Wielechowski pushes SB 21 ballot recall

Anchorage Democrat says oil tax change ‘giveaway,’ bill ‘fundamentally flawed’; calls for natural gas focus on big line, Cook Inlet

Steve Quinn

For Petroleum News

Sen. Bill Wielechowski is adamant that the new tax regime enacted in Gov. Sean Parnell’s Senate Bill 21 is so flawed that the state’s voters need to weigh in and get a chance to overturn the legislation.

A referendum he calls “truly grassroots” could be on the ballot in August 2014. For now, the state is reviewing more than 50,000 signatures to see if the referendum can be put to the voters.

Wielechowski sat down with Petroleum News to discuss what he believes are the flaws and strengths of SB 21.

Petroleum News: Critics of SB 21 have called the new regime a giveaway. And that word keeps coming up. Why is this giveaway?

Wielechowski: The biggest concern that I have with the bill — and that many have with the bill — is the fact that every penny of the $5 billion that’s being given to the oil industry through the tax cut is for oil that they already promised they were going to produce. The oil companies are required to let (Natural Resources Department) know and (Revenue Department) know what their forecasts are: how much oil they are going to produce and where are they going to produce it. Every penny of this tax cut is for oil the oil companies have already told us they planned to produce under ACES (Alaska’s Clear and Equitable Share, the tax regime enacted in 2007). So that’s why it’s a giveaway. That’s one of the biggest fundamental problems that many of us have with this bill. There are some things in SB 21 that we supported, but this was the biggest fundamental problem, in my opinion, of the bill.

Petroleum News: So what things did you support?

Wielechowski: There were provisions for incentives — the gross revenue exclusion in new fields and new producing areas — those are things we had in the Democratic bill. The problem we had with SB 21, it was expanded way beyond what it needed to be. It was expanded again to include oil that was already going to be produced. It was expanded to include oil in the legacy fields where the rates of return according to the Parnell administration experts are over 100 percent. You didn’t need to provide gross revenue exclusions in those areas. I didn’t support that and I don’t support that.

Petroleum News: Was there anything about ACES that you believe was working?

Wielechowski: I think ACES was very successful in increasing the number of companies coming to Alaska. If you look from the time we passed ACES (November 2007) to the present, we increased the number of companies coming to Alaska by 383 percent. The fundamental problem we saw with the old oil structures — PPT and ELF — was that you had very little taxes and yet you didn’t have companies increasing investment. In fact for 30 years you had a zero percent tax structure on 15 of the 19 fields under ELF. Yet you had production declining from 2 million barrels per day to 750,000 barrels per day. You had jobs declining. You had investment declining. So it was a failed philosophy. PPT went from a gross structure to a net tax structure, but it didn’t fix the problem. Our experts told us the industry was in harvest mode, taking very large profits and investing in other countries around the world, like Libya where you had 95 percent tax rate, like Venezuela where you have a 90-plus percent tax rate, like many other countries around the world. What we said with ACES was how do we fundamentally change the dynamic here? You have an oligopoly on the North Slope and you’ve had it for decades. So we created a large tax credit, tax deduction system, which has been wildly successful because it’s brought in a huge number of new companies. We wanted to encourage new investment, which I would say was wildly successful. You had investment increase to all-time highs every year except for one. It was successful in creating jobs to all-time highs on the North Slope. The investment was not just for operating investment for maintenance, it was also for capital investment. It was successful of course for the state because for years we had very low, if not no tax structure, on the North Slope, and we were practically broke by the end of 2006, so it was successful to the extent that the state got its fair share and we were able to grow our savings to over $17 billion. What we were saying with ACES was what we had going over three decades was not working. It cost us tens, if not hundreds, of billions of dollars in lost revenue. It didn’t increase production. It didn’t increase jobs. It didn’t increase revenue.

Petroleum News: Now you have a new tax regime and an initiative that may find its way on the ballot. Is this referendum realistic?

Wielechowski: I have never seen as much energy and enthusiasm behind a referendum or initiative as I have behind this one. Many times you have referendums driven by certain interest groups. This referendum, it truly was grassroots. It was people coming out of nowhere and having very strong interest in this. There is no special interest driving this. It is truly a grassroots effort with very little money and strong bipartisan support. The chances for success are probably very good. It will no doubt be challenged. There will be a huge amount of money spent by the oil industry to persuade people that it’s a bad thing.

Petroleum News: Getting back to the giveaway term for a second, some say it’s giving away. Some say it’s taking less. Is there a semantics issue here?

Wielechowski: The constitution says you have got to get the maximum benefit for the resource. I have a hard time understanding how we are following the constitution when we are giving $5 billion to the oil industry to produce oil they already said they are going to produce under the ACES tax structure, so you really get nothing for it. By its very nature, it’s a giveaway. You have a product that is very valuable that is going to make the oil industry a tremendous amount of money. They have agreed they are going to produce it at a certain rate and you just cut their rate. No business in the world would operate like that. It’s a terrible way to run government.

Petroleum News: A ConocoPhillips senior executive told Wall Street during a spring presentation that SB 21 will make a difference. It’s one thing to tell the Legislature one thing, but telling Wall Street that could be another altogether. What are your thoughts on that?

Wielechowski: When the oil industry testified six years ago when we passed ACES, there were three different charts produced: a 15 percent decline; a 6 percent decline; a 3 percent decline, and that was the best case scenario under ACES. We expect we will have a 2 or 3 percent decline in the next few years. That’s proof by the metrics they set that ACES was working. It’s interesting to hear what companies are telling Wall Street because you can go back to statements made by senior executives over the years where they say Alaska offers strong rates of return or they say Alaska offers strong cash margins, or the say they are going to invest hundreds of millions of dollars at very high rates of return.

People can say whatever they want, I suppose. When you look at the company profits, when you look at the rates of return, when you look at the cash margins, there is no denying Alaska is among the most profitable places in the world to do business. You compare the profits per barrel in Alaska — it was $28 to $29 per barrel. Globally it was $12 to $15. The profit per barrel is $28 or $29 versus $3 to $4 in the Lower 48. Executives can say anything, but when you look at the numbers, you can see the industry has made profits of $36 billion since we passed ACES. According to Parnell’s own experts, you’ve got rates of return between 65 and 123 percent range in Alaska compared to 20 to 30 percent in North Dakota, Norway and Canada. The numbers show Alaska is one of the more profitable places in the world. In fact Alaska is more profitable to do business in than it is to do business in North Dakota at $115 or below. That’s according to Parnell’s experts.

Wielechowski: Absolutely. We are certainly competitive in the legacy fields. If you look at the rates of return, we were still competitive on the new fields. One of the areas we wanted to focus on were the new fields. That’s what the Senate Democrats and the House Democrats said: if you’re going to make changes make it for new oil from new fields. That’s where we were less competitive. For the newer fields, we could have tweaked that and be more competitive. That’s why we proposed legislation to do that.

Petroleum News: The proponents of SB 21 say you need to give it time and let it work. So what will you be looking for over those next several years to gauge the success?

Wielechowski: Again, the problem with SB 21 is it’s a fundamentally flawed bill and it’s flawed because you have given away $5 billion for oil that they were already going to be produce. Nothing can correct that. That is a flaw which can only be fixed next August when the voters go to the polls. If for no other reason to repeal SB 21, it should be for that reason. You can cut that part out and leave the rest in the bill and have a vastly improved bill. Just for that reason alone, you should overturn that bill. Alaska will never be able to recoup the money it’s losing from this sheer giveaway. You can’t correct the bill. You don’t need to give away $5 billion and get nothing in return. That’s just terrible business. There is not a business in the world that would do that. There is not a government in the world that would do that.

Petroleum News: OK, but just the same if this is an issue of giving the bill time to work, what other things would you be looking for if this is about the bill that needs time?

Wielechowski: The very structure of the bill is critically flawed in that you’re giving away $5 billion. There are other provisions in the bill — gross revenue exclusions — that I think will have an impact worth watching on the North Slope. Those are things we proposed in the Senate and House Democratic bills. But you can’t get around the fact that this is a bill that gives away money for nothing. It will never be a success because you’re giving away money for oil that they said would be produced during ACES. We had an amendment that said you don’t get the credits for oil you already said you’re going to produce. If you got rid of that provision, then come back and ask me the question.

Petroleum News: You’ve talked about the constitution earlier. Both sides of the argument say it’s the constitution that’s driving their position. How do you reconcile that?

Wielechowski: The constitution says you’ve got to get the maximum benefit for the resource. I’m eager to hear how giving away $5 billion for nothing is meeting our constitutional requirements to get the maximum benefit the resource. There is no way this meets the constitutional obligation. It’s patently violating the constitution.

Petroleum News: Let’s move on to another subject. Gas lines. What kind of progress would you like to see during the remainder of the interim?

Wielechowski: I’d like to see the big line move forward. I’d like to see the big three come together with a plan and let’s get moving on it. Let’s start the project. We’ve been waiting a long time. I think the problem with the smaller line has always been volume. You’re spending $8 billion to build an 800-mile line and the tariffs are going to be extremely high. When I talk to people in my district and I ask them do you want a small-diameter gas line from the North Slope, many hands in the room go up. When I ask people are you willing to pay double for gas to get it, most hands go down. We’ve got 19 trillion cubic feet of gas according to the USGS right in our backyard in Cook Inlet. That’s enough gas to last 200 years. The idea that you can bring gas from the North Slope and ship it 800 miles cheaper than you can move it 25 miles out of your backyard will be proven to be incorrect, whereas the big line, the economics are much better.

Petroleum News: There are two schools of thought when it comes to negotiating tax terms on the big line. One says wait until the companies have a firm project. The other says the companies need these costs understood before they embark on a multibillion dollar commitment. Where do you fall?

Wielechowski: It’s a good question and one that’s been kicked around over the years. It’s hard for the state to set fiscal terms without having some idea of what the gas line is going to look like and what sort of fiscal terms the industry is going to need. I would like to see what the industry proposes and what their cost structure is going to be. If you set fiscal terms first and the industry comes in and says that’s not enough, well you don’t have the numbers from the industry to know whether it’s enough or not enough. It would be premature to set fiscal terms on gas until you have a pretty firm understanding on the costs and economics are going to look like on the big line.

Petroleum News: On to the Arctic. It’s been discussed a lot during the interim. What do you believe the state’s role should be, whether it’s ANWR or offshore?

Wielechowski: I think the state needs to take an aggressive role in responsible resource development in the Arctic. There’s an enormous amount of oil and gas onshore and offshore. The state absolutely needs to lead the charge on that. The federal government has shown very little inclination in the Arctic for whatever reason. I’m glad the state is taking a more aggressive role on that. That’s important to our future; it’s important to our country’s future. It’s the next Gold Rush in my opinion. You’re going to see open shipping lanes that will dynamically change the way trade is done, not just in the Arctic but across countries. There is tremendous opportunity there. Now is the time that we need very strong leadership and assert our rights over the oil and gas that’s there and over the resources in the Arctic.