Walker: Markets curious about AKLNG

Entering halfway mark of his term, Gov. Bill Walker says he’s not ready to give up on project industry currently calls uneconomic

STEVE QUINN

For Petroleum News

Gov. Bill Walker has logged several thousand miles these last few weeks. He’s been to Asia twice and Washington, D.C., meeting with Interior Secretary Sally Jewell, touting Alaska’s resource potential. And he’s got one more trip to Asia in November. Awaiting him will be a highly critical Legislature which needs convincing that he and his gas line team are on the right path to advance a gas pipeline after North Slope leaseholders have called the project uneconomic. Before embarking on a last-minute trip to South Korea, Walker spoke to Petroleum News about his first of what will be three Asia visits this fall, and how he views the situation with AKLNG.

Petroleum News: In a nutshell what do you believe you’ve accomplished with this trip?

Walker: First things first, we had an opportunity to correct the record. There had been a very inaccurate headline came out in Forbes magazine. It came up a couple of times in our meeting prior to my address at the conference in Singapore. Right off the bat, we corrected the record that the Alaska project is absolutely still on the drawing board and still moving forward.

Petroleum News: OK, so on one hand we hear that Alaska has a great reputation for delivery and then we hear there are misconceptions about the status of the gas line. How does that happen?

Walker: Well it happens when you have articles with headlines that say the Alaska LNG project crashes and burns as a result of the producers changing their role in the project. So that’s how that happens. They thought I was there to give last rites to the Alaska project and it was exactly the opposite. From that standpoint I was very, very pleased to be there to set the record straight and also be there to answer questions from individual companies.

Petroleum News: So what progress do you feel you’ve made other than to quell fears? Anything beyond that?

Walker: Absolutely. This is the first time we’ve ever presented the Alaska project: Before we’ve always been sort of up in the bleachers with TransCanada on the field. This is our very first time in state history we’ve had a team of people to present and talk specifically about the project without being limited by what we could or couldn’t say as a result of other partner participants. To have the commissioner (Andy Mack) of DNR there, to have John Hendrix talk about upstream opportunities with oil and of course Keith Meyer is certainly recognized in the conference because he’s a known entity in the LNG world.

Petroleum News: OK, what more do you think you can accomplish next month in Japan?

Walker: Well, it will be a continuation. Next month is a significantly larger gathering than what took place in Singapore. We will once again retrace our steps. This time we have a significantly different story to tell. Last time we were there, they wanted to know how they could be a financial participant in the project. At that time all I could say was we were a 25 percent participation. If we diluted our 25 percent, there may be some equity possibilities there. Now it’s just the opposite. So I’m very anxious to have that discussion with them. All of them expressed a desire to explore an equity opportunity for their company.

Petroleum News: Back home, there were several Resources meetings over the course of the summer and into the fall. There were several concerns expressed by lawmakers. One was the state was moving forward with an uneconomic project. How do you respond to that?

Walker: Well I do follow what is said. One thing about the Wood MacKenzie analysis is that it showed us what it would take to get to an economic project. Whose economics are we looking at? Are we looking at a 12 percent rate of a return off of some infrastructure? What Wood MacKenzie said is the path we’ve been on for the past couple of years trying to satisfy the fiscal needs of the producers was not working. We knew that. That was not a surprise. They said what does work is if we have a lower interest rate and a lower utility rate of return - I believe they used 8 percent - it brings it into the competitive range. What they said was what you’re doing wasn’t working and I actually appreciated that. We knew that. Trying to give upstream like returns on a downstream project, but they also said state ownership, lower rates of returns help. You can take whatever you want from the Wood MacKenzie report. I’m sorry many chose to take that if it doesn’t work for the producers, it doesn’t work for Alaska. I’m just the opposite. I’m excited. Now we get to find out what works for Alaska.

Petroleum News: One of the other concerns was the turnover your administration has had in the nearly two years you’ve been in office, losing Marty Rutherford, losing Mark Myers, losing Corri Feige. Lawmakers are concerned they are talking to somebody new each quarter.

Walker: Well, turnover is a fact of life. Some folks wanted to retire and chose to do that, and so be it. Some folks chose to look outside of state government. That was their prerogative to do that. They are all good people. I hate to see them go, but that was their choice.

Petroleum News: Do you feel you’ve got the core that you need moving forward?

Walker: Absolutely. I really do.

Petroleum News: Will they see the continuity they believe is lacking?

Walker: I think the continuity will be fine. I’m very pleased with who we have in place. You know to be traveling in the marketplace with someone who was president of Cheniere, it’s a sign that things have changed in Alaska that we have somebody in charge of the project with that kind of background and experience. It was very, very helpful.

Petroleum News: One of the other concerns, and even Keith Meyer identified this in the first hearing with the Legislature, were communication issues. How do you address those or do you not see it as a problem?

Walker: We tried a couple ways. Last year we began a program where I believe every Monday morning I would have a meeting with Senate and House Resource co-chairs, and anybody else who wanted to attend and talk about what was going on with the gas line, so we had that on a regular basis. When the bill that came through - SB 125 - on putting legislators on the board, I looked at that. I got two legal opinions from the Department of Law that said it violated two sections of the constitution.

I just can’t sign something that the Department of Law says is unconstitutional. Shortly after that, I went to Sen. Giessel and said, why don’t we have regular meetings throughout the summer. Not to violate the open meetings act, just do something on a regular basis. We can have an open discussion. I have not heard back on that. She has scheduled a few hearings, but I have not heard back about meeting on a regular basis. So I certainly made the offer and the offers stands.

Petroleum News: Many in leadership felt like you were among most accessible they’ve worked with, but they also said they felt as though they walked away not knowing what your plan was. How do you respond to that?

Walker: My plan has always been the same. I’m not sure what’s confusing. We have followed the letter of the law in SB 138. We haven’t attempted to change anything at all. Part of the problem we’ve had is dividing up the pie over who gets what and fiscal certainty. We need to find out if there is a project before you divide up the pie. We were living and breathing everything on the technical side doing absolutely nothing on the commercial side as far as the market side. Really that’s what determines if there is a project, not what we do here dividing who gets what; it’s does the project work with the markets and where we see it in the 2023-2024 range. That is what was significantly missing from the equation.

Petroleum News: You spoke of fiscal certainty. Everybody seems to have a different timeline as to where that should be addressed. Where do you stand on this?

Walker: Well, if all they are doing is shipping gas, I’m not sure what the fiscal certainty is. If they are not going to be an owner in a piece of pipe, liquefaction or gas conditioning, what exactly is the fiscal certainty for?

If they aren’t investing in the gas line, what exactly are we protecting them from? Typically if they invest in a gas line, they are going to want some sort of fiscal certainty but when the shift to the mode of just the shipper, all over the world people ship through gas lines and they don’t have fiscal certainty to sell gas. So I’m a little bit surprised that the fiscal certainty march continues on even though they will be just a shipper in the pipe.

Petroleum News: Every governor has his or her share of heavy lifting when it comes to making a case for their gas line plan. Now you’re faced with it. What do you see ahead to convince the Legislature that you’re on the right path?

Walker: I think when we have investors, marketplace investors. We are the only place in the world that re-injects the volume of gas that we do every day. A lot of projects, they hope they can fill the contract that they get. We are the opposite with the most proved gas anywhere in the world. This isn’t shale gas; this is conventional gas. That was a pretty big surprise with people we met with, the sheer volume of gas we re-inject every day.

Petroleum News: So what are your priorities for next session when your team is meeting with lawmakers? What do you do to make your case?

Walker: We tell them we are selling the opportunity of Alaska. The pre-FEED is almost done. Before we move into FEED we want to make sure there is a market for this project and there are investors for it so really for the Legislature, we need to keep them apprised of what we are hearing from the marketplace, the interest from the marketplace. I’ve always said if there is not a market for this project, then the project doesn’t happen. If we don’t find market here in Alaska, you have to meet the market where they are. That’s why I’m anxious to again speak at the conference in Japan where they will have 25 to 30 largest buyers in the world gather there to hear what’s new with different projects.

Petroleum News: So will this require new legislation or do you see yourself advancing under the umbrella of SB 128?

Walker: At this point, I don’t see the need for new legislation. SB 138 is broad enough. It doesn’t prohibit us from advancing the way we are.

Petroleum News: So then who is your team, who are your lead voices on this? Parnell had Balash. Murkowski had Jim Clark. Palin had Marty Rutherford. Who from your team will we see out front when discussing this with Resources and Finance?

Walker: Keith Meyer, president of AGDC. He is the one leading this effort. Certainly we’ll see some input from Andy Mack as well as John Hendrix.

Petroleum News: Also, with next session, how will discussion on oil taxes play out in the mix of priorities?

Walker: I think we will continue to fix the downside with the floor. We are not going to change anything on the upside, but boy we just can’t underwrite the losses when we are in a $4 billion deficit ourselves. We are probably going to look at some of what we had before with the floor and the NOLs (net operating losses being carried forward).

Petroleum News: So what’s your message to the bond rating agencies who have even weighed in on the news of the gas line taking a different path?

Walker: Well we are not ready to go to the bond market on the gas line. We may not go to the bond market on the gas line. If it’s all third-party financing, then we wouldn’t go to the bond market. Separate from that, bond markets do watch closely and they reacted when no action was taken. It’s interesting. Since 2013, we’ve gone down $12.6 billion in savings because we haven’t changed and we haven’t fixed the problem. That’s a pretty significant number.

Petroleum News: You’ve stressed emphatically that the Permanent Fund is not a factor in the gas line. There are a few lawmakers who are not convinced, seeing the Permanent Fund as the state’s collateral. How do you see it?

Walker: I don’t know why they continue to say that. I guess that’s their choice, but we’ve never said there would be any connection between the gas line and the Permanent Fund whatsoever.

Petroleum News: So if you determine a year from now or a year and a half from now that the project is not economical what do you do then to market North Slope gas?

Walker: We look for other ways to commercialize the gas up there. Some have talked about turning it into a different form and putting some of it into TAPS. Some people have talked about power generation on the North Slope. We need to look at how to monetize it. If there is no market for the gas line, then we need to stop spending that kind of money we’ve been spending on it. Right now there has been $600 million spent on pre-FEED and if we put that on hold for a period of time, at some point it becomes stale information and you certainly don’t want to do that.

Petroleum News: So how do you keep that pre-FEED data fresh?

Walker: It’s not done yet but it will be done by the end of the year, so it will be fresh for about a year. We have a lot to offer and a lot to present. The fact that the pre-FEED is almost completed is a big step. There is a lot more gas out there than there is a market; there is a lot of competition we are competing with. If we sit back and watch the market get filled with competing projects then we definitely won’t have a project.

Petroleum News: So you’re looking for a different way to get the gas to market than what is deemed rather traditional?

Walker: Actually, this is traditional. If you look around the world, the sovereigns are very much involved in the #infrastructure around the world. Typically people who find the gas ship it down other peoples’ pipelines. What we’ve been trying to do all these years is not the norm - partly because people would rather get a much higher return on the upside than a regulated return on a piece of pipe. What we’ve been doing is unusual. Now we are trying to move back more into the norm of how it’s typically done.

Petroleum News: The Legislature is also looking for a more definitive answer from the IRS on financing the project. Are you pursuing that now?

Walker: Yeah, we are. The biggest test is whether you have all the pieces necessary to be tax exempt. You also want to make sure that it’s done in such a way that you see what are the sideboards, what you can and can’t do as far as other investors. So is it better to be tax exempt or be taxable and have other investors involved?

Petroleum News: So if gas is put on hold for a different window of availability do you shift to oil as priority and see what the state can do to advance oil exploration?

Walker: I think you do both. I don’t think we have the luxury to sit back and do one versus the other. When I was in Washington last week, I was talking about additional access for oil. I’m pleased with announcements from ConocoPhillips, but that’s sort of ongoing. It’s almost hand-in-hand. Almost every meeting we had in Asia, the issue of oil came up. They are about 80 percent dependent upon oil from the Middle East. They would very much like to diversity that a bit. They were always asking about if there is an opportunity in Alaska for more oil. Is there any upstream opportunity for them now that we are shipping some oil to Asia? It’s nice to have someone like John Hendrix who can talk with specificity about his time with BP and Apache.

Petroleum News: Can you elaborate a little more about your trip to D.C. What did you hope to gain?

Walker: The message there is we want to make sure we stay in the five-year OCS plan and not be removed from that. We gave them an update on the gas line. They too had seen some of the media and wondered what was going on. We then met at the White House and a senior advisor to Obama to talk about the five year plan. We emphasized our fiscal situation and how we need better access to our resources.

Petroleum News: I’m sure it’s hard to tell what you’ve accomplished. What was your takeaway?

Walker: You know it is hard to tell. Over these past couple years, we’ve established a rapport with them. They took seriously our concerns. I know they are under a lot of pressure from different organizations to stop certain development around Alaska. I think that’s unfortunate.