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Study: LNG line could bring millions in state revenue, local economist disagrees
Ellen Lockyer PNA Contributing Writer
Last fall, Alaska voters spoke in favor of a state-run liquid natural gas line from the North Slope to tidewater in Valdez. Sixty-two percent of ballots were cast in favor of Proposition 3, which requires the state to create a gasline port authority to finance and build the facility.
The port authority is not in place yet although Gov. Frank Murkowski faces a Feb. 25 deadline to make it a reality.
The plan looks good on paper, but some doubt the LNG plan is the best thing for the state and at least one economist says it is a big mistake to tie the state’s fortunes to LNG.
Doug Reynolds, an oil economist at the University of Alaska Fairbanks, and author of “Scarcity and Growth Concerning Oil and Energy,” defended the Tony Knowles’ administration’s Alaska Highway natural gas pipeline proposal before a recent gathering in Anchorage.
“No one is going to invest in a LNG project ... that’s the bottom line ... if Alaska wants to do it with Permanent Fund money, that’s the only way LNG is going to happen,” Reynolds said. “The Alcan has better economics than LNG.”
George K. Baum study touted by Heyworth Tell that to Scott Heyworth. Heyworth, an Anchorage longshoreman, is one of the chief sponsors of the so-called All Alaska liquid natural gasline from the North Slope to tidewater in Valdez. And he is the architect of the ballot initiative that wooed the voters in the first place.
Heyworth sat in the lobby of a downtown hotel in Anchorage in early February, handing out summaries of the latest financial analysis concerning the LNG line from Prudhoe Bay to Valdez. New figures put forward by George K. Baum and Co. of Seattle have nothing to do with the cost of building the proposed gasline, but they project revenues of between $350 million and $1 billion annually for state coffers once the LNG line is operational. Baum and Co. financed the Alyeska Marine Terminal in Valdez, and, according to Yukon-Pacific Corp.’s Paul Fuhs, has secured $2 billion dollars worth of bonds for Alaska projects during the past decade.
“This is a huge new revenue source for the state of Alaska, and I think it should be very good news for Gov. Murkowski and his administration who are trying to get additional revenue from natural resources,” Heyworth told reporters.
Assumes railroad involvement The investment bankers’ analysis is based on an assumption that contracts for the gas will be in place before the project begins. Baum and Co. used information provided by Yukon-Pacific to come up with financing options for the LNG line that indicate that the project is 70 to 100 percent bondable.
And, the analysis assumes that tax-exempt debt for all or a portion of the project can be issued through the Alaska Railroad Corp.
State house finance co-chair John Harris asked Yukon Pacific for the data, and requested the financial analysis from Baum and Co. Harris is overseeing the finance committee’s deliberations on a budget for the gasline port authority.
Build it and they will come Yukon Pacific provided two configurations of the gasline project: a base case and a lean case. Both include costs for a gas conditioning plant on the North Slope, a pipeline with compressor stations to deliver the gas to Valdez, a facility to separate the hydrocarbons at Valdez, and a liquefaction plant with marine terminal at Valdez.
Capital costs include a fleet of LNG and liquid propane gas tankers and a LNG receiving facility somewhere on the West Coast.
Both configurations include extraction of propane from some of the gas for sale as LPG to Asia.
The base case further includes extraction of ethane and/or butane in Valdez to feed a petrochemical industry in Southcentral Alaska.
The lean case would not have the value-added options.
Yukon Pacific estimates the capital cost for the base case to be $13 billion dollars.
Baum and Co. analysts presented six scenarios, examining the base case and the lean case for three different financing options. The options are 70 percent tax exempt debt and 30 percent equity; 70 percent taxable debt and 30 percent equity; and 100 percent tax-exempt debt.
For each case, analysts computed potential revenues to the gasline authority and to the state of Alaska, cautioning that only 25 percent to 30 percent of the project can be financed tax-exempt if the Alaska Railroad option is not available.
If that were the case, a portion or all of the tax -exempt debt would be subject to bond cap allocation by the State Bond Committee. The tax -exempt portion of the debt would be limited to purposes permitted by tax laws. In correspondence to Harris, Baum and Co.’s John Urbina said the project can be financed in the bond market if the railroad vehicle is available. Urbina said the best option would be to have some equity contribution from private sponsors, because a state-owned facility would entail risk the state may not want to assume.
Economic model first “They’re saying that all these scenarios work.” Heyworth says. “There’s a thousand combinations — they’re saying that we could make a lot of money for the state of Alaska by building this project. That the numbers work.”
Heyworth admits that a lot of work has to be done before financing and bonding can begin. “We are not going to build it and they will come. We’ll get the economic model in place before we look for financing.”
Heyworth says the markets have to be lined up first. When the authority is finalized, it has to negotiate a well head price with the producers then, line up long term contracts with markets and secure a gas supply from the producers.
“I personally think a good market for Alaska is the state of California or the U.S. West Coast. That’s where the shortages are. There aren’t any gas shortages in the Midwest where the Canadian line wants to go to. We’ve always said that the shortages in America are on the West Coast and I think that the Valdez project is a good fit for California and I hope we talk to those states in the negotiating process.”
Economist defends Alcan gasline Economist Reynolds disagrees. He says California represents a mature gas market.
“There may be some needs there, but it’s not going to be much.” And he says Japan and China, two other destinations for LNG, are mature, slow growing markets as well. He points to huge reserves of natural gas in Indonesia and Australia, reserves which could fill the needs of slow-growing Asian markets for the next 15 years.
But North American markets are bound to grow, and Reynolds uses something called the Hubbert curve to predict just how high they will be in five or 10 years. M. King Hubbert was a Shell petroleum engineer and a Ph.D. He taught at Princeton, too, and devised a method of predicting energy trends.
“The Alcan route has greater economies of scale, Reynolds says. “The bigger the pipeline, the lower the cost … you don’t get that with LNG. The Lower 48 is going to need more gas and they are going to need it in the next five or 10 years. So there’s better economics with the Alcan. That’s the route.”
Gas prices will increase Based on the Hubbert curve, Reynolds says, his model suggests after 2007 to 2010 the price (of gas) will radically increase. “Already some increases are visible in the price now, so that probably will continue. The Hubbert curve is a way of analyzing the gas supply in southern Canada. And it suggests that the supply will get to a peak in a decline mode and as demand goes up, and supply goes down, you’ll get this radical increase in prices. When that happens, they’ll be needing a lot of new supplies … maybe they’ll import some LNG into the U.S., but probably they’ll need Alaskan gas to be transported by a pipeline to the lower 48,” Reynolds says. The U.S. Congress is considering a tax break on such a pipeline, which to some people is a subsidy, he says. “It could turn into a subsidy. Some energy producing states are against that, because they are afraid that with so much gas hitting the market it will radically lower the price of natural gas. I do not believe that will happen, this pipeline will take five to 10 years just to build and by that time they are really going to need a lot of gas in the Lower 48, based on Hubbert curve analysis. ... So I think that if Congress gives tax breaks it’ll create more stability for U.S. consumers and more energy security for the U.S. as a whole. I hope Congress does help with some tax breaks for the pipeline.”
Gas is more complicated economically than is oil, he says. Gas by itself is not economic to develop, so the quantities of natural gas that went along with oil discoveries on the North Slope in the sixties just sat there. High gas prices in the seventies created an incentive to market natural gas, and industry deregulation during the eighties helped spur competition. Reynolds says current low natural gas prices won’t stay down long.
Price volatility He predicts some price volatility coming. “Volatility in the energy market is an indication that things are probably going to go up,” he says. “I predict prices will go up, and stay up, because there’s going to be that shortage. They’re going to need sources in the Lower 48 and where’s it going to come from? It’s going to come from Alaska. The Alcan route gives lower costs and a better price because prices will be higher in the Lower 48 than in the Pacific Rim.”
And a Northern route? Reynolds says there is some evidence that it is less expensive. But, he says, Exxon and its affiliates are going to do a stand-alone MacKenzie Delta pipeline. There is no radical economic advantage of going over the top versus going along the Alcan, according to Reynolds.
One of the problems of over the top, he says, is a potential leak. “What if a leak or a breakdown or a problem happened under the Beaufort Sea when it is ice covered? Under the ice. You can’t get to it for nine months. That’s a nine-month supply shortage. The Southern route is always accessible, always repairable ... always easy to get to.”
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