Thursday, June 18, 2009

Exxon & TransCanada: Back to the Future

Exxon & TransCanada: Back to the Future
Welcome to the strange days of pipeline politics that provides a twist to the old saying, "there are no permanent friends only permanent interests."

In April of 2007, I sat in an airport conference room with Department of Revenue Commissioner Tom Irwin and Deputy Commissioner Marty Rutherford so they could explain their AGIA concept.

During the two hour sit down, I asked Commissioner Irwin why he didn't believe Governor Sarah Palin was capable of sitting down and negotiating with the producers over pipeline terms. After all, the governor would be the perfect ambassador coming to negotiate armed with a reservoir of goodwill and trust from fellow Alaskans and the desire to strike a deal.

Irwin's face went blank almost as if I had said something unkind about his mother.

"Do you know how Exxon negotiates," Irwin asked rhetorically. They're the worst, they squeeze and squeeze, they keep asking for more and more he said. When they don't get what they want, they'll get up and walk away from the table. Then, in order to dramatize his point, Irwin abruptly abruptly stood up from his chair and walked away from the conference table thus punctuating the message.

Across the table, Lt. Governor Sean Parnell just shook his head and said yeah they're tough.

It was clear from my two hour meeting that whatever dynamic existed between Irwin and Exxon, his dislike for the Houston based oil giant was personal.

It was also clear that Irwin's AGIA was specifically designed to avoid face to face negotiations with companies like Exxon.

The ongoing war between Exxon and the Palin administration seemed to escalate over the last year with tough exchanges regarding both AGIA and the on going litigation surrounding Exxon's Point Thomson development.

In April of 2008, Commissioner Irwin rejected Exxon's proposal to bring Point Thomson under development saying he couldn't trust Exxon while accusing them of misleading Alaskans about their Point Thomson intentions.

The intense dislike held by the Palin administration for Exxon was put on public display when emails were released as part of a legal filing in the Point Thomson court case. Internal DNR emails revealed state oil & gas executives were slow rolling Exxon's permitting requests while openly mocking the company's commitment to develop Point Thomson. Governor Sarah Palin also criticized Exxon, saying the company shouldn't let the door hit them on their way out.

Meanwhile, Exxon was critical of Palin's gas pipeline plan, AGIA.

During the two years of legislative testimony on AGIA, Exxon repeatedly warned the Palin administration that AGIA would not work. "AGIA does not provide for a commercially viable project," Exxon's Marty Massey testified over and over again during hearings on AGIA.

Massey along with other producers all testified that those hurdles to development included fiscal certainty, unrealistic terms regarding rolled in rates and ownership issues concerning the pipeline itself. The concerns voiced by Exxon and the other producers were the same reasons why none of the producers bid on AGIA to begin with.

Last week the news broke that Exxon had joined TransCanada while declaring that AGIA was the way to the promised pipeline land. Some interpreted the announcement as much to do about nothing while the Palin administration referred to it as an historic event.

At the press conference announcing the new partnership, DNR Commissioner Irwin spoked glowingly about Exxon's professionalism and then appeared is if he might just reach out and give Exxon's Massey a bear hug. Meanwhile, the governor was issuing a press statement lauding Exxon and saying how this proves AGIA is working.

Exxon's Massey then stepped to the microphone to announce the partnership with TransCanada and then proclaimed that AGIA was the best way to get a successful natural gas pipeline project in their mind.

So what happened to the distrust that the Palin administration held for Exxon and the economic concerns that Exxon held for the Palin administration's AGIA?

According to an Anchorage lawmaker, during a briefing on the new partnership an Exxon representative was asked if their new found support for AGIA represented a retraction of their legislative testimony that AGIA is not a commercially viable approach to getting a pipeline built. The response from the company representative was that Exxon stood behind their legislative testimony 100%.

A twist if you'll allow me;

there are no permanent enemies, only permanent interests.

Permanent Interests

For Exxon this is a brilliant business move and one that should be understood in complete context of protecting their permanent interests.

During Exxon's press conference, company executives stressed one of their permanent interest quite clearly; the state must negotiate a fiscal framework with gas shippers so Exxon can accurately evaluate the projects economics. An Exxon spokesman said during the news conference that "predictable and durable" tax terms with the state will have to be dealt with before Exxon becomes a full participant.

During the State's press conference, Palin's gas line team stressed their permanent interest; AGIA was working and the state's pipeline mandates were still in place with the new partnership between Exxon and TransCanada. Even the governor's press release threw a little AGIA bone to the faithful, “Alaskans will also be pleased to know that TransCanada’s obligations to the state as the AGIA licensee are 100 percent intact and unaltered by this alignment with ExxonMobil.”

AGIA was specifically created by the Palin administration to lock producers out of pipeline ownership while avoiding ever having to negotiate fiscal terms.

After all, it was DNR's Irwin and his Deputy Rutherford who famously said that the state was “outclassed” at the negotiating table and that was why the AGIA mandates were so critical.

However Exxon's reiteration that fiscal terms must be agreed upon to move the project forward is a clear sign that their engagement with TransCanada is simply a new approach to getting back to where Frank Murkowski left us four years ago; needing to negotiate a fiscal framework with the companies that will assume the risk of building the largest oil & gas project in the world.

Before last weeks announcement of a joint cooperative agreement between Exxon and TransCanada, the AGIA process was beginning to draw criticism. Concerns had been growing from various corners of the political landscape about the slow pace of work and the overall attractiveness of the project with stagnant natural gas prices and increasing reports of a glut of natural gas in the lower 48.

Exxon comes along at a time when TransCanada needed a friend with deep pockets and the Palin administration needed some positive news to tell about AGIA.

With Exxon joining TransCanada they now have a seat at the table and can basically control the ground game preparing for scheduled open season in July of 2010. The agreement between the two companies as introduced last week was fairly vague but the intent was clear.

Exxon will control the work behind the scenes as a subcontractor managing the project design and costing while TransCanada wears the public face of the AGIA license holder.

In 2000, Exxon was partners with BP and Conoco in a pipeline working group when they spent roughly $120 million studying costs for the natural gas pipeline. Industry insiders have said that TransCanada has been actively pursuing the producers with an offer to buy the 2000 study materials.

Exxon's contribution to TransCanada will more than likely include dusting off these studies, updating the information and then selling it to TransCanada. The irony is that according to AGIA, if this represents a qualified expense, the state could end up paying for 50% of the cost.

According to their agreement, “TransCanada can progress the project independently if it so elects, using all jointly developed assets/information.” This means that when open season fail to attract firm gas commitments next summer, it will be TransCanada who will then be forced to carry on to FERC permitting according to their AGIA requirements.

You might remember two years ago when DNR Commissioner Irwin told a room full of lawmakers that the strategy was to have a failed open season for AGIA, so the administration could use public, government and stockholder pressure to force Exxon, BP and Conoco into playing ball.

But now all of the producers are in the game, all slugging away with their play. This means there is nobody left on the sidewalk for the Palin administration to blame or threaten when TransCanada's open season fails next July.

If TransCanada's open season fails it won't be because Exxon didn't play, it will be because the state's AGIA mandates don't provide for a commercially viable project.

If Denali's open season fails it won't be because BP and ConocoPhillips didn't play, it will be because the state's AGIA mandates don't provide for a commercially viable project.

And while many of you might say, "Whoa Andrew, Denali is outside of AGIA so there will be no mandates," lest you forget that one of AGIA's mandates will prohibit the state from negotiating with a competing project (Denali) at the risk of having to pay TransCanada treble damages.

Even ignoring the fact that all three producers will have to all be in agreement in order to greenlight the $30 plus billion project, if Exxon did step out and commit gas to the AGIA based project on their own, they'd tag on a massive contingency; the state must negotiate viable commercial terms before project commencement.

The same contingency will accompany any gas commitments to the Denali pipeline project from BP and Conoco as well.

The problem for the Palin administration is that adopting what the producers need to commit gas and build the pipeline would mean gutting AGIA, thus rendering the entire exercise meaningless.

Meanwhile, with a new partnership with TransCanada and a key role in managing design and engineering work, Exxon will be able to walk away with a much clearer understanding of just how much the AGIA mandates will impact their bottom line while at the same time gaining a higher comfort level with the project cost estimates since they had a hand in developing them.

Value Added

Since the day TransCanada has been announced as the only AGIA applicant that made it through the process, producers have been asked repeatedly if they envisioned a time when they might join up with the Canadian pipeline building company under AGIA.

“We're interested in any partner who can bring value to the project,” has been the standard industry reply. The problem for TransCanada is they don't bring any value to the project.

TransCanada has world class pipeline building skills but so do the producers. But more importantly, the producers have what TransCanada does not; deep pockets and natural gas supplies. In fact TransCanada offers little more than a shaky claim to decade old Canadian permits.

In an interview on the Dan Fagan Radio Show, Revenue Commissioner Pat Galvin said that Exxon was going to participate via subcontractor status by taking the lead role in designing and engineering the gas treatment plant. This isn't a surprise, because the gas treatment plant is traditionally oil field equipment, not pipeline equipment.

Just one bit of irony.

Back in February, Governor Palin was informed by a reporter at the beginning of a press conference that Denali had just announced awarding a contract to a local engineering firm to design and engineer the gas treatment plant. Big deal Palin said, it's just a contract to design not a contract to build. Four months later, TransCanada announces their subcontractor and the response from Palin is dramatically different.

But in this partnershop, TransCanada offers Exxon some excellent short term value. TransCanada provides Exxon with a lane to drive in during the journey towards AGIA's scheduled open season.

With BP and Conoco driving their Denali project ahead, Exxon needed a seat at the wheel and TransCanada desperately needed a driver.

With Exxon's new partnership based on their assets and management policies, even though on the outside it's being packaged as TransCanada is still in command, the tiger is actually driving the bus.

Not to mention the fact that Exxon is now in a position to get reimbursed for half of the costs of its pipeline design and engineering studies under the terms of AGIA.

And while Exxon scores positive press for siding with the state and progressing the pipeline project, they have left themselves plenty of room to jump off the AGIA train before the crash.

Looking ahead, after the two failed open seasons in 2010, the next move in the quest for a natural gas pipeline will land Alaska and the producers right back at square one where Frank Murkowski left us four years ago; negotiating a fiscal framework with those that will assume the risk of building the largest oil & gas project in the world.

And it will have only taken us four years to come full circle and make it right back to where we began.

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