Chenault says gas tax could be addressed

House speaker pleased with AGDC launch based on HB 4, wants to keep politics out of gas line; says it’s time to get out of AGIA

Steve Quinn

For Petroleum News

House Speaker Mike Chenault knows this upcoming legislative session could be pivotal toward advancing a natural gas pipeline project, be it an in-state gas line or a large-diameter line leading to an LNG terminus in Cook Inlet.

Since the Legislature adjourned in April last year, the Alaska Gasline Development Corp. seated its board of directors and has been working toward holding an upcoming open season.

North Slope producers ExxonMobil, ConocoPhillips and BP, and pipeline builder TransCanada named Nikiski as the front runner for the terminus of an LNG line. Lawmakers listened to consultants discuss the LNG market; read reports commissioned by the governor’s office and the recent budget summary from the Department of Natural Resources providing an outlook that could preclude AGIA.

Chenault is the co-author of House Bill 4’s in-state gas line legislation and state’s longest serving House Speaker, now in his third term.

The Nikiski Republican reviewed interim developments and offered a glance at the upcoming session with Petroleum News.

Petroleum News: There have been a lot of developments during the interim either in Cook Inlet or with AGIA or consultant reports. Most recently, DNR noted in its budget summary that the department is looking to transition out of AGIA. What are your thoughts on that?

Chenault: You know, I hate to be the guy who said I told you so, but there were a number of us who said since AGIA passed that it wouldn’t work. So I hate to say I told you so, but that’s exactly what’s happening. It’s past time that we move on from AGIA. I think the governor is transitioning in the right direction. It might not be as fast as some of us want, but I don’t see where there is a benefit to that process in our current negotiations with the producers.

Petroleum News: Could this migration away from AGIA open things up for AGDC in its pursuit for an in-state line?

Chenault: I don’t know about opening things up, but it surely would give them an opportunity to look at a bigger project than what they are currently limited to by the AGIA process we currently live under. It gives them more opportunities to talk to more and maybe larger investors who would be interested in a bigger project. This would, in turn, make it more economic for Alaskans to use some of the gas coming down the pipeline. Naturally a bigger line drives the costs down as far as ultimate costs for utility gas.

We tried to write HB 4 to give it the greatest flexibility to bring a successful pipeline project to the table. So when we put it together, that was the crux behind it. We wanted them to be as flexible as they could be. That way it enables them to get to a completed project.

Petroleum news: You’ve got your board and your new chairman. Is that significant or are those just getting figureheads in place?

Chenault: It’s significant. That is something they are going to have to have to bring a project forward. The governor put some good people on that board. It gives them better flexibility and opportunities to negotiate and come up with a project to move forward on.

We put them in a position, gave them most of the tools that they need to get to that completed project; now it’s my job to stay out of the way and try to keep politics out of the project. In my opinion politics killed a number of gas pipelines across the spectrum and across the state for a number of years. Our best move is to stay out of it. Give them the tools they need. You’ve got the talent that’s there and available to put a project together. We’ve got to stay out of the way.

Petroleum News: At what point would the Legislature come back into it, perhaps for more funding or otherwise?

Chenault: the funding put into HB 4 last year is enough funding to get through an open season and a sanctioning. We don’t look to have to put any more money into it. The only way I see us having to meet again and look at funding would be if they came back with a project that required some state equity into a project. If that’s the case, then the Legislature, the governor and citizens of Alaska would have sit down and have those conversations about whether we want to be an equity owner. If we do, what is that going to look like and how do we put it together and bring a gas pipeline down from the North Slope.

Petroleum News: Speaking of equity interest, as you know Black & Veatch produced a report that suggested the state seek an equity stake in a gas pipeline project. What are your thoughts on that?

Chenault: I’ve said for years that I think Alaska ought to be an owner of the project. Now how much that is, that needs discussing. Is that a 10 percent, is that a 20 or is that a 30 percent? I don’t know that yet. And what form of ownership would that be? Would that be gas or would that be in steel? There are lots of ways to put together a project to make it successful. What we’ve seen and through some conversations we’ve had with industry folks, a way to put this project together to make it an economic project would be for the state of Alaska to own a piece of it. I’m willing to look at it and do the best we can to negotiate a fair position for the state.

Petroleum News: What is the value to having an equity interest?

Chenault: I’d say it’s two or three fold. Projects like this, whether people want to believe it or not, if they are done on an economic basis, the state of Alaska would stand to receive a benefit from tariffs, so I can see us making money. Two, if that’s what it took to bring gas to Fairbanks and a majority of Alaskans, and maybe even opportunities to bring gas to all Alaskans, then I think there is a value there to determine whether it’s a good investment of our money.

Petroleum News: On the flip side, what are the areas that call for a cautionary approach if the state decides to pursue that?

Chenault: The biggest concern I would have would be the cost overruns. History showed the TAPS line was an $800 million project initially that ended up costing $8 billion. We need to make sure however this project is put together that we guard against these types of issues.

Petroleum News: Closer to home, there have been a lot of developments in Cook Inlet, whether it’s new resource discoveries or ConocoPhillips requesting an export license. How are you seeing things?

Chenault: Cook Inlet is seeing a boom in exploration for gas and oil. All the companies that I’m aware of are out looking for oil but they also know they are going to find gas. There is a lot of money moving through the community. A lot of wells are being drilled. Gas is being found, being developed, put into pipelines and is being sold.

We’ve got ConocoPhillips saying they are going to reapply for the export license. That keeps roughly 70 Conoco employees and 50 contractors active. I’ve had Agrium folks saying if they could get a guaranteed supply of gas for a number of years, they would reopen their facility or part of their facility. That plant employed about 300 to 400 company employees and about 100 contractors year round.

All of that will hinge on what’s found and the cost of developing gas in Cook Inlet. If the explorers have a market they will spend the money to develop those projects. That’s just how it operates. If they find the gas, but don’t have a market for it or the development costs are high you won’t see it for a number of years.

I think we are poised and well positioned. We have opportunities out there to provide explorers and consumers out there to utilize it. The newer technologies have helped go into old wells to not only find new gas but produce oil.

Petroleum News: And what about Nikiski being named the frontrunner for the LNG terminus?

Chenault: To me, it wasn’t surprising. You have plenty of land available to build any infrastructure as far as any LNG plant or any chemical processing utilizing natural gas. You have access to the water. While it may not be a deepwater port to get huge tankers in there, Alaska’s position globally — and where our market would be, it would be Japan, Korea or China — it doesn’t warrant these huge tankers. A side that’s not talked about too much, is there are not too many ports in the world that can accept these huge tankers. So it makes more economic sense as far as availability of ships and building these ships that you can transport LNG across the oceans.

You can get by with smaller ships. It’s pretty early in the process to say Nikiski is the place. The bigger thing to take away from Conoco, BP and Exxon saying that Nikiski would be the terminus is that this is one of the first times in many, many years that I can think of that all three major producers have agreed to anything. To me, my takeaway, that’s as important, if not more important, than deciding where they were going to go with it.

Whereas before, a couple years ago, you had Conoco and BP were studying on their own project and TransCanada and Exxon working on the AGIA process. You had that divide there. It seems to me like the three (producers) are coming together more. We need to try to facilitate that. At the end of the day, there are four big gas owners in the state: Conoco; BP; Exxon and the state of Alaska. All four of us have to come together and bring forth a project that is going to be economically viable and that will move a gas pipeline forward.

We are years away from an LNG plant being in Nikiski or in Kenai. We are moving forward. It’s another step. The more steps we take, the closer we will get to a project. For years, we didn’t do anything. I figured out, if you don’t ever start it, you’ll never finish it. The community is excited about it. As I told them, it’s early in the process. It’s something all three agreed to and that means we are moving forward in the right direction. Whether it’s the AGDC line or the APP line. The projects will merge. I don’t know what it’s going to look like.

Petroleum News: Do you think TransCanada should be removed from the process? Several have said TransCanada doesn’t bring to the project what the other parties do: natural gas.

Chenault: that’s a discussion we need to take. I don’t think we need to just move them to the curb. They do bring the experience in building pipelines in the north and operating pipelines in the north. So there is some experience there. How do you facilitate them into the project, I don’t have all of the answers to that. Should they be given a seat at the table because they are TransCanada? I say no. We have been working with them on the AGIA process. There is a lot of information on the northern end of the project they have been working on as far as the gas treatment plant and environmental studies. I don’t think we should kick to them to the curb. Just because they have been there, doesn’t mean we give them a seat at the table. We need to see what they bring. If there is value in the things they bring to the table, then we need to consider that.

Petroleum News: OK, for the upcoming session, what are your priorities for advancing a gas line project?

Chenault: we still need to have conversations with the governor about the direction he is going with AGIA and make sure there are no legal issues there. I’m not afraid to take it up. As you well know Rep. (Mike) Hawker and I had HB 144 that would force the AGIA issue. It’s something we prefer not have end up in court, but I don’t see the need to spend money on the AGIA process anymore; it needs to away. I think the governor is on the right track there.

At some point we need to take up the gas tax. We can get through an open season. But what I want to see is a successful open season, and in order to get there, there are a number of issues. The biggest issue is how are we going to tax gas. It wouldn’t surprise me if a gas tax bill gets introduced. It’s important because we won’t get to a successful open season until we do a number of things.

Petroleum News: HB 144 — that was designed to place the burden on TransCanada to prove that it’s economic. Right?

Chenault: Right. The concern is if we just try to pull out of it, we may be opening up ourselves to trebled damages. I think people are still confused over whether that’s three times the $500 million we committed to the project; is it three times the money we spent; or is it three times the money they spent. I’m not a lawyer so I don’t know that. I would prefer to get out of it without a long-term lawsuit.

Petroleum News: A lot of lawmakers said they enjoyed the LNG symposium over the summer, but said they would enjoy more. Do you see the session being used for consultants to weigh in?

Chenault: I think so. I know I’ve had discussions with Rep. (Mark) Neuman and I know probably the first week that we get back down there, the in-state gas caucus will have at least one meeting to discuss where AGDC is now and what’s on the horizon. If there is an interest in folks learning more about LNG and how we can use it as an economic driver for the state but also how we can utilize it better around the state then I can see Reps. Feige and Saddler (Eric and Dan, House Resources Committee co-chairs) would be more than willing to have hearings on it to get information out not to lawmakers but the public so they better understand what’s being talked about.

Petroleum News: Closing out with the upcoming referendum to repeal SB 21, what are your thoughts on how things are?

Chenault: I couldn’t tell you today whether it will pass or not. I don’t think it will. I think Alaskans will see over the next eight months that what the Legislature felt will happen is happening, and that’s more investment in Alaska. While it may take a year or two — or three or four — to actually see the value of that increased investment, that’s what I think will happen. My biggest concern is that the indecision by companies looking to invest in Alaska and saying, ‘we ought to invest, but well, wait a minute, let’s see how the voter referendum goes.’ That delays investment that could be happening today until after the election — whether it passes or not. I think that’s the biggest problem and the biggest fear that I see out there: That indecision of being able to make that investment knowing what you are going to pay and how much investment isn’t going to come to Alaska this year because of this voter referendum.