Wielechowski: Tax credits need review

Anchorage Democrat says lawmakers are off to the right start by forming tax credit working group in advance of coming 2016 session

STEVE QUINN

For Petroleum News

Sen. Bill Wielechowski just attended the first tax credit working group - telephonically - made up of several state senators and members from industry backing groups. The issue: whether the state can afford its current oil and gas tax credit system and whether the state is getting a reasonable return on this investment.

The Department of Revenue and the Division of Oil and Gas led the discussion, focusing squarely this time on Cook Inlet.

Wielechowski, an Anchorage Democrat and member of the Senate Resources Committee, liked that the Department of Revenue came forward with suggested changes, but he still wants further analysis into that basin as well as the North Slope fields.

Wielechowski spoke to Petroleum News about what he would like to see in coming months.

Petroleum News: Sen. Giessel held the first tax credit working group meeting, promising more in the future. What are your feelings on establishing this group?

Wielechowski: Well, I’m really glad that we’re doing it. I think it’s long overdue. I think it’s time we had a reasoned bipartisan discussion on how we can incentivize oil production and development and at the same time protect our state’s treasury.

Petroleum News: How did you feel about having people other than lawmakers on this working group?

Wielechowski: You know I didn’t know that was going to happen. I was a little surprised. I think it’s important to involve stakeholders in the process. I don’t know who is ultimately going to make the recommendations. It seems to me that it should be legislators making the recommendations. I think we should certainly take input from all the stakeholders, but my hope is ultimately that it’s the legislators, who are elected by the people, making the recommendations.

Petroleum News: Well, looking at the initial changes for consideration submitted by the administration, the question of transparency was brought up by your colleague Bill Stoltze, citing minority concerns when SB 21 was introduced by the administration. What are your thoughts on that? Do you want to know where these are coming from, too?

Wielechowski: Absolutely. I think it’s always good to know who is behind the scenes making suggestions and recommendations. I’d certainly be interested in knowing. They seem like reasonable recommendations to me so I’d want to flesh those out - so absolutely, the more transparency the better.

Petroleum News: One of the stakeholders asked the same question of the Revenue commissioner that she did the Oil and Gas Division director: Do these prospects of tax credit change represent a change in the tax regime? What are your thoughts on that?

Wielechowski: I don’t know how that’s relevant. That seemed like an odd question to me to what we’re doing. It seems like a lot of semantics to me. I think most people recognize the tax credit system is flawed. You heard people say it in the meeting. You heard legislators on all sides say it. I don’t care what the semantics are. We’ve got something that is broken. Let’s just get to work and fix it.

Petroleum News: Some of these credits came from ACES, which you supported. Are you willing to revisit those as well?

Wielechowski: It’s all about balance. When we passed ACES, we had a balance that was put into play. The balance was we were going to provide tax credits and receive less revenue at the low end in exchange for more revenue at the high end. What SB 21 did was take away at the high end. So now the system is out of balance. Quite frankly we thought the system was out of balance under ACES too and it needed to be fixed. There were legislative proposals to fix that back then. The tax credits have been excessive for years and the state needs to fix that.

Petroleum News: So is the state in a position where it can no longer pay for the credits under the current tax regime?

Wielechowski: I really want to see a detailed comprehensive analysis. I really hope we get independent consultants looking at this. If we are investing hundreds of millions now but we are going to make billions of dollars later in revenue to the state through royalties and production taxes that might be a good investment. It probably is a good investment.

On the other hand if we are giving away money and not getting very much in exchange, then it’s not a good investment. The fundamental question that we need to answer is, are we getting our money’s worth through these tax credits? Do they genuinely need them? Are we genuinely incentivizing the behavior that we want? Or is it just simply padding the bottom line for companies. Are we incentivizing behaviors for companies to go out and not be very prudent with our money and with their money? That’s what we need to figure out.

Petroleum News: There were about 14 potential legislative changes in the Revenue Department’s presentation. What caught your eye?

Wielechowski: I think there were some good suggestions submitted by the Department of Revenue. The one thing that seemed to be lacking was a real in-depth analysis of are these working. Are we getting our money’s worth? I’d like to see a consultant look into that. On the recommendation side, I thought there were some interesting recommendations. I’d like to see more perspective on whether we want to assume an equity position at certain levels, or whether or not we would consider a loan and do it through AIDEA. Today was focused on Cook Inlet and you saw the credits were being stacked to between 40 percent and 60 percent. Those are extremely high. Some said just going to the free market is the answer. That’s a philosophical discussion we can have. You can go to a free market but what a free market means is no more tax credits, no more incentives, no more tax breaks. There seem to be advocates on the working group to do that.

Petroleum News: What would you like to see next for a Cook Inlet analysis?

Wielechowski: One of the things I would really like to see and I asked Director Alper about this, is are the credits going for oil exploration and development or gas exploration and development? The reason that we incentivized Cook Inlet to the degree that we have is that it provides natural gas; it provides energy for over 50 percent of the state’s residents.

If the bulk of incentives we are providing are going for oil production, we are getting very little return for that because we get zero tax rate on oil. We are proving massive tax incentives. That is something that would be really critical to figure out. We certainly don’t want to jeopardize the gas supply in Cook Inlet.

So I’d like to see an analysis of where the money is going: for oil or for gas. I’d like to see some sort of cost-benefit analysis.

What are we getting for the investments? I thought a slide from Director Feige was pretty interesting in terms of the money that would have cost us for the seismic studies. That’s good information. That shows me what we are getting in exchange for these credits. I’d also like to see how much impact the cost of natural gas has played into this versus the credits. How much of this activity is being driven by increased cost; how much is being driven by tax credits. I don’t feel like we have enough information. I don’t think anyone does.

Petroleum News: Didn’t Director Alper say that could be difficult without violating confidentiality?

Wielechowski: As a policy maker, we are talking hundreds of millions of dollars in incentives. If we have to go into executive decision to take a look at that or sign a confidentiality agreement to make a proper decision on this, I’m willing to do that. It’s really information we’ve got to have.

Petroleum News: One recommendation was to waive some of the confidentiality. Is there a place for that?

Wielechowski: If companies got into this (intent to apply for credits) with the expectation that their information was going to be kept confidential, we shouldn’t violate those terms. Moving forward I’ve always been a strong advocate that when the state makes large investments, we should get that information back and it should be in the public domain.

Petroleum News: Next up is the North Slope, what kind of examination would you like to see?

Wielechowski: The one thing that we really need to look at on the North Slope is the role of the deductible tax credits, the $1 through $8 tax credits in SB 21. My recollection is those will exceed $1 billion in future years. It’s important to look at how those are being used to make sure we are getting our money’s worth. I’m a big believer in that if you need tax credits to make a field or a project profitable or reasonably economic under the terms of the leases, I’m all for that. But if you’re using the tax credits to pad your bottom line and we aren’t getting anything out of it it’s simply taking tax credits when they don’t need them under their leases.

As the price of oil goes down, the state is actually allowing for larger deductions at a time when we need the revenue even more. I never thought we had a very thorough analysis of this when we were doing SB 21. I’d like to see a more detailed analysis. Let’s look at internal rate of return; let’s look at net present values on fields and projects that are using this, that are eligible to see if we should continue doing those or ratchet it back.

Petroleum News: Sen. Giessel’s goal for the working group is to have some recommendations in place by early December. Do you think that’s enough time to be ready to resume the discussion in January?

Wielechowski: I hope so. I think this should be a top priority for the administration and the Legislature. We are looking in 2016-2017 - I believe it’s close to $1 billion in deductible and refundable credits. I certainly hope we have the data that we need, the analysis that we need. It’s over $1 billion a year potentially. I don’t think anyone wants to do anything that would jeopardize oil and gas development and production. I just think we need to see if we are getting our money’s worth just like any business would do. Is this an investment that is paying off for us? I just never felt like we had an answer to that question. If we need to hire a few consultants or hire a few people in the Department of Natural Resources, then we need to do that.

It will definitely be a busy six months coming up between LNG, oil and gas credits, second session is always busier than the first session.

Petroleum News: If changes are brought forth should this come in a bill from the executive branch or the Legislature, perhaps each should draft something?

Wielechowski: What I’ve seen over the years is when you have a piece of legislation like oil taxes, you tend to need the weight of the administration behind it. We simply don’t have the expertise and the analytical ability at the legislative level. There are whole departments - like the Department of Natural Resources and Department of Revenue - whose job it is to study what’s in our best interest, so I think it needs to come from the administration.

Petroleum News: Would you like to see this right away at the beginning of the session?

Wielechowski: I think it would be good to have it at the beginning of session. Anytime you go about trying to change financials of the oil and gas industry, whether it’s tax credits, or incentives or taxes, it can be very contentious. It usually is. The longer we have to digest it, to understand it, the better it would be for everyone.

Petroleum News: Looking ahead, should there be a special session, what do you believe the priorities should be?

Wielechowski: If we have a special session on the gas line, what that would probably likely mean is the executive branch has come to an agreement with the producers on a deal to build an LNG plant, a contract to move forward to the next level: FEED. And so I would want to analyze the terms of the contract, look at it very closely and make sure it’s in the best interest of the people of Alaska.

I’d want to make sure it’s providing gas to Alaskans. Make sure it’s providing a reasonable fiscal structure that’s fair to Alaskans, that’s fair to the industry. Make sure to the greatest extent possible it’s getting Alaskans hired. Making sure we have a system that provides for future smaller independents to put their gas in the line and make sure it’s going to include expansion so we can put more gas in the line at reasonable costs.

Petroleum News: The governor has noted several times that a constitutional amendment could be necessary to get tax terms locked in for this project. Do you believe you should go to the voters on this?

Wielechowski: I would want to see what the exact phrasing of the constitutional amendment is. I would have some concern over this. Over the years we’ve heard from consultants that we wouldn’t have to lock in more than 10 years and we can do that by contract. I would want to hear the analysis from the industry and the executive branch on why they would need a constitutional amendment. I would go into this with a high degree of skepticism only because of what I’ve heard for so many years that we don’t need it and a simple contract would do it. But I’m open to hearing what needs to happen to make the gas line a viable project.

Petroleum News: The other thing the governor has discussed openly is the prospect of buying out TransCanada. How do you feel about that?

Wielechowski: Again, I want to hear an analysis that’s done by the administration on whether it’s in the state’s best interest to do that. It’s not an insignificant amount of money. It’s about $108 million, I believe. If the cost-benefit analysis of doing that is in the state’s best interest, then I’m open to hearing more about it. I was concerned during SB 138 when it was passed, that this deal was put into place to keep TransCanada part of the deal. I thought that would have been time to sever the cord. Now that they are part of the deal, there is a potential payoff. I just need to hear more about it from the administration - why it’s in our best interest to do that financially. I was concerned with the terms of SB 138 about the whole structure of the deal because it seemed to me that Alaska was - as our legislative attorney described it - the caboose at the end of the train. We weren’t going to have a whole lot of control over how the LNG project would develop, over how the pipeline would be built. So I’m interested in hearing how this deal with TransCanada would give the state more control over our destiny.

Petroleum News: Now if the state had control over more of the project, can the state effectively be an owner and a regulator?

Wielechowski: That’s a good question. That’s one of the concerns many people have had. It would in some ways be a sea change in the way we think of oil and gas and the state’s involvement. I think there are certainly benefits with the state and the industry having alignment economically in the ways that you can with the state being a partner with the industry. I’m certainly willing to hear more about that. I’ve heard concerns over the years about the state being in that position. I’ve heard pros and cons on that. I haven’t made up my mind yet whether or not it’s in the state’s best interest.

Petroleum News: Last week you had a visit from the president. What were your impressions with his visit and mission?

Wielechowski: I thought it was a very productive visit. I was glad he came. He seemed genuinely interested in what was happening here in the state. I thought it was a productive visit. A lot of people didn’t really have any idea what to expect as far as oil and gas goes. We are a pro development state. There were concerns about him taking positions that would be seen as contrary to that. I was happy about that. I know many other Alaskans were as well.

Petroleum News: Do you think he will support an approach that strikes a balance between economic development and climate change awareness?

Wielechowski: I’ve been heartened over the years by some of his actions to open up the outer continental shelf and CD-5. I’ve been disappointed by some of his actions. So it’s hard to say exactly where things will shake out. I think he has a better understanding of Alaska. The opportunity for the governor to speak with him and for him to go out and speak with Alaskans - I think that was a good thing for him. I’m hoping that it helps us.