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Providing coverage of Alaska and northern Canada's oil and gas industry
January 2016

Vol. 21, No. 5 Week of January 31, 2016

Walker: Constitutional amendment a must

Independent governor says differences between him, Legislature being smoothed out as AKLNG project advances, negotiations continue

STEVE QUINN

For Petroleum News

Gov. Bill Walker has been in office about 14 months, and heís made several trips to Washington, D.C., one including a return trip on Air Force One with President Obama, and to Japan to promote Alaskaís resource development potential.

Heís doing it at a time when oil prices are chronically low and while he and the Legislature are still getting to know one another and iron out differences in working toward advancing a natural gas line project for export to Asian markets.

Walker spoke to Petroleum News about his priorities for 2016, most immediately this session and the prospects of a special session that would follow.

Petroleum News: Letís start with the bigger picture. Overall where do you see things with the AKLNG project?

Walker: Overall Iím very pleased with the technical work thatís been done. The design, the right of way, those kinds of things. Iím very pleased with those kinds of things. Iím very pleased with what the team has put together on that. Steve Butt, of ExxonMobil, has been the lead with that. Iím very pleased with what heís done.

The second piece, or what I call the second piece, is the commercial side of it, the commercial contracts associated with putting the deal together. That Iím not as pleased with. Iím concerned about the timing. My goal is we will see those contracts in final form before the end of this legislative session.

Petroleum News: Speaking of those contracts, I believe you have been in some of the negotiation meetings.

Walker: I have.

Petroleum News: Without revealing anything thatís proprietary, describe those. Characterize them. Did you expect to be in the room?

Walker: I think we have the right people at the table. Iíll put it that way. Itís important that we have people with decision-making authority at the table, and I believe that we have that.

Petroleum News: Right now you have (Deputy Natural Resources Commissioner) Marty Rutherford back at the table. Correct?

Walker: Yes.

Petroleum News: Youíve kind of gone back and forth with that. Youíve had Marty. Youíve had Audie (Setters), youíve had Rigdon Boykin. Do you feel like things are getting settled? I know thatís made lawmakers nervous.

Walker: Itís interesting. Itís sort of broken up between different divisions. There are certain things that AGDC does. There are certain things under statutory authority. There are certain things that DNR does, that Department of Revenue does, that the AGís office does. So itís sort of divided up that way a bit. So some agencies are lead on different areas of negotiations just because by statute thatís the way itís set up. In other words, the Department of Natural Resources canít override the statutory authority of the Department of Revenue. Itís a little bit of a hybrid the way itís structured and set up. You wouldnít see that normally in a private sector negotiation. It doesnít mean itís wrong in any way. Itís just that we are a bit different. We are a government, we are a sovereign. We have certain statutes, certain authority for each department, so it makes it a little bit challenging.

We had three attorneys in the past negotiating on our behalf of which Rigdon was one. We had Ken Minesinger (Greenberg Traurig LLP) and Manzer Ijaz with (Milbank, Tweed, Hadley & McCloy LLP). So there have been three. I thought two were plenty. After a period of time, I felt it was appropriate we donít have to be paying three people to do that role. Minesinger is sort of working with Department of Natural Resources as an advisor on their behalf and the stateís behalf in their shop. Heís been involved in this at least since 2006 if not earlier.

Petroleum News: So you feel as though things are settled. Youíre not going to have any movement?

Walker: I think itís pretty much settled as far as who is doing what and where. We just had a full day retreat, if you will, at the governorís house last Saturday in which we brought together the commissioner of DNR (Mark Myers) and his key staff, commissioner of Revenue (Randall Hoffbeck) and his key staff, AGDC president (Fritz Krusen) and his key staff, the department of law and some of his (Attorney General Craig Richards) key people. We spent an entire day, 9 to 5:30, going over who is doing what. We had a facilitator as well. We set it out like a construction chart and who has responsibility for what. It was very helpful having the agencies talking to each other. Sometimes there is a potential for an overlap between jurisdictions with Department of Natural Resources, and Department of Revenue or Law.

So itís good to have that discussion about who is statutorily required to do what and who needs to be involved in that process, who needs to be consulted, who needs to be informed, who is the responsible entity, who is the responsible person. So that was pretty helpful. Some of that will be coming out in the hearings.

Petroleum News: I know a lot of lawmakers, including those who supported you in SB 3001, were concerned that they didnít understand the organizational chart. Is this an effort to address that?

Walker: Exactly. I think that was a valid concern. Itís in part we inherited an organizational chart. So we said letís put our own together. So youíll see that as far as the organizational charts. Itís really a series of organizational charts. Each department has its own organizational charts. In other words, DNR has an organizational chart on the gas line; Department of Revenue has an organizational chart on the gas line and certainly AGDC. And then there is a holistic one of all of those. Itís a little bit of an unusual structure. Itís certainly acceptable and it can work. Iím optimistic that it can work but we had to sort of walk through some stuff in that process.

Petroleum News: Still on the topic of structure, AGDC has also had some movement. Lawmakers have been giving you the benefit of the doubt as itís been your first year. Itís your prerogative the first year - and all four years - to make changes. But I think they would like to see some stability. Are you satisfied that things are pretty much done?

Walker: I am. The board is doing a search for a new president. Fritz is the interim. Heís doing a fine job as the interim but they are looking for somebody that comes with the kind of project experience for a project of this magnitude, of this size. Because you know we are a full partner now of the entire project, not just the liquefaction piece in Nikiski so itís appropriate we have somebody in that role who has done this as a livelihood for years working with a project of this size and magnitude.

Petroleum News: Now you did have somebody like that but he was on the board.

Walker: Right. Let me be real clear about that. I believe the board provides input on policy but expertise comes from the paid staff. There are lots of different boards around Alaska. I donít think the boards of the various banks we have give individual expertise on investment advice. So it was a little bit upside down.

My belief is your expertise should not come from your citizen board. It should come from the expertise you hired for that day to day operation so we are in the process of assembling that right now. The other thing is I was concerned about those on the board who were from out of state. The problem is they were setting policy such as how many offtakes, whatís the in-state use of gas, those kinds of things. Those should be Alaskans making those decisions as far as on the policy side.

As far as expertise, we are doing something weíve never done before. So are we going to have to have some experts from outside of the state. Yeah we are as coming in to advise us. As sitting board members, those board members should be Alaskan folks.

Petroleum News: You talked about the commercial agreements. Those are always going to be tough. I donít know that everybody likes the pace. One of the pieces that have held up negotiation, even in the past, was linking the gas tax with the oil tax. Whatís your position on bringing those two together?

Walker: Yeah, Iíve never been supportive of that at all. That was dealt with in the Stranded Gas Development Act, and Iíve never been supportive of that. Right now with so little oil revenue coming in ... but I donít think itís always going to be that way. That has been an issue in the past. Iím not convinced thatís going to be a problem this time.

Petroleum News: You did get the withdrawal promises - well you got the two letters at least, which enabled you to pull the reserves tax off the special session call.

Walker: Yeah, Iím sufficiently satisfied that the companiesí commitment that gas would be available for a project if they didnít participate. Iíve sort of re-read and looked at what they provided to me - the various letters and verbal communication Iíve received from some of them - and sort of put it all together and I said you know what? I think the intention is there. I donít need to have it negotiated down to the penny as far as what it will be sold for at all.

So I donít want to take up valuable time on that. Iím comfortable with where we are on that at this point. So Iíve moved it to the back of the queue of issues to be negotiated. Iím sufficiently satisfied. The two most critical pieces of this project are the gas and the market. Everything else in between is infrastructure. Itís a piece of pipe and itís a big deal, but without gas and without a market, there is no project.

Petroleum News: Speaking of the infrastructure, who builds the pipeline now? You donít have TransCanada.

Walker: Well, Iím sure it will be a consortium put together by the four partners. TransCanada was not a builder. They were there as our spokesperson at the table. They could still be the builder; they could come back in as the pipeline builder. That (separation under SB 3001) doesnít preclude that from a possibility of happening. But they just donít represent us and take our seat at the table. That change had nothing to do with their qualifications as a pipeline company.

For them the project - itís another project. I understand that. For us, itís one that I want to make sure happens if itís economic, if itís financeable.

Petroleum News: Folks have described the separation as amicable. Could that speak to them coming back in and having a role, though not a seat at the table?

Walker: It certainly could. Again, I said many, many times and I spoke to the president of TransCanada (Russ Girling) a couple of times as well and explained this is nothing other than the fact that I think itís appropriate that we have a seat at the table. They are a fine pipeline company. There is absolutely no issue with them at all in that regard.

Petroleum News: Now every governor needs to have his thumbprint on projects no matter how big or small. Do you have your input now, your thumbprint on this the way you like? Have you struck your balance between what you want and whatís in SB 138.

Walker: Iím comfortable with where we are. Many of my predecessors going back have come in and started over again, and said the last group, their process I didnít like and started over again. My commitment wasnít to start over again. Iíve been at this for the last 30 years in one capacity or another so I had some concerns, but most of those have been addressed at this point.

I just didnít want to take the time to start over again. Some governors have started over again twice. Iím not going to do that. I want to finish something rather than start something. Iím working within SB 138. Whatever Iíve received from the producers in the way of assurances with gas, Iím comfortable with where we are on a potential withdrawal.

What I donít want to have is somebody else precluding us from continuing on if somebody withdraws. I think Iím comfortable with where we are on that. So Iím OK with where we are. Iíve probably made the least changes of any governor who has come in on a project that was the driving force for me to run for this office. So many were surprised when I didnít come in and start over again like everybody else. I said, no, I wouldnít start over again.

Petroleum News: On to the prospects of a constitutional amendment, would you like to see that on the ballot this year, if everything falls into place.

Walker: It has to be. I think that it is critical for it to be on the ballot this year. If we have slippage on that, boy, that is way too much time associated with that. It appears what they are asking in the way of fiscal certainty is going to require a constitutional amendment. Thatís why I would like to have the agreements in front of them this regular session, so itís all done before making a decision of going to the voters with a constitutional amendment.

A constitutional amendment is a very big deal. We donít do that very often and weíve never done that for a commercial project so I want to make sure Alaskans know, plus obviously the Legislature knows, what the deal is. What are all the pieces of the project and how is this going to work. They are entitled to know that before they go to the polls to vote.

Petroleum News: So who, at some point, would be promoting this? Would it be the four partners?

Walker: I think it would be a little bit of everyone. Probably more so myself as the governor because it would be more appropriate for the governor on the constitutional amendment rather than a president of one of the companies. It would be a joint effort on our parts, but probably a little more on my part.

Petroleum News: So is it possible to meet these deadlines because you donít want to be locked into these deadlines?

Walker: Yes, there is concern about having deadlines. But Iím a big believer that measured things get done. These are negotiations. We are not trying to fast track the engineering or fast track the pre-FEED stuff. Thatís all on a normal sequence. The negotiations should be able to be accomplished in time for the end of the session.

Petroleum News: Talk about your trip to Japan. Folks in Japan have been getting Alaskaís gas for about four decades now. What were you able to tell them that was new?

Walker: Well a couple of things. What was new was we were going to have a seat at the table. At that point we did not. I think whatís different now is that it is good we have all three companies at the table and involved in the project. I think thatís good. Also I think they are aware that with our financial situation, itís time to monetize that gas. In other words, it was used in the past for decades to add additional pressure to the (oil) fields and we probably received more oil out and thatís a good thing, but they realize that axis is crossed and itís time to monetize the gas. Itís probably one of the largest, if not the largest, untapped gas resources in North America, if not beyond. Many of who I met with, I already met before some years ago. They recognized this is a new me and know my background and that this is a high priority for them.

Petroleum News: Quickly shifting to your fiscal plan, and the oil tax credits. What drove this bill, this plan, to revamp the credits?

Walker: Well, the credits are just unsustainable. It started off with a $10 million cap when it was first initiated years and years ago. Then it went to $25 million. Then the cap came off. When I came into office it was $700 million (requested payout). If we had done nothing, it was on track to go to $1.2 billion and it would have been $1.8 billion next year. It just was absolutely not in the cards; it was not sustainable.

Petroleum News: Have you met with industry on this?

Walker: Many times. Many times.

Petroleum News: Do you have a sense they agree with you?

Walker: I wouldnít say agree. I think they recognize our challenge. I think weíve been working with them on what would be the lesser impacts on them than the other options that are out there. Weíve made some changes as a result of that. Commissioner Hoffbeck has met with them multiple times. Weíve met with AOGA (Alaska Oil and Gas Association) board of directors a number of times. Weíve met with each independent company trying to find out how we deal with companies currently underway in the credit program. Of course we honor everything that is due. There is no question about that. As recently as yesterday (Jan. 25), I met with someone. Itís a matter of doing it carefully so we donít drive anyone away and discourage investment. Boy, an investment program that can pay up to 65 percent of someoneís cost of what they are doing is pretty heavy lift on our part.

Petroleum News: Youíve made a lot of trips to D.C. and even flew back to Alaska with the President. The (Obama) administration has not made some favorable rulings for those looking to extract resources. Do you feel like youíre not being heard?

Walker: Not necessarily. The federal government approved GMT1 and GMT2. I went and sat down with the Secretary of the Interior at ConocoPhillipsí request. They asked if I could contact her and send her a letter. I said I would do better than that. Iíll hand her the letter. So we received that approval. On the offshore, Shell ultimately got their permit. They didnít find anything. They didnít get their lease extended. So have we gotten everything that we wanted? No. Have we gotten some? Yes. Do we still have an open relationship, you bet we do. Will there be more ask? You bet there will be. So I wouldnít necessarily say we havenít gotten everything we asked for. Iím still a very strong advocate for access into the 1002 area. I spoke to the president about that directly. I spoke to Secretary Jewell about that a number of times on that. We will continue to advance our case.






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