Pruitt: AKLNG full of unanswered questions

Anchorage Republican says he would like more details to help him decide whether project should continue or be temporarily shelved

Steve Quinn

Petroleum News

Rep. Lance Pruitt never served on the House Resources Committee, but, as a member of the Finance Committee, he still remains keenly engaged on resources development. Regardless of committee, the Anchorage Republican says his job simply as a representative calls for deep interest, the kind that had him recently attend a House Resources hearing to receive an update from the Alaska Gasline Development Corp. on the AKLNG project and a recent development agreement with several Chinese entities. Pruitt shared his thoughts on the hearing, the prospects of progress to develop the Arctic National Wildlife Refuge, and other resource development news.

Petroleum News: You’ve been pretty engaged on resource development issues, even when a bill doesn’t come to your committee, though funding issues have been at the forefront for you. What drives your interest to attend hearings like the AKLNG update?

Pruitt: That last one we were invited, but what’s driving it is this is a big deal. To me, it’s that secondary piece as we’ve got to get our budget in line. At some point, you’ve got to ask yourself if we already commit ourselves to an $11 billion equity share, what are we backing it with? I know they said they didn’t want to commit the Permanent Fund, but if we are backing it with the Permanent Fund, what effect does that have on the already potentially agreed upon long-term solution for our budget. It’s important to make sure that I understand it fully. Resources are the backbone of where our state’s budget comes from. I thought it was important that I was there and am aware of what’s happening with it.

Petroleum News: You attended the AKLNG update hosted by House Resources. What is your big picture takeaway as things stand now?

Pruitt: There are still a lot of questions to be answered. One of the biggest ones will be the cost of gas from the wellhead. Is that something we can get agreement on from our partners in the industry? Is it the right thing for us to do with our royalty share and tax share of that. I think that is a big concern there. We are starting with the buyer. We haven’t really had a conversation with the producers. That was my initial concern coming out of that meeting.

My other concern is we are putting a vast majority of our eggs into one particular basket and that would essentially be the Chinese government. There is concern when you have all your eggs in one basket, but there is also concern when that particular partner is - I don’t know the best term to use - maybe the term rival, especially economically.

Whereas South Korea and Japan, we have a stronger and closer relationship with those two countries. While I’m not against China being a partner in some capacity or a customer, I think the diversification with countries we have closer relationships with is probably more of a prudent thing for us to consider.

It seems like they are pushing this really, really quickly in an effort to get something done. My question about what happened to FEED, I don’t think I’m on the only person to recognize wait a minute, we spent all of this time with AGDC talking to us about this stage-gated approach and I come in here and you’re - you, being AGDC - have changed the mechanism on going forward. As we went through that stage-gated approach, what we consistently heard was this is how you ensure that you keep your costs low, how you ensure that you’re not getting into something that is not correct for you, and to skip those steps and say we are going forward. ...

Petroleum News: So what concerns you the most? The market? The lack of collaboration with the producers?

Pruitt: I think one of the other things I’m concerned about and it wasn’t really talked about, it’s that Russia built a fairly sizable LNG processing plant in the Arctic as well as ships ready to take it right off the Arctic. We are talking about a project we haven’t analyzed at this point with a change in the ice structure up there. I recognize the continental shelf goes way out and it’s pretty shallow for a ways on the North Slope. We haven’t had a conversation about whether that’s an option or if some other mechanism is the option that would allow us to get more for our gas.

The true long-term benefit for Alaska - which is why we want to build this in the first place - is how much of the value of gas remains in Alaska. At this point, there may be other options available there because natural gas is being demanded by so many new players out there. We are still stuck in the mode of “we’ve got to build a gas line and it’s got to be down to tidewater.” While that may be the case and maybe that is the best thing that we can do, if we see other countries be able to build in the Arctic environment and not go through the structure we’re going through, maybe we should push pause for a second and make sure this is the right way.

If we can spend $10 billion as opposed to $45 billion - and I don’t know for sure if $10 billion is the right number - but if we can spend a lot less and get a lot more value out of our gas, that’s worth taking a moment and ensure we’re doing the right thing.

Petroleum News: What do you still need to hear from the administration?

Pruitt: I still need to hear they have been talking to the producers. I need to hear that they have taken Alaska’s interest into account. There are other smaller things I’m going need to hear. What is the actual financing structure? Where are we going to get the $11 billion in equity? What are the mechanisms to ensure we are not taking all this risk? They are saying AGDC wouldn’t lose the tax-exempt status. I don’t want to question them without fully understanding it. There are a lot of pieces that just make me want to hear from them to be assured that we’re not going to get ourselves into something that in the long run is not the best for us or commits us to something we are going to have to pay for in the future.

Petroleum News: Do you see any upside that these agreements are with some pretty heavy-hitting entities plus the agreement was signed in front of the two presidents?

Pruitt: There is an upside that they were talking to large organizations. I recognize that it being signed in front of two presidents. That’s a big deal. When the governor talked to us when we were up in his conference room, that’s all the governor talked about: what it took to be able to sign that agreement in front of the two presidents. It was all about that. Keith Meyer went a little bit into the details of the deal - but the very surface - but the governor was about all about the agreement being signed in front of the president. I get it that the president wants to reduce the trade deficit. How many of the $250 billion are ultimately going to come to fruition? I don’t know.

Was dropping the $45 billion amount, did it help get to $250 billion, so it looks like a really large deal. I don’t know. I’m not trying to cast dispersions on the president. Ultimately signing it in front of (Trump), who has to look at the national side of things and signing it in front of the Chinese president who has to look at his angle, still doesn’t change the fact that Alaskans are the ones who are going to be on the hook.

We can sign things in front of fancy people and in fancy halls in other countries: if it’s not good for Alaska, then it’s not the right thing.

Petroleum News: At what point do you decide to either keep pursuing or decide to put it on the shelf, as some believe should have been done already?

Pruitt: Honestly I have a lot of constituents getting a hold of me saying stop with this project. If I just went with the email I’ve gotten and the people who stopped me in stores, it would be, all right let’s stop this thing. I have to make sure I’m taking into account the big picture, do my research and come to my own understanding. I’m willing to give them some time. They also have to show us they are not going to go through and just do it no matter what we say. Last year I submitted an amendment to pull the money. There were some people who said, hey, don’t do that. But part of the reason was they weren’t talking to us. I think they finally got the message that they need to talk to the Legislature.

There are still a lot of holes. I think the Legislature will be asking questions. I know a few who will be asking more than I have a chance to ask. I think we will understand coming out of this session whether or not this is a project we should continue going forward with, whether or not we should stop. If we are going forward, is it something we need to say you need to go through the FEED process, you need to slow it down a little. While we are OK with going forward and analyzing it, we also don’t want to commit ourselves to the $11 billion in equity that we need until we are 100 percent sure. We’d rather invest a smaller amount to be sure it’s the right thing before we go ahead and commit ourselves to the whole shooting match.

Petroleum News: Against the backdrop of budget, how much of a priority is getting the kind of resolution you just spoke of either next session or next calendar year.

Pruitt: The budget right now is our No. 1 thing. It’s above the gas line. I know the gas line, particularly with this administration, is potentially seen as the savior in the future. The truth is because it’s still in progress, we need to focus and make sure we get our house in order right now.

A gas line in 10 years is a different story from whether or not we can fill our $2 billion - or whatever it’s going to end up being - budget gap this year. The question is can we give the stability to current businesses and investors in Alaska? Right now, they are struggling to invest because they are not certain of the decisions we are going to make. So the budget should be and needs to be a priority. I’m not even saying fill in the entire thing, but at least finding the key mechanism, which I think everyone understands it has to be the earnings reserve and coming up with a structure. But they have to set down their various “I’ll do that but you have to add X.” It’s the “this and.” They need to stop the, “this ands.” We have to settle on the thing we know can fix the majority of our challenges.

That right there is the best thing and the most important thing we can do this year. The gas line takes second stage to whether or not we are going to be able to afford to live here in three, four or five years. If we can’t figure this out, we choose not to reduce spending, we choose not to use the earnings reserve and we instead to decide to pull it out in taxes, we are going to run so many people out of this state that we won’t have a state for a gas line to benefit. So we’ve got to figure out the budget first before we turn around and take a look at the secondary things, which I consider to be the gas line.

Petroleum News: Speaking of the governor’s budget, one of the provisions he is including for the recent rollout was a way to pay off the tax credits, which would be issuing bonds. You wanted more money in the capital budget ($25 million) last year to pay down the credits. How do you feel about this approach?

Pruitt: I tried to look at something like this last year. I had a former revenue commissioner and he said he thought we should look into something like this. He mentioned a program from the past he thought we could use. As we looked into it, I couldn’t figure out how to make program work, so I wasn’t able to put anything together at the time. I think there is potential to what the governor has put out there. I’ll have to talk to the benefactors and see what he wants to do. I am no way ready to throw that out. I had looked at the same thing myself. It very much could be a mechanism to ensure we get that off our plate, we come up with something that is a manageable number for the next 10 or 20 years, as well as it fulfills our commitments. It can also ensure that the people who were looking to those credits helping them continue to invest in the North Slope. I’m actually optimistic. I hope what the put together is something they can work with. I think it’s promising.

Petroleum News: What do you think something like this could do to assist with the state’s investment climate?

Pruitt: I think it will be huge. When we turn around and fulfill the commitments that we’ve made - and that’s essentially what paying those credits are - especially the last couple of years we haven’t been. I think it says, they (state of Alaska) made a commitment and decided to come up with a mechanism to fulfill it and now we’re more comfortable going up there and investing; and this is a more stable fiscal regime to go back up there and invest.

Petroleum News: Speaking of investment climate, the state is inching closer and closer to developing the 1002 area of ANWR. What are your thoughts on that?

Pruitt: I think it’s awesome. The first resolution I got passed was an ANWR resolution, which every Legislature does, but I had the opportunity to do it my first Legislature, the 27th Legislature. We’ve been saying for years that this is the right thing to do. It’s an incredible opportunity for us, not just because there is a wealth of oil over there. I think it will show Alaskans that when we stick together - even if it’s 30 years - when we do, we can accomplish some good things. If we are patient, we can succeed. There is a lot of hard work behind this, going back to the mid-’90s like (former House Speaker) Gail Phillips and (former Senate President) Drue Pearce when as presiding officers we were going to educate the rest of the nation. They all deserve credit for staying the course over 30 years and not giving up. Now we have something that could be potentially a huge boom that would not only bring money to Alaska, but keeping the pipeline open, putting people to work and benefitting our Arctic Slope communities. Our delegation should be cheered for finding a mechanism to getting it passed.

Petroleum News: Another development in Washington was the appointment of Joe Balash (assistant secretary of Land and Minerals Management). What are your thoughts on that appointment?

Pruitt: Having a friend who is essentially the head of BLM is a really good thing. Having a friend who clearly understands Alaska and very much understands resource development - obviously he was our DNR commissioner - so having that person in charge of BLM, that is huge for Alaska. Joe is a steady guy, understands the issues, it’s actually be a big deal. Alaskans should be proud that we have someone who has shown themselves of a caliber that the administration would put them at the head of BLM.