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Persily says fiscal plan best alternative Former federal gas line coordinator tells Anchorage Chamber ability to walk away best negotiating tool; state needs money for that Kristen Nelson Petroleum News
With Gov. Bill Walker and leaders of the Alaska Legislator at loggerheads over plans for an Alaska liquefied natural gas project, Larry Persily told the Anchorage Chamber of Commerce April 13 that he feels for the Alaska Gasline Development Corp., which, like a kid in a contested divorce, is in the middle of the battle.
That battle is playing out in House Bill 132, which sits on the governor’s desk awaiting a promised veto.
The governor wants AGDC to expand the Alaska Stand Alone Pipeline to make it economically viable - what Walker describes as an alternative to the Alaska LNG project in which the state is an equity partner with the North Slope producers and TransCanada - but what legislative leaders see as competition.
HB 132 says AGDC cannot spend money appropriated for ASAP on expanding that project until the earliest of the AKLNG partners signing agreements to move the project into front-end engineering design, one of the resource owners dropping out of AKLNG or July 1, 2017.
Persily, formerly federal gas line coordinator and now a special assistant for oil and gas to Kenai Peninsula Borough Mayor Mike Navarre, said the disagreement between the governor and the Legislature doesn’t get the state closer to having a project and makes us look screwy to the market. Calling it a mess, and a costly mess, Persily said that given the state’s fiscal situation, the $180 million at stake is a lot of money to spend.
Persily said going it alone on a gas project is only an option if you can write a check or get financing - and 2020, when money would be needed, is about the time the state will be broke.
Issues that need settling Among the issues that need to be settled are property taxes, which start the year the equipment hits the dock and are a big issue for the project because those taxes have to be paid when there is no cash flow, Persily said.
Another issue is setting valuation: The state and the companies have been fighting over the value of the oil pipeline since it was built. The solution for AKLNG is negotiating payment in lieu of taxes, which requires creation of a formula so both communities and companies know what property tax will be. The governor has introduced a preliminary bill to start dealing what that issue, he said, noting that it isn’t an issue that will be settled this year.
The other side of that issue - what the split will be between the state and communities - is one the companies want no part of, Persily said.
Another contentious issue will be the impact aide fund to cover costs during construction. He said indirect effects will be an issue there.
Then there is fiscal stability.
Persily said when Alaskans hear that term they think it means they have been cheated.
The issue for a project like this one, he said, with 20-year contracts signed for LNG, is that the companies can’t take the chance that taxes will quadruple over that period. No one builds an LNG project without knowing the tax rates, he said.
The fiscal issue needs to be viewed over the 20-year period of an LNG contract, not in any given year when the state’s revenues from the project may spike up or down, Persily said.
Leverage issue The issue for the companies is that they know they will always be deep pockets for the state, and are concerned that they are the only deep pockets.
While the governor wants leverage, Persily said, the companies know the state is desperate - we have no money. He said better leverage would be if we had a fiscal plan and could tell the companies “we can wait” for a better deal. You’ve got to be able to walk away from the table, Persily said.
There is global competition, but other projects also have their problems, and Alaska has a number of advantages: a short tanker route; gas with high Btu value; proven reserves; dependable production; LNG production more efficient at cold temperatures; and the state as an equity partner.
Prudhoe Bay reservoir management has been focused on oil production, with natural gas used to maximize that production. But by the mid-2020s, Persily said, it will be time to take off some gas and get cash for it.
LNG projects are done for long-term income, he said, for good cash flow - it’s not something you do to strike it rich.
What are the odds for AKLNG? Persily said he couldn’t provide odds, but said as producers and markets look for diversification, both in location and in pricing index, and the producers also look to diversify their portfolios, if China’s economy keeps moving and as other countries also grow LNG imports, AKLNG is viable with the right market at the right cost.
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