Stedman: Seeks investment, tax balance

Senate Finance Committee co-chairman says if production tax isn’t done in 90 days the world is not going to end; oil where money is

Steve Quinn

For Petroleum News

Sen. Bert Stedman rarely minces words.

For the next two years the Sitka Republican will have his chance to weigh in on prospective changes to the State of Alaska’s tax policies, the uncertainty of a large-diameter gas pipeline project and the federal government hindering prospective offshore drilling.

Stedman begins his fifth year as the Senate Finance Committee co-chairman and seventh year as a member of Senate Resources.

He’ll also serve as vice chairman of the Legislative Budget and Audit Committee and vice chairman of the Alaska Northern Waters Taskforce.

He is long a critic of the Alaska Gasline Inducement Act that forged a state-backed partnership with TransCanada’s large-diameter project.

Stedman sat down with Petroleum News to discuss issues ranging from AGIA to the current oil tax and credit structure and his efforts at separating oil tax from gas tax, a bill vetoed by Gov. Sean Parnell last year.

Petroleum News: What is your plan for the tax system we have? Are the credits the problem? Is it the rate? Is it the progressivity?

Stedman: There are several issues. I wouldn’t necessarily prioritize them in this order, but start with credits. My concerns are there are roughly 850 million of credits in the budget. Roughly 60 or so million is for Cook Inlet, so you’re right at about 800 million, so what are they spending money on to generate that size of credits: maintenance or development?

It appears that a substantial amount of that is maintenance or expenditures that don’t add more drilling. That’s something we are going to sort out in the finance committee.

With (the progressivity trigger) being pulled back from 40 dollars to 30 dollars on the net and increased the slope from 0.2 to 0.4, I haven’t seen any analysis where 0.4 is where it should be.

The base rate, the submission from (former Gov. Frank) Murkowski was 20 percent. Previous to progressivity it could have been anywhere from 20 to 30. Some people in the Senate wanted 25; some wanted 20. We settled at 22.5. That’s the science behind it.

Sarah (Palin, former Alaska governor) thought the whole thing was corrupt and everybody was bought off in the Legislature.

She was the only pure one, and the rate needed to be 25. That’s what she wanted, was a sound bite at 25. She didn’t care about anything else in ACES.

The base rate is now 25 and I don’t think there is a lot of appetite in the building to move it. You can justify 25 just as easily as you can justify 27 or 23.

Petroleum News: So what do you think should be done?

Stedman: I don’t know. Once we get through the review process in the next few months, I’ll have a better idea. The credits I think are under recognized in the Legislature for their impact. A 20 percent credit is big and a 40 percent credit is colossal. It’s an issue of balancing between that investment and the tax.

Petroleum News: Does something have to be done in a 90-day session?

Stedman: If something isn’t done in 90 days the world is not going to end.

The question is will we have the analysis done and will we have enough political support one way or another in the building to do something.

I’d say it’s 50-50. In fact I’d say it’s less than 50-50. The reports we are expecting from Pedro van Meurs won’t be done until June.

We are going to have Wood Mackenzie do a separate public presentation on where Alaska stands.

We are not the highest marginal take. It’s Libya 99.4 percent. We are somewhere in the top third.

There is an awful lot of misinformation out there; which is fairly normal in this type of debate.

Petroleum News: What about decoupling, separating oil tax from gas tax? Is that something that should be done sooner rather than later?

Stedman: It should have been done before AGIA was locked down. Now that it’s locked down, the time sensitivity isn’t as big an issue.

Even today in 2011, I would imagine the impact to the treasury is 125 million to 150 million. Does it need to be rectified? The answer is yes. It’s a substantial de-stabilizer within our tax system.

Having a stable tax system is as important as having the numeric correct so both sides are comfortable with the rates.

Petroleum News: Is AGIA dead or is a large-diameter gas line dead?

Stedman: Why would AGIA work if Exxon, BP and ConocoPhillips refused to sign on with AGIA? It can’t work. It was designed to exclude those three. It was doomed to fail to begin with. You can’t put a concept together like that with the specific intent to exclude the three major producers and expect your project to perform. Look at DNR. Where are the AGIA supporters from DNR? They are gone. Where is the AGIA coordinator? Not hired. I think we need to sit down, take a good look at this situation, and encourage the governor to find a way to negotiate ourselves out of AGIA, and move on to try and find another way to move the gas to market. Under AGIA, we removed ourselves to support other projects.

Petroleum News: Is it a problem with AGIA or a problem with TransCanada?

Stedman: I have no problem with TransCanada. That’s a quality company. It’s the AGIA process. It was flawed to begin with. You can’t put together a proposal that excluded the majors from the get go.

Petroleum News: What made you vote for the law?

Stedman: I didn’t want the $40 million appropriation for Swan-Tyee to be vetoed by the governor (Palin). It was going to pass anyway, so I had to play politics.

Petroleum News: Is HB 142 a way out?

Stedman: It’s a good bill to have a discussion on and start the process. Denali has the same hurdles as the AGIA project.

It was a disastrous policy (to) put forward; frankly I’m not so sure it didn’t cost us the small window we had to move this project forward.

Petroleum News: So there is no Plan B?

Stedman: You can’t get to a Plan B if you don’t get out from under AGIA. You’re stuck. You can’t incentivize another group without having triple damages (for backing out of AGIA).

Petroleum News: What do you do to monetize the gas?

Stedman: If I had that answer, I’d be running ExxonMobil. I’m just a boy from the islands. Maybe there is always the possibility for an export license. How do you get away from the $30 billion to $40 billion in infrastructure cost to get your gas to market? There is a wild card in there, too, in that the Alberta oil sands need a huge energy supply to generate steam to general oil. That’s something that can’t be forgotten.

Petroleum News: What can be done in the next two years?

Stedman: Well, you don’t want to be under AGIA for two years and not having a project moving forward. I firmly believe all three majors want to monetize that gas. I don’t see a financial benefit for them not to.

I would say yes due to the fact that they can go after a 20 to 40 percent credit. The question is what’s going on in Prudhoe, Alpine and Kuparuk. Those are the cash cows. That’s where the easy oil is. That’s where the money is at.

Petroleum News: There was a lot of attention paid the last two or three years to a gas line. Do you think attention swayed from oil?

Stedman: Not necessarily, but I think there is finally a realization in the building that the money is in oil not gas. Five years ago, people were talking about a gas economy. That’s all hogwash. If you go back to the fiscal analysis done under Murkowski, oil was forecasted to be three times the value of gas, and that’s when oil was substantially lower than it is today. You really can’t compare the value of oil to the value of gas. Oil is where the money is at. Gas is just a facilitator to get more oil. We’ve got a normal decline curve in an aging basin. We are not going to go back up to 2 million barrels a day. I’d be shocked if we made it back up to a million a day unless we have a major breakthrough with heavy oil. It’s not the fault of a policy call that was misguided that led us into a volume reduction. I don’t think that’s clear with the public.

Petroleum News: How do you get these wells drilled?

Stedman: You can’t move the basin to a warmer climate or population center. Have to deal with it in regulation and you will have to deal with it in fiscal structure to make the basin competitive.

Petroleum News: You’re on the Northern Waters Task Force. What are your concerns about federal agencies slowing down drilling?

Stedman: From a federal perspective, you can build tanks to arm your young men and women and send them in harm’s way. Or you can develop the Arctic and develop the oil sands and become energy independent as much as absolutely possible. Until the Southern 48 decides to quit building tanks and start drilling wells, we are going to keep building tanks.