Stedman calls for focus on oil tax reform

Finance co-chair calls ACES dysfunctional, criticizes Parnell’s approach to fixing it, calling for more administration analysis

Stefan Milkowski

For Petroleum News

As co-chair of the Senate Finance Committee, member of the Senate Resources Committee, and a financial advisor with a knack for number crunching, Sen. Bert Stedman has played an outsized role in the last several years of oil tax debates.

Stedman advocates tax reform — both for certain tax reductions and for structural changes to the tax — but has also been one of the strongest critics of Gov. Sean Parnell’s proposals to modify Alaska’s Clear and Equitable Share, or ACES.

Stedman helped craft the Senate’s alternative, SB 192, which passed out of the Resources and Finance committees but never got a floor vote.

In an interview on April 25, Stedman called for more analysis from the administration and warned that support for Parnell’s new plan was dwindling by the day.

Petroleum News reached Stedman again on April 26, after the governor’s announcement to remove oil taxes from the special session agenda.

The interview below covers both conversations.

April 25

Petroleum News: Let’s start with the regular session. What happened to SB 192?

Stedman: It didn’t get the votes to pass.

When the Finance Committee put the committee substitute on the table, frankly, the Department of Revenue checked out. Also, there are differences of opinion (in the Senate) over the magnitude of financial relief to give to incremental oil production in the legacy fields.

Petroleum News: What do you think of the governor’s new proposal?

Stedman: It’s dysfunctional. You give an allowance concept to target particular areas you’re trying to stimulate, say new production. Doing the allowance concept over the entire basin is just nonsensical. There are issues embedded within ACES that need to be fixed that this bill doesn’t address.

The longer that bill is out in the hearing process, the less support it has. Almost daily, the support for it is dropping. You can feel it in the building.

Petroleum News: So it doesn’t have much chance of passing as is?

Stedman: I’d say there’s no chance of it passing as is. It doesn’t fix the problems. All it does is move cash.

Petroleum News: In a recent speech, the governor said the fundamental problem is that companies can take their profits from Alaska and invest in places where they’ll get a better rate of return. Is that true?

Stedman: I’m sure you could find a lot of places it is true. But you better broaden out the scope. There are two big pieces to the equation. One of them is the prospectivity of your basin. The other one is your fiscal terms. We’re discussing, on the fiscal terms side, a very narrow area within that.

Petroleum News: Do you think it would be possible to increase production at Prudhoe Bay and Kuparuk by reducing taxes?

Stedman: Is it possible? It’s possible to put a man on the moon.

Is it likely to happen? That should be the question. If you adjust your fiscal terms down, will an industry respond in increased production? That’s an open question.

The magnitude of what you actually need to move the production in any meaningful way has not been in front of any committee that I’m aware of, other than a comment by Exxon’s executives basically giving a ballpark feel of about $3 to $5 billion a year (industry investment).

Petroleum News: The governor claimed we could have 100,000 new barrels of production from existing fields in two years.

Stedman: That’s ridiculous.

Petroleum News: So it’s not just a question of more infill drilling?

Stedman: If you want a million barrels out of the state’s fields, you’re not going to ever get it. You’ve got the technology barrier, financial constraints, and other constraints such as processing facilities.

There’s a lot more to the equation than just moving a guy’s internal rate of return up or down a little.

Petroleum News: In committee, when lawmakers ask for economic analysis of specific projects, the Department of Revenue continues to say, You have to ask industry. Is it OK to rely on industry for information like that?

Stedman: The department should be able to come forward and put a presentation in front of the Finance Committee and the Resources Committee to justify their position and not just say, Go ask industry. That’s unacceptable.

That being said, you want to cross-reference the discussion with industry to see if they feel it’s technically possible and financially feasible.

Petroleum News: In SB 192, why did you want to change the tax mechanism instead of just adjusting the rate?

Stedman: (Adjusting the rate) doesn’t fix the internal problems with ACES. You can lower the rate of progressivity from 0.4 to some other number, but it’s a broader question than that.

I’m hoping in the future that we’ll look at getting the progressivity mechanism out of the net and onto the gross.

Petroleum News: Are you planning to introduce something?

Stedman: I think it’s time the administration carries the oil bill through the process. There were a lot of comments made that the Senate was stalling, and it turns out there was no validity in that. When we actually sat down and engaged the concept of this bill, it didn’t last 20 minutes.

I think there needs to be substantially more substance delivered into the legislative process if we’re going to get a piece of legislation through here. It needs to address the complexities of the issue and move beyond the bumper stickers.

Petroleum News: The administration says the bill would reduce revenue by up to $1.4 billion a year, but you say $1.5 to $2 billion. Why the difference?

Stedman: Probably price variances. The current version moves a little bit less cash than the original HB 110, but not that much.

Petroleum News: SB 192 tried to cap tax credits for oil producers, but the governor’s new proposal would expand well-lease expenditure credits. How will that get resolved?

Stedman: That’s crazy. I’m not going to support it, I’ll tell you that.

Excessive support through the credit mechanism is one of the problems we have with ACES. The exposure the state has under that is unacceptable. (According to PFC Energy), at about $120, which is roughly where we are today, it’s 90 percent. It’s ridiculous.

You need to deal with the credit side as you deal with the high tax burden, and adjust them both.

Petroleum News: What would you like to see happen this special session?

Stedman: A realization that ACES is dysfunctional at high oil prices and a willingness to stay here and fix it.

Petroleum News: How would you like to see it fixed?

Stedman: Well, I think you need to get down into the structural problems with ACES and fix them. You can’t just move cash on the table.

Several areas can be addressed through some mechanism changes, such as taking the progressivity from the net and putting it up on the gross.

Stedman: If you take the progressivity out of the net and put it on the gross, you’re going to delink oil and gas and put less subsidy on the expense side. To a certain degree, industry might think that’s a negative, but it would encourage them to control their costs more. It’s a cleaner calculation, easier to do and understand.

It also allows us to put in place a mechanism like the allowance (in Parnell’s legislation), for targeted areas, if we want to target incremental oil, which I think we do.

Petroleum News: Do you think it’s possible for this Legislature to agree on a tax bill?

Stedman: Not unless the administration comes to the table with some analysis and wants to participate in the policy discussion. If they want to participate just by moving cash, there’s little to no chance we’re going to get anything done. Particularly if they want to move $1.5 to $2 billion on the legacy fields, when we’ve had testimony from our consultants that it’s not needed.

Petroleum News: Do you expect to be in Juneau the full 30 days?

Stedman: I don’t know. I see less support for fixing the oil issue as the analysis rolls out.

The House did not engage our consultants last year in any meaningful way, other than Roger Marks on bracketing, and they basically threw a piece of legislation into the Senate without doing their due diligence. The more they get involved in the complexity of the issue and the more they understand our tax structure, the less likely it is that they’re going to move this bill forward without huge structural changes to it.

Petroleum News: On another subject, do you see a way forward for HB 9, the in-state gas pipeline bill?

Stedman: I think we have a unique opportunity in front of us with the unfortunate circumstances in Japan taking down their nuclear plants. We have an open ocean between us, a short trade route, and a long-standing business relationship. I think we have a high probability of getting a large LNG export facility by the three majors if the state doesn’t get in the middle of it and muck it up.

Petroleum News: And the best way to encourage that is to not pass HB 9?

Stedman: When we implemented AGIA (the Alaska Gasline Inducement Act), it was a kiss of death. That was a dysfunctional policy when it was hatched and didn’t get any better as time went on.

Petroleum News: Anything else?

Stedman: It does concern me that if we don’t get a solution to our tax structure at high oil prices, we’re going to have a 2-4 year delay.

The other concern is that we need to get it right, versus just do something and then next year do something again. We need to give the industry as much stability as possible for their fiscal planning.

So you have to try to balance those two issues.

Petroleum News: But it sounds like you want the administration to take the lead.

Stedman: Correct.

Where are their consultants? When we did ACES and PPT, both the Legislature and the administration had consultants. If the departments can’t handle the policy discussions, they need to get somebody in here that can.

April 26

Petroleum News: Were you surprised by the governor’s announcement?

Stedman: Yes.

It was too early to call it quits. The House was just beginning to engage. I thought in roughly two weeks we’d be in a position where we could start having some discussions on what the final outcome would look like.

Petroleum News: Is it fair for Parnell to blame senators who “believe Alaska’s oil production decline is a myth?”

Stedman: I don’t think anybody in the Legislature believes that a production number (falling) from 2 million to 600,000 isn’t true. But we’re going through a natural decline curve, a natural decay of the superfields — Prudhoe Bay and Kuparuk — and it’s been going on for 20 years.

Petroleum News: How’s your relationship with the governor?

Stedman: Good, as far as I know. I get along fine with him.

I don’t think we’re that far apart. He has made comments that at $80 and below, he’s comfortable with the tax structure. The Senate’s comfortable with it at $100 and below. That’s only a $20 difference. That’s not irreconcilable.

North of $110, there’s a lot of support for restructuring ACES, because it’s looked on by many in the Legislature, including myself, as dysfunctional. You’ve got problems in the state subsidy over capital expenditures, and you’ve got problems with the split of profit between the industry and the state.

Petroleum News: What would you like to see happen now?

Stedman: I think we need to stay here and deal with the embedded problems with ACES. And just because the going gets a little rough — that’s just par for the course. PPT and ACES got messy. Some people became very embedded in their opinions and some remained more flexible, but we worked through the situation in both cases and came up with a policy.

I think there’s broad realization that at $130, $140, $150, we have problems in our tax structure. So let’s fix them.

Petroleum News: You want the governor to introduce something new?

Stedman: I don’t know about that. I think all parties need to remain flexible. You can’t restructure our tax without the support of the executive branch.

Petroleum News: But technically, the governor would have to introduce it.

Stedman: If he called another special session, he’d have to introduce the legislation. If the Legislature called themselves back in, they would introduce it.

But I’m not going to introduce legislation in the Senate Finance Committee just to have (DOR) withdraw from policy discussions, because it’s not just a big cash movement. The issue isn’t let’s move cash. The issue is let’s fix ACES. And that will move the split of profit.

Petroleum News: Any additional thoughts on HB 9?

Stedman: No. I’ve got it on my desk. I have to start reading it this morning.

I was wrapped up in the oil and watching the House, and was pleased the House was starting to engage. It would have been nice to see what the Resources Committee came up with.

Petroleum News: A large-scale gas line would presumably take longer to develop. What do you say to people in Southcentral who need gas?

Stedman: Cook Inlet.

Petroleum News: And Fairbanks?

Stedman: Fairbanks is one of the communities in the tightest energy spot, and we need to try to help as much as we can.