House Resources works on Senate Bill 138

Co-Chair Saddler says committee looking at sideboards; believes administration learned from previous attempts to market gas

Steve Quinn

For Petroleum News

Rep. Dan Saddler may be in just his second year as House Resources co-chair but he’s no stranger to oil and gas issues.

He’s been in the Capitol as an aide on the House and Senate sides and worked for the Department of Natural Resources as a special assistant during previous debates on gas line legislation, most recently the Alaska Gasline Inducement Act.

Saddler and veteran co-chair Eric Feige have Gov. Sean Parnell’s LNG gas pipeline project legislation — Senate Bill 138 — in their committee, ultimately preparing it for the House Finance Committee and later a floor vote before the Legislature adjourns April 20.

Saddler, an Eagle River Republican, discussed the committee’s discussions of SB 138 and his thoughts on this round of attempts to advance the project.

Petroleum News: You’re not new to these issues, but just the same, what kind of learning curve has there been to being co-chair?

Saddler: Having been involved in the legislative process, it’s not too steep a learning curve knowing how these committees operate. What was more of a steep learning curve was how the business operates: finance decisions; evaluations; the intricacies of state tax laws. I guess it’s the awesome implications of what we do in the Resources Committee have for the prosperity of the state and the well being of Alaskans. It’s a big responsibility. I’m not saying it’s easy to sit in the back of the room and vote. Being responsible for helping lead the discussion it’s a big responsibility, one I take very seriously.

Petroleum News: SB 138 has been in your committee a few weeks now, but you folks have been working on this bill long before it arrived, pretty much since last session ended with various conferences and interim hearings.

Saddler: That’s been our focus even before the bill arrived. We’ve been preparing for this bill and the issues it raises for months, if not years in the Legislature. People with far sight have seen that once we got the oil reform issue done, that we would have to turn to gas. We’ve been prepared with briefings, educations and discussions. Rep. Hawker recommended we all read the book “Industrial Megaprojects” (Edward W. Merrow) on megaprojects and how they can go right and how they can go wrong. I’m glad to have read that. This is the bill of a lifetime for a lot of people in the Legislature.

Petroleum News: So, on the bill. What do you like about the bill and, as a follow on, what concerns do you have?

Saddler: I like that the administration has learned lessons from its previous efforts to market North Slope gas. I think they found an awful lot about the market. They found an awful lot about what drives the decision making from the producers. I think the state government has long since acknowledged that, while yes it’s our gas, we have leased the right to produce them. The implication that it’s our gas implies to me we should be able to do with it, as we will. It conveniently ignores the fact that we have already gotten value from our gas by leasing it. I like that those facts are reflected in this legislation. It sees a practical way forward to add value to the project such that the producers will want to exercise their leases and deliver gas. And it brings us along with them.

We’ve been so deep in this for months now that it’s kind of hard to remember that it was a novel concept that the state would take share of taxes and royalties in kind. Yeah, the Murkowski deal did, too, but now it’s before us. I like that state has lowered the hurdle, not the hurdle rate but the hurdle, for the producers to make the investment necessary to advance this project. We see the advantages to us. We think we see the advantages to the producers of our strategic situation around the globe. We would love to have that gas monetized for our benefit and theirs. We found a way of our participating to sweeten the deal and make it more attractive for them and for us.

I think that Alaskans are seeing it’s better to have a large proportion of nothing rather than 100 percent of nothing. I think that for a while, we have been stuck in a rut of if we can’t have it exactly on our terms we can’t do anything. There is lots of natural gas in the world. There is lots of LNG coming on line and if we want to play, we have to get in the game.

Petroleum News: And what about any concerns you may have about this bill and approach?

Saddler: The concerns I have is this the best deal we are going to get. We’ve had the administration come to us and say, ‘we went off and negotiated this heads of agreement and, as a side deal, they got the memorandum of understanding with Trans Canada. We have balanced a lot of interest, concerns and fears and we’ve come up with a deal that addresses a lot of concerns and fears. Now we present it to you Legislature in hopes you’ll bless it and authorize it to go forward. We are not asking you to renegotiate it.’

Of course every legislator would like to get their fingers in the pie and change things around a little bit. This is not something we negotiate with 60 of us at the table and it’s not something we can frankly re-negotiate with nine of us at the Resources Committee. It is for us to evaluate it, to see if it’s the best deal we can get for the state, to see if we can sweeten the edges and put sideboards on it to give Alaskans reassurance that we are getting the best deal we can get, and to assuage the concerns that we might be hanging ourselves out to a big risk.

I don’t like that there is no way of breaking the entire thing down and knowing a dollar amount in every aspects of the deal. It would give Alaskans a lot of comfort to know that each element negotiated that we got the best deal possible. I don’t think we can break it down and say that. It’s a deal. There is give and there is take.

Petroleum News: Roger Marks identified concerns, starting with risks that if the deal falls through the state could still be on the hook for a lot of money.

Saddler: Roger brought a lot of value to the discussion. He’s obviously an experienced hand with the perspective on Alaska issues. And he’s the peer of many of the consultants we have working on this. He’s got an advantage in that he’s been working on Alaska issues for quite a long time. He made some points that were clear to us that we could try to pursue it and the deal could be blown up by anybody at almost any time. That’s true. It’s also true that could spend a lot of money during pre-FEED (front-end engineering and design) and during FEED and not have a guarantee of getting a gas pipeline project. That’s clear and I think everyone knows that. We all have a bias toward success. We’d all like to see it work and see it succeed. He does ask some questions that have value to the process. We are considering them. We’ve answered some of them. We anticipate his questions will inform more discussion as we move forward.

Petroleum News: He also noted how the deal with TransCanada needs more analysis as it stacks up against the promises made under AGIA. What are your thoughts on that?

Saddler: The question of AGIA has been asked and addressed a lot of different ways. TransCanada has been involved with the process for a long time. The state gave them a license. TransCanada met the conditions under AGIA. We gave them a seat at the table. They are involved in this process. They have some leverage. That’s true. They bring value to the process. They understand the regulatory environment and engineering. They have a relationship with the producers, especially Exxon. It’s not like we are bringing them in brand new. They bring quantifiable value to the process. They do provide money so the State of Alaska doesn’t have to produce cash out of its own pocket first. Having them involved now and not going out to bid later to see if we can get a better deal saves us about $800 million in net present value, according to Black & Veatch. Bringing them along with us avoids the necessity of answering all the questions about AGIA: whether a project is economic or not; whether there are trebled damages or not. All of those messy questions go away if we agreed to proceed. TransCanada brings intangibles. There is momentum. There is a window in the market. TransCanada knows the project and knows the market. There are advantages of having a partner that is oriented toward expansion. If they make more money in the midstream, they need to get more gas in the line, so it’s more advantageous to have them with us. We are not sure we can get a better deal. This may very well be the best deal we can get. There are a small enough universe of companies who can do this kind of work. We may never get the exact dollars and sense answer to quantify everything, but I’m getting more comfort as I study the deal and get more familiar with the process, the players and the issues that having TransCanada as a partner can be a good thing. I’m not finding compelling reasons that we should get rid of them, but I do see good reasons and a lot of value in having them along in the process.

Petroleum News: Speaking of expansion, you’ve asked a lot of questions about expansion. What drove those? Are you convinced there will be an open playing field for independents?

Saddler: The hope is by having a gas line to market, we will have new discoveries, new gas produced, and new exploration, which helps support the oil industry, which leads us to a long prosperous future. My interest was how expansion of capacity might lower the cost for all participants not just for the expansion parties and if so how to capture that value for all the parties. This is what I mean. Trying to take the deal and make sure it’s fair to all concerned and make sure it’s advantageous to the state.

So I have comfort that expansion will be good for the state and we will draw new players. I was at DNR during AGIA and we talked about how there is 230 to 240 trillion cubic feet of known gas. There are 35 trillion cubic feet that’s proven or possible. Then there is the possibility of finding more. So there is a tremendous resource of gas to get to market. So they are going to do the economics based on what they know now over the 25-year initial contract term, and if they can make their money back, great that’s a good deal. If they can extend the life of that, past the 25 years, that’s gravy to the state of Alaska and to the producers and we hope to our partner.

The physics of expanding the pipeline through compression and through looping are very, very interesting; it’s amazing technology. One of the places we’re having TransCanada involved at this stage in the process is how do you design the pipeline to make it easier to put on more compression? Certainly Exxon, BP and ConocoPhillips know what they are going to put through the pipeline where they might not be quite as interested in expansion so they might not be as interested in designing it so the compressors are conveniently located next to the pipeline. That’s one of the advantages of having TransCanada involved at this stage.

Petroleum News: Speaking of pressure, do you feel any pressure of getting this done in 90 days?

Saddler: We keep a very deliberate, if not very busy pace here. I understand the people of Alaska told us they want the work to be done in 90 days. Do I feel pressure to get something done? I take some comfort in knowing that this is not the final signature, the final decision. This is a decision to proceed. We will be presented with decisions in the future about contracts, about joint venture partnerships, about precedent agreements. We will make those decisions and commitments associated with them, as we know more. So it’s a lot to do. It’s a lot of information to become familiar with and analyze. I’m fairly comfortable that we are working hard, coming up with the questions and getting the answers we need to proceed. One of the things we want to do is make sure there is time in the future to give adequate consideration of the contracts we are going to be asked to approve and to make sure the people of Alaska can see the process, ask their own questions and have some comfort that it’s not a pick and a poke.

Petroleum News: There are some people who believe that one significant difference between this effort and others is the progress at Point Thomson. You visited the site. What were your impressions?

Saddler: They had just finished their airfield and their marine docking terminal. It’s not slap dash. It’s a first class operation. It takes a lot of money. They are not cutting corners. The impression I get is that Exxon is serious about having a good facility that will last for a long time and will be used not just to develop the 10,000 barrels a day of condensate, which the current settlement agreement commits them to, but for expanding and having an operation from Point Thomson that will do great things for gas and maybe oil for a long time. It’s a wonderful airfield. I’m an aviation guy. It’s a great solid, long field; good control tower; good lighting. It’s a good modern, man camp. It’s impressive. I don’t know if they are gold plating or not. I don’t think so. They make their money by keeping costs down. They are setting up the infrastructure to support not just gas, but oil as well. I look at it and think maybe it extends the infrastructure spine a little to the east. I’ve got ANWR hopes like most people.

Petroleum News: You noted ANWR. You’ve been pretty vocal about that. Did you go back east to tout ANWR this year?

Saddler: I did. I talked to a lot of senators and representatives staffers. I think it’s valuable for Alaskans to go back there to remind a new generation of federal representatives that Alaska has a tremendous resource to offer our nation that this would help the balance in trade. I’d like to think we are having an effect. A lot of the people said, ‘I didn’t know that. I’ve got the environmental information and you’ve contradicted it with facts and not emotion. I promise to give it a reasonable listen.’ I think that one of the reasons why it’s important to maintain the infrastructure of the oil pipeline. ANWR is a good future; NPR-A is a good future and knock on wood offshore is a good future. I think it’s in the state’s long-term interest to advocate for energy production and exploration anywhere in the state where it’s appropriate.

Petroleum News: OK, back to SB 138, eventually the issue of fiscal stability for the investors — the producers — will come before you. Is too early to be considering that?

Saddler: No, it’s not too soon. The LNG industry requires long-term contracts, relationships. These are not Hub prices. These are not fungible. These are individual contracted deals. These are tougher to negotiate, tougher to structure than oil. People make money by the long-term. You don’t make much money per mcf, but you sell a lot of mcfs. It appears to me that the deal the administration has crafted envisions a way to provide fiscal certainty by balancing royalty and tax-in-kind provisions. It’s a bit of a nifty arrangement. Certainly you can’t bind a future Legislature. We all know that. A year ago, an idea was floated to me that it’s possible to do this by contract. Let’s see what we can do. Alaska has to make a decision whether they want to have infinite flexibility or do they want to get a gas line. It’s not terrible thing to give up infinite options for the certainty you need to make a project happen for real. I think there may be a way to square that circle to protect that sovereignty, to protect our rights but also gives the industry the comfort it needs to make long-term investment in capital.

Petroleum News: Do you feel the state still has the sovereignty that it needs?

Saddler: Yes. At a very basic level, we don’t have to get involved in this. There are benefits of being involved. I think our mission is to develop our resources for the benefit of the people of the state. Having stranded resources — gas or oil — does nothing to help the people of Alaska. I think this is in keeping with our sovereign mission.