Chenault: Include the Legislature

Outgoing Speaker returns as House member and fully engaged in resource development issues, calls on Walker for better engagement

STEVE QUINN

For Petroleum News

House Speaker Mike Chenault is wrapping up his fourth and final term as the House’s top-ranking officer. He’ll likely be back next session as he faces only a non-affiliated write-in candidate, but in what capacity, even he won’t predict with all the close races facing both chambers.

A Nikiski Republican, Chenault spent four years as Finance Committee co-chair, but has been squarely focused on resource development issues, serving as an alternate on the House Resources Committee.

Chenault spoke to Petroleum News on his views of what’s happening with the prospects of a natural gas pipeline that will deliver North Slope gas to a liquefaction facility in Cook Inlet.

Petroleum News: Let’s start with your own backyard. Where do you see AKLNG right now given all of the discussion over the summer?

Chenault: You know right now I just don’t know. The governor had been making trips to Asia and talking to the Japanese and Koreans. I don’t expect those would be real fruitful conversations as far as getting us to the gas line goes. If it’s not a written contract, I don’t know what the worth is. I think we all know the Asian markets would love to have another project come online in the near future to help keep the costs of LNG low, so I don’t know what real good those talks are right now. I’m not involved with them. We haven’t really heard any reports. I did attend the AGDC board meeting in Kenai. There’s not a lot of new information there, either.

Petroleum News: What’s missing for you right now? What would you like to hear?

Chenault: I think what’s missing really is direction. You know the Legislature is out of the loop - has been for a while. From my conversations with people involved with AKLNG and with AGDC, they are working toward turning over all the paperwork to AGDC and trying to allow the governor to put together a project. That’s about all I see right now. I want more information. I want more communication. I hope we get that here in the near future so that the Legislature is in tune with what the administration is doing. If not, I think it would be a pretty tough time to receive any new funding next year.

Petroleum News: What would tip the scales for your vote on funding, if you had to make that kind of vote?

Chenault: I would have to have a lot more information on the real direction of the project we are heading toward, that we are not spending money just to spend money, that there is a real prize at the end of the rainbow. We need factual information, not just what we’ve been getting.

Petroleum News: You and Rep. (Mike) Hawker several years ago began putting things into place that created what is now AGDC. Is the current form of AGDC what you had envisioned when you and Rep. Hawker crafted the legislation?

Chenault: No, it’s not. I believe there are some good board members there now, but I think when Rep. Hawker and I put this together, our vision was that we put members on the board who have the expertise to actually go out and put a project together, then bring it back to us and say here is what we’ve got, then lay it all out. While I believe there is a lot of talent on that board: Can they do it? I believe they probably can, but it’s changed more into a political reality versus a project in my mind.

Petroleum News: Do you see this more of an uneconomic project being advanced?

Chenault: You know I can’t say that I do because we don’t have the information that we need as far as what type of bonds can we float that might be advantageous to have on a project like this. Are there federal taxes that we might not have to pay to drive this project down? There are lots of questions out there that haven’t been answered. And we need answers.

Petroleum News: How do you go about getting these answers? Do you go to the governor? Do you go to Keith Meyer?

Chenault: Like I said I went to the AGDC board meeting. I talked to every one of the board members and the board president and explained to them, in my mind they need to bring the Legislature into the project and make sure we understand what’s going on because (having) no information is not a good place to be in the Legislature. I’ve expressed to the board that I would like to see them working closer with the Legislature to make sure it knows what’s going on there versus a meeting every month or two to hit the highlights. As I’ve said the Legislature at some point and time will have to appropriate money to this project if they expect it to go forward. Without this information, I think it will be tough sledding.

Petroleum News: Speaking of the board, it has a brand new look since the governor took office, short of David Cruz, and even DNR has undergone a significant turnover losing Mark Myers, Marty Rutherford and most recently Corri Feige. For some it’s a concern, others write it off as turnover. What are your thoughts?

Chenault: They are going to have to come to the Legislature, convince us they know what they are doing and what’s going on. They have to convince the Legislature that this is a project that makes sense. I’ve got a lot of respect for John Hendrix. I’ve met with him recently and expressed to him some of my concerns. In talking with him I believe he is going to try to work with the Legislature and try to keep us abreast of what’s going on. That’s true DNR lost a lot of talent - Marty and Mark and Corri - but they are going to have to get people on board and have those in depth conversations with the Legislature in order to make the Legislature comfortable with the plan they are trying to advance whatever that plan might be.

Petroleum News: One of the concerns about communication between the administration took an additional turn when Gov. Walker vetoed Sen. Costello’s SB 125, which would have placed members of the Legislature as non-voting AGDC board members. The governor, based on two opinions from the Department of Law, vetoed it.

Chenault: I don’t think it helped it or hurt it, really. If we have legislators who are not voting members of the board, they can be the conduit to bring back information to the Legislature. Like I said, if the Legislature is not comfortable with what they are hearing or don’t feel like they are hearing enough information, then it’s going to be harder to put more funding into that project. So I believe if he would have not vetoed the bill, it would have helped the relationship between not only with the AGDC Board and the president Keith Meyer, but also the governor and the administration.

Petroleum News: So what’s going on down on the Kenai? A year to a year and a half ago, there was a buzz over AKLNG. Land was being bought. People could see field work being done. Has that changed?

Chenault: That has changed. They are not pursuing any more land that I’m aware of right now. They have the majority of the land they would need to build this project. They are evaluating a few of the land purchases, but for the most part the land buying is done at this time. The field work they were doing as far as soil testing and other aspects of the project, they are pretty much wrapping up those and trying to tie up the loose ends before they hand the package over to AGDC to try to allow the state to move forward on their own: So not a lot is happening there. We are still working on trying to get Agrium restarted, probably next year sometime. We hope to have a go, no-go on that.

Petroleum News: Well let’s talk about HB 100, the Agrium bill. It was one of the last bills to get the governor’s signature or any action at all. Were you nervous that it wouldn’t get signed?

Chenault: No, we had a good understanding from the governor and the administration that they would sign it. It kind of lagged because we were looking for a date to be able to sign it to have myself and the governor down, plus have folks from Agrium there. The governor supported HB 100. It’s a different tax credit application versus what some of the others have been, and I think it’s the right one. Currently we receive no corporate tax from Agrium. They just own the property. They won’t get a credit until they use natural gas produced from state leases. We would receive somewhere in the neighborhood of $15 million a year in royalties. The credit would be somewhere around $2 million to $3 million. They wouldn’t get it until they were up and running and that’s after spending somewhere in the neighborhood of $275 million to bring facilities up to operating potential. So a lot of things will have to happen before they receive any kind of tax credit. Long term for the state, it will be a good investment. It will put hundreds of people to work with good paying jobs. It will be a benefit to other industries in the state. We are still hopeful that the numbers work out for Agrium to make the business decision to bring the facility back up. We won’t know until sometime in the middle to late next year - we hope.

Petroleum News: Would you like for this formula to be a model for other tax credits or is this something that works for this situation?

Chenault: You know I think we’ve got to look at it. I think it’s a tax model that could work, maybe not with all applications, but certainly with some. Maybe it doesn’t put the state on the hook for hundreds of millions of dollars like some of the other tax credits have. It’s something we should look at but we are going to have to take that on a case-by-case basis.

Petroleum News: The bill passed during the second year. The first year you had mentioned that being the speaker can sometimes make it tougher to publicly push your own bills.

Chenault: It is to a point. Sometimes it helps being speaker, sometimes it doesn’t.

Petroleum News: With that in mind, what did you learn most from being speaker for eight years?

Chenault: You can’t be as much of an individual as you would like to be sometimes. Many times being a speaker, you need to be supportive of your caucus members or members of the body. You don’t maybe have as much individuality as some people might like to have. That’s probably the biggest thing. If I had my choices there might have been some legislation I would have voted against if I wasn’t speaker, trying to support my members with their legislation that helps people in their districts or helps others around the state. Sometimes you just have to do it.

Petroleum News: You also mentioned not long after one of the special sessions that it’s important to understand you’re not always going to be everything you want. Is that a speaker observation or from someone in the Legislature?

Chenault: In general, it’s probably a thing in with the Legislature. I’ve never seen a single time where you got everything that you want. It didn’t matter if you were the speaker or not. What I found over my time in the Legislature is if you think you’ve got a good idea, you push it as far as you can. If you get a little bit this year, then you accept it. You might not be happy about it, but you come back next year and you live to fight another day.

A lot of times I see people say if I can’t get what I want then I don’t want anything. And sometimes they get nothing. Like I said, I think you try to get what you think is important, and if you don’t get it all, you chalk it up to experience, come back the following year and finish what you started. You have to have the attitude that you are not going to get everything you want, so accept what you can get, come back and get what you can this year or the next year. I’ve seen legislation take five or six times getting a bite of the apple completing what you thought was important.

Petroleum News: With that in mind, it looks as though discussions for changes to the tax credits and tax policy will be back on the table next year when session resumes. Are you expecting another battle like this year?

Chenault: I suspect that they will. We didn’t go as far as some people wanted. We went further than other people wanted. As long as our revenue stream is based on oil, then we will probably have those discussions every year.

Petroleum News: Do you think you have a tax structure that is durable right now?

Chenault: I think at some point we are going to make some other modifications to them. The biggest issue is how long is it going to take to pay off these tax credits and how are we going to pay them off.

Numerous independents in the Cook Inlet said: “We’ll figure out how to move forward without them, but we based all of our models on them and if you don’t pay them, then we are going to be in trouble.” If we don’t pay these tax credits, then I think some of these folks are going to end up going out of business. What we wanted to do was bring new players into the state. We did that. Here in the Cook Inlet, we not only wanted to bring new players in, we wanted them to produce more oil and more gas.

They did exactly that, so the credits worked. Was it the right amount? Were the percentages the right number? That can be debated. But what we wanted to happen did happen. We had explorers come in and stay. Again, the tax credits did what they were supposed to. Like I said was it the right percentage, should we change it some other way, that remains to be seen. But we need to remember: they did accomplish what we wanted.

Petroleum News: OK, up on the North Slope there is concern in some corners about the carry forward of the net operating loss and that is most certain to come up. It’s also among the more divisive subjects for tax policy talks.

Chenault: Yeah, it is. I don’t have an answer for it yet. A lot of it is going to depend on what the price of barrel for oil is. We paid credits maybe where we shouldn’t be paying because we may not ever see a return on that money. Maybe so. But you learn from every credit proposal that’s out there. I don’t know that we are going to have a perfect tax regime. There are different variables out there with different corporation, with each lease, with each reserve. So I think we have the ability to make some changes, but we have to be pretty methodical about it.

Petroleum News: So what would your priorities be on the resource development front for next session when lawmakers return in January? There is certainly no way of know what the makeup of the Legislature will be, but what would be on your short list?

Chenault: Oil should be the priority. I think a lot of people know that, even with the price of a barrel of oil what it is today. We need to work with the players that we have to determine how we put more oil in the pipeline. You’ve got Smith Bay out there and it’s 115 miles from current infrastructure.

It’s years away, but I hope they can prove the reserves they think they have. Even if they do, we are probably five to seven, maybe even 10 years away if things go good in the permitting stages to be able to see that moving in the pipeline. Like I said, that’s pretty far off. We need to continue to work on Point Thomson, Prudhoe Bay and Kuparuk.

Basically, we need to try to get more oil out of the ground as much as we can and as fast as we can. Some of the things we can work on - I haven’t talked to anyone from the industry about anything upcoming yet - we really don’t know just yet. It’s probably a bit early. I’m sure as we get closer to the legislative session, maybe even around budget time (in December) I think those conversations will get started.