Johnson: Oil tax solution difficult

Outgoing Rules Committee chair, two-term Resources Committee co-chair says new Legislature will miss crucial institutional knowledge

STEVE QUINN

For Petroleum News

Craig Johnson leaves the Legislature with 10 years of service in the House. He served eight years on the Resources Committee, including four as committee chair. But unlike many who enter public service, Johnson spent five years as a staffer working for outgoing Sen. Lesil McGuire, former Sen. Jerry Ward and former House Speaker John Harris. Johnson lost his bid for a Senate seat, but says there are no regrets. He’s already planning on enjoying a different pace and more time with his family that eluded him during extended and special sessions, especially these last several years. The Anchorage Republican and outgoing Rules Committee chairman shared his thoughts on his 10 years and provided a look ahead for Petroleum News.

Petroleum News: As you reflect on your 10 years, including the eight on Resources, what is your takeaway? What are your memories through the various debates and discussions?

Johnson: Well, I watched the pendulum swing quite a bit from ACES and AGIA to SB 21 and SB 138. I think we went too far with ACES. That was more of a money grab than anything else - and a punishment. And SB 21 with the tax credits was probably a little too far the other way so we saw the whole thing swing.

Then you had the pipeline and TransCanada, and the gyrations of all the pipelines. Resource development covers everything from fish wars to mining to water rights. It runs the whole gamut you might say.

Petroleum News: When it comes to crafting legislation for taxes or a gas pipeline, what would you say was the most difficult part of it? Predicting the market? Responding to the market? Or the political will?

Johnson: I think everyone wants to get it right. Regardless of political party, everyone wants to strike that balance, whatever that balance might mean to them. That’s where the difficulty comes. But I think everyone wants that balance of being able to have the resources and generate the revenue the state needs to operate.

I think the difficulty was being able to strike that balance where we could maintain a healthy oil industry and a healthy gas industry while being able to have a tax level that allows for that and provides for the needs of the state. I think that is the difficult part. I don’t think we have that right now and I don’t think we will ever have it. That’s a tough balance to do.

Petroleum News: So it’s really not one variable that makes this so difficult?

Johnson: Think about it. You’re dealing with a commodity that what’s fair at $100 but is not fair at $105 and may not be fair or certainly less fair at $60 or $40. If we knew it was going to be the same price for a long period of time, it might model a little bit better, but then you have the barrels in there, the amount of oil that goes down the pipeline, plus the cost, the expense and then anything that might happen in between.

Before I got into office in 2005, we had a pipeline shutdown at Pump Station 1 at Prudhoe Bay. When you deal with all of those elements, it’s a crystal ball as much as anything. I try to apply a business philosophy. You look at it as a return on investment and how should you do that. It’s difficult with the commodity swigs that we have. I’ve seen $9 when I was on staff and $140 when I was in office. Now it’s about $52 today, so you’ve got wild swings in such a short period.

Petroleum News: What do you feel the Legislature can control?

Johnson: I think the regulatory process and the permitting process, I think a lot of that we can control. I don’t think we’ve done a very good job of that. That comes from the administration as much as the Legislature. We pass laws and somehow they get interpreted differently in the regulations.

Listening is probably the best thing we can do, and it’s not just to the oil companies. It’s to the experts. If an expert comes in and you don’t agree with him, then it doesn’t matter what he says. If it’s Pedro van Meurs or enalytica, or anyone, if you’re not one of the people in the camp that agrees with them, I don’t care how smart he is or what he has to say, people tend not to listen. I think the best thing to do is listen to those guys and filter it through the process. Don’t just off handedly say they don’t agree with me so I’m not going to listen. That’s a pretty difficult thing to do. Sometimes you have to put your own personal beliefs aside, and that’s not an easy thing to do.

Petroleum News: On to the gas line, what’s your take on where the gas line stands right now?

Johnson: I think we probably had better luck taking our money to Vegas and putting it in a slot machine. You might get rich.

Basically the philosophy that you can build a pipeline with just buyers is just flawed at a couple of levels. One is buyers will want the best price they can get for that gas, which means Alaska gets the worse price it can get so basically there is a fundamental flaw in that approach. I’d rather be partnered with people who can make as much as it can and reap those profits. Those are the people I want to partner with. It means the state is in the same boat of reaping those profits. If we are partners with people worried about the cost of gas at the burner tip, then we are going to be getting the very least amount that we can get.

I understand that you have to have buyers but I don’t think they should be driving the boat on building the pipeline and setting the prices. I think the approach is totally wrong. It’s like if you are buying a car and you’ve got people buying the cars making the deals, it’s going to be a cheaper car. The dealership is going out of business but it will be a cheaper car.

Petroleum News: Do you see this as the state moving forward with an uneconomic project?

Johnson: If they move forward with it, I think it’s an uneconomic project. It’s been a while since I’ve seen any actual numbers on it. I think it’s what $11 (an mcf) we needed to make it work and the people want to buy it for less than that. It’s a huge project. I think when we get our money involved in it, we are jeopardizing the long-term security of our state, our ability to borrow money and educate our children I think it’s a huge gamble for the state to continue down the road we are on right now.

Petroleum News: What do you think went wrong? You’ve had AGIA and SB 138. Was it simply the markets driven by the onset of hydraulic fracturing and then a price crash that forced the state’s hand?

Johnson: Well, it was the markets, but we also had a new governor coming in who treated the partners as the enemy. The governor has had a lifelong battle I think with the oil companies, and I don’t think he was interested in partnering with them. I think that was evident from day one. Whether you like it or not, we had a four-way partnership. It gave the producers a certain amount of confidence that before we could make money, they had to make money, so it was a win-win for everyone. That dynamic changed with this governor.

Petroleum News: Several of your colleagues have said the governor is one of the more accessible governors compared to previous administrations but felt that they didn’t learn enough specifics from him. What was your takeaway?

Johnson: I had very little exposure to the governor. I didn’t really meet with him that much. I think the governor heard what he wanted to hear. People would go in and tell both sides of the story and he would only hear the side of the story he believed, and that would be it. He would say, “the Legislature is on board,” or “Exxon is on board,” or “the Japanese are on board.” I’ve actually called people and said “what happened we were just in a meeting with the governor and he said you guys are in agreement.” They said that is certainly not true. It was very frustrating for everyone. What he heard is not everything that was said.

Petroleum News: What do you think needs to be done these next two years as far as the Legislature and the administration working together to advance and position the state as best as it can?

Johnson: The one thing we can control as a state - and the one thing we can’t control is price - is set policies that encourage producers to pump oil down the pipeline. If we pump enough oil down the pipeline and start getting the flow back up, then we will be less vulnerable to price. When we were at $9, it was brutal but I think we were over a million barrels a day, so that mitigated the price. But if we are at 500,000 or less, that volume shift is huge.

It’s not all oil. I think we need to concentrate on mining. We need to pursue our own offshore within those three miles. We need to make available land for development. We need to set up a structure that doesn’t mean you have to give people money but it tells people there is consistent framework they can depend on.

An example of that going awry is the governor’s oil tax credit vetoes. Whether you agreed with them or not, they are there and we still owe them. For him to veto that money, put a huge strain on a lot of business.

Petroleum News: How do you suppose the state can pay for those?

Johnson: That’s an interesting question because we have to have revenue but we owe the money. We have to find a way to pay those. If we default on those, what would that do? We do need new revenue of some kind. I don’t agree with restructuring the Permanent Fund. I don’t know that I have the answer, but we owe the money. The bank can’t come and foreclose on the state.

Petroleum News: How do you think this could hurt the state - or not - as financial institutions consider Alaska for investment?

Johnson: I’m not a financial analyst, but the ability to come through and do what you’ll say has got to have some kind of weight. The governor’s veto of permanent fund money, like it or not, I think it sent a signal that there are people willing to make the tough decisions. I think it was the wrong decision because it hurt the economy but I think if you make tough decisions - and you saw the Legislature was willing to make cuts - the tough decision would have been to bite the bullet and pay those off. We have to show a willingness and do what we say we’ll do. Your honor or your word has to mean something.

Petroleum News: The Resources Committee will have a different look this year because of the change in leadership. What do you make of that?

Johnson: I’m going to have to wait and see. I’ve served with both of those members (pending co-chairs Andy Josephson and Geran Tarr). They are both very smart. They have a different philosophy. They are intelligent people. It will be a pretty balanced committee, either five and four or four and three. There is only a single person difference between the majority and minority. A lot of times bills on tax credits would go to the Resources Committee. In the past it did because the Resources Committee in the past was made up of people who have been around a little bit with people like (Kurt) Olson, (Mike) Hawker and myself with Mike Chenault as an alternative - certainly (pending Finance co-chair) Paul Seaton.

We had probably as much experience in that committee on taxes as any other committee in the Legislature so it made sense to go there. With the new committee it may not make sense to send a tax bill to Resources and send it right to Finance. That will depend on how they want to handle their structure. I don’t think there is a right way or a wrong way but I would be very careful about sending financial legislation to that Resources Committee.

Petroleum News: Do you have any concerns about the committee losing that experience people like you, Kurt Olson and Mike Hawker brought to the committee?

Johnson: I think if you look at the Legislature as a whole, I was doing some back of the napkin calculations, when they gavel in in January there will almost 200 years of legislative experience who won’t be there. That’s with Hawker, Olson, (Bob) Herron and myself. I’m also including Max Gruenberg in there, Lesil McGuire, Johnny Ellis, Bill Stoltze and Charlie Huggins. If you go down the list of people who aren’t going to be there, I think the total years adds up to somewhere around 200 years.

Anytime a group of 60 people loses 200 years of legislative experience, a certain history is gone, a certain institutional knowledge is gone. Quite frankly it can’t be replaced. I mean those are rough numbers. I do know it doesn’t take long to get way above 100 real fast. Those people have forgotten more - and I’m not putting myself so much in that group - than it will take the Legislature years to remember.

Petroleum News: Let’s look over to Washington. D.C. They will have a new Congress, led by Republicans, and a new administration. How do you think that bodes for Alaska?

Johnson: I think it should be very exciting. I hope we don’t miss the opportunity with a House that doesn’t take advantage of some of the opportunities that administration may put forward in terms of exploration and the ability to open the Petroleum Reserve. ANWR is a different story. That’s an uphill battle regardless of who seems to be in charge.

Our House is more anti-development because there are people in that group that don’t want to see development. That future caucus that is. We may get better access to things like mining but are those things going to be stifled by state regulations? The Senate will still be economically motivated to develop resources. If we would have maintained the same type of resource development philosophy in all three chambers here, the jury is still out on the administration. With Washington’s change, we were in a position to really do some good things. It troubles me that we may not be now. I think the country will benefit from it; I think the resource development community will benefit from it. I just hope Alaska is in line to take advantage of some of those opportunities, and I’m not sure we will be. The jury is still out. We will be missing a great opportunity to close our budget gap.

Petroleum News: The Obama administration is still making decisions that affect Alaska like removing the Beaufort and Chukchi seas from the federal five-year leasing plan. I’m sure you’re not surprised.

Johnson: No, I’m not surprised at all and I’m not sure he’s done. I’m not sure you won’t see some other things come along like a wilderness designation. It concerns me very much what can happen these next days. It doesn’t take him very long to say that the Izembek Road is a wilderness area and forego all the work that’s been done on that, which the administration ultimately held up. Those are very difficult things to overturn. I’m very concerned. I don’t think we’ve seen the last of it yet. I hope I’m wrong.

Petroleum News: Others have expressed that same concern after the removal of the Chukchi and Beaufort and before the recent executive order protecting more than 100,000 square miles.

Johnson: I don’t know who said it but they were right on, but I’ve been concerned about it since Election Day.

Petroleum News: What do you think the Caelus discovery could illustrate to the state and the feds? It’s recently been held up as an example of responsible exploration.

Johnson: It really is. It’s one of those things: Everybody wants responsible development. I was listening to a guy whose company does mapping and we use them up here to map Alaska. They also do mapping for Mars. He made the comment that he was at a Congressional hearing and they were talking about mapping Mars, and it was determined that there are more accurate maps of Mars than there are of Alaska. I found that fascinating. The message needs to be is we don’t even know that we have. We don’t know what’s out there. If we say we aren’t going to allow anyone to look at what’s out there, we are hurting ourselves. With Caelus’ find, how many more of those are out there? Look at Armstrong and Pikka, no one even knew it was there. This all goes back to what I was saying that we solve our problem by figuring a way to get more oil in the pipeline.