Hawker: AKLNG requires transparency

Undaunted by cancer treatments pulling him away from Juneau, Anchorage Republican insists on staying engaged in resources discussions

STEVE QUINN

For Petroleum News

House Rep. Mike Hawker’s longstanding fight against cancer is well known. So too is his acumen and constant engagement on oil and gas development and tax issues. Hawker, the current Legislative Budget & Audit Committee chair, says undergoing treatment may keep him away from the Capitol and the House Resources Committee room for extended periods, but not out of the loop on pressing issues like progress on monetizing North Slope gas, discussions on leases and the departure of interim Natural Resources Commissioner Marty Rutherford.

A few days after the Legislature received a quarterly updated on the AKLNG project, the Anchorage Republican shared his thoughts with Petroleum News on recent developments associated with natural gas reserves while sharing his thoughts on managing his health and a commitment to his final year in office.

“Discovering you have cancer is not anything you plan for but it’s a reality you have to deal with,” he said. “I found one of the things that helped me the most in dealing with cancer is having the commitment to my state job that has allowed me to pursue the necessary treatment of my cancer but at the same time, not in any way compromise my commitment and my work as a legislator.

“Two things made it possible to focus on legislative duties: the incredible quality and support I have in my staff members; secondly, the evolution of technology where literally I can be sitting there and tied down to a bottle of chemo pouring into my arm while having an iPhone in my other hand watching a committee meeting. It’s a phenomenal opportunity.”

Petroleum News: Starting in a broad sense, what were your takeaways from the hearing, either what you heard from Steve Butt or Keith Meyer, or others?

Hawker: Well I think the message we received from Mr. Meyer was that the state is going to pursue a completely different course of action than has previously been discussed in the state, has been evaluated by the Legislature and has been funded by the Legislature.

The single key takeaway message is that this administration is going to be pursuing a variant of a go-it-alone plan where the state assumes the vast majority of the project risk. They allege they are going to be able to find a way to do this with a special-purpose entity that they can structure on a no-recourse basis.

The presumption underlying all of this is that industry will one way or another be providing gas at the well head and the state of Alaska takes responsibility for it at that point. That’s a very, very profound difference than the shared equity concept that has evolved over the last 20 years.

Petroleum News: Does this set up a future battle between the administration and the Legislature?

Hawker: It would be my sense and opinion that it will require a great deal of education and explanation from the governor to convince the Legislature that this radical turn of project concept is the appropriate route forward. Very clearly the Legislature has been conscious of the risk the state assumes with this project. Over the past 20 years, the concept that evolved was that the state’s risk was relatively proportionate to the state’s ownership of the underlying assets - in this case the gas - the state’s ownership of the gas being our royalty and tax share of it.

Under this new concept, the state takes all of the project risk, both the construction risk, the market risk at the end. Not just the risk of the pipeline, as I understood it, the state was to take all risk of ownership of essentially designing, building and operating all elements of the project.

This may not be technically correct but let’s just call it middle stream elements, which would be gas conditioning on the North Slope, pipeline transportation and liquefaction at the end of the pipeline. It wasn’t discussed exactly what the downstream market risk would be, the risk of selling the gas on the market. Would there be some kind of shared risk, some kind of profit sharing concept? That was not discussed at the meeting, but all of these questions really ought to be answered.

Petroleum News: Does this surprise you?

Hawker: No. Absolutely not. The governor has been very clear for 25 years this is what he wants to do. It has been inevitable that sooner or later it would come to loggerheads with the project concept as it has developed over the last 20 years within the government’s sphere of influence. Historically, at least in the 14 years that I have been involved, every project concept has fallen apart until we end up aligning the interests of all the parties - the producers and the state - with an investment relatively approximating their individual share of the ownership of the resource - the gas. Again, in 14 years that has always been the mechanism that has moved the project forward.

The governor is going to have to prove to myself and other legislators that his concept is actually more viable than the concept moving forward. I know it’s intriguing to members of industry who listen to the governor’s proposal who see a possibility of having the state owning the middle stream asset - again, the conditioning plant, the pipeline and the liquefaction process - and by the state’s ownership arguably being able to exempt that part of the project, the lion’s share of the risk.

So if you can completely tax exempt that part of the major part of a major project, it becomes a very interesting scenario for industry. Their only risk becomes downhole risk, exploration risk, which in this case doesn’t exist, because we are looking for gas in a gas field we already know exists.

But if you can get the state to take all of that risk and leave industry only with the risk of the field operations and development and the industry can get a price for their gas commensurate with the very minimal amount of risk and cost they would be incurring, it certainly seems very attractive.

Something that looks too good, sounds too good, usually is too good. In this case, when it obviously is being set up as a transaction to dodge federal taxability, I really think the Internal Revenue Service is going to look at it under a sham transaction rule and very well could rule the entire project is in fact taxable even though it’s owned by the state of Alaska. They also have public purpose rules.

They could rule that this is not for the public good. That it is a project put together for the good of the industry with the state getting all the ancillary benefits. These are grave concerns that need to be resolved before the state makes any significant investment.

Petroleum News; I believe it was Mr. Meyer who said under the current path, this project is not going forward. Is there an expectation that it could be given market conditions?

Hawker: My takeaway from the meeting was that the administration intends to advance this project regardless of the underlying economic circumstances. The industry has been taking a very careful, very deliberate approach, a measured approach, recognizing the external economic circumstances. Again, it’s no surprise. The governor has always said we build a pipeline project, and we will force industry to sell gas into it under a duty to produce argument.

The very comment Mr. Meyer made, “forget about the cost of supply,” that he looks as the resource owner as the customer. That is completely at odds with everything that has developed with the industry producer players to date where the cost of supply and the commercial viability of the project have been paramount in our considerations.

My takeaway is regardless of the cost of supply, the state will step forward, build a pipeline - not only a pipeline but a conditioning plant and an LNG plant - using a special purpose tax, exempt entity that somehow accomplishes all of this on a no-recourse basis to the state. If they truly can do this, it’s a fascinating concept.

But as a practical man, one of the first things I know in business is risk is not free. We lay off all that risk on some other parties, there is going to be a cost to the state of Alaska for it. With the state taking all of the project risk away from the producers, there is a huge cost to be associated with that and that has not been analyzed or delineated yet.

We’ve heard the governor, as he says himself, he’s been doing it for 30 years and no one has been listening to him and by God we are going to do it his way. I fear it is a reckless approach to move too quickly with too much radical change without a proper economic analysis that does in fact consider the cost of supply, the cost of the project, the allocation of risk, the assumption of risk and all of the cost associated with that.

Petroleum News: Do you get a sense Mr. Meyer has a - and one of the members on the committee used this term - a build it or die approach?

Hawker: That would be another way of describing it. Again, we have a governor who has absolutely determined that a project will occur under his watch one way or another. I don’t know about build it or die, but I worry about a project that says build it at all cost. I question whether the governor does in fact have the legal or constitutional authority to move forward with a project of that magnitude to place the state at such risk. I see a scenario where the governor would have the legal authority to move forward and obligate the state in such a manner. If he’s using outside funding to handle the project, funding that does not go through the state’s books, funding that does not require any legislative participation, I think there is a strong argument that the can pursue this any way that he would like to.

Petroleum News: You’ve talked to what seems like a new lineup from the administration each quarterly update. Are you worried about this turnover?

Hawker: I have been one of the major proponents of following the best practices guidelines for the development of megaprojects. The way the governor is approaching this is very much contrary to the key guidelines. One of those guidelines you take your project and you stay with it. Once you reach a point in your development, you don’t keep changing your plan and design. You don’t keep changing the nature of the project. You move forward with what has been established. These last-minute, late-hour changes end up being ill-thought and usually cost an extraordinary amount.

Now, are we at a point in this stage-gated process where we have not yet entered FEED to make a radical decision that says “everything we’ve done so far is not the way to organize this - let’s redo it again?” Yes, we are at that point, but we will never get past that point if we don’t start stabilizing and not have every executive who comes in second guess the project, insist on putting their own blueprint on it and not sticking with the thread of development that we have over time established.

We have an administration that has always said we shall build it - they shall come. That is completely contrary to the thread that has been established over the years which is we are in a public-private partnership with the producers that will ultimately have a shared economic risk or economic benefit. What happens in another year and a half here? Does this governor get re-elected and continue or does he not get re-elected and continue?

Are we going to have a plebiscite every four years on how we approach the gas line? Frankly, as long as that keeps occurring, as long as Alaska is an unstable and unpredictable place for industry to make a significant - pick your number $35 billion to $60 billion in investment - to make this project happen, it is simply not going to happen. It is not going to happen until the state of Alaska starts demonstrating some stability and a commitment to agreements already made.

Petroleum News: Do you worry about any kind of unilateral decisions? You saw it with Medicaid. You had a bill addressing something along the lines of separation of powers.

Hawker: I may have commented on that one earlier. It’s certainly a point that would have to be fought out by the lawyers. I can see a scenario where the governor could unilaterally undertake his vision of a pipeline and abandon the vision that has been developed and culminated in an AKLNG project.

Again if the governor does not require an appropriation from the Legislature and he has the support of industry and he has the outside backing from financiers to back the project in a manner that does not require participation from the Legislature, he’s in a position to move forward with it. Now can he put together a project that meets those criteria, I’m not sure.

We were certainly given lip service at the meeting that the new project concept would still involve bringing it back to the Legislature. Those are good words; they have got a degree of comfort. But you’re right the administration has demonstrated an antagonistic attitude toward the oil and gas industry, certainly a difficult arrangement with the Legislature and a we are going to do it our way approach in the past. It’s not surprise to me that we continue to have these tensions and I continue to have these concerns with a single man’s vision for this project going forward and taking on an extraordinary amount of risk for the state of Alaska.

Petroleum News: You’ve certainly identified areas where this administration seems to be veering away from SB 138. Is AGDC’s role changing from what you had envisioned?

Hawker: My office wrote the legislation (HB 4) that established AGDC, the Alaska Gasline Development Corp. The corporation has been evolved quite significantly of what I believe was intended for the corporate structure. We had intended AGDC to be a business-like entity that would operate as much as possible, at the highest level, insulated from political influence and in doing that the mechanism was that the board of directors was to be highly qualified, experienced individuals who have completed successful LNG megaprojects across the world.

The board of directors would be responsible for hiring a management and staff structure that understood Alaska, knew Alaska and got the job done. I think at the highest level, what the incoming administration - Mr. Walker’s administration - has done is completely changed that management structure where he has said he wants average Alaskans, the average guy, to be on the board of directors and we then hire executive management from outside at these very, very large salaries to do the work. What I see is that this structure truly puts the project back with the ultimate decision makers - the board of directors - being very politicized. They become essentially a political extension of the governor’s office in the various debates with the Legislature. This is exactly what we had hoped to avoid in the original structuring with a more independent, professional board that themselves created an insulation between the Legislature and the governor, and they would hire people with the professional expertise to get it done.

Petroleum News: What would you like to hear next from Mr. Meyer?

Hawker: We heard Mr. Meyer repeatedly telling us they want to start a new era of public and legislative involvement in the gas pipeline development process. I have asked that the Legislature be provided the proposal - the actual proposal - they made to the producers in the interest of this new spirit and openness and legislative cooperation that he professed. To the best of my knowledge he has decided that it’s better for that document to remain confidential and the Legislature not be privy to it, which continues to call into question the veracity of their whole commitment to legislative involvement. At this time, I have not received that document and to the best of my knowledge no legislator has received that document.

Petroleum News: Does this speak to any trust issue or is that assessment premature?

Hawker: I don’t know that trust is the right word, but it continues to point out the difficulty the Legislature has had in working with this administration in many and varied levels. I trust them completely because they are doing exactly what they said they were going to do. I can’t say that I am comfortable with it so it’s not a matter of trust. It’s more a matter of asking them to provide me comfort that we are not exposing the state to undue risk, and that there is in fact a viable project here that it is in the best interest in the state of Alaska. That it focuses on the state maximizing the benefit of our resources over the long term. And in our zeal to get a pipeline built that we don’t either compromise our sovereignty or compromise our ultimate economic benefit of these resources.

Petroleum News: OK, switching to another issue, the administration has told the producers it wants more information from its Plan of Development (POD) on the marketing of gas while denying a Prudhoe Bay operating permit. What’s your take on this?

Hawker: This is unprecedented territory. We have producers who have used every molecule of gas in the most economically efficient way possible, which is re-injection to maximize oil production. That is not my opinion. That has been the testimony of the Alaska Oil and Gas Conservation Commission when asked over the years: what’s been the highest and best use of our gas to date. Their answer has been unequivocally: getting more oil out of the ground. That’s what the industry has done. We are in a place where it is now time for us to consider the appropriate time for a direct offtake of gas for commercialization on its own right.

But that has not progressed far enough that it’s part of the actual development of the field. These PODs, what are they? One year? They are short term what are you going to do in the immediate future with this field. Asking for confidential information from individual players - information that essentially contains their competitive process - with questions such as who did you talk to and why as you consider the viability of gas marketing, that is absolutely inconsistent with the need of the state to know with regards to the continued operations of the field for the period of the POD.

It is a serious question whether that involves revealing material that would necessarily create federal anti-trust violations and end up in a situation that creates the appearance of a collusive activity on behalf of the industry. I’m not a lawyer but I doubt that there is any legal basis or standing to take away these leases, to challenge the Plan of Development, to change the rules for Plans of Development so materially that they would be used to revoke these leases.

Where I see this headed is a very long course of litigation that, at the end of the day, will further discourage development of existing oil resources and certainly compromise moving forward with any gas line project. The state is calling into question its commitment to a responsible course of action forward, reasonably anticipated by the industry.

I’m sure there are people who argue that industry has been our enemy; industry has never done anything for the state of Alaska; industry has delayed developing our gas for their own best interest. That kind of polemic rhetoric exists, but it’s just not supported by facts.

The governor’s pursuits to apparently revoke the leases at Prudhoe Bay should be no surprise to anyone. One look at his track record and his former attorney general in dealing with the industry, the very significant amount of animosity, it all comes to a point of fruition that should surprise no one.

ly with the departure of Marty Rutherford as DNR commissioner. I have no idea if there was a direct rela-

tion or cause there, but you don’t have to scratch the surface far here to see you had a person there who has

incredible integrity, great technical knowledge, great legal expertise in these matters ­ someone who the

Legislature had a great deal of trust for.

I would have easily have seen her appointed the fulltime commissioner. To suddenly be gone at the same

time this issue comes forward with a lot of back channel conversation in the oil patch and amongst the Legislature that there was in fact some serious friction between DNR and the governor to follow the course of

action she was directing.

Failing to accept the POD and revoking the Prudhoe Bay leases will have consequences far and away

beyond anything we can ever possibly conceive with regard to damaging our economic future in the state of

Alaska. I’m pretty sure the vision that was being promoted in the documents made public regarding non-

acceptance indicating some concept they would find a way to revoke the leases with regard to gas but not the

oil. Bifurcating the leases in that manner is very unproven and tenuous territory.

Petroleum News: The last question, and you've touched on this a bit, what will the state miss by not

having Marty Rutherford in place with DNR?

Hawker: I’ve worked with Marty Rutherford since my first day in the Legislature. There were times when

I have disagreed vehemently with Marty on issues and there were times when I have completely agreed with

Marty on issues. All of those times of our professional relationship, I have never once questioned Marty’s

integrity; I have never once failed to believe she was doing anything other than what she truly thought was

the absolutely best course of action for the state of Alaska. We could disagree to the nth-degree on an

issue, but we never stopped trusting or respecting each other. The debate was always about the facts. It was

always on the merits. It was not about the politics of this and that. It was about what was the right thing to

do to develop our natural resources. I think losing that type of personality, someone who truly rises above the politics and pettiness, and focused her career on the absolute best policy for responsible long-term resource development is something the state will miss and something I will miss.