Birch: Don’t fix what’s not broken

Anchorage Republican, freshman lawmaker says he’s enjoying immersion into Resources Committee and hearty HB111 oil tax debate

STEVE QUINN

For Petroleum News

House Rep. Chris Birch wasted little time in pursing the heavy lift as a freshman lawmaker. He grabbed a seat on House Resources, which is immersed in HB 111, an effort to revise tax credits and rates at low oil prices. Birch, an Anchorage Republican, shared his perspective of his first session, now past the halfway mark.

Petroleum News: What piqued your interest in being on the Resources Committee as a freshman lawmaker?

Birch: I’m a mining engineer by way of education and a registered civil engineer by training and profession. So I spent a large part of my life building Alaska and being engaged from the trans-Alaska pipeline construction which was my first design job out of college in 1972 to working for TAPS in Anchorage in the early ’90s.

So what piqued my interest was clearly the objective we need to have in Alaska is to recognize the importance of resource development, whether it’s mineral resources or oil and gas resources or timber resources.

My interest in the Resources Committee stems from my view that if we are going to continue our success track and progress as a state we need to basically move forward. And responsibly how we can maximize our revenue from those state assets?

Petroleum News: So what have you learned so far from being on Resources?

Birch: I’m seated on three committees: State Affairs, Labor and Commerce and Resources. I would say Resources is far and away the most interesting and I think it is the committee that has the most potential for positive engagement for Alaskans, and being successful as we move forward. Resources has an objective, a constitutional obligation, would be to responsibly develop our assets for the benefit of our citizens.

When you start looking at, again whether it’s oil and gas or mining, the policies that affect resources are going to be dealt with in the Resources Committee. That certainly would pique my interest. The people I’ve worked with over the years have come to largely view resource development as something that we need to have a regulatory framework in place at the state level that embraces and supports that development.

Petroleum News: Many people the first couple of weeks feel almost overwhelmed by the volume. Are you seeing a lot of that volume, whether it’s paperwork and bills or otherwise?

Birch: I don’t think so. It’s been a lot of work, 12- and 14-hour days where we get in here early and get out of here late. From a work standpoint, it involves a lot of interaction with the public. We get a lot of visitors and that’s important. From a committee standpoint looking at the process where we evaluate and consider legislation, that’s certainly a critical piece. In some respects, the issue of trying to invite public testimony and get a good understanding where the public interest lies on a given issue is certainly helpful.

But we are well organized in the office. I’ve got Ashton Compton working with me. There is just the two of us here in the office. She’s been in the building in one capacity or another for seven years. She’s extremely helpful in making sure we are organized so that when we go into a committee meeting, we have the documentation. We are trying to go to a paperless operation. I know the State Affairs chairman (Jonathan Kreiss-Tomkins) is trying to go to a paperless function because we do move a lot of paper through the building. I think as far as efficiency and process, there is always room for improvement but the process seems to be working OK.

Petroleum News: On HB 111, what has been your takeaway so far with the presentations? You’ve been getting observations from both sides.

Birch: Certainly a little bit on both sides. I guess my concern is, if it’s not broken why fix it? My sense is in looking at SB 21 that we’ve got new investment on the North Slope. In 2013, there was a real push for tax credits. I think Les Gara (Anchorage Democrat opposed to current tax regime) was a part of that. There was broad based support for tax credits to invite smaller players into the market and encourage exploration and development. There seems to be a lot of discussion about whether tax credits have done their job - and I think that debate should be open.

From one perspective tax credits are a part of integral part of the tax structure, whether it’s net operating losses where you induce the kind of behavior that you want, the exploration and development that you want, out of an oil company that may not otherwise be interested in doing the exploration and making the investment necessary to go out and discover a Smith Bay or other unfound resources. I think to that end it’s been successful. Even ConocoPhillips, they are working NPR-A.

I’m very encouraged that the state Legislature recently passed an open ANWR bill. For many that’s kind of a motherhood and apple pie, a land-based oil asset that has tremendous potential by all indications, including the USGS. So I think the future is bright for us but I think we need to make sure we are not an impediment to progress, and we’re not making ourselves uncompetitive for investment capital.

The commissioner of DNR - we met with him here a couple of weeks ago - and he commented on how the technology is improving in the Lower 48 on oil fracking. The cost per barrel is falling. In other words the cost of producing a barrel of oil in the Permian basin, for instance, is less today than it was five years ago as that technology improves.

So those are competitive markets for us. They can turn it on and turn it off. If oil creeps up to a point where we think it’s going to be successful for us, we have to be mindful of the fact that it’s also improving the marketability and the prospects of many other regions in the country.

Petroleum News: One of the concerns that’s driving HB 111, is that at these oil prices - if they stay this way eight to 10 years - the state won’t be able to afford some of these credits. So if you can’t afford the system we have now, what do you do?

Birch: Half of the credits disappeared when they withdrew the Cook Inlet program. The credits are of diminished impact. With the governor’s veto over the last couple of years, it has certainly diminished the reliability those credits have in any sort of financing mechanism a producer might have in coming to Alaska to explore. I personally met a couple of different banking entities who are looking at foreclosure on one operator or another that had relied on those credits as part of their development strategy.

They had been very predictable for some period but they are less tangible today because of the uncertainty. The Legislature funded them but the governor vetoed them. To the extent that those credits are in play, they certainly are not doing what was intended, which was to reimburse for the exploration and development to the benefit of all of Alaskans by making sure all of those resources are located.

Petroleum News: One of the reasons those credits were predictable was because Alaska was in a high-price environment, but the statute always said there was a minimum under a formula. So where does the blame lie if people financing a project haven’t completed their due diligence on the project?

Birch: That’s a valid point. I think the very flinty eyed bankers in the lot were probably paying attention to that but I think the assumption was - and assumptions are sometimes dangerous - that reimbursement would happen in a more timely manner. I think it’s unquestionably an obligation of the state then the question is over what period or timeframe are they going to be realized. I think there is a fair amount of discussion. Actually I would like to see HB 111 divided out. It was characterized as being three or four different pieces, kind of put together. I would like to see the credits discussion broken out and talked about separately. I think that warrants a different debate.

Petroleum News: Almost as a separate bill?

Birch: Just separately, yeah. Then we can have the discussion as to what’s our intent and objective. As a mining engineer and having worked in the mining field, I’m used to overriding royalties, but typically you don’t have that type of program to induce investment. The genesis of it was - and I think it was well intended - in a higher priced environment the intention was to develop and advance that type of exploration.

Petroleum News: Early on during your first few weeks in office, you mentioned how SB 21 was better than ACES at these prices, something pretty widely accepted. Why do you keep brining ACES into the picture? Do you gain a sense people want to revert to that?

Birch: The story that I had with ACES, Gov. Palin advanced that. It was Alaska’s Clear and Equitable Share. I remember speaking with a state senator who worked on it. At that time, it basically doubled the government take when it went through the legislative process and my question to that senator was, is it still clear and equitable if it doubles it? If the governor says this is clear and equitable and the Legislature says twice that is clear and equitable, it doesn’t seem like they would both be clear and equitable.

Once it got through the legislative process, it clearly stepped up the take to where it wasn’t good for Alaska and it wasn’t doing what the objective would be which was more oil in the pipeline. I think that is where SB 21 - looking at the uptick and looking at the decline curve - and if you look at what’s going through TAPS, any uptick is good news for the state. We are pulling our royalty share out of that.

Petroleum News: When bringing up ACES, were you trying to bring it up as a cautionary tale toward change?

Birch: Anyone who has been here for a long time remembers ELF, PPT and ACES. The fact is we need to value stability in the market. Stability is important; enough already. Leave it stable for maybe a couple of years. Let’s have some stability in the market so people who are making investment decisions can say I know what the tax rate is going to be. One of the proposals now is going to a monthly tax rate. Well every one of us is going to be faced with doing our personal income taxes by the 15th of April. What if somebody said whatever you do the 15th of April, by the way, you need to do that every month of the year?

Our current structure for anybody, for business, you do it every 12 months. That’s one aspect of HB 111, a bookkeeping aspect that layers up the workload. So stability is the watchword here. With SB 21 you’ve got stability, you’ve got increased production. Let’s let it roll for another year or two. Let’s see how it goes. Let’s see if we can capture some of that additional investment and engagement on the North Slope and see some of the ConocoPhillips work be productive. Let’s see if we can get ANWR open. That’s been on the horizon for a long time.

Petroleum News: How do you define stability?

Birch: I think stability means at least having a fixed process, a fixed tax rate if you will for a session or two. A session is two years so I would say if you could provide stability for two or three years and see how it works, then tweak it. If there is something that’s grossly in error, you get together and figure out if there is some sort of problem.

Petroleum News: Do you have a concern about Rich Ruggiero being a consultant?

Birch: I would say the jury is still out. I’m waiting to make a judgment call on that. The first out of the shoot, he gave us a slide that ended in 2011. It showed that taxes were increasing. But the slide that Ms. Moriarty presented a couple of days later that was out there, available and Rep. Talerico asked for, showed in a declining market that when oil is plummeting in value, most financial regimes look for incentives that support development. That would have been helpful. Mr. Ruggiero thanked AOGA for presenting that. My sense is that there are 60 people in this building and everybody wants to do the right thing for Alaska. It’s a matter of how are you going to get there. We’ll get there. It’s a matter of figuring out whether it’s government’s position to decide what’s a fair rate of return. I happen to view that you govern with the royalty share and a tax policy in place that invites investment.

Petroleum News: Your approach is a little different from your colleagues who are freshmen. You seem to be offering a lot of your own assessments of what’s being discussed. Maybe there is a question, maybe there isn’t. Talk about that approach.

Birch: The committee process is all about getting good information in front of the committee members. It’s about education and having an understanding of why are we all here. At some point the people on that committee went through their respective caucuses and said I want to be on this committee for this reason. We certainly did that in our House Republican caucus. I’m assuming the same thing went through the discussion on the Democrats side when they had their organization. The bills that we’ve seen, we’ve had number of bills on anti-trapping, we had the Pebble discussion. I had requested that DNR be there because it’s on state lands, but they were not permitted to be there. Just the same, my question of the people on that committee - why are you here? What is your objective? Are you trying to develop or manage Alaska’s resources to the greatest potential for Alaskans? Let’s hope so, but that’s an individual question people have to ask on their own.

Petroleum News: What do you think the new administration in D.C. and the GOP-led Congress can mean for the state on the resource development front?

Birch: I’m encouraged by some of the appointments the president has made and have been confirmed in Congress. We get in this wetlands tangle periodically. Alaska has probably more wetlands in our state that the rest of the country probably combined for all I know. It’s remarkable that we have to suffer the huge cost and impact from wetlands mitigation. If you’re in Boston and look at the Boston Commons, it’s all reclaimed wetlands, but it was done hundreds of years ago. Today when you look at the cost of any reasonable project, wetlands is a huge cost piece. I know Sen. (Ted) Stevens at one time proposed something where Alaska would be permitted to develop 2 or 3 percent of its wetlands without a mitigation component.

Petroleum News: So are you optimistic?

Birch: I’m a born optimist. I really am. My father came here in WWII. He was stationed in Adak with the Marine Corps. He started his family here. You don’t live in this country and not be an optimist, I think. If you are going to be successful and if you are going to have any potential for our kids, our families, our neighbors and our community, like I said I’m an eternal optimist. I think our best days are ahead of us. I’m excited about the potential. Just having a discussion about ANWR and having it come out of our body. The Legislature passed a resolution that you heard from our senior U.S. senator (Lisa Murkowski) say they are helpful. Sometimes you never know about resolutions and how they are received and how impactful they are. That was nice feedback to hear that it is constructive.

Petroleum News: What were you takeaways from her speech?

Birch: From both of our senators, I think the message was positive. We’ve got a bright future ahead of us. We need to be competitive. We need to tighten our belts from a government standpoint. We’ve had the luxury of high oil prices for some number of years. It’s enabled our government to grow in a manner that maybe we can’t fully afford, so there needs to be some rollback and some attention on the spending side.

One of the examples I like is when I went to work for Alyeska in 1991, there were about 2,200 direct Alyeska employees and about 800 contractors. If you talk to Admiral (Tom) Barrett today that number has about flipped. What they have done is watch their full time numbers go from 2,200 to around 800. The contractors are still there but there are more of them. I think that’s what I would like to see the state do: tamp down the non-essential services and figure out where we can reduce the spend there. I think that’s the view of those who want to take a look at some of the budget savings.