Sunday, August 11, 2013

Anchorage Democrat (who supports Sarah Palin's centerpiece legislation to tax private industry and give awzy $500M) calls SB 21 a massive giveaway!

Anchorage Democrat calls SB 21 a massive giveaway, says state stands to lose too much under Gov. Parnell’s new tax regime By Steve Quinn House Rep. Les Gara has never been shy with his opinions, especially when it comes to the longstanding debate over oil taxes and efforts to rewrite the 2007 tax code Alaska’s Clear and Equitable Share, or ACES. Well, with ACES rewritten Gara remains vocal and believes a referendum to overturn Gov. Sean Parnell’s SB 21 not only has merit, but also has a chance of winning at the polls next August. Those supporting the referendum say they collected more than 50,000 signatures, nearly 20,000 more than needed. Gara believes the Legislature went too far, well beyond the intent of making a tax policy fair at high and moderate market prices. Gara spoke to Petroleum News about the prospects of a successful referendum and what he would like to see in advancing a natural gas pipeline project. Petroleum News: What is the thinking or the strategy behind the referendum to overturn SB 21? Gara: My view is SB 21 is a disaster for the state. It’s going to result in massive layoffs across the state. The give to the oil companies is way more than was necessary. We should have incentivized more with a better piece of legislation. So if the SB21 referendum passes, hopefully the Legislature will get the message, and Gov. Parnell will get the message, that giving away somewhere between $800 million a year to $2 billion a year to Exxon, Conoco and BP, the way they did it isn’t the way to do oil tax reform. It’s going to hurt the economy in the long run. After the referendum passes, obviously we need to go back and write something that makes sense. Instead of the provisions of SB 21 that basically give the money away on the premise that it hopes the oil companies will invest all of that back in Alaska, and invest enough money to offset what we are going to lose, so we at least break even. We can do something smarter. Something smarter is you get investment credits if you invest in Alaska. The biggest problem is you get a huge tax break – upwards of $1 billion to $2 billion a year – even if you don’t invest that money in Alaska. Petroleum News: Critics of the referendum say that this could have a chilling effect on investment. What are your thoughts on that? Gara: SB 21 is a huge disaster for our state. We need to come out from under this. We are not going to have money for schools. We’re not going to have money for new construction and energy projects around the state. You can’t pass something that is harmful to the state and say gosh we better not change this. Petroleum News: OK, but how do you answer the criticisms that the referendum will have a chilling effect on investment? Gara: People are just coming up with arguments. The pro-SB 21 people will say anything they can to stop the initiative. They claimed credit for production that was already going into effect. Mustang, that was a project by Brooks Range Petroleum. They announced two years ago they were going to produce that oil. The pro-SB 21 people say, hey Brooks Range is coming on line because of SB 21. Repsol announced two years ago they were going to invest at least three quarters of a billion dollars in Alaska, and if they found oil, more than that. Well they found oil in the spring and the governor said, hey this is because of SB 21. Folks who are going to try to stop the referendum will say anything they can. Petroleum News: What other provisions do you not like about SB 21? Gara: We went from roughly an effective production tax rate at 37 percent — something that was too high at high prices, and that should have been fixed — we went from that to a production tax on new oil that is going to be in the $110 somewhere at 10 to 14 percent. This state cannot run on 10 to 14 percent oil tax. At some point all oil will qualify as new oil. We will have a whole generation that will not have the schools, not have the services they need in the state because we will have vastly under-taxed the state’s oil resource. A 10 to 14 percent tax on $110 barrel of oil makes no sense. That’s a giveaway. That’s the second part of the giveaway. The first part is you get $800 million a year to $2 billion a year that goes to Exxon, Conoco and BP just for existing. They don’t have to invest in Alaska. Those are two major parts of the giveaway that need to be changed. The rate of 10 percent to 14 percent is way too low, and the give away of $800 million to $2 billion a year depending on whether oil is $100 or $130 a barrel. Those two parts are going to harm the state immensely. In other words, under SB 21, if prices are the $100 range, the state loses about $800 million a year in revenue compared to ACES. If prices are in the $120 barrel range, then we lose about $2 billion a year. That’s all related to the elimination of the state’s windfall profit share that says when companies are making record profits, the state should share in a more fair tax rate. We should have done smart oil tax reform. Petroleum News: Both sides of the argument say their position is driven by the constitution. How do you reconcile that? Gara: (Former Gov.) Jay Hammond would say the constitution is the first place you look. You’re supposed to get maximum benefit for our resources. The constitution doesn’t require any particular statute. My view is it should be driven by logic. Logic says we shouldn’t tax too high. We should tax in a way that requires investment in Alaska if you’re going to give incentives. We should tax in a way that is fair to the industry and fair to the people of Alaska. We could have done that. Many people in the hallways – Republican and Democrat – said we should have tweaked ACES instead of gone with this brand new system that frankly is a giveaway. The oil companies used to say the only problem with ACES was that at high prices the tax was too high. And I agree, at very high prices – $130, $140, $150 a barrel – we taxed a little too high. We should have tempered that down. All of the sudden the story changed this year, and we had a bill that had nothing to do with reducing taxes at high prices. It reduced the rate at almost all prices. We reduced it from an effective rate (minus credits and deductions) of about 37 percent to an effective rate on legacy field oil of about 20 percent, and an effective rate on new oil of about 10 to 14 percent on $110 a barrel. That’s going to hurt the state badly. Petroleum News: If that’s how it played out, then how do you think it got this way if the initial issue was the progressivity? Gara: We have a governor who sees things the same way as the oil company executives at the oil companies. He got rid of experts who would have treated Alaska more fairly. They were never allowed to show up in the Capitol (Bob George and Rich Ruggerio). They state had them on contract so nobody else could hire them. They hired folks who promoted a much lower tax, someone whose view was taxes can never be low enough, so what we had was a race to the bottom. Petroleum News: Do you believe there was an honest debate over the issue of oil tax reform? Gara: I feel the legislators had a very honest debate. I don’t feel like the administration’s expert (Econ One’s Barry Pulliam) was very forthright. I found him to be very evasive. I found him be very argumentative. I found him to be wedded to promoting what the administration wanted instead of being wedded to providing the Legislature with accurate information that was objective and balanced. They hired an advocate, not someone who objectively consulted with the Legislature. Petroleum News: How much faith can you place in a referendum effort when you think of how the coastal zone management ballot failed so handily? Gara: If we had a vote today, the referendum would pass. The public understands this was a giveaway. If you’re Exxon, Conoco and BP, and (you) see new oil tax at $120 a barrel, which is a reasonable high-end price that we can expect the next couple of years, then this bill gives them about $2 billion in tax breaks even if they do nothing in Alaska. For $2 billion, and if you’re an oil company, you’re going to find a way to spend millions and millions of dollars to convince the public to defeat the referendum. And we know in this world of political advertising, they tend to be very misleading. Political ads, by and large, especially when money is involved, tend to be deceptive. I think we are going to see a lot of deception over the next year and a half. Right now the polling I’m seeing is that the public does not support this oil tax giveaway. They understand that an oil tax giveaway gives money to companies who don’t have to reinvest in Alaska and can take their money to another country like Libya and Azerbaijan and Russia. They understand it’s not a good idea. That’s today. Even next August is a long time from now and memories fade. The folks who want a fair oil tax for the people for Alaska, we are not going to have a huge amount of money, so we’re going to have to try and educate the public without much money against the money Exxon, Conoco and BP, and their allies can. Their goal is going to be to sway the public to their side and that can happen with money. Petroleum News: Moving onto natural gas, what would you like to see happen to advance a pipeline project? Gara: If we can make the big line work, that is the thing that helps Alaska the greatest in terms of lower gas prices for Alaskans and revenue for Alaskans. The small line won’t result in any or much revenue because we don’t tax gas that’s used by Alaskans. If it’s just an instate line, we won’t get any revenue. More importantly it’s not cost efficient. It’s an 800-mile line that delivers very little gas. It’s like the difference between transporting lumber by train, where you can transport a lot of lumber, or transporting lumber with a series of trips by a Volkswagen. That’s why gas delivered by a small line is about twice the cost to Alaskans. If we are going to treat Alaskans fairly so they can afford gas, a big line makes the most sense. It’s cheaper gas. Second point is that it produces revenue for Alaskans. We lost oil revenue. We need revenue in this state to fund roads, schools and hopefully savings. Exporting gas from Alaska produces income. The gas sales produce revenue. And a big line, which would export about seven times as much gas as a small line, will produce cheaper gas, and make it more likely that we will get an export contract. We won’t get an export contract if we are shipping expensive gas. Right now, we’re spending a lot of money on analyzing a bunch projects. Susitna hydro we are subsidizing to analyzing to the tune of $100 million a year. Some people want to subsidize the small line that produces very expensive gas to the tune of $3 billion. I would like to see an analysis that says what happens if we put that money into a big line. What happens if we put a portion of that money into the big line? Does that make the project a go. Maybe it involves state ownership with that amount of money. Maybe it involves state financing. One thing we can do is take ownership of a portion of that line and only require an 8 percent rate of return. Trans Canada – a pipeline owner – will require a 12 to 14 percent rate of return. The math on that is if we get an 8 percent rate of return, we would make money, but less money, and that would reduce the transportation costs on the big line. That would reduce the cost of gas. Maybe that would make a big line a go. The big line has to produce cheap enough gas to export it and the export market is Asia. Everybody used to think the export market was the Lower 48, but that was until shale gas came along. Now it’s Asia. We have to act quickly. I don’t see anybody doing an analysis like that. I’m not sure what the governor is doing. I’m not sure if he’s analyzing his options. I hope he is. Petroleum News: So what do you think can be done? Gara: What’s going on behind the scenes is they are using their nuclear options. They are saying they are not going to let go of the gas unless we come to our knees and give them as low a gas tax as possible. They have all the negotiating power in the world unless we use our leverage, and our leverage is that every gas lease in this state is called a duty to produce. You can’t just warehouse gas if producing it would be economical. You can’t go to a gunfight with a pocketknife and right now we are in a gunfight with a pocketknife. The oil companies are using their leverage by saying unless you lower your gas tax to almost nothing, we aren’t going to produce. The state is not saying unless you produce gas, which is economical, we are going to litigate transferring those leases to a company that will produce the gas. I’m not saying the duty to produce legal argument will work 100 percent. We don’t know how that litigation will go. It will take a while, but it’s leverage. I don’t say we should file a lawsuit tomorrow. You have to negotiate in a sophisticated manner when you are dealing with sophisticated companies.

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