Gara: AKLNG needs to stay the course

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Anchorage Democrat, longtime House Finance Committee member, says state needs to closely scrutinize tax credits, AKLNG progress

STEVE QUINN

For Petroleum News

House Rep. Les Gara has been around for several plans to advance a natural gas pipeline and believes the state is on the right track, but adds there are unknown variables that could still derail future progress.

The Anchorage Democrat who serves on the House Finance Committee says the state made the right move financially to buyout TransCanada and take a larger stake in the AKLNG project.

Still, he says things need to be worked out with the state’s oil tax system he deems flawed for its generous tax credits against a low tax rate.

Gara offered thoughts on what lies ahead for the Legislature as it prepares for lengthy debates on the budget and priorities toward gas line progress.

Petroleum News: Before we take a look ahead at the upcoming session, let’s look back briefly at the special session, which got us to the point we’re at with the gas line project. What’s your take on how things went?

Gara: You know, I and other Democrats said the TransCanada part of the SB138 deal was a bad deal. We tried to amend out this very weird provision that said if TransCanada withdraws, we owe them 7 percent on all of their costs. It was a no-win situation for the state. They got a guarantee of getting their costs back. They got a guarantee of 7 percent on top of that. And they owned part of the pipeline for essentially next to nothing. So I think it was good to get rid of that provision. Democrats had proposed doing that back when the bill passed in 2014.

Petroleum News: So was it about the provision or was it about having an additional partner, or a little of each?

Gara: I think TransCanada can be a very good partner, but you’re not really a partner if the contract says you can jump out of the deal anytime you want, get all of your money back plus the state pays you 7 percent on top of that. At some point it’s not a very good deal for the state.

So if the pipeline succeeds, we pay 7 percent. If the pipeline fails, we pay 7 percent. Why pay 7 percent extra to somebody else and not have a bigger share of the pipeline. It was just too costly for the state the way that deal was written. It was a no-win situation for the state to have a party that could back out and charge you a 7 percent rate of return. Or stay in and continue to get that 7 percent rate of return. It all came out of the state’s coffers.

Petroleum News: So are you comfortable right now with the state having 25 percent ownership?

Gara: You know, the governor has more information than I do on whether this is a negotiable position at this point, after the bill has already passed. It is what it is. It would be very hard to change. If the parties felt like they could, my ears would be open. A bill has been passed, a deal has been signed and that part is going to be hard to change. It doesn’t really seem realistic from where I sit.

Petroleum News: So the 25 percent ownership is reasonable in your eyes?

Gara: It’s within a range that’s reasonable. Whether it’s perfect or not, like I said, not knowing any confidential information the governor may have, sitting here it sits fine.

Petroleum News: Some members of the Legislature felt there wasn’t sufficient communication between the administration and the Legislature, citing bills that landed on their desks at a time they considered late. Did you feel that same way?

Gara: The administration had a couple of blunders like when the attorney general would come to a committee meeting. That stuff tended to get overblown by folks who came in with the mindset that they were going to oppose this deal, oppose the governor.

There seems to be a number of people on the Republican side who are just for whatever reason constantly opposed to what this governor wants to do.

Petroleum News: But do you think you’re getting enough information from the governor when you need it?

Gara: I personally think I’m getting enough information with the exception of the time the attorney general didn’t show up for a committee, though it was on a tangential issue. It was not an issue relevant to the special session, but yeah, I think that was a mistake on the attorney general’s part.

Petroleum News: As you think over gas line plans under the Stranded Gas Act (Frank Murkowski), AGIA (Sarah Palin) and SB 138 (Sean Parnell), where do you think the state stands now. Is it in better shape or worse shape?

Gara: It’s in both better and worse shape. It’s in worse shape because every time we get closer to a pipeline, the market falls out from under us. AGIA didn’t fail because of Sarah Palin. AGIA failed because natural gas went from $9 an mcf to $2 an mcf. Even the oil companies didn’t predict the shale oil boom that took the bottom out of the gas prices and made the project once very feasible, not feasible.

So the downside is at these prices the gas line is going to be very difficult to build. It’s possible we might have to get the next phase of work done and the whole world might take a little bit of timeout selling LNG. At these prices there aren’t many places in the world that can make a profit selling LNG. But these prices are not helpful for the project.

Petroleum News: So is there anything that gives you confidence about a gas line being advanced?

Gara: Exxon, Conoco and BP do several things very well. They are good at exploring. They are good at drilling and they are good at protecting their shareholders. You get the sense, without being in the board rooms, that Exxon is more committed to this project than the other two at this point.

You definitely need to have the companies committed and you’ll go through this period of leverage where they are going to ask for as much as they can to protect their bottom line and we are going to have to have to ask to protect our constituents. That tussle will go on for a while. Anyone who is naïve enough to think the oil companies will do what’s in the best interest in the state of Alaska doesn’t understand how the corporate world works.

Petroleum News: Looking ahead to this coming session, you’ll be facing the question of whether to change the oil tax credit system. What’s your take on this?

Gara: First of all there is the white elephant in the room that nobody is talking about and a lot of legislators don’t know about. In effect the Big 3, Exxon, Conoco and BP they get a 35 percent credit that the state is paying. That probably costs us over $1 billion a year. They get to deduct 35 percent of capital cost and 35 percent of the operating costs. That is essentially a credit. They pay a 4 percent tax and get a 35 percent deduction.

There are not very many profit-based taxes out there where the deduction rate doesn’t match the payment rate. Here they get a 4 percent rate and 35 percent deduction. No matter how little they pay in oil taxes, they always get a 35 percent deduction. Nobody here in the majority of the Legislature or the administration is talking about that sort of bleed for the state budget.

We can’t afford a 35 percent credit to major oil companies. We are paying 35 percent of their capital costs for all of their investment costs. That’s probably over $1 billion that I think some people are too uninformed to know about and some people who always seem to side with the oil companies want to give away.

Petroleum News: So what is your prescription?

Gara: First of all, there needs to be very smart surgical changes to this oil tax system that doesn’t involve a return to ACES. Everybody understands that ACES was flawed. But this current law has a number of major flaws at a time when the state is suffering from a major budget deficit.

First of all fields after 2002 are right now paying a zero percent production tax. That’s a giveaway. That puts pressure on people’s permanent fund dividends and puts pressure on making income taxes bigger when the oil companies should be paying a fair share. You can’t have all your future fields and all fields after 2002 paying a zero percent production tax. If prices rose to $110 a barrel they would pay a production tax that got us a negative net present value in production taxes.

So that special provisions for all fields after 2002 is going to hamper the state. If you want to encourage new fields, you give them a temporary tax break, but you don’t say forever you pay essentially noting in production tax. We are giving new companies $1 billion in tax credits over the last few years in tax credits for fields that right now are paying zero percent production tax. No company would operate that way. We as a state can’t operate that way.

Petroleum News: Still looking ahead, but back to the gas line, what would you like to see accomplished to keep the project moving forward as you still work out issues with the budget?

Gara: First, I think we wait for the next report from the governor. There is some chance all three oil companies will join hands with the state and move forward with the current process. There is some chance one or two of them or three of them will try to leverage the state for extra concessions. If that happens, then we will probably have to arm the governor to leverage back as a sophisticated partner, not as a junior partner.

Petroleum News: How would you arm the governor?

Gara: There are a lot of things we can do, but right now let’s hope the parties move forward in good faith and not try to leverage each other.

Petroleum News: Speaking of one of the partners, AGDC, which represents the state, has undergone a lot of changes, it seems constant changes this year. Does that concern your or is just the governor getting settled in during his first year?

Gara: I think the conflict of AGDC has been far overblown. The public doesn’t care about it. AGDC had to be changed because it was an agency just sitting there that was designed to create a small, pretty uneconomic pipeline option. The preliminary work has already been done. You had a number of people sitting at AGDC with no real long-term gas line experience taking in very high salaries, some over $200,000 a year. You had good people there. One was a housing agency head. One was a housing agency manager. One was a department of transportation employee.

Those are not gas line experts. At a time when we don’t have a lot of money and at a time when we are trying to get a gas line moving forward, what we need is to put our money toward gas line experts, not just overhead for people who are bright but don’t have gas line experience.

That’s not to say maybe one couldn’t be kept on as a manager, but we didn’t need three of them as good as they are at what they do.

Petroleum News: There is still quite a to-do list connected to the gas line, be it PILT, fiscal agreements, a possible constitutional agreements, gas balancing agreements.

Gara: Besides the bounce back of natural gas, what strikes me at the outset is something I can’t control: that’s what’s happening inside the board room of Exxon, Conoco or BP. Are they going to move on with the current agreement or are they going to threaten to take their marbles and go home, that is to say we are going to warehouse our gas in the ground unless you give us more concessions.

That part is out of our control. I hope they don’t play the leverage game. That will move things a lot smoother and a lot quicker.

The technical engineering work, I think Steve Butt from Exxon is taking the lead on that. People seem very happy with the work that Mr. Butt is doing with his senior engineering team. I do feel pleased that somebody of his caliber is on this project. That means Exxon is not pretending to be interested in this gas line. At least on the surface it seems that way. Steve Butt is a guy who has been involved in very big gas projects in the past. This one is even bigger, so it’s good to have somebody with that caliber on the team from a technical standpoint.

Petroleum News: One of the items that could also come before you is the prospect of a constitutional amendment to assure various tax rates get locked in for the long term, something many feel that can’t be done now. What are your thoughts on that?

Gara: This is sort of a fake issue. The oil companies know that the Legislature can’t constitutionally lock in tax rates. You can’t stop the public or a future Legislature from re-visiting that stuff. On the other hand, this is a very stable place where we don’t nationalize oil companies. It’s a stable place where oil and gas workers aren’t killed like other places around the world. It’s a safe place for them unlike many of the places these companies operate around the world. It’s a financially secure place to do business. They want a cherry on top which is to prevent us from taking a look at our gas tax system five years in the future if things don’t work out the way everybody expected. I don’t know that they expect us to do things that are unconstitutional. It would be a cherry on top for them, but I think it’s just posturing for them to say they demand it. Then they want to go to the next step to say they want to lock in a very flawed oil tax system. An oil tax system has nothing to do with a gas line. There is no way that I would lock that in

Petroleum News: The constitutional amendment is a priority of the governor, not just a demand from the producers.

Gara: You know if you speak to certain people who know what they are talking about, they believe the constitutional amendment is a cherry on top, it’s not a take-it-or leave it demand. I hope the governor doesn’t bite too hard on this one when he assesses the need for a constitutional amendment.

Petroleum News: What would you like to hear from the producers that would give your more confidence the project is moving forward?

Gara: The producers got a very good deal, something I’m uncomfortable with, one of the lowest gas tax systems in the world. They got a very good deal, something I hope and try to change. They got a state that is willing to help bring gas to market that at the right price is very valuable to the state and to the oil companies. I would like them to say, yes we’ve got a deal and move forward.

Petroleum News: Another one of the governor’s priorities is going to a 48-inch line from a 42-inch line. What do you think?

Gara: We have to do a basin review to make sure the gas is there. The difference between a 42-inch and a 48-inch line sounds like a math equation, but in fact it has to do with the sovereignty of Alaska and the ability of competitors to the big three oil companies to produce jobs and produce natural gas in this state.

A 42-inch line probably gets filled by Conoco, Exxon and BP’s gas and then an independent producer probably won’t come up to the North Slope because they know if they find gas they won’t be able to get it into the pipeline. You can expand the 42-inch line to a small extent at a low cost, but Exxon, BP, and Conoco Phillips will probably eat up that expansion space.

To expand the 42-inch pipe beyond that significantly would be too expensive for an independent producer to pay for and at that point they would say we’re not coming to Alaska to explore for natural gas. We will end up warehousing a ton of our natural gas on the North Slope.

The 48-inch pipeline is an invitation for independents to come up there, explore, create jobs, produce additional natural gas and produce additional oil. The oil part is important. The bigger the pipeline and more exploration you have, the more mixed fields you’ll have. One of the goals of the gas pipeline is to get companies out there to explore so they find not just natural gas but more oil for the oil pipeline.

With a 48-inch pipeline, that’s more likely to occur. With the 42-inch pipeline, it probably damages our ability to find more oil on the North Slope.