Q&A with Revenue Commissioner Rodell and Deputy Pawlowski
JUNEAU — Department of Revenue Commissioner Angela Rodell and Deputy Commissioner Mike Pawlowski, who was integral in the development of Senate Bill 21, met with the Juneau Empire on June 30 to discuss how the new oil tax system was developed, and how companies have reacted to the new business climate for the oil and gas industry in Alaska.
They said a methodology change in how revenue forecasts are compiled by the department has confused some into thinking SB 21 has done little-to-nothing to slow the decline of oil production. They are optimistic about the state’s future under the system.
When did this administration determine there needed to be a change? At what point did ACES stop working?
Rodell: On the one hand, we saw production declining in Alaska while expanding just about everywhere else, and we also saw — despite high prices — relatively flat investment in Alaska compared to everywhere else. So those were the big drivers and indicators on Alaska not being competitive. We were dropping in production on a consistent basis, accelerating that in some years and not attracting the investment to offset that decline.
Can you talk a little about how SB21 was developed?
Rodell: You have to go back to (House Bill 110) that was debated in the Legislature for two years — it did not pass right there at the end…there were also some proposals passed by the (Senate majority) Bipartisan Working Group specifically related to the development of new oil that failed to pass the House. So during those two years, there were a lot of consultants both for the legislative branch and the executive branch that had drilled down and identified five key problems with ACES…
(Following the session) everybody had sort of admitted that oil taxes needed to be reformed; I don’t think that’s really been in question, so we really focused on what the body of knowledge said that ‘these are the problems.’ So the governor gave us four guiding principals, and what we did was work to develop a tax reform package that addressed the problems that were identified while meeting the principals.
Editor’s note: Pawlowski identified those problems as follows:
1. High tax rates made Alaska uncompetitive particularly at high prices.
2. High marginal tax rates created disincentives for cost control.
3. In low price environments, the state had significant exposure to credits and high-cost projects.
4. The complexity of the system made it very difficult to plan.
5. The way the calculation of tax worked made the development of gas next to impossible.
And the four principals provided by Parnell were:
1. Any tax reform needs to be fair to Alaskans.
2. It needs to be competitive and durable for the long term.
3. It needs to encourage new production.
4. It needs to be simpler and more balanced.
There’s no such thing as perfect legislation, so are there things about this piece of legislation that are already being viewed as weak points or things that need to be tweaked?
Rodell: The tax has only been in place for six months so we have not had a single tax filing under this tax. The taxpayers pay monthly returns, but until we end up with a complete year and a complete filing, it’s going to be hard to say. August has inserted some uncertainty in it for taxpayers, so we’re going to need to get past August and get a full year under our belt to truly understand what needs to be tweaked and the best route to go about that. We’re just not going to know until we have a full tax year.
The bill got passed and we’ve seen an influx of investment, but revenue forecasts are still low. We’re looking at years of decline and there are a lot of claims out there calling it “The Giveaway” and a lot of other things. How do you combat those claims and assertions that this hasn’t done what it intended to do?
Rodell: People are taking the Department of Revenue’s forecast totally wrong. What the Department of Revenue forecast is, is a way that we use to calculate a revenue forecast, and in the past we banked as a department on every single project happening exactly as they said it would and at the production they said it would. Instead the department moved to a more prudent approach where we add back in production as it gets closer and more certain.
So for the purposes of calculating a revenue number to tell the Legislature and the governor what they have to spend 10 years from now, we’re taking a prudent approach to forecasting, and at the same time we recognize and show a high-case scenario of if these things continue and actually come to fruition we see a much higher number — but you can have a permitting delay, you can have a well get interrupted. We add these back in as we get certainty, so these numbers that people are quoting for production are not an accurate reflection of what the department is doing with its production forecast.
Is it inaccurate to say there’s a decade of shortfalls projected?
Pawlowski: We don’t know what shortfalls will be because we don’t know what production will be, we don’t know what price will be and we don’t know what cost and lease expenditures will actually be…it’s production ultimately that will drive the value for Alaska over the long-term — and we see a lot of that production, but for the purposes of the next 10 years we’re not banking on it. You don’t do your family budget on going to Vegas and winning.
Rodell: The revenue forecast is one of the things we’ve tried to work very objectively in the department…when we apply the same methodology (as the one used for price forecasting) to our production forecast, our production forecast was way out of whack because it wasn’t being risked in any way. It was taking everything we knew and saying it was possible…our goal is to more accurately reflect — especially in the near-term, so ’15, ’16 — than what was happening. That has gotten mixed up in policy discussions.
So in 2011, you were predicting a kind of best-case scenario and the best-case scenario was off by a lot?
So you’ve switched now to more of a realistic scenario?
Rodell: A worst-case scenario…it’s good to have a 10-year plan, but when you look back to 2004 and you’re forecasting to 2014, there was no PPT, there was no ACES and there was no SB21 in that scenario — so revenues came in so differently than forecasted. That’s one of the struggles I have with a ten-year plan — there’s so much that’s going to happen over the next 10 years that to say because 2023 says we’re down to 300,000 barrels a day — it’s a political statement; it’s not a statement in fact or reality.
What is the advantage of having SB21 or any system that stays in place for a long time?
Rodell: The biggest advantage is you’re giving taxpayers certainty and stability so that when they make a significant investment into the state of Alaska, they understand what the cost of that investment is going to be and they can predict the return on their investment, and that’s true with any tax type. If SB 21 stays in place and the governor is re-elected, you’re going to see real stability and real investment in the state of Alaska — and meaningful investment.
What’s been the difference in the last year — or six months — and what investments have you seen on the North Slope, and is there a sense of optimism that we’re really going in the right direction?
Rodell: There’s a huge sense of optimism. I haven’t been to the Slope in quite a while, but just in going to Fairbanks and even Anchorage and the Mat-Su Valley, the sense of people being able to get a job, the sense of opportunity, of economic growth and development — it just feels like there is a tremendous amount of activity. When I was in Fairbanks, the amount of pipe at the rail yard there getting ready to be moved up — I’ve never seen the yard so full of pipe before…When you’re out there and you’re talking to people, people feel really good about what their opportunity is in the state right now.
Pawlowski: And we’re seeing a lot more interest from money to invest in Alaska…(Pawlowski told a story about an Anchorage-based petroleum company that was unable to find investors before SB 21 passed, but finished the financing of a project after the bill became law)…There’s just a buzz not just in Alaska, but also outside Alaska. What a good opportunity people are starting to see up here; you can feel it.
This goes right into a claim the other side would say, ‘Of course there’s a buzz, it’s a giveaway of natural resources.’ How do you contend with that?
Pawlowski: It’s a bumper sticker,;it’s not mathematically correct. The other part of it is… If you don’t drill for oil, you’re not developing it and it’s not benefiting anybody. You’re talking about something that doesn’t exist other than in the ground. It takes capital, technology and investment to target the more challenged oil. To take that, ‘Oh, you’re just giving it away so people develop it,’ well, if it never gets developed then what are we doing? That’s part of our constitutional mandate to develop these resources for the maximum benefit of the people.
Rodell: It really is philosophical at its heart. We want the private sector spending and creating jobs, not relying on government capital budgets to be the job creators in this state. Seeing that activity on the private sector side and that business — the ripple effects on small businesses…it trickles so far into our economy that we get a lot more bang for that dollar.
So I don’t think of it as a giveaway, I think of it as a reinvestment in our state’s economy because — whether we like it or not — we are a resource-dependent state and we rely on these companies to be here and to not only generate revenue into the state coffers, but to employ Alaskans and employ all the support; when one job in the oil patch creates 20 jobs you can understand what a multiplier effect this industry has in this state. We need to have a healthy oil and gas industry in this state to continue.
Pawlowski: One more point, we have not had a full-calendar year cycle with SB 21 in place for companies to progress projects to the point they share them with us. Our last full production forecast was developed in the fall after SB 21 passed, and companies have annual cycles of approving projects, so I don’t believe we’ve even seen the full company reaction to SB 21 yet. All the exploration going on doesn’t count in our forecasts yet.
Going into this, you had to have had some expectations for production, for revenue and for investment — kind of benchmark goals you wanted to hit. So where are we at compared to what you expected the reaction to be in those three areas?
Pawlowski: As the person who worked in the modeling and developing of (scenarios presented to lawmakers during the debate over SB 21 in 2013), the announced work — again, a lot of that is in the development stages so it doesn’t fall under our forecast methodologies — the announced work does exceed anything that I had thought about in the development of what we thought reasonable upside scenarios would be.
Rodell: When we did the fall forecast and we saw the increased expenditures from companies of $10 billion that’s a huge commitment to the state in reaction. As we saw production progress — the fiscal year just ended so we won’t have the final production numbers out for the current year, but from what I’ve seen I don’t expect to see the 5.5 to 8 percent decline we saw in previous years … it’s going to be much better than that. The response has been very good considering the uncertainty generated by August.
So you would anticipate even better numbers next year if this were to stay in place and that uncertainty were no longer in the equation?
Rodell: Yes, I do.
Pawlowski: Absolutely, and I’d add one thing: take all the progress in oil and you layer on top of the progress on gas. It’s the combination of both that really has me energized about the 30-year future for Alaska.