Stedman: SB 21 won’t stand test of time

On gas side, Sitka Republican believes state should have equity interest in pipeline, conditioning plant and liquefaction facility

Steve Quinn

For Petroleum News

Bert Stedman has made it clear: he does not like Senate Bill 21, Gov. Sean Parnell’s oil tax rewrite. But the Sitka Republican senator won’t defend the outgoing tax scheme, known as ACES, either. He simply believes the pendulum swung too far when the Legislature drafted ACES in 2007 and now SB 21 produced an extreme change in favor of the oil industry.

Stedman completed his one-year stint as chairman of Energy Council with a recent trip to Wyoming.

He spoke to Petroleum News about his time as chairman, his thoughts on an oil tax issue that won’t seem to get resolved and the prospects of Alaska getting a natural gas pipeline built.

Petroleum News: You’ve just wrapped up your year as chairman for Energy Council. Can you provide a brief review of that year and how it connects to Alaska?

Stedman: The experience was good. I’ve chaired other kinds of meetings before so it wasn’t just that. What I was able to do is get a little bit more focus on Alaska, the Arctic and the Pacific region with most of our members being from the Gulf of Mexico. It allowed us to have discussions about the Arctic and why it matters to North America, primarily the U.S. and Canada.

The exploration and transportation of the Arctic is opening at a very dynamic pace and a lot of the other members, I don’t think realize the magnitude of that speed. Also we had the chance to have more focus on the Pacific energy trade triangle: Australia-China-U.S. and Canada-China-U.S. We are the energy state in the energy council, including the provinces that border the Pacific and the Arctic.

What was also really nice for Alaska was they invite members from Alaska to help lead some of the discussions. We had Lt. Gov. (Mead) Treadwell, and Cathy Foerster (commissioner, Alaska Oil and Gas Conservation Commission) and Dr. Mark Myers from (UAF). For example, Cathy talked about the leaky well issues on federal lands and now we’re making progress. Treadwell talked about the Arctic in a broad sense, and of course Myers talked the resource potential in Arctic.

We also had discussion in the broader context. I mentioned the trade triangle in the Pacific. If you look at the economic ties between Australia and China, those are different from the political ties between Australia and the U.S. We also had engagements with Kazakhstan and their plains that are resource rich. Kazakhstan, their steppes are similar to our great plains. We heard a funny story about how we flew cattle from North Dakota to Kazakhstan, to rebuild their herds so they are interested in more than hydrocarbons.

As chairman you have the ability to not only lead the debate in a different direction from where it’s been before, we were able to take some excursions. We visited the Gulf of Mexico to get an update on Macondo and we got to visit a fracking site. It’s pretty exciting what’s going on up in North Dakota. What interested me most was the speed of the technology. They are going to 50 to 60 wells per pad so the footprint pad is shrinking and the amount of wells drilled off the pad is escalating.

I had the chance to sit down with energy officials in Alberta in January, which was different from the normal Energy Council meetings. One with the energy minister in Alberta, Ken Hughes. We talked about how Alaska can assist or work together with Alberta for a mutual benefit in getting hydrocarbons to market.

They want to move 4 million to 5 million barrels a day to market; that’s more than twice what we shipped in TAPS at its peak. They need to move their oil to the coast, the West Coast, the East Coast or for that matter bring it north through a rail extension. I’m hoping we get together with him again when I go there in three months.

The other thing we talked about was the Keystone XL and getting it permitted. I’m not sure that Mexico and neighbors farther south don’t feel that the pipeline would put negative market pressure on their ability to ship crude to the U.S. and refineries in south Texas. So there is a tug-o-war there and we’ll have to see what happens.

Petroleum News: Closer to home, SB 21 still hangs in the balance on two fronts. One is the referendum. The other is the concern over concluding what is new oil?

Stedman: Let me put things into context a little bit. There seems to be a black and white version in the state: you either support SB 21 or you support ACES. I hate to say it, but this isn’t black and white.

The issue with SB 21 isn’t to scrap SB 21 because ACES is the answer. ACES needed to be restructured. The bottom line issue with SB 21 is the split of profit oil. You can call profit oil an economic grant, you can call it net cash or you can call it net value.

The problem with it resides in the legacy fields. You set up a fiscal system with a split between the sovereign — in this case the people of Alaska — and the industry. There isn’t really a numeric that’s the right numeric, but there is a range you fall within when splitting up the profits. We are not even in that range. We weren’t in that range under ELF (Economic Limit Factor regime re-written in 2006) and eventually people figured that out. SB 21 puts us in that same position.

It’s not going to stand the test of time in my opinion even if the referendum is not successful in passing. If you take a look at North Dakota, they have an 11 percent tax structure and roughly about 20 percent royalties to landowners .We will be so far under North Dakota with the legacy fields. It takes the state out of that range of reasonableness.

Petroleum News: So go back to your concerns about ACES.

Stedman: Here’s an example of what I mean, and I’m not saying this to support ACES, but just to put in context: ACES at $100 a barrel after you take out the credits is about on par with North Dakota, fairly close. Say you take things to $120, $130 or $140 things are out of whack in the opposite range of where SB 21 is.

That’s the fundamentally issue of SB 21 and it comes down to fiscal stability. If you don’t have enough stability within your policy, you can’t the public to support it in the long-term.

We are in the oil business with Exxon, BP and Conoco and the four have to have a reasonable comfort in the policy they are working under or it’s not going to last. That creates a problem.

So the underlying issue with ACES is when that legislation went through it turned into a political feeding frenzy. Progressivity was hijacked and it was turned into a rate that was unsustainable. With the capital credits, there was a feeding frenzy. It was layered everywhere so it made that tax policy completely unstable. Rather than fix those problems, it became a feeding frenzy on the other side. I don’t think we are much better off under SB 21 than we are under ACES. We’ve created an unstable policy and it needs to be rectified.

All that said, it’s going to come down to the people. If they don’t want to support it, then we hopefully will go in and hopefully concentrate on areas that need to be fixed: high progressivity and excess credit issues. My concern is that if SB 21 stands, when the people who own the resources see the gross value that’s being extracted then see the net value coming to the state, they are not going to support that at all.

One of the things you need to remember, you can throw into the discussion North Dakota. They have a gross tax and we have a net. You can’t compare those two. You have to have something that is fair to the industry and the sovereign. You can’t have it one sided. It doesn’t matter if you are on the west coast of Africa, or North Dakota or Alaska, people won’t put up with it. I’m looking forward to getting into that debate next summer with the referendum.

Stedman: I think it’s going to be extremely difficult without a lot of stringent monitoring, I think it’s going to be problematic. It’s not surprising there’s already heated debate going on with this subject.

Petroleum News: Does that debate play into the referendum discussion at all?

Stedman: Oh, I think it does. You’ll be focusing on new oil versus old oil and how much of the old oil is magically converted to new oil. Depending on what side of the table you’re on, you’ll have a different opinion on that subject matter. If I were with the industry, I’d want all of the oil declared new. It’s just business. The public shouldn’t get down a public opinion path that Big Oil is somehow out to control and manipulate and somehow loot the state of its resources. They are doing what they are supposed to be doing: maximize its profits. We as the owner of the hydrocarbon should be doing the same. We also shouldn’t get wrapped up in discussion that we want to get our resources to a specific entity so we can get some jobs. We’re going to get jobs anyway. Only a fool trades jobs for resources.

Petroleum News: Do you have any other concerns about SB 21 that many others may not have brought to light?

Stedman: One of the concerns I have about the one sidedness of it — and you can look at it from the state side or the industry side — when you have another substantial project sitting in front of you like the gas line, it creates political baggage in the evaluation of it.

One of the concerns I have with the gas line — the export line either to Cook Inlet or Valdez — is the value chain of the gas is different from oil. Somehow we need to get the separation into different camps, one being oil, the other being gas. They are separate hydrocarbons and they shouldn’t be mixed, or you will lose sight the economic value of gas.

If you net gas back to the wellhead like we do with oil and if we just take a portion of the wellhead, we will end up nothing in gas. The Legislature and the administration will look like we gave away the farm.

To avoid that, we need to have alignment with the industry, which we’ve talked about for a long time. That would include a conditioning plant on the North Slope, a pipeline and the liquefaction plant. To do that you need to have equity ownership. That’s to be a negotiation. Maybe it’s 15 percent. Maybe it’s 20 percent. Maybe a little more.

If you don’t have an equity position in it, there is going to be little value to the treasury. The jobs created aren’t going to be much different no matter who owns the pipeline. Normally the industry side, the state would want to have 80 percent debt and 20 percent equity or 70-30. Well the state is a different animal.

The state needs to have all equity in its portion. In this case, if it was a $50 billion project, you use $10 billion as a number. That would spin off $1.2 billion if there was 12 percent return on equity. Hopefully we will have the industry take the state’s portion of gas and sell it; I don’t want to see the state in the gas business for several reasons. There is no reason why Exxon, BP and Conoco couldn’t split up the state’s portion and wrap it up in their product line to sell it.

In order for the state to have an equity position that’s meaningful and protects the alignment of the project and protects the interest of the people of Alaska, we need to be the fourth player, not TransCanada.

I personally don’t believe this project qualified under the AGIA reimbursement. It’s a different project. I would question if the AGIA mechanism for buying out TransCanada is even applicable. There isn’t room for TransCanada and the state of Alaska to be in this project. If TransCanada comes in, as far as the value chain, my fear is all of TransCanada’s share comes out of the state of Alaska

This isn’t anything derogatory against TransCanada because they are a good company. This is strictly business. I don’t believe AGIA reimbursements qualify for this project.

Petroleum News: So who should own the pipeline?

Stedman: You want to align your ownership to your gas volume. If Exxon, BP and Conoco, that leaves us with our royalty share at roughly 12.5. If TransCanada comes in, we get zero. The state of Alaska needs to own not only a portion of the pipe commensurate of the gas, they need to own the same percent in the conditioning plant and same percent of the liquefaction plant. Then stay out of the marine transportation arena and concentrate on the state borders. When that gas leaves, it’s gone.

Petroleum News: Still on the gas line, you attended the LNG symposium a while back what was your take on that?

Stedman: The stranded gas act under Murkowski was a heck of a lot closer to putting a project forward than AGIA ever was and the project that comes out is going to look a heck of a lot more like the Stranded Gas Act than most people will imagine. Keep in mind that process is more beneficial and viable to moving a project forward than AGIA ever was. It’s going to be difficult for a lot of people to stay out of the political washing machine to recognize that. The window of opportunity we have in the Pacific is open today and it’s not going to stay open forever. You have Russia looking to get into the game. You have Australia already in the game. You’ve got Canada is rushing to the coast. We need to consolidate behind one project and that one project in my opinion is the LNG line. It’s not the in-state line. That’s a fallback measure if everything goes to Hell in a hand basket, including Cook Inlet. We have an opportunity and we need to move forward. I think it’s going to surprise a lot of people. It’s going to look real similar to the Stranded Gas Act and the reason it is, it’s just the basic economics in the value chain of the gas.

Petroleum News: So what should the next step be?

Stedman: We need to come up with fiscal terms that have stability between the industry and the state. Oil is going to be an obstacle. How do you move forward with SB 21 or ACES and expect the industry to spend $50 billion knowing people are going to wake up one morning and know that the ships are leaving and there’s nothing in the treasury. You’ve got a political problem.