Legislature(2013 - 2014)BARNES 124
03/27/2013 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 21-OIL AND GAS PRODUCTION TAX
1:07:01 PM
CO-CHAIR FEIGE announced that the only order of business is CS
FOR SENATE BILL NO. 21(FIN) am(efd fld), "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; providing a tax credit against the corporation income
tax for qualified oil and gas service industry expenditures;
relating to the oil and gas production tax rate; relating to gas
used in the state; relating to monthly installment payments of
the oil and gas production tax; relating to oil and gas
production tax credits for certain losses and expenditures;
relating to oil and gas production tax credit certificates;
relating to nontransferable tax credits based on production;
relating to the oil and gas tax credit fund; relating to annual
statements by producers and explorers; establishing the Oil and
Gas Competitiveness Review Board; and making conforming
amendments."
1:07:36 PM
KEN THOMPSON, Co-Owner/Investor, Managing Director, Alaska
Venture Capital Group, LLC (AVCG), Owner/Operator, Brooks Range
Petroleum Corporation, began his PowerPoint presentation by
noting that Alaska Venture Capital Group, LLC (AVCG) is the
parent company of Brooks Range Petroleum Corporation, one of
Alaska's most active exploration companies. He further noted he
is a former president of ARCO Alaska, Inc. He said he has spent
75 percent of the last three months in the Lower 48 working to
find a new funding partner to invest in his company's new Alaska
development projects.
MR. THOMPSON stated why consideration should be given to his
company's perspectives on CSSB 21(FIN) am(efd fld) (slide 2).
He said Brooks Range Petroleum has been one of the most active
exploration companies in Alaska, exploring and developing solely
on North Slope state lands. From 2007-2012, Brooks Range
Petroleum drilled 10 of the 36 exploration wells drilled on
North Slope state lands. "That is more exploration wells than
Conoco, BP, Exxon, ENI, Repsol, and Armstrong combined," he
said. Brooks Range Petroleum has 105,000 leased acres in three
core areas and has a joint venture partnership with Ramshorn
Exploration, an affiliate of Nabors Industries. Alaska Venture
Capital Group was started in 1999 and its operating company,
Brooks Range Petroleum Corporation, was formed in 2006. So far,
$200 million has been invested in Alaska North Slope exploration
projects, with 3 discoveries from 10 wells for about a 1 in 3
success rate. A discovery that was made in the 1970s has been
acquired and is being assessed for development. Mustang, the
company's first development project, is under construction;
photographs of its confirmation well can be seen on slides 6-7.
A gravel road is under construction and a gravel pad and
facilities will be built this next year. Drilling will occur in
2014 and production will begin fourth quarter 2014. At 44
million barrels of oil, Mustang will contribute about 15,000
barrels of oil per day to the state. Between its discoveries
and acquisition, the company has three other development
projects in various stages of permitting or conceptual
engineering. Mustang alone will be just under $600 million in
capital. In 2013, 2014, and 2015 his company will spend about
$200 million per year, about the same level of capital spending
as Pioneer Natural Resources and about one-third the level of
ConocoPhillips Alaska, Inc. Other development projects will
total about $1.2 billion in investment capital.
1:12:04 PM
MR. THOMPSON addressed what the state will be receiving for its
investment of tax credits, which have been very important to his
company. Of the $200 million his company has spent, a total of
$69 million has been refunded in tax credits. The state will
receive back all of its $69 million in credits in the first year
of production from Mustang alone, and over its field life
Mustang will produce revenues to the state of $1.2 billion. His
company has redeployed all of the credits back into drilling or
seismic to find and develop new oil. The credits enabled his
company to drill three wells instead of two, or two exploration
wells instead of one. This helped accelerate the discovery and
delineation of Mustang in two years instead of the three it
would have taken for the company to do on its own using only the
company's budget and capital availability.
MR. THOMPSON said his company has experience in bringing other
independents to Alaska and in raising capital for Alaska. It
brought Ramshorn Exploration and two companies out of Calgary,
Bow Valley Energy and TG World Energy, which it later bought
out. Additional capital is now being sought for Mustang as well
as the company's three- to five-year exploration program. When
his company started fund raising 18 months ago, materials were
sent to 210 firms. Of the 210, only 19 had an interest in
Alaska and after further review only 2 of the 19 remained
interested. In talking with many of the 210 firms, two key
things were heard. Most commonly heard was that Alaska's fiscal
regime is complex with a high government take. The
progressivity factor was criticized, with some companies
comparing it to the federal windfall profits tax of the early
1980s that caused many domestic companies to go overseas to
explore. His company is encouraged the state is making positive
change with SB 21 and is communicating this to others. The
second most common thing heard was that companies are investing
in Lower 48 source rocks and shale, which are much quicker on
production and lower cost capital per reserve. He reported that
his company is in final negotiations with a Lower 48 independent
that has never invested in Alaska. Communication continues with
this company about the legislature's progress in making Alaska
more competitive through some of the changes being contemplated.
1:16:32 PM
MR. THOMPSON displayed a map depicting his company's acreage on
the North Slope (slide 3). He said his company's 105,000 acres
are right next to the Prudhoe Bay field, Badami, Point Thomsen,
Kuparuk River Unit, the Coleville area, and the Alpine field.
His company has discovered 44 million barrels of oil proved,
plus probable reserves. So far the possible reserves on all of
the company's projects are around 150 million barrels. Using
three-dimensional seismic his company has mapped potential
prospects that are being further assessed, but the tally, which
needs to be confirmed with further drilling, is about 700
million barrels gross recoverable.
MR. THOMPSON discussed the difference his company can make
(slide 4). Based on his work on the North Slope as a major and
now as an independent, he said he believes that "new work in the
existing fields to increase production above their existing
declines will not - by itself - level Alaska's oil production.
It will also take production from exploration discoveries."
Alaska needs exploration and production, not just production.
Some companies, including some of the majors, have stopped
exploring on state lands. While they do have huge resource in
the existing fields, that alone is not going to solve Alaska's
problem of increasing production in the existing legacy fields.
To turn the production curve up, it is also going to take
exploration and new discoveries like those of his company. As
legislators decide on exactly what changes to make, one size is
not necessarily going to fit all. There are two different
businesses in Alaska in the oil industry - that of production
development and that of exploration - different players and
different risks so different incentives can make the difference.
1:19:36 PM
MR. THOMPSON said anything included in CSSB 21(FIN) am(efd fld)
should incentivize the North Slope majors into what they do the
best - safely and reliably abate the legacy fields' decline and
extract the maximum amount of oil from existing fields. But the
legislation must also do a second thing, and that is incentivize
the explorers in what they well - find and develop the billions
of barrels of additional oil still left in smaller pools on the
North Slope. He explained the production graph on slide 4 is
for the Mustang discovery, plus his company's other potential
discoveries of Tofkat, Beechey Point, Telemark, and Appaloosa
that still require delineation. Successful delineation of those
in the next couple years would add production of over 50,000
barrels of oil per day. That is significant, he said, given
that between 2012 and 2011, North Slope oil production declined
about 50,768 barrels per day. Developments from exploration
could replace all of that production falloff and the state could
achieve no decline for a period of time. He said he believes
that with two or three more exploration companies on the North
Slope repeating what Brooks Range Petroleum is doing, and if the
majors can be incentivized in additional development in existing
fields, the production curve could be turned upward like what is
being seen in some of the Lower 48 states.
MR. THOMPSON noted that the aforementioned fields belonging to
Brooks Range Petroleum represent about $2 billion in capital
spending, $4-5 billion in state revenues, and significant Alaska
hire. He reminded members about the testimony provided [on
3/25/13] by Econ One Research in which slide 20 showed that
40,000-44,000 new barrels of oil per day would be needed to
offset the fiscal impact of CSSB 21(FIN) am(efd fld) versus
ACES. Drawing attention back to the significance of slide 4 in
his own presentation, Mr. Thompson pointed out that the
exploration discoveries of Brooks Range Petroleum, if brought on
to development, would be above 50,000 new barrels a day.
1:22:44 PM
MR. THOMPSON reviewed the positive provisions his "successful
exploration company" sees in CSSB 21(FIN) am(efd fld) and
discussed what could be changed in the bill to make Alaska even
more competitive and to help newly started companies like his
that are in different financial circumstances than the majors
(slide 5). Eliminating progressivity is very positive and
simplifies the tax calculation, he said. From his experience
talking with over 200 companies over the last 18 months, this
will be a big public relations plus for the State of Alaska.
However, raising the base tax rate from 25 percent to 35 percent
is a negative; he suggested a compromise of 30 percent. The $5
per barrel produced credit is positive and an innovative way to
help balance producer and state take at low oil prices, although
it may be worthwhile for the Department of Revenue to retest the
economics to see if more may be needed or some other mechanism
may be needed at prices below $80 a barrel.
MR. THOMPSON said very important to his company is the carry
forward loss credits, given the significant investment required
prior to production which will not start until fourth quarter
2014. The increase of this credit from 25 percent to 35 percent
and interest on the unused credits is a big positive. Pointing
out that his company does not have current production and may
have these carry forward loss credits for some time in the
future, he suggested it would be helpful to allow the credit to
be taken against any payments to the state, such as against
royalties, or to be able to transfer these credits to others
rather than having to defer them.
1:25:39 PM
MR. THOMPSON noted that in the original version of SB 21 the
small producer credit of $12 million per year was extended from
2016 to 2022, something that would have really helped his
company because peak production will not be reached until after
2016. [Because CSSB 21(FIN) am(efd fld) sunsets this credit in
2016], a small producer like Brooks Range Petroleum, with first
production in fourth quarter 2014, will be unable to utilize
these credits. This negative hurts his company's economics and
presents even more challenge in having to raise even more funds.
Reinstating this credit to 2022 would be a positive for the few
small producers existing in Alaska because it would be more cash
flow to put into facilities and drilling.
MR. THOMPSON stressed the qualified capital expenditure credit
is probably the thing that has helped his company the most.
None of these credits have been put into the owners' pockets, he
said, this immediate cash has been put into drilling programs
and seismic and right now is helping to fund part of the Mustang
development facilities and the drilling in 2014. His company
would not be developing Mustang right now without these credits;
development would have been deferred by about a year if his
company had had to live just within its capital availability. A
negative in CSSB 21(FIN) am(efd fld) is that the qualified
capital expenditure credit goes away at the end of 2013.
Extending the qualified capital expenditure credit even to the
end of 2016 would help his company get pasts its first project.
Understanding the state's concern about the amount of these
credits, he suggested limiting the credit to small producers and
limiting the amount to $40-$50 million per year per company.
Another way to continue this credit without hurting the state,
he said, would be to target the credit to specific items where
companies must show there will be a production increase. He
added he is unaware of any companies that have not used these
credits for anything but production or reserves, but has heard
otherwise from the governor and he therefore would like to see a
table of what companies have used them for.
1:29:16 PM
MR. THOMPSON stated the gross revenue exclusion (GRE) is very
helpful and will incentivize new oil production on more leases.
However, a negative is that the GRE was previously proposed at
30 percent, but in CSSB 21(FIN) am(efd fld) it is 20 percent.
He suggested a GRE of 25 percent as a balance to state and
producer take.
MR. THOMPSON concluded by pointing out his exploration company
has never had an exploration incentive credit on the North Slope
because it has not drilled wells more than 22 miles away; his
company has drilled closer than that, but has found new oil
reserves. He said his company is significantly disturbed [that
the 30 percent exploration incentive credit originally included
in SB 21 for exploration wells anywhere on the North Slope is
not included in CSSB 21(FIN) am(efd fld)]. He urged this
provision be reinstated, saying his company would put this
credit to good use in additional seismic and drilling.
Reinstating the credit, even if just for small producers, would
be helpful. He further suggested this credit could be limited
to $25 million per company per year and could be run for five
years to see if it is effective. He predicted it would be
effective in his company's case because in the past the other
credits helped his company drill three wells instead of two and
an exploration credit could do the same thing.
1:31:32 PM
REPRESENTATIVE SEATON inquired about the plans that Brooks Range
Petroleum has for production facilities.
MR. THOMPSON replied this summer his company is in the final
engineering design stages for its stand-alone facilities. The
company plans to be self-sufficient, building its own modular
facilities with a lot of Alaska hire and then trucking them to
the North Slope. Capacity is 15,000 barrels of oil per day, but
each facility module can later be increased if additional oil is
found. He said slides 6 and 7 include photographs of the gravel
pad where the facilities will be installed in 2014.
1:32:52 PM
MR. THOMPSON, responding to Co-Chair Saddler, said the estimated
cost for the aforementioned facility will be just over $200
million for total facilities, plus $340 million on development
drilling, with the whole project being over $570 million.
CO-CHAIR SADDLER inquired whether the credit in CSSB 21(FIN)
am(efd fld) for Alaska manufacture will be attractive to Mr.
Thompson's company. He further inquired whether the company
intends to fabricate these modules in Alaska.
MR. THOMPSON answered it would, and said various equipment and
components are made that could be ordered, but the final modular
construction, as well as hauling to the North Slope, would be
done within Alaska and he would think some of that work would
qualify for that particular item in the bill.
CO-CHAIR SADDLER asked how important this credit would be to Mr.
Thompson's company.
MR. THOMPSON confessed he does not fully understand whether this
particular credit would come to Brooks Range Petroleum or to the
companies that are building the facilities. He offered to
provide the committee with a figure in regard to the portion of
the facilities that would qualify under this credit. He
presumed the credit would help some and would incentivize that
the work is done within the state of Alaska.
1:34:45 PM
REPRESENTATIVE TUCK inquired how long Mr. Thompson has been
operating in Alaska.
MR. THOMPSON replied the parent company, Alaska Venture Capital
Group, began leasing acreage in 1999. Seismic was run soon
after that, followed by assessing and putting together a good
exploration portfolio. Brooks Range Petroleum Corporation was
formed in 2006, with exploration, engineering, and operating
personnel located in Anchorage. The company started operating
its own wells in 2006 and has drilled every year except this
winter in which the focus is on development.
REPRESENTATIVE TUCK asked how soon Brooks Range Petroleum might
be able to single-handedly make up that loss [equivalent] of
40,000-44,000 barrels per day.
MR. THOMPSON responded the Mustang project will be put into
production in third quarter 2014 and will be ramped up by 2016
to about 15,000 barrels a day. Also being looked at for first
quarter 2014 is Appaloosa, an offset to Mustang, and the Tofkat
discovery. Drawing attention to slide 4, he said Brooks Range
Petroleum could produce and get up to roughly 40,000 barrels a
day just on its own by 2017. The hurdle of 40,000 could be
achieved much faster with work in the legacy fields by the
majors and by other independents that are drilling on the North
Slope. It will take everyone together, but it is significant
what one independent can do and one exploration company can do.
REPRESENTATIVE TUCK thanked Mr. Thompson for his quote that
exploration does lead to exploration. Regarding it being said
that the qualifying tax credits do not lead to production, he
inquired what could be done to make it more accountable so it
can be demonstrated it leads to production.
MR. THOMPSON answered that is the most puzzling comment he has
seen quoted in the newspapers and by some within the state. His
company has put every dollar of credit received back into
seismic or drilling, resulting in these discoveries which are
confirmed, proved reserves by an outside consultant. The state
owns one-sixth of those almost 50 million barrels, plus the
taxation on production. He is unaware of which company is not
using credits to bring reserves to the table or not be in
production. His company is willing to be held accountable that
if it has continued credits it shows proof it can bring
production and new reserves.
1:38:58 PM
REPRESENTATIVE JOHNSON inquired whether Mr. Thompson would
choose ACES or CSSB 21(FIN) am(efd fld) as written.
MR. THOMPSON replied he would rather see "SB 21" improved. For
a new company without production, ACES provides a higher rate of
return because of the tax credits. However, ACES becomes very
penalizing at high oil prices and when his company is under
production the progressivity under ACES will be very negative.
In trying to attract funding his company gets nowhere with ACES;
the progressivity has turned off so many companies to not even
want to look at Alaska. Therefore, his answer would be for an
improved "SB 21" with a balance that both industry and the state
can feel good about.
1:40:17 PM
CO-CHAIR FEIGE drew attention to the last point on slide 2
regarding the sending of advertising materials to 210 firms in
2011 and today only 2 remain interested. He asked whether
adoption of "SB 21" would affect investment capital becoming
available to producers and explorers within Alaska.
MR. THOMPSON responded his company is in final negotiations with
a Lower 48 independent that will not make its final decisions
for the closing until after the legislative session. That
company wants to know with certainty what the terms are going to
be so economics can be run for making a final decision to
invest, which is why he hopes some of these changes can be made.
He shared his experience of being at a meeting in New York with
one of the largest private equity firms in the world that had
expressed interest in Alaska. He said he knew he was in trouble
for attracting investment when he walked into the conference
room and saw that the walls from floor to ceiling were covered
with geologic and seismic maps of the Lower 48 source rock plays
- no conventional prospects, nothing from Alaska, just source
rock plays. The equity firm was candid with him that it saw
that those reserves could be put on faster, could be more
significant for the firm, and were lower risk than exploration
or development in Alaska. To the positive, he continued, he has
found one company that does love conventional exploration and is
very interested in Alaska, so he remains optimistic. Because
his company's sole vision is to become Alaska's premier
independent oil and gas company, it will continue to keep Alaska
as its only focus.
1:43:29 PM
REPRESENTATIVE SEATON inquired how much capital for Mustang will
be expended before December 31 that would qualify for the 20
percent tax credit.
MR. THOMPSON answered he does not have that table in front of
him and will get the exact number to the committee, but his
guess is roughly $27 million for the road and everything that is
currently underway. A lot of engineering and ordering of
equipment remains to be done this year. He guessed that less
than 20 percent of the total $577 million will be spent in 2013.
Most of it will be the actual equipment and modular construction
in 2014 and then the drilling in 2014 and 2015, which is why he
asked if things could at least be extended on some of this to
2016, and certainly the small producer credit to 2022.
1:44:59 PM
CO-CHAIR SADDLER asked whether it is Mr. Thompson's opinion that
the high rates of government take under ACES are the biggest
barrier to entry into Alaska, or should other things be looked
at to improve investment and competition on the North Slope.
MR. THOMPSON replied the high government take is what he heard
most often in his phone calls with the 200 companies that said
they are not interested. The image of Alaska is hard to turn
around. The start of ACES put Alaska in a negative image of
high government take and the taking away of the upside at high
prices. He is one of several ambassadors discussing how the
state is working to improve things and what the positives are,
but ACES has certainly made it an uphill battle.
1:46:18 PM
CO-CHAIR SADDLER asked whether Mr. Thompson would say Alaska is
dismissed out of hand or is dismissed after being looked at and
the high government take is seen.
MR. THOMPSON responded he does not even get a foot in the door
with many companies because the high government take is just
dismissed out of hand. When he did get in the door with the 19
companies, which were private equity firms and other producers,
they realized the take was high but wanted to see the resource
base and look at the new conventional exploration. Some wanted
to look at the unconventional shale resource on the North Slope,
something his company plans to pursue after getting its
conventional prospects on line. The resource base got the 19
companies very interested; 2 are now left after putting it to
pencil. The 17 that dropped out found better rates of return
elsewhere, such as the Bakken, Eagle Ford, and Gulf of Mexico.
1:47:59 PM
CO-CHAIR SADDLER inquired whether independents like Brooks Range
Petroleum need a lower government take than do large producers
in order to "make a buck" in Alaska, given independents do not
have downstream refining and transportation interests.
MR. THOMPSON answered reasonable government take would certainly
help independents, but tax credits would help companies like his
the most. He said he understands if the state must limit how
much that is per year and if a time table must be put on it, say
five years out, to determine whether it was used wisely and got
results or should be stopped. For small companies like his,
credits are dollars that can be reinvested quickly and they
lessen the amount of funds that must be raised until there is
cash flow from oil production. The percentage of government
take is certainly very important and he knows that in the legacy
fields a base rate of 30 percent instead of 35 percent would
help the majors. For small producers/explorers, being able to
keep the tax credits for a bit would help overall.
1:49:43 PM
REPRESENTATIVE P. WILSON related it is being heard from
companies that they want surety, but now she is hearing from Mr.
Thompson to try something for a while and then re-evaluate it.
Because she has heard so much about surety she does not want to
include something in the bill that could change later on. She
asked how Mr. Thompson would feel about putting something in the
bill for five years, period, with no re-evaluation.
MR. THOMPSON replied his opinion is it may be a mix of both.
For example, the base tax rate, eliminated progressivity, and
establishment of a per-barrel credit are the fundamental tax
structure that would hopefully stay in place for a very long
time. Other issues, like the small producer credit for small
producers and the gross revenue exclusion for incentivizing new
oil production, could be kept the same through 2022 and then
reviewed for effectiveness. What hurts is putting something in
and then [changing it] two or three years later. There has been
such a flux for quite a period of time with ACES, the production
profits tax (PPT) before that, and the economic limit factor
(ELF) before that. If the basic fundamentals were set and not
changed for the foreseeable future, there may be some elements
the state wants to review every five years for effectiveness. A
combination would perhaps be a wise thing to do.
1:52:21 PM
CO-CHAIR FEIGE inquired whether the Competitiveness Review Board
proposed under CSSB 21(FIN) am(efd fld) would be suited for
dealing with the aforementioned by Mr. Thompson.
MR. THOMPSON responded the Competitiveness Review Board could be
very effective, in his opinion. He said he serves on a number
of public company corporate boards and a board does not have
time, and the board members all do not have expertise, to deal
with certain topics, so committees are set up, such as a
compensation committee or audit committee. So, he thinks this
Competitiveness Review Board could play that kind of role. The
board should not be changing things every year, the fundamentals
should stay in place for a long time, but in five years such a
board could look at things like an exploration incentive credit
and whether it has or has not worked. A key thing is that the
legislature must trust the members of that board, so would need
to be very careful who it puts on the board, and would need to
allow the board to hire the third-party consultants. However,
it would be a challenge if there was not that trust and the
legislature or legislative committees started hiring its own
consultants. Also, in his opinion, anyone serving on that board
should have no conflict of interest or any economic gain from
the oil and gas industry. He said he does think such a board
could bring to the table the necessary expertise, because all
these matters are very complex and it is hard even for people in
the business to keep up with all the latest in technologies and
changes. So, it could be very positive if done correctly.
1:55:11 PM
CO-CHAIR FEIGE inquired whether the proposed makeup of the
board, five members from the business community and four from
the government, is an appropriate ratio.
MR. THOMPSON answered this is the first time he has had to think
about this issue, so his response is an off-the-top-of-his-head
reaction to the question. In the end, he said, what is done or
not done on policy for oil taxation or oil incentives truly
affects the rate of return to other areas. If that rate of
return is positive, more capital and more companies will come to
the state. Because of that business aspect, it may make sense
to have five business and four government members and hopefully
they are all folks that can teamwork well together.
1:56:37 PM
REPRESENTATIVE SEATON asked what price Mr. Thompson meant when
he talked about a high-price range.
MR. THOMPSON drew attention to slide 3 of Econ One Research's
[3/25/13 presentation to the committee] and said right now ACES
is detrimental when it gets above $80 West Coast Alaska North
Slope (ANS) price, and above $100 the gap between government
take and producer take really widens. After companies have
taken the major risks, not being able to have as much upside at
prices "anywhere north of $100" is a fundamental principle that
needs to be addressed. The graph shows CSSB 21(FIN) am(efd fld)
does a better job of that.
1:57:55 PM
REPRESENTATIVE TARR stated an idea behind CSSB 21(FIN) am(efd
fld) is that one size fits all, thus no winners or losers are
picked. Understanding Mr. Thompson is saying an exploration
company is different than the three majors, she inquired whether
he therefore thinks a bill that separates explorers and majors,
similar to what ACES does, is better in terms of being more
specific to the business needs of small versus large companies.
MR. THOMPSON replied he does not think it necessary to separate
the bill at all; with some tweaks [CSSB 21(FIN) am(efd fld)] can
get there for both majors and companies like his. He recalled
the 3/26/13 testimony by "BP, Exxon, and Conoco" in which all
three companies felt that most of the impact in Alaska will not
be from exploration but from improving production in legacy
fields. However, he thinks it is going to take both. While he
understood their perspectives given that a small percentage
increase in fields as huge as Prudhoe Bay or Kuparuk will make a
huge difference for the state, he said he thinks the state will
regret that 10-20 years down the road because the state still
has to have exploration. Drawing attention to slide 5, point 6,
he said if the majors are not going to explore on state lands,
which he heard yesterday, perhaps there is no need for them to
have an exploration incentive credit. Perhaps the exploration
incentive credit could apply only to small producers and
explorers and be run for a few years for the state to see how
effective it has been, which would limit how much the state
treasury has to pay. Additionally, it could be capped; for
example, each company could be limited to no more than $25
million of credits per year for exploration drilling. A limit
would prevent the state from being harmed by excessive credits
and such a credit would target the small producers and explorers
that, for the most part, are doing exploration on state lands.
The big companies are doing wonderful exploration in other areas
like the National Petroleum Reserve-Alaska and offshore.
2:01:01 PM
REPRESENTATIVE TARR observed the Mustang project was sanctioned
under ACES and asked whether, if looking back, elimination of
some of the credits would have prevented Mustang from going
forward. Under CSSB 21(FIN) am(efd fld) the carry forward loss
credit will be increased, she continued, but effectively there
will be a 10 percent decrease because the other two credits
[will be sunset]. She asked whether this is significant enough
that Mr. Thompson's company will have to re-evaluate its plans
for other projects going forward if this legislation passes.
MR. THOMPSON responded "exactly right," but said his company
will continue trying to make all these projects. Without the
credits his company will not have that cash to re-deploy.
Additionally, his company cannot take advantage of some credits
right away, such as the carry forward loss credit, because it
does not have production to offset with a tax bill. His company
will have to live within its capital means, which will probably
slow down developments. The Mustang project is a real world
example of the difference made by the qualified capital
expenditure credits, he continued, all of which his company
basically returned. In winter 2011, the first wells were
drilled in the Mustang prospect and discovery was made. Follow-
up wells were drilled in 2012, enough oil was seen, and now
things are underway, as evidenced by slides 6-7. Had those
credits not been received his company would still have done the
work, but not as many wells would have been drilled every year -
the company would be drilling wells right now instead of
building a gravel road because things would have been pushed
out. For companies like his, being able to re-deploy state
credits into drilling and seismic has been very helpful.
2:03:44 PM
CO-CHAIR SADDLER asked for Mr. Thompson's thoughts about the
third category gross revenue exclusion qualification.
MR. THOMPSON answered about 60 percent of his career was with
the large major, ARCO, focusing on the North Slope. He said he
is unsure what the language means so he agrees there needs to be
some clarity in that third provision around the issues of
metered and measured, as well as exactly what it is that will
receive that element. North Dakota, for example, has special
tax incentives that are very specific for qualifying secondary
and tertiary recovery projects. Montana gives reductions for
horizontal wells. Also, when a new project starts, Montana has
a decline curve and once production goes above that decline
curve for new major projects, like tertiary recovery or enhanced
oil recovery, the producer gets reduced tax rates. The United
Kingdom brownfields also have clarifications. It would be
helpful to everybody if industry and the state could sit down
under that third element - which does not affect Brooks Range
Petroleum much at this time - and really define what types of
work would qualify to get that exclusion. These three examples
could be looked at and put into the bill as examples. In
further response, he agreed to provide by electronic mail more
information about North Dakota, Montana, and the United Kingdom.
2:07:29 PM
KARA MORIARTY, Executive Director, Alaska Oil & Gas Association
(AOGA), provided a PowerPoint presentation and paraphrased from
the following written testimony [original punctuation provided
with some formatting changes]:
AOGA is the professional trade association that
represents 15 member companies who account for the
majority of oil and gas exploration, development,
production, transportation and refining of oil and gas
onshore and offshore in Alaska [slide 1]. These
comments regarding Senate Bill 21, and specifically
Committee Substitute Senate Bill 21 (FIN) am(efd fld),
have been reviewed by all members and have been
approved unanimously.
In short Mr. Chairman, my members believe the
proposed Committee Substitute represents a base for
significant and crucial tax structure reform of ACES
that will help move the State's fiscal policy toward
Governor Parnell's four "core principles". While we
are encouraged by the Committee Substitute and the
efforts by the Legislature and the Administration thus
far to try and significantly improve Alaska's overall
global attractiveness, AOGA believes additional
changes are still needed for the bill to truly change
investment behaviors to the benefit of Alaskans.
2:08:51 PM
The industry's greatest challenge today, which we
share with the State is the decline of oil production
from the North Slope [slide 3]. A healthy oil and gas
industry is one that sees the economic benefits of
continuing to invest in projects in Alaska and keeping
its employees here, where they volunteer their time,
talent and treasure to make Alaska a better place to
live for us all. Corrections to the ACES tax regime
will remove impediments to development and exploration
and assist the industry in investing in projects that
could both extend the life of TAPS and open up new
resources to long term development. We want to create
developments that will last for decades more, creating
jobs for our children and opportunities for our
communities to flourish.
If a restructuring and tax rate reduction make
investments here more competitive, or better yet,
"attractive", companies will want to make more
investments here for that upside. Deciding to make
long term investments in Alaska's North Slope requires
the industry to see potential upside to their
investments and assessing that the essential risks of
those investments are offset by the opportunities
afforded in success. Without that potential
opportunity in Alaska, investment dollars will be
spent elsewhere, where risks are less and opportunity
is greater.
2:10:18 PM
MS. MORIARTY continued, paraphrasing from the following
written testimony [original punctuation provided with some
formatting changes]:
Core Principles to Address North Slope Production
Decline [slides 4-5]
Throughout my testimony today, I will reference
Governor Parnell's four "core principles" so it is
important to restate them here as they offer an
excellent cornerstone for you as you consider
potential solutions to the challenge production
decline creates for Alaska:
"First, tax reform must be fair to Alaskans."
"Second, it must encourage new production."
"Third, it must be simple, so that it restores
balance to the system."
"Fourth, it must be durable for the long term."
We believe the addition of a fifth such principle
would be required to meet Alaska's goals, because the
challenge is not that there are too many companies
pursuing opportunities, but that there are too few.
Alaska should therefore avoid tax changes that
artificially create "winners" and "losers."
Our goal today is to offer insights into how the
CSSB21 impacts industry and we have ideas of how the
current tax structure can be modified to better suit
the needs of the State.
2:11:20 PM
1. Repealing Progressivity. [slide 6]
AOGA endorses the elimination of progressivity.
Impact of Progressivity as part of the ACES tax
rate in industry investment decision making is the
single most influential component of Alaska's tax
structure negatively impacting investment decisions
related to Alaskan projects. Taxes are paid by the
industry in virtually every jurisdiction in which we
function and so we are very familiar with how they
work. But the uniformity and consistency in the
application of tax impacts as they relate to
investment decision making found in almost every
jurisdiction is missing in Alaska. As my member
companies have testified in the past, investment
decisions are driven by combining high and low case
scenarios where costs and revenues are estimated and
best case cash flows and worst case cash flows are
measured, risked and analyzed. Each potential project,
in every jurisdiction, is measured and compared and
only some are funded. As one of the legislative
consultants, Roger Marks, pointed out recently, the
international investment climate is characterized by
plenty of opportunities, fluid capital, but finite
capital. To choose what they can and cannot fund,
companies have compared each potential project, no
matter the jurisdiction, by application of a uniform
investment decision measuring formula. When Alaska's
tax system is quantified and added to this measure for
proposed Alaskan projects the best cases are always
burdened with an excessively high tax rate and as the
assumed high cases get better, the burden only
increases. We can find almost no other jurisdiction
that so burdens investment return where the better the
cases assumed for the decision, the higher the tax
burden that applies.
And as I have testified to before, progressivity
brings extraordinary complexity to the tax, not only
in calculating what the tax is, but also in analyzing
what the amount of the progressivity is for any
particular item that affects a taxpayer's Production
Tax Value (PTV).
The repeal of progressivity is consistent with
all the principles outlined above. Its removal
improves fairness because operators that increase
margins through efficiency would no longer be
automatically penalized. Its removal encourages new
production because it reduces the tax burden on
investment, as discussed above. Its removal is a
significant step toward simplicity. And, lastly, its
removal enhances durability because it satisfies the
three preceding core principles.
2:14:27 PM
MS. MORIARTY continued, paraphrasing from the following written
testimony [original punctuation provided with some formatting
changes]:
2. Increasing the base tax rate from 25 to 35%.
AOGA does not endorse increasing the base tax rate to
35%. [slide 7]
Let's go back to the industry investment decision
process again. Increasing the base tax rate, burdens
every investment case with a higher tax rate. The
burden of a 35% versus a 25% rate is easy to envision
as every middle case and every worst case scenario is
burdened with an additional 10% tax rate. This assumed
cost will negatively impact the potential returns
deemed available for any Alaskan project and drive
investments to be made elsewhere. Increasing the base
tax rate is contrary to the second core principle;
there is not any reasonable argument that suggests
increasing the base tax rate would encourage new
production. Indeed, using the progressivity formula as
a benchmark, the ten percentage point increase in the
base tax rate could be viewed as equivalent to a
sustained reduction in oil price of $25 per barrel,
all else being equal. In other words, a sustained $25
per barrel price change would be needed under
progressivity to get the same 10% change in the base
tax rate. Under progressivity, each $1 increase in PTV
(or price, all else equal) per barrel would result in
a 0.4% increase in the tax rate surcharge. Thus, a 10
percentage point change in the tax rate under
progressivity would be equivalent to a $25 change in
PTV or price because 25 = 10% divided by 0.4%.
3. Tax Credits [slide 8]
Industry makes investments to seek returns. In
general, tax credits, because they act to offset a
part of the costs of certain investments when the
expenditure is made are an important tool in reducing
the deemed risks of those expenditures.
It is important to reinforce that there is no tax
credit liability for the State at all until an
investor invests here. So it costs the State nothing
to offer the credit until the investment is made and
at that point the tax credit has already succeeded in
what it is supposed to do - namely to attract
investment dollars here.
2:16:10 PM
MS. MORIARTY continued, paraphrasing from the following written
testimony [original punctuation provided with some formatting
changes]:
A. Repeal of the Qualified Capital Expenditure ("QCE")
Tax Credit. [slide 8]
AOGA does not support the repeal of the Qualified
Capital Expenditure Tax Credit.
Even while the elimination of progressivity would
improve the competitiveness of Alaskan investments
from the present ACES tax, the elimination of the QCE
Credit would claw back one important financial
incentive and a part of ACES that actually acts to
improve the competitive environment. The QCE Credit
depends entirely on how much is invested here, and
provides benefits for investments even when oil prices
are lower. While the benefit from ending
progressivity, which depends on the price of oil
relative to a producer's lease expenditures, helps
when oil prices are higher the QCE provides benefits
across all price levels. At low to mid-range of oil
prices the loss of QCE Credit would outweigh the
benefit from the end of progressivity.
Repeal of the QCE credit is contrary to the
second core principle. Furthermore, because every
producer's costs are different and prices will impact
them differentially, AOGA fears the repeal of the QCE
Credit is worse than creating "winners" and "losers"
because it only creates "losers" artificially among
producers, and we see no sound tax policy
justification for doing so.
For these reasons, AOGA believes the elimination
of the QCE tax credits would not serve to attract new
business to Alaska. Instead of that, one possibility
might be to expand the scope of the "well lease
expenditure" tax credit under AS 43.55.023(l) so it is
available to producers on the North Slope. This credit
has several meaningful advantages. First, it focuses
investment incentives on subsurface intangible-
drilling expenditures, which are a reasonable proxy
for direct spending on well activity and, in turn,
production. Second, the credit is clear because it
uses already established concepts in the federal
Internal Revenue Code. Third, it is fair because it
applies equally to well-related spending in all areas
of the state, without creating winners and losers
merely on the basis of geography.
2:18:53 PM
MS. MORIARTY continued, paraphrasing from the following written
testimony [original punctuation provided with some formatting
changes]:
B. The $5 dollar per barrel tax credit. [slide 9]
AOGA is concerned that the potential benefit of a $5
dollar per barrel tax credit under AS 43.55.024(i)
will be offset by other burdens.
There are multiple issues to balance when taking
in the numerous proposed changes found in CSSB21. The
removal of progressivity, the increase in base rate,
elimination of the QCE credit all create interrelated
issues and while a $5 dollar per barrel tax credit
would provide benefits both in real tax costs and in
investment decision making, the weight of the benefit
in respect to the other changes is hard to measure.
AOGA applauds the concept of tying incentives to the
goal of increased production and as such allowing a
tax credit per barrel.
C. Small-Producer and Exploration Credits. [slide 10]
AOGA supports amending CSSB21 to extend the small-
producer tax credit under AS 43.55.024 and exploration
tax credits under AS 43.55.025 from the present sunset
dates in 2016 to a later date.
The State had sound policy reasons for creating
these small producer and exploration tax credits, and
those reasons are just as valid today as they were
then. The current CSSB21 does not extend the sunset
dates beyond 2016, even though AOGA believes these
credits have increased the likelihood of participation
by new industry players and act to increase the
opportunities that could be found by expanding
exploration. The purpose of the small-producer tax
credit was to attract new players to Alaska who might
otherwise have been deterred from coming here by
presumptions of increased risks and of higher-than-
average costs and expenses. The success of the credit
in attracting new participants is a fact that cannot
be denied. AOGA sees this success in its own
membership, and in other companies that have come here
and are now active. Smaller producers often have a
different perspective about the opportunities around
them, and as such can bring with them new ideas and
opportunities. New participants with new ideas can
only strengthen and improve the Alaskan petroleum
industry and help the state stem the decline in
production. We know from testimony that the small-
producer tax credit has made a material difference in
individual companies' decisions to do business and
invest in Alaska.
The purpose and justification for the exploration
tax credits under AS 43.55.025 are equally clear. Huge
parts of this state remain unexplored or
underexplored. Again, these tax credits are only
earned when actual expenditures for exploration occur.
The credits tangibly reduce the risks faced by an
explorer and as such incentivize them to go out and
search for oil and gas that is much needed. Increased
exploration leads to increased development and these
credits act to increase exploration and should be
extended as well. Just as with the QCE credits for
capital investments, there is no exploration tax
credit without real money having first been spent on
exploration work that qualifies for these tax credits.
2:22:01 PM
MS. MORIARTY continued, paraphrasing from the following written
testimony [original punctuation provided with some formatting
changes]:
D. Maintaining transferability of "carried-forward
annual loss" tax credits. [slide 11]
AOGA supports the transferability of these losses.
We applaud that the CSSB21 maintains the
transferability of the current "carried-forward annual
loss" tax credits under AS 43.55.023(b). New
participants and new explorers are many times not yet
producing in the state or only producing small volumes
of oil and gas and as such have little or no
production tax liabilities. The ability to transfer
their losses to others allows them to monetize the
investments they have already made, both reducing
their cost exposure on the original expenditure and
hopefully at the same time acquiring additional
capital for more investment.
E. New credit for Manufacturing [slide 12]
AOGA supports the new proposed manufacturing credit.
Although this credit is directed to the
incentivizing of development and manufacture of
drilling and exploration methods and materials, it may
not have a great impact on the reduction of the
current production decline. However, it is a step in
the right direction to incentivize jobs and additional
investment, and having more jobs and investment in
Alaska is never a bad thing.
4. Gross Revenue Exclusion. [slide 13]
AOGA endorses the proposed 20% gross revenue exclusion
or GRE, but has concerns on breadth of applicability.
The GRE would, in calculation of the taxable
Production Tax Value, exclude 20% of the Gross Value
at the Point of Production of what we'll call "non-
legacy" production, and attempts to apply to new oil
within legacy fields. AOGA supports the concept of a
GRE, and initially we were concerned that it was too
narrowly focused because it would have only applied to
those areas outside existing Units.
The Governor's second "core principle" for tax
legislation is that "it must encourage new
production." But, in order to get results from such
encouragement, the tax legislation must incentivize
the best opportunities that Alaska has for getting
results. The current CSSB21 attempts to expand the
application of the GRE and tries to include legacy
fields, which is where at least 80 - 90 percent of the
3 billion-barrel opportunity in the central North
Slope that Econ One identified as economically
recoverable earlier this session.
2:24:40 PM
MS. MORIARTY continued, paraphrasing from the following
written testimony [original punctuation provided with some
formatting changes]:
However, the current language causes concern
because of the uncertain nature of the applicability
and the problem that companies won't know if they get
the GRE until after the investment is made, so in
essence, companies cannot utilize the GRE in modeling
economics of future projects in legacy fields.
Additionally, we have concerns that the determination
methodology will be defined after the bill is passed
and be placed in future regulations.
AOGA believes our concerns can be addressed by
additional language to provide clarity and certainty
so the GRE is effective for industry.
Oil and Gas Competitiveness Review Board [slide 14]
AOGA does not support the formation of the
Competitiveness Review Board.
The proposed Board provides an oversight and
review process that we believe would be burdensome to
the industry and contravenes the Governor's principles
relating durability in the long term. The perspective
that the proposed changes found in the Bill would
provide a long term solution to problems we know exist
are placed in jeopardy because the very certainty that
is required for sound investment decision making would
be placed in question with each annual report of the
Board. Instead of moving forward with projects that
might help stem decline, industry resources would be
used to assist the Board in collecting and
understanding complex information of long term
consequence. Finally, the documentation and
information the Board might request or require is of
the highest proprietary value to oil and gas companies
and confidentiality concerns and related complexities
would hinder the efforts of the industry as well as
the Board. While we appreciate the ability to
represent industry on the proposed board, our concerns
cause AOGA to question both the viability and the
effectiveness of the proposed Board and as such we
cannot support its proposed formation.
2:26:49 PM
Reduction in Statutory Interest Rate [slide 15]
AOGA supports the lowering of the statutory interest
rate.
As we have testified to in the past, the statute
of limitations under AS 43.55.075(a) is six years from
the date when the tax return was filed for the tax
being audited, while the limitations period for other
taxes under AS 43.05.260(a) is three years from the
filing date of the tax return. Under both statutes,
the period may be extended by mutual consent of the
taxpayer and the Department of Revenue (DOR).
The current statutory rate of interest under AS
43.05.225(1) for tax underpayments is "five percentage
points above the annual rate charged member banks for
advances by the 12th Federal Reserve District as of
the first day of that calendar quarter, or at the
annual rate of 11 percent, whichever is greater,
compounded quarterly as of the last day of that
quarter[.]" Currently the Federal Reserve rate is very
low, so 11% APR is the applicable rate.
A lower statutory interest rate is very much
supported by industry, because it provides some
certainty to taxpayers.
2:27:42 PM
MS. MORIARTY continued, paraphrasing from the following written
testimony [original punctuation provided with some formatting
changes]:
Issues that the current draft does not address.
[slide 16]
There are several significant problems in the present
ACES tax that are not addressed in CSSB21, and I will
address a few of them this morning.
A. Minimum tax for North Slope production. AS
43.55.011(f) sets a minimum tax that is targeted
solely against North Slope production. That tax is
based on the gross value of that production instead of
the regular tax based on "net" Production Tax Value.
The rationale for adopting it was to protect the State
against low petroleum revenues when prices are low.
The minimum tax only complicates potential new
investors' analyses of what their tax would be if they
invest here instead of someplace else, and
consequently it has, if anything, driven investments
away. AS 43.55.011(f) should be repealed or
consideration given to significantly reducing the rate
of the minimum tax.
B. Joint-interest billings. Instead of starting
with the joint-interest billings that participants in
a unit or other joint operation receive from the
operator, DOR regulations reflect an assumption that
each non-operating participant has information, in
addition to the operator's billings to them, that
allows them to determine which expenditures are
deductible as allowed "lease expenditures" under AS
43.55.165 and which are not. Instead of one audit of
the expenses by a joint venture for any given period,
the Department audits each participant separately for
its respective share of the same pool of expenses.
We are not asking for legislation to put the
Department's regulations on a different track. But
there are some in the Department who believe that the
repeal by the 2007 ACES legislation of AS 43.55.165(c)
and (d) - which specifically authorized the Department
to rely on joint-interest billings - means the
Department cannot legally rely on them now. While we
disagree with this position (which is also at odds
with what the Department testified to during the
enactment of the 2007 ACES legislation), we do think
it would be appropriate to restore language
specifically authorizing the Department to rely on
joint-interest billings if it chooses to do so.
2:30:20 PM
MS. MORIARTY continued, paraphrasing from the following written
testimony [original punctuation provided with some formatting
changes]:
Conclusion. [slide 17]
If I leave you with one thing today, it would be
the word "enormous". While AOGA believes that Alaska's
potential is enormous we are grounded by the reality
that our competition is enormous as well, and they are
just starting to heat up. It is estimated that the
fields of South and West Texas alone could produce
over FOUR MILLION barrels of oil equivalent per day by
2020. That's more than some OPEC countries. Alaska
should ask themselves if they really believe a "middle
of the pack" policy for the state will attract new
investment capital against that type of competition.
[slide 18] We believe it is up to you, and the
Governor, to shape an attractive oil fiscal policy
that is supported by strong principles that will win
additional capital, arrest North Slope production
decline and will lead Alaska towards a prosperous
future for the long-term.
As I mentioned at the beginning of our testimony,
overall, AOGA's members believe the Bill represents a
base for significant and crucial tax structure reform
that move toward Governor Parnell's four "core
principles" - fairness for Alaskans, encouraging new
production, simplicity with balance, and durability
for the long term, but as I have outlined today, AOGA
members believe additional changes should be included
for this bill to truly change investment behaviors to
the benefit of Alaskans. You have a difficult task
ahead and AOGA stands ready to assist you throughout
this process.
2:32:43 PM
CO-CHAIR FEIGE requested further elaboration regarding AOGA's
confidentiality concerns with the Competitiveness Review Board.
MS. MORIARTY replied AOGA imagines that to determine whether the
state is competitive, the board is likely to ask for documents
from different industry players that are of the highest
confidentiality nature. A concern for AOGA is how that
information will be shared and protected by a board that is
outside any other industry or agency that already has
confidentiality provisions, and other members of the public who
do not normally have the access to that type of information. If
the board moves forward it needs to be considered how that
information will be shared to the public, members of the board,
and how confidentiality will be protected, especially between
industry players.
2:34:54 PM
J. PATRICK FOLEY, Manager, Land and External Affairs, Incoming
President, Pioneer Natural Resources Alaska, Inc., began his
PowerPoint presentation by noting that Pioneer Natural Resources
is a large independent with about a $19 billion [enterprise
value] and $3 billion annual capital worldwide budget (slide 4).
Pioneer Natural Resources Alaska was the first independent
operator on the North Slope to have a successful development.
Today it has about 70 Alaska employees and over 200 contractors
working for it on the North Slope at Oooguruk and Nuna. The
Alaska operations capital budget for 2013 is about $180 million.
Current production at Oooguruk, Pioneer's sole development in
Alaska, is about 6,000 barrels per day, with total production of
about 12 million barrels. Alaska operations began in 2003 with
the original project sanctioned under the economic limit factor
(ELF) regime, but it has changed many times since then. Pioneer
has an investment decision to make for third quarter 2013 for
the Nuna project, an on-shore development that is part of the
Oooguruk Unit. Nuna is a 50 million barrel opportunity with
total capital expenditure of $800 million to $1 billion.
MR. FOLEY explained slide 5 is a general impression slide. He
pointed out that Pioneer's core business is in the Permian Basin
of the Eagle Ford in Texas, with business also being done in
Colorado, Kansas, and Alaska. He drew attention to a listing on
the left side of the slide of all of the companies currently
operating in the Eagle Ford, noting that written in blue are the
majors operating there and in Alaska and written in red are the
independents operating there and in Alaska. Every name written
in black is not in Alaska and the question is why not. What can
be done to attract every one of these companies? The reason
they are not here is because the cost to do business in Alaska
is higher than elsewhere. The cycle time is higher and the
amount of company take is lower because of the fiscal system.
2:38:05 PM
MR. FOLEY said the core principles of the governor's bill, as
introduced, included the desire to change the current production
tax system in a way that was: fair, fostered new production,
simple and balanced, and competitive and durable (slide 6).
Every industry representative speaking before the committee has
supported these goals. As the bill has started and evolved,
legislators are doing a wonderful job in building a system that
makes Alaska more competitive. However, he continued, the bill
is not quite there.
MR. FOLEY praised the provision to eliminate progressivity and
said the gross revenue exclusion (GRE) works very well for a
company like Pioneer. Being able to immediately monetize the
"loss carry-forward" credit is huge, he continued. A company
like Pioneer that is not currently making a profit and not
currently paying taxes does not get the benefit of the loss
carry-forward credit until many years down the road; therefore,
changing that credit so a company can immediately get the cash
value of that loss is huge and is a very attractive piece of the
new bill. The $5 per barrel credit is also an attractive
feature and helps to keep the total tax relatively flat over
various oil prices.
2:39:52 PM
MR. FOLEY stated there are still a few negatives he would like
the committee to work on. Loss of the capital credits is huge.
When a company like Pioneer looks at a project under different
systems, the project that has credits associated with it is more
attractive. He agreed with Mr. Thompson that credits minimize
the amount of cash necessary to fund a project. A company may
spend all the money it has, but it can do more with that money
with the state's assistance through the credits. He addressed
why credits matter (slide 7), saying credits are important to
the state because they will stimulate work and activity, and
that work and activity results in jobs, more wells, more oil,
and ultimately more royalties and taxes. Credits are good for
the developer because they reduce risk by minimizing the amount
of cash necessary to fund a project.
2:41:29 PM
MR. FOLEY moved to slide 8, which he noted may not be in the
committee's packet and which depicts a hypothetical project with
the assumptions of $1 billion in capital expenditure and a 50
million barrel field, very similar to Pioneer's Nuna project.
He then compared the current system of ACES to SB 21, as
originally introduced, and CSSB 21(FIN) am(efd fld) for this
hypothetical project if it was being done by a new entrant with
no base production (slide 9, but labeled slide 8 in the
committee packet). The red bars depict the loss of the credits
and the green bars depict the upside gain from the lower tax
rate, the GRE, and the $5 credit. A brand new entrant would be
$87 million, total net present value (NPV) 10, worse off under
SB 21 than it would be under ACES. Under CSSB 21(FIN) am(efd
fld), this same new entrant would be $16 million worse off than
it would be under ACES.
2:43:42 PM
MR. FOLEY made this same comparison for a mid-sized producer - a
company like Pioneer that has existing base production and base
operating expenses that look like Pioneer's Oooguruk field
(slide 10, but labeled slide 9 in the committee packet). Under
SB 21 as originally introduced, Pioneer would have been $52
million worse off than it was under ACES. Under CSSB 21(FIN)
am(efd fld), Pioneer will be $8 million worse off. If the goal
is to at least put a company like Pioneer in a neutral position,
no better off under the new program than under the old program,
the committee has some knobs at its disposal. One knob is to
extend the small producer credit until 2022, which would make it
a 15-year credit instead of a 10-year credit. That knob would
make this current version of the bill more attractive to Pioneer
for this hypothetical project.
2:45:05 PM
MR. FOLEY discussed notes he had written to himself, one note
stating, "healthy big three," his point being that legislators
cannot pick winners and losers; legislators need to help the
entire industry be winners. All Alaska citizens are reliant
upon a healthy North Slope oil industry, he said, and he cannot
imagine a healthy North Slope industry that was not prosperous
for the current big legacy producers. The state needs to have a
tax system that motivates the legacy producers to keep making
significant expenditure within their fields. He agreed with Mr.
Thompson's statement that they by themselves cannot solve the
fiscal problems in Alaska; the state also needs new players,
explorers, and new producers. He further agreed with Mr.
Thompson that one system is needed, but there needs to be
elements in that system that are attractive to the current big
legacy producers and also are attractive to new smaller
producers, explorers, and developers that want to establish a
business in Alaska.
MR. FOLEY said another note to himself is "canary." Pioneer is
the canary in the coal mine in that it is an independent that
came to Alaska before any of the tax change. Pioneer is
struggling to build a business, having spent about $1 billion at
Oooguruk and spending $100 million trying to advance the Nuna
project, which the company hopes to sanction in third quarter
[2013]. Pioneer has been in Alaska since 2003, but has yet to
turn a profit. If Pioneer does not do Nuna it will probably
make a profit and start to pay production tax in the next two or
three years. If Nuna is done, that will be pushed out three to
five years. He said his point is that Pioneer will have been in
Alaska for 10-15 years without having made a profit. Alaska is
a difficult place for a new company to come and establish a
successful business. Having Pioneer be successful in Alaska
might not mean there will be 10-20 other independents behind;
however, legislators must pause and think about the opposite.
If Pioneer fails, what message is sent to others wanting to come
to Alaska?
2:47:59 PM
MR. FOLEY summarized, saying CSSB 21(FIN) am(efd fld) on balance
has some very favorable attributes, such as the flat 35 percent
tax rate, although a lower tax rate would be helpful. When the
flat tax rate is combined with the $5 per barrel credit, it
makes for a flat tax system over a very broad range of prices,
which helps Pioneer predict its business. The gross revenue
exclusion is another helpful attribute. Making the loss carry-
forward credit cashable is also helpful because it allows
Pioneer to take advantage of the credit nearly immediately. On
the negative side, the credits under ACES are a very valuable
attribute and he encourages committee members to find a way to
keep some element of that credit program. He appreciated the
fiscal challenge that that presents to the state, but said
perhaps there could be a way to cap the credits or to target the
projects that would qualify for the credits.
2:49:36 PM
MR. FOLEY suggested changes to CSSB 21(FIN) am(efd fld) that
would make investments in Alaska more attractive to a company
like Pioneer and to all of the oil industry. One change would
be to extend the small producer credit. He reminded members the
small producer credit is "use it or lose it" - if no tax is paid
there is no benefit. Pioneer has not yet made a profit, has not
yet made a tax payment, and the odds are very high that if this
credit is not extended Pioneer will never be able to take
advantage of it. He offered his belief that the small producer
credit is a knob that has very small cost to the state. He
asked the committee to consider increasing the gross revenue
exclusion to 25 percent, saying it is not a large number but
would have a dramatic impact on projects. He also requested the
committee consider targeted credits that could be focused on
projects that members wish to incent to go forward. Right now,
those credits are immediately cashable and if the credit program
was extended there are changes that could be made to make it
more acceptable to the state. For example, credits could be
used to reduce a company's state royalty obligation net profit
payment or any other liability a company has to the state;
rather than the state writing a check it would instead minimize
the payments a company makes to the state.
2:52:00 PM
REPRESENTATIVE SEATON drew attention to the quote on slide 7 by
Roger Marks when he was before the Senate Finance Committee on
3/4/13: "Recommend targeted tax credits as being preferable [vs
GRE], they provide incentive to invest." Presuming this would
be significant, he inquired how those would work for a company
like Pioneer.
MR. FOLEY replied it is more than just the credit. Currently
under ACES there are two ways that Pioneer can have the state
help with the company's investments: a 20 percent qualified
capital expenditure credit and a 25 percent loss carry-forward
credit. It is not as simple as adding 20 and 25 together to
come up with 45 percent as the value of the credit and comparing
that against the 35 percent [carry forward loss credit proposed
under CSSB 21(FIN) am(efd fld)] ...
REPRESENTATIVE SEATON inquired whether a targeted tax credit
would be something like the United Kingdom brownfield versus the
gross revenue exclusion (GRE).
MR. FOLEY, shaking his head no, responded a targeted credit
would be something that extends the current qualified capital
[expenditure] credit program for specific things legislators
would like to motivate, such as new wells, new production
facilities, new roads, or new gravel pits. For Pioneer, the
company would ask members to look at credits that apply to new
exploration wells and new development wells. He said a comment
often made is that these credits are not resulting in new oil.
He said he guarantees, however, that every well that is drilled
results in new oil.
2:54:17 PM
REPRESENTATIVE SEATON understood Mr. Foley to be saying that
targeted tax credits for certain activities would get what
legislators want more than would the gross revenue exclusion,
which might not be invested in Alaska because it is a reduction
in tax that might go someplace else.
MR. FOLEY answered neither the credit nor the program proposed
under "SB 21" makes payments until the expenditure is made. So,
a company does not get the benefit of the credit, the state does
not fund a company's program, until the company actually spends
the money to drill that well.
REPRESENTATIVE SEATON, noting the committee has not had Mr.
Marks explain this quote, said the gross revenue exclusion (GRE)
just lowers the tax rate and does not target the money to
something legislators are trying to incentivize; it does not
necessarily get well production.
MR. FOLEY encouraged that Mr. Marks be asked to come before the
committee so he can be asked this question. Mr. Foley said the
GRE affects different players differently. It reduces the tax
liability for a current taxpayer. For a company like Pioneer
that is not now paying tax, it generates a tax loss, a loss
carry forward, which the company can also monetize.
REPRESENTATIVE SEATON commented he would like to have Mr. Marks
come before the committee so this topic can be discussed.
2:57:28 PM
REPRESENTATIVE P. WILSON inquired whether Mr. Foley, when
talking about a targeted credit, is saying to target the loss
carry forward credit or to provide another credit that would be
a targeted one.
MR. FOLEY replied that when speaking of a targeted credit he is
really referring back to the current ACES program under which a
company qualifies for a 20 percent credit when it makes a
capital expenditure, and the company gets that money nearly
immediately - half this year and half next year. That helps
Pioneer to immediately reduce its capital outlay because the
state helps Pioneer finance its project. He said he believes
there are projects for which the state could grant credits
without breaking the bank. If the fear is that the state cannot
have a capital credit that is spent in Prudhoe Bay, there are
things that could be done to have a different program for
Prudhoe Bay. If the state is fearful of very large shale play
expenditures taking up too much in credits, those could be
excluded from being eligible for the credits.
2:59:30 PM
REPRESENTATIVE TUCK recalled that in past testimony Mr. Foley
talked about how ACES rewards investment, how Pioneer has been
more focused on the credit than on the progressivity, and how
Pioneer would enjoy paying some tax because the state guarantees
a company is profitable before it has to pay any tax. He asked
whether Mr. Foley believes it is fair to say that the
investments being seen in Alaska over the past seven years are
not leading to production.
MR. FOLEY responded he has to scratch his head when he hears
that statement because he simply does not understand it. The
credits that have been extended have been for drilling wells,
building facilities, and expanding production capability within
the big fields. He said he cannot imagine that any of those
expenditures did not result in either new production or the
ability of the current production to stay at its current level.
Every investment dollar the state has made through credits has
resulted in new oil.
3:01:01 PM
REPRESENTATIVE TUCK, drawing attention to slide 10, observed
that CSSB 21(FIN) am(efd fld) is a significant improvement over
SB 21 [as introduced], but is still not as good as the current
tax regime. Looking at the history of Alaska, he inquired
whether Mr. Foley would rather have had the tax regime in effect
prior to ACES in terms of getting Pioneer's projects developed.
MR. FOLEY answered Pioneer came and sanctioned its project under
the economic limit factor (ELF) and under ELF the production tax
rate for a field like Oooguruk would have been zero. Within
months of sanctioning that project, there was a new bill with
the production profits tax (PPT) and a new tax system. Pioneer
met with Governor [Frank] Murkowski at the time and was advised
that it might actually be better off under this new system.
Doubting how anything could be better than zero, Pioneer did
some discounting and analyzing and came to understand the value
of the credits and how the state helps the company up front and
the company pays the state back later down the road. Pioneer
was actually better off under the original PPT - the state
helped subsidize Pioneer's project. However, the world very
swiftly became different than it was under the original "20/20
PPT proposal."
3:02:51 PM
CO-CHAIR FEIGE held over CSSB 21(FIN) am(efd fld).
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES SB21 AVGC - BRP 3.27.13.pdf |
HRES 3/27/2013 1:00:00 PM |
SB 21 |
| HRES SB21 Pioneer Natural Resources 3.27.13.pdf |
HRES 3/27/2013 1:00:00 PM |
SB 21 |
| HRES SB21 Savant Alaska 3.27.13.pdf |
HRES 3/27/2013 1:00:00 PM |
SB 21 |
| HRES SB21 AOGA 3.27.13.pdf |
HRES 3/27/2013 1:00:00 PM |
SB 21 |
| HRES SB21 AOGA Written Testimony 3.27.13.pdf |
HRES 3/27/2013 1:00:00 PM |
SB 21 |
| HRES SB21 ASRC Testimony 3.27.13.pdf |
HRES 3/27/2013 1:00:00 PM |
SB 21 |