Fairclough on what’s next for Alaska LNG

Enabling legislation has passed, now LB&A chair will look for consultants to aid legislators in understanding project and contracts

Steve Quinn

For Petroleum News

Another round of energy bills have passed but Sen. Anna Fairclough’s job as the Legislative Budget & Audit chair, plus Resources and Finance committees member, is hardly done.

Even as many lawmakers focus on upcoming races, Fairclough said there is interim follow-up work to the recently passed natural gas pipeline bill, Senate Bill 138, that needs attention.

As LB&A chair, Fairclough’s job is to secure contracts with consultants who can assist the Legislature in understanding energy markets. With SB 138 passed, Fairclough said it’s time to understand what could be next.

That means bringing consultants back to the table or finding new ones to help the Legislature prepare for more material and ultimately a project contract from Gov. Sean Parnell’s administration.

Fairclough, an Eagle River Republican, sat down with Petroleum News to discuss the Legislature’s results on resources development.

Petroleum News: Let’s start with SB 138. What are your thoughts on the bill knowing most of the thoughts on both floors reflected a range from cautious optimism to skepticism?

Fairclough: I think that’s a fair assessment. Some people believe here we go again, expending money and Alaskans will be left holding the bag per se with no gas line and more money spent on a dream that most Alaskans have held onto for years and that is providing at least sustainable and we hope affordable energy — or certainly the lowest cost energy — for all Alaskans. So we are really talking about energy security. I believe the legislative body is looking into the future saying that gas — or LNG specifically — could be part of bringing additional revenues into the state of Alaska.

So I think that you’re fair to say that many people view this differently. I think that the administration has provided us with a way forward that has provided us more certainty in the sense that everyone can take off ramps at particular points along the process.

You’re seeing something done differently instead of being presented with a plan, like in the past, with one way to do things, like the Stranded Gas Act, and declaring it stranded and we have to go after it a particular way. It’s different from setting tax rates, then having the general population in Alaska think that it was too low and Alaskans will be forced into a process. I think that Gov. Parnell has tried to be reflective and look at how Alaskans have responded in the past and bring forward a phased approach that provides Alaskans an opportunity to understand things during each step of the way, and for the administration to share why they think it’s the best proposal we can get for Alaskans.

We still hear criticism about why TransCanada should be involved. I share some of that cynicism on that. I did not vote for the AGIA license awarded to TransCanada. I always held the belief that TransCanada would have TransCanada and Canadians’ interest first and that Alaskans’ interests would be second. What I mean by that is there was another pipeline in TransCanada’s portfolio that would have accessed viscous oil for a Canadian market and I thought their interest may be there first, financially as well as in their heart. If all things were equal, I would push the scale to the benefit of the sovereign they represent.

I don’t mean this as a criticism or to be disparaging, or anything like that. They are a Canadian company, but that said they operate worldwide. We had our analysts point to them as one of the top five in the world who build megaprojects like this. They are building Keystone XL and they do projects cost effectively around the globe, specifically in North America.

Petroleum News: So there are two separate questions with them? Whether they should do it and whether they can get the job done?

Fairclough: Technically they absolutely can do the job. Any of those who voted no and continue to be a skeptic about their involvement in the process, believe they are technically capable and at some point a bird in hand is better than nothing. Some of the criticisms have been is that TransCanada is being paid too much for participation, the idea of a sole source contract for one company. My understanding is TransCanada has been along for the ride per se with the state of Alaska trying to monetize North Slope gas for decades and that they know more about the project than anyone else who has been in Alaska looking at the project.

Petroleum News: As you carried the bill on the Senate floor, you spoke of this project as essential for Alaska’s future. Can you discuss that, please?

Fairclough: You know, it took courage for those people to vote yes, especially for those who voted yes on the AGIA license to TransCanada. That had to be incredibly hard because certainly there is criticism by some people in Alaska of expending $330 million on the pipe south and having that never reach fruition. So for individuals who voted yes again, I would compare it to wildcat drilling. They say only one in 10 wells hit oil when you’re a wildcatter out there. You upfront this money time and time again in search of the brass ring. Sometimes you get it. Sometimes you don’t. So Alaska has spent hundreds of millions of dollars to go after Alaska’s North Slope gas. To me this time it seems like a reasonable approach. It shares the risk with three huge companies that have much more experience in a megaproject that Alaska does. So for every dollar that Alaskans risk on this particular project we have three more dollars trying to monetize Alaska’s gas. The HOA proposes that Exxon, BP, ConocoPhillips enter into a partnership for 25 percent, 25 percent, 25 percent. Now inside the proposal, we share that risk with TransCanada. So as far as the pipe goes, our interest is reduced, but not in the overall project.

Petroleum News; So with TransCanada, is it genuine concern or is it simply a bad taste some people have with the AGIA process?

Fairclough: The pipeline south was a failure and TransCanada is being blamed for that failure when indeed it was the market that changed and the parameters inside that market. It wasn’t because TransCanada was involved. But TransCanada benefitted per se in putting their people to work and spending $330 million of Alaska’s money. The people of Alaska believe they were taken advantage of in some way. That’s not the case. I’ll go back to my wildcatter example. If you drill 10 wells, one of them is going to strike oil. What value that oil is to the company depends on how big that pool of oil is. The legislative body is trying to be deliberative and very tight with the people’s money but if we don’t risk trying to step forward we will never see a project. This project we’ll spend up to $50 million, then it goes up to $100 million and to reach FID (the final investment decision), I believe it’s $450 million. So there are these staged approaches and again, for every dollar we put in, our project has three more dollars. So if we put in $450 million, we’ll have almost $1.5 billion to see if it’s a commercial operation that all of the partners can benefit from.

Petroleum News: Let’s talk about your role as LB&A chair and rounding up consultants to advise the Legislature. How did you come to hire such a diverse group?

Fairclough: First we renewed Roger Marks’ contract. Sen. (Kevin) Meyer appreciates Roger from his work with the Department of Revenue. The bi-partisan working group (Senate’s majority caucus) from several years ago previously hired PFC Energy, which went through an evolution and they were bought out by IHS, and it presented a conflict of interest for the state of Alaska because IHS had contract work for Exxon. Last year I contacted IHS to see whether they wanted to continue the contract with Exxon because I didn’t want anyone in the minority or the majority to have any concerns about who our contractors worked for. IHS decided they wanted to stay with Exxon. I thought one of the presenters from PFC Energy (Janak Mayer) might want to come work for the state of Alaska period. I said, ‘Janak, the Legislature appreciates all you bring to the table. Can I hire you?’ He didn’t want to come to work for the state of Alaska, but we were contacted later by enalytica which Janak Mayer became a partner in and they proposed a contract to us.

Petroleum News: So how did you get Rick Harper under contract? You don’t see LB&A allowing a minority opinion under its series of contracts?

Fairclough: There is a role for the minority. When I was first elected, Speaker (John) Harris and then Rules Chairman John Coghill (now Senate Majority Leader) gave a presentation to the freshmen and they talked about the value of how the minority can make the majority better.

What’s most important is that Alaska gets the best product that it can for any piece of legislation that’s out there. It’s my belief that when you have someone who has credentials to be able the challenge what the majority is thinking, that’s a good thing. The majority should be able to rise to the occasion, and if they don’t have the right policies out there, to fix their policies. So I wanted to be able to provide the minority a voice in the conversation. The minority has come to me multiple times thanking me for that opportunity. The opinions came in a little bit late for the Senate to consider their ideas. We also hired consultants to work with anti-trust issues and a CPA firm to look at the anti-trust issues in regards to taxation and how the federal government might look at some of our proposals.

LB&A is set up so that if a legislator wants something, they request it from the LB&A Committee. That’s what Sen. French did. He requested Rick Harper. That made it a little difficult for LB&A because under our procurement code because I have to go out on behalf of the body to request the type of work that we want. Again, in the compressed 90 days, which all of us are trying to support the people’s will, it took us almost 30 days in to get our attorney online to review the documents as well as the CPA.

What I hadn’t anticipated was the minority request, which was absolutely valid so it took us close to 20 days to get him on board and a work product heading our way. It took a similar amount of time to get the attorney and CPA.

Petroleum News: So what does LB&A have left to do during the interim to advance what you’ve done already, especially in an election year when many want to focus on their elections?

Fairclough: It’s fair to say that legislators are busy all of the time and that an election cycle is an even more strain on their time. LB&A I believe should be looking for opportunities for the Legislature to understand marketing agreements and balancing agreements, to understand how the hydrocarbons will be balanced as far as access to the pipeline and the transmission system. Those are the two that come to mind immediately. There are a variety — more than a dozen, I believe — of agreements that have to be made before the administration brings back additional information to the legislative body. One thing the House did that was a good addition to the gas bill was they required the agreements are before the public for 90 days before the Legislature acts so the administration is really pressed to get their work done quickly so the 90 days can transpire and the Legislature has enough time to think about the issues before them.

I don’t know all that’s involved in marketing.

Petroleum News: Last year you put together an LNG symposium for the Legislature. Do you see yourself putting together another one?

Fairclough: I don’t know that it will be a symposium. That was a bit of a stretch for the Legislature to get to. Maybe a one or two day meeting on each of them. What I see happening is working with the Resources Committee chairmen and seeing what they think in a combination with LB&A that we could provide their committees so the committees in the next cycle are ready to go.

Petroleum News: The other heavy-hitting energy bill — not to the tune of $65 billion — was the governor’s refinery bill. You did not support that. How come?

Fairclough: I thought it was coming at us too fast. I absolutely value our refineries. The closure of Flint Hills is troubling. The market is changing globally. There are winners and losers in those markets. Some of the challenges I hear is, when they are refining the crude, the energy that generates the processing is by crude. So it’s more expensive for them to process. I think the administration is trying to fix a problem, but to me the credits that were being proposed to be used didn’t fix the real problem. The real problem is the quality bank and that is controlled at the federal level. The state could go forward and try to offer a solution to fix some of the costs associated with the quality bank. So offering a credit dependent on improving the facilities is a way to help one side of the coin, but the larger issue, as far as I could see, was the quality bank. Investing our resources and the state’s resources to address that issue would benefit all refineries in the state. If I would have had more time I might have been able to see it their way in what they were doing. They really did offer what they believed was the quickest way to stabilize refineries that were on the edge that had a net operating loss I believe in 2014.

Petroleum News: Between that, SB 138 and SB 21 last year, would you consider these last two years successful on the oil and gas development front?

Fairclough: The Alaska Legislature has done everything it can to compete for the long term, to provide revenue, to meet Alaska’s obligations to our retirees and to benefit the future of our people. What does that mean?

It means right now we are looking at deficits and drawing into savings, and we are looking for a long-term way to increase revenue to the state. So for everyone who voted yes on SB 21, we believe we were non-competitive under the former ACES structure. That progressivity took too much at the top end under high oil prices and we weren’t protected at the low end. ACES generated a lot of credits. Money was being spent to reduce tax rates versus getting barrels of oil into production. That’s why people voted for SB 21. We do believe that we can get more barrels in the pipeline. The USGS says Alaska is rich in hydrocarbons and we want to incentivize people to go out there and get oil in the pipeline.

The gas bill is the second stage toward revenue stream and energy security in trying to advance Alaska’s energy policy. We’ve stepped up to the plate in the gas line bill, and said once that gas starts flowing, 20 percent of it is going to go into a fund to provide energy to all Alaskans. Everyone might not think they will benefit from a natural gas pipeline but Alaskans will benefit in multiple ways: One, more revenue to the treasury through taxation and through ownership interest; two, that the feedstock can be refined for higher value in LNG form; three, putting people to work for long-term with higher paying jobs once construction is complete. On top of that, this legislative body looked at our savings, evaluated our AAA rating, looked at our pension obligations and agreed with our governor that we should take a first step and move $3 billion into the ARM board’s hand to try to stabilize our retirement system. Everyone has tried to put Alaskans first at every step of the way to make sure Alaskans are taken care of over the long term. Instead of looking at us today and spending money, there really is forethought in our discussions that we’ve had in trying to set energy as well as financial security.