Rodell: Long-term view needed for LNG

Revenue commissioner: state can’t afford not to be partner; says oil tax change, $3 billion to pension funds, are steps in process

Steve Quinn

For Petroleum News

Revenue Commissioner Angela Rodell says one financial decision for the state may have a stronger link to another than what may first appear. But these choices, she says often can stand on their own to address certain market forces like declining oil prices.

Rodell sat down with Petroleum News and spoke of the steps the Legislature and executive branch took toward addressing resource development and the financial implications drawn from them and other pieces of legislation not so obviously connected.

Petroleum News: Let’s start with low oil prices. Nobody likes low oil prices, not the state, not the industry. Consumers might like it. Still, what kind of reality check does $80 and below oil bring to the state?

Rodell: That’s a good question. We’ve been focused on production, as you know, the last couple of years. I think it reminds us that it’s a combination of production and price. We’ve always taken and lived with the volatility that is the commodity of oil. The other reality check it provides is that it makes us ask how dependent do we want to be on oil from an economic standpoint in this state going forward. We can talk about additional exploration, we can talk about additional production, all of those things, but at the end of the day are there other industries, are there other areas that we should be focused on developing, whether it’s mining or doing things for our fisheries or for forests, all of the other natural resources that we have.

Petroleum News: Do you think the $80 oil caught people off guard because for so long we’ve been enjoying $100-plus a barrel prices?

Rodell: I think it has. I think there was a sense - I saw it nationally and you saw it in a lot of forecasting done worldwide - that there was a new natural floor at $100 and the fact that we broke through that so easily I think that did catch so many people by surprise. I think what’s important to remember from our standpoint is we base the budget on an average for the entire year so when we see volatility day in day out like we are seeing here, it doesn’t necessarily mean that our price forecast might be as off as some might think it could be.

So for example we were at $105 in the spring and people see it at $80 and think we are $25 off. We are maybe for today and tomorrow, but when you finish off the averages for the year, we’ll be in a different place so I think it’s important to recognize we forecast an average for the entire year not on a day-to-day basis.

Petroleum News: How does the current tax regime stack up against the previous one at $80 a barrel?

Rodell: I think it’s important to remember that under any tax regime, we are collecting less revenue, first of all. Prices are down and that’s just the nature of the tax regime. Having said that, the tax regime under the More Alaska Production Act is collecting more revenue as a result because we have a higher threshold at lower prices so we are collecting more than we would under the old tax regime in the current price environment.

Petroleum News: So is the current tax regime still helping the state’s bond rating?

Rodell: It definitely is. There have been public press releases coming out of Moody’s. What it’s done is it’s created a floor and so there is a minimum tax and a higher base tax than there was under the old regime so it does provide more support from a credit perspective. It creates a bottom band and a higher threshold of revenue, which gives great comfort to creditors.

Petroleum News: Even as you’re not the Department of Natural Resources, do you still track new developments like the S-2 pad at Kuparuk?

Rodell: We do and we continue to get information from both industry and DNR and that helps inform our production forecasts. I think this one is a great signal. We’ve seen a public commitment from all of the major producers to continue to invest in Alaska and continue to develop infrastructure and continue to produce as much oil as they can from the North Slope.

Petroleum News: Even though it does not contribute to the state’s coffers, why is oil from federal lands important to the state?

Rodell: I think federal oil is important, especially if you are talking about OCS (the outer continental shelf), for example. It puts resource into TAPS. It maintains that infrastructure, lowers the cost of transportation for all oil and thereby generates additional revenue to the state. While we don’t get production tax or royalty per se off some of that, the benefits it adds to keeping TAPS going is very important to the state as well as maintaining the infrastructure in the state.

Petroleum News: The state’s D.C. delegation has been working on getting a higher revenue share. Do you have a role in that, even if it’s just discussion with folks in Washington?

Rodell: We do. I think it’s important that as that resource gets developed, that Alaska have a say and a share in the resource similar to our brethren in the Gulf of Mexico. We are interested in doing what we can to assist our D.C. delegation any way we can. I think we will see what happens with the makeup of the Senate changing. I think part of the difficulty was that development of the OCS always felt far out in the future. I think as it gets closer and closer to coming online, it’s going to become more of a priority to the state to advocate for Alaska’s share.

Petroleum News: You talk about getting closer to things in a timeline, do you think that now the debate over oil taxes has subsided, it will be easier for the state to move forward. Does it make your job easier?

Rodell: I do. I think the tax debate has made it challenging, for sure, as to getting additional areas opened up or finding additional prospects because the economics are more certain for companies now in a way they were not in previous years. No question that it makes my job easier. However it had turned out, it makes it easier. Having certainty around a tax code is imperative for economic investment of any kind.

So when you are constantly upending tax codes for businesses, it creates a business climate that’s not conducive to investment. I’m getting feedback that there is more certainty now, there is more predictability. There is more confidence. We are seeing more longer term contracts. The supply chains are going farther out than in the past. One of the interesting things about SB 21 is we don’t have a full tax year yet.

The first full tax year doesn’t end until Dec. 31. It takes a while for things to cycle into business activity. We are seeing things ramp up. You could argue all the uncertainty around the referendum in August may have delayed certain decision making just until they knew for sure what things were going to look like.

Petroleum News: Let’s shift to the gas pipeline. There’s still a lot to learn about whether it’s going to be economical. Do you think the state can afford to be a partner in a project this vast?

Rodell: I think the state can’t afford not to be a partner. And so what we need to do as a state, recognizing how important that is to the long-term future of the state, is do something that is very hard for elected officials to do, which is to think beyond a two- and four-year cycle. That means taking steps necessary now to be in a position to withstand those kinds of commitments should we move forward with an FID (final investment decision). Some of those steps were taken, quite honestly, by moving $3 billion from the constitutional budget reserve into the pension funds. It may seem counterintuitive but that really aids us in our ability to invest in a gas pipeline because it takes care of an obligation that we have. It’s taking care of a debt we have on the books, while it prepares us to have the financial resources to invest in the pipeline. We will be viewed as good credit. We honor contracts. We take care of our debts. Doing those things now, getting our financial house in order, means we’ll be able to afford the investment and enter into things we need to enter into.

Petroleum News: Can you think of another example that speaks to what you just noted?

Rodell: I think creating the certainty for the producers under SB 21 definitely assisted with that because it allowed our three partners, who are putting up 75 percent of the cost for this project, to have a more predictable income stream themselves and manage their own financial commitments. It aligned all four of us from that standpoint, no question. And we will continue to look for opportunities to set that stage so we are ready make that commitment, so that we can make the commitment because it’s the right or wrong thing for the state, not because we don’t have the money because we did something we should not have done.

Petroleum News: So there are a lot of moving parts that may seem unrelated to resource development that actually speak directly to resource development?

Rodell: If you think about it from your own personal finance management, it’s like talking about your credit score, cleaning it up, making sure your accounts are up to date, and debts are paid before you make a big purchase by entering into a mortgage or buying that boat you’ve had your eyes on for years. It’s the same thing here. What should we be doing now, recognizing we’ve made a strong investment in oil and gas throughout our history, not just with SB 21 or SB 138? We have provisions, lease expenditures, and we know they impact revenue to the state in the near term and those lease expenditures generate additional production which means we see revenue further down the road, so what kinds of things can we be doing to manage through this time period because we made these long-term investments, and get everybody to see the longer view picture, which is the biggest challenge.

Petroleum News: So do you see your work, at its essence, as maintaining the state’s credit score, granted it’s a lot more than that?

Rodell: Very much so. We don’t write budgets and we don’t project deficits, but we do project revenue. Having said that, we manage the financial resources of the state. It’s important that we manage wisely and we give legislators and the governor all the information that they need to balance all of the demands that the state has and will continue to have.

Petroleum News: So when you think of a project that might be $45 billion and it might be $65 billion, that can be more daunting when you are a prospective partner and not just an entity that has to foster a healthy business environment.

Rodell: In many ways, we are breaking new ground with this partnership. And it is a different view than we’ve had in the past whether it’s to foster an environment or just to be done by the private sector, or do it ourselves and try to get the other parties to come to the table. Both of those efforts taught us many lessons.

This is a hybrid. We are a full partner with the producers. We are not doing it all on our own. We are hoping that they will show up. We are creating a climate by being an investor in the climate ourselves, putting our name and our money at risk along with the producers. For the first time we are all sitting at the table trying to push this thing forward.

Petroleum News: Have you been able to look outside to other regions or countries for any kind of blueprint?

Rodell: Yes and no. I think we do look at various examples of things that have been done around the world, whether it’s Australia or Russia, for lessons learned, but there is no project out there that matches the size and scope of this in its entirety. So there are bits and pieces of it whether it’s an LNG plant or a three-train plant that may teach us lessons about cost overruns. But when we put it all together, we are breaking new ground.

Having the three largest LNG producers in the world - world class companies in Conoco, BP and Exxon - sitting next to me on this means that all of those lessons are being brought to the table. Quite honestly from the state’s perspective, we have our lessons as well and bring those to the table.

Petroleum News: One of those lessons for the state might be found in Cook Inlet with Furie. What lessons can be gleaned?

Rodell: I think it speaks to make sure we complete our due diligence and dig in with questions. That’s probably the biggest lesson, not that the setup was incorrect. We need to make sure we so some firm work there.

Petroleum News: Do you see Cook Inlet becoming your export hub?

Rodell: Or Cook Inlet becomes the gas supplier for in-state needs. It wasn’t that long ago that brownouts were being discussed. Now we’ve got a great supply of gas in Cook Inlet. It’s really a matter of understanding what’s going on in certain places.

Petroleum News: Let’s touch on the Arctic for a few minutes. There’s talk about necessary investment for things such as ports and other infrastructure. Is that on your radar as well? There are already a lot of projects being reviewed.

Rodell: I’m not on the forefront of those discussions. I’m sure Revenue will be involved in those discussions as they become more of a reality at some point and discussions of how they get financed. We will have to prioritize from a couple of different standpoints. What is the commitment to the state in terms of what does it mean for jobs, what does it mean for revenue, what does it mean for economic activity within the state. So some of these projects have great GDP impact and they are generating revenue. We have a ton of economic activity that isn’t generating revenue for the state. You have to look at what the end mission is for some of this. There has to be an overall global mandate. So when I was talking about some projects lending themselves to other projects happening, that creates a different consideration than if it’s a standalone mega project that doesn’t generate additional support to other things happening.

For example, we look at the gas line, AKLNG, and it’s moving forward on the time frame that we all expect it to move: we break ground in 2018/2019 and first gas come in 2024/2025.

As we are moving through that and we are considering a deepwater port out in Northwestern Alaska and they have a micro receiving center for LNG they want to add to it. That will develop a mining resource of some type. Now we have sort of linked projects together and we need to figure out how to stage gate them so that when first gas is coming through in 2025 that port is lined up and that mine is ready to go. Part of it is not just making the commitment, but staging the commitment in such a way that if gas doesn’t go, and we move away from it, then that project doesn’t go either because it doesn’t make sense for that other project to go.

I think we just have to have what I call a global strategy, laying things out to see how they are interrelated. But if a deepwater port doesn’t do anything but serve as a port where we bring in goods and services, that’s important, but it doesn’t have the same spinning effect.

Petroleum News: You talked about trying to create a web of projects where they are related, do you ever see a time where some of Alaska’s industries now at odds with other another, projects suddenly connect the two?

Rodell: Yeah, I would hope so. I think there is always an inter relationship and the challenge for Alaska is we are such a diverse state geographically. You really see it when you’re out traveling and you see what different industries mean to different parts of the state. Recognizing the challenge that we have at the state level to bring all industry up and to float all of these things up so people can succeed is a huge challenge. I think there will be a time when they come together where they would normally be at odds.