Fairclough preparing for gas discussions

Consultants Mayer, Tsafos, formerly with PFC Energy, onboard; senator wants public to understand difference between oil and gas

Steve Quinn

For Petroleum News

Sen. Anna Fairclough may be among the busiest of the 60-member Alaska Legislature this year. She serves on the TAPS Throughput Committee, Resources Committee and Finance Committee, meaning she will be on the front lines of most heavy hitting oil and gas bills passing through the Senate.

She’s also in charge of Legislative Budget & Audit, which secures help from industry consultants. Last summer, she assembled analysts for a symposium on LNG markets. For the upcoming session, discussions on marketing Alaska’s natural gas will be on the forefront, and Fairclough’s committee is looking to a pair of familiar names for assistance.

They are Janak Mayer and Nikos Tsafos, formerly of PFC Energy. The two will be paid $250,000 each to be available to the Legislature on a limited basis, plus $13,000 for living expenses.

Fairclough, an Eagle River Republican, discussed how this session could easily be pivotal for advancing a gas pipeline and getting the state’s gas to market.

Petroleum News: Let’s start with the consultants. So what do you like about these two?

Fairclough: Janak has a history with the Legislature and is trusted. He originally came under contract with the Senate Bipartisan Working Group (previous Senate majority). The way they conduct themselves, in my opinion, is trusted by the House and the Senate. We used them this past legislative session when we were modeling the oil tax issue. I think what I value most about their expertise is their ability to stay away from the political hot potatoes. The really do strive and drive at the fiscal modeling and point out the policy choices versus telling the Legislature which direction to go.

Petroleum News: When consultants get hired, at times the issue of making the consultants available to the Legislature comes up. How will you handle that?

Fairclough: We will send out the same memo we sent out at the beginning of last session that issues the priority level of access to the contractors. We have to manage their time and we have to make sure it’s providing benefit to the entire group or, at least as many of the group as possible.

Committee chairman have first priority on anything if there is a bill in their committee and their committee has jurisdiction over the topic, they will get first access to the contractors. I will be managing the use of their time, too. We have specific deliverables that we want to make sure the Legislature has before them. We want to make sure Alaskans, as well as legislators both in the Senate and the House, understand the difference between gas and oil, which is huge.

If you followed the gas symposium or if you go online to the Legislative Budget & Audit’s website, we have those overviews there, but it’s a lot of information. That information came across an entire week’s worth of investment in the Legislature and staff time.

So we want to make sure that they produce for the Legislature and for the general public in Alaska a work product that Alaskans can know that politics aren’t involved in this and know that this is a global market and that it functions very differently than oil.

What I want is an overview of the gas symposium that’s available to the general public in a much more consolidated manner: Sort of a 101 on the difference between oil and gas. During the symposium they made the audience laugh, (saying) oil is like speed dating and gas is like a long-term commitment. He gave a perfect parable on that. Gas is something that is going to require Alaskans to sign into a long-term agreement at a fixed price to secure contracts like a utility company does. So if you’re Enstar, you are looking for 10- and 20-year contracts. If Alaska wants to sell this particular commodity and export it — whether it’s export to the U.S. or a foreign country — we are going to have to sign some long-term contracts. So it’s important to know that no one is trying to snooker us. This is a standard practice and it’s an expectation of someone who is developing LNG that they front load about $5 billion to $7 billion before they see a return. It takes upwards of four years before they see a return from that money. Then the go into a period if the project meets its commitments of build out, then they will have 20 years of low cost anticipated expenses with the revenue starting to repay them for those billions they fronted for years that they had no return on. So they take the risks up front and by taking that enormous risk and not giving shareholders an immediate return — those shareholders have to wait — that’s what the contracts require.

Petroleum News: Do you see LB&A holding hearings? It’s not uncommon for LB&A to take the lead on energy issues during session as well as the interim like with the symposium.

Fairclough: I’m not sure. Right now I’ll be managing this. Both resources committee chairs have told me they are interested in showcasing the differences the gas symposium conversation brought up. It suggested Alaska can compete within pennies of transportation costs to Asia. We can compete if we place our asset — our natural gas — on the water and ship it as far away as Japan and China.

But there are other cost factors involved in getting to Alaska’s gas that other nations don’t face. Nikos and Janak and others from PFC asked why would any corporation choose Alaska’s project over more easily accessed gas. So why wouldn’t they go to Texas or somewhere on the West Coast where transportation charges may be similar? Why would they go to Alaska?

What they gave us was a model that showed us different places where different types of businesses invest along the value chain, or the production chain. So let’s start at the very end of the market. Alaska could invest by building ships, so we could do that and create a rate of return every time a barge sailed. If we owned a part of that shipping line it would be a fairly low rate for Alaskans. That means the producers of the gas have already made it into LNG, transported it 800 miles plus and have contracts with people to buy.

If we go up the value chain differently and look at the pipeline, it’s said in the general public, there is a rate of return between 8 percent and 12 percent that is fairly stable or sustainable for pipeline companies. So if you get a qualified pipeline company to partner and Alaska chose to invest in a pipeline, we may be able to guarantee for the residents of Alaska a rate of return and we can share in some of that profit. Again, low risk because that means we have signed gas contracts and we have the transportation in line and are ready to ship. They aren’t going to build a pipeline unless all of that is done.

Again, what the contractors asked at the symposium, is why Alaska? You can make all of those investments in British Columbia, in Oregon, in California or in Louisiana. All of those things are still available. So why Alaska when the gas has to be transported over such a long distance? If you back up to the North Slope, the most risky project in the value chain for the producers to be successful is the LNG.

Those projects, as I understand, typically again require $4 to $7 billion of upfront assets but they see no rates of return on. Those projects, typically, if someone hasn’t built a project before, cannot come online when anticipated. So there can be delays. If you look at Australia and Papua New Guinea, those are places building large LNG plants and they are not coming in and being completed on time for a variety of reasons. And those cause costs of the actual commodity — the gas — to go up when they don’t complete the project on time.

For me, when I was listening, it seems like it’s the LNG is risky for the producer, but it also has the potential for the greatest long-term return for Alaska’s dollar. And it makes it less risky for someone who wants to produce on the North Slope if the state was a partner in that. You wouldn’t be a partner in that until you have those confirmed shipping contracts, either.

I know this is a long version, but it’s important to note that there are different spots along the value chain that Alaska can invest in. We can also invest our royalty gas. So I think that’s what we have to discuss. We also have to keep in mind, wherever we choose to invest or if we choose to invest, we have to weigh like the private sector developer would do, the risk versus reward and where is our comfort level for risk?

I said a long time ago in the finance committee; I would give up my Alaska dividend to be part of a pipeline. There is very low risk and a standard rate of return once you make that risk. You don’t have a lot of downside. There could be a natural disaster, like an earthquake that would damage the line. But overall, the last 30 to 50 years, pipelines have been safe investments.

Petroleum News: That leads to the next question, and you’ve spoke to some of that, what are your thoughts on the Black &Veatch report that suggests taking an equity interest in the project?

Fairclough: I’m not sure. I think we need to look closely at the Black & Veatch report. It’s part of the work we negotiated with (Janak Mayer and Nikos Tsafos) is that review of the report to make sure Black & Veatch is grounded in current affairs globally and that the assumptions they made in the report are accurate. I specifically asked our contractors to look at that Black & Veatch report and true up the assumptions are being made in that report. That’s not anything to do with the governor or the quality of that report. It’s just as the Legislature, we should be taking a look at these issues and the numbers associated with those issues on our own. We want to fact check and make sure we agree with the assumptions used in that report. It’s just a re-check in a global market when you are looking at billions of dollars when you are looking at the assumptions the Legislature agrees with.

Petroleum News: OK, still on the administration, what are your thoughts on the governor’s announcement to set aside AGIA and the separation from TransCanada?

Fairclough: Well, I voted no on the license. I voted yes on trying to extend the opportunity for someone to bid on it. When TransCanada came forward, it was my belief that TransCanada would have Canadian interest in front of Alaskans interest. That’s just a personal feeling. I think we are all loyal to our countries. They are a business and they are loyal to their shareholders but I didn’t think Alaskans interest would be first. They have done everything technically to meet the conditions of their license. But for them to continue in Alaska’s value stream, I think that the governor is making the right decision. If they are a pipeline company who wants to bid and be part of it, they can bid like anyone else. I think they are a quality pipeline company with professionals who do a great job for their business. But there are other pipeline companies out there, so it is my hope that TransCanada will exit gracefully and allow Alaskans an opportunity to provide for ourselves.

Petroleum News: On the point of a company not having Alaska’s interest, there’s long been the concern in some circles that oil companies consider interests outside of Alaska first. Does that differ from TransCanada?

Fairclough: I think oil companies like any companies have shareholder interest first. I look at any organization that comes before the Legislature and I have to put on a filter that I know they may not all be operating in Alaska’s best interest. That’s supposed to be my job. I’m supposed to be able to filter that out and see that they are advocating for a business reason that benefits them — from their perspective. From my perspective, I’m looking to see if they offer a benefit that’s worth investing in for Alaska. We have hundreds of people who try to gain access to the Legislature each year, whether it’s electrical generation and infrastructure improvements. That’s trying to benefit a utility, but in the end it could benefit ratepayers. Sometimes it’s trucking natural gas to Fairbanks. That’s an interest for Fairbanks but it may not be as high an interest for Anchorage, but it’s still a valid interest for the community advocating for that. Certainly I don’t think everyone has Alaska’s interest first, but the Legislature should.

Petroleum News: You’ve already covered a great deal on what’s ahead for the session, is there anything else you consider a priority for the session?

Fairclough: I believe it’s in the governor’s interest to introduce a tax bill. I mean it’s going to be generated from the administration. The administration is the one who has going have to manage it. It needs to go through committees so that we understand 360 degrees how it affects the administration, those businesses who might be involved as well as the general public.

As I’ve said, gas is very different from oil and we need to lock arms with the general public so that we all understand how different that is and what that means to Alaska. I’m all about good business decisions that benefit the people of Alaska long term.

Quite frankly, the governor needs to introduce a gas taxation bill. We will not be able to get long-term gas commitments without a tax bill so that there is certainty when producers go to their corporate boardrooms either in Texas or in London. If they go to those board rooms and they can’t articulate that actual margin of profits that they can see or at least a continuum of profits that they might see over a period of time, we are not going to be able to compete. Gas is very long-term as opposed to oil that can be on the spot market and can be sold very quickly. Gas cannot. Gas is streaming as feedstock, or it’s feeding into a refinery long term or it’s feeding into a utility to move turbines for decades. So it’s very different.

If the governor does not step up; if the producers don’t do what the governor has asked them to do as far as alignment goes, I hope the Legislature will take up the issue at least in talking about the components that would be involved in gas taxing so that the people of Alaska have the opportunity to discuss those issues.

One of the other things that came up in the gas symposium, is the actual window opening and that is China and Japan are out shopping for gas contracts. Those contracts are for 2023 and 2025. China and Japan were one of the highest growth potentials for selling. To have those contracts coming up, that fits in Alaska’s plan very well. That’s why we need to push hard — now. If it takes four years to build something, there is very little wiggle room and knowing those projects in Australia and Papua New Guinea have build out times that push that window, we have to push now.

Petroleum News: What does the change with AGIA do for the in-state line and the folks at AGDC?

Fairclough: We’ve been trying to drive the projects together for some time. I think you’ll see further alignment. As budgets get tighter, the general public is talking about it more. By that I mean, appropriations that seem to be going toward similar types of projects. The governor has done a great job to make sure there is value in each project going forward so they weren’t duplicating work, that we were trying to make sure that there was specific tasks each organizations were doing that would merge together into one project. I think we should prioritize our investments so we don’t have multiple people doing the same things.

Petroleum News: OK, let’s close with oil. SB21 still remains a hot topic with the referendum to repeal the tax regime. Both sides are starting to dig in a little more with public messages. What’s your take on this?

Fairclough: I think we have to get beyond sound bites. This issue is so important to the livelihood of the state and the people of Alaska that in the end, the people will make the right decision, they will vote no. In between voting no and the current conversation, it’s going to be hard to hear the real facts. The facts as I understand it are SB21 is faring better than ACES under lower prices. We would not have seen more money under ACES. For those thinking about voting yes, I hope they take time to compare actual apples to apples to see what they would receive with less production and with a lower price. It’s my understanding that SB21 is more durable and we are now producing equal or better in the form of revenue at lower oil prices. Why this is important and why we passed it this past legislative session, just like fracking changed the access to natural gas and oil in the entire U.S., if you look back we were looking at net imports of oil, and those import numbers grew. Now that conversation has changed dramatically and now we hear we have 100 or 200 years of natural gas available. What that may mean is the price for oil and natural gas will be lower. If that stays lower, that means SB21 has anticipated and has responded appropriately to that lower level of revenue coming in for that commodity.