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.

Feds will take over gas line - Palin's socialistic policy makes it easy

Alaska lawmakers are concerned feds will take over gas line - Palin's socialistic policy makes it easy to do so.


Forget “Drill, baby, drill.” Sarah Palin says she’s building a $40 billion gas pipeline, which even President Obama wants. The only problem: It isn’t there. And it’s her fault.

“I fought to bring about the largest private-sector infrastructure project in North American history,” Palin said at the Republican convention. “And when that deal was struck, we began a nearly $40 billion natural-gas pipeline to help lead America to energy independence.”

During the vice-presidential debate, she said it again: “We’re building a nearly $40 billion natural-gas pipeline, which is North America’s largest and most expensive infrastructure project ever.”

And to Katie Couric, she said, “We should have started 10 years ago,  but better late than never.”

To many outside of Alaska, it may therefore come as a surprise to learn that not only does such a pipeline not exist, but—even as Alaska’s deep winter darkness gives way to the first light of spring—the prospect that it will be built within Sarah Palin’s lifetime grows dimmer by the day.

Palin does not play well with others

More Legislature vs. Palin

Posted: April 17, 2009


The antagonism between legislators and Gov. Sarah Palin doesn’t end. Hours after the Legislature voted down the governor’s nominee for attorney general, House Finance Committee members tonight slammed the governor’s aides for not briefing legislators on Palin’s plan for an in-state gas pipeline.

“I’ve had a lot of friction with the governor this year on her lack of connection, frankly the appearance that she’s more concerned about her national ambitions than what’s going on in the state,” Anchorage Republican Rep. Mike Hawker, co-chair of the finance committee, told Palin budget director Karen Rehfeld.

The committee was deciding on a request by Palin for $9 million to help develop a private in-state natural gas pipeline from the North Slope down to the Kenai Peninsula. Hawker and the other co-chair said Palin staffers spoke to legislative leaders about the money -- but several other finance committee members complained this was the first they’d heard of it.

“Nobody from the (Palin) administration has been to my office at all…I see a number of different legislators all shaking their heads, same thing, nobody’s been in their office,” said Kodiak Republican Rep. Alan Austerman.

Haines Republican Rep. Bill Thomas said nobody has spoken to him about gas plan either. Anchorage Democratic Rep. Les Gara -- who questioned if this is a set up to benefit the Enstar "bullet line" project -- said he’s being asked to approve a $9 million plan with no one ever describing to him what it is about.

Hawker said it’s an insult if Palin staffers were only talking to legislative leadership about it and not following up with other members of the state Legislature about something that is supposed to be a high priority for the governor.

“I would offer some counsel and instruction to the (Palin) administration. If this was your highest priority, it is beyond me… 11 people have been sitting at this (finance committee) table all year, you are looking for support for an appropriation and it is just beyond me that you folks didn’t have someone, quite frankly it just never occurred to me that you wouldn’t have talked to everybody on this table,” he said.

Palin budget director Rehfeld responded she is clearly sensing the frustration at the committee.

“We have had this appropriation in our budget for in-state gas since December…it has evolved, but the discussion and the interest and the desire to move forward on in-state gas has been very clear from the administration and we have talked with the committee about the budget request. So the specific design now going through the governor’s office is different, yes, than what we had proposed but I think clearly the governor has been very consistent in her discussion of in-state gas,” Rehfeld told the finance committee.

CNN exposes Palin on building pipeline claim

CNN exposes Palin on building pipeline claim

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Is Palin really the biggest obstacle to a gas pipeline?

Here's the press release on McGinniss' story. After that is McAllister's response to the press release. And lastly is a zinger -- a little tidbit about Palin and Exxon meeting the other week.

CONDÉ NAST PORTFOLIO ON SARAH PALIN, BIG OIL,
AND THE PIPELINE TO NOWHERE
New York-Joe McGinniss, bestselling author of Going to Extremes, a nonfiction account of his year in Alaska, returns to the state in search of the $40 billion natural gas pipeline that Sarah Palin has said she is building. But McGinniss finds that not only is the pipeline not being built, but Palin herself is the biggest obstacle in its path. ("Pipe Dreams" p. 50). "Everything she is doing is the opposite of ‘Drill, baby, drill,' " former governor of Alaska Tony Knowles tells McGinniss. Despite pressure from the Obama administration to get pipeline construction underway, the prospect of its ever being built looks dimmer by the day. McGinniss reports how Palin has virtually ignored the pipeline issue since returning to Alaska in November to focus instead on her 2012 presidential campaign strategy. McGinniss notes her absence from major oil-company summits, and hears from a rising chorus of critics, including some of her former supporters. Alaska Republican Mike Hawker tells McGinniss, "The only thing standing in the way of an Alaska gas pipeline is the Sarah Palin administration." Palin's biggest blunder? Locking the state into an exclusive contract with a Canadian pipeline company (TransCanada) that has no access to Alaska's natural gas. Now BP and ConocoPhillips--two companies that do have gas--have launched a rival project. McGinniss writes that despite her repeated claims that she'd already gotten the project underway "What Palin had done... was contrive to pay as much as $500 million to a foreign company to look into the possibility of someday building a line." Since the election, the price of oil and gas has continued to plummet and Alaska's budget deficit has soared. McGinniss argues that Palin's $500 million commitment to TransCanada looks increasingly like money wasted. Even Hal Kvisle, the CEO of TransCanada, concedes, "I don't know whether we're going to see this [pipeline] get built or not."

*****

Here is Bill McAllister's response on the McGinniss press release:

It seems to expect people to be surprised by the fact that the pipeline is not under construction. That's not much of an "aha." Obviously, anyone paying attention knows this will be years in the making.

"Palin has virtually ignored the pipeline issue since returning to Alaska in November to focus instead on her 2012 presidential campaign strategy." Show me one shred of proof for either part of that statement. The governor had a nearly daylong meeting with her gas line team the week after the election, and of course those consultations have continued. In early December, she arranged an event in Fairbanks to present the AGIA license to TransCanada. She has gas line-related funding requests pending before both the Congress and the Legislature. This is "ignoring"?

McGinniss notes "her absence from major oil-company summits." She had Exxon in her office last week. Not sure what his point is there.

McGinnis calls AGIA a blunder, but every lawmaker but one voted for it, and a majority voted to stay the course over a year later and give TransCanada a shot. The governor campaigned in 2006 on getting Alaska's terms for its gas, in contrast to the Murkowski contract that ceded tax sovereignty, judicial sovereignty and regulatory sovereignty. AGIA was a game-changer, a new paradigm.

*****

And here's a follow-up exchange between Alaska Dispatch and McAllister about the Palin-Exxon meeting:

Alaska Dispatch: Gov. Palin met with Exxon? Can you tell me more about that meeting and the date it occurred? Why did she meet with Exxon? For Pt. Thomson? The gas line? Something else? What was the result of the meeting?

McAllister: I don't have details. I just saw them go into her office. I didn't ask her about it afterward. But hey, that wasn't the first time since the election. That's what's so off-base about McGinnis. He obviously doesn't have a clue what she does.

*****

And now we end with a few questions for you to chew on in the comments section:

1) Was AGIA nothing more than a ploy to get the industry to move on the gas line project?

2) Can Alaskans trust BP and Conoco to follow through with their Denali pipeline?

3) Should the state continue down the AGIA path, including subsidizing TransCanada, especially during these lean economic times/lower oil prices?

4) And is Palin really the biggest obstacle to a gas pipeline?

Read More

Obama's Oil & Gas Tax Plan: Alaska's precarious position

(3/03/09) On Saturday, President Barack Obama detailed his fy2011 federal budget proposal by saying he would eliminate $30 billion in oil & gas company tax credits and use the money to pay for government services.

Lets face it; oil & gas companies are an easy target with the profits they've been reporting. But unlike other industries that have decimated wealth such as insurance (think AIG) and finance (think Lehman Brothers), the profits from oil and gas companies have actually helped buffer the dramatic liquidation of wealth in Americans retirement accounts.

SEC data on the ownership of U.S. Oil and natural gas companies shows that 70% of the shares of these companies are held by institutional investors (Ak Perm Fund Corp eg.) especially asset management companies, and predominantly on behalf of middle-class American households who on shares through mutual funds, pension funds and retirement accounts.

Individual investors who manage their own portfolios and are not company insiders account for almost 30% of all industry ownership, which again includes significant numbers of middle-cass households holding IRA and other personal retirement accounts.

A recent report on the subject found, “The data strongly suggest that most of those profits go to the industry’s majority shareholders, who are middle-class U.S. Households with mutual fund investments, pension accounts, other personal retirement accounts, and small personal portfolios.”

But still, it's seems politically fashionable to go after one of the only industries in the country that is making a profit.

Seems ironic in a day and age where government is spending hundreds of billions in taxpayer money to bail out failing companies who have managed themselves into the ground.

Today AGI announced the largest single quarter loss in corporate history at $67 billion and what happened? Uncle Sam rushed in with $30 billion in taxpayer money to help them out. I'd wager that if Exxon or BP were to lose that much, Uncle Sam would be as absent as mink stoll at a PETA function.

The problem closer to home for Alaskans is that President Obama's proposed tax changes represent a threat to Alaska's financial life line; oil & gas development on the North Slope.

In November of 2007, Governor Sarah Palin and the Alaska State Legislature increased taxes significantly on the oil & gas industry. The one saving grace for many producers was that in some cases, they could deduct their state taxes from their federal taxes.

President Obama's plan calls for eliminating these credits and if they become law, producers will take their capital and flee to more tax friendly countries who will be begging for investment given the global economic meltdown.

Already there are growing signs of concern on the North Slope.

In January of 2008, the governor put out a press release announcing a major new project on the North Slope:

"Governor Sarah Palin today commended the major investment announced by Italian oil giant Eni. The company will invest $1.45 billion developing the Nikaitchuq oil field. Eni expects to drill 70 wells to recover 180 million barrels of oil."

In December of 2008, Department of Natural Resources Commissioner Tom Irwin, used the Eni project in a column in the Anchorage Daily News to support his contention that activity up on the North Slope was humming along.

"Our commitment to development is further demonstrated through the royalty modification program and has resulted in major activity. Through a cooperative cost- and risk-sharing effort between the state and industry, this world-class field is being developed. Likewise, Italian energy giant Eni has sanctioned some $2 billion in project capital for the development of the Nikiatchuq field, neighboring Oooguruk."

Last week however, Eni notified sub-contractors that it is suspending all work until further notice.

According to one oil company executive, this is a significant loss of jobs.

To add insult to injury, Conoco Phillips announced they were cutting their capital budget in Alaska. Conoco has announced a $12.5 billion capital spending program for 2009, which pencils out to a 20 percent reduction in capital spending in Alaska for the coming year.

Capital spending covers exploration and oil field development costs, which have always been viewed as the marker for determining the economic health on the North Slope.

According to Eric Lidji at the Petroleum News, Conoco earned $2.3 billion in profit on $9.2 billion in revenue in Alaska last year and paid $3.4 billion in non-income taxes. Conoco paid $1.7 billion in non-income taxes in Alaska in 2007.

Conoco paid $33.83 in non-income taxes on each oil-equivalent barrel produced in Alaska last year, up from $15.27 in 2007. The figure is significantly higher than all other areas listed in the report, except for the $50.14 reported for a region marked "other areas." The company paid $4.20 in non-income taxes per barrel in the Lower 48 last year.

The dramatic increase in non-income tax per barrel is due to the state's dramatic increase in productions taxes adopted in 2007.

In fact, the news from the North Slope of late has made one thing perfectly clear; a continued refusal by DNR Commissioner Tom Irwin to delay Point Thomson development even more than he already had, would have caused an even wider spread of pain on Alaska's economy.

The global economic recession will continue to present challenges for Alaska's resource development, but the combination of Alaska's high tax structure and Obama's proposal to end federal tax breaks for producers of domestic sources of oil & gas will have tremendous consequences on Alaska's North Slope development.

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