Palin requests talks with oil executives

Governor Sarah Palin has requested a conference call this week with the CEO's of the major oil companies playing a role in the potential development of Alaska's natural gas pipeline.

The requested participants include Tony Hayward from BP, James Mulva from ConocoPhillips, Rex Tillerson from Exxon along with others. According to my source, no one knows exactly what the purpose of the call is, but some have never the less speculated.

Last week in her address to the nation, Palin stepped far over the line of truthiness (thanks Steven Colbert) when she told the country, "I fought to bring about the largest private-sector infrastructure project in North American history. And when that deal was struck, we began a nearly forty billion dollar natural gas pipeline to help lead America to energy independence."

Nothing could be further from the truth.

In fact the state has done little more to move the gas pipeline forward over the last twenty months than to grant a Canadian company $500 million to push paperwork with no guarantee a pipeline will be built.

Anchorage Daily News reporter Wesley Loy reported last month;

Palin said in her press conference that the state never before had commitments to build this line. Now we do. That's incorrect.

TransCanada has not promised to actually build the gas line, one of the state's grandest and most frustrated economic development dreams.

The state license, awarded under the Alaska Gasline Inducement Act, or AGIA, which the Legislature passed at Palin's request last year, is not a construction contract and does not guarantee a pipeline will be built."

Since becoming Alaska's governor in December of 2006, Palin's administration has had a very combative relationship with the oil & gas industry in Alaska and has ignored any attempts to communicate with them on development issues.

When the Alaska Gasline Inducement Act (AGIA) was introduced and passed by the legislature in 2007, the administration refused to entertain suggestions from the producers to make the process more commercially viable. At the end of the day the state had crafted a proposal that ignored all legal and fiscal realities.  

So instead of negotiating with the producers, the administration said they'd rely on public and share holder pressure to force three of the largest oil companies in the world to commit to paying for the most expensive privately financed project in the history of the United States.

Even United State Senator Ted Stevens raised serious concerns  about the process back in March saying; "financing terms won't be set by the legislature, the governor or the Congress. They're going to be set by the people who manage the money."

Today, the state has awarded a $500 million inducement and exclusive rights to TransCanada, while their CEO is on record as saying that they cannot order one piece of steel pipe without first gaining the financial support from the oil companies. "Nothing goes ahead unless Exxon is happy with it," CEO Hal Kvisle told the Toronto Globe and Mail in August.

So what could the agenda be on this requested phone call by Governor Palin?

Compromising on Point Thomson

The state is currently in litigation with ExxonMobil over the development of Point Thomson, a gas field critical to the economics of the Alaska gas pipeline. Alaska has only two recognized gas fields and both have always been thought to be critical to make the economics of the gas pipeline work.

During legislative testimony in June, Exxon's Alaska Production Manager Craig Haymes said, "for 3.5bcf a day pipeline for 25 years, you need 45 to 50tcf. That's how much gas you need for that commitment. Prudhoe Bay is only 25tcf. That means you need another Prudhoe Bay if Point Thomson is off the table." 

The producers including Exxon, BP, ConocoPhillips and Chevron have stated in legislative testimony that without Point Thomson, there will be no gas pipeline.

This spring, Exxon proposed a court ordered plan that would have them spend $1.3 billion to develop the field to bring on line to feed a gas pipeline. The Palin administration rejected what everyone has called a reasonable and viable development plan, because they don't trust Exxon.

After rejecting Exxon's plan, the administration has continued to pursue litigation and has rejected Exxon's appeal for court ordered mediation.

One of the thoughts is that in the conference call Palin could offer to drop the Point Thomson litigation in exchange for the producers agreeing to participate in the AGIA proposal to build a gas pipeline.

This creates problems as some companies like ConocoPhillips have a small play in Point Thomson and a larger play in Prudhoe Bay. In addition, it ignores the fact that AGIA just simply won't work because the state's terms are too perscriptive and TransCanada brings no value to the project.

Also, the question was raised about Exxon's CEO Tillerson and his willingness to participate in any discussions after his company has taken such a rhetorical beating from Palin over the last year. During a press conference last fall, Palin stated that Exxon shouldn't let the door hit them on the way out.

But now, with the campaign trying to portray Palin as an energy expert, she needs Exxon more than Exxon needs her. Especially with the favored son of her gas pipeline strategy, TransCanada, admitting that until Exxon is happy, the gas pipeline will not happen. 

The shoe is clearly on the other foot. The question is how does big oil, that Palin has claimed to be so tough on, respond now that they clearly have the advantage.

Backing off the rhetoric of windfall profits tax

Another reason for the conference call could be to get an agreement from oil company executives to shelve the rhetoric about the windfall profits tax Palin signed as governor last December.

In September of 2007, Palin proposed a $750 million dollar tax increase on the industry. For weeks her administration travelled the state convincing Alaskans that the tax hike was justified and it would not impact development.

When the tax was eventually passed by the Alaska State Legislature two months later, the increase had gone from $750 million to almost $2 billion and included a very steep progressive tax component based on the increased price of a barrel of oil.

Otherwise known as a windfall profits tax.

When asked about the massive increase from her original  proposal as she was preparing to sign the legislation in December, she commented to KTUU news that is was close enough to what she originally proposed.

Over the last nine months companies have been outspoken about the impacts on Alaska's oil production at a time when production is dropping between 6 and 8 percent per year.

In July, BP announced it's new development, Liberty, which is a development entirely on federal land. The state will get no production taxes and only a small amount of royalty over the life of the project.

The new 90% ACES marginal tax rate does not make investing on state land worthwhile, even with the tax credits. During the ACES debate all the Palin administration focused on was whether investors could make money under ACES. The question they never examined was whether you could make more money somewhere else.

Doug Suttles, BP Alaska's president, said due to the Governor Palin's hefty ACES oil production tax adopted by the legislature last fall, Liberty would not have been developed on state land.

“If this were on state lands, it’s doubtful we’d have been able to move it forward,” Suttles said. “Alaska is a very high-cost environment for the industry."

Quite possibly, Palin wants oil companies to tone down the rhetoric about Alaska's tax environment as she is trying to position herself as having the energy answers. 

Opening communications

In two different interviews with Alaska oil company executives over the last two weeks both have said they same thing; currently there is no communication between the Palin administration and the oil companies. No front channel, no back channel...nothing.

With Palin now on the national stage, one of the thoughts could be she wants to appear to be having a dialogue with the same big oil she claims to have been getting tough with during her term as governor.

"And despite fierce opposition from oil company lobbyists, who kind of liked things the way they were, we broke their monopoly on power and resources", Palin told Americans on Wednesday night.

Again, nothing could be further from the truth.

These companies hold hydrocarbon leases that were issued decades ago. These leases granted them legal rights to develop the oil and gas resources on state leased land and no political speech changed that legal reality.

The bottom line is the Alaska Natural Gas Pipeline won't be built until the state sits down and negotiates a fiscal framework that defines the resource extraction terms for natural gas. So far this administration has refused to hold any discussions with the industry and has instead decided to spend $500 million of tax payer money propping up a straw man with hopes they'll force the oil companies to cave.

Like many, I have been critical of this process. It's been further aggravated by the administration's refusal to engage in good faith negotiations, while relying on public support for supposedly standing up to big oil. The reality is they've doing little more than ignore both fiscal and legal realities while risking delays at a time when inflation is driving up the cost of construction.  

If in fact the governor is requesting this conference call to finally open lines of communications with these companies, that's good for the state and the country.

Or maybe the call is a public relations stunt...    

Over the last few days we've heard from both John McCain and his campaign staff, promoting the idea that Governor Palin has been tough on big oil.

Even Palin herself on the campaign website stated, "I've stood up to the old politics as usual, to the special interests, to the lobbyists, the Big Oil companies and the 'good old boy' network."

Possibly, the reason for the call could be to enhance the image of a maverick governor telling big oil how the cow eats the grass. This might play well in Peoria, but it won't do anything to move the industry forward and build a gas pipeline.

As governor for the last 20 months, Palin has consistently criticized the oil companies for "sitting on Alaska's gas reserves for the last thirty years."

This is factually incorrect.

Due to the expense of the Alaska Natural Gas Pipeline, the price of natural gas didn't even reach a level that allowed for serious consideration of the project until 2002.

Over the last five years, oil companies have been working on trying to develop the gas pipeline. In 2003, the Alaska State Legislature unanimously reauthorized the Stranded Gas Development Act. In 2004, the federal government passed the Alaska Natural Gas Pipeline Act that created rules and incentives the project. In 2005 & 06 the oil companies negotiated a deal with the former governor that was not acted upon by the legislature.

When Palin was elected in 2006, she took a different route, instead attempting to bypass the oil companies and deal with an independent pipeline company who has neither the balance sheet or the necessary gas reserves to make the project happen.

In addition, the state agency (AOGCC) that regulates the development of hydrocarbons to prevent waste, testified that even  if a natural gas pipeline was available today, they wouldn't allow enough gas to be sold to make it viable because the gas is still needed to help extract oil. With an estimated 3 billion barrels of oil still remaining in the ground on the North Slope and oil being worth much more than gas, permission to sell the gas would be denied.

So while the rhetoric may sound good to energy starved Americans about how big oil has been sitting on Alaska's gas reserves for the last thirty years....the economic reality is much different. 

The fact is these companies don't make decisions based on politics they make decisions based on economics. If they did base decisions on political pressure, the Exxon Valdez punitive damages case would have been settled over a decade ago. 

Public Opinion

A recent opinion poll conducted by The Cromer Group between August 18 - 21, shows by a margin of three to one, Alaskan's believe the producers Denali gas pipeline project is better for the state than the governor's TransCanada proposal.

In fact, polling results reveal the more Alaskans understand the TransCanada proposal, the more they say the deal is too risky.

Two questions which asked Alaskans how they felt about TransCanada's idea to appeal to Congress for financial help with the project drew the most concern.

Congress passed a loan guarantee for $18 million dollars in 2004 to help promote the development and building of the gas pipeline. But TransCanada proposes to use that $18 million dollars, not to get going, which is the purpose of the loan, but to use some portion of the money to cover its cost overruns. What this means is TransCanada is asking US taxpayers to pay for any cost overruns of the project that TransCanada is managing. Do you feel…(READ LIST)

1. The risk was too high and should not have been taken, or/57%

2. The risk was worth it and should have been taken?/13%

3. Don’t see this as a risk /9%

4. Can’t Say /21%

TransCanada’s plan asks for the U.S. Government to assume some of the project risk by agreeing to pay billions of dollars in pipeline transportation fees as a “bridge shipper,” in case initial gas commitments from the major oil companies are not enough to run the gas line at full capacity. Do you feel…(READ LIST)

1. The risk was too high and should not have been taken, or/53%

2. The risk was worth it and should have been taken?/16%

3. Don’t see this as a risk /6%

4. Can’t Say /26%

And in the end, disregarding all the problems, all the ifs, ands, or buts – which is your own personal favorite? Is it the (ROTATE) Denali Alaska Gas Pipeline Project; the AGIA -TransCanada Gas Pipeline Project; or the All-Alaska Port Authority Gasline Project?

1. Denali Alaska Gas Pipeline Project/45%

2. AGIA-TransCanada Project/15%

3. All-Alaska Port Authority Gasline Project/9%

4. None of these /3%

5. Can’t Say/28%

Suggested reading:

http://www.andrewhalcro.com/answering_agia_the_round_table_serves_up_reality