|
Municipalities want to build natural gas line Alaska Port Authority says it would borrow $26 billion to build project Larry Persily Petroleum News Government Affairs Editor
The state is reviewing a third application for a North Slope natural gas pipeline, the latest coming from a consortium of three municipalities that says it would borrow $26 billion to build the largest project proposed by any of the applicants.
The Alaska Gasline Port Authority, created in 1999 by the Fairbanks North Star Borough, the North Slope Borough and the city of Valdez, applied Feb. 27 under the Stranded Gas Development Act to negotiate a fiscal contract with the state for payments to municipalities in lieu of any taxes on the project.
The port authority wants to build a main line splitting into secondary pipes to take 6 billion cubic feet of gas off the North Slope, shipping a little more than half of it into Canada and on to U.S. markets; sending less than half down a line to Valdez for liquefaction and shipment to U.S. West Coast and Far East ports; and a smaller line to ship gas into the Southcentral Alaska distribution system.
The authority has no plans to get into the LNG tanker business, said Fairbanks North Star Borough Mayor Jim Whitaker, and would look to shippers or others to take on that assignment.
The other two project applicants — MidAmerican Energy Holdings Co., of Des Moines, Iowa, and the three major North Slope producers — are each looking to build a single line carrying 4.5 bcf per day through Canada to mid-America markets. Application one step in process An application does not mean any of the companies, or the port authority, is ready to break ground on a pipeline. The Stranded Gas Act merely sets up a fiscal contract with the state and municipalities should any of the applicants decide to go ahead with the project. And the expectation among political and industry observers is that only one of the applicants will actually build the project, perhaps with others joining in as partners.
“The public wants this project to move forward,” said Whitaker, who took office last fall with a goal of re-energizing the port authority. Although the port authority wants to own the project, it would prefer not to handle construction or operations, and is talking with MidAmerican about contracting for that work, Whitaker said.
“Our biggest challenge is political,” Whitaker said. “We’re not waiting for anyone.”
The port authority is not asking for permission or any fiscal concessions, he said, and instead is busy trying to line up gas purchase and sales contracts while it works to influence state and federal policy-makers to back the project. Supporters believe the authority would be exempt from federal corporate income taxes, and would be able to issue tax-exempt bonds for some of its work. Authority willing to buy or just carry gas The authority is agreeable to either buying gas from North Slope producers and marketing the supply or contracting to carry the producers’ gas and letting the companies handle their own marketing, Whitaker said. Its economic model includes a guaranteed minimum payment to producers of 30 cents per thousand cubic feet for the gas, plus a netback at the end of each year after operating costs and debt service are paid, with the additional netback estimated at $1.18 per mcf.
If the authority is able to quickly negotiate gas contracts and financing, its work schedule shows engineering starting later this year and the first gas flowing in 2010.
Building the so-called Y-Line project, with gas going to mid-America by pipe and to other markets by LNG, improves the finances by allowing some shifting between markets to follow demand and take the best price, Whitaker said.
Alaska’s Stranded Gas Act allows a project developer to negotiate a long-term contract for payments in lieu of all state and municipal taxes on a gas line project, though no such deal is required for the port authority that already is exempt from such taxes as a municipal entity.
Still, port authority officials said it would be beneficial for municipalities to set out in a contract how much they could receive and when from the project’s revenues. A Stranded Gas Act contract would provide certainty for those communities that will see increased municipal costs during construction, the port authority said, and would set out terms for all Alaska municipalities to share in the financial rewards during the line’s years of operation. Authority envisions $1-billion-plus profits In its application, the authority said it believes it could generate more than $1 billion a year in profits from operating the line and buying and selling gas, sharing that money with the state and municipalities.
The Stranded Gas Act covers only a fiscal contract for the project and there is no requirement that any pipeline developer negotiate such a deal.
The Department of Revenue is reviewing the authority’s application to determine if it meets the requirements of the law, said Steve Porter, deputy commissioner at Revenue. The act says an applicant must either own gas leases, hold the right to purchase or market gas, or have a net worth or unused line of credit of at least a couple billion dollars. As the port authority has no assets and no gas leases, it has pegged its application to its intent to buy gas.
The authority said it intends to buy the state’s royalty share of North Slope natural gas production (12.5 percent), which, it believes, should meet the requirements of the law that a qualified applicant must have “the right to acquire, control or market at least 10 percent of the stranded gas.”
It shouldn’t take more than a week for the state to determine if the port authority is a qualified applicant, Porter said March 1. “If they don’t reach the first hurdle, we don’t go on with the application,” he said. Project would carry 6 bcf per day The authority’s plan is to build a gas conditioning plant on the North Slope; a 6-bcf-per-day, 550-mile line from the slope to the “Y” at Delta Junction, parallel to the trans-Alaska oil pipeline, using 56-inch-diameter pipe; a 46-inch line to carry 3.1 bcf per day east to the Canadian border; and a 46-inch line to tidewater at Valdez. A third leg would branch away from the main pipe at Glennallen, to bring gas to the Anchorage, Matanuska Valley and Kenai Peninsula area.
The authority, like MidAmerican, proposes stopping its pipe at the Yukon Territory border and looking to Calgary-based TransCanada to build the Canadian portion of the line into central Alberta. The producers’ $20 billion project includes building the line all the way into Canada.
“We think to exclude TransCanada would be foolhardy,” Whitaker said.
Citing the economies of scale, the port authority said combining Lower 48 and LNG distribution into one project helps bring down costs. Tax-exempt status key to project Substantial savings also would come from its federal tax-exempt status, said the authority, which is relying on a February 2000 Internal Revenue Service letter that said the authority could be exempt from federal corporate income taxes.
The authority has never released the material it gave the IRS, which the agency relied upon for its tax-exempt ruling, but the IRS letter refers to the port authority’s representation that its revenues “will be derived primarily from the sale of natural gas to municipalities within the state and to other purchasers. …”
However, the amount of natural gas consumed in state is likely to be very small compared to the volume shipped out of state. The current consumption by Alaska utilities amounts to less than 3 percent of the total flow planned for the port authority project.
The port authority said it would request a new IRS ruling based on its latest plan for a larger, Y-Line project.
Tax-exempt bond financing also is important to the project’s economics. Debt service on $26 billion in bonds will be significant, and the interest rate likely would be lower on any tax-exempt bonds.
The authority believes that with an exemption from federal taxes and long-term sales contracts, it could go to investors and borrow 100 percent of what it will need to build the project. It would pay back the loans from its revenues, putting none of the burden on residents of the participating municipalities.
It envisions borrowing about 30 percent of the money from banks, and almost 70 percent by selling bonds to investors.
| 