Hollis French looks to Norway as model

Anchorage Senator calls for state investment in oilfield developments; says Alaska’s oil and gas production tax is not too high

Stefan Milkowski

For Petroleum News

A group of about three dozen Alaskans, including state lawmakers, federal, state and local officials, and private sector representatives travelled to Norway at the end of August to study the northern country’s approach to oil and gas development.

“(It was) sort of a weeklong, graduate-level seminar in how that country operates,” said Sen. Hollis French, one attendee.

The trip was organized by the Institute of the North, a nonprofit research and advocacy group founded by former Gov. Wally Hickel, and included visits with officials from Norway’s ministries of foreign affairs, petroleum, and finance.

Twelve state lawmakers made the trip: Sens. Johnny Ellis, Lyman Hoffman, Linda Menard, Donny Olson, Gary Stevens, Joe Thomas, Tom Wagoner and French; and Reps. Bryce Edgmon, Neal Foster, Bob Herron and Paul Seaton.

Larry Persily, the Federal Coordinator for Alaska Natural Gas Transportation projects, also attended.

Petroleum News spoke with French on Sept. 23.

French is a member of the Senate Resources Committee, a committee of referral for Gov. Sean Parnell’s oil tax legislation, House Bill 110. French says he remains skeptical of the governor’s plan and is more interested in an approach used in Norway called state direct financial investment, which he argues would help keep investment dollars in Alaska.

Petroleum News: Why did you want to go on this trip?

French: It looked to me like a great opportunity to see how another northern country has managed its relationship with the oil industry and how it’s managed its oil wealth.

Petroleum News: What did you learn?

French: We learned a lot. The Institute of the North was the entity that organized the trip, set up the agenda, and did all the logistical work. First of all, hats off to them for doing a fantastic job. There were 30 of us that went over — legislators, state and municipal officers, private sector representatives. There was a big group of people. Their name for the Norway trip was Exploring the Norway Model. We were looking at a series of issues, including development of offshore oil and gas; meeting community needs; How does their state-run oil company, Statoil, work?; How does their government pension fund — their permanent fund — work?; How do they meet their internal energy needs?; What’s Norway’s role in the arctic?; and so forth. So it had the potential to be — and in fact was — sort of a weeklong, graduate-level seminar in how that country operates.

My takeaways were several. First — I guess on the issue that’s probably uppermost on the minds of a lot of legislators right now — is, What do we do with this oil tax debate that is raging in Juneau? For me it was refreshing to see a country that frankly taxes higher than we do, has done so for a long time, and doesn’t have this raging debate because they’re not changing, they’re not budging, they’re not moving.

If you want to do business in Norway — and many, many oil companies do — they know what the rules are going in. The Norwegians are not going to change the rules, and so the debate isn’t happening. It’s just a business-like arrangement. Everybody knows the rules, and industry is strong and healthy there.

Petroleum News: It seems like there’s a fundamental difference in that Norway doesn’t rely as heavily as Alaska on oil revenues.

French: That’s a good point. It is a huge difference. Like us, Norway made their big find in 1969. Unlike us, Norway did not eliminate its income tax and other taxes when oil was found. The people of the country of Norway continued to pay taxes to the government and that has given them the luxury of not depending so heavily on oil.

They also made some other big policy decisions before oil came along and after that left them in strong financial shape. One is a national policy of rural electrification. A long time ago, they said, Look, we’re going to make ourselves a leader in hydropower, we’re going to connect the entire country to a grid, power’s going to be cheap. That left them in a position of being able to sell the majority of their oil and gas once it comes to market.

Petroleum News: Are there things you saw that you think might work in Alaska?

French: Actually, (their approach) explains a lot of the interest in the Watana dam. As you look at the future and see oil and gas getting scarcer and more expensive, anybody that has access to hydropower should be building it.

Besides that, Norway has both a state-run oil company, Statoil, and another mechanism called state direct financial investment, SDFI. And SDFI is just a way for the nation of Norway — or the state of Alaska — to invest right alongside the industry in projects here in this state in our case. It’s a way to lower the risk of projects, because you’re spreading it amongst more financial partners. It’s a way to increase the number of projects done, because access to capital is always a problem — we hear that frequently in our conversations with industry people, and it’s an argument we hear from the other side of the oil tax debate: Hey, capital can go anywhere it wants. Well, if the state puts some of its capital up to work, it’ll be done here in Alaska on Alaskan projects. So I think you’re going to hear a lot about SDFI during the next legislative session.

Petroleum News: Because you’ll be proposing something?

French: Yes.

Petroleum News: Why is that better than giving tax credits for oilfield developments?

French: Well, the industry’s telling us that isn’t enough. So if you believe industry, then you think, Okay, we need to do something to make projects more enticing. You know, (ConocoPhillips CEO) Jim Mulva came down to Juneau and said, Look, if you reduce oil taxes, here’s a project that’s right on the cusp, this big drill site full of wells would handle a lot more gas. Frankly, the state could take a financial position in that project, make it happen, and thus increase the gas-handling abilities on the North Slope and thus produce more oil.

So that’s a way for the state to help make projects happen. Instead of sort of pushing oil tax money across the table and hoping that that project takes place, you become a financial partner. That’s part one — you get more projects and the projects are in Alaska.

Two, you reap the financial rewards. If the projects are successful, you are an investor in the project and you get a return on your investment.

Petroleum News: Do you think the state would have to tweak its oil tax if it started making direct financial investments?

French: In my view, no. The state, if it were to enjoy making profits, would have to turn around and pay the state? I mean, you have to work out exactly how the state handles its end of the finances, but it’s an alternative path. (Regarding the oil tax debate,) no one is saying, Hey, the oil industry needs to make more money — except for a very, very few people. Most people are saying, Look, if you reduce oil taxes, you’ll get more investment, you’ll get more action, you’ll get more economic activity on the North Slope.

One of our concerns is that if you do reduce oil taxes, all you’ll do is make the oil industry more money without any more concomitant investment.

This is a way to do that, to make more investment happen on the North Slope and, frankly, to lower the industry’s cost of doing business, because you’re putting up part of the capital.

French: Well, there’s a huge lease sale happening this December, and since it’s unlikely that we’ll have the opportunity to change the rules before then, I’m not sure what practical effect it will have.

They do have much more aggressive drill-or-drop provisions than we have. To me the likelihood of us changing our leasing — it’s less likely that we pursue that than pursue something on the SDFI.

Petroleum News: What did you learn about industry regulation?

French: They’re tough regulators. I think we are as well. I don’t know that there’s an enormous difference in the practical effect of either approach. I don’t think they have strong state presences the way we do here in the United States. One hundred percent of their oil is located offshore — there’s little to no onshore oil exploration; there are onshore facilities, of course. So I think you just deal with one government entity to get your permits rather than two, which is more often the case here.

Petroleum News: Were you convinced that offshore drilling can be done safely?

French: I guess the short answer is yes. There’s a much longer answer. They are in a far more developed area. Their first find was offshore in 1969 — they’ve been doing it much longer than we have. Interestingly enough, they are going more and more to a subsea wellhead model that employs very little surface technology. Instead of having a platform that the well flows to, and then you separate liquids on a platform and handle those liquids and so forth, they do it all subsea and flow it to a facility onshore. So they’ve been working offshore much longer than we have.

There was a spill, I think on a Shell platform, in the (United Kingdom) North Sea about the time we were heading over there. So spills happen. What they don’t have are year-round ice conditions, or even heavy, heavy ice conditions like we get. They get some ice in their fields, but not like the kind of ice you get off the North Slope of Alaska.

Petroleum News: Did anything you saw there change how you think about the state’s oil production tax?

French: For me I guess it was just sort of interesting to see a place where the debate was over a long time ago — and the world did not come to an end. Norway taxes very aggressively. I don’t think we’ll ever have a state-run oil company to step in and do business where private industry will not.

A lot of people are looking at Norway saying, How did you get a permanent fund worth $550 billion? They did it partly by some good luck, but also through smart planning and being consistently patriotic towards their own country and making sure the country’s interests got settled first, before looking after industry’s interests.

Petroleum News: Can you explain your position on the governor’s oil tax bill?

French: I remain skeptical. I’ve been fairly clear in this interview and other places that our greatest concern is that you would push $8 billion across the table over the next five years to industry and not get $8 billion more investment, get quite a bit less investment than that. And that just means that we’ve been chumped.

So we’re looking for a way — if you feel the need to stimulate more economic activity on the North Slope — to do it in a way that makes sure we get dollar-for-dollar increased investment for every dollar less we take in to the state. At least that’s my goal, and I think that’s the goal of a lot of my colleagues.

Petroleum News: In your constituent newsletter, you mentioned the Law of the Sea Treaty. Why do you believe it’s important to ratify the treaty?

French: It has enormous ramifications for ownership of the seabed off of Alaska. Our delegation gets it and supports ratification. Unfortunately, the treaty’s being held up by, as somebody mentioned, a few senators who cannot see the sea, smell the sea, or know what the sea looks like from their home states.

Petroleum News: In light of Norway’s savings, do you think Alaska should have an income tax?

French: No. A lot of those things just don’t translate. We’re not going to have a state-run oil company. Alaskans are not going to embrace a state income tax when there’s $12 billion in savings in the bank to pay for state government.

Petroleum News: Did people in Norway seem frustrated by the high taxes?

French: No. The short answer is no. Part of the reason is Norway’s not part of the (European Union), so the debt crisis in Greece, Spain, Portugal, Italy is not being paid for by Norwegian dollars. (My wife Peggy and I) spent some time in Germany after the trip to Norway, and of course we talked to some German citizens who weren’t happy at having to bail out Greece. But Norway’s not part of the EU, so that’s not a problem.

And frankly the political spectrum in Norway is far narrower than it is here in Alaska, and it’s more left. So some things just don’t translate back here.

Petroleum News: Why do you think it was mostly majority senators who went on the trip?

French: Can’t answer that. Can’t speak to the motivations of anybody else besides me. I thought this was a great opportunity to look at a place that’s geographically very similar to Alaska and is doing very well by themselves, and to see how they’re doing it.

Petroleum News: What can you tell me about your plans for SDFI?

French: It’s an idea that many of us have been kicking around for some time. Sen. (Bill) Wielechowski and I were close to doing something about it towards the end of last session, because we really saw this as an alternative to what the governor was proposing.

We’ve just been kicking the idea around. Seeing it at work in Norway solidified that it’s a viable practice. And frankly some of the industry folks who were on the tour there with us also seemed to think highly of it. So it went from being something the two of us were kicking around to being an idea that obviously works in other places and gets respect across industry-slash-government lines.

Petroleum News: Any feedback on the idea from the administration?

French: We haven’t broached it with them yet.