New legislature would take up oil tax

Gara, Coghill agree: If SB 21 repealed, ACES reinstated, work on oil production tax wouldn’t happen until after general election

Steve Quinn

For Petroleum News

Sen. John Coghill believes it’s time to lay the oil tax debate to rest. That, the North Pole Republican and Senate Majority Leader says, starts with voting no on the state’s Ballot Measure 1, which seeks to repeal Senate Bill 21, Gov. Sean Parnell’s rewrite of Sarah Palin’s Alaska’s Clear and Equitable Share.

Coghill, who has also been in office for the Petroleum Production Tax under former Gov. Frank Murkowski, shared his thoughts on the upcoming vote with Petroleum News.

Petroleum News: Right now the argument against the measure is more about jobs if you look at the commercials than the original debate during session which was about production. Has the argument changed?

Coghill: I think what has changed is that you see the benefit starting to emerge. You see more activity on the North Slope. So you see people highlighting the jobs because that is one of the benefits of the tax changes. Investment has gone up. To be fair, Point Thomson, we had to settle that out, and that’s one of the big jobs parts of it. But investments in the legacy fields and in some of the marginal fields have gone up. I’d say it’s drawn attention to the jobs. It is certainly a benefit.

Petroleum News: Earnings reports have come out recently. Producers are earning more money while producing less. Is that an indication that there is still no incentive to produce more? Or is it too early to tell?

Coghill: That’s one of the reasons why we wanted to make it valuable to them and valuable to us to actually show new barrels of oil before any new investment is credited. I don’t mind an oil company making a profit. Certainly I think Alaska wants to make a profit. So I think that’s great. Alaska is probably not putting the capital up that maybe the oil companies are. When you look at earnings, you need to look at their risk portfolio, too. I know Conoco, for instance, invested in things they took a beating on. I think the risk factor needs to be part of the discussion more. It’s like if you are going to put money into the stock market, you can put it into funds that are very secure and pay low interest or the higher the interest the greater the risk, right? The oil industry is fairly risky stuff. In Alaska we want them to come up here and put their risk capital to work.

Petroleum News: ACES backers wanted their critics to give ACES time to work. Now that SB 21 is going on eight months old, should SB 21 supporters receive the same consideration?

Coghill: Absolutely. Now that we are here, it enters into the stability question. To me it’s unfortunate we let the ACES discussion move just beyond the ability to manage it all. A lot of it came down to the progressivity and the monthly figuring. It was so complex and the credits were going to cost the state of Alaska, especially under the low price scenario, Alaska would be taking the lion’s share of the risk for investment of the North Slope and not get any of the benefit. Once we began to realize that, and we realized it pretty early, we saw that we had gone a little further than we should have. Now I say, put SB 21 in place. It’s clear. It’s enforceable. It’s stable. We raised the base tax rate, but we give credit for producing oil. There is a component that says we’ll share the wealth. It’s not as much as some people would like and that’s why SB 21 is being challenged. I want a long term investment strategy on the North Slope. I don’t want to take all the cash now and have little investment later. That’s a principle I live by. Some people just don’t agree.

Petroleum News: Are you surprised this debate is still as high profile volatile as it was eight years ago when PPT was first being debated?

Coghill: No I’m not surprised. I was born and raised in Alaska. From the day they found that oil on the North Slope, they’ve been talking about what’s the fair share. It’s slid up and down throughout the years. It’s been hugely valuable to Alaska. No doubt about it. No income tax. We are willing to let our resources carry our weight. That’s what we agreed to when we became a state that our resources would carry us. This was just so big and so dominating that it’s not surprising.

Petroleum News: So let’s say three or four years from, you don’t see much difference in production, what then? I know this is hypothetical, but no tax regime seems to have stemmed the decline.

Coghill: From mature fields it is always going to be harder and harder to get the oil. I take some encouragement from places in Texas where they had given up on fields but now through some technology, they now are pumping more oil out of fields they gave up on years ago. I’m not willing to give up on a hydrocarbon basin like the North Slope that we know has everything from bitumen to light sweet crude to condensate to natural gas. We know it hasn’t been monetized to the best of its ability. I want to see the next generation get the benefit of whatever the next generation of technology brings.

Petroleum News: So if there is no change, do you go back and revisit this regime or leave it place?

Coghill: I think in Alaska and at a maturing field, we will continually be watching what’s the best benefit for Alaska. I can’t think of a legislative session that won’t ask the question are we doing the right thing, the right way for the benefit of Alaskans. That is our duty. I believe it will be continually watched, monitored and even modified.

Petroleum News: If this does pass, what do you see happening moving forward?

Coghill: There will be a couple of sad things. One of the sad things, the credits we have for quote-unquote middle earth, where Doyon is looking to drill in the Nenana Basin or up in the Yukon Flats area, or Kotzebue looking in the Sound or Glennallen looking in that area. It would be a shame to lose that.

The other part would be we would have to go look at the progressivity, the very thing we said we need to work on. Progressivity needs to be brought in. The recording mechanism has to be streamlined. The credits in ACES are not sustainable the way we put them in. We would have to look at price per barrel. When we put ACES in, it was almost unthinkable that we would reach $100 a barrel oil. It was made for $80 to $90 a barrel oil. Is that the world we are going to live in? Are we going to have to make it more flexible?

You are going to have to look at that whole structural thing meanwhile you are losing that attractiveness of investment worldwide.

Petroleum News: So do you come back for a special session and fix it quickly or do you wait for session to resume in January?

Coghill: I think you wait for the legislative session. You have every House seat up. You have a governor’s race. You have two-thirds of the Senate up. To hold a session right before election day, the criticism for doing it fast and without a lot of study, I just think it would be unlikely.

Petroleum News: Has your majority caucus talked about any contingency plans?

Coghill: I think everybody has got to think about it. You look at what are the places you can get some agreement on and what are the places you can go to work on. I’ve got to tell you, it would probably come in as a hybrid between SB 21 and ACES. The structure of ACES is very, very clear and that the complexity of figuring the production tax value is so huge and uncertain that both the taxer and tax payer have a hard time figuring it out. That has to be answered.

Petroleum News: I don’t think anyone has denied that ACES has needed some reworking. So don’t you think you can get to those answers?

Coghill: We tried to do that under HB 110 by modifying it. The Legislature ground to a dead halt .We just couldn’t get there. That’s probably what would happen again if you tried to take that existing structure. Taking some of the fundamental existing problems and fixing them, but how do you fix the price value in a market like this? Look at what’s going on in the Middle East and South America. It’s even more volatile than when we put this structure in. We can figure a little better what the price of oil produced is, but that doesn’t change the complex monthly assumptions. I think that would be where we settle the biggest argument right there. But SB 21 solved that.

Rep. Les Gara

House Rep. Les Gara knows it’s unlikely the repeal that he favors will pass, but he remains resolute in his position.

Gara, an Anchorage Democrat, discussed his positions with Petroleum News as the debate headed into the home stretch.

Petroleum News: As you look at these debates over the last six to eight years, what, if anything has changed?

Gara: Well, the oil companies’ position keeps changing. The first time Gov. Parnell surveyed the oil companies on the North Slope, virtually every one of them said ACES was fine. Then they saw Sean Parnell was willing to give them money. Second, the oil companies said ACES was fine except at really, really high prices. They said the tax cap should be lower. We should have done that. That actually makes sense. They said forget about that. We need gobs of money you’re going to give us under SB 21, and what Scott Goldsmith admits produces zero or negative income on fields after 2003 and all new fields. So their argument keeps changing.

Petroleum News: Let’s say the repeal passes. What do you see happening or what would you like to see happening?

Gara: I would like to sit down and stop hiding the experts that we could have had online that Gov. Parnell refused to allow to come to Juneau and come up with our own tax law that allows incentives to oil companies so we can become equal partners with them but only if they invest in Alaska and Alaska production, and research and development for heavy oil that is sitting in the ground that is part of our future. And a law that gets us our fair share when oil companies are making windfall profits so we don’t have to live in deficit mode, so we don’t have to cut the Permanent Fund dividend, which I don’t want to do. That’s what we should do. Giving away our oil for what Scott Goldsmith concedes is negative value is an insane policy for our state.

Petroleum News: Would you like to see a new tax drafted right away or wait until the session?

Gara: Obviously you have to wait until the session begins. ACES, let’s admit it, was bringing up the development and the development had already started under ACES but companies are touting now as if it were brand new. So that will continue. ACES imposes a modest tax that doesn’t take effect until they make $30 a barrel in profit. That’s when the surcharge kicks in. It’s a fair tax. At some point at very high prices, the tax went too high. I think we need to tighten down some of the tax credits so oil companies get them for production related items instead of building airport runways.

So there are fixes that can be made under ACES. I think we need a heavy oil incentive that will help companies with research and development. We need to help small companies build the thing that’s an impediment to their production. The big companies don’t let them share in the processing facilities. We need to have a processing facility incentive so when they find that oil they can get that oil in the pipeline.

Petroleum News: So what happens if four or five years down the road we don’t see a bump in production?

Gara: Well, first of all BP has admitted SB 21 will not get a bump in production. BP has admitted their big fields will keep declining under SB 21. And Parnell has admitted under SB 21 you’re facing a 40 to 45 percent production decline in just the next 10 years. What we need to do instead of just giving away money and hoping companies don’t spend them in counties with bigger oil pools like Russia and Azerbaijan. Just giving away money and hoping companies don’t take it out of state. It’s not smart policy. It’s not what a private business would do when it enters into a contract. Parnell says “here is a gob of money and you can spend it anywhere you want. We just hope you spend it here.”

Petroleum News: What is your interpretation of the decline during the most recent fiscal year as being about 1 percent from year to year?

Gara: The oil companies played two games. One, the annual shutdown for maintenance has been about 35 percent shorter this year than it has been in prior years in order to maximize production for PR purposes, but what BP admitted is they are producing the same oil now that they would have produced a few years later, but they are producing it now with investments they are making, but it’s not getting us new oil. It’s getting us the same oil we would have gotten a few years later.

So with BP producing the oil they would have produced a few years later - now - and now creating this very short pipeline maintenance period during this past fiscal year in order to play election games in a way that frankly jeopardizes the safety of the pipeline. They do no better than still get what the state admits is going to be a 40 to 45 percent production decline over the next 10 years. So even with the one year with a gain or flat decline, the state admits we are going to have a steeper production decline because of it.

Petroleum News: So what are your concerns for the next 10 years since that’s the timeframe you’ve noted?

Gara: The Parnell has administration has laid off over 600 teachers and staff the last three years. The Parnell administration and GOP has just passed a bill that lays off just in Anchorage over 400 staff the next three years. In 10 years who knows what families are going to want to raise their kids here if this keeps happening. They want to go places with good schools. When you lose kids, you not only lose a future workforce, but you lose the families who are our engineers, our nurses, our doctors, our economic future.

Petroleum News: This debate last year was about production. Now we are hearing it’s about jobs. Which is it?

Gara: The oil companies have hired the best advertising people they can. Of course, they shift the debate based on the poll numbers. Jobs went up and investment went up under ACES. Their ads saying they have reversed the decline in investment are false. We are talking about oil fields that started under ACES. They all testified it takes five to seven years to get to production. They move forward but they all started under ACES. I can’t keep them from shifting their arguments, but their arguments all tend to be false.

Petroleum News: How can you reach something that you believe is stable, predictable and gets more oil in the pipeline? ACES didn’t do it and you folks don’t believe SB 21 will do it. So what’s going to work?

Gara: SB 21 is not doing it according to Parnell’s production forecast which shows a 40 to 45 percent oil production decline under SB 21. The three most unstable things you can do is threaten to nationalize companies even though Conoco and BP invest in countries where that happens. The other unstable things you can do is have too low a tax because companies know it’s going to change and they will be hesitant in coming to Alaska if the tax is way too low because they know it’s going to change. And having too high a tax. All three of those things are bad. We should know what the oil companies’ original claim was before they got SB 21 was that at very high prices the tax was too high. At very high prices we should make sure there is a cap. The old cap was 75 percent and that was far too high. The new cap should be at around 50 percent at very high prices. If oil ever hit $180 a barrel, oil companies were making record profits, the state got to share on the high side. We need to get heavy oil into the pipeline and we need to help small producers built processing facilities and do the things so they can get oil into the pipeline. Those require investment incentives that that say if you invest in Alaska we’ll give you a tax break. SB 21 gives you is what Scott Goldsmith admits is a zero value tax rate and that’s in his chart in his own report, and a zero value tax rate will bankrupt this state until only the oil companies have jobs.

Editor’s note: Part 1 of this Q&A ran in the Aug. 10 issue.