Giessel works LNG, Arctic policy issues

Senator notes importance to Alaska of national Arctic policy, believes excessive natural gas tax would put state out of LNG market

Steve Quinn

For Petroleum News

Sen. Resources Committee Chair Cathy Giessel has been plenty busy during the interim and less than two months await the Legislature’s return. Since adjourning, the Anchorage Republican has spent time learning as much as she can about the liquefied natural gas market and serving on the state’s Arctic Policy Commission, work that’s taken her to Barrow, Unalaska and Iceland.

Giessel spoke to Petroleum News about what she’s learned during the interim and what the state might expect from the upcoming session.

Petroleum News: Let’s start with Iceland. What were your takeaways from the trip?

Giessel: I attended two events while I was there. The first was an Arctic energy summit, which was sponsored by the Institute of the North and that was interesting because we talked a lot about ocean renewables and digital connections across the Arctic areas. There were several presentations from Alaska companies and Alaskans. About 200 people attended that conference and 30 to 40 of them were Alaskans so we had a significance presence. What was interesting is that all of their energy is produced through renewables and because of their very low cost of hydro power they attracted Alcoa Aluminum to site their plant there in Iceland, which is incredible. The raw materials are shipped to Iceland, but because of the low cost energy they were able to attract the large industry to their areas. The Icelanders were not used to having a large industry present. We have those up in the North Slope and that significant growth that we experienced during the construction of TAPS. This was a new experience for them. As far as the social environment, they are trying to get used to the compact, multifamily housing, which is not part of their culture.

The second meeting was the Arctic Circle. There were about 1,000 people there and again Alaska had pretty good representation. It used to be called the Arctic Imperative and it used to be held in Girdwood. It’s a meeting put together by Alice Rogoff (Alaska Dispatch Publisher). She has a friendship with the president of Iceland and he said let’s make this a bigger meeting. They talked about marine transportation and energy development. The president of Greenland spoke and she spoke about how they reached independence from Denmark. They are interested in developing uranium and their offshore oil and gas. The same is true of the Faroe Islands: Again, a possession of Denmark, very small islands, but wishing independence and developing their resources. This was helpful to me understanding the worldwide resources in the Arctic and how other countries are pursuing that resource development.

Petroleum News: There is often scrutiny when lawmakers take trips like that. How do you defend against any kind of scrutiny?

Giessel: I serve on the Arctic Policy Commission. The single goal is to assist the U.S federal government in writing Arctic policy. We live rather isolated in Alaska in that we don’t necessarily have international exchange of ideas and goals. In addition the U.S. hasn’t recognized itself as being an Arctic nation until recently. Seeing what other countries are doing and looking at the broader picture at the kind of international regulatory ideas being floated out there is helpful to me.

For example, the energy summit, one of the breakout groups was on resource development and one of the ideas put forth was that all of the Arctic nations form a federation. That’s significantly different than the type of United States representative republic that we are part of. Those ideas are becoming more prevalent in our world. These kinds of things we need to be aware of. Even now, we are signatories to the International Maritime Organization. They are working on a compulsory polar code right now. This will define what kind of vessels will be allowed to transit our oceans through the Arctic. Right now, we have an emission control area being enforced in North America and this is part of the IMO’s regulatory regime. This area is requiring significant changes in the type of fuel our shipping vessels are using. In fact the type of fuel they are requiring is of such low sulfur content, that it’s not available right now. This will significantly change the cost of Alaska’s goods. We are going to be significantly impacted. This came from the IMO. It came from the U.S. signing on to this treaty. It’s important for Alaska lawmakers to understand.

Petroleum News: Still in the Arctic, let’s move onto the Arctic Policy Commission. What do you believe you folks have accomplished so far?

Giessel: The commission has been working really hard. We’ve met three times so far since the session ended. We are divided into three teams addressing specific matter based on our teams. Mine is the oil, gas and minerals development team. Two months ago we took on oil spill prevention and response. These are chapters in the overall commission report which will go to the Legislature by Jan. 30.

My team has been taking a deep dive into what resources the state has, but how we are developing them has been our main focus. What is our regulatory structure? Is it effective? Where are the gaps, if there are any? That’s what we’ve been working on and the same types of questions have been applied to oil spill and response. It’s been very informative and very encouraging. As an Alaskan I’m very proud of the way we develop our resources and protect our environment. Yet to dive into it, it’s even more encouraging. We do a good job in these areas. We’ve learned a lot from the Valdez oil spill in terms of preparedness. What kinds of infrastructure, not only in materials but also people, need to be close by and readily deployable? At this point the commission is merging these reports. I’ve appreciated the residents who have been members of a commission. There are 10 members of the Legislature. The rest of the team are all private citizens who are subject matter experts. They are so informed and that’s made it a good partnership. Listening to the reports of the other teams has been very informative.

Petroleum News: You mentioned adding the oil spill prevention duties to your group. Did the Kulluk incident have anything to do with that? The commission’s first meeting during the session came on the heels of the grounding in Kodiak.

Giessel: No. The reason oil spill prevention and maintenance was added was, as we were working on our oil and natural gas development team, clearly spill response was part of oil development whether it was onshore or offshore. We went to the commission and said let’s move this as a separate topic. The team doing the Coast Guard subject matter felt like the spill response belonged in its own chapter, so my team raised its hand and said we’ll do it.

Petroleum News: You committee leaders noted Defense Secretary Chuck Hagel’s recent 14-page report on Arctic strategy for security and defense. What are your thoughts on it?

Giessel: I have read the Arctic Strategy put out by the Department of Defense. It’s actually fairly specific, but it does have some vague terms that I have concern about. It talks about ensuring security of the U.S. and freedom of the sea. Those are great ideas, which I fully support: advancing U.S. security interests; advancing Arctic stewardship. What’s interesting to me is this report, which is about 14 pages long, our name is only cited five times, and one of those times is in a photo caption. That piece is missing, that collaboration with Alaska. I don’t know how much of that occurred. Part of my Arctic Policy Commission group is Pat Pourchot. He’s with the Department of the Interior and he wasn’t sure what collaboration occurred. As much as this report talks about U.S. sovereignty and national security, at the same time it has a statement that one of its goals is to “support the development of the Arctic Council and other international institutions to promote regional cooperation and the rule of law.” That stood out to me because the Arctic Council is an advisory group only. It is not a policy writing group. It does not have the force of law. It concerns me when folks start talking about it that way.

Petroleum News: How do you work out some of these differences with the federal government? Is Arctic policy a good place to start?

Giessel: I think it is. I think it’s not only a good place to start; it’s a critical place to start. The U.S., until fairly recently, has not been aware they are an Arctic nation. Most people aren’t aware that Alaska is stuck up here in the corner and we have a border with Canada all of our own. In any case, we have to participate in this to inform Washington, D.C., exactly what is going on up here. We have to be part of the discussion about policies going forward that are going to directly affect us.

So looking for commonalities — we are always looking for the positive — well there are a lot of things. They care about protecting the environment; so do we. They care about marine transportation through the Bering Strait; so do we. Choosing the commonalities and focusing on those like the secretary did. He’s talking about national security. We care a lot about that. That’s why we are pushing for more icebreakers and a Coast Guard station here in Alaska’s west coast.

Petroleum News: Moving on to LNG, what is your take in listening to House Resources recently and hearing from the DNR on the Black & Veatch report, especially having an equity stake in a large-diameter pipeline?

Giessel: This summer, Legislative Budget & Audit sponsored a weeklong LNG symposium here in Anchorage for legislators. It was conducted by PFC’s natural gas team, which is a group of specialists that constantly monitor the LNG world market. That symposium at its conclusion had some key takeaway points. No. 1 the natural gas market is extremely volatile; it’s constantly moving and it’s very complex. These contracts are not as transparent as it is with oil. Gas is a negotiated contract between buyer and seller, so we are getting into a very complex field in terms of marketing our natural gas. Excessive taxation of this hydrocarbon is going to put us out of the market. We are not going to be able to sell it in the world market. We’ve got a high royalty and a high production tax. So the takeaway for me is most of the provinces have negotiated an equity ownership position of the project.

So when Black & Veatch, which was hired by the Department of Natural Resources, came forward with their report, recommending some sort of ownership, I was not surprised based on the LNG symposium and what I heard at LNG 17, which was in Houston right after session. It happens every three years. The equity ownership idea seems to be the most prudent. It gives us a seat at the table. Will we be taking on risk? Definitely. I keep hearing if only we had taken ownership in the trans-Alaska pipeline, what a difference that would make in tariff negotiation and production and all of those things. I think this is a great opportunity for Alaska, but we are going to have to be very smart. We are going to have to know what we are doing and who we need to have as consultants and advisors in this process.

Petroleum News: So would an equity position force out TransCanada?

Giessel: I would ask why would it force out TransCanada? Taking an equity position only means buying in — in other words, contributing money to the whole affair. Perhaps it means contributing funds at the LNG project site. We will never, I hope, propose the state take over in building the pipeline. We simply don’t have the experience and expertise there. We need a company that has a proven track record in building pipelines, so I don’t see the state’s equity ownership affecting taking over building a pipeline at all. That would be a frightening proposition to me. We are not good at building things like that.

Petroleum News: So you would like the natural gas tax separate from the oil tax?

Giessel: Our oil tax does link to gas. It puts us between 75 and 80 percent production tax. We can’t sell gas like that. It would put us outside the market.

Petroleum News: Well the industry likes having oil prices linked to natural gas prices. So, with that in mind, what is wrong with linking oil tax to natural gas tax?

Giessel: Well, when you are talking about linking it, you are talking about Japan. Right now Japan buys gas linked to the price of a barrel of oil. Therefore they are paying $15 to $16 where the rest of the world is paying more in the $4 to $6 range, if I’m not mistaken. That is what the world market is paying right now. If we are going to be selling to Japan, they are in the process of negotiating with the rest of the world to stop linking their prices to oil because it is so very high. That’s what I’m saying. We need to be more savvy and flexible in terms of what kind of production tax we are going to have. It’s a different entity. It’s not like oil.

Petroleum News: On to SB21. I know we’ve discussed this before the referendum to repeal the law was certified, but can you restate any concerns you have about investment being curtailed should this pass?

Giessel: You’ve probably heard from the companies, whether they are large or small, that a certainty has a huge impact on their ability to make an economic change in Alaska. That applies to all of us. If you and I were uncertain about what the federal government is going to take from our income tax, we would be pretty leery about working hard. We would think maybe the federal government is going to take 50 percent. Maybe they are going to change their mind. That kind of uncertainty changes how people approach taking risk. The companies, I am thankful for, have decided they are going to move ahead anyway, despite the referendum. BP has made several commitments; ConocoPhillips has got some new rigs coming up. They are beginning to look at the Mooses’ Tooth development. Little Red Services, which is one of the support companies for oil industry up on the North Slope, have moved the construction of their heavy equipment trucks from Canada to a fabrication plant here to South Anchorage. That’s a big deal. That’s jobs for Alaskans who live here in Anchorage, not people coming in from out of state for two weeks on, two weeks off. These are people living here. We’ve got a new oil company who bought in on Pioneer’s leases. They see the opportunity. Because of SB21, they are encouraged that this kind of investment is going to be helpful to them. Despite the referendum and the uncertainty it creates, it seems to me the companies believe Alaskans will understand the rationale and will understand that lower taxes means a more promising economic future for any kind of investment, whether it’s a Wal-Mart or an Olive Garden or a Brooks Range.

Petroleum News: Do you see the Legislature working on bills to advance an LNG project?

Giessel: Well, I’m never one to predict the future, but this is so important to our future. So far we’ve been talking about selling overseas, but the ultimate goal for me is getting gas to Alaskans. We are talking about a trucking option for Fairbanks, but much more efficient would be a pipeline. That trucking option, I view as a Band-Aid, a short-term solution. Really getting that pipeline built and serving Alaskans is the main goal for me on monetizing our natural gas. I believe we will be doing something. I won’t be willing to predict what that will be. I’m sure a lot of folks have ideas and we haven’t heard from the governor’s office yet on what he will propose. Certainly I believe something would happen.

Petroleum News: Do you believe that’s the best first step, something coming from the governor’s office?

Giessel: Just as the oil tax reform came from the governor’s office, it won’t emerge at the end of the day as he proposed it. But that’s the process. That’s the balance in government, so I look forward to the discussion.