Feige: SB 21 benefit with low oil prices

Outgoing House Resources co-chair says role of state as partner in LNG project significant; encouraged by companies working together

Steve Quinn

For Petroleum News

House Resources co-chairman Eric Feige is winding down his four-year career in the Legislature, a two-term commitment that put this Chickaloon Republican on the front lines of some critical oil and gas legislation.

Feige, who did not win his primary race, led the committee through hearings on Gov. Sean Parnell’s oil tax change (Senate Bill 21) and natural gas pipeline and LNG export legislation (SB 138) among others.

Feige recapped his tenure as co-chair with Petroleum News.

Petroleum News: What do you think characterized your four years as co-chair?

Feige: The last four years there certainly were some pretty major issues we waded through and basically got laws changed to improve the investment climate for oil in this state. SB 21 was certainly a major accomplishment. It was a long battle to roll back ACES. It was gratifying to see the people defeat Ballot Measure 1.

Petroleum News: As you look at SB 21, do you think it’s durable? Is there any component in there that may need tweaking two, four, six years down the road?

Feige: I think it’s probably a little too early to tell. Right now the price of oil is about $80 a barrel. That was certainly not forecast. One of the things I looked back on as we were putting that bill together, we were knocking down the tax rate at the upper prices levels.

One of the things we did with SB 21 that is coming in handy now is that we actually raised the prices at lower taxes. So below $90 a barrel, the state is actually taking in more because of the minimum tax clauses we put in. The improvements to the investment climate have certainly started to show results. We’ll see how long this price retraction lasts and we’ll see how much that affects the investment. As far as SB 21 goes, we’ve got to resist the urge to keep tweaking things all the time. We need a stable investment climate and we need consistency.

Petroleum News: There was still concern about getting a meaningful definition of new oil, say as opposed to more oil. Do you see that being a problem ahead?

Feige: that was something we spent a lot of time on. The oil that’s there in the legacy fields and already has wells punched into those formations; that oil was going to be produced one way or the other. It might have been produced under ACES at some point, maybe later rather than sooner. But what we were looking to do was improve the investment climate so that companies could go after those new pools of oil.

New oil is oil that comes from a reservoir that has not been tapped into, as yet undiscovered, previously uneconomic, or for whatever reason it had not been developed at the time we passed the bill. It’s going to take investment to bring that oil to market. The way we all looked at it was this was oil we do not have now and would not see in the near future because of the way ACES had been implemented. Given a lower tax rate on new oil and it results in that oil coming to the surface, going to market and it the state collecting a royalty and production tax on it, that’s one we could not have counted on under ACES.

Petroleum News: Do you think the state will be able to differentiate between new oil and more oil?

Feige: I think we use the definition in the statutes then it will be new oil. Will the people of the state understand the difference? Yeah, it’s kind of a technical nuance. People can say what they want. We looked at the legacy fields as oil that would be produced no matter what. We were looking to get additional oil out of there.

Petroleum News: People who favored ACES said it needed time to work when it first came out. Do you believe that should be afforded to SB 21?

Feige: Time will tell. I think it’s important for Alaska to kind of sit on what we have and give it time to work. Just in the short term we were looking to improve the investment climate and bring more investment to the state. Certainly in the short term, that happened. You are seeing more drilling rigs committed to the slope. Commitments to purchase or lease, then bring up new rigs, plus the additional jobs that come with those new rigs. The anecdotal evidence I hear talking to people in my district who work up on the slope, they’ve never seen it busier. I think that is good news. It helped guide people’s decision to uphold SB 21.

Petroleum News: Speaking of development and anecdotal evidence, Conoco just announced a new pad sanctioned. Is that what you had in mind?

Feige: I believe that’s 2S, which is basically new oil, which they proposed. I’m happy that it’s a new pad, and that means you’re drilling in a new area. That’s going to count as new oil. That would be my guess. That’s what we intended. From my perspective, it’s gratifying that ConocoPhillips as a company has decided to commit hundreds of millions to developing new sources of oil. If they did it because of a change we made in the tax structure, that’s what we intended.

Petroleum News: You’ve flown people to the slope for your work; do you see your work picking up now that you can devote time year round?

Feige: Oh, I don’t know. I’m optimistic that there will certainly be more work. It depends on what the price of oil does and what the companies feel the price is going to be in the near future. I think most of them look at this as a relatively short-term retraction, then it will go back above $100.

Petroleum News: Now that the debate over oil taxes has died down do you think it will be easier for the Legislature to move forward on other things?

Feige: I think the Legislature should set aside oil and let the work the 28th Legislature did, well let it work. Will they be able to do that, there are so many things that drive that, but I’m optimistic they will be able to let it lie for the time being.

Petroleum News: Let’s move on to the natural gas line and LNG export project. You folks delved into it and capped it off with some late meetings, but came away with a product most seemed to like thus far. What are your thoughts on how SB 138 played out?

Feige: That was a major achievement. I think we made significant progress. The idea of having the state act as a partner, both in taking on risk as well as increased reward is a good thing. And there was a lot of back and forth with the executive branch and the companies, and then within the Legislature some of the enhancements that we felt were necessary to basically cover the interests of the state. Things like the property tax revenue and payment in lieu of taxes and how those impacts in those communities, along the pipeline route, how those impacts will be dealt with. We saw a great spirit of communication, not only with the governments along there, but the companies. I think they will all be able to work together to address those issues. Quite frankly, I was pretty encouraged by the level of cooperation that the companies exhibited not only working with the state but also working among themselves.

Petroleum News: The debate over this bill wasn’t nearly as contentious as the oil tax debate and public differences didn’t linger as with the oil tax discussion. Why do you think that was?

Feige: I think both sides of the aisle realize the gas pipeline project will bring significant benefits to the people of the state. Not only revenue going to the government, but just that lower cost energy that will be distributed through the state as much as we can do that.

Petroleum News: Should we be optimistic about the developments such as the applications to FERC and Energy Department or was this really to be expected?

Feige: Each one of those actions was part of the timeline when we put this thing together. I guess on one hand, I’m encouraged that everything the partners said would happen did happen and it happened on time. They obviously are moving forward on their work. Hopefully it continues. Hopefully this retraction of oil prices does not have a significant impact on the project moving forward. There are a lot of things going on external to the state in the global LNG market. There are a lot of entities fighting for the a piece of that LNG markets share. On the one hand, you’ve got folks buying the LNG want to delink it from the JCC - the Japanese Crude Cocktail - and you’ve got people who want to link it. That’s a market battle. We need a certain price going forward. We’ll have to let the market play out. Again, in five years, it will tell the tale.

Petroleum News: I realize we are only in pre-FEED with this project, is there anything that concerns you now?

Feige: I think the only thing that concerns me is who wins the governor’s seat. I’m hoping that Sean Parnell stays on as governor. I think that would provide a high degree of consistency and sort of steadiness and purpose. I’m not so optimistic if Bill Walker and Byron Mallott come into office. I’m just not certain as to exactly how Bill Walker will treat this project if he comes in as governor. He’s made enough conflicting statements over the last couple of years. I think the most important thing the state can do in the future is be consistent. We’ve put the state on this particular path right now as a partner. All those little relationships are part of the deal. If you start mucking with that, you have the potential to blow up the deal and we go back to square one. The most important thing for both the executive and legislative branch is to stay on path, be consistent and not muck with what’s been agreed to.

Petroleum News: Do you think the current path now that the project is on will foster future exploration?

Feige: Oh, without a doubt. One of the things that’s hindered oil exploration up north was the possibility that you go looking for oil and you find gas and you have no way to get the gas to market. With the expansion potential we built into this project and the state made allowances for in SB 138, companies may go looking for more oil, but if they find gas it’s not such a negative as it has been in previous years. So yeah, overall we are going to see more exploration. A lot of it will certainly be driven by price. I’m pretty optimistic that between the reforms of SB 21 and the project that we outlined in SB 138, we’ve greatly enhanced the investment climate up on the North Slope as well as the rest of the state.

Petroleum News: With revenues in decline, do you think the state can afford to be a partner?

Feige: You know it all depends. We are looking at a final investment decision that wouldn’t occur for five years. You have to take the position of conserve our cash as best we can. The Legislature will have to address low oil prices and cut back things accordingly. A certain amount of that is already in the works. The recent price changes the last three months is going make that go faster. The state has really no other choice but to cut back on the money that it spends whether that’s in the capital budget or the operating budget. I’m optimistic they will rise to the occasion.

Petroleum News: Let’s go back to the exploration topic but farther north into Arctic waters. What are your thoughts on the prospects of that moving forward?

Feige: Well, it depends on who sits in the White House. So far, the federal government has not exactly been a willing partner. They seem to be more of an obstacle in developing those federal lands than anything else. The market seems to be willing. The companies are certainly willing. It’s the federal government that’s either not leasing the lands or throwing up all kind of road blocks. Just look at what they did in the National Petroleum Reserve. That needs to change. That can provide a lot of income for the nation. As far in debt as this nation is right now, why aren’t we developing those resources to get us out of debt?

Petroleum News: NPR-A will have its lease sale in November. Some say it’s window dressing for a sale that really isn’t substantive, others say they are good first steps. How do you see it?

Feige: Well, they’ve had leases come up in NPR-A before. The last few years they have taken a lot of that land off the table. They are calling it de facto wilderness. Under the spirit of it, you are supposed to go to Congress to get a wilderness declaration. This administration has basically tried to go around Congress on a lot of fronts. I think the federal government could be better at promoting resource development around the country, not just Alaska.

Petroleum News: Still on the Arctic, there are concerns that the White House wants to focus its efforts in the Arctic on climate change rather than economic development when it takes over as chair for the Arctic Council?

Feige: I can see that happening. That seems to be consistent with the theme that this administration has been following.

Petroleum News: So what would you like to see for Alaska on the resource front, either with oil or natural gas pipelines?

Feige: On the oil and gas side, we need to be consistent. We’ve spent a lot of political capital these last three or four years getting ACES essentially repealed and replaced with SB 21. I think we need to give it a chance to prove itself. ACES certainly had almost six years and it was pretty clear that it wasn’t working the way the folks who conceived it originally had foreseen. SB 21 needs to be given a fair chance. We passed it believing it will do certain things and we have to give it time to do that. We have to be consistent to our investors and put forward a steady hand, not one that is reacting to the whims of whoever happens to be in whatever seat at the time, whether it’s the governor’s seat or the resources chairman’s seat. We have to be consistent because Alaska developed a reputation of changing its tax regime several times within a certain period. Alaska got a bad rap. The politics are now swinging around to favor resource development in the U.S. as opposed to other places. We just need to steer a steady course and stick with it.

Petroleum News: You mentioned the state being inconsistent of going from one tax regime to another. Doesn’t that present a double-edged sword by changing it again?

Feige: The question was, is this the right tax system now. I think we need to develop our other-than-oil economy. The problem is that it’s kind of difficult. We need to develop more of our economy but at the same time make sure we keep oil and gas strong.

Petroleum News: I’m not trying to get you to second guess yourself, but is there anything you might have done differently in your four years as co-chair?

Feige: No, I don’t think so. I wasn’t one of the legislators who picked up on the latest fad and went with it. If I saw something that needed to be fixed, we tried to fix it. I put in what I thought was the best course of action based on what we knew at the time.

Quite frankly, I think we made some pretty good calls. Take the price retraction we have going on. At the time we put SB 21 in place, the price forecast was to be $100 to $110 a barrel for the next four years. We are a year and a half later and the price is down to $80 a barrel.

We also put into SB 21, one of the House Resources revisions to the bill that actually raised the tax rate at the lower end. It was a fair trade, giving the companies more on the upside and we protected ourselves more on the down side. That was one of the things that we had to think about and put in the bill on the eventuality that prices didn’t go in the direction we thought back then.

We put a lot of thought into all of the legislation that we moved through the Resources Committee.

I have to say I had a great committee, especially the last two years. I had some of the longest serving legislators, certainly in the House. A lot of them had been through them all: PPT, ACES, AGIA. So they had some pretty good perspectives and good experience in putting together these types of legislation and they delivered.