Coghill: Scrutiny still high for AKLNG

North Pole Republican says market forces still creating uncertainty for state’s pursuits to market North Slope gas internationally

Steve Quinn

For Petroleum News

Before the Legislature returns to Juneau for a special session, Sen. John Coghill along with others on the Senate and House Resources committees will meet Oct. 16 to get an update on the AKLNG project, the state’s effort to monetize North Slope natural gas. The North Pole Republican and committee vice chair says he’s anxious to hear whether the Alaska Gasline Development Corp. shares Gov. Bill Walker’s enthusiasm for the project. He shared his thoughts in advance of the meeting with Petroleum News.

Petroleum News: You’ll be meeting in a joint Resources committee meeting next week to get updates on the AKLNG project. What’s your take on the project, say from a 30,000-foot view?

Coghill: The desire to get natural gas into a market and the realities of the market are tough. I’d say we’ve got to keep having a good permitting, a good economic system ready. It looks to me on the international scene, we have to sell it at too high of a price to be really competitive. We still have to march forward to see if there is an international market.

But in Alaska, if we have to go back to serving just Alaska, even that’s going to be tough because of the dynamics of the fields in the Kenai area. Fairbanks doesn’t use enough. I’d say our desire has never been to find the best economics. Everybody has the desire to get cleaner fuel; in Fairbanks we need cleaner fuel. We are doing it the most expensive way by truck. If it can be piped by us from Alaska, whether it comes from the north or south, that would be great for us.

Still, it looks like there is going to be enough gas in the Kenai fields to service Anchorage for some time which means the pipeline just to serve Alaska probably is not that economical either. We listened to BP people talk to us last week at the Alliance and they are saying right now Australia is online and servicing the world very well and at a very low price. The Gulf Coast - the Mexico, Texas, Louisiana area - they are going to be the next big gas exporter at somewhere around $7 to $8 an mcf. It’s pretty hard to compete against that.

Petroleum News: So with the international market uncertain, it doesn’t sound like you’re confident on a sustainable Alaska market for a pipeline.

Coghill: Unless we misunderstand the capacity of the Kenai fields to supply us. I suppose that’s an ongoing discussion, but it sounds like we have a pretty long supply. We’ll be doing some contracts with them this year and next year. I’m guessing the prices are going to go up some but it still sounds like there is plenty of gas to make long-term contracts so that means the AKLNG is not going to compete in that arena. That would be my guess. Those contracts will tell a story better than anything else.

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

Coghill: Probably how their work matches up with what the governor says. The governor has come back with some pretty glowing reports from Asia. If they are buying that, probably the credibility goes lower. If they are talking nuts and bolts where they are continually fine tuning a project that can come in economically, I’d say they probably get better marks. We know that we have to hit a market that is a 2025 to 2030 market. It looks like the Gulf Coast is going to be flowing pretty good at that point, so that means we’ll have to have a lower price structure. Can this project fit that? We’ll see. So I guess I’ll be watching for that. Have they changed enough of the structure to bring the cost down? There is still skepticism on the tax part because on one hand they say they will get a federal tax holiday but on the other hand they say we will have an international market. Those two haven’t lined up that well. That’s the 30,000-foot view. That’s probably where I live mostly. I’m not really down in the detail on this one. You can chase details and still go in the wrong direction, so I’ll keep looking at it from 30,000 feet.

Petroleum News: You had mentioned how the governor seems pretty bullish on the way things are doing. What does that tell you?

Coghill: It was just six or eight weeks ago he was talking about a very positive meeting in Asia. He feels like they are willing to buy but you never know until somebody starts plunking money down. It’s encouraging from him. I think the reality of that market is they are going to buy cheaper gas if it’s the same quality.

Petroleum News: So how much longer can the state stay on this path?

Coghill: Well the molecules don’t go away, so we have the molecules. We really need to get the molecules into market if we can. It’s healthier for the oil production that we sell that natural gas. It’s important for us. We just need to try to find a way to fit our molecules in the market. That’s kind of what I’ll be listening for from the AKLNG update.

Petroleum News: Let’s switch to the Arctic. Congress is inching closer to allowing drilling and exploration at ANWR. What’s your take on this?

Coghill: I’m encouraged first of all. They have passed out stuff that’s been good. Sen. Murkowski is in the right spot. Sen. Sullivan is in the right spot. The president seems to be willing to talk about it. But as soon as you say ANWR, you rev up a lot of opposition. So not only will it be tied up in Congress with a huge battle, but it will also be tied up in court. I’m encouraged. It’s a journey. I would not raise my expectations real high, but if it moves across rapidly and we actually can go in there and do some exploration wells, it would be nice to prove up that there is actually a good field in there.

Petroleum News: You mentioned court. Do you really expect this to be knotted up in court with all the other battles out there?

Coghill: I don’t think the environmental community would give up on that. They have been pumping misinformation about ANWR into the public view for years and years and years. They are committed to that. My guess is that commitment is not going to go away even if the political process allows it to move forward.

Petroleum News: Obviously, there is no guarantee and we’ve seen how difficult Point Thomson has been. Should the enthusiasm be tempered a bit?

Coghill: I think we need to punch some holes in the ground and find out what’s in there. To the environmental community, I would say if you can do it on land it’s less risky. Even though on the outer continental shelf, we’ve shown we can do a well. But on land has less risk than offshore. What I’m hearing so far sounds reasonable and we’ll see if they will challenge it with all of their might or challenge it with a regular challenge. We’ll see. For us in Alaska, we are greatly encouraged because the ability to find a field that may be a great producer is an energy security issue for America. It’s a huge deal. Now we have to be able to compete with shale production. There is no doubt in my mind about that. The reserve capacity in America between the $40 and $60 areas (in oil price) is pretty significant. That’s what we’d have to be able to produce out of the Arctic.

Petroleum News: What would you like to see happen next? A lease sale perhaps?

Coghill: I’d like to see an open bidding process. The more the better. I think people will gauge themselves. It’s probably not something a junior company can go into probably only because of the court issue. People who have patient capital I guess you could say or who can stay in it for a longer time would probably be the bidders. That would be my guess. I’m not trying to direct anybody; I’d like to see some juniors out there.

With Point Thomson, if you think about the Alaska push to get Point Thomson to get to production and when we did get requirements from them, then when we had a governor who starts back peddling on the final agreement, it could cause some problems. ANWR would be regulated a little differently than Point Thomson.

Petroleum News: When you think of Point Thomson and the recent plan rejection, does this conjure a “here we go again” in your mind?

Coghill: I’m just sorry that it happened that way, but it’s not surprising. But the governor, before his time in the governor’s office, was an advocate of forcing that production in a different way. The settlement he spoke against as it was coming to be and he has never been comfortable with it. Even though we were supposed to get that gas into a pipe economically, it’s going to be tough. But they are proving it up right now. That is probably, in my view, more important to watch than what AKLNG has to say. They have to have natural gas to move in a volume and Point Thomson probably is going to be part of that.

Petroleum News: Still in the Arctic, it seems some of this prospective progress may have started with Ryan Zinke’s visit earlier this summer. What are your takeaways on his trip to Anchorage?

Coghill: I personally was very pleased with his visit up here talking about the outer continental shelf, the change in BLM land management policy. He’s rolling back regulations. He’s serious about getting his staff within the Interior department going in his direction. That has caused no small stir within the appointment area. Many of the people in the department slowly and surely have been put in by people who were against the development - certainly in Alaska - and he’s changing that dynamic.

Petroleum News: Now there have been visits from administrations and members of Congress over the years with hopes of demonstrating how different Alaska is so should there be a different cause for optimism with a different administration?

Coghill: Sure. Absolutely. The idea that we can produce ourselves into an economy has been voiced by the president, the vice president and Mr. Zinke. And he means that. He’s getting the likes of Joe Balash to come in and work with him. The permitting issues have been significant struggles in Alaska from the 404 permits all the way to wilderness characteristics type management. So yes, I’d say I’m very pleased that the conversation has gone well. Will it result in structural changes that are positive for developing Alaska? I hope so. We are not there yet.

Petroleum News: Let’s go to oil taxes. It seems to come up almost every year. You just passed HB 111, which deals with cashable credits, tying them to production. It also included forming an advisory group. Does more work really need to be done or is it time to give it a rest for the next three to four years?

Coghill: I would be reluctant to bring the oil tax up again considering we are in a low price per barrel environment and we have to be competitive in a world that is struggling to produce at that level. So especially Alaska where the cost to produce a barrel of oil is making our margin very, very slim. So I would be reluctant to do that.

I think you are going to see some of that come up in the Legislature. We started talking about reducing our cash investment - because that’s really what it was. Some years ago we decided we would incentivize some things with cash. We call them credits but they were really our participation in exploration and development. We realized we couldn’t afford to do that. That changed investment strategies to be fair and so we need to let that settled out and produce under the circumstances that are in SB 21, though not perfect because you’re not going to get a perfect tax bill - never, never, never - has at least incentivized people to invest. It’s proved out by even in the low priced environment, we are getting some pretty significant investment. We have new oil flowing through the pipeline, which was one of our aims. Even in the low price environment, new production is coming down through that pipe. Anything we can add to that pipe not only stretches out the value and benefit to Alaska’s coffers, it keeps the pipeline nice, warm and viable, and maintained well. That’s important because we don’t know if we will stay in this price environment for two years, five years, 10 years. Having a pipeline drying up is not going to be beneficial to anybody in Alaska.

Petroleum News: Why do you suppose this debate has raged for these last eight to 10 years?

Coghill: We went from a gross tax to a net-based tax. There were a lot of reasons we did that. The gross based, which had a couple of net sides to it, didn’t fit what was going on on the North Slope. Value was slipping away from us as a state and as individuals from Alaska.

The big oil companies that had the oil investment structurally were not able to allow for competition on that field. We wanted more people drilling for more oil. Part of the discussion back in those days was it’s an under explored area and we need to get some people up there. The Big 3 were not in that business so we had to create a way to incentivize that to happen. Good and bad, and sometimes less than the best did happen.

But what did happen eventually was more oil came into the pipeline because more people were exploring. The oil companies who were the big companies up there had to step aside and let in new investment. The good news is more exploration is taking place on the North Slope. It did cost Alaska but we also benefitted significantly during high oil price days. So we, when we went into a net based system decided we would go into the business of trying to prove up that field. The state has had some significant benefit from it but not without significant investment. Last year we realized we couldn’t maintain that any more. Should we have bailed on our responsibilities? I for one thought it was a bad practice because the obligation doesn’t go away and the ability to pay gets tougher. So now if we produce more and new oil that is going to be the target for any taxes. We do have a per-barrel credit which incentivizes new oil, and some people will watch that. My guess is the net-based system means what are the benefits to the oil companies and what are the benefits to the state, and are they working equitably, so they will be watching pretty intently, I think. That debate is not going away.

Petroleum News: Getting back to the federal side, Alaska’s presence is growing within the administration. Let’s get some of your thoughts on those appointments starting with Ryan Zinke appointing Joe Balash to Interior.

Coghill: When Joe Balash’s name came up, two things came to my mind. First of all I know that Sen. Sullivan hugely benefited from Joe’s knowledge, work ethic and ability to get things done. That’s one of the reasons the president may have looked over his shoulder and said who do I know that can help me get out of this permitting regulation problem. That was part of the president’s campaign. Well Joe did a pretty good job when he was DNR commissioner of unravelling some of the permitting problems. He didn’t make it perfect but he was able to attack and get a permit backlog to start to diminish.

He had a lot of help but he was also good at focusing on it. So when he goes to work for the Department of the Interior, he’ll be able to get his hands around that kind of issue and do it well. For Alaska it’s good, because Alaska has a permitting problem, a land ownership problem and a mapping problem, all of which he’s aware of. It takes somebody who is aware of it in order for them to figure out what are some of the key places to work. It’s complicated, but I think he gets it. I’m glad that he is there. I couldn’t be more pleased.

Petroleum News: Steve Wackowski also received an appointment from Zinke.

Coghill: I don’t know him that well. I’d say once again, it’s good for Alaska. He has Alaska issues in mind. It fits the western states so well. Even in the eastern states, issues have arisen on use of public lands.

Petroleum News: In a different arena, there is also (former pipeline coordinator under President Bush) Drue Pearce, who got appointed to the pipeline safety agency.

Coghill: Her long history of working at the national and state level on pipeline issues is very good. So looking for ways to help Alaska be competitive in a very tough market, with pipeline regulation and pipeline economics, I’ll tell you what, that’s as good as it gets.