Kurt Olson sees inlet changes as model

Says SB 21 necessary to make state more competitive; cites changes in Cook Inlet, resulting growth in industry in that part of state

Steve Quinn

For Petroleum News

House Rep. Kurt Olson arrived in Juneau in 2005, just in time for spirited debates on oil taxes, an issue that prevails still today with an upcoming referendum to repeal the recently passed reform Senate Bill 21. He brings to the table some institutional knowledge about oil taxes, natural gas pipeline developments, be it the Stranded Gas Development Act or the Alaska Gasline Inducement Act, and recent uptick in his backyard Cook Inlet.

The Soldotna Republican says he’s enjoying what’s known in the Kenai region as The Stampede, reflecting the industry’s rush to take advantage of tax breaks for various exploration.

Olson serves on the House Resources Committee and has been busy during the interim keeping up with Arctic policy development, progress at Point Thomson since the state and Exxon reached a development agreement, and Alberta with the Energy Council.

He discussed his views with Petroleum News.

Petroleum News: Let’s start with your visit to Point Thomson. What were your impressions and takeaways?

Olson: Obviously it wasn’t my first trip to the North Slope, but it was my first trip to Point Thomson, and I was really impressed with the work that’s going on up there. They have the first portion of the camp finished. They have the foundations for the oil lines going about 30 miles. They hope to have the pipe on top of it hopefully by the end of the next construction season. The workforce will increase after the first of the year. They have drilled three holes up there and are getting ready to drill several more, I believe. So, I was really impressed with the work. The runway is incredible. The runway, considering the size, it’s probably the best runway in the state. It was necessary and it’s an incredible runway and airport operation for such a remote project.

Petroleum News: Was there ever a time when you thought the state and Exxon would never get to this juncture?

Olson: You know, I just hoped I would be around when it did. I figured ultimately we would get to it. It would be done when it made economic sense to all parties. It’s common knowledge that Exxon is negotiating with the borough for some land on the Kenai Peninsula out by the LNG facility and they are also leasing office space in the Kenai area, so I don’t believe they would be doing that if they weren’t planning on following through.

Petroleum News: You recently also went to Alberta for Energy Council. Tell me about that trip.

The place was booming. I believe the minimum wage now in Alberta is $20. It’s not government mandated. It’s what they are having to pay for entry level labor. The fast-food industry, gas stations, whatever. I know we would like to be in that position in the next few years.

We also learned Mexico wants to be in a position they haven’t been in for decades. They nationalized the oil and gas industry years ago and ran off all of the names we are familiar with: BP, Exxon and any predecessor companies. What they have is a situation where they don’t have state-of-the art equipment or new technology that the other parts of the world are using. At Energy Council, I believe that was the first place they announced they would be putting leases out to bid and they were going to be doing what most of the rest of the world is doing, having partnerships with the majors.

What it means is there could be cheaper oil in the next five or 10 years with more oil coming from that region, that part of the Gulf.

Petroleum News: Were there any other impressions from the Alberta trip?

Olson: I’m glad you asked. What’s happening in Alberta is happening everyplace. I’m getting tired of legislators from North Dakota thanking me for the workforce we are supplying to North Dakota, and not only that the Alaska-based companies that are active down there and doing a superb job for them. I would rather hear them say, ‘I wish we could get a workforce like you have in Alaska.’ A good portion of them are now moving south. I don’t know how many more years we can do that before people stop commuting back to Alaska during their time off and decide they are going to move down there.

Petroleum News: Moving on to other competitive issues, does that speak to the argument of keeping SB 21 in place?

Olson: I voted for it and will continue to support it. You and I were both around for PPT, ACES and AGIA and the whole game change on that where we had a number of different tax regimes in place but very little time in between to find out whether they were working or not working or taking too much. I spent, I’m guessing 10 days or two weeks having hearings in the House Oil and Gas Committee (in 2007), and it was incredible at that point and time.

We moved the (ACES) bill and when it hit the Senate, the taxes changed a bit — actually the progressivity amounts. Looking back as I recall, we had the models based on progressivity, I don’t believe we used anything higher than $105 a barrel. It couldn’t have been much higher than that. I don’t think we ever contemplated that it would be up to $142 or $144 and the impact it would have on that.

It’s obvious we are going to have to do something if we are going to be competitive. We saw Alberta do basically the same thing. It didn’t take them long at all to figure out that everybody was leaving Alberta over the taxes. That had one disadvantage that we didn’t have. It’s a lot easier to leave Alberta than it is to leave Alaska. It takes longer here to demobilize and send equipment to North Dakota or wherever you are going to be able to work competitively.

Petroleum News: What do you like about SB 21?

Olson: I believe it’s attempting to find a balance to where we can get the producers to invest more and to do more and at the same time have a much more reasonable tax income coming in. When you weigh the jobs and everything else into it, we are not losing as much money as people are putting out. What hurt us this time was No. 1 the decline in production and No. 2 the price came in below the estimates for the next year. I think we got hammered from several different directions at the same time.

Petroleum News: You’ve been around for PPT and ACES, and heard numerous presentations on tax regimes. Why is this still such a hot button topic eight to 10 years later?

Olson: Ultimately what it comes down to is we are still doing what we were upset about 10 years ago, changing the tax regime every couple of years, tweaking it and not having any continuity and having any fiscal stability. Fiscal certainty went out the window with the Murkowski administration but there has to be some sort of long-term regime in effect. If the producers know what it’s going to be, for the most part they can work around it. If the project pencils out, it pencils out. I think they would be happy with fiscal stability. For the state it’s the same way, too. At least it will be easier to do revenue forecasts.

Petroleum News: We keep hearing how repealing SB 21 would hurt advancement of a gas pipeline. How do you think SB 21 helps advance a gas line project?

Olson: By having fiscal stability. What we are seeing now is they can see this as adequate. I think there are people out there who would like to see the oil companies not make a profit. I’m not one of them. What I would like to see is if we took (Gov. Sarah) Palin’s version before all of the manipulations of the progressivity — the original version of her bill — and how that would pencil out as compared to what we are doing now. The same with PPT. Get a handle on whether those were closer to hitting the sweet spot or if they were out of the picture, too. I’m not going to ask for it. I don’t think it would be the best use of our money right now, especially if we don’t have a lot. I would still be real curious, especially compared to Palin’s original version because I have a feeling, it wouldn’t look all that bad now, but that was before progressivity got spiked up. What she submitted and what we passed were two different animals.

Petroleum News: I’ve heard more than one critic of the referendum say a repeal could hurt investment. Do you have any other concerns about the referendum?

Olson: If the people want it, that’s what we have to live with. I’ve been unhappy in the past, I’ve been happy, depending on which time it was. Like the cruise ship tax. It started out to be good when there were one or two issues until it got Christmas treed. There were too many things piled into it later on. I had a problem with that one, but it was the people speaking. I don’t believe that’s the best way to do government, by initiative. Whether or not it’s going to pass, I haven’t seen any recent polls. I imagine it’s relatively close. I’m sure we’ll see a lot of money pouring in for advertising before the vote from both sides.

Petroleum News: Now that some of the populist movement during the Palin administration and the corruption cloud are pretty much a thing of the past, do you notice a different in tone?

Olson: I don’t want this to sound negative. We have a number of new people who didn’t have the luxury of being around PPT, ACES and AGIA. Some of them are starting from scratch. A lot of them are quick studies. Going back to PPT, we had a roundtable discussion with all of the producers, with the exception of Exxon. Then we had several explorer companies beginning to be active on the North Slope in an open forum with questions and answers going back and forth. One of the questions was how far out does your company forecast the development of future projects. Only one company answered it. The rest said it’s proprietary. The one company said it looks out a minimum of 60 years. We can’t even get a budget out for two years, let alone do that kind of forecasting. That attracted my attention. I figured some place in London there is a map on the wall with different colored pins corresponding to an area, what decade they will be developing or what country.

Ultimately, the advantage we have is that we may not have fiscal stability but we have a stable political regime. We are not a third-world country. We don’t have hostile neighbors. We don’t have to invest a lot of money securing our assets. And we don’t have to worry about political coups. From that standpoint, we have something to offer for a premium because we have that kind of political stability. On the flip side, what do we have — a construction season of about four or five months? We are remote. Our transportation infrastructure is probably adequate but certainly not world class. On the North Slope, when we have the ability to use the water transportation, we don’t have the ports up there to handle it, we don’t have icebreakers. I believe the Chinese have ordered six new icebreakers and they aren’t even an Arctic nation. They are getting ready to be one. I believe there are a lot of things we can do to make ourselves more attractive to development and to command maybe a higher tax structure, but at this point and time, I think SB 21 hits pretty close to what will work.

Petroleum News: You’ve noted the Arctic. Have you been able to keep an eye on what’s happening there, either by watching the Arctic Policy Commission and if so what were your impressions?

Olson: No 1, I think we are going to have to spend money on the North Slope for infrastructure and that would be at least one deepwater port. We are going to have to have ice breakers that would be either state or federal at some point. We are going to have to have tugs on the North Slope. We’ve already had one load of LNG go over the top. LNG is not going to cause a problem if we have a stranding or some kind of catastrophe. But it we that same thing with oil, we’d have another Exxon Valdez with no cleanup. So we’ll have to have some infrastructure up on the North Slope if we are going to utilize the ability to transit in either direction up there, if we are going to bring in supplies or if we are going to haul out oil possibly. So I think that’s my greatest concern: that we may start doing things up on the North Slope before we have the cleanup infrastructure or the ability to contain or clean up a spill, or help the vessels that might be in distress.

Petroleum News: Still on the Arctic. Are you hopeful that Shell will be back exploring in the summer?

Olson: It’s my understanding at this point they are. I guess we will know after the first of the year. I think the people to ask would be Shell. They have put an incredible amount of money in it without anything coming to fruition. They’ve made some mistakes and it’s surprised people because it was Shell.

Petroleum News: Let’s look closer to home: Cook Inlet. There has been a lot of good news during the interim, either with supply news and most recently ConocoPhillips applying for the export permit. Did you ever think Cook Inlet would have this kind of revival?

Olson: You know I really had hoped it would work when we had the Stampede. Originally, I thought we might be giving too much away. I think the credit goes to (former) Sen. Wagoner. Tom led the charge on that. I, for the most part, was there and was definitely encouraged that we were actually doing something at that point. I wondered if we were giving away too much or had not structured it right. It seems to be working as it was intended. I can tell you that there is a lot of activity going on down here. We’ve also had Agrium up here all summer. I think as soon as they have an extended supply of gas, we might see them reopen. I moved down there in 1982 when we were still putting new platforms in the inlet. This is the most activity I’ve seen since probably the late ’80s.

Petroleum News: You certainly can’t compare Cook Inlet to the North Slope, but do you think it’s a blueprint for how policy can drive economic change?

Olson: I don’t think you can, but the policy is working or you wouldn’t be seeing the activity you are seeing today. For a long time, Nikiski was known as the rust belt. I remember companies I worked with in one form or another over the years. I can go out there and name every one of the empty buildings and what they had during their height. Now we are drilling all over downtown Kenai, and they hit gas right behind Wal-Mart. It’s just a mile and a quarter from where they could tie it into the distribution system. Where we have a real future is we’ve got new companies coming in. We’ve got people like Buccaneer; we’ve got Hilcorp that is basically made up of a number of Marathon people who are real active. We are going through a transition. As far as I can tell it’s proving better. It’s coming back.