Gara concerned about contract outcome

Anchorage Democrat likes Alaska LNG project over in-state line; wants more instructions on negotiations in enabling legislation

Steve Quinn

For Petroleum News

House Rep. Les Gara said he likes the prospects of getting a natural gas pipeline built to a liquefied natural gas plant in Cook Inlet. But he’s not so sure Gov. Sean Parnell’s Senate Bill 138, plus the memorandum of understanding signed with TransCanada and the heads of agreement signed with North Slope leaseholders ExxonMobil, ConocoPhillips and BP will protect Alaskans. Gara, an Anchorage Democrat, sits on the House Finance Committee, the last legislative committee of referral for the bill designed to advance a project to the next stage: charging the administration with negotiating a project development contract with leaseholders and TransCanada.

Between gas line hearings — and they came to about three daily as the session wound down — Gara sat down with Petroleum News to discuss his thoughts on the status of a project.

Petroleum News: Let’s start with a general question. As an aggregate — the MOU, the HOA and SB138 — what are your general thoughts?

Gara: Well there is good and there is bad. I have to decide whether the good or the bad outweigh each other. The good is that it’s better than what I call the straw pipeline, the HB 4 in-state pipeline that would deliver very little gas, at very high price to Alaskans and very much to Conoco’s benefit because it would go to their refinery, and to saddle Alaskans with very high energy costs or subsidize energy costs. To the extent that it would be subsidized would be a very bad move. So this is a bigger line that would result in cheaper gas for Alaskans and it would get us export revenue, and that’s important to Alaskans. In both ways it’s superior to the small pipeline that some of the Republicans in the building are pushing so hard. I would like to see this work, but it’s got warts.

Petroleum News: What are those warts?

Gara: One is that we want as much natural gas development on the North Slope as possible, the way it’s written right now, you can expand in an economic way through what’s called compression. That is by all accounts inexpensive enough that a new party can come in and expand the pipeline a little bit if all that compression capacity isn’t used in an initial phase. But once you pass the point where you can expand the compression, and that may be 1 bcf a day, expansion becomes prohibitively expensive for one party to pay for.

We will have no development on the North Slope at the point where the pipeline hits its capacity with compression because an independent company will know that it’s not worth exploring for North Slope gas — and by the way finding pools of oil when you find gas, which we all believe will happen. It’s not worth it to you to explore if you have to pay a prohibitive cost to expand the pipe to get your gas in the pipe. That’s going to kill potential jobs; that’s going to kill potential gas development; that’s going to kill oil finds that we need; and it’s going to kill potential export revenue for the state. There are only two ways around that and we’ve received no commitment from the administration yet.

One way is for all parties to the pipeline to share in the cost of the expansion. As a sovereign, it’s our interest in having as much natural gas in that pipeline; as much natural gas and oil exploration on the North Slope as possible. The way the contract is written right now, if an expansion reduces the cost of shipping, Exxon, Conoco and BP get the benefit of the reduced cost of shipping. If an expansion raises the cost of shipping, then only the state pays — and the new party. There is an imbalance there. The companies can’t have it both ways. As long as the cost of the expansion doesn’t raise any parties’ transportation cost above what they were then the pipeline started, then all parties should share in it to make it feasible for the new party to get their additional gas in. It benefits the state, gets us new jobs, gets us new gas revenue, and potentially gets us new oil. As a sovereign, that’s a rule we should impose. The alternative is to build the pipe large enough that it can be expanded by compression to let’s say 5 bcf a day so that we know there is substantial room by compression because expansion by compression is affordable.

What that all goes to is called basin control. You either let the Big 3 control the pipeline and the natural gas on the North Slope or you let competitors in. I think it’s time to let competitors in, but they won’t be allowed in unless you allow this contract to change somehow.

Petroleum News: This bill is considered enabling legislation. Basically it authorizes the governor to move forward with contract negotiations. Can’t this be dealt with in the contract negotiations?

Gara: Anything can be negotiated in a contract negotiation. As a legislator, I think you are a fool to say here, go negotiate. We are not going to give you any of the important rules we think should be in this contract. We’ll just assume you’ll do the right thing. That takes away leverage the state has to do the right thing. That makes you trust the governor who has not, in my view, does not have a great track record for negotiating a contract like this.

Petroleum News: Is the administration equipped to negotiate a contract like this? This was something identified during the Murkowski administration’s efforts.

Gara: They are going to be outmanned during the negotiations. They are going to be leveraged during the negotiations. The oil companies will play their nuclear option and say look we are not going to release any gas if you don’t give us the terms that we need and we need their gas for the pipeline. They have all of the leverage in the world during the negotiation. Right now the Legislature has all the leverage in the world in putting in terms to protect the people of the state of Alaska. If we don’t put the terms in to protect the people of the state, and say let’s just have the governor negotiate with three of the biggest corporations in the world and hope he does a good job, then I think we are less likely to get a good outcome.

There are three or four areas that are very important where the governor is saying trust me I’m negotiating with the biggest oil companies in the world even though they have all of the leverage, and I’ll come back with something for you. If we do that and if the contract is bad, we’ll be told you can’t touch the contract and all the parties will walk away. You’re sort of being leveraged into voting yes for it. If you set the rules up front that are fair to everybody, where the state doesn’t carry all the risk and in so many provisions the state is carrying more risk than anybody.

Petroleum News: So what are those areas you noted?

Gara: One is to prevent basin control, so that independent companies know they can get the gas into the pipeline and it doesn’t just become Exxon, Conoco and BP’s gas pipeline for the rest of eternity. Right now it’s tilted toward them.

Another is a rule that’s explicit in the statute that says if the state needs additional natural gas for in-state use we can get it for a reasonable cost. I don’t want to have to go to court and sue the oil companies for them to develop natural gas by lawsuit. I want an agreement that says as long as we pay a reasonable cost for it, we can get it as long as there is an in-state need so we don’t ship LNG north to Alaska while we have the reserves here.

Right now in a normal business relationship, all the parties go ahead and if it fails, they all pay their share of the lost costs. This business relationship says if we go ahead for two, three or four years and one of the parties backs out and it doesn’t go ahead, we pay our costs and we, the state of Alaska, is responsible for Trans Canada’s cost. That puts risk on the state and none of the other parties to subsidize TransCanada. In any normal business relationship, you enter into it knowing that if it fails you pay the costs of the investment. Here only the state — not Exxon, not BP and not Conoco — are kicking in to pay TransCanada so TransCanada doesn’t pay anything for this. That’s a tilted relationship.

We assume TransCanada leveraged the state because it has potential legal claims under AGIA, but the administration has refused to discuss any of those in any meaningful way with the committee.

We are also taking a huge risk by making this a pipeline that results in no tax payments to the state. We can either do what we do with the oil pipeline, which is come up with a fair tax structure for the oil companies and the state of Alaska. That is still an option, but the administration is talking as if they are going to negotiate an agreement that doesn’t allow any taxes. We are going to have to sell it and that’s called royalty and gas in kind. That poses a lot of risk to the state.

One of the major risks of taking gas in kind, you have to commit to the pipeline owner and TransCanada will be the majority part of the pipeline owner for the part of the gas that the state shows. You have to pay them as if you’re using the full capacity of the pipeline. If Exxon, Conoco, BP end up not selling enough gas, then you still have to pay for the full amount of the gas shipment charge even if you don’t have enough gas going through. This cost to the state for shipping will come to billions of dollars a year. We don’t know that we are going to fill our part of the pipeline. We may be paying hundreds of millions of dollars — maybe more, we don’t know — for essentially unused pipeline capacity.

If we just taxed our natural gas like we do oil, we don’t bear that risk. The testimony has been in a traditional pipeline, you use somewhere over 90 percent of your capacity. That means maybe 5 percent you’re paying for shipment of gas that isn’t being shipped. That cuts into the state’s revenue. There have been cases that have turned out to be worse, according to Rick Harper. We are going ahead hoping, just hoping, that all of our capacity is filled in the pipeline so we are not paying for empty capacity and losing money.

I want an assurance. There are ways to assure that if the producers don’t produce gas that we need that we are held harmless. That’s important.

Then there is the problem that the natural gas market is not 100 percent pretty for us. Right now you can sell gas at a very high price in Japan — maybe $17 to $19 an mcf — those are good prices. In some parts of Asia they are $12 and some they are $14 and others they are $16. If Exxon, BP and Conoco go and grab those high priced contracts and we are less sophisticated than they are, we’ll end up with the low-priced contracts. That might result in us losing money or getting very little revenue. If we are going to take on this risk of royalty-in-kind, that one of the terms we get is that the major oil companies, just like they do for oil, sell our gas and we get the same terms and prices as they get.

All of those things right now, the governor says trust me I’ll negotiate something on those areas. Well, as a sovereign, we should set rules that are fair to the public, not say, go negotiate. If it’s a bad negotiation you come back to us and we have all of this pressure to say yes. If we alter the contract all of these parties will go away.

Petroleum News: Are you concerned that when a contract is negotiated, you will have that same rancor over a gas line contract that you had during the Murkowski administration?

Gara: The governor would do himself a favor and if the oil companies are interested in this contract, they will do themselves a favor, and if TransCanada is truly interested in this contract they will do themselves a favor if they allow terms into the bill and don’t lobby to defeat terms in the bill that protect the public. If those provisions don’t end up in the bill and then a contract comes before the state that is weak and doesn’t protect the state, then they face a very real risk with a different Legislature that this project is going to go nowhere. The smart thing is to set fair rules now instead of saying let’s just see what happens during negotiations. We are a sovereign. We have a right to write laws that protect the public and we should do that.

Petroleum News: Is there anything different in the tenor of the discussions from the AGIA days and the Stranded Gas Act days?

Gara: The Stranded Gas Act (contract) came from a governor who had very little trust and we knew at the time he possibly constitutionally had the right to cut a contract without our involvement. That bill was poorly written and came without very much trust at all. He proposed a contract that he told everybody was a contract that wasn’t a real contract. Luckily we didn’t go ahead with that because nobody knew the price of gas was going to tank. We had a stroke of luck come our way apart from getting a bad deal. Under Palin, it was different. She was largely uninvolved but here commissioners were very open. That was a very open period oddly enough. Now, I like the people the governor has personally, but they seem to be wedded to pushing things the governor’s way, always answering questions not with an answer to your question but with an argument as to why they are right. If you ask them if the sky is blue, they will tell you why it’s so good when the sky is purple. It’s important to me to find out the answers to questions I have and sometimes I’m not getting answers to those questions.

Petroleum News: One of the side issues that became somewhat divisive was an AGDC board appointment who did not live in Alaska. Richard Rabinow of Houston was appointed last fall. Why did this become an issue so late?

Gara: He’s up for confirmation now. A Legislature can’t stop a bad appointment, that’s temporary, until it comes time to confirm. It’s also the fact that none or very few of us, knew that this person was not an Alaskan. I also want to make sure, in any of our appointments, that we are not just putting oil company people on our boards. We need to make sure we put people on our boards who understand the industry, understand the state’s interest and will stand up for the state’s interests.

Petroleum News: OK, but you folks brought in Rick Harper as a consultant. He’s an out-of-state hire who used to work for the industry. He might even be a good board candidate. How does that differ?

Gara: First of all, the board is the board of directors on the project for the people of the state of Alaska. We need to make sure that they are Alaskans so they understand what Alaska’s interests are. Somebody from California doesn’t know where Kwethluk is, doesn’t understand that maybe the project should benefit the people of Kwethluk, or what the problems are in Fairbanks as opposed to Anchorage as opposed to the Kenai Peninsula. The board should be Alaskans who stand up for Alaskans’ interests and not be beholden to anyone else’s interest.