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Speech: Meet Alaska Conference

Governor Sean Parnell
January 10, 2014
(as prepared)

Thanks again to the Alliance for helping us build a healthy oil industry for our state. Your work on SB-21 – phenomenal. Your work to keep the gains we have – priceless.

Over the holidays, our family had the opportunity to watch again the blockbuster movie, “Lincoln.” How many of you have seen it? The movie recounts the story of the 13th Amendment to the Constitution.

During the film, Secretary of State Seward scolds President Lincoln about letting two seemingly incompatible paths march forward. Lincoln responds: “Time is a great thickener of things.”

Time is a great thickener of things.

The Fort Knox Gold Mine was originally staked in 1913, but no mining took place for many decades. The land remained undeveloped until it was re-staked in 1980. Again, nothing happened until new owners purchased the property. Finally, first gold was poured in 1996.

The geology stayed the same over those 80 years, but time thickened the technology, transportation, and investment climate — it all changed! To this day, Alaskans benefit from Fort Knox.

In 1957, oil and gas exploration in Alaska, particularly on the Kenai, was promising, but challenged. Development on the Kenai Peninsula was estimated to cost two to four times that of wells developed in California.

In 1959, the president of Standard Oil said, “The risks likely to be encountered in Alaska oil development are not for the faint-hearted or the speculator with a shallow purse … What we see is a picture clouded by present problems and past failures, but illuminated by cautious hopes.”

Only two years later, those “cautious hopes” for Cook Inlet oil turned into a major refinery investment, thousands of jobs in oil and gas across decades, and cheaper energy for Southcentral Alaska.

For Cook Inlet oil and gas development, time has, indeed, been a great thickener of things.

And so it is with North Slope gas, a dream of Alaskans since 1968, when the announcement of Prudhoe Bay oil included an estimated 26 trillion cubic feet of natural gas.

As Alaskans, we own our gas and lease rights to our gas. Consequently, every Alaska gasline effort has dealt not only with the economics of gas, but also with the challenge of merging private and public resource ownership interests.

In the 1990s, Governor Knowles’ administration privately negotiated a North Star royalty reduction with BP. The administration presented the royalty contract for legislative approval in what was seen as a “take it or leave it” deal.

The Legislature reacted strongly and negatively.

Lawmakers of the late 90s were concerned — after North Star — that an administration might negotiate all of the commercial terms of a gasline deal, without legislative input or public scrutiny.

Legislators agreed with the Knowles administration assertion that it was not in the State’s interest to have companies negotiate with 60 individual legislators. Legislators, however, also wanted a real shot at protecting Alaskans’ interests. The Legislature codified these interests in the original Stranded Gas Development Act, and Governor Knowles signed it into law.

The Stranded Gas Act gave the administration authority to negotiate fiscal terms for a gasline, but legislators put sideboards on the administration’s authority, including requiring legislative approval of any contract negotiated.

Under the terms of the Stranded Gas Act, Governor Murkowski’s administration negotiated fiscal terms with producers between 2003 and 2005. But when Governor Murkowski sought legislative approval, lawmakers rejected the contract. Neither legislators nor the public trusted the lengthy, private negotiation process, nor the contract terms produced.

As the Stranded Gas Act was a predictable progression from the tussle over North Star, so in 2007, passage of Governor Palin’s AGIA legislation was a logical progression from the Stranded Gas Act experience.

Back then, Alaskans’ trust in state government had vaporized. Gasline negotiations had gone badly, and public trust was very low.

On the gasline, Alaskans, legislators, the administration, all in 2007, were locked in a way of doing things that assumed in order to get a gasline we had to negotiate all the terms for a gasline at once.

Governor Palin and legislators sought to restore public trust and protect the public interest by enshrining a set of “must haves” in statute for Alaskans in exchange for State participation in a gasline project.

And, time, once again, became a thickener.

When AGIA passed, no parties were moving cooperatively forward toward a gasline. AGIA changed that.

TransCanada was selected by the State as the AGIA licensee.

Exxon joined TransCanada and the two began working cooperatively with the State.

BP and ConocoPhillips joined together in a competing project known as Denali.

AGIA’s original focus was to induce construction of a gasline through Alaska and Canada to the Lower 48.

The producers, the AGIA licensee, Alaska’s state government – virtually everyone was focused on a pipe to the Lower 48. That’s because most thought the U.S. was facing a sharp decline in domestic gas production.

But the same year AGIA was passed, something unique was shifting the market. Gas volumes in the Lower 48 were increasing dramatically. Shale gas transformed the US natural gas market, and made its impact felt globally.

Some claim today that they always knew an overland pipe to the Lower 48 would never work, but I’d say to them that not even major companies, like BP or ConocoPhillips, were willing to publicly admit that until 2011, when they shuttered the Denali project.

Indeed, as late as September 2011, Sen. Mark Begich sent a letter to my office urging that I create a state loan guarantee to back a pipeline through Canada to the Lower 48.

By then, however, it was clear that Alaska gas was unlikely to flow overland to the Lower 48 in the near term, because of the growing volume of shale gas.

At the same time, the Pacific Rim market demand was strengthening.

I set Alaska on a different course. I challenged North Slope producers and TransCanada to get behind one project, an all-Alaska LNG project to supply gas to Alaskans, and be marketed as LNG to world markets.

I set a steady, logical plan to get us there using lessons learned firsthand with the history I described today.

First, we needed gas.

We need gas from both Prudhoe and Pt. Thomson to anchor any large-diameter gasline.

Pt. Thomson, with trillions of cubic feet of gas and lots of liquids, was in litigation when I became governor. No development had occurred there in more than 40 years. The State’s lands had been under lease, yet little work had been completed east of Prudhoe.

We fought for Alaskans’ interests all the way through the Alaska Supreme Court. Thanks to the hard work of many people, including then-Natural Resources Commissioner Dan Sullivan, ExxonMobil’s Rich Krueger, BP Alaska’s former head, John Minge, and ConocoPhillips-Alaska’s Trond-Erik Johansen, we resolved the litigation and put lots of Alaskans to work.

Today, more than a thousand people have jobs because of Pt. Thomson. And you heard earlier from Gina Dickerson from Exxon - $1.8 billion of spending, so far, and total projected investment at $4 billion.

In resolving Pt. Thomson, we negotiated an agreement that grows opportunity with performance and results.

At Pt. Thomson we built trust and reward through incremental, verifiable performance.

We brought a related principle into gasline discussions with the producers and TransCanada: The principle of commensurate, proportionate commitments.

In other words, you take a step, we take a step, you make a commitment, we make a commitment. Along the way, we each verify our commitments and progress.

When it comes to the gasline, the State will verify progress and make new commitments through the legislative process at multiple points, and the companies via their board room decisions at multiple points.

With Pt. Thomson gas now in the gasline equation, we next needed a project concept selected.

It is in the State’s interest to negotiate commercial terms with a single project, not individual partners. If the State gets caught up trying to satisfy individual partners, rather than negotiating with one entity, the State loses far more value.

The State has but one geographic resource base from which to maximize value for Alaskans. The companies across the table have global resources from which to work around issues arising between them. Accordingly, we want to deal with a project’s unified position, which they can arrive at using their many resources. The State does not want to get tangled up in individual company concerns.

To get a project, in 2012 I called on the producers and TransCanada to harden their numbers, and identify a pipeline project and work schedule. They met that benchmark! And, this last fall, the companies picked Nikiski as the termination point for the project.

Then, yesterday, AGDC’s Board of Directors voted to create a subsidiary with the intent to participate in the Alaska LNG project with the producers, TransCanada, and Alaska’s Departments of Natural Resources and Revenue.

For the first time in Alaska’s history, all the necessary parties have aligned to make an Alaska gasline project go – three producers, a pre-eminent pipeline builder, AGDC – an entity that can carry whatever State interest is required of it, and State agencies responsible for the people’s royalties and taxes.

With gas, a project, and alignment of parties, the next question is what role should the State play? How can we best own our destiny and maximize gas resources for our people?

Because an LNG project is much more complex and expensive than a traditional natural gas overland pipe, we hired some of the world’s most qualified experts to examine Alaska’s cost, tax, and royalty structures. We asked them to look for ways we could be competitive in world markets. And, we’ve analyzed ways to do this without necessarily reducing State royalties or taxes.

Alaska can best control her own destiny if we become a partner in the Alaska LNG project. Here’s why:

Ownership or participation allows the State to receive a share in the profits over the entirety of the project. When companies build LNG projects, they often take profits at all points in the value chain. Gas processors take profit, pipelines take profit, the liquefaction facility takes profit, and ship owners take profit.

Without ownership or participation, the State would, in essence, pay for others profits that reduce the State’s revenue from taxes and royalties.

With Alaska as a partner, Alaskans stand to gain more.

Ownership ensures we either pay ourselves for project services or, at the very least, understand, negotiate and ensure the lowest possible costs.

This structure is also attractive to the North Slope producers. From their perspective, their capital costs are reduced by an amount proportional to the percentage of State take from royalty and taxes.

Think of it like a hunting trip, where the costs are borne between the participants. Three guys go out hunting and the costs are prorated between them. But if a fourth joins the hunting party, the costs per person go down.

State participation can make Alaska gas more competitively priced in world markets in the next decade, while retaining our State tax and royalty revenues.

So let’s take stock of where we are:

  • We have the gas, both from Prudhoe and Pt. Thomson.
  • We have an all-Alaska LNG project selected from the North Slope to Nikiski.
  • We have all the right parties aligned and working together.

To pursue this path, however, requires a transition from AGIA to a new structure. It’s another natural progression where time has been not only a thickener of things, but a great teacher.

AGIA was designed for a sole developer of a singular pipeline project moving natural gas. The complexity and scope of the Alaska LNG project is different — with a gas treatment plant, pipeline, liquefaction — a broad consortium of owners that must work together.

While AGIA may not have induced actual construction of a gasline, that statutory framework played a substantial role in inducing alignment for an LNG project.

Our way forward will be on Alaska’s terms and in Alaskans’ interests.

AGIA contained timeless principles and benefits for Alaska, and we will retain them: Gas for Alaskans on reasonable tariff terms, exploration of Alaska’s gas acreage, gasline expansion potential, and local hire, to name a few. The way we get there is by working with a party or parties who will meet Alaska’s terms.

We have agreed to amicably terminate our involvement with TransCanada under AGIA, but sign up with TransCanada in a more traditional, commercial arrangement along with the producers and AGDC. The reasons for signing up under a traditional commercial agreement with TransCanada start with TransCanada’s willingness to meet Alaska on Alaskans’ terms.

First, TransCanada agreed to a debt equity structure that guarantees Alaska’s interests are protected. Second, TransCanada is the pre-eminent pipeline builder/operator in North America. Third, they know this project well, having worked on it for years. Fourth, AGDC and the producers are willing to move forward as a group with TransCanada to commercialize Alaska’s gas. And fifth, TransCanada’s participation reduces the State’s cash commitment and increases state return.

We plan to seek legislative approval for the State entities to align with TransCanada and the producers in a more traditional commercial arrangement.

Very soon, I expect a commercial agreement with a transparent set of terms and road map for Alaskans to consider. That commercial agreement is known as a Heads of Agreement for the Alaska LNG project.

I expect that document to be signed shortly by Exxon, BP, ConocoPhillips, TransCanada, the AGDC, and by our commissioners of the Departments of Revenue and Natural Resources.

The Heads of Agreement will be subject to public review by the Legislature this session.

Additionally, I will ask legislators to take up legislation addressing how the State will manage its gas resource. Our proposed legislation would authorize DNR to modify certain leases, and allow the State to enter into shipping agreements to move and sell Alaska’s gas.

The legislation will also ask lawmakers to switch from a variable net tax to a flat gross tax, for North Slope gas. It would allow certain leases to pay production taxes with gas, and enable the Departments of Revenue and Natural Resources to work together to manage the State’s gas revenues.

The bottom line: We’ll have an investment-quality project when this is complete.

Finally, this session I will ask the Legislature to review changes made to AGDC in House Bill 4 and support revisions needed to carry the State’s interests in a project—for example, AGDC could be authorized to carry an interest in liquefaction.

To summarize what I expect in the next four months: Public review of project guidance documents, including a signed Heads of Agreement for the Alaska LNG project, and passage of authorizing legislation.

With a Heads of Agreement and legislation passed, the parties will formally cross into Pre-FEED -- the Pre-Front End Engineering and Design phase.

Pre-FEED is a half-billion dollar step in gasline development. Costs will be shared among the parties. Pre-FEED further refines the cost and engineering challenges the project faces – challenges that must be addressed before the parties commit the billions of dollars necessary to complete the project.

Over the course of about 18 months of pre-FEED, the parties will finish fieldwork, begin detailed design, regulatory filings, and testing of world markets.

Unlike previous efforts to commercialize North Slope gas, the public and Legislature will have the basic ingredients of a deal in front of them as they consider legislation moving the project forward.

The guidance documents we will submit to legislators form the basic agreements that will keep the project moving forward and provide guidance to the deeply technical and complicated negotiations to follow.

The guidance documents set out general agreement on essential issues dealing with factors such as State ownership, project costs, project expansion policy, workforce development, in-state hire, and the marketing of gas.

They define the State’s and other parties’ interests in broad terms and commit the parties to negotiate the details in good faith – details that will ultimately be addressed in contracts that come back to the Legislature for approval.

Over the decades, we’ve seen efforts to develop a large gas project falter for various reasons. That’s why we’ll maintain our backup plan to get Alaskans’ gas to Alaskans. The Legislature wisely addressed this in creating AGDC.

AGDC is uniquely positioned to be our ace in the hole. We can still get gas to Alaskans first via AGDC’s smaller volume ASAP project, if work falters on the Alaska LNG project. AGDC will remain on track for an open season for early 2015.

The good news today:

  • We have a gasline project in sight;
  • We have parties aligned who can move a project forward;
  • We have protected Alaskans’ interests through commensurate proportionate steps that can be publicly scrutinized.
  • And, we have a back-up plan to build a gasline that’s proceeding to open season.

Alaska’s foundation is strong and our future is bright. We’re moving forward on the promise of Alaska’s natural gas. Thank you.

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