Isaacson: state needs to keep refineries

North Pole Republican says Alaska ‘energy rich and resource starved’; needs infrastructure, diversified energy, anchor tenants

Steve Quinn

For Petroleum News

While most Alaskans are busy debating the merits of the state’s new oil tax regime that’s going before voters in August, House Rep. Doug Isaacson has been busy responding to the Flint Hills Refinery shutting down gasoline, jet fuel and heating oil production.

Flint Hills ceased production, citing high operating costs and the long-term liability linked to sulfolane spills.

Isaacson, a North Pole Republican who once served as the city’s mayor, said the state needs to get a better handle on environmental regulations and a stronger understanding of the refining industry or risk losing an economy strongly linked to refinery plants.

Isaacson, who completed his first two-year term as co-chair of the Energy Committee, sat down with Petroleum News to discuss refinery issues, plus the Legislature’s recent passing of Gov. Sean Parnell’s large-diameter gas line/LNG bill, SB138.

Petroleum News: Flint Hills no longer produces gas, jet fuel and heating oil. Where would you like to see this go from here?

Isaacson: We still have to look at the overarching picture. We need to take the law seriously where it says there should be a process of applied benefit and not just tax credits. I’m not convinced everybody is going to sue downstream if we sell oil at less than a premium, that everyone else will want that same price. I don’t see Flint Hills and Tesoro suing each other if their contracts are different. What I’m researching is whether these commodities are contracts-price driven. We need to be accounting for the fees; whether it’s a quality bank fee or a royalty oil cost and look at how do we induce in-state refining and how do we keep in-state refining for those who are purchasing royalty oil in-kind and those who are buying it for the state.

That’s first. Let’s get a realistic, holistic view of the value of refining in-state. Second, we need to make sure we keep PetroStar alive and then also attract any other resource, so if we have natural gas plays, how can that benefit refining or other petrochemical productions in the state of Alaska? What products do the local communities need and how can we supply them locally? Coming back from Juneau after session, we were paying $3.50 a gallon for gas; now it’s over $4. This is a huge burden on a community and it’s going to be a bit burden on the state.

If we lose a certain amount of people, we lose certain economies of scale and that further continues the downward spiral of costs.

Petroleum News: Do you think this needs further examination next session, even if there are no new laws drafted, just getting discussion and clarity on the table?

Isaacson: The Legislature must get its hands around this even if the administration doesn’t. Now they’ve started, but I don’t think they’ve continued. The administration, whether it’s DNR, Revenue, DEC and the governor’s office - all of these agencies that are a part of this - they just need to be on the same page and can make things happen. It doesn’t take an act from the Legislature. They can be approaching other industries, other potential buyers, including the climate to attract new investment to the interior with refined products or petrochemical production.

Petroleum News: There is still a lot of hard feelings for Flint Hills shutting down fuel production. What are your thoughts on it?

Isaacson: It’s an understandable decision. When the state of Alaska owns the resource and the state of Alaska sets the price, it’s no longer an open free market. The state of Alaska has already affected the market. We have been gouging in-state refiners with in-kind royalty oil. Then on top of it a regime of cleanup regulations that was changing and intractable. When the division of spill and the division of water work against each other and the DEC refuses to acknowledge what other jurisdictions do, whether it’s in British Columbia or the state of Texas, and dismiss without even a summary of why they dismiss the alternative cleanup levels, and when the modeling isn’t even done and regulations are required without understanding the problem, it puts a perpetual distant horizon to a business. A business can’t function that way. So I do understand from that point of view. This is where the Legislature can help. I’d like to create a science board so any of the agencies in the state have a peer reviewed panel. You’ve got to have people who have totally different opinions about how you solve a problem. That’s one of the things we don’t have, a science review board. If DEC is only duplicating EPA, maybe it’s time to defund those departments that are duplicating EPA. And if EPA is overreaching, then maybe it’s time to empower our state agency. I’ve been talking to Congressman (Don) Young on possible solutions. I am toying with ideas about what the Legislature can do, keeping in mind - seriously keeping in mind - the need to protect the public but also the need to have a major employer, otherwise we won’t have a public.

Petroleum News: So what are your thoughts then on the incentives, or tax breaks, the Legislature passed this past session. Some believe it went too far. Others felt it was rushed.

Isaacson: I don’t think it went far enough. Again it’s shifting the burden of where the dollars go. Does it go to the state treasury so that we can continue propping up individual welfare or should it go back into the communities where men and women can work directly in those kind of jobs? Every refining job at Flint Hills created 10 more jobs in the community. They could have been high paying jobs in the railroad, in construction; they were in banking, they were contractors. It was one of the reasons we were able to save Eielson. There is a lot of other development associated with that big manufacturing piece. We tried to say the market will work without understanding that we the Legislature by law are setting the market conditions when it comes to oil and gas.

Petroleum News: Let’s move on to SB 138. Even if the pipeline doesn’t go through your district, you and other Interior lawmakers believe it will have a tremendous impact on your region beyond the prospects of affordable energy.

Isaacson: Overall, we wanted to make sure the state earns money regardless of what the market price of the commodity is and that calls for ownership, but we also want to protect our interests and we need to have someone competent in charge of the pipeline.

There were a lot of questions about whether we hire consultants and put out an RFP, and would that slow down the process, the timetable, and get us out of the market window. Or do we go with TransCanada. We’ll see what the results are.

In my own backyard, we’ve got to get fuel and energy costs down to as low as possible. Affordable has always meant to me that it stimulates private investment, it stabilizes current employment and it attracts new employment.

A large diameter pipeline or the AGDC (in-state) pipeline should accomplish that. Trucking LNG to Fairbanks is just a bridge to one of the two developments. Technically the larger the pipe, the more fuel you can transport.

There’s also PILT, payment in lieu of taxes, and even though the pipeline may not go through the North Star Borough, we are the staging point for the services. Just like the last pipeline we had shortages of housing and stress on our road and on our public services; we need to make sure we are not stressed further.

Petroleum News: Some still who gave support did so with skepticism and cautious optimism?

Isaacson: I appreciate what they could be saying. But if we always look to the past and say that is the projection to the future then we will never a get a future that is our making. We’ll be destined to repeat the failures of the past. I don’t think that we have to. It causes us to be wary but I think that’s why we’ve taken as long as we have in committee work. Even though I haven’t sat on those committees, I’ve followed them, especially House Resources. So we’ve been watching. It was a huge discussion in (the majority) caucus. I am also cautiously optimistic, but we have to move forward. This is the right thing to do. It’s 40 years late.

I was here for the AGIA stuff as mayor. I was listening in or was here personally sitting for three or four days. Then we had all of the fights in the local communities. I was never a fan of AGIA, but it’s what we had to work with.

I also understand there is still a cynicism whether or not ExxonMobil is genuine. But since the settlement on Point Thomson, and they have to get their gas to market, but even I as late as November heard at an RDC meeting, heard an ExxonMobil engineer saying from a pragmatic point, ‘we can’t be rushed with this plan. It’s on our timetable, no one else’s.’ So that would lead to skepticism in the community that the salesman within the ExxonMobil organization might be trying to tell us something different from the engineers and those that make the actual go, no-go decisions. But that was before the three entities entered into an agreement with the state of Alaska. This changes the field. It gives direction and a timetable and a known way to proceed. This should provide optimism.

Petroleum News: Among the people helping take the state to the next stage is DNR Commissioner Joe Balash. You went out of your way to defend his appointment during the floor debate during the Legislature's confirmation vote. Talk about that, please.

Isaacson: Why did I defend him? I think for all the reasons they were coming against him, they were proving their argument that he has the breadth and depth that is necessary. No, he doesn’t have extensive commercial background. He has been a student of the law. He helped create the law. As you know staff is a big part of how we get our work done. He was that staffer. He’s a North Pole kid.

He has background with the refineries. Lord knows he and I have fought long and hard over the law. But when responding to a crisis, he took this one seriously. He said that’s not what my department says I can do: he took a look at the law in relationship to Flint Hills, in relationship to PetroStar, in relationship to the other commercial and military investments with the governor and the governor’s chief of staff (Mike Nizich), the commissioner of DEC.

It became apparent that soon Joe was leading the band because he got it. I’ve talked to a lot of people in his department and they respect him. That’s very important. You don’t get seasoned veterans respecting a kid if the kid is incompetent. If the guy doesn’t know how to use his knowledge base and experience that he is overseeing, they are not going to respect him.

They are not cutting his legs out from under him. They are helping him succeed. That tells me something. I don’t know what it all tells me but it says he’s got what it takes to lead: Skills; knowledge; Alaska love. He gets the message. He knows how to tackle issues not as silos but as an organism and how it affects the whole.

All of that experience has taught him what failures are and how to avoid those pits.

One of the things that struck me about him is that he’s learned not to let his emotions get the best of him. He’ll take a breath, listen and have the appropriate people get back to us. I like the idea of Alaska grown as much as possible. It doesn’t have to be old men. It just has to be competent people.

Petroleum News: Let’s talk about your role as Energy Committee co-chair. You took a trip to Iceland last year. What were some of your takeaways?

Isaacson: How primitive Alaska is. We think we are so advanced and we have such chauvinism because we are Americans. These nations around the Arctic don’t understand how we can be so energy rich and resource starved.

We can’t defend ourselves. My takeaway is instead of trying to defend the status quo, let’s change the paradigm. Let’s connect Alaskans to themselves, to energy, to affordability because we’re supposed to encourage self supporting. That was reinforced to me in Iceland. I remember we were sitting as a panel and as everyone tried to defend Alaska, I’m sitting there because there was no defense. We are responsible for the problem but also fixing it and finding a solution, getting people to agree on it, and set direction. One person stood up, and said, you have no infrastructure. You are energy rich and resource poor.

Petroleum News: I’ve heard people say we need to use the Norway model or the Iceland model. But those are socialist countries, though. What can you extract from what they do?

Isaacson: One of the things we have to be careful about is using labels. Labels can become something that shuts down a conversation. We fail to see in many regards our constitution can be interpreted as a socialist model because private property doesn’t exist. That is the mineral wealth of Alaska - subsurface rights - belongs to the state and not to the people. So from that standpoint, we start off with a socialist model. So we need to work toward market dynamics or we tend to socialism. Again going back to interpreting maximum benefit as maximum dollar to the state treasury, everyone argues get the most for the state treasury, that’s the socialism.

So something like the refinery benefit looks like a tax credit but it is really a way of bringing about a cost or supply benefit to Alaskans by reducing the cost of refining so that ultimately in-state is at least competitive with out-of-state. We need to figure out a mechanism and this is what your models from Iceland have done. We need to figure out a model that will allow us to attract business as anchor tenants and they boost our property taxes. They are the large energy consumers. They provide logistic reasons why you need roads. We need to figure out a way of attracting these big employers throughout all of our region. Iceland has done it by looking at energy costs. So did Norway.

We’ve got to remember something about Norway. They do have high personal taxes and their grid was originally made with American investment. They looked at our Permanent Fund. Instead of giving it to their people, they’re accruing that to the state. They give the citizens benefits like medicine and education. What they have done with energy is that they use renewable energy in-state, have a postage stamp price and sell the high price commodity to the highest bidder. They use low price and gain maximum value. We are still dependent on diesel.

The fact is we didn’t create a grid using our natural gas in the (’60s). We allowed one community to benefit (Anchorage with Cook Inlet). Now we’ve got to learn a lesson that it can bankrupt the rest of Alaska if we don’t diversify the energy streams and don’t diversify the anchor tenants to make those energy markets sustainable in the outlying areas. That is going to be up to the villages a lot of times. Iceland created a grid to connect their communities. They are using their geothermal to such an advantage that you had hotels where towel bars are heated. The sidewalks didn’t need to be plowed because they were heated. Talk about how that helps the environment when you are not laying down salt on the sidewalks.

We’ve got to start taking control of our destiny, and oil and gas is the vehicle we have right now to fund all of this. We’ve got to start saying what will disappear, what will remain. Will our communities be connected to efficient energy sources, whatever they may be, and are we attracting the business that will employ our people and give us cash economies so we can live the lifestyles that we want wherever we are.