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August 2014

Vol. 19, No. 32 Week of August 10, 2014

Pro and con — Senate Bill 21 recall vote

Rep. Les Gara, Sen. John Coghill: Opposing views on the upcoming move to dispose of new oil & gas production tax, return to ACES

Steve Quinn

For Petroleum News

Sen. John Coghill has been immersed in tax debates since things heated up in the Legislature in 2006 with the Petroleum Profits Tax.

Now the North Pole Republican and Senate Majority Leader is again fielding questions. In this case whether Alaskans should approve or reject a ballot measure to repeal the state’s new oil tax.

That’s Gov. Sean Parnell’s Senate Bill 21, which replaced the net tax known as ACES.

Coghill spoke to Petroleum News about the Aug. 19 vote.

Petroleum News: Why do you support SB21 and a no vote on Measure 1?

Coghill: Let’s just put it under the category of goals that I agree with and really the Senate got behind. That was to stem the decline of the pipeline. We knew we were going to have to get more oil out of the ground. I know people will debate on how much oil we can get, but we know there is oil up there. We need to get more oil out of the pipeline. Then the tax that we had was getting investment in oil fields but it wasn’t bringing any more oil. One of the goals was get investment in the oil fields to get more oil for more revenue, not just more spending in the North Slope. The other goal was long-term production. With the ACES tax, we put ourselves in a situation that on the high end (of oil prices) we weren’t going to get the kind of investment we wanted. In the medium range, we weren’t too sure it was going to go into production other than just improving infrastructure.

Another thing as a goal with SB 21, we tried to encourage new oil companies to work in Alaska. It was a little different than the credits for exploration. This was credits for production. And so Caelus and Repsol are probably two examples and the relationship between Conoco and Doyon. We have been pushing hard to get gas commercialized off the North Slope. That meant if we took all the cash off the table, it’s going to be harder to incentivize. Those were the goals.

Petroleum News: What do you make of this partnership between Doyon and ConocoPhillips? You used it as an example. Do you really make a connection between this and SB 21?

Coghill: The catch phrase we’ve used when we were debating SB 21 is making it attractive for investment. I think it shows it in fact did that.

Petroleum News: When ACES was drafted, it was a very different time politically. The industry was in public, and in some cases legislative disfavor. You even said back then you didn’t trust the industry. What’s changed? Have the earned your trust back?

Coghill: It became real clear we had to have a better trust but verify relationship on both accounts. So we changed some of our ethics laws in the Legislature. Certainly the tax change for the oil companies was meant to kick the door open for smaller companies, different companies coming to Alaska, which actually worked. The exploration credits actually got more work up there.

If there is a success story in ACES, that’s one of the big successes, that we actually did get people up there. What happened was the production barrier on paying the tax rate was so high all we could get was people putting money into exploration so we had a lot of that and the state picked up a significant chunk of that. When it came time to invest into the production capacity, we couldn’t get there.

What’s changed with me has been that once we went through hours and days and weeks and months of consultants telling us about the international field, we began a learning process that was very, very different.

That was we began comparing ourselves with a variety of different regimes across the world and try to winnow down where we fit in the investment part of the world. That showed me companies will look out for their best interest. It was up to us to look out for ours.

Petroleum News: So do you believe the state has looked out for its best interest - and I don’t mean just money in the state’s coffers - with SB 21?

Coghill: This is how I look at it. I look at what are the principles? You go back to the constitution, right? The maximum benefit to Alaskans, right? A lot of people are saying let’s get the most cash now. My attitude is the constitution was written for multiple generations. The maximum benefit has to be an investment that’s good for this generation and good for the next generation. And so if we price ourselves so high that we’ve taken investment out of Alaska, we aren’t doing the next generation any good. So the maximum benefit to Alaska. Certainly being attractive to investors in Alaska. We went through years of looking at how we fit in the world. Yes, you can get somebody to pick one of those things from one of the consultants and say look at this. We took all of the assumptions and we tried to figure out where do we fit as the most attractive given the circumstances Alaska was under. Probably for me the idea of how do you keep a tax simple, clear, predictable and enforceable were things I looked at. As we looked at ACES, we lost on predictable, and simple and clear. Enforceable, probably. Because we tied several parts to progressivity and there were four moving parts, based on price, production and spending cost. They were all different ever month, cyclical annually and cyclical almost daily based on price. Very difficult to be predictable. It comes down to the principles of having a long-term strategy, benefit to Alaska, something attractive to investors and a simple quarterly tax.

Petroleum News: So then why do you believe this will still put more oil in the pipeline? I’m not talking about federal oil.

Coghill: Well, I think it’s been said many times that Kuparuk and Prudhoe are the fields that are going to be the paying fields for a little while. They are going to require more investment. It’s just an economic and geologic fact that the harder oil costs more to get. And so in order for us to keep people here who will invest dollars into getting that oil here, we need a tax strategy that connects longer term to an investment strategy. That includes heavy oil, viscous oil and new oil. I believe between metering and geology we can tell what the new oil is but we want that new oil coming up. It’s there. Geologically, we know it’s there.

Petroleum News: But the state projections still predict a long-term decline. How does that work into the argument of keeping SB21?

Coghill: It’s a mature field. If you are going to ask people to come in and invest into a mature field, whether it’s a big oil company or the Repsols of the world, they are going to take investment strategies that are long term and costly. Will we ever get back to 2 million barrels? I sure wish. I know we have more reserves than we ever thought. Then the other thing is, there are smaller oil fields, if we can get the gas off of them and commercialize them, then the smaller fields become more attractive to produce. If we can keep our pipeline flowing somewhere around 500,000 barrels a day, everybody wins. If we go down to 300,000, we start losing. We need to get what oil recovered we can.

Petroleum News: You mentioned natural gas. Do you believe a no vote is really a yes vote for a natural gas pipeline? There have been a lot of links to this tax regime and the prospects of advancing a gas line project.

Coghill: If you put it that simply, probably yes. I’ve heard the rebuttal to that is “you’re trying to put pressure on us or you’re trying to blackmail us.” I think once again it ends up as an investment strategy question. I guess the only way I can portray it is the way I did to a lady the other day. I said, ‘how would you like to invest in your house and to keep that house, but I was going to change the rent on you every other week. How much would you invest?’ I think that is the question we have to ask ourselves, if Alaska is going to, through years of public debate, put a tax structure in and then have it turned out based on a campaign that is probably less substantive and more emotional.

House Rep. Les Gara

House Rep. Les Gara says the state’s old tax system known as ACES needed reworking but the new regime under Senate Bill 21 not only went too far but will not serve its intent: boost production.

Gara, an Anchorage Democrat, says ACES can be fixed the right way, but first voters need to repeal SB 21 at the polls on Aug. 19.

Gara spoke to Petroleum News about his positions.

Petroleum News: To start why do you want to repeal SB 21?

Gara: I want to rewrite a law that gets us something better than what something Scott Goldsmith admits is zero or negative value oil. We can’t run a state on oil that gets us negative net worth. Even Scott Goldsmith, hired by the vote no people, has buried in his report that all oil fields after 2003 get us either near zero or negative production tax value.

Petroleum News: You’re being out spent nearly 100-to-1, do you really believe you have a chance?

Gara: If the spending was one-to-one Alaska would easily vote yes. Folks in the Legislature did a few tricky things. Number one, they tried to keep away a bunch of working class voters from this initiative by playing this trick where by extending the session, they moved all of the working class, pro fishing stream initiatives that would have been in the August ballot and attracted people to vote in August off to November’s general election to try to get those people off the August ballot. That was the oil companies and their allies in the Legislature. I still think we can win. The polling says it’s very close. It’s unfortunate that people are allowed to lie on TV. That’s what the oil companies are doing saying that fields that were moving forward under ACES are really brand new fields.

Petroleum News: What areas do you believe they were misleading?

Gara: With $12 million you can spread a lot of misinformation. Number one, every field they are talking about moving forward, was moving forward under ACES. Unfortunately, fields take from five, seven, 10 years to go from first investment to production. The most notable myth was that recent PR trip they took reporters up to so they could see Point Thomson. It is definitely moving forward. What they left out of their PR campaign was that Point Thomson is only moving forward because under ACES we sued them, we settled with them and under ACES they finally started producing a field that they had left idled for 30 years. So the Point Thomson is the poster child for what the oil companies are doing. Pretending investment that started under ACES is somehow brand new. The only thing that SB 21 does for all this oil moving forward and all this development moving forward is that instead of getting production tax revenue, we get what Scott Goldsmith says on page 19 of his report - something the oil companies have buried - are either zero value for those fields or negative value for a tax that never pays for the deductions and credits we give to these companies to develop these fields.

Petroleum News: When ACES passed and in ensuing years, supporters wanted critics to give it time before making changes and let the plan work. Why not give the SB 21 supporters the same consideration?

Gara: What was moving forward under ACES - which frankly I would make better with improvements rather than gut so we get no money in the future and have to keep firing teachers - what ACES got us was fields that were moving forward. Kuparuk was being expanded under ACES. CD-5 in the National Petroleum Reserve was committed to and moving forward under ACES. Mooses Tooth and Bear Tooth in the National Petroleum Reserve were all being explored and invested in under ACES. Point Thomson was moving forward under ACES. More companies came up to Alaska under ACES than had ever come to Alaska before, and those companies are developing on the North Slope because of ACES. I would certainly improve ACES, but throwing out a law that built up a $17 billion surplus, that brought a development forward that is still moving forward is not the smart thing to do. The smart thing to do would be to revisit ACES, look at things to make it better, but not adopt a law that gets us a zero value for our production tax on all fields after 2003 and all new fields. That’s going to bankrupt the state, kill jobs, kill teacher jobs, kill construction jobs and only benefit the oil industry.

Petroleum News: The word giveaway has been used a lot. Is it really a giveaway or is it taking less? What’s the difference?

Gara: I don’t like that term so much. It’s terrible policy if you care about having an economy that supports teachers, road construction, jobs. I think it’s terrible policy unless you believe getting zero worth on a production tax on fields after 2003 or all new fields is OK. It’s just a terrible idea. The giveaway thing, I can take that term or leave that term. But Scott Goldsmith who the oil industry quotes all the time admits in a part of his report they don’t quote that if SB 21 were in place in 2011 and 2012 it would produce roughly $2.5 billion to $3 billion less in revenue than ACES did at a time when the Big 3 were making $2 billion a year in profits in Alaska. They weren’t suffering. They are just getting even more money than they are now.

Petroleum News: Now ACES did not meet the production projections by any stretch. How do you account for that?

Gara: The Parnell administration came up with what it calls the best oil production forecasting process ever. It came up with that in April 2013. It does a biannual report on production forecasts. It predicts as of April 2014 that oil production will fall under SB 21 by roughly 40 percent by 2023. If you look at the last production forecast they did under ACES, under the same forecasting method in April 2013, they actually show more oil in 2022, the last year they are projected for ACES, than they do under SB 21 in 2022. So SB 21 is leading to the same or greater decline than ACES did. It’s giving us far less revenue for losing the same amount of oil. Instead what we should do is come up with incentives that tell companies you can’t take your tax breaks and invest them in Libya, Azerbaijan and Russia. That doesn’t work when oil is a world commodity. What you have to do is say we will give you incentives if you develop the heavy oil underground. We want that developed. We will give you incentives if you develop in Alaska, but not if you send your money outside of Alaska. And when oil reaches very high prices and oil companies are making staggering profits, we should get a fair share so we don’t have to keep firing teachers, and so we don’t keep losing construction and road jobs which is the future of the state under SB 21.

Petroleum News: So what would you be willing to retool from ACES?

Gara: We have to keep the provision that has a modest tax rate but at high oil prices, when oil companies get windfall profits, we get a fair share so we aren’t living in billion dollar deficit mode. At some point the tax at high oil prices has to be capped, which was the oil companies original concern before they realized they could get away with SB 21. We should add a new provision that does more for research and development so we can get that heavy oil out of the ground. SB 21 does very little for that. We need to help smaller companies get oil in the pipeline. Exploration credits are about to expire in a year and a half. We need to help them so that they can develop the North Slope at a time when BP has announced under SB 21 they are cutting back their presence in Alaska. The future of this state is keep developing big fields but to get small companies to start pushing and developing our new fields. Those are the future, but those are the ones that this current law taxes at what Scott Goldsmith admits around a zero or negative value to the state. That’s just insane.






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