Kawasaki on opposition to Senate Bill 138

Fairbanks Democrat, one of 4 ‘no’ votes in the House, has concerns with enabling legislation for participation in an LNG project

Steve Quinn

For Petroleum News

House Rep. Scott Kawasaki sat on the Resources Committee during seemingly endless hours of testimony and debates over amendments on Senate Bill 138, Gov. Sean Parnell’s gas line legislation. Kawasaki has been in office since 2007, having voted for Gov. Sarah Palin’s Alaska Gasline Inducement Act and House Bill 4 last year, drafted by House colleagues Mike Chenault and Mike Hawker. But Kawasaki, a Fairbanks Democrat, did not approve of SB 138.

Kawasaki discussed his views on advancing a gas line with Petroleum News.

Petroleum News: You voted for HB 4 last year, but didn’t vote for SB 138. I realize they are different bills, but the missions may meld together. What drove you to a no vote on SB 138?

Kawasaki: It’s very difficult to vote against such a bill that promises so much. Former Majority Leader Ralph Samuels was the only vote against the Alaska Gasline Inducement Act at the time when people bandied about the words historic and momentous and that can make it a real challenge to vote against a bill that promises so much. Ultimately I felt I had to vote against it. I did a lot of research on it. We sat in the Resources Committee for a long time delving into the issues like the economics. Ultimately there were questions that were never answered, chief among them whether state ownership was a good deal and whether we actually have an opportunity in the future to either exit that plan or bring it back for the Legislature to deal with what it really means. Those were the big hang ups in my mind, so that’s ultimately what I had to vote no.

Petroleum News: What are some of those other hang ups — that is if you want to break out your position further?

Kawasaki: There were no guarantees in the enabling legislation that oil taxes wasn’t going to be part of the discussion in the future gas line. It seemed like the administration believed that was so, but they wouldn’t put it on paper. That made a skeptic out of me. The other provisions that were in there dealing with like who was going to pay for the infrastructure. Again it was part of the HOA (heads of agreement) and it was discussed in committee. That was something I felt should have been in the legislation. I felt the marketing contracts should have been in the body of legislation. The other things even dealing with gas offtake and how the state will be protected, I don’t think were ever answered. Fairbanks being a stop point in my mind for any sort of gas line, I wanted to make sure Alaska gets some sort of benefit for its gas. If we are taking a lot of risk in moving the gas, we share that risk among other folks.

Petroleum News: You’ve said in the past that you were concerned about openings for expansion under this approach. Do you still feel that way?

Kawasaki: That was one of the signature provisions in the Alaska Gasline Inducement Act was a consideration of basin control. When you’ve got the three resource owners in Prudhoe Bay, the question has always been how are other entrants going to be considered. The future of that is to have the basin unlocked so there are lots of explorers, lots of players, lots of developers, not just a few. I think we’ve seen that with the TAPS line where it’s very difficult to get into the game if you are a junior or smaller player. One of the provisions of AGIA in order to make it different than the pipeline we have now, let’s allow for some real pro-expansion principles that allow independents and junior players get in the game.

Petroleum News: You said it was tough to vote no on something that offered such promise; was there anything about the bill or the agreements underpinning the bill that you liked?

Kawasaki: Again, I think we skipped way over the issue of state ownership in putting ourselves into a position where we are suddenly a junior partner in a large pipeline project. The issue of dealing with being a regulator as well as being a sovereign I think poses some risk. While some legislative consultants for the administration said this is how it’s done in other parts of the world, the examples are not similar to Alaska.

They mentioned Brazil, the mentioned Russia, they mentioned other oil and gas sovereigns that have their own infrastructure, that have their own oil and gas companies or corporations. Alaska doesn’t do that. We are not in that kind of business model. I think it was apples to oranges when we are trying to compare how we would operate similarly to Russia or Petrobras in Brazil or Venezuela. It was a thoughtful idea, I think. Again, we skipped over the ownership stake and went directly into saying this is how some other folks do it, so why can’t we. I don’t think it was a good comparison — an intriguing idea, but not a good comparison.

Petroleum News: So then what concerned you about the prospects of being an owner?

Kawasaki: I think the issue of being a regulator and part owner in a line poses some potential conflicts when it comes to environmental damage and when it comes to our own sovereignty. Their priority is ensuring for instance they make the most profit. Our interest as a sovereign should be to get the maximum benefit for the people of the state of Alaska. The maximum benefit is a real moving target. It might not be dollars and cents. It might be getting cheaper value at the beginning of the line or at the end of the line, or somewhere along the line. That was a particularly troubling thought that the state would engage itself in a lot of risk, put all of our eggs into one basket, then suddenly we would be competing with similar projects across the world. This is our only project. It will be a number of projects they are involved in across the glove. That’s not a good competitive advantage as a sovereign.

Petroleum News: So what could to ease your concerns between now and when the contract comes back at the end of 2015?

Kawasaki: I think getting some of those unanswered questions answered will be necessary: how the gas marketing will work in a global market; how the off takes will allow for consumers in my community in Fairbanks to benefit; how property taxes are handled in a borough like Fairbanks are being treated. I will be very uncomfortable signing one. The real threat and real problem in a bill like this, is you are going to advance this bill to a point where it gets so far down the line it will be difficult for any legislator to say no this is not the contract we want to see go forward. We’ve seen that time and time again. The only time when it gets challenged is when you have an unpopular governor during a very long election year.

Petroleum News: If the line doesn’t run through the borough, then the property tax issue is off the table for you isn’t it?

Kawasaki: The other issue with property taxes has to deal with impact aid and properties that are going to be used for oil and gas in the future. That was one of the issues that was never taken off the table other than a letter of intent and the governor’s executive order in how that might be treated and that folks would be involved and engaged. I would have liked to see it in the enabling legislation. That’s what legislators are supposed to do, write the confines of the law rather than leave it open for interpretation.

Petroleum News: You weren’t around for the Stranded Gas Act discussions during the Murkowski administration. Your term started just after that. In talking with your colleagues, do you see that same kind of contract coming back?

Kawasaki: I really do. The HOA and the MOU (memorandum of understanding) were done behind closed doors. This bill SB 138 was essentially a bill to legitimize the HOA and the MOU, which were done behind closed doors. It’s the backward way to do things in my mind. I have the same fears as the legislators who were here during SGDA. I share those concerns that we’re going to have a contract for a stamp up or stamp down. That’s not really the way I think the process is meant to be.

Petroleum News: Don’t you think it’s difficult to have negotiations such as this in public? That’s not exactly a standard practice.

Kawasaki: I think there is a certain thing to be said about negotiations in public. It tells the business community and industry what we would like to see in a pipeline. Though the AGIA process didn’t produce a particularly viable option with gas prices faltering and falling, the process I don’t think could be construed as negative. What we had was this is what the administration, this is what the Legislature and this is what the state of Alaska want in a gas line: bid for it. I kind of liked that kind of approach versus this one, which is done behind closed doors.

Petroleum News: Getting back to HB 4, which you again approved, then the issue of a board member from Texas rather than Alaska arose. This concerned you. Do you really see this as a problem with just one of five being from out of state?

Kawasaki: I see that as a pretty significant problem for a board of directors from the state, for the state advocating for the state of Alaska and its residents and have a person that isn’t from the state of Alaska on it while holding a distinct policy making role. On top of that a couple of folks on the board who said it was really great to have this kind of expertise on the board and it lends credence to board discussion and that they will listen to his judgment. That scares me even more that a member who is not from Alaska and doesn’t have roots in Alaska will be making huge policy decisions on everything from gas off take to in-state pricing to eminent domain. And I really believe if the person were a value to AGDC (Alaska Gasline Development Corp.), then they can contract with that person as an advisor. For that person to become a policy maker gives me real concern.

Petroleum News: Several backers point to Exxon’s advancing Point Thomson as a strong sign Exxon is serious. What were your impressions during your visit there last fall?

Kawasaki: I’m a little bit upset that it had to come to the point where litigation was necessary to really get some movement up in Point Thomson. From the state’s point of view, we’ve always known it’s an incredible asset. I think it’s an incredible asset and I think Exxon knew it and has known it all along. It took a governor like Gov. Palin, a fairly aggressive governor, to push it and push it to a point where if it’s not going to be developed like you promised for 30 years, we’ll take you to court. I think it’s a testament to the tremendous resources we have here. It’s a bigger story to get those fields developed and get those folks to develop what they’ve got.

Petroleum News: He’s only one out vote of five with the other board members being from Alaska. So he’s one-fifth of a total decision. Don’t you think Alaska’s voice is strong enough?

Kawasaki: Sure he’s one out of five, but there were several members of the board, of AGDC, who testified that they listen to him when he talks because he’s got all that experience. Being on that policy board, in my mind, means he has a disproportionate amount of say in the way policy works. I don’t think it should be that way. I think he should be hired as a consultant to the board with pay, but I don’t think he should be involved in the policy-making provisions of AGDC.

Petroleum News: Along these same lines, there is the new makeup of the SARB (State Assessment Review Board). That does potentially affect your constituents?

Kawasaki: Well we haven’t seen the new board make a ruling yet. There is a lot of discomfort to have a board like that. It gives me concern and pause for concern that the folks who were on the board previously like Marty McGee as a state assessor had experience as an assessor is not on the board. This is a shift away from local property tax payers and a shift toward the pipeline owners. That’s sort of a red flag. I haven’t seen any votes yet, but it’s certainly a cause for pause. You might have protections from the Supreme Court ruling, but the state assessors are policy-making review board.

Petroleum News: Closer to you and your constituents, Flint Hills is shutting down. What are your concerns?

Kawasaki: I don’t think the governor or this administration has been very engaged in the refining industry in the state of Alaska. We’ve heard from Flint Hills and heard them say refining particularly is not doing that well. We saw the oil spike in 2008 take down refining margins. I think the administration should have seen this coming. The administration should have done a lot more to prevent this happening either with the quality bank provisions or with the royalty oil contracts that will help us maintain refinery capacity in the state of Alaska. Again, I think the administration should have seen this coming and done a lot more to prevent what’s happening either with the quality bank provisions or working with the royalty contract to help us maintain our refining capacity in the state of Alaska. I don’t think they did either of that in this case. The sulfolane is probably one issue, but the refiners here in Fairbanks, PetroStar for instance, have complained that they had issues with refinery capacity. Again, the administration could have done a lot more to prevent it. I spoke with the person from Flint Hills and right now it will not resume operations as things are now. So the next step is what’s next? A new buyer? A different royalty contract? A combination of those needs to happen in order to make that refinery profitable and work into the future. It’s going to take stakeholders like the administrations and DNR to really get engaged in the process or it might never come back.

Petroleum News: There’s a pretty contentious ballot issue — the SB 21 oil tax repeal. Do you honestly believe there is a chance to get this repealed?

Kawasaki: We knew that we were going to get outspent. There is no way we can raise that kind of capital against an industry with a vested interest in this issue like the majors. The public is getting engaged. The public is learning a lot. It was very easy to get more than enough signatures for the petition. As more and more people see the production hasn’t increased to the level they feel satisfied and isn’t projected to increase, so we will get a lot of those votes. I still think it’s a huge uphill battle, though.

Petroleum News: Do you have any closing thoughts?

Kawasaki: This state is still an untapped resource. But I think we need to have a lot more independent and smaller players. This administration has focused on the big players and less on the smaller players who can really turn the dial on oil and gas production in Alaska. Hilcorp’s entry into the North Slope foray is going to be a positive. I hope other players like those start to play. Not just in Prudhoe Bay and places where we know there is gas but all across the state. Doyon, for instance, continues its drilling in the Interior. That’s a real positive. That’s just 35 or 40 miles away from Fairbanks. It might not be the volumes of a Prudhoe Bay find, but the fact that there is that kind of activity going on, I think it shows we are a state with an untapped resource that folks are ready to get out there and develop. We as a state need to take a larger view that incorporates not just majors but newer developers and Native corporations doing their own work.