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Providing coverage of Alaska and northern Canada's oil and gas industry
February 2017

Vol. 22, No. 8 Week of February 19, 2017

Chenault: Seeking clarity on AKLNG

Citing industry cutbacks on the Kenai Peninsula, Nikiski Republican cautions against going too far with yet another oil tax bill

STEVE QUINN

For Petroleum News

House Rep. Mike Chenault finds himself in a different position: he’s in the minority - this after a record four terms as House speaker. Still, the Nikiski Republican remains engaged in resource development issues, some of which are parked in his back yard. He’s not on the Resources Committee this year, yielding to former co-chair David Talerico and freshmen lawmakers Chris Birch, George Rauscher and DeLena Johnson. The minority was successful in engaging a spirited floor debate over how the House Resources Committee introduced HB 111, the oil tax bill. The minority says it wasn’t informed of the bill in advance; the majority said that’s how things have always worked when they served in the minority for the past two-plus decades. Chenault offered his thoughts on developments one-third into the 90-day session.

Petroleum News: You’ve served on Resources before, most recently stepping in for Mike Hawker last year, and you’ve been involved in other resource development issues leading the formation of AGDC. With the influx of so many new lawmakers, why didn’t you seek a seat on Resources?

Chenault: One we have a lot of freshmen and two we have few seats to fill. I’m more than happy to work in the background and try to garner information for our Resource members or any of our other members. There are others out there who I think can do a good job. If they are going to be here a while, they are going to have to understand the tax system that we have and how we got to the position that we are at, and what to do to try to move forward. We have folks who really want to sit on Resources like Chris Birch, George Rauscher and DeLena Johnson. They will get up to speed on it. They have to get up to speed.

Petroleum News: There was a very spirited floor session last week over the introduction of the oil tax bill. Members of your caucus felt the bill was introduced inappropriately because minority members weren’t given advance notice; members of the majority called it business as usual, saying that’s how things went when they were in the minority. What was your take?

Chenault: They didn’t know what the rules are. I think they’re probably more upset that they didn’t know what the rules were and they got caught in a rule versus how they were really treated or not treated in the past. For the most part, did that go on under our own control, yeah it did. We did ask our guys to talk to everyone on the committee. Whether agreed or disagreed is really immaterial but at least let them know coming down the pipe.

What our guys got was something is coming out when some people in the media had it before our guys even had a chance to look at it, then it was brought up on the floor as a bill by the committee. Some of our people wanted to make sure their name wasn’t associated with that committee bill. They wanted to make that statement and because the rule is available they wanted to make that statement.

The next floor session, the committee chairman (Louise Stutes) on a committee I do sit on - Fisheries - brought me a bill and said we are looking at introducing this as a committee bill. I really think that’s how it should work. Now did that work under our guys all the time? Probably not, probably not much different than what’s working under the new majority. We’ll get through it. It’s nothing major, just interesting when you know the rules and you can play by the rules, now things change.

Petroleum News: Now you’ve got that oil tax bill, have you had a chance to review the bill?

Chenault: No, not really, but I watched the hearing and the roll out of the bill. I learned about some of the pieces. There is interest accruing on a three-year cycle as opposed to a six-year cycle on audits. Why it was that way and why we need to go to the six year instead of the three year.

What it kind of looks like to me is we are changing the oil tax structure so much so quickly that one of the comments made is it’s taking longer to write the regulations so that they can audit. Then why do we keep changing it? If we keep changing it, we are going to continue to change the regulations, then we are going to continue to be behind in the audits, and we are not going to know whether the program is going to work or not because we keep changing it so often.

That’s one thing I noticed. Then there was the hardening of the floor. It looks like we want all that we can get at the lowest possible price and we want all we can get at the highest possible price. That was some of the give and take in some of the other tax structures. Under ACES we had progressivity which gave us more at the high end but took less at the low end. We didn’t want to be completely shut out but we were willing to take less at the low end than we were at the high end.

Now that oil prices have switched we want to get all of it at the high price, all of it at the medium price and all of it at the low price. That is going to be a hard issue to figure it out.

Petroleum News: So given the dynamics and the discussions on HB 111, does it help to have (former co-chair) Dave Talerico on that committee?

Chenault: Dave is solid. He’s been through at least one battle of taxes. He’s a sharp guy and he’ll be able to help out the new folks with any new questions they may have to learn how it works. We have numerous staff who have been on everything from PPT to ACES to the current SB 138 and HB 247. I don’t think it’s anything new; it’s how they are putting it together.

Petroleum News: Do you see this dragging into the summer?

Chenault: I don’t know. I have some concerns that if they try to play one bill off of another, then it drags out the whole process. If it’s a must have that we have to have this before we are going to do this, then I see it dragging out the whole process.

Petroleum News: That seems to be a concern regardless of what side of an argument you fall on.

Chenault: Sure is. You’ve got an income tax bill out there. You’ve got a rewrite of the Permanent Fund bill. You’ve got a motor fuels taxes so there are a number of pieces out there. It depends on what type of package they put together.

Petroleum News: So how does your view of what goes on in the building change when you’re in the minority?

Chenault: I’m going to do what I think is right and am going to work on the issues I think are important. There may be some agreement with the majority, but that’s going to be probably limited. I’m going to represent my district, which is pretty diverse: farming; commercial fishing; tourism; sport fishing; railroad and the oil industry.

I’m going to represent them to the best of my ability. Naturally I know more about oil than what I know about commercial fishing. But it’s a big part of my district. Each of those I mentioned are important aspects of my district. I’ll try to represent them as best as I can. If it’s the oil industry or a tax on commercial fishing or sports or tourism, then I’m going to weigh in how I think my constituents want me to weigh in.

Petroleum News: Speaking of back home, how are things there with AKLNG going a lot slower?

Chenault: Much slower. That doesn’t have anything to do with AKLNG as much as it does with the rewrite of the Cook Inlet oil tax credits last year. I’ve seen a number of projects slow down and a number of folks laid off. That trickles down through the economy. So we are dealing with that. We are also dealing with the news of AKLNG going a different route under the current governor. We are trying to figure out what does that really mean. With 600 acres plus of land that was bought by the AKLNG partnership in the middle of one of my communities, they are concerned about what is going to happen, what is going on. What about a new road that has been proposed to go around the facility? Is that still on track? If it is, what’s the status? Right now I tell my folks, don’t get excited. We are still years away from a project. The governor thinks within a year we’ll know whether or not we are going to have a project. Right now I don’t have real high hopes.

Petroleum News: So with the slowdown of AKLNG, how much of that is market driven and how much of it is the governor’s direction and plan change?

Chenault: I think the change of the plan is the biggest piece of it. Market driven, yeah you’ve got to have a market. You’ve got to have willing buyers and willing sellers. Right now we don’t have either of them. The governor has a different idea of how to move that project forward. The tax credits might be critical to moving that project forward. The marketplace will drive that commodity price. If you can’t get the price that you need to make it a profitable project, that project will not go forward, I don’t care how much I want it to or the governor wants it to. The sooner we can get to a point where we can determine that, the sooner we can either move forward or shelve the project and go onto something else.

Petroleum News: What concerns you the most about the project as it stands now?

Chenault: Probably just the unknowns. The administration is talking with folks around the Asian continents about future supplies of LNG, which at some point is important. I don’t know if it’s important today or not. Personally I don’t’ see how we get to a price for LNG to write contracts for any Asian corporation when we don’t know how much it’s going to cost us to buy; we don’t know how much it’s going to cost us to ship; we don’t know how much it’s going to cost us to convert it to LNG; we don’t know how much it’s going to cost us to put on ships.

We have some of those numbers, I think. I’m not privy to them and I’m OK with that but I need to see a direction that the project itself is really moving forward on. You can tell me you’re talking to the Asian market about buying gas and that’s all fine and dandy, but where are we on the FERC license, where are we on the tax structure of the pipeline? Those are the things that are going to be important to continue to move this project forward.

I don’t have that information right now. I personally think it’s more important that we go after the tax structure right now and see what kind of federal tax implications we get off of that. I think that’s a place where you can save a lot of money.

The concern is when you start looking at PILT, what does that mean to communities like Fairbanks, Anchorage and Kenai? It’s a way to save money but my community cannot handle the size of this project without needed infrastructure, whether that’s schools or new roads. Neither can Anchorage. Neither can Fairbanks. We’ll have to see what the new administration does.

Petroleum News: Do you mean in D.C. or here?

Chenault: It’s partially with Trump, but it’s also this administration. We’ve sidelined AKLNG. We turned it into AGDC. I want to see them perform. I’m tired of hearing them talk about it. I want to see what they are doing. Show me what you are doing.

Petroleum News: If they can’t go forward with overseas, what about an in-state line?

Chenault: If you build an in-state line, how big do you build it? Do you build a high-pressure 24-inch line or a medium pressure 36-inch line? That’s more gas than we’d ever know what to do with. People don’t understand the magnitude of how much gas you can put down a piece of pipe. It would be great if we could get gas to Fairbanks. Fairbanks is about a 10b (billion cubic feet or bcf) a year gas usage and that’s if everything in Fairbanks went to gas. We hear them complain about how it doesn’t go close enough to the base to give them gas. Well right now, last I heard, is coal is cheaper so they aren’t going to change. The only way they are going to change, the military, is if the federal government made them change.

Fairbanks is a 10b a year market. There might be some need in Anchorage or some in the valley, but it’s miniscule compared to what you can put down a 24-inch or a 36-inch line. The LNG plant in Kenai is closed. I’ve heard the state is talking about buying that. That’s a 63b a year usage. Agrium is 53b. Add it all up and if you had no gas in Cook Inlet and you’re only using North Slope gas, let’s say you’re talking about 200b a year. If you pump 1 b of gas a day for 200 days, then you’ve got 165 days a year that you can’t. It’s not economical to run.

Even if you bring it online, you’ve still got to build a gas treatment plant on the North Slope. You can size, but still running the pipe is going to be expensive, but if you have an LNG component on the Kenai, yeah that’s going to be expensive. Yeah, it would be nice to get gas to rural Alaska, either through the river system or around the salt water, but the bigger problem I see there is building the infrastructure in small villages or in other towns to be able to accept that LNG.

They have small LNG tankers and different ways to move it around, so that can be done, but just building the infrastructure and getting the gas distributed, it’s going to take a while. It’s going to take a while. I think we’ve got to be very careful if we decide we want to build a gas line just for in-state use on what we think we are going to use it for. Even if you opened up every mine along the way, it probably is not a huge amount. They will use a lot of gas. Don’t get me wrong. Donlin was talking about a 16-inch line and that would probably be low pressure, not high pressure. We have some opportunities and I think we need to explore those. We have to figure out what kind of project we might actually have if we do have one or not, then decide how to move forward.

Petroleum News: Speaking of Agrium, what do you hear about any progress to restarting the plant?

Chenault: I haven’t heard from them in a while. I know they are out there looking for gas. They are trying to get some contracts on gas. I think if they can get gas at a reasonable price, I think they would make the $275 million to $300 million investment. That’s good jobs for my community. That’s good jobs for Alaskans. Because there will be 100 percent Alaska jobs. They are a good community member. They have been in the past. I suspect that will happen in the future. It creates a better tax base in the borough that I live in.

Petroleum News: We touched on this a few minutes ago, what do you think the Trump administration, plus a GOP-led Congress can bring to Alaska?

Chenault: I think it’s still too early to tell. From what I’ve seen we have a pro development administration. Not at any costs but one that will move forward on projects and I think will be a benefit to Alaska - whether that’s with ANWR or permitting across NPR-A. I hope they are more open to allow those projects to happen than the past administration who I felt was trying to stop things from happening. Maybe there will be some OCS leasing. Whether there is any interest in that, I don’t know. Maybe that opportunity will be there. I think it’s still a little bit too early to figure out. If you look at some of the picks President Trump has made for some of his cabinet positions, could be a refreshing sign that maybe we’ll have some help.

Petroleum News: ANWR was something the D.C. delegation launched right out of gate once they were sworn in. What do you think the chances are of advancing ANWR? Does it become anymore of a reality?

Chenault: I think that we’ve got the right Congress and the right Senate in place. It may be a reality. I would like to see us at a minimum drill it so we see if there is anything there or not. Are we talking about a lot of oil or a little oil? At a minimum we need to find out what’s there. If there is nothing there, what are we fighting over? If there is oil there, I think we can do just as we have done on the North Slope: develop and produce in a manner that’s environmentally sound.






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