|
What went wrong? The story behind failed gas line talks between MidAmerican, state of Alaska Larry Persily Petroleum News Government Affairs Editor
From the start of its talks with the state of Alaska, MidAmerican Energy Holdings Co. was looking for the state to put up something of value before the company would spend money on possibly building a North Slope natural gas project.
And, until the company broke off talks with the state in late March, MidAmerican believed it might be able to strike a deal with Alaska.
At first the Des Moines, Iowa-based pipeline operator wanted the state to cover half of the company’s $100 million in estimated development costs for the multibillion-dollar pipeline project.
When the state said no to that, MidAmerican countered that the company would go ahead with development work only if the state granted it exclusive rights to the pipeline for at least three years — which later became a five-year demand.
The state said no to that, too, and the highly publicized, highly promoted effort to build Alaska’s long-awaited gas line broke down.
The two sides then took their case to dueling press conferences.
“MidAmerican has so far offered very little” to get the project built, Alaska Gov. Frank Murkowski said at a March 26 press conference, a day after the pipeline company ended talks with the state and withdrew its application under Alaska’s Stranded Gas Development Act.
“For me to arbitrarily go out and negotiate a binding contract for five years … is something that I would be derelict in proposing,” the governor said. “In five years we could very well get the project back.” MidAmerican wanted to protect its investment The company sees it differently, asserting it was willing to spend a lot of time and money trying to put together the project and was merely looking for reasonable assurances that it would not be pushed aside for another project developer.
“It was enormously distortive of reality,” MidAmerican CEO David Sokol said of Murkowski’s press conference.
The governor knew about the company’s insistence on exclusivity, or sole developer status, before MidAmerican ever submitted its application under the Stranded Gas Act in January, Sokol said at his own press conference a few hours after the governor’s March 26 event.
“The governor is trying to make it sound sinister,” Sokol told reporters.
If MidAmerican had known in January that the state would never agree to its request for sole developer status, Sokol said, the company would not have submitted a Stranded Gas Act application.
Although correspondence between the state and MidAmerican confirms the company told state officials of its insistence on exclusive rights to the project as far back as early January, neither the company nor the state ever told the public about the issue until late March.
Stranded Gas Act negotiations are confidential, but with the breakdown in negotiations both sides are talking. Sole developer status an issue since at least January “It (sole developer status) has been on the table since the very beginning,” said Mike Menge, the governor’s special assistant on oil and gas issues. “They claimed they needed some level of protection for their investment.”
Menge said the issue of exclusive rights clearly was “a line in the sand” for the company, a line the governor was not willing to cross on the company’s terms.
MidAmerican, however, never mentioned sole developer status or exclusive rights to the project anywhere in its Jan. 22 Stranded Gas Act application to the state. Nor did Sokol say anything about the company’s demand when he briefed Alaska legislators in Juneau on Feb. 25, when he said he wanted to have a draft fiscal contract with the state ready for public review by March 12 to start field work this summer and to have gas flowing by the end of 2010.
And, looking back, no one said anything about any sort of exclusive rights at the cheering press conference in Fairbanks the day MidAmerican turned in its application to the state.
“Today, I am happy to announce that a very big step is being taken toward making this dream a reality,” Murkowski said in Fairbanks. “The application we have received today is from a group of prominent industry partners, including MidAmerican Energy Holdings Co. … These companies have a level of financial vitality, pipeline expertise, consumer market base, and Alaska business association that is far beyond anything we have seen to date.”
The fact that MidAmerican is controlled by Berkshire Hathaway Inc., which is controlled by billionaire Warren Buffet, added to the excitement.
But the enthusiasm of January is long forgotten between the two parties. “We would have no interest in re-entering the project,” Sokol said March 26. It’s hard to do business with the state “when people don’t tell the truth,” he added. Company claims it was surprised The governor’s refusal at a March 22 meeting in Anchorage to accept the company’s request for sole developer status surprised MidAmerican, Sokol said. Especially since the state did not appear to have a problem with it until a few weeks ago, he claimed.
However, correspondence between MidAmerican and the state in the month before the March 22 meeting appears to contradict Sokol’s claim and support the administration’s contention that it had been consistent in its opposition to granting fully exclusive rights to MidAmerican.
The letters also indicate the state was looking to find some compromise to keep the talks alive, and MidAmerican’s correspondence indicates the company was pushing the issue with the state — perhaps believing it could win its point in the end.
The company, in a Feb. 20 letter to the state, criticized Alaska’s refusal to accept any form of exclusive rights for MidAmerican. “I cannot overemphasize our concern regarding the (state negotiating) committee’s reluctance to agree even in concept with the limited provisions for three years of exclusivity for the project that we have proposed to include in our agreement,” said Kirk Morgan, project manager of MidAmerican’s Alaska gas line effort.
“MidAmerican has been clear from the outset that exclusivity is crucial to our ability to proceed on a timely basis with the state,” Morgan said.
The company pushed the issue 10 days later, in a letter from Sokol to the governor. “Successfully concluding our negotiations, including exclusive development rights, is critical,” the CEO said in his nine-page, March 1 letter.
The company restated its demand in a March 9 letter to the state by Robert Sluder, president of MidAmerican’s Alaska Gas Transmission Co., a new company established for the Alaska project. Company says it thought it had a deal “Governor Murkowski has just informed me that Alaska is unwilling to meet one of MidAmerican’s primary elements, which was a period of exclusivity granted by the state,” Sluder said in his letter to Alaska Department of Natural Resources Commissioner Tom Irwin. “We are, frankly, disappointed that a concept we advanced in early January has been rejected.”
Instead of accepting the company’s original proposal of last November to share in the estimated $100 million development costs 50-50, Sluder wrote, the governor had suggested the company apply under the Stranded Gas Act to negotiate a long-term state fiscal contract for the gas line.
“It was understood that such an application would permit the state to negotiate terms needed to pursue this project, including exclusivity, and thus would allow us to proceed arm in arm with the state in the manner we sought from the outset.
“Unfortunately, it appears the benefits we bring to the table are outweighed by the state’s concern with preserving the option of having other developers pursue the project,” Sluder said in his March 9 letter.
The company a week later restated its assertion that the governor had encouraged MidAmerican to proceed with its Stranded Gas Act application in January, with the expectation of receiving sole developer status after Murkowski had rejected the company’s original proposal of sharing development costs 50-50.
“In early January 2004, we met with you and your team and were encouraged to submit an application … with the understanding that we would agree to develop a financeable project … in exchange for an agreement under the act that designates us to be the builder, owner and operator of the Alaska portion of the pipeline,” Sokol said in a March 16 letter to Murkowski.
“Unfortunately, since we have been unable to reach even a framework of agreement with the state of Alaska to be its project developer, notwithstanding over four months of effort, our participation in such a meeting does not seem appropriate or useful,” Sokol said, rejecting Murkowski’s invitation to attend a March 22 meeting with state officials, the producers and pipeline company TransCanada Corp. Governor denies state ever promised exclusivity The governor replied that same day. He denied there had ever been any inconsistency in the state’s position regarding sole developer status. “We made no commitment to enter into a contract under the Alaska Stranded Gas Development Act to provide you with an exclusive right to build, own and operate the Alaska portion of the pipeline,” Murkowski wrote to Sokol.
Sokol later decided to attend the March 22 meeting in the governor’s office in Anchorage, where the state offered MidAmerican a five-year exclusive deal that applied only to processing the company’s applications for state rights of way along the pipeline corridor. It would not have stopped the state from negotiating a Stranded Gas Act contract with other potential pipeline developers.
The state’s five-year offer of exclusive rights of way also included the condition that MidAmerican strike a deal with TransCanada, which holds U.S. and Canadian certificates for the project from the late 1970s and has expressed an interest in taking a major role in the gas line.
The state also offered other assurances and commitments to MidAmerican, along with the pledge not to process any other applicant’s right-of-way permits, but the company rejected the deal as insufficient and broke off further discussions with the state, accusing the administration of misleading the company about the possibility of reaching a deal for sole developer status.
Exclusive rights of way would not have protected the company’s investment, Sokol said at the March 26 press conference. A competing applicant could have applied to the Federal Energy Regulatory Commission and obtained a federal certificate for building the project, regardless of any state rights of way held by MidAmerican, the CEO said. MidAmerican and state officials disagree Sokol placed much of the blame on Jim Clark, chief of staff to the governor, and Gregg Renkes, attorney general. He said Clark and Renkes had “pleaded” with MidAmerican officials in a March 19 phone call to attend the March 22 meeting with the governor, and that Clark and Renkes had said they would back the company in its request for sole developer status.
The CEO said he later concluded the governor’s staff only wanted the company at the meeting so they could “bludgeon” MidAmerican into accepting something less than what it wanted in the deal.
Clark, in an interview April 3, denied Sokol’s accusations. The governor had repeatedly told the company the state would not consent to exclusive development rights, and neither the chief of staff nor attorney general had the authority to tell Sokol anything different, Clark said.
“We did not contradict what the governor had said in his letter to Sokol of the 16th,” Clark said. “We wanted to have other applicants,” he said. “What if it didn’t work (with MidAmerican)?”
Clark also denied MidAmerican’s allegations that the administration had ever misled the company.
MidAmerican officials April 5 declined any further comment on the failed Alaska negotiations.
It’s not which company or companies build the gas line, but which can do it at the lowest pipeline tariff, Clark said, adding it wouldn’t make sense for the state to commit to a project developer without knowing the costs. Lowest possible tariff key for state Although the state is eager to find someone to risk perhaps $20 billion on building a project to move North Slope gas to Lower 48 markets, the state’s financial interests would be best served by the lowest possible pipeline tariff. The lower the tariff, the higher the wellhead for the gas, and the higher the state’s production tax and royalty revenues.
“It is in the best interest of the state for the pipeline to be owned and operated by an unaffiliated pipeline company, assuming that such a company is able to provide the lowest possible tariff,” Murkowski said in a March 25 letter to Sokol, in an unsuccessful attempt to get the company back to the negotiating table.
Promising any one developer exclusive rights also doesn’t make sense to BP Exploration (Alaska) Inc., said company gas line spokesman Dave MacDowell. “We are surprised any party would assert that exclusivity or mandated ownership is in the best interests of the state.
“We can’t imagine how anyone could contemplate authorizing an exclusive arrangement before knowing whether that project had the lowest transportation costs,” MacDowell said. “That would be like betting on a horse without knowing it could run, let alone run well.” Producers spent $125 million without any guarantees BP, along with its North Slope producing partners ConocoPhillips and ExxonMobil, spent $125 million in 2001-2002 to study environmental and regulatory issues, construction costs and conceptual engineering, MacDowell said, all without any guarantees that the producers would be the ones to build the line.
The work showed the project’s economic risks still didn’t pass the test. The companies applied to the state under the Stranded Gas Act about the same time as MidAmerican, and are continuing to negotiate for a fiscal contract for payments in lieu of state and municipal taxes should they build the pipeline. The producers also continue working to reduce the project’s costs, while waiting for Congress to take action on the federal energy bill and its gas line incentives.
The producers want whatever contract terms they might negotiate with the state to also be available to any other potential project developer, and the same rules to apply to any terms reached by other applicants. “We’ve specifically requested that any pipeline terms negotiated under the Stranded Gas Act be fully assignable to any party,” MacDowell said.
Sokol denied MidAmerican ever asked the state to stop negotiating with other Stranded Gas Act applicants, though he later explained a key distinction during his March 26 press conference. While the company’s exclusive rights would not block the state from negotiating a contract with the producers for the North Slope gas treatment plant or taxes on the producer-owned gas, MidAmerican’s request for sole developer status would have prevented the state from talking with the producers — or anyone else — about building the pipeline itself.
Such an exclusion would have forced the producers to negotiate with MidAmerican for moving their gas to market through the company’s project.
MidAmerican wasn’t interested in negotiating a contract covering taxes on the gas treatment plant because it did not want to build the plant, estimated at around $2 billion to $3 billion, and had said in its application that it would prefer the producers take on that project. MidAmerican will not pay state negotiating expenses In addition to leaving the state unhappy at how they were treated, MidAmerican is leaving behind about $200,000 in costs the state ran up in its two months of negotiating with the company. The Stranded Gas Act allows the state to recover its negotiating costs — mainly consultants hired to advise the state and tax, tariff and fiscal issues — from contract applicants.
Although the producers signed their reimbursement agreement with the state early in their talks, MidAmerican declined to commit to covering any of the state’s costs.
“Please understand that, because of the critical nature of the exclusivity question, until that matter is resolved, we cannot commit to a reimbursement agreement with the state,” MidAmerican’s Morgan said in a Feb. 20 letter to Alaska Revenue Commissioner Bill Corbus.
| 