Answering AGIA: The round table serves up reality

July 13, 2008: In what arguably was the best two days of hearings during this entire six week long legislative review on AGIA, lawmakers spent over twelve hours getting answers from those who will pay for the most expensive oil & gas project in the world.

In a vigorous round table exchange, North Slope producers, TransCanada and state officials all took part in a give and take that provided much needed balance to a discussion that so far had been largely based on the view from the Palin administration.

Not only were lawmakers finally allowed to question North Slope producers, but they also got to see the direct interaction between the producers, TransCanada and the administration.

Due to length of the hearings, I've broken down the Q & A's into topics.

Fiscal Certainty & the State's economic modeling

Wendy King from ConocoPhillips asked that if fiscal certainty wasn't important as some have alleged, why would TransCanada require 25 years of certainty through ship or pay contracts? If TransCanada needs 25 year certainty to build the pipeline, that proves the shippers need 25 year certainty to pay for the pipeline.

Sen. Bill Wielechowski told Exxon's Marty Massey that they have risk factors everywhere, and asked why should the state grant fiscal certainty.

Massey replied that Wielechowski was wrong. "We have agreements with governments everywhere that outline the economics of the project. It's normal business."

Exxon's Massey said the state's economic analysis was based on "simplifying assumptions." The analysis ignores the reality of the real risk that firm transportation commitments represent, by classifying them as normal operating expenses.  Massey stated that under the proper analysis, the net present value to his company isn't $13.5 billion as stated in the state's analysis, but zero.

Sen. Gene Terriault asked Massey if it was true that those FT's represented just a footnote on their balance sheet. Yes Massey replied, but the entire footnote currently existing on Exxon's balance sheet today is $3 billion. With this project it would increase to almost $80 billion, which makes a dramatic difference.

John Zager from Chevron put the risk in perspective. The reliance on net present value as the state has done is only one way companies look at the economics of the project. Firm transportation commitments represent a real transfer of value that in this case would equal upwards of $125 billion. This is quickly approaching the market cap of both Chevron and Conoco, Zager stated.

Pipeline ownership

In one area that looks to be a real problem for an AGIA project is the fact that all North Slope producers present on Saturday stated that they would expect to have a percentage share of ownership in the pipeline that is commensurate to the percentage share of gas they commit to ship.

"We would expect our ownership would equal our throughput" said Exxon's Massey. The other producers present at the table, BP, Chevron and ConocoPhillips all agreed with Exxon's position. Having ownership of the pipe allows us to mitigate our risk they said.

Some lawmakers, as well as TransCanada raised issues with this idea. While TransCanada has offered an equity position to gas shippers willing to commit at first open season, they have repeatedly stated that they wanted to retain control by owning north of 51%.

We're not interested in building and operating a pipeline that will be owned by someone else, TransCanada's Tony Palmer stated on Saturday.

The rub of course is that if all of the gas shippers take a percentage of pipeline ownership based on their gas throughput, that would leave Transcanada (since they don't own gas) at zero percent ownership.   

Representative Les Gara attempted to call Exxon out on this position. There is one pipeline project that you ship 40% of the gas on and only own 9% of the pipeline, Gara stated. Exxon's Massey replied although he wasn't familiar with the creation that specific project, he could say that the pipeline Gara was referring to was only half full today.

On gas availability & Point Thompson

In a discussion that provided one of the most robust exchanges, Revenue Commissioner Galvin stated that the issue of Point Thompson gas being available is a separate question than the question about advancing a pipeline.

Galvin went on to state that in some projects they move forward with only 40% of proven reserves. This drew a heated response from the producers.

John Zager from Chevron again stated their was not enough gas without Point Thomson, especially if the ownership was in doubt due to litigation. In addition Zager pointed out, with additional demands from gas take off to power the slope, to the gas needed for a bullet line to hopes for an LNG project, the state was wrong in saying there was plenty of gas.

In addition, Zager did a good job of describing the misleading sound of using the terms proven and known reserves. Just because these reserves are proven or known, doesn't mean they will be  commercially viable.

For instance, when you buy a twelve ounce can of soda, you get twelve ounces of soda. But if you say a gas field had twelve ounces of gas, you're not guaranteed to get twelve ounces of gas.

Because gas fields don't develop in a perfect triangle, sometimes you might get ten ounces, sometimes you might get six ounces or sometimes you might get nothing. There are substantial risks and the producers made it clear that they were not willing to bet on the come with the most expensive oil & gas project in the world.

Both Dave Van Tuyl from BP and Wendy King from Conoco warned against drawing simplistic comparisons like Galvin had done. This is a unique project due to its size that comes with huge risks that cannot be compared to any other project or gas basins in the world they warned.

One interesting comment came from Cathy Foerster, a Commissioner with the AOGCC.

In response to Revenue Commissioner Galvin's comment that Point Thompson gas would not be available for open season, Foerster stated that she had been writing about that fact in her reports for the last three years.

This is alarming and highlights questions of credibility about the state's push for AGIA.

Last year during the creation of AGIA, Galvin and his staff included Point Thomson revenues as part of the dog & pony show to prove to lawmakers that the natural gas pipeline was so profitable.

In fact, during a meeting with the Palin gas line team I asked specifically about their modeling of Point Thomson and would it be in play for open season. Do your economics assume that the billions in necessary investment in Point Thomson infrastructure will be made and the revenue from Point Thomson gas will be available at pipeline start up?

Anthony Scott from the Oil & Gas Division replied, "yes."

However Foerster stated on Saturday that she's been writing reports for the last three years saying that Point Thomson gas wouldn't be available. It now seems these reports were ignored by the Palin administration when they came up with their misleading economic modeling last year.

And now they want to say that Point Thomson gas isn't critical for  open season? 

Telling exchanges

If you've watched this process long enough, you can clearly see that there are lawmakers who don't have any interest in the facts or the merits of the answers, it's all about the politics.

Lawmakers like Gatto, Gara and Wielechowski have all become what I call the buzz saw boys. Every time they open their mouths, they walk face first into a buzz saw.

On Saturday, Wielechowski called out Conoco's Wendy King.  The Denali project calls for a 4.5 bcf a day pipeline and yet you're saying proceeding without gas is a "dangerous place to go", Weilechowski asked in a huff.

But once again, buzz saw Bill tried to twist an answer out of context.

King's comments were in response to Commissioner Galvins overly simplistic statement that other gas basins have proceeded in the past with only 40% of proven reserves identified so the North Slope could do the same.

King and others testified that other gas basins are dramatically different than the North Slope, with many areas to draw gas from. On the North Slope, there are only two proven gas fields; Prudhoe Bay and Point Thomson. This was said in reference to the importance of having certainty with regards to Point Thomson before open season.

What King said was that making an overly simplistic comparison as Galvin did, with a project as unique and risky as Alaska's is, was a dangerous place to go. 

And what would be a session without the foolish comments from Les Gara?

On Saturday he told the producers that they had their chance to bid under AGIA and didn't. Gara of course ignored the substantial laundry list of reasons why they couldn't bid under AGIA and also ignored the fact that TransCanada's wouldn't even be at the table if not for the State picking up 85% of the cost of the process.

But more importantly, Gara's rebuke of the producers for not bidding on AGIA, ignored what was a very troubling admission by one his colleagues, Representative Bob Roses.

Representative Roses revelations

Representative Bob Roses dropped a bombshell of sorts when he stated one of the reasons why the producers didn't bid on AGIA was because the Palin administration quashed amendments that would have allowed them to bid.

They would go from being in support to changing their minds overnight, Roses said. He went on to say administration officials always explained their flip flops on discussions they had with pipeline companies.

When asked if the administration had ever conferred with the producers over amendments, none could recall ever being approached. When Commissioner Galvin was asked to respond, he avoided answering the question by saying there were a lot of people involved on the administration side so he couldn't answer.

Roses also said that TransCanada has stated that if they knew they we're going to be the only bidder on AGIA, they would have bid differently.

The takeaway

All in all I don't believe the two days of substantial testimony changed many minds, but for those of us who have watched this proces with doubts from day one, it was the final nail in the coffin of any thought that at the end of the day, the producers and TransCanada would strike a deal and walk off building a pipeline under the terms of AGIA.  

The producers highlighted too many areas of fundamental disagreement with AGIA from the pipeline ownership to the unrealisitic financial terms that favor TransCanada to the unfair terms that would have anchor shippers subsidize their competitors.

I predicted it in my first blog last year on April 2, 2007 and it still remains true today; AGIA will fail because it ignores critical legal and fiscal realities.