Wasting the years away: Best prospect for in-state gas still producers' highway route

Posted: Wednesday, June 10, 2009

As a former governor who had negotiated a draft contract with the producers, it is hard not to compare where the gas line project is now to where it would have been had the Palin administration simply proceeded to improve the draft contract we had negotiated pursuant to the Stranded Gas Development Act (SGDA).

The SGDA was originally adopted on 1998 during the Knowles administration. Although it was substantially amended by a unanimous vote of the Legislature in 2003, the basic concept remained the same. It became the job of our administration to negotiate an agreement with the producers and present it to the Legislature for its amendment and approval.

The SGDA realistically recognized:

* The only way the gas line could be financed was through the producers commitment to ship their gas under lease in the form of a firm transportation (FT) agreement; and

* In exchange for FT commitments and the producers' willingness to accept the risks of construction cost overruns and changes in the world price of gas, the state of Alaska would provide certainty regarding the gas tax structure over the amortization period.

My administration achieved commercial alignment by agreeing to share risk in the form of equity, taking Alaska's gas in kind, thereby reducing each of the producers' project costs to the same percentage as their share of the revenue.

As of February 2006, my team had negotiated a 457-page contract acceptable to the three producers that addressed fiscal and commercial terms and simply awaited the approval of the Legislature. Under the draft schedule on which we were operating, we would have been through the open season by now and completing the draft EIS process if the current administration had move forward with our contract pursuant to the SGDA process.

But the Palin administration tore up the draft contract and rejected the SGDA. Under AGIA she proceeded to change the basic strategy for getting a gas line:

* Instead of negotiating with the producers, which hold the gas under lease and have the financial capacity to make the FT commitments essential to financing the gas line, AGIA directed that an agreement be made with a pipeline company, even though the pipeline company had no gas and did not have the capacity to finance construction without the FT commitments of the producers;

* AGIA further directed that the negotiation of commercial terms of any contract with the producers be outsourced to the pipeline company, ignoring the state's responsibility to negotiate terms;

* There is no commercial alignment between the pipeline company and the producers (the pipeline company makes money regardless of cost overruns, the producers lose money);

* There is no commercial alignment between the pipeline company and the state (the pipeline company could give away all the state's interest to get a gas deal with the producers);

* AGIA negotiations would inevitably be conducted in secret -- a criticism then candidate Palin made of our negotiations; and

* That AGIA was more politically than commercially driven is seen from the fact it had to subsidize the pipeline company with $500 million of state funds.

So, at the end of the third session of the Legislature (June 2005) our administration had a strategy for negotiating a contract that was commercially aligned with the producers. It also included an in-state gas line with four take off points in Alaska. Had the current administration accepted our proposal the in-state line would have been much closer today.

Contrast this with the status of AGIA in which the current administration:

* Has negotiated an agreement with TransCanada which has no gas and no ability to finance a gas line;

* Has no negotiating strategy by which the producers and the state can come into commercial alignment;

* Will not see contract negotiations begin between TransCanada and the producers, if ever, until after the open season is held sometime in 2010. Because there is no commercial alignment between the producers and TransCanada, the open season is destined to fail; and

* Has no Plan B because its gas team is wedded to AGIA, which is a losing strategy.

The bottom line is that by the end of the Palin administration, Alaska will have wasted four years in attempting to get a gas line that could be far along by now had the Palin team simply picked up the SGDA contract we handed it.

Frank Murkowski is a former Republican governor for Alaska. He lives in Fairbanks.

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