AGIA's Hail Mary Gas Tax Strategy

Over the last few weeks I've heard both talk show callers as well as read blog comments asserting that AGIA is responsible for Denali and the recent tax hike approved by the legislature (ACES) has had no impact on the progress towards a gas pipeline.

In order to think that AGIA was responsible for both the ConocoPhillips proposal last December and the Denali project this spring, you'd have to ignore the fact that all of the major producers testified when the legislature was crafting AGIA that they wanted to bid, but AGIA didn't provide for a commercially viable project. 

More highlighting the fallacy of this argument later in the blog.

Last week on a local talk show, a guest stated, "when ACES was passed, a lot of people said it would harm future investment. But here we are with the producers pushing ahead with the Denali Project." The host replied that he hadn't heard that before and thought that was a great point.

No it wasn't a great point because it wasn't accurate.

In fact trying to use the emergence of Denali to prove the recent tax hike on the oil & gas industry was harmless ignores the fact that current gas tax rate under ACES is completely irrelevant for two important reasons; nobody is producing gas today so there is no way to judge its impact but more importantly everybody realizes the gas tax structure today, won't be in place tomorrow, if the state hopes to attract the final investment decision needed to build the gas pipeline.

Look, it's one thing to adopt a massive tax increase on a thirty year old legacy oil field, but that approach won't work if you're trying to attract new investment for the most expensive privately financed oil & gas project in North American history.

During testimony on AGIA in April of 2007, Department of Revenue Commissioner Pat Galvin was asked about the state's existing gas tax rate before ACES was adopted. Galvin replied, “Our level of confidence in the current tax rate is relatively low”.

A few days later in the House Resources Committee, lawmakers queried Commissioner Galvin about why the state wouldn't make necessary adjustments to the tax rate before asking for competitive bids under AGIA.

With all the concerns about the lack of fiscal predictability in AGIA, why wouldn't you want to nail down something as critical as tax rates, asked one Representative. How do you expect someone to submit a complete bid if they don't know what their tax rates are going to be, asked another.

“You have moved from a question of whether the producers need to have this level of certainty that they keep talking about at the time they submit the application or whether its at the time they commit their gas. What we have structured in the bill is that level of certainty we believe is appropriate at the time they commit their gas”, Galvin answered.

This was AGIAspeak for, "we have designed the bill so the producers can't bid on AGIA, so we will only attract independent pipeline companies."

Twenty four hours after Commissioner Galvin said the state had determined that it wasn't important for AGIA applicants to know the actual tax rate, the House Resources Committee took testimony from a prospective applicant who disagreed and told the committee just how critical it is for private companies in the real world.

“To make a sound and fundamental good decision, I have to know” replied Marty Massey from Exxon when asked about the importance of knowing the tax rate. “I don't know, I really don't know what rate to run the economics at because it can change, all of it can change”, Massey testified on April 12, 2007.

A year later, we have confirmation that AGIA was never about  attracting the most qualified applicants through a competitive process. If it was, you wouldn't have a process where the state ignored those who could build the project while subsidizing those who can't.

The bottom line is that setting a competitive tax rate wasn't a priority, because AGIA was always geared towards a third party pipeline company who wouldn't pay the tax rate.

On January 19, 2008, days after TransCanada was announced as the only viable AGIA applicant, Marcia Davis, Deputy Commissioner of the Department of Revenue testified in front of the Senate Resources Commitee.

Davis was asked if the legislature should begin discussions about changing the gas tax in anticipation of open season. "Beginning the gas talk discussion is certainly not inappropriate", she replied.

Davis went on to admit that the tax rate "effects what a producer puts into their consideration as they approach an open season and decide whether to tender their gas".

Whoa....hold on a minute. Isn't that exactly what Marty Massey from Exxon said almost a year earlier when the producers were advocating changes to AGIA to make it commercially viable so they could offer a competitive bid?

Yes, it is.

However for Galvin and company, they viewed the gas tax rate as leverage to force the producers to commit gas to a TransCanada pipeline, thus forcing a marriage governed by the vows of AGIA.

But they completely understimated the producers willingness to start their own project; even though every major producer testified last year during the AGIA hearings that they were interested if the state amended AGIA to promote a commercially viable project.

This is exactly why Commissioner Galvin was so animated last week when lawmakers asked about treble damages if the legislature  adopted a new tax structure. At the end of the day, a competitive tax structure could result in the producers moving ahead with Denali while AGIA's choosen one, TransCanada, waits at the altar after spending hundreds of millions of state dollars preparing for the wedding.

Don't do it, Galvin said. Don't think you're going to get cute and walk right up to that line because we will have to pay them treble damages, he added, sounding desparate that his AGIA Hail Mary  might be usurped by the legislature.

But this is where Palin's gas line team knows they're on thin ice with AGIA. 

The state can't adopt a tax structure and offer it to the producers only if they commit their gas to a TransCanada's pipeline. That would violate just about every equal access provision and restraint of trade clause known to man kind.

So instead, the administration's strategy is to try and force the producers to accept the terms of AGIA by committing their gas to a TransCanada pipeline in exchange for a favorable tax structure. If the legislature were to adopt a commercially reasonable tax structure before the producers caved in, the legislature would effectively neuter the administration's entire strategy.

I've said it before and I'll say it again; this arranged marriage concept is plain foolish and will put the project at risk.

Two weeks ago when FERC testified in front of the legislature they talked at great length about the urgency of not wasting time due to the major investments being made around the globe in search of natural gas.

Mark Robinson from FERC talked about how arctic gas has a competitive disadvantage and most of todays investment in gas infrastructure is going into equatorial areas like the Gulf of Mexico. And he pressed the need to get moving quickly due to the fact that other gas supplies were quickly being explored and developed.

Meanwhile, here we are trying to develop our arctic gas playing the role of Sheriff Bart in Blazing Saddles.

Aiming our own gun at our own head while warning investors that if they take one more step we'll shoot. 

This approach sets up a dangerous game of chicken that the state will not win, while putting our economy at risk.

Meanwhile the next time you hear someone say that AGIA is responsible for Denali, or that AGIA is going to be responsible for getting a gas pipeline built, remind them of the facts. 

Last year the producers testified the reason they couldn't bid on AGIA without amendments was because it didn't provide for a commerically viable project.

This year TransCanada testified the reason they needed the $500 million subsidy from the state was because AGIA required them to do things they wouldn't normally do in a regular commercial project.

And if anyone thinks the most expensive oil & gas project in the world will be built by a process where both the investors and the state's straw man have already stated that the terms in AGIA are not consistent with a normal commercial project, they're fooling themselves.