Persily: Gas line pessimism warranted

Having tracked gas line developments at three different government levels, Persily offers hard look at current project, market forces.

Steve Quinn

For Petroleum News

No one has had a more diverse look at Alaska’s efforts to monetize North Slope gas than Larry Persily, whose term as Kenai Peninsula Borough Mayor Mike Navarre’s chief of staff ends in October with Navarre’s term. Persily has worked under the Obama administration when plans called for a pipeline to go overland and into the Midwest. He also served on Gov. Sarah Palin’s pipeline team, as a special assistant for retired Rep. Mike Hawker and deputy revenue commissioner for Govs. Tony Knowles and Frank Murkowski. Known for his biting wit and incisive analyses underpinning resource development, Persily shared his thoughts with Petroleum News on the status of the AKLNG project and the prolonged, incessant debate over oil taxes.

Petroleum News: What are your general observations of where things stand, say from the 30,000-foot view, and I’ll get to specific questions from there.

Persily: If enthusiasm counted in the market, I guess the Alaska LNG project and the Alaska Gasline Development Corp. would be a frontrunner. But enthusiasm doesn’t count: It’s economics, having a viable business plan, having all the partners lined up, customers and gas supply. I don’t see us in the front of that pack worldwide. I think we have a long way to go. I don’t think this project is going to go to final investment decision this decade. Maybe next decade.

Petroleum News: So, if you sat on either resources committee, what would you need to hear next from AGDC?

Persily: Well, I would like to see detailed plans, how much money do they have in the bank and how do they plan on spending it, so I can decide: is it worth it to go through the FERC process? How much is it going to cost? Do you have enough money to actually get through the end of the FERC process? If you get to an environmental impact statement and a FERC statement, what’s the shelf life of that statement? How much would that project have to change before you had to go in there and redo that federal authorization? I’d want to know what am I buying and what’s the value of it. You can to talk about that in open meetings.

As far as what potential customers do you have and how real are those, you can’t discuss those in opening meetings, and I certainly understand why, but I guess - and I don’t know what the authority is - you can ask for a closed briefing on that.

They did do a solicitation which closed on Aug. 31. It didn’t get a whole lot of response. I guess I’d like to go over that in detail, what responses did they get and what do they mean?

Petroleum News: What do you make of the open season that was completed?

Persily: Well, open season is a legal term for FERC for rates, regulated interstate pipelines. So it wasn’t an open season. It was an ask potential customers and users if they are interested in pursuing it further. It didn’t seem like they got a lot. My understanding is the Alaska Gasline Development Corp. submitted a letter on behalf of itself saying it would use the project, the pipeline and liquefaction plant. That’s sort of like co-sponsoring your own bill.

They are trying. I give them credit for that. On the other hand, there is still a lot of money on the table. If I were in the Legislature, I would want to exercise my due diligence to make sure it’s still a good investment to keep spending.

Petroleum News: What do you make of the news of the IRS opinion that the project could be tax exempt?

Persily: Look, the Alaska Gasline Development Corp. is a political subdivision of the state just like school districts are, just as cities and boroughs and the Alaska Energy Authority are. So, it was no surprise. Yes, it’s a state entity. To the extent that the Alaska Gasline Development Corp. owns a piece of the project, their piece would be exempt from federal corporate income taxes. I didn’t see that as much news. The question is how much of it are they going to own. If they own 25 percent, that means the private partners who own 75 percent, they are still going to have to pay corporate income tax. I guess I saw it as a non-event, sort of re-affirming what I thought would be the answer. In terms how of it affects the economics, it really comes down to how much of the project the state owns and what’s the corporate ownership structure. It’s nice to have that affirmation. There is some value to that sure.

Petroleum News: The bottom line is you didn’t learn anything you hadn’t already suspected?

Persily: Not to me, no.

Petroleum News: What global hurdles are there for this project, then we’ll bring it closer to home.

Persily: The global hurdles are how much LNG is the world going to need in the future and where can they get it cheaper or at less project risk. Those hurdles determining the market demand are China’s converting from coal to gas, India’s conversion to gas, Japan’s nuclear plants, LNG competition from Russia, Qatar, Tanzania, Mozambique and the U.S. Gulf Coast. There are a lot of variables out there on that.

Petroleum News: Closer to home, what variables do you see?

Persily: You’re in a very competitive environment. We are not the only developer out there trying to sell an LNG project. The hurdles are can you compete on price and project risk? If someone signs a contract with you, can you really deliver the first cargo on the day you promised and at the price you promised? The lenders and your customers want to know you can really deliver five years out or six years out - whatever it is - from the day they signed the contract to the day that first tanker is supposed to dock at the first receiving terminal. I think there is some concern in the market in (the project’s) current form whether Alaska can because the band is not back together. You don’t have the producers and the state in an agreement. The producers might sell the gas but they are not in agreement on the structure and now you’ve got the state and Exxon fighting again. That doesn’t help.

Petroleum News: Well, let’s talk about that for a minute. What is your take on the dispute? Is this something that goes back to Gov. Walker’s longstanding disagreement with how Point Thomson was handled or something else?

Persily: Point Thomson goes back through more governors than just Gov. Walker. Yes it’s a longstanding point of contention between the state and Exxon is the lead partner in the development. I will say there are some very good reasons why Point Thomson was not developed, there are some very good reasons it’s not working as expected and some very good reasons why if I were a company I’m not sure I would want to put billions more into it right now.

I don’t see anyone else wanting to. Chevron walked away from its share of Point Thomson. Conoco earlier this year told its partners, “hey, here are the keys, we are walking away too.” Point Thomson is not a big money maker. I believe Exxon and the state will settle this one as they should. I’ve got to believe all parties will be reasonable about it. There will be more headlines about it. That’s for sure. That’s just the way we do things here in Alaska.

Petroleum News: OK, back to AKLNG. What’s the mood or the tone been like as the project’s viability has changed these last three years in your backyard on the Kenai?

Persily: I think generally the residents of Nikiski have accepted the inevitability that construction will not start this decade. At some time in the future, they hope and believe this will still go ahead. For those who sold their property when AKLNG was buying, I haven’t heard from anyone regrets for selling. For those who didn’t sell because they didn’t think they were getting enough for their property, I’ve heard a few say gee I wish I had sold when I had the chance. Others are content to enjoy their property until it comes up again. More generally, as opposed to specific property owners, like most Alaskans, they are disappointed in the sense that we thought we were getting close and we are closer but we aren’t there yet. I think people are accepting that there are still more chapters to write in this one.

Petroleum News: Walker missed his self-imposed deadline, though it was a soft deadline. Is there anything to make of this?

Persily: It was more of a we got interest and I’m spending what you gave me, but it really wasn’t a deadline like March 31, if you don’t apply for a PFD you won’t get it. This is much softer than the Permanent Fund Dividend application deadline is what I’m trying to say. The money was appropriated by the Legislature, so unless someone takes away your money, keep going with the marching orders you were given. I know there were many legislators who were skeptical but obviously the Legislature this year considered taking back some of the money but decided no, let’s let it play out and see how it goes. They had the chance and didn’t.

Petroleum News: Let’s say they get FERC authorization, what would that mean?

Persily: It certainly helps in the market to say look I’ve got my federal environmental authorization as opposed to I don’t. It makes you more real so that’s good. It eliminates some risk. It’s “OK, now I’ve got that. I don’t have to worry about that getting stretched out or delayed. I know how much it costs me. I know what conditions they imposed on the project.” There is value to it.

Petroleum News: Let’s slide over to oil and gas. Why do you suppose oil tax bills continue to come up almost annually?

Persily: Because we don’t have a professional sports team in Alaska to cheer for so this is our recreation. It’s unfortunate for all of a lot of reasons: It detracts us from dealing with the real problems like our fiscal gap; it consumes all of the political energy in the room; it dominates the elections; it’s not very productive. But we do it to ourselves because we are so overly dependent and so addicted for two generations to this one source of revenue so we don’t have to pay out of our own pocket. It continues as the dominant debate point in Alaska politics. There were years where the industry used its political sway to keep taxes too low, I think. Then under Murkowski and Palin the pendulum swung too far the other way and taxes were too high. So when you have dissatisfaction, you’re going to have volatility.

We see it in the national debate over the Affordable Care Act. It was just Democrats who passed it. For seven years, the Republicans said we are going to fix it. If they pass a new version, the next time it will change to Democrats and it will go back again. It’s been so divisive, as with this oil tax debate in Alaska. We just go back and forth with who is in charge and that’s not healthy. It would be great if we could go 10 years without an oil tax bill, a referendum, an initiative or misleading and deceitful social media advertising and accusations. It would wonderful on all sides. We have other problems. We have opioid addiction. We have an aging population. We have healthcare issues. We have a fiscal future that needs attention. We’ve got a lot going on in this state rather than wondering if the 2018 election is going to be about oil and gas taxes again.

Petroleum News: Let’s go federal. Back in late May, early June, Interior Secretary Zinke paid Alaska a visit. What are your takeaways from getting a visit from the Interior secretary pretty early into his tenure with the administration?

Persily: Yawn. He’s got to go somewhere. He’s probably going to go to some western states. He’s not going to Delaware or Rhode Island. The administration is courting Sen. Murkowski’s favor on many issues. His heart it appears is on western state federal land issues so it makes sense that he comes to Alaska. He has limited time. Out of the 50 states, we would be more of a priority than a state with minimal federal land issues. This administration certainly believes in more oil and gas drilling and fewer restrictions on the use of federal land, so it seems logical that he comes to the state that has the most. So yawn in that I’m not surprised.

Petroleum News: So can a new administration like this one make a difference?

Persily: Sure. By not funding climate change research. By streamlining permitting requirements. By putting more federal acreage up for lease. Regardless of acts of Congress, the administration has control over regulations and the budget, so you can do a lot. They have been taking positions that are favorable to Alaska, supported by the delegation and supported by the governor. To that extent the administration is supportive of a resource development agenda in Alaska. That’s what they got elected on and that’s what most Alaskans want.

Petroleum News: I’ve had you tap into your experiences with federal government and state government. Talk about your experience - even as it’s about to expire soon - working for a local government. What’s been different for you?

Persily: I like local government just like I enjoyed small-town journalism. You’re closer to the people whose lives you effect. It makes decisions more personal, not necessarily easier, but more personal. At the municipal level, working with the Alaska Municipal League and other cities and boroughs, clearly you can see the effects of state budget cuts on municipalities: reduced Trooper counts; more burden of education funding moving to cities and boroughs.

If you cut the state budget, but shift the expense of cities and boroughs, yeah, it gives them more control, but to the taxpayers it’s the same thing. When you work for the borough, it’s more noticeable. My sense on the Kenai Peninsula, most people are aware of the state’s financial situation, and the precariousness of the Alaska economy, and the constraints on the borough. They are willing to accept the inevitability that free money is gone, and there are some very tough choices ahead. They may not agree on those choices, but they are aware that those choices have to be made. As much as they would like for oil to bail us out again, I think the general public view is it would be nice to think that but it’s probably not going to happen. They still would like to see more oil be produced and more revenue to the state, but most in the public accept that it’s not going to be enough to solve our problem. We’re going to have to look at other sources of revenue and certainly spending decisions, too.