Gara: Walker’s tax credit vetoes prudent

Anchorage Democrat House Finance Committee veteran anxious to see progress on Alaska LNG project, says current plan needs tweaking

STEVE QUINN

For Petroleum News

House Rep. Les Gara arrived in the Capitol halls in 2003, and has spent most of his time on the House Finance Committee. He’s seen several major tax rewrites and some starkly different plans to advance a natural gas line plan to tap into the North Slope’s vast reserves.

The Anchorage Democrat shared his thoughts on where things stand with the state’s resource development prospects, including the pipeline that would deliver natural gas to a liquefied natural gas export facility.

Petroleum News: During the budget debates you were pretty steadfast on bringing the oil tax credits into the budget debate. Ultimately, it played a role in the governor’s final vetoes. Were you surprised?

Gara: Hopefully industry understands reality. Some of these investors are from outside of Alaska. We’ll always pay the tax credits that we owe. With the $4.5 billion deficit, we’ve got to level out the payments. There is a statute that puts a minimum on what the state us obligated to pay. Gov. Walker is still paying more than $400 million more than we are required to and I’m sure he’ll still keep paying at that level. Applications come in - first come first paid.

If we run out of money this fiscal year, the folks at the end of the line will have to wait an extra two or three months. It shouldn’t be a big burden. Not when schools are being cut and seniors are facing cuts. It’s a pretty minimal burden for an oil company. Hopefully the outside investors will have enough familiarity with the law to understand that.

Petroleum News: Do you want to see whether these credits are working as people hoped when you return next session?

Gara: It’s always worth it to know whether the credits are working. You don’t want to give a company hundreds of millions of dollars for something that they would have done without the state money. That’s when tax credits fail. You want to make sure the tax credits are encouraging new development that wouldn’t have happened without the tax credits otherwise you’re just giving away money. It’s worth it always to take a look at how the tax credit system is working and analyze whether the development would have happened anyway. We probably need to narrow the definition a little bit. We need to take a look at our oil tax system to make sure it’s fair to industry and it’s fair to the state. Right now I think the state is getting the short end of it.

Petroleum News: If any of these credits come under ACES, you supported those in 2007.

Gara: I voted for ACES and I thought it was a good deal. The state brought in a whole bunch of new players who are still developing in Alaska. They have incentive to say they are here because of the new oil tax law, but they came here under ACES. We are still seeing development from companies who came up here under ACES. That’s just the truth about it. As somebody who voted for ACES, you also still have to see if it needs to be tweaked. I would have changed ACES some, but not given away the farm as some did when they passed SB 21 in 2013.

That bill says all fields after 2002 get the state a near zero or a negative net present value in production taxes. We can’t live on a negative net present value on a production tax. That was a major giveaway that needs to be looked at.

Petroleum News: The governor says this is a starting point for review. Do you see it that way, too?

Gara: The governor is pro development. I’m pro development. But there is a difference between pro development with the governor and former great governors like Wally Hickel and Jay Hammond. They were all pro development, but they wanted to make sure the state got its fair share. We need to fund schools and roads and energy projects. If we just give away our oil with a production tax that results in near zero or negative net present value, then the state is managing its oil resource way worse than any private company would manage its assets. No company invests in things that don’t bring a positive net present value.

Petroleum News: Speaking of taxes and the governors, Gov. Walker sent a letter to the Resources committees that was made public. One of the things he noted is that he believes the state would be willing to take a 25-year term on fiscal stability and believes a state constitutional amendment is necessary. How do you feel about a constitutional amendment for the gas taxes?

Gara: I’m going to have to go into this with my mind open. I don’t necessarily like tying the rate down because the rate that Gov. Parnell got passed is among the lowest in the world. If it were a rate that was much more fair, I would consider locking it in. If you’ve got a flat tax and all of the sudden the price went up to $30 an mcf, I think it would be a loser if you didn’t have some sort of clause if you didn’t allow the tax to move a little bit. If he was going to promise a locked-in tax rate, I would hope it would be a better tax rate than what Gov. Parnell proposed.

Petroleum News: Gov. Walker also said he would not include oil for the locked-in rate. Do you prefer a separation if there is to be an amendment?

Gara: Yeah. I’m going to have to consider the whole locked-in rate thing on gas. I don’t think you ever want to ever lock in your oil taxes. When Gov. Murkowski tried to do that in early 2000s, he would have locked in oil taxes that would have cost us probably over $10 billion in lost revenue. Thank God we didn’t go with his locked-in tax rate and we changed the law and built a surplus, which is why the state can survive fiscally right now.

Petroleum News: Do you think the public would have an appetite for this kind of amendment if it were just on natural gas?

Gara: I think the public, if it saw a fair tax rate on natural gas and saw a fair project for the state of Alaska and saw companies willing to engage in Alaska hire, saw gas prices and gas production for in-state use and export, I think their minds would be open. This is a long-term dream for this state so I think everybody wants to move it forward. You just want to make sure it’s fair terms.

Petroleum News: Another issue being discussed is a 42-inch line with expansion capabilities versus a 48-inch line. The governor has said he wants a 48-inch line. What are your thoughts?

Gara: I agree with the governor on that. You want the line to be bigger because it produces cheaper natural gas. You want the bigger line because that allows for more room for natural gas for independent producers. The smaller the line the more it gets monopolized by the Big 3 oil companies. The bigger the line, the better chance we have of attracting independent explorers.

Petroleum News: So what would be wrong with a 42-inch line with expansion capabilities?

Gara: The first round of expansions tend to be affordable but the second round of expansion tends to be so expensive that nobody will be able to do it, so if you start out with a 48-inch line, you’d have a much greater chance of having competition and vibrant, independent explorers up on the North Slope. If you start out with the smaller line, you have a much greater chance that companies other than the Big 3 won’t be able to afford to expand the pipeline.

Petroleum News: The governor also noted possible routes, east versus west Cook Inlet. The tentative preferred route is the western side. The governor would prefer the eastern route. Do you have a preference?

Gara: You know, I think sometimes legislators get parochial on where the line goes. I want the route to be the one that serves the people of Alaska the best and provides the best export business for the state. The route shouldn’t be based on where legislators want it for parochial reasons; it should be based on what makes it the cheapest, most effective natural gas project as possible.

Petroleum News: So given all of this, what would you like to see done between now and year’s end, particular if there is a special session?

Gara: I hope the governor is able to fix as many of what I consider flaws in Gov. Parnell’s gas line plan as possible. I’m hoping by the end of the year there are market players who are wanting to move the gas line forward instead of companies who for many years done some things to get in the way of the project.

Petroleum News: What would some of those flaws be?

Gara: I hope the tax rate gets looked at again. If you’re going to consider locking it in, it needs to be fair to the people of the state of Alaska. There is some question about the way the law is presently structured whether independents will be able to get their gas into a gas line. You want independents to be part of the project.

Petroleum News: You mentioned the tax rate, which is really a royalty in kind. If the price goes up, don’t we benefit by the price itself with the state’s gas in the market?

Gara: It depends on how much TransCanada absorbs if they remain on the project. Royalty in kind can be a good idea or a bad idea. With royalty in kind, you are stuck for paying for that certain amount of gas, even if you don’t have that gas. That’s a big risk to the state. I hope the governor is looking at the royalty in kind concept. It’s something that places a big, big risk on the people of Alaska.

Petroleum News: The governor has also said in an address to AOGA that he would like a larger share of the line, which could mean buying out TransCanada. What are your thoughts on that?

Gara: I would be interested in a larger share of the line if it penciled out. Certainly gas line transportation is a profitable business if it’s done right and it might serve the state well to have a larger share of the line but we also need to look at our finances, look at our revenue, look at our budget and look and look to see what the benefits are depending on what the proposal is. I certainly would be open to a larger share of the line.

Petroleum News: What about TransCanada? Do you have any preference in their involvement? Building pipelines is its specialty.

Gara: TransCanada has pluses and minuses. They are a very good gas line construction company. They probably have more experience in North America in building a large gas pipeline. On the construction part, they would be one of the good ones. In terms of what share they get under the Parnell proposal for this gas line, I think the governor may have given away too much to TransCanada. Certainly we offered amendments to try and minimize what we thought were some of the giveaways. This in the governor’s hands right now and the governor has got to figure out what serves, in his mind, the state the best way and then we get to take a look at it.

Petroleum News: Even with all the gas line talk, there is new exploration about to take place with Shell heading to the Arctic. There was pushback in Seattle not just from environmentalists but those in elected offices at the state and local levels. What are your thoughts on that, politicians weighing in on something happening up here?

Gara: In the end, the project has to be looked at as to whether or not it’s safe. Do you have a way to clean up an oil spill on the North Slope? If you do, it makes the project more attractive than if you don’t. I don’t think politics should get involved. I think science and engineering should get involved.

And I think Congress needs to change the law that essentially says the state gets almost no financial benefit from offshore oil. We should get the same deal that other coast states get for oil beyond the three- and six- mile limit.

Petroleum News: As far as a governor and a mayor and city council getting involved in an agreement that its own entity – the port – had already signed. Is that meddling in another state’s affairs or defending their own interests?

Gara: Politicians take positions that sometimes are done for votes rather than for policy. An assembly from another state is going to have no impact on us. They are playing to the voters. Sometimes the Alaska Legislature does stuff like that. I’ve opposed bills before where clearly they are unconstitutional. We assert we are going to take all federal land for the state of Alaska. Or we assert that federal gun laws have no application in the state of Alaska. Those are false assertions. Those are unconstitutional bills. The state of Alaska does that stuff once in a while. They are playing to voters so I guess politicians aren’t above playing to voters sometimes.

Petroleum News: Are you confident Shell is ready to go back up north?

Gara: Shell has a record of subpar performance on its offshore development work in Alaska. They need to show the world they can get their act together. They haven’t done the greatest job at it and that doesn’t help the project at all. I hope they do safe, responsible development in Alaska. They certainly have gotten off to a rocky start. I’m not a cheerleader. I don’t want any company to do something because they are a company. I want a company to do something because they are going to do it responsibly.

Petroleum News: Would this be a make or break year for them?

Gara: I’m not one to draw up lines in the sand. I do hope the work they do this year is done a lot more responsibly than it was in the past.

Petroleum News: Getting back to our conversation on goals for the rest of the year, is there anything particular you would like to see accomplished in a special session or do you not have a hard and fast wish for the special session?

Gara: First and foremost there are some people who are trying to have an early special session on the gas line. The more time pressure you put on the governor, the worst deal the state of Alaska gets. I think the governor needs time to put together the best deal possible and you can’t come up with artificial dates to make that happen.

The best deal will come together when the governor works things though with interested parties. In my mind, I don’t have a specific date that I think a special session has to happen. The proposal should come to the Legislature once the governor has put it together as strongly as possible and in the best interest to the state of Alaska. That’s a policy issue. That’s not an issue of picking an arbitrary date on a calendar.

Petroleum News: So if the governor is not able to call a special session this fall, what would your take be on that?

Gara: If the governor weren’t able to call a special session this fall, I hope that we are still moving with the gas line project, but he should only call a special session when there is something for the Legislature to do and when he’s come up with a proposal that moves the gas line forward with a deal that’s in the state’s best interest.

That’s all I want to hear. It doesn’t matter what date that happens on. Whether it’s Oct. 1, Nov. 1 or we wait until the regular session because it serves the state’s interest the best. That’s what’s more important to me than picking a date.

Petroleum News: You’ve noted concerns about the project. Is there anything about the project that gives you optimism that the state is moving forward?

Gara: You know it’s hard for a legislator who isn’t sitting inside Exxon, BP and Conoco’s board rooms to say things definitively. We’d like to pretend that we know exactly what’s happening inside those board rooms. The rumor on the street is there is more alignment than in the past. They all have their own interests. I’m not naïve enough to think we can do anything to change the way Exxon, Conoco and BP look at the project. We can set up rules that protect the state. Those are things we can do. We can set up rules to try to move the state forward. But we can’t set up rules for what’s said inside those board rooms.

Petroleum News: It seems to be more than rumors because we’re learning in hearings from the state, TransCanada and the producers more than we did when we heard it during the Murkowski administration.

Gara: I’m encouraged that we are hearing it; of course, you don’t know whether it’s true until it happens. It’s silly for a legislator to pretend they know what’s going on inside a board room of a major corporation.