Josephson: AKLNG answers still needed

Anchorage Democrat says a fiscal plan can ensure industry confidence for future consideration, create stable investment climate

Steve Quinn

For Petroleum News

House Resources co-chair Andy Josephson says a good fiscal plan could provide a turning point for Alaska and its resource development prospects. He’ll start getting some answers when the Legislature returns to Juneau next month for a special session addressing a recurring budget gap. The Anchorage Democrat shared with Petroleum News thoughts on summer time developments such as the passage of HB 111, the state’s visit from Interior Secretary Ryan Zinke and the status of the AKLNG project being advanced by the Alaska Gasline Development Corp.

Petroleum News: Let’s start with AKLNG. What are your thoughts on where things stand right now?

Josephson: Well, I think that the revenue ruling which would allow for the potential to exempt investors from some of the taxes they would otherwise pay as I understand it, is actually potentially a very big deal. In August 2016 there was a joint session with at least both resources committees and there may have been finance committee members there as well. There were a number of legal briefs prepared. I delved into those and read them carefully. I read the case law and all of those documents pertained to the viability of getting this revenue ruling.

There wasn’t a person in the room who didn’t want a positive ruling. Everyone was broadly on the same page. The attorneys who offered their opinions gave their honest assessments that this was unlikely to occur. There was discussion about what the application would cost. What would the legal fees be? It was in the neighborhood of $100,000. So if you took the temperature in the room, this is now 13 months ago, you would have said it’s not clear whether AGDC is even going to pursue the revenue ruling and even if it does, it’s not clear they are going to obtain a positive revenue ruling. Well they’ve done that. That’s a big deal to me.

They have also done their foundation for customer capacity. I haven’t gotten the sense that it has necessarily changed the meter on success very much. We knew beforehand the Big 3 were likely to give us their gas if there was a pipeline to give it to. I think we heard last week in their open season, there may be an investor out there who is expressing interesting in helping build the infrastructure and financing that. But we don’t know who it is or what the terms of that may be.

The economics of the project are still challenged. The world market is still broadly flooded. We still have favorable components that we’ve know about for years, which are there won’t be civil strife resulting in war. We have a cold climate which is good for the mechanics in treating the gas and for liquefaction. We are relatively close to the market, and importantly we’ve seen and actually touched the gas. So those things are still favorable and the governor remains positive about it.

I’ve said before it was with some reluctance the Legislature said all right you can continue to use the $100 million we provided in the previous year. So that’s where we are now. My hope would be that some of the work, whether it’s a FERC application or other related aspect would have some benefit in the out years even if we can’t move this thing down a successful path.

Petroleum News: What would you like to hear next from the administration or AGDC?

Josephson: I would love to hear by the end of next session, so let’s say May 2018, that we have more than a Korea Gas memorandum of understanding. We have an actual commitment of partners and we have contracts for purchase. Those would be amazing things. Without that we would be adrift. Beyond the $100 million we’ve committed to this, it’s going to be more and more challenging for the Legislature to commit other resources.

Petroleum News: On to oil taxes. The working group per HB 111 is not assembled yet and there is not a lot of interim left. Do you think it will happen or do you think you’ll find yourselves easing into next session?

Josephson: I think that what may happen, if and when the special session is called for the 23rd of October, the meetings may begin then. I don’t know that officially but I think that could happen. There was talk of a group of us taking a trip to Houston, but that was cancelled because of (Hurricane) Harvey. So that created a little bit of a false start. I think that will happen. Time is certainly getting a little more compressed, but I think there will be a working group and I hope that I’ll be on it. I’m confident that Sen. Giessel and Rep. Tarr will discuss the how, where and why of that.

Petroleum News: So for the Houston trip, what was the hope? Was this a fact-finding trip?

Josephson: I think the hope was there would be meetings face-to-face with industry leaders about a path forward, talking about the credit issue and how we can helpful in this constrained climate that we’re in.

Petroleum News: So would this have been Houston or would New York be included since the issue is whether Alaska remains a good investment after the cashable credit changes?

Josephson: I think those meetings will have to occur telephonically or here in Alaska. We are starting to move toward a special session and, as you said, the working group may start up when the co-chairs choose to do that. I’m not so sure time will allow for us to go to Houston.

Petroleum News: Speaking of the working group and HB 111, you guys eventually reached an agreement. What were your thoughts on the final outcome?

Josephson: I have basically positive thoughts about it. Many of us felt we didn’t get all we wished for. In HB 111, that ending the cash credits prospectively was a good thing. There was a sadness about it for sure. It was important for the Alaska people to see that the program was ended, but the credit recipients were entitled to know what the viability of the program is and what remains. As a more practical accounting matter, we can now know there would have to be production before deductions are earned.

That’s a monumental step away from a program that was started in 2003 then continued in 2006, 2007 and again in 2013. The other thing, of course, is the ring fencing measure. I hope it was written in a clear enough way. That was a significant part. You can’t earned a deduction until a separate unit is in production and you can’t take that deduction against other non-unit-producing areas, so you’ve to get your field into production to do that.

The other features that were important to me was, even though technically one could argue it’s a reduction in interest rate, I think we’ve got the cumulative interest rate with the federal reserve and the statutory rate at a number - around 7.5 to 8 percent - that all sides can be relatively comfortable with.

I don’t think anybody is going to think anybody is going to be seeking incredible reforms from that. I think it creates incentive to get auditing done from the state’s perspective and also to pay in a timely way from the industry’s perspective. So I think that was an important reform.

Petroleum News: With what you have now as a tax regime, one question not heard a lot in hearings is does the state have a tax system the state can afford?

Josephson: My view is that it doesn’t. My own perception of this is that I’m in a moderate position on this. There are people who serve in the Legislature and experts in the field who believe under the current price environment we could reap what we need to have sustainable budgets. That is instead of say bringing in $1 billion a year, which is about what we are bringing in now in taxes, royalty and property tax, that we could bring in $3 billion plus per year. I don’t take that position. That’s the most aggressive position relative to what could be done in our oil and tax schedules.

Then you have the status quo position, which is don’t tinker with anything, leave it where it is. That is sort of the position of the defenders of SB 21 and all it was trying to achieve. I’m sort of in a middle position which is neither the first two I described in that I think that there are in the $50 price monies that the state is arguable being shorted. It may just be in the $200 million to $300 million range, but they are there. The reason we believe that is, our members continue to believe that the per-barrel credit for example on legacy fields doesn’t make any sense where production would occur anyway. The maritime transportation costs are fixed but the cost of infrastructure for legacy fields are low enough - some might say as low as $25 a barrel - that even at $50 a barrel (market price) there is profit that should be more generously shared with the state.

The other issue is the crossover point moving from a gross tax to a net profits tax is apparently around $75 a barrel. What happens is in this price environment, the state doesn’t receive more than 4 percent of the gross. The people are getting somewhat less, even if it’s a modest amount than fairness would dictate. We have these three companies that have done some modeling. I’m told in a very short time we will see what the consultants have come up with.

Obviously the Alaska House Majority Coalition took the position that the oil industry should also be contributing in a greater way to balancing our budget. That didn’t happen. That’s where we are on that question.

Petroleum News: One argument for leaving things as they are is that oil production has ticked upward these last few years. In other words, SB 21 is working as intended. How do you answer that?

Josephson: There is potential in the relative near term with fields like Armstrong’s Nanushuk, which is part of Pikka, and then you have Willow in ConocoPhillips’ play, and that could be 100,000 barrels per day. And ConocoPhillips has a play near Kuparuk and then you have Greater Moose’s Tooth. We can see that there is a win-win that could be obtained where if everything went really well and you had 300,000 barrels of new production then then benefit to the state’s treasury would be manifest. Understandably in a competitive environment makes the argument if we change SB 21 too significantly it can’t move forward with those developments. Those are the kinds of discussions we need to have and they need to be carefully gauged. I’m in a learning position and learning mode on those.

Petroleum News: Late May Interior Secretary Ryan Zinke visited Alaska touting the state’s resource development prospects. What are your thoughts on his visit?

Josephson: I actually got to meet him at Byers Lake over Memorial Day weekend. I didn’t want to take up much of his time and he didn’t have that much. We spoke for about 60 seconds. First of all, he’s got a great background. He’s a Navy SEAL; he was a congressman; he worked in the oil industry. He’s a very smart person. I support his being very ambitious of the oil industry. I have more hesitancy than he does over offshore drilling. My concerns about his agenda are related to other Interior Department issues. For example, he is supportive of legislation that Don Young spoke to last week on allowing the state to manage wildlife and national parks and preserves? Just this morning Gov. Knowles wrote a good op-ed on this topic. I view these as public lands for which the federal government should have a role in their management. He’s also taken the view seeking to reign in and modify some of the Antiquities Act designations, and I don’t necessarily support that, either.

But the positive news he gave me when I met with him is that he confirmed that the administration has no intention of taking federal land and giving it back to the state. That may not be a broadly popular position for some Alaska people, but I certainly think it’s OK with my constituents. I take the position that there is even economic benefits in the ANILCA designations remaining as they are.

Petroleum News: Secretary Zinke also brought two Alaskans on to his team. Can you speak to those appointments starting with Joe Balash? He’s fresh off his hearing.

Josephson: I certainly support that appointment. He’s impressed me as a thoughtful person, well-spoken, friendly and a good listener. I applaud that appointment.

Petroleum News: Zinke also appointed another Alaskan to his team, Steve Wackowski.

Josephson: He was there when I spoke with Secretary Zinke. I support that appointment, too.

Petroleum News: Even though you’re going to be back here in October to discuss a fiscal plan, what if the Legislature puts a fiscal plan in place. How might that help resource development in the future?

Josephson: It’s the Senate’s position that there be no increase in taxes for the extractive industry. Then the question becomes what is the Senate’s recommendation to balancing the budget. The Senate originally said it would hope for some return in oil prices. I don’t know that it’s going to happen. Then it had a plan to draw down $700 million a year from the Constitutional Budget Reserve. It claimed that could be done over four or five years and we could ride this out. Then it claimed it could fund the government from the CBR undermining its own plan.

My body has already passed a fully funded fiscal plan. It did that. The Senate didn’t. So really the success of this special session rests with the state’s Senate. They have enormous power to set a course because we are going to be responding to them. We already set a course they rejected. I believe if we had a fully balanced budget in the out years and we had a fiscal plan that people honored, broadly honored and respected, then industries - mining and oil - could know what the lay of the land is and what the rules would be. They could make judgments about the overall health of the economy and the state’s position on their industries with that in mind. With these continuing deficits and no fiscal plan, they should understandably be feeling insecure and unsure about the future of the state. I would say if the Senate agrees the people of Alaska may need to participate in their own economic future by contributing in some way to the operation of state government, if I were in the industry that would be a great relief to me because I would say it’s not coming out of my pocket. It’s going to be a shared responsibility in a way that it hasn’t been in the past.

For multiple reasons, if I were an oil explorer and developer or a mining explorer and developer, I would be hopeful the state would chart a different path. What’s interesting about that is it creates an interesting paradox. The oil industry, in particular, has been reluctant to agree that the state divorce itself from the oil industry’s economic future in any way. It’s a strange juxtaposition. I would think it would be in the oil industry’s best interest that we raise some of our own revenue independent of them. I suspect it is in their self-interest and they would want that even though they stood on the sidelines on that issue. I think they are reluctant to really let us go because there is some co-dependency there for sure.