Kelly: less government, more production

Fairbanks senator says natural gas essential for Fairbanks, Interior, other rural areas of state; calls LNG short-term solution

Steve Quinn

For Petroleum News

Sen. Pete Kelly picked up right where he left off 10 years ago. The Fairbanks senator is co-chair of the Senate Finance committee, which heard some heavy hitting legislation that changed the state’s oil tax regime and set aside Alaska’s Clear and Equitable Share, ACES, in favor of Senate Bill 21; put in place a plan (the just signed SB 23) to truck liquefied natural gas to his Interior district; and advanced a small-diameter natural gas pipeline (House Bill 4).

Reflecting to the turn of the 20th century, when oil fetched $9 a barrel and figuring out how to pay for state services was a “painful” exercise, Kelly believes all three set forth a path for smarter economic and community development for the state. The tax regime change also means treating the state’s operating budget with a more conservative eye and letting more money rest with the private sector rather than having it boost what he believes is unsustainable government growth.

Gov. Sean Parnell’s tax change, however, may face a voter referendum to overturn SB 21. In 2000, Kelly watched voters overturn his predator control bill, so he isn’t taking the prospects of another change lightly.

Kelly spoke to Petroleum News about his return to the Senate, the makeup of a Republican controlled Senate and the direction he believes Alaska needs to chart for success.

Petroleum News: Let’s start with SB 21.Why do you think there is still such a divisive debate after all the hearings and the governor’s signature?

Kelly: I think it is far more philosophical than anything else. You had a group that had found a way to get into the majority of the Senate even though the voters in Alaska are quite conservative. There seemed to be this group in the Senate that was not in sync with the rest of Alaska politically. In other words, the people who were more left leaning were in a majority of the Senate, though the voters of the state were conservative by nature. They just didn’t fit with the Alaskan voter. So the Alaskan voter came in during the 2012 election and kind of set things right. The Senate majority looks like most of the voters in Alaska. In that election, I think the voters spoke loud and clear, and the left more leaning politicians in the state want to refight that battle. There was already a referendum on what they believe (in November 2012 general election) and they lost it, and they want to continue to fight. I honestly don’t see the sincerity in the arguments that they had. The reason I don’t see the sincerity is almost every politician who stood on the floor of the Senate during the SB 21 argument, said these words: “We all agree ACES is broken.” Now they are supporting the repeal of SB 21, which would take us back to ACES, which they say is broken. So I kind of doubt their sincerity.

Petroleum News: You may have a referendum. You’ve been there. You watched a referendum overturn a piece of legislation. Is it safe to say nothing should be taken for granted?

Kelly: I don’t think you can. I’m not a big fan of initiatives and referendums. Honestly, we haven’t seen many of them that have worked well. They are hastily written and mostly poorly written by people who have a specific axe to grind. They raise a whole lot of money often from groups outside of Alaska to couch their issue in public relations terms that will sell it on the ballot. One of the great examples of that we had in the ’90s. The PR for it was we don’t want billboards in Alaska so sign this petition to get it on the ballot then vote for it. The fact is billboards were already illegal in Alaska. The wolf referendum was a pretty good example of it. It was billed as hunting wolves from the air for sport. Well the fact is federal law doesn’t allow hunting from the air for sport. People don’t often get the ability to vote on an initiative based on the facts. They get to vote on an initiative based on massive PR dollars that are poured into these initiatives and they are often not told the truth. So we don’t really get a good take on things with initiatives or referendums. They generally don’t produce laws that are in the best interest of the state.

Petroleum News: Why did you let co-chair Kevin Meyer handle SB 21? There was a lot of pushback because of his interim employment with ConocoPhillips.

Kelly: Because I had been gone for 10 years. I didn’t go through PPT (Petroleum Production Tax) and I didn’t go through ACES. I thought it was much better to have someone who was up to speed right away. I had an operating budget to get out. He had a budget as well. The operating budget tends to be more complicated and a little more time consuming. I didn’t think we’d get the proper discussion on SB 21 if the chairman was constantly trying to get an operating budget out and trying to get up to speed. It just made more sense for Kevin to handle it.

Petroleum News: So what do you think is the potential of SB 21?

Kelly: In 2007, we were already declining. The Legislature decided to change the oil tax regime. They raised oil taxes to the point that the decline increased. We hope to turn that decline around, if nothing else flatten out. We’ve already seen a lot of companies gearing up to invest more up north: Repsol; Brooks Range and ConocoPhillips. So there is encouraging news. It’s difficult to put a per day throughput number on the results of SB 21. We know that ACES contributed to the decline. By removing ACES and putting a different regime in, we hope to stop that decline or actually turn it around.

Kelly: Well, Fairbanks needs to get energy relief, but not just Fairbanks — it’s the entire Interior communities as far as we can reach. Tok has problems; Tanacross has problems; some of the communities on the river have problems. With hope, that plant on the North Slope will crack the egg of North Slope gas for the first time and make gas available not just to Fairbanks but to some of the rural communities suffering even more. I was in an interesting conversation with Lyman Hoffman (D-Bethel) and somebody said we’re paying $4 per gallon for heating oil. Lyman says, “How do I get in on some of that?” It brought home that everybody is suffering, not just Fairbanks.

Clearly the state has to have a functioning Fairbanks. It’s a transportation hub; the pipeline runs through here; we have military bases. We’ve got to get Fairbanks functioning properly or it’s simply going to fail economically. If it does, it won’t be good for the state as well. I guess what I hope to see, starting as early as 2015, there will be some hope as far as electrical prices and one of our refineries can reduce their costs at producing and we hope to get a little better measurement on air quality so the federal government will have one less reason to shut down military bases here. The box stores, the malls and some of our industrial clients can get some relief. Then you can get a general benefit to the community as prices done have that constant upward pressure that energy prices produce. Then a little longer term — not that much longer — we can actually start getting gas to houses so people can get immediate relief when people turn on their thermostat. In a perfect world, I don’t think it’s the optimum solution. As encouraged as I am with HB 4 (in-state gas line) and the progress we are making on a gas line right now, that’s all great.

But we’ve been talking about gas lines for so long, for one reason or another a pipeline just hasn’t worked. Fairbanks can’t bet that with all the effort on HB 4 that we are going to see a pipeline by our doorstep anytime soon, so we’ve got to jump on this trucking proposal that the governor has structured. I believe it will work. It isn’t going to be optimal, but it’s going to reduce prices. Even if we get a pipeline in the future, this project will not be wasted because we need relief now. We can’t bet a pipeline will magically materialize.

Petroleum News: Can the Interior be a hub for more spokes going into other areas?

Kelly: The first thing that will be a benefit to rural Alaska will be propane. The LNG project envisions providing propane to the rural communities. Ultimately we are going to have to run some pipeline to some of the projects like mining, for economic development for rural Alaska. Propane is going to help, but it’s not going to do what needs to be done on a large scale, but it will help the residential people. Gas seems to be everybody’s solution but only varying degrees. Rural Alaska will see less of a benefit, but a benefit nonetheless.

Petroleum News: What about getting energy to mining projects such as Donlin or others close to you like Livengood?

Kelly: Livengood is probably 2020 with hopes of coming on line. Livengood will do whatever works, whether it’s having gas trucked to getting their power. What they need is electrical transmission from Fairbanks and Golden Valley. Golden Valley is going to have to have more energy supply to be able to provide energy to Livengood. Golden Valley without gas can’t supply them with that kind of power. The benefit mostly for Tower Hill is pulling electricity over power lines from Fairbanks and gas will be a huge benefit. As we put gas to anywhere in Alaska, you can start powering heavy equipment and vehicles. It may not mean much to the average citizen, but if you have a big fleet of trucks for a mine, that’s pretty exciting.

Petroleum News: As you start looking at all these pieces, how to do you bring them together for short term and long term?

Kelly: Speaking for the Interior, short term is trucking, long-term is a pipeline. Discussions still have to take place over whether you’re going have a large-diameter, high-pressure pipeline to get into the export business or are you going to have a pipeline to serve the needs of the state: That all has to be worked out. Ultimately there is going to be just one pipeline come through the state and it looks like it’s going to Cook Inlet. Logistically, I don’t think it’s going to go to Valdez. When you’re talking about big economic development, you’re talking about feeder lines going to projects like Donlin.

Petroleum News: Even as you supported HB 4, what is your preference for a pipeline?

Kelly: I think the economics is going to determine ultimately what the pipeline is going to be. My preference is molecules of gas serving Alaskans and if we can get into the export business, that’s fine. I really don’t have a preference. I just want gas going to market.

Petroleum News: Do you have a tidewater preference between Valdez or Cook Inlet?

Kelly: that’s going to be based on logistics. It seems like Cook Inlet works better, but I don’t have a preference. The economics are going to determine what kind of pipeline it is, how big it is, how much pressure it is and where it lands. Either way, a pipeline kicking off the North Slope and delivering it to tidewater somewhere and for distribution throughout the state is a net benefit to the state, not just a net benefit but a huge benefit. It was somewhat of a miracle for me to come back to that position again. I had never done the operating budget as a chairman before. I had been on multiple sub committees. My goal getting back with this new majority was simple: competently produce a budget on time. We did that. When I was asked about the oil bill, I thought it was not in the best interest of our group or in the state for me to get off that singular focus of competently producing an operating budget on time.

Petroleum News: As it relates to resource development do you have a closing thought?

Kelly: What we talked about with oil and gas, much of it comes to the budget. There are such huge swings in the prices that we have attached our state government to. We’ve attached the funding of state government to a commodity. When I was in the Senate 10 years ago, we were struggling with $9 a barrel oil (in 1999). That was a nightmare. Now we’re working at $106 a barrel. The point is it’s not a reliable funding source.

I’m grateful for the work Scott Goldsmith has done creating a fiscal model for the state. It requires that we cut state government. We’ve got to shrink that back so we can begin to live off the cash flow from our investments. I would like us to work toward that direction. Since ACES, government grew 40 percent.

We pulled all of this money out of the private sector through ACES and transferred it to government and guess what happened — government swelled like a bad sprain. We were fortunate enough to drop that growth back to a fraction of a percent. We now have to start going in the other direction and actually start cutting government and making it smaller year by year by year.

The governor did a really good job. He trimmed $1 billion in requests from the various agencies. We trimmed it a little more and the governor was very willing because he realizes our government is not sustainable.

That’s the thing that drives me the most as I look at the oil taxes. The fact that we have declining production and somewhere out there we get to a point where we cannot fund the government we have. We’ve got to do some things; we’ve got to change the regime of taxes so we can get more production. At the same time, we’ve got to shrink the size of government. Even if we get more production and more money, government is still too big. If the Legislature has the money, they will spend it.

What we are hoping with SB 21 is we can get off that model, but we’ll increase throughput and we can more effectively live within our means.