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Port authority financing of gas line will save $3 billion, say mayors Group to negotiate gas purchases with ANS producers in next 12 months Kristen Nelson PNA News Editor
A port authority for an Alaska gas project will produce savings of $3 billion due to exemption from federal income tax and use of tax-exempt bonds for a portion of the project. And keep the profits in Alaska.
That was the message the pipeline mayors, Dave Cobb of Valdez, Hank Hove of the Fairbanks North Star Borough and Ben Nageak of the North Slope Borough, delivered to Commonwealth North Aug. 6.
The mayors, joined by bond counsel Rick Jones and Rigdon Boykin of O’Melveny & Myers, said that the state’s 1992 Port Authority Act — used by the Inter-Island Port Authority in Southeast — surfaced as a vehicle for the gas line after Rep. Jim Whitaker proposed that the state own the line.
Whitaker’s introduction earlier this year of House Bill 170 proposing that the state own the gas project, was, Hove said, “the real watershed event” for the mayors, creating “a circumstance where we could expand our thinking and become a bit more — shall we say visionary — and a little less conventional in how we approached this problem of commercialization of Alaska’s stranded gas.”
As to Yukon Pacific Corp. joining the project, Cobb said: “They just pushed us over the edge as far as we’re concerned.”
Cost estimates exclude LNG tankers Hove said that the project the port authority would tackle includes buying the gas, building the gas pipeline and the liquefaction plant at Valdez and selling LNG. A conditioning plant on the North Slope, he said, might be built by the port authority or might be built by the gas seller. Tankers are not included in the port authority project.
"We’ve taken the tanker issue out of our equation," Hove said. "A lot of projections say about $3 billion for tankers, somewhere in that neighborhood. We’ve taken that our of our equation because we believe there’s opportunities out there for our partners to build those tankers, to operate those tankers."
The cost of the project — without the tankers and with $3 billion in tax savings attributable to the port authority structure — would be in the $9 billion range.
Gas in $3-$3.50 per million BTU range "At or below $3.50 per million BTU," Hove said, "Alaska LNG would be competitive; at $3 per million BTU Alaska LNG would be extremely competitive.
"We feel," he said, "that we can probably bring that line into production for sale within that range — hopefully if not lower."
And the profit? The Alaska Department of Revenue, Hove said, produced figures for annual net revenue ranging from $363 million to $2.1 billion for the proposed state project. The mayor’s group, he said, "used a conservative model of $1 billion for discussion."
While royalties and severance to the state would depend on the price paid for the gas, annual revenues to the state from the port authority operation — based on the $1 billion net per year — would be $581 million a year.
In addition to the 60 percent of net revenues going into the state’s general fund, 30 percent would be split among Alaska’s municipalities based on population and 10 percent would go to the original members of the port authority.
In addition to making gas available within Alaska, Cobb emphasized that 90 percent of the net revenues would go back to the people of Alaska:
"What other project in the state of Alaska in the past or in the future takes 90 percent of the net revenues and gives them back to the people of Alaska… Not one. This project does that."
Financing through revenue bonds, Bond counsel Rick Jones of O’Melveny & Meyers said financing would be both debt and synthetic equity.
What would traditionally be considered debt would be senior debt. "It will be the portion of the debt that we’ll finance through traditional revenue bonds, 30-year bonds." If the gas is sold to credit-worthy entities those bonds should have a "fairly advantageous" interest rate.
On the equity side of the financing, Jones said that because the municipalities don’t want to put in equity, "what you’ll do is create what I would call, for lack of a better term, synthetic equity." One source of such synthetic equity, he said, might be an advance payment of $1-2 billion from a utility or country for the future delivery of gas. Another source could be vendor subordinated debt — put up by vendors participating in the project. "In the project financing world that’s fairly common today," he said.
There could also be financing from import-export agencies. Jones said that, for example, Japan’s import-export agency would probably be very interested in providing "advantageous financing" if $100 million worth of steel tubing was purchased from Japan for the project.
Jones said it would take a number of different sources of debt and would not be simple. "But," he said, "it’s fairly common now for projects of this size to be financed in this fashion."
Gas purchase agreements within 12 months Hove said that there are a number of things that need to happen next, "and they are all fairly important."
First, he said, "we need to negotiate for non-exclusive gas purchase agreements between the port authority and the producers." That step, he said, should occur within the next 12 months. Once the gas purchase agreements are in hand, negotiation of gas sales agreements with the market would begin.
Immediately after the election on Oct. 5, when residents of the City of Valdez, Fairbanks North Star Borough and the North Slope Borough ratify the port authority, the authority would make application to the IRS to secure rulings "to be absolutely certain that we do enjoy that status as being …exempt from the federal income tax. And also an IRS ruling on the status of the tax exempt portion of the bonds that we might sell."
Funding for initial work would probably come from prospective project participants. "On projects such as this," said bond counsel Rigdon Boykin of O’Melveny & Myers, "It’s become fairly typical for the players that are interested in the project to fund development money on spec. … For example, it’s certainly common for engineering companies or investment banks…to perform services on spec and they hope that they project will go forward and they will get the contracts that will come out of the project."
The window is 2005-2006 Boykin said that there’s clearly enough gas — and enough market to absorb that quantity of gas. "The question is, are you going to be competitive enough to get a sufficient portion of that market to be viable?
"Right now," he said, "we believe that it’s possible. We will not know for certain until you get all of your costs, financing, construction contracts and everything else set up because the financial community will not finance this project unless you have those gas contracts in hand, as well as the contracts to build the facility, operate and maintain it, etc."
But, he said, "we believe that there is a window of opportunity…the existing surplus of demand in this market will potentially disappear by the year 2005.
"There are a large number of other competing projects around the world. If you are not in the market securing a large enough supply for your facility, a large enough demand for your facility now, so that you can plan ahead and bring it on line in 2005-2006…we feel you will miss that window."
Why? "Because," he said, "a lot of these other projects will be brought to market and the (low) incremental cost to buy additional gas from all of those additional projects will create a barrier to new entries for Alaska gas."
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