Alaska Gov. Bill Walker's scolding of the state's industry partners in the large Alaska LNG Project has opened a rare window into the kinds of often-difficult commercial negotiations that always accompany large industrial ventures involving several partners.
The big oil and gas companies always speak politely about cooperating (the public believes they're in collusion) but in reality, behind the scenes, they argue a lot. The final result, while messy, is usually agreement, but there are often wounded feelings.
Walker unloaded his frustrations over the glacial pace of negotiations during a press conference following his call for a special session of the Legislature in late October to deal with the gas project. The governor had hoped to include completed agreements on the special session agenda but instead, in a surprise, said he will introduce a gas reserves tax to goad reluctant companies.
A gas reserves tax is like a nuclear weapon. It's something to have in an arsenal, but a weapon we'd never want to really use. The fallout, an apt metaphor, would be horrendous and devastating to the state's reputation.
Chances of the Republican-led Legislature actually passing a reserves tax are those of the proverbial snowball in hell, and surely the governor realizes that, so it's likely his proposal is a calculated threat aimed at putting more pressure on the industry negotiators.
Give and take
So, what's the problem in the negotiations? Frankly, we don't know, because they are confidential. However, the governor's statements open a bit of window, as do statements by company representatives at a recent legislative hearing in Palmer.
Any negotiation involves give-and-take and we have learned, for example, the state has given up two priorities, one a request to reroute the pipeline at its southern end to be closer to populated areas of the Matanuska-Susitna Borough, the so-called "eastern" Cook Inlet crossing.
For technical reasons, such as soil conditions, the companies held firm on a "western" crossing route that is further from the Mat-Su communities. The governor had to accede to this but is now pushing to have the gas project help finance spur lines in Mat-Su and to Fairbanks.
Another point where the state gave in was a request for a "joint-venture" group to do the LNG marketing in lieu of "equity" marketing where each partner, including the state, is responsible for selling its own share of LNG. The joint-venture approach would involve forming a marketing group that would sell the LNG.
There are pluses and minuses with both approaches, we're told, and it appears the venture will now stick with equity marketing although the state is likely to team up with one of the companies to take advantage of its experience.
We're told one of the three producers also favored joint-venture marketing and a second was neutral, but a third company was so adamantly opposed it threatened to upset the entire venture.
The state could have gotten things in return for giving in on these, as negotiations usually involve give-and-take. One "give" by the companies was agreement to the governor's request to study a larger pipe diameter, 48 inches instead of 42 inches, so the pipeline could handle more gas.
Three thorny issues
There appear to be three issues that are now the most difficult. One is a gas "balancing" agreement among the gas producers (including the state) that would provide compensation if there is a production upset in one field that has to be made up for with gas from another field. The Prudhoe Bay and Point Thomson fields, the two main sources of gas, have differing ownerships, so this is important.
The governor has expressed puzzlement as to why this has been so difficult to resolve among the companies, and we share that. There must be complexities that are not readily apparent. ExxonMobil owns most of the gas at Point Thomson and ConocoPhillips owns most of the gas at Prudhoe Bay (BP owns about the same amount in both fields) so the argument over compensation seems to essentially be between ConocoPhillips and ExxonMobil. ConocoPhillips has said this agreement is a "must have" for it, however.
For the state, the governor says a "withdrawn partners provision," a contingency covering what happens if one company withdraws, is a "must have." Walker is worried one company's exit could stymie progress for the remaining parties.
This kind of agreement seems so common-sense that we don't understand what the problem is other than the particular form of it the state is requesting, an option for the state to buy the withdrawing party's gas or for that party to agree to commit its gas to the LNG project even if it is not an owner.
One company, speaking at the Legislature's briefing, said the specific proposal by the state is unusual and has not been done elsewhere. It seems that a solution to this should be attainable, but there may be aspects of which we're unaware.
Finally, the deal on fiscal terms, mainly production taxes, between the state and the gas producers is a "must have" for the industry partners. The governor says he wants the withdrawn partners provision before he agrees to fiscal terms. "They want 'fiscal' certainty, and I want 'project' certainty," Walker has said.
All of this ought to be doable, we would think. There has been wide agreement for years among all parties some form of fiscal certainty is needed and an existing state law, the Alaska Gasline Inducement Act, or AGIA, even provides for it.
The state has meanwhile concluded a constitutional amendment will be needed to make a fiscal deal legally possible, and the companies have now agreed with that. We think a ballot question on an amendment, if properly constructed, narrowly drawn, could get voter approval.
However, it's vital we make the 2016 November general election on this. The next opportunity will be November 2018. If we don't make 2016, we delay the project for two years.
One recent twist on the tax deal, the governor has said, is one producer wants to include certainty on oil taxes, which he opposes. That will have to be resolved.
More moving parts
There are many other parts to this package including some that are internal to the state, such as a payment-in-lieu-of-taxes deal for municipalities, and the separate question of whether the state should buy out TransCanada's part of the project (TransCanada is a partner with the state in its 25 percent share). That is between the state and TransCanada.
One aspect of the TransCanada buyout is while it is true the state would earn greater profits by owning all of the 25 percent, it must also finance the full 25 percent share of construction, which will amount to several billion dollars.
The governor is assuring the Legislature this should be no problem, with either customers (presumably buyers in Japan) or Wall Street stepping up to help provide funding. However, there will be a cost to this and the state's credit rating, with its ready cash reserves depleted by 2020, may result in a higher risk premium being charged by lenders.
The governor should be questioned closely on whether some form of state collateral will be needed, such as a pledge of the Alaska Permanent Fund.
It's a complicated package but it should be doable, we would think. The messy parts of this may be just normal for negotiations at this stage. Meanwhile, the governor's talk of a gas reserves tax is likely just saber rattling. At least we hope so.
Tim Bradner is a natural resources writer for the Alaska Journal of Commerce. He regularly writes commentary for Alaska Dispatch News.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary@alaskadispatch.com.