Wielechowski: State should lead in gas

Anchorage Democrats fears results from SB 138 will be similar to Stranded Gas Development Act; expects demands for concessions

Steve Quinn

For Petroleum News

Sen. Bill Wielechowski has been among the most outspoken voices to changes in resource development. The Anchorage Democrat opposed Gov. Sean Parnell’s gas line legislation that enabled the administration to enter into project management contracts.

He remains ardently opposed to the recent oil tax change that faces a repeal vote in August.

For nearly six years, Wielechowski’s voice was among the majority. Today, with a different legislative lineup, he sits among the minority.

After the recent prolonged session ended, Wielechowski sat down with Petroleum News to discuss his views on a prospective gas line project, oil taxes, the Alaska Gasline Development Corp. board and the state’s property assessment issues.

Petroleum News: You were among a handful of holdouts on SB 138. What didn’t you like about it?

Wielechowski: I didn’t think it was the right approach for the state. I had concerns for the lack of alignment. I know that was one of the things stressed early on was this finally puts us all in alignment, but it really doesn’t. After we had our floor debate in the Senate where we really exposed the lack of alignment, they stopped talking about that. There is no alignment on the upstream end, there is no alignment on the downstream end, and I think that creates problems. The way it’s structured is problematic. I would like to have to have seen it go out to an open bid to see if we could have gotten a better deal.

I think the biggest issue I had was this creates an 18-month period and we will go out to study building a gas line and the producers will come back and ask for concessions. The problem is we won’t have very much leverage at this point. I think we gave away our leverage when we passed SB 21 last year. If you were really serious about building a gas line you would have extracted gas line commitments back then. If you were going to pass an oil tax bill, at least get something for it.

That was the significant piece of leverage we had at that time, which we didn’t use.

We didn’t get anything for passing that bill. I’m really concerned. It’s like saying to someone what we are telling Joe Balash to do is you’ve got to come back in 18 months with a deal and these are the only people you can deal with.

A better way to do it is go out and strike a deal with buyers, like Tokyo Gas, or companies in Korea and China, then come back with a deal. This is like saying go buy a house. You can only buy this one particular house; you have to buy it from this one particular person. Come back in 18 months with a deal. The other person is not going to give you a good deal. They are going to want concession after concession after concession, especially if they don’t have to sell you the house.

I think this is analogous to that and I hope I’m wrong, but I don’t think this gets us to where we want to be.

Petroleum News: You noted how you would rather have had the pipeline portion put out for bid. That was tried under AGIA and there were no competing bids to review. There was only one conforming bid.

Wielechowski: I think the reason AGIA didn’t work was because gas prices plummeted. I remember sitting in hearings where world-class experts were telling us gas prices were going to be $6, $10 and $12 into the foreseeable future, which was extremely profitable. Unfortunately, the experts all got it wrong. Had they got it right and had we been trading gas at the $10 range the next 20 or 30 years, we would be well forward with a gas line project. Shale gas has fundamentally changed gas line projects.

If I were running the show I would send out my DNR commissioner, put a team together and find some buyers, then go back to the producers and say we’ve got this deal. I think that’s the way you get a gas line built. Turning over our deal making and sovereignty over to these companies and sort of putting our faith into their hands has not historically worked for us. I don’t see that as any different.

Petroleum News: Between this and SB 21, you’ve not been happy on the oil and gas front.

Wielechowski: It’s just a philosophical difference I have with this administration. It seems like they side with big business over the people of Alaska every chance they get. I don’t think they met a tax break for an oil company they didn’t like, but when it comes to fully funding education, they become fiscal watchdogs. On the oil tax, I felt like we were giving away state resources and getting nothing in return. On the gas line bill, I believe what will ultimately happen is there will be concessions not in the best interest in the people of Alaska. We will be giving away assets and getting little in return. The same holds true for the Alaska refineries bill. I was more than happy to help the small Alaska refineries. It didn’t make any sense to me at all. The bill was the exact opposite of being fiscally conservative to give away tens of millions of dollars to a company that didn’t need it, didn’t ask for it. It’s fiscally irresponsible to do that.

Petroleum News: You mentioned how you worry about a bad deal coming back your way. A deal that lawmakers deemed bad did come back to the Legislature and it didn’t receive a vote under the Stranded Gas Act. You still have that authority, right?

Wielechowski: I view this process we are going through as very, very similar to the Stranded Gas Act. We know what the producers were able to extract back then and I think they will want the same thing this time. We tried to put sideboards on it as far as what deals could be made and what sort of concessions could be given. We’ve been through this before and it was a catastrophic failure. So I guess you could say maybe this time we’ll negotiate a better deal. The problem is you’re putting off building a gas line a couple more years. That’s the problem. You’re going down a path we’ve already been down, that the people of Alaska - Republicans and Democrats - resoundingly rejected. Here we are going down this path again. Maybe we’ve got all the time the world. Sure why not? We’ve tried this. It didn’t work. Maybe it’s time to try something new.

Petroleum News: Do you think this is the only window?

Wielechowski: I don’t think so. If you look at the numbers, there is tremendous growth in Asia for natural gas use. You can’t breathe the air in China it’s so dirty. I think there will be continued growth. That’s what the projections say. If that’s the case, we’ve still got some time. Roger Marks says we’ve still got a few more years. It’s better to wait rather than jump into a bad deal. If you look around the world, there are many other countries and states who are looking at LNG export, so we are not the only game in town. Sitting back and wasting another two years - that concerns me a lot.

Petroleum News: So if it’s not the only window, is it the best window?

Wielechowski: Like I said, the governor should put together a team of his top administration officials and business leaders and go out to get contracts.

Petroleum News: Doesn’t SB 138 enable him to do some of that?

Wielechowski: I don’t think so. What you’re doing is you’re putting your faith in the oil industry. You’re putting your faith in BP, Conoco and Exxon. The administration should be driving the train on this one. I think it’s a little backward the way you’re doing the pipeline. I think you have a better likelihood of success if you have a state and buyer pipeline. We talked a lot about the Norwegian model. Interestingly the Norwegian government owns 51 percent of the gas line there and I think they own 70 percent of the LNG plant. The state will own 40 percent of 25 percent - maybe. We will be the caboose at the back of the train. Our leg legal attorney testified that’s where we’ll be also. I don’t think that’s where the state should be particularly since we’ve waited for 30 years. We put our faith and trust in these companies for 30 years to build a pipeline and it hasn’t happened. I don’t have any reason to believe something different will happen this time. That’s why I think a different approach where you have the state taking charge and the state going out and making it happen with Alaska taking charge of our destiny.

Petroleum News: You had expressed concerns about the prospects of expansion and how SB 138 doesn't afford for it the way AGIA did. Please talk about that.

Wielechowski: This was an issue raised by our expert Rick Harper. It was one of the biggest issues when we were doing AGIA. The way it is now there will be tremendous impediments to expansion by the state. I think it’s unlikely the producers will have incentive to expand. The state will have huge incentive to expand. The problem with the way it is now, the state will have to put up huge capital to expand at a time when we are bleeding a couple of billion dollars a year. I think that’s a problem. I think rolled in rates would have been a better approach. Rolled in rates is a presumption with FERC. I think it was a big mistake not to have a provision there. The other concern I have is in-state gas, just the ability to draw enough gas out of that pipeline at a price that is economical for Alaskans. That has not been adequately addressed.

Petroleum News: So what is your solution toward affordable in-state gas?

Wielechowski: My solution has always been you build a pipeline from Cook Inlet up to Fairbanks. Shoot, we could do that and have it built in two years. It does two things. It gets gas to Fairbanks and the Interior very quickly and the second thing it does is it encourages more exploration in Cook Inlet. The problem with Cook Inlet is you find a huge amount of gas and you have no market for it. This would add a fairly large market.

Petroleum News: If you build a pipeline to Fairbanks, what about industrial use, like for the mines?

Wielechowski: You could also use it for industrial use. Cook Inlet, according to the USGS, has 19 trillion cubic feet of gas. That’s an enormous gas field. The 95 percent confidence covers 7 trillion cubic feet. That’s enough to last us for decades. The tax structure in Cook Inlet is a negative tax before you factor in everything. Cook Inlet is underutilized and it’s still a tremendous, tremendous gas asset for the state.

Petroleum News: You were probably most vocal about Richard Rabinow not being allowed on the board. You were pretty steadfast about this, six months after he was appointed. How come?

Wielechowski: We’ve had an Alaska law on the books for decades that these boards and commissions positions are supposed to be filled with Alaskans. I envision the AGDC board as a policy board; they are setting the big overarching policy on how this gas line is going to go forward. I think you are better served by having people who live in the state, who work in the state, who understand the state’s needs, someone who will fight for lower in-state gas prices and lower tariffs.

Petroleum News: He is still only one of five voices and could be overruled?

Wielechowski: That’s true, but I think it’s the message that could be sent to Alaskans. If it could be one on this board well we saw the governor try to appoint someone from out of state to the SARB board, which was equally concerning. It’s a dangerous, dangerous road to go down. Yes, it’s one this year, but it could become a few more next. If you want people who work in the oil industry we’ve got people who worked in the oil industry capable of doing that.

Petroleum News: Even got someone from Alaska who worked for an oil company, you could still argue that person has the company’s interests at heart, don’t you think?

Wielechowski: That’s true. I want to see who the appointee is. That’s the problem we had with Bernie Washington. In his case he worked for the industry for 36 years fighting that entire time or at least a huge chunk of time fighting for a lower tax. I said this on the floor, Bernie Washington I would have approved him for just about any other appointment but a guy who spent most of his career fighting for low tariffs; his task is to get fair tariffs, particularly after what happened with the firing of Marty McGee. You have to take it as a whole. That firing of an imminently qualified assessor with strong Alaskan roots fired for no other reason other than he had been fighting for a fair assessment against what the oil industry wanted. You’ve got to put everything in perspective.

Petroleum News: Was the law changed to accommodate AGDC?

Wielechowski: Oh absolutely. The bill was introduced in the Rules Committee on the House side. How often do you see that happen? We pushed confirmations back one week. The governor quickly signed it. He didn’t put out a press release.

Petroleum News: So what took the minority so long to provide pushback on this?

Wielechowski: I think we were offering pushback all along. When you look through the appointees, it just has the town and people saw Houston, then thought Houston, Alaska. When appointees come out, I don’t think there are too many legislators who go out and check where everybody lives. All it had was Richard Rabinow, Houston. It just wasn’t something you historically see. We expected the governor to follow the law.

Petroleum News: The debate over the new oil tax regime under SB 21 is heating up again as we approach the repeal vote in August. ConocoPhillips recently reported stronger earnings on less production. What does that tell you?

Wielechowski: It’s a data point to look at. In my opinion this goes back to a duty to produce. We’ve gone down the path of asking the wrong questions for years now - the attorneys who represented the state for years. The question isn’t how much can they make somewhere else. The question is, are they making a reasonable profit here in Alaska. They have a contractual obligation under the terms of their leases to produce if they can make a reasonable profit based on hurdle rates and internal rates of return. You know the returns on the legacy fields are staggering. You’re not competing anywhere else. Even if you were, you had much higher rates of return than North Dakota, Canada and even Eagle Ford. The question isn’t, are we competitive with places compared to other parts of the world. The question is can they make a reasonable profit. The answer is yes.

Petroleum News: What are your thoughts on the administration permitting oil industry to pay the lower amount of appraised property value until the appeals have been exhausted?

Wielechowski: I’m a property tax payer here in Anchorage. I can’t imagine a leader in our community, if you are disputing your property tax, you don’t have to pay the higher rate. That’s in inappropriate move in my opinion. There is a process to follow in how much you pay. If you disagree, there is a process. For an executive just to go out and change the rules for one particular player is very disturbing. Every TAPS valuation has been litigated for several years. You’ve got a Supreme Court ruling now. They can litigate every single one of them if they want. I can’t imagine the Supreme Court coming to a different conclusion than the one they reached a couple of months ago. I think it’s a pretty strong precedent that has been set by the Supreme Court.