MacKinnon: Too many unanswered questions

Eagle River Republican says Walker’s AKLNG plans remain elusive nearly two years later, but willing to listen, keep open mind

STEVE QUINN

For Petroleum News

While she may not be on the Senate Resources Committee, Senate Finance Co-Chair Anna MacKinnon had a front-row seat for the recent join Resources committee hearings, sitting next to Resources Co-Chair Cathy Giessel. MacKinnon serves as vice-chair of the Legislative Budget & Audit Committee, which hires oil and gas consultants for the Legislature. MacKinnon, an Eagle River Republican, shared her thoughts with Petroleum News on the status of the state’s prospects for marketing North Slope natural gas.

Petroleum News: You’re pretty fresh off back-to-back joint Resources hearings. What were your main takeaways from those hearings?

MacKinnon: Well for me Alaska’s project in these prices is uneconomical. We can’t pencil out because of the high cost of transporting and commercializing, or preparing for market, the gas that we have on Alaska’s North Slope. It just doesn’t work under this price environment.

There are options, and we need to not lose sight that there is a global market that will be tightening around the 2020-2024 time period and it’s very difficult to look that far ahead, but that’s where we want to look for value for Alaska, and see if it’s there and not in this current low-price environment.

Petroleum News: What questions do you have still about how the project may advance?

MacKinnon: I’m not sold at the go-it-alone model. I’m absolutely willing to listen to what the governor has to say about how to commercialize our North Slope gas on our own. But I’m very hesitant without studies to move forward in that direction.

Petroleum News: Are you detecting any kind of misalignment among the four partners?

MacKinnon: I think the misalignment happened almost two years ago in the sense that when Gov. Walker came onboard as governor, from my perspective he tipped his hand by saying timing mattered to him greatly. So when you tip your hand in poker, you are telling your partners where your weakness is at. So our weakness from my perspective in what the governor has done is that he is willing to go further on his own. In most cases, when someone is willing to go further with LNG, it means you’re willing to take on more risk. I was more comforted with Alaska contributing 25 cents with the other three partners contributing 75 cents.

So I felt more comfortable in the process that there were three other sets of eyes looking at the project that had a lot more experience than Alaska did and they were willing to invest their 25 percent - or as I said, the quarter. So yeah, I think there is misalignment on timing, but I don’t think there is misalignment on commercialization.

So like any good poker player the partners are seeing the state as someone who has to have it sooner rather than later. And if the state is stepping up and willing to pay for now instead of later, then they are going to extract their value from our need to advance sooner rather than later.

Petroleum News: There is still no long-term fiscal agreement between the state and the producers. There are varying opinions about where on the timeline the negotiations should be made. Are you concerned that it’s not done or can it wait?

MacKinnon: It has to wait, right? The governor and his team have used the taxes as a way to hold a card away from our partners. Until he gets what he wants, he’s not going to advance to the people of Alaska any kind of fixed fiscal terms. That’s certainly within his right to do so. The Legislature is waiting on the governor. I think we were willing to move forward on some assurity on taxes. The governor is negotiating differently. From some perspectives that’s a good thing. For those of us who have been around for a while there has not been clear direction for the Legislature to see how the governor is going to bring this project to fruition.

Petroleum News: What would you like to hear next from the administration, be it the governor or Keith Meyer or even John Hendrix?

MacKinnon: A basic understanding of economics. I have a hard time understanding how the state creating another seller in a flooded gas market is going to do anything but drive the value of Alaska’s commodity price down. If BP is out there selling gas; if Exxon is out there selling gas; and if ConocoPhillips is out there selling gas and the state comes in to compete with them inside Asian markets, the only thing that happens with oversupply is the price going down so I don’t understand where they are going to extract value for Alaskans. What I hear is taking less so that the timing is better. I think the people of Alaska deserve to know the finances and how that risk devalues Alaska commodity price, or how we are picking up that risk or sharing the burden. Again we don’t have enough information from the governor as a legislative body or the people of Alaska to see how this deal is good, bad or otherwise for Alaska.

Petroleum News: Now there are some who believe he has not provided enough information since he took over. Are you in that camp?

MacKinnon: I am. Let’s think about it. This governor has said I don’t want to spend money studying things. He is entirely changing direction of how the Legislature and previous administration intended to advance a project. People may applaud that or shout against it, but the bottom line is when you are in a billion-dollar project let alone a $45 billion to $65 billion project, then you should have a timeline, you should know how your money is going out and how your expected return is. It’s a little bit difficult for me because gas is not going to replace what we receive in value for hydrocarbons like oil did. You are talking about something that might be selling for about $45 a barrel and something that you will receive $4.50 an mcf if you are lucky. It’s not comparable. I know the volumes are very different. I would like to see the financial analysis to see what we really expect in these tradeoffs to receive from selling Alaska’s LNG. A net negative, which is what they are doing in some places around the world, is not acceptable to me.

Petroleum News: So what is the top priority for you? What would you like to see next from the governor’s team?

MacKinnon: I need a project that can live within its budget, so I’d like to see a budget. I’d like them to be able to back that budget up with best practices that they can demonstrate from other projects around the globe.

The economists need to price out how much we’ll anticipate having an equity share and how much we’ll have a debt share and how much that debt is going to cost. No matter what they tell a financier or a court, Alaska’s Permanent Fund backs up almost everything we do in the state because of our low population.

When our credit rating is being talked about and being downgraded, that affects everything but we stay relatively high compared to other cities. We have $55 billion that is in savings and untouchable. I’m just telling you that it’s my belief, no matter how much you protect it legally, that is always going to remain the backstop for anyone who loans. I am not going to be involved in a process that jeopardizes that Permanent Fund as a lien against a pipeline project. The governor is going to have to show me and his team will have to convince me how we can go forward, finance something and not take on risk while still receiving value for those hydrocarbons. So there is quite a bit of math that has to be done from my perspective.

Petroleum News: One of the concerns the Legislature’s analyst (enalytica’s Nikos Tsafos) had was the turnover. That he was dealing with someone different from the administration every quarter whereas with the producers he wasn’t. There was continuity. Some say the governor is simply adjusting to the market when rebuilding his team. Has the turnover become a concern of yours?

MacKinnon: Absolutely. In the special session where we bought out TransCanada, the high level concern there was for the administration to provide the Legislature an organizational chart to show us who is in charge and the lanes that they were working in to create that continuity for our partners to be able to access information and transfer information from the partner group to the state.

We absolutely were concerned, maybe not everyone, but I certainly would be in the camp that turnover is bad and lack of continuity is bad. Really understanding this project, which Alaska as a state government has not as well as the producers who build projects around the world - that is apparent when the governor does not clearly define how this project is going forward.

It is ever evolving as it should be. It is not evolving in how we anticipated it. It has people choosing not to participate, not to come on board. It could be a timing issue. I certainly want to provide the governor and his team an opportunity to prove a project that they think is viable. Again, I am suspect to making this timing issue so critical that you are running over the top of really having good numbers to determine whether the state should be moving forward or not.

Petroleum News: So do you get a sense that AGDC is starting over, nearly two years into the governor’s term?

MacKinnon: What we were concerned with over the buyout of TransCanada was there was a shadow operation going and that we were paying for a whole bunch of attorney fees we didn’t know if we were realizing a benefit. So I wonder if whether this project has been as transparent as they are reporting to the general public. So if they are ready to present a new project, then at some point the Legislature has not been as informed about this new project being ready to go. So I’m not sure how we flip a switch and are already at the starting line of a new direction unless we’ve already been planning, then that’s very different from what the Legislature was lead to believe. So either way, I’m concerned, but again, I want to provide the governor and his team an opportunity to convince me. I just don’t know how transparent this administration has been with the Legislature.

Petroleum News: What other take away from enalytica did you have?

MacKinnon: My biggest take away from the presentation from enalytica has been repeated time and time again is that if the producers are willing to sell their gas to the state it’s a bad deal for the state. What they are trying to bring home to us is that the producers are going to take their cash and eliminate their risk by selling their gas to someone else who is going to carry the risk for the mega project and if the state is the one carrying the risk, we don’t have the same experience to bring that project to the lower number of the $45 billion to the $65 billion.

So the bottom line is if the producers are willing to sell, it’s a transfer of risk the state should probably not take. To that end, I worry about the expertise we have at the state to bring in a mega project when the producers as partner believe they can bring it in at the low end of the price of $45 billion. In a state-led, I wonder about our experience in bringing the project closer to the low number and worry that it could exceed the high number at $65 billion.

There are certainly very capable people in Alaska. There are people who have been on projects before. When you have Exxon, BP and ConocoPhillips, they have been working LNG projects around the world - recently - to know what the new problems are that they face around the world. Whether it be steel, labor or litigation. Whatever the issue was on their last project, we can prevent it if we had those partners at the table having to work for their fair share of the project rather than provide gas for our project.

Petroleum News: Speaking of consultants, Wood Mackenzie provided a one-time assessment of the project, noting that if the state pulled the right levers, a viable project might be possible. What were your thoughts on the presentation?

MacKinnon: I thought that it was interesting on Slide 2, and granted I have not been privileged to hear a Wood Mac presentation, so what grabbed my attention was a disclaimer on that page saying we should not use anything they say to make a determination on whether we should advance a pipeline.

So when a disclaimer was placed in that slide deck (Wood Mackenzie: “We do not accept any liability for your reliance upon them.”), I wonder how much influence the administration had on what was said during that proposal. I’m not suggesting that they did. I’ve never seen a slide presentation that basically said I should ignore what they are telling me to make a decision, so that was disturbing to me.

The levers they were suggesting that we pull were not anything new, at least in the Senate. We had talked about federal tax exempt status. We had presenters on the second day tell us why they believe or didn’t believe that the state could qualify for tax exempt status.

If you have someone who is making money anywhere along the chain, you are not going to qualify for tax exempt status. That is my quick takeaway. It’s not an accurate description of what was said. The bottom line is it would be very unlikely that we could get a tax exempt status for the entire project. There is a possibility I think for a component of the project depending on how much risk Alaskans were willing to shoulder if you could make part of the project tax exempt.

So if we covered all of the gas treatment plant on the North Slope, we might be able to make that component and just toll the producers going through it. You can make the LNG component or you can make it the pipeline component, or even transportation across the pond. But if you took on responsibility to make that a tax exempt component that means you are taking all of the risks for the portion of the project being successful and holding it to a construction timeline and having it cost out appropriately.

Petroleum News: So is it a good idea to pursue the prospects of a tax-exempt status?

MacKinnon: I’m not an attorney, but if the governor believes it’s a good use of resources to pursue a federal tax exemption letter, I would be interested to see what the response from the federal government is, but that’s a pretty hefty price tag, mother may I.

Petroleum News: So do you see this as the state taking over an uneconomic project?

MacKinnon: I think I’ll reserve judgment on that question. If there is a project in the works that is very different from what the Legislature voted for, then the governor just has to come back and explain to the Legislature that his plan is the right way to go.

Petroleum News: Do you see that there might be a need for legislation to set aside SB 138 to accommodate a new path forward?

MacKinnon: I think there better be. It is going to be awfully hard to acquire to the necessary appropriation to finance a new direction. A marketing team they want is going to cost millions. AGDC and Mr. Meyer are working hard to stay within their budget. They believe, if I’ve heard them correctly, if given more money they can accelerate their timeline with a vote of our confidence through an appropriation. I don’t see that happening. I believe the governor is actively pursuing a relationship with the people of Alaska to change out enough members of the Legislature so he can advance his ideas for what a pipeline should and could be.

I’ll just note I was a yes in voting to create a licensing structure for AGIA. When TransCanada bid, I was a no because I thought the company would have Canada’s interest and their hydrocarbons at the front of their minds and would want to monetize those for Canada. I thought there was a bit of misalignment there. Going forward, I believe I voted in the right direction on many of these votes on who should go forward in a good structure.

Now there is a lot of rhetoric out there now that are not giving people of Alaska they need to make a good decision about whether this pipeline or an alternative pipeline is a good idea. So turning out the Legislature, that’s up to the people of Alaska. But if you’re doing that based on what you believe is the governor’s idea of a pipeline or a judicious review of the economics review of the pipeline, the people of Alaska need to look closely. There are people who are asking good questions and not trying to get in the governor’s way but really trying to understand the governor’s project, and how it will or will not benefit the people of Alaska. A sound bite will not work here. The pipeline is so much bigger than a sound bite. You have to have people willing to agree and disagree and go through the laborious debate on the right, wrong and OK that is mega project, if not four mega projects.