Legislature(2011 - 2012)BARNES 124
02/18/2011 01:00 PM House RESOURCES
| Audio | Topic |
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| Start | |
| Overview(s): Alaska Oil & Gas Explorer & Support Industry | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
OVERVIEW(S): Alaska Oil & Gas Explorer & Support Industry
[Contains discussion of HB 110]
1:04:29 PM
CO-CHAIR SEATON announced that the only order of business is an
overview of the Alaska oil and gas explorer and support
industry, as well as any comments that the industry might have
about [HB 110] and how to increase production through the Trans-
Alaska Pipeline System (TAPS).
1:05:44 PM
BART ARMFIELD, Vice President, Field Operations, Brooks Range
Petroleum Corporation (BRPC), specified that BRPC is an
operating entity on behalf of its working interest owners which
are: Alaska Venture Capital Group (AVCG), LLC, Ramshorn
Investments, TG World Energy, and Brooks Range Development
Corporation. He said BRPC manages in excess of 240,000 acres on
the North Slope (slide 1). The Beechey Point Unit, a proved and
formed exploration unit, is BRPC's near-term development area.
To the west of this unit is BRPC's exploration area which has a
pending exploration unit called the Southern Miluveach Unit and
to the east is BRPC's strategic planning area called the South
Thomson Area. The exploration well being drilled in the
southeast corner of the Southern Miluveach Unit is scheduled to
be spud on March 1, 2011.
1:08:16 PM
MR. ARMFIELD noted that by the end of 2011 BRPC will have spent
in excess of $154 million on the North Slope during its 10-year
life. He said AVCG was formed in 2000 and the time from 2000 to
2007 was used to implement business strategies, set the
foundation for the operations of the company, acquire a
leasehold position, evaluate the prospects within that position,
formulate an exploration plan, and hire the technical staff
required to support those activities, with the first well
drilled in 2007. Participation in area-wide lease sales has
occurred every year since 2000. The North Tarn Well is being
drilled in 2011 pending approval of the Southern Miluveach Unit,
at which point will be the edge of sanctioning a development
project.
MR. ARMFIELD related that during visits to legislative bodies
last week he was asked why Brooks Range Petroleum Corporation is
out drilling this year, so he developed [slide 2] to answer that
question. First, the working interest owners need to have that
investment of $154 million perform. Second, the corporation's
current approved business plan has a timeline that reflects
production, and revenues from that production, in mid-2013.
Third, each year of delay has an adverse affect on BRPC's
internal rate of return. He pointed out that BRPC is the only
entity that is out with activities in 2011.
1:11:10 PM
MR. ARMFIELD stated that the current economic models used by
BRPC to evaluate its prospects support the internal rate of
return for these smaller accumulations with an assumption that
that reserve base, once sanctioned, will foster further growth
and make that investment even more profitable. An increase in
the tax rate and a reduction in the capital credits would have
an adverse impact to BRPC's models and could very easily shift
them into an uneconomic position because they are so small and
are on the edge. Conversely, adoption of a policy that lowers
the rate and increases credits would have a much different
impact on that economic model. Performing to that economic
model would go a long way in providing a confidence level for
the working interest owners that have invested $154 million, and
a positive return would allow the gathering of more investment
capital. He advised that there is a watchful eye on Alaska and
if positive policies come out of this legislative session he
thinks there will be an elevation in the activity level of
people coming to the North Slope and to Alaska.
1:13:13 PM
MR. ARMFIELD related that he calls the proposed base tax rate,
progressivity, capital credits, and timing of those credits the
top side of HB 110 (slide 3). The first three elements do not
affect BRPC today because it does not yet have production or
revenue, but the goal is to become affected by them. He said
BRPC supports the bracketed structure and the reduced base rate
with a cap because these policy measures would greatly affect
BRPC's models and improve the internal rate of return that is
presented to the working interest owners. The fourth element,
the acceleration of the payment schedule for capital credits
from a two-year to a one-year realization, would have profound
effects on BRPC's annual planning and overall North Slope
operations. The proposed increase of the qualified capital
credits from 20 percent to 40 percent would most definitely have
a big effect on BRPC's position. Further, BRPC supports
extending the sunset for small producer credits through the year
2021 at the least, although indefinitely would be preferred.
1:15:32 PM
REPRESENTATIVE HERRON inquired whether raising the small
producer tax credit above $12 million a year would be of benefit
to Brooks Range Petroleum Corporation or to the state.
MR. ARMFIELD replied yes, it would most definitely be nice to
have it go up. However, he has not evaluated what level that
should be because BRPC has been accepting the current figure of
$12 million that is scheduled for sunset in 2016.
REPRESENTATIVE HERRON asked whether BRPC likes the tax credit on
well lease expenditures for Cook Inlet that would be expanded to
the North Slope.
MR. ARMFIELD responded yes, that is a positive, and there are
probably several other things within HB 110 that BRPC has not
fully evaluated. Additionally, BRPC has some line item concerns
and plans to address these as legislators re-define that
language.
CO-CHAIR SEATON interjected that there will be full public
testimony once the details of the bill are fully rolled out.
1:17:33 PM
MR. ARMFIELD reviewed the throughput history of TAPS, along with
the production forecast from the 2009 Division of Oil & Gas
Annual Report (slide 4). He said HB 110 has the opportunity to
profoundly impact the state's declining oil production and would
change how new and existing players plan and execute their
activities on the North Slope.
MR. ARMFIELD presented what BRPC is calling Plan-2050, which is
an incremental/phased look at how to support production and
throughput of TAPS to address the current production decline
(slide 5). The goal of Phase I would be to add 10 new fields
over the next 12 years with an average production of 12,000
barrels of oil per day per field. This would increase the
recoverable reserves by 500 million barrels. The amount of
investment capital to support that level of activity would be in
excess of $6.3 billion. History demonstrates that adding 10 new
developments over a 12-year period can be done. For example,
over the last 12 years Alpine, Northstar, Oooguruk, and
Nikaitchuq were put on line, and Badami was restarted. While
those do not total 10 projects, they collectively represent the
equivalent of 10 projects of 12,000 barrels per day per field.
MR. ARMFIELD said the goal of Phase II is 32 new developments
over the next 20 years. Since 10 new developments would already
have occurred, Phase II would be the addition of 22 new fields
under the same parameters, but in this case it would be done in
an 8-year period. He maintained that this is an achievable goal
when one looks at the current advancements in technology and
prototypes, such as the unconventional resource plays presently
happening in North Dakota. There will come a time, and it may
be in the very near future, that those processes are applicable
to the North Slope, and those advancements will support the
ability to add 22 new developments of 12,000 barrels of oil per
day per field in an 8-year period, or it could be 8 developments
of 30,000 barrels of oil per day per field.
1:22:35 PM
MR. ARMFIELD highlighted Phase III of BRPC's Plan-2050 in which
the final goal of 44 new developments would be reached by the
year 2050 [meaning 12 more new fields would be developed between
2031 and 2050]. Thus, by 2050, a total of over $18.6 billion in
new capital investment would come into the state and total
recoverable reserves would increase by 2.2 billion barrels.
MR. ARMFIELD outlined how the production decline curve would
flatten under Plan-2050 when the new production is combined with
the production from existing fields (slide 6). Current industry
as a whole could support four new developments from within
existing fields over the first 12-year period of Plan-2050. Six
new developments would come from independents and new players to
Alaska, bringing the total of new developments to ten [top left
graph]. He compared the production curve of the current
Division of Oil & Gas (DOG) forecast with that of Plan-2050
Phase I (the years 2011-2024), explaining that the Phase I curve
represents a combination of the production history from the past
12 years and the current DOG forecast, with production from
Phase I beginning in 2015 since there needs to be a lead time
for Phase I production to start. He pointed out that the two
bottom graphs [on slide 6] carry out the Plan-2050 production
curve for Phase II (years 2011-2031) and Phase III (years 2011-
2049) using the same aforementioned combination of production
history, DOG forecast, and Plan-2050 forecast.
1:25:53 PM
MR. ARMFIELD said Brooks Range Petroleum Corporation sees three
courses for action that are probably being considered [slide 7].
One course of action is the status quo where current fiscal
policy remains the same. He said he thinks that if this course
of action is taken the current production trend will continue
[declining from 600,000 barrels per day in 2011 to 100,000
barrels per day in 2050], the effect on activity will be
marginal, the chance for new developments will be limited, and
there will be a high degree of uncertainty. He expressed his
disappointment that only 3 explorers are present at this hearing
instead of 30 or 40. A second course of action is a negative
adjustment in which taxes are increased and credits are lowered.
He said BRPC's perspective is that this would cause downward
pressure on the [current declining] forecast, would reduce the
number of capable slope players, would increase the burden on
the existing units, and would have a very high degree of
uncertainty.
1:27:44 PM
MR. ARMFIELD continued, saying that a third course of action is
a positive adjustment where the focus is on throughput. He said
HB 110 would result in an upward movement in activity, improve
exposure to discoveries, exploit existing producing units,
expand clients for vendors, stabilize the state's tax revenue
base, establish common throughput targets, extend the economic
and physical operation of TAPS, and improve the life of field
potential. He noted that the $18.6 billion figure he cited
earlier relates only to those projects that are successful.
Using a basis of 50 percent successful projects and 50 percent
failed projects the total of new investment capital would be $36
billion under HB 110 [Phases I-III of Plan-2050]. Therefore,
Brooks Range Petroleum Corporation supports the positive
adjustment through HB 110. At the very least, he continued, the
payment schedule should be accelerated from a two-year program
to a one-year program [for exploration and other qualified
capital investments] and that the small producer tax credit
should be extended [from its current expiration date of May 1,
2016, to May 1, 2021] (slide 8).
1:30:20 PM
MR. ARMFIELD, in response to Co-Chair Seaton, clarified that his
basis in investment capital of 50 percent successful projects
and 50 percent failed projects would apply to all of the graphs
shown on slide 6. In further response he confirmed that for
[Phase I] the new investment capital would be $6.3 billion for
successful projects and for successful and failed projects
combined it would be about $13 billion. [For Phase II] the
total new investment capital for successful and failed projects
combined would be about $26 billion [$13.2 billion for
successful projects].
REPRESENTATIVE P. WILSON, regarding Mr. Armfield's use of a
50:50 success to failure ratio, recalled hearing a few years ago
that the ratio is 1 wet well for every 6 wells drilled. She
asked whether this ratio has changed over the years.
MR. ARMFIELD replied that he cannot support the 1 in 6 number
right now given that BRPC's performance has not been to that
level. Over the past 4 years, BRPC has drilled 9 penetrations
on the North Slope and 2 were dry. In further response, he
clarified that 2 out of the 9 were definitely not good, 2 of the
remaining 7 are known to be good, and the other 5 are still
being evaluated.
1:33:20 PM
CO-CHAIR SEATON said the committee is also focusing on
throughput and ensuring that any changes made will result in
that. He understood Mr. Armfield to be saying that for BRPC the
most important things are extending the small producer tax
credit and having the credit cycle be over a period of one year
rather than two.
MR. ARMFIELD responded that that is correct, but clarified that
those two are the most important today to BRPC in terms of real
financial impacts. The goal is to get to the position of being
a producer, at which point the other things will then have a
definite impact on BRPC.
1:34:36 PM
CO-CHAIR SEATON noted that Beechey Point and Southern Miluveach
are both unitized but not yet producing oil. Regarding the
provision in HB 110 for a lower tax rate on new units, he
inquired about BRPC's position on whether those two existing
units should be classified as new or old oil.
MR. ARMFIELD answered that BRPC has concerns about this language
because it really would affect the company. In its business
plans and execution, BRPC always forms a unit to proceed. The
acreage is acquired, any available seismic is reviewed and new
seismic is shot, an exploration unit is formed, and a commitment
is made to work programs to support that exploration unit.
While Beechey Point has been a unit for nearly three years, the
oil would be new; therefore, BRPC would definitely be impacted
if it was thrown out of being qualified for this category. In
further response to Co-Chair Seaton, Mr. Armfield said it is
BRPC's perspective that [Beechey Point and Southern Miluveach]
are new oil. Regarding heavy oil and other resources that have
been out there and are considered old, he pointed out that the
technology has not been there to allow their development and so
when the technology is refined to allow getting that type of oil
he would argue that it is new oil.
1:39:04 PM
REPRESENTATIVE P. WILSON requested further explanation on when
something becomes a unit.
MR. ARMFIELD explained that BRPC forms exploration units and
there are differences between exploration units, producing
units, participating areas, and a wide range of other
categories. His concern with the proposed language in HB 110 is
that there is no distinction between the aforementioned types of
units, the language just says units. He further explained that
once BRPC forms those exploration units, they go to the
Department of Natural Resources for approval and an applicable
work program is assigned to them that extends that exploration
unit for a given number of years based on the performance
adhered to in that work program. Once into production and
development, it goes into a producing unit that is associated
with a participating area, and from there it gets more complex.
1:40:40 PM
REPRESENTATIVE P. WILSON understood Mr. Armfield's explanation
and his concern, but asked why the other locations on the map
are not called units.
MR. ARMFIELD replied that BRPC has not yet applied for those
areas because there is a long process for forming a unit. An
area cannot be unitized just because a company wants to; there
must be a foundation that supports that unitization process.
The Southern Miluveach Unit was just completed and is currently
being evaluated by DNR. The unit's books are four inches thick
to support the unit application, which could be approved in its
current form or could be approved in a reduced or expanded form.
The Beechey Point Unit went through the process, was formed, and
is approved. These two units have work programs that BRPC plans
to move forward on. The other areas are still being evaluated
as to what BRPC thinks the units should look like and what work
program BRPC should commit to for maintaining a unit.
1:42:27 PM
CO-CHAIR SEATON inquired whether the new capital amount of $36
billion in the Plan-2050 includes new production facilities at
the new oil units, or whether the assumption was that everything
would run through existing Prudhoe Bay infrastructure.
MR. ARMFIELD responded that the $36 billion is derived through
an economic model in which the cost is applied on a per barrel
basis. So, yes, the figure involves new facilities or
modifications to existing facilities to be able to handle that.
In further response, he said the costs are inclusive of ice
roads, exploration, exploration wells, gravel, facilities,
pipeline, and whatever it takes to support that level of
production and these are applied in the model.
1:44:00 PM
MR. ARMFIELD, in response to Co-Chair Feige, confirmed that, to
his knowledge, BRPC is drilling the only exploration well on the
North Slope this winter season.
REPRESENTATIVE GARDNER asked whether all nine of the wells
drilled by BRPC participated in the state's exploration credit
program.
MR. ARMFIELD answered yes, adding that BRPC takes full advantage
of every opportunity afforded to it by the state.
1:45:39 PM
KEN THOMPSON, Managing Director, Owner, Alaska Venture Capital
Group (AVCG), LLC, explained that AVCG is the parent company of
Brooks Range Petroleum Corporation. He has lived in Alaska for
17 years and from 1994-1998 he was president and CEO of ARCO
Alaska, Inc. His purpose is to present ideas to re-incentivize
investment and increase the competitiveness of Alaska relative
to other oil basins with one common state and industry goal in
mind: to level Alaska's oil production (slide 2). Alaska
Venture Capital Group has had a very positive relationship with
the State of Alaska and its agencies, and would like to be a
company that helps the state to substantially grow the pie of
revenues.
1:48:01 PM
MR. THOMPSON maintained that the state of Alaska can have level
oil production again. Some companies in Alaska are in the
harvest mode and that should be their strategy. But there are
other companies like AVCG that are in a growth mode and over the
next one to two decades companies like AVCG do not have to find
a big Prudhoe Bay or a big Kuparuk. If the state can have 10
50-million-barrel oil fields every 12 years, the production can
be leveled.
MR. THOMPSON explained that his job at AVCG is to raise capital
for exploration and development on the North Slope, while Mr.
Armfield's job within BRPC is to do the implementation. In
addition to raising capital from current investors, he is
looking for one new investor and that is why he is currently in
Houston, Texas, at the North American Oil and Gas Prospect Expo.
In addition to looking for a partner that can bring in more
capital to help accelerate the company's work, there could be
substantial upside in shale oil on some of the acreage, which
could possibly be a new business within Alaska. Therefore, AVCG
needs to bring in a company with that expertise. He added that
Great Bear Petroleum is also playing that same concept with the
acreage that it acquired last October. Of the 15,000 attendees
at the expo, 50 stopped by AVCG's booth, and 5 companies
expressed interest and asked for more information.
1:51:04 PM
MR. THOMPSON said he thinks fundamental improvements to Alaska's
Clear and Equitable Share (ACES) are needed to attract new
investors. His company's focus is on what it calls the next
frontiers for major developments on the North Slope. Those
frontiers would grow the company as well as level production in
Alaska. Those frontiers fall into two categories for what AVCG
does: exploration of smaller fields in the 25-50 million barrel
range with the sharing of regional processing facilities and
production from low-permeability sands and oil source shales.
On the Southern Miluveach Unit about 1 billion barrels have been
identified in sands, with about 20 percent recoverable. About
100,000 of AVCG's acreage may have significant oil source shale
potential. As the state looks at how to level and grow
production, other frontier areas include North Slope viscous
oil, North Slope natural gas, and North Slope offshore oil, but
those are the realm of the major oil companies.
1:53:40 PM
MR. THOMPSON explained that Alaska Venture Capital Group is a
holding company that owns all the leases and assignments and
will own the oil production and production revenues (slide 3).
Additionally, AVCG manages the direction and business strategy,
negotiates all business deals, and attracts new investors.
Moving to slide 4, he specified that AVCG has spent $154 million
and he is a personal investor. Alaska Venture Capital Group is
committed to Alaska and is working hard to get a return on that
capital for its investors. Of the 240,000 acres, about 50
percent is held by AVCG and the other 50 percent is split
between Ramshorn Exploration, a private firm out of Houston, and
TG World Energy, a small public corporation in Calgary.
1:56:14 PM
MR. THOMPSON highlighted what he deals with to attract new
investors in the face of global competition for capital (slide
5). He related that about a year ago, AVCG had a partner out of
Calgary called Bow Valley, a small public company. It was
purchased by Dana Petroleum, a larger public company out of the
United Kingdom (UK). With that purchase Dana became the owner
of about 20 percent of the holdings shown on slide 4; however,
upon looking at everything, Dana concluded that Alaska's fiscal
regime was tougher than the UK sector where it was playing.
Dana decided to focus solely on the UK and said it did not want
to invest in Alaska, so AVCG acquired Dana's interest which
increased AVCG's interest from 30 percent to the current 50
percent. The owners of AVCG do not necessarily like the risk of
50 percent ownership given that AVCG plays the risky side of
exploration. Therefore, his job over the past nine months has
been to find an investor that can bring capital as well as
expertise. Last summer AVCG attended this same expo in Houston
at which time 12 companies expressed strong interest. Since
then, however, 11 have said no and the number one reason for
saying no is the Alaska fiscal regime with its high and
complicated taxation. Several of those companies elected to put
their money into North Dakota's Bakken Oil Shale where the
severance tax rate is much more favorable, plus the risk is less
in North Dakota than it is in Alaska. Some did not want to
participate because they were looking for fields of 50-100
million barrels or more and therefore did not like the
prospectivity on the North Slope. One company remains and is
very interested. Internally, that company is going to approve
partnering with AVCG and will bring in its technologies to the
North Slope. However, the one final hurdle is the company's
board meeting in March where board members want to hear about
the only issue that remains for them - Alaska's taxes. He said
he has prepared a positive story for this board meeting and most
of that positive story is HB 110. Over the next several months
he will meet with the other five companies that recently
expressed interest, but he is hoping the aforementioned one
company will join in and then he will not have to meet with the
other five.
2:00:50 PM
MR. THOMPSON, addressing the portion of slide 5 regarding the
UK, pointed out that the riskier fields in the North Sea are
exempt from the UK's supplemental surcharge that is leveled on
top of the corporation tax. For the first $1.3 billion of each
field's profits there is no surcharge, which allows better
recovery of capital. He related that he just met with several
executives from Noble Energy, a company that recently made a
huge natural gas discovery in offshore Israel. While Israel is
increasing its government take from 30 percent to 52-62 percent,
which is still less than the Alaska and the U.S. total take, the
30 percent rate will be maintained until a producer recovers 200
percent of investment. Under this concept, the capital comes
back more quickly, although Alaska does help in some regards
with the capital tax credits.
2:02:31 PM
MR. THOMPSON reported that while Alaska had three booths at this
expo, the states of North Dakota, Texas, and Wyoming combined
had 100-200 booths. When shale production began in North
Dakota, the state suspended its severance tax for 18 months on
any new production, after which time the tax goes back to the
normal maximum rate of 11 or 12 percent. That tax suspension
generated a lot of new activity and now it is running on its own
with about 150-160 wells per month being drilled in the Bakken
Shale. Oil production in North Dakota is on the incline and is
expected to double [this decade] at which point it will surpass
Alaska as a production state.
MR. THOMPSON, in relation to his work trying to raise new
capital, pointed out that in terms of overall attractiveness
Alaska is in the middle relative to the rest of the world
[Fraser Institute 2010 Global Petroleum Survey as presented by
the Alaska Department of Revenue on 2/5/2011] (slides 6-7). The
most attractive states depicted on the graph had tens of booths
at the aforementioned expo. He said he thinks there is a
correlation between where people are interested in investing and
these graphs, which are being shown in corporate board rooms as
well as government hearings. This is what makes it harder for
him in trying to raise capital, but AVCG is not giving up.
2:05:46 PM
MR. THOMPSON offered AVCG's recommendations to assist in
achieving the common goal of no decline (slide 8). He said AVCG
supports the proposed changes in HB 110 of revising the
progressivity surcharge and capping the total tax [at 50
percent]. To attract partners in moving the Beechey Point
exploration unit to a development unit, it would be helpful if
the base tax rate for new fields was 15 percent instead of 25
percent with the total tax capped at 40 percent, as proposed by
HB 110. He said AVCG is willing to share its economics on that.
MR. THOMPSON thanked the state for the tax credits that are
currently provided on exploration, saying those credits have
been significant to AVCG and have helped it to drill two wells
in some years instead of one, which doubles the chance for
discovery. If, as proposed by HB 110, this tax credit could be
refunded in one year instead of the current two, he would be
able to recommend to AVCG's owners to go to three wells a year
instead of two, which would help accelerate finding oil.
2:07:30 PM
MR. THOMPSON, regarding AVCG's support for increasing the tax
credits for qualified capital investments from the current 20
percent to 40 percent as proposed by HB 110, said that the only
issue is clarifying the definition, particularly of units, as
discussed by Mr. Armfield.
MR. THOMPSON pointed out that the small producer tax credit
plays very well when he talks with prospective investors. The
current credit of $12 million a year every year for the first
five years helps recover capital before the higher tax rates,
which is very helpful. Extending this credit five more years,
as proposed by HB 110, would help to bring on the Beechey Point
unit and AVCG is hopeful that the well currently being drilled
will also be able to take advantage of this credit.
MR. THOMPSON related that the mantra when he was president of
ARCO Alaska was "no decline after '99" and that was in regard to
ARCO's production, which is now ConocoPhillips. The two
companies pretty much did that for several years and he thinks
Alaska can too. Regarding the 10 fields in 12 years mentioned
by Mr. Armfield, he shared that AVCG has set an internal goal of
achieving 2 of those 10. If AVCG can attract some additional
investors, he thinks all of that can add up to the 10 fields
needed to reduce the decline.
2:09:52 PM
REPRESENTATIVE P. WILSON inquired where Alaska would be located
on the Fraser graph of overall attractiveness (slide 6) if HB
110 was passed.
MR. THOMPSON replied he does not know because he has not
calculated where the Alaska line would move. However, if HB 110
passes, it will for sure be bold headlines in the Houston
Chronicle energy section, as well as in Dallas, Denver, and Los
Angeles. It will be heard throughout the industry and likely be
headlines in the Oil & Gas Journal because the prospectivity is
there.
2:11:48 PM
REPRESENTATIVE FOSTER asked what the atmosphere is like when Mr.
Thompson approaches prospective investors and what their read is
on Alaska. He commented that Mr. Thompson's statement of "we're
not giving up" means that others are and indicates that Alaska
needs to do something.
MR. THOMPSON responded that AVCG ran a large survey three years
ago in the Southern Miluveach unit and found 16 leads ranging in
size from 10-40 million barrels of oil. While all of those may
not make it to the drilling stage, showing them at AVCG's expo
booth generated buzz and the oil source shales that were mapped
generated quite a bit of buzz. Some of AVCG's acreage on the
western North Slope is in prime areas similar to the Bakken
Shale. Showing that that play is commercial in Alaska, or that
the severance tax is suspended like has been done in North
Dakota for all new Bakken horizontal wells, could generate a
buzz, word would get out, and more people would come to Alaska.
2:15:21 PM
CO-CHAIR SEATON inquired what range of investment capital AVCG
looks for when talking to prospective investors.
MR. THOMPSON replied that for a two-well drilling program the
typical overall budget for seismic, new land acquisitions, and
two wells is $50-plus million per year. Any company entering an
area enters with the idea of pushing hard for, say, five years,
so that would be $250 million. Alaska Venture Capital Group is
looking for companies that can pay 20-50 percent of that, so it
is going to be companies that are willing to do $50-$125 million
for exploration within Alaska. For development, AVCG is looking
for hundreds of millions to billions, so the companies know that
if they become involved they must have access to pretty large
capital for development.
2:17:30 PM
The committee took an at-ease from 2:17 p.m. to 2:20 p.m.
2:20:44 PM
JAMES JOHNSEN, Senior Vice President of Administration, Doyon
Limited, specified that Doyon is a for-profit Native corporation
founded in 1972 dedicated to the economic and social well-being
of its 18,158 shareholders and to strengthening the Native way
of life (slide 2). Doyon owns 12.5 million acres of land in
Interior Alaska and 2010 was its twenty-sixth consecutive year
of profitability (slide 3). While Doyon is a for-profit
company, it also has social values in addition to its financial
goals, so Alaska hire, shareholder hire, and shareholder
development are critical to the company. Doyon's enrollment is
open, so the number of shareholders goes up daily. Fifty
percent of the shareholders are located in Interior Alaska, 25
percent live in Anchorage and the rest of Alaska, and the
remaining 25 percent live in the rest of the U.S. (slide 4).
Doyon is seeing a gradual movement of people from the Interior
villages into Fairbanks and, in particular, Anchorage.
2:24:25 PM
MR. JOHNSEN outlined Doyon's corporate strategies (slide 5).
Doyon is a holding company that works to select the optimal mix
of operating companies to maximize earnings and provide
shareholder opportunities. Doyon adds value to those companies
by providing capital, administrative services, guidance, and
strategy. A major strategy is conducting oil and gas
exploration on state and other lands, but primarily Doyon lands.
From a rural economic development standpoint, Doyon seeks
partnerships with village corporations to the extent possible.
Lastly, increasing value to shareholders is critically important
since they are the owners. Last year, Doyon paid over $20
million in shareholder wages, over $6 million in dividends to
shareholders, about $600,000 in college and university
scholarships to shareholders, and $500,000 in donations to
various community organizations.
MR. JOHNSEN, noting that this money must come from someplace,
explained that Doyon operates in three industries (slide 6):
oil field services which includes drilling, security,
engineering, facilities, and construction services; government
contracting which includes military utility management in
Alaska, security services in locations outside Alaska, civil and
military construction, and logistics services primarily for the
U.S. Department of Defense; and land and resource development
which includes oil and gas exploration, hard rock minerals, and
sand and gravel.
2:27:24 PM
MR. JOHNSEN said Doyon has four companies that operate in oil
field services: Doyon Drilling, Doyon Universal, Doyon Emerald,
and Doyon Industrial/Associated (slide 7). Doyon Drilling has
seven drill rigs operating on the North Slope, all of which are
currently under contract. A new technologically sophisticated
rig, "Rig 25", was just commissioned at an investment of over
$100 million. A large share of employees work on the slope, but
the primary location administratively is Anchorage. Current
business outlook on the slope is not good - exploration activity
is down, all of Doyon's drilling activity is workovers and
infield work. Additionally, Doyon is very concerned about the
regulatory constraints being put on federal lands. Doyon
employment has fallen by about 9 percent [from 314 in 2007 to
285 in 2010]. Doyon is the number one contractor for BP and
ConocoPhillips and roughly 85 percent of Doyon's employees
working there are Alaskans. About 45 percent of Doyon Drilling
employees are Alaska Native shareholders, which is a big deal
because of the large salaries that these particular employees
make and take back to their families and communities. Doyon
Universal, a joint venture of Doyon and the French multi-
national corporation Sodexo, provides security/facility services
on the North Slope and on the Trans-Alaska Pipeline System
(TAPS). The industry outlook here is also not positive and the
employment decline is even more serious with a 25 percent
employment loss between 2007 and 2010. Doyon Emerald, a small
recently acquired company, provides engineering consulting
services to the industry. It is doing a lot of design for some
of the integrity programs and is stable at the moment. Doyon
Industrial, a joint venture between Doyon and Associated
Pipeline, is a major pipeline construction firm doing a lot of
the feeder pipeline replacement work on the North Slope.
Although exploration activity is down this company is seeing
some work, but it is short-term work and Doyon Industrial would
like to be doing more of it.
2:30:53 PM
MR. JOHNSEN pointed out that Doyon is also looking for oil, gas,
and hard rock minerals on the 12.5 million acres of surface and
subsurface lands that it owns, while being a responsible steward
of these lands (slide 8). Doyon is investing in oil and gas
exploration in the Interior and about a year and a half ago
spent roughly $20 million in the drilling of an exploration well
in Nenana on Mental Health Trust land. That data is being
analyzed and a seismic program is planned in the Nenana Basin
for next year. Last year Doyon conducted seismic exploration
for oil near Stephens Village and that seismic program will
continue this year. Doyon partnered with village corporations
for the road construction and other work on both of these
projects, which is in keeping with Doyon's dedication to rural
economic development and which provides quite a multiplier
effect. Through its partnerships and the state's tax credits,
Doyon has leveraged its investments and has spent over $200
million on exploration activities in the Interior.
2:33:14 PM
MR. JOHNSEN concluded by stressing that Doyon is an Alaskan
company that employs about 1,500 Alaskans (slide 9). On behalf
of both its shareholders and its employees, Doyon must look to
the future for business opportunities and takes this
responsibility seriously. Doyon believes vast oil and gas
opportunities remain in Alaska and on Doyon lands in the
Interior. However, investment in oil and gas exploration and
production is down, Alaskans have lost jobs and revenues, and
Doyon has lost revenue. Doyon believes Alaska's current oil tax
policy inhibits investment in development and is inconsistent
with the state's constitutional requirement to maximize the
benefit of the state's resources. Doyon supports a state tax
policy that fills the pipeline, produces jobs, and provides
revenues for the state. Doyon supports the elements of HB 110
that encourage exploration and increase investment in
production.
2:34:47 PM
REPRESENTATIVE HERRON understood that Doyon was a key player in
getting the small producer credit in the current tax law. He
asked whether the number for that credit should be changed.
MR. JOHNSEN replied he is unprepared to respond at this point.
It will be awhile before Doyon is able to take advantage of the
credit because it is still in the early exploration phase and
therefore he will have to get back to the committee with a
response. He added, however, that Doyon concurs with the
responses that have been heard from those companies that are
further along than is Doyon. In further response, he agreed to
provide justification in Doyon's response to the committee.
2:36:06 PM
REPRESENTATIVE GARDNER inquired whether there are elements in HB
110 that Doyon believes will not act to fill the pipeline,
produce jobs, and provide revenue.
MR. JOHNSEN responded yes, Doyon would propose friendly
amendments to expedite implementation so that it takes place
sooner rather than in a few years.
2:36:50 PM
MR. JOHNSEN, in response to Representative P. Wilson, answered
that Associated Pipeline, Doyon's partner in Doyon Industrial,
is out of Houston. In response to another question from
Representative P. Wilson, Mr. Johnsen stated that the Doyon
shareholders located outside of Alaska are Native shareholders.
Responding to Co-Chair Seaton, he confirmed that slide 4 depicts
where Doyon's Native shareholders live. In response to
Representative Gardner, he said he did not know whether other
corporations have a similar percentage of 25 percent of out-of-
state shareholders, but that people have the freedom to move
around.
2:38:29 PM
CO-CHAIR SEATON, regarding the number of Doyon employees shown
on slide 7 for 2007 through 2010, requested Mr. Johnsen to
provide employment statistics for the five years prior to 2007
so committee members could see whether ACES has had a positive
or negative effect on employment numbers.
MR. JOHNSEN agreed to do so.
2:39:36 PM
REPRESENTATIVE MUNOZ asked whether Doyon anticipates a continued
employment decline under the current tax regime.
MR. JOHNSEN answered that a continued decline is definitely
projected for Doyon's drilling and services companies, although
an increase may be seen for Doyon Industrial's maintenance work.
He said Doyon does not see a positive future if there are no
adjustments to the incentives on the North Slope.
CO-CHAIR SEATON interjected that one reason for asking for a
longer range employment history is because the 2010 employment
numbers are higher than those of 2009 and 2008, but lower than
2007 and it is unknown whether 2007 was a maximum point in
employment numbers or just a spike.
2:40:59 PM
REPRESENTATIVE GARDNER inquired whether Doyon has participated
in the state's credit programs.
MR. JOHNSEN replied yes, the Nenana project, and expedition of
these programs would expedite Doyon's receipt of those credits.
CO-CHAIR FEIGE commented that he knows Native hires are
important to Doyon because several years ago he spent a lot of
time [as a pilot] hauling Doyon's Rig 19 crews back and forth
and the names on the manifests were all Yukon names. He urged
Doyon to keep it up.
2:42:26 PM
ED DUNCAN, President, Chief Operating Officer, Great Bear
Petroleum LLC, stated that Great Bear Petroleum is a new company
to Alaska in registration only because his experience in Alaska,
and that of his colleagues, goes back 30 years. He and four
other managing members run Great Bear and the company has a very
aggressive and progressive business development strategy.
MR. DUNCAN advised that Alaska competes for capital on a global
scale, not just domestically (slide 3). Capital is mobile
today; it will find the best investment opportunity in the world
and gravitate in that direction. Great Bear believes that
Alaska presents an opportunity for growth in the sense of an
investment into oil and gas business, but Great Bear also sees
great opportunity for Alaska to improve its position globally
and will talk about that in the context of HB 110.
2:44:43 PM
MR. DUNCAN pointed out that great prospectivity is what really
drives oil and gas exploration and production work (slide 4). A
poor basin with poor rocks cannot be made great with great
fiscal terms. Alaska is fortunate to have some of the best
rocks and one of the best petroleum provinces in the world, but
Alaska also has some fiscal terms that are suppressing the
development of that great basin.
MR. DUNCAN noted that recognition of Alaska as a global oil and
gas producer has declined over the past two decades (slide 5).
What can be done about that production decline? Great Bear is
singularly focused on Alaska and building an exploration leg and
production base of oil first, gas second, on the North Slope.
It is an expensive business and costs have risen; so, whether
exploration tax credits should be higher is something he cannot
answer today, but Great Bear's finance people could look into
this issue and quantify a number. Great Bear believes that the
ability to deliver unconventional resources to market, which
Great Bear thinks is a significant part of the long-term answer
for Alaska, rests primarily on improving the commercial
environment within which it operates. Great Bear believes it
has the technical risk in hand, but the commercial environment
is where Great Bear has to establish how to make this happen.
2:47:38 PM
MR. DUNCAN noted that HB 110 would have a number of significant
impacts on Great Bear Petroleum (slide 6). Extension of the tax
credits to the North Slope would have a huge impact. The
ability to claim the tax credits in a single year versus two
years would also have a huge impact because Great Bear is a
small company with very, very high expenditures on the front end
of its program. Reduction of the production tax burden would
improve Great Bear's ultimate commercial outcome, which would
improve the probability of attracting critical capital
investment to the state, to the plays, and to the business. The
scale of capital investment is huge, he added, with the numbers
mentioned by Mr. Thompson being on the low end of the amount
needed to arrest or grow the production base of the state.
2:48:52 PM
MR. DUNCAN said Great Bear Petroleum's business thesis is based
on unconventional shale oil and gas production (slide 7). His
job as a new ventures geologist is to identify new opportunity
space to look for oil and gas. He matches together geological
conditions, engineering technology, and commercial environments
to provide areas within which Great Bear will prosecute its
business. He began thinking about areas around the globe where
world class source rocks existed at drillable depths and with
appropriate thermal maturity that would allow technologies
developed in only the last three years to be deployed
successfully for unconventional oil and gas resource play
development. As he thought about such areas, he was surprised
to land back on the North Slope where he started his career.
Some of the richest oil-prone source rocks in North America and
the world are reasonably proximal to established infrastructure,
are at drillable depths, are thermally stressed optimally, and
are completely untested - and that was the genesis for Great
Bear Petroleum. This is the opportunity to deliver a play that
has long-lived production, manageable risk, allows the state to
forecast forward revenue, and provides tremendous job growth.
The critical step in making it happen is not technical; rather,
it is commercial viability and competition for capital.
2:52:15 PM
MR. DUNCAN highlighted Great Bear's vision, saying that his
company is leading the industry toward development of
unconventional oil and gas resources from known, prolific source
rocks on the North Slope (slide 8). That is Great Bear's
business thesis, he said, and the company is not doing this
anywhere else in the world. Great Bear has done this in the
Lower 48 and understands the geology of the plays and the
exploitation technology. Great Bear is on the verge of
contracting the largest service providers in the world that are
already resident in the state and that already have the
technology in the state to help Great Bear develop a proof of
concept stage for the play because proof of concept is critical.
Mr. DUNCAN, responding to Co-Chair Seaton about the definition
of proof of concept, explained that exploitation of this play
will involve long-length lateral wells. The early work program
has already been set and, weather permitting, the program will
be accelerated late this year to build a rock mechanics model
that will allow design of the wells and reservoir stimulation
program as scientifically and precisely as possible. Two full-
production tests will be drilled in the January to April 2012
window to test the viability and applicability of known
technologies to these rocks in north Alaska. While this is an
aggressive plan, accelerating the research and development phase
is critical because it allows the company to scale the business
development side and full development cycle of this project.
2:54:55 PM
MR. DUNCAN, in further response to Co-Chair Seaton, confirmed
that the proof of concept stage is drilling in the field. He
added that the regional mapping for this basin was done some
time ago by the U.S. Geological Survey (USGS) and the State of
Alaska. Thus, Great Bear was able to build an interpretation
for this play and is past the data room stage and is going to
the field next. The rock mechanics studies will be drilled
holes with whole rock extracted. Rock strength will be
determined to provide a picture of how wells will drill and what
kind of fracturing stimulation technology will be deployed. The
full-length laterals will be full exploration style wells that
will probably have a little more analytical analysis done during
drilling than when in full-production mode. A unique aspect of
unconventional resource play development is that once the
boundaries of the play are known, the characteristics of the
play are known. The industry tends to move towards a factory-
type drilling so the drilling costs go down somewhat, details of
the individual well analytical work programs simplify, and the
rate at which wells can be drilled, stimulated, and put on
production increases. Great Bear has a very aggressive annual
drilling schedule in full development mode with a target of 200-
250 wells a year. As a contrast, he noted that today 300-350
wells per month are being drilled in the Bakken of North Dakota.
2:58:22 PM
MR. DUNCAN said Great Bear Petroleum believes that development
of this play is super critical for putting long-lived, large-
volume oil into TAPS in the near term. Development of the play
is possible on the geological and technical front. However, the
commercial side is onerous and that is why Great Bear is before
the committee to talk about how the fiscal environment can be
changed to ensure that this play can be developed relatively
unencumbered. Great Bear is committed to working with the state
and is committed to operating in an environmentally responsible
manner. This play and the work program behind this play address
some of the serious concerns that were just expressed by Doyon.
This is a significant way of securing long-lived oil production
into TAPS as well as thousands of wells being drilled over the
next 20-25 years that will create an enormous amount of long-
term jobs. Great Bear believes that in a full development mode,
this play will deliver a minimum steady-state production of
150,000 barrels of oil a day over the horizon, and production in
the near term of 15 years would be much higher than that.
3:01:24 PM
MR. DUNCAN presented the play's potential oil production profile
(slide 9). He said the profile uses the same production metrics
on a per well basis as the Eagle Ford [shale play] in South
Texas, which has rock and oil types similar to the Shublik, and
Great Bear Petroleum believes this North Slope play will, at the
least, equal the metrics of the Eagle Ford. The target of 3,000
total wells will be reached by drilling 200-250 wells per year,
so the drill out period is long, the number of associated jobs
is significant, and the production profile grows dramatically
and quickly and holds until the plateau is reached. He added
that what is beginning to be seen as a science and engineering
phenomenon is that while the initial production declines are
fairly dramatic in the first year post fracture stimulation, the
wells appear to be developing a very long-lived asintotic plane
at a reasonably high production level. Therefore, the 3,000
accumulated wells run a long time over the horizon, so revenue
growth and generation for the state is tremendous, as is the
associated job growth. He reiterated that in Great Bear's
opinion the risk is not technical, but commercial.
3:04:27 PM
MR. DUNCAN concluded his presentation by noting that current
policy has not addressed declining production and has not re-
invigorated exploration (slide 10). He said HB 110 focuses on
encouraging increased oil production immediately and will aid
Great Bear in attracting critical capital to deliver on its
stated strategy. The bill encourages new exploration activity,
maintaining many of the exploration incentives that exist today.
Great Bear's lease area is over 500,000 acres and will take a
lot of exploration drilling to prove that area. Great Bear sees
it as a viable way to put long-term oil production into TAPS,
and this is in addition to the conventional exploration programs
that will continue to add oil and gas. Great Bear believes that
reasonable solutions can be agreed and implemented, providing
long-term stability to the state and HB 110 is a step in the
right direction.
3:07:25 PM
MR. DUNCAN, in response to Representative Herron, stated that
Great Bear Petroleum is now an Alaska company with an office in
Anchorage. Its mission is not to build a glass tower in
Anchorage but to build technical alliances with key service
providers that have more experience than Great Bear could
assemble by hiring [employees]. He said the biggest names in
the industry, both multi-national and indigenous, are already
resident in Alaska. Great Bear's mode of operation is to join
with groups to supply the critical skills and needed technology
to prosecute Great Bear's work program. Every company that
Great Bear has met with has said it has the technology to do an
unconventional play, which is 100 percent Great Bear's business.
3:11:32 PM
REPRESENTATIVE HERRON asked whether Great Bear thinks the small
producer's tax credit of $12 million should be increased.
MR. DUNCAN responded that he does not have a specific answer at
this time, but he is willing to commit his staff to help the
committee and the state determine whether that number should be
moved and what it should be.
3:12:44 PM
REPRESENTATIVE HERRON inquired whether President Obama's
position on fracturing will affect Alaska.
MR. DUNCAN answered that reservoir stimulation by fracturing is
controversial in some parts of the nation for good reason.
Understanding the distribution of potable water aquifers and the
effect on urban surface environments is very critical. Great
Bear Petroleum will fracture stimulate its wells in a way that
will not affect any potable water aquifers, of which there are
none in the area of operation. Great Bear is cognizant that the
subsistence communities in this area will have subsistence
hunting rights at certain times of the year and those will be
taken on board. The event in the northeast U.S. that lead to
much of the concern, real and other wise, had a juxtaposition of
certain geological elements, human habitation, and aquifers; but
those kinds of impediments are not present on the North Slope.
3:14:47 PM
REPRESENTATIVE GARDNER commented that most legislators had never
heard of Great Bear Petroleum until several months ago. She
asked whether the company is brand new and whether it has any
holdings or activities elsewhere.
MR. DUNCAN answered that Great Bear Petroleum is focused solely
on the North Slope of Alaska. When competition for capital
occurs within the walls of the company it is deciding whether to
drill the east side of the company's lease in Alaska or the west
side, not whether to drill a well in Texas or North Dakota.
Great Bear will hire to the best of its ability exclusively
Alaskan. He cannot promise that all of the service providers
have that exact same standard, but Great Bear will be dealing
with Alaska-based service providers.
3:16:04 PM
REPRESENTATIVE GARDNER asked where the capital for this type of
capital intensive work comes from, given that Great Bear
Petroleum is a brand new company.
MR. DUNCAN replied that Great Bear is a private company with
initial investment capital coming from friends and family. The
additional investment capital for funding the company through
the proof of concept stage was very broad-based and significant.
While he has no fear about Great Bear getting through the proof
of concept stage, he proffered that no company in the world,
other than a couple of the super-majors, has capital on account
to fund out of pocket the full development drilling of 250 wells
a year which is in excess of $2 billion annually for this play.
Great Bear believes the oil and gas is there and that it can get
the resource out of the ground at rates that will be material to
TAPS and the long-term health of the state.
3:17:56 PM
CO-CHAIR SEATON inquired whether the $2 billion in capital costs
includes production facilities or only the drilling. He further
asked whether the development would require separate production
facilities.
MR. DUNCAN responded that he believes the resource base is large
enough to dictate a development scenario that allows Great Bear
to get the oil into TAPS so he does not expect facilities
construction to be an impediment. Moving that amount of oil
around will require building roads, pipelines, pump stations,
and processing facilities. In further response, he said the $2
billion was directed at the drilling capital expenditures.
3:20:41 PM
DAVE CRUZ, President, Chief Executive Officer, Cruz Companies,
noted that his company is an Alaska-based provider of oil field
services, heavy civil construction, and marine services. He
said his company is faced with a tremendous amount of
uncertainty, although the previous testimony has made him feel a
little better than when he first walked into the committee room.
He began working on the North Slope in the mid-1970s, started
his own company in 1981, and then partnered with his wife in the
business 28 years ago. As his company has grown it has been in
resource development, building roads, clearing pipelines,
airports, and a multitude of disciplines. In 2004, his company
purchased a portion of Western Geophysical's assets in Prudhoe
Bay, figuring to get into the business of building ice roads.
About that time "ARCO" was sold, "Conoco" took over, and
independent oil companies began to show up and explore in
Alaska. His company specialized in exploration support,
building the ice roads and ice pads, hauling equipment across
the tundra during the winter, setting up and supporting the
drill rigs and camps, and then tearing them down for the thaws.
3:23:44 PM
MR. CRUZ said the explorers included "Anadarko, Brooks Range,
FEX, Chevron, Renaissance, Total, Conoco ... Savant ... Pioneer,
ENI, and UltraStar", but several of these companies are no
longer in the state. In 2005 the exploration side of his
company employed 30 people; by 2008 it employed 200 people all
winter, of which 99 percent were Alaska residents. In 2009 the
number of employees dropped to 150 during which time the company
took a two-year exploration project for Chevron south of
Prudhoe. When ACES started to kick in, a total lack of interest
in exploring on the North Slope began and his number of winter
employees decreased from 150 to 32, with only 5 weeks of work in
2010. He currently has 12 people working on the slope. He said
he attributes much of this decline to the business climate
created by Alaska's high taxes.
3:26:17 PM
MR. CRUZ told committee members that last fall he moved millions
of dollars worth of equipment to the Bakken oil fields of North
Dakota, after it sat on the North Slope for about a year and a
half. His company's specialty in North Dakota is moving drill
rigs. His work in North Dakota, where 161 drill rigs are
working in an area of 100 square miles, has taught him that
Alaska's production has declined to the point that it is broken.
He reported that much of the surface and subsurface in North
Dakota is privately owned, unlike in Alaska. Another difference
is that North Dakota's tax structure invites investment.
Changes must be made to Alaska's oil tax structure, he warned,
or oil in Alaska will be done.
3:27:42 PM
MR. CRUZ pointed out that to compete as a contractor he must
offer a better price than his competitor and do better work to
stay in the business. Alaska is competing against the costs in
other places; for example, the cost of drilling a production
well in North Dakota is $2.5 million, while the first
exploration well on the North Slope of Alaska requires an
investment of $25 million. For Alaska to compete, the state
government must provide incentives for investment, or people
like himself must go someplace else to make a living. He took
only 10 employees from Alaska to North Dakota, the rest are from
Wyoming, Arizona, North Dakota, and Colorado. If he was not in
North Dakota right now he would be having some very serious
problems to contend with; therefore, he is a very strong
supporter of HB 110 to help turn things around.
3:29:53 PM
GARY PORTER, Pilot, testified that he and his wife own a small
air service in Homer that operates aircraft statewide. He built
a new facility in Homer used primarily for winter maintenance
and a new hanger and facility in Deadhorse. He said his story
mimics that of Mr. Cruz's. His company went to the North Slope
about six or seven years ago when the last oil bubble happened
and it looked like things were going to take off after 15 years
of the slope looking like a ghost town. When the price of oil
went up and things were looking great, he dove in with both
feet. The money he made was immediately reinvested back into
infrastructure that still stands. He hired 100 percent local,
mostly kids graduating from the Homer high school because they
had a good foundation from working on fishing boats. The jobs
were at least six months of the year at pretty good pay.
3:32:32 PM
MR. PORTER said that at the time this last bubble began he
thought it would last. He followed the ACES taxes briefly, but
he never really got into it because it was complicated and he is
not an economist. He was therefore hopeful that the people
working on ACES knew what they were doing, but instead the oil
companies were run off and now he is left with huge investments
and no work. He wonders what the opposition to HB 110 is and
what the arguments are against it. He proffered that the state
of Alaska will have a beautiful government when the oil levels
out at 300,000 barrels, but there will be no workforce.
3:36:13 PM
MIKE PEARSON stated that he began working in the oil field
shortly after arriving in Alaska in 1975. He has worked on
drilling platforms in Cook Inlet and on the North Slope. Now he
is driving truck for NANA Oil Field [Services], hauling potable
water and diesel all over the North Slope, which allows him to
see what everyone is doing. Four years ago things were looking
pretty bright with new camps, a hotel, and other facilities
being built. But since then he has watched things trickle away.
Liberty has had engineering and bureaucratic problems and Point
Thomson is being shut down. People he knows in the Anchorage
area thought they were going to work this winter, but did not,
and he does not know what they will do this spring. He
understood why there was no work during the oil downturn of the
mid-1980s when the price of a barrel of oil was less than that
of a red salmon. However, he cannot understand why there is no
work at today's price of $100 per barrel. There used to be dust
clouds from all the trucks in a line on the road delivering
supplies, but no longer.
3:39:24 PM
MR. PEARSON further understood that this spring some of the
older drilling rigs will be cut up and sold for scrap. Alaska
is losing its manpower on the North Slope, he warned, and some
of the work is one-of-a-kind that takes many years to learn.
The wages are going down and workers are taking pay cuts and
losing insurance benefits. Companies are trying to stay, but
that has meant taking away from the worker. He said he has also
noticed that when flying on Alaska Airlines all of the
passengers have grey hair, which indicates to him that the state
is losing its young people. The North Slope is Alaska's
lifeblood, something must be done or the golden goose will be
killed.
3:41:35 PM
REBECCA LOGAN, General Manager, Alaska Support Industry
Alliance, explained that her organization is a trade association
of 500 members who employ 40,000 of the 310,000 people working
in the state of Alaska. The association represents a wide
variety of employers and sectors of business that are the
support companies for the oil, gas, and mining industries.
These companies include automotive, clothing, construction,
drilling, education, food and beverage, janitorial, oil field
service, personnel, photography, real estate, transportation,
and welding companies, as well as Alaska Native corporations,
financial institutions, and nonprofit organizations.
3:43:25 PM
MS. LOGAN related that the association recently completed a
survey of its membership. She shared the responses of 80 Alaska
companies that employ 9,739 people in the state. Fifty-six
percent of those 80 companies reported that that they have had a
reduction in workforce since 2008. Eighty-five percent of those
80 companies reported that worries about finding work in a poor
economy have kept them up at night. The 80 companies also
identified issues that will have the greatest impact on them in
2011 and the top three issues were lack of work, regulatory
environment, and access to natural resources. In response to
Representative P. Wilson, said she will provide the survey
results to committee members as well as the names of the
companies that are in each committee member's district.
3:45:19 PM
CO-CHAIR SEATON advised that the committee is cognizant of the
lack of work, but the problem is making sure that what is
enacted is right for Alaska and will generate the new
production. Regarding the lack of work, he pointed out that the
ConocoPhillips CD-5 drill pad, the Liberty field, and Point
Thomson have been stopped by federal regulatory actions or
negotiations with the state, not the state's tax system.
Members are faced with the idea that it is the taxes that are
stopping all development; yet, according to Alaska Oil and Gas
Conservation Commission (AOGCC) figures, the drop in the number
of production wells occurred before the petroleum production
profits tax (PPT) or Alaska's Clear and Equitable Share (ACES)
and the number has since been on a plateau. Legislators are
trying to identify the true levers and whether the response to a
drop in revenue to the state will be the stimulation in
production that everyone is seeking or whether the levers are
instead permitting, regulation, and negotiation. He said that
if there is any way to target the information that ties the
survey results to tax policy, and not regulatory delays, the
committee would appreciate hearing that.
3:48:40 PM
DOUG SMITH, President, CEO, Little Red Services, said his
company is an Alaskan oil field service company that operates on
the North Slope exclusively and it currently employs about 100
Alaskans. What is being seen under the current tax structure
and regulatory burden is a decrease in the infield activity
which his company supports. The work his company does is from
the wellhead down and includes feeding of crude and diesel,
cleaning the well bore to enhance production of existing oil
fields, freeze protection of the wells when TAPS has a slow
down, and getting the oil flowing again once TAPS is back on
line. In his 20 years in the Alaska industry he has seen a lot
of changes in the tax structure. While one needs to be an
economist to understand the impacts of all the tax structures
that Alaska has had, it appears that the current tax regime has
placed Alaska at a disadvantage in the global market. He said
he is unsure where the Department of Labor & Workforce
Development job numbers come from because they do not match what
he sees on the ground in Prudhoe.
3:51:05 PM
MR. SMITH stated that as an employer the biggest thing he is
confronted with is the decline in investment in the infield
arena. Since 2008 his company has seen a 20 percent drop in
demand for its services. Between 2008 and 2010 his company lost
6,000 truck hours, which equates to about 20 percent of his
company's total infield servicing truck hours and about $2
million in revenue. He was forced to lay off 11 employees, of
which 9 were Alaska residents, and these employees had an
average tenure with his company of 5 years plus. A home grown
company, Little Red Services is a long-term employer type of
company, with the company's first two employees still working
for it. This is the first time his company has had to make this
kind of reduction. Additionally, the company had to reduce its
employee benefits by changing the type of healthcare benefits
that it provided and had to stop paying profit sharing benefits
for the past two years. There has been a heartfelt impact on
the day-to-day lives of his employees.
3:53:10 PM
MR. SMITH read two statements that he agrees with from a recent
article in the Anchorage Daily News written by Senator Hollis
French and Representative Les Gara: 1) "If oil is taxed at too
high a rate there is a risk that crucial investments don't get
made in the state's most important industry." 2) "Any
reasonable tax relief proposal that will lead to more Alaska
jobs and more Alaska oil will get serious consideration from
this legislature." He related that last week he went to a
briefing where the senator and representative said that they
wanted the state to advertise what it has to offer to investors
through tax credits, royalty relief, and such. However, as was
earlier heard from Mr. Thompson, potential investors are turning
away from Alaska's prolific oil producing areas because of the
state's tax policy. Advertising what the state offers under
ACES is not the only solution; another is a broader-based
solution that weighs Alaska's policy against other areas and
having a middle ground to move forward with in the legislature.
3:54:10 PM
MR. SMITH said that while he appreciates the state's healthy
budget reserve, he fears Alaska is putting at risk the industry
that adds to that treasury long term. While opponents to reform
argue that employment is up under ACES, he said he believes that
a look into those numbers will show that exploration, infield
development, and production-related jobs are down while there is
an uptick in infrastructure maintenance jobs. His employees are
keeping themselves apprised of what is happening across the U.S.
right now, and his company is concerned about its ability to
retain key, skilled people who may choose to leave for areas
like North Dakota where they see a longer-term future with less
opposition to development. Production is down significantly and
while HB 110 will not completely reverse that, his company
supports the bill because it should change Alaska's position in
the global economy to attract additional investment, create
jobs, and allow his company to stay in the state long-term as an
employer and maintain and grow its employment levels.
3:56:11 PM
MR. SMITH said his company is not looking for a handout. This
is an opportunity to address the state's fiscal structure, keep
Alaskans working, and maximize development of Alaska's
resources. In addition to providing jobs the industry also
participates in civic activities; for example, in 2010 the
United Way of Anchorage received a total of $3.7 million from 44
major oil and oil support companies, which represented 49
percent of the funds it raised from the private sector. Little
Red Services provided $70,000 in charitable contributions across
the state. He commended Governor Parnell's grasp of what the
industry needs to move forward and said the reform proposed by
HB 110 deserves serious consideration.
3:57:36 PM
PHIL KROMM, Carlile Transportation, stated that he is a 15-year
line haul driver with Carlile Transportation, a company with
about 650 employees. He also works in safety, recruitment,
training, and driver retention for Carlile. He usually drives
his 18-wheeler on the haul road to take goods to the slope. He
loves his job and is excited to be able to share his concerns
about the situation that Alaska, its local companies, and its
people are in right now. He has firsthand knowledge of the
significant decline in business volume and work slow down on the
North Slope that has affected people. It is obvious that less
pipe is going up the road, specifically less drill stem which is
used for exploration. Since ACES went into effect, all of the
drivers on the haul road have seen the decline that happened
overnight.
3:59:46 PM
MR. KROMM reported that there is also a considerable reduction
in loads of construction supplies, from lumber to heavy
equipment. Carlisle is not the only one feeling the pain; it is
all of the oil and gas providers and contractors. Non-oil and
gas business are affected, too, because when his paycheck is
less he and his family make fewer trips to the local coffee
stand and diner. Also, during the winter Carlile hires about 30
additional people to move things around between the fields on
the slope, but for the last couple of years those 30 additional
jobs have not been there. This is significant because it is not
just 30 families without a job at Carlile, it also includes
other businesses and therefore adds up. The people that do
still have jobs are just scraping by because there is no
overtime available due to the work not being there anymore.
Drivers are looking for loads just to make a paycheck and he has
personally seen drivers leave Alaska for work in other places
like the Dakotas that have good pay and a lower cost of living.
Alaska is losing jobs and good employees because of the declines
in local business.
MR. KROMM related that the conversations on the road today are
about the high cost of living, how to make ends meet with less
money, and a nervous sense about the future of the state.
Alaska needs to be competitive to keep its workforce here,
create opportunities for jobs, and keep investment circulating
here at home. He and his fellow drivers want to stay busy
hauling drill pipe and look forward to the ice roads season. It
is exciting to see a new man camp being moved up to the slope,
not being moved off the slope to the Dakotas. With the
committee's help and cooperation, development and a stable
investment climate can happen.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Great Bear HB 110 Presentation Juneau Feb 18 2011.pptx |
HRES 2/18/2011 1:00:00 PM |
|
| Brooks Range Juneau HRC.pptx |
HRES 2/18/2011 1:00:00 PM |
|
| AVCG Thompson HB 110 Testimony 021811.pptx |
HRES 2/18/2011 1:00:00 PM |
|
| Armstrong Oil and Gas testimony HB 110.pdf |
HRES 2/18/2011 1:00:00 PM |
|
| Savant Alaska, LLC testimony - HB 110.pdf |
HRES 2/18/2011 1:00:00 PM |
|
| Doyon House Resources 18 Feb 2011.pptx |
HRES 2/18/2011 1:00:00 PM |
|
| Ultra Star Testimony HB 110.pdf |
HRES 2/18/2011 1:00:00 PM |
|
| HRES 2.18.11 NANA Worley-Parsons.pdf |
HRES 2/18/2011 1:00:00 PM |
|
| HRES 2.18.11 Phil Kromm.pdf |
HRES 2/18/2011 1:00:00 PM |