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Providing coverage of Alaska and northern Canada's oil and gas industry
April 2013

Vol. 18, No. 16 Week of April 21, 2013

House Bill 4 passes Alaska Legislature

Hawker says once bill signed, AGDC will be able to engage in confidential business negotiations, making project convergence possible

Steve Quinn

For Petroleum News

Mike Hawker enjoys a good debate. Well, the Anchorage Republican reprised one this year with his in-state gas line bill, House Bill 4.

The debate became so substantive that it attracted push back in a $900,000 campaign from the city of Valdez.

Frustrated at times with the campaign, Hawker and his backers prevailed with a one-sided victory in the House and Senate.

One day after lawmakers adjourned Hawker spoke with Petroleum News about what the bill passing means.

Petroleum News: What do you think you’ve accomplished right now by passing HB4?

Hawker: What we have accomplished is, we passed a bill that provides the state an entity first and foremost that has the necessary empowerments and tools at its disposal to move the state forward in getting the North Slope natural gas into the hands of Alaskans. At the end of session, I started looking at it very much like Alaska Housing Finance Corp. itself. Years ago Alaska Housing Finance Corp. was created and has been phenomenally successful in addressing that unmet need and the ability of the state to facilitate that housing market in the state of Alaska. What we’ve done with AGDC (the Alaska Gasline Development Corp.) is created a state entity now that it’s going to be the AHFC of energy development across the state.

We all tend to lose sight every now and then of what’s really in HB4. There is the base case pipeline project that really everybody focused on, but the bill is much bigger than that. The bill is really that whole package — empowerments and tools — that lets the state participate in any pipeline project that moves forward. It gives us the tools to now really work at identifying and all getting behind a project that is the right sized project for the state of Alaska. It also provides the assurance as a state a project that stands on its own within the restrictions provided by AGIA (the Alaska Gasline Inducement Act) that can go forward and get gas to Alaskans, if a larger project does not materialize.

Petroleum News: Think back to August of 2008 when the license for AGIA was passed by the Legislature. How does the optimism here differ?

Hawker: AGIA was about the Legislature trying to dictate and micromanage the project into the future. It was really based on telling industry how it would go forward and under what conditions a pipeline would be built and defining many of those conditions.

With the whole HB 4 process, which began with HB 369 in 2010, we really wanted to learn from that lesson. It could still be argued that the lesson didn’t get very far. We learned from that lesson and began with some similar, very simple premises.

We needed to get government micromanagement out of the process and let a pipeline project move forward on commercial terms as it is structured between commercial parties.

With AGDC, we not only respected that commercial process — that there had to be an underlying commercial transaction — but we also knew that the state needed to have the ability to participate in that transaction. We didn’t in any way try to define or control that process outside of setting up the necessary economic framework for the commercial process to move forward.

HB 4 is about facilitating a project and giving the state the ability to participate in whatever project might go forward in whatever level and in whatever manner might be most appropriate and do the most good to help that project going forward.

Under the management of Alaska Housing Finance Corp., AGDC proved its viability and competence. It is time for it to stand on its own. We’ve all recognized that and we’ve moved it into that stand-alone entity.

Petroleum News: Under AGIA, there was the debate about what’s the state getting for $500 million. People are still asking that question. What do you think you’re getting for $400 million?

Hawker: There is a big difference. The $500 million that was given under the AGIA process, there is no question what it was. It was there because in answer to the question what do you do if there is a failed open season and the project is not economic and the answer was — from TransCanada themselves in testimony back then — what they would normally do is stop, regroup and find out why it was uneconomic, and start over, regroup and address those issues.

Some legislators insisted they wanted the AGIA project to go forward regardless toward a CPCN (certificate of public convenience and necessity), no matter how the open season came out. The answer was you’ve got to pay for it. That is where we got into the 90 percent reimbursement of costs for half a billion, to keep that process moving forward regardless of whether there was a failed open season that did not prove the project to be economically viable.

AGDC has been about — from the very beginning — nothing happens unless here is an economically viable project. So for the $400 million we are investing in AGDC, it is about buying assets, the state building a portfolio of assets: of permits, of right of ways, of federal approvals, of engineering. It’s a valuable portfolio of commercial assets that are either the basis for the state to continue forward, proposing a smaller volume in-state pipeline or take those assets and make them part of a lager project.

The biggest difference is for our $400 million is we are building assets, valuable, proprietary information and tangible assets. Under AGIA, for that half a billion dollars, we are subsidizing a project moving forward that had a failed open season, exactly the opposite concepts.

Petroleum News: Wasn’t that part of the argument under AGIA? That the state was buying the permit at the end, and if TransCanada pulled out, the state would get the work product?

Hawker: If the project proved uneconomic there was fallback that the information would revert to the state. That’s why it kicked up to 90 percent after a failed open season. It was to keep the process moving toward the CPCN without an underlying economic transaction to support the project. That is a failed open season.

Again, AGDC and HB4 is about building assets, that are first and foremost assets of the state, not assets of an outside commercial party, and assets that support a project that only goes ahead if there is a viable transaction in the commercial markets that allows the project to move forward.

Petroleum News: Are you folks ahead of AGIA in any way under HB 4 and HB 369, its predecessor?

Hawker: There were some concerns from some folks that AGDC was way ahead of the AGIA process. To that end, HB 9 failed last year. We’ve had another year. The AGIA process has moved forward and has realigned its project. It’s also looking to tidewater. All you’ve seen out of them at this point is some pretty broad statements of their intent.

AGDC is very clearly on record with a significant amount of progress toward a pipeline from the North Slope to tidewater in Southcentral Alaska. The two still remain very compatible, very symbiotic as we are all looking forward with the tools the state has been given through HB 4 for those two projects to take a look at themselves and assess how they might come together or whether the state needs to look to moving forward on a smaller diameter pipeline on its own. The key point about HB 4 is we are not dictating outcomes. We provided the tools to proceed, but we have not tried to dictate the outcome. How many times have I said it? The Alaska landscape is littered with the failed dreams of Alaska politicians.

Where somebody has had a great idea and the politicians said here’s the money go do it. In this case, we said, “here’s the money. Figure out if it can be done.” I truly believe from all the evidence that’s been shown, that we continue every day to prove that not only it can be done, but it is being done.

Petroleum News: When it comes to a pipeline project, what is the optimum for Alaska?

Hawker: The optimum for Alaska is a project that actually starts turning dirt and brings a pipeline into reality. That’s the optimum. All of the details — size and route, all of the technical points involved in negotiating the underlying commercial agreements — those are the things we need to let the marketplace decide and not try to dictate or micromanage those elements as politicians.

That has been our big failure all along on those gas pipeline projects: the Legislature trying to micromanage the project, anticipate the future and dictate project terms, conditions and economics. We can’t do that. I believe that’s why the Stranded Gas Act failed when the Legislature tried to micromanage it. Frankly, I think that’s why AGIA hasn’t moved forward any farther or faster than it has. AGDC is a fresh approach that says, “treat this as a commercial project not as a legislative concept.”

As soon as we get the bill signed and have the ability to engage in confidential business negotiations, we will see rapid convergence of the concepts.

The other element so very important is the contract carriage statutes. This is new to the state of Alaska. We’ve never had contract carriage statutes before. Having those available are very important to being able to move any significant project forward and to efficiently secure financing. It gets to another underlying premise of HB 4. It was about everything we could do to remove the risk, lower risk, to mitigate risks involved in anyone moving a project forward so people know what the rules of the road are, know what the regulatory process is going to be, know what the judicial process is going to be.

All the things that the outside market looking to invest in Alaska that will make a pipeline project go forward, give them certainty and assurance that the need, so they can come here, go to work on a project and make it happen. That’s why we worked hard to make sure these are conditions that are very durable, very well crafted to allow the greatest future flexibility, great flexibility for the AGDC base case project to move forward and evolve through an open season process into a final product. Ultimately the size of that pipe, the route, all of the commercial terms are going to be determined by the people who are going to pay for it in the marketplace, the people who make those long-term shipping conditions. They know where there is gas; they know where they want it. When they come together in the open season, we will know what the project will look like. But we are not dictating that outcome.

Petroleum News: You faced some pretty well financed opposition. Now that’s not necessarily unusual, well financed lobbying, why did this seem to frustrate you during committee hearings?

Hawker: It moved us into the big leagues. I’ve never had anybody spend nearly $1 million to try to kill one bill. If you look at it, we had one small community spend $1 million on an advertising campaign to try to kill this bill. If you look at the votes on the board at the end of the day, it certainly didn’t work. I’m really proud of the Legislature. The members of the Legislature looked at the legislation on its merits, carefully evaluated it, got the facts straight then made the decision they believed was in the best interest in the state of Alaska by passing HB 4. It just goes to show that the Legislature was not swayed and was not going to be swayed by an advertising campaign. The frustration was the advertising campaign was founded on the premise that there was some sort of larger alternative that didn’t exist. There were no permits behind what they said the alternative was. No project plan. No engineering. No customers. No buyers. No commitments. It was just simply saying, “we don’t like what you’re doing because we would approach it in a different manner so we want to stop even though you are in fact moving forward with a very viable base case pipeline project.”

That base case project will immediately benefit three-quarters of the state’s population and provide a backbone to build out a gas-fueled infrastructure across the state, bringing those benefits either through connecting pipelines and through the development of additional industries. We are never in this state going to get anywhere if we don’t get a pipeline started. Here we had one small community put up $1 million to try to stop a project that was going to bring gas to three-quarters of the state immediately and the rest of the state eventually. It was tremendously frustrating, but we didn’t dwell on it. You can see how effective it was and you can see how effective the arguments on passing HB 4 were. HB 4 stands on its own merits and we are quite proud of that.

Petroleum News: Let’s switch to oil taxes. What do you think was accomplished by passing SB 21?

Hawker: I think we have definitely moved Alaska back into a more competitive position in the international marketplace than we were under ACES. The question in my mind is whether we really moved ourselves far enough back into being competitive to where we will see significant change in behavior in the industry. I definitely think it has moved the needle sufficiently that we will see some degree of change in the industry’s behavior.

Petroleum News: Even before the final vote on ACES in 2007, you called it punitive. Do you still see it as such?

Absolutely. It was well known around here that ACES came about as a result of an unfortunate situation that involved an appearance of impropriety. It wasn’t thoroughly vetted. It wasn’t seriously considered. It occurred in an environment of great doubt and mistrust by the public and a lot of legislators. It has clearly proven to be a less than wise policy decision.






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