Mike Hawker sees flaws in oil tax bill

Alaska Legislative Budget and Audit chair discusses megaprojects, gas pipelines, and the Pedro van Meurs report on fiscal systems

Stefan Milkowski

For Petroleum News

Rep. Mike Hawker, a legislative point person on oil and gas issues and chair of the Legislative Budget and Audit Committee, helped push Gov. Sean Parnell’s oil tax bill through the House last session.

But a recent report by the global oil and gas expert Pedro van Meurs argues the governor’s bill is off track, and Hawker seems to agree. In some ways the report favors Hawker’s own oil tax bill, HB 17, which reduces the tax rate on oil production but does not increase tax credits or provide lower tax rates for new fields, as the governor’s HB 110 does.

“As these bills have a long way to go in the legislative process, I’m sure Pedro’s concerns will be incorporated,” Hawker said.

Hawker maintains his doubts about a large-scale gas pipeline and says he’ll keep pushing for legislation that could give the state a way out of its deal with TransCanada under the Alaska Gasline Inducement Act.

He’s more hopeful about an in-state line.

In August, LB&A sponsored a three-day seminar for legislators on the management of megaprojects.

Petroleum News spoke with Hawker on Oct. 11.

Petroleum News: First I want to ask you about the megaprojects seminar.

Hawker: The title was “Megaprojects: Concepts, Strategies, and Practices for Success.” This is a program that is offered by the IPA Institute, a division of a company called Independent Project Analysis. They are a project management think tank and consulting firm created in 1987. They evaluate case studies of very large construction projects around the world, largely in petroleum, chemicals, and mining industries, and based on their case studies analysis over time, they have developed a very definitive best-practices case. Their seminar is really talking about what they have identified over time as best practices for successful project planning and management.

They (discussed) what they call “gating” — what you need to do and the order in which you need to do it, and when you need to have things accomplished to keep your project basically on budget, on time, and at the end of the day in a manner that it works.

Petroleum News: Were there things you think should to be applied to megaprojects in Alaska?

Hawker: Every single thing in that course is applicable. I took the same course about six years ago. I found it very informative then, and I’ve always wanted an opportunity to bring it back to Alaska and back to Alaska legislators.

The Alaska Gasline Development Corporation (AGDC) Stand Alone Pipeline project plan that was brought forward this summer very rigidly complies with the best practices of Independent Project Analysis. It’s very important for legislators to understand what those practices are and why they’re being used.

It’s also absolutely relevant to any considerations of other major infrastructure projects in the state, whether it be building big bridges or developing hydroelectric potential.

Petroleum News: Do you think Alaska Gasline Inducement Act (AGIA) licensee TransCanada is following these guidelines?

Hawker: Well, it’s different. Among the IPA’s client list are the Denali folks and TransCanada. TransCanada’s used them many times internally. The difference is the approach taken by the Alaska Legislature in bringing forward the AGIA plan and in developing the “must-haves,” which end up violating some of IPA’s practices.

The foundational premise of a successful megaproject by IPA is that you bring together at the very onset everyone who perceives themselves to be a stakeholder and you eliminate competing objectives so that all future direction is in an aligned mode with all those stakeholders.

AGIA started out exactly the opposite. It didn’t create alignment or eliminate competing objectives. It created competition and competing objectives, which is one of the reasons the Legislature’s conception of AGIA is facing some pretty severe problems here.

Petroleum News: Did the seminar give you any ideas of legislation?

Hawker: No. It was much more how to understand projects as the state approaches them and looks at developing future projects.

Petroleum News: I know in the past you’ve been pretty unconvinced that AGIA will lead to the construction of a big pipeline. Has anything changed?

Hawker: No. Our window of opportunity for a big pipe I think is severely compromised. Even TransCanada themselves have said they’ve been unable to secure sufficient economic interest to move a project forward. So while they are complying with the letter of the AGIA law, even they are saying there’s not a viable project on the plate.

Petroleum News: Do you think you’ll try again with legislation by House Speaker Mike Chenault …

Hawker: You’re thinking of HB 142, which is the need to look at the provisions in AGIA that are available for consideration if the project proves uneconomic.

Yes, I think that absolutely has to be looked at. As long as the state continues to pursue an uneconomic project, we’ve really compromised our ability to look at other in-state projects that might well be economic.

Sadly, I think the opportunity for Alaska gas to the Lower 48 is highly compromised. That’s certainly the conclusion ConocoPhillips and BP reached when they terminated their Denali project. They looked at it and said there’s no market there.

We may very well have a viable Asian market if we took away the volumetric constraints — the (500 million cubic feet per day) limit for other gas projects in AGIA.

Petroleum News: What do you think about the Alaska Stand Alone Pipeline (ASAP) project?

Hawker: It is absolutely being planned and executed in the most professionally responsible way. I think if we look at it as in-state gas — delivering gas for Alaskans as a function of state government — I think it’s extremely viable and very important.

With the AGIA project proving uneconomic, we also need to review whether it is possible to take the sort of “public works” project that AGDC currently is and potentially having it converge with the concepts behind AGIA, which was the maximum monetization of Alaska’s North Slope gas, and really look at whether there is a sufficient Asian market to monetize a significant amount of our North Slope gas — larger than the (500 mcf/d) limit that is currently constraining AGDC.

And yes, that sounds an awful lot like the Bill Walker project (the Alaska Gasline Port Authority). The biggest difference is AGDC and the state would not have to start all over going to Valdez and doing a greenfield LNG plant. It would make an awful lot of sense to bring a pipe through the major centers of Alaska and down to Nikiski, where we already have a fully permitted and operating LNG plant.

Hawker: However much we can find a market for.

Petroleum News: AGDC President Dan Fauske said it would take about $400 million to get to a sanctioning point for ASAP. Are you willing to invest that?

Hawker: That is one of the important premises of IPA, based on their empirical study of thousands of projects — successful projects require an adequate up-front investment and an adequate preparatory process.

I absolutely believe we should continue with the commitment we’ve got to the AGDC process.

Petroleum News: Sen. Joe Thomas expressed concern that new drilling in Cook Inlet could meet Anchorage demand, leaving Fairbanks in the lurch.

Hawker: Fairbanks has always had an anxiety over being left out of the resource pie, the consumer distribution of the resource. If somebody finds a massive amount of gas in the Cook Inlet, there is no reason we can’t look at a pipe project — and it’s been talked about — going from Cook Inlet north.

Petroleum News: I want to ask you about the van Meurs report. Van Meurs said the state doesn’t do enough to incentivize development of heavy oil and natural gas, but also that the state gives too much for new developments. What’s he really saying, and do you agree with his analysis?

Hawker: What he’s saying is exactly what you just stated, that the current fiscal regime in Alaska, in its most global sense, has a very disproportionate amount of exploration incentives for light oil, but our system does not specifically target incentives for heavy oil development, and our gas fiscal system is dysfunctional. Any major producer that starts producing gas ends up paying less taxes rather than more, even though they’re now selling more oil and gas.

None of this is new. We addressed the gas fiscal system two years ago in the Legislature with the “decoupling” bill. That was not acceptable to the governor. I think he thought the timing was wrong. But it’s an issue we know is out there.

I think a great number of legislators concur with Pedro that our light oil system is out of balance. We’re offering an extraordinary level of front-end credits with a very high level of taxation on any potential production. As Pedro says, that’s not conducive to a balanced fiscal regime. And I think we agree with that.

As far as the heavy oil, I think it’s a little premature to have targeted incentives because the question is still at the technology level — what’s it going to take to get this oil out? Until we have the technology in place to look at it, we really don’t know what economic incentives might aid in the production of that oil.

Petroleum News: Van Meurs says the governor’s bill won’t help with heavy oil, and that a lower tax rate on new fields might actually be counterproductive. Is there anything in the report that changes how you think about HB 110?

Hawker: I introduced HB 17 before the governor introduced HB 110. My bill was looking at one element within our fiscal system that we know is dysfunctional and needs to be addressed — the fact that under the current progressivity system, we have an extraordinarily high marginal tax rate. The bracketing and capping of the progressivity curve in HB 17 is one way of attacking that marginal tax rate.

The bill I introduced retained a single progressivity curve. Pedro doesn’t like the mechanism of the governor’s dual curve.

I introduced HB 17 because I thought it was the right and better thing to do. Pedro seems to be in agreement with me on that one.

As these bills have a long way to go in the legislative process, I’m sure Pedro’s concerns will be incorporated.

Petroleum News: What role do you think the report will play in legislative debate?

Hawker: I think no matter what position a legislator holds, they will find something in the report to bolster their position. We have to be careful that Pedro’s comments are neither taken out of context nor misinterpreted. Unfortunately, misinterpretation is a casualty of the political process.

Petroleum News: Van Meurs recommends separating oil and gas taxes because the state could end up getting no tax revenue from a gas line. Do you think we need to decouple?

Hawker: I think we absolutely need to decouple. Pedro’s exactly right, and it’s what we recognized in the Legislature two years ago. The current tax formula that links the taxation on gas to the taxation on oil was put in the initial PPT legislation as an expediency. It was recognized that we would have to structure a new gas fiscal regime, but we didn’t need to for probably 10, 15 years since we weren’t going to see any major monetization of gas. Everyone knew it was a placeholder.

Pedro is looking at our system from a global perspective. He sees it as something that needs to be evolved into a durable and functional system we all agree with.

Petroleum News: So the bottom line, according to van Meurs, is that we need to tax gas less, even though the reason to separate gas from oil is that Alaska could get too little tax revenue?

Hawker: It’s the interplay. You start to tax gas and you get a break on your oil taxes so great that it exceeds the amount you’re taxing the gas. That’s not functional.

But Pedro also points out that if you fix that linkage, our current tax rates as applied to gas make us uncompetitive.