Vol. 17, No. 4 Week of January 22, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Wielechowski remains critical of HB 110

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Anchorage senator questions need for production tax breaks, calls for more analysis, notes stateís leases require development

Stefan Milkowski

For Petroleum News

The State of Alaska is not a business, but when it comes to oil tax reform, it ought to act like one, according to Sen. Bill Wielechowski.

ďI donít think there are too many businesses that would agree to multibillion-dollar tax breaks with no assurances in return,Ē Wielechowski says.

The Anchorage senator, who is vice chair of the Senate Resources Committee, has been a vocal critic of Gov. Sean Parnellís oil tax bill, HB 110. Thereís little evidence that North Slope developments arenít profitable, he argues. And history suggests that low taxes arenít enough to halt Alaskaís production decline.

Instead, Wielechowski, a lawyer, advocates pushing companies into production through stricter enforcement of lease terms and by removing structural impediments.

Petroleum News spoke with Wielechowski on Jan. 16.

Petroleum News: Youíve been critical of the governorís HB 110 and the level of analysis his administration has presented. Can you explain your position on the bill?

Wielechowski: I think we need to act with our oil resources like any business, or any oil company, would. We have leases with the oil companies. Those leases require development when the oil companies can make a reasonable rate of return.

So I think the first analysis needs to be, What exactly is the return here in Alaska? How economic are their fields right now? I think thatís what any business, any oil company would do. They would first figure out how economic the current tax structure is. I donít think weíve seen that from the administration yet.

We havenít seen a field-by-field analysis to determine what exactly are the returns, the net present values? What exactly are the expected profits on the current fields, the fields that might be developed in the future? How are they under ACES and how would they be under the governorís bill? We havenít seen that.

We did that during ACES. We did a pretty substantial analysis of a number of fields, and that was very helpful.

Petroleum News: The administration and oil companies describe the oil tax as an impediment to increased production. Do you not trust thatís the case?

Wielechowski: Iím just saying show me the numbers. The numbers Iíve seen show they are very profitable, show that they offer very good rates of return.

In fact, those are direct statements from a number of oil company executives. Weíve seen during analyst conference calls, ConocoPhillips executives say that Alaska offers strong cash margins. We had consultants during the last oil tax debate show that rates of return were very high.

If thatís not so, letís have a factual analysis of what the numbers really are. And if weíre not competitive, truly, thatís a good place to start.

Petroleum News: Why do you think oil production has been declining so much?

Wielechowski: Unfortunately if you look back over the last 30 years, weíve had oil production declining significantly, at a rate of more than 5 percent per year. We had that decline when you had the old economic limit factor, which was a production tax of zero percent on most fields on the North Slope.

I think with the new explorers, with the advent of the shale fracturing technology, with the offshore developments and new conventional developments, the heavy oil developments, I think youíre going to see a big turnaround in the next five to ten years.

Petroleum News: Some people suggest companies exploring now are expecting lower production taxes.

Wielechowski: I think you need to look at the legal obligation the companies incur when they take out a lease. Their obligations require them to develop the lease when they can make a reasonable profit. It doesnít say, When you can make a reasonable profit under a different tax structure.

Petroleum News: Some oilfield service companies say thereís been hardly any work on the Slope for years, and some are moving personnel and equipment to places like North Dakota. Is that a problem?

Wielechowski: What the numbers show is that every single year ACES has been in place, weíve had all-time highs in capital investment. Weíve had all-time highs in operating investment. Weíll get very close to an all-time high in the number of exploratory wells on the North Slope.

Weíve had all-time highs in the number of jobs on the North Slope. Weíve got corporate profits at all-time highs. Weíve got development wells at 5-year highs. So when you look at the numbers out there, it doesnít support a lot of what weíre hearing.

There certainly is an explosion going on in North Dakota, but as our legislative research division pointed out, North Dakota had virtually the same tax rates in place for decades, and it wasnít the tax rates that caused the explosion of development. It was the fact that they figured out how to hydraulically fracture the oil.

Weíve got a lot of oil thatís similarly trapped on the North Slope, so I think you are going to see an explosion of hydraulic fracturing shale oil very soon. Weíre starting to see it with Great Bear already.

Petroleum News: You paint a pretty rosy picture of activity on the North Slope. Do you have any concern about how things are going there?

Wielechowski: Weíre obviously concerned about the declining production. Thatís something that unfortunately has been happening over the last 30 years.

Developers and explorers will tell you a lot of it is environmental, some of it is permitting, a lot of it is the fact that we donít have the infrastructure they have in other parts of the country, or the world.

I have not been convinced that our tax structure is one of the impediments. Youíve got Libya, China, Venezuela, Algeria, Angola, Kazakhstan, and more, all with government take over 90 percent. And yet you see the same companies that are doing business here flocking to do business in many of those countries.

There are no doubt some infrastructure impediments, some permitting impediments here in the state. Weíre trying to tackle those by doing things like Roads to Resources. We put more money into trying to help DNR get out of the big backlog of permits they have.

But also, we need to be looking at ensuring the lease terms are being followed and that companies arenít sitting on leases that are profitable. I think that is something that has been overlooked and needs to be more closely examined.

Petroleum News: Would you like to see the state pursue litigation?

Wielechowski: I would like to see the state look at the leases and figure out, in cooperation with the oil companies, what sort of rates of return, what sort of net present values are out there.

When you take a lease out anywhere in the world, you canít just sit on it. You have an obligation to develop that, and you have an obligation to consider the interests of the sovereign.

I do think thereís an obligation on the sovereignís part to be looking at ensuring the leaseholders are abiding by the terms of their leases.

Petroleum News: Last month, Senate President Gary Stevens gave a talk in which he cautioned against ďinexcusable trustfulnessĒ of oil companies. Are supporters of HB 110 guilty of inexcusable trustfulness?

Wielechowski: Itís the position of many of us (in the Senate) that there needed to be more analysis done. You need to look at this like a business would. I donít think there are too many businesses that would agree to multibillion-dollar tax breaks with no assurances in return.

You need to figure out if you go ahead and drop your tax rates a certain amount, how does that impact the net present values and internal rates of return and other financial metrics? And if you canít do that, or are unwilling to do that, then you donít have a basis of information to go ahead and even start the conversation.

It seems to be a given for some people that if you just lower taxes, thatís going to lead to more investment. Unfortunately, we have a 30-year history with very low or zero taxes where that very clearly was not the case.

Petroleum News: Over the interim, we had the Pedro van Meurs reports come out and a group of legislators traveling to Norway. Did anything come out of those that changed your views?

Wielechowski: My opinion did change somewhat. One of the things we heard from a number of experts was that at very high pricing levels for oil, for instance $160, our progressivity became too high. Iím much more open to addressing that issue than I was before.

I also like one of the ideas Pedro van Meurs came out with ó setting a decline curve for fields on the North Slope and then providing some sort of tax relief for companies that bend the curve.

But before you get to any of that, you really have to model the numbers.

Petroleum News: Van Meurs also suggested increasing incentives for heavy oil. Would you support that?

Wielechowski: I was surprised to see him say that. I went back through some of his testimony under PPT, and he said at that time we were applying enough incentives for heavy oil and any more would be too much.

He also wrote a document around April (2011) and one of the suggestions he made to incentivize unconventional oil, which I take to mean heavy oil, shale oil, was that states and countries in North America look at Alaskaís tax as a model.

Under ACES, we offer extremely large incentives for heavy oil, so I would want to model that very carefully.

Petroleum News: What do you think the Senate will pass this year? Do you anticipate some changes to the tax system?

Wielechowski: Itís hard to say. I canít speak for the Senate. I just keep coming back to the idea that we need to look at the financial models. And I think if you can, through financial modeling, show that weíre off kilter with ACES, I think there will be support for making changes to it.

Petroleum News: Is the Senate united on the need to decouple oil and gas taxes?

Wielechowski: We passed it before. That was a suggestion Dr. van Meurs recommended. I think thereís quite a bit of support for that in the Senate.

One of the other things Dr. van Meurs recommended was that our incentives are too high, and that weíre simply giving money away. So I think there will be some look at that as well.

Petroleum News: You think the Senate wants to reduce tax credits?

Wielechowski: Those were some of the recommendations we heard over the summer. That was a recommendation by Dr. van Meurs. We put the incentives in place to try to spur development, spur production, and if youíre not getting the desired result, then I think a reasonably prudent person or Legislature would go back and reevaluate that.

Petroleum News: My last question is about the Gleason decision on property taxes for TAPS. Is there anything to be learned from the release of documents related to that case?

Wielechowski: It was quite a decision. I spent many hours reviewing and reading it, and I think thereís a lot to take away. I think itís very clear the judge had concerns over the Department of Revenue and their ability to forecast and provide accurate information.

I think there were some big concerns over the lack of information received by the state and the municipalities regarding the level of oil that could be put through TAPS, the financial viability of the North Slope. You had documents from BP where they indicated they expected the Prudhoe Bay and Kuparuk River units to be cash flow positive through 2064.

The judge found that TAPS could operate down to 70,000 to 100,000 barrels (per day) based on BPís own experts. Nobody wants us to get to the point where TAPS is running that low. But I do think it shows that we havenít gotten as straight answers on this issue as we should have.

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