Kelly prepping for new leadership role

Fairbanks Republican begins immersing himself into pending Senate president post by spending time at RDC’s annual conference

STEVE QUINN

For Petroleum News

Most know Sen. Pete Kelly for his work on Finance committees from his 14 years collectively in the House and Senate. In January, the Fairbanks Republican will hold the title Senate president, broadening his responsibilities.

Efforts to expand outside the finance realm already began when he recently attended the Resource Development Council’s recent conference.

Kelly spoke to Petroleum News about what he believe lies ahead for the Legislature, also reflecting on his new post.

Petroleum News: Obviously the budget is the major focus of the Legislature, but as it relates to resource development, what would the priorities be?

Kelly: It’s a kind of not appropriate for me to be speaking too much about priorities at this point because we are going to be getting together in January to agree on that with the larger group. Obviously, whether we meet or not, the budget is a fairly daunting item that we are going to have to face. I think the idea of resource development is something we will have to face as well. Face in a good way because we have a lot of opportunity.

I think in some respects people get tired of hearing politicians and others talking about the vibrant community that Alaska can have. The catch phrases that we’ve heard so often can kind of ring hollow when you’re in a fiscal situation that we are in now. So I’m kind of sympathetic to people who are tired of hearing that stuff. But I believe it. Having gone through the presentations at RDC it’s kind of verified what many of us believe. We do have a lot of opportunities coming up and we have a lot of reason to be optimistic.

There is no question we are going to go through a lot of tough times. I know a lot of businesses are down and they are down in double-digit numbers, but they will come back. We are very fortunate there has been a shift in this country about the way it thinks just about business in general, not only because of the resources we have in the ground but also a much more friendly environment in Washington, D.C.

Petroleum News: Let’s talk about Washington, D.C. President Obama just removed the Arctic from consideration for development. What are your thoughts on that?

Kelly: I don’t know what it means to reverse that. All I’ve got from what I’ve read is that it’s going to be more difficult to reverse what he’s done. I just have a lot of high expectations and faith that the Trump administration will do everything that they can because many of the things Obama has done is just absurd on their face. Some of his acts, all they will do is cripple our economy. I just believe the Trump administration is going to pursue every avenue that we have for responsible resource development.

Petroleum News: One of those avenues that comes up every year either through resolutions in the Legislature or just in bigger picture conversations is ANWR. Do you think ANWR has a chance in these next four years?

Kelly: Well that’s obviously a little bit out of my orbit. I guess if you asked me to say it had more of a chance now than it did before, I would say I would agree with that, but who knows. As you know the Senate has those goofy rules where the Senate has to have 60 or there is no actual vote. Who knows what that can mean? It’s those senators thousands of miles away who pander to their environmentalist extremists in their states shutting down ANWR and having no impact on their state. That’s the problem we’ve faced all along so I think it’s still going to remain a challenge but I think we have a fighting chance now.

Petroleum News: Let’s go back to your attending the RDC conference. What were your takeaways that made you bullish on the state’s future for resource development?

Kelly: Well, Smith Bay (Caelus) and the finding at Armstrong’s Pikka, we knew about them before RDC but it was interesting to see them on a map and hear the people who have to take the risks speak so enthusiastically about bringing those projects on line. Not only those two projects but others as well. If you look at a map on the North Slope, there is just a lot of oil up there. Those who say we are coming off an oil economy, well maybe we are but it’s going to be a heck a long time before we do.

We have to make sure Alaska is in a competitive position with the rest of the world. In particular we are going to have increased competition from the Lower 48. That huge find they just made in Texas is obviously going to put Alaska in a more desperate competitive situation with our neighbors to the south as they bring that on line. Of course, the Texas find is shale oil. I honestly don’t know what it’s going to mean. We don’t know enough about that yet to know how difficult it’s going to be to bring that oil out or at what price point.

Nevertheless, you’ve got billions and billions of barrels of oil in the continental United States and that puts Alaska at a disadvantage when it comes time to start distributing capital dollars and who is going to develop what fields. We have to make sure we are in a position and look attractive to those who are spending those dollars.

Petroleum News: Have you gone to RDC every year or did you feel your new role as president warrants a broad approach this year?

Kelly: I’ve gone and jumped in and out of a few meetings in the past, but this is the first time that I’ve parked myself and sat through the presentations and network. It was very valuable. I’m glad that I went. I’ve been so budget focused. I’ve been in the Legislature for 14 years and I’ve been on Finance for every one of those years. I try to lift my head up long enough to get a larger picture of what’s going on in the state. I don’t know how successful I’ve been at that. I decided I needed to go out there and start absorbing information that wasn’t just specifically dollars and cents.

Petroleum News: You noted that the public may be tired of hearing politicians wax poetic about our oil and gas future. Where should the public get its information, if not the politicians?

Kelly: I think they need to follow Petroleum News and Journal of Commerce. Some news outlets are so agenda driven you couldn’t follow what’s going on if you had to. But as far as politicians waxing poetic about our future, unfortunately sometimes when you get a microphone thrust in your face and somebody asks you a question and you kind of defer to the positive. I think after RDC maybe there is more reason to be positive. Yet I think many Alaskans are very scared and they should be if you just look at the bottom line of some of these companies. They are losing a lot of money. I think we are in a trough, but I think there is a path out of this trough. That’s really all I’m trying to say.

Petroleum News: As someone who has a strong background with Finance committees, either as a member or co-chair, what would you like to hear from the industry to appreciate the investment climate, especially oil tax schemes are certain to be discussion next session?

Kelly: I’m not sure it is they who should be called on the carpet. They have developed our resources. They have paid royalties. They have paid severance tax. They have paid corporate tax. They have paid property tax. They have provided thousands of jobs. They have provided billions of dollars to fund our education system, our whole state government. The money that has gone into the Permanent Fund has come from them in exchange for the resource. It was a fair trade. I’m not saying they are giving us any kind of gift. Don’t get me wrong.

The point is I’m not going to call the industry on the carpet for our financial problems. We are going to have to work some things out with them, there is no question about that. The larger point is we the state of Alaska has a financial problem and we have to figure out how we fix that. We would ask them maybe to assist going forward and how we can make sure that we have a vibrant oil economy while having the oil companies participate.

Petroleum News: On the flip side, what would you need to hear from the administration on these matters?

Kelly: The problem I’ve had with the administration - and you know he’s done a few things that are bold and I’ll give him credit for boldness - but they need to take their game up a notch because some of the things that are going on in state budgeting, they just don’t seem to understand. For example, we had money from the FY 16 budget and we had a debt to pay in the tax credits in the FY 16 year. We used FY 16 money to pay the FY 16 debt. He vetoed it and called it a cut to the FY 17 budget. I’m not sure if his budget people are as sophisticated as they should be on this kind of stuff. I would hope he would direct his people to sharpen their pencils a little more and get into the game. There is a little too much rhetoric about making certain industries pay, about what a cut is and what it isn’t, about portraying themselves as someone who is going to cut back on operating expenses through some of the contracts - and by the way, they did follow through a number of times, don’t get me wrong; it hasn’t been all bad. I just want them to take their game up a notch. We just have to be on the same page about what reality is because more important than what our discussions are between the Senate and the governor’s office is the people of Alaska have accurate information so they can at least have an entry level discussion about what’s going on with the budget. When some of the things the administration has said, people run off in different directions thinking they have the right information, then they pressure their elected representative to do one thing or the other but the information they had in the first place is wrong, so again I just want them to take their game up a notch as to what the reality of the budget is.

Petroleum News: You’ve mentioned the credits. How do you think the state can pay for the credits right now?

Kelly: We have to take things a step at a time. We had $400 million to pay our debts in the FY 16 budget and it got sent back to the CBR instead of paying the debt. The CBR has a three-quarter vote attached to it. Anytime you take money out of the CBR, those who would trade their vote would trade it for more spending. So they took the $400 million and could have paid a bill, but instead sent it into the CBR where you get very poor interest. Who knows how many millions of dollars are going to be attached to that $400 million when we bring it out of the CBR. We have to have the three-quarter vote attached. I just thought that was not a very savvy move.

Petroleum News: Were you surprised it was done a second year in a row?

Kelly: You know, I don’t know. Like I said, he called that a cut. It wasn’t a cut. I don’t know what they are doing sometimes.

Petroleum News: There will also be some pretty heavy-hitting discussions on the gas line and whether the state should move forward on something the industry has deemed uneconomic. Again, tapping into your finance background, where do you see a gas line fitting in with the fiscal plan? Are they on separate paths or does one beget the other?

Kelly: You know when we started off with oil prices higher and gas prices higher, we put in place a plan to build a gas line, then we were marching along under budget and ahead of schedule while meeting all of the statutory deadlines it was easy to associate the gas line with the fiscal future of the state. I think the gas line is so much in question now that I would reserve judgment. I would obviously defer a lot to Sen. (Cathy) Giessel because she is the Resource chair. She follows this stuff very closely. As I’ve said, I’m usually off on the budgetary issues and now I’ll be doing the job as president.

The other thing too is - we are going to have a dispute over this right off the bat. Keith Meyer (AGDC president) was saying they have $100 million that they can spend. Most of us in the Legislature - I’ll still have to verify these numbers with David Teal - most of have it at $30 million. We don’t want them taking money we have appropriated for one purpose and have them spend it for other purposes. The idea of having a state-run, state-owned gas pipeline is not something we are real enthusiastic about right now, especially if AGDC thinks they are going to do it with money and we have a disagreement over how that money was appropriated. That being said, I have to do more research on whether that money is actually locked up as tight as I think it is.

Petroleum News: The industry believes this is uneconomic. Others do too. What do you need to hear from the administration that would have you willing to go forward? You may not be on Finance but you still have a vote on the floor.

Kelly: There is so much debate and discovery between us talking here and the actual push into the button that I’d be reluctant to get into that discussion. It mostly comes down to whether it’s going to pencil out. If all we have is a gas line that just moves somebody else’s gas to market, that doesn’t thrill me that much. There is some benefit to that, don’t get me wrong. But the original plan that we had looked like it was going to work pretty well and return to the state a tremendous amount of money for its budget. Just being the builder, part owner and taking so many risks - this is just 30,000 foot view of it as I see it envisioned now - I’m not that enthusiastic for what they’ve got going now.

I will give them every benefit of the doubt, though, as they develop this project and as they bring it to us. I want this project. I would be happy for Gov. Walker to be the one who puts this into the end zone for us, and I will help any way I can to do that. But ultimately it has to pencil out and it has to be in the best interest of the state.

Petroleum News: Let’s look a little closer to home. Heating costs have always been a priority for the Interior lawmakers. What developments of note are you seeing lately?

Kelly: One of the presentations at RDC was from Doyon. The Interior gas project is very important to us but we’ve got to have that gas delivered at an affordable price. It’s got to beat the price of fuel oil. One of the supply issues have been challenging. One of the things I’ve watched the most has been in the western Nenana area where Doyon is drilling for gas. If they find gas there, we are golden.

That’s just a 50-mile pipeline and we should be able to pay near normal market prices. I think the Interior Gas Utility and AIDEA and other people involved are struggling with supply issues. We started this in 2012 and here it is 2016, and we hoped to have a reliable gas supply here now.

I’ll give some high fives to the Parnell administration and the Legislature. We put money in the budget to build out here the infrastructure to get gas to homes when it comes, so that’s a very positive thing. When we finally find the supply, we can have a fairly large portion of Fairbanks covered in a short time.

You know geology is clearly something I don’t understand and the more I learn the less I know. I keep saying Godspeed to Doyon. You keep putting holes in the ground, baby.

Petroleum News: A lot of people don’t know you once worked on TAPS in the 1970s. Talk about that a little.

Kelly: I was at my high school graduation and was only 17 and had gotten a job with Lynden Transport driving a truck, but my (18th) birthday was real close. I worked up north at the Fairbanks pipe yard. I was a crane rigger and heavy equipment operator in the pipe yard. I think that was the most enjoyable work I’ve ever done in my life.

I remember around 1975 it was about 55 below for two or three weeks solid or at least it never got warmer than 55 below. Then one day it went to 20 below. Man, it was like spring time. We all thought it was going to be spring soon and things were going to change. Then it dropped back to 55 below stayed another three weeks.

We were working 7-12s. I’d get home, go to sleep at 7:30 or 8. At 19 I was still growing and I was exhausted all the time. I’d get up and head back to the pipe yard. We had good gear, but even if you did, that energy is being leached from you all day. You had to produce energy to stay warm. I would have loved to have gone on to work in the oil fields as well, but in the time I was working I hadn’t developed the skills needed at the camps. Like I said, it was some of the most rewarding work I’ve done.