Stedman: Give governor time on gas line

Sitka Republican cites value of Energy Council information for Alaska, confidence in state team working on Alaska LNG project

Steve Quinn

For Petroleum News

Sen. Bert Stedman spent the week in Washington, D.C., taking advantage of some good timing. The Sitka Republican serves on the National Petroleum Council, which is drafting a report on Arctic development and research. While there Stedman also spent time with the Energy Council during its annual wintertime meeting in Washington.

At a time when lawmakers are holding down travel spending, Stedman is one of three Senators traveling. Just a few years ago teams of lawmakers traveled.

Appointed to the Senate in 2003 by former Gov. Frank Murkowski, Stedman says he has been attending Energy Council meetings for nearly 10 years. He most recently served as chairman.

Before leaving Stedman spoke to Petroleum News about what he believes the value of this trip is and shared thoughts on where the state stands with advancing a natural gas pipeline project.

Petroleum News: Let’s start with the National Petroleum Council. What’s the value to Alaska on having you as well as Mark Myers on the council, especially with this study?

Stedman: I think it would be a real disservice if there was no Alaskan representation on the subcommittee dealing with this study. Mark Myers was filling the university position and the study was well under way, getting into its final days when he became commissioner of natural resources so rather than make a change, it was preferred that he stay in that position until the report is done.

Quite frankly, he’s a lot more knowledgeable than I am in pretty much anything to do to hydrocarbons. He’s been very involved in the writing and editing of the report, concentrating on the university side. We’ve got to remember that the magnitude of the hydrocarbons that are sitting off the coast of Alaska were roughly equal to Russia and we have larger potential than Canada and Norway.

What I expect to come out in this report is that a lot of the technology needed for the Arctic is already proven technology. It needs to be enhanced and updated with some of the work being done off the Russian coast, but the report is going to review current relevant research, technology and the ecology and the human environment.

There is frankly a big disconnect between the average American and the opportunities that Alaska residents have in the Arctic. They are not equal. Some of the communities have virtually no cash economy. Obviously there is no transportation to speak of and connections, plus there is the cost. When we look at opportunities, let’s not forget the opportunity of increasing the standard of living for Alaskans living in the area.

One thing that is nice about being on the subcommittee is that you want to have some input from Alaska on any study dealing with the Arctic and hydrocarbons in the Arctic. One of the biggest concerns Alaskans have is we don’t have enough participation and our views aren’t listened to. You can see it in the timber industry, the oil industry, the fishing industry. Pick your spot.

Petroleum News: So do you present this to the Legislature or someone else perhaps?

Stedman: Mark Myers or myself, we could do it, but I think it would be better if we had someone out of the work group, one of the major authors of the report or someone from the Petroleum Council itself.

Petroleum News: OK, so on to Energy Council, the second part of your trip. What do you hope to accomplish there?

Stedman: What’s on people’s minds more than the regulatory environment, which is fairly static, is the price and production worldwide of hydrocarbons, particularly oil, and the interplay of natural gas. So we’ll be spending some time having presentations on that very subject to bring Energy Council members up to speed on current production and pricing environments. That’s pretty high on everybody’s agency, but it also ties back to the state and the budgetary process.

For example, the outlook of oil, price wise. We are more price sensitive than volume sensitive and that comes right down to our budget process. In other words if this price reduction is an aberration that’s going to be cured the next couple of months and we go back up to $120, that’s one thing. But if we stay at $50 or $60 or even $70, that’s a whole other ball game we have to deal with. I suspect that’s where we’re going to be for a little while. Excess supply on the global market, they are talking about a year and a half. That’s one of the issues I’d like cleared up when I go back east: what are the global trends, what are the inventories and what’s it going to take to get them back into balance.

Petroleum News: So again is this something you bring back to the Capitol, especially if we are in a price sensitive environment?

Stedman: As far as getting that information into the system, I’m sure I’ll have some talks with my colleagues. Mia Costello will be there, too, so it’s not held in confidence by any means. It’s get information and bring it back. One of the best pieces of information we came back with years ago was the dynamic changes in the shale industry and how fracking was going to potentially revolutionize the production balance around the planet.

We came back from Energy Council and brought it back to the state level. At that time - this was several years ago - and we were virtually dismissed by DNR and Revenue. It turned out the information was timely and on point. That’s just one example.

The Energy Council tries to stay out six to nine months ahead of current industry trends and what’s coming at us. The further you try to reach out in the future, the cloudier your Ouija board is. They bring in some of the top quality presenters from around the world. What we don’t do is have discussions on fiscal structures on sovereigns, in other words tax structures of oil basins, whether it’s North Dakota, Norway or Alberta. North Dakota and Alberta are members; Norway is not.

That is not the subject matter or the interest of Energy Council

Now if we get into offshore and revenue sharing, that is. The position Energy Council takes is to treat all states equal. If you’re going to have 37.5 (percent royalty share) for the Gulf of Mexico, you need to treat Alaska the same, the East Coast the same. Just like building here, you want all areas of the state treated the same as you go through budget issues. Maybe not equally, but fairly.

They will take positions on the in ability for Wyoming to get coal to the coast. We take positions on Keystone. We wanted Keystone permitted and constructed. We don’t take a position on whether Nebraska deserves royalty for oil going through a pipeline going through their state. We work on a pretty much unanimous position. It’s all states and provinces that produce energy.

Petroleum News: Now as the public goes, Energy Council is a rather elusive group, some have even said covert for the lack of access the public has to the group. How do you reconcile that with the fact that essentially taxpayers are funding this group’s membership?

Stedman: We have quite a few diplomats and very high level corporate figures or scientists, or even the Energy Information Administration, for instance. We strive to have a comfortable environment for them to do their presentation in and for them to do straight talk. If you bring in ambassadors, you have security issues to deal with. Even some of the corporate folks have security details with them. For instance, when the Venezuelan ambassador came in, there is virtually no communication between Venezuela and the U.S. government for obvious reasons. So when they came in to do a presentation on their hydrocarbons potential and the basin to Energy Council, it was of interest not only the members of the Energy Council, but the industry and the U.S. government. So it gave us an opportunity to have a rather informal environment for him to come talk to us.

Petroleum News: Closer to home with the developments on the gas line project, some people are concerned that they don’t understand what direction the governor is heading. What is your take on things? Are you satisfied with what you’re hearing from the administration?

Stedman: The question is the ASAP expansion versus the AKLNG process. I think we have a major gas line. I’ve been saying that for a couple years now and that hasn’t changed. They are going through another gate here to get to FEED sometime in the fall, late fall or early winter. I don’t think the Legislature should give them a hard deadline and say we are going to be here in October or not, we are going to be here to expect something.

That’s not a good way to negotiate with your folks across the table, so when the administration is ready, the Legislature will take action with whatever is in front of us. From what I hear from the industry and the state agencies is that things are going well with normal negotiations and discussions. There is nothing to get alarmed about. The response and the concern some people have about parallel projects, we are only going to get one project.

Really, there is one huge target market - the Pacific basin. My personal opinion, the ASAP line without the expansion, it’s not going to be economical, which means you’re going to have to put billions of economic infusion to make it work, so you’ve got to upscale it. I agree the governor on that.

The timing issue, his job is to negotiate and put this deal together. I think he’ll work that out with Exxon who is in the lead. You might as well refer to it as Exxon because they are the lead on that team and we are on that team with Exxon.

Petroleum News: Now Exxon had a small entourage here. It coincides with the governor announcing his intent to expand the scope of the ASAP line. What do you make of that?

Stedman: I think that is good. It’s a positive. For Exxon to come and sit down with the governor - though I have no clue exactly what they are talking about - that’s good. It’s communication. Unless there is some announcement, some brouhaha happening, I’m not worried about it a bit. I like that Exxon and the governor’s office are having communication. We are in this together. It’s in both of our interest to get the gas line going. In fact, we are in this together broader than just the gas line.

Petroleum News: Do you have any problem with the three new appointees to the AGDC board? As you know some do because it reflects a different philosophy on how the board should be made up.

Stedman: I do not. I think they are all three good appointees. I plan on supporting all of them. They bring different skill sets to the table. Obviously (former state Sen. Rick) Halford has 20 some years of political experience. (Hugh) Short has financing experience. Then you’ve got (Joe) Paskvan who was born and raised in Alaska and served one term. My colleagues may not appreciate some of his opinions on things, but that’s just politics. I don’t think all of us agree with everybody else anytime anyway. His past positions on oil and gas stuff is of no concern to me. He, in my opinion, will look out for the state’s interest and keep his scope narrowed to the board position.

Petroleum News: So what about the technical expertise that’s been swapped out with the former members being removed? Is that important to have on the board or can that be obtained from someplace else.

Stedman: You can bring them in as hired hands. That doesn’t concern me. If we can’t get the big LNG line through the next gate, then I think this team doing the state version of the gas line will come full force and we’ll see if they can put something together. If I was a betting man - which I don’t go to Vegas - I would be putting my money on Exxon. They should be able to bring in that line cheaper through construction costs. Their marketing arm for selling the gas, their historical construction experience, I can make a list of strengths Exxon has over the state of Alaska and it’s hard for us to outscore them on virtually anything.

Quite frankly if we were to pick a partner - in my opinion to build a $60 billion project, you need an integrated company to do this, I would pick Exxon. I think they are tough to negotiate with. Don’t misinterpret what I’m saying, but if you want to build a big expensive megaproject in a small state that can’t afford to have the project turn on them, you want Exxon at the table.

Petroleum News: How do you negotiate with a partner like Exxon, a company that is formidable worldwide? Do you get outside help? Do you look internally?

Stedman: I think you do. The governor has a whole team of consultants. In my opinion we in the Legislature, in particular the state, are not going to outdo them in accounting, tax, negotiations or build a project cheaper than them. I’d rather team up with them than be an opponent, I’ll put it that way.

We are co-owners. Think of it that way. It’s a business relationship. They will be tough in negotiations. We as resource owners have to make sure we are treated fairly. I’m sure they recognize that when the industry gets too heavy handed and too far out on the negotiations with the sovereign, they end up with unrest and they end up with stability problems in their relationship with the sovereign. It’s not in their best interest to take us to the cleaners per se, because it will create problems in the future. We need a stable environment for both of our tax and royalty arena and our basic working relationship that can survive for several decades.

Petroleum News: How can the state be a regulator and a partner at the same time?

Stedman: You’re talking about taking gas in kind. It’s pretty tough. We are going to wait and see how that’s going to work out. One of the concerns that I have is if we take it at the well head in cash, we are going to basically get nothing for it because of the cost of conditioning, shipping, liquefaction and then shipping it overseas. It’s in the state’s best interest to own the infrastructure, which we are doing.

I haven’t changed my opinion: I’d like to buy out Trans Canada. It’s an alignment issue that the state has. Not an issue with the three majors but an issue that sits in Alaska’s lap itself. The other three companies are aligned. We are not. That’s one of the fundamental things that is brought up over and over again during the years. We want alignment. Whether it’s with oil taxes or gas, whatever, we don’t want to be squabbling over the next 30 to 40 years.

TransCanada, if it were up to me, I’d buy them out. I would have never let them in the door to start with. But now that they are in there, let’s buy them out. Bring them in later. If it’s such a good deal, why don’t the other three move over and give them a piece of their action. That decision has pretty much been made so I’m just sniffling over old negotiations.

Petroleum News: What do you want to hear from the governor about his plans for the gas line and any progress?

Stedman: Nothing until he is ready. I don’t want him to make a hasty decision on any of these major things. If it takes him until the summer or fall to make a royalty issue, so be it. He’s only been in there a couple of months and he’s still getting his team put together. Give him time. This is a huge decision that is going to affect multiple generations of Alaskans. Hell, it will probably be 50 to 100 years.

This is a big multi-generational decision. The worst thing we can do is poke him about making a decision before he has thoroughly thought it out with the advice from his departments. So I am not concerned about the timeline. When I hear from the department that things are going well and there are negotiations - and that doesn’t mean they aren’t squabbling - and I hear the same thing from the industry, I don’t worry about it. Let’s let the process flow. Don’t put artificial timelines on this.

The macro trends driving it, well the state of Alaska is not going to drive the gas line as much as world hydrocarbon economics. You can look at the Pacific basin and their need for gas. You can look at their transportation corridors out of the Middle East being bottlenecked. We’ve got the U.S. Navy protecting the energy supplies. You look at the age of Prudhoe and Kuparuk, and it’s time start blowing the gas off. You look at Point Thomson and it’s a huge gas field, and it’s time to get that gas to market.

You start putting all these pieces together - the only thing I see to potentially stop this from going forward is if Exxon and the negotiating team cannot agree on a pricing structure with their markets. I don’t see the state of Alaska blocking this at all.