Johnson: Proceed with caution on oil tax

Anchorage Republican, Rules Committee chair, says state must remain competitive while deciding what benefits are no longer affordable

STEVE QUINN

For Petroleum News

House Rules Committee Chairman Craig Johnson is wrapping up his second term in charge of Rules, but he’s also completing his 10th year on the House Resources Committee either as a member or co-chair. Having been part of the lengthy debate over HB 247, Gov. Bill Walker’s oil tax credit bill, with Resources, the bill found its way to Rules for further vetting. Johnson, an Anchorage Republican spoke to Petroleum News about the path HB 247 has taken and the state’s regime.

Petroleum News: It’s not uncommon for a bill to get a little more vetting in Rules. It’s not done a lot, but it’s not uncommon. This time you had to do a little more heavy lifting with HB 247. Talk about the dynamics of this happening for the month that the bill was in Rules.

Johnson: We’ve had a lot of people, various groups who have various positions in discussions with each other. So a lot people were talking about the bill. A lot went on in that period. It wasn’t like there wasn’t anything happening. We came to an impasse. There were a lot of people hard over on this side and hard over on that side.

There really weren’t 21 votes on either side. That’s why as the Rules Committee we offered a committee substitute that incorporated a lot of the ideas that floated around from the governor, past legislations from Finance and Resources and came up with this concept. One of the components was that cashable credits were a problem. That’s what the governor came out originally saying - that we had to stop writing checks to the oil companies.

So the vision we had was how do you do that without taking away the ability of people to continue to explore and continue to invest. We talked to Cook Inlet guys, as many of the producers that we could and our consultants. We came up with something where we quit writing checks but we would phase it out to where we wouldn’t do any damage and we would maintain our agreements with people who had contracts into the future would be able to fulfill those.

It wasn’t acceptable to everyone. It was changed on the floor. I’m not particularly crazy about the compromise passing out of the House. I think it was detrimental to the oil industry, detrimental to Cook Inlet and detrimental to the consumers.

Petroleum News: Toward the end of the debate in Rules, a difference over what tax credits really are emerged. One committee member said it’s not an increase because the money is really the state’s. The other side of the argument said it’s still an increase in expenses for the industry. Where do you fall into that? What is your take?

Johnson: Well, it’s kind of a mixed bag. If you have an agreement to do something you should follow through. That’s one of the things I’m big on - we need to live up to commitments we’ve already made. Certainly as a sovereign body we can change that.

By definition a credit is something that is earned. I don’t entirely disagree that they shouldn’t be just given out on demand.

There should be some process. What that is I’m not real certain. I think we’ve given some credits that have never produced any oil and gas, but I think once you’ve earned the credits and invested the money and proceeded as you agreed to, then it’s an obligation of the state to continue to pay those. I fall down in the middle of that argument.

I don’t think we should be paying credits to people where we don’t have the opportunity to regain the money - where people aren’t ever going to produce. So I’m more inclined to fall in line that if there is a reasonable expectation of a return that would be made back to the treasury, then it’s something we should support. If not, we should look at it very closely.

Petroleum News: You spoke of something being detrimental to consumers. How can the state continue to subsidize consumers in times like these?

Johnson: We really can’t afford to do much more. The bill we passed out removes the tax cap. My understanding of that is it takes everyone to a 35 percent gas tax out of Cook Inlet, which would be passed directly onto the consumers. So it’s one thing to subsidize people. It’s quite another thing to remove a cap and put a 35 percent tax on gas produced out of Cook Inlet. It’s one thing to remove the incentives, which I agree with, but it’s quite another to raise the taxes to a level that basically has pass-through costs (to consumers).

It was also statewide, so I want to know what effect does it have on the North Slope when one producer sells to another to enhance our oil production. My understanding in the way it was written they would have to pay taxes on that as well. So it increased the costs of oil production, it increased the consumer price and we really didn’t gain much out of it. It was one of those areas that was not fully understood. It was never fully explained on the floor. It’s one of those areas that needs to be looked at very carefully.

Petroleum News: OK, you’ve been in office for 10 years and on staff prior to that, so you’ve seen a lot of oil tax bills go before the Legislature - PPT, ACES and on. With that in mind, what makes this discussion on oil taxes different?

Johnson: A $4.3 billion deficit. We simply can’t afford to subsidize the oil industry at the rate that we have been. We can’t afford to subsidize any industry at the rate we are going. What we need to do is make sure we provide a path forward for those companies so they continue to invest, that we don’t yank the rug out from anyone in the middle of a project and investing, and who have actually signed contracts.

We have to be careful and make sure there is a balance. We simply can’t afford to continue writing checks to oil companies regardless of size. SB 21 did its job. I mean, I’m a firm believer in SB 21. We continue to put the oil in the pipeline. But the price of oil is the 800 pound gorilla in the room.

Petroleum News: The one thing that seemed to catch the Legislature off guard was the ability for oil companies to penetrate what was thought to be a hard floor of a 4 percent minimum. That’s also led to some widespread thought. What are your thoughts on that?

Johnson: Well SB 21 was never modeled at the prices we are at today. We were talking a $100 barrel of oil, maybe $80 and possibly $150, but no one ever modeled at the prices we are at today. I think that is a shock. It’s still better than ACES would have treated us at low prices. That is a concern. We have to look out for that. It could happen again. You have to set good policy that can endure at all prices levels. What we have before us now doesn’t do that.

Petroleum News; one of the criticisms of ACES was the progressivity and how the Palin administration and those who supported ACES failed to model and account for the progressivity and the government take at high prices. So why do you suppose there wasn’t this broad range of modeling the second go around for SB 21?

Johnson: I don’t know why. I don’t think anyone anticipated the low prices: The modeling on ACES was high prices. If you remember the marginal tax rates and high prices, we were talking about prices at $120. I don’t think anyone had anticipation of $20, $25 or $30 a barrel oil. I think it was an oversight, possibly. I don’t think it will happen again, but I don’t think anyone in the world thought prices would be at that price. We dealt with the situation that we had. At the time, that was our best guess.

All of the forecasts did not suggest prices would go as low as they did. I think we just took some advice. Maybe it wasn’t sound advice and we acted on it. In hindsight you can probably find a lot of things wrong with everything. I look back on it and probably could have asked the question, but it never occurred to me.

Petroleum News: Are you surprised that there are such diverse views on this that it took this long to get to 21 votes?

Johnson: It’s a very complex issue. Probably half the people in the building know more about it than I do and half the people don’t. I don’t think I can be surprised by much right now, quite frankly.

Petroleum News: It hasn’t seemed to get personal. Are people of varying ideologies still talking to another, say the way Reps. Tammie Wilson and Paul Seaton have?

Johnson: I would hate for any piece of legislation or any position to become personal. We are probably in trouble at that point because good ideas get ignored. I don’t think it’s personal. There are people who don’t like my idea and I don’t like other peoples’ ideas, but I don’t think it has anything to do with the person. I don’t feel that way. We still have an awful lot of work to do. Hopefully we are all back here and talking. We have to recognize our disagreements are with policy not people.

Petroleum News: Do you think the state’s tax regime is unstable or is it the market that’s unstable, or does one lead to the other?

Johnson: I do not think we would be having this discussion if we were at $100 barrel of oil and I think we would be having a different discussion if we were at $10 a barrel. I think the price is the driving factor. The deficit that it’s caused is the driving factor. Now you’ve got groups pitted against one another now. I hate to see it come down to one particular industry or company pitted against every other need that we have whether it’s social or philosophical or education or health care. I’d hate to see that happen. That’s we start going down the path of haves and have notes and picking winners.

Petroleum News: When you finally emerge with a product that gets you 21 and 11, what philosophically do you want to get from that final product?

Johnson: I’d like to see something that gets Alaska its fair share of revenue; I’d like to see us able to have a system in place that encourages investment across all pricing so that even if prices are real low, we can continue to put oil in the pipeline. I’d like to see something that is durable so we don’t have to go back and change something the next session or next two sessions. So we need something that allows for investment, puts money in the treasury and doesn’t put anybody out of business with bad tax policy.

I think we can do that even with oil at $47 a barrel. We can do that, but we have to give the producers of all sizes, large and small, the ability to continue to invest and not hamper the investment that they lay down rigs and go into harvest mode.

Petroleum News: Have you learned anything particular about Alaska’s oil patch per se that you wouldn’t have if prices were at $90 or $100?

Johnson: I think the most important thing I’ve learned is that there is a real disconnect between taxes and royalties. Royalties is our fair share. That’s what we signed up for. The taxes were tacked on later. There is a disconnect between the taxes and royalties. Everybody seems to ignore that we get the 12.5 percent royalty regardless and they seem to drop those dollars out of the equation when they say we are paying more to the oil companies than we make in taxes. That may be true under certain circumstances under certain pricing, but you still have to throw that royalty in when there when 500,000 barrels are flowing down the pipeline.

So the disconnect between that and total revenue versus just the tax portion kind of surprised me a lot. I thought that was a more clearly defined line in everyone’s mind, but clearly not.

Petroleum News: Speaking of royalties, you folks were able to move the governor’s royalty bill quickly for his signature. Could that be considered a bright spot in the session or is the cloud really that dark?

Johnson: I think so. Most of that is in-state use, so I think that helps. There are jobs attached to that and that’s part of the economy. So absolutely, I see it as a positive.

Petroleum News: There is also the speaker’s bill that offers tax credits to Agrium. Most saw this as a good investment but a few saw it as a bad time to be offering more credits when lawmakers are discussing scaling them back. There’s a time cap on this credit. What’s your take on the bill?

Johnson: This is also forgotten when you talk about his tax credits. Let’s take the 35 percent. They’ve got to spend an awful lot of money, $1 billion to get $350,000 credits so Agrium is in that boat. They have to spend the money up front to get the credits where some of ours are now we pay the credits up front. If all tax credits were structured like Agrium’s it probably would not be such a problem. If you’ve got to spend the money up front, that’s kind of a win-win situation. It doesn’t cost us a penny until they spend the money.

Petroleum News: That seemed to be the prevailing argument. If that works, that could be a blueprint for other credit programs?

Johnson: I think so but you are talking a little apples and oranges because some of these companies we are dealing with are not very well capitalized. They need the incentives up front to go to the bank to get capitalization to be able to finance their work. With the Agrium model, if they decide to invest they will have the capital to invest and get it done whereas some of the other smaller producers needed those credits up front to finance their work.

What you’re basically saying if you use the Agrium model you’ll have to have someone that is very well capitalized or has a project that is 99 percent solid and can to go the bank or another investor. Oil and gas projects are not 99 percent. Nine out of 10 holes are dry. There’s a lot of speculation in the oil industry. They borrow money very expensively. So it’s a mixed bag.

Petroleum News: Let’s shift over to AKLNG a bit. You’ve not talked about it much for obvious reasons, but you did receive a few updates, so what are your thoughts right now on AKLNG?

Johnson: One thing I’m almost certain of is without a healthy oil industry, you will not have a gas pipeline. So one of my thoughts when we structure the taxes is are we going to put something in place that allows for a healthy oil and gas industry on the North Slope to be able to capitalize and finance a pipeline. At this point, I’m not sure that is the situation right now. I think there is still reason to be optimistic.

A lot is going to depend on what we do with this tax and tax credit bill to see if we are going to have a viable oil industry on the North Slope that allows the partners to invest, so the jury is still out on that one. So I don’t think we do anything toward a gas line without a healthy oil industry on the North Slope.

Petroleum News: Do you have any concerns of the governor breaking off on his own?

Johnson: Well you know he’s got a 30-year history of trying to do that so of course I’ve got concerns. Some of the people he’s put in place who were part of that 30-year history and failure to get a pipeline built. I think you can see the way we’ve tried to control the purse strings. I’m hesitant for Alaska to strike out on its own. That’s a huge investment and a huge gamble. It could jeopardize the principle of the Permanent Fund.

Petroleum News: Toward the end of the 90-day calendar, the Legislature completed its confirmations, but there were a few names not brought forth. There was no recommendation for a Natural Resources commissioner, even as most have longstanding respect for Marty Rutherford, and an AOGCC commissioner. What are your thoughts?

Johnson: I would love to see Marty stick around. She has been through all the gyrations of this. She is very knowledgeable and very trustworthy. She has the confidence of most of the Legislature. I happen to like Marty a lot so that I’d like to see her remain. As far as AOGCC, I haven’t seen a name brought forth that I can support or not support.

Petroleum News: So do you have any concerns then about no one nominated for the AOGCC slot?

Johnson: Not really. I have a lot of confidence in the existing commissioners. I’d rather have the right person later than the wrong person sooner.