Murkowski keeps hand in on energy issues

Former governor talks gas pipeline, LNG export issues; favors negotiations with producers as best way to move gas project forward

Steve Quinn

For Petroleum News

Former Gov. Frank Murkowski left office under criticism for the way he handled oil tax and gas pipeline negotiations with North Slope producers BP, ExxonMobil and ConocoPhillips. Criticism continued years after he left office, but Murkowski, also a former U.S. Senator, steadfastly defends his approach and the Petroleum Production Tax that was replaced by Alaska’s Clear and Equitable Share, known as ACES.

Murkowski remains actively interested in Alaska’s resource development prospects, speaking to groups statewide and offering thoughts in published op-eds. The retired Republican believes the state needs to show restraint on authorizing new appropriations for mega projects, return to the bargaining table to negotiate a long-term tax policy and remove the pipeline company TransCanada from the equation to advance a natural gas pipeline project.

He remains active enough that one Japanese consortium known as REI asked to meet with him.

Murkowski sat down with Petroleum News to discuss his views and interests in Alaska’s resource development prospects.

Petroleum News: You’ve met with folks from Japan. What made you sit down and meet with them?

Murkowski: It wasn’t a matter of what made me. It was a matter of them being interested and getting some information relative to what they were particularly involved with. They represented the prefectures, which are the areas of service — like counties — where they had the authority to contract for energy supply. Several of the participants in REI are looking for a supply of gas. Evidently with the tsunami that occurred earlier, the LNG plant was re-opened and I think they contracted for six shipments but they were only able to deliver five because of the demand for gas in Cook Inlet. There was a renewal in interest in Alaska’s gas by Japan. We’ve exported LNG there for almost 40 years.

I’ve been very active in Asian activities so that’s why the connection is so strong. Over the years, I’ve probably made 25 trips. We used to do a lot more like with Alaska lumber and pulp. I’ve been active in Japanese, Taiwan and Korean activities, my entire business career in Alaska.

Petroleum News: So what did you learn about REI’s interest in Alaska’s gas?

Murkowski: They are interested in acquiring a supply of gas. The producers’ long-term venture is most likely to be economically viable. There is a market for Alaska’s gas, OK? Are we 10 years away from gas floating down to tidewater? At least 10, maybe eight. These Japanese people represent purchasers; in other words, they have LNG facilities in the sense of utilizing the gas to generate power. All nuclear plants are not going to shut down. They will reduce their dependence, but they can’t simply shut all of them down. So if there is enough gas in Cook Inlet, we can start shipping gas to the Japanese market. They might not be the competitive market we go into, but at least they represent a market that has come into Alaska spending $20 million of their own money saying we are interested to the point where the state signed a memorandum of understanding with them.

Petroleum News: OK, so let’s talk about the LNG markets. What do you make of the LNG market for Alaska? Do you believe this is the way to go?

Murkowski: the market we were looking at and the one we had pursued — we had a contractual agreement subject to legislative approval, which we didn’t get because it all feel apart in the end. We were looking into a market into Alberta and distribution into U.S. markets. That market was taken over by shale gas. Our market at the time was $6 an mcf. The market now is just over $3 an mcf. Our market has moved away. So we look at other sources. Since we had a natural affiliation with Japan and since Japan is reassessing its power requirements as a result of the tsunami and public opinion over there, it’s natural that we would look to Japan initially.

Petroleum News: You mentioned that you would like TransCanada removed from the alignment that includes ConocoPhillips, Exxon and BP. Why is that?

Murkowski: They are a great organization but the question I have is what do they bring to the table? What I’m referring to specifically is the producers hold the leases. The initial advertisement that went from the state for proposal under the administration that followed mine, evidently it was not in the state’s best interest to have the big producers own the pipeline. It should be a third party. The producers did not file a bid. TransCanada did. TransCanada’s job was to garner a supply of gas and build a pipeline. As I’ve said before that was assumed to be the Alberta market, which dried up with shale gas.

During our conversations with the producers — and these went on almost daily — one of the things at the time was TransCanada wanted to build the pipeline. The producers said what do they bring to the table? At that time the producers were willing to build their own pipeline and look to Enbridge or other Canadian partners if they needed them.

The project has changed. They want to build the pipeline. There is reason to believe, they expect to get 20 to 25 percent ownership and I think it’s in the state’s interest to have that ownership rather than TransCanada who can’t bring anything to the table. Their interest has to come from somebody, either the producers or the state. I don’t see any justification for the state to continue to pay TransCanada for a project where basically TransCanada portions out some of that money for the benefit of Exxon, BP and ConocoPhillips to continue their evaluation and engineering. They are quite capable of doing it themselves. They don’t need a subsidy paid through Exxon, BP and ConocoPhillips. So again, what do they bring to the table? I haven’t had a satisfactory response.

Murkowski: That’s another contract initiated in Canada. What’s different is TransCanada did have certain rights in Alberta and Canada, right-of-way rights for that project, but they don’t have any right-of-way rights in Alaska. The right of way would come down along TAPS and pick up the Alaska railroad and go down to Anchorage and Kenai and so forth.

Petroleum News: The other argument put forth against a producer-owned pipeline is monopoly and precludes more players in the natural gas market. What are your thoughts on that?

Murkowski: I don’t buy that at all. You have to take these things one at a time. Right now one of those things is that curtailment of 500 mmcf of gas can’t be sold outside of the agreement with TransCanada. What are you going to do with that? Then there is trebled damages if you do that. That’s ridiculous.

We had a good faith effort of all the parties to come together on one project, a project that looked feasible at one time; then shale gas came a long and chased it away. It’s over. We all need to take our licks and start over. Not continue this drain on state revenue. We have already spent $260 million and are on the hook for another $240 million. Again, what is TransCanada bringing to the table? The producers don’t need them. Don’t forget the state has leverage. It has its royalty gas. If they take an interest equal to their royalty — 20 percent — then we have what we had when we negotiated: alignment. That would represent our equity contribution. TransCanada can walk in free without any gas? By having equity interest, we have a seat at the table. We have representation on the board, whether it’s an Alyeska-type board of directors. The capacity of the pipeline can be consistent with the market demand.

I recall Bill Egan argued that the state should have taken interest in the Alyeska pipeline. It would have accommodated a lot of the dispute fought in the courts over the fairness in the tariffs. A lot of lawyers were able to send their kids to graduate school over the fees because there was constant litigation. You can eliminate most of that by having a seat at the table.

Petroleum News: So what should the executive branch be doing right now to advance a gas pipeline?

Murkowski: First of all the Legislature is responding to the frustration of Alaskans along the Railbelt who want a supply of gas that is economic. If you take that objective and apply it to the realities, obviously they are funding an in-state line, not funding it to construct it, but funding from the standpoint of feasibility and from the standpoint of trucking LNG. The difficulties with the in-state line are the unknowns. If you bring North Slope gas down and they find major reserves in Cook Inlet, what does that do to the economics of your in-state line? Of course, they are looking for oil primarily, rather than gas, because it’s more profitable. On the other hand, if they find significant reserves of gas and it’s feasible for ConocoPhillips to start up their LNG facility, I think that would be a good idea. I think it might be a good idea. I would encourage that. I see the state has asked ConocoPhillips to look at putting that plant back in operation. You can’t have a short supply of gas of gas on one hand in Anchorage and go out for long-term supply of contracts in Japan. So my point is there is a lot of risk.

There is a lot of risk for the producers because they are competing with gas in certain areas of the world that are closer to tidewater, so what’s the Legislature doing? They are responding to the pressures, but they need to take the economics into account. The economics will drive this project. The interesting thing is you don’t see the producers standing lining up behind any project to participate or fund associated with the in-state pipeline. They are focused on the market, which is primarily Asia. The price of gas is too low to justify that investment. The Legislature is starting to spend a lot of money and they have to keep in mind the economics drive those projects.

As far as the administration, here is what the producers want. They want certainty. We had a deal where we provided certainty on PPT, but they have never been able to resolve that. You have ACES now and they are about to unwind that. You’ve got to have alignment. You’ve got to have participants who have, not necessarily an equally, but an equity interest of substance. That has to be identified with something meaningful, either a supply of gas or cost of construction. My point is the administration has to keep in mind, they are spending state money on feasibility studies, but the economics will drive the projects.

There are two problems. One is the unknown of Cook Inlet with in-state gas and the other is the market. It’s so unstable. It’s all over the place.

Petroleum News: If you were to do anything different, would there be anything?

Murkowski: The easiest thing would be go back to look at the contract we had, which the producers and, to some extent, the state are currently re-evaluating those conditions. I think it’s going to be along those lines. There is obviously some changes in negotiations that are going to have to be addressed. The fundamentals we had were alignment and fiscal certainty. Those are the two big things that have to be addressed. You are going to stagnate and tread water until they are done. In the meantime, the market is not where you can say we have reason to believe that by the time we get this project built that we can amortize it for the next 20 to 25 years.

Petroleum News: So should the executive branch go back to negotiating fiscal certainty or wait for a firm project to come to the table?

Murkowski: No, it has to be done. Fiscal certainty means the producers want to know what they are going to be paying for the life of the project so they can figure out what they can amortize. We’ve heard the arguments one Legislature can’t bind over the next. They aren’t worried about that. They believe in the sanctity of a contractual relationship with the state. Then you’ve got to an alignment with everybody having an equity interest, not a regulation that’s tied off in left field that you can’t contract for more than 500 million.

Petroleum News: Speaking of money, you’ve talked about limiting funding for projects moving forward?

Murkowski: I’ve talked about 18 months or so. You’ve got plenty of projects potentially out there to evaluate and the Legislature is going to spend the money, but there are only so many practical ideas out there. The producers are the only ones with the capacity to build a project that’s in their interest to market their gas. They’ve got leases to perform on. They can’t hold onto them forever. It’s in their interest to market their gas. It’s in the state’s interest.

Petroleum News: A few analysts have told lawmakers there are so many projects being studied that we really aren’t sure what direction we’re heading. You’ve spent time in Washington and had an outside-in view. Do you agree?

Murkowski: Under the current climate of indebtedness of the U.S. government, I don’t think we can look to the federal government for a significant portion of our energy needs. We can do it with the state participating in revenue bonds or general obligation bonds.

The significant part of our energy needs has got to come from the market. You have to look at what’s the end user going to pay? What’s it going to cost to open up that plant down in the Kenai? Is it going to be cheap gas? Can you deliver that? Same is true for Agrium. How cheap can you produce gas that we need?

Petroleum News: Did you get a sense that the window of opportunity was closing for marketing Alaska’s gas?

Murkowski: I get a sense the producers are looking all over. They are multinational companies looking to secure long-term contracts. The market is competitive, but Alaska is a player in there as well. What they really need are long-term contracts whether it’s with Osaka Gas, Korean Gas or any of the majors out there. There is a lot of competition; where capital goes is to the highest return and the least risk. They are not doing business up there because they love us; they are looking at it strictly from a bottom line. We’ve got to amortize that cost to moving gas to tidewater.

Petroleum News: OK, closing out with oil taxes. Do you think the state is in a good position with SB 21 coming into play soon?

Murkowski: I think they agonized too long to come up with a perfect solution on ACES. To me, a better solution would have been trying to sell where Alaska belongs in the world tax structure of oil bearing provinces. We were at the top. We don’t belong at the top; we don’t belong at the bottom. We belong in the middle. The middle to me is Alberta, a northern developing oil province. That’s where we should be. If you go back and look at our contract, the one producers had agreed to under PPT, it was a little higher than the administration is currently purporting, so we had a little better deal but the times were different back then.