Saddler bullish on project, not process

Eagle River Republican says Legislature did well to advance gas line project, but still needs more administration collaboration

STEVE QUINN

For Petroleum News

House Finance Committee Vice-Chair Dan Saddler may not be on the Resources Committee and he may not even be subcommittee chair, but he’s no newcomer. The Eagle River Republican previously served as co-chair on the Resources Committee and he also had a stint as a special assistant with the Department of Natural Resources. His questions, like those during the recent special session, reveal engagement and a deep interest. After the House unanimously approved Gov. Bill Walker’s legislation to buy out TransCanada, Saddler sat down with Petroleum News to discuss his vote and his concerns moving forward. The following is an edited transcript of the conversation and follow-up email correspondence.

Petroleum News: You were a yes vote on SB 3001. What drove you to that vote?

Saddler: Primarily what drove me to a yes vote was a no vote would have meant an end to the project. That was the fundamental reason for me. As I said on the floor, there were some good reasons for TransCanada’s involvement at that point. The agreement had the option of this buyout. My understanding was we would have an awful lot more of the commercial agreements and the RIK decisions and more material to inform our decision before we made the decision whether or not to pull TransCanada out of the deal.

That’s what gave me a little bit of disquiet in the process. We didn’t have all we needed to make the most informed decision. But it was clear yes meant the project has a chance to continue. No meant it dies now.

Petroleum News: How do you interpret a 39-0 vote?

Saddler: Well, as we saw from the resolution passed afterward, this is not a slam dunk ringing endorsement of the plan. We voted on the measure before us which was to authorize the work plan going forward to the middle of next year and pay TransCanada what we owe them to date and excise them from the process. I did hear expression from the no votes in the Senate. They didn’t like the way the process had gone, they didn’t like the way the supplementals had come out. But I didn’t hear anyone say that a yes or no vote was a yes or no on the gas line itself. This is a process and this is the next stage in the process, to develop more information. The big decisions come later.

Petroleum News: So 39-0 should not be read as a full endorsement?

Saddler: Well everyone speaks for themselves. The reason I voted yes is it continued to keep the project going, to make progress to the next stage gated decision point and to avoid pulling the plug now.

Petroleum News: What concerns emerged for you during the hearings?

Saddler: First and foremost was the lack of transparency, frankly, and clarity on the information from the administration. This is a very complicated deal that a lot of legislators have been involved with for a number of years now. We have a new administration with a lot of past history of his own. And so our biggest question was how he was going to honor his I won’t say promise but indication that he would work with the process he inherited from the previous administration and how much he was going to try to put his own stamp on it.

I felt disquieted when I heard him say he wanted to continue with the process he inherited but we kept seeing subtle and not so subtle - and sometimes, dramatic - changes: The change in personnel of the AGDC board; the change in the transparency versus the confidentiality orientation.

So I just wondered what he was trying to come at. What was his ultimate goal? We still frankly don’t know. There are a lot of places in this agreement where we have given the administration - AGDC - great power. And we see this governor using his influence on that power to a great extent but we don’t know to what end yet.

Despite repeated efforts to get that clarity, a lot of us aren’t entirely assured. I want to know so I can help craft, approve and support. I want a gas line to happen. At least I want the decision to be a well informed decision to decide a gas line.

Petroleum News: The governor is re-assigning his lead negotiator Rigdon Boykin. Does this add to your concern about internal alignment or does this bring closure to concerns about his contract worth $120,000 a month?

Saddler: My thought is that the news regarding Mr. Boykin does not give me much new comfort that the governor has a clear plan for how to successfully conclude the many agreements and negotiations required on a tight AKLNG timeline. This recent news underscores the legitimacy of the resolution's call for the governor to tell Alaskans, clearly, who is responsible for what in his administration's pursuit of the AKLNG project. This constant churning of personnel and missions, combined with the reticence of the administration to answer questions fully during a special session called for this specific topic, does not inspire the level of confidence needed by our partners, our customers, and our constituents.

Petroleum News: So whatever remains unclear, when do you want this clarity?

Saddler: As soon as this becomes possible for us to get. Certainly you like to have all the information possible before you make a decision. There is how do you know if it’s a good deal for Alaska. You have to know the price of the gas you can get; you have to know the cost of delivery; you have to know the governance structure; you have to know an awful lot of things before you can make that hard-nosed financial calculation: is this a good thing for the state.

So as soon as possible because a lot of us, while everyone was focused on the decision at hand, we were trying to get some indication on what’s coming the next six, 12, 18, 24 months. We have some broad outlines.

I’m looking at the calendar going forward here. The pre-FEED decision comes at the middle of next year supposedly. I don’t know on what schedule we will be getting the commercial agreements: the gas handling; the gas balancing; the marketing arrangements. We are told on the schedule the next six or eight months.

Petroleum News: What was missing for you? What items? Was it an understanding of the internal structure?

Saddler: I think clear comprehension of the plan. We laid out a process in SB 138 that gave us the schedule of getting us information to make a decision. That schedule slipped. We thought we would be coming forward with TransCanada as our agent and that arrangement changed. It was fairly obvious that it changed at the administration’s desire and TransCanada realized they were not a desired player so they wanted to make a graceful exit.

So the process we thought was going to happen coming forward didn’t happen. So what is the administration’s plan for the rest? When we tried to probe for answers, we didn’t get clarity. We heard there were options, there was an authority to do this or that. We heard it’s premature to say that. We heard there’s lots of different things that could happen.

Contingencies and conditions, but not this is our plan, this is what we are going to aim for. We are responsible for writing checks on behalf of the state. We would like to have some clarity there.

Petroleum News: TransCanada, it sounded like they wanted out anyway.

Saddler: We talked to TransCanada both in the committee and in the office and they said they realized it was difficult to get with the administration fairly early on. Around about May or June, it was pretty clear to them the writing was on the wall, that the administration didn’t see a role for them going forward. Vincent Lee told me it became increasingly difficult for company to represent the state’s interest. If TransCanada tried to talk to other corporations, other investors whatever, it was pretty clear they didn’t have the backing or confidence of the state.

It’s not that TransCanada wanted out. They have been going for years and years with different administrations and rocky waters. They had clearly wanted to be part of this but felt as they said it was not going to be appropriate or commercially viable for them to stay in the project. So did they want out, I don’t think so? Did they realize they couldn’t stay in, yeah.

Petroleum News: So what would you like to hear next from the administration? Do you have some kind of wish list?

Saddler: Yes, one of the things that’s important to me is to make sure that we don’t force the issue of the withdrawal agreements and sales and purchase agreements before the Dec. 4 vote to authorize the work program and budget. We had heard from the administration that Gov. Walker’s orientation is to protect the state and have exit ramps for the state or the other partners. He obviously wants to have a lock on the partners do he can demand their participation either as equity partners on the deal we envision now or with a commitment from the producers to deliver their gas to some other project.

The financial implications of such agreements are tremendous. And we’ve only got basically four weeks or so to negotiate those. Now DNR is good and they work hard but that’s a tremendous amount of work to do. We are spending two or three or four years to make a decision for pre-FEED and they want to make the sales agreements in about three weeks. There is not enough time to do it right so I hope they don’t insist on that.

It’s hard because we don’t know exactly what the governor wants. Sometimes it appears he has must haves that are not necessarily consistent with each other so I’ll wait to see what information he develops and gives to us.

Petroleum News: What are your thoughts on a prospective constitutional amendment that would enable the state to lock down long-term tax agreements?

Saddler: Well the constitutional amendment is designed to make sure the project over the 25-year initial term has fiscal certainty, or freeze the tax conditions. This program establishes taking our royalty gas in kind and our taxes in kind. Obviously for a 25- or 30-year project having fiscal certainty is essential.

I know some of the big risks for investors in a big natural resources project are consistent financials. One of the things a company will look at when dealing with a sovereign is how consistent they are and how much they depend on natural resources to fund their government. We are good government but we also fund our government primarily with natural resources. When we hit a fiscal hiccup with the price of oil dropping, we are going to tend to want to look at resources taxes to bail us out.

So it’s not unreasonable requirement for the industry to ask for that kind of certainty. It’s not unreasonable for the state to ask themselves are we willing to give up that sovereignty or a portion of that sovereignty or at least commit that portion of our sovereignty to offering a consistent tax regime for 25 or 30 years. It’s up to the people of Alaska. We don’t have to do this. The benefits are there. But there are risks and there are expenses. One of those is lack of flexibility so an election has to happen, this is a big decision for the people of Alaska and it’s appropriate.

Petroleum News: So is this something that has to happen in November 2016?

Saddler: I think so, given the complicated timelines. A lot of things happen at a lot of different fronts that have to come together at important times. The schedule generally calls for the constitutional amendment to be on the ballot in the next general election so we can hit that window. It’s got to happen in the general election. It can’t happen in a special election or the primary.

We are told by our marketing experts that the next big window for LNG globally is 2024-2025. A lot of the earlier expensive LNG is in the works and launched but there will be a window around that time, 2024-2025. If we are able to present our gas to the market then we can lock in long-term contracts. If it slips by another two years because we didn’t get the constitutional amendment on the ballot, we might slip past that next window.

I think it’s going to be important and incumbent on the Legislature and the administration pushing this deal to educate the people about why this election has to happen now or rather what the benefits and the costs are of it happening or not happening. The people of Alaska are in a historic time again kind of analogous to the trans-Alaska pipeline days: big risks; big commitments; maybe big benefits. But we have to be informed Alaskans and make some tough decisions. We can’t put it off forever.

Petroleum News: What about getting it done through contract to get this kind of fiscal certainty.

Saddler: Boy, I’m not an attorney and I don’t know if you can actually do that. I do know that contracts are pretty important. I don’t know about doing it through contract. I’m sure some smart lawyers are thinking if that’s possible or not. I don’t think we would be hearing so much about the need of a constitutional amendment if those lawyers thought doing it by contractual agreement were possible.

Petroleum News: So what then would your priority be for next session? Somebody has got to move next with a piece of the puzzle whether it’s PILIT or RIK.

Saddler: We actually had some expectation that the payment in lieu of taxes agreement would be available to us kind of off the record or it might be placed on the call. The governor is not shy about amending or adopting his proclamations and calls. We thought we might have that in place to work on with the thought being it would be something to accomplish, a box to check off.

That didn’t come before us but I think that is one of those things that is almost ready for primetime. I’d like to see it before the last minute. An awful lot of information came to us at the last possible minute. Any advance information they can give us from the administration would be good. I think any marketing arrangements and the preliminary marketing plans would be good.

We’ve got the offtake agreement. We’ve got the offtake application signed and approved by AOGCC so that’s good. I think it’s the next commercial agreements: gas balancing; marketing; sales terms; shipping, a lot of those things that the administration and ADGC are working hard on. If they can give us the work product as it comes, that would be great.

Petroleum News: The Legislature really wanted more information ahead of time, they didn’t get it. Were you surprised by the request for the appropriations? You had even asked, didn’t they already have this money?

Saddler: A little bit surprised yeah. It’s a big job. It takes a lot of expensive people to do it. I wasn’t exactly sure how much of that work is being done by agencies with money they already had. I think some of us were surprised by the extent to which the administration was using consultants and outside attorneys.

There was some concern in the Finance Committee whether OMB was trying to get back some of the money that had been reduced in last year’s budget under the guise of gas line work going forward. There was a little bit of rumbling about that but in the end I think we erred on the side of generosity and accommodated the need of the administration to do the work. While we could have quibbled a couple of million dollars for DNR and DOL, we wanted to give them the tools they needed to do the job.

But we also put sideboards on that to make sure this is for work that is going to be done for the intended purpose, getting to the pre-FEED decision midyear. That’s why we put strict sideboards to make sure the money couldn’t be going forward into FY 17. If they need more money in FY17, we have an appropriations process. They can come to us and ask us and justify that demand and we’ll consider it then.

Petroleum News: So all of this considered, do you believe you’ve advanced a gas line project?

Saddler: Absolutely. The administration has a lot of power. They wanted to proceed without TransCanada. That was something that was important to them. It was essential to progress. We have gotten past that step in our long-term, stage-gated decision making process so yes, we have advanced a natural gas pipeline. We provided the money and tools to continue to develop information we need to make decisions. That’s also progress.

The Legislature, the administration and the industry got together in Juneau to talk about all things gas line. That kind of discussion and collaboration also advances the process. The people of Alaska saw their Legislature in session work on the gas line and help educate them in the process - that kind of thing advances the process we need for the constitutional amendment and other things.

So yes, we came to Juneau and worked really hard for 10-12 days and I think we made really good progress. Is it the route I would have liked to take or anticipated, not necessarily, but we have a new administration and they set some general direction they want to go and we are advancing along those lines.

Petroleum News: It seems like you folks, as troubled as you were with the process, you still give the governor the benefit of the doubt. When does that honeymoon end? We are approaching a year.

Saddler: I won’t say the honeymoon is going to end. I wouldn’t even say there has been a honeymoon. We will know when we see what happens at the Dec. 4 budget plan and work plan meeting when they make the vote to go forward or not. I think the ball is a little bit in the administration’s court to work with the Legislature to share information and to share their intentions (more) than to fulfill their contractual obligations to give us information by a deadline.

I hope they have gotten the message that we want to work with them, we want to help make the process better because obviously we are big players in it as well.