Hawker: TransCanada decision needed soon

Anchorage Republican says progress on AKLNG project being made, but administration has pressing matters that need addressing

STEVE QUINN

For Petroleum News

Legislative Budget & Audit Chair Rep. Mike Hawker says he’d like to have consultants help the Legislature examine a deal among the producers and the state of Alaska for a large-diameter pipeline shipping natural gas to an LNG export facility.

But he needs a deal first.

Hawker, an Anchorage Republican who also serves on the Resources Committee, issued caution against holding North Slope leaseholders to a hard-and-fast schedule for a project this big while identifying priority areas he believes needs addressing during a special session and the upcoming regular session.

Hawker discussed his take on the project with Petroleum News.

Petroleum News: Let’s start with the AKLNG project, say from a 30,000-foot view. What are your impressions thus far with any progress?

Hawker: From the 30,000-foot view, there is always progress being made. Every single day the people who need to be talking to each other are actively engaged in dialogue. They are engaged in negotiations and every time you talk you make some degree of progress.

Petroleum News: And how about as get closer to ground level? Is there more progress or do concerns emerge?

Hawker: I think that the Legislature and the public had been conditioned to anticipate that there would be a fall 2015 special session that would have a fully papered agreement for an up or down vote. I do not believe that there will be a fully papered agreement available for a 2015 special session. I believe there are certain matters that necessarily need to be dealt with in a fall 2015 special session. That is specifically our relationship with TransCanada. If the governor wishes to exit that relationship, he needs to convince the Legislature that it’s the right thing to do. The Legislature, in turn, needs to appropriate a little over $100 million to him for the buyout and substantially more money for the state to continue on its own without the financing TransCanada had brought to the table.

Petroleum News: So are you disappointed that he won’t likely have a fully papered agreement or would you rather have it ready when it’s ready.

Hawker: Megaproject science demonstrates over and over again that schedule driven megaprojects have a much higher probability of failure than those projects that are driven by and developed on their merits. To that end, I absolutely want to see this project developed on its merits and not be driven by an artificial schedule.

The schedule I foresee us on currently, which would involve having a fully papered agreement in front of the Legislature sometime next year as opposed to this fall, are well within the time parameters that were anticipated and established when we passed SB 138. So while the fall special session date is slipping somewhat, it is still well within the parameters of SB 138. So you can’t call the slippage a failure of achievement but it’s simply recognizing a more realistic expected date.

Petroleum News: So you still expect FEED to be the second quarter of next year?

Hawker: I think that decision, it needs to be made sometime within next year, necessarily the second quarter, the third quarter, the fourth quarter. So sometimes next year would be the anticipated date would be for making the decision to move into FEED.

Petroleum News: OK, on to TransCanada. What are your thoughts on the prospects of buying out TransCanada?

Hawker: When Gov. Parnell introduced the MOU with TransCanada describing the continued relationship with them, what they would provide the state in expertise and financing in exchange for an equity position for the pipeline segment of the project, it was a hard sell for the administration. They really had to come to the table and convince legislators that it was the right and best thing to do. They did that successfully. I’m certainly one of those legislators. I was certainly leery of TransCanada’s role as defined in the Parnell administration’s MOU.

But through the course of a legislative session, the many, many hearings and hundreds of hours we had in SB 138, I became a believer that TransCanada brought to the table a great deal of support for the project, but both financing and technically and that their take from the project - their share of the economic pie - was extremely small. I came to believe that it really was the best and right thing for the state to do to bring TransCanada into the transaction as it was contemplated.

Gov. Walker campaigned that he did not want TransCanada in the project.

He now has to come to the Legislature and un-convince us of what we became convinced of in the prior administration. A lot of legislators were in the same position I was in, very skeptical but at the end of the day becoming convinced it was the right thing to do by bringing in TransCanada. Gov. Walker now needs to convince us we made the wrong decision.

Petroleum News: What concerns, if any, do you have with this buyout plan?

Hawker: My current concern is that the Legislature has received no analytic information on which to base a judgment. Right now it’s just a popularity poll. Do you like TransCanada or don’t you. The administration has provided us nothing on which to base a sound economic judgment.

We heard in the quarterly briefing that the administration has had a secret study conducted by Black & Veatch that gave them their reasons for wanting out of the transaction. But that study could not be made available. I think that is problematic. I think the governor is going to have to find a way to remove the veil of confidentiality of that study so the Legislature and the public have a basis for the decision.

Petroleum News: Why would this be considered confidential? It’s easy to understand when it comes to the AKLNG partners.

Hawker: I asked that question in the quarterly briefing. The response I received was that in order to perform that analysis, they had to rely on and incorporate information that was proprietary to TransCanada. I personally question that conclusion because the analysis should be performed on all of the publically available information and performing economic analysis as to whether the economics inherent in the MOU we are working under are valid, are sound, then compare those economics with the economics of going at it alone, which involves nothing from TransCanada, so I do not understand why this information is confidential at the moment.

Petroleum News: Also, it looks as though Walker’s newly minted consultant Rigdon Boykin is getting a stronger role. Are you comfortable with this at $100,000 a month?

Hawker: Actually, it’s $120,000 a month. The Legislature was formally informed for the very first time last Wednesday that Mr. Boykin was the lead in all project negotiations and activities. Mr. Fauske was identified as our point of contact for daily questions and concerns.

At that meeting, I raised a question and concern - and I think it remains valid - and that is, is it right and best for the state of Alaska to have a third party in charge of these critical negotiations and a third party who is not accountable to the citizens of the state of Alaska through either being elected to office or being a commissioner who is appointed by the governor, confirmed by the Legislature and statutorially obligated to support the state’s constitution and perform the duties that are statutorially imposed on those agencies? A third-party consultant has none of those constraints, and that’s, I think, problematic right now.

Petroleum News: So would you rather have this point person be someone from say, AGDC?

Hawker: When the previous administration proposed SB 138 and the Legislature ultimately passed it, the conclusion was to vest the commissioners of Natural Resources and Revenue very specific and strong responsibilities for project management and execution. The approach taken with Mr. Boykin has minimized that participation and transferred those responsibilities to this third-party contractor. Also AGDC, through HB 4 a number of years ago that I basically sponsored and wrote, has many responsibilities. AGDC has been made, as necessary, a very powerful organization, but AGDC was never given the authority to negotiate on behalf of the Department of Natural Resources, the regulator; the Department of Revenue, the tax collector; or the Department of Law. AGDC was created to work with those organizations and be an entity to have very strong and clear powers to build a project. We made it very clear - we were not transferring that constitutional authority from the state agencies where we continue to vest that authority again for resource management, resource regulation.

Petroleum News: So where would you like to see the lead negotiation come from. A chief of staff? DNR? Revenue? A collaboration?

Hawker: What I would do myself or what I would want to see is really not a relevant question because the public has elected Gov. Walker, has told him they want him to pursue this his way and he is doing the right thing by that. He is pursuing this project the right way. As a legislator, what I want to see is success. I want to see his people doing it his way: bring a project to the Legislature that is viable, that we have a means of financing, that we have ready, willing and able to execute.

Petroleum News: That meeting in Palmer was a six-hour hearing that went into the morning the next day. What was your take on that meeting?

Hawker: In the six-hour hearing that ended about 1:30 in the morning, we covered the entire agenda. I think the meeting got off to a rough start with the administration’s very strong indicting statements with the industry’s lack of progress. I think the administration thought that was going to turn the Legislature against the industry players who were there. It kind of backfired. I don’t think we took that tone very well because we do understand that schedule-driven projects are prone to failure. We don’t want a schedule-driven project. We want to talk about the merits. These are complex, difficult negotiations and can be expected to take a long time to resolve.

Petroleum News: What do you think brought it around to a dialogue and an update from the administration?

Hawker: Every time one meets and every discussion is progress in the dialogue. It was very important for the Legislature to get an understanding from the administration of who is in charge, who is discussing negotiations, how are they fulfilling the expectations we had under SB 138. That was part of the dialogue.

We were also able to listen to the individual producers and ask them about their role in these negotiations. We were able to get a much more clear understanding of just who is in fact negotiating on behalf of the state of Alaska. We were able to get some clarity of what will not be discussed in the coming special session, specifically that the administration is not willing to introduce a constitutional amendment until such time as they have a completely papered project to introduce along with it. That was an important question for us so we can plan what we need to plan for in a fall special session.

We got clarity from the administration on TransCanada. And I think it’s the first time it’s been said on the record that they want out of the TransCanada arrangement. I don’t think that’s ever been officially on the record and here we are less than a month from a special session. We needed to force some clarity from the administration and we got that.

Petroleum News: As LB&A chair, do you have any plans for assisting the Legislature in understanding what’s ahead, particularly with AKLNG, by hiring consultants?

Hawker: Absolutely. The Legislative Budget & Audit Committee is the legislative entity who is provided the necessary budgetary authority to engage consultants in the Legislature in all of our activities. We’ve got education consultants on board. We’ve got Medicaid consultants on board. We currently have consultants on board that supported the production tax debates and the AKLNG development to the state, and that’s enalytica. They have truly provided outstanding service to the state but their services have tended to be limited to economic analysis and comparisons of tax regimes and economic analysis of the proposed AKLNG project.

That consulting group does not necessarily bring to the table a full spectrum of experience in the entire value chain and the documentation of a complex international LNG project that involves a sovereign entity, the sovereign being the state.

I have been investigating, identifying and talking to consulting firms that bring that latter experience to the table. I’m currently in conversations with those folks. Before we have fully papered agreement in front of us with all of the necessary commercial agreements being considered I expect to have a qualified consultant on board who can help us wade through that level of a project.

Petroleum News: Speaking of someone who understands the value chain, there is one person in the state, though he works for the Kenai Peninsula Borough and he used to work for you. Larry Persily. Even as he does work for the borough what kind of statewide value is there to having Larry back in Alaska?

Hawker: I have great respect for Mr. Persily. Mr. Persily is the go-to guy in the state of Alaska for these sort of things. He’s extremely competent. He’s extremely versed in these subjects. He puts a great deal of his personal career into it. He brings a non-partisan credibility to the debate and dialogue.

To that end, it’s one of the reasons why Mr. Persily is in such demand on these issues. It’s a very good thing to have him full-time in this state with a primary focus of his relationship with the Kenai Peninsula Borough to help facilitate the advancement of this project.

Petroleum News: Looking further ahead to the coming regular session next year, there will certainly be discussions and a bill to rewrite how the state employs tax credits in its tax code. How do you feel about that?

Hawker: The devil will be in the details. I think it is always incumbent on the Legislature to review the incentives that we provide for economic development in this state. We look at the incredible success that was achieved with the Cook Inlet Recovery Act in getting a natural gas storage facility established, a storage facility that is used almost every day in the winter to keep gas flowing in Anchorage, a bill that inspired a resurgence of investment in Cook Inlet. We accomplished the mission.

It’s absolutely incumbent upon us to take a look and ask are those economic incentives still the right incentives for the right amount and do they target the right activities. It’s a constant process the Legislature needs to go through. I certainly expect to see that occur next session, both for Cook Inlet and the North Slope. I think it’s inevitable there will be some changes that come out of that. But we really can’t evaluate what’s right and what’s wrong until we sit down and put all the pieces on the table and have an economic discussion and not simply a partisan political discussion.

Petroleum News: Do you think it became partisan when the new administration took over?

Hawker: I don’t think it’s any more or less partisan than it has been in the past. It’s always been good sport to beat up the oil industry in the state. They are the biggest kid on the block. The state is in fact dependent on them. They are obviously targets for the political process here.

Petroleum News: Circling back to the special session, what would your goals or priorities be for the coming special session for advancing a gas line?

Hawker: The Legislature and the governor must resolve the TransCanada issue. Are they in or are they out.

In order to paper a project, all the sponsors need to know who the partners are. Is TransCanada a member of this or not? And if they are not does the state have the money to continue as a partner in this? So these things need to be resolved up front. Between now and the end of the year the thing we can resolve is the TransCanada agreement. We need to make that decision: in or out. If they are out, then how are we going to finance our share of the money required up to FEED. We’ve heard that being up to $1 billion up to FEED.

A major hurdle, which has become a stumbling block in AKLNG negotiations, is whether or not the state exercises its ability to permanently lock in royalty in kind in order to support this project. That is a decision that is vested with the commissioner with the Department of Natural Resources (Mark Myers).

We hear industry telling us that the decision needs to be made now as was contemplated when we passed SB 138 so that they have the ability to go forward and construct all of the gas balancing off take and governance agreements that the project needs to have. They have to know if the state owns gas and will have gas to be co-equal partner in the project.

They understandably need to know this in order to progress negotiations. We heard from the Department of Natural Resources that they were extremely reticent to make any RIK decision until after any project is fully papered and proposed to them. So we’ve got a chicken and the egg situation. DNR wants a fully papered project before they make an RIK decision; the partners, the stakeholders, the sponsors of the project want an RIK decision so they know what kind of project to endorse. So we’ve got a major stumbling block here that somewhat has to get resolved in order to break the deadlock of negotiations.

The state needs to have a conversation about the RIK commitment. I’d like to see both of those issues resolved by the end of the year. I’d like to see an agreement fully papered and brought to the Legislature sometime during the 90-day legislative session, so we can have our consultants start working on it in anticipation of an AKLNG special session that would occur shortly after the conclusion of the legislative session. That would be the perfect world according to Mike Hawker.