Tarr: Oil tax system imbalanced

Anchorage Democrat brings 4 years to House Resources Committee, the most among a group replete with newcomers, freshmen lawmakers

STEVE QUINN

For Petroleum News

With four years’ experience on the House Resources Committee, House Rep. Geran Tarr is the senior member of the committee. She and Andy Josephson serve as co-chairs welcoming six new members.

Of those five are freshman lawmakers: Vice Chair Dean Westlake; Justin Parish; Chris Birch; DeLena Johnson and George Rauscher. Only newcomer Harriett Drummond and former co-chair David Talerico serve as returning lawmakers.

So Tarr knows the learning curve is huge. She spent the past week working to help educate committee members with presentations from Tax Director Ken Alper, members from the industry and a private practice attorney.

Tarr, an Anchorage Democrat in her third term on the committee, spoke to Petroleum News about her priorities for the coming two years.

Petroleum News: Let’s start with your committee: Six new members; five of them are freshmen; one of them is the vice-chair. How do you get the committee prepared for the heavy lifting in the next few years with that many new members; whereas, the Senate has a lot of veterans on its committee?

Tarr: One of the reasons we are spending this week laying the foundation with what we’re calling a progress report is we recognize these are members who are new to the committee if not new to the Legislature and this will be an important opportunity for them to get critical information so they understand the status of our current oil and gas tax system, understand where the changes have been made in the recent past and what the current obligations are.

I thought one of the most important things we did was look at those different price scenarios so people can understand what a net profits system means at $40, $60, $80 and $100 because I know some people are concerned about the industry and not wanting to harm jobs. I share that same concern.

If you understand the formula, then you can understand at least in these low-price environments they still have deductions and that gives them some protection. Unfortunately, that leaves the state on the side of not having much left to tax. After your deductions at $40, you’ve got $1.23 left and you’re taxing at 35 percent. Well, 30 cents is not going to get you very far.

I would say Rep. Westlake being from the North Slope area and having a lot of experience in public service and government, while he may not have come with the particular details in the tax system, we’ve been including him as much as we can in the planning and discussion.

Petroleum News: Speaking of Rep. Westlake, why did you feel it was important to give him a seat as vice chair?

Tarr: He had a strong interest. We were lucky that as we looked to fill positions, everybody was able find something that matters to their district and to their constituents as well as have some interest in their overall goals in what they want to see happen with the state. He comes from an area where the oil and gas development has been critically important for their services. He represents Barrow of course. I think it’s important to have him in these conversations and I’ve appreciated hearing some of his living experiences.

Petroleum News: So what do you want to do with all this information you’re gathering in these hearings?

Tarr: I think we have unfinished work from HB 247 last year. We didn’t deal with the net operating loss credits on the North Slope. We have to figure out how we meet our obligations that we have in a way the state can afford and have a system that is sustainable going forward should we choose to retain credits. That is something we will definitely look at.

Last year’s bill got characterized as a credits bill. It really was a Senate Bill 21 rewrite bill. It included hardening the floor in two ways, one of which we accomplished; it included the GVR; it included the minimum tax. The only thing that wasn’t really addressed was the per barrel credit. So I thought why go into it to just say you’re only going to deal with just one piece of it if there are several other pieces that we want to deal with?

Let’s try to do this in a more thoughtful way. My goal, as I’ve said all along is we could come up with something that would provide some level of stability. If that’s maybe a 5-year to 10-year time frame, I think now, especially with the Department of Revenue not doing the revenue and production really beyond five years, you are kind of aligning with where they are at. There has been a criticism of the state that the system changes too frequently.

I think that is a fair criticism. Some of those were changes requested by the industry and some of those were done by the state. If we can get to a place where we can provide something we thought looked like this is going to work at the low price and if we go to $140, are we going to feel like it works, too, rather than us lagging behind a price change.

So now we have a system that doesn’t work at low prices and we are lagging behind trying to fix the problem. I would like to have something that works better at all prices and all time horizons.

Petroleum News: Have you met with industry folks? Are you getting feedback or pushback?

Tarr: We are not considering a bill just yet, so I wouldn’t characterize it as either. What I’m hearing from a lot of folks in every industry is the need for a fiscal plan. I think everyone recognizes that will relieve a lot of the pressure on any given group of people. Having a good oil and gas tax regime is an important piece of that. We definitely have that in mind.

They recognize there is a bigger picture here and there is a lot of value getting a plan in place, and that working through changes now and understanding what’s going to happen is advantageous. If you look at the two prior years with these vetoes that caused some upheaval and disruption and what I’m hearing is probably people have gotten pushed to a point that it may make sense that we need to figure this out because the lack of stability is a challenge.

Petroleum News: Have you set a schedule yet for introducing a bill?

Tarr: I think we are shooting for next week (week of Feb. 6). There are some ideas in hand but I come from an academic background so I think there is a lot of value for understanding the system and looking at it from a few different angles. I think we should operate in a way where we are not afraid of information. I think if you have something that is really good you should be able to defend it to everyone. That’s what we need to have in the end. You know who we need to defend it to is the Alaska public. As I’ve explained to the industry folks they’ve got a political problem right now. You can’t talk about personal income tax or cuts to a PFD if people think those dollars are going for subsidies to an industry that is well financed and doesn’t need them.

Petroleum News: That industry is also not making a whole lot of money anywhere. So how do you want the public to reconcile that?

Tarr: It’s hard for the public tell the difference between this cash flow and the credit problem. So they have a cash flow problem because of the oil prices. We are not privy to their investment decisions or what reserves they have. We do know they are worldwide companies - at least the big three. Even when their opportunities are as good in Alaska, there might be good opportunities elsewhere. Unfortunately the state has all its eggs in one basket.

The industry can’t be blamed for the SB 21 problem. Nobody predicted oil was going to go so low for so long. Nobody predicted the shale development was going to come on the way it did. There are factors beyond our control that affect what happens here on a day-to-day basis. The cash flow versus the credit problem: Alaskans have a real problem understanding how things are really bad if they are getting $1 billion in subsidies. These figures are too big for regular folks. If you make $50,000 a year and you’re talking about billions and billions of dollars, there are so many zeros that it’s hard to make it real.

Petroleum News: More than half of that $1 billion comes from vetoes these last two years. Some in your caucus would like to have that paid down, otherwise as Rep. Josephson says, you’re looking at something akin to a 30-year-mortgage.

Tarr: I would like to find a way to meet those obligations. You’ve got a conflict between what the statute said and what our behavior was. So the statute says you’ve got a minimum based on a formula and that gets you to $76 million in the FY 18 budget. You’ve got this past behavior that was this open ended payment where it didn’t matter how big the obligation was, we paid it. It was compounded by the fact that we let companies use that to get financing, so there is a ripple effect. We have to address that. It’s a problem that needs to be fixed. There are lots of ways you can do it. You can set a timeline where it has to be used by a certain date. You can limit how much any company can apply to their tax liability in a given year so that you know the state’s obligation is something people think is reasonably affordable.

We talked (Jan. 30) how in 2006 our credit obligation was in the $50 million range and here we’ve got it to the $700 million range. A combination of events led to that. You can limit which companies are eligible. Some folks question even in a situation where there is a cash flow problem with the Big Three, if those are the kind of companies that need a subsidy from the state of Alaska.

What we need to look at is what is it we are trying to get from these investments.

We should see this as critical state dollars being invested into something that should bring a benefit to the state. For me one of the really important questions, you’ve got 100s of millions of dollars that went to projects that are not in production. We don’t have enough information - and this is something I’ve pushed for at least for legislators to get access to tax information - and I can’t look at that number and say 50 percent of that is going to be in production so these investments seem like a good use of state dollars.

Hundreds of millions of dollars that didn’t lead to production: That’s a problem. Another way to get to that is you’re not eligible for credits unless you have an approved plan of production. Some people have been talking about that. So there are a lot of different ways to do something that is sustainable, something that makes us an attractive place to invest. Another way to look at it is do you want to incentivize early stages of development, then once you’re in production then you’ve got a commodity that’s worth a lot, do we need to continue to subsidize you?

I think it’s worth considering all these ideas and having an honest conversation. If you have something good, you should be able to defend it and say why criticisms are not valid. I hope committee members will feel like they have a voice in this project and we are taking steps to make sure they have all the information they need before we debate a complex bill.

Petroleum News: Last week you received an update on AKLNG. What were your takeaways?

Tarr: I am really, really anxious for more detail. I have been remaining patient, but we really, really need to get to a place where we can have more optimism about the future of this project. I’m seeing a lot of people I represent believing this is a not a good use of state dollars at this time. You know $100 million in this calendar year, five years ago might not have been a big deal but $100 million now has an amplified effect because every dollar is so much more important. We just haven’t gotten enough information. It’s been a source of frustration with me. I want to understand what’s going on with the financing.

I understand when utilities invest in projects like these they want to be a very minor partner. They want a seat at the table so they can understand the pricing and know they are not getting a bad deal. I don’t know how many partners you bring into a project at 3 percent, 4 percent or 5 percent equity share to get the billions of dollars that you need. I’m anxious for a lot more information and I really to study it; we need to put a lot of time into this. That’s our first one this year. A few months from now we’ll need another one. We said to folks at AGDC by that next update we need details.

Petroleum News: This no longer seems to be a partisan issue. It seems like parties are almost aligned with their concerns. Do you share that observation?

Tarr: I think so. Maybe some of it is politically motivated on the part of some people. What governor hasn’t talked about building a natural gas pipeline? It’s been every governor’s dream.

For me it’s completely a numbers thing. I would love for us to transition to natural gas because it’s a cleaner fuel. There is no other project slated to bring $3 billion to $4 billion of revenue to the state and tens of thousands of jobs. There is no denying this would be the biggest project we take on.

At the same time, I would not support the Permanent Fund investing in it. I’ve been told the Permanent Fund would not invest in it. I have some level of comfort on that, but there was a proposal this summer by former Attorney General Craig Richards to get the Permanent Fund involved in buying out some of the credits. I was glad the Permanent Fund chose not to go that route.

You do need to have that savings account set aside. Look how lucky we are in that we might have the option of stabilizing our state finances with the wealth that can be generated from that fund. There are definitely points of the AKLNG project where I would say no. People are realizing the public is growing weary of it and they probably don’t have a high level of confidence. This is where the political rhetoric is a problem with policy. Every governor has been saying I’m going to build a gas pipeline. You can only hear that so much before saying, that’s a bunch of BS, nobody is going to build a gas pipeline.

Petroleum News: What about learning there is an office in Tokyo? That seemed to catch people off guard.

Tarr: I had asked the commissioner about that and when I learned we had previously had an individual doing work for the state, marketing our fish and other business opportunities and this person was hired to replace him, that eased my mind some. Now the fact that they moved it to AGDC, I think it’s a reflection of the budget times. The governor’s office is shedding staff. They think the bigger opportunity is with the gas project. What I don’t want to see happen is the responsibilities of the previous person - the marketing of the fish - I don’t want to see them lost or pushed aside. This is the dream scenario and the other one is reality. I don’t want to see those pushed aside; otherwise I don’t see it as problematic as others may.

Petroleum News: Do you think this person will have Alaska and this project’s interest ahead of his country’s utilities?

Tarr: From what I know of his resume, he’s a professional. Someone doesn’t have a multi-decade career with a corporation without understanding the boundaries of their position. If he works on contract with the state of Alaska, I expect he would stay within the legal boundaries of what he is supposed to do.

Petroleum News: One of the first things that came to your committee was ANWR resolutions. There’s a sense that with the Trump administration combined with the GOP-led Congress that discussions on ANWR could advance. How are you seeing it?

Tarr: It’s the vice-chair’s legislation. As we work through these important issues like the oil and gas tax regime, which is going to take a lot of time, we didn’t want to have everything else get pushed aside. I think what we are going to do is split some of the meetings so we can introduce some other bills. That way we’ll have two things going at once, if you will.

We want to make sure we do a little more comprehensive work on some of these resource issues. I do think some people see (ANWR) as a more likely potential development. I have voted against OCS because I’m nervous about our oil spill response. What we have to keep in mind is that it would still be 10 years out. I don’t want people to walk away thinking we don’t have a fiscal problem because we can drill in ANWR. It still has to get through Congress and there are Republican senators who have been a no vote.