Parnell working for more production

Governor discusses benefits he expects for Alaskans from oil tax change, emphasizes long-term benefits for residents of state

Steve Quinn

For Petroleum News

Gov. Sean Parnell didn’t rest on his laurels after getting the Legislature’s approval for oil tax changes. Since the session ended, Parnell’s been busy learning firsthand about other tax regimes with visits to Scotland and Norway; traveling to Houston to build a resource development consensus among coastal states governors and meeting with industry representatives; and renewing the state’s push toward developing the Arctic National Wildlife Refuge 1002 Area.

Still, the debate over Senate Bill 21 — the oil tax bill signed last month by Parnell — rages on. A signature collection effort is under way to get a referendum on the ballot to overturn SB 21.

Meanwhile oil industry executives are telling state lawmakers and Wall Street investors that the tax reductions will lead to more investment with an eye on stemming the throughput decline in the trans-Alaska oil pipeline.

Parnell spoke with Petroleum News about what he’s learned and about Alaska’s future in resource development.

Petroleum News: You’ve worked at changing the tax regime for the better part of three years. Was there a sense of relief when you signed SB 21?

Parnell: I would describe it as more of a sense of hope and optimism now for Alaskans and opportunity for them in the future. It truly is a milestone and it will create new investment, new jobs, new production and new opportunities for everyone in this state. It just fueled more optimism about being in Alaska and our future here.

Petroleum News: Let’s break SB 21 down to your four guiding principles, starting with this being fair to Alaskans. How does it meet that standard?

Parnell: The principles are actually interlinked and some of the provisions of the bill actually affect others. How is it fair to Alaskans? One, it does not put our treasury at risk at low oil prices like ACES did with capital tax credits. Secondly, it puts us back in the game of competitiveness for industry investment that creates more jobs here. Those are two primary ways. Third, it looks out for the long-term of Alaskans, not just short-term with cash gains. In other words it looks over the lifespan of a field and creates more production for future generations than the current system, which we know guarantees declining production.

Petroleum News: Like you said, the principles are interlinked. You talked about encourages new production. Can you talk about that a little more?

Parnell: Frankly it was really well said in the editorial piece by Rick Boyles in the News Miner. The bill is focused on new production in a number of ways. One is you get the tax benefits of the bill when you produce new oil. I think of the gross revenue exclusion provisions of the bill, which says if you produce new oil from a new field or from an older field not currently being produced, you get the benefit of that gross revenue exclusion. The loss carry forwards are against new production so you don’t get that benefit unless you have new production. Through a number of mechanisms of the bill, the focus is on new production. Otherwise existing production gets taxed at 35 percent, a higher rate than today under ACES.

Petroleum News: Another provision is you wanted something simple and focused on restoring balance. How do you believe you achieved that?

Parnell: Primarily through the elimination of those complex progressivity calculations. Those progressivity calculations have to be made by month, by field, by company. The calculation with the straight-up 35 percent tax rate is a much more simple calculation. Quite frankly, it restored balance through that same guiding principle. The balance is we are taking less at the high end of oil prices and we’re taking more at the low end of oil prices. On the high end, we are making our fields more competitive. On the low end, we’re not taking a greater risk with the people’s money in the treasury with the new system by eliminating capital tax credits.

Petroleum News: The industry has always said regardless of what the tax regime you put forward, they want it to last, they want it to be durable. That’s your fourth guiding principle. How do you feel this can be durable?

Parnell: It’s durable because it’s not designed for the short-term; it’s designed for the long-term. It’s a stable system across the long term by the very nature of the 35 percent tax rate with the few adjustments that are allowed for new production. Companies are better able to calculate returns on a field across the 35- 40- or 50-year life of a field. By doing that we have really put forth a model for the long term, not a short -term cash grab that leaves our children and grandchildren with their oil locked into the ground.

Petroleum News: What was the problem with ACES moving forward?

Parnell: In hindsight, most of the modeling for ACES was done between $60 and $80 a barrel. Very little attention was given to what progressivity would do to Alaska’s competitiveness, investment loss and job loss because back when ACES was passed it wasn’t contemplated that Alaska would be in a sustained $100-plus environment.

What became clear over time was that in these higher-priced environments, other jurisdictions like North Dakota and Texas, both shale oil and conventional plays were seeing increased investment and production was turning upward in those states. Our investment here remained flat. It was primarily investment in maintenance and maintaining the lighter oil flow from existing fields. It was becoming more and more clear that this was a problem.

The second thing that became more clear was the impact of those tax credits on the treasury and how those capital credits were not geared toward new production and it basically allowed the producers to game our system for the lowest tax rate. It became more clear over time they could take a capital tax credit against almost any capital expenditure on the North Slope whether or not it related to production. We wanted to correct that and make sure the new tax regime was focused on new production and the incentives under the new tax regime were focused on new production.

Petroleum News: There is never a guarantee with new legislation. With that in mind, what is the potential for SB 21?

Parnell: I view this as a much bigger package of economic growth potential than just the More Alaska Production Act. We passed that act and we’ve been working on permitting reform legislation. We lowered spending by $1.1 billion to $1.2 billion. We set a five-year fiscal plan of lower spending. So when you have combination of a competitive tax environment, a regulatory environment that works in stark contrast to the federal system and when you have state spending under control and companies know that the state won’t be looking to them anytime soon to jack up taxes to cover short falls, that legislative-administration combination creates a climate for investment here.

What that means is new money will move here into those fields and create jobs and new production for Alaskans. That’s the bigger picture. Looking across the life of the fields, I really do look for more investment. It’s already been evidenced by the announcements made. If you speak to the people in the trenches from these companies in Alaska — not just the executives, but the people in the trenches — they will tell you money has already moved into projects that have been shelved before. They are now dusting them off and giving them another look.

When a company here makes an announcement of bringing a new rig to Kuparuk — that was just one of I think three new projects the company announced — but that one new rig can conceivably drill 20 to 25 new wells on the North Slope. That’s a lot more work, a lot more production that will come online the next 18 months to two years. So I’m optimistic that the body of changes — the comprehensive changes we’ve made with the tax regime, with the regulatory regime, with getting government spending under control — I’m very optimist that not only we will benefit but our kids and grandkids will as well.

(“I think it certainly is going to help. The big issue with Alaska fiscal regime was it wasn’t competitive compared to other parts of the world especially at high prices so the primary change that was made was to remove the progressivity from the tax, the severance tax there.

“So it is definitely a move in the right direction so we are going through a process of evaluating how we want to adjust our capital program to — I would like to see us adjust the capital program so that we can completely arrest the decline in production in Alaska or even turn it around.”)

It’s one thing for executives to say these words to the Legislature in a committee hearing, but what does it tell you when it’s said to Wall Street?

Parnell: It’s huge. In fact I went to Wall Street and I talked to the three ratings agencies — Moody’s, Fitch, Standard & Poor’s — and I also spoke to a few financial institutions there about the state of Alaska’s finances. They’ve all given Alaska AAA (and commensurate) bond ratings. They still will list risks to that AAA bond rating and one of those risks was declining production. When they had a chance to review the final legislation — SB 21 — with me and our Department of Revenue people, they all made favorable comments about how the state was proactively addressing the risk of declining production and doing it at a time where these other efforts were made to restrain state spending. I’m very optimistic that these changes mean economic growth and opportunity for Alaskans.

Petroleum News: Let’s address some of the criticisms. One was that SB 21 was a giveaway, especially at the established fields.

Parnell: I think that’s just false. I keep seeing these reports in the media about these dollar amounts somehow leaving. I’ve got to tell you when people use a large-dollar amount they are making some assumptions that just will not bear out. One of those assumptions when they say billions is going to be given away is that no new production will result — at all — ever. They also assume the price of oil is going to remain high. A few days ago it was $104. When we were in New York, we had charts of $100 a barrel. It really depends on what your assumption is on price and production. The bottom line is if the price of oil keeps softening the way it has been and we dip down below $100 and $95, pretty soon, these people who are critics are going to be believers because we will actually be collecting more in tax revenue under the More Alaska Production Act than we would under ACES.

Secondly, and perhaps more importantly, because we are more competitive for new investment, new production will come. Just the one announcement of the new rig in Kuparuk — assuming that follows through — there will be new production. Those are known reserves they are going after.

They (critics) are just making false arguments as scare tactics to try to build their signature drive rather than focusing on what’s good for Alaska in the long term.

Petroleum News: Speaking of the signatures, are you concerned that a referendum could find its way on the ballot?

Parnell: Certainly a referendum on the ballot could chill investment into the state if people thought this had legs. We don’t want people to take a wait-and-see approach in Alaska. We want them investing now; we want new production as soon as possible and we want those jobs for Alaskans. The signature gatherers, now in my way of thinking, are really potentially hurting Alaskans rather than helping. It needs to be said: the signature gatherers potentially are delaying opportunity for Alaskans.

Petroleum News: The other significant criticism is that there are too many risks associated with SB 21.

Parnell: The riskiest course would be to continue on the path of declining production and taxing companies higher than almost anywhere else and thinking we can get away with it. We are guaranteed decline under the current system. We have five years of demonstrated evidence of that. It really is time to make that change.

Petroleum News: You mentioned your trip to New York City, but prior to that you went to Scotland and Norway. You had noted in the past that you learned in Scotland how tax regime change can affect new investment. Can you discuss that?

Parnell: The field I looked at was in the North Sea. The purpose of the trip was to look at the tax regimes there and look at the changes, particularly on the UK side. In both places I met with industry and government leaders. In Scotland, I met with BP, oil field service contractors as well as government officials and port authority people. The purpose of the trip really was to look at the tax regimes there and look at the changes, particularly on the UK side the last five years, and how investment and economic growth has been impacted. On the UK side the North Sea is like our Prudhoe Bay and Kuparuk. The brown fields are their legacy fields that have been producing for 40 years.

They made significant improvements for those older fields about five years ago. Investment was pouring into the North Sea. In 2011, a new prime minister and government made a grab for more tax dollars to pull more in, and it froze billions in investment just immediately — virtually overnight.

The government realized what had happened, and within a just couple of months, negotiated new and approved tax rates to restore some of what was taken and to give more predictability going forward, and investment returned.

If you look at the UK side of the North Sea, those significant tax benefits that were given, resulted in (a projected average five-fold production increase the last three years). There was a Financial Times article on investment in the North Sea (rising more than $2.5 billion).

My experience there was I saw the tax changes result in significant new investment across a five-year spend, significant new numbers of jobs available, significant growth in production from the old fields and significantly more opportunity, not just from the oil sector but from all sectors.

I tell a story about standing on one of those supply ships in port. You’ve got to understand, this is a place now with the tax changes in place — Aberdeen has 1 percent unemployment. They are just going like gangbusters and, the port and harbor that supplies the platforms in the North Sea is alive with activity. I went onboard a supply ship while being hosted by one of the oilfield service contractors and watched containers being flung on the supply ship before they were taken out to the platforms. They contained things that you would think, like tools and drilling mud.

But one of the containers was open at the top of the ship, and in it were groceries. It gave me that picture of the oil industry not only being good for people who work for that industry directly, but it’s very good for the mom and pops: grocers; employees of grocery stores; bookkeepers; equipment operators; mechanics. The rising tide truly does lift all boats there. That is really my dream for Alaska, that we will experience more economic growth and activity by making our tax regime more competitive.

Petroleum News: You also went to Houston since the session.

Parnell: Part of going to Houston and part of going to Scotland was to meet with executives of the producers to tell them Alaska has stepped up and we expect that the producers and the companies will step up and invest in Alaska. But in Houston, I also met with the OCS governor’s coalition. It’s a coalition of eight coastal state governors of which I’m chairman this year and our goal is having a unified effort, speaking with one voice when it comes to issues between the federal government and the states.

For example we all agreed all states ought to be treated equitably for revenue sharing purposes. Alaska doesn’t share in offshore federal lease revenues like the four Gulf states do. Neither does Virginia or North Carolina so we have a unified voice around equitable revenue sharing on offshore leases. We have a unified voice on federal offshore permitting decisions to be more timely, more consistent.

Sen. Murkowski has been very good at working this issue with Congress. She found out the Northeast Atlantic states, those governors, most of whom are Democratic, are interested in wind energy off their shores rather than oil. They are also seeing how they can derive revenue for their states from wind sources, so they are starting to become more sympathetic to revenue sharing, not only for their own budgetary reasons, but they can see more benefit for their people, too. It makes sense and I commend her for doing it. It’s going to take a bipartisan approach and that’s the way to build it and get equitable revenue sharing for the states.

Petroleum News: You connected with folks in Washington, D.C., touting a new approach to exploring ANWR. Is it time to revisit it with fresh eyes?

Parnell: The purpose was to raise ANWR’s profile again. It represents economic potential for Alaska. The underpinning in terms of what prompted our state’s evaluation and proposal for ANWR was our understanding is that the Interior will come out with a comprehensive conservation plan for ANWR and the coastal plain. We submitted comments to consider the oil and gas potential in ANWR before they take anymore conservation measures there. We don’t believe we’re being heard on that. We think the federal government would want to have all the information of what resources and economic potential the American people either have an opportunity for or will sacrifice, depending upon the policies set by the federal government. So we’ve offered to share in exploration costs of ANWR with the federal government and the private sector parties. It’s actually money the federal government should be spending, but we understand

Next week: Parnell on natural gas.