Seaton: Prepping for new House role

Homer Republican says correcting historical pendulum swings in state’s tax regimes key to fiscal plan and achieving ‘balanced program’

STEVE QUINN

For Petroleum News

For 14 years, House Rep. Paul Seaton’s view of resource development came while sitting on the House Resources Committee, including two as co-chair. Now the Homer Republican will see things as a House Finance co-chair with fellow rural lawmaker Neal Foster, a Nome Democrat. The two are part of a newly minted majority set to be sworn in Jan. 17.

Seaton spoke to Petroleum News about his new post and what lies ahead of the House in coming months.

Petroleum News: You’ve been on Resources your entire legislative career, will you miss that?

Seaton: It was a great committee to be on. I really enjoyed it for my entire time. I think most of the issues we’re talking about in Resources will come to Finance.

Petroleum News: How will your 14 years on Resources help you being co-chair of Finance, especially in these times?

Seaton: Well, in these times, I think we are going to be looking at the Alaska budget and one of those things will be expenses from oil tax credits. Oil and gas tax credits will be a big portion of that. The other is looking at taxes. Since I got there, we’ve gone from ELF to PPT to ACES to SB 21. We had HB 110 consideration there as well. There have been a lot of moving pieces with the pendulum swinging one way then another. So I think all of that background really helps looking at the situation for how we can get a balanced program for the state as well the oil companies.

Petroleum News: How close do you think you are to a balanced program?

Seaton: Oh, I think we are pretty far off. Our problem right now is when we went to a profits based tax, the person who helped us design it was Pedro Van Meurs. He warned us very strongly in the beginning that tax credits should never exceed 20 percent; otherwise, they put us at risk for high liabilities. We have been all over the map.

When things were high we became very generous with those tax credits. They worked. We’ve got a lot more players than we had before, but the liability that it has created for the state is huge, especially in a situation where we have the tax credits based totally on the companies decisions to invest money and had basically no relationship to the timing or the amount of tax or revenue that we received.

The disparity between a profits-based tax and credits based on expenditures have driven this huge wedge in our entire system.

Petroleum News: So how do you close that gap?

Seaton: I believe the tax credits need to be revised quite strongly. Last year in HB 247, we had a revision that took account several factors in the Cook Inlet basin and the North Slope. In the end, with the Senate’s changes that came out of the conference committee, we only had a roll back at taking care of the problem over time in Cook Inlet and we didn’t address the North Slope basically at all.

There is one small change and it may not be small over time and that was with new oil, the gross revenue exclusion, limiting new oil to seven years. That’s a seven year time horizon before that really kicks into effect. That’s in the future and that was the only change we made for the North Slope.

Coming out of the House, we had some provisions that would have done a whole lot more. It would have made sure with distant fields the tax couldn’t be below zero, so it wouldn’t offset profits made in other fields if you had a long pipeline and a high tariff being paid to yourself. That was one thing that didn’t get included. The other was rolling back the credits for carrying forward expense liabilities to future years.

We give the oil companies a great thing in letting them expense all of their capital expenses in the year in which it occurs. Letting that net operating loss roll forward as a 35 percent tax credit in future years doesn’t make much sense when you’re letting 100 percent of it being an expense in the first year instead of the oil companies depreciating those expenses over seven, 10, 15 years like normal business do. We let them recover all of those capital expenses as much as can be done in the first year, but letting them roll forward a 35 percent tax credit doesn’t make much sense, especially when the tax credits allow them to take their tax down to zero. In other words it goes below the minimum tax. The minimum tax is very small. It’s 4 percent and that was based on anything above $25 a barrel. There are four minimum tax levels and they are all at very, very low prices. They weren’t adjusted at all to the new price environment. There was a provision in doing that in HB 247, which allowed the minimum tax to go from 4 percent to 5 percent at $70.

Petroleum News: One of the arguments in keeping the 35 percent carry forward credit has been if the oil companies are still willing to invest at a loss, shouldn’t they be able to take that credit.

Seaton: There are provisions that are very beneficial in writing off their Cap Ex in the year in which they make it. There may be benefits, but the liability it creates for us means that we get no production tax since paying credits, which is the other component to those producing less that 50,000 barrels a day is dependent upon us receiving the production tax. So if you wipe out all of the production tax by allowing large producers to take their tax to zero, it means they can affect the amount of tax credits we can pay to the people who are trying to get up to production. So there are some back and forth influences. You have to figure out what’s the appropriate amount, what’s the appropriate level and who can get those credits.

Petroleum News: Do you think something can be worked out with the industry next year?

Seaton: Oh, I think something needs to be, so yes I hope so. It needs to be for their understanding of a longer-term secure tax regime that isn’t this pendulum swinging back and forth. But it’s unstable now because the tax credits that are generated, there is almost no production tax generated to pay those tax credits. If the system was to work the way it’s envisioned in SB 21, there has to be some production tax being paid.

Petroleum News: It seemed as though a lot of people were caught off guard by the carry forward credit last session. Was that discussed enough during the SB 21 debate or was it simply not considered because no one believed oil prices would be chronically low?

Seaton: It would have been much better to consider low oil prices. Under the SB 21 debate there was only one consideration of $60. Generally, it was always considered between $80 to $120 a barrel, which was the range of the analyses.

So it was not looked at. Even though some of us wanted the lower ranged looked at, we were kind of ignored.

Petroleum News: So do you see someone or some committee in the House bringing forth a bill or do you see yourselves waiting for the governor to bring forth a bill?

Seaton: That will of course be the significant purview of the Resources Committee and I believe the co-chairs who were both on Resources the last few years will be addressing that. They will be looking at whether they look at the vehicle generated by the governor or whether they produce their own.

Petroleum News: Do you see yourself wanting to stay in touch with Resources perhaps by sitting on the resources subcommittee?

Seaton: I can’t tell you at this point.

Petroleum News: Also, connected to a fiscal plan could be an AKLNG plan. What are your thoughts on where things are right now with AKLNG?

Seaton: I think the analyses that we got at the last quarterly report were chilling. We had two reports that came to us. Well there were three. There was the Wood Mackenzie report that said if you could get the tax free bonds that would be beneficial. Then there were two other reports that came forward that pretty well demonstrated to my satisfaction the probability of getting tax free bond status is extremely, extremely low.

I don’t think moving that path is going to make the project economic. The economics of the project is severely challenged. I don’t look for the administration coming forward asking for any more money in this next budget he will be proposing. I think it’s important to get pre-FEED finalized so if the economics change, we can then move more rapidly instead of just stopping where we are today. I don’t think the intent is to do that. I think unless something changes we are kind of in a holding pattern.

Petroleum News: So what questions might you have from the administration as the go forward on a project the industry has deemed uneconomic?

Seaton: They will have to be able to come up with other investors willing to take substantial risks on the economics and the price. I think we are much closer to getting on the lower end of the cost, but the worldwide price of LNG is such that unless there is some way to come forward and change those economics we will be in a holding pattern - just like many projects around the world are.

Petroleum News: There has been some concern over turnover with the administration’s resource development team. You’ll return to session meeting with a whole new lineup from the same time as last year. Gone are Mark Myers, Marty Rutherford and Corri Feige. That’s two resource commissioners and an oil and gas director. Do have these same concerns or is this the governor getting a new team in place to pursue his AKLNG plan?

Seaton: Well there is always concern when there is turnover of people you know and become familiar with. But the governor has the right to get people in place for the time that it is and the project he wants to go forward with. But it doesn’t mean that this changes the economics. We need to make sure we are looking at the facts and that’s what we’ll look at with any proposals that come forward to us.

I know with situations like Marty people were concerned, but we are all replaceable. If it’s for some reason not working, it has to work within the administration. Whatever proposals come forward still have to be fully vetted be economic no matter who holds those jobs.

Petroleum News: Speaking being replaceable, that seemed to have happened with enough members of the House and that led to a change in the majority. What do you hope to bring the Legislature as somewhat of a bipartisan group?

Seaton: The organization was not formed as a bipartisan organization. It was formed around people deciding that they wanted to get a comprehensive sustainable fiscal plan for the state of Alaska. That was more the organizing principle than the parties. It just depended upon who was willing to sign up with that vision of getting something done on a sustainable fiscal plan. It’s going to take a comprehensive approach. It’s going to take all the pieces, some sensible budget cuts, some way to reduce the Permanent Fund dividend amount. It’s going to take some way to get some money out of the earnings reserve in a sustainable way and it’s going to take a broad-based tax. Some of those sensible budget cuts are related to oil and gas in oil and gas taxes and reforming the tax credit system. As far as a broad-based tax, an income or a sales tax is also part of the necessary components to get us to an end point that can be sustainable.

Petroleum News: There is still unfinished business with oil tax credits that were vetoed but must still be paid. How do you propose getting in a position to pay those?

Seaton: Well, of course some of us didn’t think they should continue to accumulate at the same rate because we were terminating tax credits in Cook Inlet. They were no longer needed for gas exploration or development because the price for natural gas via pipeline in Cook Inlet is among the highest in the world. It fully allows for development of gas as long as there is a market for the gas. So Cook Inlet was taken care of. The problem was the North Slope didn’t get pulled back as far as it was offered (by the House).

The House proposed we do all three of those. One was to restrict what credits were given for by saying they would only be given for expenses in support of a plan of development so we wouldn’t be doing this far away exploration and paying for the riskiest things people wanted to do. It also ramped down the amount of the tax credit from 35 percent of their expenses to 25 percent of their expenses. It also didn’t allow net operating losses to generate credits to lower the tax below the minimum tax.

I think the House bill comprehensively looked at a way to ramp that down and constrain those credits on the North Slope but the Senate did not agree with the comprehensive approach to ramping those down. I think we’ll need to address that this next year otherwise we will keep generating these large amounts of credits. The payment schedule is still 15 percent of the production tax that we receive. That’s in statute. We anticipate paying that. You either have to increase the production tax or there is going to be this accumulated liability over time.

Petroleum News: So what would you like to hear from the industry next session on the state’s tax regime and its position?

Seaton: I mean we all know the industry is hurting. The only one we really have a good handle on is ConocoPhillips because they are required to report. They lost money in the United States and all over Canada but in Alaska they made money. So we are doing something that is in a way right, but in another way we can’t subsidize the rest of the world or the large losses in the Lower 48 in Canada. There has to be a balance somewhere.

Petroleum News: Switching to the federal level, we’ll be getting a new administration coming in D.C. How do you think that could impact Alaska’s resource development efforts?

Seaton: It will be interesting to see what comes out. There are scenarios where it could be very beneficial to allowing more development; however, if the development is not economic without allowing high-stakes subsidies, then that actually could be detrimental to the state’s budget. We definitely want resource development but we can’t do it in a way in which we are having to pay excessive amounts to get that resource development going.

Petroleum News: Some have said this could make ANWR’s prospective exploration more within reach.

Seaton: It would be great to have the exploration and find out what’s there. The question is can you actually proceed with new developments that are costing billions of dollars without billions of dollars in state subsidies.

Petroleum News: Speaking of big developments, were you surprised to hear about Caelus’ discovery at Smith Bay? It seemed to come out of the blue.

Seaton: It’s great to have another find. We are a long ways away if the only way it’s economic is that the state subsidizes it highly. The state subsidized the exploration at least at 85 percent tax credit. Whether that was paid out or not, or it’s just a liability that we owe, we can’t keep subjecting the state’s finances to a huge draw on our resources when there is no production coming for eight to 10 years. We do not have the financial balance sheet to do that.

Petroleum News: Why do you suppose the oil tax debate seems as fresh today as it was when you first got into office?

Seaton: It’s a pendulum that keeps swinging back and forth. That’s the problem. When I got into office, we had a proposal made by the oil companies to change the gross tax to the ELF system and that had not contemplated the response of the oil companies to leaving so many less that marginal wells going, which reduced the tax rate to basically zero while you’re having huge production. That hadn’t been analyzed far ahead. Then we went to a profits based tax which was supported by the industry.

Then we had the corruption problems and the pendulum swung back and went too far the other way. Then it swung back with SB 21 and we find ourselves in this same situation where the oil tax created did not contemplate the future (price) ranges of things and now we find ourselves in a situation of liabilities for these tax credits that are huge with very small amount of taxes coming to the state. Hopefully, in the future we can get a balanced program that works across all price ranges so it’s self correcting as well as volumes.