Guttenberg sees benefits, risks, in state equity

Fairbanks Democrat believes industry would treat state as weak partner; ensure it bore most of risks in LNG equity partnership

Steve Quinn

For Petroleum News

Rep. David Guttenberg says the interim has provided good news on the state’s resource front.

The Regulatory Commission of Alaska chose municipal utility Interior Gas Utility to deliver gas to North Pole and other areas of the Interior.

The state learned that taking an equity stake in a large-diameter line could be prudent in advancing a project.

But some issues remain unresolved. A referendum to repeal the newly minted oil tax goes before voters in August.

Referendum critics say Gov. Sean Parnell’s Senate Bill 21 needs to remain if the oil and gas industry is to be confident in a regime.

Guttenberg says SB 21 will do nothing to stem annual decline in North Slope production and pipeline throughout; calls arguments pushing that point disingenuous.

The Fairbanks Democrat, now in his sixth term, discussed his thoughts on resource development issues facing the state as the Legislature is a few weeks away from returning to Juneau for another 90-day session.

Petroleum News: Let’s start with news close to home. The RCA picked IGU to distribute natural gas throughout the Fairbanks North Star Borough. Do you see this as progress?

Guttenberg: In many ways, all of these issues — oil or gas — it just seems like you’re in a loggerhead until something happens and then it becomes momentum. I’m glad IGU has got it. They are the only ones committed to actually having a distribution system that reaches as many people as possible because that’s their goal. It’s not a profit driven company. Its goal is to get gas to the residents.

Petroleum News: What would you like to see next as far as a timetable goes?

Guttenberg: You need to get anchor tenants for gas. You need to get commitments to building a facility on the North Slope — or wherever the gas comes from. Whether it’s getting gas from north coming south or the south coming north, or wherever the gas comes from.

The next step for some of the anchor tenants: Golden Valley, the bases, the mines — people committing to a system that builds the economic structure for gas.

Tower Hill has a huge mine prospect in Livengood and the one factor that the state can effect and make it economical is driving the cost of power down.

That’s the answer to all the economics in the Fairbanks area is the cost of living here, the cost of heating your home and to turn your power on. We would have a vibrant place and it would be significant to cleaning the air problem that we have. It speaks to quality of life.

Petroleum News: Is it going to take a greater financial commitment, like an appropriation or a tax break? Or is it a resources commitment like a particular administrative office such as AIDEA (Alaska Industrial Development and Export Authority)?

Guttenberg: The guy on the street doesn’t care. The guy heating his home, turning on the lights and burning firewood, doesn’t care who does it or who gets it done. He just wants it (natural gas) here. You know we have been churning this forever. Every time you turn around and there are more people who express interest in doing something. There’s always a but ... ‘I need something.’

One of the things they need is a commitment to have the gas here. If you had the commitment to have the gas here, then everything else would fall into place; the gas would come here. You have to have the customer, but the customer has to have the ability of the gas. It’s been an ongoing dog-and-pony show. Now that you’ve got IGU, they will figure out exactly how much they can use, how much the citizens of Alaska can use. If the state can coordinate things well, whether it’s gas storage or a facility on the North Slope, the public doesn’t care. They just want it here. It’s been a long time coming. There have been a lot of forecasts that have been on the horizon for many years, saying that we need to get it here, not just the Interior.

If you look at the economy for the rest of the state outside the Railbelt — Fairbanks is suffering considerably — but if you look out at all of the communities off the road system, some of which I now represent, they are struggling, they are struggling really bad.

Look at Nome. They are having problems keeping police officers in Nome because of the high cost of everything. You talk about keeping people at home and building a vibrant community, that doesn’t mean the Railbelt. It means the whole state. Those communities outside from here in the Interior to the coast, it’s really problematic. How can we build an economy? How can we build a state? We lose jobs. People can’t afford to stay there.

I always feel strongly about our founding fathers and what Congress saw at the time. The state was too sprawled, too diverse, too spread out in order to sustain an economy so they gave us subsurface rights. Before it was oil and gas, it was fish, timber, mining and fur. They said take this and build a state. We need to do a better job of doing that.

Petroleum News: Still on natural gas, there has been interim movement on the LNG, large-diameter line. One is the recommendation from a consultant that the state have an equity interest in an LNG line. The other is a migration away from AGIA. Let’s take the first one. What are your thoughts on an equity stake?

Guttenberg: I love an equity interest in a gas line because it puts us at the table when they are talking about costs and projects and delivering something. At the end of the day, we need to make sure that it works for Alaskans.

Look at what would have happened if we had an equity stake in TAPS. I think a lot of these things would have been different. Personally, I think we would have cheaper oil and gas prices here in this state because of that. The problem with the equity is the risk. You’ve got rewards; you’ve got the risks.

I think the state has a lot of equity into the system right now. If we put all of our resources on the table and added them up, it would be considerable. I know they (producers) put billions of dollars into development into projects. The state also has $500 million committed for TransCanada, the reimbursables. That’s a commitment. Look at all of the work of our employees for permitting.

The problem is, everybody loves the upside, but the risk and the downside that’s considerable also. The state has an obligation to itself — and personally I don’t think we’ve done to maximize upside and minimize the loss, which is what everybody else does.

If we go into an equity situation that we are not as nimble on our feet as the rest of the industry is, and they will set us up to take a fall if things go bad. That’s what you do with a weak partner. This is a cutthroat business. I think that’s the way the industry sees the state.

We need to be very, very careful. I love the concept of being an equity partner. It’s the downside — price of gas dropping, cost overruns, changes in the market — all of those things matter. The state needs to be very concerned of those downsides. You’ve got to act like a responsible partner. The industry sees the state as a weak partner and they will do their best to put most of the burden of the downsides on us. That’s what they do now on the oil side of the equation. That’s capitalism. That’s how you do these partnerships. You try to minimize your downside and maximize your upside. The state hasn’t been very good at that.

Petroleum News: The prospects of moving further away from AGIA. Is that a policy call or a reflection of the drastic change in the market?

Guttenberg: TransCanada’s Tony Palmer said after they got the contract there will be no gas line until Exxon is part of a gas line project. When Exxon decides there is a gas line project, BP will decide and Conoco will decide that it’s time to start moving gas. The private sector could have come and built one if they like and do it without AGIA. AGIA was not the only avenue to build a gas line and get gas to market.

What you are seeing is when they all move together — and apparently they are and they are doing it quietly — but there is enough noise out there for the observers of the process to say something is happening and that it’s time.

AGIA was an attempt to get things going. That’s why I supported it. The state needs to kick start something. AGIA was a competitive bid. TransCanada was not an exclusive bid. Outside of AGIA, you could always have built something. It’s evolving.

Petroleum News: What would you like to see next from the executive branch or the Legislature as the session approaches, or is there nothing that can be done and it’s up to the industry to make the next move?

Guttenberg: I think we are going to have to set up gas taxes. I think we are going to have to separate oil from gas taxes. I think that’s something they are going to want. But I don’t think there is an urgent need for that because they haven’t made the commitment down the road to start doing something. When we talked with the consultants, there is a timeline when all of these things need to be done. I think we have to understand gas taxes better than we do oil taxes because we don’t understand oil taxes very well, either. We had a push a few years ago of separating oil from gas taxes and we need to have stronger dialogue about that. We need to keep the infrastructure in place. If they are coming down to Cook Inlet, then is that what do we need to do to make sure those things happen? Those things can be part of an equity share also.

I’ve been sitting and listening to these guys for a decade. What you need to do is listen to the things they are saying that is different or letting loose outside the normal parameters. Those are the things we need to pay attention to.

Petroleum News: Could advancing a large-diameter line interfere with the short-term solutions you folks are pushing throughout the Interior?

Guttenberg: Not at all. The timelines are completely different. One of the big things the Interior needs to do is build out a distribution system. That’s what IGU is for. The timeline for a large-diameter gas line is years away — a decade away, possibly more. Once you have a distribution system in place, then you have to have price. You have to have competition. You have to bring the gas into town. The distribution is a key part of the component. It doesn’t interfere with trucking or the large-diameter line or anything else. You still have to have the distribution system.

Petroleum News: On to oil taxes, which remains a hot-button issue because of the referendum. What are your thoughts on the referendum and how this might drive an industry response?

Guttenberg: Well, this is part of the world of listening to industry and what they say. All of the sudden there are projects going on. What’s significant is you hear the same old talking points. The state has not done a great job on understanding the nature of oil and gas. The things I heard during the passage of SB 21 were not all relevant to what we should be doing. They were talking points from the industry. They didn’t like people asking questions.

We still don’t understand how this thing works. We don’t have access to what’s going on. I think the industry does a really good job of maximizing their profits. We are so far behind on our audits. We don’t understand the rising costs of operations and maintenance that are being deducted. I think the referendum is a good thing.

The opposition I’m hearing from has just talking points and has little to do with what actually happened with the decision-making process. Over and over again we heard the industry come in with one thing and the consultants come in with another thing and in the end, we know the tax structure is just a small part of it. The best place for the industry to increase their profit is by taking more money from the state.

They are admitting it. Going back to the constitution and the founding fathers who built this state, we are obligated by the constitution of getting maximum benefit for our people, and we are giving that away. That’s a major concern for me. SB 21 was designed to cut the budget by decreasing taxes, no matter what else they say. We know it’s not going to increase production. We know it’s not going to slow down the decline. The industry knew that 30 years ago. They are manipulating the process and political environment to maximize their return from the state. That’s their job. The state is not defending itself. The state is not standing up for Alaska. That’s their job.

Petroleum News: One of the arguments for the change is that during the high-price climate Alaska missed out on the kind of investment other regions saw and that was because of ACES. What are your thoughts on that?

Guttenberg: That’s poppycock. We compare ourselves to North Dakota. We are cursing somebody else’s success. Those are new technologies in North Dakota, not the same old drilling technologies. When you look at the flow curve of production, (the industry) knew about this during ELF (PPT predecessor, Economic Limit Factor). They weren’t reinvesting then. They weren’t putting up millions of dollars to make up for the loss. They were paying almost nothing in taxes. They weren’t reinvesting here.

That’s why they could reinvest in other places. They were taking the profits they were making in Alaska and putting them in other places. Alaska has always been a cash cow. They have always taken money from Alaska and put them in other places where the margins might be different, there might be an economic environment where they have a smaller window for, and it means more dividends for their shareholders. They argument doesn’t bear out. Even back then, the production curve was doing down. They weren’t investing money back then. They weren’t paying anything in taxes; they took money and put it in other places. Now they are crying wolf. I’m sorry. It’s crocodile tears to me. I worked on the North Slope. Those jobs are critical to Alaska. I would do a lot to make sure we have those jobs. But cutting the state budget by $2 billion is what the state wanted. They wanted to cut taxes and decrease the size of government. They should have taken that money and put it into the Permanent Fund if they wanted to do that and do something that is much more productive for the state.

If you take the Norway model — it’s something we would never do — it means taking control of its resources and the industry becomes your partner. We become the CEO of all of our state resources. That’s something that wouldn’t be acceptable to a lot of people. I think we need to use some of that model. It hasn’t worked for us to be absent partners and sitting on the sidelines watching. The state doesn’t act like a sovereign. These are our resources. We need to stand up for Alaska. Now the industry sees us as a very weak partner.