Coghill likes SB 3001, pipeline progress

North Pole Republican says AKLNG project has promise, but says more cooperation from administration still needed

STEVE QUINN

For Petroleum News

Sen. John Coghill has been in office since 1999, either as a member of the House or Senate. Now the North Pole Republican serves as the Senate Rules chairman and enjoys a seat on the Senate Resources Committee. While Resources did not hear Gov. Bill Walker’s SB 3001, which approved the buyout of TransCanada, plus additional funding toward the AKLNG project, he and many others attended the hearings. Coghill shared his thoughts in a post session interview with Petroleum News. The following is an edited transcript of the conversation and follow-up email correspondence.

Petroleum News: You were among the 16 who voted yes, what drove that vote?

Coghill: There were some big questions. One was should we buy out TransCanada? It became abundantly clear to me that between the administration and its focus and TransCanada not being able to stay in that focus, it was just wise was to take that clean off ramp set up under SB138. Execute it now. There was an economic reason, but the real reason was what they call alignment.

It became apparent to me that they were separating. We could not force them to work together. So the best thing to do was take that off ramp. It was clean. All consultants said it was the best time to do it economically. Practically, the governor just chose a different direction.

He wants more say so with the one-quarter at the meetings. So the answer is yes to that. Then the question is do we give them wherewithal to get to the next decision points in the pre-FEED? The first and most critical being the work plan and budget which happens in December. That’s where the attorney general’s $10 million came into play.

Some people didn’t want to give money to the attorney general because there were some unanswered questions - everything from confidentiality to confidence in the way he would do that work program. I think it would be unwise for us to shortchange him at this point because it would be a self fulfilling prophecy. I would rather see us go forward to that next question to see if we can answer it which is does everybody want to go past pre-FEED.

If we were to say no to the dollars now, we would have said we don’t want you to do the legal contract work that is going to be required to get there. You can argue they had enough money now. But to me it was worth saying, “if you think that’s what you need, we want the project to go to the next level, so we’ll give it to you.”

Petroleum News: There were some people who voted yes, but they were not happy with the attorney general during the special session, particularly for availability. Were among them?

Coghill: I share some of those concerns. There were three questions floating around with the attorney general. How deeply is he involved with all of these different projects? The confidentiality was another. When we found out all presentations for the Legislature had to go through him.

We didn’t know if he was approving them legally or if he was approving them policy wise. He kept saying legally but anytime a policy question came up, people would say we’ve got to check (with Richards). So the credibility of that came under question. I guess the trust level was low.

The third one was attorney client privilege. If you are going to use attorney client privilege to keep policy questions away from the Legislature, are you really in the right place. Is that the best use of the attorney general? He gave some good answers but he didn’t raise the comfort level for any of us, myself included.

I like this attorney general. Some people don’t. I like a lot about him, but I also know he’s put on a whole new suit of clothes that is very different from what he’s had in his previous experience. Same with the governor. I want this governor to succeed. I’m willing to work with him and I suppose look at the best. Some people think that’s naïve. Maybe that is somewhat. But I like him. I didn’t vote for the governor, but he’s here. I like a lot of what he says. We’ve got a long way to go. We’re learning to work together.

Petroleum News: You folks have openly and publically given him the benefit of the doubt, sort of a honeymoon, for being new to his job and building a team to advance a gas line. With that came concerns about communication over his plan. When does that honeymoon come to an end?

Coghill: This next budget cycle is his. My guess is the honeymoon begins to end with this next budget cycle because he has had now one full year to live under a revised budget and now he has to make his own budget. That should at least give his team close enough to being veterans to make it work. I will say this, the governor has been very open to talking to Senate leadership. That has not changed some of the harder questions that we need to answer, so I want to keep that communication going. I think that’s going to be the glue that keeps us together.

We were under the same problem the governor landed in: that is the steep decline into low oil prices happened to us all at the same time. During his campaign and during several other campaigns that expectation wasn’t there. The market took us into a whole new level where really we have to paddle the same boat or the boat is going to capsize. We are forced to work together because of the tough circumstances we find ourselves in.

Petroleum News: Was there anything missing from the call that you had hoped might be there?

Coghill: We had an expectation of fiscal contracts and fiscal deals. That would have put a constitutional amendment in front of us. It couldn’t and didn’t happen. Some of it was the governor asking to look at a 48-inch line. That probably didn’t help. But I don’t think that was the main cause. The way I understand it, the three majors in the deal couldn’t come to an agreement on the gas balancing. You have to get that figured out before you get to the fiscals. They just haven’t gotten that far.

The governor probably kept that from happening in many ways. He kept bringing up the pipeline issue. Starting way back in September, he started talking about a reserve tax question.

He started inserting his view of a pipeline into a project that had solidified under the HOA (heads of agreement). He was kind of pushing on the edges of that. Way earlier in the summer, somewhere along the line, he started talking about 50 percent ownership, which was alarming. Even if he said, I didn’t really mean it, once you say something like that it creates more questions. My guess is he had as much an effect about the question of fiscal issues as anybody because he created those ripple effects because he was thinking aloud when he probably should not have thought out loud.

Petroleum News: Did the reserves tax issue cause any pre session distraction?

Coghill: Yeah, because we went back we started researching the history of it. We started thinking about the impact it would have on people, like Exxon starting to cycle that field in Point Thomson. What impact would that have on investment in an already low price arena for capital in Alaska? We know that we were a prize winner in many ways because we got a capital investment where many other places in the world didn’t. Would this begin to erode what has been committed for capital investment in our fields?

And so yeah, I think it had an impact on the prize oil and the second prize is a pipeline, and what that does to investors. As Alaskans, we have to not only stay close to what is the dynamic of the Alaska Inc.s - Conoco Alaska Inc and Exxon Alaska Inc. - but those people have to answer to a board who have to answer to shareholders. So when you have these conversations out loud the shareholders are the first ones who hear it. The reserves tax no doubt was heard by shareholders and how we handled it could have an impact in a volatile market time anyway.

Petroleum News: The day before session begins, he removes it from the call. Did that make this session easier as far as a focal point?

Coghill: First of all, we were bracing ourselves. That meant we had schedules that were probably going to be a little more intense. The good news - we sighed a sigh of relief that we weren’t going to have to do it. The bad news is we set in motion many schedules, called many people and had them lined up, had done a lot of legal research.

So it would have been nice if we had known two or three weeks ahead because we could have then focused our efforts just on what he was asking at this point, which might have been easy to answer. To be fair, pulling it at the last moment left the question is there any surprises?

So you’re kind of braced for, is there another surprise coming, which ups the level of distrust. So when you heard the questioning, who is in charge? What’s going on here? I don’t know that was ever really satisfactorily answered but we began to kind of get the picture of who was in charge of what piece and the governor was in charge but how. I don’t think that part was answered.

Petroleum News: You folks approved, 16-3; House, 39-0. On the surface, it looks like overwhelming backing of the governor.

Coghill: On this question probably, yes. Because what we did was when he first came to us he said, give me all this money, we’ve got this decision. Take TransCanada out of it. I want the vote. We said, OK here’s the deal if the (Dec. 4) goes south, the money comes back to us.

We put the next decision point right in front of him, the Dec. 4 work plan and budget. We said we don’t know how you’re going to handle it but this is how we think it should be handled. If you’re going to say no to the project then we want the money back because now we have to rethink the whole thing. If the state says no, then what’s the next plan if you say you want a gas line?

So it created suspicions that there was something else out there, though it doesn’t look like there was. But the suspicions were huge when we first went into it because he was asking for all the effort without any commitments to the project. Even though it came out as a final agreement, what we said was, “we will go to the next decision point with you then we want to know after that what to do.”

He laid out a few things that were comforting to us. We finally got the role of DNR a little more solidified. We finally got the role of AGDC a little more solidified. We didn’t get a lot of comfort from the Department of Revenue just yet. And then the Department of Law is probably the next big question. I think some of the no votes were the confidence level in did they need that much money for just the next month. That’s a legitimate question. We didn’t want to tie his hands to say he couldn’t go get the kind of consultant work he needed to get to the next decision point.

So it really was a confidence that says, “OK we are going to December with you. Once we know what that looks like then we can go on to other things.”

Petroleum News: You mentioned capital investment in Alaska. When you consider the projects around the globe being shelved, or just flat out shuttered, does it give you confidence that the three partners are still moving forward?

Coghill: absolutely. The fact that there is investments on the AKLNG side, that they think there is enough market to continue with significant investment and probably what some people keep characterizing as A-teams. In other words, they are putting real careers into this. Some of the best careers are being coalesced around this project.

Gas is probably one prize, but that’s an oil field up there, too. If you get two pipelines coming off that field, then you have both oil and gas that can be proved upon and brought up. At this point the oil line has probably several small fields you can get oil and gas off of, but if you can’t do anything with that gas and have to recycle it, then the cost benefit goes away. So we are hoping that it creates a bigger exploration field because you can sell all the products that you get.

For Alaska we want our small portion. The more we understand natural gas pipelines, the more we understand Alaska is a very small consumer. But we still want it. We don’t want to let the energy go out of Alaska with no benefit to energizing Alaska.

So having it come back in the form of cash so we can build schools and have public safety is one thing. But having it light our small communities with heat and transportation is another benefit that we want. So yeah, I’m greatly encouraged that the majors see that as a real project and we should reciprocate.

Petroleum News: Do you believe that the Legislature has really advanced this project by passing SB 3001?

Coghill: We moved it to the next question, which is can we go into the final stages of the front end engineering and design stage. Once that decision is made, we are talking about some pretty big change, some big dollars. I think at that point we are going to find out how committed the majors are and whether the state is capable because at that point you are staring at the real honest to goodness cash outlays.

As has been said, for every one dollar we put in someone else is putting in three dollars. We still should have our dollar ready but the confidence level should go up at that point. Then the people of Alaska are going to be asked, can we do a long-term contract with them, what is our work plan. Then from here to the final investment decision is a lot more intense.

So what we did was we moved it to the next decision in saying can we look down that road. That looks for 2016 to be those decision points, probably still with way too many questions. Are we going to get gas? No - not yet. Are we going to get to looking at a project? Yes. Is it still 50-50, probably. We know we have gas. We know there is a market out there. What we don’t know is can we create a mechanism that allows us to move that gas to market and still make money and serve customers at a good price. We don’t know that yet. We all said to the governor yeah, we want to take a good hard look at this, and we gave him the wherewithal to do that.

Petroleum News: What would your priority be for the first four months of next year, which pretty much covers session?

Coghill: Let’s call it the next 20 weeks because then it shows you it’s really not that long of a time. When you take 20 weeks, we have to cut our budget, and re-organize government to do that. We are at the level now where you don’t just say, you don’t get the money. Now we have to say we have to change the way we are doing it. That has to happen in a 12-week session.

So we have to then look at other financing mechanisms, and earnings from the Permanent Fund are probably the first target. We are already in a recession type economy already.

Take the tax credits for our oil and gas industry. You’ve got tax credits for Cook Inlet; you’ve got tax credits for the North Slope; and you’ve got tax credits for an area called Middle Earth. We did that because at one point the tax credits were trying to help an underutilized field in Cook Inlet. They said they were going to import gas because nobody would explore.

Well, the way things changed through the credits, we found that we do have gas down there. We do have a tax group that is talking about those kinds of credits. They should be coming back with recommendations saying these are working, these don’t work anymore and these need modifying because these are too generous.

On the North Slope, same question. For example, we know we have this floor, but we could owe more because of the loss carry forward. That is going to have to be a real honest question: can we afford to pay somebody to produce oil under these very, very low price conditions? Would the companies expect us to pay for that? Does our law reflect really what we call a decent management style? That’s tougher yet.

Then I’ve got the Nenana basin and the basin in Kotzebue and the basin in Glennallen that we’ve tried to say if you do something we’ll join in with cash. If we pull the credit capacity does that leave them languishing? I think Doyon has made the most investment at this point.

They think there is oil and gas there, but they are having a hard time getting investors in this low-cost investment world. So does the state want to be the only investor? That’s the question. Can we afford to? We’ll see.

Petroleum News: In light of concerns over who is in charge and who is running the show, what are your thoughts or concerns on the departures of John Burns and Dan Fauske?

Coghill: First of all, I have the highest respect for John Burns and Dan Fauske. I am sorry to see them go. The timing couldn’t be worse. However, it appears the governor is in control and his port authority looks like his model.

The law, SB 138, set in order a process that looks like it may be problematic to the governor. The industry likely sees a significant shift in policy from the governor. I am hopeful a partnership solidifies to move the project forward.