Feb 6: AGIA. DNR Commish Tom Irwin asks "Whose side are you on"?

Whose side are you on Alaska? That was the question from DNR Commissioner and AGIA architect Tom Irwin as he asked Alaskans, if you oppose AGIA, whose side are you on?

Appearing Monday on a local talk radio program to give an update on AGIA, Irwin along with Deputy Director of Oil & Gas Kurt Gibson spoke about the process, the critics and what they see coming down the trail.

We've posted both Irwin's and Gibson's comments verbatim and then added our comments and questions in italics.

 

Why AGIA?

 

According to Irwin, the State was in a "highly leveraged position" under the prior gasline proposal. "At least a ten billion dollar giveaway plus giving away administrative and legal rights. So it didn't work. The voters voted it down and the legislature voted it down" Irwin said.

 

Fact: The voters and the legislature didn't vote down the prior gasline deal, in fact the legislature refused to consider the proposal.

 

Given the way it was introduced and the unpopularity of former Governor Murkwoski, the plan didn't even receive a hearing.

But more importantly, just because the prior gasline deal had items that many found objectionable, nobody has ever said that the prior gasline deal was the only option. But this is where we see the emotion based logic of Irwin and Company. The reason they continue to bring up the previous gasline proposal is to try and convince Alaskans that the AGIA approach is a better way to get a gasline, instead of negotiating with our legal leaseholders.

In April the Anchorage Daily News put this into proper perspective; while Murkowski's deal gave too much, Palin's deal doesn't give anything.

Why does Irwin think the State will have the leverage to force the producers to commit gas under AGIA?

"There is a legal lease which commits the holder to explore and develop and get product to market".

"AGIA will produce an economic gasline and their is no reason why a company would not commit gas to a line where they're going to make money" Irwin answered.

Fact: The producers are living up to their lease agreements according to the Alaska Oil & Gas Conservation Commission. No where in their hydrocarbon leases does it say they have to build a gas pipeline if the State shows up one day and says the project is profitable. After all, these are the same people who said that Mat Maid was turning a profit when the dairy was losing $300,000 in July. 

This has always been the intent of AGIA: Gin up economic modeling showing that the project is profitable and then expect the producers to cave in and pay the bill. This defies reality on the most expensive oil & gas project in the world.

Later in the interview, Irwin would remark; "Right now the State doesn't have enough information about costs. We don't know the economics".

So how does Irwin say that AGIA will produce an economic project when he doesn't have the first idea about the economics of the project?

And if the project is as profitable as Irwin feels, why didn't Transcanada agree to build it without contingencies and without the producers?

What if open season fails?

"AGIA was designed to not stop at open season. It's designed to move past FERC certification, that clearly quantifies the numbers, the costs, the value."

Fact: AGIA would require Transcanada to continue on to apply for FERC certification. The state will pay 90% of Transcanada's  expenses from this point on, meanwhile FERC has never in it's history granted a certificate to a project that has shown up with no financing and no gas commitments.

Part of the FERC's pipeline review process involves reviewing the specific technical and operational aspects of the pipeline. How can FERC evaluate anything accurately if Transcanada can't tell them who is shipping gas and how much?

For argument, let’s say that FERC for the first time in history grants a license to a company without any customers or credit. The next step is AGIA requires Transcanada to start construction within 15 months.

Under AGIA, Transcanada could very well find themselves with no customers, no credit and under the terms of AGIA being expected to build a pipeline that will cost more than their entire company's net worth.

Irwin went on to say, "I don't believe in their own good business sense, if they can't defeat AGIA - and they won't because it's a good program, we're excited about it - they will try at a point, but at some point they will want to make money".

The host then replied to Irwin, "They have to answer to shareholders. If they can't book oil and gas they're not making money".

Irwin answered, "I believe it will be pretty tough for any company to say we've got access to gas but were not putting in the pipe"

Fact: Under AGIA, companies were not able to go to their shareholders or board and seek permission before agreeing to proceed on the pipeline project. That is why some companies didn't bid.

So according to Irwin, after the State gins up costs, the companies will be forced to simply waltz into their Boardrooms and Shareholder meetings and say that they are going to commit to twenty five year ship or pay commitments worth hundreds of billions just because a third party pipeline company and Tom Irwin say the profit margins are acceptable.

Shareholders will demand more fiscal security from their management on a project of this magnitude.

What's ironic is that Irwin nor Transcanada will carry any risk in paying off the pipeline. This is complete Alice in Wonderland economics.

What happens if Transcanada's Board of Directors does not approve moving forward?

"Frankly that has already been determined by them. They have committed unconditionally to move forward with AGIA", Irwin answered.

Fact: From Transcanada's AGIA application regarding proceeding to construction (2.2.61.):

Subject to "receipt of approval from Transcanada Corporation's TC Alaska LLC's and Foothill' respective Board of Directors to proceed with construction"

How is that an unconditional commitment? 

Last week, BG group testified that one of the reasons it did not bid on AGIA was because it didn't allow for them to seek final board approval. Compare that to Transcanada -who in their AGIA application ignored that same provision and simply penciled in that they couldn't proceed until they had received final approval from their board- clearly shows that Transcanada's application violated the strict terms of AGIA.

 

Irwin went on to qualify his answer about Transcanada's application.

 

"Now understand, we've chosen them through completion but we have a very extensive evaluation to do on them yet".

 

The show host asked about the criticisms that Transcanada's application has contingencies. "Can you tell me for sure, whether or not there are contingencies"?

"We had 20 state people, with consultants we had over 100, independently our teams ruled unequivocally that Transcanada's complies...there was no doubt", Irwin responded.

 

Contingent responses from Transcanada's AGIA application are listed below. 

 

 

"receipt of final authorization from the appropriate regulatory authorities...terms and conditions that are acceptable to Transcanada"

"securing all permits...that are in form and substance acceptable to Transcanada"

"receipt of financial commitments from financial institutions on terms that are acceptable to Transcanada"

"confirmation, to the satisfaction of Transcanada, that all shippers are not in default"

"receipt of approval from Transcanada Corporation's TC Alaska LLC's and Foothill' respective Board of Directors to proceed with construction"

 

What happens if producers are a no show up at open season?

 

Deputy Director Gibson responded, "Part of the process we set up with AGIA was those interested in seeing an open season not succeed, would not be able to kill the AGIA process by simply refusing to show up at open season. The question is a good one, our process requires the licensee to continue progress on the project even if the open season fails."

 

Fact: During AGIA testimony last spring, Transcanada testified that normally if they encounter a failed open season they step back and sit down with gas shippers to find out why. They testified against the provision in AGIA that forced them to proceed if the open season failed. It wasn't until the State increased it's reimbursement matrix from eighty to ninety percent to limit the risk for companies like Transcanada. 

 

According to Transcanada's AGIA application they are going to try and get to the open season on the cheap and in half the time, spending only a fraction of what needs to be invested in determining costs for shippers. A failed open season is immanent under AGIA.

 

Gibson went on to say;

 

"If the open season is unsuccessful, then there is really only a couple of reasons why that might happen. Number one, the project is just flat not economical. Number two, there is not enough information for shippers to feel comfortable making a commitment".

 

"So the AGIA process contemplates getting to an open season and shippers don't have enough information they need, so the licensee has to continue to make progress, continue on licensing, continue on doing front end design work, doing things that will narrow the scope of uncertainty, so that when the next open season is conducted, lot of those questions will be answered" Gibson added.

 

Fact: Under AGIA, there is nothing about a second open season. In fact Irwin and Gibson have both spoken about the strict guidelines and timelines that make AGIA such a strong process for Alaskans. 

 

However, judging from what Transcanada is planning on investing  preparing for open season, a failed open season is predicted. Years ago the producers testified they'd be spending $600 million to prepare for open season. Transcanada has committed to spending $80 million.

 

But more importantly, since the State's financial incentives are structured so less money is available upfront before the open season, - compared to after when Transcanada would be forced to move forward to FERC certification - if there is a second open season would the reimbursement matrix that says the AGIA applicant gets reimbursed less before the open season apply for the second open season?

 

Don't touch AGIA....just live with it.    

During the final minutes of the interview, both Irwin and Gibson took issue with those who are advocating changes or abandoning AGIA.

"The plan is unfolding exactly as it was envisioned" said Gibson who raised concerns about legislative leaders who have begun to raise questions about the AGIA process.

"We're doing this for Alaskans and its working", Irwin added.

"If there is any discussions to undo it, one has to ask the question, whose side are you on, whose economic side" Irwin asked, calling into question the integrity of anybody who disagrees with a process that by all accounts is not going to deliver Alaskans a natural gas pipeline.

Whose economic side are we on?

Given the fact that earlier in the interview Irwin proclaimed, "Right now the State doesn't have enough information about costs. We don't know the economics", I fail to see where  Commissioner Tom Irwin has the right to question anyone’s position.

Or at the least; Irwin doesn't possess the intelligence about the economics needed to even ask the question.