Friday, May 31, 2013

AIDEA gets energy; Some 4 years after strategic planning process, gains importance in O&G sector

Eric Lidji
For Petroleum News

One of the most ambitious players in the Alaska oil and gas sector is not a producer, or a pipeline company, or even an oil field services company. It’s a public corporation.

After decades with limited involvement in the largest private industry in the state, the Alaska Industrial Development and Export Authority is currently involved in drilling, infrastructure and distribution projects on the North Slope, Cook Inlet and the Interior.

Just five years ago, AIDEA was involved in only a handful of energy projects, including the Snettisham Hydroelectric Dam and the Healy Clean Coal Project. But a strategic plan in 2008 and 2009 kicked off a new era for the public corporation, which the Alaska Legislature created in 1967 to promote economic development in the still-young state.

When the state created AIDEA, it charged the public corporation with assisting a broad range of commercial projects, starting with any facility used for “making, processing, preparing, transporting, or producing in any manner, goods, products, or substances of any kind or nature or in connection with developing or utilizing a natural resource.”

“We had been looking at ways we could assist more in developing resource development,” AIDEA Executive Director Ted Leonard told Petroleum News on May 20. “If you go back to our definitions of facilities, these types of facilities are pretty much number one on the project definition list that we have in our statute. So we’ve been looking at how to do more resource development investment and what tools we needed.”

The strategic plan has prompted AIDEA to seek out new opportunities in recent years — both economic and legislative. Over the past few legislative sessions, AIDEA has successfully lobbied for several changes to its statutes, and it has used its increased authority to become involved in projects previously outside its reach. Those projects include the Endeavour-Spirit of Independence jack-up rig now drilling in Cook Inlet, a collection of infrastructure projects for the Mustang oil field on the North Slope and potentially financing a liquefied natural gas trucking operation for the Interior.

On the surface it may seem as though AIDEA is simply adding energy projects to a portfolio previously focused on retail, tourism and real estate, but the new strategy is actually more concerned with how AIDEA gets involved in projects. Those changes could make AIDEA a key player in the Alaska oil and gas sector in the next decade.

The decline of the majors

The AIDEA board of directors initiated the strategic plan in late 2008.

The decision came at a moment of reflection and transition for AIDEA. The public corporation had recently turned 40 and had hired Leonard as its new executive director.

“They were looking at how AIDEA could be more effective and efficient in their investment and how we could in essence get more bang for the buck,” Leonard said.

The planning team found that AIDEA enjoyed a good reputation among its traditional stakeholders, but was considered “reactive or passive” by some economic players.

To become a more active player in the economy, the strategic plan suggested that AIDEA diversify its assets, acquire new financing tools and promote itself to additional sectors.

AIDEA began implementing this plan at an unusual time for Alaska oil and gas.

Some 50 years after the discovery of the Swanson River field launched the local industry, a handful of major companies were competently overseeing declining legacy fields on both the North Slope and in Cook Inlet, but showed limited interest in exploration.

While the majors harvested those giant fields, several new players began pursing midsize fields that the majors had overlooked for decades.

Anadarko Petroleum Corp. launched a natural gas exploration program in the Brooks Range foothills in late 2007, Eni Petroleum sanctioned the Nikaitchuq unit in February 2008 and Pioneer Natural Resources brought the Oooguruk unit online in June 2008.

The rise of the indies

This transition left many holes in the sector, though.

In Cook Inlet, declining natural gas production was causing a ripple effect.

Agrium closed its fertilizer plant for lack of supplies. The Regulatory Commission of Alaska, the utilities and the producers were fiercely debating the best way to meet local demand in the near term. The exploration climate was so poor that the State of Alaska made its support for continued LNG exports contingent on the producers drilling new wells. Even with the support, the companies later announced plans to close the facility.

And on the North Slope, smaller independents were facing challenges as they pursued midsize fields that would have had investors drooling in any other state in the country.

These smaller players included the Alaska Venture Capital Group, Armstrong Resources, Savant Alaska and UltraStar Exploration. Unlike the majors or even the bigger independents, those companies would have been hard pressed to internally fund Arctic exploration and development operations during good years, let alone in the middle of a economic recession. As Alaska Venture Capital Group Managing Director Ken Thompson told Petroleum News in October 2008, “In this kind of climate, cash is king.”

In other words, the oil and gas sector provided an opportunity for AIDEA to diversify its assets by proactively promoting itself to a growing segment within the Alaska economy.

In a state where government and the economy revolve around the oil industry, it might initially seem odd that a public corporation devoted to economic development would take four decades to make a big move into the sector, but AIDEA’s Deputy Director of Project Development and Asset Management James Hemsath called it a matter of timing.

The state created AIDEA a year before the discovery of Prudhoe Bay, and designed it to be useful to range of sectors. “Once Prudhoe Bay hit and there was that very large development, there really wasn’t a place or structure for the smaller, entrepreneurial-like oil firms that are coming into play,” he said. With production declining at legacy fields, new opportunities are emerging. “Ten years ago there wasn’t the need that there is now.”

A place for AIDEA

AIDEA began seeking the authority allowing it to invest in new ways.

In early 2011, Gov. Sean Parnell signed House Bill 119.

The law gave AIDEA the ability to invest in a corporation or a limited liability company that held a development project as its sole asset. In other words, AIDEA and a potential partner could form a joint venture for a specific project by creating a new company.

“That has been, I think, a godsend, just in terms of organizational efficiency,” Hemsath said, pointing to the flexibility it gives AIDEA when working with numerous partners.

Also in early 2011, the Alaska Legislature created the Sustainable Energy Transmission and Supply fund for downstream projects. The SETS fund allows AIDEA to “issue direct loans for up to one-third of the capital cost of an energy project, or create a secondary market through loan guarantees that partner with local Alaskan banks for financing.”

This year, the Legislature approved its first use of the fund. Senate Bill 23 allowed AIDEA to invest in a proposed LNG trucking system between the North Slope and the Interior, a system that would include a major build out of the existing distribution grid.

Far more importantly, at least for the long-term, SB 23 also gave AIDEA the ability to directly finance larger infrastructure projects that it does not intend to own or operate.

For large-scale energy projects like Snettisham and Healy Clean Coal, AIDEA was required to own the project outright. This requirement limited the number of projects AIDEA could fund at any given time, and left all the risk for these projects with AIDEA.

The strategic plan suggested finding alternative ways to invest in large projects.

Between HB 119 and SB 23, AIDEA can now provide what it calls “mezzanine financing,” or financing designed to fill gaps between existing debt and equity on a company’s balance sheet. In practice, these low-interest loans can bring down the cost of financing for small independents by providing better terms than would be available on the private market, and they can also make once-hesitant financers willing to invest.

Before, AIDEA needed to find projects it could own outright. Now, Leonard said, “We’re looking at being able to leverage our investments with more private investment. That was one of the things that was key as we looked at our strategic plan in 2009 and 2010.”


Coincidentally, AIDEA launched this new strategy as the State of Alaska began implementing the credit program in the Alaska’s Clear and Equitable Share oil tax. The combination of AIDEA and ACES is creating a situation where independents can get public funds twice in the early life of a project: once from AIDEA to help finance exploration work and later from ACES in the form of exploration credits for the work.

The state never explicitly intended for these programs to work in tandem. “As it turned out, that’s what happened,” Hemsath said, “because the ACES credits became collateral for some of the companies to use with getting their financing to do the operations.”

After cashing in their ACES credits, companies have come to AIDEA for mezzanine financing “that was enough to get better business than their own cash flow,” he said.

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