Natural gas line tested as investment
$420 million stake would not be the biggest for Permanent Fund; consultant advises waiting until gas begins to flow
By Wesley Loy
Anchorage Daily News
As Gov. Frank Murkowski and state lawmakers wrangle with major oil companies over tax terms for a proposed natural gas pipeline, trustees for the Alaska Permanent Fund are quietly pondering their own pipeline parlay.
On June 19, a Virginia energy consulting firm briefed the trustees on the idea of the Permanent Fund investing $420 million in a pipeline to carry the North Slope’s natural gas reserves as far as Chicago.
Such an investment would be an important, yet relatively minor, part of an estimated $21 billion megaproject that for now remains little more than a concept with no firm dates for construction. It also would be a big departure for the fund, which so far has stayed clear of investing in Alaska roads, ports, pipelines and the like.
Permanent Fund trustees stress they’re a long, long way from actually deciding whether to invest in a pipeline. However, if the major oil companies decide to build it, the trustees and consultant Pace Global Energy Services want to figure out in advance whether an investment could be profitable enough to merit investing.
“The project is in a very early stage. There’s much we don’t know yet,” said Richard Straebel, a Pace account manager who helped brief the trustees Monday at a downtown Anchorage hotel.
Murkowski has proposed that the state buy a 20 percent stake in a gas pipeline, an idea favored by the three oil companies — Exxon Mobil, Conoco Phillips and BP — holding development rights to most of the North Slope’s proved gas reserves.
Must be ‘prudent’ standardThe state would pay for most of its share by issuing bonds or taking out loans.
The Permanent Fund’s role would be to invest $420 million in cash, according to information presented to trustees.
Goodness knows, the Permanent Fund has the money. Through last week, the state’s oil wealth savings account had $33.4 billion sitting in stocks, bonds, real estate and other investments.
The fund easily could shift some of its money into a pipeline project.
That might sound like a fine and even patriotic idea, but it’s not that simple.
First, the Permanent Fund by state law must be a “prudent investor,” meaning a pipeline investment would have to be as sound an investment as anything else the fund could invest in.
Second, the proposed pipeline would be a highly risky venture.
Much of June 19’s discussion centered on the potential for construction cost overruns that could erode the rate of return for pipeline investors, Pace advisers said.
After a while, Permanent Fund board chairman Carl Brady concluded: “It isn’t likely there will be cost overruns — it’s almost predictable there will be.”
Pace has global experience advising Fortune 500 companies and others on complex, billion-dollar projects full of risk — a description that surely fits the Alaska gas pipeline.
Wait 10 years, advises PaceOne of the most salient points the Pace consultants made was the value of patience and timing. They said the Permanent Fund might be wise not to invest its $420 million during the project’s planning and construction stages, when the risk of cost overrun is highest, but rather 10 years later when the pipe is done and gas starts flowing.
By doing that, the Permanent Fund avoids most of the upfront risk, though the trade-off might be lower investment returns, the Pace consultants said.
Once the pipeline began operating, the federal Energy Regulatory Commission would allow the owners to set gas transportation rates high enough to pay for construction and also make a profit, assuming any cost overruns weren’t due to gross negligence or mismanagement, the Pace advisers said.
Although $420 million is a lot of money, and the pipeline investment would be a major deal, the Permanent Fund already has two bigger property investments in its portfolio, executive director Mike Burns said.
The fund holds a $500 million stake in Tysons Corner Center, a shopping mall in McLean, Va., Burns said.
And the fund in February announced it would invest about $550 million to buy a big share in Simpson Housing Limited Partnership, a Denver-based apartment development and management company.
As further perspective, the Permanent Fund owns about as much of Microsoft and Exxon — two of its biggest stock market holdings — as it’s thinking of investing in the pipeline.
Two Permanent Fund board members — state Attorney General David Marquez and Revenue Commissioner Bill Corbus — did not attend June 19’s briefing. Both are part of the governor’s gas pipeline negotiating team, which this week planned to huddle in Washington, D.C., with legal advisers on the state’s proposed tax contract with the oil companies.