Costello’s faith in SB21 unwavering

Anchorage Republican keeps an eye on oil and gas development from her seat on House Finance Committee, Resources Subcommittee

Steve Quinn

For Petroleum News

Rep. Mia Costello has spent her entire three years with the Legislature on the House Finance Committee. Her first choice was resources, something she remains closely connected to just the same.

Costello, R-Anchorage, oversees the subcommittee on the Department of Natural Resources so she remains on the front lines of issues, many of which ultimately come before the whole committee for bill consideration.

Two of those bills were Senate Bill 21, Gov. Sean Parnell’s oil tax legislation and House Bill 4, an in-state gas line bill. Both bills passed and received Parnell’s signature in the spring.

The debate on SB 21 and its merits remain as fresh as if lawmakers were still in session.

Concerns over how certain regulations will be written to conform with the law have emerged; meanwhile the prospects of a referendum getting on the August 2014 statewide ballot remain strong.

Costello sat down with Petroleum News and addressed these and other resource development issues.

Petroleum News: Let’s start with SB 21. It still seems to be the topic du jour. Most recently, there are concerns over what can be counted as new oil for a tax reduction. What are your thoughts on this newest development and are you worried about these regulations getting in place by Jan. 1.

Costello: First of all it’s important to put into context how complicated the oil tax issue is. It’s without a doubt one of the most complicated issues that we address in the Legislature, and the Legislature has spent years, even before I got there, addressing it. The main concern I had going into this were the problems that existed with ACES (Alaska’s Clear and Equitable Share). We are in deficit spending under ACES in an environment when every other oil-producing regime in the world is benefitting at the high price of oil, so the market and the high price of oil is a benefit to these other areas — but not Alaska.

That to me was a huge concern under ACES so it was obvious that ACES had problems. The other problem that was glaring with ACES, and I’m not necessarily convinced it’s a general accepted awareness in the public, and that is the capital expenditure credit under ACES was already giving away a lot of the taxes we were taking in. We were turning right around giving $490 million back to the companies because of the capital expenditure credit.

We were incentivizing the wrong thing. We were incentivizing activity. What we needed to be doing was incentivizing production. That’s where Alaska benefits is when we are producing. Sure there are going to be things that needed to be ironed out and that’s the process of writing regulations.

Often times bills will pass and it’s time for the departments to write the very specific regulations related to this. New oil and how to define new oil was something we discussed in the Legislature. It was brought up, and we recognized this was going to be tricky because how exactly do you define it? The executive branch, the Department of Revenue and the Legislature, we need to be very vigilant so that the regulations are written in such a way that they reflect the intent of the legislation. That’s a process of the conversation.

The fact that we are hearing there is difficulty with it is not a surprise to me. I think that Alaskans, and the Legislature and the executive branch have a responsibility to make sure it gets worked out. But, I’m not concerned about it because it’s the natural process of laws being put on the books. I do think that when regulations are crafted the departments across the board talk to those who are affected. There is a process where Alaskans can respond, the industry can respond, so I would encourage more conversation around that. The Legislature will be coming back in January and looking at how that’s resolved.

Petroleum News: Do you foresee any tweaks to the law to address that if things cannot get smoothed out?

Costello: It depends. If we find that the department has its hands tied because of specific language that was written in the bill, it’s incumbent on the Legislature to go back and make those changes. Often times we’ll ask ourselves the question does the department have the authority to do what it is they are doing in regulation? That to me is important, that the departments are doing what they law is requiring them to do. If there is an issue with that — which I’m not sure there is yet — if there is though, I think we will come back and look at it. I’d rather not. I’d rather them work it out in the regulatory process. But if need be, certainly, because that’s our job: to write laws that then regulations can be promulgated from. If the language isn’t clear or too difficult to do that, then I would be willing to back and look at that specifically.

Costello: Alaskans can bring issues to the ballot. It’s a constitutional right we all have. I recognize that it’s a valid process. What concerns me is that we’ve taken an issue that’s very complex and it’s been whittled down to a bumper sticker. I really encourage a conversation and I encourage a debate and I encourage a vigorous look at this. This really is a serious issue for our future. What’s lost in the conversation is that ACES was so punitive that it was driving investment away.

We have to look at the long-term future. I have two boys. One is in first grade and one is in third grade.

When we talk about revenue that the oil industry produces for funding government, schools and roads and troopers and capital projects, I always think to myself what we’re doing with that money today we have to think about the kids who will be in school 10 years from now, 20 years from now or 50 years from now.

In the long term I do think it’s better that we have a positive investment climate that’s better for the long term than taking as much as we can from the industry today.

If you seriously look at what we’ve done with ACES, that’s the giveaway. We are not incentivizing the results that we want. We are incentivizing the wrong thing; we need to be incentivizing production. With SB 21 we took away progressivity, which made it very difficult for companies to plan long term and we’ve tied the taxes to the price of oil. Now what we’ve done is say OK, we’ve incentivized production.

So going back to the question about the regs, sure there is going to be some difficulty there. To me that shows how complicated it is, but it’s a far better challenge to face than the problem with ACES because we would have declining production at record high oil prices because everybody was benefitting except for Alaska. When you look at the constitution providing for Alaska’s future, to me ACES had to go. In was not a good structure for Alaska. Another question I have is if you get rid of SB 21, what’s the solution? I haven’t heard a solution from the folks backing the referendum. At some point if it comes to the ballot, and it’s resolved there, we have to continue the conversation and we still have to have what’s in the best interest for Alaska’s future.

Petroleum News: On to natural gas, you folks recently had a symposium, what were some of the takeaways for you?

Costello: I know the Legislature has had discussions about separating oil and gas tax. They are two different commodities. Oil and gas are very different in how you plan for those projects. I definitely came away with a sense of concern, which I’ve had for a long time, about the timing. We are sort of on the cusp of entering the market. These projects take a long time before they come to fruition.

I’m a huge believer in the market and the market helps drive some of the answers to our questions. That’s why there is a lot of flexibility with the gas line Alaska will have in our future. We put into statute a lot of flexibility in terms of the size and the route and the export market. We are looking to AGDC (the Alaska Gasline Development Corp.) to do a lot of good work in terms of moving that gas line forward. We’ve received a lot of updates from (federal pipeline coordinator) Larry Persily about what’s going on there. Work is being done, though we don’t hear about it that often, but work is being done to move that project forward. Obviously the main purpose of that is to get affordable gas to Alaskans, and it would be nice to be a player in the Asian market, which is the fastest growing market in the world. It’s a place where we should be marketing all of our resources. I think this is a conversation that will have many twists and turns before we come to a final pipeline project. Alaskans are hungry for a gas line. We want to do everything we can from a legislative perspective to facilitate a project moving forward.

Petroleum News: So with all that’s happening, what have you learned the most about Alaska’s resources in your three years in office?

Costello: Well, to sum it up, I think Alaska has tremendous opportunity and that’s really great news. When we talk about our challenges, these are challenges of abundance. We have transportation issues and energy issues in getting our products to market. It’s a matter of the Legislature working together and setting aside our differences. One thing that comes to mind are rare earth elements. I think that we need to make our permitting process more streamlined. I’ve worked on that with funding to DNR during the budget process. It’s a more cumbersome, time consuming process. We need to speed that up. We need to adhere to any environmental concerns. We want to use the measures on the books to make sure things are done in a responsible manner. But it shouldn’t take a decade for any project to get permitted that takes two years in the Lower 48. We’re looking at transportation issues, the reliable cost of energy issues, and we’re looking at permitting issues, all areas where government has a role. It’s a matter of doing it in a responsible manner that helps Alaska.

Petroleum News: You speak of government having a role. There is an ongoing battle between Alaska and the federal government. Sometimes the battle is high profile with the state often accusing the feds of over reach. Do you see the federal government’s role being too strong or is it the government’s execution of that role too strong?

Costello: One of the questions I always ask myself is where do they derive their power, their authority to do X, Y or Z? When I see regulations put out there for public comment I ask where does the department get its authority to write these regs?

I backtrack it to does it come from the appropriate source of authority. The federal government has a role and the state has a role. Pebble is a prime example. It’s on state land. Whether you like Pebble or not, you should be concerned about the role of the federal government.

The state should have the ability to run state land and manage state land, and the resources, themselves. When the federal government is stepping in without the authority to do so, we should be concerned. Sometimes the issues get lost, because if you’re for a project or against a project, you will push whomever is on your side. States across the country are concerned about this. It’s not a single administration.

Another example is regarding the RS2477 issues in Alaska, the historic trails. The federal government is requiring the state to litigate these issues one by one. These issues are resolved by going out and talking to people who use these trails. That generation of Alaskans is passing away. We are in this mad rush with this RS2477 issue. We have a rightful standing to have access. We will probably lose out because the federal government has dictated the terms of how we resolve that. You see this crop up over and over again. Federal overreach is something Alaska needs to be concerned about at all levels from the average Alaskan all the way to the governor’s office. We have to be vigilant with this and it’s costly too. When you look at all the departments and what they are spending in terms of working with the federal government, it’s a huge price tag.

Petroleum News: Those are good examples of state versus the feds on state land. What about the battles on federal lands and waters that would benefit the state such as ANWR, NPR-A and offshore production? What can the state do to advance its case?

Costello: One of the things I’ve come to realize is that anytime an Alaskan can go Outside, go to D.C. and just talk to lawmakers there about the life that we live here, some of the challenges that we face in Alaska. A lot of it is a lack of education about Alaska — that we do want to develop our resources responsibly, but that we do rely on our natural resources to pay for government.

I know there is a federal revenue sharing bill and that both of our senators have introduced several pieces of legislation for revenue sharing of offshore production. Making an arrangement where other states benefit from Alaska’s development also is a smart idea. A lot of the products that are used to develop resources in Alaska come from other states.

We are not an island. We do rely on a relationship — a productive relationship — with other states. We’ve got to keep an eye on that, the job creation, the economy. If we develop some of these projects responsibly, it benefits them.

Petroleum News: Still on the Arctic, what would you like to see for the state and an Arctic policy?

Costello: Alaska needs a seat at the table. From what my conversations with others legislators in Alaska and our congressional delegation, we’ve got to have a voice at the table. The Arctic holds tremendous opportunities and challenges. I remember I was asked a question during a debate on global warming — well the warming of the Arctic is going change so much about Alaska. It’s going to change shipping routes and access to those communities. It will provide opportunities but also challenges with changes to weather patterns those communities are used to. When we write an Arctic policy plan, it has to be comprehensive and inclusive of all Alaskans because certainly it will affect all of us.