April 5, 2007: Commissioner Irwin takes to the airwaves to sell AGIA

It took only a few minutes on local talk shows Wednesday for Department of Natural Resources Commissioner Tom Irwin to reveal just how divorced AGIA is from reality.

The Alaska Gas line Inducement Act (AGIA) was introduced by Governor Sarah Palin on March 2, 2007 as a way to stimulate development of a gas pipeline to transport Alaska's vast natural gas reserves to market. The pipeline, which would be an estimated 3,600 miles, stands to be the most expensive oil & gas project in the world with costs estimated to be between $25 and $30 billion dollars.

Although some complain that Alaska has been waiting for decades to develop these vast reserves, the fact is the project only became viable within the last six years.

Over the last six years much has been done to facilitate construction. The producers (Exxon, BP, Conoco-Phillips) spent $125 million of their own money to nail down cost estimates for the project. Congress passed Federal incentives for the project. The Alaska Legislature re-authorized the Stranded Gas Act and between 2005 and 2006 the producers negotiated an agreement with the past Governor on fiscal terms.

However, the tried and true method of negotiating is being waved off by an administration that feels sitting down with the those who legally own the right to develop Alaska's gas reserves is apparently too much for them to handle.

AGIA represents the white flag of surrender for Alaska's gas line hopes.

“Here's where we are at” Commissioner Irwin said on the Eddie Burke show yesterday morning. “We get where we're at today or yesterday. Nothing is happening, were at the mercy of the big companies, their leverage”.

So why not sit down and negotiate? “We're not negotiating. We're a fair business decision on AGIA” Irwin added.

Aside from the lack of clarity in his comments, the bottom line is that AGIA is not even close to a fair business decision. It is a set of economic terms prescribed by the state that allows little or no input from those who will be responsible for paying for the project for the next thirty years. The only way Alaska will ever see a gas line is to negotiate fiscal terms with the producers who will assume all of the fiscal risks associated with the project.

Instead, Irwin made it clear yesterday that the state's strategy is not to negotiate, but to force major oil and gas producers into a corner and thus they'll have no option other than to play under the state's unrealistic economic terms. Irwin feels this will be accomplished by propping up a third party company who cannot build the pipeline without the producers and then somehow using them as leverage against the producers.

At the end of the day, the Palin Administration is hoping that oil company shareholders, board members as well as the general public will force company management into paying for a project that they'll have no control over the costs.

This strategy is complete nonsense and could only originate from government bureaucrats. To think that any private company is going to be pressured into ignoring sound economics because of populist politics shows how naive this administration is being.

Instead, Irwin seems content avoiding reality and using former Governor Murkowski's previous attempt to land a gas line agreement as the reason for AGIA. “It was a really bad deal for Alaska” Irwin said repeatedly of Murkowski's fiscal terms yesterday on the radio.

However, Commissioner Irwin's tough guy approach toward the producers and the need for give and take is in direct contradiction with earlier positions he advocated for when he worked for Murkowski.

In an Op/Ed piece dated May 21, 2003, Irwin argued strongly about the need for financial incentives for the industry. “We need to make this investment because Alaska is simply not competitive with other oil provinces around the world. The cost of exploration is already high in Alaska due to our difficult weather, short season, long distances to market and lower quality of crude. Compounding this is that the state government provides no incentive to offset these costs.”

Most of these same economic arguments put forth by Irwin four years ago apply to developing Alaska's gas reserves. They highlight a few of the reasons why producers are going to need a lot more than just political pressure to invest $30 billion in a project that carries tremendous financial risks.

Since it's introduction, it is growing more and more evident what the true strategy is behind AGIA.

First, the state creates a set of unrealistic economic terms then advertises it as an “open and transparent process”. When no viable applicant emerges, the state will select a pipeline company like Mid-American, even though everyone that has testified on AGIA so far has clearly said “No producers, no pipeline”. Finally, using $500 million in public money, the state will provide a crutch to keep Mid-American propped up while hoping the illusion of progress will somehow pressure the producers into a showdown at high noon.

Great. The economic future of Alaska comes down to Clint Eastwood versus Don Knotts and the Apple Dumpling Gang.

The only question I have is how long will it take the administration to back away from this approach. In the next few weeks the legislature will alter the way AGIA looks and already the administration has raised objections to a number of changes to the legislation.

Amendments that give the legislature more time and a greater role in reviewing the applicant selected through the AGIA process are essential.

In addition, the legislature needs to protect the state's best interest by ensuring the applicant that the administration chooses, has the financing to make the project happen. To subsidize an applicant that has no gas, no financing and thus no ability to be successful building the project is an irresponsible allocation of state resources.

Alaska's legislators will have their hands full as they attempt to salvage a poorly thought out approach by an extremely popular Governor.

Yesterday in his opening statements on the radio, Commissioner Irwin said he wanted “to leave the listeners with two messages: Governor Palin is doing a great job and AGIA works”.

For those of us who have been listening and watching intently for the last month, we know Commisioner Irwin's is dead wrong when he says AGIA will work. It won't. It accomplishes nothing more than filling Alaskans with false hope while betting Alaska's economic future on a lame horse.

As far as his first message about the governor doing a great job, if his gas line gamble doesn't pay off, he'll be wrong on both messages he's trying to sell to Alaskans.

Suggested reading:

http://www.andrewhalcro.com/debating_agia_with_the_governor