MacKinnon: Proceed with caution

Eagle River Republican says Legislature must be careful with any changes to oil tax system so they don’t set state back in long term

STEVE QUINN

For Petroleum News

Senate Finance Committee co-chair Anna MacKinnon says oil tax debates are never easy. This year is no exception. With the Legislature mired in overtime trying to craft an oil tax credit bill that will establish stability and help the state chip away at a $4 billion budget deficit, MacKinnon says the debate requires measured discussion. The Eagle River Republican says lawmakers need to be careful that final decisions do not discourage investment and exacerbate problems already caused by a chronically depressed market. She shared her thoughts in an interview with Petroleum News.

Petroleum News: You closed out one of the recent Senate Finance hearings by giving every member on the committee a chance to weigh in on SB 130 and the broad issue of changing portions of the state’s oil tax regime. The perspectives ranged from don’t change anything to something definitely needs to change. It seemed to illustrate conflicting views even among a group in the majority, further demonstrating perhaps how complex this issue is. Is that an accurate assessment?

MacKinnon: Yes. I think it’s important for people from different geographic regions to offer different perspectives so the people of Alaska know we are considering holistically this conversation about the place Alaska finds itself in - a $4 billion revenue shortfall as well as the majors who are trying to close their revenue shortfall. So in that hearing you’re referring to, I asked my colleagues their perspective on the oil and gas bill before us.

Petroleum News: So what was your take from going around the table and getting their thoughts?

MacKinnon: You stated it fairly to say that there is a different perspective from different people throughout Alaska, from industry and from communities. So each of those interests are valid in the discussion. The views represented in Senate Finance reflect that diversity of views across the state of Alaska.

Petroleum News: You told people that it was not the committee’s intent to go after the industry. Can you elaborate on that assessment?

MacKinnon: I don’t recall the exact words, but we are in a $4 billion deficit and we are reviewing the foundation of state budgets and by budgets I mean different departments and how different departments are net takers of budgets, of resources, net receivers of revenues or net producers.

So if you look at DNR’s budget, you look at an area where you invest money into a place where you’ve experienced large amounts of revenue from the work that’s done there. We are trying to evaluate what any good board of directors would do, a return on investment.

In looking at ourselves as a corporation, a function of government, we are trying step back and see, if we were serving as a board of directors, what would be the best business decisions and how would you analyze those decisions. So that’s what we were trying to do in the roundtable of the discussions.

What the Finance Committee is trying to do is make sure we protect Alaska’s interests. And those interests go for the individual people in the communities but they also go for the businesses who are working in our economy and providing revenue through taxation, through production or through other kinds of investment, resources for state government and resources for the state of Alaska.

We want to provide a stable environment. Like the companies who are bleeding red ink right now so is the state of Alaska. Our cash flow is in jeopardy. We have lots of money at least from my perspective when you talk about billions of dollars in your savings account.

But we are bleeding red also. We do not have revenue that will meet our current day-to-day operating expenses. Some will interpret that state government is too big, that it needs to be cut further, so we are going through a process that evaluates that, too. We need 11 and 21 - 11 Senate members and 21 House members - to come together in concert with the governor’s blessing per se, an agreement that he doesn’t veto it.

We have been making huge efforts along the way the last three years. We have proposed if not accomplished $1.5 billion in cuts. While our budgets are being cut, we recognize that bringing them down will take time and we are trying to do that strategically from the Senate’s perspective.

Petroleum News: So what is your take on SB 130, the governor’s version? There’s an issues of credits and there’s an issue with the 4 percent soft floor and the carry forward credits. First the credits, especially as you were on the working group during the interim.

MacKinnon: I sat on the working group, but I wasn’t there all the time because Senate Finance had meetings during the interim. But I was there for multiple presentations about the health of the industry overall and how the investments were used by those working interests to benefit Alaskans as a whole.

This could benefit the Cook Inlet region in providing a stable flow of gas for that region at what some would say is a subsidized rate by that credit investment and how the lease holdings of the different projects they were working on were poised to set more gas into play for the people of Alaska or more oil into play.

Petroleum News: What do you think the Cook Inlet credits accomplished?

MacKinnon: We were going through brownouts several years ago. When I served on the Anchorage Assembly I was involved in conversations that we were looking at the contracts and the expiration of those contracts. During my several years of service until 2006, we were still talking about gas shortages on our horizon. The big issue for the people of the Railbelt, if you don’t have the gas supply will it lead to importing natural gas and what can we do to prevent that importing.

We will be paying additional transportation charges. Other countries will get the jobs connected to that project. From an Alaska perspective being a resource rich state why would we start importing when we have the rocks to explore and create for ourselves that natural gas? That whole dialogue was happening in the 2005 era. Fast forward to 2010, there were three mayors involved when we started going from red light to green light to yellow light.

Green light meaning we have enough supply to operate our utilities and our energy systems businesses and our homes; yellow would be cautionary and we are probably in the winter months and there is a surge in the call for energy, specifically natural gas in homes, meaning there are lower temperatures outside and we need hydrocarbons to heat our homes.

Then we added brown and we didn’t want to have brownouts where we would ask industry to shut down operations and the utilities to shut off turbines to create intermittent energy supply.

To that end the state tried to accommodate the Railbelt utilities and offer a variety of incentives, first off the jack-up rigs, a $25 million credit to incentivize additional drilling in the Cook Inlet.

We created a partnership to create storage and that storage was utilized in the first year of operation when the weather hit Alaska hard. It was a January-February time period and it got exceptionally cold, and they had to draw off the storage facilities to heat Alaska homes. So it worked. We have supply that we can bring on during peak periods and can accommodate almost 50 percent of the population in that Railbelt area.

Petroleum News: So you’ve talked about what the credits accomplished. Now you’re faced with the prospect of scaling back the credits in some form, what are your thoughts on that, having been in the meetings earlier and during hearings?

MacKinnon: No one wants to scale it back. I think that we wanted to let the credits expire when they were scheduled to expire. Unfortunately with the dramatic drop in oil and gas prices globally, a market that we cannot affect, the cash flow for the state of Alaska needs to be reviewed: How healthy Alaska stays in cooperation with the investments to provide energy for Alaskans.

Petroleum News: What about taxing oil profits in Cook Inlet?

MacKinnon: I think that is on the table for consideration. We need to look at any phased approach to give the industry as much time as possible. What I’m trying to say is that we have cash available to us to continue paying credits, but it could be at the expense of other things and other services so we have to analyze that return on investment. What are we getting for our investment in Cook Inlet and can those investments be sustained? If they can’t and we do have to look at changing those investments, then how can we not impact the economy as a whole and individual Alaskans as a whole, and those folks working in the industry? That’s what the Senate Finance Committee is talking about when we look at those questions. There are $400 million of tax credits asked of the state of Alaska from Cook Inlet.

The criticism from inside of Cook Inlet is they are selling some of the highest priced gas not only in the nation but the world right now at over $6 an mcf and they are being incentivized with state of Alaska tax credits so their risk is pretty low in pursuing projects to bring other hydrocarbon projects online. So how much is enough is the bottom line. That is the evaluation process the Senate Finance Committee is going through. Can we sustain what we have and what is the right balance inside any of those economies? Whether it’s oil. Whether it’s gas. Whether it’s otherwise.

So back to your question, should we tax oil in Cook Inlet? From a layman’s perspective, at first blush, absolutely. But when you are talking about removing $400 million that used to be inside that economy, inside the Cook Inlet economy for energy, do you want to start taxing in addition to removing credits?

I think Sen. (Pete) Kelly has rightfully stated, as others have, what will any change to tax credit structure do to increase production? If it doesn’t increase production, if it does just the opposite, who will be affected? For me as a representative from the Eagle River area, I worry, I ponder, I consider, I struggle with how many of my constituents understand that the state has been providing a benefit in the Cook Inlet area that they have been receiving in a lower cost on their consumer bills and they will increase as we pull these credits off.

What I have been saying is be careful what you wish for. What will that impact be on those who are currently receiving a benefit from that investment? Others like to call it a subsidy. Has the Railbelt been receiving a subsidy of up to $400 million in state money to reduce costs or at least provide production for energy in the Railbelt?

Petroleum News: Now on to the North Slope with discussions over the minimum rate at 4 percent floor being penetrated with the stackable credits. The governor wants to harden that floor and raise it to 5 percent.

MacKinnon: So on the 4 to 5 percent, if somebody is bleeding red ink, and we are considering from their perspective raising taxes. It’s a dialogue that we are having. As far as a conversation piece goes, I think that any kind of tax conversation should be deferred to a different time, but some people are insisting on this as this time. I would just say to the general public that some of the piercing of the floor is going to be taken care of with low oil prices, so big industry and corporate boards are trying to cut their expenses as quickly as possible. As much as we don’t like to see any layoffs or shutting down of rigs or any other negative factors that would affect production, the companies are reducing costs and so it is self-correcting some of the net operating loss carry forwards.

So we are speaking with the governor about how accurate and how precise his numbers are in how companies versus the state can respond in reducing expenses so we think some of it is self correcting and we are looking at that very closely to see if they can actually pierce the floor. When you look at return on investment, the North Slope has been Alaska’s bread and butter for revenue generation for some 35-plus years.

So whatever we do on the North Slope you’re talking about at the expense of revenue coming into the state of Alaska and so for me the question gets even louder from the North Slope region: Is affecting the net operating loss or the change in tax structure going to positively affect production because we can’t affect the price for what the commodity is selling for globally but we do have some interaction with production by how we allow loss carry forward to happen, by how we set the floor at a 4 percent minimum or 5 percent, how we look at a 35 percent tax rate, a sliding barrel credit that’s attached directly to oil production.

That’s what we’ve tried to accomplish in response to the people of Alaska. Production is up slightly this year. That’s one year off an initiative trying to change the oil tax structure so that delayed some investment so we are into a time after the last election cycle which confirmed we should move forward.

Now we’ve seen the investment happen. We’ve seen slight increase in production and now we’ve seen a dramatic swing in loss of value of commodity. So I understand and absolutely am watching closely how that impacts Alaskans. When you’ve lived for 35 years on a single commodity and the rollercoaster of pricing production calculation, this is an absolute down curve we have to look at.

I don’t want to use a cliché, but we don’t want to kill the goose that has been laying the golden eggs, the revenue for the state of Alaska for 35 years by doing something too soon.

Petroleum News: What about the penetration of the floor. That seemed to catch people off guard.

MacKinnon: I think we have had members of the Senate talking about piercing the floor for some time, so it may be new to some. Of course when you share risk along with continuum of pricing, which is what was accomplished under ACES and under SB 21, so under ACES Alaska shared in the revenue under progressivity as prices rose and some would say too much because the industry on the low end took all the risk. So SB 21 shared some of the risk on the low end and that’s why the floor is setting a minimum tax at 4 percent. It’s a conversation we are having. We don’t want it to be pierced. We want the 4 percent minimum to hold and we are reviewing how strong we can make that floor, but if you’re going back in and changing the structure of oil taxes I think there is some trepidation in changing oil taxes. It was our belief we were looking at oil tax reform and that was specifically happening with cash calls to the state of Alaska and that was specifically occurring in Cook Inlet.

Petroleum News: Do you see the tax credits as part of the oil tax system for this discussion? Some see it as separate others do not.

MacKinnon: To industry it’s the same conversation. If you withdraw a tax credit, you create a new cost for them, so I think that’s fair from their perspective. From the state’s perspective, we have offered incentives we can no longer afford to offer and we need to review the incentives we are offering. For me it comes down to a sense of timing.

We made a commitment through state statutes that’s always available for the next legislative body to change. I think it’s unwise to keep changing all the time. Industry has always asked for stability in whatever we do, so that they can understand how a decision they make today will be affected in the future. So from their perspective it’s a tax increase and from ours it’s an incentive conversation.

Just like they are bleeding red ink, we no longer have the services that we provided in the past. We can’t respond as quickly as a private corporation does because when we do that, we need 11 senators and 21 representatives to agree with those cuts, then we need to make sure the governor is in line or OK with those cuts. He does have some weight in the conversation.

Petroleum News: Is the state’s regime unstable or is it the market that’s unstable, or does one beget the other?

MacKinnon: We have election cycles every two years that provide a different perspective from Alaskans on everything inside of Alaska state statutes. So from the industry’s perspective when you change taxes every election cycle, it’s difficult for them to plan. I believe that’s why under the AKLNG project conversation, they are asking the people of Alaska to commit to a 20-year time period because gas is such a lower dollar value commodity. It’s a huge difference in economies. That’s why they are saying they need a constitutional amendment or a vote of the people to secure that transaction to make it more stable.