Former Gov. Murkowski criticizes TransCanada’s LNG role
A former Alaska governor is questioning the wisdom of the state teaming up with pipeline company TransCanada Corp. in a deal with North Slope producers on a large natural gas project.
Former Gov. Frank Murkowski said he believes the state is giving away too much to have TransCanada as a partner. Murkowski wrote a letter to state senators March 11. It is the first major criticism of the gas deal, or at least parts of it.
Meanwhile, the Senate Finance Committee reviewed projections of how much the state will have to spend to fund its share of construction costs with and without TransCanada, and how this might eat into available general revenues at the time.
Sen. Mike Dunleavy, R-Wasilla, said the information is sobering. His concern is how much that would leave for other public needs.
One scenario presented to the Senate Finance Committee had the project costs taking up to 60 percent of the available unrestricted general fund revenue without TransCanada as a partner in the pipeline and Slope plant.
However, State Revenue Commissioner Angela Rodell said the state would be financing at least part of the “cash calls” during construction with debt, as would the industry partners in the project.
The debt would be secured by long-term contracts to sell liquefied natural gas, or LNG, not the state general fund, she said.
By the time financing is secured and construction begins, the owners of the project, including the state, would have to have firm contracts in place for LNG sales, she told the Senate Finance Committee.
Another possibility is that the state could bring in more partners to share the costs, and risks, she said, although that would also diminish the state’s future earnings.
Murkowski isn’t happy with the deal, however. In his letter to state senators, the former governor said he does favor the “Heads of Agreement” reached by the state with North Slope producers but has real questions about a Memorandum of Understanding with TransCanada on a partnership with the pipeline company in the share of the gas project the state could take.
Murkowski advanced a similar plan in 2006 that involved, as the current proposal does, the state taking its tax and royalty share in kind, or as gas, and similarly owning a percentage of the project sufficient to ship the state-owned gas. The 2006 plan did not include the state taking on a pipeline company as a partner, however.
In his letter, Murkowski urged the Legislature to pass Senate Bill 138, a bill now pending in the Senate, and including in it the Heads of Agreement but not the MOU with TransCanada until more scrutiny is done.
“Reports have noted that the MOU is a very complex document. Some of the lawyers who have appeared at the committee hearings of jurisdiction acknowledge that parts (of the MOU) are difficult to comprehend, let alone explain. Any legislator who takes the time to try to digest the document would agree,” the former governor wrote in the letter.
The justification for the pipeline company’s involvement, Murkowski said, is that the company would finance the state’s share of the pipeline and gas treatment plant at a time when the state would be facing declining revenues, from 2015 to 2021.
“TC (TransCanada) would get the state’s share of the gasline by fronting these costs,” Murkowski wrote in his letter.
“Commissioner of Revenue Rodell stated that with TC’s (TransCanada’s) participation, the cost to the state would be $300 million in lost revenue annually once the gas started to flow,” the letter said.
The former governor told senators that a more thorough review is needed that would compare costs and rewards to the state of TransCanada holding the state’s share of the pipeline and gas treatment plant compared with the costs and rewards of the state doing those parts of the project without TransCanada.
There should be more thorough investigation of options for the state doing a full financing and without having to spend down its savings in the years before gas flows, Murkowski wrote.
Before he was governor, Murkowski was one of Alaska’s U.S. senators for 20 years and was also a banker.
“What is the alternative? There has been no discussion in the Legislature about going to the investment market to determine whether revenue bonds or other financing is available that would not require the state to pay down its savings and would not require the state to give up its equity interest in the gas line,” Murkowski said.
The arrangement is akin to a loan to TransCanada by the state, he said.
“The MOU would have the state pay for TransCanada’s services with what would otherwise be the state’s equity interest in the gas line. The tariff (paid by the state for shipping state in-kind gas) is fixed at 12 percent, which is inflation-proofed. This tariff is more than twice what the state could borrow at by issuing revenue bonds or tax-exempt bonds,” Murkowski wrote.
The agreement now contemplated, which could be finalized in 2015 if the Legislature passes SB 138 this year, includes three options: One is for the state to allow TransCanada to build and own a percentage of the North Slope gas treatment plant and the pipeline sufficient to transport the state-owned gas, and with the state owning the share of the large LNG plant at Nikiski through the state-owned Alaska Gasline Development Corp.
The deal would also give the state the right to buy 40 percent of TransCanada’s share of the pipeline and gas treatment plant at the time Front-End Engineering and Design work is started, which could be in 2016.
The cash drawdown scenarios presented to the Senate Finance Committee March 9 were sobering for senators. An example illustrated for 2021, one of the peak years of construction, assumes a 25 percent stake in the project for the state.
The required contribution would be $3.3 billion that year, although, as Rodell explained, part of this could be debt-financed.
If the state were to do the partnership with TransCanada and not exercise the option to buy 40 percent, so that the state owns only 25 percent of the Slope LNG plant, the required contribution drops to $1.68 billion for 2021. If the 40 percent option were exercised, the requirement would be $2.18 billion.
If the state takes a lower share of the project, such as 20 percent, the required contributions drop, to $2.6 billion in 2021 assuming the state does it on its own without TransCanada; and drops to $1.3 billion if the state lets TransCanada take 100 percent of the pipeline and gas treatment plant, but is $1.8 billion if the state takes the 40 percent option of TransCanada’s share or the pipeline and the gas treatment plant.
Although the 20 percent partnership scenario requires less investment, and less risk, it also reduces the state’s future income by the same ratios, state Deputy Revenue Commissioner Mike Pawlowski pointed out.
Rodell said debt can cover part of these requirements but the state would still have to put in cash, and how much depends on which option is chosen and how the financial community will rate the bonds, which will be influenced by the state’s overall financial condition at the time.
The cash equity requirement could range from 25 percent to 75 percent of the investment depending how the bonds are rated — AAA to Triple B — with most options in the 40 percent to 50 percent range of the state’s share.
Dunleavy said projections he has seen from Legislative Finance Division would have the state’s cash reserves drained by 2024, given the current trend in budget deficits and the upward spending pressures from schools, unfunded pensions and Medicaid costs.
Rodell agreed with the concern.
“Therein lies the challenge in this, the required modifications to the operating budget,” the commissioner said.
However, the problem can be managed, she said. The scenarios presented are just examples, and when the time comes the debt can actually be structured in ways to minimize hardships.
“We won’t issue debt unless we can sell gas, and we will schedule the debt to be available three to four years ahead of first gas. We would have sales contracts with buyers,” Rodell said.
If there weren’t firm sales contracts, no one would buy the bonds, she said.
Tim Bradner can be reached at email@example.com.