Knowles plan would use tax-exempt bonds to finance pipeline

Posted: Friday, February 08, 2002

JUNEAU (AP) -- A proposed natural gas pipeline to the Lower 48 could be back on track with the help of the Alaska Railroad, Gov. Tony Knowles said Thursday.

Knowles wants to use the railroad corporation's ability to float tax-exempt bonds as an incentive for producers to commit to the $17 billion project.

It could save more than $1 billion from the life of the project and be enough to sway oil producers who have thus far not found it profitable enough, Knowles said.

The proposed pipeline would ship stranded natural gas from the North Slope to markets in the South.

It's the largest privately funded construction project currently in America, Knowles said. And he said this type of ''creative financing'' will facilitate its being built.

''Congress has created and protected this opportunity for the railroad,'' he said during an announcement in Anchorage. ''By any measure, this is a significant step forward.''

A natural gas pipeline is estimated to bring in $500 million annually in state revenues and provide as much as 8 percent of the nation's daily demand, Knowles said.

It's being considered at a time when North Slope oil production is beginning to slack to half of its 1988 peak of 2 million barrels a day.

But the major oil producers in Alaska -- Exxon Mobile, BP Exploration (Alaska) Inc., and Phillips -- have not agreed to take on the ambitious project.

They also haven't agreed on whether such a pipeline should follow the trans-Alaska Oil Pipeline and the Alaska Highway -- known as the all-Alaska route -- or detour through lucrative fields in Canada.

The three companies commissioned a $100 million study to determine whether the project would be profitable and are currently studying those results.

But they've said tentatively that neither route -- the all-Alaska line or a Canadian route -- are cost effective. Oil companies contacted Thursday said they have not reviewed Knowles' proposal.

''Our preference would be for a project that stands on its own,'' said BP spokesman Ronnie Chappell. ''We need to continue to reduce costs to create fiscal certainty.''

Chappell said the company will continue to pursue state and federal incentives for the project. He said the company wants ''an efficient regulatory framework'' for the project.

In testimony before the U.S. Senate Energy Committee last year, Knowles proposed federal incentives to make the project more attractive.

Just as the project faces uncertainty, so too does Knowles' plan for creative financing.

Congress gave the Alaska Railroad Corporation the ability to issue tax exempt bonds to finance industrial development projects when the state took over operations in 1983.

Sen. Ted Stevens, R-Alaska, authored the provision, which was again reaffirmed in the Tax Reform Act of 1986.

Stevens said in a press statement that it is an appropriate use of such bonding. And Goldman-Sachs, which consulted with state officials on the use of such bonds, also believes it is appropriate, officials said.

But it remains unclear whether the Internal Revenue Service will sign off on the use of such bonds for a project of this scope.

Alaska Railroad Corporation President Pat Gamble said this type of bonding authority was designed to allow a continued role in the state's economic development.

Such a bond would generally require a 30 percent contribution from the group building the project, which could be as high as $4 billion for a $14 billion project.

Alaska Railroad would issue the debt but would not be responsible for it and it would not make the state a partner in the project.

Knowles' plan adds a new wrinkle in recommendations by the state Department of Revenue, which had concluded that Alaska could not afford to be a partner in the project.

The report concluded that tax-exempt financing might make ''feasible a project that otherwise would be uneconomic.'' Similar financing has been used in the past. Valdez helped to issue more than $1.2 billion in tax exempt bonds that allowed Arco to build a marine terminal.

Knowles plans to ask the Legislature to authorize the Alaska Railroad to undertake his plan.

Sen. John Torgerson, R-Kasilof, who heads the state Joint Committee on Natural Gas Pipelines, said he too has many questions about the plan. But Torgerson predicted the Legislature will likely support such a plan.

''I'll give him an 'A' for creativity,'' Torgerson said. ''I think it certainly puts us closer, if not over the top.''

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