Providing coverage of Alaska and northern Canada's oil and gas industry
November 2017

Vol. 22, No. 46 Week of November 12, 2017

Talerico: Working Group Has Promise

Healy Republican says time is right for the Legislature to get creative toward fostering a competitive oil and gas environment

Steve Quinn

For Petroleum News

House Rep. David Talerico may not be in the majority where he held a co-chair position but heís still plenty busy as a committee member and with his spot on the recently formed oil and gas working group. Arriving to the Legislature with a mining background the Healy Republican has become a quick study on oil and gas, starting most days by checking the market price for Alaska North Slope oil and volume moved that day. Talerico, who is spending these days in Juneau for the special session on crime and tax bills, shared current thoughts with Petroleum News.

This interview took place before AGDC signed the development agreement with Chinese companies.

Petroleum News: Letís start with the working group. Youíre not the chair but nevertheless, a member. What would you like to see accomplished with this working group?

Talerico: Well, I think one of the things that I think weíve been lacking for quite a few years is stability for our programs. It was mentioned by Rep. Tarr to have kind of an open mind to what else is outside of the realm of just the tax structure. Are there other things we can do on kind of a wide open field that will make it more attractive for industry to continue to expand and do things?

Most of our concern is based on budget and numbers, what the income is, what the output is. Of course, we dealt pretty heavily last session with tax incentives and got that to a point where I donít know that everybody is completely satisfied with it, I donít know that everybody is comfortable with it but at least itís a plan to move forward on. I think the working group probably has an opportunity to look beyond the scope of is it just all about dollars or are there other things we can do.

Iím always concerned about our permitting process because I think it has room for improvement. Iím sure it has room for some improvement. Iím not as familiar with it as I probably am with the mining industry, but I think the permitting process as a whole could probably use an overhaul. I think our discussion is just now getting started about what we can accomplish as a working group.

Petroleum News: Is there anything particular you like about this group?

Talerico: I think regardless of peopleís politics and who they are associated with, it certainly appears to me that all the people involved, they all have Alaskaís best interest in mind. We donít always agree on what Alaskaís best interest is, but they all have that focus. We are pretty broad-based and spread out which I think is pretty important with a state this big. I think itís critical to have the representative from District 40 (Dean Westlake) on the working group and he is. Itís his backyard.

I think what is kind of promising is weíve got the pipeline covered. People in the working group are where the line goes or where the new gas line might go. I think thatís pretty important; basically, we have that route covered. Weíve got seasoned veteran lawmakers on there and some pretty new people on there, which I think is pretty good for perspective. Itís bicameral; itís bipartisan. Our Legislature is really designed, at least in my opinion, to have these different levels and different backgrounds. You have people from the mining industry, the oil industry, medical professionals, legal professionals. If you look at the makeup of that group, youíve got a nice mix.

Petroleum News: A few weeks ago, you received an update from AGDC on the AKLNG project. First from a 30,000-foot view, what are your impressions of where the project stands?

Talerico: I think they have made good progress with FERC. I think that is critical. A FERC permit is absolutely essential to move forward with the project. I have concerns, though about the market, developments from other areas going on and not just onshore developments within our own country. Some things Iíve been going over, for example something Iíve been reading recently where Novatek Gas, a Russian company, and a deal they are striking with China right now for 17 million tons of liquid natural gas. Itís a $27 billion project which is less than our project would cost.

I know the Chinese have been interested to some degree in our project and I know there is some work being done on some letters of intent. Iím anxiously waiting for something thatís a little firm to happen. For me, as much as Iíd really like to see this happen, Iíve got big concerns about whether this is economically viable. And I donít think Iím the only one who shares those concerns.

Petroleum News: What did you see, other than FERC progress that gave you some optimism?

Talerico: Iíll give credit to the people who are involved in the project right now and their enthusiasm, and their professionalism has always been very good. If they lose their enthusiasm, then Iíll tell you what mine is out the window for sure.

Petroleum News: Well (AGDC board chair) David Cruz seemed to be especially bullish on the project during the last update. Did you see it that way, too?

Talerico: Mr. Cruz definitely wants to press forward. He feels something is going to break loose here. From what I can tell by his testimony, I think heís definitely feeling like we have room to advance this.

Petroleum News: On the flip side of the earlier question, what other concerns do you have separate from market conditions?

Talerico: I appreciate that theyíve gone out for letters of intent. My pause is this Novatek deal I just read about with a privately funded Russian group working with China: Is the potential of our letter of intent to be used as a negotiating tool with another producer to say ďif you donít do this with us, we can always do this.Ē I certainly wouldnít blame people. All these people out there who are negotiating are going to find the best deal that they can. A little bit of activity with us in a letter of intent doesnít anchor anything down with our project. It certainly expresses some interest. Always in the back of my mind Iím wondering is that so weíll be able to work our way with some difficulties and provide these people with something or do they use that as a negotiating tool with someone else who they are also considering purchasing gas from? Itís a step forward, but I donít think it has any concrete binding to it.

Petroleum News: You mentioned China. The governor will have gone to Asia as part of Trumpís entourage. Does that contribute to your optimism?

Talerico: Itís certainly not going to hurt my optimism to some degree. The junket may very well produce something, but when I read that Novatek is cutting a deal with China - in fact, the article said Novatek could supply that by next year - that gives me pause because when you are out on the open market and you need that product, youíre going to go with the best deal thatís available. It sounds like they are going with that. Is a letter of intent with us a serious endeavor or a negotiating tool against somebody else? I have reasons to want to get deeper into that for sure and see where we are headed.

Petroleum News: What would you like to hear next from AGDC? I believe by yearís end they said they would have something more definitive for you.

Talerico: I would need something that is beyond a letter of intent to continue to look into the project. Is it a purchase agreement? Yeah, it probably is. Then, itís probably all about volume. We have an idea the expense on the project. There has to be that cutoff point where you have got to move so much now before it breaks even. Probably one of the most difficult things is long-term contracts might be necessary for a project of this size. Iíve seen spot market LNG sales out there floating in a boat ready for a buyer. Some of the different contracts Iíve read about throughout the Pacific Rim, some of those are short-term contracts. I just canít get that wrapped around my head. I donít think short-term works for project of this size and this type of expenditure. We are going to have to see if somebody comes up with a long-term well-written contract. If China starts buying from somebody else and we are only going to be part of a supply, then how many players do we need to make this viable? That is probably my concern. I probably donít understand it as well as the people who are negotiating it right now. I think in that particular perspective, there is a particular volume you need to make this work.

Petroleum News: Speaking of a certain number, one observer noted that ďthe band isnít back together,Ē talking about how the producers and the state are no longer a party of four in this project. Do you believe a different partnership can still make this work?

Talerico: If suddenly the market were produced and you had some long-term contracts, at least a minimal volume that would be taken from the line. Itís really going to be about volume at this point. Who gets what share of what? The design that is currently set in place has the ability to move a lot of gas so I think itís all going to be about how many customers are available and whether those people jump on board. I just think itís tough for marketers.

As you go out there, youíve got competing interest from all up and down the West Coast. You also have competing interest from Texas and the Gulf states. Years ago, there were long-term agreements. They would do 20-year gas contracts. From my own research people have tried to shorten them up. If I was a guy out there buying the gas and the market was saturated with gas and people were out there offering it, I may not want to be in a long-term contract just due to the fact that I could find a better deal five years down the road, or 10 years down the road.

We are so far down the road to getting the FERC permit that I would like to see them finish that off. Itís my understanding that the FERC permit has a shelf life. Say it went five or seven years and it expired, you would still have all of that data, all of your previous permit work to move forward in the future. Iím not trying to put a final nail in the coffin on this particular project, but with competing interests, we may very well only be able to get to the approved permit stage. I hate to shelve it. Iíd rather see it move forward. But if we canít afford it and the gas price isnít there, then thatís what we would have to do. It also gives us a previous history.

I understand we are trying to get into that market, we are looking for that customer and we are looking very hard, but as far as longevity of contract, those are big concerns for me.

Petroleum News: A little farther from home, the Senateís energy committee has been holding hearings to advance development and exploration of ANWR. Does that give you optimism youíre a little closer than the state has been in years?

Talerico: It does provide a lot of optimism. In fact, I think the state is as close as itís ever been. I think there is potential to have that go well. It would be great news for us. Of course people are talking about the 90-10 split and the 50-50 split and other things like that as well. But the development of that, as an Alaskan, I think itís good. I see Alaskans going to work. It has to be done right. There is no question about it; it has to be done right. Itís an environmentally sensitive area. I think we have the technology to do it right. We have the ability to do it right, so thatís very promising. You know sometimes itís not just about state coffers. Itís about the ability to put Alaska residents to work. What I would hope is if we move forward, we have that opportunity to have more work for folks up on the North Slope.

Petroleum News: If things move forward, the state and federal government, as well as any developer, will be under heavy scrutiny. Is that how youíd want to operate?

Talerico: Not really. But I think everyone has grown accustomed to the fact that we have to be incredibly responsible when we do these things. You just canít go out willy-nilly and do whatever it is you want to do. You have to consider the environment around you. No doubt if this moves forward we will be under a microscope. Whoever is operating out there will be under a microscope. Although the microscope is pretty big right now.

There have been hiccups and little spills, but when you look at the volume that has been moved compared to the issues weíve had, itís very impressive. Technology has made a lot of improvements, but youíre right: I think weíll be under a microscope anytime we move into that area.

Looking at some of the operations reports and safety reports from people who have operated up there, particularly in the last several years, they are very capable of going in there in a sensitive area and operating really well. I think theyíve done a great job.

Petroleum News: Because of the proximity to Point Thomson, could Point Thomson become a nexus between the 1002 Area and the production facilities in Prudhoe Bay?

Talerico: I definitely do. If there is a discovery there and a responsible way of getting out of there, I think it creates more potential for a little more networking with those that are involved. Iíve never built pipelines but Iíve worked on roads in mining areas that had me thinking how do you connect the dots, so this had me thinking ANWR could actually spur on other production due to the fact that infrastructure could be put in place and networked with other areas. It could make other areas economically viable. Having a potential to actually build out the system probably makes everything else a little more affordable, a little more reasonable.

Petroleum News: Getting back to the beginning of our conversation that acknowledges youíre not the co-chair, what would you like to see the Resources Committee accomplish next year?

Talerico: Thatís a great question. Iím still got a laundry list of different things of where weíve been. So much of that is going to hinge on interest. There were recent lease sales that happened and our infrastructure - at least from my perspective - is in pretty good shape. Alyeska has maintained it well. It was mentioned during our organizational meeting with the working group, what else is it we should be looking at that continues to help provide some type of service to the industry as the industry provides income to the state. Right now, I monitor the price of oil on a daily basis and I monitor the volume. Just recently, we sold Alaska North Slope oil at $60. That particular day, it was at about 546,000 barrels.

At this time of year, thatís high. Youíre waiting for the volume to go sky high. That is already high and itís bringing the average up. Now weíre seeing the price move just a little bit. So volume is higher than our estimate; price is a little bit higher than our estimate. Itís always a little bittersweet because as we know, at the gas pumps, things are going to go up. As far as the stateís deficit and where weíre at right now, that has a direct impact on our financial status. Right now, thatís actually looking pretty good. I expected that to happen. What I didnít expect was to see that $60 price. So thatís good news for our coffers. But like I say the bittersweet pill is our gas prices will go up. So, is the sun shining on us for the projects to be moving? Maybe. It takes a little while to get moving. But with production at the numbers they are and this time of the year is not necessarily the high time of the year, I guess Iíll keep my fingers crossed for December, January and February.

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