Birch: AKLNG deal lacking details

Anchorage Republican says he is willing to give administration, AGDC benefit of the doubt, but still needs more answers

Steve Quinn

For Petroleum News

House Rep. Chris Birch had a busy first year in office, especially having a seat on House Resources. Months-long talks on oil taxes held court early but periodic updates on the prospects of Alaska’s natural gas going to market were also important. Birch is fresh off a hearing that provided an update from the Alaska Gasline Development Corp. on the recent development agreement with three Chinese entities. The Anchorage Republican remains dubious about what the agreement means and says he would like more details on the market and competitive forces. Birch shared his thoughts on this and other developments such as the prospects of advancing exploration in the Arctic National Wildlife Refuge’s 1002 Area coastal plain.

Petroleum News: Let’s start with Monday’s House Resources hearing, which featured an update from AGDC on the AKLNG project. What’s your general impressions of the hearing?

Birch: In general, it’s a lack of substance and lack of engagement with the producers - I think some of that came out last night - and in looking at that nine-page agreement, there was just a lack of engagement and investment on the part of the Chinese. When you talk about the human relationship, you look forward to the engagement ring or the promise ring and I didn’t even see any of that in the relationship.

Petroleum News: You had asked some questions about the market. What were your takeaways on that?

Birch: My takeaways are that President Meyer was rather dismissive of the Canadian engagement. I think that is a mistake. When there was concern about gas in Cook Inlet there was discussions about Kitimat and gas resources on the Canadian side for supplying Alaska and Pacific markets. I think that is a much more viable competitor than was given credit for last night. On the Chinese market - and I just know this from paying attention - there are some huge gas lines going from Russia into China. Their proximity and access is competing with us. By and large, from a marketing standpoint, I have a hard time getting a delivered gas price that will work.

Petroleum News: Do you have any other concerns beyond the markets and price.

Birch: I’m deeply concerned about our capabilities and access to capital. When you start looking at competitive projects, I brought up the issue of brownfield projects in the Gulf of Mexico. Those are much more scalable. You can invest $2 billion or $3 billion and get a scaled back version to meet demand and have the same price. We are looking at a project that will have arguable $30 billion or $40 billion - or more - invested before you see any revenue. I think the questions and concerns regarding that risk and who takes that risk are certainly atop of my list.

Petroleum News: Do you have any positive takeaways?

Birch: Not really. I don’t think there is any new news here. You know there is some conjecture that this is the furthest we got in a project. I remember the Yukon Pacific days and the Yukon Pacific with a lot further down the road with the project and permitting than anything else and that was before there was gas all over the Lower 48. I don’t see anything positive presented to us, either the slide deck or the nine-page agreement. In my view, there is nothing that cements any engagement or investment by Sinopec or any of the large players involved. Alaska is writing big, fat checks every year. I haven’t seen any cash investment or financial engagement on the part of our purported partners.

Petroleum News: What more engagement would you like to see with the producing partners?

Birch: When you talk about a $1 netback - and I think that has a potential of going negative - and they talked a little bit about that last night. Is it worth selling gas at near zero or well below prevailing market to get a rather dicey project out the door? I’m not there yet. I was much more comfortable when we had the producers put their capital in this and writing their checks to support the project. Then you would think you’ve got companies who have years and years of experience, plus expertise and they are willing to put cash on the barrel head to make a project go. I am concerned when it’s all state capital so far.

Petroleum News: Now there some people who place credence into the fact that there are some heavy hitters who signed the agreement. They say that should count for something. How do you feel about that?

Birch: I think you have to look to the agreement. What’s asked and what’s offered. I haven’t seen any money exchange hands. When you talk about firm commitments, I haven’t seen any interest in jointly shared costs going forward. That’s what I would be looking for, a financial commitment. I think I mentioned it (Monday) night, we’re dealing with some pretty astute business people. We talked a little bit about PILT (payment in lieu of taxes) and tax structure. We spent years anguishing in the Legislature over what is the appropriate tax structure. I don’t know if the Chinese government is 100 percent aware or dialed into the fact that the Alaska Legislature has the right to change whatever the tax structure is at some point in the future. Maybe that was discussed. I doubt it. This was done at a pretty high level. There was a lot of showmanship. I would be looking pretty hard at the numbers and the hard reality of investment.

Petroleum News: What were your impressions of the agreement?

Birch: If you sold a $100,000 condominium in the state of Alaska, you would get earnest money agreement at the outset to establish your interest, commitment and follow-through. I was joking with somebody that I want to see pallet loads of cash off of a Chinese military airplane with a red star on it being offloaded at the airport as a multi-million statement of earnest. The only thing that gives me hope is you’ve got the president of the United States and China trying to be involved in the development of this project. As an engineer who has competed for engineering services contracts, I’d have to say how good a deal is this? It will be in the details. Whose steel is going into this? I’ve got to believe if China makes steel and they pay 75 percent of it, it’s going to be their steel. Who is going to design it? I’m guessing if I’m paying 75 percent, I’m going to have a lot of say in who designs it. The elephant in the room, if you will, is how will North Slope gas compete? It would be one thing if it were at tidewater in the Arctic Ocean, but it will take tens of billions worth of construction to put it in tidewater in Cook Inlet. As an engineer, I struggle with seeing how you can make that economic.

I couldn’t see anything in the nine-page agreement that would assuage me, but I’m keeping an open mind.

Petroleum News: What would you like to hear next from AGDC?

Birch: I would like a realistic assessment of how this project measures up from a risk component, where they realistically expect to realize capital investment necessary to construct a project of this magnitude. As the state of Alaska is in the driver’s seat, I’m not comfortable with it. What I would like to hear next from them is more engagement with the producers, more discussion, more concrete evidence. That could be financial or otherwise. But at this point we are looking at the reality of how much it costs to keep that operation open, and it’s significant. We need to recognize who the competition is on the Pacific Rim. I would like to see a realistic assessment of that. They are somewhat dismissive of Canada as a competitor and of the brownfield projects in the Gulf as a competitor. LNG is now a commodity. Whether is comes from the Gulf of Mexico to Europe or goes from Kitimat to someplace in the south pacific. I would like to see a realistic assessment of what the competitive forces are to our landed price in Nikiski for gas.

Petroleum News: Let’s switch to some recent developments on federal lands and waters, starting with ANWR. It looks like Congress is inching closer to opening up the 1002 Area for exploration. How do you see it?

Birch: Well, it’s certainly been a long-fought battle. My first job on the North Slope was in 1968. I worked for a gentleman named Jim Dalton. He was with Colorado Oil and Gas and they named the Dalton Highway after him. It’s been dangling out there. There has been a lot of interest and support with the 1002 Area. It’s very tantalizing. It’s actually very exciting to see that it might be on our horizon.

Petroleum News: Years ago, ANWR was thought to be part of a solution toward energy independence. Now we hear ANWR in the context of energy dominance. How do you see it?

Birch: At the RDC briefings, the gentleman from Armstrong gave a phenomenal presentation on what’s going on in NPR-A and the Colville River area, so I think the development in NPR-A and ANWR is going to be part of and contribute to American energy dominance. Certainly our near-term goals are to keep the pipeline full. We’ve seen a lot of good effort that way. As a former Alyeska employee in the early ’90s, seeing the throughput head in that direction is remarkable.

Petroleum News: Well, several weeks ago, the Department of Natural Resources gave a presentation about production - and with that, pipeline throughput - increasing these last three years. What does it say about the industry being able to adjust to the price climate?

Birch: I think what we’re seeing with Hilcorp and some of the secondary operators on the North Slope arena, we are seeing some resourceful and dynamic innovation up there. We’re seeing some great ideas and great talent, and companies that have the ability to not only increase production from existing fields but also do the additional exploration necessary.

What ConocoPhillips has got going in NPR-A with Willow and some of those other fields is remarkable. I think it bodes well for us and it certainly bodes well for the tax policy that’s been in place for a limited amount of time and validated by the photos; I would hope we could have some tax stability for those making the major capital investments. On the down side of that I’ve friends who are in business of housing employees on the North Slope. They are looking at 30 percent to 40 percent capacity. They have a lot of unused beds. There are some challenging times ahead of us. I don’t think it’s reasonable of us to think it’s going to be business as usual. I think we need to be very aware and alert to what we need to do as a state to remain competitive to the investment community.

Petroleum News: Also in the news was word of Eni getting the go-ahead to drill in federal waters.

Birch: It’s remarkable what they are able to do. I believe it’s going to be a 30,000 foot lateral (drilling). It means you can go from a safe, secure on-land, island location. I believe some of the longest reach wells are over in Sakhalin. Those are remarkable distances they are achieving there with land-based rigs. The Eni initiative wouldn’t have happened without the federal government relenting with the policy and practice. Hopefully it’s a wave for the future. I know when I was touring the Hilcorp operation last fall, they had discussions about that, too.

One of the visuals that I had was a gentleman talking about spudding a well in the Dena’ina Center and putting a drill bit into the kitchen at the Kincaid Chalet some distance away, talking about the remarkable capacity. We toured the Hilcorp drill rig. We were on the floor of one of the portable rigs. It’s a high-tech world. You’ve got a relatively young person with a joystick driving the bit and a couple of seasoned hands over looking his shoulder telling him where to place that bit.

Petroleum News: Shell had a tough time there. Some believed it was the regulations; others believed it was new territory that made things difficult. What are your hopes for Eni?

Birch: Well, I think it bodes well for Alaska and certainly our offshore prospects. Our challenges up here are weather largely. Depth is not an issue. When they do leases in the Gulf of Mexico, they are incredible deepwater wells. The operations we have up here, I think Shell had a lot of adversity that was introduced after they had their lease sale and after they started their planning and mapping out of the operations. One would think if an Eni is successful and you see some of that development happening, it keeps the door open. I think Shell’s leases, they have a partner still maintaining them.

Petroleum News: HB 111 produced a working group. I know you’re not on the working group, but just the same what would you like to see from those 10 people?

Birch: I think a practical assessment of what it takes and what’s needed in Alaska to continue our attractive investment climate for the industry. It’s obviously a mix of tax structure, investment climate capacity and resources. I would like to think that resource group would have the ability to keep the dialogue going.

It’s a little disconcerting when one of our co-chairs of House Resources basically opposes opening ANWR. As the only mining engineer in the Legislature, I have to say I certainly look at ANWR as a long-term positive potential for the state, certainly for the North Slope Borough and Alaska in general. The working group has potential of putting some information together that is helpful for the legislative body as a whole.

Petroleum News: What about taxes. Do you expect more debate on oil taxes next year?

Birch: I hope not. I struggle with the fact that we have oil tax credits - cashable oil tax credits - into the $100s of millions that have not been paid. I go back to the cremation of Sam McGee in Robert Service’s book, a promise made is a debt unpaid. I’ve had people tell me we don’t have a financial duty to make these payments all today. I’ve met with people in my office in Juneau - a number of lending institutions involved - who put their faith into the state of Alaska reimbursement. That hasn’t been realized. I hope the working group addresses that. That weighs in on the tax structure. We are talking how credits are instrumental part of a tax debate, so that’s got to enter into it at some point.

Petroleum News: Many of those promises were made by another administration when oil prices were above $100. Is it reasonable to keep those kind of promises?

Birch: I think you need to realize the uptick in investment and exploration. If you look at Caelus and Armstrong, again that slide deck at the RDC presentation is phenomenal. I was sitting next to a former ConocoPhillips geologist and his comment was west is best. As we’re talking about ANWR to the east and NPR-A to the west. His insight and perspective is they view the potential to be realized and Armstrong policy is that way. I think the investment happened because of the oil and tax policy. I believe there was some frustration on the part of some of the Legislature that they wanted to attract some of the smaller carriers’ investment. I think it worked. There are a number of carriers making that initial investment. I know one Legislature can’t obligate another Legislature to a fiduciary responsibility. Unless it’s in contractual form in one way or another. That’s still to be sorted out.