Coghill: Open pipeline dialogue critical

North Pole Republican, Senate Resources member says Walker has his own duty to produce – answers for his decisions on AKLNG

STEVE QUINN

For Petroleum News

Senate Majority Leader John Coghill has been in office for 18 years. He’s seen more than most, especially when it comes to discussions on resource development. The North Pole Republican, who has served in the House and Senate, sits on the Senate Resources Committee. He shared his thoughts with Petroleum News on the AKLNG and prospective discussions on the state’s oil tax system in the upcoming legislative session.

Petroleum News: Let’s start with AKLNG. What is your broad view of where things stand now?

Coghill: We all want our natural gas to go to market, and we’ve worked at it for years. But with the downturn with the price of all the fuels - natural gas and crude oil - it’s been tougher. So the governor has been trying to figure out a way to do it by going heavily funded by the state. There is a big question mark in what does that mean for us legislators. Go it alone might mean we have huge investments from the state, which the governor has been pretty clear that’s not what he wants, but we are concerned that may be the case because the governor has not been forthcoming with his plans all along.

(AGDC) says what they are looking for is a consumer-financed pipeline for the most part. At least we know kind of where he is headed now. It’s a matter of can we get the customers. Probably the concern for many of us is if the buyer is setting the price, does Alaska get the value for it? If the sellers are the oil companies, their margin was higher than the customers could tolerate; there was no profit in it with these low-price markets right now.

So many of us are concerned we might be investing in something that might not pay for itself.

Petroleum News: So what questions do you still have about how the project advances?

Coghill: The project financing is the big thing. It really comes down to the fundamentals of economics. Are you getting a good price for your commodity, enough of a price to be valuable to Alaska to sell it? And is the customer going to be satisfied. I know the governor is working hard to try to find a way to do that. As soon as we see maybe a proposal from a buyer or a proposal from a seller that gives us a price point, then we will probably be a little more comfortable.

At this point, we kind of know what you have to have at an international market. It looks like it’s more than we can do in Alaska, just getting it from the North Slope, transporting it through Alaska, liquefying it and selling it in a vessel to an Asian market.

We have several advantages like nearness to market. But we are also in a market time where there is a glut. For investment, that’s tough. I think the governor and his AGDC new president said they are looking at the new 2024 window because that’s when he said the contracts in Australia are going to be changed out. I’m still open to discussion on that because I think the oil up there is still the prize. If you have natural gas moving from the Slope, then there is more likelihood of oil development in a broader spectrum in the Prudhoe Bay unit. So I think we still need to move forward.

Petroleum News: Do you gain a sense the state is taking over an uneconomic project?

Coghill: That’s a fear and that’s probably the best I can say. If there is a concern there, then you watch closely how a deal gets put together. When they come back to the Legislature for new options or new money, we will be asking those types of questions.

Petroleum News: As you listened to the testimony, did you get a sense of any misalignment or is this a case of pursing different approaches?

Coghill: Well it’s a different approach, for sure. The major producers on the North Slope have projects in other places around the world. The governor’s reasoning has been if they can make more money in other areas, so they will, and they are not going to do Alaska because of that.

He thinks by getting a federal tax break and getting a good buyer that he can finance that from the buyers. Those are two big what-ifs. What if the federal government doesn’t give us that kind of tax break and you’re still going to have a buyer and that money is still going to be taxable at a federal level? I don’t know how that works. The governor is throwing that out as a possibility. He sees that as decreasing the cost and giving the state a margin. Those are questions that have yet to be answered. The commodity price itself, if Japan is going to demand a price that doesn’t give us any margin in Alaska, I don’t think that is going to be a good idea, either.

We are still not in what you call the front end engineering and design. We are still in pre-FEED. What it would cost to get to that is also a big question. If you get a customer who is willing to buy the gas is it enough to get you to that engineering design that actually gives you a number you can count on for the cost of building. Those are all questions that have to be answered.

Petroleum News: Since SB 138 no longer seems to be the guiding path, at least as some people see it, do you see new legislation being needed?

Coghill: Since I’m not the expert on that one, I’m just going to say, probably so on two counts. The accountability with AGDC is probably something that many of us legislators are concerned about. We passed a law to say at least let the legislators listen in so they have an idea when it comes time to put a bill or a number before the Legislature for appropriation. That will be a number that somebody can tell us how it came to be from the legislative branch. The governor said no and vetoed that, so I think you are going to see a little higher scrutiny because of that for anything that they are doing, and the reluctance to sign off because the board said it was right. One of the accusations has been he is stacking the board with people who want to do what the (Alaska Gasline) Port Authority has always wanted to do and that is what the governor is headed for: a consumer financed pipeline which we all struggle with.

Petroleum News: Do you think vetoing that bill set back any relations between the governor and the Legislature?

Coghill: I don’t know that it set anything back because the governor was pretty clear that he didn’t like it from the beginning, so I’d say all it does is solidify the tension between the legislative branch and the executive branch.

Petroleum News: Even Keith Meyer in his first hearing noted communication gap between the Legislature and the administration. Is that being tightened up?

Coghill: Not yet, but I don’t know that it’s Keith’s problem. He’s probably working it, but there is a credibility problem between the Legislature and the governor right now anyway, so it’s not Keith’s problem. It’s the governor’s problem. Most of us are weary from a series of special sessions the governor felt very important to push the Legislature on for some decisions that the Legislature quite frankly could not get to the end of. Even though they made some really big, hard choices, he wanted more and he pushed them to the point where they were reluctant to work with him.

Then they went right into an election cycle and that’s made it even more difficult to pay attention to all the details the governor is doing. So I would say it’s not Keith’s issue so much as the cycle of this year’s policy calls, the push and pull between the governor and the Legislature and the fact that he has vetoed several of the bills has just caused tension that just isn’t going to go away.

Petroleum News: There was some concern expressed by one of your colleagues and reiterated by one of your consultants - Nikos Tsafos of enalytica - over turnover within the administration and how the Legislature seems to be hearing from someone new each quarter.

Coghill: that’s part of the distance between the Legislature and the governor. The consistency he has had in moving his dream forward, he has had to go through several high paid people - Mark Myers, Marty Rutherford, Rigdon Boykin - he’s had to change out almost the whole Alaska Gasline Development board. Those are things that have happened just in the recession time. That’s part of the credibility problem between the governor and the Legislature. That consistency just is not there except we know the governor wants a consumer-directed pipeline because that’s his thinking and that’s how it will be paid for. It’s not unusual for consumers to pay the price for the commodity that helps build the infrastructure, that’s for sure. If I were one being asked for gas prices I would start out by getting the lowest price I can get. If it’s consumer financed, they are going to get the lowest price and we are going to have the highest risk. So those two things are not a very good alignment.

Petroleum News: As you’ve heard testimony for tax exempt status, do you believe it’s possible or are you dubious of the prospects?

Coghill: It’s just been mentioned to us recently. It was a new subject that came up so we’ll have to see a little information to make sure it’s a credible point. Right now it’s a speculative point. You don’t finance something on a speculative principle.

Petroleum News: You noted AGDC’s turnover, short of board chair David Cruz, do you feel as though AGDC is starting over almost two years into the governor’s term.

Coghill: Yes, I think they are but it’s not something that I think is a surprise because the oil companies - the majors - have said we think the economics of this project are poor so we need to slow down. The governor said slow down is not comfortable to him so he decided to ramp up AGDC to figure out ways that the state could take the lead, so he’s doing that. It’s not what I call a very clear picture at this point except we know he’s looking for buyers to come up with the financing, but beyond that it’s unclear.

Petroleum News: So what are your impressions from what Keith Meyer has had to say in testimony?

Coghill: Keith looks to me like he’s bought into the project. I’ve heard him twice now and I would say he’s trying very hard to find support for what the governor wants to do. In that regard, he’s a good soldier. I don’t know that he’s getting support from the Legislature that he was hoping to get. We are just very skeptical right now. At least I am.

Petroleum News: So what would it take for him to get the kind of support you think he’s expecting?

Coghill: Well, if he is going to count on federal tax exemption, we need some clarity from the federal government. However he needs to get that, he needs to nail down that clarity. If there are indeed buyers who are willing to front sales contracts to float bonds for, we need to know what the bond rating is. I don’t know that it’s been discussed much. That gives you an idea of the finance costs. Those on the North Slope who are going to sell the gas, what the going rate is going to be, even though many will want it to be confidential, we still need a bracketed number. So he has not laid those out yet. There are a few other fears, for example the governor has made some noise over a duty to produce. That is an indication he is willing to use legal means to get that natural gas from the producers. I’m not sure that’s the best move so I think that is one other concern. We don’t know what he means by that. We don’t know if it’s a forceful thing or just a mention to create interest. Once you mention it, it’s not surprise that it goes back years for the governor, if he intends to use it or not. The old attorney general: that was one of his main things, the duty to produce. I think they believe that’s one of the hammers they have. I don’t know that it’s a good use of the law. That probably comes to double-digit questions at this point.

Petroleum News: So what would your priorities be next session as it relates to AKLNG?

Coghill: I don’t know that my priority is going to be of any consequence. The governor at this point has entrusted a lot of people at AGDC and DNR, so I guess in many ways, we will be playing the role of accountability and getting good answers to questions. I don’t think anybody in the Legislature is saying don’t sell our gas. We all want to sell our natural gas and we know it would improve our oil field potential. Those two things stay in our target. We watch how our governor is moving. If we can move him to a better methodology or hold him more accountable for something that is risky, then I think that is going to be an important priority. We have appropriation power. That will be one of the things we will watch closely and use wisely. Then it’s a matter of confidence in the governor. As I’ve said: new faces, new priorities, new directions. Whether he will work with or against the major producers is an open question. It’s in the making. Accountability and good answers are things we are going to have to demand.

Petroleum News: One of the elements identified as missing by (AKLNG) project manager Steve Butt was the long-term fiscal agreements between the state and the producers. Has that taken a back seat to the other issues you’ve noted?

Coghill: It moved naturally when the producers said we’re not ready to move beyond pre-FEED at this point and we’re just taking time to re-assess, and the governor said I’m not taking time to re-assess. I’m moving forward. That did take the discussion and put it aside, but it’s not a conversation that is forgotten, I can tell you. If we sell natural gas and the state is taking the lead, we still have a partnership and that partnership is going to require a long-term fiscal agreement. But now there is a new shape to this and at this point, I wouldn’t know what that is.

Petroleum News: Looking ahead at next session, there’s an expectation of legislation taking another look at the state’s tax credit and oil tax system, items not part of HB 247’s final passage. What are your thoughts on re-visiting this again? Is this just status for being in office?

Coghill: We will have a new House probably and I don’t know what the Senate makeup is going to look like, but the low oil prices have put us faced with the question is our oil tax system working for the state and for the fields to be developed? You have to continually ask that question, knowing SB 21 and ACES - the whole net-based tax system - for production was an imperfect system. But I’m not willing at this point to begin a higher tax level at a lower income level. It doesn’t make sense to me to tax the producers when they are in income-stressed circumstances. Certainly the state is in income-stressed circumstances as well.

I think if we are going to give credits, we want to make sure they are reasonable and fair and that the final outcome to the state is a win-win. Some people think we are actually giving the oil companies the cash and we are not getting any benefit out of it. We managed to get huge benefit from it including oil production. I think the discussion will come up, but whether or not the tax system will change or the credit system will change, I don’t know.

I think what we did in the Kenai fields was important because the dynamic had changed, the credits got what we wanted: new investments. The new investments then got new production. The more production changed the ownership structure. It was a structure that worked. The time had come.

The North Slope pays a severance tax; they pay royalty; they pay a corporate tax; they pay property tax. The credits in the severance tax weren’t meant to increase production, which they have done, then it’s a matter of is the value right. We still get the royalty, that 12.5 percent, no matter what. I think it’s been misstated that we are giving the oil away. We are trying to get increased production, which we got. Unfortunately, it’s been in a low-priced environment.