April 24: Meeting the Governor's Gas Line Team

April 24, 2007: After two hours of talking strategy with Governor Sarah Palin's gas line team, we all left the meeting same way we arrived, from totally different directions. Suffice to say, reasonable people continue to disagree on AGIA.

For those who want to cut to the chase, allow me spare you the editorial comments; After meeting with the Governor's gas line team, I'm more pessimistic about AGIA and Alaska's chances of getting a gas line than ever before.

Governor Palin's office (The wonderful Meg Stapleton) graciously coordinated the two hour discussion to coincide with DNR Commissioner Tom Irwin's layover at the Anchorage Airport.

Also in attendance was DNR Deputy Commissioner Marty Rutherford, DNR's Antony Scott and Lt. Governor Sean Parnell. The sacrifice by all of them to present the case for AGIA last Friday evening was greatly appreciated and I thank them.

During the conversation we talked at length about everything from the intent of AGIA to the failures of the previous negotiations. They answered questions about why this administration won't negotiate directly with the producers and how they believe the state can get a pipeline without negotiations. In addition we also spent a good deal of time discussing the state's view of the project economics and the risks associated with AGIA.

The biggest unsurmountable challenge I see with Palin's gas line team is their anger towards the producers.

Fueled by a history of disagreements with the industry and the high profile battle over the negotiating strategy of the last administration, it was audibly clear that it's time to swing the negotiating leverage the state's way.

The problem with AGIA is, if Murkowski's deal was too extreme towards the producers, AGIA is too extreme away from the producers.

Here is how they believe AGIA will work: Producers might bid, if they don't others will. (After all, this is about competitive process). If the license is awarded to an independent pipeline company, the state will use up to $500 in state matching funds and will support the company up to and then possibly through the FERC certification process. Once a certificate is in hand (according to their time line 2013) both the Feds and the producer's shareholders will demand the producers obligate their gas reserves to pay for the pipe.

Why does the gas line team feel this way?

The state has done a number of economic models that show the a natural gas pipeline is "wildly profitable" with high rates of internal return.

We spent time going through the state's economic projections which by their numbers the economics are so sound, there is no reason the state shouldn't own a piece of this project.

The problem with their numbers is that they have been adamantly contested by the industry because they make a number of incorrect assumptions.

When I asked the question, what happens if the producers refuse to participate, the response was there might be state or federal funding available. However this again gets you right back to square one....how do you build a gas line when you haven't negotiated resource terms with gas leaseholders?

It's important to remember that without financing (which comes from shipping agreements signed by the producers) a prospective pipeline builder can't order one piece of steel.

And again, if the project is so wildly profitable, why don't we either sue to take back the leases or propose a state project?

So I asked about the state's legal arguments to take back leases? I considered this an obvious plan B. But there is no plan B because the state doesn't have a legal case.

In fact, a review of the leases and testimony of the AG's office indicates the bar to recall leases is much higher than many are saying.

So I asked why the state won't negotiate directly with the producers? I was told after 2.5 years of negotiating they'd had enough. They felt the last deal was a bad deal and they wanted the state to finally have some leverage in dealing with the producers. Commissioner Irwin mentioned a number of times about how Exxon would get up from the table unless they got what they wanted.

So I wondered, if he thought it was impossible to get Exxon to commit to say yes at the negotiating table, how did he possibly think he was going to get them to say yes without being at the negotiating table? I was told AGIA.

Again, I'm more pessimistic about getting a gas line today than ever before.

And to be honest, with the visible contempt the current gas line team feels for the producers, I don't see any productive discussions until the administration takes a deep breath.