Hawker awaits pending AKLNG updates

Anchorage Republican says Gov. Walker’s oil tax credit bill needs careful scrutiny to maintain durable SB21 features already in place

STEVE QUINN

For Petroleum News

House Rep. Mike Hawker says he doesn’t mind change, but it must be prudent. That’s essentially his stance with HB 247, Gov. Bill Walker’s bill to restructure some of the state’s oil tax system that touches on provisions such as minimum tax rate, plus various tax credits and how they are applied.

Hawker says the state must be careful with any changes that weaken what he believes is a durable system under the most recent rewrite under former Gov. Sean Parnell, SB 21. He also warns against a myopic view of how the state earns revenue from the state’s oil and gas industry. Looking just at the production tax, a net tax that would naturally be lower at chronically depressed prices fails to consider the complete picture, Hawker says.

Hawker, an Anchorage Republican who serves as chair of the Legislative Budget & Audit Committee and vice chair of House Resources, outlined his thoughts on the current HB 247 debate as well as recent AKLNG developments.

Petroleum News: Let’s start with AKLNG. What is your sense of how things are, say a 30,000-foot view?

Hawker: I think I would reiterate what we’ve heard from (interim Natural Resources Commissioner) Marty Rutherford, that the project has definitely been slowed down. We are having a process where the governor and the industry are reassessing their roles. I, as a legislator, am certainly hoping to see some definition to come out of that the next month or so.

Petroleum News: You, among many others, have long said that the market will drive this project. Do you have any concerns the market could drive this project in a downward direction, much the way shale did with the overland project?

Hawker: The market drives all successful economic ventures, without question. We have to be careful not to look at evaluating the LNG project that would provide significant amount of gas into markets across the world, particularly across Asia, based on the economics of those markets at this moment. It’s always the challenge in business. You have to be forward looking, look to whether the project can be viable on completion and then make decisions to move forward.

That’s also why we are in this stage-gated process. We first do the conceptualization game. Move forward through it in the pre-FEED gate. We are now reaching the end of pre-FEED. It’s been planned all along that we would take a year at this point to then park the project, look at the economics, and make a decision as to whether we enter the full FEED phase, the full actual design process. Then after that there is another gate that says we enter into final investment decision and go for the project.

So all those gates are still in place. We are working our way through them responsibly, strategically. So yes, every time we get to one of these gates, the assessment of future markets is going to be a critical aspect of the decision.

Petroleum News: You certainly don’t sound nervous or panicked.

Hawker: No, not at all. Five years ago, the price of oil was $145 a barrel. Today, it’s $38. It is a cyclical world. Over time, the energy markets, the energy sector has always been a long-term success sector of the world. It’s an essential sector of the world’s economy.

Petroleum News: You mentioned Marty Rutherford. Right now she’s the point person with Mark Myers stepping down. Do you have any concerns about Myers stepping down?

Hawker: I have absolute confidence in Marty Rutherford. I’ve worked with her for the better part of 14 years in my role with the Legislature. There have been times I have been on the opposite side of issues with Marty; there have been times where I have been completely aligned on issues with Marty. But I have always respected Marty. She and I have always been able to sit down and discuss issues on their merits and sometimes agree to disagree on their conclusion. I have complete confidence in Marty Rutherford in her current role as acting commissioner.

Petroleum News: What is it about Marty that engenders this confidence?

Hawker: She approaches issues very analytically. She is always willing to basically look at all the facts, get all the facts together, consider all sides of an argument, then make her decision based on what she has learned. She doesn’t enter into these decisions with a preconceived notion. She is a very rational and empirically focused individual, something I just admire her greatly for.

Petroleum News: Shifting personal discussions to AGDC, there is a bill on both sides of the Legislature, looking to put lawmakers on the AGDC board. How do you feel about that?

Hawker: I personally am not in favor of those bills. As I crafted the legislation that created AGDC as a standalone public corporation, it specifically kept legislative involvement away from the AGDC entity to do our very best to isolate it from political influence. Unfortunately, Gov. Walker has politicized some of board with his appointments and that is motivating some legislators to believe they also need to politicize the board. I just don’t get there.

I would much rather see the board evolve back to a board that is professionally qualified, not politically connected so we have people leading that entity who are knowledgeable in the business, have experience in this business on a global basis, have experience in how it might be relevant to Alaskans and are there to make business decisions, not political decisions.

Petroleum News: Let’s switch to the governor’s oil tax credit bill and the changes being pursued. Again let’s start broad. How are you viewing this bill? I know you characterized it as a money grab.

Hawker: The administration themselves stated in their testimony that the only motivation behind this bill is to raise money. They didn’t give any consideration to the consequences of this legislation on the economics of our oil industry. The economics of the oil industry in Alaska get right to the economic security of the entire state. So I have grave concerns about a bill that was introduced strictly to raise money - to raise money immediately - without any consideration of its consequences it might have on our ability to sustain an oil and gas economy.

Petroleum News: Do you see this as a rewrite of SB 21?

Hawker: The bill before us is not a rewrite of SB 21, but it nibbles at so many places that it has substantial economic consequences. The bill does not attempt to radically change significant components within SB 21 but it makes enough changes within those components to be in the aggregate a substantial change. As you recall the governor himself when campaigning said the public has spoken and he was going to leave SB 21 alone. This bill certainly does not leave SB 21 alone.

Petroleum News: Is there any components of the bill you’re comfortable with?

Hawker: The bill identifies some elements that absolutely merit consideration. Those would be elements where there may be unanticipated consequences of the calculation dynamics in a low-priced environment that we’ve never had to deal with the reality before and they certainly bear looking at.

The bill does a very good job of raising the question of whether in some instances we have established a level of support that is no longer necessarily the level of investment we want to attract from industry. The one place I’ll acknowledge that is the credit I am responsible for establishing. When we passed the Cook Inlet Recovery Act, a big chunk in that one was the credits we provided for underground gas storage facilities. That facility is now in Southcentral. It’s built. It’s functioning. We don’t need that section in statute anymore so I agree completely with taking that out of statute at this point.

Petroleum News: Do you see this bill as a tax increase or an aggregate of ways to raise money, or a little of each?

Hawker: With all respect, as an aggregate way to raise money, what we have is a substantial tax. The bill is a substantial increase in taxes on the oil and gas industry in this state. In addition to have a few components that are not increasing taxes that are appropriate considerations for cleaning up our statutes. HB 247/SB 130 is by definition absolutely a significant increase in taxes because it was designed as a revenue enhancing measure without considering the consequences on whom we are raising the revenue.

Petroleum News: Not to rehash the argument over whether SB 21 is right or wrong, but do you see SB 21 as durable as people hoped it would be when it was passed two to three years ago?

Hawker: Absolutely. SB 21 has worked. It corrected the excess of ACES, which we saw resulted in plummeting investment and rapidly declining oil production. It stabilized the amount of investment we are attracting. We are seeing good outcomes from it. We are seeing new developments in NPR-A; you’ve got Caelus moving into the North Slope.

We’ve got Bill Armstrong testifying by saying SB 21 allows them to come back into the state to do the Pikka prospect where we have the possibility of getting another 100,000 barrels per day of oil into the pipeline. That’s a 20 percent increase in our oil production. They were able to come in and do the exploration and development necessary to prove that because we’ve got a balanced system of rewards and taxation.

Petroleum News: Some have identified a series of circumstances where there is no tax revenue and are troubled by that.

Hawker: This is where folks are confusing the concept of production taxes on new oil development with the aggregate government take, the amount we the state takes from a prospect. At these very low prices, by definition we are on a new profits tax. We still have fixed royalties. We have our property taxes. And we have our corporate income taxes. If you look at the charts presented in House Finance the other week, its shows that at these low prices the property taxes become a very significant component of our government take.

They get dwarfed under high oil prices where we take a ton of money on production taxes. Here, at the other end of the spectrum where the pendulum has swung, we have these other tax mechanisms to make sure the state is still getting a fair share of the wealth from the development of these resources at these incredibly low oil prices.

When the pendulum swings back at the other end, we’ll start taking a whole lot more out of the production taxes again. We’ve got a system today that is well balanced. You’ve heard for yourself, the industry is testifying and they are not asking for relief. They are losing money. They are not asking for relief today because we’ve got a balanced system. We all have to be looking to the future for normalized oil prices and a normalized international oil and gas market where we all start making money again.

Petroleum News: So you’re saying the critics of SB 21 are looking just at the tax component of state revenue and not the complete picture?

Hawker: Exactly. Exactly. Again, it is one element of our government take from this industry. One way or another it’s taxes. It’s a matter of what are we taking out of the industry for these developments. That royalty is contractual. No matter what. Whether the oil and gas industry makes money or loses money in developing our oil and gas, they pay us a royalty of between 12.5 and 18 percent. Regardless. No matter what they are making or losing, they still pay that to us for every barrel they remove. And that is completely overlooked by people who want to claim the industry is not paying anything for these resources.

Petroleum News: Still on the credits, if it’s a situation where the state cannot afford them but you still find them valuable, do you have a sense of how to handle them. We hear two sides. We can’t afford them. We can’t afford not to have them.

Hawker: This segues and gets to a whole different conversation. It gets to a need of the state to better manage our overall finances so that in times of low oil prices we have cash reserves to draw from when we need it to balance the budget. We need to protect and maintain those reserves during times of high oil prices, restoring what we take from them so they are available for times of low oil prices.

So at high price cycles we restore our savings accounts - constitutional budget reserve, statutory budget reserve - and in low oil prices cycles use money in those accounts to balance the budget without having to suddenly go and say it’s a really bad time, let’s go tax the oil industry some more at a time they are already losing money, which is what’s taking place right now. This gets back to the need for a more durable structured fiscal plan for the state of Alaska, which is one of the big topics going on with the state of Alaska this year.

Petroleum News: You, among others, were upset that the administration didn’t come to the committee with modeling and how HB 247 affects the industry so you have your own consultants in place who have given their own presentation of the bill. What’s your take on enalytica’s analysis?

Hawker: I think enalytica continues to validate the basic premise of our oil and gas tax structure. They do point out to us that the tax structure is very generous in Cook Inlet. That’s nothing new. We know this. They give us a much greater ability to put our tax structure into context on how it might affect the decision making of an industry. Again, they are showing us government take broken down between what the federal government gets, what the state gets, and what’s left for the industry. They give us a basis for looking at the levels of taxation within our overall tax rubric.

They also, and this is an important part of the enalytica presentation is demonstrating a concern for the Legislature to provide a stable and predictable tax structure that doesn’t change every time the wind direction changes. These guys work for us, the Legislature. They provide good data analysis. We even heard from the Department of Revenue that enalytica has more sophisticated, better modeling capability that the Department of Revenue has when we want to look at life cycle internal rate of returns, life cycle of net present values, those sorts of things at different pricing levels.

The guys at enalytica, they are world-class guys. They give us a lot of very good professional information upon which to make our political decisions.

Petroleum News: Part of the presentation noted that Alaska can be neither Norway nor North Dakota. Often comparisons have been drawn. What’s your take on that?

Hawker: Where they were at on that is North Dakota has got a gross revenue tax system. Norway has got another system. It was basically pointing out that the state of Alaska has a system that has the characteristics of a gross revenue system through our alternative minimum tax on production.

We have overall a tax structure that is constructed around a net-based production tax. When a company generates a profit on the production activities they pay us a tax. When they have a loss, they are entitled to carry forward that loss into the future until it is utilized and then pay taxes again. We are neither a gross nor a net system. We have elements of both in ours.

Petroleum News: There are certainly a lot of tax increases that are clear. There is also the removal of subsidies.

Hawker: I think you’re getting to the overall presentation the governor and the Department of Revenue tried to make for all of HB 247, claiming that the reduction of some of the state’s economic incentives for projects that require us to refund some of the costs to the industry or entities, or refund some of the net operating losses to companies that don’t have production, that removing those elements was somehow a cutting of our budget rather than an increase in taxes of those entities. For the life of me I can’t figure out when we increase what government is taking from these entities, how do we not consider that an increase in taxes.

Petroleum News: Looking ahead as this body of 60 people plus the governor looks to come up with a formula, a plan, that will help in the future as well as the short term - the coming fiscal year - what would you consider reasonable from HB 247 to send to finance?

Hawker: We need to always look at resolving those issues that truly were unanticipated or were in fact resulted from unanticipated and undesirable consequences of the various bills that have been passed cumulatively over the years. Oftentimes those issues show up under stress testing and in stress testing this time, well it’s the first time we’ve stress tested our tax system under these extraordinary low oil prices.

Looking at those items that were frankly unintended or involved a calculation anomaly, absolutely those should be dealt with. But we should not be sending a major change in our tax structure one more time out of this committee. Fix the problems but we need to maintain a durable, predictable, consistent tax structure that we all know is working at this time.