Blog: Capital Focus
Are the must haves must haves?
Published Thursday, April 10, 2008
One thing that's been largely ignored in the excitement over the ConocoPhillips and BP pipeline is the "must-have" requirements in the Alaska Gasline Inducement Act.
The companies are pushing their project outside AGIA, so nothing obligates them to meet the must-have requirements Gov. Palin and lawmakers wrote into the pipeline law. Company officials say they will meet a number of the must haves -- such as creating an in-state project headquarters and allowing for in-state offtake points -- but admit they don't intend to meet them all.
So the question is, Were the 20 must-have requirements in AGIA really must haves? Or were they just extra demands the state made in exchange for the incentives it offered (including $500 million)?
To refresh your memory, the must haves include:
-a detailed project plan
-a commitment to hold an open season within 36 months
-a commitment to seek federal licensing
-a commitment to assess market demand every two years and expand the pipeline when economically feasible
-a commitment to spread out the cost of expansions among all users (up to a certain point)
-a commitment to a certain financing mechanism (which determines how much profit the owner can seek through shipping tolls)
-a commitment to base pipeline tolls in Alaska on how far the gas travels
-a commitment to negotiate a project labor agreement and to use Alaska businesses when possible.
The Federal Energy Regulatory Commission also regulates pipelines and determines things like when owners have to expand the pipeline and how much profit they can make from the pipe. But it clearly does not cover the 20 must-haves.
Revenue Commissioner Pat Galvin yesterday told me he thought the must haves were “critical for protecting the state’s interests.” How different pipeline mechanisms affect the value to the state is something lawmakers will have to consider, he said.
But others argue the must-haves might not be necessary. The state set the bar higher for companies seeking the state incentives, Rep. John Coghill said Tuesday. If a company doesn’t want the $500 million incentive, maybe it’s OK if the state doesn’t get its must haves.
When lawmakers considered AGIA last year, they acknowledged it was only one approach to getting a pipeline, and they made a point of allowing entities to move forward outside of AGIA. But it’s somewhat hard to believe they didn’t intend the must haves to be must haves. Palin, AGIA, and the must haves all rose in the wake of former Gov. Frank Murkowski, who went into negotiations with a list of state demands but (arguably) without firm, must-have requirements.
On another note, AGIA also spelled out how the state would evaluate different pipeline proposals (assuming they met the minimum requirements). It directed the administration to consider the overall monetary value to the state and the likelihood that the project would actually happen.
ConocoPhillips and BP’s announcement is seen as great news because the two companies have capital to back the project up, they're big, can-do companies, and they control a good fraction of the North Slope gas. That is, the project seems feasible.
But it’s unclear for now how the value of a producer pipeline compares to the value of the line proposed by TransCanada. I stumbled into the question when I had a chance to talk with BP’s Angus Walker and ConocoPhillips’ Brian Wenzel on Tuesday.
WALKER: Clearly we want to get Alaska’s gas to market in the most economic way, because that’s in everybody’s interest -- it’s in our interest, it’s in the state’s interest. So we’re going to be seeking the most economic project, and the most economic way of getting that gas to market. We think the project we announced today is the best way to get this project moving. . . .
ME: So you think it will be more economic than TransCanada’s proposal?
WALKER: Well, I didn’t say that. I said we think it’s the best way of getting the project moving. We think it’s the best way of getting to a successful open season, and a successful open season is critical to making the project happen.
One thing that complicates any decision the administration and lawmakers will have to make about the comparative value to the state is the fact that the producers don’t have to share detailed information about their project, at least for now. That was one of the must haves.
Your question about the 20 "must haves" is an important one. The "must haves" can be broken down into four groups.
1) Those that really belong in the RFA and not in the statute or those that only apply to an AGIA applicant:
AS 43.90.130(1) - deadline for filing an application
AS 43.90.130(2) - describe the project proposal
AS 43.90.130(8) - explain the ownership of the gas treatment plant
AS 43.90.130(9) - propose the percentage and dollar amount for the State's reimbursement
AS 43.90.130(11) - describe the means of preventing cost overruns
AS 43.90.130(16) - waive the right to appeal the State's decisions
AS 43.90.130(18) - commit that the state's reimbursement won't be included in the applicant's rate base
AS 43.19.130(19) - provide a detailed description of the applicant and its partners
AS 43.90.130(20) - demonstrate the applicants readiness to perform the activities specified in the application
2) Those that all applicants will probably agree to perform:
AS 43.90.130(3)(B)- commitment to use the FERC prefiling procedures
AS 43.90.130(8) - seek FERC jurisdiction over the gas treatment plant
AS 43.90.130(12) - commit to a minimum of 5 delivery points
AS 43.90.130(13(B) - commit to comply with the federal law that requires distance-sensitive rates
AS 43.90.130(14) - commit to establish a local headquarters in Alaska
AS 43.90.130(15) - commit to local hire and contracting
AS 43.90.130(17) - commit to negotiate project labor agreements
3) Those that require the applicant to do something by a certain date:
AS 43.90.130(3)(A) - conduct a binding open season within 36 months
AS 43.90.130(3)(C) - apply for a FERC certificate of public convenience and necessity by a certain date.
AS 43.90.130(4)(A) - if the project is subject to the RCA conduct a binding open season within 36 months
AS 43.90.130(4)(B) - apply for an RCA certificate of public convenience and necessity by a certain date.
AS 43.90.130(5)- assess market demand for additional capacity at least every two years.
4) Those that the applicant might not otherwise do unless obligated by the state:
AS 43.90.130(6) - commit to expand the project in reasonable engineering increments.
AS 43.90.130(7) - commit to propose rolled-in rates for expansions.
AS 43.90.130(13)(A) - commit to offer firm transportaion service for in state regardless of whether any shipper bid for it.
The above is a representative analysis of the requirements of AGIA. People can differ on which category they would place a "must have" in, but the important thing to remember is that not all AGIA "must haves" are equal. Almost half the AGIA "must haves" don't apply to a non-AGIA project proposal.
As we evaluate the different proposals it is important to understand how each proposal benefits the people of Alaska and what risks they subject the State to by complying or not complying with the "must haves."
Steve Porter
AGIA does a good job of articulating the States needs. The free market will sort out the details and a project will move forward based on rate of return and net present value.
http://alaska-gas-pipeline.blogspot.com/...
Why did the FDNM remove your two blogs from a few days ago?
The ones I told people to read under the editorial Thursday or Friday?
Where you told us about Huggins and Stedman coming out of the closed door meeting in Lyda's office?
And someone else?
The ones where you said rumor had it that the congressional delegation was in on it already?
The ones where you told us "stay tuned" for more info?
Sad Stefan.
They don't want you reporting that stuff, huh?
Well, you have done a good job in the past. I'm sorry the blogs are gone.
It sure confirms what many of us have already deduced: FDNM is utterly biased in favor of Big Oil, and the Big Three from Washington DC.
Perhaps I was the only one who read them.
But you know--and I know--they were there.
I'm sorry if your job was threatened for telling us the truth...
Corinne -- Thanks for reading. As far as I know, no one has removed any of the posts I have written. The one you described specifically is still there, titled "'Major announcement' on gas line."
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