Giessel: AKLNG critical, budget priority

Senate Resources co-chair says state needs to be careful how it reworks oil tax credit and maintains its role in next year’s budget

STEVE QUINN

For Petroleum News

Senate Resources Chair Cathy Giessel says she plans on wasting little time when the Legislature returns to Juneau for a 90-day session. She says one of the first committee hearings will be used to get updates on the AKLNG project.

Still, the Anchorage Republican says the budget remains a priority and how Gov. Bill Walker’s administration and the Legislature recast the current oil tax credit system plays heavily into the next budget.

Giessel spoke to Petroleum News about what she believes lies ahead.

Petroleum News: Before we look ahead, let’s look back at the special session and what’s transpired since. First, what’s your take on how things went?

Giessel: I was pretty proud of the Senate Finance Committee who got down to work and kept us all focused on the subject. They did a great job with the questions that were asked. I think as well, they made a great decision in determining when enough was enough. I think there were possibly more questions committee members wanted to ask and delve into, but they were getting peripheral of the subject of TransCanada termination, so they did an exemplary job of managing the subject and moving the bill at the right time.

Petroleum News: Were there any concerns that emerged from the special session moving forward?

Giessel: I think that I have been aware and am more aware now that I should be keeping closer track of what the AGDC board is doing going forward now that we have the full 25 percent. I think we need to know a bit more about where regulations are coming from that might be proposed by AGDC and the role that the attorney general is playing.

Petroleum News: Are you OK with the role that the attorney general has?

Giessel: Well, the attorney general is wearing a lot of hats - a lot of hats. He is advising the AGDC board. He’s crafting the fiscal policy. He sits on the Permanent Fund board. That’s a lot of input from a single individual.

Petroleum News: So in the end, you were a yes vote. What drove that?

Giessel: I had been a fan of TransCanada during the SB 138 process because I thought they brought that expertise that we needed. I’m not a fan of government building large projects. I think roads are something we’ve been doing for a very long time and one could even argue the private sector could do a better job of building those in some cases.

For this project I have never believed that our state government should be building it. So it was difficult for me to agree to terminate TransCanada. I don’t know there was ever a choice however. The governor verbalized his desire for them to be gone five or six months prior to that special session.

It was untenable for them to remain. It was kind of like a wedding. The groom says he doesn’t want the bride anymore, what’s the bride supposed to do. It was an off ramp for us to take, buying out TransCanada’s share. It seemed like the issue had aligned in that direction.

As I’ve said, I’m going to be very diligent in terms of AGDC’s function now that it carries that full responsibility for the state of Alaska. No one on the AGDC board has ever built a mega project, certainly not three mega projects, which now is what we have - a fully integrated project of the gas treatment plant, the pipeline and the export facility. So we need to make sure that we are doing the right thing during the whole process.

Petroleum News: Speaking of AGDC, they’ve had plenty of movement in just over a month since the special session, losing (president) Dan Fauske, (board chair) John Burns and (vice president) Joe Dubler. Is this a natural settling still with the governor completing his first year in office, or is this too much movement?

Giessel: Certainly the governor had the authority to remove John Burns. SB 138 gave him the authority to appoint or remove board members. As far as removing Dan Fauske and Joe Dubler, that was the board’s decision.

I am very sorry to see Dan Fauske go. He had been with the project since the beginning. He had the trust of the Legislature. We know he is certainly skilled in financial issues and can also manage very large projects and very large teams of people. He’s demonstrated that over the years. Losing him I view as a significant loss.

Joe Dubler was doing a superb job managing the work at AGDC. He was leading the ASAP pipeline team. That team made significant progress far ahead of the AKLNG and it was Joe’s diligence and team leadership and management skills I think are a credit for that.

Petroleum News: What kind of team would you like to see assembled regardless of their names?

Giessel: Regardless of their names, we need a president of AGDC that has the credibility, and the experience, knowledge to lead this kind of project, a fully integrated, three megaprojects in one project. I’m pleased to hear they are going statewide, nationwide and internationally to find that person. I find that a little puzzling since less than one year ago, three people were removed from the AGDC board because who had that kind of experience. They were removed because they didn’t live in Alaska, two of them, so this is an interesting development.

But that’s who I would like to see as president, someone with that kind of experience, certainly the management lead to replace Joe Dubler.

There are folks who are already on the team who could step into some aspects of those roles.

The board chair, Dave Cruz, is filling that spot. I think he is doing it quite capably. I’m concerned looking at the board membership how there is no one on that board who has gas pipeline or mega project experience. Probably the closest person would be Hugh Short who has experience as a venture capitalist. But as far as having gas pipeline experience, it’s simply not there.

Petroleum News: Also since the special session, the partners on Dec. 3 agreed to move forward with the project. This didn’t surprise anyone, certainly, but still what does that tell you?

Giessel: I am pleased that our three business partners agreed to move forward. Many of us were concerned the AGDC board would not cast as a yes on behalf of the state of Alaska. Thankfully, they did. I think the business partners that we have are still indicating their positive outlook on this project and that’s what we need to know. They are the people who have done this around the world. If they are still thinking this is a viable project, that’s a positive sign to me. That’s what I’m looking for is their expertise and knowledge to let us know if this is doable.

Petroleum News: Now looking ahead to the coming session, what are your priorities, first for the session and possibly for a special session afterward?

Giessel: The No. 1 priority in all of the Senate’s minds is the budget and how we are going to manage the $3 billion to $4 billion shortfall because of the price of oil. That’s No. 1. Going along with that, as the Senate Resources chair, my focus has always been is how to grow the pie - the pie being the development of our resources which ultimately leads to revenue through production taxes, royalty, property taxes and corporate income taxes.

My attention has been on the projects going on the North Slope as well as Cook Inlet, and their success. That leads me to, of course, the oil tax credit, which was the focus of a working group convened this summer. We arrived at some recommendations. They are high level recommendations and yet in a sense they are concrete as we look at the principles demonstrated in those recommendations then look at the governor’s budgets, there will be some discussions.

The governor’s budget was pretty vague in terms of the tax credit. There is a single line on his fiscal 2017 spreadsheet - line 33 - he showed $73.4 million in oil and gas tax credits line. This is the statutory required level for those tax credits. Under that there is new legislation placeholder $1.2 billion, so he has verbalized his intent to start a revolving loan program for the tax credits. I have not seen legislation that backs up what I see on the spread sheet. So truly anything related to this is speculation.

The fact is the tax credits are significantly supporting our oil and gas projects around the state, in Cook Inlet, the North Slope as well as the frontier basin in the Interior. While I agree the tax credits need some adjustment, I’ll use the phrase the governor has used last year based on the Senate budget cuts, in this case I think the governor has gone too far.

So this will be a discussion point, certainly for me and for my committee and I believe the Finance Committee as well. About 50 percent of the members of my working group were finance members and that was done by design as this is a finance topic.

Petroleum News: what was your biggest take away from the working group that you convened?

Giessel: Some of the main talking points were major changes should be forward, meaning none of them retroactive. There are many projects under development right now that to remove those tax credits abruptly would cause those projects to falter. It would be false economy to say we aren’t going to give those tax credits because it costs too much. We’ve already invested with them. We’ve partnered with them. To stop partnering with them now would cause our previous investment to be wasted. That would not be prudent.

The thing that I think is lost on many people is the fact that the tax credit is importing capital into the state and that comes from capital investors like Bank of America and IMG.

Some people have asserted that these big oil companies come in, take our resources and leave the state. These tax credits are importing new capital into Alaska. This is one of the key reasons I oppose setting up a revolving loan system through AIDEA using state money. That’s simply taking our own money and re-running it, using it in-state and hoping the project will pay back. It’s far more reasonable and strategic to allow those tax credits to be used as collateral by these smaller companies who go outside the state, get loans from the entities that work internationally and carefully vet these projects and bring that new capital back into the state.

Another topic was the production tax floor. In SB 21, the Legislature instituted a minimum production tax, in other words it can’t go below 4 percent. It has come to our awareness that with some of the taxpayer liability issues that it would actually be possible to penetrate that 4 percent floor. Our recommendation is that the 4 percent minimum tax be hardened. In other words, not able to use net operating loss credits to go below 4 percent tax.

We looked at the frontier basin, the basins throughout the Interior and the Northwest Arctic area. One of the things that came out was the frontier basin credits were not all that helpful. They take much longer for the companies to get the credits. They are not as nimble. So those companies are using Cook Inlet credits in the frontier basin. So those frontier basin credits are due to expire. Our recommendation was let them expire.

Our last recommendation is we hear a lot from the tax credit opponents who say we don’t really know what the companies are investing. We are giving them tax credits but we don’t know what they are doing with it. That’s one of the recommendations we are suggesting: that the companies consider allowing some of their investment information to be public. This would be a voluntary thing, but let us know what are you investing in Cook Inlet and the Cosmopolitan field for example and how much in credits are you getting to offset your investment.

Petroleum News: So in the end, do you believe you’ve got to have something you can afford but isn’t something you feel is punitive?

Giessel: That is exactly the goal, something that isn’t going to decimate our heretofore partnership with the companies. These are the smaller and mid-size companies. They are not the big three we talk about. You might remember former DNR commissioner spent a lot of time traveling to the Lower 48 and overseas talking to companies and touting the resources here.

They looked at what we were offering in terms of tax credits, what it costs to work up here, what the climate was like, what the workforce was like, what the infrastructure was like and they decided to come here. For us to suddenly change the tax credit, which helped make these projects economic, will be hurtful to our credibility going forward.

We’ve heard not only from the capital investment companies but also the leaders of the smaller companies how they trusted the state when they said the tax credits were available. Now for them to suddenly disappear when these projects are midway through their development, I’m not sure we will be able to redeem our credibility if we decimate this program now.

Petroleum News: Back to the gas line, what would you like to see done during session and beyond now that the TransCanada issue has been resolved and the partners have committed to moving forward?

Giessel: When we are talking about priorities, the budget is No. 1 and tax credits play a role in that of course. Also on the plate for Senate Resources is the AKLNG. We’ve been getting updates to stay on top of what’s been happening. We will likely open up the first committee hearings with an AKLNG update again.

There are aspects of it that the state hasn’t settled on our side of the table and one of them is the PILT, the payment in lieu of taxes. Commissioner (Randall) Hoffbeck has been leading that process and meeting with the municipal advisors group. The most recent information that I have is the state is proposing that the state take 50 percent of the impact and other taxes.

That was an interesting proposal that I had not seen prior. It was my understanding that the payment in lieu of taxes would go to the very municipalities that were being impacted by the project. That gives me some concern that the administration is taking a new approach to this.

Petroleum News: What are your thoughts on a prospective constitutional amendment that some believe is necessary to lock in fiscal agreements and advance the project?

Giessel: The constitutional amendment question is an interesting one and not without questions. It’s my understanding - and I’ve heard from folks on both sides of this topic - the governor and the attorney general are convinced that it is required.

I know the governor is planning to propose a constitutional amendment. In fact, he proposed one - or presented us with one - at one of the update meetings that we had in the summer in Nikiski - a very brief proposal. I think there were about three sentences to it. It was not discussed at length. It was just brought to the table and left there. I know since that proposal was put forward he has indicated that he wants whatever the constitutional amendment to be quite specific - that is to contain fiscal criteria.

I think this will be an interesting discussion. As any citizen looks at the constitution, you’ll probably see that it makes broad statements that give authority. It doesn’t spell out details. Most constitutions are broad authority giving documents.

So to put specific fiscal terms into a constitutional amendment I think is going to require some significant discussion and legal advice.

Petroleum News: Then there is the question of royalty in kind v. royalty in value.

Giessel: This question will be determined by the commissioner of Natural Resources. As I’ve spoken to Commissioner (Mark) Myers, and Deputy Commissioner (Marty) Rutherford, they are in need of further details in terms of the fiscals for the project before they would feel comfortable making that determination.

That is somewhat on hold as we work through some of these other issues. You’re aware that the governor asked that the project consider a larger diameter pipeline. He has asked for the costs for a 48-inch line and that won’t be completed until April of 2016 at additional costs of several million dollars.

So until that kind of basic issue is settled, it’s hard to figure out the fiscals for any high level estimate on the project. That hampers the RIK/RIV decision that Commissioner Myers has to make. You can see there are a lot of complex moving parts to this process.

The AKLNG project is a high risk project. There is no one who can guarantee this project is going to go forward. There is a tremendous amount of data that is still under development before we will be able to go to the next step of getting hard figures on what it’s going to cost. That is something Alaskans need to be aware of.