Back to the Future: Parnell adopts Frank Murkowski's Alaska gas line approach

Gov. Sean Parnell's new gas pipeline approach reminds me of Edmund Burke's admonishment that those who don't know history are doomed to repeat it.

Out of frustration that the North Slope leaseholders were not moving forward with a gas pipeline, Govs. Hickel and Egan convinced CSX, the nation's largest gas pipeline operator, to fully permit an LNG project from the North Slope to tidewater to ship LNG to Asia. After spending over $100 million in the 1980s and 1990s, the effort was abandoned because the three companies that hold the leases on the North Slope gas decided they would neither build nor allow to be built a gas pipeline until the state gave them "fiscal certainty." Fiscal certainty means tax, royalty and regulatory concessions that are locked in from legislative change for decades.

Instead the leaseholders opted for enactment of the Stranded Gas Development Act in 1998. Still on the books, the act gives the governor power to negotiate a comprehensive gas pipeline deal to be approved by the Legislature after a defined public process. The Murkowski administration negotiated a deal with BP, Exxon Mobil Corp., and ConocoPhillips while telling independent companies -- like TransCanada, Warren Buffett's MidAmerica and California energy giant Sempra -- to take a hike.

The outcome is what you'd expect when you tell three of the world's largest oil companies you're desperate for a deal, but you'll only negotiate with them. It was bad, committing Alaska to tens of billions of dollars in concessions on oil with no commitment to build a gas pipeline. The rest is history. Gov. Murkowski's negotiating team quit, Alaskans got angry, the FBI arrested 10 percent of our Legislature bribed by oil company lobbyist Bill Allen trying to support it, and Gov. Sarah Palin got elected on a platform of standing up for Alaska.

Determined to break the Big Three stranglehold, Gov. Palin successfully pushed for passage of AGIA. Its purpose was to bring in an independent company that would not hold gas pipeline development hostage over fiscal concessions on oil or gas.

But AGIA was a flop. Alaska selected a project through Canada in 2008 at roughly the time the shale gas revolution ensured the Lower 48 would be awash with gas for a generation. And a few days after TransCanada was awarded the license, its president declared, "Nothing goes forward until Exxon is happy with it." BP and ConocoPhillips formed Denali as an excuse not to participate in AGIA. Exxon played the inside game and partnered with TransCanada. It ran the AGIA process on the state's dime while sticking with the refrain that no project moves forward until fiscal concessions to the leaseholders on oil and gas are locked in. TransCanada, hardly the white knight Alaska pined after, became a pointless fourth wheel in the decades-long dance with the North Slope leaseholders.

Gov. Parnell inherited the governorship in 2009 and spent the next four-plus years letting the gas pipeline dream lay idle except for writing AGIA checks and giving Exxon back Point Thomson. The governor even awkwardly ignored that Japanese, Korean, Indonesian and Thailand companies responded to the 2012 open season TransCanada was required to hold under AGIA with an interest in purchasing twice the capacity of an Alaska LNG project. The Japanese consortium REI, after Fukushima, set up an office in Anchorage and spent tens of millions of dollars trying to engage the governor and the Big Three. In REI's defense, it is confusing when you're a buyer willing to underwrite billions in investment and no one returns your calls. But the governor was too busy to meet with them.

Now, in a pre-election epiphany, the governor has rediscovered "alignment" and announced a new plan with BP, Exxon Mobil and ConocoPhillips to provide fiscal certainty via an iteration of Gov. Murkowski's gas pipeline contract. After all, those companies are clear they will prevent a gas pipeline from being built without those concessions. So Alaska is at a familiar decision point. Are we going to hope the monopolists will undertake an already profitable project if we give untold billions of dollars in concessions, or are we going to allow free markets to work by empowering other companies -- namely the Asian buyers -- to build a project?

For those of us that follow these issues closely, it has been clear for several years Gov. Parnell would follow Gov. Murkowski's approach and deal exclusively with BP, Exxon and ConocoPhillips. Although the particulars of his fiscal concessions have not been released, there are details worth discussing.

First, AGIA is not over. Rather, TransCanada agreed to drop AGIA if, in the future, it gets at least a 14 percent interest (roughly equal to the state's royalty share) in the pipeline. At least under Gov. Murkowski's proposal the state got to own a share of the pipeline equal to its throughput. Instead, lacking the will to exercise our legal right to exit AGIA, Gov. Parnell bought off TransCanada with our ownership interest in the pipeline.

Gov. Parnell's plan also suffers the same fatal flaw as Gov. Murkowski's. Like most state constitutions, ours prohibits surrendering the power to tax. The express purpose of that article is to prevent one administration or Legislature from making a bad tax deal that cannot be changed in the future. The rub is that what the Big Three demand -- unchangeable tax terms -- is exactly what is prohibited.

Gov. Murkowski's solution was a constitutional amendment. Gov. Parnell's plan is to end-run the constitution by eliminating production taxes paid in money in exchange for a contractual right for the state to receive tax payments in the form of physical delivery of gas.

What, you don't understand what that means? Don't worry, neither does anyone else. Just know it will likely involve a contract between the North Slope leaseholders and the state that provides if taxes go up in the future, contractual payments owed the state go down. Taxes can vary, but a contractual net out mechanism puts the cost of any tax increases on the state. For the policy wonks, that's page 119 of the Black & Veatch royalty study.

Another difference worth mentioning is how the deal will be presented to Alaskans. For all the faults of Gov. Murkowski's proposal, he chose a public process. He presented the deal with the North Slope leaseholders to Alaskans in its entirety, and after innumerable written findings and public hearings ensured an informed electorate. Gov. Parnell could follow the same public process under the Stranded Gas Development Act, but is instead choosing a piecemeal approach that feeds the same deal to Alaska one uninformed bite at a time.

Craig Richards grew up in Fairbanks and now lives in Anchorage. He holds a BS in finance from the University of Virginia, a law degree from Washington & Lee University, and an MBA from Duke. Although he practices law with independent candidate for governor Bill Walker, the views expressed herein are exclusively his own.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch, which welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.