TransCanada: Dissecting the decision

It was one thing to hear the audio download of Governor Palin's press conference on Thursday announcing that she had selected TransCanada for the AGIA sweepstakes, but it was completely another to actually read the transcript of the words that were spoken.

Talk about being in desperate need of a few Tylenol.

In an hour that could only be described as raising more questions than supplying answers, the spoken words of this administration in support of giving TransCanada $500 million and exclusive rights should make every Alaskan pause and yes.......think.

Different name, same lack of substance

In Thursday's announcement, TransCanada has adopted the new name of TC Alaska. Strategically this makes sense as they want to shy away from using any reference to Canada in their name. 

Remember the bumper stickers from the All Alaska line supporters; "Canada my ass, it's Alaska's gas"? 

Well, these folks are going to get more and more vocal in their opposition to a Canadian line.

Former Governor Wally Hickel wrote in his Sunday Op/Ed in the Anchorage Daily News that Governor Palin was "dead wrong" in her decision to toss LNG aside. Bert Cottle, chairman of the group pushing an All Alaska LNG line and mayor of Valdez said "I can tell you right now, we're not going to go away." 

However, even with the name change, the lack of credibility to follow through on building the gas pipeline still plagues TransCanada.

"Everything in the proposal is enforceable" 

That was one of three reasons why Governor Palin selected TransCanada. "Unlike what we've heard in past with oil producers, TC Alaska has made binding and enforceable commitments", Palin said.

But the question has to be asked; commitments for what?

If Alaska is going to give $500 million and exclusive rights to TransCanada you'd think that the "binding and enforceable commitments" would include actually building the pipeline. But that is not the case.

In February while testifying in front of the Senate Resources Committee, TC V/P Tony Palmer was asked about timelines for pipeline construction. Palmer replied, " "We're not obliged to build the pipeline, it is not what AGIA requires."  

In fact TC has several contingencies built into their AGIA proposals including one that states they first must seek Board approval before greenlighting construction.

In an interview with the Calgary Herald after the announcement on Thursday, TransCanada VP Tony Palmer said the project will not get to the financing and construction stage without shipping commitments from the producers.  

So if TC doesn't get shipping commitments from the producers (and why would they when the Denali project is already moving) they are stopped dead in their tracks.

So what in the world is the governor crowing about the advantage of AGIA's enforceable commitments for a company that admits they can't do it without the agreement and support of their competitors?

What the governor is referring to is that under AGIA, even if TC doesn't have gas commitments from the producers, they still must push on with a fools errand and try and get the only license that really counts, the one from the Federal Energy Regulatory Commission (FERC).

And FERC has pretty much already said; please don't bring us a proposal that has no gas commitments.

In their recent report to Congress, FERC wrote about the prospect of TC showing up at their door with no customers and no credit: 

"this would be a less than desirable situation, given the considerable expenditures of financial and human resources required to complete the permitting process. Clearly, a proposed project which is backed by firm shipper commitments to transport natural gas supplies will have a greater chance of ultimate success."

To put this into perspective, FERC has never in their history granted a license to a company that had no gas and no financing...ever. But the Palin administrations ignores this reality.

And remember, for this expensive wild goose chase, the state is projected to pick up 85% of the tab or commonly referred to as the $500 million inducement. Meanwhile, under the terms of AGIA, the state will be prohibited from helping a competing project like the Denali proposal which has a far greater chance of success.

So when Governor Palin and her gas line team start talking about the "enforceable timelines"; every Alaskan needs to ask, "What is the enforceable timeline that will have the pipeline up and operating?"

"Reasonable expansion terms"

The second reason the Palin administration said they chose TC was because they agreed to a fair and open access pipeline. Again, this means nothing.

According to the Alaska Gas Pipeline Act passed by Congress in 2004 the federal government will have great control over insuring that the gas pipeline is open and available to independent producers.

While the Palin team is fond of bringing up TAPS and the challenges with being owned by the producers, they conveniently ignore that Congress built in strict protections for independent companies like Anadarko when they adopted the gas pipeline legislation.

In fact, during the debate in Congress over the legislation, independent companies got every single protection they asked for to guarantee them fair and open access.

"Reasonable transportation rates"

The third reason for picking TC was because they agreed to "reasonable transportation rates or tariff." Again this means nothing.

The tariff will be approved by FERC, not the builder of the line. The tariff will be based on many aspects including the cost of construction to build the line.

Over the last few months questions have been raised about the fees and charges that TC will levy by requiring Alaska's gas to go through their hubs. This will add to the cost of shipping gas and come out of the state's pockets.

TC's AGIA proposal prohibits gas shippers to use other means of transportation (i.e. other pipeline systems) to get their gas more directly to markets. TransCanada is in fact nothing more than a middle man in this whole deal looking to take their cut.

If you had both the cash and the skill to build your own house, why would you hire a contractor who is going to do the same thing at an inflated price?

Since TC has no gas to commit, and their return on investment will be guaranteed by FERC and paid for through the tariff by the gas shippers, how is having an unnecessary middle man providing a more reasonable tariff? It doesn't.

In addition, there has been reports that TC interest in the pipeline is due in part to their need for more gas capacity to offset the decline in the coming decade in their hub. By agreeing to ship gas through TC's hub, if the their gas capacity falls from Canadian reserves, that will increase the tariff for Alaska's gas that is forced to flow through their system.

There has also been serious questions raised about just how much profit TC will be making, including in the event of cost overruns. TC's proposed ROE rates don't accurately reflect how much risk - or in this case how little risk - they are assuming in the project.

Also, TC's limitations shifts most of the risk to the gas shippers while at the same time restricting the gas shippers ability to respond. The State of Alaska is going to be one of those gas shippers. 

Governor Palin also mentioned distance sensitive rates. This would mean Alaskans would pay only the transportation costs from the North Slope to the off take points in Alaska. This is not a rare offer as even ConocoPhillips in their previous proposal offered distance sensitive rates. 

However this is where the governor fails to give Alaskans the rest of the story.

Getting gas from the North Slope to one of the proposed off take points, say Delta, is one thing. But there remains the expense to get the gas from Delta to elsewhere in the state. AGIA doesn't require TC to build spur lines, only provide off take points.

Alaskan consumers will still have to pay the remaining costs to get the gas from off take points to their homes and businesses in a spur line or bullet line. There is no such thing as a free pipe.

Palin's classic glittering generalities

While I have been occasionally criticized for taking the governor to task on her economic policies, the problem is that I've never understood  anything that has come out of her mouth when she has talked about business or basic economics.

On the Denali Project:

"While we are thrilled that AGIA, in competition, brought BP's and Conoco's ideas, and perhaps Exxon, too, out of the bushes. It's time to get this project actually built."

Actually built?

So what did the company she selected have to say about their  ability to actually build the project? TC's Vice President said following Palin's comments that without BP, Conoco and Exxon, they can't get to the financing or construction stage.

So apparently we're going to get this project built by selecting a company that has clearly stated they can't do what we're paying them to do without the blessing from competitors  who have already begun working on a  competing pipeline proposal.

In addition, the governor true to form, cannot help but try and make TC's proposal look decent by comparing it to the previous gas line proposal that everyone disliked. "It had been disclosed in previous negotiations that producer concessions would have cost the state over $10 billion", Palin said while touting TC's AGIA proposal.

Any comparison to Murkowski's deal is irrelevant and does nothing but distract attention away from the fact that the Palin administration has bet the state's future on a lame horse. The previous gas line proposal has about as much relevance today as the price of tea in China.

Ironically, a key material difference never mentioned by Palin is that Murkowoski's deal was at least with companies that had the tools to actually build the project. Palin's deal grants exclusive rights and $500 million to a company that doesn't have the necessary tools.

"If we lose focus on what TC Alaska has committed to, we risk returning to a situation where Alaska was highly leveraged by a consortium of companies holding all the cards" Palin went on to say.

Once again, not only does this fail to recognize that there are no commitments to build a pipeline from TC but it also contradicts what Revenue Commissioner Pat Galvin said just moments later.

"What the Denali project does provide, it provides them with some leverage on TC and on the State with regards to their commitment to a line that clearly has Alaska's benefit" Galvin stated.

So if you recognize what everyone has said since day one, that you need the producers because they have the leverage, why are we about to grant TC exclusive rights and $500 million?

On construction timelines and costs:

Reporter Bob Tcaz from Juneau asked what appeared to be a very straight forward question during Thursday's press conference, when he asked about timelines for construction and costs.

The response was not so straight forward.

"We did not assume absolute timelines. We did not assume absolute costs" said DNR Deputy Marty Rutherford. Somewhere between 2017 and 2020 she added.

Not only does this contradict all of the hyperbole about "enforceable timelines and benchmarks" it shows that after having five months to tear apart one lone AGIA application, these folks still can't answer the most critical questions; when will it be ready to ship gas and how much will it cost to build?

Rutherford went on to say "when we roll out all of the economic modeling, the elements that we accommodated for, you know, continuing escalation in costs, continuing escalation in labor costs, continuing escalation in prices or prices falling, we've looked at the whole panel, so there are no absolutes we can give you."

This is why government through AGIA cannot pick a private sector winner. This project will be financed by private financial markets based on absolutes, not government officials that can't give you absolutes.

On getting gas for the pipeline from producers:

Governor Palin stated "They are reasonable commercial players. There is no reason for them to hesitate, we believe when this line is ready to go."

Lets consider this; last month Commissioner Tom Irwin rejected Exxon's development plan for Pt. Thomson. In his 78 page ruling, Irwin stated that although he viewed the proposal as "reasonable" he rejected it because he didn't trust them.

So even when the producers act reasonable, this is clearly an administration that acts unreasonably.

In addition, why would a reasonable commercial player sign up for an unreasonable deal where they'd have to pay higher fees and operate under significant restrictions through a middle man when it's not in their best interest?

Then Palin said something that highlighted the only absolute present in this entire AGIA exercise; the absolute lack of logic.

"When they (producers) see the commitments to actually construct the line, there is no reason for them to not fulfill the mandates of their shareholders, and that is to boost their bottom-line", Palin said.

"When the producers see the commitments to actually construct the line", what are the commitments Palin is referring to?

The only commitments that matter won't exist until the producers make them.

The honest statement for Palin to make would have been "When the producers make the commitments to actually construct the line". As we stated earlier, TC has already admitted that until gas commitments are made by the producers, they can't construct the line.

Is anybody out there actually listening to this administration's nonsense?

On how much gas is available:

Due to Irwin's Pt. Thomson rejection the start up gas for the gas pipeline has been thrown into doubt.

Last month, Tim Bradner writing for the Alaska Journal of Commerce wrote, "The dilemma for a gas pipeline developer, whether it is BP and ConocoPhillips or TransCanada, is that if Point Thomson gas is unavailable, the pipeline will have to depend solely on the Prudhoe Bay field, which holds about 26 trillion cubic feet of gas.

But Prudhoe is mainly an oil-producing field, and the gas there helps produce oil. If gas is taken from the field, it will lead to losses of future oil recovery. An optimal plan may be for Point Thomson to supply the initial gas."

At the TC press conference on Thursday, when asked about the availability of gas, the administration backtracked.

First DNR Deputy Rutherford downplayed the importance of a field that for ever has been identified as critical to start up of a gas pipeline. Rutherford said that gas wouldn't be available for 15 years or so. This again is in direct contradiction to both what Palin and Irwin have stated about the rejection of Exxon's proposal and the importance of developing the field in a timely manner.  

It also contradicts the clear statements made by Oil & Gas Deputy Director Kurt Gibson, who while appearing on my radio show in February argued that Pt. Thomson gas would be available by 2017 when TC projected the pipeline would be completed.

Then Rutherford tried to sell the idea that AOGCC would allow TC to lift 3.5 to 4.5 bcf a day off of the North Slope, for an open season that according to the "enforceable timelines of AGIA" would take place in the fall of 2010. 

"Basically, the Prudhoe Bay Unit can accommodate very large optics, and there are other state reserves identified", Rutherford answered.

What other state reserves?

More alarmingly, when the question was posed to TC's Vice President Palmer, he had no apparent knowledge of where any of the gas for his pipeline was going to be coming from.

"Of course we are not the entity that knows the deliverability of Prudhoe Bay and the deliverability of other basins. That is something the producers know and something the state knows" Palmer replied.

But yet TC is going to accept $500 million from Alaskans and have the state pay for 85% of a process when TC has no idea how they are going to fill the pipeline they are proposing to build.

All of this makes you wonder out loud, why  any "reasonable commercial player" would give any merit to TC and this backwards process?

On fiscal certainty:

The governor was asked about the need for fiscal certainty.

"Well, remember the ten (years) comfort level that we had with the certainty was agreed upon early on with some lawmakers and that's something we're going to be talking about" Palin said.

Actually, the legislature stripped the ten year provision out before they passed AGIA. Today according to the legislation there is zero fiscal certainty.

TC's Palmer also commented on the need for fiscal certainty. "I do think it will be important for parties that look to commit their gas to understand the fiscal structure that will be in place for them. TransCanada will not be in the middle of that."

Even contained in TC's AGIA application was a clear statement for the need of fiscal certainty for the producers:

Page 2.2.52 State of Alaska Actions 

Transcanada would rely on the State of Alaska to take all feasible actions exclusively within its authority as a sovereign power to ensure a favorable economic environment for potential shippers on the project. Those actions include:

• engaging with the ANS producers to reach agreement on a commercially reasonable and predictable upstream fiscal regime that balances the needs of the state and the ANS producers

This is another area where AGIA is doomed to failure. 

Under the contract, TC has no ability to impact fiscal terms with the producers. In short, they have nothing to offer other than a higher cost of transporting the producers gas to market as a middle man.

And since TC has already stated they need fiscal certainty in the form of ship or pay commitments for twenty or twenty five years from the producers, shouldn't the producers who will actually assume all of the risk for those ship or pay commitments get the same fiscal certainty?

TC and AGIA represent Palin's long term energy plan:

"Last week, I unveiled a component of Alaska's short term energy plan, it being our energy rebate plan. What we are going to talk about today is part of our long term energy plan" Palin announced in her opening comments.

So lets review the short and long term energy strategies under Governor Palin. 

Short term we're going to spend $1.2 billion in sending out one time cash payments.

Long term we're going to spend $500 million and sign an exclusive agreement to build a natural gas pipeline with a company that cannot do the job.

Palin's view of the private sector and the risk of AGIA:

In her closing comments at Thursday's TC press conference, she stated now is the time for the private sector to start working.

"Finally, I also want to wrap it up by just encouraging now all the different players who will be a part of this monumental project. I want the players to start working together, not waiting for us to put it all together, not waiting for government to mandate partnerships" Palin said.

Again, does she even understand what she is saying?

By choosing TC as an exclusive partner, the state has just mandated a partnership. In fact by choosing TC, the state has precluded itself from working with any other project and has put the state at risk of severe penalties if it does.

According to the AGIA legislation:

“Except as otherwise provided in this chapter, the state grants a licensee assurances that the licensee has exclusive enjoyment of the inducements provided under this chapter before the commencement of commercial operations. If, before the commencement of commercial operations, the state extends to another person preferential royalty or tax treatment or grant of state money for the purpose of facilitating the construction of a competing natural gas pipeline project in this state …  the licensee is entitled to payment from the state of an amount equal to three times the total amount of the expenditures incurred and paid by the licensee that are qualified expenditures for the purposes of AS 43.90.110 that the licensee incurred in developing the licensee's project before the date that the state first extended preferential treatment to another person.”

When asked by industry officials if choosing TC would prohibit the state from offering permitting help on the Denali project, DNR's Rutherford reportedly didn't answer the question.

So in the future, if the state believes it is necessary to enact fiscal modifications to enhance the producer project, either a) the state may be unable to do so because of the large financial penalty it would incur from the damage claim by TransCanada under AGIA, or b) the state would incur the financial penalty itself for doing so.
 
According to AGIA, we cannot assume we can proceed with AGIA, and the producers can proceed with their project, and we just wait to see how each turns out. The AGIA process could very well create a material interference with the producer project.

This in direct contradiction to all of the talk about how AGIA fosters competition. By choosing TC, Palin has just killed competition at the risk of having to pay TC triple damages on every dollar they've spent during the AGIA process.

So to add insult to injury, not only are we financing a horse that can't win, but we're agreeing to pay it three times in damages when we finally realize it can't run the race let alone win it.

In closing, it was the Fairbanks Daily News-Miner that put it best in an editorial that was published on Friday:

"There’s a lot that isn’t understood yet by the public and, probably, by many legislators. And there are lots of comments that have been made — and that will be made — that aren’t quite correct. We saw it Thursday, in a news release from the governor, no less.