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Providing coverage of Alaska and northern Canada's oil and gas industry
May 2014

Vol. 19, No. 20 Week of May 18, 2014

Chenault optimistic on North Slope LNG

House majority leader sees partnership of producers, state, TransCanada as positive, if numbers for gas export project work out

Steve Quinn

For Petroleum News

Mike Chenault is completing his third two-year Alaska Legislature as House speaker, the longest tenure in the state’s history. Chenault, a Nikiski Republican, has been around for every major recent gas pipeline debate. He initiated discussion that produced successful legislation, House Bill 4, which, among other things, looks after the state’s interest in a proposed project that would advance an LNG project.

This year he backed Gov. Sean Parnell’s recently signed legislation, Senate Bill 138, which enables the administration to negotiate a project development contract with North Slope leaseholders ConocoPhillips, ExxonMobil and BP, plus pipeline construction company TransCanada. Chenault sat down with Petroleum News to discuss SB 138 and why he believes the state is making progress toward a decades’ long elusive project.

Petroleum News: You’ve been in office for just about every major gas line debate. What’s different about this project?

Chenault: All players are singing off the same sheet of music. For the first time in a long time we have the three majors who are talking about one specific project and with the state talking about one specific project. I think the takeaway is that as you well know in the past, each of these projects seems like it’s been one member or two members of the oil industry who are looking at a project and not all three. To me, that’s one of the biggest takeaways: that we have all three plus the state looking at a single project they all believe they can get behind if the numbers work out.

Petroleum News: We heard that before during Murkowski administration. So what’s changed?

Chenault: I think it was more of an open process. That probably brought some comfort level to the legislators as far as trying to move the project forward. While the heads of agreement (HOA) and the memorandum of understanding (MOU) were done by the administration, which I believe they should have been, the Legislature had an opportunity to weigh in and make some changes. Maybe not as many changes as some would have liked. There was a lot of concern about TransCanada and what their role is and was, and how the Legislature perceived that role. Then there was AGDC (Alaska Gasline Development Corp.) involvement in there, which a number of us felt they should be our lead on the gas pipeline contract.

Petroleum News: There was a sense that even those who voted for it, there was still a range between cautious optimism and skepticism, but it also carried a benefit of the doubt for the administration. What do you think that is?

Chenault: I think there is. Some of that concern falls back to here we go again, another project. As I’ve said, this is the first project in a long time where you had the three majors and the state involved looking at a project that conceivably can work if the dollars work out right. So if the economics pencil out, then I think we’ve got the great possibility of being able to move forward with this project.

Petroleum News: Where do you fall in that range of cautious optimism and skepticism or are you outside that range?

Chenault: I’m probably more optimistic now than I have been. There have been decisions made and those decisions can change. You’ve got the three majors deciding that the Nikiski area will be the terminus of the pipeline. That’s something that’s never been done before. Could that change? It sure could. They are starting to make decisions that make business sense. From my conversations with oil industry folks, with TransCanada and with the state administration, and with talking to AGDC about what do they think, it comes down to: They are the business folks and this is a business proposition. This is not because we want it to happen and think it should happen that it will happen based on good, sound business decisions. That’s what will determine whether this project will go forward or not.

Petroleum news: What do you believe the Legislature’s role should be between now and when a contract comes before the Legislature at the end of 2015?

Chenault: Any opportunity the Legislature has to weigh in on the administration’s working of the contract. As long as we can ask the administration on where they are at in the project and take a look at things going on. We certainly won’t be able to see all of it. It’s my hope we will be able to ask questions and kind of keep track of what’s going on with the contracts, and give us a little better feel of where they are at and what things are looking like, what kind of decisions the administration is making on behalf of the state.

Petroleum News: So what do you think AGDC can do to advance the state’s interest, regardless of the line?

Chenault: AGDC brings a very important role to the state as far as information gathering that they’ve already done, studies they’ve concluded and studies they continue to work on with other portions of the line. I think they’ve got the expertise there to be a big player in how the administration sets up the contracts.

Petroleum News: Speaking of expertise, the subject of board member Richard Rabinow became pretty divisive during the session. Why do you think that was?

Chenault: I think it’s more political than anything else. I believe it was a way for the Democrats to attack the administration. The gentleman had been on the board for six months. I don’t feel that governor intentionally went outside the statutes to put this guy on the board. I think that after looking at resumes, Rabinow had the most experience. He wanted to serve. He wanted to be involved in a big project like this.

That’s what he’s been involved with a majority of his life, big projects. I think it was more political pointed to the governor to make the governor look bad. My concern was we had a board member with 40 years of experience. We’ve got an international sized project, one of the biggest in the world if it does go forward, and I wanted worldwide expertise.

I would have loved for him to be an Alaskan; then we wouldn’t have had this problem. With him not being an Alaskan and with him being from Outside, after listening to the board members currently serving with him, they had nothing but high praise for him. I felt it was important to keep the continuity of the project moving forward. That’s why the legislation ended up passing to allow him to sit on that board. Should we do that for every board? No. I don’t believe that we should. For a board and a corporation as important as AGDC is, I think it made sense to do that.

Petroleum News: So you don’t have concerns about him having worked for Exxon which has the lion’s share of the gas reserves and probably the most invested thus far in the project?

Chenault: I don’t. He doesn’t work for Exxon anymore. If he worked for Wells Fargo Bank for 30 years, then worked for Alaska Credit Union, would we be having the same conversation? These are professional board members and professional executives and their number one priority is to the people who they work for. In this case, I think that Rabinow will not look at what’s best for Exxon. He’s going to look at what’s best for the state of Alaska. He’s going to give his information in the attitude of what’s best for Alaska.

Petroleum News: What would you like to see AGDC do next that perhaps hasn’t been discussed? Marketing? Looking for customers?

Chenault: Those are things the board and the administration will decide. I don’t know it all. That’s why we have AGDC and the competent people who are there to make decisions on what best to look for. They are going to be looking at possible markets. They are going to be looking at how can they trim down the costs of this project with the folks and expertise they have in order to pencil the number down where it does work economically and it does bring gas to Alaskans. They have the power and ability to look at how do they get gas to Alaskans, by what means and what kind of time schedule to get that happening. If this project does move forward, they have all the contingencies figured into this project.

Petroleum News: During the hearings, the Senate Finance Committee gave AGDC more power than under the original bill. Are you comfortable with AGDC having more power?

Chenault: To be perfectly honest, I would be happy to have AGDC be our Alaska state gas company and have a majority of the power to go out and negotiate for Alaskans on this project. I’d be perfectly happy for them to have more power than they currently have. They have assembled a great team from engineers on up. They have put together a plan that they have marched forward with on the smaller line. They have assembled a board of directors and none of them are shy about making their issues known. I think they have all of Alaskans’ interest in mind when they make their decisions. I’m very comfortable with Dan Fauske overseeing this project. He’s done a great job for Alaska for the last 20 or 30 years - however long he’s been associated with HFC (Alaska Housing Finance Corp.). They have a world-class team put together and this is a world-class project.

Petroleum News: Some believe there weren’t enough sideboards placed on SB 138, not enough provisions and guidance entering the contracts? What are your thoughts on that?

Chenault: Sometimes legislators feel like we are much smarter than the folks that we hire. For the most part, that’s just not true. While I’ve laid a lot of pipelines and I’ve worked in the oil industry for years, I’m not the smartest bulb in the box. My biggest fear that I have - and it’s a fear that we had when we passed HB 4 - was that we would allow the politics to get involved in a project. I believe what we need to do for the most part is hire the people to get the job done, watch over them and make sure they do what we want, but try to keep our fingers out of the pot. Once you allow the politics to get into a project, that’s when these projects go south in a hurry. For me, for instance, gee if it doesn’t come to Kenai I can’t support it. Or if it’s a rural legislator saying if we don’t get gas from it, I can’t support it. In the political process, you start looking at the individual districts versus what’s better for the whole. The further we can keep the Legislature out of the individual day-to-day project decisions, the better off we are. We still have to keep control over what effect it has on Alaska and what effect it has on our revenue. But we need to stay out of the day-to-day operation and let these guys go forward. We gave them the authority to do it. We told them what we wanted. Now we need to stay out of their way and let them see if they can accomplish that without our involvement.

Petroleum News: So do you believe the Legislature has a role in this project for the next 18 months?

Chenault: I think we still have to talk to the administration. We need to talk to the companies involved and see how things are progressing. Hopefully we don’t have to step back in. Hopefully they come up with a project that pencils out to them, pencils out for us, and we can sign a contract we are confident will bring a gas pipeline forward. We need to be ready to make a decision based upon whatever facts they bring forward.

Petroleum News: Do you have any concerns they will bring forth a contract that’s take it or leave it? I know some folks who voted for SB 138 felt like it was presented as a take-it-or leave-it.

Chenault: We did make some minor changes to it. I think we made the bill better. I think you’ll always have that concern whenever a project of this size comes forward at the end and say can you accept it or not. At that point the Legislature is going to have to look at it and say is the best for Alaskans? Does it bring in revenue stream? Do the numbers pencil out? Will it bring gas to Alaskans? We’ll all have to individually weigh in and determine yes or no. I’ve always heard that a business decision like this if everyone involved walks out the door and slams the door because they didn’t get everything they want, then it’s probably not a bad deal.

The Legislature is going to have to look at it very closely, see what effect it’s going to have and we will have to make a decision based on the facts, just not speculation now. If all of us were king for the day, we would have made other changes to SB 138. Individually, we couldn’t get a consensus on what all those changes needed to be. You’ve got to look at a piece of legislation of this size and complexity, and go OK yeah I think it will work or I like this and am not crazy about that, but I can still allow the project to move forward and see if we can get there. If we all voted against it because there was something in there that we weren’t crazy about or didn’t understand, no project would ever move forward. You’ve got 60 individuals trying to make it perfect.

Petroleum News: One of the common concerns was the deal cut with TransCanada and its role in the project. What are your thoughts?

Chenault: All of us did have some kind of concerns about what kind of deal was cut and what effect that’s going to have, but most of us know that TransCanada is a good corporation. They have built and operated many miles of pipeline. They are not some fly-by-night outfit that just happened to come on to the scene. Some may have rather seen us go out with an RFP (request for proposals) to different companies to see what kind of different deal we could get. That wasn’t the deal that was proposed to us so I think people are cautiously optimistic that this will work out and TransCanada will be a good pipeline company to work with. The administration did what they felt they had to do to exit AGIA (Alaska Gasline Inducement Act) and also move this project forward. I think they probably put together the best deal with all the pieces they had to work with. Apparently the Legislature felt somewhat similar because we approved the overall bill.

Petroleum News: Let’s shift to another segment of oil and gas, in this case property taxes. What are your thoughts on the administration allowing pipeline property tax owners to pay the minimum amount?

Chenault: None of us want to pay any more taxes than we want to. You have to look at the overall effect that it has on tariffs and the overall project moving forward. I won’t second-guess the administration on every move they made because I wasn’t there in the meeting to express my opinions. As we move forward with the project we’ll see what affect they have.

Petroleum News: The refinery issue, driven largely by Flint Hills closing, might have been more high profile were it not for other bills such as SB 138. The issue was addressed with a bill that includes Agrium. So what made you include Agrium in this bill?

Chenault: We’ve been looking at ways to bring them back to the state and open it back up. When it was open, you’re talking about $80,000 to $100,000 jobs. It was not only a boost for my community, but it was a boost for the state with jobs for 400 to 450 people, so it was a big loss to lose that facility. Now, they are looking to invest at least $200 million in opening back up and getting things running. So when I saw this tax credit, I thought if we could spend a few million dollars to bring back several hundred jobs, that’s a pretty good investment into the state.






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