Chenault: Legislative session successful

House speaker discusses passage of governor’s oil tax bill, in-state gas pipeline bill, says market will determine where gas goes

Steve Quinn

For Petroleum News

House Speaker Mike Chenault’s resource development priority is about to become a reality. The in-state natural gas pipeline project he and colleague Rep. Mike Hawker pushed is ready for Gov. Sean Parnell’s signature.

House Bill 4 empowers the Alaska Gasline Development Corp. to move forward to an open season for an in-state natural gas pipeline, putting this project on parallel tracks with a larger-diameter line to tidewater for in-state and export use.

Fresh off what Chenault calls one of the most successful sessions he’s seen since first entering office in 2001, the state’s only three-time House Speaker sat down with Petroleum News to review the session and take a look at what’s ahead for the Legislature.

Petroleum News: When you consider passage of the oil tax reform bill Senate Bill 21 and your HB 4, how would you rate the work done in the legislative session?

Chenault: This year has been one of the most productive sessions that we’ve had. We dealt with two big issues and moved forward with those: gas and oil tax. We also kept the operating budget to a smaller increase that it’s been in years. We also passed a capital budget that was responsible. It wasn’t too big in my opinion. It wasn’t too small. It took care of a lot of needs in the state of Alaska, certainly not all of them. We got quite a bit done and it was all for the positive.

Petroleum News: We know there are no guarantees of any kind of return, for SB 21 but what do you like about the bill and what do you believe its potential is?

Chenault: I think all of the hope and potential is that we see more investment into the state of Alaska, not only by the big three but by newer investors. The ultimate goal is to have more production and more oil flowing through the TAPS. That’s the way I look at it.

Petroleum News: What provision in SB 21 do you think will most drive that?

Chenault: Each section is important to different developers, depending on whether you’re a small guy or a big guy, each one of those you may be able to take advantage of to your favor and make your economics look better as far as getting more of your company invested dollars into the state of Alaska than elsewhere.

Petroleum News: This kind of change has been pursued the last three years. What’s changed other than the legislative lineup?

Chenault: If you look at most other oil producing regimes across the U.S., you’ve seen over the years, they have increased their production levels. Alaska hasn’t. I believe the major reason why Alaska hasn’t is simply because the tax rate is too high and they have been able to invest in other oil provinces and make more money. I think SB 21 brings Alaska back into the game. We’ll see that investment continue to grow over the near term and the long term.

Petroleum News: If the investment doesn’t grow, then you could have a two-pronged argument that SB 21 didn’t go far enough or it’s simply a giveaway for not working. Do you think you’ll have that problem?

Chenault: I don’t think we are going to have that problem. We’ll see the generation of more investment in Alaska and that more investment will certainly turn into more production. That is the crux behind SB 21. We get more investment. That turns into more production. That turns into more money for the state of Alaska.

Petroleum News: The final passage vote was pretty close. What does that tell you?

Chenault: I don’t know what it really tells you. Some people say boy you just barely got enough to get it past so it must not be good. Unless it’s a bill they want. If it’s a bill they want, they say great job. You got the votes you needed to pass. It only needs 21 and 11 and the governor to sign it.

You know, everyone has their own ideas whether they were the Democrats or some Republicans. Some thought it went too far. Some didn’t like a particular piece of it. I can’t fault anyone for voting any whichever way they voted.

Sometimes we wonder if it’s only 21, whether that’s better or not. I’ve had bills pass the House with 22 votes and the newspapers crucify you saying, “Oh my God. It only passed with 22 votes.” But if it’s a bill that somebody else wants and it may not be popular for a number of different reasons, people will celebrate, saying, “Hey, we got that passed.” But the rule is 21, 11 and 1 for it to become law.

Petroleum News: You’ve got good news recently. ConocoPhillips said they would follow through on what they told Wall Street and Repsol said the bill makes a difference in developing their discoveries. Has it really made a difference already?

Chenault: I believe Repsol said either last year or the year before last that “hey we love the credits and everything ACES provides, but if we find a developable field, we are concerned about the tax on it.” Most of the people utilizing the credits liked the credits of ACES, but they didn’t like the tax rate associated with ACES. Can you say they made this investment because of the tax change? I don’t know if you can really say that, but it’s going in the right direction. We are hearing about projects that have a chance of coming online versus where they were pulling projects off the board because they didn’t make economic sense under ACES.

Petroleum News: Let’s switch to natural gas. Again, what do you think is the potential for advancing a gas pipeline project under HB 4?

Chenault: I think the potential is very good. AGDC will continue on with their engineering. They will make sure they have all their permits in place. They currently have the state right-of-way permits. They have the federal EIS (environmental impact statement). So I believe they will have all the permits needed for the federal right of way and they will continue engineer work and go to an open season in 2014. Hopefully they will have buyers and shippers make commitments on both ends of this thing, and they will sign precedent agreements, work their way through any issues they have and be able to put a pipeline project on the table and get gas to Alaskans by 2019.

I think if we get to an open season and we’ve got the buyers out there who are interested in buying the gas, it doesn’t force gas producers to sell that gas, but if there is a market out there that is economic to make money on it, this helps them make the decision.

Chenault: The market is always going to determine the project. Right now the pipeline is a 36-inch, 1,440 psi carrying half a billion cubic feet of gas a day, according to law. The market may change that. I don’t see it changing it to being a smaller pipeline. It has the opportunity to make it a larger pipeline. Whether it’s to increase in pressure, or whether that would be an increase in wall thickness in pipe or pipe diameter. If the market comes back with a larger commitment to buy gas and sell gas certainly that opens up other venues. Right now it’s scheduled to come to Cook Inlet. But if the buyers and sellers decided they wanted it to go to Valdez, or somewhere else, they could put that stipulation in there. And if they want to sell our gas, and the price is right, then that gas line project is going to go where the market dictates, not where Alaska dictates.

Petroleum News: You got a lot of pushback on this bill, at least from Valdez. Have you ever seen that kind of pushback? What are your thoughts on that?

Chenault: We didn’t get pushback from a lot of places. We did get pushback from Valdez. I kind of looked at it and I wondered what MVP stood for (Maximum Volume Pipeline). Valdez felt they needed a way in and try to tell Alaskans the bigger pipeline is better. Well, I can tell you the bigger pipeline is better. It makes better economic sense. I’ve been saying that since we started this. Unfortunately, unless — as some propose — someone wants to spend $40 (billion) or whatever the figure is, economics is going to drive this project. I don’t fault Valdez for doing what it was doing. I think it was pretty shortsighted. The message most people got was that Valdez was looking out for Valdez only, not the rest of the state of Alaska. They spent about $1 million. Unfortunately that $1 million could have been spent on a $914,000 capital request they put in the budget to put a new roof on the school. They chose to spend that $1 million in a different way. At the end of the day, you can see through the votes not only in the House, but in the Senate, that ad campaign did nothing but waste money.

It’s frustrating because we’ve worked 40 years to build this pipeline and we’ve tried the same thing over and over again. We’re not one pipeline joint closer to putting pipe in the ground. This is a different way to approach it.

We think it takes some of the uncertainty out of it. If we’ve got a project that’s engineered and that your buyers and your shippers can look at, have faith in the numbers and pencil the numbers out and work it out.

We keep hearing Japan wants to buy our gas, and Korea and China. Sure they want to buy our gas, but they want to know what the gas is going to cost before they make a commitment to do that. They are not going to make a commitment until they know exactly what those costs are going to be to move the gas from Prudhoe Bay to tidewater and tidewater to wherever they would like it delivered. We can talk about it all day long, but until they sign on the dotted line that’s never going to happen.

Petroleum News: If a pipeline project does advance during the interim, do you see a special session to draft any further gas tax legislation or longer-term fiscal terms or is that something that takes priority next session?

Chenault: It’s early to say. I don’t see anything happening on the horizon today that would warrant a special session. I think that may be an issue we take up next session or start looking at next session. I don’t see where it gets to where we have a special session. Certainly if it was warranted and if it were important enough that we needed to take that issue up, I would be in favor of going down and doing that.

Petroleum News: Do you see discussions about Arctic development will emerge now that some of the other heavy hitting items off the plate?

Chenault: I think they will. You know we got bad news from Shell with problems they had with the Kulluk and ConocoPhillips has delayed their move into the Arctic for at least a year.

I do think this coming session we’ll be talking not only about oil and gas development in the Arctic but also how do we as a state protect the state’s interest in regards to America being an Arctic nation. I think Alaskans understand what that means for the most part. I don’t think that the U.S. government understands that the U.S. is an Arctic nation and we need to take steps to make sure that we protect our interest and that we take care of the Arctic as it gets developed.

We need to be a big player in that. You see China and others build big ice breaking ships. China is not even an Arctic nation, but they are going up and putting forth a presence to be considered an Arctic nation when in reality or not. My concern is does the U.S. and does Alaska protect our interest in the Arctic?

Petroleum News: What do you think the state can do?

Chenault: We’ve got a task force put together. They are going to come back with recommendations. We need to look at the possibility of a port up north where we can have our cutters and an ice station up north so we can have that presence up there. Right now I just don’t feel like the U.S. is putting forth enough effort to make sure enough people know we are an Arctic nation and we are there to protect our interest in the Arctic.

Petroleum News: So people think we’re more of a state that has Arctic borders but we’re not necessarily an Arctic nation?

Chenault: I would think so. I would almost be willing to be that if you did a survey of folks down south asking if you think the U.S. is an Arctic nation, probably most of them would say no. I’m assuming the people in Congress, the Obama administration and the Senate all know that we are. But how important of a discussion is going on in D.C., I don’t know. It’s probably not the level that it should be.

Petroleum News: What do you as legislators do about that?

Chenault: Every opportunity we get as legislators or even Alaskans get, we need to have our voices heard. We need to take the steps needed to makes sure Russia, Canada and China know that we are an Arctic nation and we need to take care of our interests. I realize we’re an Arctic state, but we are also an Arctic nation whether we like it or not.