AGIA's Yellow Brick Road: How Much Longer?

"We're off to see the finance committee"

March 8, 2010: The revelation came at time mark 61.44 of the House Finance Committee meeting on February 25, 2010.

Almost three years to the day after the Palin/Parnell administration introduced AGIA as the yellow brick road to Alaska's natural gas pipeline dream, the journey has suddenly taken a long predicted turn; the path is a dead end.

After years of press conferences, soundbites and cheer leading in the press about how AGIA works. After years of lawmakers throwing more and more money at a pipeline strategy that both industry and financial experts have questioned; the AGIA straw man has erupted into flames.

To turn a phrase from the 1939 classic, The Wizard of Oz; how about a little fire scarecrow?

The admission came about from an unlikely source, during a recent hearing on Governor Parnell's request for an additional $140 million for natural gas pipeline related expenses including AGIA. 

This is a very dynamic world we live in, we need to continue to monitor the economics of the (AGIA) project, DNR's Deputy Marty Rutherford told House Finance Co-Chair Mike Hawker (R-Anchorage).

"If in fact as the day progresses if it (AGIA) becomes un-economic, it is certainly going to be a policy discussion that you all are going to be engaged in, as to what if anything would the State of Alaska, long term intends to do about that," Rutherford added.

Whoa, talk about having a flaming straw man left at your front door.

However Rutherford's revelation that AGIA might become the responsibility of lawmakers to extinguish in the near future, immediately drew a quick response from the committee's co-chair Hawker.

"I sat there and listened to you folks say how wildly profitable the project was under any circumstances, and now you seem to be preparing us to make the decision that it might not be," said Hawker, who voted against issuing the AGIA license in 2008.   

If anything, Hawker was diplomatic at a time when outrage could have been far more appropriate.

AGIA under fire

DNR's Rutherford responded by doing what DNR has done best the last three years; re-write history.

Rutherford told Hawker that DNR had warned lawmakers about the risks. "We were very clear about what price points the project would fall under water and we certainly said that we could not ensure the outcome," she responded.

Look, I've been following this comedy routine for three years and the only thing I've heard from Rutherford and her entire DNR team is that AGIA makes for a wildly profitable pipeline project.

In fact, along with touting the fact that the project was highly profitable under any "wide range" of scenarios, they also threatened to sue the producers if gas wasn't commited to a gas pipeline that DNR was convinced was "deep in the money."

And their quotes...who can forget their eloquent and powerful quotes regarding AGIA over the last three years?

DNR Commissioner Tom Irwin saying repeatedly that without AGIA the state would be at the mercy of the producers and it was time to exercise the state's position.  

Revenue Commissioner Pat Galvin saying that with AGIA the state would not have to negotiate with the producers and there was no need for additional fiscal certainty due to the project's favorable economics.

And of course Deputy Rutherford's repeated threats about litigation to revoke the producer's North Slope leases if they didn't commit gas to an AGIA pipeline that DNR said was "deep in the money."

But what these folks have always failed to publicly acknowledge is while DNR can continue writing checks to consultants who will tell them AGIA is viable, DNR can't write the only checks that matter; the checks that finance the pipeline. 

And while Irwin has been quick to say that the state would be very foolish to react to every change in the market, the point the producers have always tried to make by opposing AGIA is that change happens... thus the need for fiscal certainty. 

All in all, Irwin has defended this crazy strategy since day one by promising AGIA will allow the state to harness public, political and shareholder pressure to force BP, Exxon and Conoco to roll over for the largest and most expensive oil & gas project in the world.

But today their testimony seems to say that things aren't quite as they were advertised.

Now it's a "dynamic world" instead of the sure thing they touted just three years ago when they force fed Alaskans a contract for a pipeline to nowhere. Now they're beginning to re-write history in what they told lawmakers over the last few years.

In addition, during the same committee hearing, Revenue Commissioner Galvin defended the need for additional appropriations for AGIA because he said, much of it will be needed for fiscal negotiations with the producers.

Fiscal negotiations with the producers?

Wait a minute, the main justification given by Rutherford, Irwin, Parnell and Palin over the last three years for AGIA's unconventional approach was to avoid negotiating with the producers. In fact, just two years ago DNR's Irwin warned if AGIA wasn't adopted, Alaska would be screwed.

When he addressed the opening day of a three-day public forum on AGIA in Anchorage on May 28, 2008, Irwin told state lawmakers that giving TransCanada a state license and $500 million in seed money was the only way to make the project happen on Alaska's terms. 

Irwin warned that voting against awarding the license and subsidy will mean more waiting and wishing that the major North Slope oil companies someday will build a gas line.

"They own us at that point," Irwin said. "That's what you get when you say no."

Two years and a tens of millions later, Irwin and his crew are now saying all bets are off. Meanwhile the state has been backed into a difficult corner.

We saw this coming....

From the first post on AGIA roughly three years ago, I've always maintained the same position; AGIA will fail because it ignores fiscal and legal realities.

Over the last few years, time and time again, there has been growing evidence that AGIA was fueled by egos instead of intelligence.

The dramatic oil to gas price ratio shift which AGIA's experts predicted would never happen. The Petrotel report that was used to make policy decisions at Pt. Thomson even though it was independently discredited. The admission by Rutherford that they based their economic beliefs on their paid consultants, when their consultants projections were repeatedly dismissed as "overly simplistic." 

This whole AGIA side show has been one expensive waste of time and continues to drain resources that could go to fund a more plausible pipeline strategy.

Even beyond the capitol rhetoric, there are clear signs that the wheels are coming off the entire AGIA premise.

From the recent FERC filings last month by BP and Conoco protesting the lack of information contained in TransCanada's open season to swipes being taken at AGIA during a recent Calgary energy summit.

According to the Calgary Herald, Bob Bleaney, Denali's Canadian manager, compared the state sanction of TransCanada's proposal to granting a driver's license.

But here's the catch; this state is not getting out of AGIA quietly.

The State of Alaska has a signed legal agreement with TransCanada with only two ways out; the state pays TransCanada treble damages or both sides agree the project is uneconomical.

Meanwhile, DNR has set the stage to be negotiating against the state's own AGIA license holder, TransCanada.

TransCanada needs AGIA to succeed in order to get paid, and has already clearly stated in their AGIA license application that they expect the state to negotiate fiscal terms with the producers.

So where are TransCanada's loyalties going to be if the negotiations get bogged down?

Under the terms of AGIA, the state will have to prove that the gas pipeline project isn't economically viable in order to get out of their AGIA obligations. If the state fails to reach an acceptable fiscal package with the producers, TransCanada can argue that the state had the ability to make the project economical, but refused to offer attractive tax terms.

Former Rep. Ralph Samuels brought this up almost three years ago when he warned that AGIA would turn out to be four against one; the three major producers and the AGIA applicant versus the State of Alaska.

Isn't getting leveraged by the producers exactly what AGIA was designed to avoid? According to the head of DNR, that was exactly the reason for the need to support AGIA.

"They own us at that point. That's what you get when you say no (to AGIA)," DNR's Irwin said in defense of the AGIA path two years ago.

Today the end of the Palin/Parnell yellow brick road is near and the straw man they've propped up to lead us to the promised land is engulfed in flames. 

Meanwhile the only answer from behind the curtain is to continue papering the straw man with cash.

Oh sweet Auntie Em.