MacKinnon: Change only cashable credits

Eagle River Republican says current tax regime is showing signs of success, citing production uptick, major finds

Steve Quinn

For Petroleum News

When Senate Finance Committee co-Chair Anna MacKinnon began serving in the state Legislature, an oil tax bill quickly emerged in a special session. Since then it seems like oil taxes are an annual affair. This year’s House Bill 111 is generating debate over how much change to the current regime is truly needed. The Senate’s rewrite focuses primarily on the cashable credits every lawmaker agrees are unaffordable. The bill is now before a conference committee to work out the differences during a special session called May 17 by Gov. Bill Walker. They have until June 16 to reach a compromise. The Eagle River Republican offered her thoughts on oil taxes, HB 111 and the AKLNG gas line project with Petroleum News.

Petroleum News: What do you think the Senate has achieved with HB 111?

MacKinnon: Our ending cashable credits for Alaska.

Petroleum News: Why is that important?

MacKinnon: Alaska’s cash flow in this time of financial need cannot handle the additional credits to industry to assist them in their developments.

Petroleum News: Some wanted more done, not just the cashable credits.

MacKinnon: I think the other body proposed a tax change versus ending cashable credits. The tax change will cause an additional burden on top of the cashable credits being eliminated, so if we expect industry to be able to recover in this low-price environment. One change that is impacting their bottom line is harmful from their perspective and a second change may be critical in their ability to compete for investment dollars from their investment headquarters.

Petroleum News: LB&A recently placed three consultants on retainer to prepare some modeling by July 1. Granted it’s only modeling and just that for now. What to you hope to gain from this hire?

MacKinnon: Right now, the Legislature is at a disadvantage if there are any changes proposed to oil or gas taxes terms, taxes or credits. We are bringing on consultants and they are trying to develop models so that we can take a look at how a potential gas line project might affect the state of Alaska as well as any potential changes that others may come up with in trying to change the current tax structure.

Petroleum News: So, are we looking at more than one model?

MacKinnon: We are looking at all of them having the same model so that we can stress test from different perspectives. The House has one way of approaching this issue and the Senate may have an entirely different one. So, we want to make sure we have an appropriate amount of information available for the Legislature should anyone advance legislation further.

Petroleum News: Are you looking at different kinds of models. You noted oil taxes but you also mentioned the gas line.

MacKinnon: For me we just want to make sure we are prepared. We have had people on retainer before. Those consultants, we need to make sure we are up and ready for any kind of fiscal modeling that the committees might need to advance any conversation. I think one of them has a retainer that costs the state after they achieve the ability to run the fiscal model.

Petroleum News: You’ve looked at the five proposals and LB&A selected three. What do you believe they bring to the table?

MacKinnon: Well Rich Ruggiero’s group (In3Energy) is small but very effective in taking complex information and breaking it down into sizeable bites that people could process and understand easily. From my perspective, during that review process I particularly liked that we had seen Ruggiero perform this last session under a smaller contract with an expertise on a global perspective. It wasn’t as in-depth with personnel. It’s three people who have great experience to bring to Alaska. The concern was as others had expressed with enalytica, our former consultant, if one person gets sick or if one person moves on, the Legislature would be left without the resources that we need. Even though we chose Ruggiero, we wanted to make sure we had a larger bench. With three people, it would be difficult for a team of three to be in multiple committees. Sometimes when the Legislature is working, we have the same issue running in Resources at the same time in the Senate and House or in Finance at the same time in the Senate and House, so we needed someone on the bench who can provide material in a full Legislative request.

Petroleum News: You also brought back Gaffney Cline, which has worked for the Legislature in the past. That’s the largest contract. What did you like about them?

MacKinnon: Gaffney Cline had the deepest bench and a global perspective.

Petroleum News: The last one was Palantir USA, with the middle range contract. This is a new group. What brought this decision?

MacKinnon: I think there was a difference between the House and the Senate as far as how we move forward in analyzing, so I believe some folks wanted Palantir. They definitely have a great bench and established software that could run models very quickly. It’s their models, not specific to Alaska but at least in the proposal that I read they had a bench of knowledge of different regimes. They were very specific about what they called “the library.”

Petroleum News: One of the criticisms, and I believe it came from the minority on the Resources Committee, was that HB 111 didn’t come from the governor because tax bills typically come from the governor. It’s certainly not unusual for a lawmaker to bring forth a bill. Mike Hawker did several years ago as did Bert Stedman.

MacKinnon: I can only speak for myself. It is absolutely within any legislator’s ability to introduce any piece of legislation they believe is in the best interest of Alaska, but we did not have a person modeling all of the different angles, perspectives and changing tax structure that we received from the House. Briefly when we had Ruggiero in front of us testifying, he believed if we implemented some of the pieces included in the proposal from an individual legislator versus an administrative group that we would be at the bottom globally for competitiveness. I’m not sure an individual legislator takes into account all the different perspectives - and they may.

There is global competitiveness. There is a tax rate competitiveness. There is overall competitiveness: corporate income tax, property tax. An all in number. There is internal rates of return concern. There is a commodity price concern. There is an understanding that the challenges an Alaska project faces. So there are many perspectives from industry, from government, from local communities that have to be taken into account on any kind of major overhaul with any kind of tax structure.

It’s a fair question in that we were led to believe - the we I’m talking about is the Senate - that the governor as well as the House was interested in ending cashable credits. The House had a more ambitious goal in rewriting the structure of the tax code. Doing that is one thing but you have to run the numbers to understand how it will effect state government in terms of new revenue that you’re asking for, but also how it will affect the industry and competition for investment around the world. People might ask why do you care about where they invest. We care because the current tax code appears - for the first time ever - appears to be pushing production up. It’s been in place for over five years so you can’t say it’s the previous tax structure. So why wouldn’t we want more production. People are talking about many different projects now that they haven’t talked about in years. I believe the current tax structure is driving investment in Alaska.

Petroleum News: Can the state afford the current tax system at a broad range of prices? Is it durable?

MacKinnon: You know, I’m happy to look at that. I think that we are fine at this point, but we could be pushed into a minimum tax for quite a while if the costs are not reduced for extraction. We have to watch all of this, but we shouldn’t be proposing changes all the time. We should be watching and working to make sure that all of our developments are competitive and that the state can afford whatever we are going to do in support of those investments. Removing cashable credits is something that we needed to do and was very different from how the rest of the world operates. The rest of the world actually uses loss carry forward applied against production. That’s what the people of Alaska has asked for. That’s what the current code is attempting to produce for Alaskans.

Petroleum News: Can the state still afford that down the road or because it’s tied to production is what makes it affordable?

MacKinnon: I think that’s what makes it affordable. If you have production, the rate that Alaska is participating in, promoting production that is allowing - as the rest of the world does - recovery of costs to get that production, then yes. Certainly as prices go up, we start to take more.

Petroleum News: You had said last year you thought the industry was pursuing ways to curb their costs beyond job cuts and that would level out the losses, which is why you didn’t want to react too quickly with changes. Are you seeing any of these cost-cutting measures?

MacKinnon: We did. The administration in the last special session of last year was calculating numbers that were much more of a disadvantage for the state and that was the cashable credits involved for the smaller companies. The Big Three do not receive those cashable credits. That conversation has been distorted from my perspective with Alaskans.

Petroleum News: Do you expect any more tax bills in the near future?

MacKinnon: I don’t think they will be coming from the Senate. The Senate does understand the state has a tax code that is complicated and should look at streamlining some of the practices. I’ve said it before, the rest of the world has allowed recovery of costs to create production for any particular field. What’s different in Alaska’s tax code is we provided cashable credits for those same costs so that time value of money increased the profitability for industry. It also brought increases in production volume.

Petroleum News: We’ve talked about cashable credits and I know the Senate would like to begin paying down some of those that have been vetoed by the governor. The Senate placed $288 million in the capital budget to address that. What are your thoughts on this? That doesn’t seem to fall along party lines. There are some Democrats who want to begin paying them down as well.

MacKinnon: The issue on the $288 million is there is some confusion between the operating and capital budget. The capital budget typically has one-time expenses, one-time investment. The problem is this particular debt has compounded because of the two vetoes. The ending of the cashable credits in Cook Inlet, which increased investment and use of the credits before they went away.

We believe the same will transpire on the North Slope as we take away those cashable credits. You see it spikes when you try to take away something that folks have utilized before. They try to utilize it to the highest use for their company’s perspective. Again, it’s small companies, not the big companies.

I think we all agree they need to be paid. It’s just when they are paid that’s a concern to this administration and the House and the Senate. The Senate believes, from my perspective, they need to be paid off sooner rather than later so that we honor what we said we would pay and that they are not carried on our books as a liability for outside credit rating agencies to see as a future expense for the state. But I still believe the governor and the House are interested in paying down the cash credits and they want to see a fiscal plan in place to support services to Alaska and Alaska’s economy in general.

Petroleum News: Have you heard whether the state is subject to lawsuits by delaying some of these payments? Has anyone ever discussed that?

MacKinnon: I don’t think we are subject to lawsuits on that. If we were, we would not have accepted the House’s operating budget. It fell short somewhere between $30 million and $40 million in providing funding for the statutory required payment. So, they looked at it as a cut by cutting the payment that was required in state statute for the cash credit. The Senate restored that so I think we are fine. As long as we paying what is statutorily required, outside credit agencies see that as Alaska living up to the law and the promises we have made to industry.

Petroleum News: There was a credit agency last year issued a note concerned about the state being able to put together a fiscal plan to position itself for a gas line project. Does that concern you or is it too far down the road?

MacKinnon: That is 100 percent in the control of this administration. It does give me concern. This administration has seen the gas line project differently than when the Legislature endorsed a gas line project. The environment worldwide was very different. I’ll just speak for myself, wondering what is the long-term value to the state and the short-term value. I believe it’s the wrong way to go if the short-term value is the jobs. You have to be able to have a revenue stream coming in at the same time you are taking on financial obligations. I read a second quarter update from AGDC that indicated we would have billion dollars’ worth of revenue after the project was paid for.

That causes me some concern as to what that actually means? Does that mean we will not be in positive revenue 30 years down the road after it’s paid off? Does it mean the revenue stream will be minimal? Does it mean the revenue stream will actually pay for the project as it comes on line or does it mean oil production will have to pay for a while to offset the new costs for the project? The Finance Committee has always been asking the administration to run the financials and see what the dollar numbers are. We know that jobs are important, especially in a time of recession, but we really want to know what the financing looks like. Quite frankly, I’m concerned we are going to have a business partner from the Asian markets, which is fine, but they will own too much of a share of the overall project and be able to shape that project that benefits the company versus Alaska. Those concerns can be set aside if we have the information that shows the governor’s plan. Again, we are trying to put together a financial package and they can’t share that at this time. Without information, it creates a black hole of trepidation.

Petroleum News: The Senate removed $50 million from AGDC and placed it elsewhere. Was that a message to the governor?

MacKinnon: It shouldn’t be seen as anything but the Legislature trying to fund an agency with one-time money to transition into lower operating costs long-term. So again, the capital budget is a one-time expenditure that can provide a bridge for several operating items. The project had $105 million at the start of this year. It was my understanding they needed about $35 million. They could have a different plan that burned more of that money that sits in the fund. They certainly shared some of their goals this year with the Legislature, but there was agreement that we thought there was about $50 million that could be utilized this year and not drawn from other savings accounts.

There certainly are some Alaskans who believe the project is a pipedream and they saw removal of the funds in a way that the project should stop. I can’t speak for the legislators. It served as an immediate benefit in a transition opportunity for Alaska. I think it’s fair to say I think we’d like to see financials from the governor.

Petroleum News: AGDC has been delivering updates almost every two weeks. Has that been helpful?

MacKinnon: It’s certainly helpful. It’s much more than we’ve had before. I have not signed confidentiality agreements. I don’t want to have information that I can’t share with my constituents. I can say I applaud them for their efforts. It’s as open as they have been in the three years this administration has been at the helm.

Petroleum News: What more would you like to hear from AGDC when they provide an update?

MacKinnon: I don’t think they can provide anything else. I think they are providing what they can. I think they have a plan. I think they are attempting to execute their plan. Mr. Meyers was in Asia looking for potential buyers. I’m not sure if it’s just buyers of gas or financial investors as well. There certainly is room to say they are working hard to execute their plan. I just can say what that plan looks like.