Legislature(2011 - 2012)BARNES 124
02/02/2012 10:15 AM House ECON. DEV., TRADE & TOURISM
| Audio | Topic |
|---|---|
| Start | |
| HCR19 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HCR 19 | TELECONFERENCED | |
HCR 19-OIL & GAS POLICY/NORWAY TOUR
10:21:14 AM
CHAIR HERRON announced that the only order of business would be
HOUSE CONCURRENT RESOLUTION NO. 19, Acknowledging the lessons
learned from the 2011 Norway Policy Tour and encouraging
investment in the state's oil and gas industry.
10:21:28 AM
BRIAN HOLST, Executive Director, Juneau Economic Development
Council, gave a brief description of his background. He stated
that he participated in the 2011 Norway Policy Tour that was
organized by the Institute of the North primarily to look at the
oil and gas industry in Norway. He expressed his belief that
although there are many sectors of economic development in
Alaska that must be strengthened, special attention must be paid
to the oil industry. His work experience included years spent
in South America and other countries, and he learned that much
can be gained from the experience of others. Norway is ranked
in the top 10 to 15 countries worldwide in global
competitiveness, and its per capita income is higher than that
in Alaska or the U.S. Norway's unemployment rate is about 3
percent and it has a generous government-supported retirement
system, universal medical care, and a well-educated population.
Mr. Holst said oil and gas is a major factor driving Norway's
financial success: Norway has $573 billion in savings from oil
and gas income, four times the oil production of Alaska, and ten
times the number of jobs in the oil extraction and production
services industry. Underlining Norway's success is the way it
deals with the government's role in the economy, and he made the
following observations regarding oil and gas: Norway has a view
that its citizens have a shared ownership of oil and gas
resources; it assesses the same level of corporate tax for oil
and gas and a 50 percent resource tax; the industry is taxed
only on profits; the tax regime is stable, with no significant
changes in the last nineteen years; there is no royalty system;
there is an alignment between the interests of the industry and
those of the government; the government captures 80-85 percent
of the value of commercialized oil and gas; Norway has a license
application process that replaced bidding with a commitment to
explore and develop resources; licensing is based on the
expectation of production within three to six years; direct
engagement with the industry builds capacity and maximizes
financial return; there are high levels of employment in the
industry; and there is a high level of expertise in the oil and
gas services industry.
10:28:11 AM
MR. HOLST continued his observations on the effects of Norway's
direct financial investment: investment in smaller fields leads
to better access for smaller operators; there are over 60
international firms operating in Norway; regulators and policy-
makers have greater knowledge; less risk and costs are borne by
companies; gas and oil lines are treated as a utility and the
owners of utilities are typically insurance companies and long-
term investors; and because the government supports seismic and
environmental testing, the licensing process is faster. Mr.
Holst noted that 99.9 percent of oil and gas production is
offshore, some in the far North, and Norway is producing from
wells underwater as a way to deal with ice floes. Regarding
other elements of Norway's economy, he said Norway plays a large
role in trade and communications in the Arctic, its citizens pay
an income tax, there is a strong commitment to alternative and
renewable energy, there is a high investment in education, and
the second largest industry is oil and gas support services.
10:32:11 AM
CHAIR HERRON asked Mr. Holst what he learned on the tour that
surprised him and what disappointed him.
MR. HOLST said he was surprised by the levels of investment by
the government and the private sector; in fact, the industry
seems compatible with the high level of taxation. He was
disappointed by farm fishing.
10:34:04 AM
REPRESENTATIVE MUNOZ observed that in Norway the permitting
timeframe is about two years. In Alaska, the timeframe is
unclear.
MR. HOLST said he was not an expert on oil and gas, however, he
understood that the initial ground-work prior to the licensing
and application process is directed by the government and has a
high success rate. He pointed out that Norway manages the
permitting process without influence from a federal government,
but Alaska cannot.
10:36:24 AM
REPRESENTATIVE FOSTER asked for the top two or three things from
the Norway model that can be adapted for Alaska.
MR. HOLST advised Norway has made significant investments in the
infrastructure needed for access to bring the resource from
production to market at a low cost. Also, the scope of the
direct investment produces transparency and reduces the risk for
smaller operators. These efforts are within Alaska's reach.
10:38:32 AM
REPRESENTATIVE PAUL SEATON, Alaska State Legislature, informed
the committee that the House Resources Standing Committee is
looking at a model based on lessons learned on the 2011 Norway
Policy Tour; for example, whether state investment to
incentivize basins should be in credits, or by state direct
financial interest.
10:39:39 AM
MARK MYERS, Vice Chancellor for Research, University of Alaska
Fairbanks (UAF), University of Alaska (UA), disclosed the views
expressed were his own and not those of UAF. Mr. Myers said he
was asked to comment on what parts of the Norwegian model might
be applicable to Alaska. He gave his background and experience
that began in Alaska as a petroleum exploration geologist 27
years ago, and included his time as the Director of the U.S.
Department of the Interior, Geological Survey (USGS) during the
publication of the 2008 USGS Circum-Arctic Resource Appraisal.
In his current role, he is focused - along with Norway and its
key research institutions - on the potential of research to the
oil and gas industry. Although he did not participate in the
2011 Norway Policy Tour, Mr. Myers offered his general
observations about some of Alaska's challenges and what can, and
cannot, be implemented from the Norwegian model. Norway
intelligently manages its resources by four major components:
Norway keeps a significant tax structure to provide a base
source of revenue; it holds a majority ownership in a major oil
company - Statoil - which gives the government "immense say into
how that company behaves and acts;" there is government-directed
financial interest at the time the licenses are issued, giving
the government its own investment firm; and there is a very
well-educated and professional staff in the Ministry of
Petroleum and Energy. These components create an integrated
system from the regulators to a commercial entity, to an
investment firm, and to a base tax structure. He cautioned that
the four components of the Norway model create a stable
structure and must be looked at holistically, not piece-by-
piece. Norway's stakeholder ownership ensures that Statoil
protects the interests of Norway, even though it has
international operations. In addition, Norway's ownership in
infrastructure avoids Alaska's problem of having one pipeline
under private ownership. Alaska's situation makes facility
access a challenge for other parties who are trying to develop
fields, because the pipeline owners need to maximize their
profit, and that creates a tension within Alaska's system.
Norway has solved this problem by having an equity share, and by
having strong facility-access regulations. The United Kingdom
has addressed this problem in the North Sea by the
Infrastructure Code of Practice that allows for arbitration to
negotiate third-party access. Mr. Myers said Alaska has no
method to intervene in such a negotiation, although it has a
critical interest in the use of the infrastructure.
10:45:03 AM
MR. MYERS turned to the Alaska model and observed that - in the
past - Alaska's relationship with industry relied on the nature
of competition, and since there was a lot of competition between
the major oil companies on the North Slope, leasing worked well
at that time. Competition also needs a level playing field
because a smaller operation is disadvantaged in information,
capacity, and market; for example, a large operation like Shell
can plan operations in the Outer Continental Shelf. After the
companies merged on the major infrastructure on Alaska's North
Slope, there was a dramatic decrease in competition, thus the
system does not work as well. Mr. Myers said the design of the
Norwegian model provides some solutions to the lack of
competition. He pointed out that Alaska's structure must adhere
to the Alaska State Constitution that specifies that the
development of resources is for the maximum benefit to the
people of Alaska. Therefore, adapting components of the Norway
model must take into consideration Alaska's goals, and what its
residents want to achieve. Norway has chosen a very long-term
goal by building on a stable base of governmental support to
sustain and increase revenue over a long period of time. He
opined, however, that Alaska has a hard time defining its goals;
in fact, the goals are difficult to define: Should revenue come
from new sources or existing sources? Should the state invest
for a stabilized rate of production or for a short-term maximum
rate of production? He cautioned that reaching for an increased
rate from an oil field can mean a loss of production over a
longer period of time, thus an analysis of tax structure must
consider all of these elements. Another of the state's goals is
jobs for Alaskans, and he advised that there must be a greater
investment in education if Alaska wants industry jobs to go to
Alaskans, or to export trained labor. With investment, state-
of-the-art research could also be done in the state by Alaskans
under certain circumstances. In addition, a big goal for Alaska
is affordable energy, so fundamental decisions must be made on
how to balance the revenue from the export of energy with the
cost of importing energy; in fact, confusion on this issue is
demonstrated by the multiple gas pipeline proposals. Norway's
solution to this problem was for the government to develop
hydroelectric power, but Alaska has not made a clear and
consistent choice. Norway is also ahead of Alaska in producing
value-added products; for example, Alaska lacks a petrochemical
industry. Another opportunity for Alaska is to develop its
hydroelectric energy and export its natural gas. Mr. Myers
expressed his belief that another challenge for Alaska is to
decide philosophically what is appropriate for government to do;
as a matter of fact, a state agency that is building a major gas
pipeline puts the government in the gas pipeline business,
whether or not the state clarifies its role in infrastructure
development. Finally, there is debate about whether the
industry, the administration, the legislature, or the federal
government drives investment in the oil and gas industry and
energy planning in Alaska. Norway has "harmonized" the roles of
each of those forces, but Alaska has not. Turning to actions
Alaska could take, he suggested Alaska could drive investment in
the areas of new development - where there is no infrastructure
- through credits or direct investment. However, transferring
tax and royalty revenue to an equity interest in existing
development through the Stranded Gas Act is difficult because
the state is not able to evaluate the worth of the value of the
resource, or to force a sale. Many questions arise surrounding
the conversion of the resource value of existing developments.
10:54:00 AM
MR. MYERS continued to explain that there may still be an
opportunity on the North Slope to put an equity interest in the
field at Pt. Thomson. A satellite development could lead to
significant other exploration, but the state needs data and the
professional management of its interest. Also, reclamation
costs on the North Slope for the Trans-Alaska Pipeline Systems
(TAPS) and facilities will be significant, and the state will
have to allow discounts there. He advised these issues are very
complicated, although not without merit. Finally, the state
could invest in research and development in order to acquire
needed data on water, ecosystems, and habitat, thereby saving
years on the permitting process. In fact, the state and the
companies working in the state are not employing the latest and
greatest technology available on new processes such as on shale
gas and shale oil. State investment in research and development
should be combined with education.
10:57:53 AM
REPRESENTATIVE TUCK observed that government needs to take an
active role in development, but there is an attitude that
government "gets in the way of things, ... government needs to
be removed." He asked whether the industry or the government
advanced the shale oil and gas technology that led to
development in North Dakota. Alaska relies on the industry to
implement technologies.
10:59:16 AM
MR. MYERS described how the oil and gas industry grew in North
Dakota, beginning with a USGS resource estimation of 3.2 billion
barrels of resource found in the Bakken formation. Because
North Dakota's road system was in place, and the industry had
existing infrastructure, smaller companies were able to come in
and transport oil by pipelines and trucks. There is a complex
lease system, and the risks taken by the companies were high,
but oil prices stayed high. So, there was a combination of
higher oil prices, emerging technologies, an open basin, public
awareness, and a sufficient water supply for the hydraulic
fracking process. Mr. Myers concluded that the open,
competitive model is working in North Dakota largely because of
the access to market, full-year drilling, and infrastructure.
11:01:56 AM
REPRESENTATIVE TUCK asked whether North Dakota will lose the
open competition at some point.
MR. MYERS opined that if oil prices stay high, the small,
individual leaseholders will not merge. This is not a similar
situation to Alaska because there are trucking options for
delivery.
11:03:46 AM
REPRESENTATIVE GARDNER stated that the oil industry in Alaska
credits the success in North Dakota only to low taxes.
MR. MYERS said there has to be real analysis of what the
profitability in Alaska is by looking at benchmarks on real
rates-of-return, at incentives, and at the federal taxes;
however, in-depth analysis on taxes has not been done, and the
profit margin in North Dakota cannot be compared to the profit
margin in Alaska on an equivalent field. Alaska does have
higher costs, a massive reserve base, a single landowner, and
factoring in the "royalty piece matters a lot," so there must be
a specific tax-to-tax comparison. Also, when considering
incentives for a capital-intensive development such as shale oil
and gas, the credits given by Alaska are immense. This cannot
be compared to the tax rate on an existing field with minimal
investment, but must be compared to a field that is actively
being built. In fact, Alaska's structure is more favorable than
North Dakota's on development for shale oil. The data is simply
not there for "apples to apples comparisons;" furthermore, it is
common for states to add a severance tax once successful
production is well-established.
11:06:30 AM
REPRESENTATIVE THOMPSON asked whether there was ongoing research
on heavy oils.
MR. MYERS said more data and information that will shorten
permitting time is needed. With this information the state can
make choices on infrastructure and sort out the benefits and
risks of projects. The university has the capacity to do more
research than it is doing, and he advised Alaska is not
capitalizing on its resource base the way Norway does.
REPRESENTATIVE FOSTER asked how Norway achieved consensus
towards a common goal.
11:08:42 AM
MR. MYERS restated Norway's vision of a series of long-term
goals for societal benefits and sustainability for the resources
and the environment, along with an understanding of the
integration from oil and gas exploration through to the delivery
of a refined product. Norway has also been successful at
depoliticizing the oil and gas industry, and has a much higher
level of professional engineers, geoscientists, economists, and
commercial analysts in the government who are insulated from
political appointment. In Alaska, on the other hand, technical
experts are often political appointees, which limit the job pool
significantly. Mr. Myers warned that looking at other models is
complex, and "if you aren't careful, a good philosophical idea
can turn into a terrible investment decision."
CHAIR HERRON encouraged further discussion of related
constitutional issues. Public testimony on HCR 19 was closed.
11:11:40 AM
REPRESENTATIVE KELLER introduced a conceptual amendment to page
4, line 5, that after the word "generation," insert:
private sector job expansion, affordable energy
options, and value-added options,
REPRESENTATIVE KELLER said the amendment expands and
incorporates the goals of the resolution.
11:12:54 AM
REPRESENTATIVE GARDNER observed that the amendment is related to
her belief that the testimony today raised the aspect that
having a trained workforce, and focusing on increasing jobs for
Alaskans, also must acknowledge that Norway has a pre-
kindergarten to Ph.D. free education for its citizens. She
pointed out that education is part of the lessons learned in
Norway. She then expressed her objection to the inclusion of
the word "competitiveness" because the word "has been co-opted
to be sort of a code for reducing taxes on the industry."
11:14:15 AM
CHAIR HERRON announced HCR 19 was held.
| Document Name | Date/Time | Subjects |
|---|---|---|
| EDT 2.2.12 - HCR 19 - Speaker Bios.pdf |
HEDT 2/2/2012 10:15:00 AM |
HCR 19 |
| HCR 19 - Amendment M.1.pdf |
HEDT 2/2/2012 10:15:00 AM |
HCR 19 |