Wednesday, February 27, 2013

Committee Passes Revised Oil Tax Plan After Careful Consideration; Revision to Senate Bill 21 creates fair, balanced and simple approach to oil & gas taxes

JUNEAU - Today, the Senate Resources Committee passed a revised version of Senate Bill 21 out of Committee. The amended bill was the result of five and half weeks of deliberation beginning in the Senate Special Committee on Trans- Alaska Pipeline System Throughput (TAPS), followed by work in the Senate Resources Committee. In order to arrive at the new changes, the committees held a combined total of 14 meetings featuring testimony from consultants, experts, the Administration, industry members, current producers and the public on how to put more oil in the pipeline while remaining fair to Alaskans.

“I am proud of our hard work to help establish an oil and gas tax system which is fair, balanced and simple across a wide range of oil prices,” said Senate Resources Chair Cathy Giessel, R-Turnagain Arm/North Kenai. “Using the Governor’s guiding principles we strived to create an attractive investment climate by virtually flattening government take at a level that is competitive with other similar oil basins around the world.”

The Senate Resources Committee took an innovative approach by adding the following ideas to the bill:

  • Create a fair, predictable tax structure with a flat tax of 35%
  • Expand incentives by increasing the Gross Revenue Exclusion from 20 to 30% for “new oil”. For example, oil like heavy and viscous oil that could be accessible using horizontal drilling or new technologies
  • Promote Alaska employment and economic development through a corporate income tax credit for Alaska manufacture of oil and gas equipment
  • Continue to evaluate Alaska’s oil and gas tax laws in light of changes in the global economy through an Alaskan Competitiveness Review Board

“After introducing the changes on Friday, the amended bill received favorable support from Alaskan business, the public and oil and gas industry representatives,” said Senate Resource Committee Vice-Chair Fred Dyson, R-Eagle River. “I think what is most important to note is that this plan really does foster new production before any tax liability reduction,” said Senator Giessel.

“Although we are very proud of the changes we have made to this bill, there is still work to be done,” said Senator Giessel. “There were many issues with fiscal implications that arose during our discussions more of the purview of the Senate Finance Committee to which we are referring those issues.”

The Senate Finance Committee plans to start work immediately on Senate Bill 21 with a meeting already scheduled for Thursday Afternoon.

For more information, please contact Margaret Dowling in Senator Giessel’s office at 907-465-4843.

Tuesday, February 26, 2013

Deborah Brollini's Senate Resources Testimony in Support of SB 21 the Governor's oil tax reform bill

My testimony to Senate Resources this evening, and Senator McGuire's kind words about Deborah Brollini and Alaska Energy Dudes and Divas My testimony: My name is Deborah Brollini, I’m a 37 year Alaska and I am testifying on behalf of myself, and my two children Lyndsey, and Van. I would first like to thank the committee for their work on SB 21 the Governor’s oil tax reform bill. Although I may not agree with all the committees’ decisions, I do respect the process, and Alaskans can be proud of the due diligence Senate Resources is taking regarding oil taxes because 710,000 Alaskans livelihoods are at stake.

I was pleased to learn that the Competitive Review has been included as a committee substitute to SB 21. It has been something that I’ve been advocating for several years now and I am encouraged that this might be the year that a Competitive Review board is implemented, and that we can start making sound business decisions rather making decisions based on politics and emotions.

I am supportive of the Competitive Review because it takes the politics out of the debate. I visited with Ben Parks last spring who is the former CEO of Boeing. Boeing won the national Baldrige Award for manufacturing excellence under his leadership. Ben Parks now resides in Homer. I asked him whether or not the state’s natural resources could be managed by a Baldrige model, and if a Competitive Review Board could manage, and make recommendations on what is in the best interest of the state in terms of our oil and gas resources. His answer was an overwhelming yes.

The reason it was a yes is because data is not personal. When we look at this country’s well data the only thing that we can get worked up about is that North Dakota, Texas and California are kicking our behinds. The well data is not personal. It is my hope that a Competitive Review will help lawmakers make long-term business decisions, and provide my children with a future they deserve.

Again, I appreciate your due diligence and including the Competitive Review as part of your committee substitute. Thank you.

Video of my testimony:

Friday, February 22, 2013

Industry talks changes; No surprise, companies favor end of progressivity; credits needed to counter base

Kristen Nelson
Petroleum News

The elimination of progressivity would be a good first step to reforming Alaska’s oil and gas taxation system, but reducing the base rate of 25 percent or credits are needed to counter the high cost of developing resources in the state.

That was the message the Legislature’s Resource committees heard from independent and major oil and gas companies Feb. 18 and 20 in hearings on Gov. Sean Parnell’s proposed oil tax changes.

The governor has proposed eliminating progressivity, which increases the tax rate as the price of oil increases, along with changes to the existing credit system and the addition of the gross revenue exclusion for barrels of oil from new fields or new participating areas within existing fields.

Progressivity was introduced in changes made to Alaska’s oil and gas taxation system in 2006. The previous taxation system was on the gross and is typically referred to as ELF because it contained an economic limit factor, designed to prevent overtaxing fields which were at the end of economic production. While the goal was to prevent early shutdown due to taxation, in application it resulted in very low to no production tax on healthy fields.

The 2006 Petroleum Profits Tax, PPT, effective for North Slope oil fields, was a tax on net profits. It added credits and had a 22.5 percent base tax rate, with progressivity increasing the rate at 0.2 percent per $1 over $40 net, a 20 percent capital credit and a maximum rate of 50 percent.

PPT was amended in 2007 under Alaska’s Clear and Equitable Share, ACES, which has a 25 percent base net tax rate and progressivity increasing the tax rate at 0.4 percent per $1 over $30 net, 0.1 percent per $1 over $92.50 net and a maximum rate of 75 percent.

State revenues have grown dramatically under ACES: about $20 billion in additional revenues since it took effect, compared to projected revenues under the old gross system.

The fight for change

Responding to producers who said ACES made projects in the state noncompetitive with other options available, and steadily declining North Slope oil production, Parnell began an effort to change the North Slope production tax system in the 2011-12 legislative session. A bill was passed by the House it failed in the Senate.

For changes proposed in this year’s Legislature, the governor set out four principles: changes must be fair to Alaskans; they must encourage new oil production; must be simple and restore balance; and must be durable and long-term.

The administration’s proposed changes, in House Bill 72 and Senate Bill 21, are being worked jointly by the Department of Revenue and the Department of Natural Resources, with consulting assistance from economist Barry Pulliam, a managing director with consulting firm Econ One.

In presentations on the bills Pulliam said the biggest changes in the governor’s proposal are elimination of progressivity, capital credits and the state purchase of credits from losses. The GRE, gross revenue exclusion, would eliminate 20 percent of new oil from production taxes. Carry-forward losses could only be applied against production, eliminating upfront payouts from the state and focusing on the governor’s goal of increasing production by making investment in oil projects in Alaska more competitive with opportunities available in similar areas in the Lower 48 and abroad.

Who supports what?

The Alaska Oil and Gas Association, a trade association including producers, explorers, refiners and the trans-Alaska oil pipeline, supports elimination of progressivity but does not support repeal of qualified capital expenditure credits, AOGA Executive Director Kara Moriarty told legislators. AOGA supports extension of the small-producer tax credit and also recommends extending exploration credits.

AOGA opposes changes to the loss-carry forward credit which would bar transferability, requiring the credits to be taken against production.

The proposed GRE, gross revenue exclusion, which would reduce taxes on new production, does not apply to existing fields, and Moriarty said it misses 80-90 percent of potential production, which would come from existing fields.

AOGA also proposes changes not included in the administration bill, including allowing the Department of Revenue the option to rely on joint-interest billings. Currently, Moriarty said, the department audits each participant separately for its share of the same pool of expenses instead of doing one audit of the expenses of a joint venture, which are found in joint-interest billings.

The producers

ConocoPhillips Alaska, not a member of AOGA, had similar concerns, favoring elimination of progressivity, but telling legislators the changes don’t contain sufficient investment incentives for legacy fields to offset the state’s high cost environment and don’t encourage investment at lower prices.

ExxonMobil told legislators that elimination of progressivity is a positive step, but said the base tax rate, 25 percent, is too high. Exxon called two aspects of ACES, the qualified capital expenditure credits and credits toward future production and infrastructure, positive, and recommended they be retained.

BP Exploration (Alaska) supported the repeal of progressivity, said the change in credits would harm some producers and recommended extension of the GRE to include new production in legacy fields.

On the issue of the complexity of ACES, Tom Williams, the company’s senior royalty and tax counsel, provided legislators with examples of how difficult it is to model results from proposed investments under the state’s existing tax system. He also illustrated the impact of the monthly calculation of production tax value, based upon changing oil prices. For the same total production tax value, at flat production rates, but with wildly fluctuating oil prices (comparable to monthly oil price changes in 2008, Williams said), the progressivity tax was 51 percent higher under the changing-price scenario than under the flat price, because progressivity is figured on a monthly basis.

Bill Armstrong’s take

Smaller companies working in the state — whether producers or explorers — told legislators they favored changes to ACES, citing high taxes and the impact of those taxes when they look to bring in outside companies as partners.

Bill Armstrong, president of Denver-based Armstrong Oil & Gas, told legislators his company has been working in the state for 12-13 years, attracted by the resource opportunity. He said the company has identified prospects and brought partners to the state, partners like Pioneer Natural Resources which now has production at Oooguruk, and Eni which has production at Nikaitchuq. The company’s most recent partner, Repsol, is exploring on the North Slope, while with another set of partners the company is producing gas on the Kenai Peninsula in Southcentral Alaska.

Armstrong said that because Alaska is expensive the company needs partners and what they hear when looking for partners is that while Alaska’s resource base is recognized, the state isn’t perceived as a good place to do business.

People who aren’t here don’t come because of ACES, Armstrong said.

He cited the few rigs running in Alaska compared to the number of rigs elsewhere, and called it “anemic” and “pathetic.”

Armstrong said the governor’s proposal isn’t perfect and needs to be tweaked, but said he was a supporter.

Oil and gas companies are out there to make money, Armstrong said, and said they are voting with their feet, indicating that while Alaska is a great place to find oil, it’s not a great place to make money.

Brooks Range caught in change

Bart Armfield, chief operating officer of Brooks Range Petroleum Corp., said the company came to Alaska in 2000 when oil prices were very low and they struggled to break even with Lower 48 prices. What brought them to Alaska, he said, were big reserves and high production rates — and, in 2000, an acceptable cost of doing business in the state. But that was under ELF.

The world-class reserve base Alaska has to offer isn’t the advantage it was then, he said, with high oil prices and technology advancements opening up opportunities in the Lower 48.

Armfield said it’s very difficult to find companies interested in coming to Alaska. Brooks Range has been here 12 years and has yet to make a revenue stream, he said.

Credits under the present system have helped keep them going, he said, even though the company doesn’t qualify for exploration incentive credits because it is working prospects which aren’t far enough out to qualify.

He said Brooks Range supports elimination of progressivity but changes in credits are a problem, as credits have helped keep the company going.

On the gross revenue exclusion, Armfield said that because of its constraints it would not be applicable to areas the company is working which have been part of units in the past.

Pioneer in production

Pat Foley, land and external affairs manager for Pioneer Natural Resources Alaska, said the company came to Alaska in partnership with Armstrong Oil & Gas and when it put Oooguruk into production became the first independent operator on the North Slope.

But the state’s tax system has changed, he said, noting that the company came to the state under ELF and Oooguruk development was approved under ELF.

PPT as proposed would have been a modest increase over ELF for Pioneer, Foley said, but as enacted with progressivity it was much worse.

The tax system in the state needs to be favorable and stable, he said.

He said the elimination of progressivity was a positive of the governor’s proposal, as was the extension of the small producer credit, gross revenue exclusion and escalating the loss-carry-forward credit.

But, he said, the proposal disadvantages smaller new projects. The loss of capital credits is a disadvantage, as is the complicated carried-forward-loss calculation.

Foley said the lack of GRE for legacy fields was a disadvantage.

And, he said, as the company works to prove up its Nuna project, the Alaska development must compete for limited capital against low-risk, fast-cycle projects in the Lower 48.

Read more:

AEA study says Tok biomass project possible

Elwood Brehmer
Alaska Journal of Commerce

Tok appears to be a couple steps closer to a long-term power solution.

The Alaska Energy Authority recently released its review of a feasibility study for Alaska Power & Telephone’s proposed wood biomass combined heat and power plant in Tok, and the results are promising.

The study found a 2 megawatt plant to be “technically, operationally, and financially feasible.” Energy Authority figures put the benefit-cost ratio of the plant at 1.49.

Thomas Deerfield owns Dalson Energy and has consulted closely with Alaska Power & Telephone, or AP&T, on the project. Deerfield said the plant offers incentives to the region beyond stabilizing the cost of electricity for residents.

“The most significant benefit might be — because it’s been an intractable problem for the state — is it would stimulate economic localization,” Deerfield said. “When you take $4 million that you spend on diesel in Tok and you convert any chunk of that to a million dollars worth of locally produced biomass fuel, all of a sudden there’s one or two or three million (dollars) that isn’t going directly out and away.”

The proposed combined heat and power, or CHP, plant would supply all of the town’s electric demand by burning wood chips from timber harvested from the surrounding area. Cost estimates for the plant have been in the $13 million range, according to Deerfield.

Harvesting timber near town would also reduce wildfire risk in an area where fires are common, he said.

Ben Beste of AP&T said the company’s current operation in Tok burns more than 750,000 gallons of diesel each year, which is trucked in from Fairbanks. Diesel prices hovering around $4 gallon have driven the cost of power to more than 50 cents per kilowatt.

Locally sourced biomass fuel is projected to cost AP&T about $55 per ton, or an annual fuel cost of about $1.8 million.

John Rusyniak, president of the Tok Chamber of Commerce, said some small businesses in the area are spending as much as $20,000 per month on electricity – a cost they are forced to pass on to their customers.

Residential power customers in Tok have reported power bills in excess of $400.

The economic analysis portion of the feasibility study was conducted by Northern Economics and examined power cost to consumers of a CHP plant in Tok. Its estimates ranged from 26 cents per kilowatt to a high of 31 cents per kilowatt for CHP with installed district heat infrastructure. The estimates are for a 50-year operational time frame and based current privately funded construction costs.

Deerfield said AP&T has investigated wind, hydro and liquefied natural gas as power alternatives, but found biomass to be the most cost-effective, reliable solution.

While the study put the cost of gas power at 19 cents per kilowatt, it cited the uncertainty of supply — a gas shortfall is predicted in Southcentral in coming years — as a primary deterrent to a gas-fired plant.

Hydropower is a viable option in summer, Deerfield said, but necessitates a second power source after freeze-up.

Installing district heating in the area surrounding a CHP plant to take advantage of residual steam could push capital costs to more than $30 million, the study found.

The next step, according to Deerfield, is the design and permitting phase of the project. The Energy Authority approved $400,000 for Tok CHP when it released its Round VI Alaska Renewable Energy Fund grant allocations in mid-January. AP&T’s request was for $1.9 million.

A “stumpage fee” to cover the State’s expenses would be added to AP&T’s estimated cost of $55 per ton for biomass, State forester for the Tok area Jeff Hermanns said. While final stumpage rate hasn’t been agreed upon, those cost estimates add about $1 per ton to the overall fuel cost.

“The stumpage that we would get from the sale would basically cover the cost of the sale,” he said.

Plans are to use GPS plotting to minimize on-the-ground work and related costs, Hermanns said, hopefully saving $500,000 over the life of the sale.

Sustainable fuel, safer community

In December the Alaska Department of Natural Resources made public a preliminary timber sale best interest finding for the area. The finding determined that the region’s forests could support the 25-year harvest sale AP&T needs to ensure fuel for its plant. The State of Alaska has historically agreed to timber sales of five years or less.

“You’re not going to get people to invest long-term in a facility unless you have a long-term, guaranteed supply (of timber),” Hermanns said.

Hermanns said the public comment period following the release of the best interest finding produced an unusually strong wave of support. Out of more than 30 responses there were “only a couple opposing” the timber sale, he said.

Supplying a 2MW CHP plant with the 35,000 tons of biomass fuel it would need means harvesting between 700 to 900 acres of forest annually, according to the DNR report.

Both Hermanns and Deerfield said the unique set of factors in Tok’s situation — high power cost, available land and wildfire risk — make it one of the best candidates in Alaska for biomass power.

Hermanns said he has heard concerns regarding the sustainability of an annual harvest of that size over the three years that this project has been in the works, and that the concerned parties need not worry. The nearby Tanana Valley State Forest offers nearly 1.5 million acres of forestland and Tok’s situation allows for cutting on State land designated for subdivision settlement – a designation the State has not harvested from previously.

About 7,800 acres of land immediately adjacent to the town is under the settlement classification.

In all, no more than 40 percent of land available for harvest will need to be cut, Hermanns said, even when using conservative 120-year re-growth rates for white spruce that currently dominate the landscape.

According to Hermanns, an overlooked aspect of what makes Tok so suitable is the substrate beneath the town and the surrounding is gravel, which drains well and won’t hold swamps common in Interior. This allows for harvest year-round.

The fish-holding streams and subsequent water quality issues that complicate forest harvest in other parts of Alaska don’t exist near Tok, Hermanns said.

Cutting development land first will also mitigate the risk of fire in those areas. Hermanns said the benefit of reducing the risk of wildfires to the area cannot be overstated. The dense spruce forests in the area make a devastating wildfire increasingly likely, he said, and almost inevitable without action.

“We really believe this is our plan to make Tok a much safer community from wildfires,” he said.

While the threat of fire can never be eliminated, he said Tok should be as safe as possible within five years of the first harvest. Much of the fire danger is eliminated when an area is cleared; and that risk is continually diminished by replacing fire-prone spruce with fire-resistant aspen, which naturally populate a freshly cut, or burned, area, Hermanns said.

He pointed to the 2010 fire on Tok’s southern edge known as the Eagle Trail fire as a prime example of why fire mitigation needs to happen, with or without power production. In that fire the Eagle Trail subdivision in Tok and the nearby village of Tanacross was evacuated.

“For about five days were on pins and needles because if there had been any shift in the wind, odds are we would have not been able to stop (the fire) from coming right through Tok. The consequences would have been tragic, there’s no doubt about that,” Hermanns said.

All money previously allocated for fire prevention has been federal money, he said. And because Alaska is competing with other western states for that money it often receives just several hundred thousand dollars a year, Hermanns said.

It’s estimated the State spent more than $14 million fighting the Eagle Trail fire.

By using the timber sale as a way to cut high-risk areas without spending additional money, the State will save between $1,100 and $1,400 on every one of the 700-plus acres harvested every year, Hermanns said.

Approximately 40 percent of cut areas will be left standing.

Read more:

Parnell bill to streamline permitting moving in Juneau

Tim Bradner
Alaska Journal of Commerce

Gov. Sean Parnell’s bill to streamline state permitting procedures is moving rapidly through legislative committees in Juneau.
This is the second year Parnell has sought changes. Last year the governor proposed, and lawmakers approved, House Bill 361, which made some of the most important changes the governor had wanted.

This year’s changes, in House Bill 77 and Senate Bill 26, involve additional streamlining steps proposed by the state Division of Land and Water Management. HB 77 is now in the House Rules Committee, while SB 26 is in the Senate Finance Committee.

Some of the most important changes include:

• Giving the commissioner of Natural Resources more authority to issue general permits, rather than project-specific permits where activities are unlikely to cause harm. The state may now have this authority, but the bill makes it explicit.

• Gives the state more flexibility in negotiating land exchanges with Alaska Native corporations or others, which can take years. The legislation adopts a more simplified approach used now by the state in doing land exchanges with municipalities.

• Allows property sales, such as for cabin sites to be done with an installment contract in lieu of all cash up-front, the current practice.

• Gives the commissioner authority to extend land and tidelands leases where it is in the state’s interest, and for longer-term renewal of aquatic farm leases.

• Gives the commissioner authority to issue more than one water-use permit for a project and more flexibility in issuing the permits.

• Reserves the rights to apply for in-stream water flow reservations to agencies and municipalities, and eliminates the ability of private or non-government entities to apply for the water reservations.

• Reserves the right to file appeals of state Best Interest Findings to those who have an interest or will be harmed by a proposed action, and to file other types of appeals.

The water reservation exclusion of private parties has caused the most criticism of the bills to date. One of the two successful amendments in the House Resources Committee, offered by Rep. Paul Seaton, R-Homer, gives 35 people with pending water reservation applications one year from the bill’s passage to pick a qualified entity to continue their request. Several of the pending applications could impact plans for development of the Pebble mine project.

Seaton warned that bill could also prompt new “extended jurisdiction” claims by federal agencies in response to Native tribes seeking protection of subsistence resources.

Seaton said not allowing Native organizations to apply for water reservations to protect subsistence fisheries could force them to seek the same protection under more favorable federal laws.

“The State of Alaska would almost be requesting federal overreach in areas where we currently manage waters for the state,” Seaton warned.

Juneau reporter Bob Tkacz contributed to this article. He can be reached at Tim Bradner can be reached at

Read more:

Wednesday, February 20, 2013

Consumer Energy Alliance Alaska Testimony; Senate Resources Committee – Tax Reform

February 18, 2013

Steve Pratt
Executive Director
Consumer Energy Alaska

Thank you, Madam Chair for allowing public comment on tax reform. My name is Steve Pratt, Executive Director of Consumer Energy Alaska, a regional chapter affiliated with the national Consumer Energy Alliance. We believe there are several reasons why we need to look at tax code revisions:

Business and residential consumers of energy have a direct interest in consuming competitively priced energy supplied from domestic sources, and also have a direct interest in robust overall economic activity to maintain livelihoods.

According to the Alaska Institute for Social and Economic Research, at least 30% of working Alaskans are dependent upon oil and gas exploration and development for employment.

Unfortunately, oil production has declined from a peak of over 2 million barrels a day to a little over 500 thousand barrels, and is in freefall at the rate of 5 - 7% per year. Remarkably, these declines have occurred during times of high and increasing oil prices.

Alaska is capable of making a substantially greater contribution to U.S. domestic oil production and gross domestic product than it does today.

A sustainable increase of only 500,000 bbls/day from today’s levels, at $100/bbl., would add $1.5 Billion per month to overall U.S. economic activity. It might also reduce the export of 1.5 Billion U.S. consumer dollars per month to OPEC nations.

Madam Chair, developing Alaska’s abundant natural resources and oil production potential are vital to the energy security of the entire nation as well as the state.

However, new exploratory and development drilling is both a risky enterprise and necessary to stem the decline in Alaska oil production. Just as Alaska North Slope natural gas will need to compete globally if it is to secure export markets, Alaska needs also to compete globally for investment dollars. Your work here can enable that ability.

The rates and progressivity structure of Alaska’s current tax regime provide a disincentive to attracting risk capital to the state as evidenced by declining production during times of high oil prices. Increased prices have resulted in substantial increases in oil production in other locations around the United States, but not in Alaska, and not because more oil is not available.

Increased investment through increased global competitiveness will enhance Alaska’s ability to fulfill its constitutional mandate to develop natural resources for the maximum benefit of the people.

Alaska’s remoteness from the markets, Arctic climate, high labor and logistical costs argue for a more competitive tax and regulatory structure.

Consumer Energy Alliance – Alaska is in favor of the Alaska State Legislature reviewing and approving revisions to the Alaska Tax Code that will improve the investment climate in Alaska.

In closing I will note that something is terribly wrong here, and I thank you, Madam Chair and members of the Senate Resources Committee, for taking on the task, with the Governor, of coming up with useful changes to the tax code.

Sheffield’s success: Overcoming hardship, personal loss

Tim Bradner
Alaska Journal of Commerce

Bill Sheffield’s conservative streak on spending, and his business acumen, were honed in a tough depression-era upbringing.

Sheffield was born in 1928 in Spokane, Wash. The family was comfortably middle-class with his father’s insurance business, but then times got tough.

When the depression set in, “No one bought insurance,” Sheffield recalls.

To survive the family grew vegetables from its rented five-acre farm and sold them at a roadside stand. Sheffield was very young but he remembers Franklin D. Roosevelt’s election as president and later Roosevelt’s famous radio talks, which inspired hope amid the nation’s economic despair.

“I sat on the floor listening, and I’ll never forget his words,” Sheffield said. “‘My friends,’ he would start, and you would feel he was talking directly to you.”

Roosevelt’s New Deal programs created jobs and Sheffield’s father eventually got one, giving the family a better income. Seeing Roosevelt’s policies work at close hand was an inspiration, and it molded Sheffield’s philosophy at a young age. It made him a lifelong Democrat, a Roosevelt-type, pro-job Democrat.

“There were wise people around Roosevelt and they could get things done. It was all about creating jobs that people could make a good, honest living with, and raise their families,” Sheffield remembers. “That was what government was for, to help people.”

This belief has remained with him since.

World War II ended the depression and after an Air Force stint and electronics school training, Sheffield joined Sears Roebuck. Sears was expanding in post-war Alaska.

The story is well-known that Sheffield came to Alaska to start TV sales and service for Sears. He arrived in Seward in 1953 on the Alaska Steamship Co.’s SS Aleutian. The train to Anchorage took eight hours, he remembers.

With Sears, Sheffield’s responsibilities grew. When the company expanded its retail line into appliances and home building materials, Sheffield moved into sales. For four years he was Sears’ top salesman in the nation.

It was in these years that Sheffield also overcame a problem that had plagued him since childhood, a difficult stutter.

“As I child I would go into a store and couldn’t speak. I had to point to pictures,” he recalls.

It wasn’t until his early 50s that Sheffield overcame his stutter.

Sheffield was ambitious. He became active in the Jaycees, or Junior Chamber of Commerce, and got to know other young up-and-comers like George Sullivan and Tom Fink, two future mayors.

He became a friend with Brad Phillips, who was then a Republican state senator. The two became roommates, in fact, and then business partners.

This was the start of Sheffield’s hotel chain.

Sheffield and Phillips first leased the 13-room Anchorage Inn at 9th and D Streets, and then leased the 31-room Red Ram, near 5th Avenue and Gambell Street.

This was small business, close and personal. Sheffield remembers running the night desk himself at the Red Ram and even changing and cleaning rooms in the middle of the night when airline crews came in late.

Sheffield eventually bought his partners out. Phillips went on to found an excursion business in Prince William Sound. Sheffield was set to open another hotel, Anchorage Travelodge on 3rd Avenue, in 1964 just as the Good Friday earthquake struck.

The earthquake damage was repaired, the Travelodge opened, and the chain expanded. Sheffield bought the famous Baranof Hotel in Juneau in the late 1960s and opened a string of hotels in smaller communities around the state, as well as the 13-story Sheffield House at 5th and G streets, a downtown Anchorage landmark (now the Westmark).

There were 19 hotels in the chain when Sheffield sold them to Holland America Line. Most continue in operating today as Westmark hotels.

Meanwhile, Sheffield had met and married his wife Lee. By the late 1970s he was happy in his life, successful in business and ready for new challenges. He had long been a big fundraiser for Democrats and now wanted to run for office himself. He set his sights high, too: the 1978 governor’s race. Tragedy intervened, however. Lee was diagnosed with cancer.

“I dropped everything, politics, running the business, to become her full-time caregiver,” Sheffield remembers.

Lee struggled with her cancer for one year with Sheffield constantly at her side, finally succumbing in 1978. She died at home, in Sheffield’s arms.

It took a while to recover from Lee’s loss, but the aim for the governor’s mansion was eventually reset for 1982. The stars were aligned for that. A bond proposition to pay for moving the state capital from Juneau was on the ballot, as was a referendum on rural subsistence. Sheffield opposed moving the capital, which gave him the Southeast vote, and supported subsistence, which helped get rural votes.

He was lucky, too, that in the Republican primary Tom Fink, a conservative Anchorage Republican, defeated charismatic Lt. Gov. Terry Miller of Fairbanks, a Republican moderate. In the contest against Sheffield, Fink was pro-capitol move and anti-subsistence, positions that played mainly to his Anchorage constituency.

Sheffield won handily with his support from other parts of the state.

Read more:

Saturday, February 16, 2013

Alaska’s ELF war; Oil companies continue to fight a controversial 2005 tax change that cost them big

Wesley Loy
For Petroleum News

Back in 2005, then-Gov. Frank Murkowski rankled the Alaska oil industry with an announcement that several satellite oil fields would be “aggregated” with the main Prudhoe Bay field for purposes of production taxes.

The effect was to greatly increase the taxes paid on oil produced from the satellites.

The decision by Alaska’s Department of Revenue drew serious industry grumbling and political heat for Murkowski. But he stood firm and the unhappy oil producers got over it.


Not exactly. Turns out a quiet battle over the tax hike has been simmering ever since. And it’s far from over.

During a Feb. 7 legislative hearing, a top oil and gas lawyer for the state offered a status report on the conflict, saying several hundred million dollars in tax revenue is at stake.

Recently, he said, an administrative law judge rendered a favorable decision for the Department of Revenue.

Now the oil companies are appealing that decision in state Superior Court.

The companies involved

The companies challenging the 2005 tax hike include Chevron, ConocoPhillips, ExxonMobil and Forest Oil.

The firms are working interest owners in certain “participating areas” of the Prudhoe Bay unit, the most productive unit on Alaska’s North Slope.

The participating areas, or satellite fields, include Aurora, Borealis, Midnight Sun, Orion, Polaris and Point McIntyre.

All the satellites are strongly integrated with the main Prudhoe Bay field, with all but Point McIntyre having no production facilities of their own.

For many years, oil produced from these satellite fields enjoyed a very low tax rate, due to the application of a tax break calculation known as the “economic limit factor,” or ELF.

“Very broadly, the purpose of the ELF was to prevent fields from becoming uneconomic due to an excessive rate of taxation,” said the decision dated Oct. 13, 2012, from the Alaska Office of Administrative Hearings. “The ELF was intended to scale the tax rate downward as the field approached its economic limit.”

Tax break removed

Over time, officials in the Department of Revenue began to have misgivings about the application of ELF to the Prudhoe satellites.

By the end of 2004, the tax rate being applied in the satellites was “miniscule” in comparison to the rate applied to production from the main Prudhoe Bay field, the administrative law judge’s decision said. While Prudhoe production was taxed at an effective rate of about 12.5 percent, production from the satellites was taxed at less than half of 1 percent.

Department of Revenue officials saw how the satellites shared Prudhoe production facilities, and how the satellite oil was “commingled without reliable metering,” the judge’s decision said.

Further, the officials noted a “production-shifting technique” whereby Prudhoe wells were being choked back, with production increased from satellite wells. This was done to help manage problematic rates of natural gas coming out of the older Prudhoe wells. But the effect was to replace high-tax oil with low-tax oil, the administrative law judge’s decision said.

On Jan. 12, 2005, the Department of Revenue issued a decision informing the oil companies that the satellites would be aggregated for ELF purposes. In other words, a major tax increase.

Gov. Murkowski announced the surprise tax hike the same day in his State of the State address.

A few days later, at a major oil industry conference in Anchorage, Murkowski received a chilly reception. He said after he felt “a little like a pork chop being thrown around the wolf cage.”

Judge’s decision

The central issue before the administrative law judge, Christopher Kennedy, was whether the Department of Revenue’s aggregation action constituted a regulation.

“If so, it would be invalid because it was adopted without following the procedures that Alaska law requires to create a binding regulation,” Kennedy wrote. Such procedures would include advance public notice and opportunity for public comment.

Kennedy, in his 20-page decision, held that Revenue’s action was not a regulation, and was proper.

The tax period at issue covers only about a year, from Feb. 1, 2005, to March 31, 2006. That’s because the ELF statute was repealed effective April 1, 2006, as part of state tax reform.

But despite the short period, the production tax revenue at issue is huge, in the hundreds of millions of dollars, Martin Schultz, supervisor of the Alaska Department of Law’s Oil, Gas and Mining Section, told state legislators in the Feb. 7 hearing.

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Monday, February 11, 2013

Sheffield first, and last, governor to cut state budget

Tim Bradner
Alaska Journal of Commerce

Photo: Former Alaska Gov. Bill Sheffield chats with long-time assistant Laurie Herman at his Anchorage home.

Editor’s note: This is the first in a two-part series profiling former Alaska Gov. Bill Sheffield by Journal reporter Tim Bradner, who has been covering the oil industry and state politics for more than 30 years. Coming next: An unsuccessful effort at impeachment, success at the Alaska Railroad, and problems at the Port of Anchorage.

Legislators and state officials are wrestling with some old issues in Juneau: How to control the growth of government, how to build strategic infrastructure, and how to plan, if it can be done, for a collapse of oil prices and state revenues.

It all sounds complex, and the collapse part is scary, but realistic.

However, we’ve been there before. It was in the 1980s. Bill Sheffield was governor. He was at the helm when oil prices collapsed, and he took action.

Sheffield’s decisions were unpopular but he saved the state from going off the cliff financially. Politicians who do the right things, that are unpopular, typically get unelected. That’s the price Sheffield paid.

Sheffield notched up a string of other accomplishments besides saving the state financially. He can also be credited for creating more strategic infrastructure, all of it successful, than probably any other governor. To his credit, Sheffield also shut down some big boondoggles, and with decisiveness.

Elected in 1982 by a big margin, Sheffield came to Juneau with the credentials of a successful businessman and the aspiration of instilling financial discipline to a state government that was awash in billions of dollars of surplus oil revenues, and with spending that was wildly out of control.

Experienced in business, Sheffield came in “with a mission to run state government like a business,” recalls Pete Spivey, Sheffield’s press secretary. Expectations became more modest after the new governor tangled with the Legislature.

A reporter asked the governor if he still thought government should be run like a business at the end of Sheffield’s first legislative session.

“No, I don’t. But government can still learn some things from business,” Spivey recalled as Sheffield’s reply.

Sheffield and his key staff were new to government, but they went at their mission with energy and passion even with a certain naïveté as to how things work in Juneau, Sheffield now admits.

One early success, however, was getting the state Department of Transportation and Public Facilities to locate several billion dollars of capital project money the agency had literally lost track of.

The state was flush with the first big surge of oil revenues and the Legislature, under intense public pressure, had opened the floodgates for money.

“Money was just being thrown at the DOT,” for projects, Sheffield recalls.

The agency was not able to keep track of when projects were completed, how much was spent and whether there was money left over.

Sheffield formed a special audit group and the funds were eventually accounted for. DOT got new computer systems to track funds, and the financial controls put in place have functioned well since then.

Spending discipline

Sheffield’s biggest challenge, which he wrestled with all through his term, was trying to instill discipline into the Legislature’s spending. At the time, hundreds of millions of dollars were being spent on projects many in the state administration felt were frivolous.

This battle was only partly won — Sheffield can be credited with some reforms — but the fight that ensued with powerful legislators would cause the governor real problems later on and fueled a push for impeachment.

One practice Sheffield went after early on was one that had become entrenched when state began receiving massive oil revenues in 1979 and 1980. It was the “one-third, one-third, one-third” split of the state capital budget, which was in the billions by the early 1980s.

Under this, the House got a third, with a promise of no tampering by the governor or the Senate; the Senate got a third with a promise of no tampering by the governor or the House; the governor got a third for the administration’s priorities with a promise of no tampering by the House or Senate.

Ray Gillespie, who was on Sheffield’s staff early on, recalls the first run at this. Sheffield’s budget staff, themselves new to government, tried to persuade the Legislature to simply approve an overall amount of money for the budget and to let the administration decide the which programs were funded.

“There was actually talk of a 15-line budget bill,” Pete Spivey remembers. Legislators angrily rejected the idea, or any interference of the governor in their decisions on spending.

It was a stormy wake-up call for Sheffield’s budget staff. Spivey recalls one memorable meeting with the late Al Adams, an influential Native legislator then on the House Finance Committee, pounding his fist on the table defending the one-third, one-third, one-third practice.

Sheffield persisted in efforts to slow the pace of capital spending, making heavy use of his veto power.

“We were worried they would spend all the money,” Spivey said. “The Permanent Fund wasn’t that big then,” and Sheffield was worried that the state’s new oil windfall would soon be dissipated with little of it saved.

Sheffield vetoed $700 million worth of legislators’ projects the governor felt were frivolous, and when legislators screamed the governor put the freed-up funds into the Permanent Fund, a gutsy move legislators were afraid to block.

“I put the money into the Fund in increments,” Sheffield recalls. “Every time they (legislators) did something to piss me off, I put in another $100 million, until it totaled $700 million.”

Sheffield couldn’t end the one-third, one-third, one-third tradition — a version of it continues today — but he caused it to become less formal and with more control by the executive branch.

Reversing re-appropriation

One simple reform Sheffield is proud of, and which continues, is for communities or groups asking for capital appropriations to fill out a form to explain what they want the money for. Even that had previously been lacking.

However, even today these forms are not public. The requests, with written rationale, go to legislators and eventually to the House and Finance committee chairs.

The first public viewing of which requests are approved comes in the closing days of the Legislature’s session when drafts of the budget, which are public, are published.

One particularly sloppy practice Sheffield took aim at, and where he scored a hit, was a procedure where legislators approved a project in a capital budget bill, then re-appropriated the funds in a second budget bill, and sometimes re-appropriating the money again in a third budget bill, all in the same session.

“It happened so many times people just lost track of where the money went,” Gillespie remembers, except for those lawmakers who knew the inner workings of the budget. “The custom was that legislators got to pick the projects for re-appropriated funds in their districts.”

This smoke-and-mirrors act was meant to confuse people, particularly the administration.

Gillespie recalls this particularly brought Sheffield into combat with Sen. Frank Ferguson, a powerful senator from Northwest Alaska, who had mastered the re-appropriation maneuver. There were heated closed-door meetings in the governor’s office.

Gillespie recalls one: “The governor had called Ferguson, Sackett and Al Adams to a meeting in his office to say ‘no more’ and that he would veto.”

Gillespie wasn’t in the room — he was right outside the door — but he remembers Ferguson storming out in a rage. He went on the Senate floor that day to attack Sheffield in a floor speech, Gillespie said.

It was tough going, but progress was made.

“Just airing the re-appropriation abuses had the effect of cleaning things up,” essentially ending the practice, Gillespie said. Ferguson was a master at budget maneuvers. Sheffield recalls finding an appropriation for a bridge at Selawik, in Ferguson’s district, tucked into an Anchorage appropriation.

Legislators themselves were appalled at the spending, and the difficulty in controlling it.

“One thing I finally realized was that if there’s money on the table, the Legislature is going to spend it,” recalled John Binkley, a former state senator from Bethel, who chaired the Senate Finance Committee.

Floor fights

There were lighter moments in all this, though they seem so only in hindsight. Relations got so bad between the administration and Republicans in the Legislature that at the end of the 1982 session the Republican-led House refused to attend a joint session with the Senate to confirm the governor’s cabinet appointments.

When the members of the House were “called,” a procedure where legislators can legally compel other legislators to attend a floor session to vote, several lawmakers hid out so the confirmation session couldn’t be held.

Following established practice, State Troopers were sent to find the wayward lawmakers. Jerry Ward, then an Anchorage House Republican, taunted the troopers, calling them from a mobile phone.

Ramona Barnes, another Republican House member who walked out, was located by the troopers but Sheffield ordered them not to arrest her.

“I didn’t want to put her through that,” he said.

Sheffield emerged from the scrap with considerably more dignity than the Legislature. The confirmation session was eventually held and all of Sheffield’s cabinet members were confirmed, Gillespie recalled.

Tempers were heated, though. Ward got into a fistfight with Lt. Gov. Steve McAlpine in the capitol building.

Averting financial disaster

Besides his work to rein in spending, Sheffield had some accomplishments in his years as governor, and two are remembered widely today. One was his quick action to sharply cut spending when oil markets crashed unexpectedly in 1986 and prices dived to $9 per barrel. What he did, though painful, saved the state financially.

Another was to shelve the massive Susitna hydroelectric project that had become hugely expensive and was flat unaffordable, as it was configured then with two large dams. A scaled-down version of the project with one dam, now called Watana, is being pushed today.

One other of Sheffield’s better-known actions was to terminate the costly and controversial Delta barley project, a state-sponsored agriculture project. Sheffield ordered it shut down virtually as soon as he took office, although by then hundreds of millions of dollars had been spent on clearing land and recruiting farmers from the Lower 48.

Special grain cars were purchased for the Alaska Railroad and a grain terminal was ordered for Seward.

“We didn’t let them even take it (the terminal parts) out of the boxes,” Sheffield said.

The project had been poorly planned from the start. Not only was Delta a poor growing environment for grain — it was too high and cold — but no one in the state had even done research as to whether there were buyers interested in the barley. Also, no one ever considered the wild buffalo herds that happily ate about half the barley crops that were grown, and have done so since.

Another accomplishment Sheffield is really proud of is his successful pursuit of getting Alaska all on one time zone. Previously there were five Alaska time zones, a huge nuisance for Alaskans, particularly those in commerce.

Sheffield is also proud of the purchase of the Alaska Railroad from the federal government, a priority for his administration, and his own action of insisting that it be run as a business in a stand-alone state corporation, managing its finances free of legislative and political control.

That allowed the railroad, the backbone of strategic transportation infrastructure for Alaska, to earn profits and reinvest those in rebuilding tracks and other assets that had run down during the years of federal ownership.

Sheffield is sometimes criticized today for letting the Susitna project lapse in the 1980s, but the project, which then involved two large dams, would have generated power far in excess of any demand.

Alaska’s population and economy are larger now and a smaller, reconfigured project is now planned, and is right-sized for the need.

But in the 1980s, it was a runaway train.

“It was crazy. There were just a bunch of guys who wanted to build big dams with little thought as to whether it all made sense,” Sheffield said.

Susitna’s death was really ordered by the financial community, however.

Sheffield had traveled to New York to meet with the bankers.

“They looked at the economics and told me the only way they would fund it would be if the state put up the Permanent Fund as collateral. That made it an easy decision for me,” he said.

It was actually hard to kill, though. Even after Sheffield made the decision supporters of the big project, mainly contractors, continued lobbying to get money back into the budget. It took a while to root out the hidden appropriations, Sheffield recalls.

The biggest, and most painful, task during Sheffield’s governorship was his emergency action to quickly slash the budget a billion dollars to preserve core state programs after oil markets crashed in 1986.

This was uncharted territory. “No one saw this ($9 per barrel oil) coming, Gillespie remembers.

“The Legislature had left town after approving the budget, based on $22 per barrel oil. In a matter of weeks oil suddenly went to $9 a barrel. Half our revenues were gone, and we were a billion dollars short paying for the budget,” Gillespie said.

“We had to quickly find 1,100 jobs to eliminate.”

Sheffield moved quickly to develop a plan.

“My advisors told me it was political suicide but it was the right thing to do,” Sheffield said. “I felt I was elected to protect the state and protect people who depend on public services.”

The cuts were mostly to the state capital budget, to preserve the available cash for programs in the operating budget, to the greatest extent possible. As a symbolic gesture, Sheffield cut pay for commissioners, division directors and staff in the governor’s office by 10 percent and cut his own salary 15 percent.

It was here that Sheffield’s business experience and detailed knowledge of the budget became critically important, recalls John Shively, the governor’s former chief of staff.

“As a businessman Sheffield was interested in numbers and he had become intimately familiar with the budget, far more than many of the budget analysts we had, spending hours reviewing the budget line by line with our group of budget analysts,” Shively recalled.

Armed with that knowledge, Sheffield “knew where to go (in the budget) to keep the government solvent,” he said.

It would have been simpler, but more destructive, to slash spending across-the-board, but Sheffield made cuts selectively after consulting with local officials.

They mostly understood.

“They all worked with us,” Sheffield said.

Not everyone cooperated, though. Some cuts to school funds were contested by municipalities. The courts eventually ruled Sheffield overstepped his authority by impounding funds without legislative approval, although the Legislature had adjourned.

The state would have run out of money by late fall had Sheffield not acted. The oil price crash turned out to be relatively short-lived, fortunately. By spring oil prices rebounded somewhat. Very few state workers were actually laid off, but capital projects were cut.

The reductions were hugely unpopular and they contributed to Sheffield’s defeat in his reelection bid in 1987. Today, Sheffield says he feels good about his actions.

“We did what we had to do,” he said.

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Alaska Contract Staffing

Saturday, February 2, 2013

Utilities still deciding on gas solution

—Alan Bailey

The Southcentral Alaska power and gas utilities are still assembling the information they need to decide on how to deal with pending shortfalls in utility gas supplies from the Cook Inlet basin. The utilities anticipate the total supplies of utility gas from the basin to fall short of annual demand around 2014-15 and are anticipating having to bolster those supplies from other energy sources.

Although there is a proposal to build a gas line to bring North Slope gas into Southcentral, this line cannot come into operation in time to head off the gas shortfall and it is not yet known whether the line will in fact be built.

Utility group

Members of the Long Term Gas Supply Study Group, a group of utility executives that has for several years been assessing the looming gas supply crisis and determining how to deal with it, talked to the Alaska House Energy Committee on Jan. 23.

The utilities are seeking a short-term fix that can head off any energy shortage in, say, a couple of years’ time, and a longer-term, perhaps more cost-effective, solution that can provide future supply flexibility, on the assumption that Cook Inlet supplies will remain tight. Unlike gas markets elsewhere in North America, the Cook Inlet gas market is isolated, with no current means of obtaining gas from elsewhere, should local supplies fall short.

The utilities have received information on possible solutions to the gas supply problem from three companies that could potentially bring compressed natural gas to Southcentral by sea from elsewhere, and from three potential liquefied natural gas providers, Moira Smith, vice president and general counsel of Enstar Natural Gas Co, told the Energy Committee. The utilities are also considering the option of trucking LNG from the North Slope, Smith said.

Cost challenges

Ideally, the utilities would like a solution that would avoid discouraging new Cook Inlet gas production while being scalable to market needs, with the option to turn the spigot off if new Cook Inlet gas comes on line, Smith said.

But, achieving those ideal objectives would be very expensive, primarily because of the high cost of amortizing project costs over a short timeframe, Smith said. The utilities have previously said that any marine import option would likely involve the construction of ships.

“Any import project would involve capital investments that would have to ideally be amortized over a significant period of time,” Smith said. And any “escape clause” in the contract, allowing the contract to be terminated, would be very expensive, she said.


The utilities have been considering the use of diesel power generation as a short-term measure when the utilities run short of gas. Anchorage utility Municipal Light & Power has standby diesel generation capacity, but Chugach Electric Association, the other main supplier of gas-fired power, has no generators that can run on diesel. Jim Posey, general manager of ML&P, cautioned that ML&P’s diesel generation system is more than 35 years old and would have to be shut down every five or six days for maintenance, were it to be needed on a continuing basis. The utilities are considering retrofitting diesel generation capabilities into a new gas-fired power plant that is about to come into operation in south Anchorage. But a retrofit of this type would run into issues with the facility’s air quality permit, Posey said.

The utilities are also considering the possibility of spot market liquefied natural gas purchases as a short term measure, Smith said.

State’s concerns

During a presentation to the Regulatory Commission of Alaska on Jan. 23 Dan Sullivan, commissioner of the Alaska Department of Natural Resources, expressed the state administration’s concerns with the concept of importing gas into Alaska from elsewhere. The import of gas could undermine the economics of local gas production in the Cook Inlet, and could result in reducing the state’s credibility as a liquefied natural gas exporter relative to other gas producing regions, especially western Canada, Sullivan said.

Sullivan said that the state administration does support the concept of building an in-state pipeline from the North Slope to Southcentral.

Room for CI producers

In response to questions during an Alaska House Energy Committee meeting on Jan. 23, Bill Van Dyke, a consultant with Petrotechnical Resources of Alaska, the firm that has been assessing the gas supply situation for the utilities, said that he did not think that imported gas would put Cook Inlet gas producers out of business.

“Exploration and production in the Cook Inlet is always going to be competitive against the price of imported gas,” Van Dyke said. Van Dyke also said that trucking liquefied natural gas from the North Slope would present a huge challenge, given the hundreds of trucks that would need to ply the route to Southcentral.

Asked whether he thought there is a political dimension to an aversion to importing gas to Alaska, Van Dyke alluded to the potential for power blackouts if Southcentral runs short of gas.

“Maybe importing gas to Alaska gives us a bit of a black eye,” Van Dyke said. “I’m not sure whether it does or whether it doesn’t. But if it’s a choice between a black eye and a blackout, I’ll take the black eye.”