Oil taxes top Speaker Chenault’s list

Nikiski Republican returns for third consecutive term as House leader; targets tax issue, controlling spending, in-state gas pipeline

Steve Quinn

For Petroleum News

House Speaker Mike Chenault has been on the front lines of heavy-hitting resource development issues since he began serving in the Alaska Legislature 12 years ago.

Chenault began his legislative tenure in 2001 by immersing himself into the requisite resource committees (Natural Gas Pipelines; Oil & Gas; Resources Committee; Special Committee on Oil and Gas).

This month, Chenault, a Nikiski Republican, begins his third term as House Speaker, following back-to-back terms as Finance Committee co-chairman. He is the first Alaskan to enter a third consecutive term as House Speaker.

Now entering his seventh session in office, Chenault sat down with Petroleum News to discuss legislative priorities and other energy issues.

Petroleum News: What would you say are the legislative priorities in the coming year or two years?

Chenault: I think it comes as no surprise that one of the main issues that we’ve got to deal with will be oil taxes and how it plays into the big picture of moving Alaska forward and putting more oil into the (Trans Alaska) pipeline. It is Alaska’s lifeblood. We need to control spending, not only the operating budget, but the capital budget as well.

Petroleum News: When you speak of oil taxes, do you or your caucus have a plan to put forward?

Chenault: We don’t have a plan per se. There are a number of (lawmakers) out there who have different aspects they want to look at. Whether you talk to Rep. (Eric) Feige or Rep. (Mike) Hawker, just about everyone out there has their ideas of what they would like to see. I think what you’ll see is in the first few weeks of the session there will be a number of legislators promoting different fixes. You’ll see those go through the (committee) process and some combination of those will come out as a deal the Legislature can vote on.

Petroleum News: What do you think kept something from getting done during last two-year session? Was it an inability to agree on what would put more oil in the pipeline?

Chenault: The House passed House Bill 110 and the Senate didn’t agree with that. I was told by the Senate “we spent a couple of years on researching how oil taxes ought to be put together and we’ll send you a bill.” The House never got a bill. What we got was a try at a long-term fix that didn’t address any of our short-term needs. I can’t specifically say they didn’t attempt to address the issue, but from what it looked like to me, there was a lot of procrastinating on one side. They didn’t really want to tackle the issue and come forward with a solution. They liked the amount we are taxing now. They didn’t particularly care about the workers in the state of Alaska.

Petroleum News: What do you think can be done next year, five years or 10 years out? Is it as simple as a tax rate reduction?

Chenault: On one hand we do need to look at long-term and new exploration and new fields. But we all know it’s seven to 10 years before a new field will come online, so what if anything can we do to increase oil production in our existing fields. That’s the $100,000 question.

What can we do to draw more oil out of the existing fields today? If you look at the bill that the Senate tried to give us in the last couple of days last year, what it looked like to us it was basically 10 years with no tax. Depending on the price of a barrel of oil, and the cap ex costs, you could have had a field come online and not pay a dime of tax for the first 10 years.

To me that was not the right answer, either. I think we should incentivize new exploration, and go out and look at new fields, but there are aspects of infield drilling that need a look. We know Prudhoe and Kuparuk are big fields, so how do we get new oil out of those?

Petroleum News: What are the chances of the Legislature addressing gas tax terms?

Chenault: At some point and time, the gas tax would have to be visited and a gas tax determined. When we will do that, I don’t know. I wish we had done that four or five years ago before we did oil taxes, personally. I think we would be further ahead as far as getting a pipeline project. Could gas taxes be done? Sure. Would gas taxes have to be done before you get a final approval on a project? Yeah. Because not only the buyers but the sellers are going to want to know what their taxes are and what their costs are for that commodity. Until you determine the gas rates, that’s a lot on your plate.

Petroleum News: With that in mind, the next priority seems to be advancing an in-state gas line project. You and Rep. Hawker have introduced House Bill 4. You fell short with a similar bill last year. What are the stumbling blocks to moving a project forward?

Chenault: Some of the biggest hurdles are regulatory issues and how do you get a project to an open season that allows buyers and sellers to put together a project that makes economic sense and one that they can move forward on. HB4, what it’s intended to do is give AGDC the tools they need to get to that open season.

Petroleum News: One of the criticisms that seemed to prevail is that the bill offered too much power for AGDC (the Alaska Gasline Development Corp.) What are your thoughts on that?

Chenault: I don’t think it gives them too much power. Naysayers say we don’t have people who are smart enough. We don’t have people like the oil companies do. They have the top guns. If we want to be effective, you have to put the best team that you can. If you look at AHFC (Alaska Housing Finance Corp.), we have one of the top organizations in the state.

When all of the other states were having all of these bankruptcies and all these people were leaving their mortgages, you didn’t see that kind of thing happen in Alaska. We have a state organization that does most of the lending on homes and a lot of the commercial property.

They based their decisions upon facts. They didn’t just loan anybody who said I want a loan. They didn’t loan money without some kind of backup. What you saw was very little foreclosures because we have a strong HFC. Yes, I do want (AGDC) to be a strong organization. Some say you’re giving them too much power. We don’t say that about HFC.

Chenault: I’m OK with giving them the authority to see if there is an economically viable pipeline. We give TransCanada access to $500 million, and stand to receive nothing from that other than another study. What I want to see is a strong state organization that has the ability and has the backing to go out not to compete, but to be a viable partner in any project. Right now there are assets that AGDC is building that if a pipeline moves forward could be worth hundreds of millions of dollars, whether it’s right of ways or an EIS (environmental impact study), which could be very viable for the state to be a partner.

Petroleum News: There was criticism late last year that called the gas line legislation a pipeline to poverty. What are your thoughts on that?

Chenault: It’s unfortunate that here are people out there who, if you don’t like their particular project, they are going to do everything they can to kill any other project out there. Do I like that this is only a half a bcf a day project? No. But I also know at the end of the day, economics are going to drive this project. We have people who are saying if we can’t have a 3.5 or 4 bcf-a-day line, we don’t want one.

As a legislator or as a citizen of Alaska, this project is being engineered and designed to stay within the framework of the law (Alaska Gasline Inducement Act). That’s what we should do. But what if at some point in the future, things change and maybe they decide there is not a big line going anywhere and this is our only option to invest in: to put together a project that will bring gas to Alaskans? Or at the end of the day, in an open season, if you have sellers who have 2 or 3 bcf a day and they have buyers who want to buy 2 or 3 bcf a day, do I as a legislator say this is not big enough?

Petroleum News: With considering other options in mind, do you support exporting LNG as an option?

Chenault: If the powers that be say we want to build a 3 bcf a-day gas line to Cook Inlet, do you really think the legislators are going to say no. I’ve never tried to say that I don’t like a line going to Canada or I don’t like a line going to Valdez or a line going to Cook Inlet. I don’t think that I’ve ever argued against a pipeline going anywhere. Maybe the economics of it or maybe with AGIA how we got there and what we are actually paying for when I knew in my mind the project is not going to work.

Look, TransCanada wants to build a gas pipeline; Alaska wants to build a gas pipeline. I think the Big Three agree that there is a market and we can build a pipeline. Nobody knows how big that pipeline will be until you get to an open season where people can bid on gas.

Until we get there, until we get a project on the table, it’s a lot of fluff; it’s a lot of talk.

It’s all talk. It’s all talk.

You can’t say, people in Korea or people in Japan or the people in Taiwan want to buy our gas, so there is a market there and let’s build a pipeline.

If you say I went to Japan, there’s a market there, let’s build a pipeline. I’m going to say, where’s the contract? Show me a 30-year-contract.

I’ve been to Taiwan a couple of times; I’ve talked to a number of folks there about our gas. Would they like to have it? Sure. It depends on the cost. But until you get to an open season where you’ve got buyers and sellers together, we’re just talking and we’re blowing smoke up people’s rear ends.

Petroleum News: Moving to a different subject, what are your thoughts on how things have gone with Arctic development? There was a short drilling season and then problems with the Kulluk being grounded.

Chenault: I don’t know all the specifics of what happened with moving the rig when they did. Hindsight is always 20-20. I’m not happy with it. I just talked to Shell and we had a discussion about it, but I’m glad to see they got it off (the rocks) without any environmental damage. I think for the first year in the Arctic, they did as well as could be expected. It’s a new frontier. I hope they continue to move forward with it. I don’t know what effect the grounding of the Kulluk is going to have on future development as far as this coming year or the year after. We’ll wait and see what kind of constrictions and constraints come.

Petroleum News: What about Cook Inlet? They’ve had some rig problems there as well.

Chenault: Unfortunately, the drill rig shut down in Homer has become not a real problem child, but somewhat of a problem. I think there are some things that they could have or should have been done before they moved the rig over there, but I would rather they take the time to get the drillship in shape to drill in the waters of Cook Inlet. It’s a tough basin to explore in. I don’t want to see any environmental upsets that pose problems for the fishing industries and the Alaskans who make a living in Cook Inlet. I want them to do it and I want them to do it right, so if it takes more time to get the equipment in the shape that it needs to be, then I’m OK with that. I’m not going to criticize them for making sure their equipment is as safe as it can be in the Cook Inlet. I wish there was more drilling going on and I wish we knew more about the finds they think they have made. But that’s going to happen in due time.

Petroleum News: Wrapping up, there are some heavy hitting items before you this session. Can these be sorted out in a year or two?

Chenault: It can be if we want it to happen. It certainly can. It’s a matter of whether the Legislature wants to move Alaska forward. Or do we just want to talk about it for another year or two or 20 or 30.

I think I made a statement at a gas pipeline meeting that if we put a joint of pipeline in the ground for every gas pipeline meeting we’ve held in this state for the last 30 years, we’d have a fully functioning gas pipeline.

Now, I haven’t laid out how many joints that would be, but I know I’ve been to a boatload of meetings on gas pipelines. From where I’m sitting in my driveway, I don’t see a joint of pipe being put in the ground anywhere.