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Providing coverage of Alaska and northern Canada's oil and gas industry
April 2017

Vol. 22, No. 16 Week of April 16, 2017

Pruitt: Oil tax changes going too far

Anchorage Republican critical not just of House Bill 111, but of how itís being used as leverage to pass another budget gap bill

Steve Quinn

For Petroleum News

House Finance Committee member Lance Pruitt has not held back his displeasure for HB111, the Houseís oil tax rewrite he says not only goes too far but isnít even within a reasonable range for the Senate to consider. The Anchorage Republican became even more incensed at the prospects of HB111 be listed as a condition - as is - to passing SB26, a Permanent Fund restructuring bill.

Pruitt shared his thoughts on the oil tax debate with Petroleum News, one day after it narrowly passed the House, 21-19.

Petroleum News: Letís start with a broad view of HB 111. What troubles you about HB 111 right now?

Pruitt: What troubles me now is we truly are now increasing taxes. This is ACES at low prices. Thatís one of my biggest concerns with this: When prices are down, when industry is struggling, we are going to raise taxes. Itís not that we are going to raise taxes on industry, itís that industry will have to make changes themselves and that many times means they have to lay people off, jobs are lost and the effect that it has on my constituents, on the economy, is profound. There is just not a reason to do that. We should get our own house in order instead of going and saying we want to look at you so that you can then look at our constituents.

Petroleum News: Havenít you got your own house in order these last two or three years?

Pruitt: Weíve done some cuts and there is definitely more that can be done. Iím of the measured approach. I donít think there is another $1 billion there to be cut in any way shape or form. I think we can still manage some things to bring it down. Separate from that, itís time to have an appropriate discussion about the earnings reserve. I think most of the building recognizes that.

Instead of first going to the same industry every single time and creating instability there, itís time for us to figure out why do we keep going there, what things can we do to put in place for diversification of our own revenue streams as well as encourage diversification of our own economy in general. Are we encouraging mining projects for example? Thatís why Iím such a proponent with AIDEA going through what they need to do with the Ambler Road. Thatís what AIDEA is for. They are the investment bankers. Sometimes we jump in the way and get involved with that. Thatís part of the diversification that just has to take place right now.

Petroleum News: You talk about why we keep going back to the industry. Some feel that ACES went too far one way and then SB 21 went too far the other way, so depending on what side of the argument youíre on there seems to be a belief that the Legislature just canít get it right.

Pruitt: SB 21 didnít have the cashable credit discussion. That came during PPT and ACES. I think if we could go back and look at SB 21, we could fault ourselves for not taking a deeper dive into the cashables. Thatís the one thing the Legislature could agree on: that this time we canít afford to put those cashables out. So that is a little bit of bringing it back to parity. The challenge is with this bill, they are not trying to pull back on the cashables discussion. They are saying we are going to reform the tax structure itself. Some of the thoughts in the change in structure, they are not small tweaks. The ring-fencing for example - that is a monumental change.

Petroleum News: What about hardening the floor? Even the Senate had a working group that posted a report recommended it, but then they walked back on that.

Pruitt: The question is do we pay for it now or do we pay for it later. If we are going to operate this system that includes, as it should, the net operating loss, the question is do we pay for it now or do we pay for it later?

If we harden the floor the challenge there is the ramifications on a return on investment for a company when they are looking to invest. If they turn around and say the value of that money will be eroded because we canít use it against the net operating losses sooner rather than later, then that return scales down. So itís really a policy question of well you can do it but maybe later and the value of it will be eroded. We are going to have to pay for that at some point. I remember Ken Alper in a separate conversation last year, saying we can pay them out now or we can take a zero interest loan and pay them later. Thatís the other kind of attitude and itís not taking concern about the impact to industry. Itís taking into account our bottom line. Thatís a big concern. Weíve got to balance ours with concerns for the industry.

Petroleum News: Did you see any compromise in HB 111?

Pruitt: The problem is that itís just so bad. I think what they were trying to with the NOLs as it related to the cashables is a worthy effort. I think George Rauscherís amendment is an example of meeting both sides concerns. Thatís what I would like to see. It takes a little of the Resources Committeeís version. So there might be some there, but there has to be an opportunity for everyone to have a discussion on this particular issue. I donít think thatís necessarily taken place at different levels.

Petroleum News: As disappointed as you are, this still goes to the Senate, so youíre a long way from any kind of final product. Are you at all heartened by that?

Pruitt: Iím heartened by the fact that the Senate is out there and there is that second body. Hereís the concern. If you already know that you are so far in one direction that the other body is not going to come anywhere close to it. Iíll pull back to another issue Iíve been harping all this year. When I was knocking on doors, I heard three things: budget, public safety, get your job done on time.

So thatís the other piece that is concerning. You are right. We are a long ways away, but yet the people are very frustrated that we continue to blow past the 90 days as if it doesnít exist. We go into multiple special sessions. They are really, really tired of that. Recognizing that, what I would have liked to have seen is, that can we get closer to something, so that in the end the Senate might be able to get a hold of it and be more receptive to it. Instead we are so far apart that itís going to take a long time to get to a conclusion. It seems like to some people, thatís not an issue.

Petroleum News: Now the governor, by his own admission, has remained in the background of these debates. Do you feel like youíre getting enough administration engagement?

Alper: Hereís what happens. My friend Ken (Alper) will come up and give his perspective and heís speaking for the governor. Then when we ask if heís speaking for the governor and there is a separation there. Then we heard from Commissioner Hoffbeck on SB 26, and he said the governor is not going to make any comments on it. Youíre talking about one of the three legs on the stool. I reference a Doris Kearns book the Bully Pulpit that I have up there (in bookcase).

When you are the governor, you do have a bully pulpit. Some people use it in a way that I would disagree with using it because they might perpetuate things I disagree with. When it comes to the oil and gas industry, he needs to make it very clear now where he stands with this. Iím hearing one thing from his people when they are at the table that is very concerning to me. Then again, Iíll hear other people who may be a part of industry who said, Ďwell, he said this.í

He needs to make it very clear. He needs to send a true message. Should they expect a dramatic shift and allow them to say this is the impact of what the shift will be? I think there is a little bit of worry right now because they donít know whatís going to come out. Is he going to say we should narrow it down to X? That would help drive the conversation. While Iím OK with him stay out and let the legislative process work, because of what we are talking about and where we are in the timeframe, I think it would benefit everyone if he said this is on the table and this is off the table. Thatís been a little frustration. Itís time for him to say Ďguys, get it back to more of this area, this is what I would be more comfortable with.í If itís off to the other side, it gives the industry to come and say something.

Petroleum News: During the HB 111 hearings, you were saying you didnít think it was appropriate to compare Alaska to other countries or compare Alaska to places like Texas or North Dakota, but that was done an awful lot during SB 21 debates. So if you donít compare yourself to other states and countries, what do you do?

Pruitt: Thatís a good question because a lot of time we try to do an apples-to-apples comparison but the factors that we have compared to other areas are different when it comes to cost and difficulty of getting to that the resource compared to the Permian basin (Texas) or another basin. If we are going to make those comparisons, we have to be cautious of trying to make an apples-to-apples.

Thatís what gets frustrating, is we automatically say X does it this way. Well OK what are some of the other factors and how do we include our factors in the discussion. Other countries that have a different regime like Iraq and Iran, you canít compare yourself to that situation. At the same time, we canít compare ourselves apples-to-apples with Texas and North Dakota.

We still have to ask ourselves why are people going into the Permian basin? North Dakota is having that same discussion. While they are flocking to the Permian, they are not flocking to the Bakken the same way they were a few years ago.

They are going to be asking those same questions. Itís not necessarily the tax rate as much as it is the other factors. Donít make it apples-to-apples. You have to think about what are all the different factors that make this an attractive place.

Petroleum News: HB 111 is also being used as a bargaining chip in a very hard and fast way in SB 26. That seemed to upset you. Talk about that.

Pruitt: The wording especially is what I was concerned about. My first year here, when we saw language on energy projects that said if the governor vetoed one of the energy projects, all the projects would be vetoed. We stood our ground as a House for 27 days in a special session saying that is a separation of powers issue and you canít do that. Here Iím looking again at something that says something to the Senate you canít pass this piece of legislation, unless you agree to these other two stipulations, and oh by the way one of them has to be exactly the way we say itís going to be.

To me I think there are ethics problems with that. We are finding out now whether itís legal or not. That right there totally destroys the purpose of why we have these checks and balances. You canít do that. You shouldnít do that. Itís very disturbing. I totally get that sometimes the House and Senate donít agree, but itís a different thing to flat out say youíre only going to accept our issue or this is going to void. They know the Senate wants SB 26 passed. They already passed SB 26 twice already once last year and once this year. So it was very disturbing to read those two provisions in that contingency language.

Petroleum News: Something you havenít heard a lot about since early in the session is the gas line. Do you make anything of the silence or is it that youíre so focused on the budget, oil tax bill and other budget gap bills?

Pruitt: Itís a good question. Because of the fiscal challenges that weíve faced, it almost got put to the side and I think we know we canít do that. There are definitely people in my district who told me they were concerned about us going forward on the gas line. That being said, I donít want to be out there to kill a project. I donít know all the details myself. I donít know all of the things that are shifting. The concern that I have with AGDC is one the silence and two the fact that legislators donít have any idea.

They havenít communicated to legislators what they are doing. They handed out a glossy form and someone came by and dropped off chapstick and mints. As much as I love the Iditarod, was $50,000 to advertise with the Iditarod the right direction? They havenít shown us right now that they are using the money wisely and they havenít communicated to make us think otherwise. I donít want to kill it. I really want them to communicate. I really want that. I want to be able to know whether we should continue to support them. We need to understand should we continue with the $100 million weíve already given them.

Petroleum News: What would you like to hear from them?

Pruitt: Iíd like to hear a little more detail in terms of what are you doing and how are you going to pay for this project. Thatís a piece of it. When the governor was talking about the president of China saying he wanted to take an equity interest potentially, I think Alaskans would be very concerned with that. Alaskans would still struggle with some place like Japan and South Korea, even as they are allies and countries we would be more comfortable with. So we need to understand what are you doing right now? Where are you looking? How are we going to pay for this? I think itís time we bring in the partners we are using. I know BP is using some of their employees. Iím not asking to break confidentiality. Iím asking them to give us something we can talk to our constituents. Bring in the partners and say why are they still involved in this particular project and working with you. We havenít really heard about that, either.

Petroleum News: What does it tell you that Chinaís leader lands in Anchorage and wants to talk to our governor?

Pruitt: It definitely is positive. When I visited China, they highlighted their energy challenges. I remember being in a meeting with the former chief executive of Hong Kong in Beijing about one block from Tiananmen Square. He was talking about the pollution and he said the people there were asking to clean up the air. The first two days I was in Beijing, it was beautiful blue skies. The third day, I understood what they were talking about. I couldnít see across the street. And so they know thatís the challenge they have to deal with and they are looking for those cleaner sources of energy. So itís a good thing he came over, but we have to balance our own interests with the fact that they also have their own interests at stake. We canít sell out to them but they definitely can be a partner as an end user and we should be engaging in that sense.

Petroleum News: You noted confidentiality. Letís go back to HB 111. How do you feel about the confidentiality provisions when it comes to receiving credits?

Pruitt: Iím OK with some additional disclosure to DNR, AOGCC, whatever the appropriate mechanism. The worse thing we can do is go to a constituency and say I know more about it but I canít talk to you about it. We shouldnít put ourselves in a place where we signed a confidentiality report and now we are going to go out there and say I canít talk to you. I think we should be cautious to make sure we have enough information to go out there and be able to talk about it. There is a balance there. I do think there needs to be more available to DNR but we donít want to get into sharing information that would be proprietary. Putting it out there could get into SEC or competitive challenges.






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