Editor's note: The following commentary has been adapted with permission from a letter sent in response to questions recently raised by former Gov. Frank Murkowski about the current plan to bring Alaska's natural gas to market.
Dear Governor Murkowski:
Thank you for your recent publications, which raise important questions about why the state is partnering with TransCanada on ownership of the state's share of the midstream component of the Alaska LNG project. We take these questions very seriously and have worked closely with the Legislature to respond to the concerns.
We would like to share with you some relevant facts that have been presented to us by the legislative consultants, the administration and the administration's consultants during legislative hearings and through responses to various questions posed by committee members.
You correctly note the importance of a side-by-side comparison of the costs and rewards of having TC hold the state's interest in the midstream component versus having the state own the state's share of the midstream component directly. In fact, we, along with our consultants, have provided comparisons demonstrating the benefit of having TC as a partner.
First, TC's participation enables the state to spend much less capital (reducing the draw on the state's fund balances and easing the state's credit burden) in the risky years prior to the first gas being shipped. Specifically, TC's ownership of the midstream reduces the state's cash outlays by as much as $6.8 billion because TC will be responsible for the cash calls in those years. TC's willingness to bear these costs and associated risks is important. While the state has significant resources and good access to the capital markets for borrowing capacity, both the state's resources and its borrowing capacity have a practical limit. TC's ownership of the midstream component frees up state resources to be used for other important public priorities.
We have balanced and continue to balance the ongoing needs of the state and to evaluate the state's ability to manage our way through moving this project forward during a time of potentially low general fund revenues. Our ability to "go it alone" is impacted by our limited revenues and our need to provide ongoing state services. The state has the ability to actually invest less and earn more by taking a greater ownership interest in the project through TC's participation in the midstream than by "going it alone" and taking a smaller ownership interest. The administration's consultants have shown that, under the Memorandum of Understanding, the state can reduce its outlays between $1.3 billion to $4 billion less in the project and yet earn $400-$500 million more annually by taking a 25 percent interest in the Alaska LNG project in partnership with TC, compared with taking a 20 percent interest and "going it alone."
Second, TC's participation helps maintain forward project momentum. TC brings valuable AGIA work product to the AKLNG project immediately. Moreover, finding another partner could also be a lengthy process for the state, considering the AGIA bid process took approximately two years to complete. Importantly, our consultants have estimated that each year's delay in the project could potentially cost the state $800 million in value which would potentially dwarf any benefits of improving on the current commercial terms.
Third, in response to your question asking why the state should share pipeline ownership with a non-producer, we think there are important benefits of having an independent pipeline company, and particularly TC, as a partner. Unlike the producers (Exxon Mobil, BP and ConocoPhillips), TC has a strong incentive as an independent transporter to expand the pipeline to ship additional gas produced by other companies; thus, TC's incentives are aligned with the state's strategic interest in maximizing North Slope exploration and production. TC also has valuable experience building northern pipelines, and dealing with unique Alaska gasline construction issues, having pursued major Alaska gas projects for decades.
Fourth, you mention the tariff that the state would pay to TC for transportation service under the MOU. The administration's consultants have shown that the tariff is based on terms that compare favorably with the terms approved by FERC for recent major new pipelines, and with the competitively bid AGIA terms. We would point out that the 12 percent return you reference in your letter is only a return on the 25 percent equity for ratemaking purposes and not a guaranteed rate of return. When combined with the 5 percent rate on debt allowed on the remaining 75 percent of the capital deployed by TransCanada the tariff will be based on a weighted average cost of capital of approximately 6.75 percent. Further, the consultants have demonstrated that TC potentially bears a significant risk of reducing its actual return on equity and even achieving negative net present value if its actual inflation-adjusted cost of debt exceeds the negotiated 5 percent.
Finally, you question whether the off-ramps under the MOU are realistic options. As we have explained, the off ramps under the MOU can be exercised by essentially paying TC's development costs -- costs the state would have had to bear if TC had never been its partner.
In sum, while the Legislature needs to continue to analyze the "go it alone" alternative thoroughly, we believe the prudent course at this juncture is to maintain project momentum by partnering with TC through the MOU. Given the very early stage of project development and limited information on the project's commercial terms or cost structure, it is too early in the Alaska LNG project's development to go to the investment market to determine the terms of any revenue bonds or other financing that may be available to the state before revenue starts to flow. If, based on further analysis in future years, the "go it alone" option can be demonstrated to be more advantageous to the state, we can always exercise one of the MOU off-ramps and pursue that option at that time.
Thank you again for your letter and your interest in the gasline project.
Joe Balash is commissioner of the Alaska Department of Revenue. Angela M. Rodell, is commissioner of the Alaska Department of Natural Resources Department of Revenue.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch, which welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.