Hawker sees hope for gas project

What’s different this time is Point Thomson resolution, producers working together and innovative concept of pipe within a pipe

Steve Quinn

For Petroleum News

One look at Rep. Mike Hawker’s office bookshelves and the story of a debate on an Alaska natural gas pipeline unfolds.

The shelves are teeming with three-ring binders on pipeline and oil tax legislation since he took office in 2003. This year, the Legislature is again debating a pipeline project, this time looking at the prospects of a liquefied natural gas export proposal in Senate Bill 138.

Hawker was one of the authors of House Bill 4 last year when the Legislature gave the Alaska Gasline Development Corp. the authority to advance an in-state gas line while having a role in the larger line that has eluded the state for decades.

Hawker, who serves on the House Resources Committee, will need more shelf space soon. For now the SB138 binders are within reach while the bill sits in the Resources Committee.

Hawker, an Anchorage Republican, sat down with Petroleum News to discuss the prospects of the Legislature advancing a pipeline project.

Petroleum News: What gives you confidence that this time around a project can be advanced?

Hawker: The biggest things changed this time are we have the Point Thomson development issues behind us. That’s the first time that has occurred in this entire process. We do have all three of the producers working together, albeit they have the differences as well they need to. And third we have a really innovative concept coming out of the state and that’s a pipe within a pipe concept.

This pipe within a pipe concept has allowed each of the producers its quarter share of the pipe — round numbers — and the state to have its quarter share of the pipe, and the state to do whatever we want with our quarter without imposing our must-haves on industry. They each are allowed to operate their piece of the pipe the way they need to for their best interests. We, the state, get to operate ours for what we perceive is our best interest. That structural concept — it just has unlocked everything and made this project possible.

In 2003, we were having LB&A hearings and literally the Legislature was getting introduced to all of the terms relevant to making these decisions: capacity; route; regulatory structure; financing; expansion. From 2003-2014, the questions haven’t changed an iota. We’ve looked at an awful lot of alternatives, and the root issues have not changed a bit.

Petroleum News: Questions for the legislators, the administration or the industry?

Hawker: The questions about how do you build a pipeline. Nothing has changed. Building pipelines hasn’t changed. We’ve been through so many different efforts. We’ve been through the Stranded Gas Act. We’ve been through AGIA. We certainly have the AGDC effort moving forward. Now we’ve got the post-AGIA Parnell effort moving forward — AKLNG if you want to call it that. Still, the root of every one of these projects — the underpinning economics, the underpinning decisions that have to be made to build a pipeline project — nothing has changed. Over the last 12 to 14 years, we’ve sure looked at a lot of alternatives and developed a ton of paper and frankly, at this juncture with both the AGDC project going forward and the AKLNG where it’s at, I really think we are finally on the verge of getting a project moving.

Petroleum News: Let’s talk about the state’s one-quarter. Are we equipped to market our own gas or is that getting a little ahead?

Hawker: We don’t need to be. That is a decision for down the road and we have a lot of options in front of us. We can develop in-house expertise. We can contract with the producers and piggyback our gas sales onto theirs. We can go out and contract a third-party as a marketing agent. We’ve got plenty of options for getting our gas into the market in a manner that is competitive and that does not leave us at a disadvantage to the producers or anyone else. No, we don’t have to make that decision today. The decision today for everyone is the aggregate decision both for the producers and the state: Is there a market for Alaska gas in the world? To build a natural gas pipeline, you have an absolutely linked value chain from the wellhead all the way to the consumer and that’s tied down in 30-plus year contracts. So our question isn’t necessarily how we market the gas, but can we get those 30-year, long-term take or pay shipping commitments that underpin a pipeline project.

Petroleum News: You talked about what you feel good about what’s moving a project forward. Do you have any concerns that are in moving in parallel to you optimism?

Hawker: Absolutely. I’m not rubberstamping the governor’s proposal. Yes, I do have concerns. We are working through those in committee. We are able to get our questions answered. There are two elements in play in this process. Those two elements that will be triggered by the passage of the enabling legislation, SB138. One side of that is it will provide a basis for the state executing its memorandum of understanding with TransCanada, which will be contractual agreements between the state and TransCanada that will not come back before the Legislature. On the other hand, it will also be the legislation that the producers need to work among themselves and with the state to actually move the project forward.

In that capacity the state will be represented by the partnership established in the MOU. The details of that MOU still have concerns to folks. I have concerns about ownership versus control. While the state potentially will own up to 40 percent of the limited liability partnership of the state’s quarter of interest, control will vest totally with TransCanada. I’m not yet convinced the state giving up all control is the right thing to do. I’m still looking at it and trying to figure my way through it.

Within the legislation, we are still working to resolve a number of issues related to AGDC, so the bill we passed last year — HB4 — that set up AGDC and empowered it to move forward is not compromised unintentionally by the language in SB138. We are working through those points. I have concerns about the tax code revisions in SB138 that are critical to moving forward. While I don’t know if the provisions in SB 138 are right or wrong, there are just questions yet to be answered about how this new regime will affect not only the North Slope but the rest of the state. What are the consequences of making this change on a universal basis. Those questions are yet to be answered.

If you pull back to the 10,000-foot level, and ask ourselves, what did we give and what did we get with this deal? There’s the ultimate question. All of these nits we can be looking at: AGDC, taxes, control, ownership, corporate structure. At the end of the day, the big question is what are we as a state giving up and what are we getting. In the broadest sense, what we are getting is the possibility of a pipeline.

What are we giving to get that? Some folks argue we are giving too much to TransCanada. TransCanada does have an exclusive contract under AGIA. That exclusive contract provides trebled damages for us breaking that contract, so they have a huge amount of leverage.

Their willingness to abandon that contract and abandon that leverage has great value. One of those things we get is relief from those punitive provisions in AGIA. What did we have to give to get relief from those punitive provisions? Well, part of it is the involvement of TransCanada in this project. If this one blows up again, then for the next five years they get a right to participate on similar terms on any similar project. Those are understandable business tradeoffs. If they are going to give up their hold on the state and trebled damages clause of AGIA, they want to be sure we can’t pull out the rug from under them and say so long, Charlie. It’s all of these on-going tradeoffs. Looping back to the balance we have to determine as legislators, it’s what are we giving, what are getting and is it a transaction that we can accept.

Petroleum News: You talked about prospective unintended consequences. What are some of those?

Hawker: AGDC which had been originally designed to be a company that could not only develop an in-state pipeline but also develop connecting lines from a backbone to communities in the future, lost the ability to get gas out through those connecting lines to the rest of the state. Unintended, but the way terms were redefined in SB138, it had the unintentional consequence of narrowing what AGDC could do. There were constraints placed on the board of director’s ability to manage and control all aspects of AGDC’s operations. We are working very productively with the administration to find common ground language that continues to make sure AGDC is the state’s oil and gas pipeline company and that it is there with a mission to get Alaska gas to Alaskans, but it’s also nimble and flexible enough to be part of any viable project that comes into being no matter what the size of the project is, which is exactly what we set up AGDC to be.

Petroleum News: Still on AGDC, last week Sen. (Pete) Kelly talked about how his committee thought it was important to keep AGDC nimble by removing the originally proposed subsidiary. Is that an example of what you’re citing?

Hawker: That’s where SB138 as it got introduced I think got into problems. It tried to micromanage and establish a corporate structure by statute. It said by statute we will establish this subsidiary in this manner and it’s going to be controlled by a completely different set of board of directors outside of corporate structure and board of directors at AGDC. Any businessman knows you can’t have two different boards of directors operating the main company and the subsidiary company if there is not a line of authority in command.

That’s one of the things the Senate helped us clean up by re-establishing a proper corporate organization and structure by having linear management and reporting trails from the board of directors at the top down through the executive director down through the management and operations of subsidiary organizations. It went back to allowing AGDC to use its corporate powers to create a subsidiary to operate rather than to create a subsidiary in statute and try to dictate how it was going to operate.

Again, we’ve been working very productively with the administration to re-establish a proper corporate organization and management — an administrative and financial control structure — that assures that we continue to have at AGDC the ability to pursue the in-state gas pipeline project to get Alaskans gas into Alaskans hands, but at the same time be a partner and a player in this larger project that we all hope comes to fruition and if it does, AGDC has the capacity becomes the state’s agent as is appropriate.

If the larger project falters one more time for whatever reason, be it market conditions or the producers failure to reach consensus on commercial agreements, AGDC is ready, prepared and able to keep moving forward a project so we aren’t, one more time, aren’t sitting here going, ‘no gas line, start over. What are we doing?’ We are making great progress with AGDC. We hope it morphs into this larger project and we all get this large-scale pipeline with huge export capacity. I’ve been watching this now for 12 years. We’ve had a lot of false starts. I’m not prepared to abandon AGDC and have no intention of abandoning AGDC on the promise of a new project, a bigger project. I believe we can get there. It’s going to take a lot of work from all parties. But we are prepared whether we do get there or whether we don’t. The state has the best resources applied, most productively and affectively.

Petroleum News: Six months after the AGDC board gets appointed, one of those appointments comes under question for living out of state. Are you surprised this happened six months later rather than immediately?

Hawker: That’s just bad politics in action. We testified during the creation of AGDC, and as one of the sponsors of the legislation that created AGDC, it was absolutely my intent that the governor would be empowered to appoint the best, most competent and qualified board with no restrictions placed on those decisions based on residency. We wanted him to be able to pick the best pipeline people in the world, the best finance people in the world, the best construction people in the world. He came up with a balanced board.

He did put a lot of Alaskans on the board. He happened to have one guy who has a resume that is just spectacular in the gas pipeline world. It’s unfortunate that politics played against that individual. As Rep. Chenault, my cosponsor on HB4, has said, we are looking into other vehicles at this time to pass clarifying legislation that makes it very clear the governor has the authority to appoint the most competent and qualified board on AGDC from anywhere in the world.

Petroleum News: The speaker (Chenault) also noted who better to go up against formidable companies than someone who came from one of those companies. Can someone like that do both?

Hawker: I agree with the speaker. If you want someone experienced in pipelines where do you get it? You don’t go to the ice cream shop. You go to the biggest pipeline companies in the world and hire someone from that environment. It’s politically easy to say they are compromised but the fact is true professionals know who they work for. That’s why people change jobs in their careers. Just because somebody started a career with BP and moved over to Exxon, the day he’s working for Exxon doesn’t mean he’s loyal to BP. We the state of Alaska hire who came out of Exxon, in this case as a retired individual, to work as a board member for AGDC, his loyalty is to the state of Alaska. I believe these competent, qualified experienced professionals do take this seriously, and that individual is dedicated to Alaska, not to his former employer.

Petroleum News: You’ve got two reports critical SB138 posted with the Legislative Budget & Audit Committee, one each by Roger Marks and Rick Harper. What are your thoughts on each, starting with Mr. Marks?

Hawker: I’m a little hesitant to criticize somebody else’s report because they have their perspective. It’s one we’ll take into consideration. Mr. Marks is very competent and very qualified. His perspective will help us ask the right questions and will help us get to answers that will help us make our decisions.

Petroleum News: And Mr. Harper?

Hawker: I think Mr. Harper’s report did not quite demonstrate the same grasp of the facts and circumstances we are looking at that Mr. Marks’ did so it’s a little harder to work with Mr. Harper’s report, so we’ll look at it, consider it and take it for what it’s worth.

Petroleum News: Do you have any concluding thoughts?

Hawker: This entire debate still and will continue through the rest of the session, hinges on what did we give and what did we get and becoming comfortable with what we are getting is what we are giving. I know I’m repeating myself a bit. There is a huge amount of detail embedded in the HOA and the MOU and our understanding it and the details of the transactions that will be precipitated if we pass the enabling legislation. It’s a daunting task for us to understand all of this, analyze it, dissect it, evaluate it in the timeframe that we have in this legislative session. That’s why we are meeting seven days a week on this. I think we will do something that will continue to enable the AKLNG project to move on to the next phase, which will then be brought back to us for the next step in the decision-making in 2015.