Dec 1: AGIA - New Faces, Same Old Problems

The much anticipated bids for AGIA were opened yesterday to much excitement and fan fare. Five applicants submitted bids under the AGIA process, including some surprises.

"We have a ballgame now", stated Revenue Commissioner Pat Galvin. Well, lets take an honest look at what kind of team we've fielded with these five applicants.

Alaska Gasline Port Authority

This is a consortium of three local governments in Alaska that have been advocates for the so called "All Alaska Line". Their project would be an LNG line from the North Slope to Valdez, where tankers would load up and take the gas to the west coast.

These folks first made a splash in spring of 2005 when they ran a high profile advertising campaign to promote the idea of an Alaskan Line. However, this idea has too many hurdles that seemingly cannot be overcome.

From the fact that these three local governments have no assets to build the line and the necessary receiving terminals, to significant transportation challenges with the Jones Act to the lack of any gas reserves.

This project has long been dismissed by those who understand the economics of natural gas.

Recently, AGPA Chairman Jim Whitaker of Fairbanks publicly stated he was "pessimistic" about the projects chances for success.

During the AGIA hearings, little attention was given to the idea of an LNG project as many now realize the only real solution to get our gas to growth markets is through Canada to the Mid-West.

Alaska Natural Gasline Development Authority

This is a state agency that Alaskans voted to create in 2002 to look at a pipeline from the North Slope to Valdez. They have since changed their focus to provide a spur line to get gas to southcentral Alaska off of a main line 

Their bid is is an addendum. Their proposal is to build a spur off a main line from Glenallen or Delta Junction.

You can't really consider this a bid as it is completely contingent on a main line constructed by another party. 

SinoPec ZPEB

This is the second largest oil & natural gas producer in China. The company is 76% owned by the Chinese government. Their proposal is to more than likely to build an LNG line from the North Slope to Valdez and then load tankers bound for China.

This bidder has many problems.

First, I seriously doubt that Congress or many Americans would approve of the Alaska Natural Gas Pipeline being owned by the Chinese government.

In fact all three of Alaska's congressional delegation have said it will not happen under their watch. "I will tell you the Chinese have no possible hope of getting gas from us", said U.S. Senator Ted Stevens.

Second, at a time when predictions show America's demand for natural gas growing in the next thirty years, why would we want our gas to be shipped to China?

During this whole process, the governor and AGIA supporters have talked about how our gas is needed to provide energy independence for American security. How is that achieved by shipping gas to China?

Third, Sinopec has no gas reserves. 

TransCanada

TransCanada appears to be the most legtimate bidder due to its history of building and operating a large pipelines throughout Canada. However, they share most of the same challenges as the other bidders.

First, they still have outstanding legal issues in Canada with a competitor (Enbridge) over who would have the rights to build the section of the gas line through Canada. They also may have a pending issue with a group of former partners who share rights to profit off any Alaskan natural gas pipline that TransCanada builds.

Second, they have a net worth of only $25 billion which means they don't have a deep enough balance sheet to finance the project on their own.

Third, they have no gas reserves. 

During the AGIA hearings this spring, it was one of their executives Tony Palmer who coined the phrase, "No customers, no credit, no pipeline". It was a reference to the fact that without the producers participating, there is no way a pipeline can be built.

Also during the AGIA testimony, TransCanada objected to the clause in AGIA that mandates if they have a failed open season they would have to continue on to permitting, even without any gas to make the project happen.

In a recent interview with TransCanada CEO Hal Kvisle, he again reiterated what AGIA clearly failed to consider, "We can't make tis project happen go on our own".

AEnergia LLC.

This is a completely unknown company with little or no information available in the public venue.

According to the state's data bank, the LLC was formed on the same day the bids were due. There is a local agent listed but little else is publicly known.

While Aenergia might be new, its members have been working on getting a gas pipeline built since 2001 under the name of GSS/TC according to the Petroleum News. 

The experience of AEnergia's members with an Alaska gas line proposal dates back to the original effort to build an Alaska natural gas pipeline in the late 1970s and early 1980s. AEnergia core members were most of the senior and staff-level personnel working for the consulting firms that provided the earth sciences design expertise.

Seeing how this is the largest oil & gas project in the world, it appears that these folks lack any depth and are not serious players.

Also, they have no gas reserves and no financial abilty to backstop the $30+ billion project.

Summary

Four applicants (excluding ANGDA's bid addendum) under the AGIA process to build an Alaskan Natural Gas Line. Not one of them has any natural gas reserves to put in the pipe and none of them hold any legal standing to negotiate with the producers to acquire gas commitments.

One of the biggest surprises was the lack of a bid from MidAmerican Energy. They have been long believed to be the favored son in this process. During the AGIA hearings, they were the strongest advocate for all of the terms in AGIA, even some that others objected to.

The failure of MidAmerican to bid should be a warning sign. They were the ones who publicly stated the loudest that they intended to bid on AGIA, but eventually made the decison that it wasn't in their interest.

By process of eliminating the LNG line, which has serious economic and political challenges you are really left with one legitimate bidder which is TransCanada.

According to the AGIA timelines, the administration will take the next two weeks to go through the bids. Then the public will have 60 days to comment, which puts us into late February. Then the state will propose a winner and submit it to the legislature.

When the legislature receives the state's chosen AGIA license winner, they will have sixty days to approve the license. This is where AGIA potentially puts Alaska at risk.

Lets say TransCanada is awarded the bid and granted a license by the legislature. One of their first objectives will be to try and secure the participation of the producers who hold the lease rights to the gas.

Because the pipelines financing will depend on TransCanada securing ship or pay commitments from the producers, this whole process now depends on the producers willingness to deal with a third party.

However, the producers leases are legal agreements with the State of Alaska.

TransCanada as a third party has no legal standing to try and make the producers  commit gas at open season or even talk to them. 

In fact, until the State of Alaska sits down with the producers and comes to an agreement on fiscal terms regarding what the governments tax take will be, the producers won't commit any gas. 

Ironically, this was why AGIA was created. To try and get around the fact that sooner or later you'll have to negotiate tax rates with the producers. It was a fools errand.

And who would blame the producers for requiring some kind of fiscal certainty. First the AGIA was built on faulty economic modeling. Second, the whole AGIA process was skewed away from those who own the legal lease rights to develop our natural gas reserves, and now the state is hoping a straw man can get them to play ball. 

And while some of us have said from day one, that AGIA ignores both legal and fiscal realities, this message will soon be heard by all when the producers make it clear to the state; If we can't understand our tax liability going in, we're not going in. 

The danger is, under the AGIA terms, we could very well get stuck with TransCanada as a partner for years, without any prospects of a pipeline being built and being on the hook for a least $500 million and possibly more.

What's the best move for Alaska?

It's safe to say it's not going to happen, but we need to either change AGIA or throw it out.

There is only two ways Alaskans will ever get a natural gas pipeline. Negotiate or litigate. Either we sit down and negotiate the terms of the deal with the producers who will pay for it, or we sue them to take back the leases.

The second option isn't an option and is nothing more than an idle threat. These are hydrocarbon leases, they don't distinguish between oil & gas. If by some longshot the state was successful, they'd be on the hook for the producers entire North Slope oil infrastructure.

While some say their leases demand they produce the gas, they already are. It has generated an additional 3 billion barrels of oil for Alaska from older fields.

In addition, their lease agreements imply that any development project will be mutually beneficial.

The state coming up with a list of must haves and then demanding the producers pay for them without any say in the cost is not mutually beneficial.

Even DNR Commissioner Tom Irwin said that AGIA was not a legal strategy in my meeting with the gas line team in April. So that leads us back to option one; Negotiate.

The only way for Alaska to start moving forward on a natural gas pipeline is to seriously consider the proposal that Conoco-Phillips submitted on Friday.

What they submitted was a road map the state needs to take to get to a viable pipeline project. The current path with AGIA, propping up a third party to act as the state's surrogate won't work.

In their 115 page proposal, the proposed terms are fairly close to AGIA but include a few changes.

The first one is that rolled in rates for pipeline expansion is capped at 105% of the increased cost. This is reasonable and will allow future explorers to put their gas in the pipeline well after it's built, without making the original shippers whose risk cost were much higher cover the total cost.

Second, the need for a fiscal package. This cannot be overstated enough.

In order to green light a $30+ billion dollar project,  investors are going to want to know the rules of the game and how long they can depend on them.

After just two weeks after the legislature went back and retro-actively raised taxes and gutted investment tax credits and deductions, the producers have a sound argument for fiscal certainty.

In fact, Conoco's proposal represents most of the items that producers testified they needed in AGIA to bid when the legislation was being crafted last spring.

They were ignored.

And now with the four AGIA applicants, none of which can make the project happen on their own, we're fielding a team that doesn't have the right equipment to play ball. 

Every Alaskan should pay close attention to the AGIA bids when they are released and ask the question: What is the likelyhood of this company getting Alaska a viable natural gas pipeline?

Sooner or later the Palin administration is going to have to sit down and negotiate with the producers, why not now?