Kelly: Cautions on changing tax credits

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Fairbanks Republican urges caution when pursuing change on tax credits and severing deal with pipeline partner TransCanada

STEVE QUINN

For Petroleum News

Sen. Pete Kelly steadfastly defended funding the tax credits during the prolonged and extended budget debates that pushed the Legislature into a pair of special sessions this year.

That hasn’t changed for the Fairbanks Republican who is in his second stint as the Senate Finance Committee co-chairman.

With the debate over rewriting the tax credit program, Kelly says he wants to be careful North Slope producers aren’t punished and that any changes aren’t misplaced.

Kelly discussed with Petroleum News his thoughts on tax credits, the status of the state’s efforts to advance a natural gas pipeline project and on Interior communities are inching closer to a stable supply of natural gas to heat their homes.

Petroleum News: As Finance co-chair you’ll be tasked with helping review the prospects of change to the state’s tax credit system. What are your feelings on that?

Kelly: Well, my thoughts are we reduced the amount of tax credits that we paid the big producers in SB 21 back in 2013. I think people who criticize the tax credits forget that we actually reduced the amount of tax credits that they pay. And that the tax credit spike the last year has been more related to the Cook Inlet tax credits and some residuals to the old ACES system.

So I am reluctant to go through a wholesale fix of the tax credits because mostly they are politicized. I don’t believe there is any amount of tax credits that might be on the books that some legislator might not criticize. So I just don’t take it as seriously because it isn’t what it’s portrayed to be because the tax credit spike that we saw wasn’t associated with the producers.

At least those were the opinion pieces that went out from the governor and some of the more left-wing legislators, and what we found out was that it wasn’t the big producers who were getting the tax credits. It was the Cook Inlet producers.

So there has been a lot of disingenuous rhetoric about the tax credits. It’s important that we keep the production going on the North Slope and I don’t want to mess with that.

Given that the increased tax credits aren’t even coming from the producers on the North Slope, it doesn’t make sense now to go after their credits. It’s just hard for me to take the tax credit rhetoric seriously because it’s rhetoric. It’s a bait-and-switch thing.

First “it’s oh my gosh, we’ve got all these tax credits that we are paying out, let’s go after the producers. What do you mean the producers aren’t the ones who are getting these tax credits? Well that doesn’t matter we’ve got to go after tax credits.” The issue is if and when we go after the tax credits, we will be going after the Cook Inlet tax credits because those are the ones that spiked. Do we want to start messing with the supply of gas in Anchorage? That’s essentially what it comes down to: the beneficiaries of the tax credits are the producers in Cook Inlet who are producing the gas in Cook Inlet for Anchorage.

Petroleum News: So the discussion is inevitable in the coming session. As co-chair of Finance, what do you do to temper the discussion?

Kelly: We will deal with the truth. And, keep in mind I’m not the one who does the bills so it’s not going to be my call what bills we have in front of us. That is for Sen. MacKinnon to decide.

But my approach, I guess, is going to be we’ll talk about the truth. We are going to get rid of some of this nonsense rhetoric. If the tax credits are too high, then we’ll have that discussion, but we are not going to use the tax credits going on in Cook Inlet to beat up on the producers on the North Slope.

Petroleum News: What kind of questions do you see having for the administration since obviously a bill would come administration?

Kelly: I hope that by the time a bill gets to us that they would have weeded through some of the mistakes they made early on last year. I don’t know if you remember the opinion piece that the governor put out before session. He has fallen into that same trap by making it sound like it was the Big 3 producers on the North Slope who were causing this spike in tax credits and off he ran with that rhetoric, but he had to walk that back later. That didn’t stop Bill Wielechowski from pounding on the Big 3 producers over those tax credits. By the time a bill reaches us, if it’s coming from the administration, I don’t want to see the political nonsense in there where people are trying to make points by beating up the North Slope producers when these credits are not really about the North Slope tax credits.

Petroleum News: Are there any particular analyses that you would like to see whether it’s looking at the North Slope or Cook Inlet as you folks often do?

Kelly: I look forward to seeing what’s happened to the production curve on the North Slope since the institution of SB 21. Actually, SB 21 did flatten the curve out. There are credits involved and they exist after we reduced the credits for North Slope producers. They are credits that are associated with actual production of a barrel of oil.

Then I want to know what the numbers are in Cook Inlet and what is the impact on burner tip gas prices for Anchorage residents if we start adjusting the credits. So I want to know what the end result is on the consumer if we start reducing tax credits.

I don’t know all the ins and outs of this but I know when the governor took that reduction of $200 million in payments that was a pointless move. By law we have to pay those credits anyway. So what you do is reduce them in one budget then you come back next year in a supplemental (budget) so we’ll see a supplemental that is somewhere in the neighborhood of $200 million to pay back the budget that we reduced.

There was absolutely no benefit to the state by doing that. However there were some pretty significant consequences for some of the small producers when their financiers said we don’t trust Alaska’s financial environment anymore and you the producers are going to have pay higher interest rates. There were consequences on what they did but they had nothing to do with the budget.

They did impact companies trying to produce, but they didn’t impact the budget one bit. I think what is going to happen is we will see a supplemental that reinstates the money they reduced. We will have to pay that money because it’s a statutory payment and we will ultimately not reduce the payment a penny.

Now, I don’t know this for sure. I haven’t talked to anyone with the Revenue department. I think this is what they are going to have to do. I don’t see any way around it.

Petroleum News: I know you’ve said any bill comes under the purview of Sen. MacKinnon. LB&A comes under the leadership of another lawmaker (Rep. Mike Hawker), but just the same you are an alternate on LB&A. So would you like to see LB&A get involved by hiring consultants, as it often does, to review the tax credit system?

Kelly: I don’t mind LB&A hiring consultants, but I don’t want to see a bill going to LB&A because Resources and Finance have been the appropriate committees in this case. So if LB&A wants to get consultants that’s fine, but I don’t want to see a bill going to LB&A.

Petroleum News: Looking ahead to the fall, there are the prospects of a special session and that could include discussions over buying out TransCanada as a partner in pipeline project. I know you weren’t in office for the vote, but you’ve been here since. What are your thoughts on the prospects of a buyout that could cost more than $100 million?

Kelly: The TransCanada thing survived SB 138, which I was involved in. My thoughts are we included TransCanada in SB 138 because we thought it was a good idea. It was a good idea because they are going to put a whole bunch of money forward to help us get into that deal and they are going to pay for some of the payment calls. Currently the financial situation we are in, because we have such huge deficits, so I’m more inclined to keep TransCanada in because they are willing to pay. I don’t see us getting $104 million.

So (Walker consultant Rigdon) Boykin comes up here and he wants to completely re-write this whole deal of SB 138 when it comes to TransCanada and TransCanada is in there for good reasons and frankly he hasn’t given good reasons to take them out yet, so I’ll be listening very intently to what Mr. Boykin says.

I’ve already heard a little bit of what he’s says and frankly he hasn’t convinced me that TransCanada needs to go, particularly when we can’t afford it. You can get into that discussion in a period of time when you don’t have $4 billion deficits. But we do. If we want to have a gas line, it looks like we are going to need a partner to make some of those cash calls and to help us with the investment.

So Boykin has got a long way to go with me. Other than he has sat down and said this is a ridiculous deal and we need to get these guys out because it’s a ridiculous deal. OK, I’ve got you, Boykin, it’s a ridiculous deal. Point is you need to put a little more meat on that analysis, particularly for $100,000 a month.

I am unconvinced.

Petroleum News: Exxon’s CEO Rex Tillerson noted with this project Alaska is its own worst enemy changing directions drastically from one administration to the next. Are we looking at too many changes right now?

Kelly: I don’t know. There are 60 people in the Legislature and 40 of them have to be convinced. I don’t know what the future is. I think the Legislature will try to make the environment as stable as possible as we go into the FEED portion of this investment. By kicking TransCanada out it would look completely unstable. Many of us voted for SB 138 because of the reduced cash the state was going to have to commit to this partnership. So if the state comes in and says we want to kick this partner out, you’re rolling the dice and you don’t know what’s going to come up again. When we went through SB 138, we had a very deliberative process. We came up with the conclusion we have now and that included TransCanada. I guess I would agree with what you just said, that it would be too big a change right now.

Petroleum News: Also possibly up for discussion would be a constitutional amendment that would enable the state to lock in taxes for several decades for the project. Is that a good idea, taking a proposal like that to the voters?

Kelly: I’m going to have to wade through on that process to see whether I approve or not. I don’t know enough about the pros and cons about this process. A deal this big you have to have some fairly quantifiable fiscal terms. I don’t know if a constitutional amendment is the way to go about that, so I’ll have to listen to the debate.

Petroleum News: OK, a little closer to home in Fairbanks and the Interior. What’s your view on how the gas into Fairbanks project is going particularly with HB 104 being passed this past session?

Kelly: I think they had to regroup a bit and come up with a slightly different plan. I’m glad they did. I think it needed to happen. If they had just continued to go forward with the proposals in SB 23, the original bill, it would just go and go and go, and it wouldn’t work out. I’m glad they retooled and decided to hit the reset button. They are hitting some of the timelines so I’m encouraged by what I’m seeing.

Petroleum News: I keep hearing the infrastructure is slowly coming online in places like Fairbanks and the North Pole. Do you gain a sense that people are getting hope that heating prices will come down?

Kelly: Yes, I guess we’ve had that hope before. But if today everybody had their burners switched on and the pipelines going into their home, I think the cost of oil is actually lower than what we anticipate gas being. With the price of oil going up and down, up and down, it’s difficult to know whether it’s a good deal or not. What we need is a community that has reliable, somewhat inexpensive source of heat for their homes. That will add a little bit of competition into this market. Going into the future we’ll have just better prices overall. I don’t know you can say oh boy we will have $15 at the burner tip in the future. If oil price stays down, oil is going to be cheaper. We just need to have a reliable source of energy and we need to have a stable source of energy, and gas will definitely help with that. I think people are getting hopeful because they are paying a lot less this fall when they fill up their oil tank.

Petroleum News: did you ever think you would hear yourself saying that: oil is cheaper?

Kelly: No I didn’t. That could change tomorrow. That’s the thing. We’ve got 36 trillion cubic feet of gas on the North Slope and there’s a bunch in Cook Inlet. We’ve got a bunch everywhere. That means it’s stable and somewhat under our control and we can somewhat control the prices a little bit. Or keep a downward pressure on it based on how we structure these deals. So that’s a good thing. If we are all attached to oil, there are going to be continued crises of spikes, which happen overnight.

With the elasticity of demand, coming down takes a long time. We’ve had serious downward pressure on oil prices since last year. I’ve noticed we’ve had about a 2 cent per gallon drop for our price of gasoline at the pump. I’m mixing metaphors a bit here, but it shows you how trends happen. We got up overnight, but now we are down to $3.39 a gallon while the rest of the country is $2 a gallon. We were $3.47. It came all the way down to $3.45 after about nine months. Now we are about $3.39 so now it’s moving downward.

The point is, do people have hope? Yeah, they do, maybe for a more stable environment. We have some air quality issues here in the Interior, so there are a lot of reasons for us to go to gas, but it’s hard to get as excited as before when heating oil, which used to be about $3.30 a gallon is now about $3.50 a gallon.

Petroleum News: I know this isn’t your specialty necessarily, though the research is done in your backyard, Alaska will be on the forefront of Arctic issues for the next year and a half, particularly with the president having just visited. What are your thoughts about the state being able to strike a balance in addressing climate change and embarking on economic development?

Kelly: Security and economic development are the top two things on my list. Most of what I’ve heard on climate change is nonsense and I don’t want us spending any large resources or misdirecting our efforts on climate change when it’s about military security. We need to have ports up there and some runways.

We need to have an established military presence up there as the rest of the world is literally trying to take over the Arctic. If you look at what the Chinese and the Russians are doing. We need to respond to that.

Second of all, there are economic opportunities. I support the icebreakers and those types of things. I support the ports so we can have cleanup responses that can happen on a timely basis. We have almost none of those resources now to respond to an oil spill.

When I say oil spill, I don’t necessarily mean an American oil spill. Let’s say some Russian tanker has an accident up there and that oil comes over to our shores. We didn’t do anything to cause it and we don’t have the infrastructure to do that now.

So I’m a big believer in establishing security and economic development, and as I say when I talk about security, I don’t just mean military security. We have to defend ourselves from the environmental excesses that some of the other countries engage in, and we don’t have the infrastructure for that yet.