Educator engaged on resource issues

Wasilla Republican Dunleavy says he’s eager to hear pre-FEED results, what may or may not lie ahead for marketing North Slope gas

STEVE QUINN

For Petroleum News

Sen. Mike Dunleavy may not sit on a resources or energy committee but the member of Senate Finance and the Education Committee chair remains focused on resource issues enough that he often finds himself with a seat on a joint panel of resources committees. He stays the entire eight hours, asks questions and wants to know more. Dunleavy recently sat on the joint resources committee hearing for the AKLNG quarterly update. The next update could feature the closeout of the project’s front end engineering and design phase. Dunleavy, a Wasilla Republican, spoke to Petroleum News about his concerns over the project and its prospects.

Petroleum News: Most of your focus since coming into office has been either education or finance, but also kept a close eye on resource development. You’ve attended hearings. What drives that interest when you’ve already got a pretty good work load on Finance?

Dunleavy: Alaska is a resource state. You can go back in history and see that was the United States’ reason for purchasing Alaska: its resources and its potential. There were some geopolitical issues there, too: there was a check on Great Britain which would have expanded west into Alaska. But you’re right. Education has been my career. I’ve been a government person my entire life. I’ve been a recipient of government revenue.

Where you get that revenue in Alaska is the resources, mainly oil. So if you have a healthy economy based on resource development, resource extraction, that means more revenue for the state. That’s a huge reason for having that interest.

Petroleum News: OK, let’s go back a few weeks to the AKLNG quarterly update. You were invited to sit on that panel, as were a few others not on either resource committee. Some accept those seats. Some don’t. What made you accept it?

Dunleavy: Partly the same reason, but also, we are looking at potentially one of the largest projects ever attempted in the world, certainly in Alaska. It’s one of the most expensive and one of the most risky. I mean there is potential for some huge payout if everything goes well and there is potential it could be the mother of all boondoggles if it doesn’t. As you know, sitting on Finance, we are the ones who will appropriate all the money if this project has legs.

Petroleum News: With that in mind, in a broad sense, what were some of your takeaways from the meeting?

Dunleavy: Well, well we’ve got a new guy at the helm, Keith Meyer, who was recently brought on board by AGDC. But my takeaway is really the takeaway I’ve had for the last year or so is that I’m skeptical. I know some people want everyone to be a cheerleader for a project such as this. I certainly would love to be, but I’m also charged with looking out for Alaska and Alaskans. You have to be able to ask as many questions as possible and get those questions answered so that you feel comfortable moving through the different stages of a project like this.

I’m skeptical. I have a lot of questions. I do have concerns. As I mentioned during that meeting right now I’m less optimistic for a whole host of reasons that the project will meet its timelines and that the project will move forward as I believe some envision. There are a lot of different views I think that people have on how this project should move forward and what it should look like.

There were questions that were posed to Keith Meyer, like what’s the plan? Are we still going stick with working as a partner, the 25 percent quadrant with the other three partners? Initially I thought he said yes that’s the plan. But then the subsequent discussion seems to indicate the administration is preparing for a departure from that route.

That again is going to mean more time - potentially - and more money - potentially - and we’re not sure how that’s going to turn out. We are going to be asked to appropriate more money. Last fall we had a quarterly update in the (Mat-Su) Valley, which I attended. At that point one of the issues that stuck out was well we went from what we thought was going to be a 42-inch line to a 48-inch line; therefore, the partners had to slow down and study the 48-inch line concept and see if that was a benefit to the project.

Well, according to Steve Butt that cost somewhere in the neighborhood of $20 million in time. I understand a project of this size that if a partner wants something looked at, the group is probably going to agree to that because they want to make sure everyone is comfortable moving forward. The point is the project spent $20 million and the research on that came back that it wasn’t feasible.

So I have concerns. If you were to ask me right now would I vote to appropriate whatever money it took to “make this project” work I would have a hard time doing it. I voted no during the special session in the fall in large part to send the administration a message: you don’t seem to have your act together; there are musical chairs; people are moving in and out constantly; there’s people moving in and out constantly; there is turnover; there are differing ideas; there are new ideas.

To me, they are either somewhat confused or they are still figuring out where it is they want to go. Again that costs money. You’ve got to get this right. It’s not like it’s an oil project. Gas is a little different. Some would say it’s a lot different. We’ve got to be very careful. Right now I’m not very confident this project is going to move forward based on what we heard in the meeting.

Petroleum News: You also had concerns over turnover, which you alluded to earlier. Talk about that.

Dunleavy: Well, when you have turnover, you have to bring in new people and they have to come up to speed and learn what’s going on. Why is there turnover? Is that because there are individuals who may not agree with the direction the administration wants to go? We lost Marty Rutherford, she’s gone. Mark Myers, he’s gone. Rigdon Boykin, he’s gone. Much of the ADGC board has turned over. So I don’t know why these folks are leaving. I don’t want to speculate. When you’re in politics, there’s always rumor.

But certainly with Marty Rutherford, something is up. Right? There was an editorial written by her and Pat Galvin questioning the governor’s move on the tax credits, not paying the obligation on them.

What I’m seeing is people moving in and out and I’m not 100 percent sure why and that adds to the doubt and concern about appropriating large sums of money.

Petroleum News: What does it tell you when Pat Galvin and Marty Rutherford suddenly weigh in like this?

Dunleavy: I have to believe it tells me that they have concerns regarding the direction of the administration when it comes to the gas and, to a degree, oil. They may not necessarily agree where this administration wants to take the state of Alaska. The average American does a lot of tremendous amount of diligence in many cases just to buy a toaster. They will go consumer reports; they’ll go online; they’ll shop; they’ll talk to their neighbors; they’ll look at it. They’ll get all the possible information they can get. They don’t want to get a lemon. They don’t want to waste money. They want the thing to function properly. The want a thing to do what the manufacturers say it will do.

If you’re dealing with a $65 billion potential project, everybody should be asking questions. Everybody should be skeptical. The stuff should be laid out. We’re approaching a major gate with pre-FEED. I think I picked up from Steve Butt talking on behalf of the producers - the majors - when I asked how do you see this going, I believe he basically said it doesn’t appear so under these conditions. I believe he was referring to market conditions. You’ve got all of this going on, so you would have to close your eyes and pretend you didn’t hear any of this to believe everything is perfect.

It doesn’t sound like it is. I think we need to be asking more questions. I look forward to the results of the pre-FEED study to see if from the producers’ point of view this has legs. It appears the administration is gearing up for at least one producer or others not wanting to move forward for reasons hopefully they will state. It appears the administration is gearing up to potentially go it alone. If that’s the case, what do we know that they don’t and so I think we need to be very skeptical, very concerned.

Petroleum News: So what concerns do you have about Marty’s departure?

Dunleavy: The timing is kind of weird. People say Marty was retiring. I don’t know. Unless I hear something different, guess I’ve got to accept it for what they say. I mean, Mark Myers, he’s gone too. These people came into the administration and were doing other things. They came into the administration, because they probably liked what they heard. Consequently they are gone and you’ve got to believe they no longer like what they heard and no longer like where things are going. That’s just speculation, of course. I can’t even keep up with the names.

Keith Meyer alluded to some way to raise capital for the purpose of investing in the project in which we wouldn’t have to be the ones who raise it - others will - but we would still own it. I’m very curious to find out what that concept it and what instruments they use. I’m not a Wall Street guy, but you hear something like that you think junk bond rating, where it’s a high risk proposition that if it works, there’s a high return. How do you give investors high return without impacting your return on a project? You see, these are questions that keep coming up.

Petroleum News: What would give you comfort or more answers with the next quarterly update or the pre-FEED report, whichever comes first?

Dunleavy: The pre-FEED information, that’s what we’re all waiting for. That’s what we funded this project for up to this point. If this group believes that the conditions - economic, financial, market, political - whatever else goes into that consideration. If the conditions are there and this group believes we should move through the gate, I’m looking forward to hearing the results of the study. If they believe they should move forward and why. I’m going to ask a lot of questions. Or if at least one partner or more says no, this is not the time to do it, I’m going to ask why because if they believe this isn’t the time to do it, I have to believe there is a response from the administration. I think we all need to be looking forward to this next meeting and the report to find out where we are going from this next stage.

Petroleum News: So what else did Mr. Meyer say to give you pause, concern, or optimism?

Dunleavy: He’s new to Alaska, certainly not new to oil and gas. He made the statement that he could never understand why Alaska was never able to bring the concept over the last 30 years to fruition. I thought there were obvious reasons why. It’s expensive. The gas is stranded at the top of a subcontinent. It’s not like Rhode Island. You can drive across the state of Rhode Island, that’s like driving from Wasilla to Anchorage.

We are at the top of a subcontinent with no infrastructure. We’ve got extreme weather. When he said he couldn’t understand why it wasn’t brought to market coupled with the oil and gas commission which monitors and manages out Btus that come off the slope, have - and rightly so - viewed gas as a better play for the state use it as a lifter of oil, which is a much more lucrative product.

Even I understand the lack of infrastructure, the climate challenges, the marketing issues, the geographic issues, the purpose for gas right now. Here’s the deal, we all can have great, sometimes wildly fantastic ideas on projects. We dream big and we are able to put those dreams into reality. Sometimes they pay off and they move this world forward.

However, when you’re dealing with other people’s money and you’re put in charge to safeguard that money as we are the Legislature, you have to temper your optimism a little bit and interject as much reality as possible. We’ve dreamed a lot which paid off in the pipeline. Alaska was a dream itself by (William) Seward which I believe paid off for the country.

We’ve got to be careful. We do have some instances where we dreamed and nothing came of it and we lost money. This could be one of the greatest projects ever built, ever conceived or it could be one of the greatest boondoggles. I don’t think there is any middle ground with this concept it’s so big. With that idea that big, you’ve got to be very careful.

Petroleum News: So if one or two of the partners decide it’s not economical to advance to FEED, what is it you want to hear?

Dunleavy: I want to know why. I’ll do everything I can to get the information in a public meeting. What is it they may know that we may not? Who knows they may just come straight forth and say we don’t have the cash for it. We understand the horizon for this thing is 10 to 15 years, but our internal analysis - and we’ve been in this business for decades - tells us this is not a project we want to invest resources in.

I want to find out what the particulars are and why other partners might want to go forward. Are we dismissing reality? Are we creating our own reality? Is it truly one partner who has cash flow issues, their balance sheets are upside down, their board’s priorities were always skeptical to begin with and they were always looking at other projects? I want to find out why. All that information will be great information.

Petroleum News: On to oil taxes and oil tax credits. The last special session, you had a two-hour hearing?

Dunleavy: The administration has a different idea as to what the state should look like from the previous administration. The administration has a different idea as to what the state should look like from a lot of legislators. Again, as I said when we started this conversation, I’m not an oil and gas person. I’m an educator, basically a government person, but I know where revenue comes from. I’ve been here since 1983. It appears to me that this administration has a different view of oil tax policy. When we first started this conversation six months ago it was oil and gas credits, and it was mostly Cook Inlet for the purpose of internal consumption. Those credits appeared to have worked. At the same time the Legislature has agreed some of these tax credits aren’t necessary. Then we move to middle earth. The hope was there would be gas and oil plays so those projects will be allowed to finish out.

Then we looked at the Slope. In the back of our minds as many of us think this through it the technologies have changed dramatically since the majors and others went to the Slope back in the 1960s. The geopolitical landscape has changed dramatically.

The key for myself and others is how do we keep a continual rolling process of exploration, development and production so that the pipeline has as much oil in it as possible. It would appear that this administration is heading toward tax policy.

What does this tell anyone who wants to invest in Alaska. What is the message we are going to send to folks? That we want people here investing or that we don’t. Some will say of course we do, Dunleavy, we don’t want to give away our resource. I don’t want to give away our resource. I think we are dipping into tax policy. More and more companies are going to view Alaska as a host desperate for revenue.

Any other industry - people don’t think about this - any other industry who wants to take advantage of our geography being close to Asian markets, they are going to be somewhat skeptical if we are constantly changing our policies, especially if we change them radically. For most people believe looking into the tax credit concept was a worthy and necessary discussion, but getting into a tax policy that was just put into place two years ago, I think is going to potentially cause some issues.

Petroleum News: You had wondered in the hearing what happens when shale oil come back online?

Dunleavy: I asked Mr. Alper (Alaska Tax Director Ken Alper) how does this ensure continual exploration, development and production. There is no doubt that the governor wants a healthy oil industry. There is no doubt we all want that. The question is whether our policy and approach will let it happen. I believe these technologies have changed the landscape. The geology of the North Slope - you’ve heard the expression we have great rocks - still has huge promise as a producer of large quantities of oil. But the fracking, you can set up and move a rig to get set up for production a lot quicker than you can on the North Slope. If oil starts to creep up and we are still dithering with our policies that has individual companies, groups, etc. saying we’re not sure if we want to invest there. They can move a whole lot quicker down south is my understanding. What I’m afraid of is they will be able to take advantage of the demand for oil much quicker that we will. We have to constantly have this activity going on. We can’t shut things down and then next week we get word the Saudi king is going to hold back oil and the price is going to go through roof, well let’s jump back in there. We can’t do that as easy as they do down south. We have to be very careful.