Wielechowski: Tax regime not durable

Anchorage Democrat adds state should not abandon gas line efforts just yet, having already spent hundreds of millions toward permitting

Steve Quinn

For Petroleum News

Sen. Bill Wielechowski says Alaska needs a durable oil tax system and it’s not likely to happen this year. Still, the Anchorage Democrat, a Senate Resources member, says he’s heartened by the news of recent contracts awarded to consultants who may help the state in future reviews. Wielechowski offered his views on the state’s tax system and the prospective AKLNG project with Petroleum News.

Petroleum News: Let’s start out with Ryan Zinke’s visit to Alaska. What do you think that means for Alaska’s resource development prospects?

Wielechowski: I think it’s great that you have a high-level official from the administration come to Alaska during the opening stages of the administration talking about Alaska resource development. I think that’s positive sign.

Petroleum News: Do you have any particular takeaways from his visit?

Wielechowski: It seemed like they are certainly very interested in Alaska continuing and growing its position as an energy provider for the rest of the United States and for the world. I think there is a likelihood you’ll see pro development stances and positions related to federal lands in Alaska and federal waters outside of Alaska. I think there is a pretty high likelihood you’ll see an opportunity for the opening of ANWR and for offshore development.

Petroleum News: People in this state and Washington have had their share of optimism toward ANWR. Is this optimism realistic?

Wielechowski: I think this is the probably the best chance we’ve had in a generation for the opening of ANWR. I think with the composition of Congress right now and the president’s position on energy development, this is probably the best chance we’ve had in a generation.

Petroleum News: Does it help having Point Thomson operating close to ANWR?

Wielechowski: No doubt. You know how expensive it is to push that development further east or west on the North Slope. Every mile you get in there really helps because it’s so expensive in getting that infrastructure in place, getting that pipeline in place, gaining the experience and knowledge of the geology up there. Figuring out how to work in that environment I think is tremendously beneficial.

Petroleum News: What at a minimum would you like to see happen up there these next few years?

Wielechowski: I’d like to see an opportunity for companies to go up there and do some exploration and seismic tests. Obviously you’ve got to be cognizant of the environment and the caribou and other wildlife up there. I’d like to at least have seismic tests done and see what the geology looks like. I’ve always been a big advocate of going in from just outside of ANWR and horizontally drilling so I’d definitely like to see seismic testing done to see what it looks like underground.

Petroleum News: What about federal waters?

Wielechowski: You know I think (former) Sen. Begich did a tremendous job working with the Obama administration to open that up. For the first time ever we did have exploration up there. Unfortunately Shell didn’t find anything. It’s a tremendously expensive environment. It’s a risky environment. We saw what happened in the Hilcorp spill in Cook Inlet right outside the most populated city in Alaska. They couldn’t stop the gas spillage. That’s concerning.

I think whoever is up there is going to have to prove they can do it in an environmentally safe manner. I really hope when they do allow the continued exploration in the offshore waters, they keep strict environmental controls in place. That’s a pristine environment that’s important to the people up there. If there is any sort of problem, they would probably shut it down forever.

Petroleum News: OK, closer to home. HB 111 is still in play. Why do you think this debate comes up almost yearly in the 10 years you’ve been in office?

Wielechowski: The fundamental problem is we don’t have a durable tax structure at all prices and that is something that needs to be addressed. Clearly the cashable tax credits is a huge problem. When you owe 100s of millions of dollars every year in cashable tax credits and we have multibillion deficits every year, that’s a problem. I don’t know that there are any other countries in the world that have the cashable tax credit system that we do. I think we are the only one at this point. When you have a tax structure that’s as generous as ours, you have to make sure that on the back end, you are getting fairly compensated.

The way we’ve done our tax structure, we get very little on the back end. In fact, we have gross value reductions where if you have a higher royalty rate, you get an additional gross value reduction. In many countries where they have systems where you get to recoup your costs, the country, the jurisdiction, gets a pretty large amount at the end. Norway, 78 percent; Iran and Iraq, 98 percent. They allow for full cost recovery and even some interest on top of that, but then they get a very large recovery for the state. Whereas we have a situation where we have these cashable tax credits where we are co-investing and providing massive support - 35 percent. We are lucky of we get 4 percent gross tax at the end. That’s problematic and I think the people see the challenges with that and I think we’ve got to address those challenges.

Petroleum News: There’s at least one thing out of anyone’s control is that companies doing shale exploration are finding even cheaper ways to get it out of the ground. How does Alaska stay competitive with that?

Wielechowski: We had Rich Ruggiero testify in a joint Senate Finance-Resources hearing. And Roger Marks also testified about the costs. What we heard was in Texas, in Eagle Ford, when you factor everything, the total costs Rich Ruggiero estimated was about $20 to $40 to produce a barrel of oil. In Alaska, we heard Roger Marks testify that on the legacy fields it was $22 a barrel and the transportation costs were $9.33, so that’s about $31. That puts you square in the middle of Eagle Ford. That’s for legacy fields.

The new fields are obviously more expensive. That’s where you need to direct your tax policy considerations. That’s where you need to direct gross value deductions. That’s where you need to direct other forms of incentives. You’ve got to balance that with the state’s budget. You’ve got to make sure you’re getting something in return for that. If as a state, you decided you want to allow companies to carry forward all of their losses, it’s not necessarily a bad policy. You just have to make sure you’re getting in the end, a fair return. That’s the balance point you have to strike. I was encouraged by the testimony on the cost, but the new fields are without a doubt challenging economically.

Petroleum News: What do you think at this stage has been accomplished with HB 111?

Wielechowski: I think there is a consensus that has arisen that we can’t afford cashable tax credits anymore. I think it’s a good idea to get out of the cashable tax credit business. So that’s certainly a positive. I think there has become more of an awareness of the way our tax structure works. We have a lot of new people who don’t understand the intricacies with the deductible tax credits. I think the debate has helped people become more aware of that.

Petroleum News: So whatever has emerged, do you think the Legislature will be back to the table discussing this next year or the year after, or will that depend strictly on the makeup of the Legislature and the administration?

Wielechowski: I think there is a growing consensus in the building that the oil tax structure is not a durable one. I think that is across all spectrums in both bodies. The reason I feel that way is I look at the oil tax consultants who have been hired. We have several new consultants who have been hired. I think that is a good thing. I think legislators want to make sure we have a system that is durable and ensures we are getting appropriately compensated. I think those experts were hired in part to help see that was the case.

Petroleum News: They were also hired to have a model in place by the end of the month. How can those models benefit the Legislature?

Wielechowski: Particularly since we have a net profits tax, it requires us to become a lot more knowledgeable about our oil tax structure and the finances that are behind it. In the past, when you had gross, you applied the rate at the point of production. I remember when I started 10 years ago, we would have companies appear before us and we were talking about the net profits tax. I would ask some of the companies that would appear before us, one example was Exxon, which flat out refused to tell us how much they made.

I don’t know how you can come to a state Legislature and argue that Alaska is not a profitable place to do business and refuse to divulge what your profits are. That seems a little odd to me. Our experts have verified that. Gaffney Cline years ago testified how they were shocked at how little information we had. They had never seen a net profits jurisdiction with as little information as the state of Alaska.

As lawmakers who are tasked with coming up with a system that is fair and durable - fair to us and fair to the oil industry - it’s critical that we have this information. It’s critical that we have information to figure out what’s the net present value of various fields and various projects. What’s the internal rate of return? I think those are the two key metrics people look at and we don’t have that information. We had none of that information this year in our debate. I’ve never seen an oil tax bill to the magnitude of HB 111 progress this far without being done by the executive branch.

As legislators we have a couple of staffers. The executive branch has thousands of staffers and hundreds of people who work in oil and gas. It’s very hard to do this as a legislative body when you don’t have a staff to do this and you don’t have access to the information you need to come up with a system. Rich Ruggiero testified “I can’t believe I’m here 10 years later and you still don’t have this information.”

Petroleum News: What would be next for you? A simpler tax system?

Wielechowski: I think most people agree that our tax structure is one of the most complex in the world. That’s what most experts have testified to. It is very complex. You have different tax credits available to you, depending on a whole variety of absolutely unpredictable situations. I do think it needs to be simplified. I think we’ve gotten ourselves into a situation where I don’t know how you fix it simply at this point. I will look to the experts to give us some advice on that. I don’t know that going to a gross system is the best solution. It’s certainly the easiest and simplest solution.

Back in 2007 (his first year), I was a big supporter of the gross tax structure, but then I was persuaded after I saw numbers and the projects on specific fields that a net structure was better for the state. The problem is when the system was altered in SB 21 it was altered in ways that a lot of people didn’t understand. It had negative impacts to the state.

We are in a situation where we are getting very low compensation for our resources at low prices, then as oil prices rise, we don’t get very much more until oil starts getting up to a price which is not predicted for the next decade. I think we need to take a look at that. You want to keep an oil tax structure as simple as you can, but at the same time, oil companies are pretty smart. They have great accountants and great lawyers who are pretty good at figuring out these systems. Usually they are better than the state. That can end up costing the state a lot more than the state thinks. When you add that level of complexity, unless you really, really analyze well, there is a chance you are going to lose out on it as a state.

Petroleum News: Where do you think the perspective of the term government take should be applied? Some include royalty as government take; others do not because in some states royalties go to private land owners, not the state.

Wielechowski: Government take has to include everything an oil company pays, whether it’s royalties, corporate income taxes, property taxes, severance taxes. Everything they pay to a public or private land owner. You have to include all of that. You have to get an apples-to-apples comparison. If you are in Texas and you’re talking about a 5 percent tax, but you’re paying a 25 percent royalty to a private landowner as opposed to a 12.5 percent royalty, that’s an enormous difference. You need your experts to ferret that out. Lease expenditures are another thing. You’re paying $25,000 an acre in Texas and you’re only paying $25 here in Alaska. How do you not factor that in? That’s another thing we’ll look to our experts for.

Petroleum News: Let’s switch to AKLNG. How do you see things right now, say from a 20,000-foot view?

Wielechowski: I think it’s good to re-evaluate where we are with the gas line, but I’m not someone who thinks we should end our pursuit of that right now because gas prices go up and they go down. We happen to be at a point where they are down. That being said, this is a 40- or 50-year project so you don’t base your decisions on where the price of gas is today or last year. You base it on where you think it will be the next 50 years. The projections are that demand for LNG will continue to grow. It’s a cleaner fuel source. Countries are moving to cleaner fuel sources.

We have a lot of advantages here in Alaska with our gas. We have a known resource. We are pulling up 6 bcf of gas per day in Prudhoe Bay and re-injecting it. That’s an enormous amount of gas. Quite frankly we have an enormous amount of gas in Cook Inlet. I’m not in the camp that says we should end the project. I think we want to keep our options open. We’ve spent so much money getting to FERC approval. I’d like to see us get to a point where we can present it to FERC. I’d like to see us get to a point where we don’t spend all the money we do as a state to try to move the project forward. So I’m not ready to throw in the towel. The numbers we’ve seen from Wood Mackenzie and others, that you can make it viable if you come up with different financing strategies, are encouraging. Clearly we couldn’t go the way we were going with the three producers. That was uneconomical.

Petroleum News: You voted to remove $50 million from AGDC for other expenses in the capital budget vote. What drove that?

Wielechowski: That would have been interesting if it had been the subject of hearings and other debate. What happened was there was a motion made and no objections, so it passed. That being said, I don’t have a problem with cutting it back. They still have a pretty significant amount of money that is available to them to continue their pursuit. If they need more money, then we should evaluate that.

Petroleum News: What would you like to hear next from the administration?

Wielechowski: I’d like to hear about the reception we are getting from the international markets. I’d like to hear the substance of the conversations they are having in Japan, Korea and China. I think that’s where the natural market is for our gas. I think it’s really critical that we line up buyers for the gas before we spend a lot more money on the project. I think that is really critical; you have got to have buyers lined up.

Petroleum News: You’ve been getting periodic updates delivered to your office. Have those helped? There was a criticism that AGDC has not been communicative enough.

Wielechowski: I haven’t criticized them for that. They have come in and testified in front of Senate Resources, and I have appreciated that. I think it’s important that on the gas line that we don’t micromanage it. I’ve said that for years. One of the things that can kill this project more than anything else is simply that the Legislature gets too involved in it and micromanages it. You are going to have political changes in the Legislature. If AGDC is whipsawed back and forth in how they are going to pursue this gas line with every election - that’s every legislative election, every new Resources Committee and every Finance Committee - that’s a problem. They are an independent organization and they need to go out and work within the directives we’ve given them and try to get us a gas line. I’m willing to give them some space.