Tarr: Scrutinizing oil tax credits vital

Anchorage Democrat, House Resources member says committee prides itself in thorough vetting, anxious for further updates on AKLNG

STEVE QUINN

For Petroleum News

House Rep. Geran Tarr enters her fourth year on the House Resources Committee having already been part of a panel that’s reviewed oil taxes (SB 21) and a prospective natural gas pipeline project that would market North Slope natural gas to a liquefied natural gas facility. Today, the Anchorage Democrat sits on a committee reviewing the state’s oil tax credit system, which some say needs to be left alone or risk future investment while others say it’s costing the state too much. Tarr shared her thoughts on this and the status of the AKLNG project with Petroleum News.

Petroleum News: Let’s start with House Resources. You’re hashing out the oil tax credit bill right now. What’s your sense of the bill and how things are going?

Tarr: Right now it seems that there are unanswered questions for many of the members and that is sort of slowing things down a bit. I think we need to keep proceeding. Having been through SB 21 and SB 138, I know if we scheduled the extra meetings to put the extra work in, we can get the work done. That’s mostly where I’m at right now: making sure that we are diligent in our work and making sure we continue to have meetings while working through any questions on the proposals so we don’t run out of time.

Petroleum News: You guys are taking the lead on this bill the way the Senate did with SB 21 or SB 138.

Tarr: Well, I would say on SB 138 we did pretty substantial work to that bill. A dozen or more amendments were adopted. Even though that bill came over from the Senate, we made pretty major improvements and that’s what ultimately made me vote for it. So in that sense, I don’t’ think it’s that different.

It’s a serious piece of legislation that everyone wants to have their time with. We need to be able work through and get some of these bills to our committees and give the other members opportunities to look at the package. A lot of people are saying we need a plan; we don’t just need a single option. No one thing will solve the budget gap, or the revenue question.

We need to make sure we get all of our work done in a timely fashion so that all things come to the Finance Committee. The House and Senate Democrats had called on leadership to work as a committee of the whole. I think that has a lot of merit.

Ultimately, and I saw this to be the case with SB 3001 in this last special session, one committee puts a substantial amount of work into a bill and sometimes the other members don’t take the time or don’t have the time to get to know it as well as they might like to.

So nothing that happened in the fall special session was a surprise to anyone that sat on the Resources Committee during the time the bill (SB 138) was developed. We knew there would be a special session and we would have this conversation

The rest of the members were very much behind on that so that whole first week of the special session was getting everyone else up to speed and on the same page. So for any of these proposals we need to do the work in the committees, then we need to get to a place where they need to be considered as part of a larger package and that all members of the Legislature have an opportunity to really review and get comfortable with it.

Petroleum News: Don’t you think you’re achieving that approach with the House hearing bills only dealing with the state’s fiscal situation?

Tarr: In theory. But for example there will be people on this particular bill that want to hear the very same questions answered being asked in committee: what will be the impact on the industry; would this prevent exploration in Cook Inlet; are we going to have to worry about gas shortages in the future; how does this rank us competitively around the world; companies are already laying off employees so is this going to impact them.

Everyone is going want answers to those questions. We are going to do a lot of that work in the Resources Committee. It will have to be reiterated so all the members get those answers. This is one of the biggest pieces of this overall, new Alaska sustainability plan the governor has put forward. There is going to be a lot of scrutiny. I expect a lot of scrutiny and a lot of intense review by members, so the quicker we get to that place the better off we will be. Even looking at the mining tax, that’s $6 million. Even if we did that, several other things have to be considered. We need to get to a place where several options are on the table so people can visualize how they work together as a package.

Petroleum News: So as you take a closer look at bill what’s your analysis on the credit situation?

Tarr: The idea that we are would be paying more than 100 percent is reasonable to question. We are researching whether that happens in other jurisdictions and are having difficulty finding examples of that. When you talk about Cook Inlet and the gas shortage, the potential for brown outs, that situation has changed dramatically. We’ve got storage.

We’ve got an RCA decision that changed pricings. You’ve got a lot of positive things happening there. You’ve got Hilcorp giving their employees bonuses this year. A lot of the work where they have been successful has been this new Alaska work. So if you want to look at the big picture of incentivizing certain behavior we have previously in statute put sunset dates on those.

We’ve previously said we think these should be in place for a certain amount of time. So we aren’t doing anything that is unusual by looking at putting adjustments on the dates. Frankly I think it’s long overdue. I’ve been working in this building through ELF, through PPT through other proposals, through SB 21.

Part of what happened is when all those structures got overlapped with one another, there were these unintended consequences. Even if we weren’t in a budget crisis, I don’t think it would be unreasonable to do a review and reevaluate this entire package and see how all of these things interweave and whether they are exactly what we wanted to happen.

One of the challenges was the modeling has not been done at the prices ranges we’ve seen. That’s created some challenges. That’s one of the requests I’ve made of the department, that they really go down to these low values that we are seeing as well as on the high end. We went back and looked at the work done for SB 21: We never went below $60. We used $60 as the low point for oil prices.

We didn’t understand or anticipate what’s happening now when we are below $30. Because we didn’t evaluate that during that time period, that’s why we are seeing the unintended consequences now where we are paying more than 100 percent, so really evaluating along the full spectrum of prices that we might see.

We’ve learned lessons. I would hope we’ve learned lessons. Both with ACES in not modeling high enough and with SB 21 with not modeling low enough. If we want this whole idea of durability and stability that everyone says the industry likes, then we are going to have to do a much more thorough job in evaluating how any of these structures work along a much greater range of prices.

Even without evaluating what it means revenue wise, what we know very easily is that we didn’t look at what happens in these price scenarios. It would be reasonable to evaluating so we understand that. None of the fiscal notes were prepared for these price ranges, none of evaluations done by our legislative consultants were prepared for these price ranges. You’ve got to understand the reality you’re living in.

So getting back to your question of what do I think of the bill, paying more than 100 percent, I think it’s reasonable to question whether that’s a good policy for the state of Alaska. Do we want to look long-term at how we keep the flow in every phase? You want to have people in exploration, you want to have people in development, you want to have people in operations. One of these things we are consistently hearing about these different proposals is that maybe the exploration side is what will be deterred because it will make the financial outlook less favorable. Well let’s focus in on that and understand it more.

I think we have a lot more work to do really to understand. We haven’t heard from industry yet. I’m interested in what they have to say and what they think.

The recent announcement on the changes to the AKLNG project in the face of these low oil prices helps underscore this different reality we are in and that investment decisions are going to be treated differently.

Petroleum News: Let’s talk about that. What did you think of the governor’s announcement?

Tarr: It was a non-announcement announcement that someone is re-considering their participation. When we look at long-term revenue forecasts, people have started in the last year or so counting on in the 2023-24 range about $2 billion coming in from that project. That’s not far off and we need to look at what the revenue reality would mean absent that project. The governor is wanting to accomplish a decades-long dream to market that North Slope gas so that kind of passion and commitment is very positive.

He is suggesting doing project financing. That is something we talked a little bit about when we considered SB 138 but at that time the evaluation that was done suggested it wouldn’t be doable. You wouldn’t be able to get enough individual partners. Maybe the governor, he’s been lobbying the federal administration and they have been very supportive of this project with an export license, putting us in our own category for approval. Maybe the way that Gov. Walker has engaged President Obama is a more productive relationship that the previous administration. I guess I’m looking forward to the first week of March when we get more details.

Petroleum News: You talked about the special session, which wasn’t long ago. When you look at what took place and what’s happened with the governor’s press conference, how do you reconcile the two?

Tarr: I tried to be optimistic the whole time. A lot of people have been detractors. The no votes on SB 138 were people saying this wouldn’t work. I wanted to be optimistic. In talking to people who have been working on this for decades, there were a lot of reasons to think this particular infrastructure where the equal partnership was a path we hadn’t been down before that presented new opportunities, so I remained optimistic.

There was confusion on the role of TransCanada. For some reason a lot of people thought they were going to build the pipeline. They were never going to build the pipeline so what we were giving up was expertise on the operational side of things. Because we are still too early to say how the project will go forward, if it takes on some other structure, it’s hard to say today whether losing that expertise in pipeline management will be a detriment to the pipeline project.

One thing we repeatedly hear is the market wants to see strength and commitment, and right now with that being a reshuffling of the deck in how the project was going to be organized, then our bond rating taking a ding and then this, I do wonder if this sends signals that we are not as serious as we say we are about commercializing North Slope gas. That would be my main concern - that investors or buyers elsewhere would somehow perceive what’s happening as moving away from a near-term project and putting it on the back burner again. It’s a big part of our economic future and a clean energy future.

Petroleum News: The governor’s announcement will likely mean delaying any ballot measure for a constitutional change so the state can lock in certain fiscal terms for decades. Were you in favor of putting this on the ballot before the voters or not?

Tarr: We hadn’t really discussed enough of the details to really flesh that out. Under the previous Stranded Gas Development Act and a different attorney general said we didn’t need a constitutional amendment. This one says we do.

Now the timeframe was different. Under the Stranded Gas Development Act, they were looking at 15 to 20 years. Here we are looking at 20 to 30 years. Between those two time frames, it becomes questionable. We haven’t had a chance to have the conversation about what that difference in fiscal certainty means on the buyer side of things. Could people go with 20 year contracts or do we need to go longer term.

The Asian market definitely likes longer-term contracts. Maybe that was part of the push because of the people who prefer that. The governor is saying now we may not need a constitutional amendment. That leads me back to my earlier comment, I’m looking forward to the first week in March.

I’m hoping we get on a path where everyone is in agreement and we can keep moving forward. If that means more financial commitment from the state, we have to have that on the table now as we evaluate the overall budget picture and what it does to our borrowing capacity. For example, if you want to borrow for a gas line, do you want to do a G.O. (general obligation) bond package? We need to see more details.

A big hang up under the current infrastructure was the PILT agreements and the impact aid. That’s going to change dramatically if it’s all state ownership or if you don’t have the private company paying taxes. I don’t know how local communities will respond to that because it doesn’t mean the impact won’t be there. Instead you wouldn’t have the impact aid going to the community. There are a lot of big pieces to this if the infrastructure is going to change.

I spent more than 100 hours working on SB 138. I expect to put that same kind of work into reevaluating any big structural changes from where we are today. It’s getting close to March so we’ll need to get moving in my opinion.

Petroleum News: You’ve had quite a bit of movement within AGDC, be it the board or management. Has this been too much change for you or is this normal over the course of a first year?

Tarr: A little of both. I approach it cautiously because the institutional knowledge that you have with the original setup is a real asset. I would say that of most organizations. Luckily Mr. Cruz (board chair David) has been there since the beginning. And putting on a borough mayor (Luke Hopkins) and he brings a lot of municipal experience and that can be a real asset with things like I just mentioned with the PILT and understanding impacts to the community. So it doesn’t have to be a detriment that you change out this person for another because maybe you bring in something that was a missing component.

My understanding of our current CEO (Fritz Krusen), he is regarded in the industry for his technical expertise and that’s the piece of the puzzle he was working on when he wasn’t doing this job. So in thinking you want to put people where they are most talented. I’m looking forward to us finding someone who can be at the helm of the organization and bring the right skills for that position so Mr. Krusen can get back work he has previously been doing in the technical arena.

Petroleum News: There is a bill on each side of the Legislature calling for two members, one each from the House and Senate, to have a non-voting seat on the board. What are your thoughts on that?

Tarr: I think that could be a good thing. They are non-voting members. It would be like me attending a meeting, which following a special session I did attend a couple and have been trying to be more active in that arena. I thought some legislators individually could have taken some responsibility for that because we had a lot of interim House and Senate Resources meetings.

There were updates on AKLNG. Board meetings are public. Was anybody attending those meetings? Not a lot of them. When some of those things happen, we have to look to ourselves and say, “What can I do?” That’s why I committed to making sure I was really following the board, attending the meetings when I could.

I think with a project of this size, and because we are changing the typical state role from regulatory to owner, even though we like to say owner state, but we mean that more in an owner of the resource, not an owner of developing major projects like this. So we should be involved. In areas where there have been miscommunications and misunderstandings, this could be a positive thing. We need to have people really participate.