Fairbanks senator concerned with energy

Joe Paskvan, co-chair of Senate Resources, looks at range of issues from gas and hydro, to information on oil and gas tax impacts

Steve Quinn

For Petroleum News

Joe Paskvan has been busy during his first year as co-chair of the Senate Resources Committee. One day he’s learning about the prospects of Great Bear Petroleum’s 500,000-acre lease acquisition for shale development. The next day he’s collecting information on what changes are needed to Alaska’s oil tax system. All of it has his interest and rapt attention. The Fairbanks Democrat, now in the third year of his first four-year term, recently discussed these and other issues with Petroleum News.

Petroleum News: Talk a little bit about Great Bear and the prospects of Alaska entering shale production.

Paskvan: We are hearing about all the significant developments in other parts of the United States whether it’s the Eagle Ford in Texas or the Bakken in North Dakota and those are all the source rock shale oil plays in those regions. The arrival of Great Bear to Alaska in October 20010 was so to speak the initial statement that shale oil may be real and alive for purposes of Alaskan shale oil development. I found it exciting to think that it may be significant for the future of Alaska’s oil production.

Petroleum News: What additional questions do you have for a project like that, whether it’s Great Bear or someone else who wants to pursue that kind of development?

Paskvan: The difference in that process will be the difference between working for a short duration during the year as compared to working 365 days a year. That will be so to speak a change in the way Alaska perceives the way its resources can be extracted as compared to the conventional oil which is now done — the drilling and the access — on ice roads and getting to these locations only during the winter. I believe the shale oil play is a change in mindset to accessing the resources 365 days a year. This means how many miles of roads do we need to build a year so shale can be developed in this state. I think they need 20 to 25 miles of road per year in order to develop their business model. If you look at the acreage they obtained, they are strategic in their development close the Dalton Highway and close to the line itself.

Petroleum News: Repsol out of Spain recently announced buying a significant interest into Armstrong’s leases. What does that tell you about Alaska’s investment climate?

Paskvan: Repsol has joined with one of Alaska’s newer players in Alaska, which is Armstrong, and I think Armstrong has done good things for the state of Alaska in the developments they have been able to bring online. Repsol is another in a pretty impressive string of successes in bringing new investors, new ideas, new companies to Alaska. The comments made by Repsol are obviously favorable to Alaska as a place to invest, and I think it’s wonderful.

Petroleum News: You’ve heard plenty of testimony on the need to change the tax system. It sounds like everyone agrees there needs to be more oil in the pipeline. From there everyone has a lot of different ideas of what needs to be done. What is your take thus far?

Paskvan: I somewhat start from the foundation in what I’ve been hearing is that Alaska doesn’t have a lot of the information or data that could drive this discussion on a more factual basis as compared to the potential that’s driven on an emotional basis. We’ve heard that as far as a central database that would be an important tool for Alaska to have so the information we are currently receiving can be timely processed and conveyed to the Legislature. We don’t have that. We don’t have the capacity to be using the information we currently receive so we can better understand how the capital expenditures and how the capital credits are working. From every indication the credits structure is working and they are rebuilding the Prudhoe Bay facilities — that I think is for long term operation. If that’s part of the goal, the capital expenditures indicate a long-term presence of the oil industry in Alaska. The capital credits are obviously useful to the producing companies and the non-producing companies.

Petroleum News: When you talk about getting your hands on the right information, what’s missing?

Paskvan: When one reads the Jan. 18, 2011, report from the Department of Revenue to the Legislature, there was a focus in that report on the need for substantive information. That is my beginning point when the Department of Revenue indicates there is a need for substantive information. I think I have to listen to that statement. When one listens to others who are expert in this field, they compare Alaska as a jurisdiction to other jurisdictions as far as the transparency of information that is derived by the sovereign from the producing companies to help guide the best model for taxation, I think Alaska is perceived to be weak in its ability to process information. Then there are potentially holes in the types of information we receive so that we again can rely upon sound facts and a solid foundation in developing a tax structure.

Petroleum News: Continuing with the topic of tax structure, you were a champion of decoupling (separating gas tax from oil tax).

Paskvan: I still am.

Petroleum News: How so and should this still be a priority?

Paskvan: Ultimately I believe the tax structure that couples oil taxation with gas taxation is a bad thing right now. It’s premised upon a certain correlation or connection between the value of natural gas and the value of oil.

It’s obvious from the last three to five years there has been a separation of the pricing structures of oil as compared to gas where oil is much more valuable on a unit bases to natural gas.

The complication that brings into a coupled tax structure is injecting a low value commodity devalues the oil. The ultimate issue that was of key importance a year ago was that if you were to throw on a switch and inject 4.5 bcf of natural gas into Alaska’s tax structure that in effect the State of Alaska would receive less money than if no natural gas were part of the structure.

We would be receiving oil taxes at a certain level. You inject 4.5 bcf in, and the cumulative tax that would be imposed on oil and tax is less than the tax just on oil under the coupled tax structure.

I think that shows the inherent problem with that coupled tax system. It shows the obscene results that would be reached under the current tax structure with current pricing: that you would have less revenue to the state the minute you flipped on the switch for 4.5 bcf a day going through this hypothetical large-diameter line.

Petroleum News: Would you like to see this included in any change the Legislature passes the next few years?

Paskvan: Yes. Getting back to the first comment I made about the sufficiency of information received from the industry and the ability to process that and the holes in it, all of that needs to be looked at. Which raises the issue in the oil tax: Alaskans should fully understand our credit structure and its impact on the current production tax and also the potential for royalty reduction. That it’s not widely used — there are only two projects that have receive royalty reduction — we need to understand the global oil industry in Alaska in order to create a tax system that will be able to handle the spectrum of oil exploration and oil development in Alaska.

Petroleum News: Who are the people to be filling these holes for you?

Paskvan: The conversations I’ve had with Department of Revenue, the question is whether they can do that by regulation or does it need to be done by statutory change. I have explicitly put that on the table to them: What is the type of information they need; can they do it by regulation; is it something the Legislature can obtain through statutory change. The substance of this issue goes back to the Jan. 18, 2011, report. As soon as the report came out, that was an area of significance to me.

Petroleum News: Let’s switch to another power source. Hydro is being discussed a great deal in Capitol halls. Can hydro help this state?

Paskvan: Hydro is 10 or 15 years down the road. It will all help in the long-term to stabilize our energy costs. But the question really is — other than electricity — in the Interior we have the heating demands, there is no way you can affordably heat your homes. We need something that is going to be affordable for the customer and that is probably natural gas in some form. Again, when one looks at the separation of pricing of natural gas from the pricing of oil, I think that it makes sense that you distribute the lower value of hydrocarbon to Alaskans and then we can heat our homes, heat our business and provide an energy resources around Alaska so we are not burning our high-value commodity which is diesel.

Petroleum News: With natural gas in mind, what concerns do you have with any progress or lack of progress natural gas pipeline?

Paskvan: The in-state gas line report will be issued July 1, so I’m hoping that a 24-inch line will be explored. The question will be whether the state will believe that will be an advance from the standpoint of distributing low-value energy resource to Alaskans. I think the Gottstein approach is intriguing as far as bringing a large-diameter line to the Interior of Alaska, then let the markets decide where it will go from there.