Legislature(2011 - 2012)SENATE FINANCE 532

04/06/2012 01:00 PM FINANCE


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01:04:48 PM Start
01:06:34 PM SB192
05:11:41 PM 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
+ 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."                                                                                      
                                                                                                                                
1:06:34 PM                                                                                                                    
                                                                                                                                
DAMIAN BILBAO, HEAD OF  FINANCE, DEVELOPMENTS AND RESOURCES,                                                                    
BP, introduced himself.                                                                                                         
                                                                                                                                
TOM   WILLIAMS,  SENIOR   TAX  AND   ROYALTY  COUNSEL,   BP,                                                                    
introduced  himself.   He  noted  that  he   worked  as  the                                                                    
Commissioner  for the  Department of  Revenue (DOR)  for the                                                                    
State of Alaska thirty years prior.                                                                                             
                                                                                                                                
Mr. Bilbao  displayed the PowerPoint  Presentation, "British                                                                    
Petroleum (BP) Testimony to Senate Finance."                                                                                    
                                                                                                                                
Mr. Bilbao looked at slide 2, "Key Messages."                                                                                   
                                                                                                                                
     CSSB 192(Fin):                                                                                                             
     íLVDWD[LQFUHDVHWKDWZLOOFDXVHXVWRUH-evaluate                                                                      
     existing activity plans.                                                                                                   
     íLVQRWPHDQLQJIXODQGZLOOQRWOHDGWRPRUH                                                                             
     investment.                                                                                                                
     íOLNHO\WRFUHDWHPLVDOLJQPHQWEHWZHHQSURGXFHUV                                                                          
     that slows/stops activity.                                                                                                 
     íFUHDWHVPRUHGLVLQFHQWLYHWKDQ$&(6WRinvest in the                                                                      
     long-term.                                                                                                                 
                                                                                                                                
Co-Chair  Stedman requested  a  definition of  the range  of                                                                    
reference. Mr. Bilbao replied that  he would address it in a                                                                    
later slide.                                                                                                                    
                                                                                                                                
Co-Chair  Stedman looked  at  the  word "misalignment",  and                                                                    
requested further  explanation. Mr.  Bilbao replied  that by                                                                    
having  a   different  target   from  each   producer  could                                                                    
potentially direct  investment to a field  that could better                                                                    
achieve that  project. He stressed  that the  producer would                                                                    
shift to a field that would better achieve its target.                                                                          
                                                                                                                                
Co-Chair  Stedman   agreed  that   a  tax  increase   was  a                                                                    
disincentive. He stressed that  there were issues related to                                                                    
cost  and "full-cycle"  economics.  He  referred to  earlier                                                                    
testimony related  to the analysis of  full-cycle economics.                                                                    
Mr. Bilbao  replied that  a tax increase  would cause  BP to                                                                    
re-evaluate production and exploration activity.                                                                                
                                                                                                                                
Mr. Bilbao  discussed slide  3, "CSSB  192 (version  T) Will                                                                    
Not  Draw  More  Investment."  He  remarked  that  CSSB  192                                                                    
(version O) was  not attractive. He stated  that graphs were                                                                    
provided by PFC  Energy, and felt that there  was not enough                                                                    
production incentive in CSSB 192.                                                                                               
                                                                                                                                
1:13:56 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman noted  that each  tax structure  increased                                                                    
tax flow  to the companies.  Mr. Bilbao responded  that CSSB                                                                    
192 would  be a  larger tax increase  than the  Alaska Clear                                                                    
and Equitable Share Act (ACES).                                                                                                 
                                                                                                                                
Senator Thomas  wondered if a meaningful  incentive would be                                                                    
a  $2 billion  addition  to  the price  of  the current  oil                                                                    
price.  Mr.  Bilbao  replied  that   achieving  a  level  of                                                                    
meaningful  tax   change  would  return  money   that  would                                                                    
otherwise go to the State  to the producers to incrementally                                                                    
invest back into production.                                                                                                    
                                                                                                                                
Co-Chair  Stedman remarked  that there  were three  entities                                                                    
that  were  the  focus  when engaging  in  tax  discussions:                                                                    
industry,  federal government,  and the  state. He  stressed                                                                    
that a $2 billion shift  back to the industries, as outlined                                                                    
in  HB  110,  would  also  be  contributed  to  the  federal                                                                    
government.  He   noted  testimony  from   consultants  that                                                                    
stressed no need for significant  change. Mr. Bilbao replied                                                                    
that  the  assumptions were  based  on  how the  costs  were                                                                    
modeled.  He stated  BP took  a  different perspective,  and                                                                    
felt   that  tax   change   would   encourage  and   enhance                                                                    
competition in Alaska.                                                                                                          
                                                                                                                                
1:18:45 PM                                                                                                                    
                                                                                                                                
Mr. Williams looked  at slide 4, "CSSB 192 (version  O) is a                                                                    
Tax Increase." He stated CSSB 192  was a tax increase at oil                                                                    
prices that affect project economics.  He remarked that over                                                                    
time,  the resources  would deplete.  He  stressed that  oil                                                                    
fields stop producing, before all  the oil is taken from the                                                                    
ground. It  stops because of  substantial cost  increases to                                                                    
obtain  the  resource  as  the   resource  is  depleted.  He                                                                    
stressed that eventually the cost  of getting the barrel out                                                                    
of the ground,  is the same as  value of the oil  once it is                                                                    
out  of the  ground, so  money would  be lost.  He explained                                                                    
that the graph showed curves  that assumed that the cost per                                                                    
barrel  is maintained,  but stressed  that  costs would  not                                                                    
remain  the same  per barrel  in real  terms. He  noted that                                                                    
between $70 and  $130 per barrel there was  a "dolphin fin",                                                                    
because there was a gross  tax impact on revenue. He pointed                                                                    
out that 20 to 30  percent of industry production costs were                                                                    
not deductible under  ACES, because of the  21 categories of                                                                    
costs that were disallowed in statute.                                                                                          
                                                                                                                                
Co-Chair  Stedman  looked   at  the  value  in   the  FY  13                                                                    
projections, which was $22 billion  gross. He understood the                                                                    
issue  of  declined  production  and  increased  costs,  but                                                                    
pointed out that there was  a $2 billion increase related to                                                                    
a volume  problem. Mr. Williams  replied that the  costs for                                                                    
the new  production of  heavy oil would  be higher  than the                                                                    
current costs.                                                                                                                  
                                                                                                                                
Co-Chair Stedman  furthered that there was  some analysis of                                                                    
incremental  production with  a lower  progressivity charge,                                                                    
and  conversations related  to incentivizing  heavy oil.  He                                                                    
stressed  that the  industry  was not  ready  for heavy  oil                                                                    
incentives,  because   the  industry   did  not   know  what                                                                    
financial  burdens heavy  oil  extractions  would incur.  He                                                                    
expressed  concern  regarding   the  industry's  refusal  to                                                                    
disclose  its target  range; therefore  the legislature  was                                                                    
incapable of  determining the  economics for  the individual                                                                    
oil  companies.  He  stressed   that  the  consultants  were                                                                    
willing  to   work  with  the   companies  to   analyze  the                                                                    
economics,  but  understood  that there  were  disagreements                                                                    
regarding the imbedded cost issues.  Mr. Bilbao replied that                                                                    
BP  was attempting  to provide  a  range of  costs, but  was                                                                    
careful about disclosing  their confidential planning price.                                                                    
He  felt  that   the  range  was  accurate,   and  what  was                                                                    
represented was starting point.                                                                                                 
                                                                                                                                
1:32:15 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  referred  to a  "hypothetical  amendment"                                                                    
stating that the profit level  should just be split, and the                                                                    
government  take should  not level  out. Mr.  Bilbao replied                                                                    
that any  shift above $120  per barrel would not  affect the                                                                    
way  BP looked  at their  business.  He stated  that BP  was                                                                    
basing  their assumptions  on experience  and planning.  Mr.                                                                    
Bilbao  furthered  that it  would  be  premature for  BP  to                                                                    
determine  incentives for  heavy oil  production, and  noted                                                                    
that the focus was on  efficiency. He remarked that the only                                                                    
way  heavy oil  could be  produced  is if  there was  enough                                                                    
light oil to dilute the  heavy oil to efficiently flow along                                                                    
the Trans-Alaska Pipeline (TAPS).                                                                                               
                                                                                                                                
Mr. Williams added that progressivity  was becoming a tax on                                                                    
the  gross  value,  without  regard   to  the  cost  of  oil                                                                    
extraction. He felt that the  problem with the gross tax was                                                                    
similar  to  the problem  with  the  gross royalty,  because                                                                    
there was  no recognition  of the change  in the  margin per                                                                    
barrel,  which could  result  in zero  profits  in an  older                                                                    
field.                                                                                                                          
                                                                                                                                
Co-Chair Stedman  stated that  the projection  in FY  13 was                                                                    
$5.8  billion in  total  costs, with  $22  billion in  gross                                                                    
revenue,  and  $7 billion  in  transportation,  at $110  per                                                                    
barrel.  He felt  that  the  analysis needed  to  be run  in                                                                    
dollars, because  there were blended costs  and broad legacy                                                                    
field   calculations.  He   reiterated  that   a  full-cycle                                                                    
economic analysis needed to be  run to determine the rate of                                                                    
return  to  net  present  value. He  pointed  out  that  the                                                                    
analysis of  ACES was currently  different that when  it was                                                                    
passed,  because the  price of  oil had  almost doubled.  He                                                                    
stressed that  Alaska had  the second  largest oil  field in                                                                    
North  America, and  wanted  to  be sure  that  there was  a                                                                    
severance tax.                                                                                                                  
                                                                                                                                
1:40:41 PM                                                                                                                    
                                                                                                                                
Mr.  Williams stated  that  the  legislature had  originally                                                                    
created  a  presumption  that could  not  be  rebutted:  300                                                                    
barrels  a  day   were  needed  to  break   even,  and  1989                                                                    
legislation changed that problem.                                                                                               
                                                                                                                                
Co-Chair  Stedman stated  that  he would  like  to focus  on                                                                    
dollars, rather  than barrels.  He pointed  out that  he did                                                                    
not  want the  state to  be  placed at  a disadvantage.  Mr.                                                                    
Bilbao suggested that there be  an analysis of the economics                                                                    
below  $125 per  barrel. He  stressed  that if  there was  a                                                                    
fixed cost per barrel,  and production decreased, costs were                                                                    
going to decrease. He felt  that there should be an analysis                                                                    
run of the low base-cost from an industry perspective.                                                                          
                                                                                                                                
Co-Chair Stedman  understood, and noted that  there would be                                                                    
a  factoring of  the  inflation index.  He  stated that  his                                                                    
current  numbers showed  that operating  expenditures (OPEX)                                                                    
were running flat, with declining volume.                                                                                       
                                                                                                                                
Mr. Bilbao discussed slide  5, "Unintended Consequences." He                                                                    
noted the Incremental Production Incentives:                                                                                    
                                                                                                                                
     Issue:  Economic  Risk.  Concept:  Existing  production                                                                    
     from  the legacy  fields is  the  foundation for  North                                                                    
     Slope  present and  future; SB  192 penalizes  the base                                                                    
     business. Impact  to the state: Weakens  the foundation                                                                    
     of the Alaska economy.                                                                                                     
                                                                                                                                
     Issue: Likely misalignment  between operators. Concept:                                                                    
     SB  192   provides  each  producer  with   a  different                                                                    
     production   target;   creating   misalignment   around                                                                    
     projects.  Impact to  the  state:  Delay of  short-term                                                                    
     projects.                                                                                                                  
                                                                                                                                
     Issue: Short  versus long-term  focus. Concept:  SB 192                                                                    
     provides  a financial  incentive  to  shift effort  and                                                                    
     resources away  from long-term  projects in  support of                                                                    
     short-term rate.  Impact to the  state: Delay  of long-                                                                    
     term projects.                                                                                                             
                                                                                                                                
1:49:35 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman   noted  some  work  by   Senator  Wagoner                                                                    
regarding  an amendment  in the  Senate Resources  Committee                                                                    
related to  incentivizing incremental production.  After the                                                                    
consultants  analyzed the  benefit, it  was determined  that                                                                    
the incremental benefit was very  short-term. He stated that                                                                    
there should  not be  an increase to  the complexity  of the                                                                    
current structure.  Mr. Bilbao  replied with slide  6, "What                                                                    
does  meaningful  look  like." He  stated  that  efficiency,                                                                    
technology,  and tax  change  would  collectively result  in                                                                    
production growth.  He explained that no  alternative proves                                                                    
meaningful  tax  change with  a  25  percent base  rate.  He                                                                    
remarked that there  should be one system  for legacy fields                                                                    
and  new  fields.  He  felt  that if  there  were  too  many                                                                    
separate tax groups, there was  risk of misalignment between                                                                    
the groups. He stressed that  there should be no distinction                                                                    
between legacy  fields and new  fields. He pointed  out that                                                                    
most production  would be from  the existing  legacy fields,                                                                    
but the  natural decline of  the legacy fields was  about 15                                                                    
percent per  year. He stated  that billions of  dollars were                                                                    
spent  to maintain  the decline  at 6  percent per  year. He                                                                    
felt  that  providing  incentive  for  production  somewhere                                                                    
other   than  a   legacy  field,   failed  to   recognize  a                                                                    
misalignment  with other  producers. He  proposed a  similar                                                                    
structure to CSSB  192, with a base rate of  22.5 percent, a                                                                    
minimum tax  of 5  percent, and  the base  rate would  be in                                                                    
effect  until $80  at which  point  the progressivity  would                                                                    
initiate at 0.2  percent. The 0.2 would max out  at $130 per                                                                    
barrel at 10 percent, at  which point the progressivity rate                                                                    
would rise  to 0.1 percent  and max  out 50 percent  at $180                                                                    
per  barrel.  He felt  that  this  proposed structure  would                                                                    
provide a meaningful impact in  the price per barrel horizon                                                                    
that BP used to look at the projects in the base business.                                                                      
                                                                                                                                
1:54:13 PM                                                                                                                    
                                                                                                                                
Mr. Williams stressed  that the base tax rate  had "gone too                                                                    
far." He  felt that the challenge  was to fix the  future of                                                                    
oil development.                                                                                                                
                                                                                                                                
Co-Chair Stedman would  like to focus on the  cash flow, and                                                                    
wondered  how  much  cash  would be  moved  around  in  BP's                                                                    
proposal.  Mr. Bilbao  replied that  the  proposal was  very                                                                    
similar to HB 110.                                                                                                              
                                                                                                                                
Co-Chair Hoffman looked at slide  4, and felt that there was                                                                    
a  contradiction in  slide 6.  He wondered  why there  was a                                                                    
concern regarding  progressivity change, if the  company did                                                                    
not feel that progressivity had  an impact in their decision                                                                    
making  process. Mr.  Bilbao  agreed that  there  was not  a                                                                    
substantial concern  regarding progressivity, but  there was                                                                    
an attempt to  create something that could  enhance what the                                                                    
committee had already constructed.                                                                                              
                                                                                                                                
Co-Chair  Hoffman wondered  if BP  would ask  for additional                                                                    
tax rate reductions if the price  of oil reached $170 in the                                                                    
next  five years  per  barrel. Mr.  Bilbao  replied that  he                                                                    
would be surprised to see the  price of oil rise to $170 per                                                                    
barrel, but felt that $170 per  barrel would be good for the                                                                    
industry and the State. He  stressed that BP would encourage                                                                    
Alaska  to   remain  as  competitive  as   possible  in  the                                                                    
international market. He stressed  that Alaska was currently                                                                    
one of  the least attractive destinations  for investment on                                                                    
the planet.                                                                                                                     
                                                                                                                                
2:00:19 PM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman remarked  that discussions  in structuring                                                                    
ACES  used projections  of $30  to $70  per barrel,  with no                                                                    
concern  regarding progressivity  percentages above  $100 to                                                                    
$110   per  barrel.   He  felt   that  the   industry  would                                                                    
continually  come back  to  the  legislature suggesting  tax                                                                    
rate  restructuring, due  to  continually  price per  barrel                                                                    
increases.   Mr.  Williams replied  that in  order to  avoid                                                                    
continual industry recommendations,  BP proposed a permanent                                                                    
shift in market prices.                                                                                                         
                                                                                                                                
Co-Chair Stedman  wondered if the  company would  be pleased                                                                    
with  this  recommendation.  Mr.  Bilbao  replied  that  the                                                                    
numbers  were   looked  at  a   quarterly  basis,   and  the                                                                    
recommendation was consistent with the change.                                                                                  
                                                                                                                                
Senator  Egan  wondered  if the  misalignment  would  foster                                                                    
competition.  Mr.  Bilbao  stressed  that  the  misalignment                                                                    
would  provide challenges  around  short-term decisions.  He                                                                    
felt  that  the   current  misalignment  impacted  budgetary                                                                    
decisions.                                                                                                                      
                                                                                                                                
Senator  Thomas wondered  who needed  to agree  for the  big                                                                    
projects and investments. Mr. Bilbao  replied that the three                                                                    
major  producers  in Prudhoe  Bay  needed  to agree,  before                                                                    
advancing  projects. He  explained  that  BP made  decisions                                                                    
unilaterally related to the independent fields.                                                                                 
                                                                                                                                
2:05:14 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman wondered  how much  incremental investment                                                                    
was needed to  flatten the decline curve in  Prudhoe Bay. He                                                                    
stated that there  had been testimony in  the Senate Finance                                                                    
Committee  that showed  an investment  of roughly  $3 to  $5                                                                    
billion  annually.  Mr.  Bilbao responded  that  $5  million                                                                    
dollars a day would be needed  to offset the decline to 4 to                                                                    
6 percent.                                                                                                                      
                                                                                                                                
Co-Chair  Stedman asked  if $2  billion would  be enough  to                                                                    
offset. Mr. Bilbao responded that  the $5 million investment                                                                    
a day was reflective of the next ten years.                                                                                     
                                                                                                                                
Co-Chair  Hoffman  noted  that  CSSB 192  would  give  $1.25                                                                    
billion  to the  industry, and  wondered what  BP's proposal                                                                    
would  give  the companies.  Mr.  Bilbao  replied that  BP's                                                                    
estimation would be consistent with HB 110.                                                                                     
                                                                                                                                
Co-Chair Stedman wondered if  an incremental analysis should                                                                    
be run  on the  current economics.  Mr. Bilbao  replied that                                                                    
anything that could the state  could do to better understand                                                                    
investment in Alaska would be beneficial.                                                                                       
                                                                                                                                
Co-Chair Hoffman  noted that if  BP's proposal was  close to                                                                    
HB  110, the  benefit would  be  closer to  $2.4 billion  as                                                                    
opposed  to  the  CSSB  192  $1.25  million  return  to  the                                                                    
industry.                                                                                                                       
                                                                                                                                
Co-Chair  Stedman pointed  out  that $277  million would  be                                                                    
going  out of  the  state treasury,  but  that the  proposal                                                                    
would decrease government take by $2 billion.                                                                                   
                                                                                                                                
Mr.  Bilbao   encouraged  the  committee  to   consider  the                                                                    
increased revenue  and production, if there  was substantial                                                                    
tax rate restructuring. If  there was additional production,                                                                    
there  would be  additional government  take that  would not                                                                    
reduce, minimize, or entirely  offset government take from a                                                                    
tax decrease.                                                                                                                   
                                                                                                                                
2:12:19 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:22:04 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
BOB   HEINRICH,   VICE-PRESIDENT,  FINANCE,   CONOCOPHILIPS,                                                                    
ALASKA, introduced himself.                                                                                                     
                                                                                                                                
SCOTT    JEPSEN,     VICE-PRESIDENT,    EXTERNAL    AFFAIRS,                                                                    
CONOCOPHILIPS, ALASKA, introduced himself.                                                                                      
                                                                                                                                
2:23:27 PM                                                                                                                    
                                                                                                                                
Mr. Jepsen displayed the  PowerPoint Presentation, "CSSB 192                                                                    
Observations."   He   looked   at  slide   2,   "CSSB   192-                                                                    
Observations."                                                                                                                  
                                                                                                                                
     -Tax rate on base still too high.                                                                                          
     -New oil incentive insufficient to offset high base                                                                        
     tax rate.                                                                                                                  
     -Floor represents a tax increase at low prices                                                                             
     -Indexing is a positive step.                                                                                              
     -CSSB192 insufficient to improve the investment                                                                            
     climate and attract capital necessary to stem the                                                                          
     decline.                                                                                                                   
                                                                                                                                
Mr. Heinrich looked at slide  3, "Government Take Comparison                                                                    
vs. ACES."  He stated  that the graph  addressed a  range of                                                                    
prices.  He declared  that  government  take included  state                                                                    
production  taxes, royalties,  property taxes,  state income                                                                    
tax, and  federal income  tax. He  stated that  the analysis                                                                    
was  conducted prior  to the  modeling of  the progressivity                                                                    
trigger  point indexation,  but  that  progressivity had  no                                                                    
impact on FY 13. He  explained that the red line represented                                                                    
ACES, the  yellow line  represented CSSB  192, and  the blue                                                                    
line represented HB  110. He stressed that  the high minimum                                                                    
gross revenue tax,  at 10 percent, had  a significant effect                                                                    
on  the government  rate.  He looked  at  the current  price                                                                    
range, $80 to $100 per  barrel, ACES was highly unattractive                                                                    
competitive with  minimal benefit from a  reduced government                                                                    
take to incentive additional investment.                                                                                        
                                                                                                                                
Co-Chair Stedman  noted the proposed  shift of  $142 million                                                                    
loss  to the  state in  FY 13  that was  represented in  the                                                                    
chart.   Mr. Jepsen replied  that the State's  revenue would                                                                    
actually increase to  $1.5 billion, so the  share that would                                                                    
return to the producers was  a small share of the government                                                                    
take.                                                                                                                           
                                                                                                                                
Co-Chair Stedman noted  the freezing of the  split of profit                                                                    
oil,  queried ConocoPhilips'  position regarding  the profit                                                                    
split. Mr.  Heinrich replied  that the  progressivity aspect                                                                    
of  ACES was  not beneficial  at  any cost  per barrel.  The                                                                    
benefit should be  moved to the lower end of  the scale. Mr.                                                                    
Jepsen  furthered  that  ConocoPhilips   would  like  a  tax                                                                    
framework that had  a sufficient split of  share between the                                                                    
producers  and  the  state  in  any  price  environment.  He                                                                    
stressed  that there  should be  a homogenized  system, that                                                                    
did not split  different fields, projects, new,  or old oil;                                                                    
rather  one that  provided  incentives  to make  investments                                                                    
under any  price environment for the  best economic projects                                                                    
for the companies.                                                                                                              
                                                                                                                                
2:29:58 PM                                                                                                                    
                                                                                                                                
Co-Chair Hoffman noted that there  were many consultants who                                                                    
had  declared that  there were  no problems  with ACES,  and                                                                    
industry always commented that ACES  need to be fixed on the                                                                    
high end.  He wondered  why the  consultants would  be wrong                                                                    
with  the current  prices at  $100 to  $110 per  barrel. Mr.                                                                    
Jepsen  replied  that  the consultants  were  not  investing                                                                    
money. The  producers were looking  at opportunities  in the                                                                    
Lower 48  and other locations  around the world,  and Alaska                                                                    
was not  attractive for  the incremental  capital investment                                                                    
in other jurisdictions.                                                                                                         
                                                                                                                                
Mr. Heinrich reiterated that Alaska  was not able to attract                                                                    
the investment it needed.                                                                                                       
                                                                                                                                
Mr. Jepsen stressed  that the industry was  currently in the                                                                    
high  price environment,  and  there was  no  change in  the                                                                    
investment climate.                                                                                                             
                                                                                                                                
Co-Chair  Hoffman pointed  out that  Alaska was  in harvest-                                                                    
mode for many years. Mr.  Jepsen replied that the production                                                                    
in  Prudhoe Bay  was in  decline  since 1989.  He felt  that                                                                    
Alaska was not currently in harvest-mode.                                                                                       
                                                                                                                                
Co-Chair Stedman noted  the recommendations from consultants                                                                    
that there  should be 70  to 75 percent government  take for                                                                    
legacy  fields. He  noted that  the chart  did not  have the                                                                    
government  take exceeding  75 percent.  Mr. Jepsen  replied                                                                    
that  the   consultants  were  not  making   the  investment                                                                    
decisions.                                                                                                                      
                                                                                                                                
2:36:35 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman wondered how  the decline would flatten out                                                                    
in Kuparuk. Mr. Jepsen responded  that ACES was not allowing                                                                    
ConocoPhilips  the  opportunity   to  devote  the  resources                                                                    
necessary to  devote money to  specific projects.  He stated                                                                    
that the geologists,  geophysicists, engineers, and drillers                                                                    
felt that  Kuparuk was  "opportunity rich."  However, Alaska                                                                    
did not  provide an attractive enough  investment climate to                                                                    
develop those projects. He felt  that HB 110 would encourage                                                                    
investment.                                                                                                                     
                                                                                                                                
Co-Chair Stedman looked  at the graph on Slide  3, and noted                                                                    
the $2  billion negative spread  to the State under  HB 110.                                                                    
He stressed that if $2  billion was taken from the treasury,                                                                    
he  wanted to  be certain  that  the industry  was going  to                                                                    
invest. Mr. Heinrich agreed.                                                                                                    
                                                                                                                                
2:41:04 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  wondered what  it would take  to stabilize                                                                    
Kuparuk.  Mr. Jepson  replied  that  increased drilling  was                                                                    
required  to revitalize  Kuparuk.  He  noted that  increased                                                                    
investment would provide more revenue for the State.                                                                            
                                                                                                                                
Mr. Heinrich  discussed slide 4, "State/Industry  Share." He                                                                    
stated  that the  data was  from the  current Department  of                                                                    
Revenue  Sources  Book.  He  stressed   that  there  was  no                                                                    
representation  of the  benefit from  the indexation  of the                                                                    
trigger points, and only  represented the base progressivity                                                                    
elements of  the gross  tax. He stated  that the  x-axis was                                                                    
the Alaska  North Slope crude  oil price; the solid  red and                                                                    
green  lines represented  the Alaska  and producer  share at                                                                    
the   industry   under   ACES;  the   diamond-marked   lines                                                                    
represented the  Alaska and producer  share under  CSSB 192;                                                                    
the  triangle-marked   lines  represented  the   Alaska  and                                                                    
producer  share   under  HB  110;   and  the   dashed  lines                                                                    
represented  the severance  tax  structure, which  was a  25                                                                    
percent net  margin tax under  CSSB 192. He stated  that the                                                                    
Alaska  share   represented  royalties,   production  taxes,                                                                    
property  taxes, and  state income  tax. The  producer share                                                                    
had a deduction  of federal income tax. He  pointed out that                                                                    
CSSB 192  was virtually "on  top" of  ACES in the  low price                                                                    
environment below $105 per barrel.                                                                                              
                                                                                                                                
Co-Chair  Stedman  requested  a  restatement.  Mr.  Heinrich                                                                    
stated in  CSSB 192,  there was  very little  improvement as                                                                    
prices increased in the $120  per barrel price range, making                                                                    
industry earnings "essentially flat."                                                                                           
                                                                                                                                
2:48:17 PM                                                                                                                    
                                                                                                                                
Mr. Jepsen looked at slide 5, "Production Incentive."                                                                           
                                                                                                                                
     -New production incentive insufficient to overcome                                                                         
     high base tax rate.                                                                                                        
     -All new production investments challenged by costs                                                                        
     and smaller targets.                                                                                                       
     -Maintaining base decline will require more investment                                                                     
     over time.                                                                                                                 
     -Increases complexity.                                                                                                     
    -Production incentive does not go as far as HB 110.                                                                         
                                                                                                                                
Co-Chair Stedman wondered if there  was something wrong with                                                                    
the  economics  that  the  legislature  was  analyzing.  Mr.                                                                    
Jepsen replied that there were  not simple variables related                                                                    
to  hypothetical  projects.  He  stated  that  the  industry                                                                    
analyzed  margins and  potential upsides.  He stressed  that                                                                    
ACES and CSSB 192 did not  provide the same kind of "upside"                                                                    
that was available in other jurisdictions.                                                                                      
                                                                                                                                
Co-Chair  Stedman  felt  that  he  did  not  have  the  same                                                                    
information  that   ConocoPhilips  used  to   present  their                                                                    
opinions. Mr. Jepsen stressed that  the analysis was similar                                                                    
to  the Department  of  Revenue,  but financial  projections                                                                    
within the company were confidential.                                                                                           
                                                                                                                                
2:58:52 PM                                                                                                                    
                                                                                                                                
Senator Thomas wondered if  ConocoPhilips had utilized local                                                                    
contractors  and sub-contractors.  Mr.  Jepsen replied  that                                                                    
Alaska  Hire would  continue to  be  a focus.  He agreed  to                                                                    
provide more  detailed information regarding  Alaskan hiring                                                                    
statistics.                                                                                                                     
                                                                                                                                
Senator Thomas noted that PFC  did not reference Alpine, and                                                                    
wondered if  ConocoPhilips considered Alpine to  be Colville                                                                    
River.  Mr. Jepsen  affirmed  that ConocoPhilips  considered                                                                    
Alpine to be Colville River.                                                                                                    
                                                                                                                                
Co-Chair Stedman noted  that the magnitude of  the spread at                                                                    
$120 per  barrel, HB  110 would provide  a cash  increase to                                                                    
the  companies to  approximately $1.3  billion. He  stressed                                                                    
that there was  a significant difference between  HB 110 and                                                                    
CSSB 192  that needed to  be reconciled. Mr.  Jepsen replied                                                                    
that CSSB 192 needed to be recalibrated.                                                                                        
                                                                                                                                
3:03:09 PM                                                                                                                    
RECESS                                                                                                                          
                                                                                                                                
4:42:58 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
DALE  PITTMAN,   PRODUCTION  MANAGER,   EXXONMOBIL,  ALASKA,                                                                    
recognized the  work of the  committee's work  in organizing                                                                    
SB  192. He  stressed that  the current  tax system  was not                                                                    
designed to  incentive significant increases  in investment.                                                                    
He  felt that  CSSB 192  was an  improvement over  ACES, but                                                                    
still fell "far  short" in creating the  kind of significant                                                                    
changes  in development  investment that  was needed  by the                                                                    
state.  He  encouraged the  committee  to  look at  all  oil                                                                    
fields,  especially  the legacy  fields.  He  felt that  the                                                                    
long-term and near-term future was  in the legacy fields. He                                                                    
continued  to   thank  the  committee  for   their  work  in                                                                    
analyzing the tax system restructuring.                                                                                         
                                                                                                                                
Co-Chair  Stedman  requested   a  discussion  regarding  the                                                                    
needed  capital  investment   to  stabilize  the  production                                                                    
decline.  Mr.   Pittman  felt  that   there  needed   to  be                                                                    
encouragement  to continue  to invest  in legacy  fields. He                                                                    
could not address an exact tactic to stabilize the decline.                                                                     
                                                                                                                                
Co-Chair   Stedman  referred   to  the   incremental  policy                                                                    
discussion,  and   pointed  out   how  the   producers  were                                                                    
separated  in CSSB  192 according  to  a calculated  decline                                                                    
curve  and   a  lower   progressivity  on   the  incremental                                                                    
production above  the forecasted decline curve.  Mr. Pittman                                                                    
stressed that  there were some unintended  consequences when                                                                    
determining tax  incentives. He felt that  the principle for                                                                    
new  volume  investments was  good  policy,  but added  that                                                                    
there would be some disagreement  in how to incorporate that                                                                    
policy.                                                                                                                         
                                                                                                                                
Senator  McGuire  referred  to  testimony  from  PFC  Energy                                                                    
regarding  setting a  decline curve.  She wondered  if there                                                                    
were concerns from ExxonMobil regarding  a set decline curve                                                                    
in other  jurisdictions. Mr.  Pittman was  not aware  of any                                                                    
jurisdictions in ExxonMobil's business  that had set decline                                                                    
curves.                                                                                                                         
                                                                                                                                
4:55:38 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman pointed  out that there was  a $180 million                                                                    
shift  to the  industry in  CSSB192 at  $120 per  barrel Mr.                                                                    
Pittman felt  that $200  million was a  large sum  of money,                                                                    
but encouraged  the committee to understand  that ExxonMobil                                                                    
was a large company and $180  million was small on the broad                                                                    
scope.                                                                                                                          
                                                                                                                                
Co-Chair  Stedman  felt  that there  should  be  a  positive                                                                    
insurance from  the industry that  there would be  a return,                                                                    
if there was a significant tax change.                                                                                          
                                                                                                                                
Co-Chair Stedman  queried Mr. Pittman's thoughts  related to                                                                    
incentivizing a specific carbon  stream. Mr. Pittman replied                                                                    
that  cost  allocation could  be  intensive,  but felt  that                                                                    
there would be some consequences  to the industry, and would                                                                    
be detrimental to the state.                                                                                                    
                                                                                                                                
5:01:41 PM                                                                                                                    
                                                                                                                                
TODD ABBOTT,  PRESIDENT, PIONEER NATURAL  RESOURCES, ALASKA,                                                                    
ANCHORAGE  (via teleconference),  thanked the  committee for                                                                    
the work regarding SB 192.                                                                                                      
                                                                                                                                
Mr. Abbott noted that Pioneer  Natural Resources entered the                                                                    
Alaska market in  2002. He pointed out that  Pioneer was the                                                                    
first independent  operator on the  North Slope in  2008. He                                                                    
stated that Alaska  was less competitive now than  it was in                                                                    
2002,  because  of  the  lower   risk  high  margin  project                                                                    
elsewhere   in   the   United  States.   Alaska   had   many                                                                    
geographical,    logistical,    climate,    and    financial                                                                    
challenges. He  declared that Pioneer had  a large inventory                                                                    
of opportunities  in the Lower  48, and those  projects were                                                                    
easier  to execute  and bore  a  lower tax  burden than  the                                                                    
Alaska projects.  He stated that  Pioneer had  invested $2.1                                                                    
billion in Texas  oil production, versus $135  in Alaska. He                                                                    
stated that  the cost of  logistics for  finding, developing                                                                    
and producing  the North Slope projects,  put those projects                                                                    
at an immediate disadvantage.  He explained that the current                                                                    
tax system and  the proposed version had  widened the divide                                                                    
with the Lower 48, and  Alaska's disadvantage was growing as                                                                    
oil prices increased.                                                                                                           
                                                                                                                                
Mr. Abbott  addressed the gross progressivity  feature of SB                                                                    
192  was   counterproductive,  and   did  not   make  Alaska                                                                    
competitive  with the  domestic  partners. He  did not  feel                                                                    
that CSSB  192 encouraged investment behavior.  He felt that                                                                    
the three tier progressivity  system made some reductions in                                                                    
the  government take,  but did  not make  Alaska competitive                                                                    
with the domestic alternatives in  the Lower 48. He believed                                                                    
that   the   proposed   structure   inherently   discouraged                                                                    
investment on the higher  cost, more difficult opportunities                                                                    
that  remained on  the North  Slope; therefore,  lowered the                                                                    
probability  of new  fields coming  online.  He stated  that                                                                    
Pioneer had supported  meaningful and significant production                                                                    
tax reform since  the adoption of ACES.  While some features                                                                    
of the  current proposal were attractive,  the progressivity                                                                    
remained "broken."                                                                                                              
                                                                                                                                
5:06:47 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman wondered what  would be beneficial in order                                                                    
to  enhance   investment.  Mr.   Abbott  replied   that  the                                                                    
environment  was   difficult  in  Alaska,  and   there  were                                                                    
difficult challenges. There needed  a larger accumulation in                                                                    
a more  productive well in  Alaska, versus smaller  wells in                                                                    
Texas, even before  taxes. He felt that given  the risks and                                                                    
disadvantages in Alaska, there needed  to be a more generous                                                                    
tax structure than one in the Lower 48.                                                                                         
                                                                                                                                
Co-Chair Stedman  noted that the small  producers faced some                                                                    
issues facing  a marginal spread, and  wondered if Pioneer's                                                                    
profit would  balance out in the  processing facilities. Mr.                                                                    
Abbott   responded   that    Pioneer   produced   into   the                                                                    
ConocoPhilips station, and ConocoPhilips had a fair working                                                                     
relationship with Pioneer.                                                                                                      
                                                                                                                                
SB 192 was HEARD and HELD in Committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
5:11:00 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman discussed housekeeping.                                                                                        
                                                                                                                                

Document Name Date/Time Subjects
SB 192 4-06-12 BP Testimony to SFC.pdf SFIN 4/6/2012 1:00:00 PM
SB 192
SB 192 4-10-12 Revision to 4-06 BP-Bilbao Slides for SFC.pdf SFIN 4/6/2012 1:00:00 PM
SB 192
SB 192 4-10-12 Syring signed letter of correction.pdf SFIN 4/6/2012 1:00:00 PM
SB 192