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Vol. 20, No. 51 Week of December 20, 2015
Providing coverage of Alaska and northern Canada's oil and gas industry

Stedman: ĎI believe we have a projectí

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Sitka Republican says state took correct step to buyout TransCanada, must keep oil policy separate from natural gas decisions

STEVE QUINN

For Petroleum News

Sen. Bert Stedman has never been reluctant to speak out against the majority, even on high profile issues like the recent tax rewrite SB 21 and the gas line legislation SB 138 when he voiced opposition against TransCanadaís involvement.

Well, TransCanada is no longer a partner thanks to SB 3001 in the recent special session and oil tax credits are being revisited. Stedman says he doesnít want to be right; he wants the Legislature and Gov. Bill Walkerís administration to work toward getting it right.

Stedman, a Sitka Republican with a resume of serving on several national energy boards, reviewed recent developments in an interview with Petroleum News.

Petroleum News: A lotís happened since the special session, particularly with changes in AGDC with John Burns and Dan Fauske leaving. What are your thoughts on that?

Stedman: I liked John Burns. I thought he was a good guy. I donít quite understand that one. I thought it was a bit of a surprise. With that being said, every governor appoints who he feels should be in that position. So Iím not so concerned that the governor is changing around the deck chairs.

Petroleum News: Even as itís been over a year since he took office? Are you OK with constant changes?

Stedman: I think when you look at any change of administration, it takes a little while to get the deck chairs re-arranged. Also when you get something so complex, itís going to take time for the chief executive to come up to speed on information he wasnít aware of at the time through more detailed briefings. It does not come as a surprise. You have to give the governor a little flexibility when he first sits down. Just like any other elected official, he can perceive something one way, when you get elected and sit in that chair and the perception changes. It doesnít matter if you are on the borough council, the Legislature or the governor.

Petroleum News: You mentioned Burns, what about Dan Fauske also leaving?

Stedman: Danís a good guy but I donít think he has a pipeline background. I recall the testimony when I was in charge of the Finance Committee and we asked him about that. His response was he had enthusiasm.

Petroleum News: So what would you like see in that spot, even if you arenít sure just who?

Stedman: Iíd like to see somebody who has extensive background in LNG projects.

Petroleum News: Now one of the discussions over the qualification issue is that person may not reside in Alaska. Are you worried about bringing someone from the Outside?

Stedman: Iím more concerned about having somebody who technically knows what heís doing rather than where he resides in Alaska and/or has a real good feel for the culture of the state; that would be even better. But thatís his job. We are the appropriators; we are not the chief executive.

Petroleum News: How soon do you think someone needs to be in place?

Stedman: In an organization that complex the sooner the better is the general answer. I want to see this project continue to move forward. Itís in the state and the industryís best interest. Itís also in the countryís best interest for a balance of trade. And we also have a potential to look at a huge capital project at a time when the industry is in a capital slowdown and we should be able to get some price concessions for some materials.

Petroleum News: You voted against the two prevailing bills right now, SB 21, the tax regime rewrite and SB 138, the current path for a gas pipeline, but you voted in favor SB 3001. Whatís changed?

Stedman: If we are referencing SB 21, I think we will show here this winter there were significant structural flaws within that bill. They need to be worked through and quite frankly toward a more balanced product, a more balanced fiscal structure to not disadvantage the industry or the state in any given the price environment.

With SB 138, the reason I didnít vote for that was I didnít support TransCanada and that forced misalignment with the state and the other partners and giving up our voting rights when I saw there was no need to have them.

Now weíve passed a bill to get their capital back to them and getting our voting rights back. They were not holding the stateís interest - in my view they were in front of the stateís interest. So I had a different viewpoint on SB 138. Thatís why I didnít vote for it.

So Iím glad to see TransCanada exit because itís imperative that we have alignment with our gas and fiscal ownership of the liquefaction plant, the pipe and the treatment plant to align ourselves with our three partners. Otherwise, we would be put in a position of countless decades of arguing over costs and tariffs, all of the stuff thatís haunted us with TAPS over the last 30 years.

Petroleum News: Was there anything about 3001 you didnít like or that concerns you?

Stedman: Not necessarily. There is always the interest the Legislature has in some of the management decisions the governor makes - whoever the governor is. In that regard, having the hearings will hopefully end up being a net-positive for the project in helping bring some things to light, some things that might in the future be smoothed out between the Legislature and the administration.

Petroleum News: There were some very vocal concerns about transparency and who is in charge. Do you share those concerns?

Stedman: The governor is in charge. We have the strongest governor in the country. Iím not talking about him personally. Iím talking about the structure of this state. Itís the strongest governor of all 50 states. You see that in the style in which they govern. Iíve seen that in all four governors who served in this building since Iíve been here.

So I think itís pretty normal. If itís a question of management and who is making the decisions, that will get streamlined out.

Petroleum News: There is also the question over whether a 48-inch pipe should be built rather than a 42-inch pipeline. Is that something you believes warrants attention?

Stedman: That is an economic decision the four partners need to make and they need to make an economic decision thatís in their best interest. Our viewpoint might be a little different than the individual one of the remaining three. Iím more concerned about having a project.

I kind of like a 48-inche pipe, but Iím more optimistic than some of my colleagues about of volume of gas that will be available, which is substantially more than whatís up there today in Prudhoe Bay and Point Thomson. I donít think this is the 30-year life project; I think itís a century longer. If we can get some expansion in that area, I think it will prove that Iím right.

If we ever crack the hydrates, which eventually we will, itís going to take our volume numbers - it will be so big, we wonít be able to comprehend them. Literally. Whatever we build, having access capacity, through looping, compression or size of the pipe to make sure whoever is up there can get access to the pipe and sell the product because it doesnít do us any good to leave it in the ground.

Petroleum News: Do you think it will encourage more players, a 48-inch pipe?

Stedman: Depends on how the agreements go and how much excess capacity you have. Thatís the preference of going to a 48-inch line, but does 42-inch line with looping and compression work more economically than a 48-inch line? I donít know. Let the guys who know the gas business bring forward from a commerce position whatís in the best interest of everybody. Iím sure if one or two of the partners disagree, weíll hear about it. I donít have the background to tell you whatís one or the other. I think what resides in this building is more of a political argument than a technical argument.

Youíve got the cost of the pipe; can it be made; the availability of the steel; is it proven. There are a whole list of items youíve got to check before you jump in and decide what size pipeline you are going to make. Itís more than just a diameter increase. Iíd rather have someone who knows what they are doing make the decision and come tell me what they think. Weíll get a better product that way.

Petroleum News: Do you think the Legislature accomplished all it could do during the special session or could there have been other things on the call?

Stedman: I think this is the more timely thing on the call. When you talk about the other agreements in the negotiations, one of the concerns I have is you have timelines on this mega project and the timeline starts driving the decisions and you start making subpar decisions.

That ends up costing you a lot of money. That is one of the messages that came out of the mega project class we had two years ago. Iím interested in this project for monetary issues of it. Thereís always the arguments of gas to Alaskans. Iím more interested in dollars to the treasury. We will have all the gas Alaskans will need for over a century.

We donít have to worry about that. Iím concerned that public in the Railbelt will expect cheap gas out of this, the LNG line. Itís not going to be cheap because of tariffs and costs compared to competitive advantage Cook Inlet will bring.

Petroleum News: So was there anything missing on the call?

Stedman: I donít want them to bring stuff into the legislative environment until itís ready. Having a fall deadline two years ago for this fall and even last winter when they were talking about the October special session - I was concerned the date would drive the project versus the product. If you ever want to mess up a mega project, set up the date and walk into it. Thatís a good way to mess it up. Until they get it ready, those documents negotiated and ready, weíll wait.

Petroleum News: So did you anticipate the buyout of TransCanada, knowing you werenít happy with that provision in SB 138?

Stedman: Itís not an I told you so. As the clocked ticked and there was an off ramp, which was put in by the previous administration. They put it in for a reason so we could get on it. It gave us time to look at it and understand the project more and make the decision. Iím glad that was the decision. What I do not want to do is take the gas at the wellhead and not have ownership of the infrastructure. This is business. It has nothing to do with liking or not liking TransCanada. TransCanada is a damn good company. Thatís not the issue. The issue is our ownership of that gas and getting fair value - maximizing that value - for the people of Alaska who own it. If we want to minimize it take it at the wellhead or leave in the ground, right?

Petroleum News: Speaking of regional areas in Alaska, there is talk of Avista bringing LNG to Southeast. Do you think if something like that comes to fruition in Juneau that could help other communities in Southeast?

Stedman: I think if they brought LNG or compressed gas into Southeast, it will come from B.C. Once they get an anchor tenant to make the economics work, there will be derivative customers off of that who will benefit. It really comes down to the cost of producing the electricity versus the infrastructure thatís already in place. Iím kind of curious about the costs they are going to run into when they start plumbing the towns and those type of challenges. But you need an anchor tenant. Obviously Juneauís got 35,000 people; Ketchikanís got 13,000 and Sitkaís got 9,000 so Juneau would be the target. It may end up being beneficial to some of the smaller communities. I havenít seen the analysis yet. If it brings lower costs of energy to the islands, Iíll be looking at it favorably.

Petroleum News: So looking ahead at next year, and we touched on this early, there will be tax credits addressed, what would you like to see done?

Stedman: My concern about SB 21 was it was sold to the public as a 35 percent tax on the net and you were going to have an increase in production. You can define an increase in production numerous ways. All the forecasts Iíve ever seen is declining production. This parabolic curve weíve been on for a while doesnít appear to have changed. We will have a shallowing of decrease for a year or two possibly. There will be a slight benefit in that regard. Those who think we are going back to 750,000 barrels per day are dreaming.

That being said, when you get to the credits, they arenít put on production. They are put on capital investment so the whole fiscal structure is put on its head. As time goes on, the public will see that it doesnít work. I think some of that is going to be rolled out in glaring form this winter.

We canít have a fiscal structure where the sovereign pays for the extraction of its resources. They donít do that. Once we see how the mechanics of this works, weíll see the problems that are embedded in it. They will be rectified.

Petroleum News: So where should tax credits be applied?

Stedman: I think when you look at tax credits all over the globe, youíll see they are put on investments, capital expenditures to change the cash flow dynamics to make marginal projects get over the hurdle rates. They are not put on barrels produced with increasing credits as price declines. What youíve created here is, well letís put it in numbers. This year we are sitting in now, the expectation is the per-barrel credit will generate somewhere around $1.3 billion in credits and they canít be rolled forward. Then you have another $700 million in other credits. Thatís $2 billion in credits. You have very little net. Itís a net tax system. So yeah, there are huge structural flaws. Even, if for whatever reason, you want to do your credits on per barrels, youíll have to make some adjustments, because the structure doesnít work. The international royalty rate is about 20; our royalty rate is 12.5. It doesnít take a mathematician to work on the back of an envelope and conclude there is a huge amount of instability imbedded in this oil tax system and we need to get it out so we have an oil tax structure that works at $50 and $150.

With the exit of TransCanada I think we are going to have real strong alignment with our partners on the gas line, so letís not mix up gas and oil. If we can get alignment in this oil structure, something similar to gas, where regardless of the price, we are rewarded and penalized together, I think weíll have a system that will stand the test of time.

With that negative severance tax, how do you go forward and say youíve got 35 percent tax? The concentration should not be who voted which way in SB 21, what should be before the Legislature is how do we adjust within the structure for a more stable oil tax environment? When we cut school funding and we reduce state dividends and we have a negative severance tax, we have the dynamics that are going to be explosive in the ballot box. I donít want to see all of those things come together.

Alberta threw out its entire government, lock stock and barrel. We just all need to sit at the table and figure this out.

Also, Iím concerned about stackable credits against the treasury going forward and I asked about that a year ago, so weíll be asking about that again. Itís standard business: what do we have in deductions; whatís the net; whatís the revenue; whatís coming next year. Itís basic business. There is no gotcha. My concern is you have potential with loss carry forward in stacking. You have an environment where youíve got $1.3 billion per barrel credits, then you have these stacked credits in front of you. The treasury canít recoup. Youíre turning the state into an insolvent position. Thatís unacceptable.

I would suspect there would be substantial interest by some companies in keeping the credits. It doesnít matter if itís a fish tax credit or an oil tax credit. But in how we phase them out or change them, itís going to be a political discussion. From my viewpoint the quicker we turn them off together. These are unprecedented times, not only from the industry to deal with but the state of Alaska.

Now Cook Inlet is going to phase out in 2022. Youíve got to have some rationale. Hopefully all that works out in the discussion trying to get to a stable environment, fiscal environment. I donít see the state in a position, after we fix the ability not to make payroll, that we are going to be able to compile any significant cash. Thatís not a good position to be in.



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