Legislature(2011 - 2012)BUTROVICH 205
04/01/2011 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB49 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 85 | TELECONFERENCED | |
| += | SB 49 | TELECONFERENCED | |
SB 49-PRODUCTION TAX ON OIL AND GAS
3:33:20 PM
CO-CHAIR PASKVAN announced the consideration of SB 49, and
informed the committee that Bryan Butcher would discuss the Oil
and Gas Production Tax Status Report and Kevin Banks would
discuss North Slope leasing and the state's royalty modification
program. He asked Mr. Butcher to begin with an overview of the
Alaska's Clear and Equitable Share (ACES) Status Report, and
then walk through the executive summary, focusing on each key
finding. Before transitioning to Mr. Banks, he said he'd like to
know if DOR performed an economic analysis when it contemplated
a production tax reduction, similar to the one DNR conducted for
royalty modification. He asked for an explanation of the
decision, and if it would be in the best interest of the state
to do that sort of analysis considering the potential impact of
SB 49.
BRIAN BUTCHER, Commissioner Designee, Department of Revenue,
stated that the Oil and Gas Production Tax Status Report to the
Legislature is required under AS 43.55.180 as part of the 2006
Petroleum Profits Tax (PPT) legislation.
3:36:24 PM
SENATOR MCGUIRE joined the committee.
COMMISSIONER BUTCHER provided the following overview of the ACES
status report, which evaluates six elements of the state's
production tax system.
1. Revenue Generation/Tax Rate - Revenues under PPT and ACES
exceeded the amount that the state would have received
under the Economic Limit Factor (ELF) each of the four
fiscal years since a net profits tax was implemented. He
noted the PowerPoint includes a chart that compares the
three tax systems.
CO-CHAIR PASKVAN noted that the explanation also includes the
statement that the production tax rate under ACES may be as high as
75 percent. He asked if that is a nominal, marginal, or effective tax
rate.
COMMISSIONER BUTCHER answered it's a nominal tax rate.
CO-CHAIR PASKVAN asked what the price is for crude oil at that rate.
COMMISSIONER BUTCHER said he would follow up with specifics, but that
is the cap under the original ACES legislation.
2. Industry Investment - Capital expenditures have increased
each of the four fiscal years since the net profits tax was
implemented. However, it is not clear how much of those
capital expenditures were drilling or well-related and how
much were maintenance or facilities-related. He noted that
the committee previously discussed that DOR will need to
implement regulations to gather additional information so
as to definitively know what that breakdown is. He
acknowledged that it's an area that needs improvement.
CO-CHAIR PASKVAN asked if he knew whether or not the major oil
companies were rebuilding infrastructure at Prudhoe Bay.
COMMISSIONER BUTCHER replied he didn't have specifics, but he's sure
that considerable work is being done to keep that mature
infrastructure going and safe.
CO-CHAIR PASKVAN asked if it's fair to assume that if capital
expenditures are not going into well-related activities, then they
are likely going into infrastructure rejuvenation at Prudhoe Bay.
COMMISSIONER BUTCHER replied that is one area where that is probably
taking place.
BRUCE TANGEMAN, Deputy Commissioner, Department of Revenue
(DOR), referenced the earlier question about the 75 percent
nominal production tax rate, and explained that is the top rate
in a production tax value (PTV) of $342.50.
SENATOR WIELECHOWSKI asked what the nominal and effective tax
rates would be when oil is $100/barrel.
MR. TANGEMAN offered to follow up with precise numbers, but
generally it's about $30 in transportation costs.
COMMISSIONER BUTCHER continued to review the elements of the state's
production tax system.
3. Impact on Exploration, Development, and Production -
Exploration generally increased after 2003, when the
Exploration Incentive Credit (EIC) was implemented, but
dropped off in 2010 and 2011. Although development
continues in three relatively new North Slope projects,
production continues to decline.
4. Industry Employment and New Entrants - Industry employment
rose steadily between 2006 and 2009, but dipped slightly in
2010.
CO-CHAIR PASKVAN asked what that signifies.
COMMISSIONER BUTCHER replied that's simply the information that DOR
received.
3:43:28 PM
SENATOR WIELECHOWSKI asked if in 2004 and 2005, roughly 8,000
people were working in the oilfields.
COMMISSIONER BUTCHER answered yes.
SENATOR WIELECHOWSKI asked if the tax rate at that time was zero
percent on at least 15 of 19 fields.
COMMISSIONER BUTCHER answered yes.
SENATOR WIELECHOWSKI recapped that there were 8,000 jobs when
the tax rate was zero, and he understands that last year there
were 12,800 jobs on the North Slope.
COMMISSIONER BUTCHER agreed, and added that the largest spike in
jobs occurred in 2006 when corrosion became a big issue on the
North Slope. Job numbers increased by 1,400 that year and
continued the next couple of years.
MR. TANGEMAN pointed out that the price of oil in 2003/2004 was
between $30 and $40 per barrel. In 2008 the price spiked to well
over $100 per barrel.
SENATOR WIELECHOWSKI said his understanding is that as the
production tax rate on the North Slope was declining towards
zero from 2001 to 2003, job numbers on the North Slope were also
declining. He asked if that was his understanding as well.
COMMISSIONER BUTCHER replied job numbers bounced up and down,
but definitely trended down.
3:45:26 PM
CO-CHAIR PASKVAN said a lot of people that were previously
employed in the oilfields are questioning why so many Alaskans
aren't working when total numbers in the oil industry are up.
COMMISSIONER BUTCHER agreed it's a contradiction, but DOR has
not received detailed information from the Department of Labor
and Workforce Development (DOLWD) as to why this is occurring.
CO-CHAIR PASKVAN asked if there was a potential correlation
between the numbers of resident versus nonresident hires.
COMMISSIONER BUTCHER replied the breakdown on unemployment
claimants indicates that both residents and non-residents are
affected. He didn't have the breakdown of the North Slope
employment numbers for residents and nonresidents.
CO-CHAIR PASKVAN asked if people from the Interior who
previously worked in the oil industry have a valid concern about
nonresident hires in light of the fact that their employment
numbers are down when overall employment numbers are up.
COMMISSIONER BUTCHER replied he, too, has that concern, but
until DOR gets a breakdown from the Department of Labor and
Workforce Development (DOLWD), he can't dig in and figure out
what is really going on.
SENATOR FRENCH said at some point he'd like to hear from Mr.
Fried.
CO-CHAIR PASKVAN noted for the record that Neal Fried with
DOLWD, Kevin Banks with DNR, and Lennie Dees, Cheryl Nienhuis
and John Larsen with DOR were online to answer questions.
SENATOR FRENCH asked Mr. Fried if he had an explanation for the
apparent contradiction between DOLWD's most recent numbers
indicating record high employment on the North Slope, and the
volume of individual testimony about layoffs and force
reductions.
MR. NEAL FRIED, Economist, Department of Labor and Workforce
Development (DOLWD), said part of the difficulty comes from
looking at the annual averages instead of the monthly data. In
2008, 2009, and 2010, annual average employment was relatively
stable, but the monthly data shows a lot more volatility.
In 2009, employment for oil and gas peaked at about 13,500, but
by November that number had dropped to 11,988. Employment
drifted down over the course of the year, and at the same time
the number of unemployment claims increased between 2008 and
2009. In 2010, employment stabilized in the first quarter then
grew through the third quarter, while unemployment claims in the
oil industry drifted down. Between 2008 and 2009, the number of
unemployment claimants in the oil and gas industry went from
about 1,400 to about 2,700 and then dropped to about 2,500 the
following year. There's a lot more volatility month-to-month,
quarter-to-quarter than on the average annual basis, he said.
3:52:54 PM
CO-CHAIR PASKVAN asked him to explain the context of his
statement that "The oil industry has been able to perform more
work using fewer workers."
MR. FRIED said he wasn't sure.
CO-CHAIR PASKVAN asked if he generally believes the statement to
be accurate.
MR. FRIED reiterated that he would need to see the context
within which he made that statement.
SENATOR WIELECHOWSKI asked if the BP corrosion work ended in
2008.
MR. FRIED replied he couldn't pinpoint the time.
SENATOR WIELECHOWSKI asked if he had a breakdown of the number
of residents versus nonresidents filing for unemployment.
MR. FRIED said in 2008, the number of residents receiving
unemployment that were tied to the oil and gas industry was
about 1,200, and increased to about 2,200 in 2009. In that same
data set, nonresident numbers increased from 154 in 2008 to
almost 500 in 2009. Resident numbers doubled and nonresident
numbers almost tripled. In 2010, resident numbers dropped to
about 2,100 and nonresident numbers stayed about the same. He
added that there is a certain amount of churning in the
oilfields as contracts come and go, even if overall employment
doesn't change much.
MR. FRIED summarized that the large increase in unemployment
numbers between 2008 and 2009 was due to the job losses that
took place during the latter part of 2009. Those numbers began
to recover in 2010 and unemployment claims began to drop.
SENATOR WIELECHOWSKI asked if the 2,200 residents that filed for
unemployment in 2009 are new people filing or if the 1,200
residents that filed in 2008 are included.
MR. FRIED replied it's hard to tell, but he would guess that
there was both overlap and new claimants.
3:58:09 PM
SENATOR MCGUIRE asked if DOLWD had ever collected oil and gas
industry data that more clearly defined work categories like
drilling, transportation, catering and other companies that are
directly involved in the oil industry.
MR. FRIED replied the definitions are specific to the oil
industry, which means they exclude people that are involved in
transportation or catering, despite the fact that those players
also directly work in the oilfield. He explained that a number
of years ago, DOLWD looked at Prudhoe Bay and found that about
25 percent of the employment that was generated in the oilfields
was from non-oilfield employers. They weren't drilling companies
like Schlumberger, ConocoPhillips, CHMHill, or Doyon Drilling.
2
He said it's difficult for DOLWD to separate those non-oil
industry employers because a lot of those players (the catering,
transportation and construction companies) are also involved in
activity elsewhere in the state and in other sectors of the
economy.
4:01:12 PM
SENATOR MCGUIRE asked if DOLWD data delineates the categories of
activities to maintain existing infrastructure as opposed to
activities that are specifically related to oil and gas
extraction.
MR. FRIED answered no. DOLWD does break out oil producers from
oilfield service companies, but not the activity of exploration
versus maintenance. Most of the North Slope employers work both
sides so there is no way of knowing if they are involved in
maintenance activity or exploration activity.
CO-CHAIR PASKVAN asked if the definition had changed in last 6-
10 years.
MR. FRIED answered no; there had been no change in the
definition of the oil industry and the oil industry employers
that fall within that category.
SENATOR WIELECHOWSKI said the jobs issue is critical, and at
some point he'd like a deeper analysis to figure out why
employment on the North Slope is at a record high, yet Alaskans
are saying they've lost their jobs. Between 2008 and 2009 the
Alaskan unemployment rate nearly doubled so this is a good
discussion to have, he stated.
CO-CHAIR PASKVAN reiterated the committee's extreme concern
about the apparent conflict between overall employment versus
resident employment numbers on the North Slope.
4:04:46 PM
COMMISSIONER BUTCHER continued the presentation.
5. Use and Expansion of Tax Credits - The amount of credits
used has increased annually since 2006 and that trend is
expected to continue, because new credit programs were
added during the 2010 legislative session. He noted that
DOR continues to look at how effective those tax credits
are.
CO-CHAIR PASKVAN observed that the "Conclusions and
Recommendations" section of status reports includes the
statement that "it is untenable to blame a tax system for the
lack of industry investment." He asked Commissioner Butcher to
comment.
COMMISSIONER BUTCHER replied that sentence continues to state
that, "it is equally untenable to claim that the tax system is
the reason increased activity or investment occurs." He
explained that the point is that industry investment is
dependent on many factors, and changing just one element won't
solve all the problems.
CO-CHAIR PASKVAN said he was trying to square that qualifying
statement with Commissioner Galvin's January 14, 2010 ACES
status report that indicated that ACES was performing as it was
expected to perform when it passed in 2007. The economic
provisions resulted in the anticipated revenue levels, and the
investment incentives appeared to distribute the increased tax
burden in a manner that continued to encourage investment.
4:07:19 PM
COMMISSIONER BUTCHER responded the current status report looks
at information that is one year beyond where Commissioner Galvin
was looking. At the beginning of 2010 his team might not have
been aware that only four exploration wells would be drilled
(two of which would be delineation wells), and that just one
exploration well would be drilled in 2011. He also didn't know
that the result would be a spike in the price of oil.
SENATOR WIELECHOWSKI said DOR's conclusion just one year ago was
that the investment incentive provisions in ACES were
contributing to increased levels of expenditure. He asked
Commissioner Butcher if he was saying that he had evidence to
the contrary.
COMMISSIONER BUTCHER confirmed that there had been increased
spending since ACES passed, and added that there was already
increased spending before both ACES and PPT passed. He opined
that since the slope was already increasing, it would be
difficult to say that the increase was due to passage of either
tax legislation.
SENATOR WIELECHOWSKI asked if he believes that the $3 billion in
tax credits led to any increased investment or exploration, or
that it should be scrapped.
COMMISSIONER BUTCHER answered the changes made in ACES resulted
in a lot of new companies and smaller independents coming to
Alaska. There are many positive aspects to ACES and it
definitely should not be scrapped. However, the new companies
have indicated ongoing difficulty getting the larger companies
to move from exploration to production as a result of the
progressivity tax. That is the focus of the governor's
legislation.
SENATOR WIELECHOWSKI said he finds it implausible that
exploration companies would come to Alaska and spend huge
amounts of money to buy leases and explore before analyzing the
potential costs, profits and taxes under ACES.
COMMISSIONER BUTCHER suggested he ask the companies specifically
what they look at in those situations. He noted that Savant, for
example, last year testified that they loved the credits, but
had difficulty getting partners to move on to production.
4:11:18 PM
SENATOR WIELECHOWSKI asked if the administration believes that
it is helping the investment climate when it says that Alaska is
closed for business; the tax rates are too high and the state is
uncompetitive.
COMMISSIONER BUTCHER responded the administration is not saying
that Alaska is closed for business. There are many tax credits
that make investment in Alaska attractive, but the
administration believes the tax needs to be adjusted. In part,
this belief is based on conversations the administration has had
with the companies that have come to Alaska or those that would
like to come.
CO-CHAIR PASKVAN asked Commissioner Butcher to address point 6.
COMMISSIONER BUTCHER continued.
6. Tax Administration and Compliance - DOR continues to write
regulations for the new tax system. The last audits under
PPT have been completed and the first audits under ACES are
underway. DOR believes that most of the work that needed to
be done to change from a gross tax to a net tax has been
done, and the expectation is that the audits will be
accelerated thereafter. However, DOR has been hampered in
its tax reporting and compliance efforts by the lack of a
centralized database in which to house and manage the large
volumes of oil and gas data. This slows the process and
limits output.
CO-CHAIR PASKVAN summarized that the state is slow in processing
the data it receives and, in part, that is the reason that DOR
is unable to provide answers as to whether or not the tax
credits are working to promote investment.
COMMISSIONER BUTCHER responded that doesn't help, but it's also
a matter of not having passed regulations that would help to get
more definitive numbers from the industry. He reiterated that he
wasn't aware of that prior to becoming commissioner, but getting
that information is a focus going forward.
CO-CHAIR PASKVAN noted that Senator Joe Thomas had joined the
meeting.
4:15:03 PM
SENATOR WIELECHOWSKI noted that the legislative audit report
found significant issues related to the auditing of ACES, and
asked if he still supported reducing the timeframe to perform
those audits from six years to four years.
COMMISSIONER BUTCHER replied the administration is very
comfortable that the audits could be done in the shorter
timeframe, but leaving it at six years is also acceptable. The
provision addresses the difficulty associated with hiring and
keeping good auditors and, while the situation is better now
than a year ago, it is still an issue.
SENATOR STEVENS asked if it was possible to contract with
independent firms to do the auditing.
COMMISSIONER BUTCHER offered to follow up with specific details
about the times in the last few years that DOR has relied on
contracts.
CO-CHAIR PASKVAN asked what type of industry information was
missing from the DOR database and if those significant holes
should be addressed in statute or regulation.
COMMISSIONER BUTCHER replied DOR doesn't get a detailed
breakdown from industry on capital and operating expenses so as
to know what is going into exploratory versus maintenance work.
However, DOR has the regulatory authority to get more detailed
information, and will probably pursue it after the end of the
legislative session. He noted that the extensive regulation
process that occurred during ACES focused on an open workshop
process that encouraged participation from producers,
legislators and any other interested parties. That same
invitation will go out for the upcoming process, he stated.
4:19:35 PM
MR. TANGEMAN added that there are two issues. First is what
information DOR is getting and how they get it. Second is how to
handle the information. The change from gross tax to net tax
resulted in a huge amount of additional information coming in,
and the existing standalone systems have difficulty keeping up
with the influx. He said it's often necessary to page through
documents by hand to respond to legislative requests for
information.
SENATOR WIELECHOWSKI asked for the timeline for when the
legislature could expect to see the regulations. He reminded the
commissioner that it was more than three years ago that Gaffney,
Cline & Associates highlighted that Alaska didn't have anywhere
near the information that other sovereign jurisdictions had, and
reinforced that point again this year. Their testimony was that
Alaska is handicapped in making decisions about its economic
future because it doesn't have the data necessary to manage its
resource like a landowner.
COMMISSIONER BUTCHER responded that it was a personal priority
and he would like to start the process this summer.
MR. TANGEMAN added that DOR was substantially caught up on the
regulatory work it had done the last several years and was ready
to look at what was needed and getting those additional
regulations in place.
SENATOR MCGUIRE suggested that this was an opportunity to
develop a robust and detailed database that could last for
institutional generations. She opined that Alaska should be the
number one oil and gas jurisdiction in the U.S., and its fiscal
system should be able to move on a dime to respond to needs as
they arise. Data should be readily available to show when and
why adjustments should be made, she stated.
4:25:09 PM
CO-CHAIR PASKVAN asked who authored the January 18, 2011 report.
COMMISSIONER BUTCHER replied it was a joint process that
included work from Bruce Tangeman, Cheryl Nienhuis, most of the
economics team, and himself.
MR. TANGEMAN added that they relied heavily on the DOR petroleum
economists and then put the report together.
CO-CHAIR PASKVAN asked Commissioner Butcher if the report was
put together after he became commissioner designee.
COMMISSIONER BUTCHER replied he had an impact on the report, but
it was already in a preliminary form as it was due 14 days after
he started.
SENATOR STEDMAN commented that the single point audit and the
marked deficiencies caught a lot of attention at the Legislative
Budget and Audit meeting, and that information has since been
released to the public so there are no surprises. He then
highlighted that the FY12 budget did not include a request from
the governor to put the database in place, despite the fact that
legislators are being asked this winter to come to a decision
about the tax system and they need more data points to come to a
proper conclusion. He reported that rather than waiting for the
next budget cycle, the legislature was stepping forward to
address this situation by including about $34.7 million in the
capital budget for the purchase and implementation of that
system. He said there have already been discussions with the
commissioner to identify that amount, so the department won't be
taken by surprise. He emphasized that the legislature will do
everything possible from a policy-making standpoint to ensure
that DOR has the funds available to protect the state's
interest. He stated that he and other policy makers are not
comfortable that the most recent audit was conducted in 2006,
and opined that the administration also would be more
comfortable with a more timely audit.
4:28:47 PM
CO-CHAIR PASKVAN segued to the royalty modification issue, and
asked if DOR performed an economic analysis when it contemplated
a production tax reduction similar to what DNR performs when it
does a royalty reduction.
COMMISSIONER BUTCHER replied he couldn't speak to the DNR
program, but he could say that DOR's process was underway with
both DNR and the governor's office in January when he started as
commissioner. In that process, DOR looked at numbers, talked to
companies and gathered as much information as possible in order
to make the decision to move forward.
CO-CHAIR PASKVAN pointed out that the report on the DNR model
indicates that it describes project cash flows; incorporates
fiscal system attributes including state/federal taxes, state
production tax, and royalty obligations; includes the metrics of
annual and cumulative discounted and undiscounted cash flows;
years to payout net present value, expected monetary value and
internal rate of return on investment as well as state revenues.
He asked if DOR intended to provide any comparable information
to the legislature with respect to a production tax reduction.
COMMISSIONER BUTCHER replied DOR worked with DNR and spent a
great deal of time "tweaking with brackets, with no brackets,
taking a look at what ... the shifts in share would be." He
offered to follow up and show DOR's various models that can be
manipulated to show different scenarios. He reiterated that he
would need to become more familiar with the DNR model before he
could specify both similarities and dissimilarities.
CO-CHAIR PASKVAN asked if the overall debate would be enhanced
if DOR were to perform a similar process to find things like
internal rates of return, expected cash values and years to pay
out.
COMMISSIONER BUTCHER opined that more information is always
beneficial, but there will always be more information that one
could have.
MR. TANGEMAN pointed out that the royalty modification analysis
is done on a field-by-field basis, whereas DOR is looking at a
production tax modification for the state as a whole.
SENATOR STEDMAN asked if DOR would conduct a field-by-field
analysis to set up a fiscal system for a new basin or if the
analysis would cover the entire basin.
MR. TANGEMAN responded the information such as internal rates of
return would be of value, but his understanding was that DOR
doesn't have those details. A lot of the information that
companies base their decisions on is proprietary and limited
with regard to what is shared with the department.
SENATOR STEDMAN observed that rate of return style calculations
are done all over the world, and asked if DOR had ever looked at
those when it considered things like modifying a base tax or
changing progressivity.
COMMISSIONER BUTCHER responded DOR has looked at that sort of
information, but it was very much an estimate and there were so
many differences that it was difficult to make any specific
comparison between Alberta or Nigeria or Alaska, for example.
4:35:16 PM
SENATOR STEDMAN asked if DOR runs calculations to determine
rates of return, present values, and expected monetary values
when it suggests changing the state's fiscal system from 25
percent to 15 percent base tax, for example.
COMMISSIONER BUTCHER responded DOR used all the information it
had when it ran the different analyses, but that kind of
detailed information was limited. He offered his belief that DNR
receives much more detailed information in the royalty program
because companies have to prove whether or not the area would be
economic based on the royalty.
SENATOR STEDMAN pointed out that the state has the ability to
grant royalty relief, and questioned why there wasn't a flood of
royalty relief questions when the royalty ranges from 12.5
percent to 16.5 percent. He explained for the listening audience
that the royalty comes off the gross value coming out of the
ground, so changing it has a huge impact.
COMMISSIONER BUTCHER suggested that Kevin Banks could provide a
more complete answer, but his understanding was that just four
developments considered that the economics of the field hinged
on the royalty. Two of those were turned down and two were
worked out with the department.
SENATOR WIELECHOWSKI stated agreement with the notion that more
information is better, and observed that a problem with the bill
was that it had virtually no information that would cause anyone
to believe that it would lead to extra production or more jobs.
He said we know there was a six percent decline when the tax
rate was zero percent on 75 percent of the fields; that jobs are
at all-time highs, that capital expenditures are at all-time
highs, that operating expenditures are at all-time highs, and
that the North Slope now has twice as many producers. But we
don't know why jobs are being lost; how the incentives are
working; which fields are marginal; which fields will be
incentivized if SB 49 passes; how much more exploration will be
incentivized; which fields meet hurdle rates; if this bill will
cause a single drop of oil to be put into the pipeline; if any
Alaskans will be hired if the bill passes; if a single well will
be drilled if the bill is passed; what the company hurdle rates
are; what their net present value rates are for certain fields;
what the internal rates of return are for certain fields; or how
much profit Exxon makes in this state. He emphasized that the
legislature needs a lot more information in order to make a
decision on what will cost the state from $7-10 billion over the
next five years.
COMMISSIONER BUTCHER responded that oil continues to decline
more than the department's annual revenue forecast, and there
seems to be almost no exploration when oil prices are at
historic highs and boons are going on all over the world.
Companies have come forward and testified that SB 49 will make a
material difference and while there have been no promises DOR
believes that to be the case. He pointed out that there was next
to no information with PPT changing from a gross tax, and then a
year later PPT was changed to ACES. DOR gathers and analyzes the
information it gets and then makes a decision, he stated.
SENATOR STEDMAN highlighted that the FY12 fall forecast had
about $5.5 billion going to the state and $2.4 billion of that
was royalties. He pointed out that it's not necessary to run
through the math model to see that changing the royalty rate
will result in a huge material difference. Obviously, they are
very significant.
4:42:09 PM
COMMISSIONER BUTCHER responded that he didn't intend to convey
that the issue wasn't important. He added that DNR has said that
it is a piece that is more difficult to prove as to whether a
field is economic or not economic.
SENATOR STEDMAN observed that one of the questions is why
industry isn't coming forward and asking for relief, because
requests were made and granted in the past.
MR. TANGEMAN suggested he ask Mr. Banks when DNR can enter a
royalty relief negotiation. He offered his understanding that it
is before a field comes on line, not necessarily after
production starts.
CO-CHAIR WAGONER asked if anyone looked at a carry-forward
credit tied to an increase in production, and the amount of
deduction the governor wants to provide to the legacy field
producers.
COMMISSIONER BUTCHER responded that DOR would be happy to talk
about any issue that would facilitate the governor's goal of
more production. He assured the committee that the governor
would be willing to discuss any beneficial ideas.
CO-CHAIR WAGONER asked if he had information on the number of
well workovers that had been done and the result.
COMMISSIONER BUTCHER replied AOGCC delivered that information to
House Finance several weeks ago and will probably include that
information in their presentation to this committee next week,
but DOR can also provide it.
CO-CHAIR PASKVAN thanked Commissioner Butcher and Mr. Tangeman
and again emphasized the importance of modeling and a detailed
analysis to determine if modifying the lease terms for an
applicant would or would not result in the state giving up
revenue for no reason.
4:46:51 PM
KEVIN BANKS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), stated that the issue is royalty
modification, and that is governed by AS 38.05.180(j).
He explained that the DNR commissioner has always had the
statutory authority for royalty modification, but until about
1996 it could only be used for fields that fell into two
categories: 1) to prolong the economic life of a field that was
about to be shut in because the operating costs had exceeded the
operating revenues, or 2) to allow lessees to reestablish
production from a shut-in field. In both cases, royalty could be
reduced to as little as three percent.
A third category was added in 1996 to the authority of the
commissioner to relieve royalty for fields that were not yet in
production. To qualify, the field had to be sufficiently
delineated to satisfy the commissioner, it had to be a field
that would not otherwise be economically feasible, and the
royalty rate could not be reduced below five percent.
MR. BANKS said the important discussion that took place in those
days was that tinkering with the royalty modification statute
meant the legislature was tinkering with contracts that had been
let competitively. In tinkering with the statute, the state
arguably was pushing up against the doctrine of material change
to a competitively let contract. The legislature was also
concerned that the royalty modification be both efficient and
effective. Effective means that it actually changes the behavior
of the applicant, and they go into production when they
otherwise would not. Efficient means the state would not give
away anymore royalty relief than was necessary.
4:50:56 PM
MR. BANKS said the legislation stipulated that the information
provided to the commissioner would make a clear and convincing
showing that relief was in the best interest of the state.
Because of the complexity of the analysis, DNR has the ability
to expedite the process by selecting a contractor to do the work
and the lessee pays for it.
He explained that DNR offers a relief mechanism on a sliding
scale based on price, but there is some latitude to tailor it to
the situation at hand. In addition to price, the relief can be
conditioned on production rates, ultimate recovery, capital
expenditures or operating expenditures. Finally, the legislature
can review the analysis through the Legislative Budget and Audit
Committee.
4:52:33 PM
MR. BANKS highlighted the following:
· BP applied for royalty relief for Milne Point in 1995.
· UNOCAL in 1997 applied for royalty relief for ten platforms
in Cook Inlet, which didn't fit any of the three
categories. The legislature eventually amended the statute
to allow a decrease in royalty from platform production.
Depending on the rate of production, it could be as low as
five percent.
· Phillips in 1999 applied for royalty relief for the Tyonek
platform to develop the Tyonek Deep under the sufficiently
delineated new field category, but the application was
withdrawn when the company merged with Conoco.
· Pioneer in 2005 applied for and received royalty relief for
the Oooguruk unit.
· E&I in 2007 applied for and received royalty relief for the
Nakiachuk unit. An earlier application by Kerr McGee for
that same unit was denied, in part because the cost
structure showed that royalty relief wasn't necessary. The
E&I application had much better information about the costs
and the royalty relief was structured around a minimum
price protection, rather than an outright five percent
royalty relief. The Nakiachuk sliding scale royalty doesn't
kick in until the price falls below $42.64.
· Chevron applied for royalty relief at the Ivan River and
Stump Lake units in Cook Inlet, but the application was
withdrawn before a full analysis was done.
MR. BANKS mentioned an earlier comment about the huge amount of
royalty that is collected as part of the state's revenue, and
submitted that unless some of that production is in the category
of "about to be shut in," there isn't a royalty relief mechanism
in statute that can have any effect on that production.
SENATOR STEDMAN clarified that his point was more broadly
directed. He then asked if a company could still ask for royalty
relief given the opportunity for a 40 percent exploratory
credit.
MR. BANKS answered yes. He explained that DNR applied the tax
credits under ACES when evaluating the Nakiachuk royalty relief
application, and ended up awarding royalty relief, but Nakiachuk
was different than Oooguruk in that the behavioral mechanism for
the Nakiachuk application was to provide some insurance for low
price situations.
SENATOR STEDMAN asked if he should conclude that if the
situation was in front of DNR today and the price of oil was
$100/barrel, royalty relief would not be granted because the
company's returns would be fairly attractive.
MR. BANKS replied they probably wouldn't qualify for royalty
relief if costs and production rates were the same, and the only
difference was the $100 price of oil.
4:59:30 PM
SENATOR WIELECHOWSKI asked about the merit of having a provision
in law to provide production tax relief, much the same as with
royalty relief. DNR would look at the company's books to
evaluate the economics in terms of meeting hurdle rates, net
present value and internal rates of return.
MR. BANKS reiterated that royalty relief is a rather difficult
process simply because of the lengthy analysis that DNR does.
Second, he said, the applicant has to be sitting on a prospect
that is sufficiently delineated to provide a clear and
convincing showing that relief is needed, and it takes a fair
amount of investment to get to that point. Third, it's something
of a deterrent in terms of new exploration and new activities,
in part because nobody is betting on failure and the need to
request royalty relief. Finally, there was the concern about how
different lessees would be treated under the rules of royalty
relief. The definition of royalty relief was tightly woven into
the legislation so there would never be a situation where a
commissioner could grant relief to one applicant and deny it to
another similarly situated applicant.
CO-CHAIR PASKVAN thanked Mr. Banks and commented that production
tax reduction was an interesting concept, and might be a process
that defines best interests in a way that gets positive results
for both the state and the company. [SB 49 was held in
committee.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 49_Back-Up_Letter to Governor Parnell re ACES Status Report_January 14_2010.pdf |
SRES 4/1/2011 3:30:00 PM |
SB 49 |
| SB 49_Back-Up_ACES Status Report_January 14_2010.pdf |
SRES 4/1/2011 3:30:00 PM |
SB 49 |
| SB 49_Back-Up_DOR Excerpt from SOA Single Audit for the FY Ended June 30 2009.pdf |
SRES 4/1/2011 3:30:00 PM |
SB 49 |
| SB 49_Back-Up_Leg Research Reoprt 11 245.pdf |
SRES 4/1/2011 3:30:00 PM |
SB 49 |
| SB 49_Back-Up_Ltr to Sen Wagoner RE OG Leases.pdf |
SRES 4/1/2011 3:30:00 PM |
SB 49 |
| SB 49_Back-Up_Nikaitchuq_Final_Findings_and_Determination.pdf |
SRES 4/1/2011 3:30:00 PM |
SB 49 |
| SB 49_Back-Up_DOR 2011 OG Tax Report 1-18-2011.pdf |
SRES 4/1/2011 3:30:00 PM |
SB 49 |
| SB 49_DOR ACES Report Slide Show.pdf |
SRES 4/1/2011 3:30:00 PM |
SB 49 |