Giessel: AKLNG questions stacking up

Anchorage Republican, two-term Resources chair says turnover among Walker’s resources team a growing concern with each departure

STEVE QUINN

For Petroleum News

Senate Resources Chair Cathy Giessel was nearly as busy during the interim as she was during regular session holding joint hearings that spanned up to eight hours in one case and two days in another. She and other members learned that the state’s pursuit to monetize North Slope gas has essentially stalled, having been deemed uneconomical. Still Gov. Bill Walker believes the state has too much to lose by not progressing forward. Giessel, an Anchorage Republican, offered thoughts to Petroleum News on recent resource development issues.

Petroleum News: Let’s start with recent news about Corri Feige’s departure from the Division of Oil and Gas. Some of your colleagues have been concerned about the turnover in light of Mark Myers and Marty Rutherford also leaving. Do you share these concerns?

Giessel: You know, I do. The people you named - Mark Myers, Marty Rutherford and Corri Feige - were all knowledgeable people about this project, demonstrated expertise in Alaska and now they are gone. I would add they are people the Legislature trusted, so yeah it’s concerning.

Petroleum News: One of the Legislature’s consultants, Nikos Tsafos, noted in a recent hearing how he feels as though he’s starting over each quarter whereas with the industry partners, there is a constant.

Giessel: Well there certainly has been a pattern of quality people leaving. You probably heard us at the quarterly updates, certainly last year, asking the question who is on first because folks are coming and going. Just as we get to know them, they are gone, so yeah it’s disconcerting. On a positive note, (Exxon’s) Steve Butt has been with this project from the beginning and has been that consistent anchor, providing that global expertise and great information, keeping the Legislature updated on the status on the project, so he has been a bright light on this changing landscape.

Petroleum News: Speaking of AKLNG, what is your view of how things are at this point?

Giessel: Well, we had a project plan in place. In 2014, we passed SB 138. We did provide in that legislation off ramps. Those were provided because we foresaw perhaps partners would be leaving and new ones coming into the project. So my hope is we will continue to work within the framework of SB 138.

Petroleum News: If you can’t continue under SB 138, do you see the need for a new bill?

Giessel: The governor hasn’t taken any actions since the Legislature adjourned in terms of new approaches to the project, so I don’t know exactly where he is planning to go in terms of answering questions. The Legislature has consistently asked three questions:

Who - that is who will be the experts doing this project? How are we doing to do it? What will the costs and risk structure look like? So the who, how and what remains pretty much the same. If he proposes a new approach, then I guess we will be looking at new legislation.

Petroleum News: Do you have any additional questions about how the project advances.

Giessel: Sure. I think the risk question is a big one. Who is going to take on this risk? What does the financing look like? Which brings on the who question as to who will pay for financing this and who will build it? What contractors is he looking to hire? These are questions we’ve asked AGDC President Keith Meyer but so far haven’t received satisfactory answers to.

The governor is in Singapore as you and I speak. The reports from brief summaries I’ve received from that are that it’s a rather somber mood, frankly, in Singapore at the summit. The market is recognizing right now that there is an oversupply.

The low priced environment, which is so beneficial to consumers, is certainly challenging to new projects. I do want to say the low gas prices have allowed parts of the world that have lived in poverty for their entire existence to now be emerging from poverty. Having low-cost, clean supply of energy is a wonderful thing for them. That’s all good. For those of us on the supply side - I’m referring to the state of Alaska, of course - that presents a challenge for us in terms of making money for our project and building it. I was reading in another supply publication today, the East Coast - the Appalachian area, the Utica shale - is booming right now with increased production of both gas and oil. That to me underscores what we are hearing that frankly gas is everywhere in the world so we may have to wait a bit for our project to actually become economic.

Petroleum News: So do you feel that the state is moving forward with an uneconomic project?

Giessel: Well, again, I’m not sure how far forward we are moving right now. We certainly have heard from consultants, one being Wood Mackenzie that right now our project is the most uneconomical of all the projects under consideration. I know the governor is still hopeful and hope is a great thing to have but hope is not a strategy or a plan. In listening to the Wood Mac presentation they were very clear on the second or third to the last slide that even if the state of Alaska gave up all taxes, this project would still not be economic: Again, a pretty clear message. Our consultant Nikos Tsafos made the memorable statement that if our only goal was to spend $50 billion, we can certainly do that. My goal is any billions of dollars that we spend is for the wellbeing and good return of Alaska citizens. So that is the question that we are asking right now: Is the project still something that brings a good return to citizens of Alaska?

Petroleum News: During the hearings, were you seeing any kind of misalignment among the four partners?

Giessel: I’m almost having to laugh here. There is clearly in my opinion misalignment between the state of Alaska and the three producing partners. In recent news I see BP and Conoco have both started looking at the possibility of a joint venture with the state on marketing. That’s great. That was something that we had talked about early on in this project, so that’s a positive. In terms of other misalignment: certainly the timing, obviously. That’s why we are where we are today. We, the three producing partners and the state of Alaska, are misaligned as far as moving this project forward. The companies, however, have said to the governor, if the state wants to go forward please feel free and we will agree to put our gas into the pipeline after you’ve built it.

Petroleum News: So what do you make of the governor going to Asia?

Giessel: Marketing trips to Asia are honestly not new. I know when (U.S. Sen.) Dan Sullivan was DNR commissioner he also made trips to Asia, marketing Alaska’s gas potential and other resources. DNR Commissioner Sullivan made trips to the Lower 48 marketing the opportunities for oil exploration in Alaska, so we’ve had a pretty aggressive person in Commissioner Sullivan. I suspect other commissioners that I’m not even aware of have gone to the markets in the past, so Gov. Walker’s trip is not the first one ever done.

Petroleum News: So is this something Alaska should be doing, keeping these relationships open with Asian countries until the market takes a turn in Alaska’s favor?

Giessel: It’s prudent to keep our name on the table, our interest in selling the resource. I think it’s important to make sure the right people are going. It sounds like there was a fairly large entourage. Whether that large number of people needs to be going I don’t know. That’s another question related to the state budget, which is right now a hot topic because we are running short on cash. I don’t think it’s necessarily wrong to be promoting our resources. I think it’s resources beyond just gas, that being our mining opportunities and fishing as well.

Petroleum News: What have your impressions been thus far of Mr. Meyer?

Giessel: It’s my understanding that as the board interviewed President Keith Meyer, they were impressed with his resume. He certainly has a long history in the gas industry, so that’s great. We in the Legislature continue to ask questions that we talked about earlier: the who, what and how. Mr. Meyer has proposed a new financing structure for the gas pipeline. So again asking the who: Who would consider investing in a project that is not built yet? How much would they consider investing and how would it work? What are we looking at in terms of a timeframe? What would we be giving up as a state to go into this kind of arrangement? What kind of risk would the state be taking on in all of this? So we’ve asked for answers. In fact after the last update at the end of August, I’ve sent yet additional questions related to these topics and I am looking forward to getting some answers hopefully soon.

Petroleum News: On the topic of a new finance method, the tax exempt status pursuits, what’s your take on this?

Giessel: We heard from two attorneys on the idea of having tax exempt status from the IRS. They both opined they thought it was a long shot. That’s two attorneys. I think if we asked a third, we’d get a third opinion. I think that is something we need a firm answer to before we move forward on this because it makes quite a difference in the cost. As I mentioned we also heard from Wood Mackenzie that even if the state were to get the tax exempt status and gave up its production tax, property tax and corporate income tax, the project would still not be economic. I would be interested in hearing from the communities along the route who would be giving up the property tax. We asked the Wood Mackenzie consultant if he had considered the impact payments. He had not considered those payments. That to me indicates they hadn’t even considered all of the costs.

Petroleum News: So what would you like to see done next with pre-FEED coming to an end?

Giessel: First of all, what I would like to see is us completing the FERC process so continuing to go and follow through on that part of the project. We can also look at decreasing the cost of supply. There are things the state can be doing that would expedite and reduce the cost of this project.

We have roads that are going to be needed to transport the materials to build the pipeline, the LNG facility and the gas treatment plant. So those roads can be beefed up now. This is going to be heavy equipment running across these roads; DOT can be working on that. We can be working on wetlands mitigation. We have talked in the past about a wetlands mitigation bank that would be state operated. That’s something we can work on. We can continue to work with the federal agencies on the permitting process.

The other thing that is sort of obvious but we forget to talk about is continue to talk about and encourage oil production on the North Slope. With oil more gas is found. In addition, an increase in oil production will help our finances. So these are just a few things we can continue to do that can advance this project even though we may not be progressing at the same speed we originally were when we started when it was economic.

Petroleum News: So who does it fall under? Is it the commissioner? Is it John Hendrix? Is it Keith Meyer? A little of each?

Giessel: At the end of the day, it falls to the governor to strategize how we can continue to move forward under SB 138 for this project, so instructing the Department of Transportation to continue to work on roads. Certainly the Department of Revenue has a role in oil production on the North Slope through its tax policy advocacy. We are continually hearing about increasing the oil tax structure. We know that has a concerning effect with companies willing to invest on oil production on the North Slope. We have tax credits that have not been paid. That is something the Legislature is concerned about and the companies are floundering as they wait for those payments to pay off bills that already occurred.

With wetlands mitigation bank, that’s something DNR can be working on. DNR and the Department of Revenue can continue to work on the state components of the permitting process for the project.

Petroleum News: You mentioned the state’s role for oil production with tax policy advocacy. Do you expect to be discussing changes next session?

Giessel: I have heard through media reports that Director (Ken) Alper continued debate on tax policy, so I would not be surprised if that were brought to the table again. On the other hand, I don’t know for certain that it would be. We’ve seen a significant slowdown with the oil industry on the North Slope. I can tell you as I talk to thousands of constituents I have encountered people who have been laid off from their jobs. I have walked neighborhoods where I have not previously seen for sale signs on houses that are already empty. Having been through 1986 here in Alaska, I’m not real interested in going through that kind of crippling shutdown again. We can do that to ourselves if we will be antagonistic to an industry that feeds the families of a lot of Alaskans. And if we do, we can lose Alaskans. I’d rather not do that.

Petroleum News: The two issues that seemed to be in play are the 4 percent hardened floor and the net operating losses being carried forward. Initially, after last year’s working group of tax credits supported a hard floor, you supported it but then during the session ruled it should remain as it is. Has your positioned changed?

Giessel: My position hasn’t changed. It has been demonstrated that hardening the floor is a tax increase for the smaller companies as well as the large. For the smaller companies, it’s more than a simple 4 percent increase; it’s a 100 percent increase. So my position remains the same. I think it would be imprudent. It’s essentially a tax increase on companies that right now are not making a profit at what they are doing. I noticed today’s price is about $47 a barrel. Director Alper noted to us during session that $47 a barrel - on average - represented a breakeven point for North Slope companies.

Petroleum News: The second was the NOLs and those being carried forward.

Giessel: We have a net profits system. We moved to this somewhere in the mid-2000s. Net operating losses or carry forward losses are an integral part of that type of tax structure. So changing that NOL would be a significant change to our foundational tax structure. Again, that’s not something I think we want to do. I think it needs a lot more discussion. If we want to go back to a gross tax system that’s something we can discuss, but that’s a significant change and would require quite a bit of discussion.

Petroleum News: So whatever your role is next year, what would your priorities be next session?

Giessel: My priority has been for the last four years in Resources is what we call “grow the pie,” in other words increase the use of our resources to support our families and communities. So what that means in terms of oil. We have on the Slope a new discovery by Armstrong and Repsol called Pikka unit and that promises to possibly be another Kuparuk field.

I want to see that move forward in development. That will provide significant jobs for Alaskans. It will provide significant revenue for the state coffers to continue to support our infrastructure, and the social services we provide to the most needy. There are mines that could come into development if we continue to support that process. I think particularly of Donlin mine. That mine is located in southwest Alaska, the poorest part of our state.

Again, it would provide significant jobs for Alaska residents. The mining industry on average has salaries of $100,000 a year. In an area like Southwest Alaska that would be a game changer. Donlin mine is planning a gas pipeline from Cook Inlet to the mine site. They have oversized the pipe to allow communities in the area to tap into it to supply themselves with natural gas. This will also be a game changer. The state has to participate here by actually being open for business for this mine. So those are just a couple of things related to resource development that will continue a vibrant, private sector economy in the state. And allow families to continue to live here.

Petroleum News: If you are in the majority next year, do you want a third term as Resources chair? Is it something that still piques your interest?

Giessel: You know, people wonder why a nurse practitioner would care about resource development. I’ll tell you as a health care provider, my focus is on healthy citizens who can live productive lives. Having a good job, even two good jobs - some folks work more than two even - but having work is one of the elements that contributes to human happiness. We are meant to be productive people, and resources are the way that Alaskans are able to be productive.