Meyer: Oil tax credit changes needed

Senate President, Anchorage Republican, says Legislature should review oil tax credits while being careful not to delve into SB 21

STEVE QUINN

For Petroleum News

Senate President Kevin Meyer is playing a waiting game. He’s waiting for the oil tax credit bill - HB 247 - to come over from the House. The bill has been in House Rules for over a week undergoing revisions. Until it arrives, Meyer says his chamber is ready, especially having held numerous interim hearings on oil tax credits. The Anchorage Republican offered his thoughts on the Legislature’s overtime efforts on reaching a compromise on one of the most divisive bills this year.

Petroleum News: Let’s start with oil taxes and oil tax credits in SB 130/HB247. You’ve been through this before more than once. Several times. Why do you suppose you’re back discussing some of these issues again, though clearly it’s not a re-write of SB 21?

Meyer: Well, I think the oil tax credits are probably a legitimate discussion at this time. Obviously Cook Inlet is 60 percent of the oil tax credits. They worked exactly how we wanted them to work. We had a shortage of gas in the Cook Inlet. That is where 60 percent of the population lives. It was critical that we get gas to that area.

We were looking at importing. Now we have a surplus and we have a storage facility there to store the gas. So do we need to continue the credits? Probably not. On the other hand, I don’t think you want stop them abruptly because some of these small oil companies have come up here and borrowed money thinking that they were going to get some of these credits. If we don’t do that, it hurts them, it hurts our reputation.

I think the governor proposed setting up a revolving loan fund in another bill, about $1.2 billion. That idea was probably not a bad idea, but that money was coming out of the CBR and to get a three-quarter vote is virtually impossible. So I think he underestimated that. Now you don’t hear much about that. You are hearing all these different proposals. Everybody has different ideas. So I think the Cook Inlet is probably OK to address. The question is how do you address it? Do you stop it immediately? Do you phase it out? Do you say no more after a certain date? Everybody has different ideas on that. That is one of the problems.

The other problem is they are wanting to go up on the North Slope. That’s a whole different ball game up there. It’s a very expensive area to work, but it also has the most potential for the state as far as production and revenue goes. When you look at the two basins, Cook Inlet versus the North Slope, you have to look at them different, separately.

I think that is what’s causing a lot of the problems on tax credits. Some want to focus on Cook Inlet, some want to focus statewide, even middle earth. I think the governor had originally proposed raising the minimum from 4 percent to 5 percent and hardening it: Now that gets into provisions of SB 21.

I think a lot of us would prefer not to. We spent a lot of time on that and the voters confirmed our decision. For us now to mess with it would be wrong. It’s not an easy thing to do. We tried to rewrite ACES two or three years at least. It’s one of those things you don’t do quickly.

Petroleum News: What about the ability to penetrate the 4 percent minimum floor? That caught many lawmakers by surprise.

Meyer: I agree that it did catch a lot of people off guard. But I think there is some merit to going below zero and certainly going below 4 percent rather than having a huge carryover from year-to-year so that ultimately when prices do rise, you’re not getting much because of the carryover.

Petroleum News: So it’s better to pay them now than pay them later.

Meyer: Yes. The problem with paying them now is we don’t have any money. It’s hard to pay them now when you’re talking about new taxes. That rubs people wrong. We get that. I think that’s why we are struggling with trying to come up with a policy that is fair to the industry, does what we want as far as incentivizes work, especially on the North Slope, but on the other hand minimizes how much the state has to pay out.

Petroleum News: Do you have any concerns that Alaska is starting to look like an unstable regime with its tax system?

Meyer: I think if we make some of the changes that I’ve heard about, then yes; making adjustments to your tax credit system and doing it in such a fashion that’s fair and reasonable, then no. Again that is our biggest expense and most of those are in Cook Inlet so I think most people have come around that we need to make some changes.

I think every time we come down the path of oil and gas tax credits, the response is this only affects the small guys. What are we going to do about the big guys? I’m not sure the big guys are part of the talking points when it comes to the tax credits. Exxon may be using some, but I’m not sure BP and ConocoPhillips are.

So now you’re talking about raising the floor and the loss carry forward. Some of those have to do with SB 21 than oil tax credits.

Petroleum News: Do you think that if you make the right changes, you can help the state with the bond ratings? That’s one area where the state is being closely watched, even as this is just one piece of the bigger picture.

Meyer: That’s why our plan is the three Rs. Reductions comes first. Everybody knows in an organization this big that there are some reductions that can and should be made. The reforms, you want your government to be as efficient as possible. The revenue: We do need to diversify our revenue sources from oil, which used to be 90 percent of our revenue. If you can restructure the PFD as the governor has proposed, I think that will help a lot with the bond rating.

We don’t propose to fill the gap completely this year, but if we can get to $3 billion and dip into our CBR for $1 billion then I think that would still be good with Moody’s and S&P. I’m not sure. I think you want to keep the pressure on us to always have a little deficit so we don’t get back into spending when oil was $110. Obviously if you are dipping into your savings $1 billion at a time versus $3 billion, it’s going to last a lot longer.

Petroleum News: So if you’re back up to $110 or $120 or $130, do you think the Legislature will remember this time when it considers budgets?

Meyer: Because the dividend is such an emotional topic here. People say it’s a third rail and don’t touch it. Now we are talking seriously about touching it. I take a business approach to government. When times are tough like they are now, you reduce your dividend, like a Native corporation or other businesses.

But if oil does get back up to $110, I hope then we look at increasing the dividend. I think the general public will put pressure on us to do that as well. If oil gets to $110 or $120, I think before we are tempted to spend a lot more, we’ll use it on the dividend. But right now we have almost a zero capital budget. I think we have $100 million for federal match. At some point, you’re going to need a capital budget again.

Petroleum News: This year, more than previous years, there seem to be greater differences across all 60, some saying don’t change a thing, others say change it a little and some want wholesale changes. What’s driving this kind of spread, even within existing caucuses?

Meyer: Oil taxes in general is always a difficult topic, subject and policy call. We want to do what’s right, but it is a finite resource and we want to get the maximum we can for that resource. We haven’t really addressed it much in the Senate either, so we may see a similar situation as the House majority in the Senate.

I can assure you in our majority, Sen. Stedman and myself have different opinions on oil tax credits, the floor and carry forward - all of those topics. I’m hoping ultimately we can find one area where we agree on. In my opinion, I think the Cook Inlet tax credits is something we all agree that probably needs to be modified.

Like I said, it’s about 60 percent of our costs. It’s accomplished what it set out to do. The North Slope is a whole different ballgame. They are starting to find some pretty good size fields. Armstrong has got some. Caelus has got high hopes. And ConocoPhillips is expanding with CD5 and Greater Mooses Tooth. Certainly when you start talking about raising the floor from 4 pe4rcnt to 5 percent, that would impact their economics like anybody else.

Petroleum News: Speaking of ConocoPhillips, you don’t seem to have the pushback that you have in past years over working for them. Do you think people have kind of accepted you declare it when you run and when you vote on the floor?

Meyer: You know this is my 16th year here and I’ve always been very open and I’ve always disclosed it. It’s on my financial disclosure every year. A bulk of the people know I work there part-time. Like right now I’m not working there. I probably work there eight months a year.

But I’m sure once the issue comes before the Senate that will come up again. Now I’ve got Sen. Micciche, too, so maybe there is safety in numbers. We’ll disclose it. If the vote goes a certain way, I’m sure people will say it’s because of where I work.

This is my 24th year in elected service, including eight years on the Assembly. I’ve always worked in the same place. First it was ARCO. Then it was Phillips. Now it’s ConocoPhillips. That’s why a lot of people have supported me. They know how important the oil industry is to the city of Anchorage and the state. I feel like if I have voted the wrong way or if I voted more for my employer than the citizens of Alaska, they would have elected somebody else.

So I know some people think we shouldn’t vote. Everybody is going to have a conflict on some issues sooner or later, whether it’s (Bill) Wielechowski on union issues or Paul Seaton on fishing issues. The method we have here, which has been in place, (former House Speaker) Mike Bradner told me since the ’70s.

It’s probably the fairest in that everybody has to vote on every issue. It would be easy for me and maybe I should say I need to not vote on oil taxes. That’s always a tough vote for everybody. I think you want to force everybody to vote and be on record one way or the other. So to answer your question, yeah, there could be some flak for voting on oil and gas tax credits assuming we get an opportunity to do so. I think the main focus will be on Cook Inlet and ConocoPhillips doesn’t have a lot going on there.

Petroleum News: I think there are a lot of people who say ConocoPhillips is back in Cook Inlet along with BP, Exxon and the state as a partner with AKLNG. Cook Inlet could still be key for the state’s future. What is your sense of the AKLNG project now? Are you confident it could still move forward?

Meyer: You know as long as the governor still keeps the three majors and as long as the state is working with people who know what they are doing, I feel pretty good about the state moving forward. We’ll know come October or November, sometime later this year, whether or not all three producers are going to move forward to the next stage. The price of oil and gas are going up a little bit. I guess it depends on what everybody’s crystal ball looks like as far as when the pipeline is built and when the gas is ready to be sold.

Petroleum News: You’ve been around for the various iterations. Is there anything about the way things are now that gives you confidence that it could happen?

Meyer: I think this is the ideal partnership where you have the state with the people who have the leases to the gas. The state can, through regulations and through permitting, help expedite the process. One of the complaints I’ve heard about TAPS is that well the state doesn’t really know how much they are making or not making. Now the state will be at the table with the three producers, so I think this one has probably got the best arrangement.

Petroleum News: Speaking of TAPS, you guys quickly passed a bill to sell royalty oil to Tesoro. Would you consider that a bright spot in a session mired in deficit discussions?

Meyer: I think that definitely is a bright spot. I heard somebody say now we need to take back the tax credits we do for refineries. But yeah that is a bright spot for the state, a nice added bonus in a time we are $4 billion in the whole. Also we are getting break on the (retirement) payments.

Petroleum News: Another potential boost was HB 100, the Agrium bill. It comes at a price, the credits against the corporate tax.

Meyer: That bill made good sense. I’m not sure if the governor is going to veto that so right now we are getting zero revenue from them. So we’ll get the royalty from that and lots of jobs. Micciche knows that area and he’ll tell you when you look for gas, you find oil, so maybe we’ll get more oil production from the gas they find for Agrium. Maybe we should be looking at production tax for Cook Inlet oil because we don’t have any right now.

Petroleum News: How has your view of things changed now that you’re Senate president from when you were co-chair on Senate Finance or even House Finance?

Meyer: When I was on Senate Finance, I was more hands on with the policy itself and the bill itself. Now as the president, somebody else is doing that work. It’s my job to make sure whatever product they come up with, we can get it past our body on the Senate floor. So yeah, it’s a different role for me.

Petroleum News: Do you still feel in touch?

Meyer: Not quite as much or as close, because now I’m seeing all of the bills so it’s hard for me to know any one in any detail. A big bill like this, the oil tax credit bill, I’ll talk to the Finance chairmen as they are both on the leadership team. Then we usually talk about it in caucus, so everybody pretty much knows what it’s all about. I guess I don’t have as much ability to turn a few knobs here or there.

Petroleum News: Do you feel that even though the Senate hasn’t looked as closely at the oil tax credit bill as much as the House, because you expected it to come over sooner, the Senate is still more engaged because the operating budget was complete weeks earlier than normal?

Meyer: You’ve got to remember, Sen. Giessel held a lot of hearings on the oil tax credits during the interim with her working group. There were quite a few members from the Senate on that task force. Sen. (Anna) MacKinnon was; Sen. (Bill) Stoltze was; Wielechowski was. So we had several members on the task force studying this before the session began.

The plan all along, because we had been working on Medicaid reform and (Sen. John) Coghill was working on criminal justice reform the last two years was for the House to take the lead on the oil tax credits bill. We could have easily done the oil tax credit reform bill, too, but you don’t want all the bills on one side. Those were the three big reform bills.

That’s been the Senate plan since day one, the three Rs: reduction; reform; revenue. Unfortunately, we are having a hard time getting past step two. You could almost say we’re not past step one because the operating budget isn’t done, but we are within range.

Petroleum News: Do you wish you had done it differently?

Meyer: I don’t know. I’ve watched the struggler with the criminal justice reform bill. Had we done the same with oil tax credit reform bill and sent it over there, I think it would be a similar situation as with the criminal justice reform bill. The House is an interesting group this year. It seems like everybody is out for their own. Some might think that’s good, but on the other hand, too, it’s hard to get anything passed.

In the past most of the majority members would stay together or think similarly. Maybe it’s an election year. Who knows? I don’t want to speculate.