Chenault: Oil price plunge causing chaos

Republican House Speaker from Nikiski says continued investment considerations must underpin any changes oil tax system in HB 247

STEVE QUINN

For Petroleum News

House Speaker Mike Chenault has held that post longer than any Alaska lawmaker - by a long shot. He’s completing his fourth term as speaker while spending his eighth year on House Resources filling in for longtime colleague and friend Mike Hawker, who is being treated for cancer.

He’s been in office during oil tax debates through administrations run by Frank Murkowski, Sarah Palin, Sean Parnell and now Bill Walker.

Chenault, a Nikiski Republican, spoke to Petroleum News about his thoughts on the current state of Alaska’s oil tax and tax credit system and why it’s so difficult to negotiate any changes.

Petroleum News: You’ve been around for this debate over and over be it PPT under Murkowski, ACES under Palin, plus HB 110 and SB 21 under Parnell, why do you suppose you’re back here working on this again?

Chenault: The world has changed. As long as we don’t control the price of oil, we are going to have to change with it. I don’t believe anyone ever thought oil would get down to $28 a barrel, where it has been but now it’s about up to $50. No one thought when we got our last program that oil would get to $28 and the program before that no one thought it would get to $140 either where we were raking in money hand over fist.

So that’s the main reason why we are in the situation we are in, is because we don’t control the price of oil, but our budget is based on the price of a barrel of oil, very heavily weighed. I think that’s the biggest reason. It’s not devious plans to give more money to the oil industry. It has to do with the last tax program that was put in place; no one was thinking what happens at low oil prices other that we instituted a higher tax if it went that low.

Petroleum News: So why has it been so difficult to come to 21 and 11, as the catch phrase goes, and get a bill to the governor?

Chenault: I just think there are probably different philosophies in play. I personally think we need to continue investing in the oil industry to make sure that in five years or 10 years or 15 years that we have as much oil production as we can. I truly feel that if we don’t continue to make that investment, then when the price of a barrel of oil does rebound we won’t continue to see production increase, either. We’ll continue to see it fall and at a rate of 7 percent or more. That doesn’t do us any good. There is a balance there, but I don’t have the magic ball to tell me what that balance is right now.

Petroleum News: You appointed (Resources co-chair) Dave Talerico, Kurt Olson and Geran Tarr to the HB 247 conference committee. What made you select them?

Chenault: All three have basically heard the bill more than anyone else has. I looked at the possibility of someone on Finance but with all the revenue bills up there and the operating budget out, I didn’t to take anyone away from Finance.

Petroleum News: You sat on Resources quite awhile this session. Have you learned anything about the dynamics beyond what you’ve identified with the world market driving changes here?

Chenault: Yeah, it’s that there are many facets to our taxes, like Cook Inlet and the many different players in Cook Inlet and how any change in the tax formation, what affect it has on some of them.

Some use QCE credits more and some use NOL credits. They can be both small corporations doing it or a large corporation. Some use the WLE credits more. So there really can’t be any one fix, any one tax credit that really addresses the oil industry statewide. You’ve got Cook Inlet; you’ve got middle earth and you’ve got the North Slope.

Each one and each business looks at what’s available to them and how do they manipulate that tax system that best fit the needs of their company. Then we try to take care of the big guys; we try to take care of the small producers; we try to take care of the exploration companies; we try to look at wildcatters.

We try to take everyone together and put together a plan that fixes or addresses the needs. You are not going to get it right. If you have one size company doing one type of exploration or one type of production, then you can come up with something that might be durable and that will last for a while. But when you have all the different aspects of the industry, you get some of them right and you don’t get some of them right.

Cook Inlet I think we got right. We spent a lot of money in tax credits. But we also doubled oil production in Cook Inlet. While it may not be much, we still doubled it. We got away from the issue of brown outs and the possibility of bringing in LNG. I think it accomplished that. Was it expensive? Yes it was. Can we cut back on those tax credits? Yes we can. But we probably won’t see as much investment from the industry as we would have done in this tax regime anyway.

Yes, they were set to sunset and we would have to come back and look at them and see if they are doing what we wanted them to. What is the cost of them? Do we still need it or do we get rid of them or do we need to modify it to make it work better for us.

We see it in the tax bill where we are basically getting rid of the Cook Inlet tax credits. If you talk to the industry, they will tell you “as long as you pay the credits that you owe us, we’ll figure out a way to move forward. We may not make the investment as quick as we would with tax credits, but if we have a customer we can sell the product to, we’ll figure out a way to get there.”

Petroleum News: Speaking of reviewing it, that is one of the provisions in the bill that emerged from House Resources; do you still want to see that happen?

Chenault: I think that it probably should happen. Let’s look at it. It doesn’t hurt us to look at it. I don’t like to cause indecisiveness in industry’s business decisions. They will adapt. They have to, but we don’t need to be making knee jerk reactions. We need to make well thought out decisions based on the facts that we know them today. Something could change tomorrow. Oil could go up to $150 a barrel tomorrow. We would probably forget about where we are at today. We need to find something that is durable that could stand the test of time and as of yet we haven’t found that to be very durable.

Petroleum News: It seems like that’s one of the concerns - durability - and the question of whatever the Legislature arrives at, will it be durable or not?

Chenault: I would like to see that, but I think the House’s version has a task force that would look at Cook Inlet and see what if any changes need to be made, what concerns are out there and how do we keep a positive outlook on investment in Alaska. I think if we send the wrong message, we lose all the little guys. The little guys in fields as old as Cook Inlet, they are the ones who are going to go in and take all the chances where some of the big guys, it’s not profitable for them, but it is for the smaller guys. That’s the way the oil industry has been for as many years as I’ve been involved - 40 years - you have the big guys come in when they discover a field, then they develop it. As you start getting into declining production, the smaller guys come in and they take it over. They produce more oil than originally thought. That’s the way of oil fields. The same will happen on the North Slope. You’ll get enough small guys in there that the big guys will leave and they will go to newer and bigger fields - well, they hope they will.

Petroleum News: Now the House, largely behind the majority leader (Charisse Millett), has spent the last four to six years making a push to have the federal government clean up legacy wells. There was a recent report how the Bureau of Land Management has fallen short recently, as least as AOGCC (Alaska Oil and Gas Conservation Commission) sees it. What are your thoughts on it?

Chenault: I know there is frustration there. I know we as a state are frustrated with the federal government, not only with the lack of cleanup of the legacy wells, but also with the federal implementation of regulations to deal with the industry. We want it done right. Unfortunately, when the federal government drilled all of these wells, they didn’t do it right, and they largely ignored the problem. In turn if something even considerably smaller had happened at a current oil company’s facility, there would be hell to pay.

We just want those wells cleaned up. There are going to be times when you go in there to plug the well and things don’t go as well as you expect them. You may have to go in there a second or third time. I can’t fault the contractor. I can’t fault the federal government.

But they need to own up to it. They need to say Ms. Foerster (commissioner, Cathy) you’re right, we didn’t’ get this thing plugged like we wanted to and our plan is to go back in there and get this thing fixed. I think just that type of conversation between the federal and state agencies - that makes the problems go away. We currently have folks in the federal government who don’t want to spend money on those legacy wells to clean them. It’s a high priority of ours. It’s a high priority of the state’s. It’s a high priority of the majority leader. She worked very hard in trying to bring these wells to light.

I promise you, if those wells had been left by an oil company, they would be crucified right now. There would probably be folks in jail and the federal government would step in, pay for whatever cost there was to fix these wells and bill the oil company for it.

Petroleum News: Speaking of AOGCC, you never got a third name brought forth for confirmation to round out the commission. How do you feel about that?

Chenault: I would love to have a third name. I had conversations with the governor, but I won’t say who they were looking at, but I thought they were a good choice. They weren’t available yet and I’m hoping that works its way through and the governor puts that person on the board. I think that would be a good person. I didn’t think there was anything devious going on so that when we got done, then he would have a year for that person to be in the position because we wouldn’t have to confirm whoever it was. In my conversation with the governor about that particular subject, I was comfortable with what they were doing. While I would like to have that third person on there, hopefully that happens pretty soon.

Petroleum News: So is it a matter of getting the right person in there later rather than the wrong person sooner?

Chenault: I believe so. I don’t want them to put somebody on there because they felt like they had to have somebody on a certain date. I’d like them to vet someone. I think the person they were looking at, I was very comfortable with who they talked about. If it takes an extra month or two months to find that person, we as a state will be in better shape.

Petroleum News: There is also the matter of no name being brought forth for a Resources Commissioner with Marty Rutherford still in place as interim.

Chenault: Personally I’d like to see Marty Rutherford. I like Marty. We’ve been at the opposite end of the spectrum during the Murkowski administration and during the Palin administration. Since she’s been back, we’ve had numerous conversations. I think she is very knowledgeable. I know she would like to retire. When you burn the candle at both ends, 24 hours a day, month after month after month, you tend to say, what am I getting out of this? I would be very comfortable with her but it depends on what her plans are. I would love to have her there to steer us through what I hope is a pipeline project. She understands SB 138, she understands AGDC, she understands AKLNG. I can call her, ask a question and I’ll get a straight answer.

Petroleum News: A lot of people in this building have been around 8 to 10 years and seem to respect her regardless of whether they agree with her or not. What is it about her that she can command that respect?

Chenault: I think the respect comes from her being truthful with you. You can pretty much take what she says to the bank. In a particular time in history, she will tell you everything she knows that’s going on if you ask questions. There are some who will answer it a certain way and you walk out of a meeting wondering what’s really going on. My relationship with Marty is I ask a question and she’ll give me a straight answer. We don’t hide anything from each other. That’s how I like it.

Petroleum News: I know you haven’t been back home a lot, but are you seeing or hearing anything on the Kenai that has you confident that people want to move forward with AKLNG?

Chenault: Naturally things are different on the Kenai. A lot of land has been bought and a lot of homes have been bought and torn down to keep riff raff from going in. I think people still believe there is a good possibility that project is going to happen. There is concern about it, because they haven’t done anything about it, but they are anticipating Alaska moving forward and AKLNG can move Alaska forward.

They are going to reach the pre-FEED stage and re-evaluate their position. Maybe the state will say we don’t like where we’re at. Maybe Exxon, or BP or Conoco will say is this a project that can move forward.

Petroleum News: Do you have a sense that gas will get monetized?

Chenault: You know we’ve been monetizing it for years by re-injecting it and bringing more oil up. That’s made us a lot more money than if we had taken the gas cap off the Kuparuk field and the Prudhoe Bay field years ago; we would not have produced near the oil we have and we would probably be broke today. But by monetizing the gas with re-injecting it and bringing up more oil, we did the right thing. Now though it’s time we can monetize it as far as selling it or using it for Alaskans, the small amount that we would. Yeah, I think it’s time that we monetize it. Economics is going to drive the project. We all know it. It doesn’t matter how much we hope for or wish for. If it’s not going to make us money, we shouldn’t do it. I guarantee you none of the oil companies will invest in it, either.

Petroleum News: Also, another recent announcement was BP saying they would be selling their building with the intent of leasing it back. Is this a development that concerns you or is it a natural response to today’s climate?

Chenault: I don’t know. I think some of it is a natural occurrence. I don’t believe ConocoPhillips owns its building. Does it mean BP is looking at leaving, I don’t think so. I think they are like us, looking at ways to cut the costs of expenditures to their corporation and that may be a way to do it.

Petroleum News: Now you did get HB 100 through the Legislature, which affords Agrium credits up to 6.5 years in exchange for certain development in bringing operations back on line. It took two years to get through. Was it hard getting a tax credit pushed through when discussions of scaling back credits take place?

Chenault: That was the hard part. People looked at it as tax credits and we can’t be paying out more credits with the price of a barrel of oil. The hard part was explaining to people is currently we are receiving zero dollars. We aren’t receiving any corporate dollars because they are out of business. They don’t get any money until the invest $275 million and use other people’s gas. The state won’t be paying any credit. I wish there was another word I could use to describe what was happening. When you’re in the realm we are in today with low oil prices and you’re trying to get rid of tax credits, it was a hard sell.