AGIA: Failure to Launch

August 3, 2010: After three years, untold millions, and dozens of various differing voices on the prospects of the Alaska Gasline Inducement Act, the day has come: AGIA has officially failed.

With the close of AGIA's open season on Friday, it has become crystal clear that the state's attempt to force feed the largest oil & gas project in the world to the largest oil & gas companies in the world, has turned out to be just as we predicted three years ago; a pipe dream. 

While Governor Sean Parnell and his administration are trying desperately to spin this failure into a win, their so called milestones are in actuality millstones around the neck of Alaska's gas pipeline dreams.

Back in April 2007, in a private meeting with Department of Natural Resources Commissioner Tom Irwin, his Deputy Marty Rutherford and then Lt. Governor Sean Parnell, all of them proclaimed that AGIA was the only way to get Alaska a gas pipeline without having to negotiate (as Frank Murkowski did) with the oil & gas companies.

Exxon is terrible to negotiate with, they get up and walk away from the table when they don't get what they want, said Irwin. Yeah, the big three are tough to negotiate with, added Parnell.

A little more than a year later, DNR's Irwin told a packed ballroom at the Sheraton Hotel, If you don't support AGIA, we will be at the mercy of the producers. AGIA is Alaska's only chance to get a pipeline on our terms without being held hostage by the producers, he said.

However here we are three years later, open season has closed, and the terms "key conditions" and "protracted negotiations" are being tossed around like Nerf balls by TransCanada, AGIA's licensed strawman.

"We're encouraged about the future advancement of the project if key conditions can be resolved," Tony Palmer said on Friday after reading from a brief statement that left more questions than answers.

Most likely, TransCanada's Palmer said, the bids will be conditional, leading to protracted negotiations. Bidders might ask for an ownership stake in the pipeline as a condition, or special tax breaks from the state. Or he said, they might want TransCanada to be responsible for construction cost overruns instead of seeing those extra costs added to transportation charges.

Wait a minute...this is what AGIA was specifically designed to avoid; negotiations with the producers.

According to several dozen quotes on the issue from administration officials over the last three years that were chronicled on countless blogs, AGIA's must haves were supposed to be met without debate to protect the state.

"We're not negotiating" said both Irwin and Revenue Commissioner Pat Galvin at various times throughout the last three years.

“Here's where we are at” Commissioner Irwin said on a local talk show on April 4, 2007: "We get where we're at today or yesterday. Nothing is happening, were at the mercy of the big companies, their leverage”. When asked why not negotiate? “We're not negotiating. We're a fair business decision on AGIA” Irwin added.

The pipeline was supposed to be built on AGIA's terms not the producers. But here we are three years later with conditional bids and the promise of protracted negotiations. A true failure to launch.

While the administration and TransCanada are both trying to sugar coat the unexplained details of AGIA's open season, the public is soon to realize what a complete ruse this entire exercise has been.

One can only hope this means the clowns at DNR who have blown three years, millions on questionable expert advice and played a game of politics that crucified the producers during the AGIA debate will be fired.

Key Conditions

The major producers, (those who will pay for the gasline) have made it very clear what they need during the debate on AGIA. In fact, time and time again they warned the Parnell administration that the current mandates in AGIA did not allow for a commercially viable project.

The producers will demand the following:

Fiscal certainty of at least the same length as TransCanada is asking for which is 25 years. Ownership of the pipeline commensurate with the amount of gas they are going to ship. An elimination of the AGIA's mandates that add cost to the project like higher rolled in rates and transportation directives, along with better upstream inducements to make the project pencil out.

The problem for the administration is that all of these producer "must haves" means AGIA needs to be gutted, therefore making the last three years clearly a waste of time and taxpayer money.

Remember State Senator Fred Dyson's comment when AGIA was rolled out back on April 5, 2007?

"I think what the governor has put forth is near genius," said Dyson, R-Eagle River. "I don't believe that the majors are going to be able to face their stockholders and say we walked away from being able to book $8.6 or $8.7 billion of oil equivalency and get away with it."

Well, I guess looking at all of the conditional bids, Dyson couldn't have been much more out of touch with how the real world of risk and reward is managed in the private sector.

But the biggest problem isn't lawmakers like Dyson and all of the others who voted to send Alaskans up the river without a paddle, it's what happens next.

Protracted negotiations; with whom?

The biggest sham of AGIA is that TransCanada, who will now hold negotiations with potential shippers to resolve "key conditions," has no legal authority to change those conditions.

Only the legislature can change the terms of AGIA to allow for fiscal certainty, modified rolled in rates, pipeline ownership or breaks on taxation.

In fact, TransCanada has no legal authority to resolve any of those conditions that potential gas shippers have already made clear they need in order to proceed with evaluating the project. Thus the reason we have always referred to TC as a strawman. The gas shippers might as well negotiate with themselves.

In addition, the state has now put itself in a position where it's chosen AGIA flag bearer could very well be negotiating against the state.

Meanwhile, for every dollar TransCanada now spends on the AGIA process, the State of Alaska taxpayers will be coughing up ninety cents to reimburse them.

Fiscal certainty, gas taxes, pipeline ownership...all unresolved, all needing the legislatures approval. Furthermore with Point Thompson still in litigation and offshore gas now being placed on hold, you don't even have enough known reserves to justify a 4.5 bcf a day pipeline.

Oh...and lets not forget that if the legislature acts on all the requirements that gas shippers have conditioned their bids on, they will apply to the Denali project as well.

And...if the Denali project moves forward as the more viable project, we are on the hook for treble damages to TransCanada.

In short, Alaska's gas pipeline hopes are right back where former Governor Frank Murkowski was in 2005.

Of course, minus the millstone of AGIA.