Feige stands behind governor’s HB 110

House Resources co-chair makes case for cutting oil production taxes, and soon; says state losing workers as well as investment

Stefan Milkowski

For Petroleum News

As a pilot flying oilfield workers to the North Slope, Rep. Eric Feige of Chickaloon enjoyed a first-hand look at Alaska’s oil industry. Convinced that the state’s 2007 tax law, Alaska’s Clear and Equitable Share, was threatening North Slope investment, Feige ran and was elected to the House in 2010.

As a freshman, Feige served as co-chair of the House Resources Committee. He helped get Gov. Sean Parnell’s oil tax bill, HB 110, through the House, and he remains an outspoken proponent of tax reform.

Feige argues that a good exploration season on the Slope is not enough — companies might still be reluctant to produce the oil they find if taxes are too high. Competitiveness reports by Pedro van Meurs and new information about low-flow operations of the trans-Alaska pipeline also have not changed Feige’s views. At lower flow rates, the pipeline could be less resilient in the face of a shutdown, he says.

Feige also highlights another threat. A slump in Alaska production could lead experienced Alaska workers to leave the state, with long-term consequences.

Petroleum News spoke with Feige on Jan. 10.

The newspaper will feature a critic of tax changes shortly.

Petroleum News: HB 110 passed the House 22-16 last March, with your support. Why are tax changes necessary?

Feige: Tax changes are necessary because companies need to be able to make a profit. By raising the tax rates to the degree that ACES did, you made it more difficult to make the same profit in Alaska as in other places. This reduces Alaska’s competitiveness against other projects around the world.

Certainly Alaska has some good things going for it. There’s a fair amount of development already here, a fair amount of proven resources in the ground, and a method of transport in place. However, the costs in Alaska are significantly higher than other places in the world, and that weighs heavily on companies’ ability to make a profit.

Petroleum News: What evidence is there that Alaska is not competitive?

Feige: Well, I simply don’t see the same amount of investment in our oilfields that other oil provinces are getting.

You can look at the capital investments that companies like ConocoPhillips and BP have been making in Alaska — they’re investments in maintenance, investments in their infrastructure, but they’re not investments in new production. Those investments are going to other markets.

I was working on the slope right after ACES passed. ConocoPhillips had a capital project on the books to construct an ultra-low sulfur diesel plant up there. Soon as ACES passed, they cancelled the project.

Exploration initially went away. Alaska has enacted some pretty significant exploration credits, which go a long way in encouraging people to explore. But all that’s going to do is encourage exploration. If companies are successful, they will raise the value of their lease holdings, but that doesn’t necessarily mean they’ll go into production.

ACES puts a pretty high penalty on production. The higher the oil price goes, the higher the percentage goes. That progressivity curve is steep. HB 110, by switching to a bracketed system and lowering the rate, will go a long way to encouraging production.

Petroleum News: Natural Resources Commissioner Dan Sullivan described this as a pretty good exploration year. But you’re saying that’s not enough?

Feige: Exploration is great. And this is probably one of the more robust seasons.

It has not turned out to be as busy as originally projected — some of these newer companies, like Repsol, came in with big plans but started running into reality. They had issues with permitting, rigs, and ice pads — a lot of those things that seasoned operators up here have learned how to deal with.

Petroleum News: I understand you were just on the Slope. What did you see?

Feige: There’s a fair amount of activity. There’s a lot of drill rigs that are standing up and not stacked in a corner somewhere. I went into Deadhorse yesterday and from the airport over to Pump 1 and back. I was there to present a legislative citation to the Alyeska employees at Pump 1, recognizing their efforts during the shutdown last year.

Feige: I think they’re certainly hopeful. I’m not sure anybody has a crystal ball on this one. I think eventually enough people will see that lowering the taxes is the way through the current state of affairs.

Right now, production continues to decline. There’s been a lot of emphasis in the press lately about Alyeska and their low-flow study, which said 300,000 (barrels per day) is about what we can operate the pipeline down to without major modifications. That was simply their opinion at the time of the report.

We have great engineers in this country, and I’m sure we can find a way, through the use of heaters and other techniques, to get lower and lower flow rates out of the trans-Alaska pipeline system.

The question for the people, for the Legislature, is not, How low can we go on the pipeline? The question is, What point in the production curve do we have to reinstitute the state income tax to pay for government?

Petroleum News: That sounds different from testimony last year, when people really were concerned about the pipeline shutting down. Are you less concerned about that now?

Feige: I’m still concerned that we have enough oil to run through the pipe. You can predict all you want as an engineer, but if something turns out not to work, if we have a mechanical issue or another leak, there’s not that extra margin of warm oil in the pipe to give us a buffer.

Petroleum News: A few things have come out since last session, like the van Meurs report. Would you like to see changes to HB 110?

Feige: I’ll let the senators address that. We passed the bill out. We thought it was the best we could do at the time with the information we had. It goes in the right direction, as far as lowering the overall rate of taxation.

I’m sure the Senate has other plans, but as long as we end up with a meaningful reduction in the taxes, we will encourage future investment. And with investment, we should realize more oil in TAPS and increase revenue to the state.

Petroleum News: Some senators say they want commitments from oil producers that they’ll invest more if taxes are lowered. Is that a reasonable thing to request?

Feige: It’s reasonable to ask. And the companies have certainly delivered on those requests. ConocoPhillips and BP have both committed publicly that they will make significant financial investments in production if it’s a meaningful reduction in the tax rate.

Petroleum News: Some also point to Norway, where taxes are similarly high, but there’s a thriving industry. Is that a reasonable comparison?

Feige: You’re comparing apples and oranges. Norway taxes the heck out of the people as well. We have operated our state government for many years primarily on the revenues from oil, and the people have enjoyed a permanent fund dividend.

Petroleum News: What do employment numbers tell us about the need for tax changes?

Feige: You have the issue of Alaska hire. There’s a huge emphasis on hiring Alaskans. As far as I’m concerned, it’s more efficient to hire somebody from the state, hire somebody who’s used to the weather conditions, who’s here and is not going to bail on you. It’s always in the company’s best interest to hire an Alaskan, everything else being equal.

Now, if you’ve got particular specialties or job skills that you can’t find in the Alaska market, I’m not going to tell a company it can’t hire somebody from outside — that’s gone to court before, and the state loses every time. Companies have the right to hire whoever they need to do the job.

As far as money being spent on the Slope, the argument was they’re still spending just as much under ACES as before. Yes, but they’re spending a lot more money on maintenance, which you would expect as you get an older field. Given the regulatory climate regarding spills and environmental issues, a company runs a huge risk if they don’t maintain what they have.

The Department of Revenue last year, in response to concerns from the Senate, got permission from oil companies to release (tax return) data. I think it will show there’s been a lot of money spent in operations on the North Slope, but a far greater percentage is going to maintenance now than new production.

Petroleum News: And that doesn’t help with tax revenues.

Feige: The money that’s spent on maintenance isn’t money spent on new production. And maintenance doesn’t get the state any more revenue down the road.

Petroleum News: Do we need to separate oil taxes from gas taxes?

Feige: At some point we’re going to have to do that. When they passed ACES, the Legislature was reluctant to address the issue because there wasn’t gas being produced in large quantities. Based on what I’ve seen, if we leave it the way it is, you end up collecting far less tax revenue if you don’t separate them (if a gas line is built).

Petroleum News: How likely do you think it is that the Senate will pass some kind of tax reform this session?

Feige: You’ll have to ask the Senate. I’m not going to try to predict anything. I would hope they would at least engage in a debate and try to work through some of these issues. Last year they didn’t seem to want to address it at all, and they pushed it off until this session. I hope they address it, I hope it’s a meaningful discussion, and I hope it results in lower taxes on our industry.

Petroleum News: If they just focused on progressivity and maybe credits for heavy oil, could you support a bill like that?

Feige: I’d have to see what the bill is. Whatever it is, it’s got to be a meaningful reduction. Just to have a couple percentage point decrease here and there to say they enacted a reduction isn’t going to cut it.

Petroleum News: How important is it to do it now? If the Senate doesn’t act this session, would you support a special session?

Feige: I’ve already had two special sessions. I can’t say I’m looking forward to another. But if we have to do it, we’ll do it.

Petroleum News: Anything you want to add?

Feige: We’ve got some really good people in the industry. There’s a lot of creativity and talent there. And if we leave the taxes where companies won’t reinvest, it’s not only the reinvestment in the infrastructure for new production, it’s the reinvestment in people that will bring those new discoveries online.

One of the things we’re seeing now is the younger guys picking up stakes and heading to greener pastures. I know of several people in the Mat-Su Valley that have found employment in North Dakota. Things are booming down there, as they are in most other energy-producing states.

If Alaska’s tax rates were more competitive with the rest of the world, those Alaskans would want to stay in Alaska to bring those oil projects online.

Just anecdotally, last week a friend of mine came up on the airplane from Seattle, and he said it was full of Alaska oil workers — not going to work, they were coming back to Alaska from North Dakota on their days off.

If we let that go on too many more years, we’re going to start losing the people resource as well as the oil resource.

Petroleum News: And that could have a long-term effect?

Feige: That has a longer-term effect. The oil is going to be in the ground. The people to get that oil out of the ground need to have a reason to stay here.