Persily: Changes with AKLNG afoot

Former federal pipeline coordinator says signs pointing toward Walker wanting to push forward even if industry partners aren’t ready

STEVE QUINN

For Petroleum News

Larry Persily has seen progress and setbacks on Alaska’s efforts to market North Slope natural gas from as many angles as anyone in Alaska. He’s tracked it for the state, for the federal government and now is as attentive as ever as a special assistant to Kenai Peninsula Borough Mayor Mike Navarre. Persily sat down with Petroleum News and offered his thoughts on the prospects of getting North Slope gas to market. He spoke after the state and its partners ExxonMobil, ConocoPhillips and BP provided a quarterly update on the AKLNG project June 29.

Petroleum News: What was your broad take on the hearing?

Persily: Clearly a majority of the legislators there today are skeptical of the state increasing its ownership stake, its risk as they see it. Even though they are assured the risk won’t increase, they are skeptical of the state taking control of an Alaska North Slope gas project. They are not happy that the project could get delayed by market conditions. They are accepting of that. I would say a majority are not accepting that the answer may be the state takes over trying to push this thing through. That was to me the clarification lawmakers heard today.

Petroleum News: Were you surprised that Keith Meyer was really the only one talking on behalf of the state?

Persily: No because the indications were that Keith Meyer and the Alaska Gasline Development Corporation are the state’s gas line team right now. The new DNR commissioner (Andy Mack) is not as well versed in the gas line project as Marty Rutherford has been for years and years. And the administration indicated it’s going to be AGDC, Keith Meyer and the board. As one legislator mentioned, well we went through this last fall, we got an update, people who were with AGDC aren’t there anymore. We get nervous when we see change.

That’s a valid point. When you look at the state it was Marty Rutherford with natural resources. She’s retired. Craig Richards the attorney general was also part of the gas line team. He’s left state government. So it doesn’t surprise me that it’s AGDC and their new president.

Petroleum News: I believe the lawmaker you were referring to was Sen. Dunleavy. He raised the issue; he’s concerned about it. Should there be a concern about this kind of turnover from one quarterly meeting to the next?

Persily: Do I have a personal concern? No. When any company - if you want to treat AGDC like a company - when any company changes its chief executive officer or president, the market, the suppliers, your customers, the staff want to know what’s his or her style going to be. Are we going to change directions? So that’s natural.

Same thing for a state agency when a new commissioner comes in, everyone wonders what kind of relationship will there be? What’s different? It does seem like there is a fundamental shift in the state’s position whereas last fall the state wasn’t looking to pursue a go-it-alone option. It now appears the state is going to look at a go-it-alone option. I don’t think that’s necessarily due to a change from Dan Fauske to Keith Meyer.

I think it’s coming from the governor’s office that he believes Alaska needs the project; that’s true. That the companies are not going to move ahead on the same schedule that the governor had hoped last year. That does seem likely. It appears the governor believes the state has to look at other options so the schedule doesn’t slip. I’m just not sure the other options are going to work.

Petroleum News: You mentioned Marty Rutherford retiring. What will the state miss with Marty’s retirement?

Persily: They will miss her historical knowledge. You’ve already lost Mark Myers and Craig Richards. Whether you agree with him or not, he has been following the project for years. Whether you like how they use that knowledge or not you are still losing the historical knowledge and the context that goes with it. You’re losing all of the little pieces that happened over the past two years, five years, 10 years that explain why you are where you’re at today. So that’s unfortunate.

Petroleum News: One thing that I’ve repeatedly heard is that whether you agree with her or disagree with her, you walk away from the conversation willing to talk again. Maybe it’s where you left off. Maybe it’s a new starting point. But she was always welcome in lawmaker’s offices. Did you find that to be true as well?

Persily: Oh yeah, I’ve disagreed with Marty over lots of things over the years. I wouldn’t always agree on the conclusions she came to from that knowledge. But she had a greater historical knowledge and understood the project and the players. I think Marty Rutherford knew what had to happen for this project to go ahead. She has studied this for a long time and understands the risk to the state and how much risk the state can take. She understood what royalty means: RIK versus RIV decisions. She knows where the strengths are for the state and where the weaknesses are, and the different players. I think generally Marty Rutherford was very well respected in the Legislature even by lawmakers who didn’t always care for her conclusions.

Petroleum News: How do you replace that body of knowledge and that disposition that people have cited to be valuable?

Persily: It’s not the first time key players have left state government or the private sector. No one stays forever. You hopefully have a good group of people who have been there maybe not as long or not in the lead situation and they step up. Maybe you bring in a new person. You’ve got to allow for a little bit of time for adjustment. I mean people retire all the time in government and business continues. Sometimes you stumble a little bit in the transition. Other times it’s smooth. We’ll just see how this one goes.

Petroleum News: You noted the AG stepping down too. Just before doing that, he issued an opinion on tax authority as it relates to long-term lock in of taxes for natural gas. I know you’re familiar with the issue. What does that fit right now? Some say it’s got to come earlier. Others say it can wait.

Persily: It depends on whose perspective. If you are Exxon, BP or Conoco and you’re making a decision whether to invest in this, you need buyers. When you go to buyers, you need to quote them a price. If you’re not sure whether taxes are going to fluctuate wildly over the life of the contract, it’s a little hard to give someone a 20 year contact when you don’t know what the government take is going to be. The producers, with fiscal stability, they have got to have that assurance before the start quoting prices and start signing contracts. They would want as much fiscal stability as they can get before they commit themselves.

Petroleum News: Do you believe this is something that should go before the voters?

Persily: I don’t know. There have been attorney generals who say you don’t have to amend the constitution. Craig Richards firmly believed you did have to amend the constitution. From a public policy perspective, should it go to the voters? I’m hesitant on going to the voters for approval on everything or close to everything or on too many things. It’s an unwieldy way to govern. I believe we elect officials. If we don’t like the decisions they make, we unelect them. If on the other hand, it really is unconstitutional to provide fiscal stability, you may have to go to the vote of the public on this one. If you do get a constitutional amendment that’s the best guarantee of fiscal stability you can have because there is no question.

Petroleum News: Getting back to the presentation. Whether it was Keith Meyer or Steve Butt, was there anything about what you heard that progress is being made?

Persily: Well, there are two parallel paths being made here. One is preparing everything to get your application into FERC so they can start writing the EIS. Progress is being made there. They will finish all their final reports this year. It’s a few months later than initially hoped but in the scope of this project, what’s a few months. So progress is being made as far as route selection, route refinements, reducing the foot print, reducing the amount of steel and gravel that you need, reducing the mileage of more costly steel pipe that you need to use in certain points in the line.

So a lot of progress has been made to reduce the costs of the project which is essential if this thing is going to have a prayer in a competitive market. A lot of progress has been made in purchasing land in Nikiski and where are the best spots to cross rivers.

Separate from that, there is the concurrent parallel: the commercial, political and fiscal work. Well they haven’t made a whole lot of progress on that right? They don’t have commercial operating agreements between the state and partners; the three producers are clearly not enthused about going to a $2 billion engineering design commitment next year given the market conditions and now the state is saying if you aren’t going to do it, maybe we’ll figure out a way to do this and you can work with us if you want.

I wouldn’t say great progress is being made there, but those are some tough hurdles to overcome. AGDC is going to see if they can come up with a better solution that works. If not, Alaskans, as much as we don’t like it, may just have to wait for the market.

Petroleum News: Given how the market has slowed down things a little bit, if there is a time to look at other options, is this the time to do it?

Persily: I think you always want to look at other options. Just like AKLNG has spent the last couple of years looking at is there another way to build a gas treatment plant; is there another way to get across Cook Inlet; what’s the best way to get past Denali Park. So you’re always looking at options to reduce costs, to reduce risk.

There is nothing wrong with looking at is there another way to finance this, build it, operate it, market it to increase the odds of success that we can get the cost down to build it. Do think that’s going to work. It’s probably questionable. There is nothing wrong with looking at it and trying to see if there is another way to see if we can do it.

I don’t think people should underestimate how hard it is to raise that much money. This isn’t a federally regulated interstate pipeline where the federal energy regulatory commission says we grant you permission to build and operate this pipeline with a regulated rate of return.

Because of that, it’s more financially risky.

You’re selling a commodity; you’re not necessarily selling pipeline capacity. Someone has got to take that risk as how much is that gas going to be worth to overseas customers for 20 years. Whereas a gas line in the Lower 48, they don’t care what it’s worth they get paid 87 cents per thousand cubic feet to move it from say Texas to Connecticut regardless of what the gas is worth.

Keith Meyer understands that. I think Alaskans need to understand there are different worlds between rate regulated interstate pipes where the project operator doesn’t take the risks as opposed to an LNG project where you are just selling a commodity.

Petroleum News: Was there anything that Mr. Meyer said that gave you some optimism or sounded positive?

Persily: He has a lot of ideas. He has a good grasp of the market. Sometimes a fresh set of eyes help whether it’s LNG projects or a roof leak that you can’t figure out and you’ve been staring at it for six months. I didn’t hear anything that made me jump and say that’s going to work. But he didn’t represent it that way. He made it clear that we have some ideas that might work.

I’ve always been skeptical that the federal government will allow the state of Alaska to issue tax exempt bonds for anything more than the portion of the project that serves local utilities. I think it’s something that AGDC is going to look at. As I look at project financing round the world, yeah it’s done all the time with LNG projects.

The largest ones I’ve seen to date, the project financing portion is about $20 billion, maybe a little less than that. I look at a $50 billion AKLNG project - it would be the largest by far in the world. That makes it that much harder. No matter what people may think, you are going to have to put some money in. This isn’t the home building craze of decades ago when you put no money down.

I think legislators are certainly interested in hearing the answers even though they are skeptical on some of it. Some of that is also a spillover of some relationship issues between some legislators and the governor as it relates to the gas line and other issues. It’s just politics.

There were legislators who clearly said whoa, this is a big change from the past, the notion that maybe the state would manage, own, assemble this project. Ten years ago we weren’t even going to be a partner. It is a big difference and the Legislature the governor, and 735,000 Alaskans are going to need a lot more information before they buy into that it’s the best solution. I think AGDC staff and board will do their job and get those answers.

Petroleum News: I think it was Dan Saddler who asked where are we in this low-cost environment and how that sometimes open up new opportunities.

Persily: If you went out in the market today and said I want to build a road or a building, contractors are hungry so you’ll get good prices. But if you go out in the market in 2017 and say I want to build an LNG plant but I don’t need you until 2020 and I don’t know what the price of steel will be in 2020. Yes, contractors are hungry but you’re not asking for the work today and since no one knows what the price of those components will be, it may help but it doesn’t solve the problem of project economics at this point.

Petroleum News: There was some brief discussion still about a 48-inch line versus a 42-inch line. Did you have any kind of preference?

Persily: Well, I thought 42 made more sense. You go to bigger, heavier pipe with a 48-inch line. Fewer mills can do it. You’ll probably have to pay more since there is less competition for the steel. It’s going to take more cars on the rail, more truckloads and it will take heavier equipment to lay into place. I think 42 seemed to make business sense to me.

Petroleum News: It was Keith Meyer who said, “under the current path” he didn’t believe the project was going forward. Is it too soon to say that?

Persily: Going forward to final investment decision in 2018, no I don’t think any of the partners expect to make a final investment decision for their share of $50 billion. I do believe this project will go forward. It just may not be on the schedule that we as Alaskans hoped, that the companies hoped a few years ago. It’s not just the low price of oil which has cut into a company’s cash flow - they are not sitting around on cash to invest on something they won’t get a return on for another decade. They have cut back on capital spending just like the state cut back capital spending. We aren’t building every road we want to this year. They are not investing in every project they want to this year and next year.

And also the LNG market, yes it’s over supplied - vastly over supplied - into this decade and into the next decade. Prices are one quarter of what they were two and a half years ago with the Asian spot market. If I were a company I’d have to say “you know, maybe slow this down a year and see what happens with the market, make sure all of my studies and environmental work are current and ready to do.” I’m not sure I’d recommend to my board of directors to go next year to the $2 billion final engineering design stage.

It’s a scary market out there. Yes, demand may pick up in China. And Japan may not start as many nuclear plants as some of the utilities want to. And India may do a wholesale switch from coal to natural gas. And all of that may happen. They may not. In which case the window may not open until 2024-25.

Petroleum News: One of the concerns about a delay that takes too long is some of the studies and field work could go stale.

Persily: I trust that Exxon, BP, Conoco and the state are smart enough to look at what has a shelf life, what doesn’t, what you need to do preserve the value. For example, the EPA is going to want current air quality readings, then maybe you keep an air monitoring station up and running so you’ll always update your baseline data. They are smart enough to figure out what do we want to keep current so we don’t have to start over and so we can hold onto as much value as possible. You’re right we cannot stop everything and 24 months later pick it back up. You’ll have to make sure it’s current data.