Seaton: Benefits in Norway lease process

Resources co-chair thinks adding work commitments, state investment option to process would work for Alaska oil and gas leasing

Stefan Milkowski

For Petroleum News

Rep. Paul Seaton, co-chair of the House Resources Committee, was among those traveling to Norway at the end of August for a weeklong, policy-oriented trip organized by the Institute of the North.

Seaton is a vocal critic of Gov. Sean Parnell’s oil tax legislation, HB 110 — a position that has put him at odds with fellow House Republicans. Seaton says nothing he saw in Norway makes him think Alaska’s tax is too high.

In fact, the Homer legislator suggests Alaska might benefit from two things the industry is unlikely to support — tougher work commitments in leases and separate accounting of corporate income tax.

Seaton says he’s also interested in state investment in oilfield projects, which he says could be allowed in upcoming lease offerings.

Petroleum News spoke with Seaton on Sept. 23.

Petroleum News: Why did you want to go on the Norway trip?

Seaton: Well, Norway’s always been one of those countries that have been our comparison. It’s an arctic country, so it works in the far north in the same conditions. It’s a country that has oil discovered about the same time as ours. It has an oil tax rate that’s considered by some people fairly high, and yet they’re very successful.

Petroleum News: What did you learn?

Seaton: One of the first things we did was have a really good explanation from the rector — basically the chancellor — of the university that gave us a perspective on what makes Norwegians Norwegian, in their psychology, their philosophy. That was really beneficial, because then we could separate out those things that worked with their philosophy and wouldn’t necessarily work with our philosophy in this state.

On oil and gas issues it basically came down to three things. One was their leasing structure, which is different than ours and has different goals, almost. Another was state direct financial investment and Petoro. The other thing was separate accounting of their corporate income tax. The same companies that do business here have no problem doing — even at a much higher corporate income tax rate — separate accounting for Norway.

Petroleum News: What’s an example of something where Alaska’s philosophy is different from Norway’s?

Seaton: Right from the get-go, you have things like retirement, which is not at all connected to employment. Retirement is basically a right of all the people in the state, just like health care. Health care is disconnected from employment as a statewide offered issue, as well as education. Education is — all the way through Ph.D. — funded completely by the government. And it’s for anybody, including people from Alaska. Their university is no tuition for foreign-born folks as well.

That’s very different from our philosophy. No one on the trip was at all confused we were talking about changing Alaska into Norway.

Petroleum News: Were there things you saw that you think might work for Alaska?

Seaton: Yeah, in their leasing structure.

Norway doesn’t take any upfront money. What they do is say, OK, we’re interested in leasing this area, and then the state does 2-D seismic on the whole area — or contracts for it — gets the information and gives that to anybody who’s interested in bidding. Then oil companies bring forward plans of development, their proposals for developing that oil field after looking at the 2-D seismic. (Norway) selects based on who presents the best plan of development. Then it’s a six-year term on the lease, and there are work commitments. In the first two years, you have to go out and do 3-D seismic work, and if you don’t do that, then you lose the lease.

(Norway) also picks the partners. It’s not just one person. It could be ConocoPhillips is going to be the operator because they had the best plan of development, and then BP and Statoil and ENI. And then some little guys might be in there with 1 or 2 percent.

Of course, the state generally is participating through the state direct financial investment just like they were an oil company — not an operating oil company, but a financial investor. They need to put up their percentage of the capital for all the expansions and the exploration.

We’ve had the leases here in Cook Inlet where (the Cosmopolitan unit) had work commitments. You had to drill another sidetrack well in the first two years. You had to do this and that. The rents were more. So we have already incorporated that in a few places. It’s not a real stretch to see how — if what we’re trying to do is get production into the pipeline — we may need to look at having firmer work commitments in a leasing structure going forward.

Petroleum News: It seems like having a system based on the strengths of the producer might discourage the smaller companies the state is trying to bring to the North Slope.

Seaton: It actually doesn’t, because they put together the other working interest owners. The operator might not be the largest working owner — that happens quite often — although they’re going to be looking at the technological expertise and all that kind of stuff. One example we saw had a Swiss firm that was a financial investment firm but had really strong expertise in accounting and making sure plans went on time, so they were in there at 2 percent.

Seaton: Statoil of course was a state-owned oil company, and it was solely a subsidiary of the state. Norway realized Statoil was getting so powerful and so big that its long-term plans might not be aligned with those of the Norwegian state. So they decided to spin off Statoil from a direct operation of the state to a private company — they’ve got 67 or 68 percent of the shares, but it’s a privately operated oil company.

They shifted most of the funds that come to Norway to Petoro, which is like the Alaska Railroad (Corporation), or the Alaska Housing Finance Corporation — it’s a wholly owned subsidiary.

The state direct financial investment (SDFI) could be variable. It ranged all the way in some fields to 60 percent and down to as little as nothing or 3 or 4 percent in other fields. What they’ve figured out over time is that 20 percent is about the right state participation, so almost universally now 20 percent is what the state does. (Petoro) only manages the finances of their investment. All the money that comes to it goes directly to the state general fund, or the retirement fund. So Petoro, other than some working capital they have, relies on the government to give them a budget. That keeps them from not operating in the state interest.

Petroleum News: Sen. Hollis French seems pretty interested in trying state direct financial investment in Alaska. Do you think it would work?

Seaton: I do. I think it would be interesting to look at.

In fact, I’ve been talking to the (Department of Natural Resources) Division of Oil and Gas about using 8 to 10 percent SDFI as a bonus bid option in the next set of leases. At least in Norway the oil companies are saying they don’t mind at all having state direct financial investment in the project because it’s just like another partner they’re going to select anyway.

I’m kind of focusing on 8 to 10 percent because we have a 12.5 percent royalty and I don’t see us turning upside down our current system of royalty and taxes. But SDFI could be that other piece that gets us into the 20 percent range.

I’ve heard the question of going back on the current leases, (but) I hear no discussion from any legislators about going back and making an attempt to change existing leases. I think that’s just too problematic. The leases have been going on a long time.

Petroleum News: Did the trip change how you think about Alaska’s production tax?

Seaton: (Norway’s tax system offers) uplift and some other things to compensate and emulate what we do in ours. We allow 100 percent write-off of capital expenditures in the first year. They have six-year depreciation, but they give four years of 7.5 percent uplift, or additional recovery of capital.

There was nothing we saw there that would support the idea that we are overtaxing the oil companies.

Petroleum News: I know you had a lot of concerns with the governor’s oil tax bill.

Seaton: I was one of the two Republicans who voted against it.

I think it would have lost if the Department of Revenue had given us the information we requested before that vote took place. What I’d been asking all along — from Resources on — was, OK, we have a proposal from industry, Great Bear, that says here are the costs of their wells, here’s how many wells they’re going to drill, here’s the expected production if everything goes right. What would that look like in production tax?

We finally got it two days before the end of session. It showed that at 350,000 barrels a day, which would make that the biggest producing field on the North Slope, they would pay zero production tax all the way through 2025, even at $96 oil.

I don’t think people realized that was going to be the effect. I mean, that’s what got us here in the first place. When I got in the Legislature in 2003, we had Kuparuk paying no production tax, with the (economic limit factor). Creating another tax system that creates the same problem — I don’t think that’s very beneficial to the state.

Petroleum News: How does Norway handle corporate income taxes?

Seaton: They say you have to pay your income less your expenses in Norway. You don’t apportion it out from around the world. Basically what we have here is a situation where, with this worldwide apportionment, we subsidize the lower profitability of investments around the world. Why we have this idea that we should lower our income tax to subsidize less profitable ventures around the world is a real question.

Petroleum News: Do you think Alaska can do something like Norway did, using oil money to get off oil, and use renewable energy instead?

Seaton: I think we are. All you have to do is look at the state legislature and what we’ve been doing with the renewable energy fund and funding these hydro projects. One has to realize that if HB110 had been in effect, we wouldn’t have had any surpluses and we wouldn’t be doing those things. If we had to take money out of savings, it would be much less likely we would do that. It would be much less likely we would have revenue sharing. It would be much less likely we would have the large capital budget that has kept us out of being hammered by the recession.

Petroleum News: Should Alaska have a state income tax?

Seaton: When I first came to office, I campaigned on it. Everybody from (former Gov. Jay) Hammond on has said it was a really bad deal to take it off the books. Norway has a different philosophy. They have a 28 percent personal income tax, and they have a 25 percent value-added tax. People pay those, but they realize they have retirement out of that; they have education and health care. We’re not like Norway.

Petroleum News: Anything else?

Seaton: Two things: It is really interesting how they have 98 percent of their energy from renewable energy, hydro energy — even the offshore platforms, except a couple that are too far offshore. Fifty miles offshore they’re running electric lines underwater out to the platforms. Part of the reason is they have a carbon tax. Even though they’re producing natural gas, it costs money to use that gas, so they run electric lines.

(And) fuel prices are the same anywhere in Norway. It doesn’t matter if you’re from a small village or in Oslo. Those are different choices people make.