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$103.5 billion and aiming for more Background paper illustrates Alaska has ample money to jump-start a long-coveted natural gas pipeline. But does it have the nerve? Wesley Loy For Petroleum News
If Alaska really wants a natural gas pipeline, the state probably has the financial muscle to make it happen.
The question is how much of an appetite it has for risk.
Those are two of the main thoughts conveyed in a recent background paper from the Alaska Natural Gas Transportation Projects Office of the Federal Coordinator.
The eight-page paper (http://bit.ly/tPJ0Es) is a clear-eyed look at some of the state’s options for realizing a gas line, construction of which has long been a top economic development priority for Alaskans — and one of their greatest frustrations.
The paper also details what has become of the extraordinary wealth generated thus far from Alaska’s original petroleum megaproject — the 800-mile trans-Alaska crude oil pipeline, in operation for 34 years now.
Staggering figures Juneau economist Gregg Erickson and Larry Persily, the federal coordinator, co-authored the background paper, titled “State fiscal options to help move Alaska gas.”
They open with a couple of questions: “What could the state do to help the economics of a large‐volume natural gas pipeline from the North Slope to out‐of‐state markets, combined with a smaller in‐state line to serve Alaska’s energy needs? And should the state do anything?”
The paper then establishes Alaska’s staggering financial wealth resulting from its bread-and-butter petroleum industry.
“Since 1977, when North Slope crude first flowed down the trans‐Alaska pipeline, the state has collected $103.5 billion in oil revenue,” the paper says.
This has allowed Alaska to build a rare cushion for itself, the writers observe.
“No state in the union, and only a few sovereign nations, can boast the per‐capita financial assets accumulated by Alaska,” the paper says. “As of June 30, 2011, the state held $55.5 billion (over $78,000 for every resident) in the Alaska Permanent Fund, Constitutional Budget Reserve Fund and other savings accounts. If Alaska truly wants a gas line(s) to become a reality, it likely has the means to help make it so.”
Where did the money go? The paper features a simple pie chart (reproduced here) showing how Alaska has allocated the $103.5 billion in taxes, royalties and other oil revenue.
The chart, which Erickson prepared, shows that, broadly speaking, about 62 percent has been saved or invested, with the rest consumed for government services.
“Only 33 percent,” the paper says, has gone into real productive assets — nonfinancial investments that increase future productivity. These investments include infrastructure such as roads and airports, or education and job training.
Another 18 percent has gone into the Alaska Permanent Fund. Fund profits from stock, bond and real estate investments support a popular annual “dividend” for state residents. This year’s dividend was $1,174 per person.
Finally, 10 percent of the state’s oil revenue has been allocated to three “rainy day” accounts, including the Constitutional Budget Reserve Fund.
How to deploy the state’s billions “has been a continuing issue for Alaskans,” the paper says, noting that staking a gas pipeline could yield significant new revenue, jobs and other rewards.
The writers suggest the smartest approach would be to pursue a large gas line for the Lower 48 market together with a smaller, local line.
“The public benefits of marrying large‐pipeline economies of scale and a spur pipeline supplying in‐state needs would be gas delivered to Alaskans at the lowest cost while also producing much greater tax and royalty revenue,” the paper says. “Under the state’s existing tax and royalty structure, public revenues would be seven times higher under such a combination than from a stand‐alone, smaller in‐state gas line.”
Some state options While very rich now, Alaska is under pressure because of the decline in the state’s oil production and the masking effect of high crude prices, the writers note.
“Given the longstanding concern over the state’s unbalanced and unsustainable economy,” the paper says, “why hasn’t Alaska chosen to invest more of its oil revenue in long-term, productive assets to take up the slack when the state feels the pinch from declining oil?”
The paper outlines eight approaches the state could take to financially assist gas line projects. Among the ideas:
• Provide direct subsidies. The state already has pledged $500 million under a 2007 law, the Alaska Gasline Inducement Act, for a proposed project involving AGIA licensee TransCanada and partner ExxonMobil. But that project currently is “high-centered,” the paper says, as TransCanada struggles to sign up customers for its line.
“The state could build on the AGIA model by offering a substantial direct subsidy in return for further commitments by the licensee, including commitments to proceed to actual construction,” the paper says. “But this could prove very costly to the state, in that it’s likely any pipeline developer would require significant sums of state dollars to start ordering steel pipe for a project lacking enough shippers to pay the mortgage.”
• Make an equity investment. The state could own a North Slope gas pipeline outright, using its “solid credit rating” to borrow the billions of dollars it would take to build even a smaller, in-state line.
“But there are risks to the state,” the paper says, including a possible credit rating downgrade for adding hugely to the state’s existing debt.
• Defer gas production taxes. Deferring production taxes during the early years of a gas line project would allow North Slope producers quicker recovery of their investment, and lessen their risk if gas prices were low at the outset.
“Less risk makes a project more attractive to them,” the paper says, adding: “If the state expects to be cash rich with oil dollars when the gas line starts flowing, Alaska may be in a good position to defer its gas production tax receipts until later.”
• Add to the existing loan guarantee. Congress already has authorized a federal loan guarantee on up to $21 billion of debt for a Lower 48 gas line. Because the pipeline cost has escalated to $30 billion or more, the state could offer an additional loan guarantee to cover the difference.
• Make a shipping commitment. “As a royalty owner of approximately one‐eighth of North Slope gas, and as the recipient of production tax revenue, the state could consider taking its royalty gas in kind and also taking its production tax in kind (instead of a check from the producers) and signing shipping commitments equal to its share of the gas flow.”
This would shift some of the risk from the producers to the state with respect to possible low gas prices and construction cost overruns, and this “could help tip the balance on a pipeline.”
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