Does Alaska want its taxes and fees paid in cash or natural gas — that is one of the questions facing lawmakers as they mull the intricate details of the proposed Alaska LNG project.
In a volatile energy market, if the state takes gas while holding an ownership stake, the financial risk goes down in the long run, analysts told lawmakers Thursday.
“In-kind participation actually protects the state in price risk better than in value,” Janak Mayer, a partner at consulting firm enalytica, said at a Senate Finance committee meeting.
The LNG project consists of three components: a gas treatment plant on the North Slope, a pipeline to carry the gas south and a liquefaction plant in Nikiski. If built, the project would be the largest in Alaska since the trans-Alaska oil pipeline.
The Senate Finance committee has spent most of the week gathering information on the proposed mega project before moving to a line-by-line evaluation of SB138, the bill behind the project, Sen. Pete Kelly, R-Fairbanks and co-chair of the committee, said previously.
“The administration looked at this as the initial proposal,” said Mike Pawlowski, the deputy commissioner of the Department of Revenue. “One of the key things the Legislature and state need to do is work on how the state will participate.”
The committee listened to a presentation Thursday about the financial implications of three likely options for state involvement.
In the first scenario, Alaska takes its royalty and tax payments in cash. In the second, it takes its payments in natural gas and owns 20 percent of the project. In the third, it also takes its share in gas but owns a 25 percent share.
Taking taxes and fees in cash is only beneficial for Alaska when gas prices are relatively high.
“The value can quickly go away to next to nothing with either downward movements in price or upward movements in cost,” Janak said of a scenario where the state takes its share in cash.
If the state owns a portion of the pipeline, its revenue is less vulnerable to changes in the price of natural gas.
The lowest revenue fluctuations occur under the model where the state holds a 20 percent share in the project and takes its taxes and fees as gas, according to the presentation given to the Senate Finance committee Thursday.
Exact figures on how much the state would be risking vary depending on the model of participation legislators approve, but one senator says the state should learn from the past.
“In looking in hindsight from the Trans-Alaska Pipeline, everyone in Alaska says, ‘Why haven’t we received more?’ We didn’t receive more because we didn’t risk,” said Sen. Anna Fairclough, R-Eagle River. “The same economics is holding true. “If we don’t risk something, our reward will be much smaller, and we may not get a line at all because of the risk out there in the market.”
She added that by aligning the state’s interests with oil companies and TransCanada, the state has mitigated its risk due to the companies’ experience.
“They are not cutting their teeth on our project,” Fairclough said. “They are coming into it with wisdom from past experience.”
Should the state move all the way to the final investment decision point — when about 95 percent of the project’s cost is due for actual construction — and decide continuing was not in its best interests, there would still be a chance to opt out, Fairclough said.
“There will be buyers out there that are looking to purchase our equity if we want to take the off-ramp at that particular point,” she said.