June 8: AGIA - Signed, Sealed and Delivered

It has been awhile since my last blog about Governor Palin's gasline plan. For the last month there hasn't been much to write about although there has been plenty to fret about.

The Alaska Gasline Inducement Act (AGIA), which sets up terms and conditions for competitive bid process for companies interested in building an Alaska Natural Gas Pipeline was introduced March 2 and subsequently passed by the legislature on May 11.

AGIA is intended to attract an independent pipeline builder such as Mid-American, who if awarded the license will be the state's surrogate and thus tasked with getting the three producers (Exxon, BP & Conoco-Phillips) to commit their gas so a pipeline can be financed. This strategy fails to recognize the critical fact that Alaska has already contracted those rights to the producers decades ago to develop hydrocarbons on the North Slope and Point Thompson.

AGIA creates a parallel set of rights for a third party, whom they hope can force the producers into accepting all of the risks involved with a $30 billion gas line project without any say in the matter. However, almost every independent pipeline builder that testified on AGIA (except Mid-American) said without the producers the pipeline is not going to happen.

Meanwhile, on May 3, two former and one current state lawmaker were indicted on corruption charges. Three days later two of the most prolific political donors in Alaska's history pleaded guilty to criminal charges surrounding the bribery of those same elected officials last year during the over haul of state oil taxes.

And although the indictments had as much to do with AGIA as the price of tea in China, the concept of three equal but separate branches of government seemed to fly out the window as legislators weary about their diminished standing in public abdicated their responsibility and simply accepted what the Palin administration said was gospel concerning AGIA.

It was troubling enough to watch a parade of committee chairman and members fail to ask basic questions about the administration's highly questionable economic modeling and the legal realities about current leaseholder rights, but when the indictments came down, any hope that they would fix the bill and make it workable became a pipe dream. As one House Republican told me via email a few days after the indictments, “It's all over but the shouting.” Looking at AGIA and it's actual probability for success, I'd say it's all over but the crying.

AGIA is not based in reality. In fact it blatantly ignores critical legal and financial realities. It is a political effort by Palin's gasline team that is bitter and angry towards the producers. The entire success of AGIA is based solely on using public pressure to force the project into being.

In a closed door meeting with majority lawmakers in the House, DNR Commissioner Tom Irwin stated the goal of AGIA is to have “a failed open season so the public will be outraged at the producers.”

This in turn is supposed to make the three producers ignore their fiduciary duties to their stockholders and the significant risks simply because Irwin and his team don't have the capacity to negotiate with the legal leaseholders over resource extraction terms.

So this is crux of AGIA. The state is going to award a license to a third party company. Stake them with investment protection of up to 90% of costs up to $500 million in match money in public funds and then when the open season comes and goes without any bidders, they are going to continue to reimburse up to 90% of the cost to the licensee to get to the next step. Even though by that time the licensee will have no customers and no way of obtaining financing to build the line. It reminds me of the old saying, a fool and his money are lucky to get together in the first place.

From the beginning, those who recognized the significant legal and financial realities surrounding AGIA have been afraid to speak out. A governor with high approval ratings who has embraced a populist and somewhat clueless leadership strategy and legislators who for the most part allowed themselves to be neutered, combined to help create a proposal that will do nothing more than delay the project and put the state's economy at risk for no good reason.

All you have to do is simply listen to the words of lawmakers concerning the probability of success for AGIA:

“I support it because the governor thinks it will work,” “It passed just like the governor wanted,” he said. “It’s her new administration, it’s her plan, but I think we would have all benefited from a more elastic process that brought more potential applicants to the table.” Rep. Ramras

“Most of us hope that it works but think that it should have been more flexible.” Rep. Coghill

"I can't say this strongly enough: AGIA does not lead directly to a gas pipeline. Rather it is a process to get us closer to a pipeline, and to put pressure on the producers to commit the gas they control"
Rep. Mike Doogan

But my favorite came from House Speaker John Harris.

 

In a written statement about the legislature's accomplishments this past session he mentioned AGIA.

 “Now it is up to her administration to produce the proposals they believe AGIA will generate.”

Notice the arms length endorsement and the word they instead of we. This is not a typical statement you'd expect on a piece of legislation that passed on a vote of 57-1.

And to think these are the comments from lawmakers who actually voted for AGIA.

During over a hundred hours of committee hearings, legislators cowered in their seats, failing to ask the most basic of questions. In the House Resources Committee, the Chairman actually asked one of the legislative attorneys for for public policy advice on AGIA.

In all my years of serving and watching the legislature, I've never seen such a complete absence of leadership and intelligence. In fact, the only two questions my own Representative could muster concerning AGIA were regarding Exxon's balance sheet. It was enough to make you scream.

Legislators for a mixture of reasons (some political and some because they just didn't understand the complexity) refused to point out the obvious shortcomings of the bill and instead parted like Moses and the Red Sea allowing the administration to roll AGIA through the legislative process.

During the last week of April as rumblings started to occur about possible amendments to make AGIA a little more realistic, the governor threatened to veto the bill.

This of course is in direct contradiction to her claim in the press that she doesn't play politics with legislation.

The legislation passed the House and Senate with a near unanimous vote. The only legislator who had the courage to vote no was Representative Ralph Samuels, who ironically is well recognized as the most knowledgeable legislator on oil & gas issues.

The Economics

The foundation of AGIA is based on economic modeling run by DNR that showed that a natural gas pipeline is as DNR officials have described as “deep in the money” and “wildly profitable”. This is fueling comments by the administration and lawmakers that this is a pure money maker.

However the state's economics are flat out wrong and misleading.

For instance, the state's economic modeling includes both new infrastructure and significant revenues from Pt. Thompson, even though the state at this very minute is in court trying to take back the leases from the producers.

If the state is successful in reclaiming Point Thompson leases, you can be assured that they wouldn't be available for gas production for at least ten years. It will take three years for court action with appeals. If the state wins, which is a toss up, another year or two to package new lease sale offering. Two or three years for any new leaseholder (and an estimated $200 million) to recreate the reservoir data to understand the highly complicated and high pressure fields (since the current 3D reservoir data is proprietary information belonging to the producers it would have to be recreated) and an easy three to four years to build the gas treatment plants and pipelines to connect to the main line.

In addition, the projected revenues that are likely to flow into a natural gas pipeline from the existing NS basin are also seriously distorted by the Palin Administration.

For instance, when DNR was trying to justify the rolled-in rates as a "must have", DNR analyst Anthony Scott created three scenarios. Each scenario has 1/3 of the gas being discovered on state lands, 1/3 of the gas being discovered on NPRA lands, and 1/3 of the gas being discovered on the Federal OCS.

He changes which lands (state, npra, or fed ocs) first participate in expansion and adds the values together to "prove" that the state is statistically better off with rolled-in rates in future expansions. The only problem is in his assumptions, which the legislature swallowed hook line and sinker.

He assumed 33.3% of the gas comes from state lands when they only have 18% of the future reserve potential. He assumed 1/2 the revenues from NPRA go to the state when the vast majority of NPRA funds thus far have gone to the North Slope Borough in impact funds. Then he assumed only 33.3% of the gas comes from the OCS (federal lands) where we receive no revenue when in reality there is a greater than 50% chance the expansion gas will come from the OCS.

In addition, the entire analysis ignores costs associated with FT's. But this shouldn't surprise anyone who actually watched the committee hearings. Traditionally, the Department of Revenue plays a key role in outlining the revenue projections but they have been taken out of the game. Instead they were put on the back bench and in their place DNR officials took the stage so they could sell their fuzzy math.

During one particular hearing, while the DNR was promoting this skewed data in front of the Senate Resources Committee, officials from the Department of Revenue were in the back of the room shaking their heads in disagreement.

The problem with AGIA is it is full of bad assumptions, bad analysis and bad data.

The dangerous thing about the legislature blindly accepting DNR's self serving economics, is it subjects the state to absorb significant risks including up to $500 million and the likely hood that Alaska could be stuck with a partner that can't perform for up to ten years. And if the state wants to get out and go another direction by offering incentives to those who have access to gas and can actually make the project happen, the state might have to pay up to a billion dollars in treble damages.

And again, when you consider that Commissioner Irwin (the same DNR official who crafted AGIA) says the goal is to have a failed open season, that means the state is not only investing in a risky partner but we're actually hoping that partner will fail.

The Reality

On Thursday, Governor Palin surrounded by her gas line team signed AGIA into law in Fairbanks. Interestingly enough, it was the Fairbanks Daily News Miner who just weeks ago in a editorial blasted AGIA and it's probability for success.

"What Alaskans should fear, however, is that the governor’s people have chosen a plan that has a high probability of failure and that they haven’t recognized that fact in order to adapt to it."

Fairbanks Daily News Miner Editorial 5/9/07

One of the surprising disappointments has to be Lt. Governor Sean Parnell. Through out the campaign for Governor last year many people told me they were counting on him to provide much needed balance in an administration that was so clearly anti producer. But Parnell fell silent, then he fell in line with the whole AGIA sales pitch.

In April he penned a scathing editorial that was to say the least factually incorrect and to say the most was intellectually dishonest.

In his Op/Ed he wrote, “First, we’d love to have the Producers’ gas in a pipeline heading for market. That’s why AGIA offers the chance for the Producers (and others) to get together to make a proposal to win the State’s inducements.”

This is a blatant falsehood. During the AGIA process, all of the producers testified that AGIA was too prescriptive and needed some basic changes to allow them to offer a bid. Not only did the legislature refuse to adopt any of the suggested changes, when some lawmakers talked about amendments Governor Palin threatened to veto the bill. AGIA was specifically designed to exclude the producers even though most of the independent pipeline builders testified, no producers no pipeline.

Even the governor, offered this little disingenuous nugget during the AGIA bill signing this week;

“The beauty of AGIA is this legislation is open to all comers,” Palin said, “AGIA excludes no one.”

Oh really. Then why did she threaten to veto the bill if the legislature made changes so the producers could bid on AGIA.

This doesn't even pass the straight face test.

After my two hour meeting back in April with the Governor's gas line team which included Parnell, we had the following exchange about AGIA and the notion of putting it out to bid. He stated Rf P's are a part of every day business life. I quickly pointed out that while that is true, the company that puts out the RFP is the same entity that pays the cost of what it is bidding for. Under AGIA, if the award goes to a third party company, they won't be paying the bill. They'll pass along all of the costs associated with the bid requirements (including the state's must haves) to the producers.

In addition, AGIA creates a scenario where the people who will end up paying the bill (the producers) are excluded from bidding because of the administration's desire for an independent pipeline owner. It was very obvious by the administrations strenuous objections to any amendments which would have allowed the producers to make a viable bid on AGIA.

When I served with Parnell in the legislature, I always thought he had a great capacity for independent thought. After talking AGIA for two hours, I could tell that either he was falling in line for political reasons or that I had seriously misjudged the landscape.

At one point during the discussions, I looked across the table at him and asked him why in the world the state would adopt a strategy like this so prematurely without first trying to sit down and negotiate terms with the people who could actually make the project happen. I even walked through the time line of events and that the price of natural gas wasn't even high enough to justify a pipeline until 2001/02. He didn't offer much of an answer other than the Irwin company line about producers being unreasonable.

The Future