Wielechowski believes ACES is working

Anchorage Democrat cites profits, jobs, investment, expenditures, Great Bear, Repsol coming to state, as successes for current tax

Steve Quinn

For Petroleum News

When it comes to the prospects of changing Alaska’s oil tax laws, Sen. Bill Wielechowski has a pretty simple response: Leave it alone.

The Anchorage Democrat serves as a member of the Senate Resources Committee and is loath to change Alaska’s Clear and Equitable Share, ACES, less than four years after it’s been put into place.

Gov. Sean Parnell’s tax plan, House Bill 110, has passed the House, but went nowhere in the Senate during the first regular session of this two-year legislative term.

Currently in a special session to work out differences with the capital budget, the Legislature will leave the tax bills for another time.

Still, Wielechowski took an afternoon to present his argument before the Senate Judiciary Committee.

He titled the presentation, “Is ACES Working?”

After the hearing, he sat down with Petroleum News and stated his case.

Petroleum News: The title of your presentation is, “Is ACES Working?” Is it?

Wielechowski: I think it is if you look at a number of different methods. Clearly we have companies making very strong profits. We have jobs at an all-time high under ACES; we have capital investment and expenditures at an all-time high since ACES passed. We have many more companies doing business in the state of Alaska. If you look at the facts of the various metrics, it’s hard to say it’s not working by those metrics: We are doing very well.

Petroleum News: One of the prevailing arguments by those who want a change is that it’s not enough to provide a profitable environment and you have to provide a competitive environment.

Wielechowski: When a company takes out a lease, then it is obligated to produce and explore when that lease is profitable. That’s the duty to produce. It’s very clear that duty exists in the State of Alaska. I don’t know that the tax rates in other countries and other states are relevant because the company has a duty to produce. When you look at the rates of return, what we’ve calculated under ACES seem to be very good rates of return. When you look at the profit numbers, you see ConocoPhillips making $549 million in the first quarter, but you also see they generate only roughly 12 percent of their worldwide exploration and production output from Alaska yet they are generating 28 to 30 worldwide exploration and production profit out of Alaska. When you look at the metrics, the metrics show the company makes very good profits so they should be making investments. When you look at the tax rates and government takes in other countries, you’ll see there are investments from companies who do business in Alaska to where the tax rates are much higher.

Libya for instance 95 percent; Russia 90-plus percent; Venezuela 90-plus percent, Conoco no longer does business there because their assets were expropriated; Ecuador, tax rate is 85 plus percent, companies are no longer doing business there because their assets were expropriated; Iraq, tax rate of 98 to 99 percent. Norway has an effective tax rate of 78 to 81 percent, so when you compare Alaska to other parts of the world where the majors are doing business, you see Alaska is very completive.

Petroleum News: Norway is also a different system. It’s not nationalized the way Venezuela and others are.

Wielechowski: Basically they tax in two different ways. One is a 50 percent tax; the other is a 28 percent tax and they are stacked on top of each other. When we were debating ACES, Norway, we consistently heard (was the country) that we should be comparing ourselves to. That was by Gaffney & Cline, the consultants the Parnell administration is using right now. When you look internationally, our tax rates are very competitive.

Petroleum News: Everybody seems to agree on one thing, the need to put more oil in the pipeline. How do you achieve that?

Wielechowski: The thing to remember is we had a 20-plus year experiment, the old Economic Limit Factor, where you had tax rates of 12.25 to15 percent of the gross, but those tax rates only applied to the large fields, the legacy fields: Kuparuk, Alpine, Prudhoe. The satellite fields had zero percent tax rates. All the tax rates were set to decline to zero percent. Prudhoe Bay rate in 2006 was little north of 12.5 percent. In 2006, you had 15 out of 19 fields in the North Slope paying zero percent taxes. During the 20-year period you saw an annual decline of 6 percent, so the tax structure has little to do with whether a company will invest. It has something to do with it, but I don’t think — it’s not a be-all end-all. In fact the No. 1 thing we’ve heard consistently over the years is the most important thing companies look for — it’s the rocks, the geology of the field. We know the North Slope is a prolific hydrocarbon basin. So how do you get more oil in the pipeline? Fortunately, based on our tax structure, we have a couple of major new developments just this year. We have Repsol who has agreed to come in and spend $768 million on exploration and development. That’s a significant new entrant. You have Great Bear who acquired 500,000 acres and believes there is enough shale oil on the North Slope that they can put in 1 million barrels of oil a day. Even if they are half right, that’s virtually doubling our oil production right now from where it is. So I think good things are happening. Increased competition on the North Slope is a great thing; it’s probably the best things we were able to do under ACES, to increase the number of competitors. You’ve got to keep one thing in mind: We are financing the vast majority of the development and exploration on the North Slope. With a new entrant, the state picks up 65 percent of the exploration costs; with an existing producer, the state picks up 76 percent of the investment cost. The state is the largest investor on the North Slope. The Parnell administration, their fall forecast, their decline rate will be down from 5 or 6 percent per year to about 2 percent a year in the next seven or eight years. I think you will see a stem in the decline, and that doesn’t include Repsol and Great Bear.

Petroleum News: If there is anything that needs changing in the tax program, what is it?

Wielechowski: I think ACES is working. It’s designed in a way that encourages new entrants; it encourages new exploration; it encourages reinvestment in legacy fields. So I think it’s working. Are there changes that could be made? The one big thing the executive branch could do to put more oil in the pipeline right now is start enforcing the leases. We heard (ConocoPhillips CEO) Jim Mulva say if we pass HB 110 they will spend $5 billion they believe will generate 90,000 barrels a day. We looked at those numbers under ACES and by our analysis that’s an extremely profitable project. It should generate about $3 billion in profit. It’s also a project that generates a rate of return over about 95 percent. Those numbers have not been refuted by the administration. In fact they looked at the numbers and said they are about right. With that knowledge, why isn’t the governor saying, ‘why aren’t you developing those fields now instead of waiting for billions of dollars in tax breaks?’ That’s the No. 1 thing we could be doing now: strictly enforcing those leases.

Wielechowski: Cook Inlet is still under ELF. There is a zero percent tax rate for oil. There is about a 2 percent tax rate for natural gas. It’s certainly the lowest tax area for Alaska. For years we haven’t seen more exploration. The response for years is more incentives, more tax breaks. We pick up between 45 to 50 percent of the exploration costs. We just haven’t seen the exploration we want in Cook Inlet. The Henry Hub rate is around $4.25 per thousand cubic feet; in Cook Inlet we are paying about $7 per thousand cubic feet. We are paying high rates and getting basically zero taxes. The policy has been basically to subsidize shipment of our gas to Japan. I think it’s been a failed policy. Now the state is saying we are going to subsidize 100 percent of a jack-up rig for the first well.

Petroleum News: Yeah, but they will have to reimburse that once they start producing.

Wielechowski: That’s true. But it was sort of a Hail Mary pass. At some point the State of Alaska is going to need to say if the leaseholders in Cook Inlet, if the leaseholders on the North Slope aren’t going to develop their leases, we’ll take the leases back, and we’ll either re-bid them or we’ll do them ourselves.

Petroleum News: That could mean years in court. Just look at Point Thomson.

Wielechowski: Point Thomson is a good example. We waited 30 years for Exxon to develop Point Thomson. It wasn’t until Frank Murkowski began the process of taking way the leases that Exxon spent $1 billion. Sometimes the state has to exercise its sovereign right and say either you drill or we will.

Petroleum News: Point Thomson represents something crucial for a prospective (large diameter) gas line as well as liquids into TAPS, don’t you think?

Wielechowski: It’s one of the largest undeveloped reserves in North America. It is an important asset not only for the State of Alaska, but also the United States of America. But as a sovereign sometimes we have to get aggressive and say either you drill or we are going to do it ourselves. I think that’s ultimately what pushed them to doing what they are doing.

Petroleum News: Looking ahead a bit, you’ll be getting an in-state gas line report this summer. Is that the way to go?

Wielechowski: The big problem with the in-state gas line is the costs. Can we afford to pay the tariff? You’re looking at natural gas from the North Slope being nearly triple what it is from Cook Inlet. I supported it because we need natural gas. We need a new resource in Southcentral. But it’s an insurance policy more than anything else. I don’t think it’s the most optimum way. That being said, would you rather have gas at $17 to ship the gas down from the North Slope to Cook Inlet an mcf or no gas at all? You can’t have a situation where you have no energy source in Cook Inlet.

Petroleum News: On to the bigger pipeline: Are you losing faith in AGIA (Gov. Sarah Palin’s Alaska Gasline Inducement Act) and TransCanada’s ability to move the project forward?

Wielechowski: At the time it was clearly the right thing to do. We based it on the best evidence we had at the time. I know the Parnell administration still supports the process. I’ve spoken to TransCanada. They lead me to believe the process is still moving along. Of course the big game changer has been shale gas. To the extent that it affects the pipeline we’ll see. We know there were significant quantities of gas bid under AGIA. So we are waiting to see what the results are. We know they are trying to work out precedent agreements. I think it would be premature at this point to abandon the system.

Petroleum News: There was a bill on the House side calling for some benchmarks by July. That’s not going to happen, but if come January the bill gets recast, for the following year, does it warrant consideration?

Wielechowski: I would be open to looking at some legislation in the future. At some point you have to pull the plug. I’m not sure we’re ready at this point. You have two competitors: TransCanada and Denali. It would seriously disadvantage TransCanada’s commercial process if the state were to back out at this point and change the terms in the middle of the game. But I think we should always be re-evaluating as policy makers to see that we are on the right track. I feel like we still are on the right track. It’s a complex agreement. It’s an extremely costly and complicated project. My understanding is they are in the process of negotiating precedent agreements. We had two open seasons last year, the first in the history of Alaska, so I think those are all positives.