Legislature(2011 - 2012)BARNES 124

02/23/2011 01:00 PM RESOURCES

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* first hearing in first committee of referral
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= bill was previously heard/scheduled
-- Continued at 7:05 pm --
Moved CSHJR 9(RES) Out of Committee
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
              HB 110-PRODUCTION TAX ON OIL AND GAS                                                                          
1:22:36 PM                                                                                                                    
CO-CHAIR  FEIGE announced  that  the next  order  of business  is                                                               
HOUSE  BILL  NO.  110  "An  Act relating  to  the  interest  rate                                                               
applicable to certain  amounts due for fees,  taxes, and payments                                                               
made  and  property  delivered  to  the  Department  of  Revenue;                                                               
relating  to the  oil and  gas production  tax rate;  relating to                                                               
monthly installment payments of  estimated oil and gas production                                                               
tax; relating to  oil and gas production tax  credits for certain                                                               
expenditures,   including    qualified   capital    credits   for                                                               
exploration,  development,   and  production;  relating   to  the                                                               
limitation  on  assessment  of  oil  and  gas  production  taxes;                                                               
relating  to the  determination  of oil  and  gas production  tax                                                               
values;  making  conforming  amendments;  and  providing  for  an                                                               
effective date."                                                                                                                
1:23:14 PM                                                                                                                    
CO-CHAIR SEATON drew  attention to question 13 on page  16 of the                                                               
Department of  Revenue's 2/21/11  letter responding  to questions                                                               
from the committee's 2/7/11 meeting.   He read the question:  "If                                                               
44% of respondents to the  Frasier survey indicated that Alaska's                                                               
tax regime  deters investment, what did  the other 56% say?"   He                                                               
said he  asked this  question because  the main  reason purported                                                               
for HB  110 is that  Alaska is  seen as uncompetitive  with other                                                               
regions  around the  world.   Results of  the [Frasier  Institute                                                               
2010  Global Petroleum  Survey] relating  to Alaska's  tax regime                                                               
[were presented to the committee  by the Department of Revenue on                                                               
2/7/11, slides  9-15].   Putting more  oil into  the Trans-Alaska                                                               
Pipeline  System (TAPS)  is what  everyone  is trying  to do,  he                                                               
continued, and his concern is that  the right lever be pulled for                                                               
getting the  response that  the state  wants.   In its  answer to                                                               
question  13  the department  provided  a  breakdown of  industry                                                               
responses  that were  depicted  on  [slide 14]:    25 percent  of                                                               
respondents said Alaska's tax  regime "encourages investment," 31                                                               
percent  said  Alaska's  tax  regime   "is  not  a  deterrent  to                                                               
investment," and 25  percent said Alaska's tax regime  "is a mild                                                               
deterrent  to investment."   [Sixteen  percent said  Alaska's tax                                                               
regime "is  a strong  deterrent to  investment and  three percent                                                               
said they "would not invest due to this criterion."]                                                                            
CO-CHAIR  SEATON   calculated  that  by  adding   the  first  two                                                               
responses together it  can be seen that [56]  percent of industry                                                               
respondents  identified Alaska's  current  tax  regime as  either                                                               
encouraging  investment or  not a  deterrent to  investment.   By                                                               
adding  the first  three  together  it is  seen  that 81  percent                                                               
identified Alaska's  current tax regime as  either encouraging or                                                               
only a  mild deterrent to  investment.   He said the  tax changes                                                               
proposed by HB  110 would run the state into  deficit spending of                                                               
up to $2  billion per year after the bill's  provisions are fully                                                               
implemented.   Therefore, he concluded,  given that over  half of                                                               
the survey respondents said the  current regime either encourages                                                               
or is  not a deterrent to  investment, it seems that  running the                                                               
state into deficit  spending is the wrong lever to  pull.  Alaska                                                               
will not  get the response it  desires from the oil  companies by                                                               
using this particular vehicle.                                                                                                  
1:28:23 PM                                                                                                                    
REPRESENTATIVE MUNOZ  asked whether the  81 percent is of  the 56                                                               
percent that responded favorably.                                                                                               
CO-CHAIR  SEATON   said  he  believes  the   department's  answer                                                               
includes the full response from  industry because adding together                                                               
the last three  responses of 25, 16, and 3  percent equals the 44                                                               
percent [that was depicted on slide 14].                                                                                        
BRYAN  BUTCHER, Acting  Commissioner, Department  of Revenue,  in                                                               
response to  Representative Munoz  and Co-Chair  Feige, explained                                                               
that  the  numbers  provided  in the  department's  answer  is  a                                                               
breakdown of 100  percent of the responses.   In further response                                                               
to Co-Chair Feige,  he confirmed that the  breakdown includes all                                                               
of the survey's 645 respondents.                                                                                                
REPRESENTATIVE  P. WILSON  understood that  the first  two groups                                                               
[of 25 percent and 31 percent] add up to 56 percent.                                                                            
ACTING COMMISSIONER BUTCHER nodded yes.                                                                                         
1:31:04 PM                                                                                                                    
CO-CHAIR FEIGE  asked whether any  of the 645  professionals were                                                               
actually considering investing in Alaska.                                                                                       
ACTING COMMISSIONER BUTCHER said  the Department of Revenue (DOR)                                                               
has not talked  to the 645 respondents, but the  state has done a                                                               
good  job  of  getting  information out  about  the  tax  credits                                                               
available in Alaska.  Many  independents are excited about Alaska                                                               
as a result  of this effort.  Unfortunately,  companies have come                                                               
into Alaska, received leases, and  found oil, only to abandon the                                                               
leases because they  were unable to find partners.   When looking                                                               
at the lack of exploration and  the continued decline of oil, one                                                               
can look  at an opinion  poll and glean  some things from  it, he                                                               
continued.   The department showed  half of the opinion  poll and                                                               
now the  other half is  being discussed,  but it does  not change                                                               
the bottom line of what is going on in the state.                                                                               
1:32:02 PM                                                                                                                    
REPRESENTATIVE GARDNER  said she  appreciates the  question asked                                                               
by Co-Chair Seaton because she  thinks the department presented a                                                               
distortion of what the Frasier study actually concluded.                                                                        
ACTING  COMMISSIONER BUTCHER  replied  that  when presenting  the                                                               
slide the  department stated 44 percent  and did not try  to make                                                               
it sound like  every respondent looked at Alaska's  tax regime in                                                               
a negative way.   The department was pointing out  that almost 50                                                               
percent  of the  645 respondents  listed Alaska's  tax regime  as                                                               
either a  mild deterrent, strong  deterrent, or would  not invest                                                               
under any  circumstances.   He said these  were numbers  that the                                                               
department  did  not  feel   comfortable  about  when  discussing                                                               
Alaska's tax regime.                                                                                                            
REPRESENTATIVE  GARDNER contended  that  Alaskans  would want  to                                                               
know that  another way  of looking  at these  numbers is  that 81                                                               
percent  of  respondents  said  Alaska's  tax  regime  encourages                                                               
investment,  is not  a deterrent  to investment,  or is  simply a                                                               
mild deterrent to investment.                                                                                                   
ACTING COMMISSIONER BUTCHER appreciated  the point being made but                                                               
countered that  it could also be  looked at as 25  percent of the                                                               
respondents  saying  it  encourages  investment  and  75  percent                                                               
saying it is either a negative or not a deterrent.                                                                              
CO-CHAIR  FEIGE commented  that numbers  can be  made to  reflect                                                               
about anything that is wanted.                                                                                                  
1:34:26 PM                                                                                                                    
REPRESENTATIVE DICK said that if he  was a respondent he would be                                                               
counted as someone with an  opinion, but his potential to develop                                                               
oil  would  be   way  smaller  than  one  of   the  "big  three."                                                               
Therefore, to  make an accurate  assessment, each  response would                                                               
need to be weighted in terms  of the respondent's potential.  For                                                               
example, each of  the 25 percent of  respondents listing Alaska's                                                               
tax regime  as encouraging  investment could be  so tiny  that it                                                               
would not matter,  yet they are given the same  weight as someone                                                               
who might put  billions of investment in  exploration.  Therefore                                                               
these numbers do not give him a true picture either.                                                                            
ACTING  COMMISSIONER  BUTCHER  agreed, but  said  department  was                                                               
trying  to   provide  this  information  because   it  gets  many                                                               
questions  about how  Alaska  is viewed.   By  no  means was  the                                                               
department stressing that this was  a foolproof way of looking at                                                               
it, he added, it was just a piece of information.                                                                               
CO-CHAIR FEIGE asked  whether it is known how  the people holding                                                               
leases in Alaska feel.                                                                                                          
ACTING COMMISSIONER  BUTCHER replied he  does not have  an answer                                                               
other than what has been heard in committee.                                                                                    
1:36:34 PM                                                                                                                    
CO-CHAIR SEATON said  the Frasier survey is of  the oil industry,                                                               
not a random  survey off the street.   If the basis  for [HB 110]                                                               
is  the  perception   that  Alaska's  tax  system   makes  it  an                                                               
unfavorable place  to invest,  the data is  that the  majority do                                                               
not view it that way.  The  question is whether to pull the lever                                                               
that shows  not much  effect on  the industry's  attitude towards                                                               
investing in  Alaska.  That  is the  point that should  be looked                                                               
at, not the absolute details of the survey.                                                                                     
CO-CHAIR FEIGE remarked that this is only one survey among many.                                                                
1:38:18 PM                                                                                                                    
CO-CHAIR SEATON drew  attention to slides prepared  by the Alaska                                                               
Oil and Gas Conservation  Commission (AOGCC) depicting production                                                               
and exploratory  wells drilled  between 1996  and 2010  [slides 9                                                               
and  10 of  the AOGCC's  2/21/11 presentation  to the  committee,                                                               
dated 1/4/11 and  2/24/10, respectively].  He said it  used to be                                                               
that basically only three companies  were exploring and producing                                                               
in  Alaska,  but  the  slides  show that  since  ACES  many  more                                                               
companies are  now doing so.   [Further discussion on  this topic                                                               
was interrupted  until copies  of the  slides could  be obtained,                                                               
see timestamp 1:56:44 p.m.]                                                                                                     
1:39:18 PM                                                                                                                    
The committee took an at-ease from 1:39 p.m. to 1:42 p.m.                                                                       
1:42:09 PM                                                                                                                    
REPRESENTATIVE P. WILSON  asked for a review of item  10, page 8,                                                               
of  DOR's  2/23/11  letter  responding   to  questions  from  the                                                               
committee's  2/21/11  meeting.    [Item 10  is  the  department's                                                               
response to the  committee's request to, "Produce  an estimate of                                                               
what the price of  oil would have to be to cover  the cost of the                                                               
Governor's proposed  FY 12 budget  were all the provisions  of HB                                                               
110 in effect currently."]                                                                                                      
ACTING  COMMISSIONER BUTCHER  replied that  if the  bill were  to                                                               
pass today  it would not have  an effect on the  fiscal year (FY)                                                               
2012  budget  because  the  effective date  takes  place  in  the                                                               
future.  However, he said he  believes the intent of the question                                                               
was for if it  was a full fiscal year, in which  case it would be                                                               
approximately  $90-$92  per  barrel  to  balance  what  has  been                                                               
submitted for the governor's budget for FY 2012.                                                                                
1:44:24 PM                                                                                                                    
REPRESENTATIVE P.  WILSON asked whether  that would be  $90-$92 a                                                               
barrel more than it is now.                                                                                                     
ACTING  COMMISSIONER BUTCHER  clarified that  with passage  of HB                                                               
110, meaning taking  out the credits and with  the tax reduction,                                                               
it would be  $90-$92 a barrel for that fiscal  year and would not                                                               
be in addition to anything.   Without HB 110 passing, it would be                                                               
$81 per  barrel.  In response  to further questions, he  said the                                                               
cost to  the state  for a  full fiscal year  would be  $9-$11 per                                                               
barrel of oil.                                                                                                                  
REPRESENTATIVE P.  WILSON surmised that  $9-$11 is what  it would                                                               
cost even though the bill would not be in effect yet.                                                                           
ACTING COMMISSIONER BUTCHER responded correct.                                                                                  
REPRESENTATIVE  P. WILSON  understood that  even when  it is  not                                                               
into effect it will cost the state  $12 a barrel.  She asked what                                                               
the cost would be when it is in effect.                                                                                         
ACTING COMMISSIONER  BUTCHER replied  that if  the changes  in HB                                                               
110 were in  full effect for the fiscal year,  an increase of $9-                                                               
$11 per  barrel of  oil would  be needed to  balance the  FY 2012                                                               
1:46:30 PM                                                                                                                    
REPRESENTATIVE  P. WILSON  presumed  that if  it  would cost  the                                                               
state $12  a barrel when the  provisions are not in  effect, then                                                               
when in effect it would cost the state more.                                                                                    
ACTING  COMMISSIONER  BUTCHER  answered that  under  the  current                                                               
scenario it is  $81.  If HB  110 was fully in  effect now instead                                                               
of current law,  it would be $90-$92.  So  the difference between                                                               
the status  quo and  the passage of  HB 110, if  it were  in full                                                               
effect for the fiscal year, would be $9-$11.                                                                                    
REPRESENTATIVE P. WILSON  understood that the $12 a  barrel is if                                                               
HB 110 were fully in effect for a full year.                                                                                    
ACTING COMMISSIONER BUTCHER said, "Correct, $9-$11."                                                                            
CO-CHAIR  SEATON   requested  the   department  to   provide  the                                                               
calculations for how it arrived at  these figures.  He noted that                                                               
this does not show the difference  in revenue between the two for                                                               
the year, it just shows how much underwater the state would be.                                                                 
ACTING COMMISSIONER  BUTCHER agreed  to provide  the information.                                                               
He said  the department has had  a lot of information  to provide                                                               
and  apologized that  preparing  the responses  has taken  longer                                                               
than hoped.                                                                                                                     
1:48:30 PM                                                                                                                    
REPRESENTATIVE  MUNOZ asked  how much  revenue is  represented by                                                               
the $9-$11 per barrel.                                                                                                          
ACTING COMMISSIONER BUTCHER explained it  is the per barrel price                                                               
that would be required in each  of the two scenarios to reach the                                                               
amount of the  governor's amended budget.  It is  a matter of how                                                               
the tax  is affected,  which determines  whether the  state needs                                                               
more or less per barrel.                                                                                                        
REPRESENTATIVE MUNOZ  said she is  trying to understand  the real                                                               
dollar impact because she has  heard differing reports on what it                                                               
would be.   She understood that  at last year's price  per barrel                                                               
the state  is bringing in  roughly $5.5  billion.  Based  on that                                                               
number she  asked what the impact  of $9-$11 per barrel  would be                                                               
going forward.                                                                                                                  
ACTING COMMISSIONER BUTCHER replied  it would be approximately $1                                                               
billion,  more or  less, in  production tax,  plus the  $200-$400                                                               
million estimate, for a total of $1.0-$1.4 billion.                                                                             
1:50:53 PM                                                                                                                    
The committee took an at-ease from 1:50 p.m. to 1:52 p.m.                                                                       
1:52:51 PM                                                                                                                    
REPRESENTATIVE P.  WILSON inquired whether the  proposed increase                                                               
in tax  credits would result  in the state receiving  less money.                                                               
She further asked  about the reasons for setting  the tax credits                                                               
as proposed.                                                                                                                    
ACTING  COMMISSIONER  BUTCHER  explained that  credits  for  well                                                               
lease expenditures are  currently 20 percent for  the North Slope                                                               
and  40 percent  for  the rest  of  the state.    The bill  would                                                               
increase this  credit for the North  Slope from 20 percent  to 40                                                               
percent  because  the  department   believes  it  would  increase                                                               
investment.    The department  estimates  this  would affect  the                                                               
state by  approximately $200-$400  million annually.   In further                                                               
response, he  clarified that this  $200-$400 million would  be in                                                               
addition to what the amount is currently.                                                                                       
1:54:55 PM                                                                                                                    
ACTING COMMISSIONER  BUTCHER added  that at the  previous meeting                                                               
he  estimated that  changing the  progressivity  from monthly  to                                                               
annual  would  be $100-$400  million,  which  is not  inaccurate.                                                               
However, he said he was thinking  about what the number was under                                                               
the  current scenario  with the  high marginal  rates.   Under HB                                                               
110, which  would switch progressivity  to brackets, it  would be                                                               
much smaller, at probable tens  of millions of dollars as opposed                                                               
to hundreds of millions.                                                                                                        
CO-CHAIR FEIGE  understood that companies would  not receive this                                                               
credit unless they had spent money in the first place.                                                                          
ACTING  COMMISSIONER  BUTCHER   responded  that  this  particular                                                               
annual  to  monthly  would  apply   to  the  companies  that  are                                                               
producing on the North Slope and paying taxes.                                                                                  
1:55:42 PM                                                                                                                    
REPRESENTATIVE P. WILSON referenced the  graph depicted on page 4                                                               
of  DOR's  2/23/11  letter  responding   to  questions  from  the                                                               
committee's 2/21/11  meeting.   She said  the graph  compares the                                                               
current  nominal tax  rate under  ACES and  what that  would look                                                               
like  if it  were a  bracketed  system.   However, she  observed,                                                               
there appears to be no difference between the two.                                                                              
ACTING COMMISSIONER  BUTCHER answered that  Representative Herron                                                               
had  asked  what it  would  look  like  if  the current  law  was                                                               
bracketed without any  of the tax reductions proposed  by HB 110.                                                               
That  pretty much  speaks to  the 50  percent cap  that would  be                                                               
implemented by  HB 110 as  opposed to  75 percent under  ACES, he                                                               
said,  so the  bracket  would continue  to go  up  as opposed  to                                                               
reaching a plateau at 50 percent.                                                                                               
1:56:44 PM                                                                                                                    
CO-CHAIR  SEATON returned  to his  earlier  discussion about  the                                                               
number of  new companies investing  in oil exploration  in Alaska                                                               
between  1996  and  2010,  as  depicted on  Alaska  Oil  and  Gas                                                               
Conservation  Commission  slides   [Co-Chair  Seaton  distributed                                                               
slides  8 and  10 dated  1/4/11 and  2/9/11 in  the bottom  right                                                               
corner, respectively,  and dated  2/22/11 in the  bottom center].                                                               
He  reiterated that  in the  earlier years  there were  basically                                                               
only  three  companies drilling  production  wells,  but that  in                                                               
later  years  many   more  players  have  come   in  and  drilled                                                               
production wells (slide 10).  This  same scenario can be seen for                                                               
exploratory well permits (slide 8).   He cautioned that there not                                                               
be confusion between permits and  wells and drew attention to the                                                               
graph on page  6 of DOR's 2/23/11 letter  responding to questions                                                               
from the  committee's 2/21/11 meeting,  which depicts  the number                                                               
of exploration wells actually drilled  on the North Slope between                                                               
the  years 1995  and 2010.    In the  four years  after ACES  was                                                               
instituted,  an average  of 12  exploration wells  per year  were                                                               
drilled.   In the four  years preceding  ACES, an average  of 7.8                                                               
exploration wells per year were drilled.                                                                                        
2:00:18 PM                                                                                                                    
CO-CHAIR FEIGE maintained that the  variety of new explorers that                                                               
came into  Alaska corresponded to the  spike in oil price.   From                                                               
2001-2002 the  price was below $20  a barrel, but after  that the                                                               
price was  generally upward.  He drew attention  to the  spike in                                                               
exploratory wells  drilled in  2007 depicted on  page 6  of DOR's                                                               
2/23/11  letter  responding  to questions  from  the  committee's                                                               
2/21/11 meeting.                                                                                                                
CO-CHAIR  SEATON said  he wants  to  make sure  the committee  is                                                               
looking  at  the data  for  what  those  averages are,  not  just                                                               
explanations of why the averages are the way they are.                                                                          
CO-CHAIR FEIGE understood.                                                                                                      
2:02:01 PM                                                                                                                    
CO-CHAIR FEIGE  asked how many  years it takes, in  general, from                                                               
the time  a decision is  made to drill a  well until the  well is                                                               
actually drilled on the North Slope.                                                                                            
MICHAEL  HURLEY,  Director,  Government Relations  and  Community                                                               
Affairs,  ConocoPhillips Alaska,  Inc.,  explained  that after  a                                                               
well  is   planned,  the  permitting,  environmental,   and  site                                                               
clearance  work must  be  done.   An  ice road  often  has to  be                                                               
constructed if  the well is  in an area  of no development.   The                                                               
timing  will vary,  but the  quickest would  be about  18 months.                                                               
However, it could  be up to 2.5 years because  of the seasonality                                                               
when the decision  is made; for example, there may  be a wait for                                                               
the season  to construct the ice  road.  In further  response, he                                                               
agreed that the average length of time would be about 2 years.                                                                  
2:03:04 PM                                                                                                                    
CO-CHAIR  FEIGE  inquired  whether companies  will  change  their                                                               
plans or  stop their plans  once the  decision to drill  has been                                                               
made if something  changes in the short term with  the economy or                                                               
price of oil.                                                                                                                   
MR.  HURLEY  replied  that  it  depends  on  the  nature  of  the                                                               
decisions.  An example of  being committed and going through with                                                               
the  development  anyway  is  the  Oooguruk  field  developed  by                                                               
Pioneer Natural Resources.  He said  he thinks Pioneer was at the                                                               
point of no return when the tax  laws were changed in 2007.  Once                                                               
to  a certain  point and  enough dollars  have been  sunk into  a                                                               
process, whether  it is development  or an exploration  well, the                                                               
company must  look at it  point forward and continue  despite the                                                               
economic conditions at the time.   He added that a company always                                                               
looks point forward in its economics.                                                                                           
CO-CHAIR FEIGE returned  to the graph on page 6  of DOR's 2/23/11                                                               
letter responding  to questions  from the committee's  meeting of                                                               
2/21/11.   He drew attention to  the 2007 and 2008  spikes in the                                                               
number  of  exploration  wells  drilled  and  surmised  that  the                                                               
decisions to  drill those  wells were made,  on average,  in 2005                                                               
and 2006.                                                                                                                       
MR. HURLEY responded, "That is quite likely."                                                                                   
CO-CHAIR FEIGE further  surmised that the decisions  to drill the                                                               
exploratory wells  drilled in 2009  and 2010 were  therefore made                                                               
in 2007, 2008, and 2009.                                                                                                        
MR. HURLEY answered, "Yes."                                                                                                     
2:05:29 PM                                                                                                                    
REPRESENTATIVE P.  WILSON, following the aforementioned  train of                                                               
thought, presumed  that this could  be illustrated in a  graph by                                                               
sliding the numbers of exploratory wells  over by two years so it                                                               
could  be  seen  that  what  happened  in  2008  was  because  of                                                               
decisions made in 2006.                                                                                                         
MR. HURLEY replied, "Generally, on  average, that is true."  Much                                                               
of it  depends upon  the particular decision  being made  and the                                                               
time of the  decision relative to seasonality for  the field work                                                               
that needs to be done at a new site.                                                                                            
REPRESENTATIVE  P. WILSON  surmised that  the activity  occurring                                                               
two years  after the  [2007] enactment of  ACES was  unrelated to                                                               
the  bill's passage;  however, the  big drop  in activity  in the                                                               
third and  fourth years afterward  would be related to  the bill.                                                               
She asked how  long it would take after a  bill's passage for the                                                               
state to  see the  shift in  activity related to  that bill  by a                                                               
company like ConocoPhillips Alaska, Inc.                                                                                        
MR.  HURLEY  responded  that  ConocoPhillips  Alaska,  Inc.  goes                                                               
through a budgeting process pretty  much every year.  During this                                                               
annual   process,  the   various   exploration  and   development                                                               
opportunities  are ranked.   He  reminded members  that ACES  was                                                               
passed  in  November 2007,  so  ConocoPhillips  Alaska, Inc.  was                                                               
already committed  to the things it  was going to do  in 2008 and                                                               
partially  into  2009.   The  budgetary  process for  exploration                                                               
wells  and  other  short-term decisions  usually  starts  in  the                                                               
spring,  he  continued,  so  the  rankings  for  these  types  of                                                               
projects  occur each  year even  though the  projects may  not be                                                               
undertaken  until   the  next  spring.     Long-term  development                                                               
projects become  part of the  ongoing budget in  subsequent years                                                               
once  a  commitment  has  been   made  to  the  project  and  the                                                               
authorizations for expenditure (AFE) have been signed.                                                                          
REPRESENTATIVE  P. WILSON  commented  that this  means about  two                                                               
2:09:49 PM                                                                                                                    
CO-CHAIR  SEATON, in  regard to  exploratory well  permits, noted                                                               
that  ConocoPhillips Alaska,  Inc. drilled  only one  exploratory                                                               
well in 2007, which means the  decision for that well was made in                                                               
2005.   He contended that  ConocoPhillips Alaska,  Inc. therefore                                                               
stopped  exploration decisions  prior  to enactment  of the  2006                                                               
production profits tax  (PPT) and [2007] ACES.   Between 2003 and                                                               
2005  "BP"  had  zero  exploratory  wells and  it  had  only  one                                                               
exploratory  well in  2006, he  observed, so  BP's decisions  for                                                               
that time  period would  have been made  under the  fiscal regime                                                               
previous  to  PPT  and  ACES,  under which  there  was  very  low                                                               
production tax.                                                                                                                 
MR. HURLEY  said he  follows the co-chair's  chain of  logic, but                                                               
that he cannot  speak to whether "BP" or  "ExxonMobil" made those                                                               
kinds of decisions in those time frames.                                                                                        
CO-CHAIR  FEIGE noted  that ConocoPhillips  Alaska, Inc.  drilled                                                               
four wells  in 2006, one well  in 2007, and three  wells in 2008.                                                               
He asked whether there was any particular reason.                                                                               
MR. HURLEY answered  that it is always about  the availability of                                                               
opportunities and where the rocks  are seen.  Sometimes there are                                                               
projects that are  ready to drill and sometimes  it takes several                                                               
years of  seismic work,  along with  acquiring land  positions in                                                               
the lease sale so a company knows  it has the land where it wants                                                               
to drill.   Those things can take  time, so it can  take years to                                                               
develop a prospect to the point where it is ready to be drilled.                                                                
CO-CHAIR  FEIGE asked  whether  those wells  could  have been  an                                                               
MR. HURLEY said, "It could easily have been."                                                                                   
2:12:23 PM                                                                                                                    
CO-CHAIR SEATON said development and  service wells can be looked                                                               
at without  backing up two  years because acquiring the  land and                                                               
access is  not a consideration for  those types of wells.   Also,                                                               
with infield drilling  there is no looking for the  resource.  He                                                               
observed that  for companies doing  infield drilling,  the number                                                               
of production  wells was  low during  the years  2005-2007, which                                                               
was  a time  of generally  rising  oil prices  [AOGCC slide  10].                                                               
This could not have been driven  by consideration of a profit tax                                                               
rate  because  it  was  before  the  PPT,  he  maintained.    The                                                               
philosophy behind  HB 110 is  that dropping the state's  tax rate                                                               
will result  in a  different response  than what  happened during                                                               
those  years of  low production,  low tax  rates, and  rising oil                                                               
prices.  Based on this, it  appears that the wrong lever is being                                                               
pulled to  reach the desired  goal of  putting more oil  into the                                                               
2:15:24 PM                                                                                                                    
REPRESENTATIVE  GARDNER inquired  whether ConocoPhillips  Alaska,                                                               
Inc.  would  be  drilling  exploration wells  this  year  in  the                                                               
National  Petroleum Reserve-Alaska  (NPR-A) had  it received  the                                                               
permits that it had expected to have by now.                                                                                    
MR.  HURLEY  explained  that  the CD-5  field  is  a  development                                                               
opportunity, not  an exploration opportunity.   Exploration wells                                                               
are not needed because discovery  wells have already been drilled                                                               
and the  area delineated.   It is simply  a question of  when the                                                               
field can be developed.   ConocoPhillips Alaska, Inc. has not yet                                                               
signed and  committed the authorization for  expenditure (AFE) to                                                               
do the development  because it is waiting on the  permit from the                                                               
U.S. Army  Corps of Engineers.   Once  that permit is  received a                                                               
decision must  be made  on whether the  economics still  stand up                                                               
for that  particular project given  any stipulations that  may be                                                               
put on the permit and the conditions at the time.                                                                               
2:17:05 PM                                                                                                                    
CO-CHAIR FEIGE drew attention to  the AOGCC graph for exploratory                                                               
well  permits (slide  8) and  noted that  in 1996  four companies                                                               
were engaged in  exploration, the number expanded quite  a bit by                                                               
the mid-2000s, and then in 2010  the number of companies was down                                                               
to five and only one well  was drilled out of those five permits.                                                               
He said  he recognizes some  of the  company names listed  on the                                                               
slide because  of his former work  and some of the  names include                                                               
companies in  Cook Inlet, but  that many of these  companies have                                                               
pulled out  of Alaska.   For example,  "FEX" drilled a  number of                                                               
exploration  wells  in NPR-A  which  have  now been  plugged  and                                                               
abandoned and the  leases turned back to the state.   "Fowler Oil                                                               
and Gas,"  a coalbed methane  developer in  the Matanuska-Susitna                                                               
Valley, never  got off the  ground.  "Renaissance" folded  up and                                                               
went home, although it may still exist on paper.                                                                                
CO-CHAIR  SEATON pointed  out that  three exploration  wells, not                                                               
one,  were drilled  in 2010,  and  that one  exploration well  is                                                               
projected for 2011.                                                                                                             
CO-CHAIR  FEIGE  said  two  of  the three  wells  were  at  Point                                                               
2:19:16 PM                                                                                                                    
REPRESENTATIVE GARDNER turned  to Item 3 of the  analysis page in                                                               
Fiscal Note  1 regarding the  change in calculating the  tax rate                                                               
annually rather  than monthly.   She observed  that Item  3 lists                                                               
the revenue  impacts [for the  fiscal years 2013-1017  that would                                                               
result from passage of HB 110].                                                                                                 
2:20:03 PM                                                                                                                    
The committee took an at-ease from 2:20 p.m. to 2:22 p.m.                                                                       
2:22:39 PM                                                                                                                    
REPRESENTATIVE GARDNER  asked what  the price  per barrel  of oil                                                               
would have to be to balance this budget in FY 2017.                                                                             
ACTING COMMISSIONER  BUTCHER said  he does  not have  that number                                                               
off the  top of  his head  and will provide  it to  members later                                                               
2:23:43 PM                                                                                                                    
REPRESENTATIVE P.  WILSON referenced an electronic  mail document                                                               
from  Linda Hay  dated 2/23/11,  10:29 AM,  to which  a two  page                                                               
document  from  DOR was  attached  entitled,  "Revenue Impact  of                                                               
Provisions  of  HB  110  and  SB 49  as  compared  to  Fall  2010                                                               
Forecasted Revenue."   She observed  that page 2 of  the document                                                               
states the  revenue impact of HB  110 for FY 2013  would be -$582                                                               
to  -$782 million,  whereas Item  3 of  Fiscal Note  1 states  an                                                               
impact of -$382 million.                                                                                                        
ACTING COMMISSIONER BUTCHER  explained it is the  same numbers as                                                               
in the  analysis section of  the fiscal note; the  analysis takes                                                               
it issue by issue, whereas  this document puts those numbers into                                                               
a spreadsheet format rather than a narrative.                                                                                   
2:25:43 PM                                                                                                                    
REPRESENTATIVE DICK described  a graph with one  line being state                                                               
revenue  and one  line  being  the oil  production  decline.   He                                                               
understood  that  at  $90  per barrel  the  state's  income  will                                                               
decline  because   of  the  production   decline.     He  further                                                               
understood that what is being  talked about here is reducing that                                                               
income for  a time,  but at  some point  that income  will either                                                               
increase or  be at a  lower rate of decline.   Given a  best case                                                               
scenario in which exploration actually  takes place, he asked how                                                               
many years  would it take  before the  two lines crossed  and how                                                               
many years  beyond that would  it take  for the state  to recover                                                               
the money that it had lost.                                                                                                     
ACTING COMMISSIONER  BUTCHER replied  that DOR  has done  work on                                                               
that, but  it is difficult to  make an estimate on  where the two                                                               
lines would  cross because so  many different variables  could be                                                               
considered.   For example,  one variable  is the  price.   If the                                                               
price went  up to  $120-$130 per  barrel for  a couple  of fiscal                                                               
years these numbers  would completely change, just  as they would                                                               
change if  the price went  in the opposite direction  and dropped                                                               
to $50  per barrel.   It is  so complex that  every one  of DOR's                                                               
assumptions in  a best  guess estimate could  be questioned.   He                                                               
said  DOR would  be  happy  to work  with  members in  developing                                                               
possible scenarios to determine where the lines might cross.                                                                    
2:27:52 PM                                                                                                                    
REPRESENTATIVE DICK said  it would help him get  a better picture                                                               
even if a  scenario stuck with just $90 per  barrel.  He surmised                                                               
that where  the lines would cross  in a best case  scenario might                                                               
be three  or four years down  the road, and perhaps  another four                                                               
years  beyond that  before the  state gained  what it  would have                                                               
invested into  this.  Thus, in  a best case scenario  it would be                                                               
eight or nine years before the state broke even.                                                                                
ACTING COMMISSIONER BUTCHER agreed it  would be a number of years                                                               
and  it  would  be  determined by  how  quickly  the  anticipated                                                               
increase in exploration and development  occurred under the bill,                                                               
as well  as the  size of the  fields that are  found.   The state                                                               
could be pleasantly  surprised or not.  He added  that Mr. Balash                                                               
is  available  to  address  the discussion  that  occurred  in  a                                                               
previous committee meeting about what constitutes a unit.                                                                       
CO-CHAIR FEIGE  recalled that Mr.  Bart Armfield of  Brooks Range                                                               
Petroleum Corporation brought up  that issue during his [2/18/11]                                                               
2:29:49 PM                                                                                                                    
JOSEPH BALASH,  Deputy Commissioner, Office of  the Commissioner,                                                               
Department of Natural Resources, said  the state has the right to                                                               
make state land  available to lessees.  This is  done by dividing                                                               
blocks of land into individual  leases that are made available at                                                               
competitive sales  once a year.   The state's oil-  and gas-prone                                                               
regions  are broken  into five  areas:   the Beaufort  Sea, North                                                               
Slope, North  Slope Foothills, Cook Inlet,  and Alaska Peninsula.                                                               
A sale occurs for each area  once a year, so five area-wide sales                                                               
occur  at different  times  throughout  each year.    All of  the                                                               
available leases  within an  area are available  for bid  at that                                                               
area's annual sale.                                                                                                             
MR. BALASH  explained that once  a lease is obtained  the company                                                               
has a maximum of 10 years  under state law to exclusively explore                                                               
the land on  that lease.  If  after 10 years the  company has not                                                               
obtained a  certified well  or successfully  put that  lease into                                                               
production, the term will end  and the lease will terminate, come                                                               
back to the state, get a new  lease number, and be offered at the                                                               
next area-wide  lease sale.  If  the lease is drilled  and oil is                                                               
found, the  lease itself is unlikely  to be the only  place where                                                               
the oil is  located, so there will probably  be additional leases                                                               
for the  area surrounding that  well.  This collection  of leases                                                               
is  grouped together,  put into  a  unit, and  a single  operator                                                               
identified  to develop  that unit.   The  unitization process  is                                                               
therefore  a  means for  efficiently  developing  a pool  of  oil                                                               
underlying multiple leases.                                                                                                     
2:33:22 PM                                                                                                                    
MR. BALASH said a unit can  be formed through the Division of Oil                                                               
& Gas,  or the  Alaska Oil and  Gas Conservation  Commission, or,                                                               
for federal  lands, the U.S. Bureau  of Land Management.   If the                                                               
unit contains all  state acreage or some state acreage  it can be                                                               
formed and  filed at the  Department of Natural Resources.   Once                                                               
that unit is  petitioned and agreed to be formed  by the Division                                                               
of  Oil  &  Gas,  the  company must  provide  either  a  Plan  of                                                               
Exploration  (POE) or  a Plan  of Development  (POD).   Under the                                                               
regulations  at  the   Division  of  Oil  &  Gas,   there  is  no                                                               
distinction between  an exploration unit and  a development unit.                                                               
It is just  a matter of whether the unit  is being operated under                                                               
the terms of a Plan of Exploration or a Plan of Development.                                                                    
MR. BALASH  related that if oil  in the unit has  been delineated                                                               
and is  ready to be  produced, the  Plan of Development  will lay                                                               
out the  facilities that  need to be  constructed and  a timeline                                                               
under which  they will  be constructed  and put  into production.                                                               
However, if all that is present  in the unit is a discovery, then                                                               
additional drilling needs  to be done to delineate  the oil field                                                               
or pool.   In this case, a Plan of  Exploration is submitted that                                                               
guides  the  development  or  delineation  of  the  field.    The                                                               
department tracks  what is  going on  and makes  sure that  it is                                                               
occurring.  If  the unit does not go into  production within five                                                               
years it is  subject by law to terminate.   Any leases within the                                                               
unit that are beyond their  primary term would then terminate and                                                               
go back into the pool for the next area-wide lease sale.                                                                        
2:35:58 PM                                                                                                                    
MR.  BALASH stated  that once  a specific  unit is  formed and  a                                                               
reservoir is  identified within that  unit, then  a Participating                                                               
Area (PA) is  defined to locate the exact position  of where that                                                               
area is.  A Participating Area  is almost always smaller than the                                                               
unit.   There  can  be multiple  Participating  Areas within  the                                                               
unit, but once the Participating  Area has been formed within the                                                               
unit,  any leases  within  the  unit that  are  not  part of  the                                                               
Participating Area  are then contracted  out of the  unit, unless                                                               
there is  a plan of  exploration to further explore  those leases                                                               
within  the unit.    If those  leases  are at  the  end of  their                                                               
primary term,  they will terminate  and go back into  the general                                                               
pot  for the  next  area-wide lease  sale.   When  they are  made                                                               
available for re-leasing, they get a new lease number.                                                                          
REPRESENTATIVE  GARDNER inquired  whether an  area that  has been                                                               
contracted  out  but   then  re-leased  to  a   new  owner  would                                                               
automatically be part of the operating  area or on its own within                                                               
a Participating Area.                                                                                                           
MR.  BALASH  clarified  that  when  a  lease  within  a  unit  is                                                               
contracted out,  the unit's boundary  shrinks to just  the leases                                                               
that  are  in  the  unit,  which  is  roughly  the  size  of  the                                                               
Participating  Area or  the  Plan of  Exploration  for any  other                                                               
leases that are part of  the Participating Area.  A Participating                                                               
Area is  a subset of the  unit.  In further  response, Mr. Balash                                                               
explained  that within  the  collection of  leases  in the  unit,                                                               
there may  be more  than one  Participating Area.   There  may be                                                               
some  gaps  where  there  are  leases that  are  not  part  of  a                                                               
Participating Area,  but these gaps  with leases would  require a                                                               
Plan of  Exploration.   The gap  is either subject  to a  Plan of                                                               
Exploration or  is part  of a  Participating Area  and, if  it is                                                               
neither, it goes back into the pool of available leases.                                                                        
MR. BALASH,  in response  to Co-Chair  Seaton, agreed  to provide                                                               
his written crib notes.                                                                                                         
2:41:15 PM                                                                                                                    
CO-CHAIR  SEATON understood  from previous  testimony before  the                                                               
committee that Alaska is not  equal to other jurisdictions around                                                               
the  world  in  its  requirement  for  submission  of  data  from                                                               
companies  for leases  on  state  land.   He  requested that  the                                                               
Department of Natural Resources let  the committee know what data                                                               
the department  would like  to have and  provide an  analysis for                                                               
what  would be  a  reasonable length  of time  for  that data  to                                                               
remain confidential.   He further  requested that  the department                                                               
provide  its position  on whether  data from  an abandoned  lease                                                               
should become  the property  of the state.   Data  from abandoned                                                               
leases would  help make  the state  more competitive,  he opined,                                                               
because  that information  could help  lower the  cost of  future                                                               
development of the state's resources.                                                                                           
MR. BALASH  pointed out  that a variety  of seismic  and geologic                                                               
geotechnical  information  is  collected   on  any  given  lease.                                                               
Additionally, the  department draws  a line  in the  treatment of                                                               
information that has  to do with interpretation by  the lessee or                                                               
a contractor  for the lessee.   He asked for  clarification about                                                               
which information the co-chair would like indentified.                                                                          
CO-CHAIR SEATON said  he would like Alaska to  be competitive and                                                               
have the  same information that  the producers and  explorers are                                                               
required to  give to  other jurisdictions in  the world,  such as                                                               
Norway or  the United Kingdom.   For example, he  understood that                                                               
some jurisdictions  require field-by-field  data.  He  would like                                                               
to  know what  data the  Department of  Natural Resources  thinks                                                               
would be useful and reasonable for the state to require.                                                                        
2:47:22 PM                                                                                                                    
REPRESENTATIVE HERRON noted there is  a variety of opinion on the                                                               
bill, with  some people saying  it is a huge  leap of faith.   He                                                               
asked whether  Acting Commissioner Butcher believes  that HB 110,                                                               
as currently written, is the correct size parachute for Alaska.                                                                 
ACTING COMMISSIONER  BUTCHER responded  that he believes  this is                                                               
the way forward  for the state.  He related  that in delving into                                                               
the issue, the  department kept coming back to  three things that                                                               
are known  definitively:   there is  oil to  be found  in Alaska,                                                               
production  is continuing  to decline  in the  state and,  as the                                                               
price of  oil has gone  up over  the last few  years, exploration                                                               
has risen  considerably in other  states but  not in Alaska.   He                                                               
allowed  that there  will be  changes  made to  the bill  through                                                               
amendments, but said  the three lynchpins of HB 110  are:  the 15                                                               
percent tax  rate for new  explorers, the change to  brackets for                                                               
progressivity, and  the increase to  40 percent for  well credits                                                               
on the  North Slope.   It  has now been  nearly four  years under                                                               
ACES  and  there are  some  positives  to  it that  the  governor                                                               
believes  should  not be  thrown  out;  for example,  independent                                                               
operators have  come into Alaska as  a result of ACES.   However,                                                               
there  is also  an alarmingly  low amount  of exploration  in the                                                               
state as a  result of ACES.  The administration  believes this is                                                               
a  critical  time   in  the  state's  history  and   this  is  an                                                               
opportunity to change the direction  in which the state is going.                                                               
If the  bill passed today,  there might not  be a flood  of money                                                               
within a year from today, but  at that time the industry could be                                                               
invited to address the legislature and say what is going on.                                                                    
2:52:37 PM                                                                                                                    
REPRESENTATIVE  GARDNER recalled  that  in  testimony before  the                                                               
committee Brooks  Range Petroleum  expressed concern  about being                                                               
excluded  from  the  bill's provision  for  unitized  development                                                               
because its leases  were unitized before 12/31/10.   She inquired                                                               
whether  the administration  will  be proposing  any language  to                                                               
allow Brooks Range Petroleum to participate in this benefit.                                                                    
ACTING COMMISSIONER BUTCHER answered  that the department has had                                                               
conversations  about  this issue  and  is  open to  discussing  a                                                               
change in this regard.                                                                                                          
CO-CHAIR FEIGE  pointed out that  there are several  units within                                                               
the state  that do not yet  have any production.   He provided an                                                               
amendment,  labeled 27-GH1007\A.2,  Bullock,  2/22/11, to  Acting                                                               
Commissioner  Butcher  for his  comment  prior  to the  amendment                                                               
being offered  on 2/25/11.  He  said the amendment is  an attempt                                                               
to  encourage production  in areas  that are  not yet  producing,                                                               
whether or not they are in a unit.                                                                                              
2:55:09 PM                                                                                                                    
CO-CHAIR  FEIGE  said  that  after  listening  to  testimony  and                                                               
talking  to many  people,  he has  taken this  apart  in as  many                                                               
different  ways as  possible  and  he keeps  coming  back to  the                                                               
governor's bill.  It is  well crafted legislation, he opined, and                                                               
strikes a good compromise between  the revenue needs of the state                                                               
and trying  to relax the fiscal  terms of the state  so that more                                                               
development and production are encouraged on the North Slope.                                                                   
2:57:24 PM                                                                                                                    
CO-CHAIR SEATON  inquired as  to the  status of  the department's                                                               
response to his question that the  fiscal note does not take into                                                               
account the proposed 15 percent tax rate in the future.                                                                         
ACTING COMMISSIONER  BUTCHER replied  that the response  has been                                                               
dropped off in the co-chair's office.                                                                                           
2:58:26 PM                                                                                                                    
The  meeting was  recessed  at  2:58 p.m.  until  7:00 p.m.  that                                                               
7:05:23 PM                                                                                                                    
CO-CHAIR  ERIC   FEIGE  called   the  House   Resources  Standing                                                               
Committee meeting  back to  order at  7:05 p.m.   Representatives                                                               
Feige,  Seaton,  Dick,  Kawasaki,  P.  Wilson,  and  Herron  were                                                               
present  at  the call  back  to  order.   Representatives  Munoz,                                                               
Foster, and Gardner arrived as the meeting was in progress.                                                                     
REPRESENTATIVE  HERRON asked  the Department  of Revenue  whether                                                               
any of the committee's requested information is still pending.                                                                  
ACTING COMMISSIONER  BUTCHER responded  that the  department will                                                               
provide the remaining information to  the committee as quickly as                                                               
it can.  In further response,  he nodded to confirm that there is                                                               
still one more packet of information yet to be provided.                                                                        
7:07:14 PM                                                                                                                    
REPRESENTATIVE  DICK requested  that  the  committee be  provided                                                               
with a  projection of how many  years after passage of  HB 110 it                                                               
would take for  the state's investment to equal  the return under                                                               
best-case and worst-case scenarios.                                                                                             
ACTING  COMMISSIONER BUTCHER  answered that  the department  will                                                               
try to  put together  that information.   He said  the department                                                               
will  also use  testimony  provided by  Great  Bear Petroleum  to                                                               
project industry response if HB 110 was passed.                                                                                 
7:10:01 PM                                                                                                                    
CO-CHAIR SEATON presumed the department  would do this by looking                                                               
at oil production status quo  compared to a change resulting from                                                               
the bill.                                                                                                                       
ACTING COMMISSIONER  BUTCHER said correct.   The department would                                                               
keep the  same assumptions on  oil price and same  assumptions on                                                               
production  forecast out  into the  future, and  then incorporate                                                               
what  might be  an  increase in  production as  a  result of  the                                                               
passage  of  the  bill.     In  further  response,  he  said  the                                                               
department will try to provide  a side-by-side graph of where the                                                               
state  would expect  to  be under  the status  quo  and with  the                                                               
passage of HB 110.                                                                                                              
[HB 110 was held over.]                                                                                                         

Document Name Date/Time Subjects
HJR 9 Endorsing ANWR Leasing Packet.PDF HRES 2/23/2011 1:00:00 PM
HRES DOR Answers to Rep Seaton Questions 2.18.11.pdf HRES 2/23/2011 1:00:00 PM
HRES Dept. of Revenue response to 2.7.11 questions.pdf HRES 2/23/2011 1:00:00 PM
Rep. Young HR 49.pdf HRES 2/23/2011 1:00:00 PM
HRES 2.23.11 DOR Modeling for Rep. Seaton.pdf HRES 2/23/2011 1:00:00 PM
11.02.23 Hse Res response for 2-21-11.pdf HRES 2/23/2011 1:00:00 PM
HB 110
HRES 2.23.11 DOR Response to Feb. 11 Questions.pdf HRES 2/23/2011 1:00:00 PM
HRES 2.23.11 DOR Explanation on FN.xlsx HRES 2/23/2011 1:00:00 PM
HRES 2.23.11 AOGCC slides discussed in committee.pdf HRES 2/23/2011 1:00:00 PM