McGuire pleased with passage of SB 21

Oil tax vote follows 3 years of work targeted to make fiscal system more competitive; senator also supporting LNG trucking, HB 4

Steve Quinn

For Petroleum News

Sen. Lesil McGuire’s lead title for the next two years is Rules Chair, but much of her time has been spent pouring over Gov. Sean Parnell’s oil tax bill, Senate Bill 21, which passed through the TAPS Throughput and Resources committees, on which she serves. McGuire has also been active in the Pacific Northwest Economic Region, PNWER, serving as past president and as the Legislature’s co-chair of the Alaska Arctic Policy Commission.

McGuire sat down with Petroleum News to discuss the Senate’s recent passing of SB 21, the state of a natural gas pipeline project and the prospects of Arctic development.

Petroleum News: Let’s start with oil taxes. It was a lot of work and you got it done. What do you believe is the value of SB 21?

McGuire: I am thrilled with the accomplishment in passing SB 21 this past week. It’s been a long-time goal of mine. We’ve spent three years behind the scenes trying to convince the lawmakers here in the Senate of the value of making Alaska competitive. As you know, last year, my office took a lead and we were only able to convince the group that it was important to make Alaska competitive with respect to new oil, and not new oil just in the strata located in the existing fields, the legacy fields.

This has been a long time coming for me. It’s the reason I ran for office again actually. I just felt it was so important to the future of Alaska to come back to attend to this reversal of a flawed tax system. What do I think it means to Alaska? It’s our future. I know from my presidency in PNWER; I know from my travels to Energy Council, from my time talking to small producers like Armstrong and Repsol and my time talking to larger producers if we were to leave ACES in place that we could anticipate a decline curve from 4 to 6 percent and that would take our state right into bankruptcy.

So for my son and for our future, this is it. This is 90 percent of the state’s income. The other part of what the vote means to me and the work that we put into it is that it means that Alaska is open for business — that we are not a dying oil and gas province at all. We still have 9 billion barrels of oil and untold trillions of cubic feet of natural gas that are waiting to be commercialized.

This is the first in a series of public policy steps that I hope this Senate majority continues to make over the next two years with this team of bright individuals toward that end that puts us back on the map.

When you go back to the late 1970s and ’80s, Alaska was in the mix. We were right there with Texas, California and Alberta. We have fallen out of the major leagues in competitiveness. This was the first step that was needed to get us back to being competitive.

Petroleum News: Both sides of this argument say whatever happens Alaska’s future is at stake. Passing it, one side says we’re saving our future, the other side says we’re harming our future. How do you reconcile that disparity?

McGuire: It shows you what an intense, emotional decision this was for people to make because you had me talking about Grayson’s future and Donny Olson talking about Maggie’s future. We both believed vehemently that the votes we took completely opposite of each other were with their future in mind.

How I would reconcile it is, whether or not you believe changing the tax code will encourage new investment. It’s not to say that lawmakers who voted against SB 21 are ill informed or bad people. It’s a matter of life experience, maybe time in other provinces they haven’t had to see the turn around.

I credit my time as president of PNWER when Alberta had adopted a similar windfall profits tax and saw the same result; then they were able to collectively move toward a more competitive system quicker than we were and have now seen a turnaround.

I also credit my time studying the North Sea investment and the brownfield credits. It’s an opportunity to see that an elephant field can truly be at the end of its perceived lifeline and go through a renaissance as a direct result of a change to a fiscal system.

I think what you have is a distinct understanding of what’s happening in employment investment, what drives investment, what industry is saying to us and what the future holds.

To me, it’s clear that industry both small and large have said Alaska’s system is uncompetitive, that they will choose to continue to move large amounts of capital to other jurisdictions that are more competitive and as a result Alaska’s production curve will continue to decline.

I believe all of those things and if you believe all those things you only have a few choices. Certainly permitting reforms and regulator reforms are important and we are looking at those in the TAPS Throughput Committee. At the heart of any capitalist economy are certainly the fiscals. If you believe those things are true, you’ve got to alter the fiscal system to allow for more industry take. That’s where we are.

You can make comparisons in your own personal life where the government reaches in and takes more profit from you, there will be a disincentive to expand your business and to produce. The oil and gas industry is competitive on a global level. They have the ability to invest all over the world and they do. They move their capital quickly.

Petroleum News: You managed to get the competitiveness review board inserted into SB 21. Why was that still important to you? Where is the value in that?

McGuire: It’s one of the missing pieces in how we evaluate Alaska’s competitiveness. When you look back over generations in how we have responded to industry concerns about competitiveness, it’s always in a crisis. The unfortunate part of that is you have tight timelines, you have politicized debate and unfortunately you usually end up with an inadequate result.

Putting a competitiveness review board in place that will annually drive the conversation toward more reasoned, thorough factual assessment of an industry that provides 90 percent of what goes into the state coffers is the smart thing to do.

Put experts on that board asking them to come together not in a political environment, not under a time constraint and ask them what are other jurisdictions doing out there?

For example if this board had met five years ago, certainly they would have been able to discuss fracking and the developments that were taking place there, the Department of Energy’s injection of capital via grants into the fracking program and what that might mean to Alaska. It might have allowed Alaska to get ahead of that curve. Are there tax credits in place? Are there regulatory reforms in countries like Canada that Alaska can emulate? Is there access to infrastructure issues that have been brought up by the support industry alliance group that the Legislature might want to tackle? I’ve always felt like every one of the tax debates I’ve been involved with, I’ve walked away feeling like we may have responded to the particular bill in front of us but we’ve been left with more questions than answers.

McGuire: I like the gross revenue exclusion as compared to ACES. I’ll say that. The tax credit system was too risky for the state. It was too expensive. When you look at next year, the exposure was potentially $1 billion yet with no guarantee that the state would be bringing in commensurate production to make up for that amount of credit for the exposure going out. What I like about the gross revenue exclusion is that because it’s production based, volume based, it pays for itself. I think it’s fairly easy to administer the way it’s been described by the administration because it’s incumbent on the producer. They share the burden of proof. They have to prove it (new production) to DNR and AOGCC will be there to assess the wellhead data. I like it as compared to the current system where you have stackable credits and an unascertained exposure to the state.

However if you were to consider another method that would be simpler, you could add an additional per barrel deduction. That was a thought that I had. In other words, you could eliminate the need for a gross revenue exclusion all together, and keep the formula divided between a base rate and a per barrel deduction and keep it divided into the two categories. That would simplify the system just a little more.

There is a point in the process where you simply say this is a good bill. The parts and pieces are easy to understand. Our accountants can audit this system. SB 21 is a simple, durable tax system, and it works. If you wanted eliminate the GRE and provide for that additional volumetric increase by simply adding it into the other part, you could make it a little bit more simple.

Petroleum News: Let’s more onto another resource, natural gas. What are your thoughts on the status of advancing a natural gas pipeline?

McGuire: No. 1, I’m a supporter of HB 4. I believe it’s a critical component of Alaska’s dream to commercialize Alaska’s natural gas. It furthers the bill I carried in the Senate, the bill Mike Chenault carried in the House, the bill that two years ago we merged together what was then HB 369 to create the Alaska Gasline Development Corp. Essentially we had the exact same idea. We combined the powers, duties and partnerships. My language said compatible but not competitive with AGIA, then we had tight timelines with delivery. AGDC exceeded my expectations as co-chair of the in-state gas caucus by light years. They came back with project costs, timelines for completion and places where the work that they would do would be compatible and not duplicative with the work being done by the Department of Natural Resources and the AGIA project. It’s imperative that we give them funding, allow them to have a confidentiality waiver so they can be in the room representing Alaskans at the table and continue to push forward the opportunity to realize a gas pipeline. At the same time I’ve been proud of the majors following through with the benchmarks. Just as we thought with the in-state gas caucus, this plan B will motivate the producers and elevate the conversation. If I had my wishes, these two projects would come together. I would like to see the work that has been done on the AGIA led pipeline merge together with the work of AGDC so Alaskans would get the full value of what was invested. I did not support the half a billion that went into AGIA, but I’m protective of the Alaska coffers. I do not want to see that half a billion go to waste. So if there is a way to merge these projects to get the full value of the Alaska dollar, because as you know each project has what the other one needs.

Petroleum News: Why didn’t you introduce a companion bill to HB 4, perhaps to speed things up a little?

McGuire: I thought about it, but frankly when the speaker and (Legislative Council Chair, Rep.) Mike Hawker introduced this one, it had so much involved in it and had so much advance work. We decided to let that be the vehicle. There is value in it, but sometimes a bill has so much of its own personality to it that introducing a Senate companion can confuse things. Over here we started working on SB 23, the LNG trucking project bill. As Rules chair, I wanted to help the Fairbanks guys get their bill moving as well, so I’ll put my energy to help see that one over to the House and help HB 4 once it gets over to this side and apply my efforts to support the Speaker and Mike Hawker.

Petroleum News: Let’s go the Arctic. You had your policy commission meeting last weekend. What do you believe the state’s priorities should be with Arctic development?

McGuire: The No. 1 priority is to weigh in by June 14th into the crafting of President Obama’s federal policy on the Arctic. That is what we talked about in our meeting. When we went back to Energy Council in Washington, D.C., we learned that the federal government was on an accelerated march toward crafting this policy. We don’t take over the (Arctic Council) chairmanship as the United States until 2015. We learned the policy and strategy is being drafted as we speak, so our No. 1 goal is to get Alaska’s voice included into that federal policy and strategy. No. 2 is infrastructure. We have got to decide where our major ports are going to be and where our tertiary ports are going to be. That will drive investment. That for Alaska is where it’s all about. After crude oil, after the commercialization of natural gas, that is the next phase of Alaska’s economy. Guggenheim, Carlyle Group and Citibank Energy, they all say the last great economic frontier is the Arctic. Alaska has so much opportunity. I’m very excited about it. We have to have the infrastructure to support it. We need ports and we need a maritime tracking system that protects Alaskans and our way of life. If there are spills, the people and their lives need protecting as those vessels travel through. A comprehensive Alaska policy is the goal of this group that will go into the statutes that will guide us for generations to come as we look at these issues because there will be mineral development, there will be oil and gas development, there will be housing structure development. All of these things will butt up against people who have lived there for generations. I want to leave the people of the Arctic better for having the development of the Arctic that comes. I want it to reduce the suicide rates, domestic violence, alcoholism, and hopelessness, and at the same time preservation of culture.