ADN Opinion: It's the gas, not the pipe -
The money, the risk and the taxes are in the gas, not the steel pipe
adn.com
Published: October 11, 2006
Last Modified: October 11, 2006 at 01:55 AM
Far too many Alaskans -- candidates included -- are talking as if building the North Slope natural gas pipeline is simply a matter of negotiating with developers eager to borrow some money, dig the trenches, lay the pipe, collect the tariffs and run the operation.
Were it so, the line probably would be built by now.
But it's not.
It isn't so much the fluctuating market price that has kept Alaska's North Slope gas stranded in recent years. It's the reality that someone would have to commit to spending $25 billion or more before selling the first molecule of gas a decade later. The sheer size of the undertaking is the blockage.
Among the candidates for governor, Republican Sarah Palin and former Democratic Gov. Tony Knowles each say they want to hear from any and all companies interested in building the line. They talk of offering pipeline tax incentives as needed, in exchange for a construction timetable.
They are right in that several companies are interested in building and operating the pipeline. They are right to demand a meaningful project timetable in exchange for any incentives.
But they are coming up short on the key point: No one is going to build the project unless the gas owners sign binding contracts to use the line for as long as it takes to pay off the mortgage. There's no way investors will write checks for billions and billions of dollars on speculation. There's no way the project will ever proceed unless companies with very deep pockets sign what are called "ship-or-pay" contracts to use the line.
That means no matter how slim the profit between that day's market price for gas and the pipeline tariffs, the gas will move through the line and the shippers will pay the pipeline company the full transportation charge -- with no discount for periods of low gas prices.
That means underwriting the cost overrun risks on the largest private construction project in U.S. history.
The point isn't about who might build the line. Gas pipelines are a regulated utility, with fixed profit percentages set by the government.
The point is who is willing to open up their checkbook and promise to use the line for years to come. That's the deal the next governor absolutely needs to work out.
It's sort of like the parents co-signing a car loan for their young college graduate. Yes, it may be the young adult who shops for the car and negotiates the sale and is listed on the title and drives the car, but if the grad misses a payment the bank will look to the parents to cover the debt -- not the owner of the steel chassis. The Alaska gas line will be just like that car. The owners that pay to ship the gas will be the same as the parents co-signing the note. Without their signatures, no pipeline loans.
What it means is that negotiating fiscal terms for the pipeline will be easy compared to fiscal terms for the gas. The property tax and corporate income tax on the pipeline itself will be very small compared to the production tax and royalty on the gas moving through the line. The serious money on the table and the biggest risks will come not from owning the steel pipe but from the commodity that will move through that pipe. That's where the state will make its real money, and where the North Slope producers are needed to cover the pipeline mortgage.
The candidates for governor need to keep that in mind as they tell Alaskans they will get the pipeline built. The tough negotiations are not to build the pipe, but to cover the mortgage, keep the line full and pay the production taxes to keep Alaska wealthy.
BOTTOM LINE: Don't underestimate the complexity of the project. |
