Hawker: LB&A’s audit of AGDC warranted

Outgoing LB&A chair says new Resource Committee alignment deserves chance to succeed, warns of consequences that come with changes

STEVE QUINN

For Petroleum News

House Rep. Mike Hawker is closing the books on a 14-year career in the Alaska Legislature.

Long known for his work ethic and attention to resource development issues - some of which continue to beset Alaska - Hawker’s years-long battle with cancer often underscored his willing to serve, even if it meant following meetings from a hospital bed.

“I’ll be straight up with you: A year ago, last Christmas, cancer was completely dormant; I had it completely beat,” he said. “In March I went in for my quarterly checkup and the cancer had exploded like somebody had set off a hand grenade in my body. I was solid cancer from my knees to the base of my skull again.”

By June, the news got worse - “the cancer was raging,” - prompting doctors to attempt “last-ditch” therapy. Four months later, Hawker said the cancer went dormant.

While undergoing intense treatment, Hawker stayed engaged in legislative activity as much as time and his health would allow - all from the Mayo Clinic in Rochester, Minnesota.

As a member of the Resources Committee, Hawker followed hearings on HB 247, Gov. Bill Walker’s oil tax credit bill, while also tracking progress and setbacks on the AK LNG project. His role as Legislative Budget and Audit chair also remained important to him.

Hawker, an Anchorage Republican, discussed his tenure in the House and his views on resource development with Petroleum News.

Petroleum News: One of your final actions has been for LB&A to request an audit of AGDC (Alaska Gasline Development Corp.). What do you hope to accomplish?

Hawker: We authorized the examination of certain aspects of AGDC really with the purpose of documenting where they’ve been, how much we’ve appropriated, what we’ve appropriated it for, how the money has been spent and where the organization stands at this time. I view it as a handoff audit to clearly define, objectively define where we came from, where we are at, how much money has been appropriated and how well it’s been managed. Then obviously AGDC will continue to perform however they choose to and however the governor chooses to develop, but it’s sort of an after action report on AGDC as it was originally developed by the Legislature.

Petroleum News: You’ve certainly detailed a lot of what you would like to learn. Was there anything particular that drove this request?

Hawker: Part of what motivated the request is the difficulty we have had - and that would be myself and Resources chairs, people who have had an interest in AGDC - in getting a clear understanding of what they have done with the money that has been appropriated to them. So we were very clear in attempting to compartmentalize the money between the AGDC’s work to develop the state’s gas resources for in-state use and the efforts being put forward to develop a mega pipeline project to build a pipeline for international export. It’s been difficult for our finance people to get any real clarity on what’s been spent, where it’s been spent and how it’s been spent. Myself and others really wanted to have a sense from an objective report on that as a basis to move forward.

Petroleum News: This doesn’t strike me as a partisan issue. I’ve heard these concerns from members of the current majority and the current minorities. Do you have that same sense?

Hawker: I have received no pushback from anyone on the request that we’ve got to do an examination on where AGDC has been, where we came from and where we stand today in regards to the funds. There have been a lot of questions in the last two years about AGDC making business decisions outside of what we intended to be the scope of the structure of its management hierarchy.

My legislation a couple of years ago - HB 4 - moved AGDC from being a subsidiary operation of Alaska Housing Finance where it got its start as a result of legislation sponsored by Rep. Chenault into a standalone corporation where it could be as independent as possible. The concept was to have an extremely competent and qualified board of directors with the best and the brightest from around the world.

The organization would work as free from Alaska politicians as possible. I think we were doing very well until we had a change of governors. The first thing the governor did was fire the board of directors and put in a team of political hires and ended up hiring his friends and associates from his Alaska Port Authority days, which he has all the right in the world to do those things. But it changed the character and the operations of AGDC so sufficiently that it’s not even recognizable in relation to how I believe we intended the organization to operate. Part of that is we very much intended with the quality of the board of directors who would control and manage a competent and qualified professional staff. They would make decisions in as responsible and business-like manner as they possibly could, free it from all the politics of legislators, of governors, of newspaper editors, state commissioners and anyone who would have their own ax to grind at these issues. We truly had tried to set it up to operate as a state-owned independent resource development company. With the election of Gov. Walker, it changed from being certainly extremely independent of politics to being an entity that in my opinion completely politically driven.

Petroleum News: How is that hurting the pipeline process?

Hawker: Personally, I think it stopped it dead. Under how we had originally conceived the organization was you had an organization that was very much part of the state of Alaska and its board of directors knew it was beholden to the people of the state of Alaska and we had people with the skills and experience to get in the same room of people with comparable skills and experience with the three major producer companies in the state and work toward making decisions necessary to secure the investment of upwards of $60 billion of capital into a major pipeline project. That certainly included having a staff at AGDC that also understood when the world markets changed, we had to change in relationship to them. We had a symbiotic relationship going with the people we expected to step up and put up $60 billion. The state doesn’t have that kind of money.

We now have an organization that is built on the AGPA (Alaska Gasline Port Authority) model which says we don’t want any participation by the producer companies. We are going to build this entirely on our own. We shall build it and they shall come. We will be forcing the producers to sell us their produced gas at the well head. After that the state takes full risk and responsibility for it.

I don’t see a project happening under those terms. We’ve seen no forward movement. We’ve seen none of these mysterious Asian entities step forward as the governor kept implying. This is not how you build a $60 billion mega project. The very first thing you do for a mega project is you get all of the people who perceive themselves as stakeholders into one room at one time and you sort out all contentious differences, then resolve them before you start the project and go forward working together instead of going forward in a hostile relationship. So I think that any hope of an Alaska natural gas pipeline is dead under the current circumstances.

Petroleum News: So would you say the state is trying to advance an uneconomic pipeline?

Hawker: I think there is clearly sufficient evidence, if we look at the decisions and rationale offered by three of the smartest and biggest companies in the world, why they felt they need to slow down on this development project. That decision from them and the rationale they gave clearly is indicative that this project is economically challenged. The governor then steps forward and says you’re gone, you are out of here, we are going to do this on our own. It’s not being done in a manner that’s looking at economics first. Are we advancing a project, I don’t know that we are even advancing a project.

If it is being advanced, is it uneconomic? I think if it were economic we would have companies like ExxonMobil leading the way. There is a lesson to be learned and something to listen to when ExxonMobil says this isn’t exactly the right move at the time. If they are not willing to make the investment and don’t feel they can receive an adequate return on that investment, I’m not sure what the state of Alaska thinks that we can do better than them. Now the reaction is we don’t need as much return as Exxon does, Exxon has other opportunities around the world to build. If this project was competitive around the world, industry would be flocking to it. That’s the key word we are looking for: competitiveness. I don’t know about economic or uneconomic, but I do believe this administration is pushing against the competitiveness curve and pushing forward a project that just is not globally competitive.

Petroleum News: You speak of competitiveness - that seems to underpin a lot of your philosophies. When you folks debated HB 110 and SB 21, one of your arguments was even if the companies were making record profits, Alaska was still not competitive. Has that been a driver for your policy philosophies?

Hawker: It’s foundational in my personal philosophy in managing the state’s resource wealth. If we are not competitive in the global markets, we are not going to succeed in marketing our resources. There is nothing special about a molecule of Alaska oil; there is nothing special about a molecule of Alaska’s gas; there is nothing special about a molecule of Alaska gold. I could go down the list. These are fungible commodities and wherever in the world they can be extracted and developed in the most economically efficient manner they will be. That is the nature of the beast here. We’ve got a lot of folks in the state of Alaska that I’ve seen in my 14 years in politics here somehow thinking Alaska is better, Alaska is different and that industry is going to be putting forth the billions of development dollars necessary because there is something special about Alaska resources or because there is some obligation to develop Alaska’s resources. There is not. The state must always look to be competitive in the world in all manners if we are going to look to be a participant in a global economy in developing and marketing natural resources.

Petroleum News: Normally you hear about a country being competitive globally as opposed to a state. Why does Alaska get lumped in with global discussions?

Hawker: Around the world, the sovereigns - the various nations - typically are the ones who ultimately control the ownership and access to most of these natural resources. How a nation chooses to develop those resources creates a world of alternatives to those with capital to invest, to place that capital and get a return on it. Naturally there is going to be a place where there is the highest probability of greatest return who is going to get that capital. Folks around here tend to think we can change the law of economics and the laws of physics by passing a statute. Respectfully, that just isn’t the case.

Petroleum News: With the markets determining the fate or direction of a project in recent years how does a state craft legislation that is stable say for an oil tax regime?

Hawker: In the state of Alaska, I don’t see any likelihood for a stable tax regime considering the current state of Alaska politics. I don’t see it being stable. The only way these things become stable is by passing a tax regime that obtains for the state a fair share of the resource wealth and then having the courage and the strength to stick with that tax regime over time, and not attempt to change our tax regime every time economic circumstances change that we cannot control. I want to talk about a fair share, when I say that, a fair share is the maximum amount that we extract on tax and royalty basis for the development of our resources we want. It’s a give and take. The lower the taxes, the greater the development of our resources will be. We have to figure that spot in the middle where we get enough - and you’ve heard it talked about, the sweet spot - but don’t discourage development. We’ve certainly seen that the ACES tax regime went way beyond what industry could tolerate. It took too much and our production stopped significantly. We corrected that. We’ve seen a resurgence of investment. We’ve seen additional production that is coming online and forecast to come online. Because of the low prices of oil and overall low production, we are hurting financially. It seems to an awful lot of people to be an easy solution to go to those industry players and again raise the taxes on them. All that is going to do is tilt the teeter-totter to where investment stops.

Legislators have got to realize this. Stop changing the rules constantly. Write fair rules and stick to them. ACES was a punitive venture to hurt the industry as much as possible - and it did - and we see what we got for it.

Petroleum News: There will be a different makeup of the House next session with a different majority and new views leading House Resources. What do you make of that?

Hawker: Everyone who wins their election and succeeds in establishing an organization deserves to be given a chance to succeed. So I believe the new organization needs to be given a chance to succeed. They themselves have the responsibility to see if they can put together the necessary policy to succeed. Oftentimes that means putting together the necessary will to not mess with things that are already working. Whether this new organization succeeds or fails within the resource arena, we will see fairly quickly. We have a fairly rapid response from industry. Does investment continue? Do we keep seeing new production brought online or do we have an increasing decline rate for our production. With the resource industry there is a meter that tells you how well you are doing?

Petroleum News: When you look back over 14 years, what do you believe has been accomplished toward resource development?

Hawker: I think one of the most successful resource development initiatives was one of my own. It was the Cook Inlet Recovery Act. It seems to be completely overlooked these days, but just a few years ago we were having brownout and blackout drills in Southcentral Alaska. Our utilities were actively negotiating the import of natural gas in order to keep the heat and lights on in Anchorage. We passed landmark legislation with the Cook Inlet Recovery Act. It created an economic environment that attracted the necessary industry investment into Cook Inlet to start developing the resource base that remained. What had happened was the major gas domes developed in the 1950s forward had been depleted, and it was an entire new world to go after much smaller, much more expensive, much more difficult pockets of gas across Cook Inlet.

The Cook Inlet Recovery Act recognized what was needed to attract the investment capital to do that, and we succeeded. You haven’t heard about a brownout for how long? No one is worried about running out of gas in the immediate future. We are talking about selling it up to Fairbanks or potentially exporting it in the near future. But I do worry that because it’s happening and the financial environment that we had to set up to get it done, there are a number of legislators who want to tax it back to the stone age again, tax it into non productivity. That’s something we are going to have to watch very, very carefully.

Another element of the Cook Inlet Recovery Act that should be noted is that we had to tell the regulators - in this case, the RCA (Regulatory Commission of Alaska) - to get out of the way of development and recognize the world has changed. It wasn’t always the least cost alternative that accomplished the greatest good and greatest desired outcome. We had to do what we needed to do to approve gas sales and gas contracts that necessarily have increased prices in them because now we are in a changed economic environment where it does in fact costs more to develop the resource.

So you have two things: We provided the economic environment for the industry to move forward with and we told the regulators to get out of the way. I stand back and say, it’s worked. You have heat and lights on in Anchorage at this moment because we passed this act. It’s proof the Legislature can create an environment that fosters development.

Petroleum News: You noted how there may even be enough gas to ship to Fairbanks. There have been ideas floated about a pipeline to Fairbanks. Why has this idea never taken off?

Hawker: Two elements. One was securing an adequate supply of gas in Cook Inlet. The second was economics of developing a project. You talk about one of the greatest boondoggles the state has undertaken was the fool Interior Energy Project thing. We had the phenomena where oil prices spiked to exorbitant levels and the cost of heating oil was strangling the people of Fairbanks. They legitimately were looking for alternatives. Two years ago, the state stepped in and started buying the public utilities and started making investment toward building a pipeline or trucking it by rail - whatever choice they were going to do. It became a state-sanctioned, state-sponsored project and today nobody will hook up to it in Fairbanks because it’s still cheaper today to buy fuel oil than to pay for gas that the state-owned project attempted to provide because it cost so much to get it out of the Cook Inlet. Again, it’s availability of resource and the cost of delivery. That project has never been able to pencil out.

Petroleum News: So as you look back over 14 years, what will you miss the most?

Hawker: That’s an easy answer: Working with my staff. I have been privileged to work with some of the most talented and what I believe is a truly brilliant staff dedicated to their specialty in building the state on a basis of good policy and not politics. For years, Paulyn Swanson was my finance aide; Julie Lucky was my legislative aide; Rena Delbridge was my resource policy aide. I don’t think anyone could have had three better staff working with them. Truly what I will miss most is working in the policy arena with people of their caliber.