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Legislators consider cash or gas for state's pipeline share

Posted: February 28, 2014 - 12:09am
Sen. Anna Fairclough, R-Eagle River, speaks with consultants Nikos Tsafos, center, and Janak Mayer of Enalytica before their presentation to the Senate Finanace Committee titled "In Kind vs. In Value, Risks & Midstream Options" pertaining to an instate gas pipeline on Thursday.  Michael Penn | Juneau Empire
Michael Penn | Juneau Empire
Sen. Anna Fairclough, R-Eagle River, speaks with consultants Nikos Tsafos, center, and Janak Mayer of Enalytica before their presentation to the Senate Finanace Committee titled "In Kind vs. In Value, Risks & Midstream Options" pertaining to an instate gas pipeline on Thursday.

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.

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John McDowell
John McDowell 02/28/14 - 03:11 pm
Send SB138 to the trash bin

Is Senator Fairclough one of the same wise senators and representatives who advised us TAPS could shut down in as little as three years if we didn`t pass SB 21?. I believe so.
As did Rep Hawker and many others in the "majority".
If that same poor judgement, even after "all the vetting" they claimed they did on SB21, is at work here risking Alaska`s fiscal future with SB138,..we need to be doubly cautious,.. if she speaks for the committee`s views, if we base it on past performance with SB21. I wish Stedman would "pipe up",... but he`s not free to "expound" anything that would bolster the minority view, under the policy of the oil party caucus, who masquerade as "conservatives" to us poor hard-working, tax-paying voters, while giving away billions on a crapshoot, and now risking our remaining treasure with foreign multinational corporations... in secret. Great.

"Does Alaska want its taxes and fees paid in cash or natural gas?"

I have a few thoughts on that. Right now the state has the right to take it`s royalty in kind or as money. We have that right. We also have the constitutional duty to tax the varying values of our resources as the markets dictate. SB138 would remove the duty of Alaska to fulfill the intent of our state constitution and charter. I vote. I do not support the gas tax giveaway either. Giving away our duty and obligation to tax, as well as that of following legislatures, is unconstitutional in my opinion no matter how it`s "couched". Why should we agree to alter our charter`s mission to produce our own oil and gas on legally let leases? SB138 is coercion akin to yelling "fire" in a theater. if not extortion through totally baseless propaganda and legal stealth (and they have the market cornered on lawyers fellow voters). It is and was presented as a "fait-accompli" to the Alaskan people. One more year of study giving all Alaskans the "clarity of time" will not close the growing demand window of natural gas. It will give us time to better vet investing the state`s true fortune. such a huge venture. SB138 should be held over or brought back next year more refined as to how it would meet the heat and power needs of rural Alaskans. Until then SB138 is an empty promise that serves only to take all options for Alaska off the table, effectively, certainly for several years while we all cogitate,..and possibly decades if we give up out taxing sovereignty as well as all future legislature`s taxing options as described in our constitution. Vote YES on 1. Help take Alaska back from these folks.. Thank you Empire for the public forum for Alaskans to freely voice opinions on this serious issue.

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