Josephson: Oil tax credit work unfinished

Anchorage Democrat and House Resources Committee member says issues driving concerns over oil tax structure, credits could return

STEVE QUINN

For Petroleum News

House Rep. Andy Josephson says while HB247 may not have done all he had hoped with the Legislature’s discussions on oil tax credit reform, the recently passed bill may not be the final word, either. Too many questions remain, he says.

The Anchorage Democrat, who sits on House Resources, probably aligns himself philosophically with conservative views when it comes to resource development, but he still has concerns about the mounting costs of credits against chronically low oil prices.

He spoke to Petroleum News about his views.

Petroleum News: HB 247 passed your chamber then came back for another vote from the Conference Committee and it passed, 21-19. You were a no vote. Talk about that vote.

Josephson: I was captivated and moved by the Seaton-Wilson compromise. I think that that coalition, starting with Republicans largely and some Bush Democrats, was one of the more interesting stories that came out of the entire session. It took five months, but that’s what’s there.

When we met, and here I mean some members of the Independent Democratic Caucus, when there was a meeting with the Seaton-Wilson team, they were receptive to some of our additions to the bill.

Particularly, they agreed to add 5 percent (gross minimum) at $70. That would not have generated more than about $50 million a year but they were receptive to it. They were receptive to a measure where GVR oil (the gross value reduction for new oil) would drop from seven years to as little as three years if the price of a barrel of oil averaged $70 for three years. And there were a couple of other features, too, that made a difference.

In my caucus, those who really found SB 21 troublesome and who wanted a tax effort as much as a tax credit reform effort, which I never thought was something before us in this session, they remained not wholly satisfied with the Seaton-Wilson plan. A minority of the minority if you will, wanted more, but they were willing to vote affirmative on the Seaton-Wilson plan when it first came to the floor.

What I found particularly beneficial about that bill was the way it dealt with net operating losses. I didn’t harbor any illusions that the Senate would embrace every aspect of the House version and be done with it. I wasn’t naïve about what might come back from the Senate. The Senate version, as is well known, did make reforms in Cook Inlet. It used a placeholder tax on oil and gas in Cook Inlet that was too small while the Seaton-Wilson plan was too big, and there should have been a compromise made there.

The Senate version, in my opinion, didn’t go far enough on the North Slope. I guess what was most frustrating is Senate majority members saying yes but the net operating loss credit has resolved itself because we are over $50 a barrel and we are hopeful that net operating losses won’t happen.

The obvious retort is if that won’t happen then you shouldn’t mind something pre-emptive that would stop us from when or if prices return to something less than $50 a barrel. I conveyed to members of the House who were on the fence that this vote was critical to sustaining support for an overall fiscal plan.

The public had, I think through messaging and a large amount of press coverage on the oil and gas tax credit issue, had come to the belief that these reforms were necessary and that what we were doing was unsustainable, that we couldn’t place a burden on them and their pocketbooks while paying the industry something that was unsustainable.

Petroleum News: So do you think the state is protected on the low side of the per barrel price range?

Josephson: No. As I understand it, it’s not protected. The GVR can still go under the 4 percent gross minimum tax. The per barrel cannot but it never could. The NOL can. Of course the argument with the NOL was whether we should take some minimum amount or take virtually nothing and erase those NOLs faster. I think that was a debate that I wasn’t as intrigued by because I view it as debt either way. There were members of the Independent Democratic Caucus who said we need a hard floor with NOLs so we get some tax. I think the number floating around was around $300 million. I didn’t view that as a deal breaker because I knew we either had to pay it now or pay it later. I think the industry should view the reforms that came out of the past version of HB 247 with some hesitancy. I’m not convinced those reform efforts are over.

Petroleum News: The industry’s position was no change at all. What do you think the industry could have done differently to facilitate a compromise, and I’m not suggesting they should have done anything at all, I’m wondering if you think there were those options?

Josephson: It was interesting to see that the three majors - some would say four majors - and the smaller independents were willing to play hardball with one another, that they would fracture just like a political caucus would fracture. I think we saw some of that.

They have a corporate position, which is in the interest of their shareholders, but by definition a program of credits back in 2006 was $53 million and is now over $900 million. It’s not sustainable. It’s not even close to being sustainable.

The original argument was SB 21 could give us an increase in production. It then became a stem the decline argument. And that’s fine. I’m not here to criticize what some might see as an evolution of that argument.

But I think if you look at the stem the decline position, it’s hard to say the increase of production or the cessation of the decline rate, that 100,000 barrels that may not have been there otherwise is sufficient to justify the credit outlay.

That’s my problem. You do see the morphing of the industry position that says yes, but you’re getting royalty. I think the industry largely prevailed and I’m not so sure that the reform effort is complete.

Petroleum News: Would you like to see the governor veto HB 247?

Josephson: If the governor were to veto it, as someone who is moderate with my own caucus on this issue, some would even say even more conservative, there are good things and bad things right now. The good thing is it would send a signal that in January the entire discussion would start again.

It would defeat the argument that we hear from industry that boy this keeps coming up every year, some new legislation every year. The retort would be yes, but there wasn’t last year because nothing passed.

On the other hand, as Commissioner (Randall) Hoffbeck said today in the House Finance Committee when addressing the Permanent Fund restructuring bill, there are reforms in HB 247 that have merit. Selfishly if the governor vetoed this bill, it would signal he wants to keep us here through June and into July. That’s not something I relish.

I’m not hung up on whether he vetoes it. I think there is an argument that some of the appropriations should be vetoed because I think that it’s just not reasonable to be paying - we saw the most egregious example - 85 cents on the dollar for exploration and development costs - frequently 55 and 65 cents on the dollar.

We don’t do that for other industries. It’s not my goal to offend or upset industry’s position. I want them to thrive here. I just think just as they have retracted their own rig count and their exploration and development costs, it’s unfair to say you the state of Alaska must maintain, keep doing exactly what you’ve been doing. It’s not reasonable. I think the veto of some of the appropriations is allowed by statute and might be warranted as a way of signaling that the state doesn’t find the existing outlay sustainable or affordable.

Petroleum News: So do you expect this issue to come before you again in January?

Josephson: I do. I do. One thing - and I never heard anybody rebut this, never - is there wasn’t sufficient modeling at these low prices. No one considered in 2013 during the SB 21 talks that a fiscal downturn could result in net operating losses for the Big 3. I think it’s reasonable to look at making sure that cannot happen again. It’s inadequate to say yeah but prices are higher so don’t worry about it, so yeah I think there will be some revisiting of it.

Petroleum News: The argument that prices are up so don’t worry about it, do you see it as this is what got you in this situation in the first place?

Josephson: Yes, it’s exactly what got us into this position. The Cook Inlet outlay was more expected.

Petroleum News: What was achieved that you support?

Josephson: There is some new transparency language that allows legislators to peak behind the curtain to see which credits have efficacy and which credits that do not have efficacy. There is some GVR language that is frankly somewhat remarkable given that it is a change to SB 21. There is a ramp down, albeit not as fast as I would have liked, of the credit regime in Cook Inlet and even an end of the net operating loss in Cook Inlet. So those are the things that come to mind.

Petroleum News: Now that transparency issue, many lawmakers said they wanted clarity on what the state is receiving for the credits. Do you think you’ll start getting that clarity moving forward?

Josephson: Yeah, I think so. You know I was asked toward the end of a 90-day session to join a working group that we kiddingly called a non-working group. We were trying to fashion some sort of compromise on HB 247. The net result was a lot of discussion on Cook Inlet and not much discussion at all on the North Slope. It’s interesting that was sort of the result of HB 247 in the final analysis as well.

So with the transparency, we had discussion with the industry executives that were very candid and very insightful, and they really gave us a sense of which types of credit - be it a qualified capital expenditure or a well lease expenditure - were useful, how much longer they needed them, which were not useful, which could be rolled back. So we had these candid and compelling conversations with industry executives about what was working.

One member said we can never go back. Meaning, once you’ve seen - as I’ve said - what’s behind that curtain, it makes you a better legislator. It may even make you a better legislator in a way that it’s in the corporate interest so you’re steering state investment and dollars that’s best used.

This was the working group that became know through a series of stories and was formed in the late April timeframe. It was made up of Resource and Finance members - a bipartisan group - that met with some staff and tried to fashion a deal that could then make its way through the House. Ultimately a bill was drafted by the Rules Committee chairman (Craig Johnson). That bill did not have sufficient support, but on the heels of that bill, the Seaton-Wilson plan emerged.

Petroleum News: If it didn’t advance a bill, did it get you closer?

Josephson: Rep. Seaton was on that working group, so I think the Seaton-Wilson draft was a logical outcome of what some of us saw as insufficient reform of the credits that came out of the original working group of late April.

Petroleum News: What will it take for the state to have a stable regime at low oil prices, moderate oil prices and high oil prices?

Josephson: I’m reminded that if we can live off the earnings reserve of the Permanent Fund, it will be less important what revenue we receive from the oil industry. That’s good and bad. It’s good that we can look after our own interest in a direct way. Frankly that should be something the industry welcomes. I’ve been surprised, however, that the industry, just like a new chick that is going to leave the nest and fly away for the first time, the industry has mixed feelings about our economic separation from it.

I think it should welcome our use of the earnings reserve to sustain our own budgets in our own way, but at the same time it wants to remind us that yet the industry is vital to us and remains vital to us. It’s an interesting paradoxical dance we are going through.

The reason I think this answers your question is that I think if the focus comes off the industry a little bit, one might think that would result in a more sustainable ultimate bill on tax credits and tax rates as well. Once they are set, they are sort of going to be set. They will not be relied upon as the end all, be all.

I will say the one thing the industry might watch for is the debate between SB 21 and ACES, which is mostly engaged in not by freshmen and sophomores - I’m in my second term - but by the old guard that really has entrenched interests relative to that debate. That debate whether SB 21 is the better bill or ACES was the better bill never really reached a full climax in this legislative session.

The reason is those who supported SB 21 made the argument, I think convincingly, that at low prices we actually received a little bit more revenue. The industry should be watchful, however, when we get to higher prices, then that debate could return because you might see some dialogue what does this mean now at a higher rate.

Are we taxing some other industry? Are we imposing an income tax? Or is there some other part of the revenue package that’s going on because we are not getting the windfall we would have gotten under ACES. For the record, I look at some of the ACES tax credits as overly generous so I’m not overly beholden one way or another.

Petroleum News: OK, switching topics to AKLNG, how much do the low oil prices concern you as it relates to the prospect of the AKLNG project? I realize there hasn’t been a lot of discussion on it.

Josephson: Well, I think broadly speaking, the affordability and the economics improve when oil prices are somewhat higher. In that respect I have concerns about AKLNG because the prices are low. The sad part for me about AKLNG, as a booster and backer of SB 138, has been that I think the hope that came with that bill has seriously waned. So you don’t hear much discussion about it. You don’t hear much belief that this could really happen. I still saw as late as a week ago something from the AKLNG team that said yes, it’s summer time, we’ve got people in the field, we are doing everything we intended to do. I’m guilty of falling into the same cynicism, some of it earned at this point that others have about the future of AKLNG.

Petroleum News: Now they just hired Dan Fauske’s replacement and at quite a price - more than $500,000 - that’s a hearty paycheck. Does that concern you at all during austere times?

Josephson: Not particularly. We have these sorts of salaries for our Permanent Fund team as well. Not quite this high. This is what the market bears. If I was forming a major league baseball team, I would expect that my top pitcher would earn a good salary.

That’s what top pitchers get paid. Similarly the director of the Alaska Gasline Development Corp. should receive a generous compensation package. That is the nature of the work. So I’m not especially troubled by that.

I guess it does raise the question of how long are we going to do this if we are not going to have a gas line. If the gas line really doesn’t prove viable, then we need to admit that to ourselves.

Petroleum News: Does it give you any confidence that someone is willing to walk into a situation with the economic backdrop the way it is?

Josephson: I haven’t met with the individual that’s been hired by the board. I don’t know quite yet what we are going to get. It’s a job and I just hope the new director has confidence and intelligence and he will do everything possible.

Petroleum News: Pre-FEED is due for completion in the fall. Is there anything you would like to hear from the partners once pre-FEED is completed?

Josephson: Well, I’m not that anxious about that. The reason is we are not going to go into FEED and be responsible for billions of dollars unless they are, so I don’t think there will be great exposure for the state. The reason I’m less hopeful and less sanguine about it is that the industry indicated during the January-February timeframe that there would be some reconsideration essentially, some re-visitation over the viability of all of this. After that happened, frankly, most legislators, as I did, went to work on the fiscal crisis.