Hendrix: Tax credits require results

Newly hired cabinet-level, Walker consultant says he wants tax credits to be investment that nets oil, gets re-invested into Alaska

STEVE QUINN

For Petroleum News

With lawmakers expressing concern over the loss of Deputy Natural Resources Commissioner Marty Rutherford and still learning who the new guy is running the Alaska Gasline Development Corp. - Keith Meyer - Gov. Bill Walker had another surprise. While speaking at the Anchorage Chamber luncheon, he announced the hire of former Apache and BP executive John Hendrix to a cabinet level post.

Hendrix, who grew up in Homer, spoke to Petroleum News about his new post with Walker’s team.

Petroleum News: When did the governor approach you about working for him? Did you meet at an AOGA lunch or an RDC lunch? What drove the decision?

Hendrix: We’ve met a lot over the past few years. I first heard of Walker from my children’s godmother in Homer. He was campaigning the first time through Homer, I was in Egypt and she was telling me, “He’s a good guy; I really like this guy.” I think we talked a few times at dinner and we just talked. He’s got a love for Alaska and I’ve got a love for Alaska.

That’s what Alaskans need to come together on, is our love for Alaska to make this thing work in the short term and in the long-term. We can continue to make oil and gas the funding mechanism for our state, but if the last couple wake-up calls we’ve had haven’t woke us up, nothing would.

Petroleum News: What do you see as your role as a member of the governor’s cabinet and advisor?

Hendrix: First as an advisor, I’m a relationship connectivity-type person and understanding the potential of oil and gas resources in the state of Alaska, and messaging it to the governor so he can understand it, then have a good conversation with the producers, developers and explorers in the state for not only the short term but also the long term. What is the potential? What is the prize of Alaska oil and gas? How best can we get it out of the ground?

Petroleum News: What gave you confidence that you’ll have the governor’s ear? There has been some significant turnover and lawmakers have expressed concern about that.

Hendrix: I think just the relationship I have with him. We’ve had some frank conversations. Even in the staff meeting, the governor is saying, “I hired John to be John. I didn’t hire him to be a yes man.” Mostly it’s just looking him in the eye and talking to the governor. I trust him. That goes a long way and he trusts me.

Petroleum News: Beyond any reports on potential reserves by the USGS and other numbers what is the potential as you see it?

Hendrix: I think the potential is very strong. Our tax credits came about to basically be an equalizer to competition in the Lower 48. But there are a lot of things that get in our way. Not only is it the cost of doing business in Alaska, but it’s basically the requirements we have as a state when 65 percent of the land is held by others. The map of the state of Alaska changes considerably when you only include land held by the state of Alaska.

The federal permitting, the NGOs - everybody should have a conversation and everybody should be held accountable when they bring up concerns, the impact on projects - everybody has to be held accountable for any kind of delays they keep the people from enjoying Alaska.

Petroleum News: You talked about good conversations with producers and explorers. Do you see yourself as kind of a liaison between the governor to smooth over any differences that may have emerged during his just under two-years in office?

Hendrix: Well, I think Walker is a very friendly guy. People who know him personally, they find him very friendly, approachable and a good listener. It’s basically understanding what are the drivers for oil and gas companies and what are the drivers for the state of Alaska and the citizens of Alaska.

It’s having some really quality conversations because we have a lot of opportunities for exploration, development and production if we unbridle those. A lot of times it’s the permitting, not just cost. We can’t continue to have people bring up rigs here for one-off wells. When we lease land to people it would be nice if they could actually drill an exploration well, and start development without these stalls that costs Alaskans their livelihoods and jobs leaving Alaska.

Petroleum News: So if your job isn’t in a regulatory role, how can you affect that change?

Hendrix: I’m bringing an oil and gas business perspective and what’s keeping oil and gas business from being competitive with not just with the Lower 48 but with the global market of oil and gas.

We have huge resources up here. If you talk to anybody who has been on the North Slope, it’s probably the most environmentally conscious place in the world. We’ve demonstrated to Alaska that we can develop oil and gas resources in an environmentally sound and socially responsible way to the stakeholders in that area.

Petroleum News: One of the reasons for the question about smoothing over relationships is there has been criticism of the governor by the Legislature and the industry that, while he’s accessible, they don’t always have a sense of what he’s doing, they don’t know what his plan is.

Hendrix: I don’t think any politician in the history of the state has been faced with what this governor is faced with. I’m here to basically speak the oilfield language with this cabinet and with these reports.

I was talking to someone today and they were talking about construction. To me construction is surface. It doesn’t include drilling. I had to say that’s development, including drilling. It’s making sure we’re speaking the same language. A lot of times people get confused saying one thing and through a different ear or lens, we hear it differently.

Petroleum News: You’ve been on the job about a month. Have you had a first meeting with the governor where you’ve had to offer your first set of advice?

Hendrix: I think before I was even on board I was consulting with them, helping script things the right way. I can’t tell you what.

Petroleum News: One subject that will likely come before the Legislature again is tax credits and taxes, whether it’s hardening the floor, raising the minimum, all those things. What kind of role do you see yourself having in this debate, especially having been on the receiving end on the current structure?

Hendrix: I see myself as someone who has been there, done that and still doing it, and making sure everyone understands the facts around tax credits. The governor, unless there is special legislation right now, can only pass out $30 million, so the $30 million he is releasing to let people cash in tax credits. These are like rebates. It’s $30 million and some people probably didn’t quite understand that. Other people probably really used it to their advantage.

I believe tax credits - and I’ve said this before - we want someone who is drilling for oil and gas, not drilling for tax credits. If we start with that philosophy, the state will do well. We’ve got to make sure people drill wells responsibly, explore, develop and produce responsibly to earn these credits. Not just show us an invoice and get a rebate on it.

So we have to have sound, sustainable exploration, development and production. We have to encourage them to re-invest the money back into the state of Alaska. That right there, if companies would put money back into the state of Alaska, that right there is an economy amongst itself. So maybe there will be some changes around that concept in making sure we keep the money going back into Alaska businesses, Alaska exploration, development and production companies.

Petroleum News: So did these credits work for Apache?

Hendrix: The credits worked for Apache. I, as the general manager, I wish they would have had the stipulation that money paid stayed in Alaska. It would keep people here longer and help them compete against other interests. Companies should not be here for tax credits. The tax credits should allow companies to basically increase the breadth of their operations. Maybe they won’t drill one exploration well this season. They will drill a confirmation well and another confirmation well. That way they can go right into development instead of piecemealing it one well at a time or maybe shooting seismic. If tax credits are right, they should be an equalizer, not a profit center.

Petroleum News: Now there will likely be more discussion on net operating loss credits. Some believe the state can’t afford those. Others believe when producers losing money are still investing, they should not lose that deduction. What are your thoughts?

Hendrix: I’m just looking right now at the ones already spent. I’ll look at those later. It all boils down to we’ve got to have an equalizer in the state of Alaska. We should get away from as much tax credits and rebates as we can.

We need to make it more friendly here. When someone like the NRDC (National Resource Development Council) sues a federal or state agency and basically delays the development by a year on a quarter billion program, that costs Alaskans money. When those companies do that and the federal government pays them for doing that.

It’s very beneficial if you’re an NGO to sue an oil and gas company if you have a friendly judge, he can get the federal government to reimburse them for all of their expenses, even though it could cost the state hundreds of millions of dollars in development.

We need to work on the state and federal level to make people understands this. Dan Sullivan understands this. I’m sure Lisa Murkowski and Don Young do, too. It’s about getting traction and understanding what this means. We are in a precarious situation right now. People know we need help. Alaskans, like Americans, like to help people. So maybe we can finally get around to having people in Washington, D.C., and in the Lower 48 understand how Alaska works.

We should have the right to develop our land in a way that is sound. We have good people up here who have done a great job of developing our resources in an environmentally friendly way.

Petroleum News: Do you see the insights you want to provide the governor more upstream?

Hendrix: No. I see it as the whole cycle, really. I look at oil and gas, the whole model. I look at what’s getting in our way. That’s who I look at - exploration, development and production. If we can understand that, and if there is some commonality between all those that’s affecting every oil company in the state of Alaska maximizing resources from the people of Alaska, I’m going to be on it.

Petroleum News: I realize Mr. (Keith) Meyer is in charge over at AGDC, but what kind of role do you foresee having a role with the AKLNG project?

Hendrix: Keith is new to Alaska. I can help him with insights into Alaskans. I have relationships with every oil company up here, having worked for one of them. It’s conversations you can have when you’ve known someone for 20 years. It’s a little different than when it’s just a few months. Knowing the upstream with his knowledge of the downstream can help a lot also.

Petroleum News: When you take your experience with BP and Apache, then you look at AGDC, is an entity like that capable of managing an AKLNG project?

Hendrix: I think if you have the right resources and right skill sets you can manage anything. I’ve gone and built teams that ran companies making billions of dollars. I think what Alaskans need to understand is that this governor wants to have the right to go out and market the gas. If he has a certain amount of gas that he can market, he can back into what the cost of the project has to be then he can get investors if it’s a sound economic investment. If it’s not, he’s not going to do it. That’s a concern I have: everybody needs to understand what we are trying to get at here. We are not even at the stage of building it yet.

We just want to market that gas and find out how much can we get for our gas. You’re going to get a better price the more gas we go to the table with. It’s going to be hard to market the gas if the outside world knows we have issues. It would be nice to go in with some strength knowing we’ve got a few Bs of gas to sell.

Aligning the producers with the state is one thing we are working on. I think we’ll be successful in moving the alignment. The state has some special incentives on the pipeline. We are not taxed and that really helps when you are trying to make a project economic.

Petroleum News: It looks like you’ll have your eyes on a lot of different issues.

Hendrix: Right now LNG is on the peripheral with tax credits on the forefront. At the same time, I’ve met with a majority of the companies and I’ll continue to meet with them about what is their plan for Alaska, understanding what the strength of the company is, what the weakness of the company is, what’s basically getting in their way of obtaining what they think they can do and see where I can help them. The commonality, that’s what I’m really working on with them.

Petroleum News: Will you be in Juneau during session?

Hendrix: If I have to. I try to work with everyone. The main thing is what is the short term and what is the long term for the state of Alaska.

Petroleum News: The Legislature will likely be interested in what you know as well as the governor. As you can see from the last six weeks of the interim, the Legislature has a lot of questions about AKLNG or the POD issue on Prudhoe Bay.

Hendrix: First and foremost, I work for the state of Alaska. I’m here to help the state. Right now we are spending more money than we take in and that’s one of the reasons I took the job. I’m tired of sitting on the sidelines and not watching this great state of ours move forward, spending our savings when we shouldn’t be.

Petroleum News: Where is the state’s greatest potential near term?

Hendrix: The North Slope. I’ve got to watch what I can share. I have to keep some things in confidence. In this job, trust is very sacred, like anything. I know we have opportunities. We just have to make sure we understand the obstacles and I’m here to help remove them.

Petroleum News: One of those obstacles, some feel, is a stable tax system. There seems to be difference of opinion on whether the state has a stable tax system. Do you think the state can achieve that?

Hendrix: We need a stable tax system. We need to make Alaska bankable again, but $30 oil and $40 oil doesn’t help that. It basically establishes commonality between every Alaskan that we need to basically get down and look at the foundation of this state, how we manage our costs and how we manage our income streams. We need to plan for $45 oil, manage to the down side of where we are now and the upside is cream. When oil was trading at $107, we were budgeting for $107. The oil companies were budgeting for $70. We have social responsibilities to the state. The oil companies do not.

Petroleum News: So will you be among those who consult the governor on the plan of development issue in Prudhoe Bay?

Hendrix: Yes. We are working through it, but that’s up to the oil and gas companies to do it. I’ve talked to them. The main thing here is it basically goes back to be able to market gas, for the state to go and talk to the outside world and say I’ve got X-amount of gas, what do you think I can get for. With Keith’s knowledge of optimizing an LNG plant, maybe we can build one for the volume we need. The pipeline size wouldn’t change, but maybe the different stations would. Without that you’re kind of guessing. The governor is asking to be given the chance to market the gas.

Petroleum News: You mentioned being in Egypt. Do you see yourself traveling to places like Houston, our country’s energy hub?

Hendrix: I’ll go wherever is needed. Right now we’ve got to get our gas. It’s not necessarily our gas; it’s their gas. We just want the right to market it, bring it together as one project. I think the producers on the North Slope understand. They want to monetize the gas, too.