Kawasaki: SB 21 tax change went too far

Lack of definition of ‘new oil’ also problem; on gas line, Fairbanks Democrat says state’s second-largest city in tough position

Steve Quinn

For Petroleum News

House Rep. Scott Kawasaki has been on the front lines of oil and gas issues since he first took office in 2007. The Fairbanks Democrat first cut his teeth on resource development by serving on the Special Committee on Oil & Gas and the House Resources Committee.

This legislative session, Kawasaki held a seat on the House Finance Committee, which reviewed major oil and gas legislation, starting with Senate Bill 21, Gov. Sean Parnell’s oil tax reform and House Bill 4, which provides the Alaska Gasline Development Corp. the authority to advance in-state gas line.

Kawasaki sat down with Petroleum News to discuss recent developments with the large-diameter line, the fierce debate on bringing natural gas to Fairbanks and the referendum seeking to overturn SB 21.

Petroleum News: Let’s start with SB 21. You’ve got a two-pronged issue with the bill: getting a clear definition of new oil and the pending referendum set for next year’s ballot in August.

Kawasaki: I supported the referendum. I feel this Senate bill was rushed through the process this year. We still don’t have an audit of the original numbers. We still are lacking a lot of the data to prove up the concept will work: if we lower taxes we’ll increase production. That’s what’s been sold to us all along. Just the justification to move so quickly on an issue so large wasn’t there four years ago when we first started, and it wasn’t there this year again. So I definitely support having the public engaged and involved in this process.

Petroleum News: You talk about this process being pushed through so quickly, but ACES (Alaska’s Clear and Equitable Share, the production tax bill passed under former-Gov. Sarah Palin in 2007) was pushed through six committees, three each in the Senate and House, and those favoring it didn’t subscribe to the premise of 30 days being too short. How do you reconcile that?

Kawasaki: ACES was only a 30-day session, too. But the Legislature heard from the governor even before that in 2007 saying she would like to introduce a bill dealing with having the state earn some sort of equity in our oil and gas resources. I think it was the right thing at the time with the numbers that were given. I wasn’t 100 percent sold on ACES. I talked about a gross-based floor at the time or a gross-based tax component to it. Ultimately the Legislature said we don’t want that. We want an up or down net-based profits tax. Whereas maybe we went too far on one side with ACES, I think we’ve gone extremely too far on this governor’s bill. We certainly are incentivizing fields like Kuparuk, Alpine and Prudhoe Bay that we know are exceptionally profitable fields to develop. Rather than staying mid course where we should we’ve gone now too far to the other side. In addition to that, I don’t think we’ve done enough to incentivize middle players and small players in oil and gas development. That is going to be a real big issue coming up as we try to find more young entrepreneurial businesses in the North Slope and the rest of Alaska.

Petroleum News: Still on SB 21, there is still the issue of drafting regulations that clearly define what new oil is.

Kawasaki: We asked the question several times during hearings in the Finance Committee and they never came up with a real answer about what new oil is going to be. Now we’re in a predicament where the state has to come up with regulations based on what the Legislature discussed at those times. The amount of testimony is pretty slim. Is a new barrel of oil from a new field? That’s kind of what I had hoped it would be. I think that’s what most legislators hoped it would be. Or is new oil just a barrel of oil more than oil that was produced in the previous year? I don’t have a way to reconcile that question right now. I can certainly tell you that what we want to see is new oil in the existing TAPS pipeline — new oil from new fields from more exploration and more development. I don’t think we get there with SB 21.

Petroleum News: So do you see that provision coming back to the Legislature for rework in the form of a new bill?

Kawasaki: I think ultimately new legislation and tweaked legislation might be in order. The problem is opening this up again leaves it up to the same politics as usual we’ve seen the past couple of years. It can be a really divisive issue.

Petroleum News: Then how do you propose to reconcile that or is that for the referendum to do as a mandate to rework SB 21?

Kawasaki: if the Legislature actually sat down as a group and said we want to see new oil and this is what new oil should be, and let the committee process take care of that, then that would be the most perfect course of action. I think people, whether they were experts on the issue, or whether they were involved in the Resources and Finance committees in the House and Senate or whether they were new members, even these new members thought that new oil meant new oil and new oil was going to be oil from new fields not oil from existing fields from Alpine and Kuparuk which are wildly profitable.

Petroleum News: On to natural gas, you attended the LNG symposium that Legislative Budget and Audit put together a few months ago, what was our take on it?

Kawasaki: I think the takeaway was there is a willing buyer, which is Asia, now more than ever because of Fukushima, and there are willing buyers we are close to in proximity. And as a state, I think, rightly so the folks there are urging that we become a willing seller. Again, there are all sorts of issues that come into play about the costs of monetizing the gas and how much it’s going to cost the state and the fiscal impacts. We have willing buyers who want our gas; we should get something to get that moving. I guess two years ago when we were talking about LNG and LNG exports, we were hearing that Russia could move us out of the market. It doesn’t look like they are moving with any kind of speed, either, but it doesn’t mean we can let up. We need to push harder.

Petroleum News: What would you like to see done to advance a project, whether it’s a large-scale line or a smaller line driven by HB 4?

Kawasaki: I’ve always been a fan of ANGDA (the former Alaska Natural Gas Development Authority), which is a large-scale line from the North Slope to tidewater, through the spine of the state to Valdez. It makes more sense from an economic standpoint being a larger line. The economics of a small line don’t seem to play out. I’ve been a supporter of having a big line and it makes sense that it goes along the existing pipeline route. I think it makes sense that there be some alignment necessary between what AGDC wants, which is purely an in-state pipeline and what AGIA wants. When we tailored AGIA, we said we wanted to have in-state use of gas. We created a Y-line, one that could be used for LNG export and the rest of it going through to the Midwest in the United States.

That’s what I supported at the time. That would have made the economics of the project and it would have helped Alaskans the most. Hearing that potentially Nikiski is being looked at as the number one option for an off-take point for LNG, I share everybody else’s excitement. We’ve been talking about a big natural gas line and it looks like it’s one step closer.

For Fairbanks, this means we can have an off-take near Fairbanks. With such a large volume, we’ll be able to take off as much as we need for local use. I know they said they are looking at other potential places, but it looks like that one is the top of the list now. I’m excited about having a large-scale gas line and I think Fairbanks will be part of the mix.

So there is momentum going on that gas line.

Kawasaki: I did support HB 4 this year. I was also very critical of it missing Fairbanks. One of my big issues was that it’s a line that won’t help Fairbanks directly. If we really wanted to have an in-state line, shouldn’t we have an in-state line that serves the state’s second largest city that’s currently starved for gas? We were able to add some amendments that gave us a straddle plant to provide gas here. I still think that a small-diameter gas line to Anchorage makes less sense than a large gas line to Valdez for major export makes more sense. It does in an economic fashion and it provides gas for the entire in-state market.

Petroleum News: So what made you support it?

Kawasaki: That one provision made it more sweet for me to able to support it. Even though I didn’t support other iterations before, Fairbanks is in a real tough position. As desperation sets in, we are willing to try more and more things. The small pipeline might be helpful. Even a small help makes a difference here in Fairbanks.

Petroleum News: What would you like to see next then?

Kawasaki: From the standpoint of Fairbanks, everybody has been talking about in-state gas and local use, but a lot of the debate and a lot of the forward movement has been about export. I don’t want to get so wrapped around export without also considering in-state use and figuring out how we as Alaskans take advantage of our own resources. Export is going to be the anchor, but we sometimes get too wrapped around that. I would like to see us talk a little bit more about in-state use. In addition, I think the next step is a real timeline. I think that will show us light at the end of the tunnel and I think that’s what the state needs.

Petroleum News: So if you get that timeline, is that enough for the executive branch to begin negotiating a long-term fiscal policy?

Kawasaki: I think that gets us to the table. Neither side wants to share their cards. We don’t want to give out too much concession on our natural gas. On their side, they don’t want to say, we’ll do it, until they know what concessions they are going to get. A show of faith from the Big Three and TransCanada would be, give us a reasonable timeline and reasonable expectations. That gets us to the table.

Petroleum News: OK, so still in the Fairbanks area, getting LNG to that market has been pretty heated. What’s your take?

Kawasaki: Well, they anticipated the hearings being done in four to five days. I’m concerned with the testimony I’ve heard from Fairbanks Natural Gas and IGU and especially the comments from the RCA (Regulatory Commission of Alaska) themselves. I was critical of the governor’s original plan on trucking LNG bill. I didn’t think it was enough cash to get this job done. He ended up adding a significantly larger amount. Ultimately, a project like this and the build-out necessary to get gas into a person’s home is going to cost much, much more. Even though the bill passed unanimously, I’m still critical that we didn’t put enough cash in there to get the job done.

Petroleum News: So then what’s your view on the bickering between the two groups?

Kawasaki: I don’t know if any legislator has picked a side. I don’t know that’s what we want to do. There is room for both of them working together. I don’t know what RCA wants. That could potentially be a big problem. Either RCA grants a certificate or doesn’t grant it, or puts conditions on it to one or the other. They are autonomous of the Legislature and autonomous of the governor. They are looking at the economics of the area and they could come up with a different decision from what we as legislators want to see: getting natural gas to Fairbanks as fast as possible and a build-out as fast as possible.

Petroleum News: Let’s go to the Arctic. Where do you think the state’s future lies with Arctic policy?

Kawasaki: So much of our Arctic policy is driven either by U.S. trading or International trading and Alaska has, unfortunately, been playing second fiddle for the situations that are happening in our own backyard. This state needs to spend a lot more time, a lot more energy, a lot more resources to make sure Alaska’s stakes have a seat at the table rather than get run over by China and Russia — all the other traders who want to come through the Bering Sea. As a state we need to have a hand in this and be at the table when negotiations are happening. It’s unfortunate we are not as involved and this administration is not as involved as we should be. Even though we are outside the three-mile limit of federal waters, it’s basically the backyard of our backyard and we need to be more concerned about what’s happening there.

Petroleum News: Do you have any closing thoughts?

Kawasaki: As Fairbanks residents, we are trying to really find solutions to get the second largest city in the state some energy relief. My goals are sooner rather than later, but doing it right whether it’s natural gas through trucking or through a pipeline, or whether it’s coal.

Even with our challenges, sometimes we overlook good news like Nikiski and Great Bear Petroleum with the shale play across the North Slope. That’s great news that someone is looking to monetizing it. It’s all part of the mix that’s going to be part of TAPS, so it’s good news because we haven’t really taken advantage of our shale play like the folks in North Dakota with the Bakken.