House Resources works state’s LNG deals

Co-chair Feige wants committee prepared when it gets enabling legislation; Legislature could sideboard administration authority

Steve Quinn

For Petroleum News Bakken

House Resources Committee co-chair Eric Feige doesn’t have Gov. Sean Parnell’s bill (House Bill 277 and companion Senate Bill 138) in front of his group just yet. He’ll await the Senate’s version. But he’s keeping his team plenty busy reviewing two agreements between the state and prospective industry partners: ExxonMobil, ConocoPhillips, BP and TransCanada. The committee is also reviewing what really happens to the current law, the Alaska Gasline Inducement Act.

Feige, a Republican from Chickaloon, sat down with Petroleum News to discuss his views on advancing a gas line project.

Petroleum News: You’re a little more than one-third through the session. What’s your game plan as the Senate hears SB 138?

Feige: The main objective at this point is to make sure the committee members understand the basic foundational documents — that is, the heads of agreement and the memorandum of understanding with TransCanada. If they understand the actual commercial deal that has been negotiated at this point, if they understand the mechanics of that, they will be a lot better equipped to deal with the enabling legislation when it comes around from the Senate.

They will be able to put the changes in law in context with the actual commercial deal. Keep in mind that part of the agreements — HOA and MOU — is that if the enabling legislation is not satisfactory to one or more of those parties, those deals blow up. To some degree we are in a box in certain areas, but there are certainly opportunities for us as the Legislature to put additional restrictions, sideboards, whatever you want to call it.

We can add our own requirements to that legislation. Exactly what form that will take, I don’t know yet. We’ve still got a lot of pondering to do. In this first round of briefings, we’ve heard certainly from the administration; we’ve heard from the project team; we’ve heard from our own consultants; we’ve heard from our own lawyer, Don Bullock, who has been involved in all of this oil and gas legislation over the last 10 years. He’s very well schooled and understands a lot of the possibilities we have front of us.

Petroleum News: What about AGDC (the Alaska Gasline Development Corp.)?

Feige: I’ve talked to individual board members with AGDC, phone conversations with AGDC management. All of the different players in this, we are talking to them, so we make sure we understand what they believe it’s all doing.

The companies — that is the producers — they have certainly their part of the overall heads of agreement commercial structure of this thing. They saw the MOU with us and TransCanada at the same time as I did. We had private conversations with each of those companies to basically hear what they have to say about the TransCanada arrangement.

Right now we haven’t come up with any showstoppers that are really going to muck with this deal in any significant way. For us, at this point, we have basically two options before us.

One is to terminate AGIA, go through what I refer to as the AGIA divorce. That would cost about $130 million for us to buy all of the accumulated studies and science that has been done in preparation for this project under the AGIA process. That would entail bringing somebody on to the project team to help manage construction on the pipeline and provide technical expertise on the pipeline.

The big worry for us is that it could cause a significant delay on the project. It appears the producers are certainly reasonably comfortable with TransCanada. They recognize that they know their business. They have been involved in this project for roughly five years in a fairly detailed level. There are some certain benefits in that regard to keeping them around.

The other option we have is the MOU. To go forward with that arrangement, it would involve a conveyance of equity of the midstream portion of the project. That equity has a value and a significant value. The terms of the MOU also provide some significant financial benefits to the state in just how we finance our portion and how we manage our risk in the project.

Petroleum News: So do you see this as an option between losing AGIA or going with the MOU?

Feige: No. I think the question is do you want to continue with the momentum that has started. I think TransCanada certainly brings advantages to the table based on their familiarity with the project, their company expertise in building and operating pipelines. The question is do we really want to change horses in midstream?

Petroleum News: With the MOU and the enabling legislation, you are setting aside AGIA, even if it isn’t a formal repeal, correct?

Feige: Essentially the licensee under AGIA has agreed to walk away from AGIA in return for this MOU.

Petroleum News: So what would be the benefit of formally getting rid of or terminating AGIA?

Feige: The only benefit for actually repealing AGIA — or terminating it — is essentially not have that law kind of obfuscating the political situation as things go forward. By eliminating it, you eliminate all questions that somehow we could end up going back to that. That is something we will have to consider, whether or not we want to do that as part of this enabling legislation or not. If you do, you might as well make it all contingent upon approval of the enabling legislation. If they agree that the enabling legislation is satisfactory, then that’s an opportunity to take AGIA and get it off the table.

Petroleum News: You weren’t in office when AGIA was passed. The Legislature was in a 120-day session back then. Though the bill wasn’t introduced right away, details of the bill were slowly being released. You have 90. Is that enough time?

Feige: I believe we will be able to get through it in 90 days. We had a sense of what was coming, too. We have the benefit of all the previous go arounds in the law. I think there has been a pretty good effort on the part of the project team to get information out about the project. Steve Butt from Exxon does a pretty good job of explaining things in easily understood terms of how all this works together. It’s pretty important for not only legislators, but people of the state to understand exactly what it is we are getting into. This whole gas line deal is somewhat unconventional because involving the state as an owner in a project is not something we typical do in the United States. There is precedent in other parts of the world, but for the state to act as a business partner, especially a project of this size, it’s certainly unprecedented in the United States.

Petroleum News: You talked about Don Bullock having tremendous experience in these issues. Do you feel the Legislature is equipped with enough institutional knowledge or do you see it as a balance of fresh ideas and institutional knowledge?

Feige: There is certainly plenty of institutional knowledge. I know my committee is comprised of very senior members of the Legislature. Most of my guys have been around the block when it comes to all of these pieces of legislation the last eight years or so. They are pretty well versed. The key to this is getting a variety of information from a variety of sources. I certainly don’t want to depend on any one individual whether it’s the lawyer or the consultant or a member of the committee. We are going to try to get as much diversification in our information. Ideally in a perfect world it all lines up and meshes together and everybody agrees with everybody. Where there are disagreements, we’ll try to suss out why there are disagreements and try to ascertain what the truth is.

Petroleum News: Speaking of prior knowledge and time served with the state. You are on your fourth year here both as a member of the House and as co-chair of House Resources. What have you learned in that time?

Feige: Oh my God. The education on this job has been pretty good. We went through two rounds of oil tax legislation. Both of which were big fights. The next thing about this gas line deal is it’s not a big fight. We are not arguing over whether or not the state government should be spending the money into the economy or whether the private sector should be spending the money into the economy. Hopefully we’ve settled that. There is general consensus that the state of Alaska needs and would certainly benefit greatly from a gas line project, whether it’s the AKLNG project or a bullet line down to Southcentral. Either one of those projects are going to bring a cheaper form of energy and in plentiful quantities to last for the foreseeable future. That will have a great benefit to the people of the state and the economy of the state, and offer a chance to get out from under the quite frankly very costly energy situation that we are in now. That is the ultimate benefit, and probably the greatest benefit to the state. If we get a project that exports 2 bcf or 3 bcf a day of liquefied natural gas overseas, great. There is certainly a benefit to the state. But if that doesn’t pencil out for whatever reason, the opportunity to have a smaller diameter line in place and ready to go if that larger line failed, puts us in a pretty good position.

Petroleum News: If this enabling legislation passes, can the state move forward on an in-state line bigger than 500 mcf?

Feige: If the enabling legislation goes through, part of that, is the terms of TransCanada basically withdraws and we agree to withdraw from AGIA. I’m not sure what we will do with the laws themselves, but certainly that would also remove the restrictions on the line. At this time, I don’t believe that’s the intent of that Legislature to increase the size of that line to anything bigger. That line is primarily for in-state use of the gas, whether it’s to heat homes in Fairbanks, to provide security of supply in Anchorage, to supply large mining projects that would now be economical because they have a cheaper supply of energy, or to make LNG out of the gas and ship it around the state to places like Bethel and help them heat their homes. It would obviously require some build out of infrastructure. There has been some talk that somehow AGDC is angling to build a bigger project and compete more directly with AKLNG. I talked to the managers and I talked to the board. I don’t believe that’s the case. We can certainly put intent language in the enabling legislation to reinforce that. I think the Legislature would much rather go with the larger AKLNG project with — as the governor calls it, the ace in the hole — of the smaller line that for a time is going to more or less move in parallel, but at some point get parked on the shelf as a ready-to-go-project, in case the big line does fail.

Petroleum News: What are your greatest concerns about what’s in front of you?

Feige: One of my major concerns in this whole thing is the possibility of the cost overruns in this project. I think our biggest risks for cost overruns are in the pipeline portion of the project and the (gas treatment plant), the GTP because it’s a very complicated piece of machinery and it’s being built 70 degrees north latitude. The logistics and the opportunities for things to go awry are much better there and the remote logistics of the pipeline than in the building of a liquefaction plant in Nikiski. So being able to manage our risks appropriately and having TransCanada assist us in that brings great benefit to the state. We still have yet to hear from Commissioner (Angie) Rodell with the Department of Revenue. She has had a major influence, especially on the financing arrangements of the MOU. We’ll probably hear from her (the week of Feb. 24) but we have to work out the exact time regarding that aspect of the project, the various places that we can option into the line. We can go back and take 40 percent of our share back from TransCanada at FEED. Depending on how this thing goes forward, we can option in — or not. This whole deal depends on finding customers willing to buy the gas and pay a price that is high enough to justify doing the project. If the Japanese, the best they can offer up is $12 an mcf delivered to Japan, that’s probably not going to float the boat on this deal. But if they come in at a rate that guarantees all of the investments throughout the whole supply chain, as long as those investments are going to get paid back and paid back in a way that is satisfactory to all the parties involved, then the project is going to go forward. But we are not going to know that for another couple of years anyway, at least not until late fall or early winter of 2015.

Petroleum News: You had at one time favored Valdez as the terminus for the pipeline, but Nikiski has emerged as the leading candidate. What are your thoughts on that?

Feige: You know obviously I’m disappointed that it did not go to Valdez. Based on my conversation with the project manager, there were some fundamental engineering problems with setting up a liquefaction facility in Valdez. The footprint of that facility, the requirement that it be above a certain height above sea level for Tsunami risks, a requirement that it be on tectonically stable ground really limited it to just a couple of potential sites within Valdez arm and one of those sites was actually the town site. I don’t expect everybody to move — again. The other option was to have to blast away a good portion of the mountain to get enough level ground. That put the cost significant higher. It was mostly an engineering decision. Frankly, it wasn’t my decision to make. One of the amendments we put in HB 4 was a requirement for AGDC to, as soon as a construction decision has been made on a line, they are statutorily mandated to start looking at all of the potential distribution lines coming off the main line. It’s my hope the Fairbanks/Richardson Highway corridor is going to see a benefit from that because that’s an area of the state that is certainly reachable to a pipeline.

Petroleum News: So what’s the bottom line on this?

Feige: The biggest question we have is how much of our state treasury do we put at risk. We can take a larger share of this pie in terms of the overall project, but the greater share we take, the greater our risks are in the investment. Another question is at what point do you get the greatest reward for the investment? Obviously we are going to have to come up with some kind of equity investment to make this project go. Just by making it go, we receive tremendous benefits as a state: a boost to the economy by the reduction of energy costs, not just in Fairbanks but throughout the Bush if you can move LNG cheaper than you can provide diesel that’s a significant savings.

Just by having the project go, the state derives a huge benefit. The more you invest above that, certainly the return would be greater to the treasury. You still have that basic benefit as a whole to the state’s economy. The more you invest, the more return you have to the treasury.

What we want to avoid is the situation where we take a little bit too big of a bite on the project, there’s an overrun and all of the sudden now instead of being able to pay for it out of savings, we have to go and borrow above and beyond what we had originally planned. We don’t want to get into a position where all of the sudden we can’t make the cash calls and that starts to diminish our ownership in the project. We have to be very prudent in that regard.