Tarr: ALKNG concerns mount

With state in austere times, Anchorage Democrat wants more financial information from AGDC to help gauge Alaska’s prospective role

STEVE QUINN

For Petroleum News

Rep. Geran Tarr is wrapping up her fourth year on the House Resources Committee. Even after nearly six months of talk on oil tax credits and rates, there was no break during the interim. Resource committee members from both chambers met to discuss the prospects of the AKLNG project and whether the administration was reasonable with its request for more marketing information for natural gas in the Prudhoe Bay plan of development. Tarr, an Anchorage Democrat, shared her thoughts on recent developments with Petroleum News.

Petroleum News: Let’s start with the AKLNG quarterly update in June. What were your takeaways?

Tarr: One, the state is interested in a new direction that means a substantially bigger role than the role we have right now. It was interesting because the new director for AGDC has a different approach, trying to characterize this merely as a few infrastructure projects. I was surprised to hear that because this particular infrastructure project would be the largest in the world, and I was surprised to hear him downscale it I guess would be the best way to describe it.

It was more of an introductory meeting for him. To be honest I haven’t gone back to learn a little more since that meeting as I would like to, but he did talk about a little about his previous endeavor’s failings because they were projects that looked good but didn’t pan out. That gave me a little bit of reason to feel concern. I’d like to go back and look into his background a little bit.

I did ask the board and his hiring was approved unanimously. At this point it’s an all new board except for Mr. (Dave) Cruz and he’s been there since the inception, so I’m really happy there is at least one person on the board that has institutional knowledge that pre-dates the Walker administration.

One thing I’m having trouble with is this administration is not consistent. It’s difficult to know where things are headed depending on what point in time we’re at. For example, I don’t think anybody really thought Dan Fauske was the right person to lead this project forward if it got really serious because he didn’t have any real gas line experience.

But at the time when he was let go, the administration had said we weren’t going to be hiring people for $400,000. Now the new individual is actually more like a million-dollar state employee. That’s where my constituents start to raise an eyebrow and wonder if state dollars are being well spent and if this is going to pan out.

I think people have lost confidence in the project and see that kind of money being spent at a time when we have such difficulties as a bit troubling. That’s just one example. Or saying we have to have board members who are all from the state of Alaska, which I stood by him for. Then he subsequently hired Rigdon Boykin, who was an out of state $1 million contractor, who by all accounts he caused more problems that he did good.

I think that is one of the bigger challenges for me, the lack of consistency in how things are moving forward.

Petroleum News: You’ve noted turnover. One of your colleagues in the Senate raised the issue that it seems as though the Legislature is hearing from someone new each quarterly update. Is that a concern or is it still the governor assembling his team.

Tarr: I would say a little bit of both. I was willing to be patient initially and figured you’ve got a new administration, you’ve got to bring new people on and that’s going to take a little bit of time. But now we haven’t got to a point of stability. We’ve had some pretty major departures from people I’ve had a lot of confidence in like Marty Rutherford and Mark Myers.

It’s surprising that folks would come on in the beginning of the administration and leave just a little over a year after taking the job. Generally a person who takes such a high level position is making more of a commitment than that. That’s been difficult. As you lose that institutional knowledge, the next person doesn’t know what happened before.

As an example, with SB 138, we spent a lot of time talking about how this new arrangement would have some tension because the state’s traditional role was that of a regulator. Now we were going to go into a role essentially as an operator. It would be an evolution of the process for the state to be able to accomplish both of those roles successfully, and who makes the decision and where is the fire wall.

Because we have all these new actors, people don’t remember that conversation. They didn’t experience that conversation themselves to be familiar with the way it was discussed. So you are sort of starting over on some items. On such a big project that doesn’t help us moving forward.

Petroleum News: So what is your confidence level for this project? Is it an issue with the project or the market?

Tarr: I wouldn’t say it’s the project so much to say it’s the timing. We know right now oil is still the more profitable commodity. There are hundreds of thousands of barrels in storage right now (globally) that we have to get through before we can create a demand for more supply. The last I looked oil was at $41 and that was within the last couple of days. Those are just a supply and a price situation that doesn’t bode well for this particular project.

(Exxon’s) Steve Butt is one of the most qualified, talented individuals I’ve ever encountered. I know he has decades of experience in developing projects. This one again is of a greater scale. I’ve felt very confident of the work being done on the project. Unfortunately, it doesn’t matter how good the work is if you can’t overcome the economic problem.

I think that is where we are finding ourselves right now: how is this going to pan out in dollars and sense. It’s true that the project financing option exists. We did spend some time talking about this during SB 138, and the way it was described was if you have a utility that wants to enter into a long-term contract with this project, they may want to become a minor partner - 3 to 5 percent partner - because they want to have a seat at the table and understand pricing.

But we didn’t talk about project financing to the degree that you finance the entire project. You have to give up something to get that financing whether it’s a percentage of the profits or lower pricing.

So I would say the project itself we know it’s an incredible resource; we know it’s going to be developed; the particular arrangement we had with the four partners had the potential to work well, but right now there is an economic and supply issue that we have no control over. It makes it less desirable at this time. The question will be how much will we have to give up to go forward and will that be worth it.

We’ll have to be realistic about the kind of commitment can make when we are having trouble paying bills for essential services like education.

Petroleum News: Do you gain a sense that the administration is pulling away from SB 138?

Tarr: They are pulling away from the project that was envisioned under SB 138. What SB 138 really did was expand the powers of the commissioner at the Department of Natural Resources to make decisions about RIK versus RIV (royalty in kind versus royalty in value) and to make other decisions about leases. It significantly expanded the powers of AGDC in terms of taking over a project like this.

I wonder if we won’t see legislation in the future to scale that back. I think one thing you could see is legislation to redefine AGDC’s role so it couldn’t take on a project independently. That’s what I think could be coming from members of the majority. When you go back and read what AGDC can do with this bill, it’s very broad. It gives them a lot of authority to take on a natural gas pipeline project. I don’t think when people voted for that bill, they envisioned it being something where the state becomes a major partner because all of the documents that came with SB 138 - the heads of agreement and the JVA that will expire coming up.

Unfortunately, the law is pretty broad in what AGDC can do and that may be something that has to be reconsidered if it looks like things are going in a direction that people don’t support. I’m hearing from my constituents they are starting to feel like this isn’t a good use of state dollars. There is a lot of concern over the hiring of in addition to a new AGDC director who is a million-dollar employee, there is also a new oil and gas advisor. That’s a pretty hefty salary for that person.

Again, this was a discussion that took place during SB 138, if the state of Alaska wants to play in this sandbox, then we are going to have to be prepared to pay what the industry pays and we will probably not be in a position to do that.

Petroleum News: So do you think new legislation would come from the Legislature or the governor?

Tarr: I would think we will see legislation from the Legislature. I got a sense from the Senate Republican members that they were very dissatisfied. Many of the questions from the hearing were about whether they were violating the law. As I read it, they are not. I think it’s a circumstance for some of those folks who voted for a bill thinking it would be a different group of people making those decisions.

Now they don’t have the same vision the decision-makers have, or lack of trust. It could be any number of things. That’s what I’m getting out of the last hearing. So many questions about SB 138 and were they violating the law. My reading of it is no they are not. It’s just the language gives AGDC broader authority to engage in these projects. The way you would change that would be through legislation that would more clearly define their roles.

Petroleum News: Also, on the turnover issue, you’ve been on resources four years, what do you think the state will be missing from Marty Rutherford’s departure?

Tarr: She is a wealth of knowledge about these issues and has been though several of these projects before. One of the things we talked about with SB 138 was what are the lessons learned. What made Stranded Gas Development Act fail? What made AGIA fail? What made the Port Authority fail? Let’s learn from those mistakes and other efforts that have been unsuccessful. The partnership was the answer to that. People thought the state had skin in the game and more equitable in terms of the commitment.

When Marty came on, she was supportive of the infrastructure put in place through SB 138. They chose to go through with the option we reserved in buying out TransCanada. That was all part of transitioning out of AGIA and making sure we weren’t sued for trebled damages. It was the best of both worlds because we got out of it without any lawsuit and we were also able to get all the data and the work, and have it become part of the project.

So that had some value, which you hope because the state spent hundreds of millions on it. When we talked early on about how things were moving forward, she was really supportive of it. As we got closer to her departure, I had less and less communication with her. Someone of her caliber, well that’s a real loss for us.

Petroleum News: It seems like the lone constant is Steve Butt. He doesn’t work for either branch, but he seems to have the rapt attention of anyone attending hearings. Talk about the respect he seems to have earned.

Tarr: I think he really knows what it takes to make a project like this successful. He’s careful to say what his role is as far as representing the project even though is the conduit to Exxon. He has enough experience to know you can’t wish your way or want your way to this project happening. It comes down to is it economic? Can you make this price and cost of supply as low as possible?

I’m seeing a transition in his attitude from optimistic to almost a bit let down. I think this would have been the capstone project for his career and what a way to finish up with the biggest project in the world. At each quarterly update he’s been able to talk about meeting each milestone with field work and the success they have had with the federal government (FERC and Energy Department).

He is working with some incredible talent. They have this incredible infrastructure where the plan for the evolution in the project with a senior member, then someone who is not as far along but ready to step in when the senior member transitions out. So he is doing everything he can to manage the project in a way that makes it successful.

They have met all their milestones. They have been able to find ways to reduce costs in significant ways because now they can say it’s closer to the $45 billion rather than the $65 billion. But at the end of the day, if it’s not economic, if you can’t get the cost of the supplies low enough to meet the current price, then you are stuck.

Petroleum News: So what would you like to hear next at the quarterly update or at the close of pre-FEED assuming they don’t coincide?

Tarr: What I want to do in the near term is get a better understanding of how much money is left from when we appropriated money in the special session last fall. My understanding was that was for the work plan in 2016 and we are slowing approaching the end. We asked the governor’s office if we should expect another special session this fall and they said they didn’t think so. I know for example the delaying the hiring of Mr. Meyer, some dollars weren’t spent.

I want to get an accounting update of where we are and what dollars are still left out there.

We need to make that tough decision in the near term about how this project is moving forward if it is, what level of commitment will be coming from the partners, and what level of commitment will be coming from the state. We have some serious issues at hand and I’m not willing to compromise public safety, and education needs for the children of Alaska to try and push this forward right now if it’s not looking like it’s nearly 100 percent chance that it will be successful.

Petroleum News: Nearly two weeks after that meeting, Resources met again to review the administration’s push for additional marketing information from the producer Prudhoe Bay plan of development (POD). Again, what were your takeaways?

Tarr: Well I asked Corri Feige, the division director of oil and gas - and she is very pro development - about the timing of this requests. She said because the way the AOGCC called for more information but not for several years, that this would be the opportunity to find out more information on their plans for marketing their gas. That seemed pretty reasonable to me. You’ve got a need for particular information, you’ve got one way to get that information but it’s several years out and you would like to get closer than where you are today in getting that. The way she described it to me was this would be the only opportunity to request that information. Like I say, that was a reasonable response. I’m going to be watching closely to see what happens. We really don’t want anything that is too disruptive in nature that would involve lawsuits. But they seem to be optimistic that the conversations were productive and they would be willing to share this information in the near term. I hope that’s what happens and we can move forward.

Petroleum News: OK, let’s take a look ahead into next session. Depending on your perspective, some say there is some unfinished business with oil tax credits and oil taxes. Do you expect the debate to be reprised?

Tarr: I can tell you that there will be people who want to address both the net operating loss issue, that was unresolved, and others who want to do something bigger and rework the policies.

I know there are people in agreement with the suggestion start over. It will be anybody’s guess as to how those efforts might move forward because there are so many unknowns with who will be sitting in those seats come January, but we have to fix the net operating loss. My position is the state of Alaska needs an oil and gas tax policy that works at all prices along all time horizons and right now we do not have that.

Things have changed. Now we have to think of the low price environment as the new normal. We did not evaluate how SB 21 worked at those prices. If we had, I know there are several members of the committee would have said this doesn’t work. There would have been at least a few voices who said wait, this doesn’t work. If you had been sitting at this table in 2013 and said before we pass this bill, let’s look at $35 oil, people would have said that would be a waste of time.