French concerned LNG moving too fast

Anchorage Democrat says there was later remorse over some aspects of AGIA; also sees similarities to Stranded Gas Development Act

Steve Quinn

For Petroleum News

Sen. Hollis French won’t back down from a debate. So when one suddenly ensued on the Senate floor recently, the Anchorage Democrat engaged. It didn’t last too long, about 15 minutes, and it included colleagues, Resources Committee Chair Cathy Giessel and minority colleague Bill Wielechowski. A few hours later French took his seat with the Resources Committee, which began hearing testimony on Gov. Sean Parnell’s LNG pipeline legislation, Senate Bill 138. French sat down with Petroleum News after the Feb. 10 Senate Resources hearing to discuss his views on the spontaneous floor debate over oil taxes, the prospective LNG project and SB 138.

Petroleum News: That debate is ongoing largely thanks to the upcoming repeal vote. Are you surprised the discussion ensued?

French: I was surprised. It was a highly contentious debate last year. It’s almost like we put it behind us; the Senate passed the bill. It’s out of the body. It’s out in the public now. It’s operative on the North Slope, and the public is going to decide what to do with it in August. So when Sen. Giessel decided to stand up today, and start waving numbers around and make projections about SB21, I was surprised because we can’t settle any of these questions here. I have a strongly divergent point of view from hers and from the people who voted for SB21. It only passed the Senate by one vote. It was highly divisive in our body. And 50,000 Alaskans signed the referendum to undo it so it’s divisive in the public. If anybody wants to debate oil taxes on the floor, I’m always happy to do that because there is a strong case on our side.

Petroleum News: Your colleague Sen. Wielechowski raised the issue of where is the oil, citing the governor’s wishes to reach 1 million barrels a day of throughput. Part of that strategy included Shell’s Arctic development and a robust NPR-A in reaching that goal. With that in mind, is it fair criticism, knowing Shell pulled out temporarily?

French: I guess I’d have to go back and see what the governor said about those predictions when he was making them. The idea that our oil tax would spur development in the Chukchi and Beaufort seas is patently absurd on its face. Our oil tax has nothing to do with the Chukchi Sea or Beaufort Sea. So for the governor to say we are going to pass this bill to increase production and that production includes oil from fields that don’t pay for our oil tax. It doesn’t seem like a very strong argument for him to make. I’d have to go back and see whether he included those fields in the million barrels or whether he even got posed the questions.

But you see my point. You can cut our oil tax to zero or you can increase them to 100 percent. Neither one of them has anything to do with the Beaufort Sea or Chukchi Sea. Now, NPR-A, a fair point. Whether this new plan on NPR-A actually produces oil in the foreseeable future, I think is questionable. Most of the development is still going ahead. CD-5 is a perfect example. They decided to go ahead with that before SB21 passed and ConocoPhillips has been honest about that. It seems like the foreseeable development in NPR-A is all within reach and open for development. That is it hasn’t been closed off.

Petroleum News: Now on to SB 138 and LNG, there is a lot get your hands around. Let’s start with your views on the upside. What do you like about what you’ve seen so far and what you’ve heard? Then we’ll get to any questions or concerns you have.

French: The easiest blanket statement to make: I want a gas pipeline as much as anybody else does. No true Alaskan is opposed to a gas pipeline. If you went out to the public and said do you want a gas line or not, you would get a positive response in the high 80s. Everybody wants a gas line, and I’m one of them. It looks like AGIA didn’t deliver, although I guess I would appreciate more of a post mortem on that, on why it didn’t work. I don’t think we got that in a hearing from TransCanada on what happened at the (failed) open season.

If AGIA didn’t work, then you’ve got to try something else. This is the something else that’s in front of us. OK, great. Let’s take a look. This might work. Obviously you’ve got to have some principles. Our basic principles have been pretty simple: gas line yes; giveaway no. Is this going to deliver a return to the people in the state of Alaska in a way that educates our kids, builds roads, helps operate the criminal justice system, and lets you live in a better state. That’s the point. That resource has to serve us and not vice versa.

Despite my optimism, I have some skepticism as well about this administration’s ability to craft a deal given what I saw in SB21, given what I saw as putting their thumbs on the scales on the side of the producers more than where I would put my thumb. That’s where I would start off.

Petroleum News: So what questions do you have for the administration right now since they are the one bringing this forward?

French: The first and biggest question is, are you willing to take oil taxes off the table? I think that is extremely crucial. What this process is driving toward is a contract or series of contracts that will bind the state and the producers into a long financial relationship and part of that binding is to fix our gas tax at a certain gross rate and leave it in place, to take our royalty share of gas as gas at a fixed rate and leave that in place. To some degree provide what they call fiscal stability and fiscal durability in this relationship.

We tried that in AGIA. We tried it through a 10-year statutory freeze of the tax rate. That seemed to be the right balance. That seemed to be the furthest we could go and the fairest to both sides, mainly because of what we learned in the hearing process, which was, given the way time, value and money works, you get back I think 80 percent of your money in 10 years anyway. Those first few years are most valuable to you and the out years are less valuable. That’s the way present value of money works. We are sensitive to that at some level. People have different ideas of how aggressively you have to address it.

Putting oil taxes into that mix I have deep concerns about. Deep concerns. In my view they shouldn’t be mixed. You should be able to structure a deal on gas that fixes your royalty, fixes your gas percentage, gives the producers certainty without putting oil taxes in the mix.

It’s not in there explicitly but there are words in the Heads of Agreement that can be interpreted to include oil taxes. In an informal conversation in this office with BP, Conoco, Exxon and TransCanada, I said isn’t this coming, isn’t oil taxes coming? I lived through the Stranded Gas Development Act. They didn’t exactly stand up and say yes, but they said yeah it’s coming. That’s why we — we as in the minority — sent a letter taken to the governor. His answer was I haven’t heard that mentioned, oil taxes. He didn’t definitively answer the question. That’s my biggest concern — that we get oil taxes taken off the table and not locked in at any time.

Petroleum News: I understand you’re not the committee chair and aren’t setting the agenda, but you’ve been around long enough. Do you think this can be done in 90 days? So far the committee is being very deliberative.

French: (Committee chair) Sen. Giessel is doing a good job of setting out a work schedule. We’ll see whether 11 senators can be persuaded that this deal is worth going forward given the terms we have before us in the amount of time. My guess is it will pass this year. My concern is that it will not be fully thought through. We learned a lot from AGIA in having passage, then having second thoughts on some of the provisions like the trebled damages and the limitation on 500 mcf a day (for a competing state-backed line) and the high reimbursement rate. All of those things were lessons we learned. What we are trying to do with this deal is not have buyer’s remorse or seller’s remorse, whatever it is you have after passing something and saying we could have done a better job with this if we had a little more time, and thought about it a little longer.

Petroleum News: So do you see opportunity? Are there windows that might be closing?

French: Absolutely there is opportunity, but that’s another area where I’m leery about that. That idea — window of opportunity — can panic you into a deal you’re not ready for. For example, the overland route to Chicago, if I heard it once from Ted Stevens or Lisa Murkowski visiting us for a joint session, “the window of opportunity is closing; the window of opportunity is closing.” If we had gotten panicked into building an overland pipeline to Chicago, it would have been a financial debacle, a financial disaster. We would have been selling gas into one of the weakest markets in history, so thank goodness we were deliberative. Thank goodness the shale gas revolution happened before we committed to a $30 billion project to Chicago because it would have hurt everybody. On the one hand, sooner or later you’ve got to flick the switch and you can never predict the future; on the other hand that 35 tcf gas on the North Slope is still in the bank. Some day it will go to market, and you want it to go to market on terms that are good for everybody.

Petroleum News: Do you have any concerns that this is reminiscent of the Stranded Gas Act negotiations during the Murkowski administration?

French: Yes. I really do. As much as I’ve heard at the hearing last Wednesday when we had everybody lined up: Conoco, BP, Exxon, TransCanada, and Dan Fauske. This was a joyful new, unique alignment that had never been achieved in the past. I was thinking back to the picture of the Murkowski administration with Frank shaking hands with all of the producers. I don’t see what’s different. That same deal had us taking an equity share; that deal had us taking royalty in kind and not in value. I appreciate some people’s perspective that this is a brand new deal. It’s not brand new to me. It’s not brand new to folks watching this process since 2006.

Petroleum News: Is there anything different from the Stranded Gas Act?

French: You know I’ve listened to the commissioners explain why this is different. I guess I’m not persuaded. If I were them, I would say we learned from the mistakes on that deal and I think that’s their point. Their point is this is going to come out in stages. It’s not clear how many stages this is going to come out in. Basically with the SGDA, they passed enabling legislation and they developed a contract. Here we are asked to pass enabling legislation and it’s going to lead to a contract, so it’s a very similar process.

Petroleum News: What have you heard from the producers or administration that suggests there will be advancement toward a project because people have been hearing this for decades?

French: It’s true. I can’t say that they are lying. I have to believe they are telling the truth when they come and sit before a committee and testify they are putting money into this, and people into this, and hiring people and doing the engineering. That’s good I support that.

Petroleum News: What have you heard that makes you think we’ll be back in six years with another plan?

French: Well, today’s hearing we saw on a chart all these other projects around the globe that are on the planning books that beat us on their breakeven point. The point of that slide is to say if most of these come on line, they are going to take all of the existing demand around the globe, fulfill it and they will do so at a price that beats our price. That means our project can’t get into the market. Black & Veatch said in black and white your project is out of the money. We didn’t finish the entire presentation, but it was a little bit of a depressing place to stop. Alaskans have to remember: Our project is different from most of the other LNG projects around the world because of the overland separation between where the gas is and where you can put it in a tanker. Most of the projects, it’s a 20- to 40-mile pipeline and you’re at tidewater. Here we’ve got a pipeline that’s 800 miles and that’s just extremely expensive, so you start at a disadvantage for costs.

Petroleum News: Exxon has been quietly building on this. Under AGIA, the company became a partner with TransCanada; they resolved their Point Thomson dispute with the state; they are actively looking to purchase land in the Kenai Peninsula. Do these little steps over the last several years give you confidence that a project can be done?

French: I met with Steve Butt, a highly competent and highly persuasive individual, very confidence inspiring. When he says we are going to work this and come up with a way to make this thing work. ... He just finished building one of the biggest LNG projects in the world.

They are spending way more money at Point Thomson than you can recoup with 10,000 barrels a day of liquid production. That’s the point that (Resources Commissioner) Joe Balash and others are making. I went to Point Thomson and I took the tour there. It is impressive what they are doing at Point Thomson. Maybe they feel like they got put in the corner a little by the Murkowski and Palin administrations’ legal action against them. Maybe they decided it’s time to finally bring this online, and the only way you make money on this is with a gas pipeline, so let’s go down the road a little bit and see if we can make it pencil out. Exxon — as reluctant as many Alaskans may be to see them take the lead on this project — it may be the fact that that’s what’s happening.

Petroleum News: Talk a little more about your trip. What were your impressions?

French: I worked eight years on the North Slope myself and I was impressed with the level of attention to safety there, which was baked into every inch of the project. It wasn’t just put on, in my view, for the visiting legislators. Those people have had safety drilled into their bones. That was amplified by the orientation. The size of the development, man it was huge. It’s not connected by road. If I had to do one thing over, not that I negotiated it, it disappoints me that we didn’t get a road out of the settlement. That makes the investment in Point Thomson all the greater because everything has to be done by ice roads or barge. Some of the people on the plane, leaving Anchorage going to Point Thomson, were from the Juneau area, contractors and engineers who slowly worked their way to get North Slope contracts. They were sort of new players. It was refreshing to meet folks outside the normal world of contractors, people beyond the Railbelt.