Legislature(2011 - 2012)SENATE FINANCE 532

03/21/2012 09:00 AM FINANCE


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09:02:59 AM Start
09:03:34 AM SB192
10:59:48 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 192 OIL AND GAS PRODUCTION TAX RATES TELECONFERENCED
Heard & Held
+ Industry Testimony TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
SENATE BILL NO. 192                                                                                                           
                                                                                                                                
     "An Act relating to the oil and gas production tax;                                                                        
     and providing for an effective date."                                                                                      
                                                                                                                                
9:03:34 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman stated  that the meeting  would consist  of                                                                   
testimony  by  representatives  from  ConocoPhilips,  British                                                                   
Petroleum (BP),  and ExxonMobil  related to Alaska's  oil and                                                                   
gas  basin.  He  anticipated some  questions  that  would  be                                                                   
answered  later  via email,  but  hoped that  some  responses                                                                   
could be given during the meeting.                                                                                              
                                                                                                                                
BOB HEINRICH,  VICE-PRESIDENT FINANCE, CONOCOPHILIPS  ALASKA,                                                                   
introduced himself.                                                                                                             
                                                                                                                                
SCOTT     JEPSEN,    VICE-PRESIDENT     EXTERNAL     AFFAIRS,                                                                   
CONOCOPHILIPS ALASKA, introduced himself.                                                                                       
                                                                                                                                
Mr. Heinrich  discussed the PowerPoint Presentation,  "Senate                                                                   
Finance, Discussion of CSSB 192" (copy on file).                                                                                
                                                                                                                                
Mr.  Heinrich looked  at slide  2, "Agenda."  He stated  that                                                                   
the   CSSB   192  provisions   were   progressivity   change,                                                                   
discretionary production  incentive, increased  gross minimum                                                                   
tax, oil  information system,  and decoupling. He  added that                                                                   
he would also address the framework for modifications.                                                                          
                                                                                                                                
9:06:02 AM                                                                                                                    
                                                                                                                                
Mr. Heinrich  addressed slide  3, "Progressivity  Change." He                                                                   
stated  that the  graph represented  the split  of cash  flow                                                                   
between  the  State of  Alaska  and  the producers  across  a                                                                   
range  of prices.  The data  was  used from  the most  recent                                                                   
Revenue Sources  Book, and  the modeling  defects for  FY 13.                                                                   
The x-axis  was the  Alaska North  Slope crude price,  rather                                                                   
than  the  production tax  value  (PTV).  He stated  that  in                                                                   
order  to  determine the  PTV,  $40  would be  deducted.  The                                                                   
solid  red  and  green  lines   represented  the  Alaska  and                                                                   
producer  share  at  the  industry   level  under  ACES.  The                                                                   
diamond-marked  lines  represented  the Alaska  and  producer                                                                   
share  under  CSSB   192.  He  stated  that   "Alaska  share"                                                                   
included production  taxes due  under ACES, royalties,  state                                                                   
income  tax, and  property  tax paid  within  the state.  The                                                                   
producer  share was  a  net, after  federal  income tax,  and                                                                   
incorporated  all of  the  fiscal taxes  paid.  He noted  the                                                                   
0.05  percent   decrease  in   progressivity  provided   only                                                                   
minimal impact over  a narrow price range. He  furthered that                                                                   
the 60  percent tax  cap had  no impact  below $230/bbl,  and                                                                   
did  not anticipate  existing  in that  price environment  in                                                                   
the near future.                                                                                                                
                                                                                                                                
Co-Chair  Stedman   noted  some  discussions   regarding  the                                                                   
inaccuracies  about  the  actual revenue  that  is  different                                                                   
than   what  was   presented.  Mr.   Heinrich  replied   that                                                                   
ConocoPhilips paid  some of the highest taxes  of any fortune                                                                   
500  company.  He  stressed  that  each  taxpayer's  position                                                                   
would be different.                                                                                                             
                                                                                                                                
9:11:39 AM                                                                                                                    
                                                                                                                                
Co-Chair   Stedman   stated   that   after   the   last   tax                                                                   
restructuring,  there  was  an expectation  of  higher  State                                                                   
revenue, but  that did not  happen. He stressed  that changes                                                                   
and  expectations should  materialize,  so the  presentations                                                                   
should  reflect actual  numbers.  Mr. Heinrich  replied  that                                                                   
the model  was merely  a static model,  and there  were other                                                                   
factors that  influence the company  take. He  furthered that                                                                   
variable  such  as  prices,  cost   structures,  and  capital                                                                   
investments affect  the capital credit programs  on the split                                                                   
of cash flow.                                                                                                                   
                                                                                                                                
Co-Chair  Stedman  stressed  that   there  could  be  similar                                                                   
charts,  with different  assumptions.  He  surmised that  the                                                                   
presentation  was put  together  based on  the Department  of                                                                   
Revenue  (DOR) Source  Book. Mr.  Heinrich  replied that  the                                                                   
presentation was  based on the producer's perspective  on the                                                                   
legacy  fields,   or  slow-point  production  based   on  the                                                                   
Revenue Source Book.                                                                                                            
                                                                                                                                
Co-Chair  Stedman noted  that  if a  company  has no  income,                                                                   
Alaska's share decreases. Mr. Heinrich agreed.                                                                                  
                                                                                                                                
Co-Chair Stedman  looked at the  price range from  $70/bbl to                                                                   
$150/bbl, and wondered  if the split should ever  be split so                                                                   
the lines run parallel.                                                                                                         
                                                                                                                                
Mr. Jepsen felt  the lines should parallel,  but there needed                                                                   
to be an examination  of all the components. He  did not want                                                                   
to  state  a  specific  number,  without  analyzing  all  the                                                                   
attached components.                                                                                                            
                                                                                                                                
9:16:05 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  noted  testimony   from  consultants  that                                                                   
declared that the  relationship of the sharing  of profit oil                                                                   
could be in  a reasonable range around $100/bbl.  He wondered                                                                   
where specifically  the tax issue landed:  $80/bbl, $100/bbl,                                                                   
$130/bbl,  or  $150/bbl.  Mr.   Jepsen  stated  that  it  was                                                                   
approximately  $100/bbl  in  other investment  areas  in  the                                                                   
North America.                                                                                                                  
                                                                                                                                
Mr. Heinrich added that there  needed to be an examination of                                                                   
the  effective  tax  rates,  so  the  areas  that  are  "most                                                                   
attractive" are at the lower end of the price range.                                                                            
                                                                                                                                
Senator  Thomas wondered  why each industry  partner  did not                                                                   
present their own individual story,  because it was important                                                                   
to understand each company's objective.  He would like to see                                                                   
the individual  company's projections.  Mr. Heinrich  replied                                                                   
that ConocoPhilips was not able  to provide that information,                                                                   
because projections were considered confidential.                                                                               
                                                                                                                                
Mr. Jepsen furthered that the  State of Alaska should look at                                                                   
the  presentation  as a  "portfolio."  He stressed  that  the                                                                   
individual company's  actions culminate into a  higher level.                                                                   
He felt that ConocoPhilips' "story"  would be very similar to                                                                   
what was presented.                                                                                                             
                                                                                                                                
Senator Thomas  knew DOR's perspective, and stressed  that he                                                                   
would like to see ConocoPhilips'  individual outlook based on                                                                   
their  own business's  financial  considerations. Mr.  Jepsen                                                                   
responded   that   the   graph   was   very   reflective   of                                                                   
ConocoPhilips' numbers.  Senator Thomas surmised  that it was                                                                   
proprietary,  and  that  was the  reason  for  "lumping"  the                                                                   
numbers together.                                                                                                               
                                                                                                                                
9:21:41 AM                                                                                                                    
                                                                                                                                
Co-Chair   Stedman   stressed   that  there   were   multiple                                                                   
presentations regarding Alaska's  share versus the producer's                                                                   
share.  He  would  like  to  have  further  discussions  with                                                                   
consultants, because he felt that  ConocoPhilips presentation                                                                   
overstated the State's share,  and understated the producer's                                                                   
share. He  felt that  there was  most likely  a $200  to $250                                                                   
million spread  at $109/bbl  for income  tax. He stated  that                                                                   
the  government   take  number  referred  to   property  tax,                                                                   
royalties, income  tax, severance, and corporate  income tax.                                                                   
He noted that  the consultants had suggested a  range from 70                                                                   
to 75 percent, with the analyses  using 75 percent government                                                                   
take at  $100/bbl. He  alleged that  those numbers  might not                                                                   
actually materialize. He felt  that there needed to be a more                                                                   
accurate  analysis  of  the projected  impact  on  the  State                                                                   
treasury. Mr. Heinrich  replied that the State  of Alaska had                                                                   
a  different  marginal  tax  rate,  and  there  were  several                                                                   
assumptions across the board.                                                                                                   
                                                                                                                                
Co-Chair Stedman  agreed, and furthered that  there were many                                                                   
comparative analyses that used  the 35 percent corporate rate                                                                   
in the jurisdiction. He stressed  that the focus should be on                                                                   
the State of Alaska's revenue.                                                                                                  
                                                                                                                                
Co-Chair Hoffman  stated that  the goal  of tax revision  was                                                                   
based  on  getting  more  oil  into  the  pipeline,  and  the                                                                   
governor had a goal of an increase  from 550,000 to 1 million                                                                   
barrels a  day. He  wondered if  ConocoPhilips felt  that the                                                                   
governor's goal  was realistic.  Mr. Jepsen replied  that the                                                                   
governor's  goal  was  very  challenging,  and  ConocoPhilips                                                                   
liked  that challenge.  He  stated  that drilling  in  legacy                                                                   
field  was  a  great  challenge,   because  of  the  lack  of                                                                   
motivation  to explore an  older field.  He noted that  there                                                                   
was some  heavy oil that could  be developed, but  that would                                                                   
require great investment.                                                                                                       
                                                                                                                                
9:29:18 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman felt  that the goal  of off-shore  drilling                                                                   
was potentially  realistic, but the proposed  changes that SB                                                                   
192 addressed  did not  affect off-shore  drilling.  He noted                                                                   
that tariff  costs could be  reduced, but the  basic question                                                                   
was whether  or not the changes  would be beneficial  to both                                                                   
the  State and  the  producer. Mr.  Jepsen  responded that  a                                                                   
later   slide    would   address   ConocoPhilips'    proposed                                                                   
alternative  to  the Alaska  Clear  and Equitable  Share  Act                                                                   
(ACES). He  was confident  that if  there was an  environment                                                                   
that promoted  investment,  then there  would be healthy  oil                                                                   
production for many years. Mr.  Heinrich furthered that there                                                                   
were  many  comparisons  between   tax  reductions  equal  to                                                                   
capital  investment,   and  felt  that  comparison   was  not                                                                   
helpful.  He  stated  that  there  needed  to  be  comparison                                                                   
between  tax reduction  and what  is  actually generated.  He                                                                   
noted that every project was different  in terms of the types                                                                   
of returns, nature  of the cash flow, and timing  of the cash                                                                   
flow; but  generally it was  a two to  one ratio in  terms of                                                                   
the  investment  dollar. Every  investment  dollar  generated                                                                   
approximately two dollars in royalties  and production taxes.                                                                   
                                                                                                                                
9:33:08 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  noted  that   Prudhoe  Bay  was  producing                                                                   
approximately  300,000   barrels  a  day,  and   Kuparuk  was                                                                   
producing approximately  133,000 barrels a day.   He wondered                                                                   
how ConocoPhilips  could move  from about 150,000  to between                                                                   
200,000 through 250,000  a day. Mr. Jepsen responded  that in                                                                   
order  to stop  the decline,  there needed  to be  additional                                                                   
drilling. He stressed that Alaska  was at a big disadvantage,                                                                   
because  of the  intense  ecological environment.  He  stated                                                                   
that there was some examination  of new technologies, and the                                                                   
new technologies were fairly sophisticated  and expensive. He                                                                   
stressed that  it was possible  to level out the  decline, if                                                                   
there  were additional  resources.  He pointed  out that  the                                                                   
development  of  new  resources within  new  fields  required                                                                   
cutting edge  technology. He did  not know if  the governor's                                                                   
goal  of  1 million  barrels  a  day  could be  reached,  but                                                                   
pointed  out  that  skill and  science  would  encourage  new                                                                   
development.                                                                                                                    
                                                                                                                                
9:38:04 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  remarked  on  some  discussions  regarding                                                                   
above-ground  and  below-ground   processing  facilities.  He                                                                   
wondered if  the processing facilities  were a  high priority                                                                   
on the  list of capital  improvements for ConocoPhilips.  Mr.                                                                   
Jepsen  replied that Kuparuk  did not  face many  significant                                                                   
capital  constraints. He  added  on the  hottest  day of  the                                                                   
summer, there might  be decrease of 3,000 or  4,000 barrels a                                                                   
day for a short period of time;  in the winter there might be                                                                   
a  decrease  of  1,000  barrels   a  day.  ConocoPhilips  was                                                                   
continually  looking   at  ways  to  efficiently   and  cost-                                                                   
effectively handle  the production that was  available at the                                                                   
wells.                                                                                                                          
                                                                                                                                
Co-Chair Stedman referred to some  testimony from consultants                                                                   
regarding  profitable in-field  drilling at  $100/bbl in  the                                                                   
legacy  fields.  He wondered  where  ConocoPhilips'  concerns                                                                   
lie. Mr. Jepsen responded that  decisions were not made based                                                                   
on a single  variable. He stressed  that most of  the revenue                                                                   
flows to the State; it did not come back to the producer.                                                                       
                                                                                                                                
Co-Chair Hoffman  wondered if  there would be  harvesting for                                                                   
another 50 years, if there was  no change to ACES. Mr. Jepsen                                                                   
replied that ConocoPhilips  was investing $90  million a year                                                                   
in  Alaska,  and restated  that  it  was difficult  to  fully                                                                   
exploit the  resources under  ACES. He  alleged that  if ACES                                                                   
was reformed, there would be greater  desire to fully develop                                                                   
the fields.                                                                                                                     
                                                                                                                                
9:44:00 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  stated that  Pedro Van Meurs  was surprised                                                                   
at the small amount of capital  expenditures, and the maximum                                                                   
amount of harvest  mode investment in the Arctic.  He assumed                                                                   
that ConocoPhilips  did not agree with that  perspective. Mr.                                                                   
Jepsen affirmed  that ConocoPhilips  did not agree  with that                                                                   
point  of view,  but furthered  that the  tax environment  in                                                                   
Alaska did  not allow for  rapid new investment.  He stressed                                                                   
that ConocoPhilips  was  pursuing state  of the art,  cutting                                                                   
edge drilling technology in Alpine  and Kuparuk. He felt that                                                                   
new oil fields were essentially  being developed, because the                                                                   
current  technology  did  not  exist  when  the  fields  were                                                                   
initially  developed.  Pools  of  oil  were  currently  being                                                                   
accessed that were not accessible 20 years prior.                                                                               
                                                                                                                                
Co-Chair  Stedman  felt that  prospectivity  needed  to be  a                                                                   
focus.  Mr. Jepsen  agreed, but  stressed that  ACES did  not                                                                   
promote investment.                                                                                                             
                                                                                                                                
Senator  Thomas  pointed  out  the production  decline  of  5                                                                   
percent, and  wondered how much  investment it would  take to                                                                   
increase  production. Mr.  Jepsen remarked  that half  of the                                                                   
production  in Kuparuk  was a  result  of in-field  drilling,                                                                   
well  optimization,  and production  optimization.  He  noted                                                                   
that the  decline was substantial,  but felt it  was possible                                                                   
to  have  significant  results from  increased  drilling  and                                                                   
investment in the legacy fields.                                                                                                
                                                                                                                                
Co-Chair Stedman stated that PFC  Energy would help with that                                                                   
analysis.                                                                                                                       
                                                                                                                                
Senator  Thomas  stressed that  there  was still  decline  at                                                                   
Kuparuk,  so   he  requested   a  model  from   ConocoPhilips                                                                   
regarding their plan to at least reduce the decline.                                                                            
                                                                                                                                
9:50:41 AM                                                                                                                    
                                                                                                                                
Mr.  Heinrich explained  slide  4, "Discretionary  Production                                                                   
'Incentive'."  He stated  that  discretionary production  did                                                                   
not incentivize  the significant investment required  just to                                                                   
offset decline. Production aggregated  by the producer had no                                                                   
benefit  derived by  new satellite  of  production offset  by                                                                   
decline at  other fields.  He explained  that for the  short-                                                                   
lived   benefit  period,   the  PTV   reduction  impact   was                                                                   
immaterial.  He noted  that  there  was no  way  to plan  for                                                                   
discretionary production.   He stressed that  a discretionary                                                                   
production  "incentive"  could  not  improve  the  investment                                                                   
climate.                                                                                                                        
                                                                                                                                
Co-Chair   Stedman   explained   that  there   were   various                                                                   
perspectives  that were  considered to  boost production  and                                                                   
revenue.  He  noted there  were  some  discussions  regarding                                                                   
changing the $10 allowance to  $20 or $30, and lengthening it                                                                   
over time  to determine  if the concept  could mature  and be                                                                   
more   effective.   He  stated   that   there   was  also   a                                                                   
consideration  regarding a tax  holiday, and the  consultants                                                                   
were  going  to  present  the  benefits  thereof,  and  other                                                                   
recommendations  to boost production.   Mr. Jepsen  felt that                                                                   
the changes  to ACES  must apply  to the  legacy fields,  and                                                                   
must encourage investment. He  declared that Alaska needed to                                                                   
be attractive  place  for additional  capital investment.  He                                                                   
felt  that  the impacts  would  be  beneficial to  the  state                                                                   
treasury  over  the  long-term,  but could  have  a  negative                                                                   
impact in the short-term.  He felt that there needed  to be a                                                                   
focus equally on legacy fields and new fields.                                                                                  
                                                                                                                                
9:56:49 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  stated  that   there  was  testimony  from                                                                   
consultants  that   showed  that  $100  a  barrel   was  very                                                                   
profitable for the  industry. He explained that  if there was                                                                   
a broad  adjustment for  all production,  then too  much cash                                                                   
was moved unnecessarily.                                                                                                        
                                                                                                                                
Mr. Jepsen stated  that if there was a  significant reduction                                                                   
in severance tax, the State would  see an immediate change in                                                                   
its  revenue.  However,  over   the  long-term,  the  State's                                                                   
revenue would  balance out,  and even  be positive.  He added                                                                   
that  ConocoPhilips  would  be   willing  to  work  with  the                                                                   
committee to determine the best approach.                                                                                       
                                                                                                                                
Co-Chair   Stedman  observed   that   the  consultants   were                                                                   
analyzing  the  language in  the  bill, and  running  various                                                                   
numbers to determine  whether or not the bill  was aggressive                                                                   
for  incremental production.  He encouraged  the industry  to                                                                   
provide some input.                                                                                                             
                                                                                                                                
9:59:41 AM                                                                                                                    
                                                                                                                                
Mr.  Heinrich   stated  that  healthy  legacy   business  was                                                                   
important  to  future development  on  the North  Slope.  The                                                                   
assets  that currently  exist were the  "backbone" to  future                                                                   
investment.                                                                                                                     
                                                                                                                                
Senator Thomas  understood the industry's concern  and wanted                                                                   
their thoughts  on how  they would  structure something  that                                                                   
would clearly  delineate  new oil other  than current  year's                                                                   
investment   and   revenue.   Mr.   Jepsen   responded   that                                                                   
ConocoPhilips had  invested billions of dollars  in operating                                                                   
expenditures   (OPEX)  and   capital  expenditures   (CAPEX).                                                                   
Senator  Thomas furthered  that  there needed  to  be a  fair                                                                   
definition to determine what was considered "new oil."                                                                          
                                                                                                                                
Co-Chair Stedman  stated that  there would be  a presentation                                                                   
by PFC regarding the incremental  issue. He indicated that he                                                                   
expected the number to be billions  every year. He encouraged                                                                   
industry  to help  the State  solve the  problem. Mr.  Jepsen                                                                   
replied  that  they  were  trying to  be  as  transparent  as                                                                   
possible and that under ACES Alaska  was not as attractive of                                                                   
a place to invest.                                                                                                              
                                                                                                                                
Co-Chair  Stedman noted  he would  be surprised  to hear  any                                                                   
agreement with the producers at any set tax rate.                                                                               
                                                                                                                                
Senator McGuire  felt that there  was an assumption  that the                                                                   
tax system  at $100  a barrel  was "good" and  "competitive."                                                                   
She remarked  that there  was a  philosophical divide  in the                                                                   
Senate regarding  tax reform. Some  felt that the  tax system                                                                   
needed  to  be  altered  for future  barrels  as  opposed  to                                                                   
improving the overall  tax system. She stated  that the focus                                                                   
should be  on every  price per barrel,  and on analyzing  the                                                                   
entire tax system.                                                                                                              
                                                                                                                                
10:04:59 AM                                                                                                                   
                                                                                                                                
Mr.  Heinrich   discussed  the   slide  on  page   5,  "Other                                                                   
Provisions."                                                                                                                    
                                                                                                                                
     1. Increased gross minimum tax.                                                                                            
     -A minimum tax is already in place under ACES                                                                              
     -Increased minimum tax triggers at higher price than                                                                       
     under ACES.                                                                                                                
     -Impact is increased taxes at low to moderate oil                                                                          
     prices.                                                                                                                    
     2. Oil information system.                                                                                                 
     -Provides for a sweeping list of data to be warehoused.                                                                    
          a. Burdensome and potentially duplicative.                                                                            
          b. Includes data considered to be trade secrets.                                                                      
          c. Confidentiality concerns.                                                                                          
     -Creates unrealistic expectations about public access                                                                      
     to specific data.                                                                                                          
     3. Decoupling.                                                                                                             
     -Administratively burdensome.                                                                                              
     -Cost allocation mechanism unknown -left to discretion                                                                     
     of DOR.                                                                                                                    
     -Implementation should be tied to major gas sales.                                                                         
                                                                                                                                
Mr. Heinrich stated  that the provisions in the  bill did not                                                                   
improve the current investment climate.                                                                                         
                                                                                                                                
Co-Chair  Stedman indicated  that committee  would deal  with                                                                   
the issue of changing the tax  process on the upper end later                                                                   
in  the process.  He  was worried  about  the production  tax                                                                   
value going  in the negative,  because of high volume  of tax                                                                   
credits.                                                                                                                        
                                                                                                                                
10:07:09 AM                                                                                                                   
                                                                                                                                
Mr.  Heinrich  stated  that ConocoPhilips  supplied  a  large                                                                   
amount of data to DOR. Some of  the information should not be                                                                   
made  publicly available.  They were  not against  decoupling                                                                   
oil  and  gas,  but  they  wanted  clear  regulations  before                                                                   
implementation  of decoupling.  Co-Chair Stedman pointed  out                                                                   
that the  document from  DOR showed  that not decoupling  oil                                                                   
and gas would result in a loss  of $80 million dollars to the                                                                   
State.  He noted that  decoupling would  provide billions  to                                                                   
the state per year in the event of a major gas sale.                                                                            
                                                                                                                                
Mr.  Jepsen   discussed  the   slide  on  page   6,  "Capital                                                                   
Allocation."  He   explained  that  the   graph  demonstrated                                                                   
ConocoPhilips'  budget history in  Alaska from 2010  to 2012,                                                                   
and compared  it to the capital  budget history in  the Lower                                                                   
48. He stated  that with the higher prices,  one would expect                                                                   
to see  more investment  in Alaska.  He stressed that  Alaska                                                                   
had a low investment profile.                                                                                                   
                                                                                                                                
Co-Chair  Stedman  alleged  that the  graph  represented  the                                                                   
gross rates. Mr. Jepsen replied  that it was actually the net                                                                   
income. Co-Chair  Stedman wondered  what would happen  if the                                                                   
comparative  states allowed  for  capital expenditure  write-                                                                   
offs.                                                                                                                           
                                                                                                                                
10:12:55 AM                                                                                                                   
                                                                                                                                
Mr.  Jepsen replied  that  the  severance tax  write-off  was                                                                   
meant to be  a tax on the  cash margin. It took  into account                                                                   
operating costs  and capital costs to determine  "free cash",                                                                   
but it was still  taxed at a very high rate.  He did not feel                                                                   
that it should be considered a  write-off, rather a mechanism                                                                   
at which to arrive at the cash  margin to apply the severance                                                                   
tax.                                                                                                                            
                                                                                                                                
Mr.  Heinrich furthered  that  many of  the expenditures  did                                                                   
benefit from the 20 percent capital  credit, which was put in                                                                   
place to  off-set the high  progressivity on the  calculation                                                                   
of tax.                                                                                                                         
                                                                                                                                
Co-Chair Stedman stated that one  way of looking at it was as                                                                   
an accounting entry,  but that he was concerned  that capital                                                                   
credit could swing  against the treasury. The  State could be                                                                   
in  a position  where  they  were  covering all  the  capital                                                                   
expenses.  He observed  that  consultants  had informed  them                                                                   
that the state would be left in an exposed position.                                                                            
                                                                                                                                
10:16:11 AM                                                                                                                   
                                                                                                                                
Mr. Jepsen  replied that  ConocoPhilips allocated  the actual                                                                   
dollar  for   the  project.  He   stressed  that   the  graph                                                                   
represented  an accurate  depiction  of investment.  Co-Chair                                                                   
Stedman  stressed that  he  was very  curious  about the  net                                                                   
income of the producers after tax credits had been applied.                                                                     
                                                                                                                                
Senator  McGuire   queried  how  ConocoPhillips   felt  about                                                                   
credits  and how  the credits  influenced their  investments.                                                                   
Mr.  Heinrich  replied  that  every  producer  would  have  a                                                                   
different    perspective.    The   biggest    priority    for                                                                   
ConocoPhillips  was the change  in progressivity,  because of                                                                   
the impact  it had on long-term  cash flow, cash  generation,                                                                   
and net  income per  barrel. He stated  that after  the first                                                                   
few years  of tax  credit benefit,  there would  be a  burden                                                                   
with  an  impaired   asset  from  a  profitability   or  cash                                                                   
generation standpoint.                                                                                                          
                                                                                                                                
Mr. Jepsen furthered  that there were many ways  to determine                                                                   
how  Alaska  could  promote  investment,   but  ConocoPhilips                                                                   
looked  at  every   possible  mechanism  to   become  a  more                                                                   
profitable company.                                                                                                             
                                                                                                                                
Co-Chair Stedman  felt that a good discussion  would be about                                                                   
pre-  and post-tax  consequences.  He stressed  that the  net                                                                   
cash  flow  was a  concern  for  both ConocoPhilips  and  the                                                                   
State.                                                                                                                          
                                                                                                                                
10:21:14 AM                                                                                                                   
                                                                                                                                
Mr.  Jepsen looked  at  slide 7,  "Will  Alaska Benefit  from                                                                   
Reduced Oil  Taxes?" He pointed  out the letter on  the right                                                                   
side of the slide from ConocoPhilips.                                                                                           
                                                                                                                                
     Last spring, ConocoPhillips made the following                                                                             
     commitments to Alaska if the business environment is                                                                       
     improved:                                                                                                                  
     -We will pursue increased drilling activity on the                                                                         
     North Slope.                                                                                                               
     -We    will   aggressively    pursue   more    satellite                                                                   
     developments at Alpine and Kuparuk.                                                                                        
     -We will work with partners to develop major projects                                                                      
     at Prudhoe Bay.                                                                                                            
     -We will proactively pursue other projects that can                                                                        
     move the needle on oil production.                                                                                         
                                                                                                                                
Co-Chair Stedman  queried the  date of the published  letter.                                                                   
Mr. Jepsen replied that the letter  was dated the year prior.                                                                   
Co-Chair  Stedman  stressed  that the  discussion  had  moved                                                                   
further from what was addressed in the letter.                                                                                  
                                                                                                                                
Co-Chair  Stedman  wondered  if  there was  a  potential  for                                                                   
disagreement  between  Exxon,   ConocoPhilips,  and  BP.  Mr.                                                                   
Jepsen  replied that  BP and  ConocoPhilips had  to agree  on                                                                   
major capital expenditures in  Kuparuk. He furthered that all                                                                   
three  parties  had  to  agree  on  capital  expenditures  in                                                                   
Prudhoe  Bay,  and encouraged  the  committee  to query  each                                                                   
company's level of commitment.                                                                                                  
                                                                                                                                
Senator  Thomas   looked  at   slide  5,  and   queried  what                                                                   
specifically  was duplicative  and what  would be  considered                                                                   
"trade secrets."                                                                                                                
                                                                                                                                
Co-Chair   Stedman  interrupted   that  there   would   be  a                                                                   
presentation from DOR, so there  would be further information                                                                   
later regarding  the oil information  system. He felt  that a                                                                   
response  from   industry  should  wait  until   after  DOR's                                                                   
presentation.                                                                                                                   
                                                                                                                                
Senator Thomas  looked at  slide 6, and  wondered if  the Mr.                                                                   
Heinrich agreed  with Co-Chair  Stedman regarding  the impact                                                                   
of  credits.  Mr.  Jepsen  stated  he  agreed  with  Co-Chair                                                                   
Stedman's point of view regarding credits.                                                                                      
                                                                                                                                
Senator Thomas  wondered if the  new projects referred  to on                                                                   
slide 7 needed  long development periods. Mr.  Jepsen replied                                                                   
that  some projects  had  been  put aside,  but  there was  a                                                                   
pursuit of  new projects if  there was significant  change to                                                                   
ACES.                                                                                                                           
                                                                                                                                
10:26:57 AM                                                                                                                   
                                                                                                                                
Senator  McGuire  requested  an  example  another  democratic                                                                   
jurisdictions  that ConocoPhilips  struggled with tax  rates.                                                                   
Mr. Jepsen stated  that Alberta, Canada had  seen significant                                                                   
reduction  in   production  and   they  adjusted   their  tax                                                                   
structure and saw more development.                                                                                             
                                                                                                                                
Mr. Jepsen explained slide 8,  "Framework for Modifications."                                                                   
                                                                                                                                
     1. CSSB192  as currently  proposed does not  improve the                                                                   
     investment climate.                                                                                                        
     2. Focus the legislation  on elements that will make the                                                                   
     Alaska North Slope an attractive place for investment.                                                                     
     -Significantly   reduce   rate   of   progressivity   or                                                                   
     incorporate bracketing.                                                                                                    
     -If   decoupling   is  included,   make   implementation                                                                   
     contingent upon major gas sales.                                                                                           
     -Meaningful change must include  the legacy fields -this                                                                   
     is where the largest potential  production gains reside.                                                                   
     3.  Changes on  same order  of magnitude  as HB110  will                                                                   
     lead to more investment and production.                                                                                    
                                                                                                                                
Co-Chair Hoffman looked at slide  3, and noted that flattened                                                                   
out the progressivity  to between 130 and 150  per barrel. He                                                                   
wondered if that would be significant impact.                                                                                   
                                                                                                                                
10:32:02 AM                                                                                                                   
                                                                                                                                
Mr. Heinrich  felt that it was  at too high of  a price-point                                                                   
and the  problem with progressivity  was at the lower  end of                                                                   
the price range.                                                                                                                
                                                                                                                                
Co-Chair  Hoffman  remarked  that there  had  been  continual                                                                   
focus  on the progressivity  change  at the  high end of  the                                                                   
price range, and the focus should  continue to be on the high                                                                   
end. He  remarked that the  issue with  ACES fell at  the low                                                                   
end.                                                                                                                            
                                                                                                                                
Co-Chair Hoffman felt that there  would be a reduction in the                                                                   
State's  coffers of $4  billion if  the price  of oil  was at                                                                   
$150/bbl.   He  wondered   if   the  $4   billion  would   be                                                                   
significant.  Mr. Jepsen  replied  that  the State's  revenue                                                                   
would continue  to rise at $4  billion. He stressed  that the                                                                   
current  structure did  not make Alaska  competitive  even at                                                                   
lower prices  per barrel. He agreed  that a cap  to severance                                                                   
was  a  helpful   component,  but  there  needed   to  be  an                                                                   
examination of the rate of progressivity.  He noted that even                                                                   
at $110/bbl there was an 80 percent marginal tax rate.                                                                          
                                                                                                                                
Co-Chair Stedman felt that the  focus should be equal between                                                                   
the effective and marginal tax rates. Mr. Heinrich agreed.                                                                      
                                                                                                                                
10:36:41 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman  wondered  if $4  billion  was  significant                                                                   
number.  Mr.  Jepsen replied  that  $4  billion was  a  large                                                                   
number, but could not reply accurately,  because he felt that                                                                   
his calculations would not produce a similar number.                                                                            
                                                                                                                                
Co-Chair Stedman stated that the  numbers could be determined                                                                   
by  PFC. He  furthered that  he had  requested more  analysis                                                                   
from  DOR, from  concept purposes.  Once  the mechanics  were                                                                   
determined, there  could be a  policy discussion.  Mr. Jepsen                                                                   
replied that a cap was an important  component, but there was                                                                   
an issue when oil was below $130/bbl.                                                                                           
                                                                                                                                
Senator Thomas  referred to  slide 8, and  felt that  the gas                                                                   
tax should be in  place from the point of view  of the State.                                                                   
Mr. Heinrich  stated that decoupling  would be  contingent on                                                                   
major gas sales and development.                                                                                                
                                                                                                                                
Senator  Olson commented  that  rural Alaskans  were  "hyper-                                                                   
sensitive" to  the high price  of oil because of  the limited                                                                   
amount of deliveries they receive  each year. When there were                                                                   
high oil  prices, the affordability  and out-migration  was a                                                                   
major issue. He  felt that the perspective of  rural Alaskans                                                                   
was an important issue in the discussion.                                                                                       
                                                                                                                                
10:43:45 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:48:57 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
DAMIAN BILBAO, HEAD OF FINANCES,  DEVELOPMENTS AND RESOURCES,                                                                   
BRITISH   PETROLEUM,   ALASKA,   discussed   the   PowerPoint                                                                   
Presentation, "BP Testimony to Senate Finance."                                                                                 
                                                                                                                                
Mr. Bilbao looked at slide 2,  "Alaska's Future." He stressed                                                                   
that  ACES was  not working,  more investment  was needed  to                                                                   
increase  production,  and  policy must  focus  on  long-term                                                                   
solutions.                                                                                                                      
                                                                                                                                
Co-Chair  Stedman   stressed  that  ACES  had   worked  as  a                                                                   
harvesting  tax structure,  but did  not promote  incremental                                                                   
production. Mr.  Bilbao clarified  that ACES did  not provide                                                                   
incentive for increased production,  and felt that the record                                                                   
reinforced that perspective.                                                                                                    
                                                                                                                                
Mr.  Bilbao looked  at slide  3, "Declining  Production is  a                                                                   
crisis for  the State."  He stated  that Alaska general  fund                                                                   
revenue was projected to decline through 2017.                                                                                  
                                                                                                                                
Co-Chair Hoffman  wondered if  the general fund  expenditures                                                                   
included  operating  and  capital  expenditures.  Mr.  Bilbao                                                                   
agreed to provide information.                                                                                                  
                                                                                                                                
Mr. Bilbao  stressed that there  was a crisis for  the State,                                                                   
and added that  the policy in place did not  support Alaska's                                                                   
infrastructure.                                                                                                                 
                                                                                                                                
Co-Chair  Stedman stressed  that  the legislature  would  not                                                                   
accept a substantial deficit,  and pointed out that there was                                                                   
continual  close examination  of the numbers.  He noted  that                                                                   
there was  no blind  acceptance. He  stressed that  there was                                                                   
not  going to  be  an acceptance  of  the operating  side  of                                                                   
stemming  the decline  of production.  Mr. Bilbao  understood                                                                   
that  the  committee  was  looking  forward,  explained  that                                                                   
increased  investment   and  production  would   occur  after                                                                   
meaningful tax reform.                                                                                                          
                                                                                                                                
Mr. Bilbao looked at slide 4,  "State's Experts - ACES is not                                                                   
working." He felt that there were  serious concerns with ACES                                                                   
regarding   incentivizing  investment   and  production.   He                                                                   
stressed that there were multiple  data points that require a                                                                   
need  for tax  reform.  Fundamentally,  there  was a  serious                                                                   
concern for the  long term issue, and needed  to be addressed                                                                   
currently.  He  stressed  that  ACES  was  a  "failed  fiscal                                                                   
policy."                                                                                                                        
                                                                                                                                
SB  192  was   HEARD  and  HELD  in  committee   for  further                                                                   
consideration.                                                                                                                  
                                                                                                                                

Document Name Date/Time Subjects
SB192 COP 03-21-12 Testimony.pdf SFIN 3/21/2012 9:00:00 AM
SB 192