Wednesday, May 28, 2008

AGIA (Alaska Gasline Incentive Inducement Act)- The Cliff Notes


What I Learned at the AGIA Forum Today (You'd think I could get the name right at least.)

Overview:

There were four basic questions:
  1. Is TC Alaska up to the task? (TC Alaska is term people will need to know - it is the name of the company that submitted the proposal, Trans Canada Alaska)

  2. Why should the Legislature choose the TC Alaska proposal over the LNG and the Producers (Conoco-Phillips/BP) proposals?

  3. If the Producers control the gas, how do we get them to give us the gas?

  4. Why does the state have to pay $500 million as an incentive?

There are other issues - jobs, energy cost relief now, tariffs - but these are essentially addressed directly or indirectly in the answers to these four questions.

Below, I’ve given a brief outline of the answers as I heard them today. But first a few more overview comments.

At the Special Session beginning June 3, the Legislators will decide whether to license TC Alaska to pursue the various permits they need to build a pipeline. Commissioner Irwin summed up what the legislators face very succinctly. Asked by a legislator something about various choices, Irwin bluntly replied (approximately),

“There are only two choices - yes or no. If you vote ‘no’ on AGIA, you are giving the Producers a free hand and giving up the state’s sovereignty.”

The Department of Natural Resources has reviewed the various proposals and decided the AGIA proposal from TC Alaska is best. Of course, there is some history here. Commissioner Irwin and some of his staff were among the state employees who resigned in protest to how Governor Murkowski was negotiating with the oil companies. They felt that he was making far greater concessions than he should.

There is a lot of research that underlies their proposal. Far too much for the average person, and even for most legislators.

Ultimately, the people of Alaska, and their legislators really have to decide if they trust the Department of Natural Resources or ConocoPhillips and BP. I, for one, was very impressed with
  1. the quality of the data, (this was not fluff or buzzwords, it was hard content)
  2. the arguments,
  3. the transparency,
  4. the ability of the staff and contracted experts to answer all the questions easily and in detail,
  5. the apparent dedication to this process and to the people of Alaska
These are competent, skilled people who seem very much to have the public interest as their goal. This is a far cry from the Murkowski administration and the oil companies he negotiated with in secret who, now that their bluff was called, are making a (veiled?) threat of not releasing the gas.

For me the choice of whom to trust is pretty easy. I would mention that one legislator (Therriault, I think) asked if the experts were free to give their honest opinions or if everything was scripted. Irwin responded quickly, that they are expected to give their honest opinions and if anyone has a script he doesn’t belong here. Compare that to the secrecy and deceptions of the previous administration and the oil companies they dealt with.


The Basic Issues


  1. Is TC Alaska up to the task?
    1. They’re a big, well run pipeline company, “one of the best if not the best”
    2. They are Canadian with connections to the Canadian galine hubs we need to go to, and probably will be able to work well with the Canadian regulatory agencies
    3. They are in financially good shape, with strong ratings from Moody and Standard and Poors so they will be capable of getting the financing
    4. The questions raised about former partners suing them for competing with them if they take on this project seem remote and not likely to win

  2. Why TC Alaska over the LNG and Concoc Philips-BP Plans? (I refuse to call it the Denali - with a little trademark symbol - Plan because I think it’s disgustingly arrogant for ConocoPhillips-BP to trademark something as Alaskan as Denali and because that hides who the people behind the plan are. The other way they were described was “The Producers.” Hmmm, maybe we could make a Broadway play about this and the LNG plan)
    1. The TC Alaska plan has the following benefits
      1. It includes an open access policy. Open Access means to the State that anyone producer with gas has access to use the pipeline, not simply the pipeline owners.
      2. It includes an expandable pipeline Expandable pipeline means that the capacity of the pipeline must be increased if there is demand by producers to use the pipeline to get their gas to market.
        [Both of these were identified as “must haves” by Commissioner Tom Irwin, because they make the long term jobs and revenue potential much greater by encouraging other developers to explore and produce gas once the pipeline is approved.]
      3. It includes lower tariffs
      4. It maximizes state revenue and future economy
      5. It is the only proposal that was responsive to the States requirements and on time.

    2. TC Alaska, unlike the Producers, is a pipeline company, not a producer. Their incentives are to move gas. They aren’t competing with other gas producers. “If the tarifff's high, at the end of the year, a producer owner gets its own tariff money back. The state’s high tariff money goes out of the state and to the producers. Independents just might not want to be here.”
    3. The Producer proposal had no enforceable commitments. No time lines. No specific goals. No conditions on tariffs.

    4. Maximizes state revenue and creates future growth of the state economy and jobs, because open access and expandable pipeline conditions mean more exploration and production and jobs in the future.

    5. The Producers did not submit a proposal to the state under the bidding process. Their later proposal does not meet the conditions set up by the State. TC Alaska had the only proposal that complied with the Request for Application (rfa). The LNG proposal needed some fixing, but when they resubmitted it, it was a totally new proposal. "We feel we need to keep our word and play by the rules to develop credibility with all future bidders." AGIA does not preclude LNG in the future.
    6. There were issues with LNG
      1. The market is Asia. That market requires a higher grade of gas which raises various issues.
      2. With the high price of oil and the US’ need tor energy independence, Congress is not likely to approve exporting our gas to Asia.
      3. Financing is more difficult





    7. Preserve state sovereignty. In the TC Alaska plan, the various state conditions have been met. The Producers have refused to meet the State's conditions - ie, open access, mandatory expandable pipeline, lower tariffs, etc.
      [Some of this is repetitive because the issues overlap. But the repetition will help you remembr.:) ]


  3. If the Producers control the gas, how do we get them to give us the gas?
    1. Economic Incentives. Even without considering Point Thompson, the Producers will make lots and lots of money from this.

    2. Pressure. There will be pressure from Congress to get the gas to the Lower 48 because of shortages. When stockholders understand the money the Producers will make, they will pressure them too.

    3. Much of this is gamesmanship. They thought they had a deal with the former governor to get an agreement that would give them concessions from the state without their having to make any commitments. The state didn’t fall for their bluff. Now, after the process, they came back with a new proposal, but it still has no concessions. Technically, they could build their own pipeline, but we expect that in the end this is part of their negotiating ploy for when they work things out with the State and TC Alaska.

    4. The regulatory commissions will weigh everything and consider it all. FERC (US) is looking after the interests of the US, not Alaska specifically, so we do have to look after our own interests in what they don’t require.

    5. The Producers say they can't do a pipeline without State concessions.

    6. Potential lawsuit and/or cancellation of their leases by the State.


      Ultimately, there is a risk that the Producers could refuse to release the gas or could build their own pipeline, but the various presenters felt that much of this is posturing in hopes that AGIA is rejected and the Producers can then get what they want. Or can negotiate some piece of AGIA after all, even though they have missed the boat now.


  4. Why does the state have to pay $500 million as an incentive?
    1. Shouldn’t think of it as a subsidy, but as an investment.
    2. The beginning is always the hardest part of a big project like this. The money will help show we are serious and help get the project off the ground.
    3. The money we invest at the beginning has a much higher return than money we invest later down the line.
    4. We get the money back in lower tariffs.
This is an incomplete outline of the arguments. I was there for almost eight hours of presentation. But it gives a sense of the basic arguments I heard today. They were backed up with a lot more information, which is further backed up by the report which is available on the AGIA website.

The Executive Summary is 17 pages and fills in some of the pieces I left out above. People who want to have an idea of the issues would do well to read it.

And today's session should be up tomorrow on Gavel to Gavel. The morning session - about three hours - should give you a good introduction as well.

4 comments:

  1. I must respectfully disagree with many of your standpoints. I feel that you have a grievous anger towards the major producing companies and that you are allowing your jaded opinion of the companies to cloud sound reasoning of comparing the projects side by side. I can’t help but question some of the points that you have made. You have stated that TC Alaska is a large well run (“if not the best”) pipeline company. I can’t disagree with being a well run company, TC is a very respectable operator. However, TC is not as large as you make it out to be. TC has a market cap of approximately 21.5 billion dollars. That sounds like a lot until you compare it to the combined market cap of 350 billion of the two main partners of the Denali project. You will no doubt argue that this has no bearing, but in fact it does. What this means is that TC NEEDS the 500 million dollar grant from the administration to be able to afford the front end work that needs to be done. They do not have the liquid capital to start this endeavor on their own. What this also shows is that they do not have the internal resources to support this and will no doubt rely heavily on outside contractors for support. This will in turn drive development costs up. Also, having a smaller market base means that they will have more difficulty absorbing the cost of any unforeseen development hurdles, which attaches a higher risk profile to the project.

    Second, I would like to mention that there are timelines and goals in place for the Denali project. A project like this does not make it to this point with “no specific goals”. Please research this more.

    Third, you alluded to the oil companies “making lots and lots money”. I will concede that at current oil commodity prices (being driven up by geopolitical events and heavy demand), Oil companies are making a larger net profit then they were at $11/barrel. The key in that statement is NET PROFIT. I would be interested to hear you elaborate on your understanding of the development costs associated with developing a new play such as Point Thompson. The capital investments for projects like these are many times greater then almost any other industry out there. And on top of that, there is a much higher risk factor tied to these projects, a risk that you will invest many millions of dollars and be met with failure. Please do not be cynical; this is a reality in exploratory development. Oil companies generate a profit, but at the cost of a high investment in technology and development. Why is this one of the few industries that is criticized on a GROSS PROFIT basis? A lot of that profit is rolled back into development.

    Finally, the employees of these oil companies are Alaskans. They have the same love of the state that you do. They pay the same prices at the pumps, they heat their homes with the same gas you do. These people are just that, people. They have no desire to do what is worst for the state. I feel that you think there is some hidden agenda to “steal Alaska’s gas” for others. Please keep in mind that the people behind this project have a common goal of bringing the resources to the people.

    Thank you.

    ReplyDelete
  2. Trip, I appreciate your taking time to comment on my post. Most of my blogging colleagues think I am much too polite and compassionate, so I’m surprised that you think I have a ‘grievous anger towards the major producing companies.’ Maybe you could point out what I said specifically that caused you to think that.

    Also, the post was a report about the meeting the State held at the Sheraton to explain why the State was recommending TC Alaska. Most of what I wrote was simply reporting the arguments made by the State. I was not attempting or claiming to be examining the other proposals. When I mentioned the other proposals I was just saying what the State’s experts were saying. They said that TC Alaska was a large company that could secure the financing and they said that the Denali plan did not commit to specific goals. I was just reporting.

    The point about the oil company profits is one that I made. According Google Finance
    ConocoPhillips made $15 Billion in NET profits in 2006, $11 Billion in NET profits in 2007, and $4 Billion in the first quarter of 2008. I do realize that net profits need to be viewed as gain on investment. The charts list several different figures that seem to capture that. By any standard today, these look pretty good. I wish I was getting this much return on my investments these days.
    Net Profit Margin 7.32% (1st Quarter 2008) 6.11%(2007)
    Operating Margin 13.35% (1st Quarter 2008)11.97%(2007)

    EBITD Margin - …………………………………..16.77% (2007)

    Return on Average Assets 9.20% (1st Quarter 2008) 6.94% (2007)
    Return on Average Equity 18.60% (1st Quarter 2008) 13.86% (2007)

    I don’t think I said anything negative about the employees of the oil companies. If you are one, and I’m assuming you are, I have no animosity toward you. And I’m sure you enjoy Alaska as much or even more than I do.

    But, if you were buying a house, would you be more likely to believe the attorney and real estate expert you hired or the sellers and their representatives? The oil companies are here to make the best deal they can. That's how the market works. I would be foolish to take everything they say at face value. If you do work for an oil company, then why didn’t you identify yourself? Because you know that would lower your credibility? Not because oil company employees are bad people, but simply because they have a vested long term interest in how this is decided. And that interest doesn't make them lie, but rather it influences which side of the line the fall when things aren't completely certain.

    Trip, I acknowledge the possibility that I could be wrong. Actually, there are enough uncertainties that probably no one knows with absolute certainty. The State’s experts were NOT hired to say TC Alaska was a good deal if it wasn’t. They've examined the proposal (and the others) and have backed TC Alaska's plan. The major oil company experts have differing views - views that just happen to favor their own proposal. So, even the experts disagree. All things being equal, it seems prudent to listen to the experts who represent me, than the ones who represent the seller. I don't see how that becomes 'grievous anger.'

    ReplyDelete
  3. It appeared to me that the tone of the article was very much against "Big Oil". However, If I have misinterpreted your context I apologize. I am, in fact, an employee of a major producer here in Alaska. I withheld that information because, in today’s society especially, I do not want to create a situation where my company is held liable for my opinions or statements. Its not that I am trying to be cagey, I just am trying to avoid any legal conflicts in the future.

    Several comments you made seemed to imply that companies involved with the Denali project cannot be trusted. That is a very bold statement to make about major corporations that have invested billions of dollars in the state of Alaska to set the standard of environmental practices, safe operating, and community assistance. At no point have any of the companies tried to “hide who is behind the project”. When you are dealing with a joint venture of this size, a very smart business move is to spin the project off into its own entity in order to ensure it gets the resources and focus it deserves. I don’t believe that its intent was to hide anything at all.

    As to your analogy about the house, how would you feel about the deal if the attorney and real estate expert told you that the final price of the house could be plus or minus $50,000; but you won’t know until you sign the deal? I wouldn’t sign that. With no tax structure in place, the oil companies have no idea what to expect once they access the reserves. The government could raise the tax at any point, ruining the economics of the project. As with any business venture, you need to fully understand your costs before you embark on a project. My final comment, business is business, these companies exist to turn a profit. However, not at the expense of the community they operate in. These companies have formed great relationships with cities around the world and have operated respectfully for many, many years. I would caution you in your trust of the government, maybe I am a cynic, but I feel that this administration will try to do what makes them look best, not necessarily what is best.

    To you sir..

    ReplyDelete
  4. Trip, sorry I've taken so long to respond. It seemed like a serious response, and I wanted to carefully consider what you wrote. Then other things distracted me.

    But I did get back to it and I decided to make this a whole new post. So my response is here.

    ReplyDelete

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