Legislature(2013 - 2014)BELTZ 105 (TSBldg)
01/22/2013 03:30 PM Senate SENATE SPECIAL COMM ON TAPS THROUGHPUT
| 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
3:30:35 PM
CO-CHAIR MICCICHE stated that the first order of business to
come before the committee was SB 21. He noted the presence of
Senator Giessel.
CO-CHAIR MICCICHE related that the Senate Special Committee on
TAPS Throughput is "looking through challenges to decreasing the
decline of North Slope oil production." He pointed out that the
committee is not an oil tax committee, but rather it is designed
to arrest throughput decline.
CO-CHAIR MICCICHE said that the purpose of the meeting was to
begin the discussion of SB 21, the Governor's oil and gas
production tax bill. He introduced the presenters: Commissioner
Butcher, Commissioner Sullivan, Joe Balash, and Michael
Pawlowski.
3:32:38 PM
DAN SULLIVAN, Commissioner, Department of Natural Resources,
began by thanking the Senate for the public service of
establishing a special committee to work on the goal of
decreasing throughput decline. He emphasized that the Department
of Natural Resources (DNR) believes that the issue of TAPS
throughput decline is the most urgent problem facing the
economic future of Alaska. He maintained that the more people
understand the problems and the solutions of oil production
decline, the more likely the issue will be addressed for the
benefit of all Alaskans. He said that DNR and the Department of
Revenue (DOR) have been working together as a team on this goal
at the request of the Governor.
3:35:26 PM
COMMISSIONER SULLIVAN stated the goals of the presentation:
provide the background of TAPS; show some of the challenges of
hydrocarbon production and investment in Alaska, the U.S. and
the world; and provide examples to support the idea that oil
production decline in Alaska is not inevitable.
COMMISSIONER SULLIVAN drew attention to a handout entitled,
"Arresting TAPS Throughput Decline & Oil Tax Reform." He
depicted TAPS as a critical state and national energy asset. He
reminded the committee that Congress was instrumental in the
approval and rapid development of TAPS and continues to have an
important role. The throughput issue has federal elements, such
as the energy security of the country and access to federal
lands.
He highlighted the staggering number of barrels produced since
June of 1977. Production peaked at 2.2 million barrels per day
in the late 1980s, representing 25 percent of U.S. domestic
production. He noted how impressive that amount was. Today, at a
little less than 600,000 barrels per day, there is excess
capacity and the decline threatens America's economic future. He
said there was currently a reconfiguration of TAPS capacity.
COMMISSIONER SULLIVAN stated that the ultimate giveaway is the
year-after-year decline of throughput. He spoke of a Bloomberg
report from December 2011, which showed production of 620,000
barrels of oil a day compared to December 2012 with 582,000
barrels a day, a loss of 40,000 barrels per day for a year. The
value of 40,000 barrels of oil a day in a year is 4.7 million
barrels; at $100 per barrel, $1.5 billion was lost. He
emphasized the goal to arrest and turn around that giveaway.
3:40:49 PM
COMMISSIONER SULLIVAN showed a graph of Alaska North Slope (ANS)
production history, pointing out the dominance of Prudhoe Bay.
He distinguished mature fields from mature basins. He maintained
that the state does not have a mature basin, it has some mature
fields.
He highlighted the urgency of the throughput decline issue and
stressed that it was not a scare tactic. He gave a personal
example of his experience with the January 2011 TAPS shutdown in
minus-40 weather. He concluded that the lesson from that near
disaster was that the lower the output, the higher the risk of
shutdown and the more chance for technical challenges. He
discussed the consequence of higher tariffs due to companies'
costs from efforts to address such problems.
CO-CHAIR MICCICHE emphasized the increase in operational costs
due to lower flow rates.
COMMISSIONER SULLIVAN agreed. He did not think that there was
any dispute that lower flow rates create a higher risk of
complication.
CO-CHAIR DUNLEAVY asked if the state can flatten out or decrease
the decline.
COMMISSIONER SULLIVAN said absolutely. He related that there is
a large resource base and several basins have already begun to
decrease the decline.
SENATOR GARDNER asked if the future looks larger with the majors
or with new smaller investors.
COMMISSIONER SULLIVAN replied that he believes that all players
will contribute; all investors and the entire diversity of
plays. He spoke of the opportunities that lie in all plays. He
pointed out that Alaska is unique in that conventional and shale
plays can exist in the same field or basin. The goal of
increasing competition in the North Slope is very important.
3:47:52 PM
SENATOR FAIRCLOUGH referred to the TAPS shutdown in 2011 and the
anxiety over that situation. She emphasized that it was not an
easy start up and it was fortunate that the pipeline had great
employees and attorneys to interpret TAPS language and prevent
outside entities from stopping the flow of oil.
COMMISSIONER SULLIVAN agreed with Senator Fairclough's
depiction.
CO-CHAIR DUNLEAVY requested information on a possible timeline
for stemming the decline and increasing production in existing
wells and for the onset of new oil, given the right climate.
COMMISSIONER SULLIVAN said it was a good question, but hard to
predict the answer. He agreed that infield drilling would be an
obvious place to begin a turnaround. He pointed out that there
has been exploration outside of the big units which could turn
into capable production within a few years. He used Point
Thomson as an example of a field that ExxonMobil is starting to
build this winter with a target three years away. He recalled a
commitment by Exxon a year earlier that ran into delays due to
federal permitting problems.
CO-CHAIR MICCICHE suggested that the committee was formed to
streamline legislation related to the timeframe between
discovery and production. He noted Senator Bishop's arrival.
CO-CHAIR DUNLEAVY thought it was a huge issue.
COMMISSIONER SULLIVAN suggested that the best way to address
technical issues from a shutdown is to get more oil through the
pipeline.
He turned to positive solutions to address the decline. He
pointed out the most important factor; the huge, world-class
basin on the North Slope. The United States Geological Survey
(USGS) estimates that Alaska's North Slope has more oil than any
other Arctic nation. It has about 40 billion barrels of
conventional oil (federal, state, and OCS), and over 200
trillion cubic feet of conventional natural gas. Alaska also has
world-class unconventional resources, including tens of billions
of barrels of heavy oil, shale oil, and viscous oil, and
hundreds of trillions of cubic feet of shale gas, tight gas, and
gas hydrates. He added that the North Slope remains relatively
unexplored relative to other hydrocarbon basins in the U.S.,
another positive factor.
He spoke of efforts to market oil prospects in an attempt to
bring more investors to the state. One of the most common themes
heard from potential companies is that though the hydrocarbon
structure is great, the cost of doing business is too high.
3:57:24 PM
CO-CHAIR MICCICHE thought an important piece of educating the
public is if people believe there are adequate supplies on the
North Slope to increase throughput. He suggested DNR and
industry geologists provide further information on that topic.
COMMISSIONER SULLIVAN said there were geologists available to do
so.
CO-CHAIR DUNLEAVY asked if the "majors" share the state's
optimism about the potential to stem throughput decline because
of the large amount of resources.
COMMISSIONER SULLIVAN opined that the majors see infield,
unconventional, and federal land potential. He spoke of the
efforts to get companies to invest and lease in shale play. He
used North Dakota as an example of large shale production
increases within a period of five years. He predicted that
source rock in Prudhoe Bay would have huge potential.
SENATOR GARDNER understood that shale development involves more
drilling and more wells. She inquired if shale oil comes on line
more quickly than conventional oil.
COMMISIONER SULLIVAN related that a task force made up of DNR,
other agencies, and counterparts from North Dakota has been set
up in order to deal with shale development. He said he would
find the answer to that question.
He showed a map of Alaska's North Slope oil and gas potential.
He said he was optimistic about the resource; however, he said
it would cost billions to bring it to production.
4:01:58 PM
COMMISSIONER SULLIVAN discussed the U.S. energy renaissance. The
International Energy Agency (IEA) predicted in their "2012 World
Energy Outlook" that the U.S. would overtake Saudi Arabia and
Russia to become the world's largest global oil and gas producer
by the second half of this decade. This would include an
enormous capital spending boom by the oil industry. In 2012
about $600 billion was spent on exploration and production
globally, and it is projected that in 2013, $650 billion will be
spent. He opined that Alaska needs to be on the leading edge of
the American energy renaissance, rather than an anchor.
Currently, a lot of the spending is going to Organisation for
Economic Co-operation and Development (OECD) countries. He
stated that Alaska should strive for more of that global
spending.
SENATOR GARDNER asked how Alaska's position as an exporter
compares to the rest of the nation.
COMMISSIONER SULLIVAN said he did not think Alaska would become
a major exporter of oil; however, he did think it would become a
larger exporter of gas.
He provided examples of how other basins have turned their
decline around, such as in Texas, Alberta, and North Dakota. A
lot of those basins involved shale plays. The North Sea basins
and Apache Corporation's Forties field acquisitions have turned
declines around as a result of tax reform. He described Apache's
tax reform, which had an impact on production, new jobs, and
investment.
COMMISSIONER SULLIVAN related that the TAPS Throughput Committee
has a much broader mandate than just tax reform. He said the
state has been focused on a comprehensive plan that covers many
areas beyond tax reform. For the last couple years, the state
has examined permitting reform, the next phase of North Slope
development, and promoting the state's resources by targeting
certain companies that would be a good fit in Alaska. He agreed
with a statement from Governor Parnell's 2013 State of the State
address that said the state's problem with attracting investment
is not below ground, but above ground.
COMMISSIONER SULLIVAN discussed the North Slope's recent and
proposed activity for oil and gas. Recent lease sales
demonstrated positive results. He shared that DNR has actively
sought out new investment and has seen positive results. He
stressed that this is only the beginning and Alaska has the
ability to attract new investment by all types of players.
4:12:06 PM
SENATOR GARDNER asked about the role of Congress in developing a
gas pipeline.
COMMISSIONER SULLIVAN offered to provide that information.
CO-CHAIR MICCICHE noted the presence of Senator Huggins.
4:13:33 PM
BRYAN BUTCHER, Commissioner, Department of Revenue, began the
presentation on oil tax reform. He listed the four principles of
oil tax reform which the Governor recently reiterated: the tax
reform must be fair to Alaskans, it must encourage new
production, both short-term and long-term, it should be simple
so that it restores balance to the system, and it should be
durable for the long term. He gave an example of the complexity
of Alaska's current tax system.
CO-CHAIR MICCICHE inquired what the administration means by "it
must be fair to Alaskans."
COMMISSIONER BUTCHER shared the idea proposed by former-Governor
Hammond of 1/3 of profits each going to the state, the federal
government, and the companies. He said that, in reality, it
never works out quite that way. The state's take is much larger
than the federal government's take.
COMMISSIONER SULLIVAN added that it must be fair to future
generations of Alaskans.
4:19:04 PM
COMMISSIONER BUTCHER defined "durable for the long term" as a
system that is competitive into the future. He pointed out that
the proposed tax change is the third one in the past six or
seven years. He said that the administration has a goal of
making the tax a "long-term answer."
COMMISSIONER BUTCHER spoke of the integrated team made up of DOR
and DNR, as well as the consulting firm Econ One Research, Inc.
COMMISSIONER BUTCHER described the process used to develop SB
21. The team reviewed previous work by both the legislature and
the administration. It identified problems with the current tax
system: declining production, lack of a competitive environment,
problems with progressivity, and tax credits.
CO-CHAIR MICCICHE agreed that lack of competitiveness due to
high government take was a problem. He asked whose role it is to
determine the distribution of government take for oil and gas
production and severance taxes, the legislature or the
administration, or both. He suggested setting a number first.
COMMISSIONER BUTCHER said it comes down to the legislature and
the Governor to determine what number is competitive and makes
the most sense in moving forward.
CO-CHAIR MICCICHE asked if there was a place in global average
government take where "we can see excitement beginning to occur,
versus a level where there is not much happening because the
take is too high."
COMMISSIONER BUTCHER did not know. He suggested Barry Pulliam
with Econ One might have an answer.
CO-CHAIR MICCICHE noted that the committee would be
commissioning PFC for independent consulting work.
4:23:41 PM
COMMISSIONER BUTCHER continued to identify problems with the
current tax system. He discussed progressivity and tax credits.
He said DOR and DNR coordinated efforts to understand the
impacts of production decline on TAPS revenues.
He showed a graph that shows how the competition fared when oil
prices spiked. He maintained that other basins have turned the
decline around. He compared Texas, North Dakota, and Alberta
with Alaska. He said the biggest takeaway compares Texas with
Alaska to show that Texas flattens out and turns around, while
Alaska shows no production increase at higher oil prices. He
noted that unconventional oil, not shale oil, turned production
around. He maintained that these examples are proof that decline
is not inevitable.
COMMISSIONER SULLIVAN commented that "everybody is turning it
around" except for Alaska.
4:30:07 PM
SENATOR GARDNER questioned Texas's government take during the
time when production was low.
COMMISSIONER BUTCHER answered that Texas's tax rate was also low
during that time. He did not know what royalties were paid to
primarily private land owners. He speculated that government
take was not much higher than Alaska's. He offered to find out.
CO-CHAIR MICCICHE suggested a theoretical scenario that
contained two product lines; shale oil play during a high price
environment and conventional oil at a low price environment. He
talked about decoupling types of oil and encouraging additional
production at lower prices, if shale does play out.
COMMISSIONER BUTCHER agreed that it could be done and has been
considered. He spoke of heavy oil as an example and suggested
that it might be incentivized.
COMMISSIONER BUTCHER explained a table with detailed models and
a variety of metrics that shows how Alaska compares to other oil
opportunities. The table shows an example for a 50 million
barrel development in Alaska and comparable developments in the
Lower 48, Canada, Norway, and the United Kingdom's North Sea.
In PFC Energy's analysis last year, Alaska rated second to
Norway when comparing OECD sites. At $140 per barrel, Alaska
would surpass Norway. He stated he could provide comparisons in
a variety of ways.
CO-CHAIR MICCICHE said he has seen very different numbers
published in tables that look like the one Commissioner Butcher
presented. He questioned why there are so many versions and how
to know the right numbers on which to base decisions.
COMMISSIONER BUTCHER explained that it was a very complicated
issue. Progressivity, price, and credits, all have to be taken
into account. He stated that DNR and DOR have presented Econ One
with the most up-to-date information on how Alaska's tax system
works.
CO-CHAIR MICCICHE wished to bring all the groups together and
arrive at the real numbers for Alaskans. He added that if the
departments have spent the time to arrive at the real numbers
that should be made clear.
COMMISSIONER BUTCHER said that, generally, all the consultants
get together to make sure the input to the models produce the
same numbers.
4:36:57 PM
COMMISSIONER BUTCHER spoke of the difficulty of defining
progressivity. He noted it was complicated and unpredictable,
both for the state and investors. He described how the
progressivity rate is achieved. He compared Alaska's system to
North Dakota's simple tax system.
SENATOR GARDNER thought the difficulty was in calculating
production tax value, but that changing progressivity and adding
different values is just a formula to put into a spreadsheet.
She opined that it might be complicated to explain and to set up
a spreadsheet, but it's not hard after that.
COMMISSIONER BUTCHER related that companies have complained that
they have to run endless numbers based on the changing price of
oil. He described the difficulty of the tax system due to its
not being a straight percentage.
SENATOR GARDNER did not accept that progressivity is hard to
calculate.
COMMISSIONER BUTCHER added that Alaska's tax calculations must
be done monthly instead of annually.
4:41:05 PM
COMMISSIONER BUTCHER explained a graph that shows the number of
tax credit certificates refunded and the credits applied against
production tax liability. In FY 13, of $800 million in
production tax credits, $360 million credits were refunded and
$440 million were credits applied against production tax
liability. He predicted that the total would be about $1 billion
in FY 14. He questioned what the state was getting for $1
billion. He said it was difficult to see what the state is
getting for its investment. He noted that the tax credit system
is incentivizing spending, but that it has not been connected
with increases in production. As a result, the administration
has approached the bill cautiously.
He posed a hypothetical situation where the price of oil would
drop to $80 - $90 per barrel over the course of a year and
Alaska would have a deficit in "the billions of dollars." He
spoke of the type of investment being sought.
CO-CHAIR MICCICHE requested clarification about pre-2009 through
2014 when the state averaged paying out $375 million for credit
certificates that did not produce any oil.
COMMISSIONER BUTCHER said it was speculation on the companies'
parts as to what may have been produced that wouldn't have been
produced as a result of production tax credits. He said that DOR
was never able, in their five-year look back, to make any direct
connections. He added that the total of $5.85 billion is the
amount the state either took off the tax liabilities of
companies or paid out in cash over the last 5-7 years.
CO-CHAIR MICCICHE asked what conditions in 2011 made the refunds
higher than the credits applied against production.
COMMISSIONER BUTCHER explained that the department relies on
company expense reports. That year, more companies spent more
money. The department checks to see that the work is done and
that the company qualifies for the refund before it pays.
4:46:47 PM
CO-CHAIR DUNLEAVY understood that there is no evidence that
production tax credits increase production.
COMMISSIONER BUTCHER said DOR does not have that information.
COMMISSIONER SULLIVAN stressed the point that the system should
be balanced and Alaska's treasury should be solid.
CO-CHAIR DUNLEAVY asked if tax credits are spending credits not
tied to production.
COMMISSIONER BUTCHER said yes. The company only has to show that
an expense qualifies under law.
He discussed a growing concern of DOR and DNR that TAPS tariffs
in revenue modeling did not dynamically link throughput with
tariff rates or capture any added capex or opex spending for low
throughput mitigation measures. He said that assuming price,
production and tariff provided in the "Fall 2012 Revenue Sources
Book," a $1 increase in the TAPS tariff will decrease state oil
and gas revenue by an average of $110 million.
4:50:30 PM
SENATOR GARDNER questioned the statement, "Current work not
designed to find the optimal low flow mitigation option or
forecast specific operational outcomes and exact tariffs." She
wondered whose current work the phrase refers to.
COMMISSIONER BUTCHER explained that it means the department is
running models to determine the effect an increased or lowered
tariff will have, not to determine when oil will run out and
TAPS would shut down.
SENATOR GARDNER asked who is doing that work. She assumed it was
the operators and owners, not the department whose job it is to
evaluate the impact on state revenues.
COMMISSIONER BUTCHER agreed. He added that the state is not
getting involved in predicting operational outcomes.
CO-CHAIR MICCICHE said that Admiral Barrett [President, Alyeska
Pipeline Services] would be covering those issues.
COMMISSIONER BUTCHER highlighted the oil tax reform proposal
which would eliminate progressivity and credits based on capital
expenditures - a 20 percent capital expenditure credit on the
North Slope and reform remaining credits to be carried forward
to when there is production - tax credits can be taken where
there is a tax liability and the state would no longer be paying
cash out on a yearly basis. It would also establish a "Gross
Revenue Exclusion" for newer units and new participating areas
in existing units targeting new oil and challenged areas, such
as a new area that is far from infrastructure with higher costs,
or a heavy viscous oil area. The bill also holds Cook Inlet and
Middle Earth harmless.
4:53:41 PM
MICHAEL PAWLOWSKI, Oil & Gas Project Manager, Department of
Revenue, began an overview of SB 21 - the oil and gas production
tax. He reviewed the highlights of the bill and locations where
that information can be found within the bill. The information
regarding eliminating progressivity can be found in Sections 1
and 26. Conforming sections can be found in Sections 2, 5, 6,
and 22. Information on North Slope credits based on capital
expenditures is located in Section 8. Conforming sections are 7,
11, and 12.
CO-CHAIR DUNLEAVY questioned the contents of Section 2.
MR. PAWLOWSKI provided clarification. He said that Section 2 was
also a conforming section.
SENATOR GARDNER asked for the rationale behind the "hold
harmless" provision in Cook Inlet, but not for other smaller
developers.
MR. PAWLOWSKI explained that the provision applies mainly to the
tax ceiling. The legislature has provided for limited taxes in
areas south of 68 degrees. Middle Earth has a 4 percent tax
based on legislative work last year.
He discussed the sections in SB 21 related to reforming
remaining credits to be carried forward until there is
production. He related that the North Slope net operating loss
credits are found in Sections 9 and 15, with conforming sections
10, 19 and 20. Information about small producer tax credits is
found in Section 16. The forth provision, Gross Revenue
Exclusion (GRE), is found in Section 24, and in the conforming
section 5.
MR. PAWLOWSKI stressed that relatively few sections of the bill
relate to the basic proposals for the North Slope system.
He provided locations for the provisions dealing with Cook Inlet
and Middle Earth. The hold harmless provisions are found in
Sections 3 and 22, with conforming sections 4, 13, 14, 17, 18,
21, and 25.
He said he hoped this guidepost would be helpful to the
committee.
5:00:45 PM
CO-CHAIR MICCICHE suggested extending the meeting on Thursday to
6:00 p.m. in order to finish the presentation on SB 21.
CO-CHAIR MICCICHE held SB 21 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 21 ver A.pdf |
STTP 1/22/2013 3:30:00 PM |
SB 21 |
| SB 21 Sectional Analysis -DOR-TAX-01-11-13.pdf |
STTP 1/22/2013 3:30:00 PM STTP 1/29/2013 3:30:00 PM |
SB 21 |
| SB 21 Fiscal Note-DOR-TAX-01-15-13.pdf |
STTP 1/22/2013 3:30:00 PM |
SB 21 |
| SB 21 Fiscal Note-DNR-DOG-1-14-13.pdf |
STTP 1/22/2013 3:30:00 PM |
SB 21 |
| SB 21 01.15.13 Huggins Oil Tax Transmittal Letter.pdf |
STTP 1/22/2013 3:30:00 PM |
SB 21 |
| SB 21 Revenue Overview to TAPS Spec Committee 1-22-13.pdf |
STTP 1/22/2013 3:30:00 PM |
SB 21 |
| Arresting TAPS Throughput Decline and Oil Tax Reform.pdf |
STTP 1/22/2013 3:30:00 PM |
SB 21 |