The federal infrastructure bill does not include billions of dollars in loan guarantees for a proposed gas pipeline project on Alaska’s North Slope. The legislation simply changed federal law so that a liquefied natural gas export project could be eligible to apply for a loan guarantee.
Big difference. It’s like the bank said you can apply for a home loan, not that you get the loan.
Without a doubt, a federal loan guarantee for more than half the construction cost of the proposed Alaska LNG project would be a big win for any developer.
The US Treasury backstop would not only make it easier to borrow money, but would reduce the interest rate applied to any debt the developer would have to repay from the project’s cash flow. This could help reduce the selling price of gas in a fiercely competitive global market where price matters.
A recent report by global energy consultancy Wood Mackenzie, which was commissioned by state-owned Alaska Gasline Development Corp., found that federal insurance to cover any potential default could lower the interest rate. on the debt of 1.5%.
AGDC has run the $38 billion Alaska LNG project since late 2016, when North Slope producers pulled out of the project due to depressed oil and gas markets at the time.
Before the change written into the infrastructure bill, only a project in Alaska that delivered gas to the lower 48 states would have been eligible for federal aid. That was the intent of the original provision passed in 2004, when Congress feared the United States was running out of natural gas — a few years before the rush for shale gas production put an end to that concern.
The amendment to the law simply removed the requirement that gas must be delivered to the “continental United States” or “west coast states,” leaving the definition of a qualifying gas project in Alaska as no anything – a gas processing plant, a pipeline, a liquefaction plant, or tankers – that transport “natural gas from the North Slope of Alaska.”
Obtaining the change in eligibility included in the Infrastructure Jobs and Investments Act, signed into law by the President last November, was relatively easy because it cost the federal treasury nothing. Provisions with a cost, in particular amendments to a very sensitive 2,072-page bill, are much more difficult to incorporate into legislation.
The loan guarantee program, administered by the Department of Energy, is free to the US Treasury. But it could cost the project up to hundreds of millions of dollars in finance charges, unless the developer can either convince Congress to take the note or convince federal budget and Treasury Department staff that there is no risk of default on the loans.
While it’s likely that a project developer — especially if the state of Alaska is part of the venture — would prefer that Congress appropriate money to pay the risk fee, known as the ‘cost of credit subsidy’ would be a difficult political question. No doubt some members of Congress would support paying the levy if it meant selling more exports to China, while others would just as likely oppose footing the bill so China could get some cheaper gas.
Another important point is that while the law allows the Secretary of Energy to issue the guarantee, it does not require the Secretary to guarantee the debt.
Before the Alaska LNG project could even apply for a federal loan guarantee, it would need to find customers, investors and financing. A developer would need binding contracts from enough customers to use the pipeline and liquefaction plant and take on the gas to convince private investors to lend the billions of dollars for construction.
Only after assembling the whole package could the project developer approach the Ministry of Energy and start the process which would go through several stages before getting a response.
The possibility of a federal loan guarantee was one of many provisions included in the Alaska Natural Gas Pipeline Act of 2004 to help the long-awaited but never financially feasible North Slope gas project come to fruition. The loan guarantee was set at $18 billion in 2004, indexed to inflation, bringing it to over $26 billion in 2022. The LNG project is estimated at just under $40 billion.
Like any other federally guaranteed loan, such as a Small Business Administration guarantee, the sponsor would have to line up private lenders willing to write the checks, although these private loans may be contingent upon receipt of the federal guarantee.
The project sponsor would then approach the Secretary of Energy, where department staff would review the applicant, much like the bank reviews a mortgage borrower’s finances. Staff would review the project’s projected revenues and expenses, as well as the quality of customers for the gas – are they likely to honor contracts for the term of the loan.
If the Secretary of Energy approves the guarantee, the Federal Office of Management and Budget and the Treasury Department, under a 1990 law called the Federal Credit Reform Act, would determine the “cost of credit subsidy » of the guarantee – an estimate of the amount the Treasury could be required to pay if the loan goes bad and the guarantee comes into effect.
The 1990 law was designed to provide a more realistic picture of what federal loans and loan guarantees actually cost the government due to nonpayments and defaults.
For example, if the review determines that there is a 2% risk of default on a $25 billion loan guarantee and the government could recover half of what it could lose by honoring the guarantee , the project developer would have to pay a $250 million fee to cover that risk — or ask Congress to cover it.
Once this issue is resolved, the project developer and energy department staff would negotiate the specific terms of the warranty contract.
It is certainly possible for a gas project in Alaska to obtain a federal loan guarantee if it can enter into binding contracts with creditworthy customers for the pipeline, the liquefaction plant and the gas. It’s just more complicated than changing a few words in the law to make an export project eligible for warranty.
Larry Persily is a former federal coordinator for the Office of the Alaska Natural Gas Transportation Projects and can be attached to [email protected].