Gara: Curious about pipeline options

Anchorage Democrat hopes for flexibility in state’s and industry’s pursuits for natural gas pipeline, marketing North Slope gas

STEVE QUINN

For Petroleum News

House Rep. Les Gara says he isn’t ready to give up on a large-diameter natural gas pipeline, even in a chronically low-priced resource environment. He’s hoping for a way to slow down the process and be ready when the market is ready and so is a buyer. The Anchorage Democrat, who sits on the House Finance Committee, says he understands that may be easier said than done. He discussed his views on the AKLNG project and the prospects of discussion oil taxes and oil tax credits when a new Legislature arrives in Juneau next year.

Note: This interview was done prior to the Aug. 24-25 House and Senate Resources committees AKLNG hearing.

Petroleum News: Let’s start with a 30,000-foot view question. What are your observations with what’s going on with AKLNG?

Gara: There are 20 different ways to go forward with the gas line. It’s hard to criticize somebody for taking one of those routes. The question is whether it’s economic. The other is whether the state can make money off of it. And, of course, we have a third question which is at some point we need a stable, reliable source of natural gas. You want all of those three things to happen - that it becomes economic, we can make money off of it, and that it happens in time to meet our natural gas demands when Cook Inlet starts declining. Fortunately, Cook Inlet is still going strong.

Petroleum News: You also have three partners who want to make a certain amount of money, too, right?

Gara: That’s true. There were also promises that if there were a gas line, we would be able to get fuel to rural areas. I hope some of those promises weren’t reactive. Anyway, the gas line is an important project for Alaska with jobs and potential revenue. The problem is the price of natural gas is making it very challenging. I don’t see an easy way around that. The state doesn’t get to take control of those gas prices.

Petroleum News: Have you had a chance to get know some of the new players with the state like Keith Meyer or John Hendrix or learn about them through reading reports?

Gara: No. Not yet. Right now the most important things for us to do is, we are going to have to make a decision on the big conundrum if gas prices stay moderately low or low. On one hand if gas prices are too low, the project is a potential money loser. On the other hand, if you’re not ready to go with your project, you may find out there are no markets left when somebody else moves faster than you. It’s a Catch-22 and not a simple sound bite solution. On one hand, if you want to be ready to move ahead and sell your gas to an Asian market, you have to be ready to go. You don’t want to jump too soon because right now gas prices are at a level that are uneconomic or marginally economic. That’s the conundrum.

Petroleum News: Some of your colleagues are not happy with AGDC and how it’s changed these last two years. They note how the Legislature handles the funding. The issue of funding, is that a political ploy or just a reality under these circumstances?

Gara: Look, the governor gets to be the governor. At some point, people have to accept that. We get to decide whether or not to invest when it comes to appropriations. Again, it’s a conundrum we legislators have to look at. We have to get much more information.

You want to have your gas line ready to move ahead to get one of the remaining buyers in Asia. The buyer could have the best price. On the other hand, you don’t want to move ahead on a project with gas prices that are very marginal and could cause you to lose money. That should be the legislators’ focus, not really a decision that quite frankly some legislators will never be happy with because they came in not liking the governor and wanting to vote no on his proposals from day one.

Petroleum News: You spoke of new information. What would you like to hear next, either from the partners, the administration or perhaps Steve Butt, who has essentially been the lead voice for AKLNG?

Gara: For the next round of decisions, if we are going to make this project go, we are not going to just need a day of hearings. We are going to need significant number of hearings. Steve Butt is a nationally known expert on gas lines. It shows it’s a real project when a company like Exxon - whether I’ve agreed with them or disagreed with them in the past on some things - when they put somebody like Steve Butt on something. On the other hand, there is no getting around the fact that gas prices are low enough that it’s causing everybody concern about whether the project right - at this point in time - can move forward or at what increment we can move forward.

So I’d like to hear a miracle, but I’d like for gas prices to be high enough that the gas line will become a revenue resource for the state. That’s just hope. I’ve got to do more than hope. What we need to hear is what are the levels of risk of continuing to move ahead. Are there increments that we can move ahead with to convince a potential buyer that we are ready to go when gas prices rebound? I know a number of jurisdictions have cut off their gas lines even though the general view is you want to move ahead so you are the first one ready when there is a buyer out there. The 20,000-foot view is there are limited buyers out there; I don’t even know if that’s true. We need more information on how long the buying market in Asia will remain.

Petroleum News: You mentioned that it might require a series of hearings.

Gara: It’s significant work. It’s significant expertise. My hope is we can hold off significant investments long enough for a way to make the project profitable and one that will produce revenue for the state because we certainly need revenue.

Petroleum News: Do you think it would require new legislation?

Gara: It’s hard to know whether it would require new legislation. I suppose one option would be if a buyer would want to become an investor in the gas pipeline and they want to take all the risk. Then the state would have to decide whether we want to forego the benefits of owning the gas pipeline. We are in a new world. Gas prices are lower in Asia. There always seems to be something that pops up that delays the gas pipeline project.

It used to be that the producers wanted to warehouse their gas. They said they want to warehouse their gas to produce oil for a long time and so they would leverage it for lower taxes. They would use their gas until we lowered their tax rates. They had leverage that we could only beat back with the threat of litigation. Today’s roadblock is a combination of those things and the price of gas.

If there is a prudent way to move forward with the gas line and do incremental progress that won’t bankrupt a state that has a $3.5 billion deficit, we should hear those options. I think everything is on the table but I think we should be prudent about it.

Petroleum News: You speak of incremental progress, there’s a concern among some that if a project gets slowed down, it has to be at the right pace because some work product could be lost.

Gara: That testimony was a little bit vague a few years ago. We have to know what benchmarks need to be made so that the work remains valid for the future. My sense is by the time we complete this phase that’s already being funded, we’ll have resolved that issue which is if you move far enough, the work will remain valid for the future.

Petroleum News: Looking ahead into January, there’s an expectation that discussions on oil tax credits and oil taxes will again be on the table. What are your thoughts on this being reprised?

Gara: Two things. One is it’s a policy decision that depends on your views on the world. One is a math problem. We have roughly a $3.5 billion deficit. You’re lying to the public if you say you can solve it by cuts. I know that’s the popular thing to say, but even if cutting another $1 billion that will be 12,000 lost jobs. That will probably mean a big recession. That will be decimating schools and senior services. I’m not going to play that game that there is that kind of cutting left. There is no single item that will solve a $3.5 billion deficit.

Even a Permanent Fund plan, by cutting the dividend and using some of the earnings, will solve roughly 60 percent of it. You have to ask yourself, what’s fair to the public? Is halving the dividend, which doesn’t solve the budget deficit, but leaving yourself on the hook for possibly half a billion a year in oil tax credits fair? I don’t think it is. You can’t give some of the biggest companies in the world, some of the biggest subsidies in the world while telling somebody who has very little money they have to give up half of their dividend.

That’s a hard thing to sell. To me it isn’t a fair way to do things. The most privileged companies in the world need to chip in too. Right now they are bestowed by a very low tax rate. They pay a 4 percent tax rate up to $76 a barrel. The tax rate should move as price of oil goes up, but not in a way that harms oil companies, so we can fund our basic services. Every $100 million, or half billion or billion dollars that you give away in tax credits, it puts pressure on a bigger income tax, on the dividend or pressure on a bigger sales tax. It all works together, I think, oil taxes and oil tax credits. You can’t have an oil tax system that, even when profitable, that gives them a 35 percent deduction for all of their capital and operating costs when they don’t pay a 35 percent tax. Oil companies, when they are profitable, get a fantastic big deduction. The tax rate is pretty low and when we are in this 4 percent minimum range near $76 a barrel, companies should pay more than a 4 percent tax, not one that will hurt them but one that is fair.

Petroleum News: Do you ever see the state achieving a stable system that lasts?

Gara: It’s difficult. The oil companies will push for lower. When they do, there will be a public reaction that says we want a fair share. Oddly enough one of the problems is there has been oil company overreach by pushing so hard. Almost every year for the last five years, the oil companies have pushed for exceptionally low oil tax payments.

The two things that create the most instability in our tax system in a democracy, leaving aside where they nationalize oil fields, are taxing too high and taxing too low. Everybody knows they are going to be changed. Right now we are at a point where the state is giving away too much of its oil wealth when prices reach profitable levels. We are giving away too much in the way of subsidies in tax credits. There is no other jurisdiction in the world that takes a combination of such a low level of tax payments and gives away such a level of subsidies. There is no other jurisdiction in the world that has such a harmful combination.

Petroleum News: One of the issues is the NOLs (new operating losses) being carried forward. Is it not unreasonable to have that credit for oil companies still investing and producing during a low-price environment?

Gara: Every big company in the world would love sort of a corporate socialism where the state pays big companies. These NOLs, let’s face it, the biggest companies in the world for those rare years where they lose money, the state pays 35 percent of the loss. I run a restaurant: I would love 35 percent of my losses to be paid by the government. Everybody who runs a business would like 35 percent of their losses paid for by the government. When they make large profits, they don’t say “hey, our profits are too large this year, we are going to give $1 billion back to state.” They don’t say let’s give the state extra money but they want extra money from the state when they lose money. I don’t think that’s a sustainable system. We want for all companies some sort of fair incentives, but not a guarantee for the biggest companies in the world that we will pay 35 percent of your losses and we have a $3.5 billion deficit.

Petroleum News: One of the new appointments to the governor’s cabinet, John Hendrix, says he views credits as something that should result in production. How should the role of a credit be?

Gara: It’s hard to tell whether a particular credit led to production or whether those investments would have been made anyway.

What we do know is that every field that came on line the last three or four years when SB 21 passed, those fields were being invested in already before SB 21 passed. Greater Moose’s Tooth was being invested in. CD-5, Conoco said they were slowed down by the Army Corps of Engineers. The oil companies have always been trying to expand development within Kuparuk and Prudhoe Bay so any expansions of those fields, that was already happening before SB 21. There is not a single field that wasn’t being invested in before 2013.

Petroleum News: So those who defend SB 21 say it’s too soon to tell if it’s not working and too soon to consider a change. What are your thoughts on that?

Gara: We already know what’s happening. The state can’t afford its current oil tax system. We can’t afford the subsidies that we pay out. We can’t afford an oil tax system that says up to $76 a barrel all you have to do is pay a 4 percent production tax.

Petroleum News: There was clearly no appetite for any kind of change this year. Do you think with next year not being an election year there will be some change?

Gara: Well, hopefully legislators will keep their minds open. We don’t know what the Legislature is going to look like. If it’s more moderate and if there are more Democrats, if we see that in the Legislature, then we might have the votes to scale back these big company subsidies and have a fair tax. It’s very hard to explain to the public that you want to cut their dividends when oil companies are getting these very big subsidies.

Petroleum News: So what will it take that gets a system in place that could be deemed stable by the state and the industry?

Gara: By law the industry has to keep as much profit as it can. That is what every corporation is required to do by law, to protect their shareholders and maximize their shareholder profit. Unless they see a huge tax increase come forward there isn’t going to be a compromise. Legally, they have an obligation to protect their shareholders. As a legislator my job is to maximize the fairness to my constituents. There is a sweet spot. We are not there. What can we do to get the oil companies to say a fair share for the people of Alaska makes sense? That’s just not going to happen. It’s almost not allowed to happen as a matter of law because corporations have an obligation to the shareholders.

What we do know is our tax system gives away too much and returns too little to the state of Alaska. That’s something we have to analyze with experts, the Legislature, the governor and the industry. But you can’t just take the industry’s word, and their desires for corporate welfare, and corporate socialism. Every company would love corporate socialism. We can’t afford it and it’s not the right way to go.

Petroleum News: The argument occasionally comes up, depending on what side of the bill you’re on, that the state has made too many changes and is viewed as unstable.

Gara: The last two changes were influenced by the oil industry. Gov. Parnell’s precursor bills were influenced by the oil industry. We are on a string from 2010 through to the present where oil companies have been pushing for the biggest subsidies they can get and the lowest taxes they can get. A lot of changes and a lot of arguments for changes have come from the oil industry. I’ll tell you what’s more dangerous to an oil company is a country that has nationalized oil fields. Those are much bigger risks than a stable democracy, a stable workforce that doesn’t nationalize oil fields and that just wants a fair share for its oil.