Resources Chair Giessel has ambitious plans

Anchorage Republican says there is plenty of work to be done during interim, leading up to special session on Alaska LNG project

Steve Quinn

For Petroleum News

Sen. Cathy Giessel closed out the regular session as Senate Resources Committee chair for the third straight year. This represents what many lawmakers believe to be needed continuity as the state gets closer to debating prospective contracts to advance a large-diameter natural gas pipeline to an LNG export facility in Nikiski.

The Anchorage Republican says the committee will be busy during the interim reviewing various developments including how the recent Interior Energy Project advances. But she is also hoping the AKLNG project is the subject of a special session this fall.

Giessel spoke to Petroleum News, first reviewing the regular session, then offering a look ahead.

Petroleum News: What’s your take on how things went during the session?

Giessel: I am concerned that the focus on budget causes a slip in the timeline. A property tax bill was introduced, but it did not include a PILT provision, despite the revenue commissioner saying it would. It seemed to be a template bill, requiring work in the interim to gain credibility and legislative passage.

The AGDC appointments were made on time. At issue was the expertise for some of the appointees. That was reflected in the votes for two of those appointees. Hopefully, the governor now appoints people with really high technical expertise comparable to the three he replaced.

What was troubling during this session was a conflation of tax credits for oil and gas development, and a call for new revenues. Don’t get me wrong; we are in unchartered waters with the budget shortfall. But oil pays nearly 90 percent of that bill.

We are a state that’s second biggest source of revenue is a tobacco tax. We do not pay a state income or sales tax, and our citizens continue to receive a dividend from the Permanent Fund Earnings. It is critical to remember the source, oil, that foots the bill for all our public needs and wants.

I want to take this opportunity to set the record straight: the amount of government take at the state level from the major oil companies is still greater than the credits they receive for production. If that was not the case, there would be no revenue in this year’s budget to spend, no royalties going into the permanent fund. Money is going in there.

Still, it felt like the focus was on making sure progress was continuing forward on AKLNG, but like I said most of the focus was on the budget and how we would be proceeding with our resource development and grow our economic pie so to speak.

We know we are in times of constraint so the goal of the Resources Committee, of course, is to increase the amount of revenue coming in. We’ve seen Caelus being given the royalty modification. So that’s a good thing. They are moving forward with that project.

Many other projects on the Slope are moving forward because of tax credits for smaller independents. That’s all positive. We still see wonderful gas developments and/or oil exploration, of course in Cook Inlet. Again because of those tax credits for Cook Inlet. So we’ve been trying to kind of keep things moving forward has been our focus, I’d say.

Petroleum News: Can you talk a little bit more about that tax issue? That was a hot-button topic, and still is, during the budget debate over priorities and what needs to be cut and what should be kept.

Giessel: Tax credits for the majors on the North Slope is meant to encourage production. And it’s funny how the recent reports of flat production are being cast as bad news. Back in 2013, when SB 21 or MAPA (More Alaska Production Act) was being deliberated, Alaska was suffering from a 7 percent annual decline in TAPS throughout. We have pushed back the decline curve, an event many opponents said was not realistic.

We don’t have any control over what OPEC does on oil prices. We cannot influence the needle on the price oil is sold at around the world. The one real tool in our house is encouraging production, and we have done it.

Not only that, but people need to remember that SB 21-MAPA is bringing in more revenue at current prices than ACES, the previous tax regime. There actually is a floor, and the tax credits go away under MAPA when the prices get near that lower price threshold. ACES, the previous tax policy, didn’t have that. We protected the state from a double shock: a drop in prices but also a true negative drop in revenue.

I asked the Department of Revenue to summarize for me the total amount of tax value in a barrel of oil at today’s prices of about $60 per barrel. At that price of oil, under the SB 21 tax policy, the total state, federal and local property taxes scoop 75 percent of the value of a barrel of oil. The producers get to take home 25 percent of the value of the barrel of oil. We are still getting a majority share of the value for our oil.

There is another element to the tax credits, and that is the tax credits paid to small producers, independents, and Cook Inlet explorers. Those credits make up the bulk of the total amount of dollars being thrown around. This is really important because these are different credits serving very different purposes.

We hear from the minority and from this governor that we should not be beholden to the Big Three producers. We need energy security. Well, again, short-term memory loss may come into play here. I remember when, three years ago, we were talking about brown-outs in Southcentral due to a lack of natural gas. We were seriously talking about importing LNG.

The irony of that, and the ramifications to the reliability of the Railbelt’s intertie aside, imagine what the fluctuations of a heating bill would be then. We put those credits in place, and now we have an amazing gas supply coming online.

Schools are of no value if they aren’t heated. Businesses can’t function without a stable energy source. Those tax credits offset the economic costs to the state of the largest population area not having an energy source. Our next challenge is to secure stable, lower cost energy source for the Interior.

If one looks at who supported those independent and Cook Inlet credits that make up most of our tax credits amounts, you’ll be surprised. Some are the very same people saying that we are giving away our resource for pennies on the dollar, and assigning that tax credit liability to companies that are not actually receiving those credits, that is, the large producers on the North Slope. Oh well, it’s complicated.

Petroleum News: So you’ve been able to stay busy as busy as you had hoped, even with no significant gas line decisions to make?

Giessel: Well, there haven’t been any decisions to make, well except for the pipeline right-of-way bill. We asked the governor for that bill. He did deliver it. We asked DNR and Fish and Game to go over it and over it because we didn’t want any errors in the identification of properties. We did find a couple of other slight changes in Senate Finance but we did get the right-of-way bill completed. The payment in lieu of taxes bill (PILT) was really a rough draft and really didn’t get much vetting at all. That will be a project that may take over during the interim. It is a piece they will need as the negotiating team goes forward with the AKLNG project because we will want the property taxes to have a bit more certainty for the companies, for our partners and for us.

Petroleum News: Did the PILT bill come a bit late for your liking?

Giessel: Very late.

Petroleum News: What is your outlook on how things are right now with the AKLNG project?

Giessel: Well, I am cautiously optimistic. What I am hearing from AGDC and the AKLNG people, things are moving forward. I’m hopeful that will continue. Of course, I have concern the governor is spending time and money to do a 45-day review of the AKLNG project and I’m hoping that the outcome is one that still supports that project going forward.

I certainly understand as the state’s new chief executive that he would want in-depth information about the most significant project that we have. At the same time, I’m hopeful the people doing this review have the experience, credentials and expertise to give it a proper vetting, so we’ll see how that turns out.

Gov. Walker is well intentioned, and there are growing pains to a new administration. That said, his talk of a competing, line to AKLNG is disconcerting. It is especially so when Gov. Walker talks about a pipeline that is, at minimum, 51 percent bought and paid for by the state, at a time when we are facing an $8 billion budget shortfall over the next two years.

Despite not having our side of the house in order, our partners in AKLNG are plowing ahead. We want to make sure the negotiating teams for the state continue to hash out the best agreements with our other partners.

There are many types of agreements that need to be made. Exxon lead engineer, Steve Butt, and his team are really hard at work. It looks like pre-feed development work will be done by this fall. We have to reach agreements in order to give them more work to do. This is an A-plus-plus team; to keep that band together they need sheets of music. For all the criticism of the parties in the past (some of it frankly well founded), I don’t want the state of Alaska to be the party that holds up the project this time, after we’ve demanded a gas pipeline for over 40 years.

Overall, this was by no means an oil and gas session. We did pass SB 70, a right-of-way bill. It passed the Senate unanimously and I’m pretty sure it passed the House as well in such a fashion.

Petroleum News: Several lawmakers, including yourself, have gone out of your way to give the governor the benefit of the doubt for being new in his role. That said how would you characterize the Legislature’s relationship with the governor?

Giessel: Well, I think that the governor and the Legislature spent the last session getting to know each other. The governor was learning the process and the rules of various branches of government. I think he has a clearer picture now that the Legislature is a separate but equal branch, and where we fall in the government structure. I’m hoping that will make our relationship going forward a bit smoother, perhaps a bit more mutually respectful, but that remains to be seen. I think we need to be patient with each other and a bit more respectful.

Petroleum News: Do you think that respect could be tested in October if there is a special session?

Giessel: Yes, it certainly could, and I’m hoping that doesn’t happen. It would not benefit the state if that were to happen.

Petroleum News: Do you still want to see a special session in the fall?

Giessel: Yes, I think first of all, it would mark a continued movement forward of AKLNG because there will be then some contracts for the Legislature to review, and that’s a good thing. It would also be a time when we could address the payment in lieu of taxes issue. There may be need for additional attention to the budget, depending on what happens with this first special session.

Petroleum News: One of the budget issues lingering is AGDC money being removed from the budget to fund education. Under the governor’s new budget proposal, he wants money put back in. He says he needs it for negotiations with TransCanada. What do you make of that?

Giessel: I’m not clear what that means. We signed a memorandum of understanding with TransCanada and I’m not sure what finances would be needed to go forward in negotiating further. That was never defined, so I’m confused by that.

Petroleum News: So does that give you pause about keeping money there or putting it back?

Giessel: Of course, yes.

Petroleum News: All that said are there any other plans you might have for the committee during the interim? You had mentioned the PILT bill needing some further work in other committees.

Giessel: We are going to be taking the update reports that are in statute. There will be come confidentiality issues with the in-depth updates for legislators.

We’ll also have the public updates. The Senate Resources Committee and any other legislator who want to come to the confidential briefing.

Anyone from the administration, too, they are certainly welcome. We will be inviting Deputy (Resources) Commissioner (Marty) Rutherford, who has signed the confidentiality agreement. ADGC board members as well will be there. We’ll be getting an update on things going forward, or any glitches if there are any.

Petroleum News: During your committee hearings, you noted how SB 57, clean air act bill, is also a priority for the interim and moving forward. What’s driving this bill?

Giessel: The concern of course is these rules being promulgated by the EPA are intended to discontinue coal-powered generation. Here in Alaska we depend on that coal. It is one of our low-cost fuel sources. The rules we anticipate would be unattainable. The bill requests the Department of Environmental Conservation to do a cost analysis impact in Alaska. It would be part of their work anyway, but we are asking them to do it a more structured format and something the Legislature will be able to review. The number one request in the bill is that we seek an exemption for the state of Alaska.

So we will work on that as well. But the Resources Committee will want an update on the Interior Energy Project. We passed HB 105, and we will want to hear the progress. It is an important issue to get affordable energy to Fairbanks and time is of the essence.

Petroleum News: Let’s talk about the IEP bill. You say you want to monitor progress, but what would you expect to hear so soon?

Giessel: It’s not necessarily that they will have completed aspects, but we want to watch the progress as they go forward and what the fiscal analysis looks like, how they are making the decision of what’s economic and what’s not. They set the target price of $15 of gas delivered to the burner tip in Fairbanks. That’s a pretty high bar. I’m wondering, first of all, how they set that bar. Second, if they are able achieve it, that would be pretty impressive. You might have heard me say at the end of the committee meeting that the Resources Committee is concerned that AIDEA doesn’t step in between the private sector’s process in the sale of assets, and it felt like that was happening. They say it wasn’t. I’m interested in following that process and making sure that wasn’t going on.

Petroleum News: OK, looking even further ahead. I realize you’ve noted plans for the interim and a hope for the fall special session, but can you provide a look ahead for the second year of the 29th Legislature in January?

Giessel: I want to focus on a climate of stability for investment. Oil prices are driving investment into very conservative plays. SB 21 did that. Despite higher government take at these prices, this is a better overall system because it is stable and consistent.

I continue to have an interest in what our shale oil opportunities look like. We have not heard much about Great Bear Petroleum’s work in the last few years. I recall several Senate Resources Committee meetings in years past in which very optimistic forecasts were made about oil production from our shale deposits.

Next session will be touching up anything not covered in the fall special session related to AKLNG. Our goal is to get to a FEED decision by the second quarter of next year. That’s a big deal. That’s tens of billions of dollars in this project, that’s six TAPS projects bundled into one.

That’s good jobs for our labor force, getting our trade halls, technical education and job centers jammed with new folks learning a trade that will give them good paying wages for nearly a decade. This is the legacy I want to leave our next generation, just as my generation benefited from TAPS and North Slope oil discovery.

My focus on next session is keeping track of the long haul. We cannot be penny wise and pound foolish. There is not an income tax high enough, or an industry robust enough, to replace the revenue we get from oil.

Our biggest shot at growing the pie is a gas pipeline. I will be focusing on that. Any legislation that undercuts that, including raising taxes after we’ve spent the last 10 years doing nothing but argue and change oil taxes, will not get a warm welcome from me.