Saddler: Many unanswered AKLNG questions

Eagle River Republican, House Finance vice chair says turnover, lack of clarity driving AKLNG doubt in some legislative camps

STEVE QUINN

For Petroleum News

Not long after he won his primary race and with that a clear path to another term in office, House Rep. Dan Saddler went right back to work. Even though he’s not on House Resources or the Resources finance subcommittee, he pays rapt attention to resource development issues. Most recently he sat at the table during a joint House-Senate Resources committees hearing on the AKLNG project, which featured updates from BP, Exxon, ConocoPhillips, plus analyses from consultants Nikos Tsafos of Enalytica and David Barrowman of Wood MacKenzie, plus Alaska Gasline Development Corp. President Keith Meyer.

Saddler, an Eagle River Republican, shared his views in an interview with Petroleum News.

Petroleum News: What was your take from these last two hearings and where do you think we are heading?

Saddler: My take is the governor’s administration is trying hard to bend the curve of the process we have in place - and the governor initially said he supported - and trying to turn it into something that the governor wants but so far is unwilling to clearly delineate. It’s clear we all agree the natural gas pipeline is very important for the state’s economy and the producers’ bottom lines and all the attendant benefits: economic activity; jobs; low-cost energy for the state. But how we get there is the big problem. We have been pursuing a process we thought would work. Now we find out, kind of to our surprise, an entirely new concept is being interposed on top of that old prospect and we are not exactly sure why. The answers to the questions are not very compelling - yet.

Petroleum News: The ability to get the answers you’re looking for seems to have been eluding the Legislature since the administration took over. Is that a fair observation?

Saddler: That’s a fair assessment. Certainly Bill Walker ran for governor in 2010 on a platform of advancing a natural gas pipeline. That’s the whole reason he ran. After winning office in 2014 on largely that same platform, it’s clearly been his priority, and I respect that. We’ve tried to ask questions of him as to what his intent is. It’s hardly ever clear what he wants to do. He came into office saying that he was not going to change the schedule and change the process he inherited laid out in SB 138, and the HOA (heads of agreement) joint venture agreement.

But almost immediately he began changing it, changing personnel - Dan Fauske and other members of the AGDC board and staff, the quick change on the attorney general. We’ve heard a lot of potential ways this project could go but not with a lot of clarity of which way the governor wants to go. So we tried to ask questions and get answers.

Sometimes we are faced with the attorney general claiming attorney-client privilege and saying nothing. Sometimes we are told to submit our questions and we’ll get our answers later. Sometimes we ask questions of the governor and he responds with double-talk if you will that may technically fill the answer but it doesn’t give us any clarity over what it means, so it’s frustrating to not know what the view and the path forward are.

Petroleum News: At what point do you feel the Legislature is going to need some firm answers?

Saddler: I think pretty dang quickly. The governor is going to come to us for a budget for AGDC under his new scenario of state leadership, and it’s a state-owned corporation. It’s got a separate identity but we are the guys expected to write the checks for increasing the operation to basically replace TransCanada and ExxonMobil as the team leaders of this project. So he’s going to ask us for money and I think we have an obligation to the people of Alaska to find out what he intends to do with that money. That’s where I think the rubber will meet the road.

Petroleum News: Do you foresee new legislation needed?

Saddler: I think a lot of folks were surprised by the extent to which this governor has taken the broad powers of AGDC to empower the structure of joint power between the state and three producers and he’s turned that into a structure that has subverted the original intent. I don’t know if we need to have new legislation to restructure AGDC. During the joint Resources hearing the question was raised about whether the state can easily use tax-exempt financing. The attorneys gave us some information that indicated some changes in the state statute regarding AGDC might be more beneficial to making that tax-exempt status more clear. You know we did try with Mia Costello’s bill - SB 125 - to improve communication by putting members of the Legislature on the AGDC board as non-voting members, which, to my mind, would have been a good gesture. It passed the House and Senate and the governor vetoed it, which to my mind is a bit of evidence of a desire to not have cooperation and mutual understanding. That’s troublesome.

Petroleum News: Did you get a sense of misalignment among the four partners?

Saddler: Well, yes I do, pretty clearly. We can clearly identify alignment under SB 138 with the three producers, the state and TransCanada. And the advantages are pretty well established. But when the governor threw his curve ball of state leadership or ownership that brought some obvious misalignment we heard that Exxon and Conoco maintained their preference for the current structure of the AKLNG project.

But BP indicated they were willing to consider state ownership. Another evidence of misalignment is that Exxon and BP helped fund the Wood MacKenzie study with the state but ConocoPhillips did not, so I’m just wondering what that’s about.

We’ve seen the governor continue to claim the producers want to shelve the project, but Bill McMahon of Exxon made the point rather firmly, he called out the governor for repeated misrepresentation of Exxon’s position, so there is evidence of misalignment or at the very least miscommunication.

The original project included TransCanada and they were eliminated from the equation entirely because the administration froze them out of the project. I’m just afraid we are seeing the producers are being frozen out too on the pretext that they don’t want to meet the governor’s timeline. I’m afraid that could lead to the governor saying, “well there is nobody else standing with the AKLNG project so the state has to go at it alone.” It’s kind of like the child who is on trial for killing his parents, but throws himself at the mercy of the court because he’s an orphan.

Petroleum News: Speaking of the Wood-Mac study, what was your takeaway from it?

Saddler: That the current economics don’t make the project economic. The right answer is not to enter the next stage of the project is what the producers said. We had a meeting with Dave Bannerman. He said even the most favorable oil price projections of about $70 a barrel, that AKLNG is marginally economic and still relatively disadvantaged compared to the peer projects. Alaska’s supply of gas is known and that’s a low cost, but our transportation cost is tremendously higher relative to peer projects. So even if the price goes up and down the delivery cost is a huge factor.

The other takeaway from the Wood MacKenzie presentation is even if the tax exempt financing is a possibility even that doesn’t really get us there and it’s not a sure thing anyway. So I think the proper conclusion there is not full speed ahead but caution, yellow lights ahead.

Petroleum News: Do you see any advantage to slowing down the project so when the market conditions become more favorable, then you can ramp up easier.

Saddler: I do. Again we signed onto a process where we agreed to spend money to get clear answers based on real facts, not just rhetoric and pie in the sky stuff. In each stage in the process, we examine the facts developed and make a considered decision to move to the next stage or not. We followed that process through pre-FEED, which Steve Butt says is 97 percent complete. So the indication from the producer is we should not proceed to that next step of FEED at this point. Their recommendation is we should go slow, keep carving down the price, continue with the FERC regulatory process and see if prices improve and see if market conditions change. I don’t see a compelling reason why that is not the right thing to do here.

Petroleum News: Earlier you touched on taxes. There is still no long-term agreement on taxes between the state and the producers. Administrations now and previously have disagreed on when is the right time to secure those. Is it a concern that this hasn’t been complete yet?

Saddler: As you know the process called for a special session last fall for the Legislature to approve some of the decisions that had to be made. We were supposed to be presented with commercial terms, with marketing plans, the RIK/RIV decision was supposed to be made. I think we were supposed to have put the constitutional amendment on fiscal on the ballot at that special session. It would have come up in the 2016 general election. The governor slowed things down and stopped negotiations on some of those fronts, so we let the window of opportunity slip to 2018.

Steve Butt’s report had a red light, a green light and a yellow light. And the red lights were lack of commercial agreements and lack of tax certainty. Those are not just my concerns that they aren’t done yet; those are the producers as well. Exxon, BP and Conoco have made it clear for years and years and years: fiscal certainty was sine qua non (essential action) - without that this project cannot go forward.

I remember the Murkowski administration squaring that circle saying we would do it by contractual basis and we never ever tested that. The current administration seems to think a constitutional amendment is the way to do it, but that’s a convenient way to push it off two years and the governor had insisted on a timeline, making a FEED decision.

Petroleum News: Would you like to see efforts move forward?

Saddler: I would have liked to see them happen on the schedule we laid out. I think the people of Alaska need to have the conversation among themselves and see what that means. Maybe having two years of seeing what the next iteration of the plan forward is before that vote happens is a good thing. I’m looking for a good thing. I want a gas pipeline project to go through if it makes economic sense. I don’t want it to go through at any cost. I know fiscal certainty on taxes is a critical, essential element. If that requires changing the constitution, it’s not my opinion, the state of Alaska and its citizens need to make that decision if the benefits, as I understand them, are worth that long-term commitment.

Petroleum News: Do you view this situation as the state taking over an uneconomic project?

Saddler: I will echo what Nikos Tsafos said, if it’s not an economic project and the state takes it over, you’ve still got a state-owned uneconomic project. Again, the process we laid out seems to show there is a lot of caution and this is not the time to go to FEED but the time to go slow and bring down the cost. I’m concerned that the governor’s focus on getting a gas line, on his terms, under Alaska ownership will cloud his judgment as to whether it’s the best deal for the state. So I’m concerned the governor will lead us toward a decision to participate or lead an uneconomic project with the hope that it will be better in the future but without any evidence toward that end.

Petroleum News: So what do you need to hear from the governor or Mr. Meyer say between now and when session begins in January?

Saddler: I do have a lot of questions. I need to see if the state can actually qualify for tax-exempt financing and frankly whether income would be tax-exempt or not. I need to know what provisions are being made for payment in lieu of taxes for the communities affected by the pipeline construction. That’s a big issue the work the municipal group has done but that’s since been suspended. I guess I’d like to know if the governor envisions going it alone to the point that he’s willing to pledge the Permanent Fund to back up the state ownership of this project. I guess I’d like to know if there is going to be clear sailing for the FERC permitting. We need to make sure we can get the regulatory permission. The last thing I’d like to know is if the governor will pursue a private letter of ruling on tax-exempt status. If so and the timeline is about a year, why not just continue with the current project design that we have and use that year to continue to carve down the cost and finish the FERC process. I just don’t see the governor’s compulsion for changing the project structure the next couple of months.

Petroleum News: One constant that’s going to be missing soon is project manager Steve Butt. Even those on different sides of various resource development arguments seem to come together in appreciating Steve Butt. He seemed to command people’s attention with his thoughts and respect. What does that mean to you?

Saddler: I met with Steve shortly after he was named as the leader of this project a couple of years ago. He’s been the face of the AKLNG project every time we’ve had an important briefing. That continuity, that trust has been a valuable element of this project to me as a legislator. I never had a sense he was representing just Exxon’s interest. He was representing the entire working group’s interest including TransCanada, BP, ConocoPhillips as well as Exxon. We are going to lose that trust.

I do understand one of the ways that kept the costs down was rotating human resources off the project once the work was done so I can’t fault the team for taking him off the job once his work is done. There is no need to keep him on payroll twiddling his thumbs for a year. I would be concerned at who would be the next person leading that effort. Until I know who that person is I really can’t denigrate them. There will be some loss of trust, some loss of comfort and one more data point of the project we thought was moving forward has to pause for a while.

Petroleum News: Nikos Tsafos touched on that. When he was meeting with people he felt like he was meeting with someone different every time from the administration.

Saddler: That is problematic to me as well. The working group leaders were always consistent and we had some kind of relationship. Seeing an ever changing parade of people - consultants, commissioners and deputy commissioners - cycle through this project I think is one reason why some people in the Legislature have some discomfort with the governor’s direction. It’s not clear exactly what direction it is. We’ve had to make guesses - informed guesses, but still guesses - as to what the ultimate goal is and what the ultimate strategy for getting there was. Even Keith Meyer said at his first meeting was one of the problems he saw was a lack of trust by the Legislature of the administration. I think that changing parade of characters is an important part of that.

Petroleum News: It seems like it’s going to fall on him to regain that trust. Where are you with him on that?

Saddler: He’s got a way to go. I’ll just leave it there.

Petroleum News: Do you feel like AGDC is starting over?

Saddler: Yes, I do. As I said before the legal structure is pretty permissive. It gives pretty broad powers to AGDC to do a lot of things, to create a gas line, to create subsidiaries, the power of eminent domain, a right to certain public resources, so it’s a very powerful organization. The staff, executive leadership and the board have almost been entirely flushed by the current administration. The people appointed in their place seem to have an orientation toward a different kind of project.

So yes, I think AGDC has become a new organization with new people and according to my best evaluation with a new mission. That’s particularly troubling because the governor came into office promising to maintain the structure and the momentum we had in the system designed by SB 138, and I guess we presumed that meant the executive leadership of AGDC.

Petroleum News: Let’s go back to your concern over the tax-exempt status. Did you get any clarity on it or is it being researched?

Saddler: The clear answer is it’s pretty murky. It sounds like it’s a lot more difficult than it might appear. The clear advice was to ask for a private-letter ruling from the IRS about the tax-exempt status of the financing bonds for the AKLNG project. It sounds like it requires the application be supported by the clear facts of the plan, not hypotheticals, not provisional plans that can be amended later.

I think I heard there are questions that even if tax-exempt status were obtained for the state then it would apply to sections of the project the state actually owns. If the state were to sell off portions of the project, those elements would lose tax-exempt status. It’s not entirely clear if the producers as private entities would be able to obtain benefit from this project. I guess the state ownership might obviate that but these are a lot of issues that need to be nailed down.