Micciche: AKLNG has upsides, drawbacks

Soldotna Republican says greater collaboration needed if administration, Legislature hope to advance AKLNG project into future stages

STEVE QUINN

For Petroleum News

Sen. Peter Micciche says he remains bullish on the prospects of a natural gas pipeline, but he warns Gov. Bill Walker’s administration needs to smooth out its organizational chart and, with that, eliminate what many lawmakers perceive are internal struggles among departments. He also cautions against the Legislature taking unnecessary shots at Walker as the project - known as AKLNG - progresses.

In an interview following last month’s special session and follow-up correspondence, Micciche, a Soldotna Republican who serves as the Senate Finance Committee vice chair, offered his thoughts on where things are with the project and what remains to be done.

Petroleum News: A lot has happened since special session ended. First, what are your thoughts on the changes at AGDC with Dan Fauske and John Burns no longer with the corporation or on the board? Do you have any concerns or is this the natural course of business under a new administration?

Micciche: I certainly have my concerns and they are two-fold. First, there was a level of trust between Dan Fauske and the Legislature. The trust was not based upon a political allegiance, it was simply due to his skill set and his well-established relationships as an administrator. In fact, I know of several key legislators that were not generally supportive of Fauske’s communication style, yet supported him due to the specific results delivered by Fauske-led projects over the years. I am going to miss Dan Fauske. Many of us will.

Secondly, the removal of the last two key members (Fauske and Burns) causes one to question if the SB 138 roadmap is the route the current administration intends to follow. The past administration’s AGDC board members and their associated backgrounds demonstrated fidelity to the essential concepts in SB 138. As I’ve said in the past, I certainly don’t mind the route taking a side road from time to time due to appropriate adjustments from the new administration. The expectation, however, is that the general route will continue to track the interstate that is the SB 138 framework. Only time, and the quality of relationships developed between willing individual legislators and the administration will write the rest of the AKLNG story.

Petroleum News: Does the news of the partners agreeing to move forward last week give you any particular hope or was this simply to be an expected extension of the special session?

Micciche: Although I remained focused on communicating with the administration and key AGDC board members regarding my desire for a continuation of the current path through a “yes” vote, I was not surprised by the unanimous agreement to move forward through the vote on the third (of December). Although there are key agreements to complete and execute over the next months, I believe there remains an “all in” attitude at this point from all four partners to determine if AKLNG will pass the adequate feasibility test to move to the next decision gate. We have much to do to execute key agreements in the near future, such as the gas supply and balancing agreement, the RIK/RIV decision and preparation for the constitutional amendment in 2016. Cool heads and a steadfast commitment to a successful project will be required to get us there. Cautious optimism, pragmatic decision-making and the absence of political rhetoric will remain imperative in the process needed to get us there for the benefit of all Alaskans.

Petroleum News: You asked a lot of critical questions, but in the end you had a yes vote. Why?

Micciche: in the process of our due diligence of SB 3001, the essential elements of the bill are easy. We sort of reached a place where I believe our relationship with TransCanada had maximum value. I’m excited about the fact that we essentially bought out our AGIA liability - $500 million plus trebled damages - for the sum of about $3 million in interest, plus I believe there was a conflict between the state and TransCanada in the project decision making process. So SB 3001 solved those problems.

It provides no additional liability to the state. We have the same level of risk. We have full control over the 25 percent of the project. Generally speaking the special session was very productive. I think it was time well spent. We were efficient. It gave us a chance to look under the hood so to speak of the state’s current organization and I think we found some gaps. A lot of the questioning around the buyout of TransCanada centered around is the state ready for that responsibility. Do we have the right people in place? Do we know what we know and do we know what we don’t know?

It became obvious that the four entities involved in AKLNG on the state side - AGDC, Department of Natural Resources, Department of Revenue and Department of Law - truly need a charter if you will. They need to know who is filling what boxes, what the responsibilities are. For the empty boxes, what are the skill sets there? As a member of the Legislature, I want to make sure the state of Alaska is receiving 25 percent of the revenue for 25 percent of the investment. I’m not sure we are there yet.

I think we heard and saw a lot of testimony that we’ve got some work to do. And that’s OK. As long as we recognize it, take this opportunity and use it very wisely to create that organization that doesn’t mirror the organization of the producers but certainly has the right people in place to validate that our interests are being adequately represented.

Petroleum News: I know from the hearings you weren’t happy with the organizational chart. Is that one of those gaps?

Micciche: I hate to place focus around a piece of paper that was handed to us that was titled an organizational chart. I think the chart was created to try to satisfy the request. What it did for me was it brought light on the fact that that organization is lacking an independent evaluation of what’s need from the state side to manage this project. Part of the problem is you’ve got a very sophisticated DNR, a very sophisticated Department of Revenue. You’ve got a relatively sophisticated AGDC. Those organizations have not been blended at the proper roles and responsibilities for an AKLNG. How are we going to realize of expansion is hurting and helping maximum and best use of the resource for Alaskans?

Do we have the people who are going to recognize whether or not we are competing against ourselves and our 25 percent of AKLNG? Are we going to protect that investment? Are we going to flood that investment with a lower revenue producing source of new gas? That’s my worry and that’s what the state needs to evaluate. If you look at the project model, in year 15 they are assuming gas.

Do we want expansion prior? You’ve got a billion cubic feet of extra capacity in the 42-inch line. Is that not enough? That’s another Point Thomson today. What gas is going to backfill the need for new gas in year 15? I think we really need to evaluate that and not just be focused on maximum production of natural gas at all costs. I challenge the administration to model what would have happened if we had upsized the TAPS line in the earlier days. My assumption is, had we had significantly higher production in the earlier years, we would have never met the years of a higher commodity cost. We would have produced our resources much earlier and we would have essentially had nothing in savings today.

So when you think about the maximum value to a sovereign, does it happen over 15 years, or does it happen over a generation or two? I think we’ve seen many projects globally where that longer period of production is far more beneficial and far more manageable during those peaks and valleys. What if you are in a low commodity cost 10 of those 15 years? You’re never going to bridge to where you can get maximum value over catching the next peak of the commodity value. I worry about that. I want to make sure we have the right people in place not to jab the producers but to serve as an equal 25 percent shareholder in a 100 percent project that has three producers as our partners.

Petroleum News: Do you feel that the project has been advanced as a result?

Micciche: absolutely. As far as advancing the project, this wasn’t a make or break decision. This was a gate designed in SB 138 and this exit ramp was at the place where we would ask the question does this relationship with TransCanada make sense. I think this is a segment in a forward moving project. As our consultants explained to us the fiscal benefits of a TransCanada exit are likely a net positive. I believe they will be. Even if they are a wash, I believe eliminating that conflict between two parties that have 25 percent will result in a smoother project going forward.

The administration made a decent case for taking this off ramp, particularly in terms of alignment - or lack thereof - between TC’s and the state’s interests and the question of who gets to vote for what at the negotiation table. Ultimately this was a case of the administration making a policy call that was every bit within its rights under SB 138 and the Legislature deciding whether or not to endorse that decision via a $157 million appropriation.

Petroleum News: Could this have been headed off in SB 138?

Micciche: I can’t think of a more positive way to resolve the AGIA liability issue than the way it occurred. Had we even challenged whether or not AGIA was any longer economically feasible we likely would have spent a greater amount and there was always the potential for compensatory damages paid to TransCanada. We spent $3 million for a positive result for the elimination for potential liability.

We executed the plan and the plan worked as intended, and I do think, as I said, we’ve reached a point where there is likely no additional value to keeping TransCanada in the project. I appreciate TransCanada very much. I think they are a class act from day one. The fact they are going to leave key employees in position until May 2016 to ensure a smooth transition. I think TransCanada’s backing remains with the state even though it’s not formal and it’s not financial.

I believe this wakeup call of reformulating the state organization will lead to a very positive outcome.

Petroleum News: What would you like to see done next session or even next year to advance this project?

Micciche: Obviously there remains some minor conflict between the producers that needs to be worked out and result in a gas supply balancing agreement. That’s due by the second quarter of 2016. I’d like to see that moving along. Now that we’ve resolved a conflict problem within our organization, I’d like to see the same with the other three partners. We are still working on gas supply agreements. The governor made it clear that he is not looking at a gas supply withdrawal contract. He’s looking for something largely in concept that gas would be available if we move forward.

In my view, risk is in relative proportion to market cap. We’ve got four entities in this AKLNG organization. If you start at the top with market cap, you’ve got ExxonMobil, then BP, then the state of Alaska, then ConocoPhillips. You have to think about the relative risks if one of the partners pulls out because of challenged economics on this project. It’s not time to look for a way to immediately expand Alaska’s proportion of the interest. It’s time to sit back and evaluate whether it’s time to move forward with this project or look at another project.

Right now I’ve joined the Senate in requesting that the governor remain with the SB 138 framework. We support this project. We think the administration supports this project, however we are going to keep respectfully encouraging that we don’t put the little processes in place which create obstacles. I think you saw some of that. You saw some uncertainty about the Department of Law’s role, whether or not folks who are very highly compensated in other departments - very highly qualified individuals - are we letting them go to work every day to do the best job they know they can do. Or are there internal obstacles in the way of maximum forward motion of this project.

I think there are some obstacles. I think it’s time for the administration to sit back and say to themselves what are we doing here? Let’s create a list of objectives of what we want to see done in the next work period. Let’s create an effective organization and let’s let those professionals go to work every day do what they do best. We can tweak the project as we go along, but we can’t do it without allowing them to do what they do best.

I personally feel the administration recognized some of those obstacles as well. We are going to support this administration. If they don’t succeed in this project, none of us succeed and that is something we absolutely have to do. There are still some folks in the Legislature poking the governor and this administration at every opportunity. That needs to stop. We need to put this project and what’s best for Alaskans first and forget about the last election.

If Governor Walker doesn’t succeed, Alaska doesn’t succeed. Three more years is a long time to delay this project. So we need to pull together as a team and ensure its success to the very best of our collective abilities.

Petroleum News: With that in mind, what are your concerns moving forward? What questions still need to be answered? Are you worried about what some have identified as a lack of internal alignment?

Micciche: The market remains the single biggest factor in whether or not this project comes to fruition, so that will always be a concern. But I’m optimistic - and I think more importantly our project partners seem to be optimistic - that the LNG markets will recover in time to support a positive final investment decision.

Another concern I have is the state assuming a larger share of the project than the 25 percent it will hold following TransCanada’s exit. Along with a greater share in the project would come greater risks and greater costs. I’m not sure we want to assume greater risk on a project of this scale nor am I convinced we would want to - or even could - pay for more than the $14 billion-$17 billion that amounts to the state’s estimated contribution toward the total project cost.

I’m a little concerned about the transparency vs. confidentiality paradigm as it’s been framed by the administration. While I understand and fully support transparency in state government, the way the state’s participation is structured in AKLNG - and I think it’s a way that makes a great deal of sense - has us fundamentally taking on a far different role than we’re used to. Instead of adopting the role we’re used to - that of a sovereign that sits back and collects taxes and royalties - we will effectively become a business partner that’s responsible for the costs of transporting and marketing tens of billions of dollars’ worth of gas.

As such, I don’t think we can afford to revolt against standard business practices by refusing to sign confidentiality agreements. Competitiveness is going to be the key to getting this project sanctioned. Anything we do to undermine that competitiveness - like refusing to sign confidentiality agreements or, worse yet, compromising one of our partners by letting sensitive commercial information fall into the wrong hands - is taking a step in the wrong direction.

Petroleum News: Given the number of projects globally getting shelved, are you surprised there is this kind of movement?

Micciche: No. If you look at the spend curve, we are still at the low end of the curve. It hasn’t started its upward climb. When I buy a position in an equity, I buy blue chip companies that do well in all markets. The very best companies invest in low value commodity markets so they have projects in the queue and are prepared to enjoy maximum profits and high value commodity market. I’m not a dot.com sort of guy. The state needs to think like a blue chip. It is appropriate. I think ultimately it will be beneficial to continue to evaluate this project despite this current global outlook. It’s going to change.

Petroleum News: Also, next year you will be taking another look at the state’s tax credit system. What are your thoughts on that?

Micciche: I can’t say at this point whether or not there needs to be a change, but I certainly think it’s appropriate to have a detailed evaluation. We started with the Senate Oil Tax Working Group. We have to evaluate without picking winners and losers, if we have a process in place that responsibly disperses state credits to companies with some sort of evaluation whether or not they have any probability of success.

I think it’s an appropriate discussion. Do I think there will be some changes; yes I think there will be. I go back to my dot.com discussion. We want to operate like a blue chip. It’s a temporary downturn in a commodity price. We want to make sure we have future projects in the queue for additional revenue when the commodity price recovers. We also want to make sure we are offering those exploration and development credits to companies that have a relatively high probability of success, and at this point I think we’ve got some gaps in that system.