Legislature(2011 - 2012)BARNES 124
02/23/2011 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HJR9 | |
| HB110 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HJR 9 | TELECONFERENCED | |
| += | HB 110 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 110-PRODUCTION TAX ON OIL AND GAS
1:22:36 PM
CO-CHAIR FEIGE announced that the next order of business is
HOUSE BILL NO. 110 "An Act relating to the interest rate
applicable to certain amounts due for fees, taxes, and payments
made and property delivered to the Department of Revenue;
relating to the oil and gas production tax rate; relating to
monthly installment payments of estimated oil and gas production
tax; relating to oil and gas production tax credits for certain
expenditures, including qualified capital credits for
exploration, development, and production; relating to the
limitation on assessment of oil and gas production taxes;
relating to the determination of oil and gas production tax
values; making conforming amendments; and providing for an
effective date."
1:23:14 PM
CO-CHAIR SEATON drew attention to question 13 on page 16 of the
Department of Revenue's 2/21/11 letter responding to questions
from the committee's 2/7/11 meeting. He read the question: "If
44% of respondents to the Frasier survey indicated that Alaska's
tax regime deters investment, what did the other 56% say?" He
said he asked this question because the main reason purported
for HB 110 is that Alaska is seen as uncompetitive with other
regions around the world. Results of the [Frasier Institute
2010 Global Petroleum Survey] relating to Alaska's tax regime
[were presented to the committee by the Department of Revenue on
2/7/11, slides 9-15]. Putting more oil into the Trans-Alaska
Pipeline System (TAPS) is what everyone is trying to do, he
continued, and his concern is that the right lever be pulled for
getting the response that the state wants. In its answer to
question 13 the department provided a breakdown of industry
responses that were depicted on [slide 14]: 25 percent of
respondents said Alaska's tax regime "encourages investment," 31
percent said Alaska's tax regime "is not a deterrent to
investment," and 25 percent said Alaska's tax regime "is a mild
deterrent to investment." [Sixteen percent said Alaska's tax
regime "is a strong deterrent to investment and three percent
said they "would not invest due to this criterion."]
CO-CHAIR SEATON calculated that by adding the first two
responses together it can be seen that [56] percent of industry
respondents identified Alaska's current tax regime as either
encouraging investment or not a deterrent to investment. By
adding the first three together it is seen that 81 percent
identified Alaska's current tax regime as either encouraging or
only a mild deterrent to investment. He said the tax changes
proposed by HB 110 would run the state into deficit spending of
up to $2 billion per year after the bill's provisions are fully
implemented. Therefore, he concluded, given that over half of
the survey respondents said the current regime either encourages
or is not a deterrent to investment, it seems that running the
state into deficit spending is the wrong lever to pull. Alaska
will not get the response it desires from the oil companies by
using this particular vehicle.
1:28:23 PM
REPRESENTATIVE MUNOZ asked whether the 81 percent is of the 56
percent that responded favorably.
CO-CHAIR SEATON said he believes the department's answer
includes the full response from industry because adding together
the last three responses of 25, 16, and 3 percent equals the 44
percent [that was depicted on slide 14].
BRYAN BUTCHER, Acting Commissioner, Department of Revenue, in
response to Representative Munoz and Co-Chair Feige, explained
that the numbers provided in the department's answer is a
breakdown of 100 percent of the responses. In further response
to Co-Chair Feige, he confirmed that the breakdown includes all
of the survey's 645 respondents.
REPRESENTATIVE P. WILSON understood that the first two groups
[of 25 percent and 31 percent] add up to 56 percent.
ACTING COMMISSIONER BUTCHER nodded yes.
1:31:04 PM
CO-CHAIR FEIGE asked whether any of the 645 professionals were
actually considering investing in Alaska.
ACTING COMMISSIONER BUTCHER said the Department of Revenue (DOR)
has not talked to the 645 respondents, but the state has done a
good job of getting information out about the tax credits
available in Alaska. Many independents are excited about Alaska
as a result of this effort. Unfortunately, companies have come
into Alaska, received leases, and found oil, only to abandon the
leases because they were unable to find partners. When looking
at the lack of exploration and the continued decline of oil, one
can look at an opinion poll and glean some things from it, he
continued. The department showed half of the opinion poll and
now the other half is being discussed, but it does not change
the bottom line of what is going on in the state.
1:32:02 PM
REPRESENTATIVE GARDNER said she appreciates the question asked
by Co-Chair Seaton because she thinks the department presented a
distortion of what the Frasier study actually concluded.
ACTING COMMISSIONER BUTCHER replied that when presenting the
slide the department stated 44 percent and did not try to make
it sound like every respondent looked at Alaska's tax regime in
a negative way. The department was pointing out that almost 50
percent of the 645 respondents listed Alaska's tax regime as
either a mild deterrent, strong deterrent, or would not invest
under any circumstances. He said these were numbers that the
department did not feel comfortable about when discussing
Alaska's tax regime.
REPRESENTATIVE GARDNER contended that Alaskans would want to
know that another way of looking at these numbers is that 81
percent of respondents said Alaska's tax regime encourages
investment, is not a deterrent to investment, or is simply a
mild deterrent to investment.
ACTING COMMISSIONER BUTCHER appreciated the point being made but
countered that it could also be looked at as 25 percent of the
respondents saying it encourages investment and 75 percent
saying it is either a negative or not a deterrent.
CO-CHAIR FEIGE commented that numbers can be made to reflect
about anything that is wanted.
1:34:26 PM
REPRESENTATIVE DICK said that if he was a respondent he would be
counted as someone with an opinion, but his potential to develop
oil would be way smaller than one of the "big three."
Therefore, to make an accurate assessment, each response would
need to be weighted in terms of the respondent's potential. For
example, each of the 25 percent of respondents listing Alaska's
tax regime as encouraging investment could be so tiny that it
would not matter, yet they are given the same weight as someone
who might put billions of investment in exploration. Therefore
these numbers do not give him a true picture either.
ACTING COMMISSIONER BUTCHER agreed, but said department was
trying to provide this information because it gets many
questions about how Alaska is viewed. By no means was the
department stressing that this was a foolproof way of looking at
it, he added, it was just a piece of information.
CO-CHAIR FEIGE asked whether it is known how the people holding
leases in Alaska feel.
ACTING COMMISSIONER BUTCHER replied he does not have an answer
other than what has been heard in committee.
1:36:34 PM
CO-CHAIR SEATON said the Frasier survey is of the oil industry,
not a random survey off the street. If the basis for [HB 110]
is the perception that Alaska's tax system makes it an
unfavorable place to invest, the data is that the majority do
not view it that way. The question is whether to pull the lever
that shows not much effect on the industry's attitude towards
investing in Alaska. That is the point that should be looked
at, not the absolute details of the survey.
CO-CHAIR FEIGE remarked that this is only one survey among many.
1:38:18 PM
CO-CHAIR SEATON drew attention to slides prepared by the Alaska
Oil and Gas Conservation Commission (AOGCC) depicting production
and exploratory wells drilled between 1996 and 2010 [slides 9
and 10 of the AOGCC's 2/21/11 presentation to the committee,
dated 1/4/11 and 2/24/10, respectively]. He said it used to be
that basically only three companies were exploring and producing
in Alaska, but the slides show that since ACES many more
companies are now doing so. [Further discussion on this topic
was interrupted until copies of the slides could be obtained,
see timestamp 1:56:44 p.m.]
1:39:18 PM
The committee took an at-ease from 1:39 p.m. to 1:42 p.m.
1:42:09 PM
REPRESENTATIVE P. WILSON asked for a review of item 10, page 8,
of DOR's 2/23/11 letter responding to questions from the
committee's 2/21/11 meeting. [Item 10 is the department's
response to the committee's request to, "Produce an estimate of
what the price of oil would have to be to cover the cost of the
Governor's proposed FY 12 budget were all the provisions of HB
110 in effect currently."]
ACTING COMMISSIONER BUTCHER replied that if the bill were to
pass today it would not have an effect on the fiscal year (FY)
2012 budget because the effective date takes place in the
future. However, he said he believes the intent of the question
was for if it was a full fiscal year, in which case it would be
approximately $90-$92 per barrel to balance what has been
submitted for the governor's budget for FY 2012.
1:44:24 PM
REPRESENTATIVE P. WILSON asked whether that would be $90-$92 a
barrel more than it is now.
ACTING COMMISSIONER BUTCHER clarified that with passage of HB
110, meaning taking out the credits and with the tax reduction,
it would be $90-$92 a barrel for that fiscal year and would not
be in addition to anything. Without HB 110 passing, it would be
$81 per barrel. In response to further questions, he said the
cost to the state for a full fiscal year would be $9-$11 per
barrel of oil.
REPRESENTATIVE P. WILSON surmised that $9-$11 is what it would
cost even though the bill would not be in effect yet.
ACTING COMMISSIONER BUTCHER responded correct.
REPRESENTATIVE P. WILSON understood that even when it is not
into effect it will cost the state $12 a barrel. She asked what
the cost would be when it is in effect.
ACTING COMMISSIONER BUTCHER replied that if the changes in HB
110 were in full effect for the fiscal year, an increase of $9-
$11 per barrel of oil would be needed to balance the FY 2012
budget.
1:46:30 PM
REPRESENTATIVE P. WILSON presumed that if it would cost the
state $12 a barrel when the provisions are not in effect, then
when in effect it would cost the state more.
ACTING COMMISSIONER BUTCHER answered that under the current
scenario it is $81. If HB 110 was fully in effect now instead
of current law, it would be $90-$92. So the difference between
the status quo and the passage of HB 110, if it were in full
effect for the fiscal year, would be $9-$11.
REPRESENTATIVE P. WILSON understood that the $12 a barrel is if
HB 110 were fully in effect for a full year.
ACTING COMMISSIONER BUTCHER said, "Correct, $9-$11."
CO-CHAIR SEATON requested the department to provide the
calculations for how it arrived at these figures. He noted that
this does not show the difference in revenue between the two for
the year, it just shows how much underwater the state would be.
ACTING COMMISSIONER BUTCHER agreed to provide the information.
He said the department has had a lot of information to provide
and apologized that preparing the responses has taken longer
than hoped.
1:48:30 PM
REPRESENTATIVE MUNOZ asked how much revenue is represented by
the $9-$11 per barrel.
ACTING COMMISSIONER BUTCHER explained it is the per barrel price
that would be required in each of the two scenarios to reach the
amount of the governor's amended budget. It is a matter of how
the tax is affected, which determines whether the state needs
more or less per barrel.
REPRESENTATIVE MUNOZ said she is trying to understand the real
dollar impact because she has heard differing reports on what it
would be. She understood that at last year's price per barrel
the state is bringing in roughly $5.5 billion. Based on that
number she asked what the impact of $9-$11 per barrel would be
going forward.
ACTING COMMISSIONER BUTCHER replied it would be approximately $1
billion, more or less, in production tax, plus the $200-$400
million estimate, for a total of $1.0-$1.4 billion.
1:50:53 PM
The committee took an at-ease from 1:50 p.m. to 1:52 p.m.
1:52:51 PM
REPRESENTATIVE P. WILSON inquired whether the proposed increase
in tax credits would result in the state receiving less money.
She further asked about the reasons for setting the tax credits
as proposed.
ACTING COMMISSIONER BUTCHER explained that credits for well
lease expenditures are currently 20 percent for the North Slope
and 40 percent for the rest of the state. The bill would
increase this credit for the North Slope from 20 percent to 40
percent because the department believes it would increase
investment. The department estimates this would affect the
state by approximately $200-$400 million annually. In further
response, he clarified that this $200-$400 million would be in
addition to what the amount is currently.
1:54:55 PM
ACTING COMMISSIONER BUTCHER added that at the previous meeting
he estimated that changing the progressivity from monthly to
annual would be $100-$400 million, which is not inaccurate.
However, he said he was thinking about what the number was under
the current scenario with the high marginal rates. Under HB
110, which would switch progressivity to brackets, it would be
much smaller, at probable tens of millions of dollars as opposed
to hundreds of millions.
CO-CHAIR FEIGE understood that companies would not receive this
credit unless they had spent money in the first place.
ACTING COMMISSIONER BUTCHER responded that this particular
annual to monthly would apply to the companies that are
producing on the North Slope and paying taxes.
1:55:42 PM
REPRESENTATIVE P. WILSON referenced the graph depicted on page 4
of DOR's 2/23/11 letter responding to questions from the
committee's 2/21/11 meeting. She said the graph compares the
current nominal tax rate under ACES and what that would look
like if it were a bracketed system. However, she observed,
there appears to be no difference between the two.
ACTING COMMISSIONER BUTCHER answered that Representative Herron
had asked what it would look like if the current law was
bracketed without any of the tax reductions proposed by HB 110.
That pretty much speaks to the 50 percent cap that would be
implemented by HB 110 as opposed to 75 percent under ACES, he
said, so the bracket would continue to go up as opposed to
reaching a plateau at 50 percent.
1:56:44 PM
CO-CHAIR SEATON returned to his earlier discussion about the
number of new companies investing in oil exploration in Alaska
between 1996 and 2010, as depicted on Alaska Oil and Gas
Conservation Commission slides [Co-Chair Seaton distributed
slides 8 and 10 dated 1/4/11 and 2/9/11 in the bottom right
corner, respectively, and dated 2/22/11 in the bottom center].
He reiterated that in the earlier years there were basically
only three companies drilling production wells, but that in
later years many more players have come in and drilled
production wells (slide 10). This same scenario can be seen for
exploratory well permits (slide 8). He cautioned that there not
be confusion between permits and wells and drew attention to the
graph on page 6 of DOR's 2/23/11 letter responding to questions
from the committee's 2/21/11 meeting, which depicts the number
of exploration wells actually drilled on the North Slope between
the years 1995 and 2010. In the four years after ACES was
instituted, an average of 12 exploration wells per year were
drilled. In the four years preceding ACES, an average of 7.8
exploration wells per year were drilled.
2:00:18 PM
CO-CHAIR FEIGE maintained that the variety of new explorers that
came into Alaska corresponded to the spike in oil price. From
2001-2002 the price was below $20 a barrel, but after that the
price was generally upward. He drew attention to the spike in
exploratory wells drilled in 2007 depicted on page 6 of DOR's
2/23/11 letter responding to questions from the committee's
2/21/11 meeting.
CO-CHAIR SEATON said he wants to make sure the committee is
looking at the data for what those averages are, not just
explanations of why the averages are the way they are.
CO-CHAIR FEIGE understood.
2:02:01 PM
CO-CHAIR FEIGE asked how many years it takes, in general, from
the time a decision is made to drill a well until the well is
actually drilled on the North Slope.
MICHAEL HURLEY, Director, Government Relations and Community
Affairs, ConocoPhillips Alaska, Inc., explained that after a
well is planned, the permitting, environmental, and site
clearance work must be done. An ice road often has to be
constructed if the well is in an area of no development. The
timing will vary, but the quickest would be about 18 months.
However, it could be up to 2.5 years because of the seasonality
when the decision is made; for example, there may be a wait for
the season to construct the ice road. In further response, he
agreed that the average length of time would be about 2 years.
2:03:04 PM
CO-CHAIR FEIGE inquired whether companies will change their
plans or stop their plans once the decision to drill has been
made if something changes in the short term with the economy or
price of oil.
MR. HURLEY replied that it depends on the nature of the
decisions. An example of being committed and going through with
the development anyway is the Oooguruk field developed by
Pioneer Natural Resources. He said he thinks Pioneer was at the
point of no return when the tax laws were changed in 2007. Once
to a certain point and enough dollars have been sunk into a
process, whether it is development or an exploration well, the
company must look at it point forward and continue despite the
economic conditions at the time. He added that a company always
looks point forward in its economics.
CO-CHAIR FEIGE returned to the graph on page 6 of DOR's 2/23/11
letter responding to questions from the committee's meeting of
2/21/11. He drew attention to the 2007 and 2008 spikes in the
number of exploration wells drilled and surmised that the
decisions to drill those wells were made, on average, in 2005
and 2006.
MR. HURLEY responded, "That is quite likely."
CO-CHAIR FEIGE further surmised that the decisions to drill the
exploratory wells drilled in 2009 and 2010 were therefore made
in 2007, 2008, and 2009.
MR. HURLEY answered, "Yes."
2:05:29 PM
REPRESENTATIVE P. WILSON, following the aforementioned train of
thought, presumed that this could be illustrated in a graph by
sliding the numbers of exploratory wells over by two years so it
could be seen that what happened in 2008 was because of
decisions made in 2006.
MR. HURLEY replied, "Generally, on average, that is true." Much
of it depends upon the particular decision being made and the
time of the decision relative to seasonality for the field work
that needs to be done at a new site.
REPRESENTATIVE P. WILSON surmised that the activity occurring
two years after the [2007] enactment of ACES was unrelated to
the bill's passage; however, the big drop in activity in the
third and fourth years afterward would be related to the bill.
She asked how long it would take after a bill's passage for the
state to see the shift in activity related to that bill by a
company like ConocoPhillips Alaska, Inc.
MR. HURLEY responded that ConocoPhillips Alaska, Inc. goes
through a budgeting process pretty much every year. During this
annual process, the various exploration and development
opportunities are ranked. He reminded members that ACES was
passed in November 2007, so ConocoPhillips Alaska, Inc. was
already committed to the things it was going to do in 2008 and
partially into 2009. The budgetary process for exploration
wells and other short-term decisions usually starts in the
spring, he continued, so the rankings for these types of
projects occur each year even though the projects may not be
undertaken until the next spring. Long-term development
projects become part of the ongoing budget in subsequent years
once a commitment has been made to the project and the
authorizations for expenditure (AFE) have been signed.
REPRESENTATIVE P. WILSON commented that this means about two
years.
2:09:49 PM
CO-CHAIR SEATON, in regard to exploratory well permits, noted
that ConocoPhillips Alaska, Inc. drilled only one exploratory
well in 2007, which means the decision for that well was made in
2005. He contended that ConocoPhillips Alaska, Inc. therefore
stopped exploration decisions prior to enactment of the 2006
production profits tax (PPT) and [2007] ACES. Between 2003 and
2005 "BP" had zero exploratory wells and it had only one
exploratory well in 2006, he observed, so BP's decisions for
that time period would have been made under the fiscal regime
previous to PPT and ACES, under which there was very low
production tax.
MR. HURLEY said he follows the co-chair's chain of logic, but
that he cannot speak to whether "BP" or "ExxonMobil" made those
kinds of decisions in those time frames.
CO-CHAIR FEIGE noted that ConocoPhillips Alaska, Inc. drilled
four wells in 2006, one well in 2007, and three wells in 2008.
He asked whether there was any particular reason.
MR. HURLEY answered that it is always about the availability of
opportunities and where the rocks are seen. Sometimes there are
projects that are ready to drill and sometimes it takes several
years of seismic work, along with acquiring land positions in
the lease sale so a company knows it has the land where it wants
to drill. Those things can take time, so it can take years to
develop a prospect to the point where it is ready to be drilled.
CO-CHAIR FEIGE asked whether those wells could have been an
aberration.
MR. HURLEY said, "It could easily have been."
2:12:23 PM
CO-CHAIR SEATON said development and service wells can be looked
at without backing up two years because acquiring the land and
access is not a consideration for those types of wells. Also,
with infield drilling there is no looking for the resource. He
observed that for companies doing infield drilling, the number
of production wells was low during the years 2005-2007, which
was a time of generally rising oil prices [AOGCC slide 10].
This could not have been driven by consideration of a profit tax
rate because it was before the PPT, he maintained. The
philosophy behind HB 110 is that dropping the state's tax rate
will result in a different response than what happened during
those years of low production, low tax rates, and rising oil
prices. Based on this, it appears that the wrong lever is being
pulled to reach the desired goal of putting more oil into the
pipeline.
2:15:24 PM
REPRESENTATIVE GARDNER inquired whether ConocoPhillips Alaska,
Inc. would be drilling exploration wells this year in the
National Petroleum Reserve-Alaska (NPR-A) had it received the
permits that it had expected to have by now.
MR. HURLEY explained that the CD-5 field is a development
opportunity, not an exploration opportunity. Exploration wells
are not needed because discovery wells have already been drilled
and the area delineated. It is simply a question of when the
field can be developed. ConocoPhillips Alaska, Inc. has not yet
signed and committed the authorization for expenditure (AFE) to
do the development because it is waiting on the permit from the
U.S. Army Corps of Engineers. Once that permit is received a
decision must be made on whether the economics still stand up
for that particular project given any stipulations that may be
put on the permit and the conditions at the time.
2:17:05 PM
CO-CHAIR FEIGE drew attention to the AOGCC graph for exploratory
well permits (slide 8) and noted that in 1996 four companies
were engaged in exploration, the number expanded quite a bit by
the mid-2000s, and then in 2010 the number of companies was down
to five and only one well was drilled out of those five permits.
He said he recognizes some of the company names listed on the
slide because of his former work and some of the names include
companies in Cook Inlet, but that many of these companies have
pulled out of Alaska. For example, "FEX" drilled a number of
exploration wells in NPR-A which have now been plugged and
abandoned and the leases turned back to the state. "Fowler Oil
and Gas," a coalbed methane developer in the Matanuska-Susitna
Valley, never got off the ground. "Renaissance" folded up and
went home, although it may still exist on paper.
CO-CHAIR SEATON pointed out that three exploration wells, not
one, were drilled in 2010, and that one exploration well is
projected for 2011.
CO-CHAIR FEIGE said two of the three wells were at Point
Thomsen.
2:19:16 PM
REPRESENTATIVE GARDNER turned to Item 3 of the analysis page in
Fiscal Note 1 regarding the change in calculating the tax rate
annually rather than monthly. She observed that Item 3 lists
the revenue impacts [for the fiscal years 2013-1017 that would
result from passage of HB 110].
2:20:03 PM
The committee took an at-ease from 2:20 p.m. to 2:22 p.m.
2:22:39 PM
REPRESENTATIVE GARDNER asked what the price per barrel of oil
would have to be to balance this budget in FY 2017.
ACTING COMMISSIONER BUTCHER said he does not have that number
off the top of his head and will provide it to members later
today.
2:23:43 PM
REPRESENTATIVE P. WILSON referenced an electronic mail document
from Linda Hay dated 2/23/11, 10:29 AM, to which a two page
document from DOR was attached entitled, "Revenue Impact of
Provisions of HB 110 and SB 49 as compared to Fall 2010
Forecasted Revenue." She observed that page 2 of the document
states the revenue impact of HB 110 for FY 2013 would be -$582
to -$782 million, whereas Item 3 of Fiscal Note 1 states an
impact of -$382 million.
ACTING COMMISSIONER BUTCHER explained it is the same numbers as
in the analysis section of the fiscal note; the analysis takes
it issue by issue, whereas this document puts those numbers into
a spreadsheet format rather than a narrative.
2:25:43 PM
REPRESENTATIVE DICK described a graph with one line being state
revenue and one line being the oil production decline. He
understood that at $90 per barrel the state's income will
decline because of the production decline. He further
understood that what is being talked about here is reducing that
income for a time, but at some point that income will either
increase or be at a lower rate of decline. Given a best case
scenario in which exploration actually takes place, he asked how
many years would it take before the two lines crossed and how
many years beyond that would it take for the state to recover
the money that it had lost.
ACTING COMMISSIONER BUTCHER replied that DOR has done work on
that, but it is difficult to make an estimate on where the two
lines would cross because so many different variables could be
considered. For example, one variable is the price. If the
price went up to $120-$130 per barrel for a couple of fiscal
years these numbers would completely change, just as they would
change if the price went in the opposite direction and dropped
to $50 per barrel. It is so complex that every one of DOR's
assumptions in a best guess estimate could be questioned. He
said DOR would be happy to work with members in developing
possible scenarios to determine where the lines might cross.
2:27:52 PM
REPRESENTATIVE DICK said it would help him get a better picture
even if a scenario stuck with just $90 per barrel. He surmised
that where the lines would cross in a best case scenario might
be three or four years down the road, and perhaps another four
years beyond that before the state gained what it would have
invested into this. Thus, in a best case scenario it would be
eight or nine years before the state broke even.
ACTING COMMISSIONER BUTCHER agreed it would be a number of years
and it would be determined by how quickly the anticipated
increase in exploration and development occurred under the bill,
as well as the size of the fields that are found. The state
could be pleasantly surprised or not. He added that Mr. Balash
is available to address the discussion that occurred in a
previous committee meeting about what constitutes a unit.
CO-CHAIR FEIGE recalled that Mr. Bart Armfield of Brooks Range
Petroleum Corporation brought up that issue during his [2/18/11]
testimony.
2:29:49 PM
JOSEPH BALASH, Deputy Commissioner, Office of the Commissioner,
Department of Natural Resources, said the state has the right to
make state land available to lessees. This is done by dividing
blocks of land into individual leases that are made available at
competitive sales once a year. The state's oil- and gas-prone
regions are broken into five areas: the Beaufort Sea, North
Slope, North Slope Foothills, Cook Inlet, and Alaska Peninsula.
A sale occurs for each area once a year, so five area-wide sales
occur at different times throughout each year. All of the
available leases within an area are available for bid at that
area's annual sale.
MR. BALASH explained that once a lease is obtained the company
has a maximum of 10 years under state law to exclusively explore
the land on that lease. If after 10 years the company has not
obtained a certified well or successfully put that lease into
production, the term will end and the lease will terminate, come
back to the state, get a new lease number, and be offered at the
next area-wide lease sale. If the lease is drilled and oil is
found, the lease itself is unlikely to be the only place where
the oil is located, so there will probably be additional leases
for the area surrounding that well. This collection of leases
is grouped together, put into a unit, and a single operator
identified to develop that unit. The unitization process is
therefore a means for efficiently developing a pool of oil
underlying multiple leases.
2:33:22 PM
MR. BALASH said a unit can be formed through the Division of Oil
& Gas, or the Alaska Oil and Gas Conservation Commission, or,
for federal lands, the U.S. Bureau of Land Management. If the
unit contains all state acreage or some state acreage it can be
formed and filed at the Department of Natural Resources. Once
that unit is petitioned and agreed to be formed by the Division
of Oil & Gas, the company must provide either a Plan of
Exploration (POE) or a Plan of Development (POD). Under the
regulations at the Division of Oil & Gas, there is no
distinction between an exploration unit and a development unit.
It is just a matter of whether the unit is being operated under
the terms of a Plan of Exploration or a Plan of Development.
MR. BALASH related that if oil in the unit has been delineated
and is ready to be produced, the Plan of Development will lay
out the facilities that need to be constructed and a timeline
under which they will be constructed and put into production.
However, if all that is present in the unit is a discovery, then
additional drilling needs to be done to delineate the oil field
or pool. In this case, a Plan of Exploration is submitted that
guides the development or delineation of the field. The
department tracks what is going on and makes sure that it is
occurring. If the unit does not go into production within five
years it is subject by law to terminate. Any leases within the
unit that are beyond their primary term would then terminate and
go back into the pool for the next area-wide lease sale.
2:35:58 PM
MR. BALASH stated that once a specific unit is formed and a
reservoir is identified within that unit, then a Participating
Area (PA) is defined to locate the exact position of where that
area is. A Participating Area is almost always smaller than the
unit. There can be multiple Participating Areas within the
unit, but once the Participating Area has been formed within the
unit, any leases within the unit that are not part of the
Participating Area are then contracted out of the unit, unless
there is a plan of exploration to further explore those leases
within the unit. If those leases are at the end of their
primary term, they will terminate and go back into the general
pot for the next area-wide lease sale. When they are made
available for re-leasing, they get a new lease number.
REPRESENTATIVE GARDNER inquired whether an area that has been
contracted out but then re-leased to a new owner would
automatically be part of the operating area or on its own within
a Participating Area.
MR. BALASH clarified that when a lease within a unit is
contracted out, the unit's boundary shrinks to just the leases
that are in the unit, which is roughly the size of the
Participating Area or the Plan of Exploration for any other
leases that are part of the Participating Area. A Participating
Area is a subset of the unit. In further response, Mr. Balash
explained that within the collection of leases in the unit,
there may be more than one Participating Area. There may be
some gaps where there are leases that are not part of a
Participating Area, but these gaps with leases would require a
Plan of Exploration. The gap is either subject to a Plan of
Exploration or is part of a Participating Area and, if it is
neither, it goes back into the pool of available leases.
MR. BALASH, in response to Co-Chair Seaton, agreed to provide
his written crib notes.
2:41:15 PM
CO-CHAIR SEATON understood from previous testimony before the
committee that Alaska is not equal to other jurisdictions around
the world in its requirement for submission of data from
companies for leases on state land. He requested that the
Department of Natural Resources let the committee know what data
the department would like to have and provide an analysis for
what would be a reasonable length of time for that data to
remain confidential. He further requested that the department
provide its position on whether data from an abandoned lease
should become the property of the state. Data from abandoned
leases would help make the state more competitive, he opined,
because that information could help lower the cost of future
development of the state's resources.
MR. BALASH pointed out that a variety of seismic and geologic
geotechnical information is collected on any given lease.
Additionally, the department draws a line in the treatment of
information that has to do with interpretation by the lessee or
a contractor for the lessee. He asked for clarification about
which information the co-chair would like indentified.
CO-CHAIR SEATON said he would like Alaska to be competitive and
have the same information that the producers and explorers are
required to give to other jurisdictions in the world, such as
Norway or the United Kingdom. For example, he understood that
some jurisdictions require field-by-field data. He would like
to know what data the Department of Natural Resources thinks
would be useful and reasonable for the state to require.
2:47:22 PM
REPRESENTATIVE HERRON noted there is a variety of opinion on the
bill, with some people saying it is a huge leap of faith. He
asked whether Acting Commissioner Butcher believes that HB 110,
as currently written, is the correct size parachute for Alaska.
ACTING COMMISSIONER BUTCHER responded that he believes this is
the way forward for the state. He related that in delving into
the issue, the department kept coming back to three things that
are known definitively: there is oil to be found in Alaska,
production is continuing to decline in the state and, as the
price of oil has gone up over the last few years, exploration
has risen considerably in other states but not in Alaska. He
allowed that there will be changes made to the bill through
amendments, but said the three lynchpins of HB 110 are: the 15
percent tax rate for new explorers, the change to brackets for
progressivity, and the increase to 40 percent for well credits
on the North Slope. It has now been nearly four years under
ACES and there are some positives to it that the governor
believes should not be thrown out; for example, independent
operators have come into Alaska as a result of ACES. However,
there is also an alarmingly low amount of exploration in the
state as a result of ACES. The administration believes this is
a critical time in the state's history and this is an
opportunity to change the direction in which the state is going.
If the bill passed today, there might not be a flood of money
within a year from today, but at that time the industry could be
invited to address the legislature and say what is going on.
2:52:37 PM
REPRESENTATIVE GARDNER recalled that in testimony before the
committee Brooks Range Petroleum expressed concern about being
excluded from the bill's provision for unitized development
because its leases were unitized before 12/31/10. She inquired
whether the administration will be proposing any language to
allow Brooks Range Petroleum to participate in this benefit.
ACTING COMMISSIONER BUTCHER answered that the department has had
conversations about this issue and is open to discussing a
change in this regard.
CO-CHAIR FEIGE pointed out that there are several units within
the state that do not yet have any production. He provided an
amendment, labeled 27-GH1007\A.2, Bullock, 2/22/11, to Acting
Commissioner Butcher for his comment prior to the amendment
being offered on 2/25/11. He said the amendment is an attempt
to encourage production in areas that are not yet producing,
whether or not they are in a unit.
2:55:09 PM
CO-CHAIR FEIGE said that after listening to testimony and
talking to many people, he has taken this apart in as many
different ways as possible and he keeps coming back to the
governor's bill. It is well crafted legislation, he opined, and
strikes a good compromise between the revenue needs of the state
and trying to relax the fiscal terms of the state so that more
development and production are encouraged on the North Slope.
2:57:24 PM
CO-CHAIR SEATON inquired as to the status of the department's
response to his question that the fiscal note does not take into
account the proposed 15 percent tax rate in the future.
ACTING COMMISSIONER BUTCHER replied that the response has been
dropped off in the co-chair's office.
2:58:26 PM
The meeting was recessed at 2:58 p.m. until 7:00 p.m. that
evening.
7:05:23 PM
CO-CHAIR ERIC FEIGE called the House Resources Standing
Committee meeting back to order at 7:05 p.m. Representatives
Feige, Seaton, Dick, Kawasaki, P. Wilson, and Herron were
present at the call back to order. Representatives Munoz,
Foster, and Gardner arrived as the meeting was in progress.
REPRESENTATIVE HERRON asked the Department of Revenue whether
any of the committee's requested information is still pending.
ACTING COMMISSIONER BUTCHER responded that the department will
provide the remaining information to the committee as quickly as
it can. In further response, he nodded to confirm that there is
still one more packet of information yet to be provided.
7:07:14 PM
REPRESENTATIVE DICK requested that the committee be provided
with a projection of how many years after passage of HB 110 it
would take for the state's investment to equal the return under
best-case and worst-case scenarios.
ACTING COMMISSIONER BUTCHER answered that the department will
try to put together that information. He said the department
will also use testimony provided by Great Bear Petroleum to
project industry response if HB 110 was passed.
7:10:01 PM
CO-CHAIR SEATON presumed the department would do this by looking
at oil production status quo compared to a change resulting from
the bill.
ACTING COMMISSIONER BUTCHER said correct. The department would
keep the same assumptions on oil price and same assumptions on
production forecast out into the future, and then incorporate
what might be an increase in production as a result of the
passage of the bill. In further response, he said the
department will try to provide a side-by-side graph of where the
state would expect to be under the status quo and with the
passage of HB 110.
[HB 110 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HJR 9 Endorsing ANWR Leasing Packet.PDF |
HRES 2/23/2011 1:00:00 PM |
|
| HRES DOR Answers to Rep Seaton Questions 2.18.11.pdf |
HRES 2/23/2011 1:00:00 PM |
|
| HRES Dept. of Revenue response to 2.7.11 questions.pdf |
HRES 2/23/2011 1:00:00 PM |
|
| Rep. Young HR 49.pdf |
HRES 2/23/2011 1:00:00 PM |
|
| HRES 2.23.11 DOR Modeling for Rep. Seaton.pdf |
HRES 2/23/2011 1:00:00 PM |
|
| 11.02.23 Hse Res response for 2-21-11.pdf |
HRES 2/23/2011 1:00:00 PM |
HB 110 |
| HRES 2.23.11 DOR Response to Feb. 11 Questions.pdf |
HRES 2/23/2011 1:00:00 PM |
|
| HRES 2.23.11 DOR Explanation on FN.xlsx |
HRES 2/23/2011 1:00:00 PM |
|
| HRES 2.23.11 AOGCC slides discussed in committee.pdf |
HRES 2/23/2011 1:00:00 PM |