Work will continue on oil, gas taxes

Stedman says taxes will be an issue in Alaska Legislature next year; he hopes governor planning exit strategy for state from AGIA

Steve Quinn

For Petroleum News

The regular legislative session is over. So is the special session, which ended three days before the 30 days afforded the Legislature.

But the work is hardly done.

There still is a coastal zone management plan that will expire July 1 if something isn’t done.

There is a tax regime many lawmakers believe needs retooling and those bills sit in the Senate. Meanwhile many senators remain concerned about a report on the state’s outdated tax audit system, leaving one senator to call it “limited.”

Then there’s the news that ConocoPhillips and BP will not continue with Denali, their North Slope to market gas pipeline project, furthering doubts about the state-backed project under the Alaska Gasline Inducement Act or AGIA.

Sen. Bert Stedman sat down with Petroleum News for a second interview — this one post session — for a wide-ranging discussion of resource development issues.

Stedman, a Sitka Republican, sits on the Senate Resources Committee and serves as co-chair for the Senate Finance Committee.

Petroleum News: You’re barely done with the special session and news that Denali will not continue with pursuits of a large-diameter project. What do you make of it?

Stedman: I’m surprised at the timing two days after (special) session ended. But I’m not surprised that it happened; I’m not surprised they pulled the plug.

With the flood of shale gas and the Chinese finding gas in their land mass, there is gas everywhere.

What I am concerned about is an endeavor Mackenzie is considering, exporting their gas by tanker. With retreating ice, the Arctic may be a viable alternative, shipping gas by sea instead of overland. AGIA is just as dead.

If BP and ConocoPhillips — two of the three bigs — feel it’s a no go, and we have a tax structure that that would incur negative revenue from gas on our oil tax, and they still can’t make it work? What does that tell you?

What this does is refine the issue. Look at AGIA and what it gets the State of Alaska. Right now it’s a drain on our treasure. We could be using that money we give TransCanada and Exxon and build schools or fix a lot of roads leading to healthy oil fields. Right now we are pouring money into a dead project.

I’m hoping the governor is reviewing the options for an exit strategy from AGIA for the state.

Petroleum News: What do you see happening with coastal zone management as it didn’t pass the House by a single vote?

Stedman: It’s dead. As we sit here today, it’s not resolved. It was a mistake politically for the House not to flip a vote either led by the speaker (Rep. Mike Chenault) or (Rules Chair Craig) Johnson. They should have changed their vote to yes and implemented the conference committee negotiated language, then moved on. Next year we could have filed a bill to further refine the language. But to kill a program is ridiculous. The reason I’m saying should have been Chenault because he’s the speaker or Johnson because he was the chairman of the conference committee. If I was to make a recommendation to the governor, I would recommend that he call another special session and get this issue resolved. This puts the state in a position where it doesn’t have a seat at the table.

Petroleum News: Can you identify any accomplishments connected to resource development?

Stedman: One of the things — I wouldn’t necessarily classify it as an accomplishment but an area I guess that needs improvement — and that’s the information from a tax perspective and handling the data. So we put $34 million in the capital budget so they can put together an integrated tax system and have the ability to answer what I think are very basic questions.

Petroleum News: Your colleague (Sen. Joe Paskvan) noted a report on the Senate floor during a special order that discussed the lack of sophisticated audit capabilities. It seemed to catch several people by surprise.

Stedman: The concerns we had was the administration didn’t bring that request forward. When we asked them during the operating budget subcommittee hearings to bring me a solution, it was truncated further up the chain of command, so the Legislature is the policy making branch and we made a policy call. We want that data; we put the money in the budget. Hopefully the governor recognizes the need for it. Frankly, it’s embarrassing for the State of Alaska to have an oil tax bill in play and not be able to answer questions that are critical.

The complexity of our system has been substantially advanced since ELF (economic limit factor). We need to make sure Revenue and DNR keep up. There is too much money at stake. It’s not only the money; it’s the relationship between us — us, meaning the people of Alaska — and the industry that extracts the oil and gas. If we are going to set accurate policy, we will need accurate data.

Petroleum News: What are you priorities during the interim?

Stedman: Go camping; spend some time with my family. Work wise, I want to see that we continue to gather information to allow us to have a discussion next winter on the tax structure — oil and gas. There are concerns with the oil and we have no gas tax. It’s a negative.

Decoupling is not an Alaska issue; it’s a global issue. When you pay the industry to take our resource, something is wrong. The value of the gas is extremely low. The monetary value to the treasury is lower than most people would want.

Stedman: No doubt about that. That issue goes global. I’d like to see Alaska on the leading edge of that rather than the trailing edge.

Petroleum News: What do you see happening with the tax debate?

Stedman: Well we have two bills in the Senate right now (SB 85 and HB 110). (Legislative Budget & Audit Chair Rep. Mike) Hawker still has a bill on the House side (HB 17). I don’t know if the House is going to take any action on that or not. I think Hawker’s bill is a lot closer to solving what I say are the biggest points of discussion, points that figure into a policy call. That bill in my opinion should have been the bill that moved out of the House.

Petroleum News: Since the regular session ended there have been several developments. ConocoPhillips’ Jim Mulva and BP’s John Minge discussing their plans should a tax change pass, then President Obama announced intent to ease the way for drilling on NPR-A a few days after Shell announced its exploration plans for the Chukchi Sea.

Do you see the dynamics of the oil tax debate changing because of some of these developments?

Stedman: Clearly having two of the three majors making comments referencing how they would respond to changing in our tax structure is a positive. They will have that opportunity next winter to do that in person in the committee. Well, some committee. I would imagine they will be invited to Senate Finance if I get hold of the bill. Or representatives speaking on behalf of the companies.

Petroleum News: And what about Obama’s announcement?

Stedman: That was made clear to me by (presidential aide) Pete Rouse in a meeting we had at the White House that the president wanted to move forward with domestic production of oil and he was frustrated with his agencies inability to handle it. He also made clear there was no interest in moving into the wet refuge. Quite frankly there is more oil going east than going west. In my opinion we should be going east instead of west, the coastal plain, not the mountains. I think we should drill where there is oil. I think it’s a positive still. There are political concerns I’m sure the President has. With the Arctic, it does concern me that the United States was such a hindrance on the industry that they can’t move forward, yet several miles away you’ve got a Russian federation moving forward, Canada is moving forward and China is building a world-class ice breaker as we speak to potentially drill right off the shores of Alaska. It’s asinine that we don’t adopt the Laws of the Sea Treaty. China is going to have drill rigs over our oil basin, well the basins which are in the area where the laws of the sea will cover. I don’t know how our delegation gets that message across to the senators in opposition to it. I’m sure the Chinese have not as stringent environmental concerns as the United States.

Petroleum News: And Shell’s news of their exploration plans?

Stedman: I’d like it a lot better when they get the stamp of approval. There are a lot of hydrocarbons in our basins. There’s a lot of oil offshore. It doesn’t go unnoticed the Shell is the standout of all of the offshore companies. Alaska should be thankful Shell is at the table and is going to be the lead offshore company. Shell is the preeminent offshore oil company in the world. If I had to pick an offshore oil company, no doubt about it, it would be Shell. Am I concerned about a mishap? I think all Alaskans are. It doesn’t help the oil companies when they have a spill. Look at when Exxon had its spill. Exxon basically backed out of the state and was gone for 20 years. Not only was it an environmental disaster, it didn’t help with the development of our oil and gas basins.

One concern I have is some of the fear tactics some groups are portraying on the citizens of Alaska, almost to the point where every morning they wake up wondering if TAPS is going to have any oil moving in it. That’s pure hogwash. That pipeline will be pumping oil when my daughter is 70 years old and she’s 16.

Petroleum News: Speak to that. Some people feel like the prevailing message that the sky is falling.

Stedman: It’s fear tactics, plain and simple. We’ve had declining producing for 20 years. We have an aging basin. The issue is how do we get more production in the declining basin. The easiest oil to get to is Prudhoe, Kuparuk and Alpine. When we review our tax structure, we need to take a look at it. Everybody is curious about the shale. You’ve got North Dakota that had a flat industry for decades. The technology broke that industry open. Now it’s moving forward. I think we have more opportunity with source rocks and area of richness. We vastly exceed North Dakota. We’ve got some cost issues dealing with the Arctic and some infrastructure needs. If that technology advances in the next couple of years, we are going to be in a real good position, the State of Alaska.

Petroleum News: Do you see the Legislature putting together an oil tax change that is more of an omnibus bill where you bring several features together in a single bill?

Stedman: Nope. The reason I say that is this is an issue that is extremely complex. When you start putting too much in the soup, you have problems moving forward. You want to have a good understanding of what you are doing. Frankly there are just a handful of us in the Legislature that understand the credits and the magnitude of what we are dealing with. I’m not personally excited about issuing more credits unless they are targeted, well defined and shown that they are needed. When you have a 40 percent credit and a 100 percent write off on your capital expenditures, at some point we need to have a discussion from a policy level should we not just take an equity interest in the venture. That’s in effect what we are doing. Putting up the equity. Are we going to get the equity investor’s return? I’m not saying we should do that. I’m saying that’s a policy question that needs to be addressed. I think Alaska would be a lousy partner for numerous reasons. Well, not the preferred partner, let’s put it that way.