11-5-15: A Review of the November 2015 Special Session of the Alaska State Legislature

If TC had remained engaged the state would have been obligated through agreements made by previous administrations to pay more than it would under the current arrangement (i.e. We are told the 7.1% interest rate paid to TC is significantly higher than the state could now get via its own financing).

During current, special session hearings, legislators discovered that:

• there appear to be no single line of authority or clearly delineated organization chart illustrating management of Alaska’s equity interest; overall state coordination of Ak-LNG project participation is unclear and could threaten project efficiency.
• the Administration seemed to be contradicting its long-vaunted claim of “transparency” when denying transparency to the Legislative branch of government by:

• not providing a full data packet to Members when the special session was called, even after repeated requests, and
• not communicating the full extent of major project roadblocks — caused by the administration — associated with its position on confidentiality agreements (CA), a withdrawal agreement format and commercial gas sales agreements, and
• not communicating that the AG had influenced the Alaska Gasline Development Corporation (AGDC) board to approve creation of two subsidiary corporations and the reasons therefore, and
• the AG refusing an audience with the House Judiciary committee earlier this week, causing a cancelation of the meeting, and appearing to being evasive as he participated in other meetings.

We believe Legislators and citizens as well, were comforted in part by knowing that the four Ak-LNG members will vote on whether to go forward with the project’s 2016 work plan on December 4 — and that takes a unanimous vote.

Accordingly, we believe that may begin to ponder longer range questions:

• As investment decisions begin to require more and more cash outlays, should the state continue supporting a high risk venture that could be justified by high profits in a future robust, world LNG market?
• Or, should the state be satisfied with royalties and taxes from the project while avoiding risky equity gambles in highly technical, competitive pipeline, LNG, and gas sales industries whose unpredictable business environment is exacerbated by fickle energy prices, incredibly intense competition, volatile world economies and high costs?
• (Note: While legislators, industry and the governor seem to be fully supportive of the first alternative right now, we truly hope that this review in some small way assists well-studied Alaskans and aficionados of the state to draw their own conclusions, enabling them to better compare the high risk/low risk options.  We also acknowledge the importance the Ak-LNG producers place on having the state government at its side as the project moves forward @ 4:19:04.  Indeed, one should seriously question whether or not they would wish to continue the project at this time without the state’s 25% equity participation.)

Project crises could result in delays, unanticipated expenditures and large controversies that prevent lawmakers and the governor from competently carrying on the traditional responsibilities of office.  Examples of such project crises include :

• Constant controversy time spent debating issues like confidentiality agreement (CA) requirements, withdrawal agreements and “completion” of commercial gas agreements.  All of these are current issues elevated to a controversial level by the Administration, to the possible detriment of project “alignment” which all parties claim they must have to be successful.
• Having an unpredictable state partner insist at the “last minute” on big expenditures benefiting its equity interest injects an element of uncertainty. For the state, it carries with it the obligation to be the “cost payer” for 100% of the increased project costs that it “causes”.  One of the most well recognized pipeline and utility rate principles is that the causer of costs pays the costs.  Following this principle, the state should pay, as the governor has said, for his desire to 1) “study” a 48″ pipeline model as compared with the 42″ case that has already been studied to death — at great expense.  2) The state should also pay for the six month delay that the governor’s 42″ vs. 48″ request may already causing.  If the state’s expenditure should prove that the 48″ model benefits all parties, we can imagine all parties at that point freely agreeing to share the study costs.  However, if the 48″ model study reveals higher costs, the state should continue to bear all of those higher costs–thus negatively affecting net revenue the state might otherwise enjoy until future gas producers are capable of taking up the slack in capacity.  Since the state justifies the 48″ model on the thesis that it encourages more North Slope gas exploration by those who are not equity owners of Ak-LNG, that is a value that could accrue to the state and a new royalty/tax payer but not the other three equity owners.  Accordingly, the state should also be prepared to shoulder other costs of the governor’s 48″ idea: 3) the additional cost of materials, labor and overall construction; and 4) the additional cost of operating any spare capacity in a 48″ line that is, in essence, reserved by the governor for unknown future gas owners; and, 5) the cost of connecting any new gas shippers should be borne by the new “cost causers”, not the existing 4-member consortium.

Unintended consequences.  All of our respected elected and appointed officials mean well, “intending to represent the good people of the state of Alaska”.  However, while we cannot imagine or fully describe all possible unintended consequences of government attempting to control both its obvious and subjective interest in a free enterprise project, we have already articulated a number of traps and snares in earlier Northern Gas Pipelines commentary.  All of these, and more, could require a significant amount of elected official time.   As a refresher, here are a few of those possible traps and snares:

• Existing and future governors and legislators seeking to pressure the three private consortium members into accepting project expenses that do not benefit their shareholders.  This dangerous possibility is created when one’s peer, one’s “aligned” partner is also one’s regulator, one’s royalty landlord and one’s tax master.
• Elected officials “recommending” that AGDC talk with certain contractors about their capabilities–thus indirectly undermining AGDC contracting policies.
• Alaska elected/appointed officials in Juneau or Washington D.C. “recommending” employees/executives for AGDC consideration, thus attempting to influence employment practices that may corrupt established, fair hiring practices.
• Should AGDC be prohibited from hiring family and recommended friends of elected officials as a way to protect against the application of undue or even subtle influence?  Members of the legislature work for private Ak-LNG affiliates; should legislators be permitted to work as employees or contractors for Ak-LNG, a public agency whose budgets and policies they control?
• Should the legislature, in this unique circumstance, create a “wall of ethical separation” between state officials and Ak-LNG’s AGDC and private participants?
• Should AGDC, as Anchorage’s ML&P has done in the past, purchase expensive “tables” or “tickets” at public events and invite elected/appointed officials to join executives at the event?
• Under what conditions should AGDC employees/spouses/families be given special treatment at public expense as private companies do at private expense (i.e. Christmas parties, birthday parties, retirement parties, summer BBQs, undocumented compensatory time, company vehicles, etc.?  Can AGDC operate as a ‘business’ member of Ak-LNG under traditional state human resources policies?  Should it?  Do citizens want AGDC to become a “sponsor” of various community non-profit or government events, at public expense?  Should AGDC use public funds to support member or board involvement in various community non-profits?)
• Should AGDC, acting as a ‘business’, develop community relations, stakeholder and public relations programs that result in the transfer of public money to private beneficiaries (i.e. travel, food, entertainment, scholarship programs, gifts, logo items, etc.).
• Should public meeting laws apply to AGDC ‘business meetings and practices’?
• Should decision makers review the application of freedom of information requests to AGDC’s public and confidential communications, especially when they could negatively affect private members of Ak-LNG?
• And, on, and on, and on….

Conclusion.  We believe that for all these and many other compelling reasons, Alaska’s elected officials should consider taking the following steps.

• Complete the buyout.  We do not oppose the buyout of TC’s participation in Ak-LNG.  It might have been done differently.  (i.e. One could have proposed amending, for robust committee discussion and debate, conditions the administration must meet prior to executing the buy-out.  Those conditions might have eliminated many of the legislative concerns raised during the special session.  The concerns included lack of an effective AGDC chain of command; role of the AG in AGDC business; confidentiality agreement regulations acceptable to Ak-LNG’s private participants; conflict of interest rules and any other employee or agency practices that could or should deviate from state statutes and regulations.  Of course, in committee these could be shown and agreed upon as related to the Governor’s call.)
• Auction Alaska’s equity interest to a qualified buyer.  In view of the above, one could imagine sincere consideration being given to arranging a date certain (i.e. or, an appropriate time in the “stage gate process”), by which the state could conduct a world-wide auction of the state’s entire equity interest in the Ak-LNG project under terms and conditions acceptable to both the Legislature and to the three private participants in Ak-LNG.  If adoption of this sort of process is considered, it might be done only after passage of an acceptable constitutional amendment guaranteeing the private participants an adequate degree of fiscal certainty.  Thus, any “alignment” issues affected by a sale of the state’s equity could possibly be ameliorated.   But in our view, this could only happen if the private project participants felt sufficiently comfortable with a new alignment of interests enabled by the constitutional guarantee of fiscal certainty .

Shedding Ak-LNG equity over time could permit the governor and legislature to focus all their energies and talents on the pressing problems of a state facing immediate fiscal crisis:

• an operating budget with a $3-4 billion annual deficit
• a disinclination to make significant spending cuts leading to a sustainable budget
• available savings to subsidize such a deficit for only another 2-3 years
• a current unfunded employee pension liability that is several times greater than the annual deficit
• an annual deficit that could expand to 90% of the current operating budget if the Trans Alaska Pipeline (TAPS) should fail.  The hot oil pipeline now operates 3/4 empty, is losing throughput at a rate of 5-7% annually, and is vulnerable to a catastrophic shut down — especially during a cold winter.  TAPS over its life has already experienced a number of unexpected shut-downs resulting from maintenance, man-caused and force majeure events.
• If the TAPS should fail, it could affect the future of the Ak-LNG project, since producing Alaska North Slope (ANS) gas is enabled by both the production of oil and the extensive and expensive array of production and service facilities already existing there.
• 90% of Alaska’s operating budget originates with oil & gas tax and royalty income, mostly from the ANS.  Even if an LNG project becomes reality by 2025, the income it would generate would come too late to support a more immediate, significant loss in TAPS throughput.  The volatility of the LNG market and the now-accessible world-wide reserves of shale oil and gas contribute to a prudent view that the state should not now be counting on any particular income from a gas project.  Before counting its eggs, the state should wait until 20-year “take or pay” contracts are safely secured before an Ak-LNG final investment decision (FID) is made.  Even then, in the final stretch, there is the potential for unknown and extremely dangerous delay and project completion risks.  Perhaps the state legislature and governor should have a discussion and perhaps even call for a public vote confirming the public’s risk-avoidance preferences.
• Decisions about state budget spending cuts/increases will be difficult and demanding enough. Inserting into the schedule of elected officials the overwhelming, additional burden of minding Ak-LNG equity exigencies will cross all legislative, executive, political, public relations, cultural, logistical, geographical and legal boundaries, and officials should be prepared for that.
• Controversies surrounding additional taxation or the Permanent Fund or Sovereignty Funds will introduce overwhelming challenges into a life for elected officials of perpetual crisis.

Dave Harbour, publisher of Northern Gas Pipelines, is a former Chairman of the Regulatory Commission of Alaska and a Commissioner Emeritus of the National Association of Regulatory Utility Commissioners (NARUC).  He served as NARUC’s official representative to the Interstate Oil & Gas Compact Commission (IOGCC).

The former Army officer is past Chairman of the Alaska Council on Economic Education, former Chairman of the Anchorage Chamber of Commerce, and past President of the American Bald Eagle Foundation and the Alaska Press Club.  He is Chairman Emeritus of the Alaska Oil & Gas Congress.

Harbour has served as a public/government/external affairs manager for three gas pipeline companies and an oil company and has owned several small companies in Alaska.

He has addressed or chaired dozens of oil and gas conferences throughout the United States and Canada and hundreds of his editorials and articles have appeared in newspapers, magazines and electronic media throughout North America.

Harbour holds a Master of Science Degree in Journalism-Communications and is an accredited member of the Public Relations Society of America (APR).

Opinions or viewpoints expressed in this webpage or in our email alerts are solely those of the publisher and are not intended to — and frequently do not — reflect the opinion(s) of any affiliated company, person, employer or other organization that may, in fact, oppose the views stated herein.  -dh