>>Has Palin created a prisoners' dilemma for the oil companies?<<
This article by Tim Bradner outlines some potential problems with AGIA. Perhaps the Palin team's tough requirements are a negotiating ploy? They expect the companies to walk off the field, but then make concessions in return for more favorable terms during a special session to amend AGIA? We'll see...
Governor runs a risk with AGIA game plan
adn.com
TIM BRADNER
ECONOMY
Published: May 13, 2007
Last Modified: May 13, 2007 at 06:19 AM
There's just a few days left in the 2007 legislative session and Gov. Sarah Palin has won her Alaska Gasline Inducement Act, or AGIA, with which she hopes to attract proposals to build a North Slope pipeline. Palin has laid out incentives, including a $500 million state grant, for a developer who agrees to meet certain objectives.
The state House and Senate approved slightly differing versions of the governor's bill on Friday. Minor differences are expected to be worked out.
Palin deserves credit for achieving her major legislative goal, but getting the bill passed was the easy part. Actually getting a pipeline will be much more difficult.
Hopefully there will be more than one competent proposal. If there is, Palin will have to decide between them and also make a choice between an all-land pipeline to the Lower 48 and a liquefied natural gas project that will surely be proposed by the Alaska Gasline Port Authority, a municipal group that strongly backed the governor in her election.
Most important, Palin will have to persuade the North Slope producers to sign long-term contracts to ship gas through the pipeline. These are ironclad financial commitments that could total as much as $144 billion in obligations, an incredible sum.
The immediate worry, however, is that Palin may have drawn her "must-have" requirements so tightly that she may drive potential applicants away. There are cynics who say that this strategy is deliberate and the administration already has its winner picked, but I don't believe this to be true.
It's quite possible, though, that there could be only one or two competent proposals instead of many, as the governor had hoped. This would be disappointing.
Legislators had wanted to persuade Palin to loosen AGIA a bit to encourage more competition.
As things stand, the three major North Slope producers have said they won't submit proposals to build the pipeline and at least one has said it won't sign multibillion-dollar contracts to ship gas through an AGIA-licensed pipeline. The producers have a lot of experience in the Arctic and in managing mega-projects and they say administration officials, who are inexperienced in large project management, have set deadlines and other requirements that are too inflexible. It's a prescription for big cost-overruns, a disaster for this project.
With the producers out this leaves, possibly, two independent pipeline companies in the bidding as well as the port authority, which is working for a liquefied natural gas project. However, one of the pipeline companies, TransCanada Corp., says it may not participate unless the administration changes one part of AGIA.
That is a requirement that a company selected by the state continue engineering and other work toward a Federal Energy Regulatory Commission certificate even if the initial "open season" fails, meaning insufficient contracts for capacity are signed. An open season is a period in which a pipeline company solicits firm contracts so it can raise financing for construction.
TransCanada says that if the open season fails, it prefers to go back and work with the customers, the producers. That's a sensible approach. TransCanada takes this position even if the state pays 80 percent of the cost, as Palin proposes under AGIA.
When legislators asked the company whether it would be willing to continue engineering if the state paid 100 percent of the costs, TransCanada said it would still hesitate.
The other interested pipeline company, MidAmerican Energy Holdings Corp., has no qualms about continuing work on engineering if the open season fails, and taking the state's money to do it. Interestingly, when MidAmerican was asked by legislators whether it would continue work if the state subsidy wasn't there, the company ducked the question.
It has been a puzzle to many why the governor has been so insistent that a license holder continue spending money, 80 percent of it state funds, if the initial open season fails. The explanation has been that the project must continue to progress and that eventually the customers, the producers, would feel enough political heat and other pressure to sign the capacity contracts.
There's something wrong with this picture. The premise seems to be that an open season would fail only if the producers decide to sit on the gas and wait for a better deal. That there might be something wrong with the pipeline plan at open season, some reason why it might not be workable on a business basis, obviously escapes the administration.
TransCanada is savvy enough to recognize this. The company realizes that without the producers there is no pipeline. "No customers, no pipeline," TransCanada told legislators.
MidAmerican, a highly competent company, has surprisingly bought into the political mantra that the producers can be pressured into signing billions of dollars in capacity contracts. It said as much in hearings before the House Finance Committee two weeks ago. I was shocked to hear a company of MidAmerican's stature take this position.
We need to get real. Large companies like BP, Conoco Phillips and Exxon Mobil will not sign contracts committing more than $100 billion of their money unless they believe the pipeline is economically sound. The state of Alaska will not strong-arm them into doing it, either.
That aside, we are where we are. Now that she has AGIA, or almost has it, the governor must deliver. Let's wish her luck. If she's fails, we're in deep doo-doo. At the rate North Slope oil production is declining, our economy will be in dire straits without a gas pipeline.
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Tim Bradner writes for an Alaska economic reporting service. He also consults for private clients and writes for business publications. His opinion column appears every fourth Sunday. |
