Kelly steers LNG bill through Finance

Fairbanks senator talks about issues his committee faced with enabling legislation giving Alaska an equity stake in an LNG project

Steve Quinn

For Petroleum News

Last year Sen. Pete Kelly let his Senate Finance Committee co-chair Kevin Meyer handle the oil tax reform legislation, one of Gov. Sean Parnell’s signature laws to advance through the Legislature.

This year, Kelly, a Fairbanks Republican now in his second year of his second tenure in the Senate, handled Parnell’s major resource offering: Senate Bill 138, Parnell’s LNG legislation.

A few days after the committee passed SB 138 and one day before the Senate approved the bill, 15-5, Kelly sat down with Petroleum News to discuss the work Senate Finance did to advance the bill, including provisions for rural Alaska derived from project-driven state earnings, giving the Alaska Gasline Development Corp. more authority and giving the state 25 percent equity into the project.

Petroleum News: Can you give us an overview on how you approached the bill?

Kelly: We began to have presentations before the bill came into the committee. I knew it was going to take a long time; there were things we needed to be sure on as best as we can. I mean, we are looking pretty far into the future. You can’t be 100 percent. So I had asked that we get the information in committee going before we had the bill. I thought the consultants that we had and the consultants the administration had made a case that this is a fairly elegant package that’s been put together.

Clearly the state can’t do this on its own. If we just did the taxing scenario, which most sovereigns do, we’d probably end up with a lot less money and more risk, risking future money wouldn’t be there. Obviously, there is risk involved in being a partner in this. I don’t mean to minimize that. I think they made the case that the state is better off being a partner because we can get into it at a more significant participation if we have a partner and we can make more money being in the gas business given that we’ll have to do that through some surrogates.

So I thought the case was made and I thought it was important, as I looked at how we were going to proceed as a sovereign, did we want to start remaking everything that we had done in HB4 last year. The administration didn’t make the case, but others made the case that we probably should give AGDC more authority than the governor wanted to give them. That’s why you saw that we put a program director in there. We fought a little over whether the Attorney General should be the lead counsel on this. Ultimately it was the feeling of the committee that he should not. That may be resolved in the House, I don’t know, but that was part of the bill that was a bit contentious.

We thought we should be in at 25 percent. We were at 20. We moved it up to 25. The reason was that this is so early in the process. You can stake your claim at 25 percent now. In the future, you can back off of that and sell your share actually at a premium. If you go in at a lower amount, and say we want more, you will have to pay someone else at a premium. Fact is, you probably couldn’t get in at a greater amount anyway. So the best thing to do is go in higher and you always have the opportunity to drop back, and you can probably drop back and get some money out of the process in the first place.

Then we went to the rural energy fund. I actually like changing the name of that because I think there is some misunderstanding of what we created. I had discussions with people who think it should be an outreach energy fund. What you have is this line going down the middle of the state. There are people on the other sides of the line who will benefit from that fairly quickly. There are people that going all the way out who will probably need some help from an energy fund to make sure gas or lower cost energy gets to them. Those people might live on Chena Hot Springs Road in Fairbanks, they might live in Nenana, the might live in Wasilla. There are a lot of places that don’t have gas that aren’t necessarily deep rural Alaska.

We also want to make sure people of rural Alaska have it also, that we didn’t miss this opportunity to set something up. I think Lyman (Hoffman, Bethel senator) made a pretty good case that we’ll look back on this and we’ll wish we had done something like this. We’ll take income stream from this project and put it into an outreach energy fund.

Petroleum News: OK, you guys started working on this before the bill got to your committee, so what was your thinking doing it that way and is 90 days really enough to accomplish something this big?

Kelly: Ninety days is a bad idea whether it’s something this big or something else, so we adjust and we do the best we can. You saw we did HB4 last year, we did the gas trucking to Fairbanks last year, we did the oil taxes. So we can do it, but 90 days doesn’t serve the people of Alaska well at all. It kind of dawned on me that this is the second committee of referral (between the Senate and House). We’ve had exhaustive presentations and there came a time we had to get the bill out. That’s why I’m a little inoculated from criticism from when people say we are rushing this. We’ve known there has been gas up there on the North Slope since the first headline in 1954 or something like that. We’re not rushing.

Petroleum News: There is this prevailing thought that the window of opportunity is now, and it’s always been there. So is it necessary to get it done in 90 days or is it that it can be done in 90 days?

Kelly: The minority is always going to find a way to criticize it. The less meat there is to their criticism, the more you’ll hear things like you’re rushing it, or the people in Alaska haven’t had input — those kinds of clichés. I don’t take it very seriously. I refer the last two to fellas who we serve with here who are in the minority and more from certain people in the press who just complain about everything. It’s always the same stuff: going to fast; not listening to the people of Alaska. They just ask questions but they have no substantive contribution. They ask questions that can’t be answered but are designed to damn the actions of the Legislature or whoever happens to be in power that they don’t agree with.

Petroleum News: Let’s go to your point about giving AGDC more power. What’s driving that?

Kelly: they seem to be the entity that’s available that can do this. You don’t want government trying to accomplish these types of things. You can’t have the talent that you need for something like this because you have all kinds of pay restrictions. AGDC was created to be fairly powerful, fairly nimble and you need those kinds of things to pull off a project like this. I have great trust in the board and particularly the executive director Dan Fauske. He’s a home run hitter.

Petroleum News: The chairman (John Burns) is an attorney, as well as a former attorney general; does that enhance your confidence in the board?

Kelly: I’m not sure I need more confidence. This is the type of project where you need the F. Lee Bailey of pipeline attorneys. I’m not sure who that is. That’s who you want and you want access to them. If you wanted to go through the attorney general’s office, you have to remember they have a lot on their plate and they are distracted. They are not motivated like a law firm is money wise.

We structured the bill so you didn’t have that separate subsidiary, that separate corporation the governor wanted. You are really handing AGDC the ball on this one. There may be some criticism in there and I may be one of them that there still may need to be some changes to boost AGDC’s role in this.

Petroleum News: There are people who staunchly support AGDC, so what else is it that you like about this body?

Kelly: They are powerful and they are nimble. We gave them plenty of statutory authority to do these kinds of projects. We have talented people in place. We’ve given them lots of money in the original fiscal note, plus in the fiscal note this year. They should be able to deliver for us. I’ll be really curious to see if the big line doesn’t go forward and we are removed from the requirements under AGIA, I’ll be interested to see how quickly AGDC adapts itself to the needs of in-state energy of getting gas to the burner tip. They will have to take that 36-inch line down to something quite a bit smaller. There are so many restrictions with AGIA right now. Later on when AGIA is off the table and there is no major LNG line, they are going to still deliver gas to Alaskans, I hope.

Petroleum News: Has the bill done enough to set aside AGIA?

Kelly: I honestly don’t know the answer to that. I really don’t.

Petroleum News: OK, let’s go to your point about the 25 percent. How did you reach this figure?

Kelly: Early on everybody said we need to go to 25 percent. The consultants said go to 25 percent because if you don’t like it you can pull back on it a bit. One of the great challenges of this bill is that people want to discuss things that aren’t in it. They want to discuss the larger pipeline and from time to time, you have to remind yourself this bill is getting us to pre-FEED (pre-Front-End Engineering and Design). The consultants are saying you’re just going to pre-FEED, establish yourself early on. It was kind of a general consensus. I didn’t hear anyone in the Finance Committee object even once.

Petroleum News: And back to the outreach fund. Several said 20 years from now you’ll look back and be glad you’ve done this. You’ve got the five off-take points, so how does this outreach fund make this a statewide endeavor?

Kelly: I think that is probably going to develop over time. Just as we don’t know exactly where the off-take points are now, we don’t exactly know what the needs for rural Alaska are or even 100 yards over there are going to be years from now. I don’t have an answer for that. It’s going to take some crystal ball gazing. The point is we want to make sure that in this fund delivers lower cost energy to Alaska. It doesn’t have to be LNG. That’s one of the reasons I don’t like the renewable energy fund. It’s too esoteric. It’s wind. It’s solar. It could be construed by some that it’s a slush fund for rural Alaskan projects. I don’t care if it’s coal. I don’t care if it’s oil; I don’t care if it’s LNG; as long as it’s lower cost. We got off on all of this solar, which is interesting, but our needs are much greater than that. We have the resources to get lower cost energy to rural Alaska. Our challenge is transportation.

Petroleum News: Your committee was criticized for not considering two reports critical of this plan. The first was by Roger Marks and the second by Rick Harper, which was posted on LB&A’s website a few days after you passed the bill out of committee. What are your thoughts on those reports?

Kelly: It’s mostly against Trans Canada (Marks report). I like the Trans Canada model. You’ve got a company that’s built pipelines, that’s willing to fund our portion and willing to get us a larger share, a company that’s got $130 million worth of data that’s relevant to this project and by the way a company that has met the terms of AGIA. We are the ones who created the terms of AGIA. They signed off on it with us. There are people who wanted to criticize them for being part of AGIA or they are carrying around sour grapes because they are part of AGIA. The big problem is you say let’s go to somebody else. It’s going to take a year to develop the RFP to go out to get people and it’s going to take a year to get a response. The last time we put an RFP out, TC was the only one who responded (with a conforming bid), so we might have anybody in the future and they are willing to go now. Like I said they’ve got $130 million invested in the project.

Petroleum News: So without playing Monday morning quarterback, is there anything that you wish you had worked into the bill?

Kelly: My answer is no but maybe not for the reason you think. I’m more of a quarterback than a coach. I don’t have to have my personal paw prints on everything that goes through my committee. Sometimes you’ve got to realize you’ve got to get a decent product through your committee and keep it moving through the process. That was only the second committee of referral. We massaged it and squeezed it. If we had examined it anymore, we would have just been taking up time and not made any changes that were worth the time.

Petroleum News: You’re in your second year of co-chair this go-around. What’s the learning curve been like?

Kelly: It’s been a pretty steep learning curve because I wasn’t around for the debates — the oil debates (ACES) and pipeline debates (AGIA).

Petroleum News: So do you think it helps to bring fresh eyes and ears to the debate?

Kelly: Not necessarily. You need somebody who doesn’t get wrapped up in a lot of the nonsense that accompanies a bill like this. If you don’t have a chairman that ultimately comes to the point and realizes this is the second committee of referral and the bill has to get through the floor, over to the other body, then it’s got Resources, Labor & Commerce and Finance. If you don’t have chairmen who understand that, they don’t know how to get a bill through the process. That’s one thing I do understand, whether it’s oil and gas or anything else. That’s probably what I bring to the table. You don’t need a fresh set of eyes as far as the substance of the bill, but you do need people who are willing to move the process along and who don’t get caught up too deeply into the politics. Yes, politics is what we do here. But what we saw a few years ago with the bi-partisan working group, stuff got stalled and stalled and stalled. And there were always reasons for killing something. I just don’t play those games.

Petroleum News: As someone who has been in leadership positions, and in this state watching this debate go back and forth for decades, do you see this as the only window of opportunity? We’ve heard “the time is now” a great deal in this building.

Kelly: At a certain point, you’ve got to believe the people that you hire, and that’s kind of what they are telling us. I don’t know if it’s the only, but it’s the next window. There is the old adage don’t let the perfect become the enemy of the good. I was down on the floor today and a guy that I really like — Hollis French — was talking about rushing the process. Come on. Every time we get close on this thing, there is something you can dangle. With our AGDC structure, we are so not confined that we can’t shift courses a little bit. This is the biggest project in the world of its kind to get what we know is somewhere in the neighborhood of 36 trillion cubic feet of gas off the North Slope. There are markets in Asia who will say we’ll take it or it’s anticipated that they’ll say we’ll take it. There are companies are who willing to put a lot more on the line than we are. If it doesn’t work out, we’ve got off ramp after off ramp after off ramp built into this thing. This is an opportunity. It’s probably worth the investment. We should take it.