Talerico: New perspective on Resources

Healy Republican wants to make sure those pushing for oil tax changes understand production rose during low-price environment

STEVE QUINN

For Petroleum News

House Rep. David Talerico served as co-chair of the Resources Committee for two years as a freshman lawmaker. Today he is the committee’s ranking Republican in the minority. The Healy Republican remains as engaged in resource development issues and will again find himself immersed in oil tax credit discussions. While the view may be a little different without the gavel, Talerico says he’s enjoying a second term on the committee. He spoke to Petroleum News two days before the committee rolled out its new tax credit bill.

Petroleum News: You’re the ranking member of the committee. What is the view like being in the minority?

Talerico: It’s definitely different not having the gavel and the person not being responsible for agendas, making sure presentations are ready and timely. There is lots of contact sometimes from your office to make sure everything is going well and you’re staying in touch with your committee. When you’re the chair, your staff and your committee aide takes care of all the contact with the clerk’s office.

That’s gone but we are going to have a busy year so the schedule is going to remain the same as last year. A lot of people are looking for ways to generate revenue. That could really be a focus on resources. I think the next couple of weeks are going to tell us just how busy but we are going to be busy.

Petroleum News: So when committee seats were being decided, did you raise your hand to return and pursue Resources; did your caucus ask you take the seat and maintain that experience?

Talerico: You know I pursued the Resources seat and they (committee) were kind enough to say yeah, that’s a good idea. The last two years, particularly going through the oil tax scenario we went through with HB 247, what a learning experience for me. I really did find out a lot of different things. I thought I knew something about some of that. What I realized last year, the deeper I got into that, I saw that my knowledge was pretty incomplete.

There is still a lot for me to learn. I wanted to use that experience to see if I can provide more assistance as we advance our way forward in this. I really did want to be on resources.

Petroleum News: You also serve on Dean Westlake’s committee. Did you pursue that one as well?

Talerico: I did. It’s economic development, tourism and Arctic policy. I represent a couple of communities above the Arctic Circle. With tourism thrown in there, I represent the community that has the entrance to Denali National Park. And with economic development, living where I do in the Railbelt, it’s got a highway and it’s got transmission lines where the Railbelt power goes through. It really seemed like a good fit, particular for my district. We’ve also got the big expansion and construction at Eielson Air Force Base, which is in my district and a big economic driver in my district. I looked at the title of the committee and I said, this looks like a three-for-three.

Petroleum News: You were immediately busy with an ANWR bill in that committee (HJR 5, now in House Resources). You even had two amendments that sailed through. With that in mind, that too is a young committee with a freshman committee chair, it looks like you’re not afraid to assert yourself with your experience without being too aggressive. Do you see that as a role for yourself, particularly with so many freshmen legislators?

Talerico: Well I think as long as the committee puts up with me, I’ll continue that road. I did appreciate the ability to be able to do that from the position that I’m in now where I’m actually able to propose amendments that can get put in there. I can’t think of anybody who serves down here, whether I agree with their ideology or not, who isn’t down here for the benefit of Alaskans. I think what I saw in that committee is everyone saying Alaskans as a whole have been telling us to do this and we’ve needed to do this for a long time. This seems to be a resolution we can craft together, throw a couple of amendments on it that will work well for everybody.

We’ve had public comment on this and quite a few people have said we don’t want this. Unless there has been a huge change in the area I come from, and a lot of the areas I represent, folks are ready for it to happen. Rep. Westlake probably says it better than anyone else: There are a lot of jobs there.

We still want to fund education appropriately. We still want to fund public safety appropriately. So we need the development. And folks want to work. I’ve had somebody tell me well, they just are not sure people are all that excited about going to work. I know people throughout my district who are out of work right now. They are anxious to go to work. They are good workers and anxious to go to work. Whatever we can do to help people that way I think is going to be pretty important, particularly for our private economy right now. There is no doubt, people who have said we are heading into a recession, so as we think about revenue for the state, an expansion of the private economy is good all the way around.

Petroleum News: Alaska’s D.C. delegation jumped on that issue pretty quickly, so with that in mind, you’ve got a new administration and a GOP-led Congress, are you more optimistic now with advancing ANWR?

Talerico: I don’t think our chances have ever been better to have something happen than right now. I certainly wouldn’t hang my hat on it and guarantee it. I think it looks really good for that to happen. I think we need to remember for years and years and years, we will do it responsibly. We have done our developments responsibly, in my opinion. Some people don’t agree with that. I think the state, in particular on the central North Slope - no doubt there has been a hiccup here and there, but for the amount of oil that has been moved off of there, we have been very responsible.

Petroleum News: Exclusive of ANWR, do you think that alignment I’ve alluded to can help in other areas, like places put off limits?

Talerico: I hope so. I know they addressed the stream rule. We are still a very mineral-rich state. We’ve got all kinds of places in all kinds of different areas in the state where there is potential for the mineral development. We need to be very careful because once again we need to do it in the appropriate fashion. There are several areas where we are developing a very large scale. Fort Knox is one of them. They have water control. They have the reclamation program started. Things seem to be working very well. As long as we keep that in place and we continue to do responsible resource development, I think there is probably an opportunity now, to get out there and open some of that up because we have such great potential.

Petroleum News: Let’s go back to the Resources Committee. You recently received an update on the AKLNG project. What are your observations on the project?

Talerico: The hardest part for me, at least from the information I have - we are very close to receiving the FERC permit. If we get the FERC approval, we can hold on to that for a while. That next step is very difficult. We obviously need customers in order to consider bringing gas off the North Slope. If we don’t have a really big customer - and we may need more than one big customer - who we can do a long-term contract with and we can guarantee we have a return on that. People say that gas is worth a lot and I say it is but I wish it were 800 miles closer to port.

One of the things I find difficult is I had a constituent tell me that they had a relative working on a pipeline out of North Dakota and he said they built a pretty long line and it wasn’t a big deal. He said the first 400 miles they hooked up to about a half million customers. That pays for the line. We have this long, long gap before we have a market we can serve.

Maybe the stars will align. Maybe a customer will pop in. It will probably be a Pacific Rim customer that we would deal with, I’m sure. It would be great to have gas available in Fairbanks, too. They have started the Interior Energy Project with gas coming up from Cook Inlet but we still need a good gas supply there. As far as the AKLNG project, that effort has been put forward to look for customers. We’ll eventually get the FERC approval and then we’ll know. We definitely need an anchor tenant in that line to do the AKLNG line the way we hoped.

Petroleum News: What are your concerns about where the project stands?

Talerico: It’s very competitive out there. It really is. When people talked about it years and years ago and how people wanted our gas. With some of the shale plays and the technology, it’s become much more competitive. If we can just get the gas to a port, we are reasonably close. People have looked at a map before and they have seen how we can transfer things to the Pacific Rim.

My biggest concern is we’ve got a lot of competitors out there. Are we competing with someone who has the ability to undersell us for a couple of years just to make sure we aren’t in the market? Maybe so. We need that large volume to move and have somebody pay for it so that we can control the price to some degree. Now, it’s not like that gas hasn’t provided benefits for us already. We know a lot about that gas because we’ve cycled it into the ground three or four times - maybe more. Gas has provided us the opportunity to push more oil out of the ground so what a bonus for us if we can monetize the gas we’ve already used to push more oil up.

So we’ll see. It also sounds like with the change in administration in Washington, D.C., it seems like a few of those countries would like to deal with the new administration and maybe start becoming customers of products from the United States. Maybe one of those products is liquefied natural gas and if it is, you know Alaska is working toward a project.

Petroleum News: What do you think you would like to hear from AKLNG on the next update?

Talerico: What I would like to hear is a decision is about to be made, they have moved forward, and a permit is about to be approved. Then I would love for them to come and say we didn’t find just one customer in the Pacific Rim, we have two countries that want to sign contracts. I’m keeping my fingers crossed but I’m not going to hold my breath because that’s more dangerous than crossing my fingers.

Petroleum News: And last week you got a briefing on the oil tax system, getting perspectives from Tax Director Ken Alper, the industry and oil and gas attorney Robin Brena. What were some of your takeaways?

Talerico: We got completely different perspectives, particularly from Mr. Brena and the industry. Mr. Alper came in and really gave us the nuts and bolts of the tax and how it works, which I appreciate. He got into the mechanics of it because he knew there were a few people in the room that maybe didn’t understand it as well as he does. I don’t know that anyone will ever understand it as well as he does. At the same time, though, I hope he doesn’t think he was just talking to the freshmen because I was taking notes, too.

So we’ve got these varying opinions. The producers say that the current tax system is working. Mr. Brena didn’t feel that it necessarily was. He had indicated there were hidden pots of money out there. One thing is for sure, I was shocked to see an increase in production (3 percent in fiscal year 2016) with prices we’ve dealt with for the last 18 months to two years.

We’ve had a slight uptick in prices too. That’s one of those bittersweet things. It’s not where a lot of people would like to see it. I have a lot of constituents who are enjoying low fuel prices.

At the same time with our own state coffers, the market drives our own revenue down. We appear to be ramping up production as we go and I check that every day just to see where we are at. I don’t expect the current average we’re doing. Looking at the past, we have a slight decrease in summer months, but our numbers are really good right now. I would like to be a glass is half full guy rather than a glass is half empty and someone is always trying to drink the rest down.

The current structure isn’t going to completely bail us out, but I don’t think anyone wants to turn their head on the potential that we have for more income coming in and working our way toward that.

We are going to have to do something as time goes by. The big criticism is well you know that it bailed us out the last time. It was a wake-up call to the state of Alaska. I don’t think it’s such a bad thing that we’ve looked much more closely on how to operate state government. I’m a typical Alaskan. A lot of things in my life were supplemented. My hunting license was supplemented. I don’t pay income tax. I don’t pay a sales tax. That’s a good thing.

There is a transitional period here for everyone. What are we going to do? My crystal ball isn’t clear enough. I’m looking at everybody’s proposal. I’m going to try to come up with some of my own. I think the hardest part for us is when we talk about a revenue measure, what’s going to be acceptable to everybody? I think we’ve already seen what might not be acceptable. Now it’s time for us to get creative and see what would work.

Petroleum News: It seems like Mr. Alper and the industry agreed to disagree, but Mr. Brena had another take completely separate. What were your impressions with Mr. Brena’s presentation?

Talerico: I think Mr. Brena is a highly intelligent guy who has been involved with this for a very long time. I disagree with some of the things he’s talked about just because I see it differently and view it differently.

He had talked about there being so much money wrapped up in the tariff structure because the companies are involved. There is no doubt they have shares of Alyeska pipeline. I don’t think the pipeline runs for free. He had also talked about the transportation. I think British Petroleum shipping has about 25 percent of Alaska tanker companies. The other 75 percent isn’t, which is a big chunk of the transportation. I would not say 75 percent goes back to the majors. I’m not sure that’s exactly what Mr. Brena meant but he feels there’s a lot of money hidden in there. So there is going to be that difference of opinion. It’s very difficult and a very sensitive issue. Here we are trying to evaluate all of these different perspectives on these things.

I can understand though to a degree when someone says you’ve changed the tax system on us six times. Can we just stay with something for a while? Or if you do, massage it a little bit. A lot of folks say what we did last year was not significant.

North Slope, mostly what we dealt with was GVR, or new oil. We gave new oil a great deal and it stays new forever. It doesn’t stay forever now.

The big elephant in the room is the net operating losses. Right now you can carry them forward. It’s not very unusual in a net-profit system. Some people don’t think that’s right or fair. Maybe we don’t change the way we do them, maybe it’s the percentage.

Petroleum News: So will it come down to what can the state afford at various price points?

Talerico: I think so. I know everybody talks about the former tax system and progressivity, and the way it worked. But while that tax was in place, production was declining. Prices were good and we were getting a lot of money, but production again was declining and declining and declining. If you had too large of a progressivity number when prices where high and we just took all of their money, what was the incentive to produce? I’m sure glad there are a lot of smart people down here. I’ll need a lot of help with that. We’ll just see where we land. It will be very interesting, I think. I don’t know what kind of progress we’ll make and I hate to predict.