Kito: AKLNG, fiscal plan closely linked

Juneau Democrat believes strong fiscal plan gives state better footing for advancing a natural gas pipeline project

STEVE QUINN

For Petroleum News

House Rep. Sam Kito III may not sit on the Resources Committee or the Finance Committee but he still believes he has an obligation to study as much as he can about resource development. The Juneau Democrat, who just won his second full term in office after being appointed Beth Kerttula’s successor, does serve on the Legislative Budget & Audit Committee, which hires resource development consultants. Kito shared his thoughts with Petroleum News on the status of the AKLNG project and the prospects of more debate on oil taxes in the upcoming session.

Petroleum News: You sit on a committee which deals with the costs of consultants, so my first question would be what are your general observations with what’s happened over the last year with AKLNG?

Kito: So, from my perspective with prices not coming back up for oil, it means gas prices are low. That means transportation costs are a significant driving factor in marketability for the gas, and Alaska has high transportation costs. The big three oil companies who control a lot of the gas three to five years ago had excess capital that they could put into a project that would allow them to get their gas to market. With continuing low prices and some of the companies looking at losses and profits worldwide, it’s becoming more difficult for them.

I can’t speak for them but it just appears as though they are looking at the economics and saying it doesn’t make a lot of sense for us to spend billions right now because we are losing money. The governor is still interested in getting a gas line, and he has committed to trying to keep the project moving forward regardless of what the supply partners will do.

The supply partners are saying sure we’ll provide you with gas. What they are not saying is yes we will provide you with investment capital, which means we have to go find that money someplace else. I’m a little concerned about that because if we leverage ourselves and our financial position too strongly for this one project, we can put our state in a fiscal jeopardy more so than we already are with low oil prices.

So if we are doing the project, certainly we may be able to find investors to advance fund the project but they are also going to want a return on their investment, so we pay them back plus interest, or they are going to want payment in lieu - so gas - out of it. That means in order to get past the point where we’ve paid off the capital investment, the state of Alaska won’t be generating any revenue, so I don’t know how long that’s going to be. Is it going to be five years before we are paid off? Is it going to be 10 years? What kind of revenue are we doing to get? Those are questions we are going to have before we start going to the front end engineering design phase.

I’m anxiously, like a lot of people, awaiting the announcement in December of what the pre-FEED shows. It may not be as exciting as we think, but I do want to see the information.

Petroleum News: You mentioned questions for the administration. What other questions might you have about the project?

Kito: It’s a question probably more for AGDC than for the governor. That is trying to look forward at the market. I’m hearing more and more that gas is being sold on spot price as opposed to long-term contracts. When we have long-term contracts because of the cost of the infrastructure, it makes sense because then you know your payments.

Long-term contracts lock you in. They lock you in maybe at a lower price, but you get a guarantee of revenue and they get a guarantee of gas. Because there is so much gas coming from other places, I’m hearing gas is being sold on the spot market, which means prices can go up and down a lot more rapidly.

As long as the prices are on an upward trend, that helps us but right now they are flat. The spot market trading does not give us the security that we need to build a big project to get our gas to market. So I worry about that and that’s one question I would have for AGDC: How are we poised to interact with the gas market if there is more spot market trading?

Petroleum News: One of the concerns even AGDC’s new president (Keith Meyer) brought up was communication between the administration and the Legislature.

Walker: At LB&A, we had a few meetings last year about the project, updates as things came along. This year we haven’t. I don’t know if it’s because we haven’t scheduled a meeting or if it’s because there isn’t as much going on. Last year we had the TransCanada decision so we had to have information to make that decision. We haven’t seen anything on pre-FEED but I can imagine if the report is not ready and available until December, the challenge we’re going to have is it’s going to take a while to start looking at it and at the same time we are starting to deal with our fiscal plan.

One of the things, at least from my perspective that I think we should be carefully considering, is that if we in the state of Alaska actually get to a stable fiscal plan, that puts us on more equal footing with the gas suppliers, and we are not driven as much by the need to have revenue from the gas line coming in by the mid-2020s, then we will be able to be more patient with getting the gas to market when it’s available.

I honestly believe the gas suppliers want to move the gas off the North Slope. I don’t believe they are going to want to let Prudhoe Bay oil fields decline to the point where people are leaving and they are shutting things down - then have to gear up again. So there is going to be a point where the suppliers are going to want to get their gas out. Right now we want to get the gas out earlier than they need to.

If we have a stable fiscal plan, our timelines could match a lot better so that when the suppliers are ready to ship the gas, and we are ready with a pipeline to produce it and we are not going on a timeline only because the state of Alaska needs revenue.

So solving the fiscal plan actually helps get to a stable fiscal footing and gives us the ability to look at how much money we can afford to put in as an investment to a project on a sustainable basis.

Otherwise we are looking at $2.5 billion FEED investment. Unless we’ve got some kind of a fiscal plan, we are going to look at taking that out of the earnings reserve of $8 billion, I don’t think we can afford to do that right now. I do think we have to take a step back, look at the big picture, and perhaps be a bit patient with when we want to try and have gas flowing through a pipeline.

Petroleum News: Do you think LB&A would need to hire consultants again?

Kito: The Legislature will need consultants. The governor has his consultants. We need to have people who can do some value engineering on the economics. We have had people in the past who have done a fair job. We are going to make sure we have people on tap so when we receive documents that we have the ability to look critically. Very few of us legislators are experts in oil and gas policy or project activities. We are going to need somebody to interpret some of that for us. We’ve got a slightly different perspective in the Legislature than the governor will so it does make sense to have someone to look at some of those issues.

Petroleum News: Even as very few may be experts, you’re not on Finance or Resources, but you still seem to immerse yourself into resource development.

Kito: I would certainly not be somebody I recommend to write a report about the benefits or detriments of any FEED report that comes out. But it’s still critical for the state of Alaska as a whole for everyone to be looking at what our resource development strategies are for the future. There are a handful of issues that bubble up as very important for the state and that is one of them. Because it’s very important for the state, it’s one of those that I need to understand. It takes me a while because I’m not an expert. I like to try an understand things at a level I can communicate to other people.

Petroleum News: You seem to have done that since you took office.

Kito: It’s the importance of my job, making sure that I adequately understand the issues that I have to make decisions on.

Petroleum News: There will be some seats open in Finance and Resources due to retirements. Do you see yourself pursuing one of those seats?

Kito: I actually - from the experience I’ve had with Leg Council, Legislative Budget & Audit and the Labor & Commerce Committee - I feel there is a lot that can be done either from a majority or minority seat on other one of those.

For me, Budget & Audit, with oversight on a lot of activities on state agencies, is important. With Legislative Council, being in the capital city and making sure we are adequately represented on basically the board of directors of the Legislature is important. The reason I started getting interested in Labor & Commerce is the time the last two years I’ve been on the committee looking at insurance issues, looking at what the state of Alaska can do to decrease the cost or expenses on the Alaskan public and if we can figure out how to decrease the cost of healthcare, we can save Alaskans a lot of money. One of the ways to do that is to take a closer look at insurance, and that’s through Labor & Commerce. Those issues are not as glamorous as the gas line or the budget, but I would certainly want to be on budget subcommittees, but I do think insurance is a huge issue for the state that can help us control healthcare costs.

Petroleum News: Eventually Labor & Commerce could have a role in the gas line when it comes to work force issues.

Kito: AKLNG and other project bills will go through Labor & Commerce, so I’ll get a chance to weigh in.

Petroleum News: So as it relates to your seat on Labor & Commerce, what would you like to see done for statewide hire on a project like that?

Kito: Constitutionally, we can’t do an Alaska hire preference for anything. What I would like to see, and what I made a comment on when SB 138 passed several years ago, was that I’d like to see something in there that provides training for some of our rural residents. As much as we made the attempt to do that with the Alyeska pipeline during the original oil pipeline project, making sure there are job opportunities for all Alaskans, especially those who are disenfranchised in other ways. That is one thing I would like to see us try and support. It’s probably the biggest thing. They did put in a revenue sharing component in SB 138 that allows some of the revenue coming in to actually go to decrease energy costs to rural parts of the state. Making sure that is adequately administered is going to be important in conjunction with the power cost equalization program.

Petroleum News: Would you like to see vocational training should the state get closer to a project sanction?

Kito: We have to manage that carefully and we do need to make sure we are adequately training Alaskans. My thought in adequately training Alaskans is, even though we have a declining budget, make sure we are taking care of the infrastructure that we have, which means keeping Alaskans working on construction projects in Alaska, maybe on a lower level than we’ve had in the last 10 years but at a level that is stable so that when we do gear up to construct a pipeline we have a good size workforce in the construction trades that have the ability to work on a project and we are not pulling everybody from outside of Alaska.

If we allow our construction industry to collapse because of decreasing budgets and no ability to take care of our existing infrastructure, we will be just like the 1970s when we were bringing up people from Oklahoma, Texas and Louisiana to work on a project in Alaska, then they go back home after that. We need to make sure we are training and providing that workforce during this time before we get to the pipeline.

Petroleum News: You mentioned the provision in SB 138 where a small percentage of revenue goes to rural areas to help with costs. There has been discussion of LNG being important to Southeast, particularly Juneau. What are your thoughts on that and where do things stand?

Kito: I, along with Sen. (Dennis) Egan have received several presentations on the project that Avista has been looking at. One of the things that could happen is infrastructure for natural gas in Juneau but one of the other beneficial components for that is bringing in bulk shipments of LNG, repackaging them into containers and shipping them to smaller communities or canneries or other operations, so we have the ability to have lower-priced, less environmentally damaging fuel for heating Southeast Alaska. There are a lot of people who would like to see more use of electricity. We can but that’s also a very large capital expense.

There is quite a bit of natural gas in the state and other places. Once we have the infrastructure in place, we can be a beneficiary of low-cost Alaskan natural gas when that starts producing. In the meantime, there is natural gas available at a pretty reasonable price from the Lower 48 that can be shipped here to Southeast.

It wouldn’t be a benefit just to Juneau; it would be a benefit to all of Southeast. There are people who would like to see strictly renewable, but those costs are a fair bit higher for developing and you also have conversion costs for electricity to heat. They are still getting better but are not quite as cost-effective as natural gas.

Petroleum News: Do you see areas like Southeast or others, which are not directly in the path of the pipeline, will have to fend for themselves for energy.

Kito: They should not. I don’t know of many places that would really benefit from direct supply of natural gas. There are places that would benefit from excess capital to get off of oil for heat. I do think there are things technology wise that will change over the next 10 years that will make it a lot more affordable to living in some of the smaller communities.

Petroleum News: You had talked about the state having a fiscal plan and how it would help with advancing a gas pipeline project. Part of that is the governor’s plan to alter that tax regime. That effort came up short in some people’s eyes. What are your thoughts on what happened?

Kito: In the House, we came up with a pretty good compromise to limit the expense of cash credits for gas exploration, which were needed but everybody seemed to agree weren’t needed to continue because we found natural gas and weren’t receiving any revenue for the natural gas. The other component as the bill went to the Senate and came back was the loss carry forward. That means basically the state of Alaska is helping the Big Three carry their burden. At least two of them have bigger savings accounts than the entire state of Alaska does. So I am a little less concerned about their viability. Prices go up; prices go down. They manage their revenue steam. I do think allowing them to carry forward significant losses is a big burden on the state of Alaska that is not necessary to keep those companies to keep producing oil.

I think when we start looking at a fiscal plan, we should balance it without natural gas because natural gas revenue will not be coming in for at least 10 years, maybe longer. When it does come in and we’ve got a fiscal plan already in place, any revenue we see from natural gas, we can put right into the Permanent Fund, grow the principal and increase dividends for Alaskans. It’s more sustainable that way than it is expecting we will go year-to-year on resource revenue.

Petroleum News: So what would you like to see happen next session?

Kito: I’d like to see us look at the carry forward operating loss for oil and gas. If we have to revisit any credits for oil exploration or gas exploration, in my mind there has to be some reasonable understanding that those credits will result in increased production. We heard the battle about film credits and how they weren’t bringing any revenue to the state of Alaska but we completely ignored in that discussion the fact these oil and tax credits were not bringing in what we were expending. I think we need to have that question answered as we offer hundreds of millions of dollars in credits and carry forward losses that we know that they money is going to be coming back to the state of Alaska and it’s not just a gift to the industry.