Giessel: AKLNG update enlightening

Anchorage Republican buoyed by BP-AGDC agreements, but remains concerned over transparency she says still lacking from AGDC

STEVE QUINN

For Petroleum News

Sen. Cathy Giessel began her third term as the Senate Resources co-chair with her typical heavy lifting by getting an update on the AKLNG project, which is designed to market North Slope natural gas. The Anchorage Republican’s first hearing, she says, came with some good news, some alarming news and new questions for the administration. She shared her thoughts with Petroleum News after the committee’s first hearing Jan. 23.

Petroleum News: What are your objectives and goals for this session?

Giessel: Broadly, number one, my goal for the committee is we do whatever we can to increase oil production for the state. That’s the source of our lifeblood - revenue - and that’s what we need most, increased production. Just as we saw 3 percent increase production this last calendar year, that’s what we would like to continue to facilitate.

Petroleum News: As much talk as there has been for natural gas, be it SB 138 and quarterly updates since then, do you think people forget that oil is still where the money is?

Giessel: Well, I’m not sure that they forget about it so much as take it for granted. Even though we are in a challenging time in terms of our budget, it feels like people still think oil is going to pay the bills and we need to tax them more. The fact of the matter is we can actually destroy that industry by taxing them more.

There is also a false message out there about what gas sales will bring to the state. Gas does not have nearly the value as oil. The main value we looked at with the passage of SB 138 was gas for Alaskans. We knew that bullet line just was not going to pencil out. Our demand in-state is just too small. It had to be a project that would monetize the gas globally but always that main emphasis was gas for Alaskans first. That seems to be left behind.

Petroleum News: You’ve got three new committee members. One is new to the Senate (Shelly Hughes); one is new to the Legislature (Natasha von Imhof) and someone who is not new to the Legislature but by his own admission is coming up to speed (Kevin Meyer). How do you integrate these three with the rest of the group - Bill Wielechowski, John Coghill, Bert Stedman - who have more experience?

Giessel: First of all, Sen. Meyer, he actually is more up to date than he thinks he is. He asked great questions today. They are the kinds of questions that Alaskans are asking also. Sen. Hughes, same thing, she was here to vote on SB 138. She’s heard this information before. This is refreshing it for her. Sen. von Imhof, she is a very intelligent, hard working woman. She has been meeting with DNR commissioners, the Department of Revenue, and I’ve been meeting with her as well. She is coming up to speed. I’m confident she is going to step up. Remember, this was her first meeting. She has also attended one of our summer updates. So she has more information in her back pocket than perhaps you saw exemplified today. But it will come out.

Petroleum News: So it’s your first hearing and you’re digging in right away with an AKLNG update ...

Giessel: As we always have ...

Petroleum News: What were some of your takeaways?

Giessel: I was very encouraged by BP’s announcement of entering an agreement with AGDC today. A couple of reasons for that: No. 1, I’m pleased that AGDC is willing to accept help. That says to me they realize that they need help; no. 2, I appreciate BP’s willingness to frankly spend a bit more on the project. They are committing personnel and personnel represent a cost. They are the most valuable asset any company has.

So I’m grateful for that. At the same time, it’s not eluding me the fact that this is a self-interest by BP. They want to monetize their gas. The more they can help this come to fruition helps them. Plus, they then have that inside information. So I get that and that’s a reasonable tradeoff.

Petroleum News: Getting back to some of the analyses that you’ve heard, would you rather be in a slowed down pre-FEED than where we are now?

Giessel: I would rather have taken the option that the producers suggested and that was spend more time in pre-FEED, keep the partnership together with the four entities, make sure we keep the cost of supply down utilizing those industry experts, and when we all felt the market had recovered enough, then move forward.

Petroleum News: Speaking of industry experts, what was your takeaway from enalytica’s recent report on the project?

Giessel: This report is really enumerating the concerns the state Legislature has. We don’t know what the plan is. We don’t see that the market has gotten any better. Frankly, we’ve been kept in the dark in terms of what is going on with the state side. Really, then the enalytica report is summarizing what we know and that is: Be careful.

Petroleum News: You noted something that speaks to transparency or at least not knowing what’s going on. Sen. Meyer also noted transparency in the hearing. Do you feel like you’re seeing more transparency and would you like to see another bill pushed through to get some lawmakers on the AGDC board?

Giessel: First of all no, we don’t see more transparency. I was shocked to get (AGDC’s) power point presentation last night at 5:30 and go to near the end of the presentation and find five staff people in the Houston office and a couple of days prior finding out there was a Tokyo office. What?

I go to these board meetings. None of this was discussed in public session or even intimated at other than we are going into executive session to discuss infrastructure acquisition. We had heard they were looking at doing that (staffing Houston office). In fact, the board meeting included discussion on hiring Mr. (Keith) Meyer’s daughter to run the place. I didn’t know that it had been fully implemented with five staff people. That’s news.

It raised my question about the ConocoPhillips export facility (whether AGDC is pursuing a purchase) but all of that was a surprise to me. Now that we are in session, we can certainly demand more information and we will be doing that. We will have another update before we leave Juneau and in the summer.

So more transparency: We would love to have more transparency. I don’t know that we’ve had it.

Petroleum News: So should you try again to get another member of the House and Senate on the board? As you mentioned, last year’s effort was vetoed by the governor.

Giessel: I think that’s pretty fruitless. The governor is not willing to do that apparently. You know many of us have signed the confidentiality agreements when SB 138 passed. They are not being honored, either - to allow us to see any confidential information. AGDC is refusing. The partner companies have been agreeing, but ADGC declined.

Petroleum News: So you’ve got the office in Houston, which you knew was on the horizon, just not to the extent you learned in the hearing, and you’ve got the Japan office, which you said caught you off guard. What was your reaction?

Giessel: Well, I was very alarmed. We know DNR is the entity - constitutionally - to guard those molecules and get the greatest return for Alaskans. Now we have somebody in Japan promoting our project? Really, what is he telling people? How could companies in Japan be interested in our project if they have no idea what the cost of supply is? So, yeah it’s alarming. We don’t know what’s being told to buyers over there.

The other question I ask is are we only focused on Japan? China, we know is going to increase its demand for LNG. Are we going to allow them to simply have Russia as their supplier or are we going to try to get into that market? It seems pretty narrow to be only focused on Japan.

Petroleum News: Well, one of the staff in Houston apparently speaks Chinese, so maybe there are targeting that region.

Giessel: That’s a good thing, but we haven’t heard AGDC talk about going to China.

Petroleum News: On DNR then, what do you feel DNR’s role is, given the gentleman in Tokyo right now?

Giessel: Basic, basic things. We had deliverables last session that we knew were milestones that needed to be done. The first was RIK, royalty in kind. That’s up to the commissioner. If they, DOR and the Department of Law, those three state agencies are actually part of this process, they should have enough information to be making decisions like this. It’s been a year.

That says to me they haven’t been engaged in all of this. That concerns me. That was a very clear mandate in SB 138, which raises the question in my mind, has AGDC violated SB 138? We will be exploring that.

Petroleum News: Do you foresee putting in some new legislation?

Giessel: I can’t tell you. I really don’t know. Then of course comes the question would it be a futile effort if the governor disagrees with us and wouldn’t sign it anyway? There is always that question. And I don’t know how our House colleagues feel about all of this. I think their concerns mirror ours and that’s based on the joint hearings we had, two of them last summer, particularly House Resources Co-Chairs Rep. Josephson and Rep. Tarr were mirroring the same concerns senators were expressing.

Petroleum News: You’ve got a new mix of committee members on the House side. I know that doesn’t change how you do things here, but does it affect any kind of communication you might have with them?

Giessel: You know, honestly, I have not in the past collaborated in terms of agendas or things like that with the House people in the Resources Committee anyway. Rep. Josephson and Tarr knew I was doing the update. They thought boy we’ll do it too. That’s great. The more we can mirror that with people testifying the better, so you’ll certainly see that just as happened in the past. They have legislation very different than anything you would see coming out of the Senate so there will be a parting of the ways at times.

Petroleum News: They have said they want to revisit the tax system. I know your position on tax credits and that to scale them back or even remove them is ultimately a tax hike. If the state can’t afford these beyond what the statutory formula says must be paid, how do you reconcile that? Let’s say you have a project that cost $10 billion to bring to production and the state is on the hook for more than $3 billion, but at these prices can only afford $100 million a year, how do you pay for that? Do you find a way to revise in a way that still incentivizes?

Giessel: So still yet another change to tax policy? So first of all, last session people don’t understand we made a huge change to the tax credit program. Cook Inlet will be gone next year. We diminished the credits on the North Slope by changing the new oil designation. The two big projects from Caelus and Armstrong and of course Conoco has got the Willow discovery, those are years out yet.

There are discussions about what kind of creative ideas would facilitate additional oil development without the cost that the credits represent. So we will see what evolves. There are lots of heads thinking about it so that’s a potential. One of the things the governor is going after is completely changing the tax policy by taking away the net operating loss.

The net operating loss is an integral part of a net profits tax policy. That’s what we have. What the governor is proposing reverts us to a gross tax policy. That’s a huge change in policy. We certainly can do whatever we want, but it diminishes the potential of increasing oil production. I want to keep that pipeline as full as possible so it continues to be economic. As flow does down, the tariff goes up.

Petroleum News: What did the recent discoveries tell you about Alaska’s prospects?

Giessel: Pretty awesome, huh? You know the most recent lease sale where there were very aggressive bids around the Armstrong property. I think the companies realize what Armstrong realizes. They may have gotten into a layer on the North Slope that has huge, huge potential. Of interest was former commissioner Mark Myers’ response when Armstrong announced they thought they had a big find. He, as a geologist, was aware something was there, so he was pretty excited when somebody proved that up.

Petroleum News: Do you think that it’s piqued interest from other companies?

Giessel: Oh, yes. I’ve heard it speculated that this particular layer of oil may extend a significant distance to the west, so that’s into NPR-A, so that becomes a challenge because it’s federal. On the other hand what alleviates some of that challenge is the new administration. So I’m eager to see what that businessman who is now the president will be doing to allow business to prosper in this country. As large businesses prosper, it stimulates small businesses, which in turn employ local people. All of that prosperity raises everyone’s vote.

Petroleum News: You’ve got a new administration and a new Congress aligned with resource development. What are your hopes from that alignment?

Giessel: I’m hoping our state government will align with development. Sometimes it looks pretty challenging. Sometimes it feels like we are out of step, but I’m hoping for the best.

Petroleum News: There is a special committee on Arctic policy this year in the Senate. You’re the chair of that committee: Talk about that.

Giessel: The U.S. still chairs the Arctic Council. We don’t want to lose track of what’s happening in Arctic policy. We have a new president who may not be totally informed on the subject, though we have Alaskans in Washington who are available to brief him. We are interested in some of the additional appointments he could make within the Department of the Interior, some of the lower level type of appointments. They could be Alaskans who know a lot about the Arctic. Regardless, we still need ice breakers. We need an Arctic port. I was part of the Arctic Policy Commission and I wrote the section on resource development and spill response. You probably saw that Sen. Olson and Sen. Hoffman are on those committees. Those are our Arctic area representatives, though the entire state of Alaska is part of the Arctic as far as we are concerned. I used to have Seward in my district. Seward is certainly an Arctic port. That is where a lot of the infrastructure comes through. The University of Alaska Fairbank’s research vessel harbors there.

Petroleum News: OK, getting back to AGDC, there was an issue over how much money remains. Did you get a satisfactory answer?

Giessel: I did. As I said back in November I have a letter from President Meyer there is $109 million so now to hear that there is $104 million tells me they spend $5 million in the last six weeks. That’s interesting. I’m not a Finance Committee member but I think that information will be of interest to the Finance Committee. We will need to know what it was spent on, which is part of the reason I was delving in what it cost to run the Houston office.

Petroleum News: There was also the issue of getting tax exemption from the federal government. You’ve received some opinions that it’s not likely to happen. Are you still waiting for the IRS to weigh in?

Giessel: Of course, the last word belongs to the IRS and the private letter ruling. I haven’t heard anyone say oh, yes, this will be easy to get. Not only the two law firms that presented to us in August were unpromising on that subject but Mr. (Larry) Persily, a former federal pipeline coordinator, does not see that as a likelihood, either. We also have Roger Marks, who has been a consultant to us in the past, not believing with the structure that is being set up now that it’s going to be a possibility. But let’s write to them (IRS) and find out.

Petroleum News: And if the project is not taxable by the state, where does the state get any return?

Giessel: That’s the reason I keep repeating that question. I think the citizens of Alaska are interested in whether we are abdicating our taxing authority. That’s in our constitution, so is that going to require a constitutional amendment to give up property tax, corporate income tax, production tax? Citizens should be aware of this.

I conducted a pretty extensive qualitative research project this last summer. It’s called going door-to-door. One hundred percent of constituents I talked to at the door said the state of Alaska should stop spending on the gas line if the companies are not willing to build it .We should not be spending our money on it.

Petroleum News: So is the state advancing an uneconomic project?

Giessel: The information I’ve seen from experts, I would say yes. I am willing to let AGDC, with the help of BP, bring back proof that this is viable.