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Former gov steps in to smooth-over potential diplomatic issue

Frank Murkowski meets with Japanese over liquid natural gas project investment

Posted: September 2, 2013 - 8:37pm  |  Updated: September 2, 2013 - 11:07pm

A former Alaska governor has stepped in to smooth over a potential diplomatic faux pas that might have impaired a Japanese initiative to invest in a North Slope liquefied natural gas export project.

Former Gov. Frank Murkowski offered to host the visit by Gov. Toshitami Kaihara, the former governor of Hyogo Prefecture in Japan and a key figure in the formation of a Japanese group interested in Alaska LNG, after Gov. Sean Parnell declined a meeting.

Resources Energy Inc., or REI, is a Japanese consortium of municipalities and business groups formed to find an independent source of LNG. The group opened an office in Anchorage a year ago.

In Japanese business and diplomatic protocol, declining such a meeting is considered a snub, particularly after Parnell met with the president of KoreaGas, a competitor to the Japanese in purchasing LNG, earlier this year.

“The Japanese tradition is to want to shake hands with the top guy. I’m not sure Parnell understands that,” said Murkowski, who helped organize a reception for Kaihara Aug. 20 at the Petroleum Club in Anchorage. “I was glad to step in to accommodate these visitors when our governor had other commitments.”

Murkowski is an old hand in Asian affairs, having chaired the U.S. Senate’s Foreign Relations Committee’s East Asia subcommittee for years while he was in the Senate.

There may have been more to Parnell’s declining the meeting than just diplomatic naïveté, however.

The problem may be Kaihara’s relationship with REI, and it tends to fit a standoffish attitude the governor has exhibited, on several levels, since REI announced its desire to pursue an Alaska LNG project separate from the project North Slope producers BP, ConocoPhillips and ExxonMobil and pipeline company TransCanada are working on.

Kaihara wanted to stop in Alaska on a trip back to Japan from Washington State to pay a courtesy call on Parnell on July 20, with officials from REI also attending. Ironically, Washington State Gov. Jay Inslee met with Kaihara in Seattle — the occasion was the 50th anniversary of a sister-city alliance between Seattle and Hyogo Prefecture — and made the former Japanese governor an honorary Washington State citizen.

Such things are important in Japanese business and government protocols.

Although the request to meet with Parnell was made July 10, the governor declined the appointment with Kaihara, citing schedule conflicts. The governor’s office offered a meeting with Deputy Natural Resources Commissioner Joe Balash as a substitute.

Kaihara did wind up meeting with Balash, and Murkowski organized a private meeting with ConocoPhillips officials. Other Alaska business leaders attended the Aug. 20 reception hosted by Alaska Nippon Kai, a Japan-Alaska business association. Later in the week Kaihara met with Lt. Gov. Mead Treadwell.

Treadwell, who has extensive Asia business experience, was unable to attend the reception but did send a letter welcoming Kaihara.

The sting of being turned down by Parnell was eased, although not completely.

Parnell spokeswoman Sharon Leighow downplayed the issue.

“Look, we can’t accommodate everyone who wants to meet with the governor,” she said.

As a follow-up, Leighow provided a written statement.

“Japan continues to be a major trading partner with Alaska and the governor appreciates our long-standing, respectful relationship with the Government of Japan,” Leighow wrote. “In the past year, Gov. Parnell has met with government officials of Japan as well as senior executives in Japan’s energy, utility and mining companies,” including REI officials.

Leighow also said Alaska Natural Resources Commission Dan Sullivan has met with REI president Shun Shimizu several times during visits to Alaska by Shimizu and REI’s technical team.

On those earlier visits, Shimizu had asked to meet with Parnell, but those meetings were also declined.

Leighow said there were other reasons contributing to Parnell’s decision not to meet with Kaihara but did not explain what they were. Some of it would be explained in emails the governor’s office had received from REI, she said, but the governor’s office could not provide the emails to the Journal unless a Pubic Records Act request was filed.

The Journal filed a Public Records Act request on Aug. 22, but as of Aug. 28 the emails had not been provided.

A source familiar with the proposed LNG export project, asking not to be identified, said he was struck by Parnell’s position.

“This is just plain rude. These kind of meetings are mostly ceremonial and when you’re governor this goes with the job,” the source said. “Someone comes in from overseas who wants to invest, and you shake their hand and tell them they are welcome.”

Parnell’s reluctance to meet with REI officials, most recently with Kaihara, may be rooted in a concern that such a meeting, even if only as a courtesy, might be interpreted as some form of state endorsement of REI’s independent LNG initiative.

The governor may also be concerned that the North Slope producers and TransCanada might interpret such meetings as the state’s flirting with potential competitors, and might use that as an excuse to ease off on efforts to advance their own project.

Parnell has been pushing the Slope producers and TransCanada to show signs of progress on an LNG export project, and expressed displeasure in June when the group failed to meet a key benchmark the governor had laid down: a commitment to begin Preliminary Front-End Engineering and Design work, a key step in the project.

Nuclear fallout

REI’s initiative is somewhat different than that of the producers and TransCanada, however.

For one thing, REI is not yet an actual customer for LNG, but is a startup company formed by Hyogo Prefecture and a group of Japanese technology firms who are anxious, following the near-total shutdown of Japan’s nuclear power industry, to develop their own, direct sources of imported LNG and not have to depend on Japanese LNG imports dominated by major Japanese companies like Tokyo Gas.

The company is an entrepreneur in the field, in other words. If the Alaska project appears possible, REI and its managers, mostly retired senior Japanese executives in the LNG business, would move to expand REI with additional Japanese municipal governments and regional industries, as well as utilities, who want their own direct sources of LNG.

While the company would like a State of Alaska endorsement, it would settle for some form of recognition by the state, REI has said in the past. This is still seen as important in Japan’s business culture given the importance of cooperation by governments in international trade.

To that end, REI asked for a “Memorandum of Understanding” with the state in mid-2011 that would lay out how the state would offer cooperation and an MOU was agreed to and finally signed last December after extended discussions. But rather than the MOU being signed by a senior state official like DNR Commissioner Sullivan, it was signed by a middle-level official, then-state AGIA Coordinator Curt Gibson.

MOUs like this are typically symbolic. A previous MOU signed by the state with the Alaska Gasline Port Authority was signed by state commissioners Tom Irwin of DNR and Pat Galvin of the Department of Revenue.

However, the MOU offered REI enough encouragement that the company proceeded with a $20 million initial feasibility study of an independent LNG project in Southcentral Alaska and the marine shipping of LNG to Japan, REI Vice President Mary Ann Pease said.

The study was concluded last April, and while the results are confidential they were promising.

Among other things, the study showed LNG could be shipped to Japan for about $1 per million British Thermal Units, half to one-third of the shipping cost from competing sources of LNG to Japan, Pease said.

REI rebuffed

Meanwhile, the state administration has also been slow to sign a long-pending MOU with the Japan Bank for International Cooperation, or JBIC (formerly the Export-Import Bank of Japan), Japan’s government investment group that is interested in whatever REI might be able to do in Alaska.

The arms-length attitude toward REI was illustrated on another level. The state’s Alaska Gasline Development Corp., AGDC, declined REI’s request in June to establish a confidentiality agreement, as allowed under House Bill 4 approved by the Legislature earlier this year.

A June 18 letter written to REI President Shimizu by Dan Fauske, CEO of the state gas corporation, said, “we have concluded that, due to current law and contractual obligations between the state of Alaska and the AGIA licensee (TransCanada Corp.) AGDC cannot participate in further discussions with REI.”

A key point of concern for AGDC, the letter indicated, was REI’s request to work with the state corporation on shipping 750 million cubic feet per day of gas, which is beyond the limit of 500 million cubic feet per day allowed for AGDC under the state’s agreement with TransCanada.

In an interview, Fauske said he was told by the Department of Law not to sign a confidentiality agreement with REI even though HB 4 now gives the state corporation the authority to do so for commercial discussions.

Despite the terse wording of the June 18 letter, which Fauske said was suggested by state attorneys, “the door is always open” at AGDC for REI or other potential customers for the state-backed pipeline, Fauske said.

Fauske and other AGDC officials also met with Shimizu and others in the visiting Japanese group August 23 to smooth over any misunderstanding about the June letter. Fauske also said he urged REI to participate in an open season for gas shipments that AGDC plans in late 2014 or early 2015.

Pease attended the meeting.

“We indicated that we were willing to start off with a small plant, in the range of 200 million cubic feet per day, which is well below the 500 million cubic feet per day legal limit imposed by AGIA,” she said.

“Even without a confidential agreement, my specific request at the meeting was that REI be included in the list of potential industrial customers who could be anchor customers for an AGDC pipeline. We did not get an answer to that.”

But, because of the inability to sign a confidentiality agreement, REI cannot share any data from its feasibility study on an LNG project with AGDC, which is unfortunate, she said.

Murkowski, in an interview, said he was concerned that REI’s initiative is being given short shrift not only by the current state administration but also the producer-led LNG group.

“I’m concerned over the lack of willingness to really evaluate what these people have to offer,” the former governor said. “Here the Japanese are coming in with a willingness to spend their own money and are not asking for anything,” in the form of a state subsidy.

Murkowski contrasted that to the producers’ and TransCanada’s project where the state is chipping in $500 million at a 90 percent cost reimbursement rate under TransCanada’s AGIA (Alaska Gasline Inducement Act) license, funds that are now being shared with BP, ConocoPhillips, and ExxonMobil as well as TransCanada, he said.

“There seems to be a presumption that only the producers can develop this project and monetize the gas,” Murkowski said. “That may be the case, but here we have people with different ideas who are willing to invest in a project and buy state royalty gas at the wellhead,” to transport it through a pipeline.”

Murkowski said he doesn’t understand why Parnell recently extended the state’s contract with TransCanada, which includes the subsidy, and he faults Parnell for not explaining why he felt the extension was necessary.

“I feel the governor is really exposed on this, by not explaining to the public what we’re getting for our money,” Murkowski said.

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