Because of serious delays in obtaining private financing, the Department of Energy's special counsel on the proposed $20 billion Alaska natural gas pipeline has recomended that it be owned and operated by a federal government corporation.
In a confidential memo to the secretary of Energy obtained by The Washington Post, the special counsel, Martin Lipton, accused John McMillian, chairman of Northwest Alaskan Pipeline Co., of refusing to negotiate financing details with the oil companies that own the gas, particularly Exxon, Arco and Sohio. Northwest is the partnership picked by the government to build the pipeline.
Unless McMillian enters negotiations and they are quickly successful, Lipton said in the memo, "the public interest in expediting this long-delayed, vital energy project is so great" that a totally different aproach to its construction is needed.
An attorney for the pipeline consortium, in a reply to Lipton also obtained by the Post, accused the special counsel of being "highly irresponsible" and guilty of "a gross distortion of the facts." Attorney Russ Moody Jr. wrote, "Your January 30 memorandum may well destroy any hope of success in the delicate on-going negotiations with Canada for access to surplus Canadian gas as an aid to construction of the Alaskan system."
Lipton, hired by DOE specifically to try to find a way to bring McMillian's group and the gas producers together on financing, proposed that the producers build the Alaska portion of the line, with ownership to be acquired by a federal pipeline corporation (Fedline) once it is finished.
Legislation would be needed to create Fedline, which would issue bonds without a government guarantee to the producers to buy them out. The producers would have an incentive to undertake construction so they would have a market for their $40 billion worth of gas, Lipton said. They would also be relieved of the burden of paying for a $3.5 billion plant at Prudhoe Bay needed to process the gas before it moves through the pipeline.
"Because the producers have substantial experience in this type of construction and they are the only interested parties (other than the government) with the ability to finance the project, they are the logical choice," Lipton said in the memo.
Under the terms of legislation passed two years ago to expedite the pipeline, however, the gas producers are prohibited from having any equity ownership of the line, have any voting power in the project, any role in management or operations, or any continuing financial obligation in relation to debt guarantees after the project is completed.
The producers can provide completion guarantees, and that is what McMillian has been seeking -- to the tune of $4 billion to $6 billion.
Initially, Exxon proposed the three major gas producers provide 40 percent of the equity and 40 percent of the borrowed capital, an approach that presumably would require new legislation.
The restrictions on producer involvements were recommended by President Carter to avoid any anti-trust complications. Now the consortium, McMillian's group, DOE and the Justice Department are all engaged in an effort to find a way to bring in the producers without violating the law.
The results is a struggle between McMillian and the producers over who will have what degree of control over the project. Under Lipton's proposal, McMillian and his six other gas pipeline company partners would no longer have any role whatsoever in the line.
Last Saturday Energy Secretary Charles Duncan met with representatives of Exxon, Arco and Sohio, which collectively own about 80 percent of the gas, to discuss the project's financial difficulties.
A high DOE official said no agreements were reached at the meeting. The official said the administration still wants the project built without federal financial involvement. Lipton's recommendation is "one extreme option" that likely would be used only as a last resort, he said.
The major stumbling block to obtaining private-sector financing for the pipeline is that the seven pipeline companies in McMillian's group are having trouble convincing financial markets they have the resources to complete the project.
That is why McMillian wants completion guarantees from the producers "Your approach," Moody castigated Lipton, "will effectively reward Exxon for refusing to negotiate by proposing an alternative whereunder consumers will pay Exxon for the pipeline, for the processing plant and for the gas that moves through the system. Given your approach, we fully understand why Exxon keeps postponing face to face negotiations with Mr. McMillian."
The memo and the replies may have changed someone's mind, however, because sources said McMillian has invited the producers and Gov. Jay Hammond of Alaska to meet with him sometime this week or next.
The financing controversy involves only the 741-mile Alaskan segment of the pipeline, which would cost $6.2 billion, or $7.5-billion with a 20-percent cost overrun anticipated in Lipton's memo. The gas processing plant would cost an additional $3.5 billion.
A separate group of Canadian pipeline companies is planning to build the 2,028 miles of the line in that country, at an extimated cost of $6 billion.
Gas reserves at Prudhoe Bay are estimated at a minimum of 26 trillion cubic feet. Initially the new pipeline would carry about 2.4 billion cubic feet a day, or 5 percent of daily U.S. consumption, but could be expanded to handle 3.2 billion.