Munoz: Budget first, the rest follows

Juneau Republican, House Finance Committee member says new fiscal plan is a legislative priority, but gas line progress still a must

STEVE QUINN

For Petroleum News

House Rep. Cathy Munoz may represent a Juneau district nowhere near the path of the projected natural gas pipeline that would deliver gas from the North Slope to tidewater in Nikiski, but she and others on the House Finance Committee keep a watchful eye on the state’s prospects of a gas line project coming to fruition.

Fresh off a special session to sever ties with TransCanada, the Juneau Republican says while the budget remains a priority, the gas line remains vital to the state’s future. In a recent interview, immediately before the Legislature gaveled in, Munoz offered her thoughts on prospective developments with the gas line and possible changes to the oil tax credit system.

Petroleum News: You’re fresh off special session, and even some developments since then. Before discussing what’s ahead, what is your take on the special session and what transpired since then?

Munoz: I think the special session was very well executed. The committees on both sides - the Senate Finance Committee and the House Finance Committee - asked thorough questions. We got a very full record of discussion and support around the TransCanada buyout.

Petroleum News: What about concerns among some members over a perceived lack of communication and transparency, or a sense that not everyone within the administration was on the same page?

Munoz: When Gov. Walker came into office there were some changes immediately with the direction of the gas line, particularly in the membership at the AGDC board. When the summer unfolded, there were other changes, potential changes and the discussion of changes that caused a great deal of concern among many legislators. One was the route of the pipeline. The second was the possibility of implementing a gas reserves tax. The third was looking at expanding the pipeline from 42 to 48 inches, which is currently under study.

Before starting the special session, there was a great deal of concern as to whether or not the governor and the administration supported the direction outlined in SB 138. The takeaway of the special session, for me anyway, is that the governor is on board with this integrated model where you have the holders of the gas, the three majors in the state of Alaska all working together in cooperation on an integrated project from the extraction of the gas all the way down to the shipment of the gas to the orient. The partners are involved with each other in all levels of the value chain. That is a concept that continues to move forward.

Petroleum News: You noted changes on the AGDC board, more changes took place after the special session, including two whom lawmakers have long respected: (President) Dan Fauske and (board chair) John Burns. What were your thoughts on that? Is it too much or is it a matter of the governor still getting settled in?

Munoz: Well certainly the governor has the authority to choose board members. I was concerned with the loss of experience. Dan Fauske is highly regarded. He brings a great deal of experience to be able to get a large-scale project completed. He’s well liked, so I think he is going to be very difficult to replace. In answer to your question, I would have preferred to at least see Dan Fauske stay on board.

Petroleum News: Moving forward still with the gas line project, why is it important for someone from Southeast to pay attention to a project just as much as someone from Anchorage, the North Slope Borough or someone on the Kenai Peninsula?

Munoz: If the project gets built, it will probably be one of the largest infrastructure projects in the history of our country. The potential for revenue to the state is significant. Of course all regions in the state will benefit from direct revenue to the general fund as well as economic opportunities. People in Southeast Alaska will benefit in numerous ways with the construction of the project and the revenue that comes with the project. In previous discussions, the Legislature set into place with the direction of Sen. (Lyman) Hoffman and other coastal legislatures, a mechanism whereby some of the revenue from the gas line can go to help build up alternative energy outside the Railbelt. I think that was a very important inclusion in the gas line. Ultimately all regions in the state benefit from this project whether you live in the Railbelt or not.

Petroleum News: Speaking of alternative energy. Some people see that in different ways. Some see alternative as wind, hydro or solar. Others see it as another option in the form of natural gas. Southeast seems to have both working for you, whether it’s hydro or with Avista proposing an LNG project to be anchored in Juneau. How do you view it?

Munoz. There is always going to be a need to develop infrastructure outside of the Railbelt, not just in Southeast, Alaska, but in many of our rural communities. Juneau is fortunate that we have access to hydro power resources. We also have a company with a great deal of experience that is considering bringing natural gas to our community.

But we also have to look out for the communities outside of Juneau. Even the communities in our region face some of the highest energy costs in our state. So having a mechanism - a fund - to provide the opportunity to build alternative energy projects in coastal Alaska is very important. Those projects could include tidal generation, hydro or wind.

There are a number of opportunities so we need to continue to keep an eye on the communities that pay the highest cost in the state and look for ways to bring those costs down.

Petroleum News: So what’s your outlook at the prospects of Avista bringing natural gas to the state?

Munoz: They are the in the due diligence phase. They are meeting with municipal government leaders, business owners and legislators, educating them about the opportunity. The benefit is long experience. It’s a company with 100 years of business experience.

They have knowledge in other communities and other regions of the country delivering natural gas successfully. They are looking at getting a legislative extension on the infrastructure tax exemption opportunity for municipalities.

Currently a municipality can opt to allow a tax exemption for a property over a certain number of years if a project brings a new form of energy to the community. So I think Avista is looking at extending that out 10 or 20 years. First of all they are working with the city of Juneau to find out if they would support extending it.

Petroleum News: I know Avista has spent most of its time with the Juneau Assembly, but have you met with them?

Munoz: I have. I met with the executives from Avista (Jan. 14). They have the capital. They are a company with a great deal of experience, and knowledge and the commitment to make it happen, particularly in the natural gas market. They would like to have some things in place before they move forward. We talked about the municipal tax exemption and an extension. They are working with the city of Juneau now to see if the city would support the tax exemption to their project if the Legislature were able to extend the number of years that the opportunity would happen.

Petroleum News: Did he say where the gas would come from? British Columbia perhaps?

Munoz: We didn’t get into the details of where the gas would come from. I would assume it could come from Canada. It could come from the Lower 48 but they are committed to bringing natural gas to Juneau and they need to see certain statutory modifications to make the project possible or successful.

Petroleum News: So are they looking at this as a regional investment with Juneau being the hub?

Munoz: My understanding is that Juneau would be the hub and once Juneau is built out then the opportunity would be extended to other communities.

Petroleum News: Back to the Alaska, the gas line, what would you like to see accomplished next for the gas line? What piece of the puzzle is next in your mind?

Munoz: Well the next big issue is of course fiscal certainly. Before we move to the FEED process, the producers have indicated that they need fiscal certainty before they move forward to construction. That would require the Legislature passing a resolution to put the language on the November ballot.

I believe that is going to be a significant undertaking to get public buy-in to create fiscal certainty at a time when we are talking about reduced dividends and possibly implementing broad-based taxes.

I believe we need to be looking at concessions or opportunities for companies to cover more of the state’s upfront costs, the pre-construction costs, in exchange for having that fiscal certainty. The public is going to want to see something in exchange for locking in the long-term tax rate, especially at this time of budget concerns.

Petroleum News: So is there anything particular you need to learn from the governor on this issue?

Munoz: OK, I understand the importance of fiscal certainty and the importance it has for the success of the project, getting to the construction phase. What I’m concerned about is getting the public’s buy-in. Recognizing that what can the companies offer that makes that public support possible. That’s what I will be focusing on. I will be focusing on whether or not to get the companies to commit more of the upfront cost, then when we get to the point where we know construction is happening, then possibly we could work out a deal where those costs are covered through our portion of the construction costs. What we’ve seen happen over and over again is that we’ve seen the state of Alaska has initiated a number of gas line projects or ideas, put up a lot of money up front then never seen a project come to fruition. Taking that experience under our belt, I think it’s really important to see whether we are able to reduce the state’s risk at this point before we get to the certainty of the construction of the project.

Petroleum News: So would the advocating of a constitutional amendment come from the people in this building, be it the administration or Legislature, or the industry because some people may just see this as a perk for the industry.

Munoz: That’s my concern. The public, especially at a time when we are talking about broad-based taxes and talking about reducing the permanent fund dividend, will be very circumspect on whether or not the oil companies deserve fiscal certainty for the project. Of course there is enormous benefit if the project goes to construction. But I think we want to be looking very closely at the risk-reward. Expending those upfront costs will determine our success to get support for a constitutional amendment. Can’t the state reduce its risk in this stage of the game and in the process get public support for a constitutional amendment that would provide fiscal certainty and more of a likelihood for a project in the future.

Petroleum News: There is still a lot of skepticism over whether the state can really get a gas line at all. Various plans have been set aside for re-written plans. What makes you think the state is headed on the right path this time?

Munoz: The fact that this project is integrated, that the four aspects of the project - the gas, the treatment plant, the pipeline, the export facility - they are all integrated as one project. It’s still going to be difficult. There is no doubt about that because there are so many international factors that will affect whether or not we move forward. What I was talking about earlier was the importance that we reduce our risk until we get to construction phase because of the history the state has of unsuccessful gas line projects. I think we need to look at history and protect the state moving forward.

Petroleum News: Do you see yourself as bullish on the project or is that a bit too optimistic?

Munoz: I don’t know about bullish. I’m more optimistic though because the partners - the holders of the gas - are all at the table together working on a project from the extraction of the gas all the way down to the shipment of the gas. This is the first time in the history of our state that it’s happened. So I think from that standpoint it’s the most well thought out, the most well developed. Whether or not it goes forward depends on international commodity prices, cost of financing, construction costs and many other factors. I think the fact that we are working at the table with all the partners on the project, on all aspects of the project gives this project the greatest chance we’ve had so far.

Petroleum News: Do you see that as a priority for the 90 days?

Munoz: I understand the governor is looking at the possibility of a special session just on this topic and it may happen right after this session.

Petroleum News: Do you think you would get more accomplished during the regular session if you can focus on one or two items during a special session?

Munoz: This session is going to be primarily about the budget and putting into place a long-range sustainable plan for the state of Alaska. That is going to be the elephant in the room if you will. It is going to take precedence over all the other issues. So to that degree yes, it would be nice to have an opportunity to dig into just this issue.

Petroleum News: So as this session is going to largely be about budget, oil tax credits will be part of that debate. What is your take on all of that?

Munoz: My constituents are telling me that the oil and gas credits are where we need to look for revisions. My feeling is if we reduce or revise the current credit program, it should be going forward, not going back. In other words, I don’t think we should take away credits to projects that have already been committed, that are already in the development phase. The governor has an innovative idea - the idea of putting together a loan fund is I think worthy of discussion. Again, I’m looking at credits going forward not retroactively taking them away.

Petroleum News: What questions then do you have for the administration on the oil tax?

Munoz: Well, we know that many of the credits are going to small companies, $700 million on the books last year. The governor reduced that to $500 million. My concern is these credits are paid to companies that do not have a tax liability. So at a time when we are struggling to close our budget deficit, I think it’s logical that we look at that. It needs our focus. Having said that, I don’t want to harm projects that already depend on the availability of those credits, so it’s going be a fine balance, and I look forward to the discussion.

Petroleum News: These tax credits are drawn from several tax regimes, be it ACES or SB 21, but as SB 21 is the most recent change, is there anything you would like to see revisited in SB 21?

Munoz: One issue was on the new oil, getting the more favorable rate for new oil. We looked at a seven-year sunset. I think that is one area that could be looked at. I like the idea of looking at the floor and making sure that’s solid at 4 percent, maybe even 5 percent. That’s logical. I think we need to look at the qualified credits. Maybe 35 percent isn’t an appropriate rate.

Petroleum News: So as you look at these features - oil tax credits, the taxes themselves, gas line - what is your priority?

Munoz: My priority is to balance the budget and implement sustainability in our budget planning, spending versus what we bring in. It’s going to take reductions in the price of state government. All the departments will be taking reductions. We are going to be looking at the oil and gas credit area. We’ll be looking at whether we can afford to inflation proof the corpus of the Permanent Fund account. We will be looking at the possibility of using excess earnings of the Permanent Fund. There are a number of ideas and models that are sustainable that will be on the table. The governor’s sovereign wealth will be the focus of a great deal of discussion; the ISER model will be on the table as well as the percent of market value model, so we have a number of good ideas to work with. Time is of the essence for us to put a sustainable plan forward.

Petroleum News: One of the other items that could come up for review is the state’s payment in lieu of taxes (PILT) plan.

Munoz: I know the governor and his representatives are working diligently around this issue. There is a lot of work with the mayors throughout that region. We have not seen a specific proposal on PILT yet but I’m encouraged that progress is being made and the administration is committed to completing their end of the work.