French sees windfall profits as focus

Anchorage Democrat says referendum repealing new oil tax could succeed; thinks Legislature would then tackle progressivity rate

Steve Quinn

For Petroleum News

Sen. Hollis French helped write the outgoing oil and gas tax regime known as ACES. Now he’s advocating for another change. He wants the public to get behind a repeal of Senate Bill 21, Gov. Sean Parnell’s rewrite that sets aside ACES as of Jan. 1, 2014.

French said he and other Democratic legislators understood ACES needed changing, starting with the tax surcharge known as progressivity, which captured more net revenue from oil companies as the market price rose.

But French, an Anchorage Democrat who serves on the Senate Resources Committee, says SB 21 goes too far, leaving the state with prospectively little in return.

French discussed his concerns and the prospects of a successful referendum with Petroleum News.

Petroleum News: Now that the elections office has certified the petition for a referendum, what’s your take on the effort so far?

French: The effort needed 30,000 signatures; it got 45,000. That’s 50 percent more than what was needed. The new, more stringent rules surrounding referendums and initiatives make it a challenge for anybody who wants to put something on the ballot. Whereas initiatives have sort of an open-ended timeline, referendums are very tightly bound by a 90-day window after the Legislature gavels out.

Typically people rely on the fall to get signatures. The state fairs in Anchorage and Fairbanks are around that time and are an especially great place to get signatures. That was not a possibility in this effort. So this was a huge grassroots effort. There was not a lot of money involved. It was really volunteers and committed folks.

This spanned an array of generations. You had the elder statesmen like (Alaska Constitution delegate) Vic Fisher, (Crude Dreams author) Jack Roderick and (former Senate President) Chancy Croft; folks in the middle of their careers like me, Les Gara and Bill Wielechowski; then you had a whole cadre of younger folks that are stepping up, grabbing signature boards, going out and hitting the streets.

Petroleum News: Now, realistically, you’re facing an uphill battle financially. How can you educate folks when you’re on a budget, a lean budget at best?

French: I think you will see a large imbalance of money raised on this issue as this campaign moves into next year. A lot of us look back at the cruise ship initiative as an example where a small band of committed people with a powerful message can overcome a huge economic force on the other side. I haven’t looked at those numbers recently, but it was anywhere from a five-to-one, maybe 10-to-one disadvantage to the cruise ship initiative people, and yet that was successful.

Petroleum News: On the flip side, the coastal zone initiative did not fare as well under the same conditions. Many voting against this initiative would certainly be in the camp favoring SB 21.

French: I agree that was a more complex issue. It’s the same with the clean water initiative. It’s another complex issue that you can’t necessarily look at and understand. I think folks get this issue at a more basic level. We gave up our windfall profits in exchange for nothing. That’s a simple idea that cuts through a lot of op-ed pieces and lovely TV ads.

Petroleum News: So what should the expectations be in return for tax breaks?

French: You know I think ACES established a good system. It set a high rate for companies in harvest mode and it rewarded the companies that invested in Alaska with generous tax credits for that investment and lowered tax rates accordingly. The actual effective tax rate that Conoco paid under ACES was around 30 to 31 percent. That’s not an onerous tax rate because they were actively re-investing in Alaska.

It’s either going to be a dollar invested in Alaska or a dollar invested overseas or in Texas or somewhere else. From my narrow perspective, I’m a fierce partisan for Alaskan investment. It’s my job as an Alaska policy maker to make sure we get our fair share of investment. I think ACES set up a good framework. You can tinker with any tax system; you can always make it better. There is no perfect tax system. But the basic framework was pretty sturdy, pretty sound.

Petroleum News: OK, so what would you have altered in ACES.

French: We talked about capping progressivity. A lot of us became convinced that progressivity reached too high a level at super high prices. That’s something we were interested in addressing. We also believed the real future of the North Slope lies in true new oil, in heavy oil and in shale oil. Those are areas where you can offer incentives and lower taxes to try to drive investment in that direction. By the same token, Prudhoe Bay, Kuparuk and Alpine, those are fields that were capitalized many, many years ago. They are enormously profitable, and the state should get its fair share from those fields.

Petroleum News: Let’s talk about the new oil issue. There are concerns over drafting regulations that efficiently determine what is truly new oil. Did you foresee these problems?

French: We did. You saw us fighting this on the floor of the Senate arguing for a more narrow definition. Ultimately the House picked a more narrow definition. We are seeing in the regulation process the industry trying to make an end run around that and get the most expansive definition of new oil possible. That is their prerogative. But that’s not what we voted into law. That’s why my Democratic colleagues weighed in during the comment period to make sure our concerns were heard.

There are two concerns:

One, the industry is balking at their complexity. That’s bad. You should always have things as clear as possible. Whether you agree with SB 21 or disagree with it, everyone should agree that the regulations should exactly put into effect the language of the statute. There should be no daylight between the regulation and the statute. That’s one main point on the drafting of the language and the specificity.

The larger point is how much wiggle room the regulations will allow with respect to finding new oil. The industry has a powerful incentive to get oil already coming out of the ground reclassified as new oil. That amounts to about a $7 a barrel reduction in the tax and an increase in their profits. That’s a big amount of money. It adds up to a lot of money over the years. There’s tens of millions, if not hundreds of millions of dollars a year with that question.

French: Well on the regulation side, you’ve heard the industry say if the definition doesn’t work out, it’s going to produce uncertainty. And uncertainty means a cooler investment climate. And that’s bad. You have to have certainty. From the state’s perspective, the industry gets rewarded for doing what it’s already doing right now. That’s why I have already called for hearings and (House Rep.) Geran Tarr has also called for hearings. There’s a committee called the regulation review committee. That seems like the perfect place to have hearings to make sure this gets flushed out and nailed down as tightly as possible.

Petroleum News: Do you see the Legislature revisiting this next session?

French: My guess is no. My guess is the Legislature is going to wait for the referendum to play out and address other issues this session. That’s my view for now.

Petroleum News: Getting back to the referendum. What do you think will be done moving forward to get the message out?

French: That’s a question for the central referendum organizers. I think you’ll see op-ed pieces. I think you’ll see social media. I think you’ll see letters to the editor. I think you’ll see grass root activities to spread the word.

Petroleum News: The criticism against the referendum is that it will have a chilling effect on investment until this gets resolved. What are your thoughts on it?

French: Well we stressed over and over that investment climbed under ACES and investment reached all-time highs during ACES. So if the worst thing that happens to the industry is that we go back to ACES again, they were making record profits under ACES. We had record employment. We had record investment. So it doesn’t look too awful from my perspective to the industry if ACES gets put back in place.

Petroleum News: If the referendum does pass. What then? Do you go back to the drawing board?

French: I think you do. I think you go back and get another chance to do oil tax reform right. From our side, we agree that progressivity should be capped. We agree there should be a stimulus provided for new oil, for heavy oil and for shale oil. By new oil, I mean oil outside the legacy areas of Prudhoe Bay, Kuparuk and Alpine. One of the things that I think gets lost in this debate is the degree to which Democrats are interested in oil tax reform. We are not obstructionists on oil tax reform. We are interested on doing responsible tax reform that benefits both sides. We believe we can make this system better as long as you stand by a few guiding principles. And those principles are to reward investment in this state. That was one of our biggest complaints of this bill. It eliminated windfall profits in exchange for a huge concession. Basically we got hope on a wing and a prayer for new investment on the North Slope.

Petroleum News: Let’s shift to natural gas. What would you like to see next in advancing a project, be it a large-diameter line or a smaller in-state line?

French: First things first. Let’s celebrate Cook Inlet. Every day it looks like Cook Inlet is getting stronger and stronger. I worked on a Cook Inlet platform for five years, so it does my heart good to see it revitalized and investment revitalized. For the foreseeable future the natural gas breadbasket for Southcentral Alaska that even if you flipped a switch today and said OK, let’s start building a gas line, it’s going to be a long time before the gas comes down here, so the news for Cook Inlet helps everybody. There are more stories showing more finds and the so-called shortage is getting pushed into the future as those finds come on line.

Petroleum News: OK, so what about a pipeline project?

French: My view is North Slope natural gas will come to market. It’s too rich and too valuable a resource. We offer too stable a political climate for it to not come to market. The point, I believe, is to build the biggest pipeline possible. Building anything short of an enormous project, challenges the economics. That was part of my objection to the small line, and others as well. So my view is to keep working on the big project.

Petroleum News: The governor had his own benchmarks. Most of them have been met; one of them wasn’t to his disappointment. If you had your own benchmarks, what would they be?

French: I would be careful about issuing them. I think the governor saw the trouble you get into when you draw a line in the sand, and then it doesn’t happen. I think it’s better left to industry to drive this train. It’s going to be very hard for the state to drive this train. You can set up a fiscal network and a regulatory network and a framework, but ultimately the industry is going to put their money down, and it’s got be driven by their expertise.

Petroleum News: Let’s shift to the Arctic. What would you like to see in the way of an Arctic policy from the state?

French: the state needs to work better with the feds in stimulating and creating a deepwater port in the north that can be a base for cleanup vessels and other working vessels. That’s one of the prime needs we lack to develop infrastructure in a safe and sensible way. It would be either near Nome or north of Nome. It’s impractical to have a working oil field without some kind of working base for all of the ships and steel and people that you need to do that work.

Petroleum News: What kind of partnership do you have in mind? They seem to be rather elusive, any partnership with the feds. How do you reconcile something like that?

French: It’s hard to reach out to the feds and say we need your help for a deepwater port when we are poking them in the eye about every other day. I’m as firm a supporter and champion of state sovereignty as anyone else. It just seems like every week, we open up the paper, and we are blistering the feds for this or that policy. I think there is a better way to do business. When they cross the line, yes you say something. It seems like a lot of this is not productive.

The federal government helped build Alaska. We are going to need their help in the future. Working together we can open up the Arctic, but we are going to have to be partners.

Petroleum News: Still on the Arctic are you concerned that Alaska lost a summer season?

French: I think that’s a better question answered by Shell, by Conoco and by Statoil. I think it’s pretty clear the permits were issued on time. They were given the green light on time. There was one logistical problem after another. I support their efforts. The question for them is, are you going to be ready for next year?