By Stefan Milkowski
For Gov. Sean Parnell, simple economics dictate that lower oil production taxes will make more North Slope projects profitable. It's also clear that declining oil production is not okay, putting at risk thousands of direct and indirect jobs.
Parnell has made tax reform a top priority but has struggled to win legislative support for his proposals. After his HB 110 died this year in the Senate, he called lawmakers into special session to consider a new proposal. He surprised many when he pulled the bill from consideration on April 25, blaming the Senate for intransigence.
In an interview May 9, Parnell outlined the next steps to getting a gas line, defended his approach to tax reform, and discussed the Point Thomson settlement.
Petroleum News: Let's start with gas. This winter you encouraged North Slope producers to get behind an LNG export line, and on May 2, your administration gave TransCanada permission to focus on that project instead of an overland route through Canada. Why is that a better project?
Parnell: I actually led the charge last October when I announced that I wanted to see the producers, TransCanada, and all parties focus on a line from the North Slope through Alaska to tidewater. It was clear that the Lower 48 market had shifted to shale gas -- the large volumes there had depressed the price. And the tsunami in Japan and the Japanese shift from nuclear power clearly created another reason to move to an LNG export scenario.
I then began calling on, working with, cajoling the CEOs of the producer companies towards alignment and towards resolution of Point Thomson, because each of those was necessary to get a large-diameter gas line approved and constructed.
Petroleum News: Will you require that an APP (Alaska Pipeline Project) and producer pipeline adhere to the "must-haves" in the Alaska Gasline Inducement Act?
Parnell: In my state of the state address, I called for alignment of the producers and TransCanada by the end of March, and that occurred. I called for resolution of the Point Thomson settlement among working interest owners, and that has occurred.
The reason I said I wanted the alignment "under an AGIA framework" is because of the benefits the Alaska Gasline Inducement Act provides Alaskans. It assures offtakes for Alaskan communities. It assures that Alaskan lands will be fully explored for gas because the pipeline will be accessible to future explorers. It assures that Alaskans will pay a distance-sensitive tariff on the gas they receive.
So I believe it has significant benefits within its framework, and I would much prefer to start any negotiation over fiscal terms with those benefits in place for Alaskans, instead of starting from scratch.
Petroleum News: Will you stick to all of the must-haves, or are some of them negotiable?
Parnell: Obviously some of them will need to be negotiable. But again, we're starting from a position of strength, where Alaska's must-haves are already clearly defined by law.
Petroleum News: When do you plan to address fiscal terms?
Parnell: The next benchmark for these companies to achieve is a project concept selection of an LNG project, which, under the benchmarks I set in my state of the state address, should occur in September of this year.
If that occurs, if the companies' hardening of their numbers and their alignment of interests come together around this LNG project, then fiscals will be the next step. Assuming all the benchmarks were met, I had offered to take those up during the legislative session of 2013.
Petroleum News: Why did you also support HB 9, which was aimed at jumpstarting a competing, in-state line?
Parnell: In every commercial negotiation, it's in a party's interest to have an alternative. When the producers, between 2001 and 2003, were negotiating with TransCanada over a "bullet line" from Alberta to Chicago, the producers were promoting their own line as an alternative.
I don't want Alaska to be dependent upon the producers' goodwill. Having an alternative, in this case the Alaska Gasline Development Corporation alternative, is very important to getting the best deal for Alaskans when it comes to a large-scale pipeline.
Petroleum News: So what's the next step?
Parnell: The next step is for the producers and TransCanada to get together with the Alaska Gasline Development Corporation to determine whether there is interest and value in merging, combining those efforts. The other benchmark that needs to be met by third quarter 2012 is for the producers and TransCanada to harden their numbers and finish their project concept selection stage of an LNG project.
Petroleum News: Moving to oil taxes, why did you decide to introduce a new bill for the special session?
Parnell: The new bill was merely a continuation of the two-year discussion we've been having. It reflected the methodology used by the Senate in passing tax credits for new fields. The bill I introduced used the Senate's methodology to incentivize not only new fields but also new oil from existing fields.
I made the mistake of thinking senators would be consistent in applying the same rationale to trying to extract new oil from existing fields as they had used to incentivize development at new fields.
Petroleum News: Why did you remove the proposal from consideration?
Parnell: I removed the proposal from consideration because it was clear that there were a few senators in controlling positions who think status quo decline is fine, who think the existing tax structure is fine. These senators don't have a plan for altering our production decline, but they were extremely critical and had hardened their positions against any notion of applying lower taxes to existing fields.
My view is very clear, that both existing fields and new fields have new oil that will not otherwise be produced without a tax change. That's simple economics. And to think that an oil company will extract 100 percent of the oil in a field anyway is not based on fact.
Petroleum News: Sen. Joe Paskvan, one of the Resource Committee co-chairs, requested that Gaffney Cline (a consultant to the administration) testify. Why were they not made available?
Parnell: Our work relied on Gaffney Cline. The Legislature had their consultants in PFC Energy. The issue was that Sen. Paskvan appeared not to trust the Legislature's own consultants, when PFC Energy's work actually agreed with our administration's position.
There's no sense in us putting forward our experts when the Legislature already had its experts testifying the way they were.
Petroleum News: If Gaffney Cline had testified to the Legislature, what would they have told lawmakers?
Parnell: I don't know. I'm not going to make assumptions or speculate because I don't know what the questions would be. I can just tell you that we set forth a proposal that was in Alaska's interest to develop existing fields and new fields.
Petroleum News: Did Gaffney Cline help draft the legislation?
Parnell: I worked directly with the commissioner and deputy commissioner on it. I do not know exactly what occurred within the Department of Revenue. Literally, they had two years of working together. So I don't know exactly when and where those communications happened.
Petroleum News: How do you respond to charges from people like Senate President Gary Stevens that your administration couldn't adequately defend the proposal?
Parnell: I think that notion was simply nonsense. What the senator is failing to tell you is they could not get 11 votes within the Senate for a comprehensive change to bring about an increase in oil production.
We had hundreds if not thousands of people who testified, sent messages, and whose livelihood in our state depends upon more work in the oil patch. To say that we can maintain ourselves and that everything is fine while we're experiencing this production decline really is a slap in the face to Alaskans who want to work, who want to grow this economy, and who depend upon oil and gas.
And it's not just oilfield workers -- it's restaurant owners, office supply store workers, realtors, auto dealers and their employees. We are all dependent upon this industry.
I will continue to do everything I can to assure that we grow production and grow Alaskan opportunity rather than saying that status quo decline is fine.
Petroleum News: Sen. Bert Stedman, one of the Finance Committee co-chairs, claimed there was widespread agreement the tax doesn't work at very high oil prices. Did you consider just focusing on that?
Parnell: We did, and therein lies the rub. Because we could only get to 10 votes in the Senate. It was split down party lines. Ten Republicans were willing to engage in that discussion and vote for change. Ten Democrats were not. That's the raw truth of what happened there.
Petroleum News: Well, I'm guessing this issue won't go away.
Parnell: Not as long as production decline continues.
Petroleum News: What's your next step?
Parnell: I'm going to continue working to convince a few more senators that production decline is not fine, that we can pull new oil from existing fields with tax changes, and work these issues again in 2013.
Petroleum News: Will you try a different proposal or just hope that a new Legislature sees things differently?
Parnell: It's too early to tell now. I'll be making those decisions in November, December. That's when I put in my legislative package of bills.
Petroleum News: Does the difficulty settling on an oil tax affect the gas line project in any way?
Parnell: It very well could. The Legislature is not structured to take up both oil tax terms and gas tax terms related to a pipeline in the same session. Those are two weighty issues that require a lot of time and effort, and we're likely going to have to choose one or the other to take up in 2013.
Petroleum News: About Point Thomson, former Oil and Gas Division director Mark Myers criticized your administration for giving up too much control in the settlement with Exxon Mobil. How do you respond to his critique?
Parnell: The attorney general, the commissioner of natural resources, and I all firmly believe that the state resolved the Point Thomson litigation in the state's interest, for a number of reasons.
First, it maximizes development of Alaska's resources for Alaskans. We obtained solid work commitments requiring billions of dollars of spend by these companies. If they don't meet those work commitments, the companies lose acreage at the unit.
Second, the settlement will provide jobs for Alaskans now and into the future. Third, it brings us closer to a major gas line. And fourth, it resolves a case that has already been going on for seven years and by all estimations could have gone another 10-15 years.
Everything in this settlement was measured and weighed with Alaskans' interests in mind. Frankly, this settlement is pointed at getting Alaskans a major gas line.
Petroleum News: Does the language specifically require Exxon to complete its gas cycling project?
Parnell: I'm going to point you to our department personnel on that.
Mark Myers was arguing to delay any major gas sale in favor of what's called full-field cycling. The information he was relying on, from a 2008 PetroTel study, has since been updated, both by PetroTel and by DNR, with a more realistic view of Point Thomson's reservoir performance. Full-field cycling, as he's urged, is simply not a viable option.
The choice in the settlement was really between the initial production system and continued litigation, as well as balancing our interest as a state in getting to a major gas sale.