Parnell says SB 21 protects the future

Governor characterizes pro, con of his production tax change as private sector driving economy vs. government driving economy

Steve Quinn

For Petroleum News

No one can accuse Gov. Sean Parnell of being wordy. In fact when asked about the new tax regime he crafted last year under Senate Bill 21, he responds: “It’s working.”

Yet, the debate isn’t over. Not yet anyway until Aug. 19 when voters go to the polls and decide whether Parnell’s plan deserves to stay on the books or get repealed.

Parnell talked with Petroleum News about what he sees are the merits of the More Alaska Production Act.

The Republican, completing his first full term, also discussed the need to develop other fields in addition to the North Slope such as Cook Inlet and the Arctic’s outer continental shelf.

Petroleum News: You’ve been around for two significant tax rewrites, including your own last year, and yet this argument won’t ease up. Why does this remain such a divisive topic more than a year after you’ve signed the More Alaska Production Act, and more than half a year after it’s been in place?

Parnell: It presents two very distinct and different world views on how economies grow. One side would say the government should have all it can get and the government is the driver of the economy. My view is it’s the private sector that creates real opportunity for individuals, for Alaskans. Even though it’s as divisive as you said, I can tell you that Alaskans are better off already with the passage of the More Alaska Production Act. You can list billions of dollars of new investment at Prudhoe Bay.

There’s a new $2 billion project there with an expected 40,000 barrels per day beginning in 2018.

There’s another Prudhoe Bay unit drilling commitment there, a $1 billion investment with two drilling rigs to be added in 2015 and 2016.

You’ve got new entrants there - Caelus Energy with their Nuna project and a $2 billion investment.

You can go down the list. The bottom line is this: there are billions of dollars of new money flowing into this economy of ours that creates opportunities for Alaskans to go get jobs and create businesses.

We have at this point, more construction activity, more working activity on the North Slope than we’ve had in decades.

I can not only point to new investment, I can point to new jobs for Alaskans. I can also point to real world production numbers that are increasing. I say that because for the past decade we’ve had declining production. For the last year we were over 6 percent decline. This year, for the first time, that decline has been stemmed. Basically it’s flat. It’s a 0.01 decrease. That’s amazing when you consider the decline has been between 6 and 8 percent across the last 10 years. We made real progress with new investment, new jobs and new investment. I’m encouraged with just one year past that we’ve made some real progress.

Petroleum News: Those who supported ACES (Alaska’s Clear and Equitable Share, the previous production tax regime) told critics they wanted some time before making changes. Do you want that same consideration or is your case being made as you’ve noted?

Parnell: Absolutely. ACES had what five years before it was changed through the More Alaska Production Act. Through that time we continued to see guaranteed decline and we saw no prospect in the future for that to change. So I ask for a similar five years or better when it comes to this. We’ve already demonstrated in the first year that it’s working.

Petroleum News: Some critics, even those within each of the majority caucuses, say like ACES, the pendulum has swung too far, but this time in favor of the industry.

Parnell: I think the pendulum has swung toward Alaskans and Alaska opportunity, and again I just point to the new investment, new jobs and new production coming on line to demonstrate that.

Petroleum News: More Alaska Production Act critics have continually called any change offered by the governor a “giveaway.” What’s your take on the word giveaway?

Parnell: “Giveaway” is an effective but false bumper sticker. It is factually wrong, as the Department of Revenue and Dr. Goldsmith have demonstrated. What troubles me more about the word is the underlying premise - it’s a short-term view of Alaska and Alaskans. Those who support higher taxes today are willing to sacrifice our kids’ future - riding guaranteed production decline into the ground rather than encouraging more production and jobs for Alaskans long into the future.

Without new investment today, there will be less future production, fewer jobs and less revenue for essential state services. When I introduced SB 21, one of my core principles was long-term benefits for Alaskans, not short-term revenues. The word troubles me because it is built on a short-term vision, rather than long-term gain for our children and grandchildren.

Petroleum News: The argument for changing the tax regime was putting more oil in the pipeline. That seems to have changed the last few months, with supporters calling it a jobs issue. Has it changed?

Parnell: It’s always been about both. It’s always been about more. It’s about more investment, more production, more jobs for Alaskans and a brighter future for Alaskans. It’s not about one or the other. The reason to continue this course is really about our future, and it’s about creating opportunity. Not just for ourselves but our kids and grandkids.

Petroleum News: Last year you shared a story about going to the U.K. and witnessing what you believed were indicators of what a tax change can mean for Alaska’s future. A snapshot if you will. Can you please review that and discuss whether that is playing out here?

Parnell: When the Labor Party in the United Kingdom jacked up taxes on the industry producing oil in the North Sea, those were older, legacy fields. When they jacked up the taxes, that investment lagged in the North Sea. They knew almost immediately they made a mistake - a huge mistake. Within months, they turned around and put in place a different tax regime to incentivize investment in the brown fields, those legacy fields as we know them.

I saw in Aberdeen, Scotland, the effects on the average Scot, the average citizen in the U.K. The benefit there was I saw unemployment at less than 1 percent. I saw a bustling port and businesses around the port as the supply ships moved goods and supplies out to the platforms. I saw in the supply ships containers carrying groceries and tools.

Everything that business owners in our state could supply an oil industry that is growing. I said I want that for Alaskans. I want unemployment at 1 percent or less. I want our grocers and our small businesses to have a shot at more opportunity. I saw within the oil company records, I saw production increasing from a North Sea field that had been declining all because of new investment under the new tax regime. I want that for Alaskans.

Petroleum News: Is that happening or is it too soon to tell?

Parnell: I’m already seeing it. You can already feel the confidence and you can see it in our welding yards. You can see the welders and pipefitters working. You can see pipe being stacked before it’s moved from Wasilla or Fairbanks to the North Slope. You can’t get a bed to sleep in on the North Slope because there are so many people working. When you see that effect, that economic effect, and how Alaskans can benefit, including interests so diverse as a Homer flight seeing operation, not just having summer work, either. I talked to the owner and he says he has flying work in the winter supporting winter exploration because the industry need as many people as they can supporting these efforts. SB 21 is already fueling new opportunity for Alaskans and Alaska businesses.

Petroleum News: You had worked pretty hard to make your case to the coastal communities during the drive for SB 21 and previous bills to lower taxes. People in these communities kept asking how does this connect to their lives when they are hundreds of miles from the oil patch. Do you feel like your points are starting to get backed up?

Parnell: I continue to make that case. I made it as late as about two hours ago when I was at a Juneau luncheon. I spoke to how a state that is 95 percent dependent on oil royalty and taxes for state revenue needs to ensure a healthy oil industry. State employee paychecks come from those oil taxes and royalties. The only way we can continue a healthy economy and have a healthy public sector as well is to assure more production is coming and more taxes are collected for that production. The same goes for other coastal communities when it comes to port infrastructure that is fueled with oil tax dollars and royalties. Our schools, our public safety officers, our economy are dependent on a healthy oil industry. I’m told that one-third of our workers in this state directly or indirectly work because of the benefits from oil royalties and taxes. It’s a huge benefit to coastal communities, although the connection isn’t seen as readily in those communities.

Petroleum News: During session and even afterward, you took a lot of heat for setting a goal of 1 million barrels of oil daily through the pipeline, a goal that seems well out of reach. How do you respond to that?

Parnell: You’ve got to set the bar high and you’ve got to set expectations high. If you don’t have a goal to shoot for you’re going to get nowhere. By setting the bar high, by saying I want to see 1 million barrels of production, I’m really just saying we last saw that in 2002, and we are in the 529,000 range right now. Given that we’ve first stemmed the decline, you know compared to a previous 6 percent to 8 percent decline, my belief is we can actually climb farther than this if we continue to inspire new companies and new investment into Alaska.

Petroleum News: Going back to Washington again, there is talk about exporting U.S. oil. Do you believe this could help Alaska?

Parnell: Absolutely. At this juncture, we still have plenty of oil and plenty of markets in the Lower 48 to sell into, but we’ll sell Alaska oil wherever Alaskans can benefit.

Petroleum News: Let’s switch resource fields from the North Slope to Cook Inlet. Analysts have dubbed Cook Inlet as Alaska’s wild card that adds to the state’s resource development prospects. What are your thoughts on Cook Inlet’s potential?

Parnell: I always want to see more investment in our oil and gas basins. I can also tell you that because of the tax reforms put in place three years ago, the Kenai Peninsula is hopping with gas exploration work with new gas finds. You’ll notice there is no more talk in Anchorage about having to import gas because we supposedly don’t have it in Cook Inlet. I’m excited about these new smaller players who have come to Cook Inlet. In the past years there are several companies with assets around the world. Hilcorp is a multibillion-dollar company that has the capability to make long-term investments there. I’d like to also see Agrium restart and see the LNG plant come online. There’s a lot of activity going on in the peninsula right now. I’m pleased to have a hand in that along with the Legislature.

Petroleum News: You had one hiccup with Buccaneer (bankruptcy). Do you have any concerns with the oversight of the state’s investment?

Parnell: Obviously I have a concern whenever a company makes the announcement that Buccaneer did. Certainly the Kenai leases they have, I understand those will be sold at auction to help cover the company’s debt. The state is going to continue to receive its royalty in rent payments. The exploration leases might be sold as well. If they aren’t, they will go back into the pool and go back up for sale directly by DNR next spring in an areawide sale. The jack-up rig is no longer owned by Buccaneer so there isn’t any sort of loss there. It’s kind of a multifaceted issue, but right now I’m thinking the state is on fairly good ground.

Petroleum News: Speaking of Hilcorp, and circling back to oil taxes, they bought North Slope assets from BP. Do you think that speaks to the new tax regime?

Parnell: I don’t know. I think it would be better to ask the companies about that. Hilcorp’s acquisition of those lower producing fields would tend to me to think that they can bring expertise and a cost structure to the table to make those better plays for them as a smaller company than for BP as a larger company but I still think that’s a question for the company.

Petroleum News: What has the administration done to make sure the state has a seat at the table for Arctic policies as this gets discussed more and more with the U.S. role with the Arctic Council next year?

Parnell: Well, I’ve made sure we have an Arctic coordinator in our office. That’s Stephanie Moreland who attends virtually every Arctic-related meeting. I’ve communicated regularly with our military leadership on the Arctic, including this last week with the new Coast guard commandant in Washington, D.C. I am concerned that the United States Arctic policy has almost exclusively reflected environmental concerns rather than embracing economic concerns for Alaskans and other Americans. One of my focuses has been to ensure that whenever Arctic policy is being considered it’s viewed in light of our people and not just in light of the environment and that’s been a heavy focus of ours.

Petroleum News: With that in mind, what are your thoughts on the continued exploration delays and that, in turn, delays production. That production was one of the factors you stressed in boosting pipeline throughput to reach 1 million barrels per day.

Parnell: When I think of exploration delay, I think of Arctic OCS and Shell’s work, and their six years and billions of dollars of investment, then their inability so far to penetrate an oil bearing or gas bearing horizon. Five of those years of delay are attributable to the federal government or environmental group litigation. One of those years can be attributable to Shell’s inability utilize their contract vessel in a way that was that was safe. So my hope is they will continue pressing forward and that the Department of Interior will provide a timeline so that Shell can be back in the Arctic exploring the OCS during the summer of 2015. Just this past week I had a lengthy conversation with Secretary Jewell in Washington, D.C. One of the topics I raised was asking for her assurance that the Department of the Interior would meet the timeline they have set forth for decision making in Shell getting back in the hunt for Alaska oil and gas in the Arctic.

Petroleum News: What about infrastructure? Members of the Legislature have expressed concerns about getting infrastructure in place for events such oil spills that might not even be in our waters, but can migrate to our waters.

Parnell: There are significant infrastructure needs that I think about. I think about communications in the Arctic. I think about ports. You mentioned oil spill and response. All of these areas need to be addressed. I will tell you that Alaska’s ability to respond to an oil spill is unparalleled. In fact our equipment, our knowledge was brought to bear in the Gulf during their tragedy. While we have a long ways to go when it comes to Arctic conditions, you certainly can’t walk anywhere in an onshore facility and not be conscious of the hundreds of millions of dollars and years of dedication and effort to ensure safe exploration and development without seeing stacks of oil spill response commitment.

Petroleum News: When the U.S. takes over as chair for the Arctic Councils, do you believe that person should be an Alaskan?

Parnell: My first priority would be to see an Alaskan there. My second priority would be to assure anyone in that position has had recent experience with Alaska, Alaska conditions, and with Alaskans.

Editor’s note: Part 1 of this Q&A appeared in the July 13 issue of Petroleum News.