Parnell: markets, experience move project

Governor says North Slope LNG project result of market changes, alignment of state and producers, and state’s growing experience

Steve Quinn

For Petroleum News

The word alignment has been closely linked to the state’s natural gas pipeline plan, this time to ship North Slope gas to a liquefied natural gas export facility in Cook Inlet.

Gov. Sean Parnell believes the word not only has merit but it is reflected in the recent joint venture agreement signed among the Alaska Gasline Development Corp., TransCanada and North Slope leaseholders ExxonMobil, ConocoPhillips and BP. Last week Parnell announced the agreement and the upcoming work, known as the pre-front end engineering and design or pre-FEED that will take place over the next 18 months.

The agreement calls for partners to invest millions in pre-FEED work over the next 18 months for the project, which could ultimately cost between $45 billion and $65 billion.

It also comes two months after the state’s solidly Republican Legislature backed Parnell’s plan to work with industry players.

Parnell has been on the front lines of the state’s efforts to advance a gas line project on and off since 2003. He worked for the Division of Oil and Gas in the early years under Gov. Frank Murkowski, and was lieutenant governor when the state pursued a line under Gov. Sarah Palin’s Alaska Gasline Inducement Act.

Severe market changes weakened AGIA, making an overland line uneconomical.

Parnell then turned to the LNG option. Along the way, he convened a meeting with CEOs from the North Slope producers, negotiating a production settlement on Point Thomson leases with Exxon and its partners, and received support for Senate Bill 138, enabling legislation authorizing the administration to negotiate a project development agreement.

Parnell also used this past session to boost up the refining industry after Flint Hills announced plans to shut down and become an oil shipping and storage terminal. Flint Hills followed through with those plans while Parnell and the Legislature created tax credits against increased investment into state’s refineries.

Parnell sat down with Petroleum News to discuss these developments and what he believes they mean for Alaska’s future.

Petroleum News: What do you believe has changed that put Alaska on its current course? Is it the market? Is it a more educated administration? Is it a little bit of each working in sync with one another?

Parnell: I was the deputy director for the Division of Oil and Gas and I represented the state in negotiations on a gas line in the Murkowski administration. I was on the state team that was negotiating at the time with TransCanada. There was a separate team negotiating with the producers. As you recall, Gov. Murkowski in 2005 elected not to proceed with TransCanada negotiations and focus exclusively after that with producer negotiations. I left the Division of Oil and Gas in 2005 and I was not there when everything blew up, but I did gain a very useful perspective and saw what went wrong and what went right.

So then your question is what’s changed that’s put Alaska on its current course? It’s a couple of things. One, certainly the market has changed. Back then, and not so long ago, everybody thought the Lower 48 states were going to be the market for Alaska’s gas after Alaskans get their own gas for their own energy purposes. With the advent of shale gas in the Lower 48, and the loss of that market, combined with the urgent need for more gas in the Pacific Rim, specifically Japan and Korea and then China beyond them, the market has changed. It’s actually set up an easier system. It’s a complex project and it’s easier for Alaskans and the companies to deal with a pipeline through the state of Alaska, through one state, rather than through two different countries and multiple jurisdictions that way.

The markets have changed and obviously our experience has changed, too. The state as an owner of the resource, that remains the same. I personally saw how in the earlier years with the producer negotiations - again I was not involved with the producers negotiations - public trust and confidence was lost because the companies demanded that the state make a lot of promises and a lot of commitments without corresponding commitments on the companies’ side.

As a result of that experience, I set a new course, and I started it and modeled it after the Point Thomson litigation and that resolution where we were making what I call commensurate proportionate commitments. Meaning, you take a step. We take a step. You take a step. We take a step. Building a gas line and an LNG project is not going to be a situation where producers say you give up everything and wait for us. That’s totally unacceptable and we are on a completely different path from that the state was on before. I think that what changed were the markets but also our experience. We are acting like an owner of the resource and we’ve become an owner of a project. Both are to Alaska’s benefit.

Petroleum News: What is it that you like about taking an ownership stake in a project like this? I know we got a heads up that this might be coming in the recent session with Black & Veatch report.

Parnell: It’s more money and more opportunity for Alaskans. It’s pure and simple about getting greater Alaska benefit through taking an ownership stake in the project. The numbers that were calculated in our experts models that we saw last fall and presented to the Legislature demonstrated to us as well as to them through the public process that Alaskans are better off in this project as owners in the project.

Petroleum News: There are not too many models out there in non socialist countries. Do you see yourselves breaking new ground or feeling your way around the dark or a little of each?

Parnell: You know as well as I do because our Constitution says Alaska is the owner of the resource, we not only have to act like an owner of the resource but we also have to be the sovereign that collects taxes as well. The question really is how do you bring those realities together in a competitive environment, where we do want the private sector doing what they do best: competently and efficiently building projects and getting gas to market. That’s something we don’t have expertise in. That’s something we do have experts advising us who have done these kinds of things for decades.

Petroleum News: You noted how you’re doing things in stages. The producers will take a step; Alaska will take a step; the producers will take a step and Alaska will take a step. SB 138 seems to be that step Alaska is taking. Many who supported the bill did so with skepticism and cautious optimism, their words. It wasn’t so much directed at the bill as it was past attempts. Can you relate to that cautions optimism?

Parnell: Absolutely. I’ve lived here for about four decades. Like many, I’ve seen projects come and go. At the same time, I believe we are on track to getting Alaska’s gas to Alaskans first because we made historic progress in doing so. You mentioned SB 138. The significant announcement now is we have a commercial agreement now, an alignment with all the parties, so real work is beginning now on engineering, design and environmental fieldwork.

The state is now a full partner in the project. That summer field season work has commenced. So while many projects have faltered in the past, I am cautiously optimistic about this one because it’s the first time in our history when all the necessary parties for a project are aligned, all the necessary parties are putting down their money and have agreed to work together for the next 18 months in this pre-FEED stage. The safeguard for Alaska is the commensurate proportionate approach I spoke of. After 18 months of work that the Legislature has authorized, we will be able to take all of that work and show the Legislature and the public what’s going on, so the accountability and transparency is there. The Legislature, just like the boards of directors of the corporations who are parties to this, the Legislature can make a decision - an informed decision - about whether and how to progress. In other words, are we willing to make the next financial commitment to go into FEED? These are the commensurate proportionate steps that each of the parties are taking together. So far we’ve reached a milestone by walking and working together into pre-FEED.

Petroleum News: There’s been a lot of talk about alignment, again something we’ve heard before under another proposal. Where do you believe your alignment first began? Was it when the three North Slope producer CEOs met you in Anchorage or another time? A progression of all of that?

Parnell: Alignment has been a progression. The first phase of alignment began when I brought the CEOs together. When I first started in this office, there was no alignment on gas. In fact, I recall the Denali project was in the process of disintegrating and the companies were in different orbits. Then through bringing the companies together, we’ve been able to gain alignment first on Point Thomson resolution because we need that as well as Prudhoe Bay for a large-volume line. Ever since Point Thomson was resolved, we had to reach alignment on a project concept selection. In other words the parties had to agree that this pipeline is going to go from the North Slope to Nikiski, for example, and the project concept is for an LNG project. So the parties had to get alignment on that. Now we have alignment on moving into real engineering, real environmental field work in this pre-FEED stage. The alignment has been growing stronger but it’s been a step-by-step evolving alignment as the parties become more and more confident that the project can move to the next phase.

Petroleum News: With AGIA off the books, what value did AGIA have in the current efforts moving forward and what does TransCanada bring, if they don't have a stake in the resource?

Parnell: TransCanada’s participation in the Alaska LNG Project means greater monetary return to the state. And, TransCanada is the only party aligned with the state's interests in ensuring natural gas resources beyond Point Thomson and Prudhoe Bay get maximized for Alaskans’ benefit. TransCanada, like the state of Alaska, is an expansion-minded party, an important partner to have early in the project.

 Further, AGIA was essential to promoting alignment amongst all of the parties, as was the formation of the Alaska Gasline Development Corp. It was under the AGIA license that the parties collaborated to develop a concept for an LNG project after I asked them to shift focus to an LNG project.

Petroleum News: We talked about front lines experience dating to the Murkowski negotiations. One member of your administration, Commissioner (Joe) Balash also brings those traits to the table. Most just see him on television testifying and may not know that. What do you think he brings as you move forward with the LNG export project?

Parnell: One of his benefits is that he’s been on earlier gas line discussions on the legislative side as a staff member, plus the last several years as DNR commissioner and before that as deputy commissioner. Whereas I in 2003 and 2004 had day-to-day experience in the executive branch, he’s been doing it for some time, for several years as part of DNR. So he does bring a wealth of knowledge both from the legislative branch and the executive branch that are extremely valuable to the state and to its people.

Petroleum News: His supporters in the Legislature cite a balance of a demeanor that blends tenacity of a high school state champion wrestler with the calmness and composure of a statesman. Does that play into it?

Parnell: those traits you described are possessed by Joe and possessed by the team day in and day out. I also think it’s important to point out the role of (Revenue) Commissioner Angie Rodell and (Deputy Commissioner) Mike Pawlowski. Those three in the role they play between tax issues, royalty issues and negotiations on behalf of the state, they are stronger together than one individual. Alaskans are better off for their serve.

Petroleum News: The argument in Washington to export LNG seems to be gaining ground, at least in favor of exporting. Does this help Alaska, or are we still seen as a separate market?

Parnell: I think we’ve been able to make a good case that Alaska is separate. We are not selling into the Lower 48 market. We would not put U.S. consumers at risk to higher prices by our exporting gas to the Pacific Rim. At the same time, I do believe as Lower 48 consumers and members of Congress become more comfortable with the economic benefits of being part of the global market in gas I think that helps Alaska’s chances as well. I can also make a case that this attitude does help Alaska’s prospects as well.

Petroleum News: Also this session, after the Legislature pretty much wrapped up discussions on the LNG export project, you introduced legislation to boost the state’s refining industry. It was kind of last-minute work by the Legislature. Do you see yourself taking a closer look at the industry next session?

Parnell: From a national security perspective and making sure we have jet fuel for those Interior base facilities and airplanes, and from a job perspective, an in-state refining capability is hugely important to us. When we took action this past year - the administration and legislators - to assure a more healthy refining industry, I think we need more time to let that play out. I understand one of the companies is already starting to invest more heavily in refining capacity in this state. So we’ll have to wait and see what happens. At this point, I think we’ve made it clear a healthy refining industry is important to our state.

Petroleum News: Do you see Flint Hills ever coming back to its old form?

Parnell: That requires a willing Flint Hills. They made it very clear, they want to be a terminal at this point. What I’m working to do is make sure that other in-state refiners who want to invest and expand their capacity can. Clearly we’ve made it possible for a purchaser of Flint Hills to take advantage of those tax incentives as well.

Editor’s note: See part 2 of this interview in the July 20 issue.