Legislature(2007 - 2008)SENATE FINANCE 532
11/07/2007 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB2001 | TELECONFERENCED | |
SB 2001 "An Act relating to the production tax on oil and gas
and to conservation surcharges on oil; relating to the
issuance of advisory bulletins and the disclosure of
certain information relating to the production tax and
the sharing between agencies of certain information
relating to the production tax and to oil and gas or
gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas
auditors and their immediate supervisors; establishing
an oil and gas tax credit fund and authorizing payment
from that fund; providing for retroactive application
of certain statutory and regulatory provisions
relating to the production tax on oil and gas and
conservation surcharges on oil; making conforming
amendments; and providing for an effective date."
SB 2001 was HEARD and HELD in Committee for further
consideration.
SENATE BILL NO. 2001
"An Act relating to the production tax on oil and gas and
to conservation surcharges on oil; relating to the issuance
of advisory bulletins and the disclosure of certain
information relating to the production tax and the sharing
between agencies of certain information relating to the
production tax and to oil and gas or gas only leases;
amending the State Personnel Act to place in the exempt
service certain state oil and gas auditors and their
immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund;
providing for retroactive application of certain statutory
and regulatory provisions relating to the production tax on
oil and gas and conservation surcharges on oil; making
conforming amendments; and providing for an effective
date."
SB 2001 was HEARD and HELD in Committee for further
consideration.
9:23:12 AM
Co-Chair Stedman stated EconOne would be presenting on
production cost increases. The Committee will reference the
original Petroleum Production Tax (PPT) expectations as well as
the results of the PPT legislation. The Administration will
discuss credits and how they affect the PPT calculation.
BARRY PULLIAM, SENIOR ECONOMIST, ECONONE RESEARCH, CONTRACTOR,
LEGISLATIVE BUDGET AND AUDIT COMMITTEE, highlighted his
extensive history of working with the state on oil and gas
matters. He explained that he previously analyzed expected
revenues during past PPT and Economic Limit Factor (ELF)
discussions. The PPT system was a change from the old system,
which moved from a gross-based tax where value was measured at
per barrel value at the well head; to a net tax system that
considers both capital and operating costs. The change required
examination of upstream costs and estimating future costs.
9:28:07 AM
Mr. Pulliam pointed out that the Department of Revenue (DOR)
conducted the analysis in order to provide a fiscal analysis of
the PPT bill. The Department has estimated that the current
system would produce less revenue due to anticipated increased
costs. EconOne was asked to determine why estimates differ and
whether the cost increases seen in Alaska (DOR) estimates are
reflective of trends elsewhere.
Mr. Pulliam said that EconOne interviewed DOR employees to
determine what process was used to collect data, particularly
related to the PPT returns. During the discussion it became
clear that the information could not be released.
9:32:12 AM
EconOne also looked at information available in the public
domain relating to costs throughout the world and Alaska. Mr.
Pulliam prepared a written report, "Report to the Alaska
Legislature on Production Cost Increases" (copy on file).
AT EASE: 9:33:09 AM
RECONVENE: 9:35:11 AM
Mr. Pulliam explained that page 1 of the handout, "Summary of
Costs", shows the cost forecasts that were used in the fiscal
note for HB 3001, or the current PPT system. The fiscal note
information for HB 2001 is depicted on the bottom section. The
information is expressed in two different ways, total cost for
capex and opex and then on a taxable barrel basis.
Mr. Pulliam addressed total costs first. In the fiscal note
projection for FY 2008, capital and operating costs were
anticipated to be about $1.1 billion each. Those costs appear
to be roughly in line with the spending levels through FY 2005.
Current estimates of roughly $2.1 billion each for capex and
opex for FY 2008 are depicted in the lower graph. The forecast
for the next several years are at that same range.
Mr. Pulliam explained that the costs were developed by reviewing
information available from 2002-2005. Estimates going forward
are based on DOR's review of what has been coming in under PPT
and on discussions with taxpayers.
Mr. Pulliam addressed the numbers based on the taxable barrel
basis. The total under the fiscal note for HB 3001 is about
$9.26 billion; under the fiscal note for HB 2001 it's about
$18.85 billion. He explained that the total is arrived by
taking the total cost used in forecasting and dividing by the
taxable barrels. The state gets tax revenue on taxable barrels
- production less royalty barrels. The entirety of the costs
reflects the cost to produce all barrels, which gets "netted
out" against taxable, non-royalty barrels. He noted that the
figures are all averages.
9:42:42 AM
Mr. Pulliam reported that there is broad consensus among
industry analysts that costs for producing oil have gone up,
which is dramatically related to the increase in oil prices. He
referenced page 2, "Platt's ANS Crude Oil Price; January 2000 -
September 2007". He noted that between 2002 and 2004, oil
prices were within a range of $25-$40 per barrel, as expected.
From 2004 to date, oil prices have doubled and production and
exploration are now a much more profitable business and have
therefore increased.
9:45:19 AM
Mr. Pulliam reviewed page 3, "NYMEX Futures Price for December
2011 Delivery; January - December 2005, Latest Quotes". The red
bars depict the futures price for each month of 2005. This
graph indicates what expectations were for prices long term.
The expectations increased significantly during the year. The
blue line reflects the most current futures price at
approximately $80 per barrel. Expectations regarding prices
drive investment and production decisions.
Mr. Pulliam reported that as expectations have risen, a high
demand has been placed on services for oil production and prices
have gone up.
9:48:21 AM
Mr. Pulliam turned to page 4, "IHS/CERA Upstream Capital Cost
Index; 1Q2000 - 1Q2007". He explained how the index works.
Between 2000 and 2004 costs for upstream capital have gone up
about 10 percent, which is roughly consistent with the overall
inflation rate. A large increase took place in 2005. He noted
that an IHS/CERA press release suggests a flattening out of
capital cost increases currently due to the ability to respond
to the higher demand for oil production and services.
9:50:24 AM
Mr. Pulliam reviewed page 5, "IHS/CERA Upstream Capital Cost
Index vs. West Coast ANS Price; 2000 - 2007". He said if prices
continue to rise, it will push up costs as service firms try to
respond to increased demands for services.
9:51:52 AM
Mr. Pulliam explained page 6, "Average* Oil Drilling Rig Daily
Index; 1Q2002 - 2Q2007". The graph depicts on-shore drilling
rates, but not those in Alaska. Costs doubled from 2002-2003 to
2006.
9:53:13 AM
Mr. Pulliam turned to page 7, "Average* Oil Drilling Rig Daily
Rates Index vs. West", to show the relationship between crude
oil prices and rig rates.
9:53:48 AM
Mr. Pulliam reported that page 8, "Average* Operating Costs",
was constructed from data prepared by the Department of Energy.
The graph shows cost increases beginning in 2003 and 2004, but
not as dramatic as the capital costs. Operating costs may not
be increasing as quickly as capital costs.
9:55:08 AM
Mr. Pulliam explained that page 9, "Average* Operating Costs for
10-Well Oil Lease Index' 2000-2006", depicts the relationship
between ANS price and operating costs. He emphasized that there
is not a lot of available information that applies to Alaska's
costs.
9:55:55 AM
Mr. Pulliam reported that page 10, "ConocoPhillips Reported
Production Costs Per BOE; 2003 - 2006", shows production costs
in Alaska and in the Lower 48. ConocoPhillips costs don't
include capital costs, but rather operating costs. Production
costs for Alaska were in the $3-4 range up until mid-2005 when
oil prices rose. That information is consistent with DOR's
information and other comparisons. In 2006 there was a 63
percent increase from the prior year. Corrosion issues on the
North Slope may have been a factor, as were production declines.
Co-Chair Hoffman asked if most costs were corrosion related,
would costs come down in the future. Mr. Pulliam offered to
address corrosion issues later in the presentation.
Senator Elton inquired if production costs per barrel for
ConocoPhillips might rise higher than for ExxonMobil because of
a greater level of exploration. Mr. Pulliam was not sure
because much of the exploration would be capitalized and the
graph depicts operating cost numbers.
10:00:53 AM
Mr. Pulliam addressed page 11, "BP Reported Costs Per BOE; 2002-
2006". The Alaska costs are higher than anywhere else reported
in the world. The increase in 2006 is about 82 percent and,
relative to ConocoPhillips, much greater. Production costs in
the United States include Alaska, and the slope would be flatter
without that data included.
10:02:33 AM
Mr. Pulliam explained page 12, "BP and ConocoPhillips Reported
Alaska Production Costs Per BOE; 2003-2006". In 2006 there was
a much greater increase in BP numbers. This graph does not
include capital expenditure, property tax, or production tax.
10:03:24 AM
Mr. Pulliam talked about "Corrosion/Integrity Management Costs"
on page 13. Exxon does not break out Alaskan numbers in their
public reporting, so the only comparisons are with
ConocoPhillips and BP. Not much line item detail is specified;
the information is a summary. The oil transit line replacement
was about $260 million and was probably already spent. Another
$550 million net will be spent for "integrity management" in
2007-2008. Integrity management is money that is being invested
and spent on facilities to avoid an incident such as happened in
2006. It's not clear if that money will be spread out into the
future or if BP is speaking as a working interest owner or as an
operator.
10:07:47 AM
Mr. Pulliam commented further on corrosion integrity management
costs, which would put pressure on costs in Alaska due to an
increased need for resources from a fixed pool. Higher costs
will be reflected in the Department of Revenue Cost Forecast.
10:10:00 AM
Mr. Pulliam turned to page 14. He concluded that DOR current
forecasts are based on unaudited taxpayer returns under PPT.
These costs may be reduced after review and audit. Forecast
costs used in DOR's fiscal note to HB 3001 are in line with
publicly reported information specific to Alaska during the
2002-2005 period. Costs have increased in recent years with
increases in expectations of future crude oil prices. The level
of increase is likely to be mitigated over the long run. The
increase in costs filed with the SEC filings for Alaska,
relative to the Lower 48, reflect expenses associated with
corrosion repair and integrity management efforts.
Mr. Pulliam continued to say that corrosion repair and integrity
management efforts are likely to increase costs reported for
Alaska, even for non-corrosion repair services. DOR forecasts
likely include costs related to these efforts. DOR cost
estimates now include cost/price sensitivity. A proper
determination of the actual costs will require examination of
supporting materials. Examination should include a review of
unit-by-unit information, both during the PPT period and several
years prior to the implementation of PPT.
10:15:12 AM
Co-Chair Stedman reported that Senator Wagoner had joined the
meeting.
Co-Chair Stedman suggested sorting out the unknowns surrounding
corrosion costs and integrity management costs.
Mr. Pulliam agreed. He thought the state should take the
opportunity to understand how the $550 million relates to net or
to gross and the length of spending as it relates to deductions.
Senator Thomas recalled that there were underestimates of costs
and prices that contributed to the inaccuracy of PPT. He
maintained that things aren't much better now due to lack of
specifics. He wondered how to gather the information needed to
better predict future finances.
10:17:46 AM
Mr. Pulliam responded that there is better information now than
when estimates were first made last spring. There are now
monthly PPT filings, and more "real time" information regarding
costs. This information must be shared and approved between
interested parties in joint/shared fields. The state gets no
information until after the taxes are filed, and is not privy to
"line level detail" that would be forward looking.
Senator Thomas asked if that is typical of a relationship that
exists between an oil producing nation or state and industry.
Mr. Pulliam was not sure. He thought that Alaska was more like
foreign countries that rely heavily on oil production. The
information is shared regularly with the owners of the field.
Under lease agreements there could be a disclosure of
information requirement.
10:22:14 AM
Co-Chair Stedman asked if, in the fiscal note on HB 3001 (PPT),
an adjustment for actual production and actual price is made,
the vast majority of the variance lies in the operating and
capital cost adjustment. Mr. Pulliam replied that in August the
Department of Revenue put out a status report that stated that
in FY 08 the current forecast showed about $800 million less in
revenues than expected under HB 3001. That was mainly due to
different levels of anticipated costs.
10:23:36 AM
Co-Chair Stedman asked if the $800 was "in operating and capital
in transition credits."
Mr. Pulliam affirmed, but pointed out there is more weight to
capital because that's where credits come into play. With the
transition credits, there is a normal 20 percent credit on
capital. He gave an example showing that the capital piece is
the biggest piece of the $800 million difference that was
forecast.
Senator Huggins termed it a "two-edged sword for Alaska". For a
worker on the North Slope it may be good news as reflected in a
larger paycheck. A merchant could also benefit by capital
construction improvements. He wondered to what extent workers'
wages would be reflective in rising costs. Mr. Pulliam thought
that wages would be a part. On the operating side it would not
appear that wages would be a major portion; more likely it would
be equipment and labor force related.
10:26:32 AM
Senator Huggins spoke of the state's doing a better job of
checks and balances and oversight over the industry, causing
prices to rise. Mr. Pulliam agreed that having more
requirements in place could cause cost increases.
Senator Huggins voiced concerned about "wildcatters" and a
disincentive effect on new explorers. He wondered how important
incentives might be.
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