Stedman supports Senate Bill 21 repeal

Sitka Republican believes state should use Permanent Fund for gas line; thinks global trends, not legislative actions, drive project

Steve Quinn

For Petroleum News

Sen. Bert Stedman may not have the committee seats he once held, as he did with Senate Resources and Senate Finance, but he’s still actively involved in giving Alaska a resource development voice.

Last year the Sitka Republican completed his term as Energy Council chairman. In March, he received an appointment to the National Petroleum Council, an advisory board to Energy Secretary Ernest J. Moniz.

He joins Mark Myers, University of Alaska Fairbanks vice chancellor of research, on a committee dealing with Arctic issues.

Stedman is still speaking out against the new oil tax regime passed under Gov. Sean Parnell’s Senate Bill 21. Voters in August will decide whether to repeal or keep the new system.

Should a repeal succeed, the old system known as ACES returns.

Stedman spoke to Petroleum News about his new post, the upcoming oil tax vote and recent legislation designed to advance a gas line and LNG export facility project.

Petroleum News: Let’s talk about your National Petroleum Council appointment. Is this a matter of the common refrain, “Alaska having a seat at the table,” or can having you and Mark Myers help advance the discussion?

Stedman: I think both. It’s nice to have someone from an Arctic state in discussions. Clearly we have different viewpoints than people in Louisiana and Texas. We are more sensitive to the state itself: the people and the critters who live here. We can open up the Arctic in an environmentally friendly way. We need to advance and do that for national energy security. Not only that we need to be in a position in the Arctic, so if there is a problem somewhere else there, like an environmental incident, we’ve got the wherewithal to respond, not only the scientific knowledge but the physical infrastructure to do it.

We won’t get into fiscal policy discussions. It has to do with the viability and the national interest of an oil line and hopefully a gas line out of the Arctic. It does have to do with that, but this is not a group that discusses fiscal policy.

Clearly there is a need to expand and open the Arctic. The Arctic is getting opened regardless if the United States does anything or not. Hopefully this advisory council can make a positive impact. It’s important to have two Alaskans like Mark Meyers and myself on the committee. We have a little different view of Alaska than folks elsewhere.

I think it’s going to be a good position to be in even though it’s a large group overall. I think it will be easier to inject some of the concerns Alaska has as a state at the federal level than would be possible if we didn’t have anyone there. We can send all the resolutions we want to. Once I get involved, I’ll sit down with DNR, DEC, other agencies and sync up as much as possible with a concentrated message from Alaska.

Petroleum News: OK, closer to the Capitol, the state is approaching a vote on whether to repeal or leave untouched SB 21. You favored an ACES rewrite, but you didn’t like this version. What are your thoughts on how all this played out?

Stedman: I think the needle went too far. Clearly there was a problem with ACES and there are three major areas. First was the high progressivity. It was too aggressive on the upside. If you were more in a socialistic sovereign somewhere else in North America, it might be acceptable, but I don’t think it is here. Then you’ve got the large credits coming against the treasury that were in concept, not about capital expenditures for oil production increases versus a lot of maintenance.

Even though we did recognize there was a lot of maintenance to be done on a 30-year-old field that needed to take place. Then there was the down side of the exposure to the state.

SB 21 took care of the high progressive mechanism on the upside but left the complexity in place and the credit issue in place, and it didn’t change the downside in any appreciable amount. Some argue that SB 21 may produce more revenue to the state when prices are $70 or $60 a barrel, but if you sink your boat at five fathoms or you sink your boat at three fathoms, you’re still sunk. The arguments are illogical.

The state as a sovereign should not be exposed to increasing credits at declining prices. In other words, this per-barrel-allowance mechanism, that was a way to basically bastardize the mathematics of a progressive fiscal system.

In other words, it took the low side of the curve and bent it down, which would visually appear as a regressive system, which the system would be without it, to a progressive system. When you put together progressive systems you want to bend the upper price range up not the lower price range down.

This leaves the state in a peculiar position. As the price drops, your per barrel allowance goes up, so your allowance - or your credits, because that’s what it is a credit - ends up. I’d like to see the political elected officials stand in front of the public and explain to them why when prices drop $20 (from $100 per barrel), credits goes up $350 to $400 million. There is going to be a lot of fancy dancing at the podium and a lot of B.S. flying around the room. It’s not going to put the state and elected officials in a very good light in my opinion. And I think it’s dangerous to the treasury to boot. We’ve got the downside issue. We’ve got the complexity issue. We did fix the upside mechanism of progressivity.

So those are the real core issues with SB 21. The argument that the revenue stream off of ACES and SB 21 are very similar off of $105 a barrel gets masked because as you go through the system to get to the net, the net numbers in that price range is an anomaly because it was set up to mirror that. At that range the legacy fields were economic by virtually any measure. The underlying cash flow being moved is significant to say the least. If the net cash flow was truly to remain fairly the same, it would make no difference what tax regime you were under because the name of the game is net cash.

You can look at it from the sovereign’s side or you can look at it from the industry’s side, it’s still net cash - more so on the industry side. If you look at North Dakota’s structure, which was the comparative that was constantly thrown out there three years ago, they have 11.6, a compilation of two components at the state level, but that doesn’t take into account the royalty they have to pay to the subsurface owner. They have roughly a 31.5 percent gross tax in North Dakota. In 2015, when we have a full year of SB 21, we will be $1.4 billion under North Dakota and we used to be $300 to $700 million over North Dakota, so we went from several hundred million over to $1.4 billion under? So when the public figures this one out and we have to deal with budget implications throughout the state, it’s going to be an interesting dialogue. I think it’s going to lead to some public unrest.

Petroleum News: The argument for SB 21 started out as an issue toward more production. It seems to have shifted to a jobs issue now. Are you sensing that, too, or is it both?

Stedman: I would agree with that from what I can see in the public arguments. Three or four years ago at the (Senate) finance table, there was a testimony that we were approaching a deflection in the downward sloping production curve and we would be in a one to three (percent) decline curve for quite some time because of the magnitude or size of Prudhoe Bay and Kuparuk. Those are the same numbers they are talking about today after SB 21 and there is more of a concentration today about jobs.

You don’t, as a sovereign you don’t trade jobs for a hydrocarbon. You get your fiscal policy in balance so you have a fair and competitive revenue stream on your hydrocarbons. When you do that, you’re going to get the development and then you get the jobs. You get the jobs through having a balanced fiscal system and having a workforce that is trained and competent for having to do the labor. When you put your hydrocarbons on a going-out-of-business sale, which is what’s going on with SB 21, and you think you’re going to trade them for jobs and you think you’re going to be economically better off as a sovereign, I don’t agree with that at all. By the way, we are not going out of business and there is no reason to have a going-out-of-business sale. That pipeline is going to be in place for decades

You don’t undersell your hydrocarbons for jobs unless you are a chump. Alaska being the only state that owns the subsurface needs to act like a sovereign. As diligent as the industry is on protecting their interest, the state of Alaska needs to do the same.

Petroleum News: So is SB 21 more complicated, equally complicated or less complicated?

Stedman: I don’t think it makes any reasonable improvement at all. If you take out the capital credits, that cleans up some of it. But it’s still too complicated in my opinion. The complexity is an issue.

Petroleum News: So let’s say SB 21 gets repealed, what’s the Legislature or the Administration’s next job?

Stedman: We’ve got a concession system that came in with PPT. With ACES, all we did was change some credits and increase progressivity. It’s the same structure. SB 21 strips out a lot of the capital credits, puts in this bastardized progressive mechanism with a per barrel credit and really takes a concession concept and turns it on its head. With that being said, you can take ACES and restructure SB 21. Personally, I would take SB 21 and modify it. That would be my starting point. You’ve got to remember the foundation of both of them are the same, so you can go from either direction. But per barrel credits on pure production was a clever mathematical maneuver. It’s not going to stand the test of time. If we end up dealing with SB 21 for several years, it will be interesting to see what the Department of Revenue ends up doing with that downside exposure to the state.

Petroleum News: On to LNG, you didn’t vote for SB 138 on the Senate side but you did vote for it on concurrence. What changed your mind?

Stedman: I think there was a little bit more discussion and adjustments put in on the house side. I’m still not comfortable with it. I don’t like the concept of using TransCanada as a bank. I don’t like our misalignment of TransCanada basically front running what I see is our interest in the gas line and the conditioning plant. If you were to ask BP, Exxon or Conoco, either one of them collectively or individually, to have the same structure on alignment, I’d be surprised if either one of them stood up and saluted. They have been pretty straight up with us over the years that alignment is in everybody’s interest. Their interest and the state interest needs to be aligned. I think we have an alignment problem with TransCanada.

The state is in a unique position fiscally that we can finance a lot of our percentage of the project ourselves, either through our own financial relationships and other institutions or direct equity, so I think the financial structure can be reworked and improved to the benefit of the state.

It’s not very popular for elected officials to bring up the Permanent Fund as a mechanism to advance the state in these large projects, but the state of Alaska should use the Permanent Fund to finance their portion of the gas line in an equity position and debt it after first gas. Then set the debt limit they want after first gas and take the risk exposure down to the state. You could finance it through your realized earnings. It would shrink the dividend going forward a little bit, but you would have a lot stronger cash flow being spun off the gas line to finance and run the state.

If we had production declines and problems in the markets without a lot of debt on it or no debt at all, we still have positive cash flow otherwise your bondholders are going to eat a significant part of your cash. I think there is a preferred financing mechanism called the Permanent Fund that should be in play to put the state in a stronger position both risk wise and cash wise to put the state in a stronger financial position. I know a lot of elected officials are afraid to bring it up.

Petroleum News: So you are on board with the state taking a financial stake in a project?

Stedman: The state needs to not only take a position, the state needs to not have TransCanada in front of us on our position we should be staking. Should we have ownership in the infrastructure, not only the shore side liquefaction but the pipeline and the treatment plant in accordance with our gas position? Yes. The area I’d like to see the state pursue is our percentage of the gas, we don’t have to have a marketing arm put together but the gas percentage is taken care of the three majors: BP, Exxon and Conoco. If Alaska does not take an equity position in that infrastructure, our revenue stream is going to be significantly reduced. If that happens, the public will be concerned that we gave away the farm. For those who say don’t invest in the infrastructure, my position is not only do you invest in it, you pay cash for it as much as possible.

Petroleum News: What do you believe the Legislature should do between now and the time a contract comes for your review in 2015?

Stedman: I think we will be wrapped up in a dialogue hopefully in a repeal of SB 21. And we’ll get that sorted out. We need to take a harder look at our infrastructure and make sure we are in a position to not slow down the construction of (the pipeline) because we have problems with bridges or roads. You know sometimes we try to be too helpful and we actually hindering things. Sometimes we need to just get out of the way and let private enterprise move forward and get something done. I think we have a real project in front of us.

If you look at the age of our basin, you’ve got a field that’s 30 years old and it’s time to blow the gas cap off. You’ve got the economics in the Pacific with Japan needing gas and a secure trading partner, plus a free and defensible transportation corridor. In other words we don’t have the Panama Canal and all of the choke points incoming in Southeast Asia. We’ve got the North Pacific from Alaska due south and the U.S. Navy protecting it. It looks like the macro trends are lining up in our favor better than they’ve ever been. I think we have a project.

Petroleum News: Are you more confident that the Legislature advanced the prospects of a project this past session?

Stedman: I think the global economics advance the project and the age of our basin do that. I think we in the Legislature are static in the game. In other words, when this project is economic, it’s going to get built. There isn’t a lot we can do to change the macro trends and/or the age of the basin. We can take some marginal positive steps like regulatory issues, there’s some tax issues, infrastructure issues, but we don’t have any control over the age of the basin - it was opened up when it opened up; the volume’s the volume - the earthquake and tsunami in Japan, growth in China, South Korea’s economics, our physical location on the planet sitting here atop the Pacific So I don’t think we should beat ourselves on the chest too much. We should make the changes we can make to make a marginal positive impact, but it’s mainly global trends that are going to drive this. It has been driving it for about a decade.

Petroleum News: Do you have a sense that, whether you liked it or not, the Murkowski contract is going to come back in a few years?

Stedman: I think it is going to be the contract from when we were under the Stranded Gas statutes coming back at us. I’m hesitant for the state to take gas in kind and have to market it ourselves. There needs to be a concrete agreement with the three majors to market the state’s gas and diminish the state’s exposure to a certain degree.