Wagoner calls for production incentives

Senate Resources co-chair supports substantial tax reform, but warns it will take time; wants more than just progressivity tweak

Stefan Milkowski

For Petroleum News

As chair of the Senate Resources Committee in 2006, Sen. Tom Wagoner helped craft the replacement for an oil production tax widely seen as broken.

Now Wagoner is convinced the tax needs fixing again, and after a stint in the Republican minority, he’s back in the majority, co-chairing the Resources Committee with Sen. Joe Paskvan.

But things are different this time. Members of the bipartisan Senate majority hold wide-ranging views on tax reform. Senate leaders declared Gov. Sean Parnell’s HB 110 dead, but have yet to offer their own proposal. A frustrated Parnell complained in a press conference Feb. 14 that the Senate is headed in three different directions, and Wagoner says that may be so.

Wagoner says he’d like to see real changes, something that guarantees new production. But he argues doing it right will take time, and the last thing he wants is a half-solution. The best idea, he says, might be to wait until a new Legislature begins next year.

Petroleum News spoke with Wagoner on Feb. 15.

Petroleum News: Senate Resources has been meeting five days a week. What’s the goal of all the hearings?

Wagoner: I think it’s just information gathering.

It looks to me like the emphasis once this bill gets to Senate Finance will be on decoupling and maybe a tweak to the progressivity. If that’s the case, why are we going through this frustrating experience with all these presentations?

I think Pedro van Meurs did a pretty good job. Pedro said the same thing I’ve said before quite often — ACES is kind of broken. It really doesn’t fit what’s going on today.

(Senate Finance co-chair Bert) Stedman says there are too many credits out there for exploration — I don’t totally agree with him. We need those credits, but we only need to pay out those credits when it results in oil production.

My SB 85 had a pretty well crafted process whereby people are invited to come to Alaska, explore, and develop what they find. Once they’ve developed that and gone into production, they get a five-year period to write off the expenses they’ve incurred up to the time of production. That way the state doesn’t put any credits out there for dry holes.

Petroleum News: You also heard from lawyers involved in the TAPS case and other experts. What did you think of Shelby Gerking’s assertion that lowering taxes hasn’t traditionally led to much increased production?

Wagoner: I’m not sure we can stand on that statement totally. If you lower taxes for people that are currently producing and not exploring, yeah, it won’t increase production. You have to structure your system so if you’re giving anybody a break or a credit, it has to lead to new production.

Pedro van Meurs was just right on the mark. Most of the companies on the North Slope that are currently producing oil are in a production mode.

Petroleum News: That’s what he called “harvesting.”

Wagoner: I’ll say this about the Gleason decision. That’s a court decision that’s still not totally decided. In all probability, it will be appealed. And it really has very little to do with what we’re doing with our tax system.

Petroleum News: Are you still concerned that if taxes are too high, the pipeline could shut down relatively soon?

Wagoner: No. Absolutely not.

That’s what the Gleason decision and those hearings were all about. It kind of got wrapped around the axle and we lost sight of the objective of those hearings, but the people of Alaska do need to understand that we are not in danger of that pipeline shutting down in the near future.

Petroleum News: Robin Brena, one of the lawyers, said before lowering taxes, the state should demand more information from oil companies, like development plans, authorizations for expenditures, and plans for heavy oil development. Do you agree?

Wagoner: We’ve got experts from all over telling us what to do to bring heavy oil development. If you listen to the companies that hold the leases and are doing the development of the heavy oil, they will tell you that’s eight to ten years out and they don’t need anything until they come up with the right technology to produce it at a commercial level.

Petroleum News: What about development plans?

Wagoner: I guess if we want to see the development plans, we have to make the request for it. That’s been done, and I think the companies will come forward with those.

But we’ve got 60 days left of this session basically, less if you take Energy Council time out of it. I think a lot of the things being done are commendable, but I don’t think we’re ready to do a major tax review and rewrite of the tax system until perhaps the 28th Legislature.

We need to get started early the first year and get after it and do the proper job, give it the proper review. It will probably take 120, 140 days. But with the two sessions of 90 days, we’ve got plenty of time to do that.

The last thing I want to see done is a tweak here and there, and then come back next year and have everybody throw their hands up in the air and say, Oh, we fixed the system last year.

We need to really bore down into the issue and see just why the current producers are not attempting to go out and explore more or develop marginal fields. That’s where we’ll get more oil in the system, on marginal fields that they know are there but they don’t feel are economic to produce. Those are the ones we have to incentivize.

That’s why I go back to SB 85. We’ve been trying to work in where they can do those fields that are in existing units but haven’t been drilled and produced. We can get that oil quicker into the system than going out in NPR-A for instance and starting a whole new development requiring a pipeline and all the permitting.

Petroleum News: I remember SB 85 had a tax credit mechanism, but you’ve also talked about a production tax holiday. How would it work?

Wagoner: The tax credit is for companies that do not have production that want to come and explore. They get a credit through SB 85 only if they bring something into production. They have five years to write off the credits.

The other part was a tax holiday to incentivize the companies that have leases that are producing, like Prudhoe and Kuparuk, to go into other areas in those units where there are pockets of oil they know exist but haven’t drilled because they’re economically marginal fields.

That’s what the other part of the bill was going to do. We haven’t gotten there because we’re trying to figure out where we’re going with this current bill (SB 192), which is basically a tax increase.

Wagoner: I have no idea. I had nothing to do with directing the drafters to draft that bill, so I don’t know what the intention is. But it does amount to a tax increase over the current progressivity.

Petroleum News: So what would you like to see?

Wagoner: Well, if I was king for a day, I’d wait till next year.

The worst thing you can do with this tax system is do something minimal that doesn’t move the ball any distance at all.

I’m not in favor of giving something away if I don’t have a result. I’m a results-oriented person. So if we can structure something and bring in a new addition to ACES or modify ACES or come up with a new tax plan that moves the ball by giving credits for production, then I’m good with that.

Petroleum News: So you’d like to see something like SB 85 pass this year, but otherwise you’d rather wait?

Wagoner: I don’t think SB 85 has a chance to go anyplace this year.

I offered that. I even offered to take my name off it to use it as a vehicle this year to get something accomplished and that was rejected in the Senate side.

So I’m just holding on to SB 85, probably let it die a slow death.

Petroleum News: If you’re not king, but just Resources co-chair, what would you like to see?

Wagoner: I’d like to see some positive action toward an end goal. And it should be something that’s major, not minor. That’s why I say it might be better to put it off until next year, to give us time to vet some of the things that need looking at.

We’ve heard from one consultant — Pedro van Meurs. Pedro’s a pretty brilliant guy, but there are other people out there. When we’re setting a tax policy for the State of Alaska, and the people of Alaska, we need to hear from more people.

Supposedly we’ve got some other consultants coming in later this week — PFC Energy. We’ll see what they’re coming to consult on — there’s been very little information let out to the Legislature, to the Senate, or anybody about what exactly they’re working on.

Petroleum News: Van Meurs talked about setting different tax rates for different types of hydrocarbons. Does that appeal to you?

Wagoner: There’s nothing wrong with doing that. I am continually critical of the complexity of ACES. I think we should have a tax structure that every sixth grader in Alaska can understand.

We have one of the most complex tax systems in the world. We can have a simplified system and basically accomplish the same goals.

That’s basically what Pedro laid out yesterday afternoon. The only problem is we took three meetings to get to the point where he laid out what he thought we should do, so we only had an hour and a half to look at that.

When we did PPT, I was chairman of Resources, and we took six to eight weeks just in Resources. Then it went to Finance, then we had the supercommittee, and then we went to special session. It wasn’t something we crafted overnight.

Petroleum News: Gov. Parnell stands by HB 110. What’s wrong with his proposal?

Wagoner: I believe in trust but verify, and I think his bill gives away too much to trust with no required verification. I commend Gov. Parnell for making his attempt. But I think there are other ways to get to the point he wants to get to.

Petroleum News: Parnell said yesterday the Senate seems to be going in three different directions. Is that right?

Wagoner: I don’t know what direction we’re going in. We may be going in three different directions.

I know we’ve spent more time discussing and having testimony on the Gleason decision dealing with the longevity of the pipeline than we have dealing with the tax bill. Three days to hear about the Gleason decision I thought was a little much.

Petroleum News: It sounds like there’s disagreement even within the Resources Committee on how to proceed.

Wagoner: Yes there is.

Petroleum News: Any concluding remarks?

Wagoner: Well, I’m not saying the process is broken, but I’m not sure if we get anywhere or not. Last thing I want to do is get partway there.

Petroleum News: Do you think the Senate will get something to the House this session?

Wagoner: I think we’ll get something over there; it’s a matter of when. Sen. Stevens told the House we’d give them 30 days. I haven’t heard that same commitment out of anybody else.

Even if we tweak progressivity, or change it drastically, that doesn’t guarantee us any production. And decoupling has absolutely nothing to do with production.

We’re losing oil production at a rate of 6 percent a year. Unless we change that rate of decline, we could be in a not-so-rosy financial position in the near future.