Same guy, different job, renewed energy

Persily switches from federal to Kenai Peninsula Borough office while tapping into wells of diverse skills for projected AKLNG hub

Steve Quinn

For Petroleum News

There doesn’t seem to be much Larry Persily hasn’t done. Reporter. Legislative aide. Editorial writer. Deputy Revenue Commissioner. Federal Pipeline Coordinator.

Now Persily calls the Kenai Peninsula Borough his new employer. Mayor Mike Navarre needed an oil and gas specialist to tend to details but also do some heavy lifting on major projects. His wealth of knowledge on resource development, particularly the Alaska LNG project, will be the most visible, but Persily’s new job as a special assistant runs deeper than that.

Persily talked about his new role after the federal pipeline coordinator’s office closed over the winter, and his views on the prospective LNG project.

Petroleum News: So talk about your new job a little bit.

Persily: It’s, in many ways, similar to what I was doing with the federal government certainly: tracking the project; make sure the public knows as much stuff about what’s going on; representing the Kenai Borough’s interest in the project; talking with community groups; talking with the public trying to serve as a liaison between the project and the public. An informed public is better than an uninformed or ill-informed public.

This project is going to have a massive impact, if it goes ahead, on the Kenai Peninsula Borough from the liquefaction plant storage tanks, marine terminal, 30 miles of pipeline on bottom of Cook Inlet, pipeline on both sides of Cook Inlet. The way I look at it is, you will have half the value, or more, within the boundaries of the Kenai Borough.

There are other oil and gas issues that I’m tracking for the borough: BlueCrest Energy down by Ninilchik, just all the activity in Cook Inlet. The mayor was looking to have somebody on staff who had expertise on oil and gas, and represents the borough, not just Alaska LNG, all the activity down here.

I’ve known Mike Navarre since he was a legislator and I was a reporter in Juneau a long time ago. I bumped into Mike in January when I was presenting at a Kenai economic development conference. By then, we knew the (coordinator’s) office was closing; it was just a matter of when.

Mike told me he had just recently presented to the Borough Assembly a proposal to create a new position for oil and gas consultant special assistant, and I should keep it in mind, which I did. He and I talked the next couple of months and I started on March 10.

Petroleum News: Weren’t you lead staffer on some Cook Inlet legislation when you worked for (Legislative Budget & Audit Chair) Mike Hawker?

Persily: Right, the Cook Inlet Natural Gas Recovery Act. I helped with legislation for Cook Inlet gas storage and some initial tax credit discussion. But I should also clarify it’s not just oil and gas. Mike Navarre knows the fiscal situation is going to be tight in years ahead, not just for the state but for the municipality so he wants me to work on some projects as we look at the borough’s fiscal situation and as we look at the state’s fiscal situation, what can the municipalities do to help. So I’ll be working on those issues too

Petroleum News: So he is also tapping into your experience as a deputy revenue commissioner?

Persily: Right. So basically I’m doing the same thing I’ve done the past 20 years as deputy revenue commissioner, legislative aide, federal gas line coordinator and putting all of that to work. It pays to get a job where you don’t have to learn anything new.

Petroleum News: So you’ve worked at just about every level - state, federal and local - and with what you just covered in mind, what would you like to accomplish with this appointment?

Persily: Certainly the Kenai Borough and most of its residents welcome the LNG project. It’s not only going to have good impacts on the community but traffic certainly during construction, demand on services, fire, police, more traffic. So the more actively involved the borough can be speaking up during FERC proceedings, working with the project, working with DOT, the better everyone will be. I can’t say I’m going to make Alaska LNG possible. That implies I’ve got some God-like powers. I don’t. I like to make it as publicly manageable to the residents here and help translate between residents and the project development team so the misunderstandings are kept to a minimum, and also serve as a resource for other communities along the route and the state to the extent that I can.

Petroleum News How engaged is the community right now? Do you sense a buzz or is it too early for that?

Persily: No. I think the fact that Alaska LNG has been buying property and either purchased property outright or executed options on property to more than 550 acres of the 800 acres they are trying to amass for the liquefaction plant and marine terminal. You don’t keep that a secret. People are sensing this has the possibility over being very real.

So yeah, I’d say the buzz is building but there is still that cynicism, that skepticism that we’ve heard before that you’re going to have to overcome. But purchasing land, having crews out drilling bore holes and testing water wells, doing surveys, holding community meetings, people are not dropping the cynicism and pessimism, but there are cracks in the cynicism and pessimism, and people are starting to see the possibility that this is really good work.

Petroleum News: So as you look at how things are now, what gives you optimism and what gives you pause about the prospects of Alaska LNG?

Persily: the market gives me pause. I’m glad that Conoco, BP, Exxon and TransCanada are looking at using their own money and not mine because I get nervous. The commodity markets - whether it’s cotton, sugar, oil and gas, iron ore - make everybody nervous, particularly the energy markets the last couple of years.

Aside from that I guess what gives me encouragement is that I see a serious effort made by the companies bringing in key people, bringing in people with expertise on projects from around the globe, and not just bringing them in for a couple of days but setting them up as permanent members of the Alaska LNG team, and committing substantial resources.

Yes it is a methodical approach. Yes it is a careful, measured approach, and I know many people would like to speed it up and the problem is when you speed it up, you make mistakes and you started spending too much money.

The other thing is if you look at reservoir management in Prudhoe Bay which is where most of the gas will come from. If you look at reservoir management in the 2020s and beyond, good reservoir management dictates that it’s time to start taking off some of that gas so you are not going to appreciably damage oil recovery.

You’ve used the gas for decades by that point to push the oil over in the reservoir for collection. Now you can start finally in the 2020s to pull off some of that gas - not all of it - and start diverting some of it into the line. Begin making money off gas continue making money off of oil. As the cliché goes: the time has come.

I guess I see a serious effort, but back to what gives me pause is the market which no one can control. At some point, the companies will reach that decision where they have to check the market and make their corporate investment decision.

Petroleum News: Down here in Juneau, there has been some back and forth between the governor and leading members of the House and Senate. Some say that’s to be expected with a new governor, but at some point it also has to ease up. Where does this need to end?

Persily: Yes, the governor and significant number of legislators are at odds as to how to proceed with the state-sponsored, state-supported backup gas line project. A significant number of legislators and the governor are at odds with the Alaska LNG partnership. The governor has talked about wanting more ownership and more control. The governor has had a more contentious relationship with the industry in the past in his role as attorney for Valdez on oil pipeline property tax assessments. At some point, if it’s not going to jeopardize the project, the governor and the legislators need to agree a little bit more. They are never going to agree completely whether it’s gas line, budgeting, ferry system management.

They need to agree more on how to proceed: How much ownership stake should the state have? What is the role of the Alaska Gasline Development Corp. backup project? How much money should be put into it? How actively should they pursue it so it doesn’t get in the way or conflict with the producers on the bigger project?

I guess there is never going to be 100 percent agreement, but a little less disagreement would be good for the project. The governor has an opening for the Alaska Gasline Development Corp. board. One of his nominees was rejected by the Legislature.

Filling that opening would be an opportunity for the governor to extend the proverbial extension of the olive branch if he could find a nominee that would be acceptable to him and the Legislature. That would signal: “hey, I’m willing to work together. I’m not going to nominate somebody who you are going to reject. I’m going to put someone up you will support.”

As I’m looking for opportunities to get along, that open seat on the Alaska Gasline Development Corp. would be an opportunity to mends those shaky fences.

Petroleum News: We’ve been under SB 138 for about a year now. What kind of changes are you seeing the last year?

Persily: One thing Alaskans are going to do differently is we’ve been trained over the decades to follow the daily price of oil. It determines the capital budget, it determines state spending, it determines the fate of elections and how much money we have to pass around.

But the daily price of LNG really doesn’t mean squat in this. The industry has historically built these megaprojects on long-term contracts. Long-term contracts are eroding a little bit this year as there is an oversupply. But looking ahead to the 2020s demand, nobody is going to build a $40 billion project on speculation like they do a duplex or a zero lot line in South Anchorage.

You are still going to have to have long-term contracts because that’s how you get financing. Yes, long-term contracts are down now. But the question isn’t where they are today. The question is where are they going to be in 2024 and where does the market think it’s going to be for signing long-term contracts.

Last year was great if you were selling LNG on the spot market, getting $20 per million Btu. This year, not so good. You’re getting $7 to $8 for the same molecules, but as we know from oil prices they go up and they go down. Long term over a 30-year to 40-year project life for Alaska LNG, where are they going to be is what matters. Not today’s low or today’s high

Petroleum News: You had noted the importance of a 30-year project life in one of your reports looking at the permit application with the Energy Department. Why is that important?

Persily: The expectation at this point is it will run more than 30 years. The ConocoPhillips plant at Nikiski opened up in 1969. That’s been running for 46 years without any significant problems. Generally long-term LNG sales and purchase contracts have been running 15 to 20 years.

Of late there are more spot and short-term sales because buyers are saying boy I can get cheaper prices in the spot market, let me sign some contracts in the short-term market and see where this falls out. I’m not aware of any 30-year contracts. The difference between the initial contracts signed and the useful life of the equipment can be great.

If this gets built between gas in Prudhoe, gas in Point Thomson, gas that hasn’t even been found yet because nobody has even explored for gas, this thing could last for 40 to 50 years.

The 30 years was a factor in the export permit that Alaska LNG asked for. The Department of Energy gave a conditional approval. The longer you can get for export, it means the longer you can go without having to go back for approval again. It’s more value to you if you can get 30 years rather than 20 years. You’ve got an extra 10 years before you go back and ask for permission again. That was a plus for the project.

Petroleum News: It seems like the federal agencies are realizing the scope of the project - possibly hitting $65 billion - is anything remotely close to this emerging from around the world?

Persily: There is a project called Gorgon in Australia which is supposed to come online next year. It’s about $54 billion. A lot of the $54 billion is the gas field development cost which you don’t have at Prudhoe and a very expensive CO2 sequestration where they are going to re-inject the CO2 deep underground. In Alaska, they are already doing re-injecting of water, CO2. So there are components of Gorgon that you don’t have here. That’s the most expensive.

Then there is Yamal LNG in the Russian Arctic. It’s $27 billion, but that’s a little misleading because the Russian government is paying for the port and airport and other infrastructure so the Russian developers don’t have to foot the bill.

Keep in mind Alaska LNG is 2012 dollars so it will be the most expensive. The Lower 48 projects being built or proposed are all greenfield. They already have storage tanks and jetties because they are being built on the site of an underutilized import terminal.

Petroleum News: Say, I know I’ve asked you this before, but where is the competition coming from at least versus the AKLNG project?

Persily: The competition is worldwide in that it’s Gulf of Mexico projects; it’s British Columbia West Coast projects; it’s African nations; it’s expansions of LNG capacity. Because LNG is in a ship, unlike a pipeline, it can really go anywhere. It’s going to come down to what is the demand and what supply is out there. You can end up with swaps where U.S. gas produced in the Gulf Coast goes to Europe instead of Asia, but maybe some Mideast gas that would have gone to Europe doesn’t go there and instead goes to Asia. Once those tankers are on the ocean, they can go anywhere, it’s just a matter of figuring out shipping costs and where it makes the most sense to send that cargo. So in that sense, everybody is our competitor, not one particular location or one particular project. It’s who can get into the market at a price that attracts buyers and on a schedule that attracts buyers.

Petroleum News: Once on awhile we hear how we’ve missed the window. How do you feel about that?

Persily: I met an interesting guy at a conference in Singapore in February who said he has never been a great believer in windows. His response was a lot of people get hurt trying to jump through the window while it’s still open. Every year there are multiple utilities around the world who are signing contracts for future deliveries. There is not a window today that won’t come back. The sooner you can get into the market, the sooner you can start earning a return on your investment. Surely you would like to get into the market when people are willing to sign higher value contracts.

Petroleum News: There are a lot of steps toward reaching FID (final investment decision). Is there any step more crucial than the next?

Persily: As far as what Alaskans will see, to stay on schedule and get to front end engineering and design (FEED) next summer. That’s a billion-dollar-plus commitment to stay on schedule. The next one would be for the companies to submit their final environmental reports and complete their application to FERC which is tentatively scheduled for late summer 2016. If they make those decisions to spend the money on FEED, go to FERC with full reports and a clean application that would be a serious indication that there is progress.

Petroleum News: So with that in mind, what would you like to see accomplished by year’s end?

Persily: Certainly, it would be good to see progress on fiscal negotiations between the state and its partners, the producers. That would involve taxes and fiscal stability to the developers and the state so you can count on the revenue. It would be good to see progress on commercial and fiscal negotiations this year so everybody would feel more comfortable making that big FEED decision next year.

Petroleum News: Can the state be a partner and a regulator at the same time?

Persily: The Legislature passed it and the public seems to support it so it’s something that Alaska is going to have to learn how to manage. There will be moments when you scratch your head and say, what am I going to do? Can they manage it? Will it be difficult at times? Yes. Is it insurmountable? No. But it’s a unique situation that I cannot find anywhere else in the country where the state takes an equity role in a project like this. Hey, this is Alaska. We love being unique. We love being different.