Burn the Ships

 In 1519 the Spanish Conquistador, Hernán Cortés set out for the Yucatan Peninsula to conquer the Aztec Empire and seize their treasure. Upon landing he ordered his men to “burn the ships.” The phrase has now taken on the meaning of doing something that makes it impossible for you to change your plans and go back to a situation you were in before.

Cortez knew that conquerors with far more resources and men had tried and failed to conquer the Aztec Empire previously. But Cortéz believed he could succeed where others had failed, and he instilled in his men that same belief. To create additional incentives he burned his boats. With no exit strategy in place they had to succeed or die trying. Burning the boats created an unwavering commitment to attain their goal, the conquering of the Aztec Empire.

The State of Alaska could learn something from Cortéz. In the past, whenever the State committed to pursue a large diameter gas pipeline, they always had a real or imagined alternative available to them. Often the alternative looked better than the proposed project, even when there was no specific alternative in place.

What the State has failed to realize is that the possibility of success substantially increases with the full commitment of the stakeholders of the project. The lack of commitment, conversely, is one of the biggest reasons for failure of a project.

One of the reasons why a gas pipeline has not succeeded in the past is the lack of the complete commitment from the State in exploring alternatives when a roadblock comes up in the progress of the pipeline. Sometimes the roadblock is even of the State’s own making.

Under the Stranded Gas Development Act, the producers and the administration made a proposal that included incentives for the producers to move forward with the project. This option was rejected by the Alaska Legislature and the Alaska people. It was a common belief at the time that the project was strongly economic and that the producers did not need incentives. Alaska believed that a no project alternative was better than the proposed project.

If the State of Alaska had been fully committed to the project, it would have reviewed the proposal and submitted terms back to the producers that the State would find acceptable. This might have resulted in substantial political risk for those involved, a risk that most did not want to take, and the legislature would have had substantial difficulty in coming to a recommendation since the legislature was not in a consensus building mode. But a fully committed State would have attempted to overcome those obstacles. 

One argument that I tire of hearing is that we are at a substantial disadvantage at the negotiating table, that somehow the producers are more intelligent and have better negotiators and better lawyers. This is simply not true. The State has assembled some of the most experienced and knowledgeable personnel as a part of their AK LNG team. Many of the State’s team have as many or more years experience as those who are across the negotiating table from them. In the past, the State’s lawyers were as good or better than those on the other side of the table. I assume this is still the case. The only thing that is clear about those who tout the State’s weakness as an argument against the AK LNG project is that we certainly don’t want them at the negotiating table representing the interests of the State of Alaska.

One of the issues that seems to be at the forefront of the discussion of the AK LNG project is that some believe the State needs a back-up plan in case the producers decide not to move forward with the project. But if the State was fully committed to getting a gas pipeline, it would take a different approach. The State would “burn its boats” and focus entirely on making the project a success. The following is what a committed State would do.

If the State is concerned with the producers not proceeding with the project, the State should negotiate terms in the contract that would allow the State to move forward with the project without the producers that no longer want to participate in the project; the state should negotiate strong milestones that would require the producers to make decisions in a reasonable length of time; and the State should make sure that its voting rights are not diluted to the point where it does not have an effective voice in the decision-making process.

 The State should spend a substantial amount of energy looking for ways to make the project economic. If the State moved forward with an alternative “back-up” project, it would still be required to make the project economic. These same alternatives that would make a State “back-up” project economic should be proposed in the AK LNG project.

If there are other concerns that limit the State’s commitment to the AK LNG project, the State should first look at options and alternatives that would solve its concerns within the AK LNG project negotiations. 

There is nothing to be gained in a “back-up” project that cannot be gained through participation in the AK LNG project. And there is substantial risk in keeping the “back-up” project around. It allows the state to not fully commit to the AK LNG project and it allows the State to believe it has a viable alternative to the AK LNG project. This is the type of thinking that precipitates the failure of the project due to lack of the full commitment of the State.

Whether the Governor vetoes the SB 132 legislation and whether the Legislature overrides the Governor’s veto is like arguing over what color we are going to paint a sinking ship. It’s time for the Governor and the Legislature to begin to work together to find ways to change the economics of the pipeline. It’s time for the State to consider burning its boats and fully commit to getting a large gas pipeline completed.