Kawasaki: Oil taxes warrant scrutinizing

Fairbanks Democrat cut his teeth on resources with four terms served on House committee before moving on to House Finance

STEVE QUINN

For Petroleum News

When House Rep. Scott Kawasaki first arrived in Juneau 10 years ago, he was the lone Democrat sitting on the Special Committee on Oil & Gas as well as Resources. It came at a time when Gov. Sarah Palin was pushing for a new way to market North Slope gas and new tax system to replace one she believed was crafted under a cloud of corruption. Today, the Fairbanks Democrat sits on the House Finance Committee with four terms as a Resources member under his belt, service he considers handy as his committee considers House Bill 111, another oil tax bill. Now in his sixth term, the Fairbanks Democrat shared his thoughts on the bill, the series of tax legislation he’s seen and the prospects of building a natural gas pipeline.

Petroleum News: How did spending time on the Special Committee on Oil and Gas and Resources help with your role on finance?

Kawasaki: Let me tell you a funny story first. My freshman year, I’m a Democrat coming in. We had 17 Democrats and 23 Republicans. We get to choose which committee we wanted to be on. Everybody wanted to be on Health and Social Services. All the Democrats. Nobody wanted to be on oil and gas. I’m jumping up and down saying I want to be on oil and gas. It’s such an interesting, important topic and I want to learn. So I got to be on the oil and gas committee, and resources my freshman year. I received a great learning experience. It was a fascinating and important topic.

Petroleum News: You weren’t completely alone as a Democrat or from the Interior, right?

Kawasaki: (Fellow finance member David) Guttenberg was on Resources but not on Oil & Gas. Jay Ramras was, but he was a Republican.

Petroleum News: And that helped with finance?

Kawasaki: Of course the direct amount of money from the oil industry is the greatest single contributor to our general fund budget. It represents anywhere from 60 percent to 80 percent in some years of our general fund budget. It’s really important to get the right situation, the right finances available.

Petroleum News: There are some who believe that because there is more oil in the pipeline, at least year over year, and because there are some pretty sizable finds out there, even if production is 10 years out, that SB 21 is doing what it’s designed to do. So how do you respond to that?

Kawasaki: If you look at the history, many of the finds that are currently in development were previously at least in the plan of development (POD) stage. Some were sanctioned. Some were partially sanctioned. Most of those were already there and we expected them to go, so I don’t know if it’s causation or correlation. Certainly taxes are a part of it, but the economics of a project can stand on their own.

Petroleum News: You’ve been in office for 10 years. Why do you suppose this topic comes up every year, certainly every two years at the least?

Kawasaki: It comes up every year. I’ll tell you what. When I was sitting on the oil and gas committee as a freshman, we paid out roughly $50 million on cashable oil credits. This next year they are anticipating I think $900 million in cashable tax credits. That is a 2000 percent increase since the time I started 10 years ago. It’s a big number. It’s a number we have to look at and not because we are in a time of great danger within our own deficits. I think it’s fair.

Petroleum News: Now that $900 million, it’s not what’s in the budget right?

Kawasaki: That’s what’s owed.

Petroleum News: Some members of your caucus would like to see that debt paid down, comparing it to having a 30-year mortgage if just the minimum is paid. So where do you see yourself on this issue?

Kawasaki: I get it when a company says that we need some sort of certainty, especially the little guys who are saying “we need some certainty on this, we are a junior company we are not like the majors and we don’t have a lot of cash so we use this to offset risk.” So I do understand where they are coming from. But from a financial aspect and from a financial committee member aspect, it’s really tough to say we are going to pay out these oil tax credits that are fairly generous, at the same time we are cutting education, cutting social services, cutting public safety. It’s a real challenge. That’s why it has to be looked at and reviewed.

Petroleum News: So what would you like to see from HB 111, either in numbers or practice?

Kawasaki: I think there needs to be a real good look at tax credit reform general. I think HB 111 gets us in that direction. I think there are some parts of the bill dealing with the overall oil tax structure that really we should deal with on its own.

I think what I would like to see coming out of this legislative session this year is a plan that really looks at oil taxes in its entirety. Right now we are juggling budgets, we are jugging things like Uber, Real ID and smoking in public places.

I think we need a year where we focus on oil taxes and bring in consultants because the world has changed. The economics on oil and gas has changed. I think it’s fair that we take a closer look, a slower more methodical look at our entire oil and gas tax regime.

Petroleum News: So what would you like to accomplish this year in the first year of the two-year session?

Kawasaki: I think the first major goal over this two-year session is to try to stop our bleeding when it comes to our cashable credits and our future net operating loss credits. Both can devastate our budget not only this year but in subsequent future years as well. On the Finance Committee, we are really concerned about the deficit. We know we can’t erase the deficit in year one, but how are we going to reduce the deficit five, 10, 15 years down the road so we don’t pass on massive deficits to our children? That’s why I think there is a value in reviewing the oil tax system and overall tax regime.

Petroleum News: There are some who say this may be your last real crack at it for having stability. There are some who don’t view Alaska as stable; others say the oil companies requested some of the changes. Shouldn’t that be the theme that you weave through any changes you might make?

Kawasaki: I think that’s true. There is something to be said about having something stable so it’s a signal to industry that this is a stable tax regime. At the same time, I don’t think SB 21 or HB 247 last year added anything. I think we keep doing these small, piecemeal taxes and credits. HB 247 was a small piece. I would rather have gone back to the drawing board and done a larger revision instead of coming back every year with a smaller revision.

Petroleum News: You heard testimony from the industry. Was there anything that resonated with you that had you think I need to give this further thought?

Kawasaki: One company, Great Bear Petroleum, is in a different situation. They are not a major. They are not an explorer, but they have great potential. His criticism of the bill was how there would be unequal footing on tax credits between majors and new entrants. So his argument was that it treats incumbents on a better level than it treats the new entrants. As a (first-time) candidate I thought about that. Incumbents have more power than new candidates in the field. That’s the way the system is. I can see his argument for wanting to try and make it so there is some sort of parity and some sort of equality when it comes to credits. Cashable credits in particular - and the net operating loss credits.

Petroleum News: Are you hearing anything from the bill sponsors - Rep. (Geran) Tarr and Rep. (Andy) Josephson - that give you similar pause?

Kawasaki: With the bill coming over from the Resources Committee rather quickly they did a lot of hard work and a lot of heavy lifting and they did a lot of diligent time on it. From the Finance perspective there are some complexities in the bill that, while even as I spent a lot of years on Resources, I don’t even understand and will have to learn more about before I feel more comfortable with it. One such aspect is the preapproval process for the credits and some of the disclosure requirements and how those impact DNR and the Department of Revenue. I can understand some of the basics on the financial parts like the floor and where the credits come in but the rest is still a little complex to me still. It will get reconciled, though.

Petroleum News: Let’s talk about the gas line and AGDC. The prospects of the AKLNG project don’t seem very strong among lawmakers from both parties. So, at this point, what is your 30,000-foot view of the project?

Kawasaki: Well, I’ll say this. I wasn’t a supporter of SB 138. It was the most recent iteration of the gas line bill. I thought it left us in a position where we would assume a lot of risk. Today we find ourselves in that position where we’ve spent a lot of money where there is a work product that will soon come out but it still leaves us with a lot of exposure when it comes to moving a product forward. At the same time, I’m willing to see AGDC come to a point where you can have in hand a (FERC) license so there is some value we can retain as a state at that point. Every time the state has pushed a major project, whether it was the Gasline Port Authority, whether it was ANGDA, whether it was Gov. Palin’s AGIA or this SB 138 project, it feels like we start to get the ball rolling and we lose momentum. I’d like to get the ball rolling so we have enough momentum, so it actually keeps rolling rather than stopping because every time we stop it takes a lot more energy to start again, to start pushing that ball down the road.

Petroleum News: Don’t these changes have a lot to do with the market changing drastically?

Kawasaki: Sure. But just like Exxon, BP and ConocoPhillips look at projects with a 20-year horizon or a 30-year horizon, the state of Alaska should really be looking at that, too. If we only looked at things in terms of a few budgeting years or who was going to be governor next year, a project of that nature would never get done. Bradley Lake would never get done; the railroads wouldn’t have got done; we wouldn’t inter-ties between Fairbanks and the rest of the state; we wouldn’t have Snettisham Dam. All of those major projects took a longer-term view.

Petroleum News: One of the prevailing criticisms toward AGDC has been an identified lack of communication from AGDC toward the Legislature. Even your colleague Rep. Tarr has said in a recent confirmation hearing that communication still needs improvement. How do you feel about that?

Kawasaki: I’ve been on both sides of the argument when I felt it was not giving us enough information or when I thought they trying to hide things or sequester information. I’ve been pleased recently with AGDC’s ability to get us information we’ve asked for in a timely manner. There are other multimillion dollar agencies that are out there that we have equal difficulty getting information from at times. AGDC, for the most part, has been a lot more open and given us a lot more clarity.

Petroleum News: So what would you like to hear from AGDC next as far as the project is concerned?

Kawasaki: I want to hear at what point do we get to the decision if it’s a go or no-go. I want to know at what point do they pull the plug. At what point do they decide that this project is not feasible in this market climate nor in the foreseeable future and that it makes no sense at this time for the state to pursue a project. There are a lot of agencies out there that can keep accepting state budgeted money, state budgeted dollars.

But if they are not moving forward, we as members of the Finance Committee really have to take a hard look at it and say if this isn’t something that’s moving forward, whether it’s the KABATA or the Susitna-Watana, then we need to pull back on those particular projects and AGDC is one of those potentially.

Petroleum News: There has been a lot of turnover there. Does that concern you at all?

Kawasaki: You know the professionals - the ones who do a lot of the engineering and modeling - are still there. There have been some faces who seem to move in and out of all sorts of different agencies from time to time. I think the underlying employees who are still part of AGDC and still part of the project over all are good people.

Petroleum News: OK, let’s circle back to oil taxes in the context of a fiscal plan and how a fiscal plan is connected to the gas line. A lot of people in this building, regardless of what plan gets supported, say that without a plan it’s going to be increasingly difficult to advance a gas line. How do you feel about that?

Kawasaki: The number one issue we need to solve is to have a comprehensive fiscal plan moving forward out of this Legislature. I think it underpins everything. It underpins whether we support AGDC to the amount they need or whether they pull the plug. Whether we support the Department of Natural Resources and their permitting process, the 100 percent most important thing we do is make sure we’ve got a fiscal plan in place.

Petroleum News: So what among them comes first? A fiscal plan? An oil tax rewrite? A gas line plan?

Kawasaki: I think they are all pieces of a grand puzzle. They have to be laid out at the same time and completed like a puzzle. I think many of us can see us getting to that point. If you stand back you can really see the full picture and that it all needs to be done.

Petroleum News: Let’s get closer to your home in Fairbanks. When you first came into office, all the rage was turning back Gov. Murkowski’s gas line plan in favor of Gov. Palin’s plan, also known as AGIA. But Interior lawmakers stressed the high energy costs for heating homes and businesses. How do you see things now? Has there been any progress?

Kawasaki: The big thing was the price of home heating oil. It went from $2 to $4 overnight in 2008. Many people were suddenly spending $5,000 more than they anticipated just to heat their homes. That shock has generally subsided. Oil prices are under $2 once again because of the markets. People aren’t talking about the costs of energy when we go door-to-door as much as they did two years ago. At the same time, for folks who want to think about long term, the prospects of natural gas still are there and folks still want to get natural gas into their homes and into their communities but because of the low price of heating oil, it makes that really difficult for most families to make the decision to switch.

Petroleum News: So is the infrastructure getting put in place the way you would like to see it done?

Kawasaki: The infrastructure under the Interior Energy Project is still moving forward. They have done the Phase I out of North Pole and I think they are laying groundwork in phases. I’m pretty sure they are caught up. Fairbanks Natural Gas did a lot of work over the few short years. I think they pretty much hit every part of the neighborhood, but they also capped them because most houses aren’t ready to switch and we don’t have the supply.

In the early years, we did see some help. We started the phase of getting Healy II up and running. We put wind generation in over at Healy on the hill. We had expanded capacity at Flint Hills at the time. For the long term we passed AGIA, which was a longer term prospect, so a lot of things moved really quickly during those years of high energy prices. Now with lower home heating fuel prices really driving that train, it’s tamped down any moves to continue on with natural gas as we used to see just a few years ago.