Micciche favors blended gas line project

Senator says SB21 makes state competitive for production growth; positive of referendum — it will provide info on why bill passed

Steve Quinn

For Petroleum News

Pete Micciche arrived to the Alaska Senate just in time for some of the most heavy-hitting legislation passed in 90 days. Micciche earned a post as chair for the TAPS throughput committee, a special committee assembled to examine issues connected with the intrastate line that has produced billions to the state treasury and been the lifeline of Alaska’s economy. It comes at a time when production decline is at the center of an oil tax debate.

Micciche, a Soldotna Republican who also serves on the Senate’s Resources Committee, got two committee chances to review Senate Bill 21, Gov. Sean Parnell’s oil tax reform package. Micciche backed the bill that now faces a prospective reversal at the polls next year when voters weigh in on a referendum.

Micciche participated in a Q&A discussion with Petroleum News via phone and email on oil taxes, news of Nikiski being the terminus of a prospective LNG project, the value of House Bill 4, advancing a small-diameter line, and SB21.

Petroleum News: Let’s start with news of Nikiski being named the terminus. How is your community receiving this news? What are your thoughts on it? Is this the right decision?

Micciche: Frankly, the morning began on a positive note when I received a call early in the morning of October 7th from the Alaska LNG project folks. Once announced publically later that morning, I began hearing from constituents excited about the news. Not being the parochial type, first and foremost I am excited for Alaskans more so than just the folks in my district. A project moving forward will provide much-needed natural gas security for people and projects throughout the state of Alaska. I followed the site selection process objectively and I should add that I am very pleased, but not surprised that the Kenai Peninsula site was chosen.

The Kenai Peninsula has been a pioneer in oil and gas production since the Swanson River discoveries of the late ’50s. The region has benefited significantly from the industry since. As mayor of Soldotna, I was honored to annually lead the celebration of what the community calls “Progress Days,” which was an event created back in 1961 to celebrate natural gas service being provided in the city. Since then, the benefits have primarily been the diversification of an economy that once depended on commercial fishing as a relatively sole source of revenue into a thriving, relatively diversified economy.

Folks here understand the incredible opportunities that would be the result of being Alaska’s natural gas distribution and export hub. They’ve experienced what the industry has brought to the community in the areas of employment, an increase to our property tax base and the availability of significant supplies of natural gas for our constituents, businesses and industries. The additional supply would revitalize existing local industries such as Agrium, and provide countless new opportunities.

Our district also includes many individuals with decades of expertise in oil, natural gas production and distribution, as well as LNG production, storage and marine transportation. There is significant existing, necessary infrastructure and the availability of quality land with direct marine access. I am extremely supportive of and clearly find the decision to be logical and of great benefit to the current and next generations of Kenai Peninsula families and businesses.

Why am I not surprised? Well, there is clearly a need for the governmental role of ensuring public safety and necessary, bare-bones environmental regulation. However, when government stays out of the way of business decisions, those decisions are generally logical, competitive and fiscally responsible. The Nikiski area has demonstrated a decades-long, successful history of oil and natural gas production, distribution, refining, manufacturing and LNG exports. Specifically, the area holds the record of unprecedented excellence and reliability for on-time deliveries despite local challenges. No matter how many dollars were spent by another community to attempt to convince folks otherwise, I personally believe the record was adequate proof that the Cook Inlet location presents a superior option for the primary reasons that really mattered in this particular decision.

Petroleum News: Still on a gas line, what major development would you like to see happen next, be it for the smaller line or the large-diameter line? Does the Nikiski news put this project ahead of the other?

Micciche: Alaska will continue on the roller coaster that is our economy until the day that natural gas energy is available and cost-effective for the majority of Alaska’s homes, businesses and industries geographically in a significantly higher proportion of the state than what’s available today. I lead off with that statement because I’m not sure that the message is adequately understood and appreciated.

I supported HB4, The Alaska Gasline Development Corp. bill, for one reason and the reason is that I strongly feel that our economy will struggle until the densely populated areas of Alaska can count on the availability of a reliable, lower cost source of clean energy. Do I believe it’s the most cost-effective approach? Probably not. Yet, it’s the approach that makes the statement to Alaskans and the investment world that we are serious about energizing our great state.

I believe the preference of all 30 House and 15 Senate Members who supported HB4 is that a large-diameter natural gas pipeline is built completely by private industry from the North Slope to a Southcentral terminus and export facility. However, Alaskans are also tired of waiting. They are tired of spending their retirement dollars on diesel fuel, or dealing with poor air quality that is the result of heating with wood. HB4 is an insurance policy.

You may have heard me say that personally, I’ve been hearing about a gas line from the slope since I had pimples and a voice that cracked. I’m 51 this year and the conversation is eerily similar to the conversations during my adolescence. In a resource development state that has allowed several of our industries to wither over the past generation, we must make every reasonable effort to further diversify our economic opportunities and that will not occur without the availability of natural gas.

The fact is this: there is likely a fiscal gap between the cost of a pipeline and the long-term commercial value of the gas. Yet, Alaska is in a unique position. We are a wealthy state that can likely afford to close that gap to make the pipedream (with no pun intended) a reality. What’s key is not over-investing on that commercial gap as a state, and taking the time to understand the long-term value for Alaskan homes and businesses through a lower-cost energy environment.

What keeps coming to mind for me is the question of where we would be as a state had folks fiddled around with the decision about the TAPS line until 2013. We had the same issues back in the early ’70s, yet the decision was made and folks pulled together to create a stronger economic future for Alaska. Where are those visionaries? How do we get back to the days where we Alaskans, who are folks that are defined by our ability to conquer calculated risk, can get together, define our energy future and assemble a comprehensive plan to get us there?

My hope and my efforts will be toward blending the projects into one comprehensive, economically feasible and non-parochial project that will deliver the energy that is so much needed to Alaskans, while also placing our natural gas reserves in the competitive global marketplace.

Micciche: Cook Inlet gas supply has an entirely different outlook than the dire situation that was believed to be the case such a short time in the past. Although surprising after the acquisition of Marathon by Hilcorp, the resulting increase in Cook Inlet natural gas production has been significant.

The increase in supply presents both benefits and challenges. The benefits include secure utility contracts for the next 5 years and likely better pricing for the utility ratepayers of Southcentral Alaska. However, there are challenges to longer term production due to current excess gas in the market. There were many days this summer where large quantities of natural gas were “backed out” of the market and production was curtailed as much as 100 mmscfd. Curtailment is not a good thing for anyone concerned with the future of Cook Inlet production.

The transition of Cook Inlet from larger, integrated companies to independent explorers and producers creates a condition where curtailed gas has a much more significant negative impact. The independent business model leaves little room for curtailment. Smaller companies do not operate with the comfort of significant cash reserves and when they discover gas molecules, they must immediately sell those molecules in order to stay afloat and, hopefully, profitable. The result of curtailed gas is an inevitable retraction in investment and retraction inevitably produces less future gas.

The loss of the supply cushion of exports from the Kenai LNG facility (where I happen to be employed in the interim), and the Agrium facility has created a condition where only local demand and storage can consume Cook Inlet gas. My understanding is that the operators of both facilities are evaluating future limited operations designed to balance the Cook Inlet natural gas market.

The effect on the Cook Inlet oil and gas industry is expected to be minimal should the Alaska LNG Project come to fruition, simply due to the fact that the absence of significant tariff should permit Cook Inlet gas to remain competitive for the long term.

Petroleum News: On to oil. SB21 is still a hot topic, starting with the referendum and more recently the issue over defining new oil.

What are your thoughts about the referendum and do you think an easily understood definition of new oil can be drafted or will the Legislature have to revisit this?

Micciche: There are positive aspects to the referendum. One key positive aspect is that a great deal of information will be provided to the public that will help them understand why 12 Senators and 27 Representatives passed SB21 on concurrence and reconsideration votes respectively. The simple philosophy is consistent with all essential laws of commerce that Alaska must be competitive with other oil producing regions in order to become more attractive.

The Prudhoe Bay basin has significant new oil yet to be extracted, but that oil is more expensive to produce. SB21 provides incentives for new oil production that will result in investment in producing infrastructure. Alaskans have already enjoyed positive new-investment results from SB21. I personally believe that the end result will be Alaska being able to join all of the other oil producing regions in our country in an environment of increased production, instead of continuing in our lonely, single-member club of decline.

On the subject of SB21 issues associated with “new oil.” The Legislature drafted a clear definition of new oil in SB21 for two of the three categories. New units and new participating areas in existing units are clearly defined and consistent with the intent of SB21. Of Alaskans that have taken the time to understand SB21, I am unaware of folks concerned about or questioning the first two categories.

The third category is easily seen as new oil, because the oil has to come from expanded acreage around an existing participating area. However, the third piece is where the question lies.

To qualify, producers actually have to add new rock and the new rock must contain adequate quantities of oil feasible to produce. The issue is whether or not the Department of Revenue can create a predictable and fair method of measuring that new oil and differentiating it from existing production. The state adds new oil to participating areas today, and allocates production to those leases for the purposes of calculating royalty. To protect the state, SB21 included a requirement that for the purpose of taxation, a producer must demonstrate that they can measure those new volumes from the new acreage.

What we hear from folks that politically oppose the concept of a competitive business environment, is that eventually all oil will be taxed as though it were new oil. That is not the case and not realistic. What may have to be reevaluated at some point in the future is whether or not new oil credits should include a sunset or a credit reduction. What’s key for Alaskans to understand is the role of the Legislature and the role of the department. The Legislature does not create specific regulations and the Legislature must remain engaged through the regulations process until there is an opportunity to evaluate the effectiveness of new regulations associated with SB21.

The state has many, very bright people working in the Department of Natural Resources. I am confident that new oil will be adequately defined such that both the state and the oil producers know precisely the difference between new oil and legacy oil. However the legislative process must be continuously improving, and legislators must be willing to objectively measure effectiveness and adjust legislation to ensure adequate current and future revenue streams for the people of the State of Alaska.

Petroleum News: I know you and two of your colleagues took heat for connections to the oil industry. Do you believe that will be a problem further?

Micciche: Will there continue to be those in the press unwilling to learn the facts about me, my history over the past 30 years or my commitment to the people of Alaska? It will only continue for as long as partisan political motivation remains an obstacle to making the best decisions for all Alaskans.

Criticism has come solely from people who disagree with the positions I’ve taken and falls far short of meaningful debate. The focus is irresponsibly designed to discredit folks personally rather than provide substantive argument on effective legislation. I use the word “irresponsible” specifically because of the way I’ve been inaccurately portrayed as an executive newcomer sent by the company to do their bidding.

I continue to challenge the press to become more responsible by getting to know my history, my objectives and my vision for Alaska. I’m not an executive. I’m not a newcomer. And when it comes to “bidding,” I can tell you that industry folks were not happy with my 35 percent base tax that passed in SB21; the highest ever discussed. So I suppose having the left upset about adjustments to their ACES government cash cow, and the industry folks upset about the 35 percent base tax made it so essentially everyone was upset with this “Micciche guy.” I guess I’m not here to win a popularity contest.