2-20-15 Alaska Gasline Board Appointees AND More On Fairbanks Gas LNG/Transportation/Distrbution Project

Yesterday, Alaska Governor Bill Walker appointed three new board members to the AGDC (Alaska Gasline Development Corporation, aka. “ASAP”).

Video: note sound volume low in beginning, becomes normal after a few minutes.

STATUS: Interior Energy Project (Government project to establish a new, natural gas LNG / transmission / distribution system for Fairbanks Alaska.)

Here is our “links page” to the IAP for quick reference.

COMMENTARY: IEP

On February 12 we had become confused about status of the multi-hundred million dollar government program to provide one Alaskan community with low cost energy.

Since a previous administration had tried and failed to make such a project financially feasible, we wondered how a different administration would use the same agency (AIDEA, Alaska Industrial Development and Export Authority) to reinvent the project in a way that might serve the broad public interest.

We were further confused about …. Read the rest of today’s commentary here, including the questions we put to AIDA regarding the Fairbanks project…and the answers the agency provided.

We also include a reference to the regulatory docket, containing a full array of background information.

AGDC is the governmental corporation charged with building a small in-state gas pipeline down from the Alaska North Slope to South Central Alaska. It would serve consumers from the Interior community of Fairbanks to the largest population in the state, centered in Anchorage. The AGDC also serves as the state’s representative to the larger, Alaska LNG project supported by TransCanada (i.e. of Keystone XL and Energy East fame), ExxonMobil, ConocoPhillips and BP. Most experts believe that only one of the projects will be built and that the AGDC project serves as a ‘back up’ project to serve consumers and provide smaller export volumes in case the larger project is never built.

The new AGDC board members replace three appointees of the previous Parnell administration whom Walker fired upon taking office.

During this video press conference, our readers will note that the qualification Walker most heavily counted on was the qualification of being an “Alaskan” (While the popular and provincial word, “Alaskan” refers to a fact of citizenship, it also connotes an emotional reference that, in this case, apparently substitutes for educational and professional credentials). This is an important reflection to investors, international trading entities and the federal government of the new governor’s philosophy of governing.

Below is the text of yesterday’s news release issued by legislative leaders whose original law created AGDC.

We will leave the video and press release record for our readers to digest. (Segments below, See the full release here….)

Thursday, February 19, 2015, Juneau, Alaska – House Speaker Mike Chenault (NGP Photo-R) and Representative Mike Hawker (NGP Photo-R-below), architects of the legislation creating the Alaska Gasline Development Corporation, urged a diligent review of the qualifications of three new board members appointed today by Gov. Bill Walker. The three appointees are former state Senator Joe Paskvan, a Fairbanks lawyer; former state Senator Rick Halford of Dillingham, a retired pilot; and Hugh Short of Bethel, a businessman and former mayor.

“AGDC’s original board members, some with international pipeline expertise, were a tremendous asset to AGDC,” Hawker said. Along with directing the organization, the public members added value by serving on subcommittees along with AGDC staff on commercial, engineering, and governance topics.

AGDC is not the only state corporation/entity to require specialized expertise in board members. The Alaska Aerospace Corporation, Alaska Housing Finance Corporation, Alaska Industrial Development and Export Authority, Alaska Permanent Fund Corporation, and Alaska Railroad Corporation statutes all require certain qualifications in board members.

In the case of AGDC, the presence of two cabinet-level commissioners on the board, not their designees, is designed to ensure the board as a whole considers the broader interests of the state and of all Alaskans in directing the organization.

The three fired AGDC board members were:

Al Bolea of Big Lake, brought insights into governance and the oil and gas industry through his former roles as a BP executive; chairman of Alyeska Pipeline Service Company, and CEO of Dubai Petroleum in the United Arab Emirates.

Drue Pearce of Anchorage, brought a wealth of expertise in federal rules related to permitting, a deep history of Alaska oil and gas development, and a comprehensive understanding of Alaskans’ needs through her former roles as a state senator; the Department of Interior’s Alaska advisor; and the federal coordinator for Alaska natural gas transportation projects.

Richard Rabinow, of Texas, brought decades of experience in major pipelines, through his former work as President and CEO of Longhorn Pipeline Partners; as President of Exxon Mobil Pipeline Company; chairman of the Association of Oil Pipe Lines; and membership on the TransAlaska Pipeline System Owners Committee. See the full release here….

Our Friday IEP Commentary:

IEP Questions

Please see these earlier commentaries on the Interior Energy Project (IEP)

Dave Harbour

On February 12 we had become confused about status of a revised, multi-hundred million dollar government program to provide one Alaskan community with “low cost energy”.

Since a previous administration had tried and failed to make an Interior Energy Project (IEP) financially feasible (i.e. for the Interior Alaska community of Fairbanks), we wondered how a different administration would use the same agency (AIDEA, Alaska Industrial Development and Export Authority) to reinvent the project in a way that might serve the broad public interest.

We were further confused about how the state could be considering such a huge new spending venture (i.e. even with funds obtained by an “Independent” public corporation of the state), when:

it had already invested hundreds of millions of dollars into two gas pipeline projects that would flow gas right by the Fairbanks community, if built, and
its operating budget, 90% dependent on Alaska North Slope (ANS) revenue was operating billions of dollars in the red, even before last year’s 50% oil price drop, and
its remaining savings accounts after this fiscal year will add up to approximately $9 billion, when the unfunded liability of the State’s personnel retirement system is almost $10 billion, and
when Alaska is the highest per capita debtor state in the nation, and
Alaska is the highest per capita spending state in the nation, and
the oil price drop is likely to guarantee a continued drop in ANS production upon which the state’s government and economy are based.

Those realities pretty much beg for citizens to ask of their government, “Why are you undertaking any huge, new spending program — no matter how well motivated it may be — when the state simply cannot afford any new expenditures or risk?”

Since the logic defied our analysis, we sent questions to AIDEA. Some were admittedly better than others. As a former regulatory commissioner we posed some questions that may have been important, but without fully understanding all of the history and nuances. As a former oil industry executive and consultant to many of the large companies operating in the state, we asked several questions. And as a grandfather whose kids will end up inheriting the result of our state and national governmental decisions, we had questions, and still do, about the intergenerational equity of Alaska’s rather cavalier, decades-old pattern of deficit spending.

So, please ignore the questions you find unhelpful and, please, feel free to send us your own questions which we will append to this commentary for reference of decision makers.

NGP February 12, 2015 Questions to AIDEA Below (slightly edited for this viewing) – AIDEA escaped answering our query and questions in this way

1. Re: the January 28 release. What does the term, “In conjunction with Governor Bill Walker..,” mean? Did Walker, his Chief of Staff or other administration official ‘order’ or ‘strongly suggest’ that AIDEA reconfigure the IEP? Or, did AIDEA and its board initiate the reconfiguration independently via the “Letter of Intent”? Without the Governor’s interest / influence / support, would AIDEA have ceased all effort on the IEP following receipt of the negative MWH results? In any case, why use that phrase? Please provide a link to the actual letter of intent. Since the release states that the intent letter “was signed”, I assume the date was the date of the release (1-28-15) or earlier (i.e. in which case, why was it not released earlier?).

Note: Yesterday we received a copy of Harvest Alaska’s position, provided here for your review. Harvest seems relatively unconcerned about the transfer of LNG facilities directly to AIDEA, believing that AIDEA is bound by a sale and purchase agreement. Their greater concern probably rests with an Attorney General position to which the letter refers.

2. Did the Administration ask AIDEA to change the focus from North Slope Gas to Cook Inlet gas? Does AIDEA believe Cook Inlet reserves — as suggested in FNG’s TA — can now support both South Central Alaska and Interior demand? In the event that the new, Interior demand causes gas shortages or higher prices in South Central Alaska, is AIDEA comfortable with the obvious necessity of importing LNG (i.e. in the event a large ANS gas pipeline is delayed or found to be infeasible under prevailing market conditions)? How does AIDEA see the RCA process affecting its own project planning (i.e. the June 1 deadline for a final TA order)? Does AIDEA plan to involve Harvest Alaska in its planning process? Please explain.

3. If Fairbanks and South Central gas utilities find themselves before the RCA, in the future, debating where limited Cook Inlet gas supplies go, is AIDEA comfortable with the RCA deciding that the existing South Central utility consumers should have supply priority over an area that had no historical dependency on Cook Inlet gas?

Since we are no longer privvy to the inner workings of the Regulatory Commission of Alaska (RCA) we asked one of the most foremost regulatory attorneys for a quick summary and links. His response is here….

4. While state statutes allow for ‘self regulation’ of a municipal utility, does AIDEA see any value in having a more objective third party like the RCA economically regulate the FNSB utility–other than a local elected officials and/or a board of political appointees?

5. Has AIDEA definitely dismissed the ANS-origin of the IEP project? If so, did that decision have anything to do with AIDEA’s opinion about the safety/cost of transporting LNG to Interior via trucks across the Brooks Range vs. bringing cryogenic containers from Cook Inlet to Fairbanks via truck or rail? Was that matter debated and voted on by the Board and, if so, is there a link to the meeting transcript/minutes? Or, does AIDEA simply believe that the MWH work proved the ANS IEP project to be infeasible, leaving only one other alternative? If that was the conclusion, has the board considered the potential advantages/disadvantages of entertaining private proposals, such as that embodied in Ray Latchem’s letter to Governor Walker (See Latchem’s later suggestion 2-19-15), waiting for any Hilcorp plan to mature, or even soliciting proposals from any other qualified proposer? If that or any similar private alternative has not been considered, please explain why the board did not consider it. (See Harvest Alaska letter)

6. Why would AIDEA announce its “intent” to purchase Pentex Alaska Natural Gas Company, LLC, (“Pentex”) assets for $52.5 million and in the same release announce the initiation of a due diligence process? Isn’t that backward? Wouldn’t you conduct due diligence to determine the appropriate purchase price along with other terms and conditions? Even if the $52.5 million is subject to negotiation and board approval following due diligence, wouldn’t it be smarter not to put that specific amount in up front? If it was important to put in a number, why not put in $17 million or some lesser number that could then be raised following the due diligence process, if merited? Did pressures from outside AIDEA cause you to target an ‘intended’ price of $52.5 million before completing due diligence? Has there ever been another case wherein AIDEA signed a letter of intent to purchase an asset for a specific price before first conducting a due diligence process?

7. The pressure to build a natural gas distribution and supply system for Fairbanks reached a zenith in the last few years when citizens said, for example, “I can’t afford to live here anymore; my fuel oil bill is higher than my mortgage.” (Note: An especially poignant and detailed local consumer reaction to fuel oil prices is embodied in this narrative by Fairbanks business leader, Buzz Otis) AIDEA became Governor Parnell’s vehicle of choice for solving Fairbanks’ near term energy problems–as the 2014 gubernatorial election approached. By the time Parnell left office, oil prices were well on their way downward and the AIDEA project was in a nose drive. Some legislators from other areas have remarked that Fairbanks’ current Btu equivalent oil price is cheaper than their citizens are paying for energy. Here’s the question, “Does AIDEA’s board of directors and Executive Director believe it is a reasonable use of public funds — with today’s lower fuel prices — to continue the IEP?” If so, does AIDEA plan to provide subsidies/loan packages to other areas of the state which have higher Btu equivalent energy prices than Fairbanks?

8. Why wouldn’t AIDEA assure that a critical mass of industrial, commercial and residential customers had committed to take gas from the IEP before setting out to build the project? Wouldn’t taking advance customer deposits be part of the due diligence that would, in part, enable AIDEA to better calculate the present and future value of Pentex and its assets? Or, is the demand from a few major base load commercial or industrial customers (i.e. GVEA, Ft. Knox, etc.) sufficient to justify financing the project?

9. Assuming the price of fuel oil continues to remain low (at least for the next few months–if not years), is it possible that AIDEA might sink several hundred million dollars into mostly buried pipe assets (and cryogenic carriers) only to find that residential consumers would rather not make expensive oil-natural gas boiler conversions and instead stick with a cheaper fuel oil alternative? How would AIDEA guarantee payment for long term, take or pay gas supply contracts in this situation? How would such self funded guarantees affect bond coverage requirements, a potential technical bond default and/or the rates paid for revenue bonds? Would base load customers be willing to pay the cost of unused distribution facilities for which they were not the ‘cost causer’? How would AIDEA or the local utilities know how many new employees to hire if they didn’t know how many new residential customers they would have? How will the distribution utilities manage line pack, line pressures and take or pay contracts if they cannot predict the customer base? If AIDEA concedes that lack of customers in a low fuel oil cost environment is possible, would it not be prudent to stop acquiring project expense until the system can be fully subscribed and financially supported by local consumers? If, for a variety of possible reasons, the FNG LSA with Harvest Alaska falls through, does AIDEA have assurance that it can obtain for the IEP the same cost of gas for the same term with the same or lower 2% escalator?

10. The state is investing in both the Alaska LNG project and AGDC. The success of one of those projects could make the portion of the IEP gas delivery system to the city gate not used and useful. Does AIDEA still believe that the current project under current market conditions is in the best interest of IEP consumers and the citizens of the state in light of the impending, large gas project that will touch Fairbanks and provide an ability for utilities to ‘tap in’? In the event of the reality of an ANS LNG/gas pipeline project, will gas customers in Fairbanks be paying both a new tariff to transport gas via the new system in addition to paying an old tariff on AIDEA’s surplused transportation infrastructure? Please explain. (I ask this question without regard to what the legislature or governor may or may not think about project feasibility in today’s market.)

11. Can you provide a link to the minutes/transcript of AIDEA’s public meeting during which a vote was taken to approve the content of the Letter of Intent, prior to signing of the letter? Was the vote unanimous? If not, were the dissents noted? If there was no advertised board meeting, how does AIDEA explain an apparent bypassing of the state’s open meeting statute(s)? If any board action to approve the letter of intent occurred “after the fact”, how does AIDEA’s legal advisor conclude that such retroactive approval makes the action legally enforceable under Alaska statutes and/or AIDEA bylaws (Article III)?

12. How does AIDEA plan to handle the cost of having purchased Spectrum’s ANS facility for $1.8 million if it is not a ‘used and useful’ part of a Cook Inlet based project?

13. Since GVEA will, hopefully, be a major base load customer, how has AIDEA addressed CEO Cory Borgeson’s concern expressed in a Journal of Commerce interview that, “As to whether or not AIDEA should look to Cook Inlet for a gas supply, Borgeson said the low wholesale cost of North Slope gas is hard to overcome.” Has AIDEA acted to respond to that concern?

RCA Re: IEP LNG Sale Process

Since we are no longer close to the RCA’s regulatory process, we asked one of the state’s best respected regulatory attorneys to summarize the regulatory aspects of a proposed sale of LNG assets to Harvest Alaska, a Hilcorp affiliate.

Docket U-15-002 is FNG’s application (through Tariff Advice Letter TA37-514) for approval of a LNG supply agreement (LSA) with Hilcorp’s subsidiary, Harvest Alaska. The LSA is conditional upon the AG’s approval and upon the closing of the sale of the Pt. MacKenzie liquefaction plant and related assets from Pentex (FNG’s parent company) and Titan (FNG’s sister company) to Harvest. Attached to this email is FNG’s TA and the RCA’s Order No. 1 opening the docket. The link to the RCA web site for Docket U-15-002 follows: http://rca.alaska.gov/RCAWeb/Dockets/DocketDetails.aspx?id=21a4d2d3-7190-4d00-9286-35a271e5d0ae

The liquefaction plant was transferred last year from FNG to Titan for no consideration, and is now being transferred from Titan to Harvest for undisclosed consideration. FNG has not requested, nor has the RCA approved, the recent transfer of control of FNG, the transfer of the plant to Titan, or the transfer from Titan to Harvest.

AIDEA politely answered our query and questions this way:

Good Afternoon Dave,

Please see the attached public documents. These should answer your questions.