State Ownership of the Pipeline

The most important thing the state can do to encourage a pipeline is get its fiscal house in order. The gas shippers are primarily concerned with fiscal certainty and fiscal stability. They want to know what they are required to pay and they want to know that they can depend on that decision for many years to come. They also want the payment, i.e., the tax, to be fair.

There are other secondary issues that, if understood and approached properly, can increase the likelihood of a natural gas pipeline. One of those is state participation in the pipeline. State participation in the gas pipeline can take two forms: one as an owner of the pipe and one as a shipper of royalty gas. Both have potential positive benefits to the state and to the overall success of the pipeline and both carry an increment of risk associated with deciding to participate.

State Ownership of the Pipeline

If the state decides to participate as an owner of the pipeline, it can bring certain valuable benefits to the ownership team. If it participates as an owner, it can advocate its interests in front of regulatory bodies and Congress in ways and with credibility that the oil companies and pipeline companies do not have.

The state as owner could shoulder its proportionate share of the risks involved in the development of the pipeline. But the value here is only achieved if the other pipeline owners know and agree to the ownership interest of the state prior to construction (and preferably sooner). The state does not increase the likelihood of success of the pipeline if it attempts to purchase an interest in the pipeline after the risk has been taken and the pipeline has been completed. The later the state waits in the process to obtain an interest in the pipeline the less value it brings to the table and the less interested the pipeline owners will be in allowing the state a participatory interest in the pipeline.

Of course, the reason the state would bring value to the pipeline by taking an ownership interest in the pipe is because it is taking the same risk through planning and construction of the pipeline as the other owners of the pipe. This is not an insignificant risk and the state should not take the risk lightly. If the state elects to negotiate a participatory interest in the pipeline, it must have a sound financial plan in place that includes how it is going to manage project failure, cost-overruns, and project delays, to name a few issues. The state must approach participation as a business decision with a sound business plan. Otherwise it should stay out of this private sector project.

Public ownership of the pipe brings no financial benefit to the state's analysis of participation in the pipeline. Financially public ownership of the pipe is more of a burden to be managed than a benefit to be encouraged. There are other reasons, primarily political, to offer pipeline ownership to the public, but those reasons do not meet any type of straight faced economic analysis. The small amounts of money the public would bring to the table and the large number of owners required to make any significant contribution would add an administrative burden to the project that far outweighted the financial benefit the public owners would bring to the table. I will discuss the benefits of public ownership later in this article, but it is important to remember that public ownership could be valuable, but that value is not financial. It is not because of the small amount of money they would bring to the table.

If the state were to own a participatory interest in the pipeline, the state would be at the table with the other owners of the pipeline. It would be able to protect the state’s interest in decision-making. Every owner of the pipeline will vote its interest in the pipeline to benefit it individual corporate interest. The state would have a better chance of protecting the interest of the people of the State of Alaska if it was at the table to argue those interests to the other owners. For example, when the state was negotiating a participation agreement in the first pipeline negotiations, the owners were considering an 80/20 debt equity ratio for funding and financing the pipeline instead of the debt equity ratios proposed by either of the current pipeline proposals now moving forward. This could have resulted in a lower tariff for gas and lower overall costs to Alaskans. If the state were an owner of the pipeline, we might have seen better tariff terms proposed by the pipeline.

There is at least an argument that if the state owned a portion of the pipeline, the legislature would be less likely to pass punitive legislation against its own interests. The pipeline company might get a fairer review by the legislature before the legislature passed legislation affecting the pipeline.

State Ownership of the Gas

The state owns its royalty share of the gas, something more than 12.5% of the gas depending on which units participate in bringing their gas to market. The state has a right to allow the owners of the gas to transport and sell the state’s share of the gas or the state can elect to take its share of its gas “in kind” which means the state can elect to take its royalty share of the gas, pay for its transportation, and sell its gas instead of having the gas owners sell the state’s gas for the state.

If the state took its royalty gas in kind, the likelihood of litigation over gas value would be substantially diminished even though there are now regulations in place that substantially reduce the likelihood of litigation regarding gas valuation of the state's gas. If the state were to sell its own gas the issue of the value the state should receive for owner sales of state's gas would go away.

Assuming the two current open seasons fail and a new open season occurs from a consolidated pipeline group, if the state elected to take its gas in kind and bid its gas at the open season, the state would be in the same risk position as the other shippers. And even though the state has argued that the risk on the shippers is not that great, I am sure the state will not elect to take its gas in kind prior to completion of the pipeline. If the state has the right to take its gas in kind prior to construction and bid its gas at the open season or sometime after the completion of construction, it does not make sense for the state to take the construction risks that are placed on the shippers through bidding at the open season and eventually leading to shipping contracts that will allow the project to move forward to construction. The state is much better off allowing the upstream gas owners to take the shipper risk prior to construction and if the state decides it wants to take its gas in kind, wait until sometime in the future after the construction of the pipeline when it knows the tariff costs and knows that the pipeline is a viable project.

ON THE OTHER HAND, if the state really wants to increase the likelihood of a pipeline getting built, it should take its gas in kind, show up at the next open season, shoulder its proportionate share of the risk with the other gas owners and commit to ship its gas on the pipeline.

Form of State Ownership

What would state ownership look like?

First, state ownership of the pipeline is not a right the state has, unless the state wants to be the owner and builder of its own pipeline. If the state wants to participate in the ownership of either of the two existing pipeline projects or in the ownership of a future consolidated group of the two pipelines, then the state must convince the other owners that the state would add value to the success of the pipeline. The other owners must see state participation as more benefit than negative and worth the hassle to allow state participation in the project.

If the pipeline companies allowed the state to participate, the pipeline companies would be looking for certain things in the creation of the state entity that would hold the ownership interest of the state in the pipeline.

The pipeline companies have certain requirements for providing information to the public and the state and federal regulatory agencies. All other information is private and kept confidential. This isn’t because they are doing something bad or illegal, it is just the way they do business from a competitive standpoint. They do not like to reveal to the public, the regulatory bodies, or their competitors anything they are not required to reveal. The state entity would have to abide by the same corporate policies regarding what is public and what is kept private. The state entity would have to be insulated from influence from the governor, the legislature, or other political or public groups. The state entity employees would be bound by the same confidentiality obligations as the employees of the other owner pipeline companies. A corporation would be the likely form the state entity would take.

The other pipeline owners would have to be assured that the state would pay its proportionate share of all costs and take all the same risks as the other corporate owners of the pipeline. The owners would have to be assured that the legislature could not hold the pipeline hostage through the appropriation process.

The other pipeline owners would have to be assured that the state would not vote against its own financial interests by attempting to influence the pipeline, through the state’s vote, to take a position that may be in the interest of some in the state, political or otherwise, but is not in the state’s economic interests regarding a successful pipeline.

In essence, the other pipeline owners would be looking for the state to create an entity that looks and acts like a private corporation without influence from the public, the governor or the legislature. And the other pipeline owners would have to be assured that the legislature would not change the state entity at some future date. The other pipeline owners might require the state entity to grant the other owners the right to purchase the state’s interest in the pipeline if the legislature attempted to change the entity. The purchase may even need to be with some penalty to the state it make sure some future legislature does not attempt to meddle in the state entity’s business in the future.

If the state is not willing to agree to the above criteria, I recommend the state not consider state participation in the pipeline because the pipeline owners will probably not consider granting the state the opportunity to own an interest in the pipeline.

Public Ownership of the Pipeline

Public ownership of the pipeline can only come through ownership in the state entity created for that purpose.

If set up properly, the state could offer ownership shares of the pipeline to the people of Alaska. This would help the people of Alaska feel like they had a stake in the pipeline. It would also add additional protection against adverse legislative action against the pipeline. If there were a substantial number of Alaskans or a number of influential Alaskans that had an ownership share of the pipeline, the legislature would more thoroughly consider any legislation potentially adverse to the interests of the pipeline company.

The other owners of the pipeline would probably not see public ownership of the pipeline as a negative so long as the public was limited to buying non-voting, non-participatory shares and public ownership did not place any additional burdens or obligations on the other owners of the pipeline. The public owners could also not have any additional rights to influence the decisions of the corporation or be given access to information that was not already available to other members of the public. Anything different from this and the other owners of the pipeline would probably not consider allowing the state to participate in the ownership of the pipeline with them.

Conclusion

The above is just a shapshot analysis of some of the issues that must be addressed if state ownership of a pipeline is considered. state ownership, in and of itself, will not increase the likelihood of a pipeline. In fact there are other issues that are more important to the success of a natural gas pipeline that need to be addressed by the legislature. But if state ownership is considered, the form that ownership should take is one that looks more like a private corporation than a public entity if the state wants it to be effective in increasing the likelihood of success of the pipeline.