Legislature(2011 - 2012)BARNES 124

02/02/2012 10:15 AM ECON. DEV., TRADE & TOURISM

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10:20:36 AM Start
10:21:14 AM HCR19
11:15:15 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Presentations by:
- Brian Holst, Director, Juneau Economic
Development Council
- Mark Myers, Vice Chancellor for Research,
University of Alaska, Fairbanks
              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                                                               
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                                                               
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