Fairclough: Think long term on gas

The chair of the LB&A committee believes Alaskans need to consider how North Slope natural gas fits into the global market

Steve Quinn

For Petroleum News

Liquefied natural gas and the prospects of advancing a natural gas pipeline project — either strictly for instate needs or a large-diameter line for export — has kept the Legislature busy during this interim.

The consortium pursuing a large-diameter line to a liquefaction plant at a tidewater port — TransCanada, Exxon Mobil, BP, ConocoPhillips — fell short of Gov. Sean Parnell’s benchmarks.

Dan Fauske resigned from the Alaska Housing Finance Corp. to head the Alaska Gasline Development Corp.

Sen. Lisa Murkowski released a report, noting how the country’s window for LNG export opportunities is closing, while the Energy Department approved a third LNG export terminal from the Gulf of Mexico.

Back home in Alaska, Sen. Anna Fairclough organized a five-day conference examining LNG markets and Alaska’s prospects.

Fairclough chairs the Legislative Budget & Audit Committee and sits on the Senate’s Finance, Resources and TAPS Throughput committees.

Fairclough says Alaskans need to think long-term when it comes to resource development, and believes that school of thought needs strong consideration as voters contemplate whether or not to repeal Gov. Sean Parnell’s oil tax reform, SB21.

The petitions have yet to be certified, but both sides are bracing for a long campaign just the same.

Fairclough spoke with Petroleum News about the recent natural gas symposium and the repeal prospects.

Petroleum News: What drove the idea of the symposium?

Fairclough: I won’t want people to think it’s mine because Rep. (Mike) Hawker, (former LB&A chair) had talked about it some time ago, bringing the Legislature together to talk about how gas is different from oil and how our little market versus the world, works differently around the gas market. I was thinking about that after the oil discussion (SB 21) during session and decided to move forward to bring that educational opportunity to Alaska.

Petroleum News: With that in mind, what did you learn?

Fairclough: That there is an abundance of prospective gas throughout the world, and that North America, the Lower 48 specifically, and Canada may be one of our major competitors if Alaska chooses to export gas. The market we probably have the greatest opportunity to be successful would be somewhere in the Asian market. Japan, with the thought of less nuclear in their portfolio. Their facilities are aging and they are switching to different energy sources. In various regions of China, as future contracts are expiring in those regions, as well as opportunities for new consumption.

Petroleum News: Was there any one thing that really resonated being there for five days?

Fairclough: Well, Alaska has a large commodity of natural gas and there is a lot of competition out in the world. We want to make sure Alaskans have the appropriate expectations on what we can receive as far as cash that we would bring as far as export. For me, the gas on the North Slope, because it has such a different value than oil, that gas is not going to provide the same value to the treasury, though there will absolutely be some.

The most important thing for me is how do we make it economical so we can provide sustainable and affordable energy for Alaskans. That may be different than what most Alaskans think. They may think this gas and a gas pipeline is our next big boom. While it will be a big boom for putting people to work and growing businesses, it’s not going to be a plum to the treasury that some Alaskans might think. It’s going to be on a much different magnitude than oil. That’s why the Legislature is talking about bringing our fiscal house in order. Just bringing on a pipeline is not going to cure Alaska’s prospective fiscal issues.

Petroleum News: Is there anything else Alaskans need to understand that came out of the symposium?

Fairclough: A few things happened outside the LNG symposium. One, Dan Fasuke in his new position. I hope with his financial experience, knowing what it takes to oversee big projects — and he’s headed a few of them — that we will merge the projects. Only one project will be viable. Whether I support a big line, a bullet line or whatever line is out there, in the end, the market will determine what pipeline is economical for Alaska. Unless of course Alaska wants to spend $40 billion to $65 billion to do it ourselves, but I don’t think Alaska has that much tolerance for risk, so the private sector is going to be part of that. As we struggled with Alaskans being frustrated with not bringing Point Thomson online, I asked a consultant if you were to look at things from the outside what would people from the Outside see in what we’ve been doing to try to bring our gas online? The speaker was very respectful, but as an analyst he says sometimes it’s hard to figure out sometimes what Alaska is doing. So when we have the big line out there and have the bullet line out there, and when we have different conversations from an analyst perspective when they are looking at global markets and they report to other countries what competitors are doing, it’s hard to describe what Alaska is doing because there are a variety of paths we can take. That was interesting to me, because on the inside we feel like we are working so hard to push a pipeline forward on behalf Alaskan people. From the outside it looks a bit different.

Petroleum News: So what can the Legislature or Alaskans do advance its status for a pipeline?

Fairclough: First, SB 21 and the people of Alaska understanding what SB 21 does versus the sound bites that are out there, and whether we believe that we want to be in the oil and gas game. Because we are going to see competitive oil prices that will mitigate the costs that I said are somewhere between $45 billion and $65 billion, so having oil production alongside the investors who are trying to produce the gas is going to be critical. Gas line development, they are spending billion dollars up front waiting for a return over thirty years. They said oil is like the dating game. You can go in and spend money, and recoup your money in a short term. But gas is like a marriage. You go in up front, invest a whole lot of energy and effort. It requires work; it requires good communication. So what can Alaskans do? I hope Alaskans vote no on the recall of SB21 because there is so much more going on than the sound bits. Working under existing law, SB 21 while decoupled it in one sense – oil from gas – gas fared the worst in SB 21. We were told by analysts, oil gets the tax credit and producers of the investment actually put a barrel of oil in the pipeline will get a credit. But we are not going to write checks if there is no production. But since we said that was oil based gas gets none of those credits and it creates a 33 percent tax against gas.

If you are looking for a long-term relationship where owners, possibly Alaskans, could see a recoup of their investment over 30 years versus oil can recover costs over four and five years because of the high price of that commodity, we need to look at that differently. If we were to get a pipeline, how would we want to tax that? I want to make sure Alaskans get their highest value, but I want to make sure Alaskans can use the gas coming out of the ground.

So there are two things.

We need to not repeal SB21. I support SB21 as it stands. It was the first step in providing the finances to make projects economical for oil exploration, discovery and production on the North Slope. With that you’re able to help with some of the gas costs for those investors because on our North Slope it’s the same Big Three that would be in there who have ownership on that property to produce.

Fairclough: I think on gas we will have to look differently on oil. The idea of the gas symposium, I didn’t know what the difference was, so I took a hands off approach to what the consultants would deliver in the final product. My goal was for them to tell us what’s happening around the world. Tell us what other regimes are doing. Tell us the pitfalls you see. Give us an analysis on how Alaska hopes to compete. It’s not a bed of roses. There are, along the value chain, many opportunities to choose value for Alaskans, but it will require investment. If we want to receive value, we will have to mitigate risk along that value chain. It can be done, but it is a long process. It’s not something that happens quickly anywhere in the world, just because of the huge investment that’s made and the number of years it takes an owner — whoever that owner is — to recoup that investment of $45 billion to $65 billion.

Petroleum News: One of the issues raised by PFC was not just can they build it but will they build it? What do you think? Will they build it?

Fairclough: And what our analysts said was many regions have been waiting for decades. I think Alaska has been waiting longer. Absolutely. Will they? I believe they will if they have oil and gas terms, they can make money for their shareholders, and the project is economical even if we don’t like how much money they are making. The opposition to SB 21 would say some industries are bad because they are making huge profits. I want Alaskans to benefit to the maximum amount that we can, but we can’t say that something we own is more valuable somewhere else in the world because these are national companies. We can think that. We can continue to fight about that. But if we don’t make a decision about that soon, we can push them out further. Because of the timeline we are looking at 2025 or 2030, so we can pull it together and, we can provide a stable resource at a good value, and do it right. We have the talent to do that.

Petroleum News: It sounds like you believe the prospects are closely connected to SB 21 and establishing a tax regime that will last and has durability?

Fairclough: What I’ve heard in these presentations is having infrastructure where you are developing gas moves you from green field scenario where you are having to make additional investments for roads and sleeping facilities, to a brown field. We have advantages with some of the oil infrastructure there and can be used for people working on gas and on oil. So a healthy oil industry that is there competing are going to make our gas prospects better because they can use the infrastructure that’s already there, or at least utilize some of it to move us from a green field project to a brown field.

Petroleum News: You talked about maximum benefit, which is part of our Constitutional mandate. It seems that both sides of the argument say the Constitution drives their argument. How do you reconcile that?

Fairclough: The people of Alaska are going to have to reconcile that. If you believe our budgets can continue to escalate and that we can just take money from one provider and continue to charge them more when you can look at the decline rate and see that in 2017 to 2020, we run out of cash, I think you vote no on the repeal. There is no way we can support Alaska’s budget if we can’t grow our economy and you are not going to grow our economy if you continue to take someone more. Just think about my own personal paycheck if the government continues to take more, I’m not going to be successful. Pretty soon I’m not going to be able to pay for my house. We have to be able to allow our projects in oil and in gas to compete in a global market.

Look at who is arguing the other side of SB 21. No disrespect to anybody, but sometimes it’s attorneys arguing contractual commitment. That’s different than what we are doing in establishing a policy for oil taxation. We still have to compete in that global market. We have to lay down our sword and saber and bring our heads up and look at the horizon to see what’s going on around the world. Australia is going to be one of the largest producers of natural gas bringing gas online in the spot market or with contracts around the world. North America — the United States of America — has an opportunity to be equal players in that but our politics are getting in the way of that. Maybe as Americans we just don’t want to play in that arena. We have the potential to be there and Alaska has the potential to lower the nation’s debt load if we can secure contracts that are viable in the Asian market, specifically in China we can reduce our debt load and even out our import-export imbalance if we decide to be a player. We have to quit fighting about who’s right and who’s wrong and look at the facts on paper. Let’s not mislead Alaskans that if we hold out and wait, we can get more money later. Those people who have coal and have been waiting for a better price, they are in a world of hurt as carbon regulations come on and additional costs to develop that coal comes on. Coal is going to have hard time competing even with renewables in the very near future. The federal government – the EPA specifically – is requiring a whole bunch of additives to coal so it can be used as a fuel. It’s increasing costs drastically.

Petroleum News: Sen. Murkowski put out a report, saying the window of opportunity is closing on getting export contracts. Does that concern you?

Fairclough: Contracts are going to expire in the 2025 and 2030 time period: those are the contracts we are going out compete for. We’ll have low transportation cost. Our big costs are going to be in liquefaction, but hitting that Asian market because of our proximity is easier for us. For the rest of North America, Sen. Murkowski might be right. They have an opportunity to pipeline into the Mexican market and provide lower cost energy. I think this is an exciting time. I’ve come away with a little frustrations that others feel by waiting decades. We really need to work together on behalf of Alaskans. No one should be taking credit for something. We have to get past the politics of it in pursuit of gas for Alaskans.

Petroleum News: Are the companies pursuing the LNG big line doing everything they can?

Fairclough: I hope so. I think the legislation passed this session (HB9) will provide an opportunity for Fauske and others to look internally as to what’s going on. Some of the big issues are confidentiality. Alaskans like to know what’s going on and that’s an important thing. But it’s hard on big companies because they have so much proprietary information. It creates a push-me, pull-you situation. They are trying to protect their competitive interests. Legislators are trying to make sure Alaskans have as much knowledge as they can about the situation.

Right now patience will be a virtue. There are not that many contracts out there. There are not that many needs for gas that hasn’t already been contracted out from other sources. So it’s not going to be fast. Progress will be incremental. As they go out to an open season, there just are not buyers who will not need our gas for a while in a big way. Some are more likely to go back to the same supplier.

We are going into a market where we haven’t sold that gas before – at least not from the North Slope. We’ll have to struggle to market our gas and find those buyers. That’s why the new needs in the Asian market are more likely for us to pick up because we’re competing with someone who hasn’t had a 30-year relationship with a partner.