Stedman: Alaska tax regime unstable

Sitka Republican who opposed ACES and SB 21 says state continually fails at establishing a tax program that reflects stability

By STEVE QUINN

For Petroleum News

Sen. Bert Stedman says he’s not surprised the Legislature is mired in yet another oil tax debate just three years after the Legislature passed SB 21 - the latest wholesale rewrite of a previous regime. While SB 130 and HB 247 are not rewrites, they still have consumed lawmakers and will until the final hours. Stedman, a Sitka Republican in his 13th year in office, says whatever gets accomplished this year still may not resolve any concerns Gov. Bill Walker or some lawmakers may still have. Stedman offered his assessment in a recent interview with Petroleum News.

Petroleum News: Why do you suppose the Legislature is back at the table discussing oil tax and tax credits?

Stedman: Because we have an unstable tax policy for one of the largest oil sovereigns on the planet. And we have one of the top 10 fields in North America yet we have an unstable tax structure. Clearly I don’t see how you can conclude it any other way. The industry has come in there time and time again and testified to the complexity and the difficulty in understanding, interpreting and communicating with the Legislature. It’s far too complex.

The complexity’s at such a magnitude that most of the legislators haven’t a clue what the outcome is going to be under given price scenarios. You can see that in the building the last several months. The discussion on the floor came up where people were shocked at the minimum floor is not a minimum floor. It’s a 4 percent wellhead value and the deductions go from there.

The NOL, the net operating losses, those of us with a business background we learn about it in our younger days and you get some practical education during your working life of the impacts of net operating losses. No business runs a net operating loss by choice that I’m aware of. So having a tax structure the policymakers don’t understand is problematic.

That is the root of why we are here today. When we changed tax structures under SB 21, it wasn’t stress tested. I have to hand it to the industry, well the majors. All three of them Exxon, BP and ConocoPhillips, especially the tax guys, they stress test stuff. Like with the gas line, they always talk about the low end and how we could make this thing work under difficult price environments. Then when you have a robust price environment that’s great.

But we didn’t do that with SB 21. It’s a basic error on our part, or oversight. Whatever you want to call it - lack of experience maybe. You’ve got 60 legislators of varying backgrounds. For whatever reason it wasn’t done.

I had hoped we would have learned our lesson with PPT (Petroleum Profits Tax). We came back on PPT when price changed and the expectations didn’t materialize. We had projections of price ranges and what was going to happen to the treasury and when that didn’t materialize, we came back to the table.

Petroleum News: Would you have hoped the same lesson would have been learned with ACES then because no one modeled it at the extreme high prices that followed and more money than expected on the high end went to the state.

Stedman: ACES (Alaska’s Clear and Equitable Share) got high jacked in my opinion. If the progressivity wasn’t jacked up as steep as it was in the political heat of the moment, we probably would still have that structure today. The upside was delivered to the state albeit a little too high but that was also to fund the downside exposure the state had. Now we have the downside exposure and no ability to fix it on the upside. That is going to be interesting when the public realizes that if we get into $90 and $100 a barrel oil, the first time period after that we will still have no severance tax because we’ve still got the NOLs to pay off.

Petroleum News: With that in mind, whatever comes out of SB 130 or HB 247, do you think you’ll be back here doing this again?

Stedman: Yes. We’ve got a system that is too complex and yields surprising results. We need to get it stabilized. As a case in point: Why have a 35 percent base tax that can never get paid that the public thinks is the base tax rate? Then you put a per-barrel sliding credit on it, and that drops the rate way down. Why not get rid of both of them and put in a flat rate. The GVR is another example of a shell game. It’s gross value reduction. You take the gross value calculation and throw it against the net to annihilate your tax. I think we are getting rid of some of that. If I had my way, you’d get rid of the whole damn thing. We need to get rid of the conceptual misrepresentation of our tax code. We need to clean it up. Even if the net cash flow stayed the same, both the state and the industry would be far better off. If they just sat down and took the net results of the structure today and cleaned it up and made it straightforward, we would be better off. Both sides of the table.

But how do you go home if you are an elected official if oil is $80 a barrel and you tell them that severance tax is zero or $85 a barrel or $90 a barrel. And severance tax collection is zero. Then you have to explain what an NOL, what it is and why there is a 35 percent credit on it. By the time you walk through all of that, they are not going to believe you. By the time you explain it, they are going to think it’s more finance trickery.

Petroleum News: Now, you foresaw - but didn’t exactly predict - the possibility of some of this happening two or three years ago.

Stedman: I had a bill to try to get the Legislature, particularly the Senate, to recognize that there is a problem with the floor, that their interpretation of what the floor is isn’t how the floor works. I got one hearing on it, which is great but it didn’t register. There may have been some political issues, too. Obviously I wasn’t a supporter of SB 21 and for good reason. It was because of the demons buried inside of the tax code that are coming out from time to time. The other was one was the NOLs, which I’ve been working on for a little over a year now.

Petroleum News: So why is it so difficult to find a sweet spot?

Stedman: That’s a good question. It’s difficult for the state of Alaska. It’s a young state, frankly not very sophisticated - virtually third world in a lot of respects. We don’t have the ability to have as much of an arm’s length transaction as what we would have if we were a federal jurisdiction or a country.

In other words, if you take Alaska being the only state that has subsurface rights and we compare it to countries that have that issue, they would have a little further arm’s length transaction with the industry. There are some advantages to complexity. It’s not always bad. The advantage of complexity is when you get more cash than the other guy. That’s the advantage. The disadvantage is when the other guy figures it out.

Petroleum News: Do you think this being an election year has anything to do with what will come out of this building?

Stedman: Oh yes. It always does. Everybody in the House runs every two years; and half of us every two years. To me it doesn’t. I have had my same position for quite some time. My arguments have been grounded in analytics that I can back up, no matter whether I’m meeting someone from (Dan) Seckers from Exxon, (Scott) Jepsen from Conoco or the BP folks.

We actually have good conversations when I sit down with their tax guy. Jepson’s not a tax guys but he knows this inside and out, and backward; he definitely knows the subject matter.

We have real good conversations on policy and what’s good and bad, but when you deviate out of that into the support industries, the quality of the conversation goes straight downhill. It’s all taxes are bad and no tax is good. It’s very difficult to talk about the complexities and the policy. Quite frankly it’s too dang complex.

There are a few guys in the industry you can have a reasonable conversation with guys like Dan Seckers from Exxon, we can sit at the table and go round and round. They are very straightforward. They answer it. My job is to know what to ask them. If you don’t know what to ask, the right question, you aren’t going to get the right answer.

Having a business background and a finance background makes it easier. We don’t digress into things like would a company run an NOL or net operating loss for some reason. Nobody runs NOLs. You’re forced into them and you want to get out of them. We don’t talk about that stuff. We might argue about the logistics and the policy of a 35 percent NOL carry forward, which equates to a statutory tax rate versus the effective rate which would be in the low 20s. In other words the 25 percent rate is much more applicable frankly than the 35.

Politically they got 35 delivered. If I were them, I would hang on to 35. From my side of the table I’d like to see it at 25. Those are the kind of conversations. Nobody is going to want to come and want to give up 35 percent NOL if you are the one who is receiving the cash. If you did, they would change you out and put someone else in that chair. It’s hundreds of millions. It’s not a little number.

Then the fairness issue: One of the things I enjoy in conversations with these tax guys is when we get down to the squareness of the deal so both sides are playing fair with each other: If we are dealing with interest carrying costs, if we’re dealing with tax rates, if we’re dealing with transparency. We’re in business together. It’s not like we are enemies. We are more like brothers who argue among themselves.

Petroleum News: Do you feel like the industry at least the majors and maybe some of the Cook Inlet operators are being straight with you?

Stedman: Yes. That doesn’t mean I agree with all of their positions. I’ll take this one step further. If I have a conceptual challenge, a complexity or something doesn’t add up, if I’m getting a different answer, if it seems odd and I don’t understand it, I’ll go to Revenue and ask them. Or I’ll ask one of the major’s tax guys. They have never in the 13 years I’ve been here ever intentionally misled me that I know of, even looking back. You can possibly mislead a guy once in a while, but they will figure it out in the end eventually if they stick around long enough. They might not agree with a position, but the mechanics we often agree on.

You know I think they get a bad rap in the public, particularly the majors. Anything that goes wrong in this state, I swear to God, they blame it on the majors. If it rains almost they blame it on the majors.

It’s unfortunate because they don’t give me misinformation. I’m more comfortable talking to them instead of the support groups. That’s where you get into some problems. A lot of them don’t know. They are trying, but a lot of them don’t have the ability to give you information. And then you get into the oil industry said this or the oil industry said that when it was an oil industry support group.

You always want to ask the guy who knows. I don’t know how to quite deal with that in public. I try to tell people in my communities when that type of subject comes up that it’s just hogwash. They have to sign their financial reports and it goes all the way up to the chairman. They aren’t going to be creative in their bookwork. If there is a gray area in the deduction, I’d expect them to take it and I’d expect them to argue the other side and it will come out in the audits. That’s just standard business.

Petroleum News: Speaking of audits, the Department of Revenue seems to be getting caught up on the audits. What are your thoughts on that?

Stedman: I think it’s a positive. They got behind with PPT and then ACES. We were changing the rules all of the time. We have a competitive disadvantage in the hiring hall with auditors. I’m happy they are getting caught up and I think if they can get down to three years instead of six, we’ll be a lot better off. Six years is way too long. This bill we are working on here, one of the complexities we are trying to clear up, that’s one of them. We are trying to encourage, with interest costs, quicker audits. So it’s not an advantage to one side or the other to run the clock six years.

The other thing on audits some in the public think the audits are going in there to look for skullduggery. That’s not the case. They are going in there to look at the gray areas of deductions where it’s not clear. Can you deduct it? Can you not deduct it? That’s just standard. I mean I’d be shocked if we had an audit report that said one of the majors are cooking the books to screw the state. That’s just ridiculous. They are not going to do that. They might take a gray area and argue it and lose the argument. But that’s just business. If they worked for me, they would take the gray area all the time.

Petroleum News: On the AKLNG you’ve received updates throughout the session. What’s your 30,000-foot view of what’s happening?

Stedman: We need Exxon at the table to build that line. The size and dollars and complexity, I don’t think you can ask for a better partner. I personally am more comfortable with the majors at the table and our 25 percent ownership. Now if we go do some other project we’ll have to look at it and judge it at the time. That may or may not come true. I’m hoping when the commodity prices turn around a little bit, that project comes back on the table pretty much as structured.

Petroleum News: What concerns to you have at this point?

Stedman: Well, I don’t like $40 oil. I think the burn rate of the state is alarming. Our ability to fix it is challenging. When you start going into the Permanent Fund and you have large credits and NOLs to pay, that’s instability on steroids. I don’t like it.

Petroleum News: What about AKLNG?

Stedman: I think we should take a look at the property tax structure that was proposed and throw it in the trash can. Too much wealth has gone into too few communities. If you look at the value of the revenue stream, it’s heavily weighted toward property tax and in my opinion the property tax should come into the state and the communities affected should apply to an infrastructure fund for help for roads, sewers, schools whatever it is. Then it can be paid out. That concept is left over from the pipeline. If we had to do the pipeline today - TAPS - we would not have the structure we have today. In fact, look at the value coming off the TAPS line. There is $575 million waiting in property tax. I think $125 million is what the state gets. It’s too heavily weighed.

Petroleum News: There’s a school of thought that low commodity prices could also mean low prices for goods and materials to build the line. Do you see something like that playing out for this project?

Stedman: I’ve asked the question to the majors. They told me they haven’t seen it with finished goods. My personal guess is the industry’s economic slide is just beginning. We’ll go through a wave of consolidations and bankruptcies. A lot of suppliers will get squeezed. Hopefully when a window of opportunity opens up, it’s still somewhere at the bottom of that commodity cycle as far as finished goods and they can shave several billion off the project.

Petroleum News: Are you confident there will be some good news this fall toward advancing a gas line project?

Stedman: Structurally, I’d say yes. We are not losing our geographical position on the Pacific Basin. Japan and Korea aren’t going to move on the planet. We have a straight shot to feed them energy guarded by the U.S. Navy. They can’t get it from anywhere else like this. I think we are uniquely positioned. We just need the economic window to open again. We need to go to pre-FEED, stop and just like putting your finger on the trigger. When the window opens, pull the trigger.

Energy demand worldwide is going up, not down. I think we are very uniquely positioned. It’s not like we’ve got a greenfield development going. The majors know how to build gas lines and liquefaction plants. I’m pretty confident. I just turned 60. I’d like to see it before I turn 70. I hope I see it before I get Alzheimer’s and don’t even know what the heck it is. The clock is ticking.