TransCanada: Milestone? More like millstone.

On Friday (12/5/08), the Palin administration took center stage in Fairbanks to follow through with their ridiculous idea to give away $500 million to TransCanada who has already stated publicly that they can't move forward on building the Alaska Natural Gas Pipeline until Exxon, BP and ConocoPhillips are happy. 

The ceremonial signing on Friday meant little more than the fact that TransCanada could begin spending the state's money.

Tis' the season where a fool and their money are lucky to get together in the first place.

The license award on Friday, caps a two year process in which the Palin Administration has effectively accomplished their goal; to gin up a straw man and make the public believe that it will deliver Alaskans a natural gas pipeline while ignoring fiscal and legal realities.

For those who think at the end of the day TransCanada and the producers will simply marry up under AGIA, think again.

The terms and conditions of AGIA have been wrapped around TransCanada's neck like a two hundred pound millstone. 

Friday, Governor Sarah Palin stated that the official transfer of a state gas line license to TransCanada is a significant step toward the state’s “next economic lifeline.”

A significant step? What a minute, just two months ago the governor told the entire country that "we're building the nearly forty billion dollar natural gas pipeline, which is North America's largest and most expensive infrastructure project."

In a campaign speech in October on energy, Palin said that because of this monopoly, the gas pipeline was “all talk” before she was elected.

“So we introduced, when I got elected, we introduced the big oil companies and their lobbyists to a concept of something that, evidently, they had forgotten, and that’s free-market competition. They had a monopoly, previously, on power and on resources, and we broke it.”

“And the result, finally, is progress on the largest private-sector infrastructure project in North America’s history — a nearly $40 billion-dollar natural gas pipeline to help lead America to energy independence.”

These comments, like the ones she offered Friday at the ceremony as well as in an interview with the Fairbanks Daily News Miner, show that this governor doesn't have the faintest clue about what is happening with this project and that any description is based on moving her image forward not a natural gas pipeline.

To Palin, it's all politics.

To her incompetent DNR staff, it's all personal.

“We have every reason to believe that both the lease holders and the state will do quite well when the project is built,” Palin said. “Nevertheless, Alaska’s North Slope lease holders have yet to commit their reserves to this project. That needs to come, in due time.”

It's not a stretch to say that the governor hasn't been paying attention to anything that the producers have said. She didn't listen to them when she crafted AGIA, she didn't listen to them when they asked for changes to AGIA so they could bid and she didn't listen to all of the reasons why they stated they would never commit gas to a TransCanada/AGIA pipeline before the legislature voted to pass an AGIA license.

The producers have clearly highlighted too many areas of fundamental disagreement with AGIA from the pipeline ownership to the unrealistic financial terms that favor TransCanada to the unfair terms that would have anchor shippers subsidize competitors.

Since AGIA does not allow the administration to negotiate with the producers outside the process that has led to the TransCanada agreement, the state’s options are limited. Thus, Palin and her gas line team's fairy tale ending that the producers and TransCanada will hold hands and walk off into the sunset building a pipeline are just that; a fairy tale.

The areas of fundamental disagreement include the need for fiscal certainty. If it wasn't important as some have alleged, why would TransCanada require 25 years of certainty through ship or pay contracts? If TransCanada needs 25 year certainty to build the pipeline, that proves the shippers need 25 year certainty to pay for the pipeline.

Another complaint is for all the Palin administration's talking about how profitable the project is for producers, the state's economic analysis was based on simplifying assumptions. The analysis ignores the reality of the real risk that firm transportation commitments represent, by classifying them as normal operating expenses.  For instance with regards to Exxon, under the proper analysis, the net present value to his company isn't $13.5 billion as stated in the state's analysis, but zero.

In one of the biggest areas that appears to be a deal killer for an AGIA project is the fact that all North Slope producers have clearly stated that they would expect to have a percentage share of ownership in the pipeline that is commensurate to the percentage share of gas they commit to ship.

"We would expect our ownership would equal our throughput" said Exxon's Marty Massey this summer. All other North Slope Producers are on record saying they'd expect the same ownership percentage. Having ownership of the pipe allows the producers to mitigate their risk.

This will be a major sticking point as some lawmakers who are demanding an independent owned pipeline as well as TransCanada raised issues with this idea. While TransCanada has offered an equity position to gas shippers willing to commit at first open season, they have repeatedly stated that they wanted to retain control by owning north of 51%.

We're not interested in building and operating a pipeline that will be owned by someone else, TransCanada's Vice President Tony Palmer has stated publicly. 

The rub of course is that if all of the gas shippers take a percentage of pipeline ownership based on their gas throughput, that would leave Transcanada (since they don't own gas) at zero percent ownership.   

Another key disagreement is the availability of gas. The fact is clear; no Point Thomson, no gas pipeline.

However the Palin folks disagree. “It still works,” said Marty Rutherford, the DNR Deputy Commissioner. “The economics of the project still work, even without that initial through-put from Point Thomson.”

This is the most mind blowing aspect of this entire AGIA debacle; who is Marty Rutherford to say if it's profitable or not.

The State of Alaska won't write one check to cover the cost of building this pipeline and will assume none of the risk. Remember how Rutherford opposed Murkowski's idea of owning some of the pipeline? She opposed the idea because it would put the state at too much risk.

But yet here Rutherford is declaring the pipelines profitability when someone else will be writing the checks. If the project is so profitable as Rutherford says, why isn't the state rushing to become an equity owner?

Back to Point Thomson. Palin, Irwin and Rutherford have all echoed that the gas line does not need Point Thomson gas. However none of these folks will be paying for the project.

Craig Haymes, Alaska Production Manager for Exxon testified this summer, "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."

But here is the rub; TransCanada is proposing a 4.5 bcf a day pipeline. So if Exxon says you need both Prudhoe Bay and Point Thomson for a 3.5 bcf a day pipe, how would any rational mind think you could do without Point Thomson building a 4.5 bcf a day pipeline.

And lets be honest, the CEO from TransCanada has already said publicly that "nothing moves forward until Exxon is happy."

But the over riding farce about AGIA and TransCanada is that it fails to recognize just who will be making the final decision to build this pipeline. The terms and conditions of AGIA are no more than a two hundred pound millstone around the neck of TransCanada.

In an interview with the Fairbanks Daily News Miner, Palin acknowledged that producers are critical to the success of TransCanada’s plans. She said the state will help bring producers on board by reminding them of upstream inducements and of how economical the pipeline project is.

What ignorance and arrogance.

Yeah governor, remind them of the upstream inducements and how economical the project is, after all it's not like they didn't know the score last year when every producer refused to bid on AGIA because it wasn't a viable proposal. 

It wasn't like they all didn't say the same thing over and over and over again during the legislative hearings; "AGIA does not make for a commercially viable pipeline project." 

Ironically, the ignorance from Palin comes just after she spent the last three months telling the country how she brought the oil & gas industry to its knees while building the gas pipeline.

Now she's back home and facing the harsh reality that she callously misled Americans over the progress on the project for votes and in reality her pipeline proposal is a dead end. No matter how many times she said it was being built on the campaign stump, AGIA is a pipeline to nowhere.

Speaking with stock analysts in late October, TransCanada CEO Hal Kvisle said the “single most important step” in moving the gas line forward is what he hopes will be “fruitful discussions with the existing producers on the North Slope.”

Kvisle's problem is that the companies he hoped would be his customers who would commit gas to AGIA, thus allowing him to secure financing to build the pipeline, have now become his competitors. 

It's the splashback of the very words from Kvisle's own Vice President; "no customers, no credit, no pipeline."

State Rep. Jay Ramras was at Friday's AGIA license signing, and has been skeptical of the deal since the start.  "I was careful to stand in the back of the room," Ramras told KTUU News, "I'm one of the non-believers."

Ramras still believes as he did the day the Legislature approved the TransCanada license that AGIA will fail.

"Until we get the three producers to sit down with the state and the country of Canada, we're no where," Ramras said. "In my opinion, all we've done is waste a lot of time and some growing fraction of $500 million."

The biggest challenge to getting out of this mess and changing courses is now that the license has been awarded to TransCanada there is no looking back. As we've said before, from here on out it's going to be an expensive divorce.

What a mess.