Concerns over credit bill, AKLNG status

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Sen. Wielechowski, an Anchorage Democrat, says Alaska needs a tax credit system that doesn’t cost the state more than it earns

STEVE QUINN

For Petroleum News

Sen. Bill Wielechowski got a quick look at the Department of Revenue’s spring forecast and didn’t seem surprised that the news of the state’s deficit got worse. The Anchorage Democrat and Senate Resources Committee member says he understands the chronically low oil prices are driving many of the problems, but he insists the Legislature can make changes to sections of the tax law he believes unfairly favors the oil industry, such as the tax credits system. Wielechowski spoke to Petroleum News on the prospects of a change to the tax credits as well as the status of the AKLNG project.

Petroleum News: The governor released a preliminary spring forecast, which cites greater deficit linked to low oil prices than previously expected. What are your initial thoughts on the report?

Wielechowski: In a word? Depressing.

A couple of things jumped out at me. The money coming into the state continues to go down, and that’s a huge concern. A few other things jumped out at me. I looked at the production numbers and saw oil production numbers are up slightly then it starts tracking down slightly in the outward years.

The other thing that I noticed was the tax credits, up to $825 million and we now under water $771 million - paying out $771 million more than we are receiving in oil production taxes. When you add all the unrestricted revenue in the state from petroleum - whether it’s income taxes, property taxes, royalties - we are actually for the first time in the state’s history underwater. We are paying the oil industry more than we receive. Now that’s unrestricted. We take in slightly more when you take in restricted revenue, but it just goes to show you the tremendous dependence on the oil industry, and a situation financially that is unsustainable for the state.

Petroleum News: Let’s talk about production. It goes up slightly then works its way back down. What do you make of that?

Wielechowski: I’m always happy when we see the production numbers go up. As you went out to 2025 there is a slight decline, so it’s relatively flat. It’s a little disconcerting because during the SB 21 debate, we were promised more production. We stopped the drop. Remember that mantra? Unfortunately, when you look at every production forecast has shown declines in long-term production. So that’s troubling. This is even when the price of oil $100 a couple of years ago after the passage of SB 21 and that’s very concerning.

Petroleum News: At the very least, it has seemed to level out. Are there some provisions in SB 21 that are working?

Wielechowski: I think it’s working for the producers. For the state of Alaska, it’s financially hurting the state long term. ACES needed improvement; there was no doubt about it. The tax credits, we’ve known that’s been an issue. Under ACES, we took too much at the high end. We had a lot promises under SB 21: more jobs, more revenue, save the Permanent Fund, increased production. We are just not seeing that happening at this point.

Petroleum News: So how much of that is SB 21 and how much of that is the market?

Wielechowski: I think oil was on a decline and there was probably nothing that was going to stop it in Alaska. Certainly not SB 21. I think there are other things that could have been done to stem the tide and we sponsored legislation to do that. We had projected decline when oil was $90 and $100 a barrel. Nothing has changed. You’re dealing with a resource that’s on a long-term decline. A lot of promises were made that we knew were not going to be kept and they are not being kept. I think there are ways to spur more production on the North Slope but SB 21 was not the way to do it.

Petroleum News: The Senate has first crack at a bill to place two members of the Legislature on the AGDC board as non-voting members. What are your thoughts on that?

Wielechowski: I don’t support the legislation for a few reasons. I think there are some legal issues with it number one. There is an attorney general opinion which says it’s unconstitutional and that’s a huge issue. I think from a practical standpoint, we need to remove the politics from the gas line. I’ve said that for years now. We have this body that we’ve created, the AGDC. The governor appoints, we approve and I think we need to address it at that point. We give general legislative guidance but I think for us to politicize it even more by having legislators on it is just the wrong approach.

Petroleum News: So where do you stop. Any appointment by the governor is a political appointment, so it’s already there.

Wielechowski: The appointees get questioned vigorously after the governor appoints them, and they should. Once we appoint them to this position, we shouldn’t be micromanaging it as a Legislature. To the extent that’s possible, we need to get the politics moved out of it. They have been appointed by the governor and approved by the Legislature, they are very contentious hearings, but to make it even more political to have legislators sitting on the board knowing full well the Legislature controls their purse strings. Having even more power is just the wrong approach.

Petroleum News: On the pipeline, what are your thoughts on the status of AKLNG right now?

Wielechowski: The commodity costs are at a cyclical low. If you can secure commitments, now is the time to do it. Most experts believe the price for oil and gas will rebound. Now is the time. If you can take advantage to get low-cost contracts to build now is the time to do it.

Petroleum News: Are you OK with the governor’s handling of it with his announcement?

Wielechowski: Obviously I was disappointed like all Alaskans. We are in a partnership we don’t have sole control over this. That’s one of the reasons why I opposed the gas line bill that Gov. Parnell set up a few years ago. I didn’t want to put our fate, our destiny in the hands of three or more producers or pipeline builders. By passing that bill we’ve lost a lot of our ability to control our destiny. Sure with the producers, it’s a tough time for them. They don’t want to commit the funds to the project and they have the votes. We have 25 percent. So yeah in some ways this is a byproduct of the legislation passed where we have turned over our sovereignty.

Petroleum News: Do you ever foresee a gas line being built?

Wielechowski: You know I’ve asked this question of people who I trust and I’ve asked this question of the experts who appear before us. I think there is a very strong argument for an Alaska gas pipeline and an LNG project. The advantages that we have here are location, cold weather, the infrastructure that we have in place, that fact that we have known supplies of gas in large quantities. We have lots of things going in or favor. It is going to take a commitment by everyone. Again, we’ve put our destiny in the hands of others and that’s a challenge at this point.

Petroleum News: What’s the alternative to putting your destiny in the hands of others?

Wielechowski: I would like to have seen an exploration of going out to the market, like the governor had proposed and trying to get contracts, then seeing if we can get the funds to build it. You go to Tokyo, you go to Korea, you go to China and get companies that desperately need the gas and work together with them and get the financing to build a project. So the state would be the lead agent. The state would be taking control. Now we’ve got a producer built pipeline. If you remember going back decades this is a discussion we had eight or nine years ago saying how there are AG opinions saying that it’s not in Alaska’s best interest, it’s not in our country’s best interest to have a producer-owned pipeline. There are a lot of issues associated with that. We’ve had many, many hearings about this over the years.

It’s sort of like we are reliving our mistakes. Here we are again, we’ve put our faith, our destiny in the hands of others and I certainly understand these are tough financial times for everyone. This is our economic future and I would have liked to have seen an exploration, going out to the market to see if we could finance a project that way.

Petroleum News: So what would you like to hear from the governor by the end of the year on the LNG project?

Wielechowski: The problem that we have now is we are locked into this gas line bill, locked into this strategy to get a gas line. It puts our fate into the hands of others. I don’t know how you get out of that - until the Legislature acts to get us out of that situation, which I don’t see happening. The governor is stuck in that position. He opposed that situation also. You’ve got a Legislature that wants to stick with that broken formula for building the pipeline. So how do you get out of that? Unless the Legislature realizes we are not going anywhere with this.

Petroleum News: So what would you like to hear from the producers, the partners in this project?

Wielechowski: I’m sympathetic to the partners’ financial situation. This is tough financial times. At the same time, this is what happens in the oil industry. They made $45 billion in the six or seven years we had ACES in place. Now they have a couple of years where they are not making money. The hope for them is you make enough money in the good times that you can weather the bad times.

So I can’t fault them for saying look, times are tough financially for us, we can’t go through with this. I can fault the Legislature for getting us in this situation that some of us had predicted. Would I like to see the oil industry come forward and say this is a top priority, we are going to go ahead and finance this, and try to get these low costs steel contracts when prices are low. Sure. Is that realistically going to happen? Probably not.

Petroleum News: So do you believe the spring forecast changes your outlook on the prospects of the AKLNG project?

Wielechowski: I look at these forecasts with a grain of salt. I really do. Two years ago we were forecasted to have $100 to $120 a barrel oil for the next 10 years. Today’s it’s $30 to $60 oil for the next 10 years. The one thing I can tell you about predicting the price of oil is no matter what price you predict, you are going to be wrong. There are so many different variables. You don’t know what somebody is going to blow up a pipeline in Nigeria or war is going to break out in the Middle East. These are things we don’t have sufficient knowledge of. The one thing I have said is we shouldn’t be overreacting when you are at a cyclical low. I feel pretty confident that the price of oil will go up over the next several years. We have to be careful as a state not to overreact when the prices are too low and not to overreact when the prices are too high. I’ve seen that over and over again in this building. This mindset that sets in that oil is $40 and it’s going to be that way forever or oil is going to be $100 and it’s going to be that way forever. It’s just not how it works. It’s not how it happens. So I think we need to be measured in what we do. We need to have a long-term vision on the pipeline and I don’t think the current framework gets us to where we want to get. I understand it’s a complex process, but I think we would be better off having one entity, that being the state or AGDC, managing this, going out and trying to get contracts. The demand for gas is projected to rise in the future. Asia needs natural gas: Japan, Korea, China need natural gas - LNG. Countries like to diversify where they get natural gas. We’ve got a long track record of delivering natural gas from Nikiski. I still think it’s possible to make this happen. I don’t know if it’s possible under the current frame work though.

Petroleum News: OK, onto a bill that is expected to make its way to your committee - eventually. It’s HB 247. You were on the steering committee that looked at the tax credits. What were your takeaways from the working group first?

Wielechowski: It seemed to me there was a general consensus that something needed to change. We certainly had industry members there fighting for the industry and supporting the industry. I get that. I think people of Alaska and people of the committee in general agreed we can’t sustain where we are going on oil tax credits. It’s reached a point now as the revenue forecast points out that we are paying out $771 million more in tax credits than we get in production taxes. That’s just not sustainable.

I asked Revenue why did the numbers go up so much? What is happening is companies realize this is coming to an end and everyone is out there exploring and we are paying them 85 percent to go do the exploration. In some cases, it could be more than 100 percent that we are paying them.

If a company is looking at investing in Alaska versus another state, they will say well Alaska is paying us 85 percent, even 100 percent. Yeah, we get the nod but at the same time it’s crushing to our treasury. You’ve got speculation going on and companies are saying I can drill this well for practically nothing. I can gold plate it. There is disincentive for companies to act rationally. I think there are wild bets being made.

Petroleum News: OK, so onto the bill, what’s your sense of how the bill is looking?

Wielechowski: I think everybody recognizes we have a problem with tax credits and everybody realizes we have a problem with finances in general. All the interest groups are coming out very, very strongly and opposing virtually everything. I can’t tell you how many industry groups I’ve had come to my office and say we’ve got to do something but don’t tax me. It’s the same with the tax credits. I think companies and people recognize it’s a problem but nobody wants to be the one to lose their tax credits or have to pay a little bit more in taxes. The question is will the Legislature have a little more will power to do that.

Petroleum News: Occasionally there has been some discussion, however briefly, there seems to be more people talking about new oil, whether it should be sunsetted or not. That was a concern you had during the SB 21 debate. Is that a concern for you?

Wielechowski: It’s a huge concern. Ultimately all oil is going to be considered new oil and that means ultimately we get no taxes from it. There was an amendment run in the House to limit it to I think seven years. That failed by a few votes. To make it unlimited is irresponsible of the state. What our experts have testified to over the years is that after five to seven years companies have recouped their costs. So I think five years probably gives companies more than enough time to recover costs.

What I think we should do is look at how do we truly encourage new oil to be produced. If a company had already planned, they shouldn’t get tax credits for new oil. If a company made investments in certain areas, and a tax credit isn’t going to incentivize them, then they shouldn’t get tax breaks for it. You want to design it in a way that you truly incentivize companies to go out and invest in areas and develop new oil, and do it in areas you wouldn’t do it absent of the tax credit.

Petroleum News: You know a few weeks ago President Obama and Prime Minister Trudeau were both speaking to the Arctic with a climate change bent. Many worry this could ultimately jeopardize the chances of ever developing ANWR. Do you support drilling there?

Wielechowski: I do support it and always have. I think there is a way you can do it that both sides can support. I think one of the ways we’ve heard is you get at it from state land and drill diagonally. I don’t think you’ll see it at $40 or $50 oil, but I think the next time oil spikes again and you go up to over $100.

I think as the price of oil rises, more people will be supporting it. So in the future, I think it’s important for us as a state to keep pushing for it. There are massive amounts of oil there. There is good quality, light oil. The one thing I want to ensure is we get a fair share for it. Because it’s on federal land, we don’t get federal royalties for it.