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September 2013
Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)©1999-2019 All rights reserved. The content of this article and website may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law subject to criminal and civil penalties.
Vol. 18, No. 38 Week of September 22, 2013

Munoz brings family legacy to Legislature

Juneau Finance member breaks ranks with most Southeast colleagues, supporting SB 21, then standing by it in face of voter repeal

Steve Quinn

For Petroleum News

When Cathy Munoz secured one of two Juneau House seats in the state Legislature, the state’s oil tax scheme known as Alaska’s Clear and Equitable Share, ACES, was in place and bringing in billions. Soon the oil tax debate would be reprised and Munoz, a Republican, would be on the frontlines first on the Resources Committee and now on the Finance Committee.

Munoz, a third-generation Alaskan to serve in the Legislature, brings unique bloodlines to the House.

Her paternal grandmother Thelma Engstrom served in the Alaska Territorial House in 1947 at a time when the Legislature met during odd numbered years only.

Her paternal grandfather Elton E. Engstrom served in the Territorial Senate (1951, 1953 and 1957) and again the State Senate (1961-63).

Her father Elton E. Engstrom Jr. served in the House (1965-66) and the Senate (1967-70).

In her first year on House Finance, she reviewed every major piece of energy legislation that eventually went before the full House: Senate Bill 21, oil tax reform; House Bill 4, in-state gas line; and Senate Bill 23, LNG trucking.

The view of oil and gas exploration and production can be slightly different from Southeast. Munoz, who supported SB 21 on the reconsideration vote, discussed her perspective of oil and gas issues from Southeast Alaska with Petroleum News.

Petroleum News: This is your first year on Finance after spending two years on the Resources Committee, among several others in your previous term. What’s different?

Munoz: First of all, it’s important for our region, the Southeast region, to have a position on Finance. With the changes in the last election — the loss of (Rep) Bill Thomas as co-chair, and (Sen) Bill Stedman as co-chair and Sen. Egan not maintaining the position on Finance, it became really important that Southeast had at least one seat on Finance. My priorities changed after the election and after the outcome of those particular races and the positions we had both in the House and Senate. Also, I think on Finance, it’s really important that being on just that committee we focus our attention and work on the topics that are coming to just that committee, which are already complex and varied for sure. By no longer being on five or six standing committees and running like a chicken with your head cut off, I find it much more reasonable and better for my schedule to better focus on one committee and to really dig down on the issues and focus on that one committee. I’m able to focus on the topics at hand. I found it very difficult when I was on five committees and chairing one or two of those committees to not really be able to get into the depth of some issues the way I wanted because you’re spread so thin. On the Finance Committee you’re able to have much more time and opportunity to get to know the issues in a much deeper way.

Petroleum News: On Finance, every heavy hitting bill comes before you. Last session, two of those bills were SB 21 and HB 4. How do you bring an appreciation for something like the oil patch and gas line that geographically is about as far away from the North Slope as you can get in Alaska, short of the Aleutian chain?

Munoz: I was elected in 2008 and we have debated the oil tax issue every year I’ve been in office. This is the most important issue facing Alaska because it’s the economic engine; it’s the economic foundation that funds state government. Really, the changes in law that were necessary were changes, are changes, about protecting our future and creating a sustainable economy for Alaska. How does Southeast fit into that? Very directly. Because state government funds a majority of our governmental operations in Southeast Alaska.

Petroleum News: Supporting SB 21 is not always the most popular thing in Southeast, especially in Juneau. You might have voted yourself out of office. Granted, we won’t know for another year, but how do you feel about that?

Munoz: I have listened to five years of public testimony and five years of expert testimony around ACES and the problems with ACES. Both the Democrats and Republicans were united in believing that ACES was flawed, particularly that progressivity was seen as being too punitive. The credits under ACES were tied to investment, not necessarily tied to production. Whether you voted for SB 21 or not, both sides recognized that those were areas that needed to be changed or addressed in ACES.

There were aspects of SB 21 that needed further work. Particularly I was concerned about the issue of new oil. I supported amendments that would have tightened up that definition and put a sunset on that new oil provision at seven years. I think that was reasonable because the big challenge now is defining what is new oil versus old oil? How do you meter it? How do you determine what is new oil in the legacy fields? And once you’ve established new oil, it remains new oil for the life of the operation.

So when you’re layering new oil upon new oil and also trying to calculate the decline rate of between 5 percent and 7 percent, it becomes very complicated. That was an issue that I and others thought needed further work on SB 21. The public comment period for the regulations that have to do with this area of new oil closed in August. The Dept. of Revenue is actively reviewing at those comments and making every effort to put into place a system that matches the intent of the law. It is possible that we may have to come back to the legislation and further clarify what makes new oil versus old oil. But right now we are going through the reaction to the public comment period. Within three to four months, we’ll have a sense of where the department is going.

Petroleum News: If any are made, we won’t specifically know what they are now, but if the Legislature does adjust SB 21, do you think it could affect how people vote on the referendum?

Munoz: First of all there is a lot of misinformation about why the change was so necessary but also what the impact of that change will be. When you get down to the nitty-gritty of SB 21 and what it does, it comes very close to the revenue projections under the original ACES. As ACES was originally introduced, the revenue projections were roughly in the area of what SB 21 is anticipated to bring in. In the final days of the (special) legislative session, when they were adopting ACES, I was not in the Legislature, but I understand there were some significant changes that were happening that were not properly modeled at high prices. When ACES was put into effect, and we had an environment with very high oil prices, Alaska was bringing in tremendous revenue from those high prices. That was a result that was not anticipated with the final changes that happened under ACES. SB 21 puts more reason into our tax policy, more predictability and brings the revenue projections pretty close to what the original ACES package envisioned and slightly more than what the PPT system brought in.

Petroleum News: A consultant who appeared at a recent LNG symposium told some who attended that it can appear that Alaska doesn’t really know what it wants because it’s investing in a large-diameter line, a small-diameter line and massive hydro project in Susitna Watana dam. From the Southeast perspective you’re pursuing that kind of diverse use. With that in mind, what are your thoughts on that observation?

Munoz: One model does not fit all of the regions of Alaska. Certainly in Southeast Alaska the resources that are predominant here may not be similar to other parts of the state. We really believe strongly in Southeast that we need to develop our hydro potential to its full capacity. The communities of Juneau, Ketchikan and Sitka rely on dependable hydro resources. Many of our smaller communities still pay high prices for diesel fuel generation. Even with (Power Cost Equalization), the electrical rates in communities in Angoon and Hoonah come close to 50 cents a kilowatt hour. First of all, when we talk about HB 4 and getting gas to Alaskans, what I’m looking at and what other members of Finance are looking at, is how do other areas outside of the Railbelt benefit. To that end, we included language in HB 4 that ensures the coastal communities and the river communities will be considered when the distribution of those resources is made possible. Obviously it’s going to take great investment into infrastructure and transportation to put that system in place, but we also want to, in Southeast, not lose sight of the importance of developing hydro potential in these smaller communities where hydro exists and also getting our fair share of the pie as these resources are divided around the state.

Petroleum News: Even as you’ve served on Resources, what have you learned most about your one year on Finance with all of these resources bills that come to your desk, be it trucking LNG to Fairbanks, SB 21, HB 4?

Munoz: We are fortunate to have such a robust resource base, be it oil and gas or mining. All of these bases are the envy of the world. It’s a matter of developing these resources properly and training Alaskans for these jobs that are happening here at home. For example, mining here in Southeast, the industry is booming. One of my great interests is to make sure local Alaskans are training for those jobs so that the high paying jobs are not going to people who come to Alaska for two weeks at a time then go back to Montana for two weeks. Of course a certain number of those positions will be filled by individuals from Outside, but we need to do as much as we can as a state to ensure that Alaskans are getting trained in mining, engineering, diesel mechanics — all the trades — the career opportunities that are happening because of our strong resource base.

Petroleum News: There seems to be a greater distrust for the oil industry more so down here in Southeast than other parts of the state. What’s your take on that?

Munoz: We have had a history over environmental concerns: the spill in Prudhoe Bay, the Valdez spill, the spill in the Gulf recently. So there will always be an environmental concern. In the coastal communities, we’re away from the Railbelt and the majority of the population is not employed by the oil industry, so the perception of separation exists when your neighbor or your family member is not directly employed by the industry.

The fact of the matter, without the benefits of revenue that comes through the state, think of the difficulty we would have in funding our school budget, our university budget or even our transportation budget. Everything is so closely linked to the money coming in through the oil industry. It’s trying to educate people of those direct benefits. For communities not in the Railbelt, it is a greater challenge.

It’s just like the mining industry here in Juneau. Before Greens Creek and Kensington opened, I think there was a greater distrust of mining in general. Even though we were built on the mining industry, that disconnect developed over the years when there was no activity, made individuals generally distrustful of what it would look like in the communities once it was in place.

Now, there are several hundred jobs at each site; think of how the community has turned around in terms of how we view mining and how we support mining. I think it’s fair to say Juneau is a mining town now. Two of Alaska’s six working mines are right here in Juneau.

Petroleum News: Circling back to SB 21, one of the prevailing criticisms is that the referendum will have a chilling effect on investment until the issue gets resolved. Do you believe that’s true?

Munoz: It’s bound to happen. Alaska over the last 10 to 15 years, we’ve changed our oil tax policy several times. Three or four times at least. I have to believe that creates uncertainty for investment in the international investment community. I’m hopeful with SB 21 that the public will see the benefit of creating a stable tax policy and the long-term benefit that it will have of creating a stable economy. When I was elected in 2008, we were at 650,000 barrels of production a day. Today, we are at about 520,000 a day. That’s a huge loss, about $3 billion in revenue a year.

We cannot continue to decline at the rate that we are. We have to be able to level out that decline curve. That’s what changes in our tax policy. That’s what we are attempting to stabilize — our fiscal system — so that we can encourage new development, encourage new investment. Until we have that stability, I think investment will be tentative. My hope is that once we get through this, we can look to a brighter future.

Petroleum News: When ACES passed, there wasn’t a great outcry to change or repeal it, but after SB 21 passed, the level of discussion remained intense. Why do you suppose there was such a disparate reaction?

Munoz: Part of it was the environment going on during ACES. The high profile (federal) probing going on here with the Legislature, really the misconduct of certain legislators. There really would have been great hesitation to unravel something that came out of that period. In all fairness, there was a bit of greediness. ACES brought in huge amounts of revenue at high oil prices. We were swimming in money. From a legislative perspective — the capital perspective — it’s more fun to be involved in a climate where you are able to fund your favorite projects as opposed to not being able to do so. Those two elements had a tremendous effect.

Now with this incredibly fast decline in production to a point where operationally it becomes more difficult and more challenging when the oil flow is so low, to see over 150,000 a day decrease in my five years, that’s outstanding. When you consider it’s your primary source of revenue, this has to be an incredible wakeup call when you look at the collision course we’re on without meaningful change. We have been declining rapidly and the high oil prices have been masking some of that decline. When you start looking over the precipice and in a matter of 10 or 15 years you could be at 400,000 barrels a day or even 350,000. You’re facing a much more shocking reality.






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Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)©1999-2019 All rights reserved. The content of this article and website may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law.