Micciche growing bullish on AKLNG project

Soldotna Republican Senator says state’s focus needs to be common goal between Gov. Bill Walker and Legislature on export project

Steve Quinn

Petroleum News

Sen. Peter Micciche is getting different views of the AKLNG project. One comes from inside the state’s Capitol where he serves on the Resources and Finance committees. The second comes from the home town of this Soldotna Republican. Micciche is watching the Kenai Peninsula evolve into an area preparing to become the terminus of what may be the world’s largest infrastructure project: a pipeline that ships natural gas from the North Slope to tidewater in Nikiski. First gas is at least a decade away, but Micciche says it can happen and he’s more optimistic than ever. Still he worries about a lack of alignment between the Legislature and Gov. Bill Walker, who arrived just four months ago. Walker’s inexperience is getting him some benefit of the doubt, but that tank is running low.

Micciche spoke to Petroleum News about his views on the gas line progress.

Petroleum News: Where do you think the state is, within the context of SB 138 or otherwise, with the gas line and LNG project?

Micciche: So I’ll give you two aspects, one I know from the Legislature and one I know from the community sense.

The community sense is there is a joke how there is one expanding economy in the United States right now and it’s in Nikiski, Alaska. There is a lot going on in Nikiski, aside from the field work where the holes are being bored and data collection going on. Land purchases have been successful and significant. There is a buzz going on, on the Kenai. As the terminus of the AKLNG project, my community is excited about the project.

Organizations today don’t like to own real estate. This organization, for folks who are not yet convinced that things are moving along, owns a lot of real estate. You can see an outline of hundreds and hundreds of acres they secured.

Now sitting here, even though we watched people tell us that everything is going well and on schedule, I think I don’t want to say a bomb because I don’t want to sound entirely negative with the field work on track, but I do believe doubt has been cast with the ASAP, that being Plan B, has slowed down other negotiations that have to occur.

As you know a project like this has many, many moving pieces. When one of those pieces has stalled, it creates doubt throughout the rest. A lot of those things have to come into play. We should be working on key negotiations like fiscal terms, governance, commercial terms. Those things need to get under way this summer. We still have to work on royalty in-kind agreements, PILT agreements. We have a lot to do.

So here’s my take. I think the governor is a very good man who has Alaska’s best interest at heart. Under SB 138, which enjoyed a 52-8 level of support in this building, we put forth a plan. That plan seems to be functioning as intended. I think when a new administration comes in, especially when it had the experience with the Port Authority, everyone wants to put their fingerprints on something to ensure that the project succeeds.

I believe that the governor in his heart thinks that a Plan B is prudent. So if we back up where we are with credibility, it’s a challenge to credibility. It no longer says that this state is a strong believer in the success of AKLNG. Gov. Walker ran in my district on a platform that he supported the AKLNG project with a terminus in Nikiski. The ASAP project doesn’t have a terminus and it certainly doesn’t have a terminus in Nikiski.

That is important to my district for all of the benefits that come with a large project. The interruption is something that we cannot afford. If Gov. Walker was to be the governor when we went to FEED and these major agreements that still have to occur were executed, he would still be the guy.

He’s the guy. There is enough of a challenge in moving forward with AKLNG without feeling that a different plan would mean that he’s any more successful. If he’s able to lead this state and pull off what we have under SB 138, I’m certainly going to appreciate his leadership.

Petroleum News: So where do you see differences right now?

Micciche: I think the beauty about the AKLNG arrangement under SB 138 is you truly enjoy the benefits of being in a partnership through trust but verify or ironclad agreements and the benefits of combined experience of companies who are responsible for the lion’s share of global LNG throughout the planet. Or you forget about that value and always feel like you’re looking over your shoulder and there is a better deal out there. When you look at the administration’s thoughts that we should have a controlling interest in this project, well we are harnessing the value of companies with the value of one trillion dollars.

I think the governor has a philosophy that the larger the proportion of ownership, the bigger potential gain. Where I’m sort of at is the maximum amount of value the state can derive from the project with the minimal amount of acceptable risk.

Those other companies, again a trillion dollars in market cap essentially with millions of shareholders and other projects all over the world. We have one game with 730,000 souls, so making a major mistake on too much ownership, on a project that is commodity value driven can put the people of Alaska on the hook for much more liability than I’m comfortable doing.

When you think about credible sponsors with the AKLNG arrangement, the answer is easy. One of the companies is a pioneer in LNG; the others have a large global share in reliable successful projects. They have relationships with buyers. They have all of the pieces along the value chain that Alaska simply doesn’t have.

With Alaska as majority owner, is that what we really want to do? Do we want that Norwegian business model that we hear pushed throughout this building from folks who don’t understand the value of experience in an industry that’s really only 50 years old?

It’s funny because I like the governor and the governor has talked about how he has interested buyers in another concept.

I think Alaskans need to understand that if you hold a sign up that says gas for sale, the entire world is interested. When you finally take the time to figure out whether or not that entity has the financial and technical wherewithal to be a partner or customer, there is likely a very small pool of people who can sign on that line. We already have those partners together on a project side. Those parties have generations of experience on the market side.

I’d rather avoid all the risk we possibly can. I believe we are a state that has one shot at doing this right. I would rather borrow the experience of our partners than trying to wing it with majority ownership.

Petroleum News: What do you feel you’ve learned this session throughout these hearings?

Micciche: I don’t know how much I’ve learned. There hasn’t been a lot of AKLNG progress. I’ve learned about things from around the world that have not proved up the way they expected, and that’s important while we look at AKLNG. One of the benefits we have is conventional gas reserves. If you look at places like Queensland, Australia, their supply is not coming on as expected.

Alaska has been in this market for many years and that’s a benefit. Our traditional buyers - when you think of Tokyo Gas, Tokyo Electric, and Mitsubishis of the world - Alaskans have known and dealt with those entities. A relationship with a new player can be hard to establish. It’s interesting because you hear folks worrying about the current commodity price, and I think about the history of TAPS and think about that pendulum of unit value.

I’m not sure I’ve learned this but it’s been talked about a lot. Plan B. Philosophically, what is Plan B? So as opposed to adjusting a Plan A. First, you’re looking at the most economical project that has the greatest probability of success. If one of the partners doesn’t pan out, the plan can evolve. It may evolve into a plan that’s very different than AKLNG today. The probability you will have a second plan on the shelf is not great - and this is not dogging the governor, this is more philosophically from me. There are examples around the planet where a project is not a good fit for a partner and there is a re-adjustment.

I do enjoy (consultants) enalytica. They do have a unique way of explaining the global outlook. They look at places like Sabine Pass, Angola, Qatar Gas, those are all re-worked projects that came to fruition. If your project becomes uneconomic, you’ll have to analyze what went wrong with the first project and understand if there is potential for another.

People get squeamish because the current price of LNG may be somewhat destabilized. Had we worried with TAPS and worried with oil was $10 a barrel, think about how different this state would look. What is going to make this project work or not work is what we can deliver energy on a cost-per-unit basis.

I think we are on track with that. I’d like to continue forward with our current progress. I certainly hope the governor and legislative leadership can agree without the very public spectacle where we have the governor dropping a bomb and the Legislature reacting.

Petroleum News: The term “Plan B” seemed to carry a positive tone a few years ago. Now it seems to be the opposite this year. Why do you think that is?

Micciche: It is interesting. Remember the study when we talked about expanding ASAP, when the governor came in with his administrative order to stop all forward progress. This has gone both ways. He sort of ridiculed ASAP, then that became his path. Where the Legislature had already sort of processed ASAP then put it on a shelf. You almost have converging paths that are intersecting in a way that is not good for either project. We may very well decide to move forward with a smaller-diameter project at some point. Smaller diameter may be dramatically smaller if we feel there is not a market for large volumes of LNG. But I think the biggest struggle is promoting both projects as being viable and investing in both projects as being viable. I heard a statement that $180 million at AGDC is not enough to build a pipeline. It’s not. But it’s more than enough to compromise the success of AKLNG. That’s what worries me the most.

Petroleum News: So should that money be used at all, or in part?

Micciche: I would like for the dollars to be spent eventually. I don’t mind some of the dollars to be spent to study the potential of ASAP, but it needs to be a project on the shelf. We need to stop creating what has led to a credibility issue that has certainly commercially slowed the progress of AKLNG, when the Army Corps delayed moving forward because of a lack of understanding of the state’s intent. I think it’s clear federal agencies need to be alongside us along the way every step of the way.

Once you lose their attention, you can delay a project significantly. We need to let them know we are on a clear path. If that path doesn’t pan out, I’ll be the first to agree it’s time to look at other options.

It’s improbable that we are going to find, after fully processing AKLNG toward a final investment decision, it’s improbable we are going to find a smaller diameter export project that is going to be economic if AKLNG doesn’t pan out. The sad thing is we have talked about this since my voice cracked with puberty. This is the first time we have alignment that looks very promising. I hate to see anyone or anything get in the way of that amount of project.

I like where we are going, and I hope we can all work together as a team to find out if AKLNG is going to move toward fruition.

Petroleum News: Speaking of team, the Kenai Peninsula added a member of its team: Larry Persily. What are your thoughts on that?

Micciche: For me Larry Persily is a welcome addition to the Kenai Peninsula Borough. As the terminus for the AKLNG export, although there is some experience residing on the Kenai, what Larry brings to the table is all that experience and connections as federal coordinator. He’s got an impressive volume of contacts. He’s got a wealth of knowledge, of expertise. I think it is something that the Kenai Peninsula needed. He is going to be very helpful on all stages from field work to permitting. If we need an extra push with some help from D.C., he has those connections. He seems resolved toward seeing AKLNG through and not interested in a diversion from the ASAP project. Mayor (Mike) Navarre is a great man to be at the helm at this point and time. He’s a member of the PILT (Payment In Lieu of Taxes) team.

Petroleum News: Speaking of the mayor, Gov. Walker said the mayor was here to broker some differences. Can that help either in the short- or long-term?

Micciche: The mayor was in this building for a long time (as a former state lawmaker), so if anyone can be considered a centrist, it would be Mike Navarre. He works both sides of the aisle very, very well. I’m appreciative of having him by my side. The key here is he saw the letter the governor wrote to the Legislature. He put a letter out telling us what he thought the Legislature should be doing during extra innings. I was asked about that letter by the press before it was received by the Legislature. What I would rather see the governor do is, if we are a team, and we are different branches of government, the communication should be started with your work mates, then provided to the press so that we can inform Alaskans about what’s happening. We’ve seen the reverse happening with this administration. I don’t think there is any ill intent.

But after three bouts of dropping a bomb, then looking to your friends in the Legislature to remove the scar tissue, I hope that going forward on this project and many others, it starts with direct communication. We don’t work for the governor; we work with the governor. He’s been in office for a few months. I expect very positive things from the administration. I hope in some cases, he retools with some of his personnel.

The administration has a flavor of having some efforts of the past that were not entirely successful and I think we’ve moved beyond that. I think it’s time to sit back and re-evaluate how this whole thing started. I know my relationship with him is very good. I think legislators are willing to start over and hopefully move as a unit as opposed to what looks like in the public a very divided administration/Legislature team. And it is.

The reason I think AKLNG is important, when you look at the Goldsmith model, it does capture the remaining wealth in the state, and a lot of it is counting on billions of revenue from AKLNG. When you think of the fiscal gap, this is the first time we’ve talked about not how to meet the budget but how to shrink the gap. We can’t close the gap, but how to shrink the gap. This shows the importance of working together on AKLNG.

It would provide a new source of revenue. It provides a diversification we don’t enjoy. If we had substantial exports of LNG, it would be somewhat softened. The governor campaigned on 25 percent cuts. When we talk about the administration and shared leadership, we’ve seen very little working together on how to meet that gap.

AKLNG is one revenue solution we are not going to enjoy for perhaps close to another decade. If they are going to keep people investing in our state, they need to understand we are getting our fiscal house in order. That needs to be a team effort. It’s not. It currently isn’t.

We’ve got to stop firing salvos between the third and other floors and try to negotiate through the press. It’s not going to get better until people are at the same table.

On April 9 Tom Wright, chief of staff to Rep. Mike Chenault, R-Nikiski, sponsor of the bill, told Ho