Coghill talks Alaska gas project issues

North Pole Republican says collective legislative experience helped in moving forward plan for state equity ownership in project

Steve Quinn

For Petroleum News

Senate Majority Leader John Coghill doesn’t sit on the Resources Committee or the Finance Committee, but he’s been in office long enough to understand Alaska’s efforts — futile at times — to advance a natural gas pipeline project.

As turnover in the Legislature continues, this North Pole Republican has been around for debates predating the Murkowski administration and its effort to strike a deal with North Slope producers.

Coghill sat down with Petroleum News to discuss the latest proposed project before the Legislature, Senate Bill 138 which now awaits Gov. Sean Parnell’s signature.

Petroleum News: Let’s start with some context. What was different about the tenor of the debate between this offering and the last discussions to advance a large-diameter line?

Coghill: Probably the difference in this one is when we said we are going to build a pipeline ourselves under HB 4, I think the oil moguls — the producers — saw that we were serious about going ahead to build a gas line. The governor got enough leverage to say ‘give me some flexibility and maybe I can get them in on this deal.’ Sure enough, when we gave that authority, they came to it. Then the process is stage gated.

We are not going to do a stranded gas deal. In other words we are not going to try to figure it all out at once. We are not going to do a Murkowski deal where we beg the producers, come make a deal with us and give too much away. This is going to be stage gated, where the state will consider being a partner with you because we have an option. If we can’t be a partner with you, we are going to build our own pipeline.

We’ll get that gas. So the gas is going to be for Alaskans. I think that’s going to be the difference. We finally found a way to say we are going to get gas for Alaska. If you can sell it on the international, market that’s great; if you can’t, guess what, we are going to get gas for Alaskans. If we can sell even a small amount on the international market, that’s great. If not, we are going to build a gas line for Alaskans.

Petroleum News: So you see HB 4 as a turning point?

Coghill: I know we called it a little bullet line, but what it was really saying was we are going to get North Slope gas to market. One of the markets is Anchorage. One of the markets is Fairbanks. Certainly one of the markets could be LNG. Everybody knew probably better than 60 percent of it had to be sold elsewhere anyway. We knew the gas had to come off the North Slope and make it to Alaska. That began the process. The governor picked up on that process. The governor did a great job of reaching out. The LNG market is such a dynamic world that it looked like we were going to hit a stride in the market.

The conversation of getting gas off the North Slope to market has been going on all of my life. We’ve tried in various different ways. To be fair, and I think the people of Alaska need to understand this, it’s been more valuable to pump out oil with gas for a variety of different reasons. Certainly with the economics of oil, it’s the bigger pay. Anywhere from 10 to 1 to a 50 to 1 ration depending on the market place. So why sell a unit for a dollar when you can sell it for $50. Gas has been good for oil recovery. It’s been excellent. So a lot of people say we’ve been trying to get our gas to market for 30 years. That’s true but we wanted the oil more than we wanted the gas. That’s true with the oil companies. That’s true with Alaska.

The basin in the Kenai area has been so flush that until recently there has been no desire to move North Slope gas. Then when they started talking about importing gas because of a lack of investment in the Kenai fields, all of the sudden, (House Speaker Mike) Chenault decided we need gas in the Kenai area. Well, we did two things. We incentivized storage and drilling. We incentivized getting a pipeline.

And by the way, both of them continue to move. The good story is Southcentral area has done well. Their gas supply is better, but it’s still short term and it’s still very expensive to drill for a very small market. So they see that if you tie these two fields together, all of the sudden Alaska has a better marketability. So the Kenai guys and the Interior guys get value added and a marketable product that ties two fields together as a single sales point.

Petroleum News: So where do you see yourselves now?

Coghill: To date what we’ve done is we’ve tried to create the whole deal where you act like the oil companies and you get a work product, a contract, a negotiation and a final price. The timeline to get that done is so price sensitive that you try to nail down certain things. The big sticking point is how do you give tax certainty, how do you say we won’t keep upping your taxes and messing with the royalty in kind. We know the economics is uncertain. We know the distance is uncertain.

The way this governor put together a tax and regulation package was to say OK, we’ll take our gas in molecules, we’ll take the value risk on that, and you build a pipeline, we’ll ride along with you, we’ll pay our fair share. Then we don’t mess with your gas. Therefore you will always know what your rate is. The big thing is who gets to ride down the pipeline. How are we going to split that up? The ownership of the pipeline tells the story on that.

We own our part. They own their part. We get economies of scale by all being in the same pipe. It creates a dynamic where everybody gets a little more satisfied. The tariff rate to the big companies doesn’t matter because they can cost shift between liquefaction plant, a production plant or a movement plant like the pipeline.

We can keep things price sensitive for Fairbanks versus Kenai because we know how much it takes to move a molecule from the North Slope to Fairbanks and from Fairbanks to Big Lake. We can figure that out on a small scale.

This sets up a system that says OK, we can go forward under this condition. Now how can we do that?

Petroleum News: So what’s the next step?

Coghill: We’ve got to see can we afford to do it. That’s the next step. Right now we’re just saying we agree to go to that next step. We’ll look at facility costs, permitting costs, we’ll look at shipping. We’ll look at customers. We’ll look at the project and see if we can go to the stage gate that says look this might be a real project. That’s very different from what we’ve done before. Before we tried to look at the end and work back. This time we’re working from the back and looking forward.

Petroleum News: Do you have any pause about the TransCanada deal?

Coghill: Anytime you have a partnership with someone you should have pause. You shouldn’t have contempt. They are a good working partner. I think you hear that even from the detractors of this particular bill. Their credibility is very high. But they want to make a profit and guess what we want — the best value for Alaskans. In that tension, we have to find a place to agree. We haven’t gotten there. At this point that’s an open discussion for me. I’m respectful of TransCanada; therefore I’m willing to talk. The structure of having that buyback has some real benefits to me. You have people who know what they are doing. They are highly motivated to get more gas whereas the oil companies are not as highly motivated. We are highly motivated to get more gas to market as well. So we have a motivation that is similar. Now it’s a matter of how do we split up that motivation once we begin to make it real?

At this point we begin to move it forward but there are a few caveats in SB 138 that may make TransCanada ticklish about it. We passed it and it’s now going to the governor. There are caveats on how we take care of communities and caveats on the buyback. They didn’t violate the MOU. In the MOU there were quite a few definitions that create a lot of consternation. It looked contractual, but it’s just an understanding. There will come a time where that could fall into a contract so that’s why we gave them a reservation that we want to make sure we are getting best value. We want to make sure on a work product we want to make sure we get equal input.

To be fair, we are asking TransCanada to take the risk. People of Alaska need to understand we are willing to buy back the risk, but they are taking the risk. Because they are taking the risk, they want some value for it; understandably so. But when we buy it back, are we getting the best value? I think that’s a reasonable question.

Petroleum News: It seems like people in this building still have a bad taste in their mouths from AGIA?

Coghill: Many of us in this building here went into AGIA with great expectations. There is no doubt about it. Truth be told at $6 an mcf and above we were in the money. The market just changed on us. The way we got to TransCanada, like it or not, we were saying to the North Slope producers we are going to partner with a pipeline company and if you don’t sell us gas, those leases go up. They didn’t want to do that. They had a reasonable expectation we were going to march forward. AGIA had probably many, many bad parts about it. The one good thing it did was provide resolve by Alaskans that we were going to do anything we can — to the tune of $500 million. Which we got ridiculed for.

Maybe there are some reasonable good parts for that ridicule. The fact is we were in the money and the producing companies didn’t express enough interest in building until the Denali project came in (2008) and then Exxon joined TransCanada (for gas treatment plant). Meanwhile the gas industry changed dramatically just because of the fracking. At the time, people were building import terminals for gas. I think we were doing the right thing. The market changed on us. Now as we go into this LNG project, we watch probably a little more closely. You’ll see us being a little more deliberate about the market as well as the agreement.

Under the Murkowski administration, we were told we had to think like an oil company. It was an explosion of information. It was overwhelming to people who didn’t come down here as gas line experts and were not up to negotiations. As we went in with TransCanada, we re-set what we learned and took another step further. And what we learned from TransCanada has probably played out with skepticism, but with good thought and knowing who the consultants are and knowing the different between a consultant who is an advocate and a consultant who can tell you these are your best options and really listen to those options.

I’d say there is a growing wisdom. Not that what we did before was foolish, but we had to change our way of thinking. Even with new members in the Legislature, they were able to follow that line of thinking. We’ve learned how to hire the people who know and we’ve learned how to ask them the questions because we’ve been through this debate three different times. Even going through HB 4 debate was very thoughtful because of the TransCanada deal. We learned from AGIA and we began to learn how TransCanada thinks about things. We got an education that is very hard to get. I think HB 4 was a good exercise and this is good example.

Petroleum News: There are two key people in the administration who have been on front lines of this. One is the governor. The other is a North Pole guy, Natural Resources Commissioner Joe Balash. During the confirmation vote, he was called unlearned, I believe. You supported his nomination. Talk about that.

Coghill: First of all anytime you have somebody with quick wit, broad capacity for learning, ability to understand political processes and he has to navigate in that world with fact and with fun. He’s very savvy. He had a little bit of school in that early on in the political realm. A little bit with LB&A. A little bit with campaigns. Prior to that he was involved in the development of the Stranded Gas Act with Gene Therriault.

They then began to think through the process. It was a very detailed issue. Remember the Stranded Gas Act was saying we are going to try to figure out a way to incentivize that gas and what is our legal responsibility so that was the first step: how do you get to the legal question before you get to the practical. The Stranded Gas Act was one of the key tools.

So he got bathed into the law, the leases and the markets. Let’s say a guy has a Ph.D. in petroleum economics. How many years would they go to school? Well, here you have a guy like Joe Balash deeply involved. He goes from Stranded Gas Act into the Murkowski question. All of the work product that goes with dealing with oil companies. He gets to hear them talk. He gets to go into private rooms. Another four years. So now you’re talking about eight years of intense and deep study.

My guess is he has a Ph.D. in capability. To say that he’s unlearned, I think is just unwise. Then he goes into a time with the Palin administration with AGIA. Now you have another two years deeply involved in the gas line markets, working with the producers, with commissioners and with the governor.

He’s worked with lands and water; he’s worked with fish and game; he’s worked with parks and rec. This kid is home grown. His heart is deeply rooted in Alaska. He’s got a family here. He’s been involved with names and faces from the Resource Development Council all the way to health and social services. He knows the good and the bad of Alaska and he loves it.

He’s learned patience. I can remember Joe Balash in his early years. He’s fiery. The guy can be intense. Through the years he’s learned how to take his tenacity and turn it into purpose rather than fire. It’s great to watch a man become that capable. His credibility is deep yet his passions are under control. This kid has come a long way. He’s a young man yet. I expect to see a lot of good years out of him.

Petroleum News: With that in mind, is that enough? Does that really give you the confidence you need to have someone embark on negotiations and marketing Alaska’s resources?

Coghill: Yes, and I’ll tell you why. This kid knows who to go get when he doesn’t know what he wants to know. That’s why I was talking about his temperance process. There is a difference between a man who is a strong leader but lets his pride cause him not to ask directions when he needs it.

A man who is tenacious and knows when he needs to bring in the extra help because that’s his strength, Joe and the governor really know when you need to bring in horsepower you know where to get it.

You’ve got to tip your hat to him, because he’s been learning. You don’t ever see that because it’s not in the headlines everyday type of thing. Neither is a guy who is a Ph.D. Neither is a guy who has worked in the industry for 30 years. He has been on the Alaska side every time, yet he’s had to listen to those who want to benefit from Alaska and work with Alaska.

Petroleum News: OK, so you’ve got your argument about a home grown boy leading natural resources department and then you’ve got an out-of-state AGDC board appointment that generated so much controversy. How do you reconcile that?

Coghill: Same way. You go and get the people that know how to make it work. I don’t mind Joe hiring people to help make it work. On the board, here is what you get. Some pretty heavy duty power, great knowledge from someone who makes a commitment. Some people think if you work for Exxon and BP, they are sold to the company store. To think that a man who has an industry history will be so loyal that he can’t work for Alaska, I don’t buy that. Should it be an Alaskan board? Yeah. Should it be all outside members? No. In the board picture, would it have been my first choice? No. But is it the best choice? Could very well be. It’s a unique circumstance. How many pipelines are you going to build from the North Slope to tidewater? So why not get the one who knows the best world economics in shipping than someone who has done it? I have great confidence in that board.