The Senate Resources Committee heard Thursday from consultants who warned that the proposed Alaska LNG project faces significant cost and schedule risks common to megaprojects. The consultants also analyzed how a proposed alternative tax structure might improve the project's economic viability.
Nicholas Fulford, senior director of LNG and energy transition at Gaffney Cline, presented updated economic modeling showing that a 6-cent-per-thousand-cubic-feet alternative volumetric tax would generate roughly $60 million annually for the state, or about $2.23 billion over 35 years in nominal terms. That figure would decline to just under $2 billion in real terms due to a proposed 1 percent annual indexation that falls below expected inflation.
The committee also heard from Pegasus Global Holdings, which reviewed risks associated with large infrastructure projects and presented case studies of two recent natural gas pipelines in the eastern United States that faced major cost overruns and permitting challenges.
Tax Structure and Competitiveness
Fulford's presentation focused on how the proposed alternative volumetric tax would compare to tax structures in competing jurisdictions. The alternative tax would replace traditional property taxes on the pipeline. He showed that combining federal and Alaska state taxes with the 6-cent volumetric tax would result in an effective tax rate of about 33 percent, compared to roughly 24 percent for competing Canadian LNG projects.
"The combination of US federal and Alaska state comes to about 28.43 percent," Fulford said. "With the 6-cent volumetric tax, that would move that number up to about 33 percent."
Senator Bill Wielechowski questioned why the proposed 1 percent indexation would not keep pace with inflation. "I certainly think 1 percent is too low. It does not even remotely keep up with inflation," he said. He suggested a 1-cent annual increase might be simpler and more effective.
Fulford acknowledged that fixed percentage increases over decades carry risk for both the state and project developers. "Some kind of inflationary measure is more typical" in international projects, he said.
The modeling showed that at $1.50 per thousand cubic feet for upstream gas and baseline capital costs, the project could achieve a 10 percent post-tax return under the proposed tax structure. Without the alternative volumetric tax, the project would need lower gas prices or capital costs to reach the same return threshold.
Wielechowski also raised concerns about the impact on local communities. He noted that the alternative volumetric tax would eliminate roughly $600 million in property tax revenue that would otherwise flow to local governments. "The total cut in property taxes is $600 million or so," Wielechowski said. "If the local communities were to say, okay, we'll give $600 million in tax breaks and accept this 6-cent alternative volume tax, but in exchange we want an equivalent equity stake in the project."
This article was drafted with AI assistance and reviewed by editors before publishing. Every claim can be verified against the original transcript. If you spot an error, let us know.
Wielechowski pressed for information about producer returns at different gas price points. He noted that upstream economics could have a larger impact on project viability than the state's tax structure.
Dan Stickel, chief economist with the Department of Revenue, confirmed that under baseline modeling assumptions, producers would see positive overall income at $1 per thousand cubic feet when accounting for both gas sales and associated oil development. He said the department would provide more detailed analysis of producer returns in an upcoming response to the committee.
"Why is there so much pressure on the state to change our tax structure when just through these we can see that the producers of the gas on North Slope can have a significantly larger impact on whether or not the project is profitable?" Wielechowski asked.
Fulford responded that the question required detailed analysis. "Projects like these are exceptionally complicated," he said. "The sort of dialogue we are having now probably requires a day or two of kind of analysis and scenarios to examine."
Megaproject Risks and Case Studies
Jeremy Clark, chief operating officer of Pegasus Global Holdings, presented findings on risks associated with megaprojects and gigaprojects. These extremely large infrastructure developments can transform regional economies but face heightened execution challenges.
Clark highlighted two recent natural gas pipeline projects in the eastern United States as cautionary examples. The Mountain Valley Pipeline, initially estimated at $3.5 billion, ultimately cost $9.6 billion and took six years to complete instead of the planned timeline. The Atlantic Coast Pipeline was canceled in 2020 after costs rose from an initial $4.5 billion estimate to more than $8 billion, with roughly $3 billion already spent.
"Both of them suffered from cycles of agencies issuing permits, opposition challenging those permits, courts vacating those permits, the agency then reissues the permit, and then another lawsuit is filed," said Joe Miller, president and CEO of Pegasus. "Many of the challenges occurred after construction" had begun.
Senator Cathy Giesel asked whether Alaska's existing federal permits would protect the project from similar challenges. Miller said the permits represent significant progress but do not eliminate risk. "We just want to make the point that that does not mean that challenges are over," he said.
Phased Approach Considerations
The committee examined the Alaska Gasline Development Corporation's plan to build the project in phases. The plan starts with the pipeline to deliver gas to Southcentral Alaska before completing the gas treatment plant and LNG export terminal.
Clark said the phased approach reduces initial capital requirements and could deliver in-state gas two to three years earlier than building all components simultaneously. However, he noted it introduces structural risks because the pipeline's economics depend on revenue from LNG exports.
"Phase 2 is delayed, it would further increase that risk," Clark said.
Senator Jesse Kiehl questioned whether the pipeline would remain viable if later phases were not completed. Miller said that scenario raised difficult questions about project financing and cost recovery.
"One question we have is, is Phase 1 financeable on a standalone basis?" Miller said. "Can you kick off construction of Phase 1 without having the overall program financing in place?"
Miller noted that Department of Revenue modeling suggested Phase 1 in-state gas supply costs could range from $12 to $13 per thousand cubic feet, roughly comparable to LNG import alternatives. However, he said those costs depend heavily on volume assumptions and whether Phase 1 costs are amortized separately or pushed to later phases.
TAPS Lessons and Cost Control
Pegasus reviewed lessons from the Trans-Alaska Pipeline System, which faced cost overruns from an initial estimate of roughly $900 million to a final cost exceeding $8 billion in the 1970s. A Government Accountability Office study identified key factors including underestimated costs, inadequate contingency, and no escalation in the estimate despite a four-year construction delay.
Clark said the TAPS experience highlighted the importance of thorough estimating processes, independent reviews, strong risk assessments, and ongoing government audits to protect the public interest.
Senator David Nelson asked whether regulatory oversight through the Regulatory Commission of Alaska would provide adequate protection against cost overruns being passed to consumers. Miller said he was encouraged by testimony earlier in the week that capital cost overruns would not be passed to customers, but emphasized that commitment needs to be formalized.
"That just needs to be memorialized in some fashion, either in the contract between Enstar and the project, or through the RCA process, or through legislation," Miller said.
Senator Lea Claman noted that preventing cost recovery from consumers could increase financing costs by raising perceived risk for lenders. Miller agreed that greater risk would likely result in higher expected returns for investors.
Next Steps
Committee Chair Cathy Giesel said the committee would hear from the Regulatory Commission of Alaska at its next meeting to address regulatory questions. She also read into the record a legal opinion from the Department of Law stating that any pipeline spur line owned by a municipal utility would be constitutionally exempt from property taxes regardless of the alternative volumetric tax framework.
The committee will continue consideration of Senate Bills 275 and 280 at a meeting Friday afternoon.
Comments
Sign in to leave a comment.
No comments yet. Be the first to share your thoughts.