Stedman: SB 21 moves too much cash

Sitka Republican argues legacy Slope fields economic without tax change; says HB 4 a good step, argues it is time to dump AGIA

Steve Quinn

For Petroleum News

Sen. Bert Stedman advocated for tax reform, just not Senate Bill 21, which Gov. Sean Parnell made official on May 21.

Stedman is a holdover from the old guard — meaning members of the Senate’s majority caucus from the 2011-12 Legislature — who wanted a change, but he believes the formula approved this session is the wrong one.

Stedman, a Sitka Republican, will have a busy interim serving as chairman for Energy Council.

After lawmakers adjourned, Stedman spoke with Petroleum News, offering thoughts on resource development legislation and how Energy Council’s work this year connects to the state’s efforts to bring oil and gas to market.

Petroleum News: Why didn’t you support SB 21 on final passage or on the concurrence vote?

Stedman: The reason I don’t support the bill is that it moves too much money in the legacy fields in already economic areas. I think we are within a reasonable range in the uneconomic regions, the outlaying areas. We are on the low end of the acceptable range, but we are within the range. My concern is Prudhoe and Kuparuk where the oil is and the cash margins are, and the hurdle rates are already met. We’re moving too much cash — at $100, $110 and $120s. You can see it in 2012 numbers. If you ran this tax bill through 2012 in Prudhoe and Kuparuk, it would be $1.7 billion. It’s not going to be exact, but if you get the direction and the magnitude, both of them tell me we are moving too much net cash that doesn’t need to be moved. I understand the interest of all three parties involved: the federal government, the industry and the state, the sovereign — all like net cash. I understand that.

Petroleum News: What would you have recommended as far as a formula to make Alaska competitive?

Stedman: Alaska is competitive. There are areas where we’re at a disadvantage. To say Alaska is not competitive has more to do with politics than it does with finance. I’m talking about the legacy fields, not areas where they can’t meet their hurdle rates in their analysis. We all recognize those areas within ACES (Alaska’s Clear and Equitable Share) are dysfunctional. They don’t meet their rates. Part of the problem is the excessive slope of progressivity or the marginal increase in government share at high oil prices. There was a lot of leverage off of that issue to move a lot of cash that didn’t have to be moved. If the initiative or referendum process that’s under way to roll it back — time will tell, I don’t know — but clearly there is some interest in having the public vote on it. It will be interesting to see how that’s rolled out.

You have to take the tax issue and parse it out. You’ve got your legacy fields. You’ve got your new areas. And you need to fix what’s broken. My concern is they moved too much cash in areas that were not broken.

And there is a lack of analysis as far as how many barrels will be needed and over what timeframe to compensate for that. I will be very surprised if they can get more out of the basin off the normal historic decline curve with tax policy.

In other words, when we are pumping 600,000 barrels a day off state lands, then this is a success: or 580,000; or 575,000 — the high five hundreds.

Petroleum News: Is there anything you would have done that would have addressed boosting production? What are some of your alternatives?

Stedman: The overall structure of the bill is good. The GRE or gross revenue exclusion — you can name it anything you want — but that mechanism works. I like the idea of having some allowance tied to production versus capital expenditures. I think that is good. I’m not excited about the 10 percent GRE that can be secured if you have royalties above 12.5. I think that’s a little excessive. Don’t mix up the issue of the bill versus the cash cow. Fix the broken parts of the structure, but you better keep your eye on your cash cow or your cash cow is going to be sitting in somebody else’s piggy bank. The citizens of the state own that oil, and it’s a finite resource in an internationally driven economy and we should be compensated on an international scale. That’s my fundamental concern for the bill itself. And if I was on the other side of the table, I would want as much out of Prudhoe and Kuparuk as I could get. That’s just business.

But when you have a 30-year-old field and depreciated assets, one of the largest conventional oil fields in America, one of the top elephant fields in the world, that’s a very valuable resource. I think it’s underestimated, in my opinion, the value that we’re sitting on and its opportunity.

Petroleum News: Switching to House Bill 4. You did vote for that. Was it an endorsement of HB 4 or an indictment on AGIA (Alaska Gasline Inducement Act)?

Stedman: I would say it’s an endorsement of HB 4. I don’t think AGIA worked. I didn’t support the proposal, the licensing. This is in some respects, AGIA light, but in other respects it’s the removal of the AGIA amendments. I don’t think it’s going to go forward and get built; I don’t think it’s going to get us a project. I personally believe the Big Three are going to deliver an in-state gas project. I think it’s in the money. You look at the timeframe our basin has been open, you look at the economics in the Pacific for energy with Korea and Japan needing an energy supply of natural gas, and the potential in Hawaii with the ability of no choke points in the delivery of this across the Pacific where the Navy can protect our shipping lanes. I think the time has arrived where this project is going to move forward.

Switching back to HB 4, the work done in HB 4 for a little in-state line, which is not really a little project — it’s a huge mega project and it’s a big line by itself — a lot of that won’t be wasted money. It will be used and this will hopefully push the construction date of a main gas line forward a year. And if by chance, the big export line does not work, then we have a framework and we can have a discussion to see if we want to take this forward and bring that Arctic gas to Southcentral and feed Conoco’s plants in Nikiski. If I was a betting man, and if we would have an in-state gas line coming, it’s going to be part of the big line.

Stedman: Working as far as a vacuum out of the treasury for more than $200 million. I’m a not a fan of AGIA as you can tell. I haven’t really looked at AGIA this winter or spring. We should fold that project up, move away from it and move on. It was a bad economic policy to try to dictate to the industry to move a project forward. It was ill-conceived, ill-executed and a waste of money. I don’t know how else to put it. HB 4 is a hell of an improvement over AGIA. I didn’t participate a lot in HB 4. I’ve got confidence in (co-sponsor House Rep. Mike) Hawker and his support staff. When that project finally evolved to the point where it was coming to the floor of the Senate — even as it was in my opinion a virtual Railbelt project — there is various language in there for them to look at coastal Alaska and rural Alaska. The main focus is get that gas from the North Slope to Nikiski and hook up as many people as we can along the way as well as we can. That’s the idea. But I want the bigger line. I think there is economics of scale and three big players who know how to do big projects. I think the state needs to be cautious and not to stick their fingers into the pie and muck it up.

Petroleum News: If a big line gets advanced during the interim, should there be a special session on fiscal terms?

Stedman: They already got the cash from SB 21. I don’t think we need to negotiate anymore, do we? The negotiations are done. The monetary value of the gas to the treasury will be interesting. I’d be surprised even on the big line. There will be some things to look at, like corporate income tax, property tax, tariffs. The value of the gas depends on the cost of the project and the market economics. It’s not going to be the cash cow like the oil line was — or is. But it all adds up. The industry always says a healthy oil business makes for a healthy gas business.

Petroleum News: What will you be doing during the interim as it relates to your position with Energy Council?

Stedman: I want to have a dialogue in North Dakota at Bismarck, bringing the Russians, Canadians and Americans together on shipping and emergency response. We’ll also talk about the Bakken and the impacts to the state of North Dakota — good or bad. As far the state goes, you’ve got the water, sewers and schools. You’ve got the basin economics and getting it out on rail and the chokepoints. In the fall, we’re going to Regina and take a look at some Saskatchewan issues dealing with carbon sequestration, enhanced oil recovery and a few things going on up there with a coal fired plant. We’ll continue our conversations with getting oil out of Alberta if Keystone XL is going forward by that time and the eastern delivery of oil out of Alberta by rail or by pipe. We’ll have a good idea of the western direction of the pipeline to the coast for both oil and gas. The initial conversation — hopefully to be legitimate consideration for the future — is rail extension out of Alberta to the Delta Junction to rail oil out of Alberta.

Petroleum News: Now how does it help Alaska to drill down these details out of North Dakota, Saskatchewan and Alberta? Why does it help the Legislature?

Stedman: You can take a look at it as a state — the sovereign right down to the district.

Let’s start with the state. We’ve got this elephant field called Prudhoe Bay sitting up there in the Arctic. We are in this global race for energy, production and distribution, so we have to know what’s going on. There is also these huge transitions from the conventional oil extraction to nonconventional, then you’ve got the natural gas economics and the dynamics of that industry pushing coal and oil and a whole litany of things from an environmental concern. So it does play in and it plays into our fiscal policy of our oil basin and a litany of things like that.

Then if you take this down to the district, well I represent a coastal district far away from the oil basin. We’re way out, then again we’re not. We have good jet traffic and airports; we’re close to the supply chain; we’re building a ship port in Ketchikan; we are in the infancy of offshore oil development in the Arctic, which 50 years from now will look like the Gulf of Mexico as far as economic activity.

That’s a huge support infrastructure that has to be put in place. They will need ship construction and maintenance, and you have to have facilities to do that. There is a potential in Ketchikan to facilitate Shell, and ConocoPhillips and Statoil and other firms that want to expand and go into the Arctic with ship construction and maintenance, and other related items that need building. So it has a statewide impact all the way down to the district.

For example, Energy Council has been down to Louisiana a few times, New Orleans, and down in Arkansas, looking at their energy issues. For example going to the shipyards in Louisiana, seeing the size and magnitude of what it takes to maintain these drill rigs. It makes it a lot easier when the industry folks sit at the table and they want to talk about a particular issue. They have some concept of the magnitude of what they are talking about. We get used to talking about billions of dollars in the treasury and projects like HB 4. That’s a huge project. What? Eight billion? We talk about it like it’s a little project.

We went to a pipe rolling facility with Energy Council where they rolled Keystone XL pipe. They had 500 miles of pipe stacked in the yard, 300 miles delivered. To sit there and look at 500 miles of pipe stacked in the yard gives you the idea of how much pipe it’s going to take going from Nikiski to North Slope and the magnitude of these projects.

I’ve been asked several times about this and we don’t at Energy Council get into a lot of fiscal policy discussions. Each state or each sovereign has their own policies so that’s not what we do. But there are a lot of other things we examine, so I think it’s been very useful.