Mustang Project default puts AIDEA in tough spot

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IT ALL STARTED WHEN GOV. WALKER MADE BROOKS RANGE A DEAL

The State-owned Alaska Industrial Development Authority to the list of creditors for Caracol/Brooks Range Petroleum, which owes AIDEA tens of millions of dollars on a loan for the Mustang Project.

Although the exact amount owed to Alaska’s publicly owned development agency is hard to calculate from the outside, what is known is that since October, the company hasn’t paid the $3.1 payment due on the note. It’s in default. Brooks Range is supposed to pay $3.1 million per quarter.

Brooks Range has produced a small amount oil from the project — about $500,000 worth. But there are creditors to the tune of $15 million that it took to produce that bit of oil. The company is now in “warm storage,” and if the creditors don’t get some money, they won’t likely keep the small crew on staff that monitors the generators. Creditors, if not paid by end of 2019, could very well put the company into bankruptcy.

HOW AIDEA GOT THERE

A series of missteps by former Gov. Bill Walker relate to Brooks Range Petroleum’s financial peril:

Misstep one: Walker ordered a conversion of AIDEA’s equity position in the project to a loan in 2018. The company never made a payment.

Misstep two: Walker vetoed the tax credits and ordered the Department of Revenue to essentially lend money to Brooks Range, while all other players suffered (i.e. Furie going bankrupt), as they were counting on those tax credits.

Misstep three: The loan from the Department of Revenue was paid off by AIDEA, during the restructuring of the equity deal.

Under Gov. Bill Walker, AIDEA sold off its interests in the holding companies and road and pad infrastructure associated with the Mustang field. The state-owned agency instead financed the purchase by Caracol for $52.5 million for the Mustang processing facilities and $8.5 million for the road and pad operating company, and other associated costs.

Under the restructuring, there were no payments due until Oct. 1, and there was a 30-day grace period for Caracol, which has also passed. In the loan agreement, that means AIDEA could call in the entire note as due.

Decisions made during the Walker Administration were done behind closed doors with consultants to Walker, such as Mark Gardiner, the Portland consultant paid $400,000 a year, who met with Walker in Juneau behind closed doors without anyone from AIDEA present.

Unfortunately, the chickens are coming home to roost under AIDEA now that Walker is no longer in charge and the board must decide what to do with a Walker loan agreement that appears to have gone bad.

13 COMMENTS

  1. Another behind close door dealings and we elected these people to do their jobs. AIDEA should place a demand for payment. The banks call our mortgage loans when we are in default right?

    • These tend to be capitalist failures and occasionally these capitalists are bailed out-for example look at Secretary Paulson’s bailout of the banks at the start of our “Great Recession.”
      This took a vote of Congress and, of course, many today say they would have voted differently is had to do it again. Hindsight has a way of forgiving many sins and may just make this situation look different, too.

  2. Walker deserves a good share of the credit for this debacle, of course.
    The question now is whether anyone still working for the State of Alaska had anything to do with the goofball machinations with public funding. Is anyone still on the payroll going to be held accountable?

  3. One might actually say mistake number one was the insistence by the “anti-big-oil” lobby led by senators Wileckowski and (at the time Hollis French and crowd) to include the tax credit component to SB21 in hopes of luring in new players to compete with the “evil” “big three” who have up till now virtually exclusively been the investors in the development of Alaska’s oil industry as we know it today.

    If it wasn’t such sick irony, I’d be rolling on the floor laughing at their consternation when they discovered they might have to pay their piper, but of course their rabid followers have no problem helping the media to ignore how this all came to pass, and continue to hate “big oil”, and act like “big oil” was responsible for the socialistic tax credits in the first place.

    I’m sure they will figure out a way to spin this Brooks Range thing to be the fault of “big oil” as well, and try to avoid paying their piper for this debauchle as well as they tried to dodge their commitment with regards to Furie energies bankruptcy, it’s gonna be interesting to see how a federal bankruptcy judge feels about telling all the Furie and now Brooks investors to go packing with no recompense, and all the while they are showing on their books all those millions in tax credits promised by the state.

    When I recall the hundreds of millions the state gave away in the transcanada debauchle, in combination with how this tax credit thing ends up getting resolved, it’s hard not to see that the irrational liberal scocialists desire to steer Alaskas energy development in directions they believe will provide the best return, rather than trusting any of our business partners (that’s right, “big oil”) who have trained and qualified experts with a proven track record for getting responsible energy development done safely and which has carried the lions share of financial burdens of running this state for many of our Alaskans lifetimes, even for 2 and 3 generations at this point.

  4. The problem is not the tax credit portion of SB21 which overall is responsible for the largest program of development and successful exploration we’ve seen since the early days. Most of this is by independents on projects deemed uneconomic, or not yet marketable, by “big oil” with it’s high overhead costs. this large increase in slope activity translates to JOBS for Alaska!
    The problem is, hopefully was, in the inclination of AIDEA to become a bailout funder for borderline operations. This can only be remedied by better project and operator evaluations which means hardnosed, and oilfield experienced, investment advisors on the AIDEA board where the decision responsibility lies. Also it should be recognized that the speculative nature of these loans will generate some losses. So, it becomes a matter of weighing the overall effectiveness of the program–i.e., gains to the Alaskan economy versus the (hopefully) few losses that are inevitable in these type of endeavors.
    It is a fact that before SB21, oilfield development ( spell that-Alaska income revenue and jobs) had become stagnant..

    • I certainly agree with you that SB21 stimulated oilfield development. I’m not so sure that the tax credits themselves caused this, certainly to some degree, but the stabile tax structure established for the current producers looks to have spurred far more development. The vast majority of the new oil in the pipeline since SB21 has not been from those eligible for the tax credits, but rather from the established producers. The same is true for what future developments are being developed.

      That being said, dangling the promise of tax credits in front of the noses of businesses in order to entice them to enter a market and compete head on with established and successful businesses, and then refusing to pay them… it’s even “wronger” than the initially conceived idea.:(

  5. AIDEA’s mission has morphed from dispensing Ted Stevens’ Denali Commission money as grants to now being a bank for the State. (I wrote an AIDEA grant for my city 9 years ago.) Another bureaucracy trying to perpetuate itself? Perhaps, but they do hold promise if they can try to be neutral politically and do a better and more thorough job with the projects they are loaning to.

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