Tuck wants to see more oil production

Concerned SB21 won’t result in more oil; on gas pipeline, says state taking equity position would bring a lot risk, some benefits

Steve Quinn

For Petroleum News

House Minority Whip Chris Tuck supports repealing Senate Bill 21, Gov. Sean Parnell’s signature oil tax rewrite, saying it’s the wrong change that will not accomplish the one thing all lawmakers agree upon: increasing production.

Tuck, an Anchorage Democrat who serves on the House Resources Committee, says he understands those advocating for a repeal at the polls next year face an uphill battle against a well-funded opposition.

Tuck spoke to Petroleum News about his views on resource development and what he believes some of next year’s legislative session holds.

Petroleum News: Let’s start with SB21. You’ve had concerns about the new law and support an upcoming referendum vote. So what are your concerns?

Tuck: Looking at Alaska’s history, it’s always been our goal to get more production down the trans-Alaska pipeline. Even in the late ’80s and early ’90s we’ve always been talking about the decline, so the goal is to get more production. The question is how do we get more production? With SB21 passing and the governor’s goal of getting to 1 million barrels a day, it’s disappointing, but a little bit expected to see the (Department of Revenue’s) fall sourcebook and seeing by 2023 we are going down by barrels, not going up. I think it’s evident, even the administration is recognizing that SB21 may not necessarily be that vehicle to get to that 1 million barrels a day. I think there are a couple of reasons for that. One is we can’t rely on the legacy fields to reduce that decline and get us to more production. We are going to have to have new production and new fields come on line. I think ACES was a good start because we separated exploitation from exploration. For exploitation we were making sure we had a progressivity so when prices went up, we would take some of the windfall revenue from that, then come back with the most aggressive tax system worldwide into new exploration. If the harvesters or the Big 3 wanted to buy down their tax burden, all they needed to do was reinvest in Alaska. However, if they wanted to take their profits and reinvest them elsewhere, Alaska is going to benefit from that. With SB21, we’ve shifted from giving those tax incentives on exploration to giving tax breaks on our legacy fields. I’m not sure that’s in the state’s best interest. Those fields are already very profitable. What we need to do to reverse the decline is get the new exploration.

Petroleum News: OK, so there is a referendum on the ballot to repeal SB21. There are already television ads speaking out against the repeal. You’ll be up against a lot of funding from the other side.

Tuck: when it comes to taxation, especially with oil revenue, a lot of information is confidential. It’s difficult to educate the public on what the situation is and what’s led up to the most recent investments that we have up there. One thing is very evident is that in the last six years, we’ve seen three times more investment up on the North Slope than we have prior to that. We’ve had more activity on the North Slope ever in the history and employment numbers are way up. So ACES wasn’t perfect, but ACES was a good start. We have brand new companies are there who were exploring. One of the limitations that we have is getting facility access to those new companies. We don’t want to pull the rug on those new guys, but we believe SB21 does exactly that. Now we’ve shifted with the tax credits going to new exploration to a whole bunch of deductions going to existing fields. So your questions about how do we get the public educated on that, it’s basically demonstrating what we’ve done in the last six years and how we’ve benefitted from it and it shows in the Resource Source book that we may not benefit from it.

Petroleum News: I know you’re not involved in the committee driving the referendum, but as someone supporting it, what do you believe can be done to get your message out?

Tuck: It’s going to be very difficult to do. It’s going to be a very heated political cycle this next year. There is going to be limited time on the airwaves given that there will be a governor’s race, a U.S. Senate race, every House member will be running again and a large number of our Senate will run again. We also have four ballot issues. It’s going to be very difficult under those circumstances. I’m not denying that in any way. But I don’t know what the strategy is going to be.

Petroleum News: So how do you respond to criticisms of the repeal that say it will have a chilling effect on investment?

Tuck: Just talking about the tax regime has a chilling effect. So the fact that we’ve been talking about making changes the last few years is stifling new investment on the North Slope. So why invest now when something might be totally different. But since we are having the talks, we need to talk even more to make sure we do the right thing.

Petroleum News: Let’s say the repeal goes through, what do you folks bring to the table as an alternative, even as you did have your bill out there?

Tuck: ACES isn’t perfect. It needs to be refined. Basically, we cap off the progressivity and we are trying to get facility access for the new players up there and we wanted to make sure we weren’t upside down on credits. That’s just the first step. Whenever you pass a major piece of legislation, especially tax regimes like this, you tend to do audits. Unfortunately, we haven’t done an audit since 2006. To make better changes, we need to do an audit so we best know what changes to make. But throwing out the baby with the bathwater is not a good idea in this case. ACES isn’t perfect, but it’s a good start and we need to refine it from there. It’s given us more players and more competition. When you have activity like that, efficiencies are going to happen. With all of that activity, we are going to see new oil.

Petroleum News: One of the terms used by those seeking a repeal is giveaway, citing no promises of new production. If we get a reduction in our federal income taxes, there’s no hard and fast expectation of how we spend our money. Why would there be an expectation of a certain response in this case?

Tuck: We’ve seen it before when we collected almost zero revenue for some of our fields up there and didn’t see investments that we wanted to see in the state of Alaska. If the industry becomes even more profitable in those fields, who is to say they are going to automatically invest it in Alaska. One of the things the International Monetary Fund is good about is they said you need to separate exploration from exploitation because when you go into exploitation or harvest mode, any type of tax changes rarely ever change behavior. But when you separate the two and put heavy incentives into new exploration — tax credits — then you can change behavior. That’s the system we have now. Why would we want to break away from that when the evidence shows we have more activity on the North Slope than ever in its history, more employment, more capital and operating expenditures taking place. To pull the rug out from under that when it takes seven to 10 years once you find new oil up there. So this is high risk shifting from ACES to SB21 when you are shifting the benefit to the legacy fields more than the new fields that come on line. With our bill, you produce — you get a reduction in taxes. With this bill, there is a reduction in taxes while hoping for more production. There are no guarantees in that.

Petroleum News: So what do you foresee happening? Don’t you foresee new oil coming?

Tuck: We really don’t know what the definition of new oil is right now. We don’t know what the definition of more efficient is going to be. We rely on the administration to write the regulations on that. Now those writing the regulations are relying on the industry to make those definitions. One of the ways Alaska has continued to get itself into trouble is relying on the industry too much. Even the courts have talked about how Alaska has gone way too far in trusting the industry. So not knowing what those definitions are, we could be giving a lot of tax breaks for oil coming out of the ground anyway.

Petroleum News: Are you concerned that all oil will be considered new oil even if production doesn’t go up?

Tuck: That’s correct. The existing production we are seeing on the horizon will eventually qualify as new oil and we won’t be able to capitalize on new revenue from that.

Petroleum News: On to the gas line. DNR recently released a report from one of its consultants Black & Veatch. Part of that report discussed having an equity stake in a large-diameter line? What are your thoughts on the report?

Tuck: With equity comes a lot of risk. There could be some potential benefits. We had a class where we had a group teach us about mega projects. It was alarming to learn that 50 percent of these mega projects have failed. We want to reduce the risks as much as possible. I know that the industry likes to find new investors to help reduce the risk. We need to be sure if we are going to be a partner that we have a seat at the table and part of the decision-making. We don’t want to take on the risk and making only the investment.

The report does have a lot of assumptions. They say we have $4 gas and they are saying we can get anywhere from $14 to $17 gas in the Asian markets. There are a lot of things that need to be validated. We also need to do a supply chain cost analysis to find out if the pipeline is the best decision for us. With the North Slope opening up and the Arctic opening up with the ice receding, it might be better for us to ship directly from the North Slope, store it in warmer areas, then ship from there year round. There is a lot of information that needs to come our direction before we make billion dollar decisions.

Petroleum News: Let’s go to the Arctic for a second. Some of your colleagues have been busy with the Arctic Policy Commission and you’ll have a draft report before you next month.

Tuck: What they are doing is crucial and the reason why it’s such an important topic is because there are a lot of opportunities up there. We’ve got to make sure Alaska plays a key role and make sure our interests aren’t being overtaken by other countries.

Petroleum News: Back to the gas line, what would you like to see happen toward advancing a project next session?

Tuck: This next session will be more presentations and information. I want to hear from the producers, more from them. We haven’t had a chance to go through all of the presentations with the Black & Veatch report. What are our opportunities? What are the risks? I see risks coming from a lot of different directions, but hopefully we can minimize those risks and get a gas pipeline. That’s one thing I know: Alaskans want to see our gas get to market. We just need to figure to out the best way to do that, the most cost-effective way and the most competitive way worldwide.

I don’t know if we are going to be able to come up with a final decision this time around. I know we have AGDC looking at opportunities; I know we have the AGIA folks looking at opportunities. I still think we have to do a supply chain market analysis.

Petroleum News: Still on the topic of gas, things in Cook Inlet seem to be steady and even picking up. Some consultants have called that area a wild card with so many eyes on the North Slope. Is that a good description?

Tuck: The activity going on in Cook Inlet is good news for Southcentral Alaska. We already have existing pipelines. We had concerns over the last few years over whether we were going to be able to provide electricity and affordable heat to Alaskans in those areas. Now with new activity taking place, we’ve always explored for oil and always had natural gas as a byproduct. Now we are exploring for natural gas and that’s good news. The one thing we need to make sure of is whatever gas pipe line, whatever export facilities that we have, whatever LNG plant that we have, we need to be able to allow any new players in there. That way it keeps prices down, it keeps competition going, it keeps exploration going. New players will know they can market their gas, whether it’s gas coming from the North Slope or gas coming from Cook Inlet.

We’ve got people actively pursuing developing natural gas in Cook Inlet. Thank God for HB 280 that passed in 2010 to (provide for) a third-party natural gas storage facility that handles the up and down swings for gas demand from winter to summer months. Even the USGS, they showed that we have an abundance of natural gas down there. You compare that basin, the evidence is there that we have an abundance of gas in Cook Inlet.

Petroleum News: Do you have any closing thoughts?

Tuck: Being a representative of the people of the state of Alaska, and we being a natural resource state and an ownership state, that we definitely in all decisions, whether it’s a natural gas pipeline or it is future development on the North Slope and Cook Inlet, we have to have a place at the table, that we get accurate information, that we partner with the industry. That the industry is productive and profitable but at the same time we get more production down the line. Alaskans want to see more production. That’s in everyone’s best interest. How we get there is different. Right now we guarantee the industry profits and in that guarantee, we take more of the windfall if oil prices are up. Then we can have them significantly buy down their tax burden by re-investing in the state of Alaska. It’s important we trust but verify. And we don’t just trust wholeheartedly without having some sort of partnership role. I’ve been elected, hired, appointed — however you want to look at it — to make sure the public’s interest is well taken care of and make sure we remain in a partnership role.