Saturday, January 3, 2015

Politicos have tough hands to play in 2015


By Tim Bradner
Alaska Journal of Commerce

Gov. Bill Walker, center, has been dealt a tough hand entering his first legislative session facing a $3.5 billion budget deficit for the current fiscal year as oil prices have dropped by nearly half since July. After campaigning on budget discipline, he’ll be pitted against legislators battling for their own priorities ranging from education to Medicaid expansion to the Alaska Stand Alone Pipeline, or ASAP. Walker has already made a few plays, affirming his commitment to expand Medicaid and ordering a halt to new spending on ASAP.

Chips are down for gov, legislators facing massive budget gap

Gov. Bill Walker and his new administration are still settling in as state legislators are packing up to head to Juneau for the 2015 session.

The annual political poker game begins Jan. 20 when the state Legislature convenes.

Walker will be at the table. So will House Speaker Mike Chenault; Senate President Kevin Meyer; House Democratic Minority Leader Chris Tuck; and Senate Democratic Minority Leader Berta Gardner.

What’s different about the game this year is that the chips on the table will be painful budget cuts instead of new money for projects and programs that Alaskans have enjoyed for years.

No more, at least for now. With oil prices still less than $60 per barrel and back-to-back $3.5 billion budget deficits pending it seems like a bleak year ahead. Two credit rating agencies, Moody’s and Standard and Poor’s, have issued warnings about Alaska’s finances.

Still, the sky isn’t falling. Alaskans have been through these times before during prolonged oil price slumps in 1986 and in 1998 and a more recent, brief dip in 2009.

The state’s economy still seems on sound footing, however. Jobs are increasing, though at slower rates, but employment in key industries like petroleum are at record highs, according to state Department of Labor and Workforce Development data.

Despite the low oil prices it’s going to be another busy year of winter construction and drilling on the North Slope, mostly due to projects already in construction.

Still, cuts in the state budget are in the wind and this may have an effect on business confidence.

Walker issued an Administrative Order Dec. 27 asking agencies involved in several big projects to put a hold on unencumbered funds.

This is more a symbolic move because much of the money appropriated to these projects, which include the Susitna-Watana hydroproject, the Knik Arm bridge, the Kodiak Launch Complex, Ambler road and the Alaska Stand Alone Pipeline, has been encumbered, and with federal funds mixed in on some projects.

What may be of more substance for the immediate budget gap is a request by legislative leaders, in a Dec. 23 letter to Walker, that the governor review past appropriations for capital projects that are still unspent, or where projects were completed with money left over.

Hundreds of millions of dollars in state-funded projects are still “in the pipeline” from prior year capital budgets.

Alaska LNG Project proceeds

Meanwhile, on the one big project that will really move the needle for state finances and the economy — the large North Slope natural gas pipeline and liquefied natural gas project — there’s no indication so far of a slowdown.

The governor’s Administrative Order to stop spending affects the Alaska Stand Alone Pipeline, or ASAP, but not work being done on the Alaska LNG Project by the Alaska Gasline Development Corp., or AGDC.

AGDC is the state corporation that manages both ASAP and the state’s partnership in the Alaska LNG Project.

In one other development Alaska LNG Project, Walker announced that Marty Rutherford, Deputy Commissioner in the Department of Natural Resources, will lead the state’s gasline team in negotiating several major issues still to be resolved with the Alaska LNG Project partners: the North Slope producers and TransCanada Corp.

Rutherford’s new role has raised some eyebrows. In her previous tenure as the state Natural Resources deputy commissioner, Rutherford was an architect of the Alaska Gasline Inducement Act, or AGIA, an initiative of former Gov. Sarah Palin.

This was a project that awarded a state contract to TransCanada Corp. to lead a Lower 48 gasline initiative. Legislators became disenchanted with AGIA mainly because of a $500 million subsidy that went with the plan, but in reality the all-land pipeline was undone by a surge of natural gas from Lower 48 shale producers.

TransCanada itself promoted a switch to LNG early on, a course ultimately endorsed by former Gov. Sean Parnell and the North Slope producers, which led to the present Alaska LNG Project authorized by the legislature last year.

For this year, AGDC plans on spending about $100 million on the state-led ASAP plan with about half of that already expended, Baker said. However, most of this is work that will benefit both ASAP and the larger Alaska LNG Project, he said. Another $25 million was appropriated solely for AGDC’s work on the big project.

“From this point forward, any work that does not benefit both projects will not be spent,” he said.

State legislators may not take kindly, however, to any plans by Walker to completely scrap the ASAP project, which was initiated as a backup plan to get North Slope gas to Alaska communities in case the big project falters.

Since 2010 the Legislature has appropriated $420 million to the ASAP project with those funds to take the project through to the completion of engineering and permitting and an “open season” for prospective gas shippers in 2016.

A good portion of the work funded by those appropriations will benefit both projects, however.

An example of this, Baker said, are the five gas off-take points that would supply gas to Alaska communities along the large 42-inch pipeline. The responsibility for planning and building those remains with ADGC regardless of which of the two gas pipelines are built.

Preliminary engineering on the offtake points must be done in 2015 because it is part of the pre-Front End Engineering and Design, or pre-FEED, work now underway for the large pipeline project, Baker said. For the Alaska LNG Project to proceed into the full Front End Engineering and Design, which could happen in the first quarter of 2016, the offtake points must have preliminary engineering done, he said.

State legislators who back the ASAP alternative backup plan aren’t likely to let Walker completely abandon the state-led 36-inch pipeline plan, however.

Rep. Mike Hawker, an Anchorage Republican who co-sponsored legislation authorizing the backup gas pipeline, says if may be legally difficult for the governor to block expenditures of a project the Legislature has authorized in law, and such a move in any event would spark a fight with the Legislature.

“It seems wrong that the governor can impound those funds from a statutorily directed appropriation,” Hawker said.

“He could go after a change in board of directors (of the state gas corporation) but still have a confirmation issue on his hands,” for any replacements Walker might name to the AGDC board.

House Speaker Chenault, R-Nikiski, was also a prime sponsor of the ASAP enabling legislation but Chenault was not available for comment.

One potential shipper of gas in the state-led 36-inch pipeline, if the big gas project stalls, is Resources Energy Inc., Japanese consortium planning a 1 to 1.5 million tons-per-year LNG project at Port MacKenzie on upper Cook Inlet.

REI hopes to have its project operating by 2020 and plans to use Cook Inlet gas as feedstock, but if North Slope gas is available from either the state-led 36-inch pipeline or an industry-led, 42-inch line, REI could expand its plant to export larger volumes of LNG, its president, Shunichi Shimizu, said in a recent briefing in Alaska.

During his campaign, Walker said he hopes to keep the big gas project on schedule. The matter is more urgent now because the revenues the gas project would bring to be state treasury, estimated at $4 billion per year, will be needed to offset declining oil income.

Several major steps on the gas project need to be taken this year, however.

During the 2015 legislative session, a Payment-in-Lieu of Tax, or PILT, agreement for property taxes on the gas project paid to the state and municipalities must be approved.

The state administration must also formally approve the gas royalty and tax payment in-kind, or in the form of gas instead of money, that is a key part of the industry’s joint-venture agreement with the state.

The state must also agree to some mechanism that assures North Slope producers that state production taxes on gas won’t change, and the state must sign a long-term agreement with TransCanada Corp. to ship the state’s in-kind share of gas, 25 percent of the total, through TransCanada’s portion of the 42-inch gas pipeline and Gas Treatment Plant.

Previously, state officials in the Parnell administration had said a special session of the Legislature is likely in late 2015 to ratify these agreements, but Walker has not yet spoken on this.

Read More: http://www.alaskajournal.com/Alaska-Journal-of-Commerce/January-Issue-1-2015/Politicos-have-tough-hands-to-play-in-2015/
Tim Bradner can be reached at tim.bradner@alaskajournal.com.