Feige remains bullish on oil tax reform

House Resources co-chair says he’s not worried about industry pushback on proposed regulatory changes, calls for patience

Steve Quinn

For Petroleum News

House Resources Committee Co-Chairman Eric Feige hasn’t done as much charter flying to the North Slope as he wishes, but the twin otter pilot says he likes what he sees, and he believes the new oil tax changes will provide even better views.

The Legislature rewrote the existing tax law under Senate Bill 21, which takes effect in January. However a referendum vote for next August looms, creating what tax reform supports call an uncertain investment climate.

Meanwhile, industry has concerns over proposed regulatory changes it deems complex.

Feige, a Chickaloon Republican who serves on the Energy Council executive committee, discussed issues facing lawmakers during the interim with Petroleum News.

Petroleum News: Over the last few weeks there is some growing concern that regulations under consideration are too complicated to make SB 21 reach its desired result of tax breaks for new oil. Are you concerned?

Feige: What they are going through is a normal process. It’s a lot better that we write these regulations in partnership with the industry. I don’t think the guys in Revenue are so arrogant that they believe they have the answer to everything so they are reaching out to industry and making sure when they write regulations, they do so in concert with industry so they don’t write something that is absolutely unworkable from the industry side of things. The article that was written in the Anchorage paper, I don’t read too much into it. I’ll let the process work and I’ll leave the folks at Revenue do what they do. It will come out just fine. A lot of the issues that were brought up, sure it’s complicated, but it’s always been complicated. That’s what they are trying to work through to make sure things are as straightforward as possible.

Petroleum News: Do you foresee any kind of tweaking to the new laws that might have to be done next session? These are concerns brought forth by the industry, not a minority voice complaining because they lost.

Feige: Let’s be specific. Was industry complaining about the statute or the proposed regulations? Remember, those are proposed regulations. That’s why you have the give and take back and forth between the regulators out in the field. Wait until the final version of the regulations comes out. That’s the whole point of going through the public hearing process. To get comments. Go back to the drafting board and make those adjustments. It’s almost no different than the committee process in the Legislature. Somebody puts a bill out — that’s the proposal. Then you take invited testimony. Then you take public testimony. Then committee members offer amendments and those amendments get voted on. At the end, you get a document — in principle a bill — that’s had the collective intellect of the committee applied to it. What the newspaper article highlighted was one individual’s comments in a public hearing.

Petroleum News: There was the LNG symposium that you and your staff attended. What were your takeaways?

Feige: A lot of it was not necessarily new to me. I try to stay up to speed on a lot of what was going on obviously in Alaska but also across the world. I’m as well read as anybody can be who is not directly involved in the business deals. One of the things, just in talking to the legislators, was how the Legislature appreciated the depth into which PFC delved into the subject matter. The fact that these business deals are very, very complex. I think people got a much better appreciation for how complex they are and how different from oil transactions they are.

Oil is generally run on sort of a spot market set up. You go out, find oil and sell into the market. The market for gas, to date, has not really operated that way. With gas, you go find the gas then you find a contract that guarantees your revenue over a period of time, then with that guarantee of revenue you can go out and borrow money to go build and design all the equipment necessary to move that gas to a particular customer. You don’t just have, except in very rare cases, a cargo of liquefied natural gas looking for a customer.

So the whole nature of the business transaction is significantly different (from oil) and very complicated. I think a lot of legislators clearly came away with that appreciation.

Petroleum News: Alaskans have been waiting for decades for good news. Do you foresee any coming down the road?

Feige: I don’t predict the future, but I know there are a lot of people working hard on this topic. It’s not like nothing is happening. There is a fairly good amount of work with the executive branch. There are a lot of people trying to work through the issues, hopefully trying to get a project up and running. Just because people aren’t reading something in the papers, doesn’t mean that nothing is happening.

Petroleum News: Let’s talk about Energy Council. You’re in your first year of a two-year appointment with the executive committee. First, why is Energy Council important to Alaska?

Feige: I view it as a series of continuing education seminars that allows legislators to number one get out and talk to other legislators from other energy producing states as well as provinces in Canada. It helps establish those personal contacts that come in handy occasionally. It’s also a forum for simply learning about what’s going on in various aspects of the industry and what’s going on in other states. We generally go to the annual meeting in Washington, D.C., which happens to fall in the middle of our session in Juneau. In the three years I’ve been going to it, there have been excellent series of presentations on a wide variety of energy subjects: everything oil and gas, LNG, geothermal even. There’s a fair amount of knowledge presented at those meetings.

The quarterly meetings tend to be a little smaller, but the quality of the presentations are just as good. This past June I attended one in Bismarck, N.D. Most of it was focused on the Bakken and what’s going on in their state. We had in depth conversations with local government officials and legislators. We learned about impact some of the industry efforts were having on the local economy and local population.

To some degree they transferred back to Alaska. We are happy to know that Alaska companies working in North Dakota had a good reputation. We got to tour some of the facilities and look at some of the drilling projects. We got a feel of what people are talking about when they are discussing the fracking operation. OK, here is a fracking operation: we can do it in 2.8 days and 32 stages; here’s how it’s laid out on the ground; here’s how it’s laid out on the site; here’s the choreography of the equipment that has to go on to make it all happen. It’s hard to get a good sense of that if you’re just reading a magazine or an online article. But to actually go see it is fairly useful.

Feige: As a member of the executive committee, I go down a few days early and get a more in-depth tour, a more intimate tour as part of a smaller group that gets to see what’s going on. Again, it’s good knowledge that hopefully I can apply to our advantage here in Alaska.

Petroleum News: Let’s circle back to SB 21. The prospects of a referendum seem to be advancing. The debate over SB 21 seems to carry on long after the bill gets signed. What are your thoughts on this?

Feige: It’s the right of people to petition the state to have a referendum on the subject. It’s all written into our state constitution. People are free to do that. As far as whether or not the referendum is good or bad, mostly it’s immaterial. It’s part of the system. If enough people want to call for a vote on a particular subject, there are mechanisms in place to do that.

As far as my feelings overall are people in this state elected people like me to go to Juneau to sit through all of the meetings, to listen to all of the evidence, to spend a great deal of time considering various questions. This go around, it was oil taxes. My committee spent 48 hours of committee time (11 hours during the final committee hearing that featured 35 amendments offered).

That’s sitting in the room. That’s not including discussions on the side. That’s not including getting ready for the meetings. That’s 48 hours sitting in a committee room going over every aspect you can think of on this particular subject. It went through four other committees throughout the Legislature (before House Resources Committee heard the bill) as well as a debate on the floor of the Senate and the floor of the House. These issues were aired very well. They were aired in a public forum. In the end, it came down to yes, yes we will adopt these as new statutes.

OK, so there are folks who don’t agree, so they will go forward and do this. We’ll go ahead and vote. The industry will spend a lot of money to explain their side of the story; the folks who put forth this referendum will put forth this story. I think the people will decide that SB 21 was a good idea. Yet the fact that the referendum was hanging out there introduces a modest amount of uncertainty into oil investment for the state.

Companies have already stated they are going to move forward with certain projects because those projects are now economic and make sense given the new tax regime. They are pulling projects that had been shelved and re-evaluating them, and going to their board of directors in London, Houston and Dallas, and saying hey, can we do these additional projects in Alaska. That round of corporate budget meetings is in process as we speak. I think there will be announcements prior to the legislative session in which we all hope that they will push some money our way. I think we’ve improved the economics by changing the law. I expect there will be additional investment coming toward Alaska.

As far as my own observations up on the Slope, I did a flying hitch up there in June and I’ve got another one coming up here next month. It’s pretty positive. There are a lot of people who are fairly upbeat. The buzz on the ground up there is camps are getting increased in size, both at Alpine and Kuparuk. New announcements of drill rigs means there are new jobs for the Slope as a whole. Companies seem to be delivering on what they indicated would be a logical result of a tax change. I hope it continues because it’s good for everybody.

Petroleum News: It’s pretty well understood there are never guarantees with any tax change. So what do you believe are the prospects from this change?

Feige: Lowering taxes allow for more money to be available for re-investment. If it makes our potential investments more attractive here in Alaska, then basic economic principles say investment money is going to flow into Alaska. That is going to result in some of the announcements we’ve already seen. More drilling rigs. Let’s see: a drill rig is 12 men on a shift for the most part. Four shifts over the course of an entire month. That’s almost 50 people right there, plus people who change the linens, do the housekeeping and other support work. Just in drilling crews, you’re talking several hundred jobs over the short term. As you start bringing more and more rigs, you start drilling more and more holes, you get production increased. Because the economics have changed, you’re able to apply more specialized techniques to improving the productivity of the wells in the ground. All of that results in more revenue for the State of Alaska, but it generates more economic activity for the state as a whole, not just the state government. That’s really what’s going to help lift the Alaska economy. Having more activity in the oil patch, having more investment headed in that direction, more or less helps the long-term viability of the oil fields and that helps gas. Now the companies know they are going to be there for a long time. They are in a much better position because the economics are much better to develop the gas resource that we have.

Point Thomson is trucking right along. I was able to fly over that project on my last hitch. They’ve done a considerable amount of work the last couple of years. They will be able to start moving forward with the development they have scheduled for up there. As that field comes on line, they will do a gas cycling project initially. That could result in an incredible amount of gas that’s going to need to find a market. That’s going to help push the gas pipeline project forward as well as have additional gas to help improve recovery of oil in place.

I remember flying over that same area in the summer of 2008 and there wasn’t a whole lot there. Now there is a camp with a runway and helipad and a road connecting the two with dining facilities and people working. That’s the kind of thing we need up there to help push the Alaska economy forward.

Petroleum News: OK, What are your responses to the criticisms of SB 21, especially with prevailing assessment that the new law is a giveaway?

Feige: I disagreed with those kinds of statements then. I disagree with them now. They haven’t really trotted out any new arguments since the original debate. It’s the same old arguments we considered. I don’t think anything has really changed.

Petroleum News: Do you foresee any significant work being done toward oil and gas development?

Feige: I don’t see us going back to review oil taxes. I’m content to let things go for awhile and see how the oil tax change works out. We spent a lot of time on that. We do more harm than good by twiddling with oil taxes all the time. It’s better to see things settle out and give the world some certainty about what it is Alaskans are going to do. If we see a compelling need at some point in the future to tweak something — but not this session immediate following a change. There is not enough time for any required change to really manifest itself.