Drilling down on oil tax credits bill

Senate Resources Chair Cathy Giessel says Legislature must reconcile value of credits with costs to state in low price environment

STEVE QUINN

For Petroleum News

Senate Resources Committee Chairman Cathy Giessel spent most of the interim examining the state’s oil tax credit system with a working group made up of members of the Senate and industry personnel. With less than two weeks remaining in the session, she’s begun working on SB 130, Gov. Bill Walker’s oil tax bill designed to scale back tax credits and harden the gross floor at 4 percent.

This comes as House Finance is still working on the rewrite of HB 247 offered by the House Resources Committee.

Giessel, an Anchorage Republican closing out her fourth years as committee chair, spoke to Petroleum News about SB 130, as well as the progress on the AKLNG natural gas pipeline project and other resources bills that have passed through her committee this session.

Petroleum News: Let’s start with the oil tax credit bill discussion in the context of your working group’s findings during the interim. One of those findings said the state needs to look prospectively before making any changes, saying these moves should be graduated rather than have a firm date. Talk about that, please.

Giessel: So what the working group recommendation meant was we would not be favorable to retroactive changes to tax policy. You may recall that there was discussion by the working group that the tax rebate program is part of our oil tax policy. So by prospective, we mean any changes would happen in the next year, two years, three years. This would allow the companies an opportunity to adjust.

Now, allowing the companies time to adjust was a key point, but also the stability question. All of the investors in the oil and gas industry in our state are seeking stable, predictable fiscal terms. So the more deliberative those changes are, the more that stability and predictability element comes in. I’m always thinking about AKLNG and that gas pipeline because if we lose those producers, those small and big producers on the North Slope, the chances of a gas pipeline diminish significantly.

Petroleum News: The next observation was how the state needs to consider the project timelines and this will encourage that North Slope production and be critical for the state’s fiscal health. It sounds like the timelines and prospective approach go hand-in-hand in your eyes.

Giessel: Absolutely. Timelines and prospectivity go together.

Petroleum News: The working group also found the state needs to maintain its appeal as a place for capital investment, citing the state’s credit ratings being under heavy watch by the credit rating agencies. How much does policy affect this scenario even in low price environment?

Giessel: Well the state policy of being true to our word creates that magnate for investment. On the one hand we have the capital investors ING and BOA (Bank of America) who have said these tax credits looked durable and looked reliable so we decided to go forward with companies that would use those as collateral. So we started financing these smaller projects. They looked to them even more, financing these opportunities when the governor vetoed the $200 million. So that is the magnet for investment that the tax credits have been.

With the price of oil being what it is now, we get it - I get it - that we can’t afford those anymore. So how do we make those changes without appearing erratic and not having any long-term vision? That’s again where the prospective changes come in.

Petroleum News: One of the last items addresses what’s become probably one of the more hotly debated provisions - the production tax floor. The working group recommended against raising the floor, something the bill does, but also says the floor should be hardened. Talk about that, too, please.

Giessel: when it became evident to us through the working group hearings that the 4 percent tax floor could in fact be penetrated, we were concerned. Certainly on the Senate side, we believed that it was a firm floor but at the same time we deliberated and passed that in SB 21, there was no thought that oil could fall down into the $30 barrel price range, and so it was never really considered. Even when the working group was going on, we didn’t spend a lot of time asking the companies or the consultants, model for us what would it look like with a 4 percent hard floor at $29 barrel oil? Having been to that location now, and even this location, we see that this in fact is adding a tax to companies who are already losing money on each barrel. So I’m actually personally re thinking even the idea of a hard 4 percent floor at this price range. Certainly at $80 a barrel, a 4 percent floor is not unreasonable, but $20 or $30 a barrel oil, even $40 a barrel oil, we are seeing this is significantly detrimental. Raising the floor in my view is out of the question, and that was my view, even during the working group when it was suggested outside of that working group meeting one day that someone might propose raising the floor. I immediately said I would not support that.

Petroleum News: With all of this in mind, what do you need to hear from the administration on this because it’s the administration that needs to make its case?

Giessel: You know I’ve been listening to the administration. I certainly understand where they are coming from. They are in charge of our bank account and the amount of money that we have. Right now we are short about $4 billion, so they are looking for the quickest way to fill that hole. So I understand the side of the elephant they are examining. I’m looking at the other side of the elephant. The side that says how is this going to affect Alaska families, Alaska businesses, Alaska jobs? How is this a long-term view? What are the ramifications of what we are doing? I don’t think it can be refuted that what the governor has proposed in SB 130/HB 247 will not negatively affect Alaska jobs, which in turn, causes significant loss to Alaska businesses and even more to Alaska families.

I have a constituent in my district who is a registrar to one of the schools in my district and in one month, she had five families withdraw. Four of them because of oil industry jobs that have been lost so those families were leaving the state. She said in the numbers of years - and there have been a number of them - that she has been a registrar, she has never had that many families withdraw in one month. The loss of three rigs on the North Slope, 100 jobs on each rig - that is rippling out right now in the state’s economy. Not the state of Alaska government’s fiscal, well it’s rippling there too, but I’m worried about the citizens’ economy.

Petroleum News: What would you like to hear from the industry?

Giessel: The industry has been speaking with great clarity. I cite BlueCrest for example. Their testimony in House Finance on HB 247 that they in fact do return to the state all the credits they receive plus a whole lot more. They are bringing not just jobs and work to businesses and are bringing significant royalties to the state, certainly energy security for Cook Inlet, and Cook Inlet being the main focus is the energy security element. For the North Slope, again jobs and throughput for TAPS, as I like to call it our aorta from our medical background, coming from the heart of our state government revenue source. So the credits are doing what we want them to do. The fact is we’ve got to figure out how we afford them.

Petroleum News: How do you afford them?

Giessel: Well, therein lies the challenge. I appreciate what House Resources did in reducing the credit/rebates incrementally over time, the well lease expenditures slowly going away, reducing the capital expenditure credit. Those are good. At some point - and I know it comes off the books in 2022 - and at that point we can institute production tax on oil in Cook Inlet. I feel like probably that time should be shorter, maybe 2018 or 2019. It is true with no production tax in Cook Inlet, it does look bad. It is bad. So I think that is a piece I think we can change.

Petroleum News: One member of the House said, after hearing all the testimony, it was almost as if everyone is right.

Giessel: In a way that is what Commissioner Hoffbeck said to the working group when he said it seems like Cook Inlet credits have worked and it’s time to declare victory. I understand where he is coming from. At the same time, we made a promise to at least two companies, three actually. But the new companies, BlueCrest and Furie, we wanted companies like that to come. Furie has got gas they are bringing online; BlueCrest has got a lot of oil and the prospect of gas. That’s who we want here. So we need to be faithful to the promise that we made that brought the companies here. So how do we do that and still meet the financial demands the citizens require of the state government? Incrementally reducing the credits over time, allowing BlueCrest and Furie to adjust their financial and development plans going forward is one way to do that.

Petroleum News: Do you worry if there are a high number of credits in the budget that you could face another veto?

Giessel; The governor has proposed $73 million in the tax credit fund, which complies with the law. It has a formula in it. The price of oil is X. This is how much the credits are. It is true that $200 million (vetoed last year), we are either going to have to appropriate it out of savings or it will continue to carry forward. And there likely will be more than $73 million in credits asked for. So that will be challenging for the companies and their lenders. I don’t know how we appropriate more money into that general fund. The money just isn’t there unless we take it out of savings.

Petroleum News: So given all of that, what is your plan for the bill with less than two weeks remaining and the House’s version still in House Finance?

Giessel: My hope is to get the bill appropriately modified and to the Senate Finance Committee in enough time to pass it. What that looks like, I don’t exactly know. It’s tough to tell at this point.

Petroleum News: OK, so you alluded to AKLNG earlier. What is your 30,000-foot view of where things stand now, given the updates you’ve received from the partners and the news conference the governor and the partners had a month ago?

Giessel: I look forward to any day now hearing about the evaluation of the 48-inch pipeline versus 42 inches. So that’s expected to come any day and that’s going to inform further the work plan that’s going to complete pre-FEED by October or November. The governor in that press availability, with the two companies standing there and the third online, said we are still on track and we’re working together. That’s what I’m dedicated to as well and hoping to see continue forward.

Petroleum News: So what is your take on that? Is it a slowing down in the current environment or is it more cautionary than that?

Giessel: What I have heard in conversations with the producers is that this is the time where it is more critical than ever that the cost of supplies be reduced, be brought down. And you might remember from AKLNG updates, (ExxonMobil’s) Steve Butt saying if this is a $65 billion project, it’s not going to go forward. That’s just too much. The cost of the supply, the LNG coming out of the end of the project, is not going to be sellable. Even $55 billion is too much. But at $45 billion you’re getting closer. Talking to the producing companies, they are working for $40 billion or lower. I know that BP has talked about projects they’ve worked on around the world in this price environment, and they’ve been able to drop the cost of supply by one-third and even one-half in some scenarios.

This is a time when steel is costing less and the workforce is available. We have a significant partner in Exxon, important partners in the form of BP and ConocoPhillips. They have done this before and they are successful because they know how to get the cost of supply down.

Petroleum News: You’ve talked about the pipeline size study. What else would you like to learn by year’s end?

Giessel: Well, by the end of the year, I’m looking forward to hearing what the actual cost is because they will refine the numbers. Probably in May we will have another AKLNG update. I’m looking forward to hearing the companies’ report on how this is going. We are hearing appointment confirmations for AGDC so those are important things that are going on. The joint body will vote on those very soon (April 15). And we have a vacancy on AOGCC (Alaska Oil and Gas Conservation Commission) that I’m hoping will also arise here before we adjourn. That’s another important seat. Three commissioners: One seat hasn’t been filled for about another year and a half. We need that filled. I’m looking forward to hearing a name for that.

Petroleum News: Are you getting nervous that a name hasn’t been brought forward?

Giessel: It’s been very nerve wracking. In fact I know the Senate President (Kevin Meyer) sent a letter to the governor about a month and a half ago expressing his concern. I believe the governor has been diligently looking for folks to fill that position. I regret how there was a capable person filling that role who had just been appointed and was removed when this administration came in and that was unfortunate. But it is what it is and we move on.

Petroleum News: Back to AGDC for a second, there is a bill moving quickly through both chambers that will put one member from the House and Senate on the AGDC board as a non-voting member. You voted yes on the floor. What do you like about the bill?

Giessel: Well as several members of the Senate have verbalized they have served on state boards and commissions and have been a valuable addition to those state boards and commissions because they bring the perspective of a lawmaking body into what is otherwise a lay board of citizens so there is value there.

Some of the controversy around this bill is that wait a second this is an executive branch entity. AGDC is part of the executive branch. My response to that is they are not. It says so on their website that they are an independent body. In fact, the board president (David Cruz) in confirmation hearings last week in the Senate articulated again, “we are an independent agency, not connected with the executive branch.”

To me that opens the door to appropriately putting some legislators as non-voting members. It would allow not only the board to be more informed from the legislative perspective of what’s going on but help the legislators themselves move the project forward for the legislative viewpoint.

Petroleum News: You also just moved HB 100, also known as the Agrium bill, which would provide 6.5 years of credits against the corporate income tax once the company resumes production. What are your thoughts on it?

Giessel: I am a big fan of it. I think this is a good opportunity for the state. Not just for the jobs but because of the gas Agrium is going to buy. They are going to bring in $15 million to $18 million more in royalty just by virtue of the gas they will be able to use for this project. It’s manufacturing. I keep hearing from my constituents all the time, we need to diversify our economy. We need to manufacture something in Alaska. Well, here is an opportunity.

Petroleum News: Do you see where some believe it’s tough to give credits at a time when the state has this $4 billion deficit?

Giessel: It’s not a credit. It’s a tax deduction from corporate income tax. It’s capped. It cannot exceed, in other words, the amount of money the state brings in for royalty on that gas. So it cannot exceed what the state has taken in and it likely will not even match the amount the state has already gained in royalty money from the gas that Agrium will be using. That means it’s a tax deduction from corporate income tax after they have done the work, used the gas and the state has been paid their royalty.