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Federal loan guarantee extended to LNG Amendment would expand federal provision for Alaska project Larry Persily Petroleum News Juneau Correspondent
After losing in her attempt to expand the Alaska gas line federal loan guarantee in the energy bill to also cover a liquefied natural gas project, U.S. Sen. Lisa Murkowski, R-Alaska, has succeeded in adding the LNG provision to a federal spending bill.
The extension of the federal loan guarantee to also cover a possible LNG project would become effective — as with the loan guarantee for a pipeline through Canada — only if the energy bill passes the Senate, which is questionable. The bill fell two votes short of passage last month and will be on the list of unfinished business when senators return to work in January.
Murkowski’s amendment to the federal omnibus spending bill leaves it up to the federal government to decide whether an Alaska pipeline through Canada or an LNG project to the U.S. West Coast would receive the loan guarantee — the bill limits the assistance to only one project.
“It will ultimately be up to project designers, financers, the markets and the secretary of energy to decide which project gets the loan guarantees,” she said. “All I’ve proposed to do is offer the exact same loan guarantee should the secretary of energy find that LNG from Alaska is the best option.” Opposition starts early And while the freshman Alaska Republican senator issued a press release heralding her accomplishment at eliminating “unfair discrimination” against proponents of an LNG project, and while LNG supporters cheered the amendment, it didn’t take long for opponents to take notice.
In fact, the first press release criticizing Murkowski’s amendment was issued even before she sent out her own release to the news media. It wasn’t planned that way, but the senator was in no rush to announce the amendment she won with help from Alaska Sen. Ted Stevens, chairman of the Senate Appropriations Committee.
The LNG amendment was added to the spending bill by House-Senate negotiators sometime before the joint conference committee signed off on the compromise legislation Nov. 24, said Murkowski spokesman Chuck Kleeschulte, who said he did not know exactly when the amendment was added to the bill.
It likely was added to the bill sometime after Nov. 17, when Murkowski failed in her attempt to expand the Alaska pipeline loan guarantee provision in the energy bill to also cover an LNG project. Murkowski had not planned announcement The senator did not want to issue a press release on the LNG amendment to the spending bill until Congress passes the measure, Kleeschulte said. The House is scheduled to vote on the bill Monday, Dec. 8, with Senate action possible later in the week or perhaps not until January.
However, Rep. Ed Markey, D-Mass., issued a press release Dec. 2, criticizing Murkowski’s amendment, prompting the senator to send out her own release later in the day listing the amendment’s benefits.
“Even the energy bill, which is chock full of pork-barrel subsidies for wealthy oil and gas companies, didn’t include this egregious and unwarranted taxpayer giveaway,” Markey said. “Clearly this (LNG) is an industry that is meeting heightened demands without the need for another government handout.”
The Alaska LNG provision is just 33 pages from the end of the 1,101-page spending bill, Markey said.
The 14-term representative has sent a letter to two of his colleagues who served with him on the energy bill conference committee, asking that they work to strip the amendment from the spending bill. He reminded his colleagues — Republican Reps. Joe Barton of Texas and John Shimkus of Illinois — that they had joined Markey in voting against the same amendment when it was offered to the energy bill two weeks earlier. No cost unless project in default Despite Markey’s label of the amendment as a giveaway and subsidy, the loan guarantee would not cost the federal government any money unless the project sponsor defaults on the loan. The provision would make it easier for an LNG project to obtain financing and at a lower interest rate by providing a payment guarantee to lenders.
In addition to covering an 800-mile pipeline from the North Slope to tidewater, the LNG loan guarantee would cover the cost of a treatment plant on the slope to prepare the gas for shipment, a liquefaction plant at tidewater to cool the gas for loading aboard tankers, and the tankers themselves. Construction estimates for the pipe, treatment and liquefaction plants and a fleet of tankers start at $12 billion and move up from there for moving at least 2 billion cubic feet a day of gas out of Alaska. Export gas would not qualify The provision would restrict the loan guarantee to cover only those costs associated with moving Alaska gas to U.S. West Coast ports. Any portion of an LNG project dedicated to exporting gas overseas would not be eligible for the federal loan protection.
Proponents of an Alaska LNG project have long looked to the Far East as the most likely market for gas, though they have turned in recent years to seeing the West Coast as the primary market.
Beneficiaries of the federal guarantee could include the Alaska Gasline Port Authority, comprised of Valdez, the North Slope Borough and the Fairbanks North Star Borough, and the Alaska Natural Gas Development Authority, created by a citizens’ initiative on the November 2002 election ballot. Both public corporations believe an LNG project can be built at a profit, although the three major North Slope producers contend an LNG project would not be competitive with less expensive gas from elsewhere around the Pacific Rim. Can’t have guarantee and tax-exempt bonds Both authorities also believe they might qualify under IRS laws to issue tax-exempt debt, which, if true, could substantially lower their cost of borrowing. But it’s an either-or proposition — federal law says a borrower cannot enjoy the benefits of both tax-exempt bonds and a federal loan guarantee. If the project is judged high-risk, a federal loan guarantee would be more attractive than tax-free debt at higher interest rates.
The producers, meanwhile, say the best bet for taking Alaska gas to market is a pipeline through Canada to mid-America, and they have been working to reduce the line’s estimated construction costs and obtain federal and state support for the project. In addition to the loan guarantee, the energy bill includes provisions to provide accelerated depreciation and tax credits for the North Slope gas treatment plant, in addition to provisions for expediting permit reviews and a limit on litigation delays.
The producers’ proposed line would carry 4.5 bcf per day of gas, at an estimated construction cost of $20 billion. Loan support address tanker costs Murkowski acknowledged in her press release that expensive tankers are one of the cost obstacles to an Alaska LNG project. Federal law would require the use of U.S.-built and U.S.-crewed tankers to move Alaska gas to West Coast ports, she said, noting that U.S. ships can cost more than twice as much as foreign tankers.
“It was important that we take those costs into account,” she said, adding that a new fleet of domestic LNG tankers would create jobs for shipbuilders and crew members.
The senator, who is seeking election next year, also acknowledged in her press release the strong voter support for the Alaska Natural Gas Development Authority and its proposed LNG project. “This amendment also recognizes the 130,000-plus Alaskans” who voted last year to create the state authority, she said.
Although Murkowski’s amendment calls on the energy secretary to decide between an LNG project and a pipeline for the loan guarantee — if different sponsors submit an application for each project — it is possible, her spokesman said, that one applicant could propose to build a line through Canada with a smaller spur line to tidewater in Alaska. That single project, providing gas to mid-America and LNG to the West Coast, could qualify for the loan guarantee, Kleeschulte said. A limit to federal guarantee There are limits on the amount of the guarantee, however. The energy bill limits the gas pipeline guarantee to no more than 80 percent of an $18 billion loan. The spending bill amendment limits the guarantee for an LNG project by requiring that the federal set-aside to cover the risk of a loan default may not exceed $2 billion.
The Congressional Budget Office “scores” each federal loan guarantees such as the Alaska gas provisions, with the score essentially stating the odds of a loan default. The agency said the default risk on the pipeline through Canada is at 10 percent, which requires Congress to set aside 10 percent of the amount of the loan guarantee — much like a bank maintains reserve funds to cover potential bad loans.
In the case of the LNG project, a higher score, or risk factor, could limit the amount of the loan guarantee offered. For example, if the budget office set the risk factor of a default at 20 percent, the $2 billion limit would mean the loan guarantee could not go above $10 billion.
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