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State Revenue report finds little
benefit in pipeline investment
Allen Baker PNA Contributing Writer
The state doesn’t have the money. It’s not a particularly good investment. The state wouldn’t gain much of a voice in management. It wouldn’t speed the project. And the oil companies really don’t want Alaska as a partner in the proposed pipeline from the North Slope to North American markets.
Those are among the conclusions of a report by the state’s Department of Revenue on state investment in the pipeline project. The report, released Jan. 31, was prepared at the direction of the Legislature.
Unlike a special committee of the Governor’s Alaska Highway Natural Gas Policy Council, the Revenue Department’s report doesn’t conclude flatly that the state should avoid ownership in the pipeline, perhaps in deference to the politicians’ right to decide public policy.
“Although we believe the financial risks to the state are substantial, it is possible that some would decide — as a matter of public policy — that the state should take such sizable risks in an attempt to exercise greater control over its own destiny,” says the report’s cover letter from Revenue Commissioner Wilson Condon.
While a state role mostly would have negative impacts on the deal, there is one area where the state might improve the economics of a gas line, the report indicates.
“If the state could provide a means for tax-exempt financing of the project, it might improve the economic feasibility of the project and therefore increase the chances the project is actually constructed,” says the report.
But even that might not be persuasive to the companies that would build and operated the line.
“Even with the lower interest rate on tax-exempt debt,” the report says, “it is still possible that the companies might choose to issue their own taxable debt in order to take advantage of the federal tax benefits of owning and depreciating the line.”
The report says backers of a state stake in the pipeline project see three major benefits: getting a good return on the investment, increasing Alaska’s control of its destiny, and improving the feasibility of the project.
It doesn’t find much evidence that cash put into the pipeline would further any one of those goals.
Investment return
As an investment, pipelines are similar to other utilities, with a return regulated by the Federal Energy Regulatory Commission in the United States and a similar body in Canada.
The report says that “we expect that return would not differ significantly from what the state — or the Permanent Fund — could earn from other investments with similar risks.” State investment as a partner could mean financial risks if the project was delayed or market conditions changed, “and it would be a difficult policy call to tell the public that key government services might be cut back to make money available for gasline expenses.” Controlling destiny Controlling the state’s destiny, at least by influencing pipeline development or management, is problematic at best, the report indicates.
Building the pipeline outright with state money would require a huge chunk of the Permanent Fund and major changes in the laws governing that savings account.
Borrowing enough money to have majority control or even a major influence on the project would endanger the state’s credit ratings and raise interest costs for everything from building schools to home mortgages backed by the Alaska Housing Finance Corp.
“Assuming the state was not the sole owner or majority owner of the gasline, its seat at the table would most certainly be a minority seat with little or no ability to influence any major corporate decisions,” the report says. “The state would have more authority with its own statutes and regulations to influence project management decisions than as a minority business owner.” Improving feasibility While the pipeline will cost something in excess of $10 billion to build, industry heavyweights have plenty of cash on hand, as well as traditional private financing options.
“Several of the companies interviewed are so large that they said they did not intend to borrow to finance their share of the $10 billion to $18 billion project, but intended to `write a check’ off their balance sheet,” the report said. ExxonMobil’s enterprise value alone is about $266 billion, the report notes.
And since raising the money isn’t really an issue, the constraints of dealing with a public entity are seen as an impediment.
“There was a general consensus among industry representatives interviewed that a public/private ownership relationship with the state either would not help or would be a hindrance to the project,” the report says in its conclusions.
The industry sees politics impeding decision-making, a lack of state expertise in owning and managing a pipeline, problems with having the state be an owner and regulator at the same time, and general differences between public and private goals and cultures that would hurt decision-making, according to the report.
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