Legislature(2011 - 2012)SENATE FINANCE 532

04/19/2012 03:30 PM Senate RESOURCES


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03:34:28 PM Start
03:35:36 PM SB3001
05:03:10 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ SB3001 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
Introduction of the Legislation and Fiscal Note
Presentation by Commissioner Bryan Butcher,
Department of Revenue
               SB 3001-OIL AND GAS PRODUCTION TAX                                                                           
                                                                                                                                
3:35:36 PM                                                                                                                    
CO-CHAIR  PASKVAN  announced that  the  first  order of  business                                                               
would   be  a   presentation  by   the  Department   of  Revenue,                                                               
Commissioner Bryan Butcher,  who would introduce SB  3001 and the                                                               
fiscal note. He said that the  bill was introduced at the request                                                               
of the  governor. He noted that  yesterday he had made  a request                                                               
for modeling or analysis or evaluation  of the bill, and that the                                                               
committee had only recently received today's presentation.                                                                      
                                                                                                                                
3:36:40 PM                                                                                                                    
BRYAN  BUTCHER,   Commissioner,  Department  of   Revenue  (DOR),                                                               
apologized  for the  lateness in  providing the  presentation. He                                                               
began  by  stating   the  goals  of  the   bill:  to  incentivize                                                               
production on the  North Slope, both within  and outside existing                                                               
units; to  generate additional jobs  and activity for  the Alaska                                                               
economy,  to  build on  work  already  undertaken in  legislative                                                               
committees  during  the  regular session,  to  maintain  existing                                                               
structure  of ACES,  with slight  modifications, and  to maintain                                                               
alignment of working  interest owners by not  tying incentives to                                                               
individual companies to fields as a whole.                                                                                      
                                                                                                                                
COMMISSIONER  BUTCHER addressed  the five  key provisions  of the                                                               
bill. He  termed it a  hybrid bill. The  first provision is  a 30                                                               
percent  gross revenue  exclusion  for calculating  base tax  and                                                               
progressive tax  for qualifying new  North Slope fields.  He said                                                               
that language is  identical to the language the Senate  had in HB
276.  The  second  provision  is   a  40  percent  gross  revenue                                                               
exclusion for  calculating progressive tax for  other North Slope                                                               
fields. That  is the tax structure  taken from the new  fields in                                                               
HB 276 and applied to the rest of the North Slope.                                                                              
                                                                                                                                
CO-CHAIR  PASKVAN asked  if  there was  an  advisor, economic  or                                                               
otherwise, that  DOR has  relied upon to  determine the  rate for                                                               
existing fields.                                                                                                                
                                                                                                                                
COMMISSIONER BUTCHER  said no.  The work that  has been  done has                                                               
been between the governor and DOR.                                                                                              
                                                                                                                                
CO-CHAIR PASKVAN  asked if there  will be an economic  advisor to                                                               
present information to the committee.                                                                                           
                                                                                                                                
COMMISSIONER BUTCHER replied that there  may be, depending on the                                                               
topic. He explained that a  lot of the department's understanding                                                               
of  these provisions  is  as  a result  of  discussions with  the                                                               
Senate's consultant, PFC Energy.                                                                                                
                                                                                                                                
CO-CHAIR PASKVAN concluded that  the administration does not have                                                               
an  economic advisor  to present  components of  the bill  to the                                                               
committee.                                                                                                                      
                                                                                                                                
COMMISSIONER  BUTCHER reiterated  that it  depends on  the topic.                                                               
The Department of Revenue will speak to most of the bill.                                                                       
                                                                                                                                
CO-CHAIR PASKVAN asked who the advisor would be.                                                                                
                                                                                                                                
COMMITTIONER  BUTCHER  said  it   would  be  Gaffney,  Cline  and                                                               
Associates.                                                                                                                     
                                                                                                                                
CO-CHAIR PASKVAN asked if Gaffney,  Cline could be made available                                                               
to the Senate Resources Committee.                                                                                              
                                                                                                                                
COMMISSION BUTCHER thought it might be a possibility.                                                                           
                                                                                                                                
3:40:40 PM                                                                                                                    
SENATOR FRENCH asked if DOR has had access to the PFC Model.                                                                    
                                                                                                                                
COMMISSIONER BUTCHER said they had.                                                                                             
                                                                                                                                
SENATOR FRENCH  asked if DOR  was able to put  their calculations                                                               
into the PFC Model.                                                                                                             
                                                                                                                                
COMMISSIONER BUTCHER said yes.                                                                                                  
                                                                                                                                
SENATOR FRENCH asked  which members of the  legislature have that                                                               
model.                                                                                                                          
                                                                                                                                
COMMISSIONER BUTCHER did not know.                                                                                              
                                                                                                                                
SENATOR FRENCH repeated the question  regarding if DOR has access                                                               
to the PFC Model.                                                                                                               
                                                                                                                                
COMMISSIONER BUTCHER said yes.                                                                                                  
                                                                                                                                
SENATOR STEDMAN  commented that PFC  Energy is the  consultant to                                                               
Legislative Budget and Audit and  was the consultant hired by the                                                               
legislature. It is common for  the consultants of the legislature                                                               
to work  with the administration  and with industry on  what data                                                               
goes into  their models  and what  comes out  for the  purpose of                                                               
policy discussions.  However, he stated  that he was  confused on                                                               
the  interaction between  the administration  and  PFC Energy  on                                                               
this  bill.   He  requested  clarification  about   the  type  of                                                               
interaction the administration  had with PFC Energy.  He asked if                                                               
PFC modeled SB 3001 for the administration.                                                                                     
                                                                                                                                
COMMISSIONER BUTCHER  explained that PFC  Energy has not  run any                                                               
models  for  DOR.  They  just   provided  information  for  DOR's                                                               
economists so the outputs would be the same.                                                                                    
                                                                                                                                
3:43:05 PM                                                                                                                    
BRUCE  TANGEMAN,  Deputy  Commissioner,  Department  of  Revenue,                                                               
provided  information on  the  process of  making  the model.  He                                                               
added that  it was not DOR's  intent to present PFC's  model, but                                                               
rather to align input and output  of the models. PFC and DOR will                                                               
each be presenting their models.                                                                                                
                                                                                                                                
SENATOR STEDMAN  said that was  a little bit different  than what                                                               
he  had heard  earlier.  He  said he  understood  the process  of                                                               
sharing data. He wanted to  know what interaction the legislative                                                               
consultants  have  had  with the  administration  on  the  credit                                                               
issues.                                                                                                                         
                                                                                                                                
COMMISSIONER BUTCHER  said there has been  no interaction between                                                               
PFC  and the  Department of  Revenue when  crafting the  bill. He                                                               
explained how  the provisions were  developed. He  listed various                                                               
ways a more  meaningful tax reduction could be  attained. He said                                                               
HB 110 was the administration's attempt  to do so, but it was not                                                               
the only way.                                                                                                                   
                                                                                                                                
3:46:07 PM                                                                                                                    
CO-CHAIR PASKVAN asked if it was  a fair statement to say that no                                                               
economic advisor  has provided information to  DOR in determining                                                               
the 40 percent allowance.                                                                                                       
                                                                                                                                
COMMISSIONER  BUTCHER said  the economists  in DOR  provided that                                                               
determination.                                                                                                                  
                                                                                                                                
CO-CHAIR PASKVAN  asked what  government take  the administration                                                               
believes is a reasonable range for existing fields.                                                                             
                                                                                                                                
COMMISSIONER BUTCHER  explained that the presentation  would show                                                               
that. The amount  is in the general vicinity of  HB 110's numbers                                                               
and was  a result of work  done by DOR along  with the governor's                                                               
office.                                                                                                                         
                                                                                                                                
CO-CHAIR   PASKVAN  asked   if  any   advisor  has   advised  the                                                               
administration about what a reasonable  range for government take                                                               
is for existing fields.                                                                                                         
                                                                                                                                
COMMISSIONER  BUTCHER listed  a  number of  consultants, such  as                                                               
Pedro Van  Meurs, Gaffney  & Cline,  and others,  as well  as the                                                               
legislature's  consultants, Mr.  Marks,  Mr.  Dickinson, and  PFC                                                               
Energy.   He   stated   that  no   one   consultant   made   that                                                               
determination.                                                                                                                  
                                                                                                                                
CO-CHAIR PASKVAN asked  if the administration believes  that a 70                                                               
percent  to  75  percent  government take,  including  state  and                                                               
federal, is a reasonable range for existing fields.                                                                             
                                                                                                                                
COMMISSIONR BUTCHER explained that it  was in the general area of                                                               
one-third each.                                                                                                                 
                                                                                                                                
CO-CHAIR PASKVAN requested a yes or no answer.                                                                                  
                                                                                                                                
COMMISSIONER BUTCHER replied that there  is no "yes or no answer"                                                               
unless the dollar amount is known.  He gave an example 70 percent                                                               
to 75  percent government take at  $200 oil and pointed  out that                                                               
is is considerably different than at $60 oil.                                                                                   
                                                                                                                                
3:48:54 PM                                                                                                                    
CHAIR WIELECHOWSKI  asked about  a legislative contract  with PFC                                                               
Energy for  $750,000, which was  supposed to provide a  model. He                                                               
questioned if such a model had been provided.                                                                                   
                                                                                                                                
COMMISSIONER BUTCHER  replied that  he was not  aware if  PFC had                                                               
made that available to the legislature.                                                                                         
                                                                                                                                
CHAIR WIELECHOWSKI asked who the consultant was for SB 3001.                                                                    
                                                                                                                                
COMMISSIONER BUTCHER  replied that  different pieces of  the bill                                                               
required different  consultants. He gave as  an example provision                                                               
four, extending the  40 percent well lease  expenditure credit to                                                               
the  North  Slope,   which  was  developed  prior   to  the  2010                                                               
legislative session. He did not know who the consultant was.                                                                    
                                                                                                                                
CHAIR WIELECHOWSKI  asked if  Commissioner Butcher  had consulted                                                               
with the oil industry to see if they would support the bill.                                                                    
                                                                                                                                
COMMISSIONER BUTCHER reported that  the department had not talked                                                               
to any individual companies.                                                                                                    
                                                                                                                                
CO-CHAIR PASKVAN asked if DOR had the PFC Energy model in hand.                                                                 
                                                                                                                                
COMMISSIONER BUTCHER did  not know. He added  that the department                                                               
did have a version of the PFC model that was run for validation.                                                                
                                                                                                                                
3:51:19 PM                                                                                                                    
SENATOR  FRENCH stated  that he  was extremely  unhappy that  the                                                               
department  had received  the  model before  the  Senate did.  He                                                               
protested  that the  consultant  the  legislature hired  provided                                                               
information to the department first.                                                                                            
                                                                                                                                
COMMISSIONER BUTCHER  responded that he  had not seen  the model.                                                               
He explained  that the department  took what the  Senate prepared                                                               
regarding new fields and used it to run the model.                                                                              
                                                                                                                                
CHAIR WIELECHOWSKI  said he was  extremely disappointed  with PFC                                                               
Energy  and had  lost confidence  in  its ability  to advise  the                                                               
legislature.                                                                                                                    
                                                                                                                                
CO-CHAIR  PASKVAN  turned to  the  advice  from Pedro  Van  Meurs                                                               
regarding  reasonable  government  take,   in  the  range  of  75                                                               
percent,  for existing  fields. He  asked if  the department  was                                                               
accepting or rejecting that advice.                                                                                             
                                                                                                                                
COMMISSIONER BUTCHER said he disagreed with that advice.                                                                        
                                                                                                                                
CO-CHAIR PASKVAN asked how much he disagreed.                                                                                   
                                                                                                                                
COMMISSIONER  BUTCHER  offered  to  provide  that  breakdown  but                                                               
stated that there  was no magic percent. He gave  an example of a                                                               
consultant in Albert  giving advice on changing  their version of                                                               
ACES.                                                                                                                           
                                                                                                                                
CO-CHAIR  PASKVAN  asked  if  any   consultant  had  advised  the                                                               
department that  70 percent to  75 percent is not  reasonable. He                                                               
emphasized that  the legislature's consultant maintained  that it                                                               
was a reasonable rate.                                                                                                          
                                                                                                                                
COMMISSIONER  BUTCHER   replied  that   most  of   the  advisors,                                                               
including presentations  by PFC Energy,  have shown Alaska  to be                                                               
among the highest tax regimes in  North America and in the world.                                                               
He maintained that  that designation was playing a  major role in                                                               
Alaska's not receiving major investment.  He said that Russia has                                                               
worked to  reduce their  extraction and export  taxes to  a level                                                               
below Alaska's taxes, and hoped to  receive up to $500 billion in                                                               
investments as a result.                                                                                                        
                                                                                                                                
3:56:05 PM                                                                                                                    
SENATOR  STEDMAN  commented  that the  state's  ranking  globally                                                               
changes when the price of oil  changes. The fiscal terms that the                                                               
state operates  under are  only half of  the equation;  the other                                                               
half is  the prospectivity of the  basin - how much  oil resource                                                               
is available. He  maintained that it is more  complex than saying                                                               
Alaska  is one  of  the  highest tax  regimes  in the  organized,                                                               
economically developed countries.                                                                                               
                                                                                                                                
CO-CHAIR  PASKVAN  reiterated  the   question  regarding  if  any                                                               
consultant  has said  that 70  percent to  75 percent  government                                                               
take in existing fields is unreasonable.                                                                                        
                                                                                                                                
MR. TANGEMAN opined  that the number the  department should focus                                                               
on is  the number that  brings more  investment to the  state. He                                                               
referred to capital  investment in 2010 to 2012 and  pointed to a                                                               
downward trend.                                                                                                                 
                                                                                                                                
CO-CHAIR  PASKVAN  argued  that  the charts  the  department  has                                                               
prepared regarding capital expenditures  show an increase through                                                               
2016. He asked Commissioner Butcher if that was correct.                                                                        
                                                                                                                                
COMMISSIONER  BUTCHER  replied  that  it  is  as  accurate  as  a                                                               
forecast can be.                                                                                                                
                                                                                                                                
CO-CHAIR PASKVAN said  those numbers had been relied  upon by the                                                               
department in recent presentations.                                                                                             
                                                                                                                                
COMMISSIONER BUTCHER said that was correct.                                                                                     
                                                                                                                                
SENATOR  FRENCH  brought up  the  issue  of the  legislature  not                                                               
having access to  capital investment numbers by  the industry. He                                                               
asked  if  the  department  has   access  to  those  confidential                                                               
numbers.                                                                                                                        
                                                                                                                                
COMMISSIONER BUTCHER said no.                                                                                                   
                                                                                                                                
SENATOR FRENCH  asked if Commissioner  Butcher ever  worried that                                                               
the  state  might  be  getting "squeezed  by  the  industry  with                                                               
respect to investment."                                                                                                         
                                                                                                                                
COMMISSIONER BUTCHER  agreed that was  a concern, but  that every                                                               
factor must be weighed.                                                                                                         
                                                                                                                                
SENATOR  FRENCH  restated  the   question  to  ask  whether  it's                                                               
possible  that   the  industry  would   look  at   their  capital                                                               
expenditures from last year and decide  to spend less in order to                                                               
benefit from a big tax break.                                                                                                   
                                                                                                                                
COMMISSIONER BUTCHER did  not think there was  a conspiracy among                                                               
oil companies to do something like that.                                                                                        
                                                                                                                                
SENATOR FRENCH  said he did  was not suggesting a  conspiracy. He                                                               
restated  his question  to ask  if one  company might  reduce its                                                               
capital  expenditures in  order to  convince the  state to  lower                                                               
taxes.                                                                                                                          
                                                                                                                                
COMMISSIONER BUTCHER  said he  could not  imagine an  oil company                                                               
doing that.                                                                                                                     
                                                                                                                                
4:02:21 PM                                                                                                                    
SENATOR FRENCH  reported that BP  did under invest in  their flow                                                               
lines to  the point of  a criminal offense,  so it is  known that                                                               
oil companies  will under invest  from time  to time. He  read an                                                               
email from  a retired North Slope  worker which said that  it was                                                               
absurd to think  that the oil companies are going  to do anything                                                               
other than what they have  already planned, regardless of the tax                                                               
rates.  He reported  being in  meetings where  the oil  companies                                                               
have  come  very  close  to admitting  that  they  are  currently                                                               
bluffing for better tax treatment.                                                                                              
                                                                                                                                
COMMISSIONER  BUTCHER related  that he  did not  have any  inside                                                               
information.                                                                                                                    
                                                                                                                                
MR. TANGEMAN  added that he  could not imagine a  situation where                                                               
that discussion could take place, due to shareholder oversight.                                                                 
                                                                                                                                
SENATOR STEDMAN  expressed frustration and recalled  a discussion                                                               
by  the  department  on   capital  expenditures.  The  department                                                               
reported  capital  expenditure  decline  when it  was,  in  fact,                                                               
increasing. He maintained that the  same thing is happening today                                                               
and it  is hard to  return to "re-plow  old ground." He  said the                                                               
legislature should be  able to rely on  the information presented                                                               
by DOR. He stated he was "gun shy."                                                                                             
                                                                                                                                
CO-CHAIR PASKVAN agreed  with Senator Stedman. He  stated that it                                                               
is  startling   to  receive   information  again   that  directly                                                               
contradicts other statements from the department.                                                                               
                                                                                                                                
4:06:06 PM                                                                                                                    
MR. TANGEMAN  explained that the  department did  present numbers                                                               
that show  an incline in  capital expenditures  for FY 2010  - FY                                                               
2012.                                                                                                                           
                                                                                                                                
CO-CHAIR  PASKVAN  asked if  there  was  disagreement within  DOR                                                               
regarding those numbers.                                                                                                        
                                                                                                                                
MR. TANGEMAN said absolutely not.                                                                                               
                                                                                                                                
SENATOR STEDMAN inquired if the  discussion today is that capital                                                               
expenditures are going to decline.                                                                                              
                                                                                                                                
MR.  TANGEMAN  referred  to  FY  2010 -  FY  2012  and  said  the                                                               
department  provided  charts that  show  an  increase in  capital                                                               
expenditures in  the forecast. The  production forecast  shows 50                                                               
percent of oil produced will be from new oil.                                                                                   
                                                                                                                                
SENATOR  STEDMAN pointed  out that  the forecast  for FY  2015 is                                                               
$3.890  billion and  it is  currently  at $3  billion. He  voiced                                                               
concern about sound  bites by some legislators  that are opposite                                                               
of this forecast. He inquired  if forecast numbers were submitted                                                               
twice a year to the department.                                                                                                 
                                                                                                                                
MR. TANGEMAN  reported on a  fall forecast and a  spring forecast                                                               
by DOR.                                                                                                                         
                                                                                                                                
SENATOR STEDMAN  recalled testimony  from the industry  that they                                                               
were comfortable with their  forecasts and expenditures delivered                                                               
to the department,  after the question was asked  of the industry                                                               
whether or  not there was  a directional change between  when the                                                               
information was submitted to the department and a month ago.                                                                    
                                                                                                                                
SENATOR WIELECHOWSKI  shared in that recollection.  He understood                                                               
that capital  expenditures have increased  to record  highs every                                                               
year since ACES  was instigated. If that is not  true, he said he                                                               
wanted to  know where the decline  has been and what  fields have                                                               
been projected  to increase, but  didn't, and what  projects have                                                               
been projected to increase, but  didn't. He requested an economic                                                               
analysis  of  each decline,  because  companies  have a  duty  to                                                               
produce under the terms of their leases.                                                                                        
                                                                                                                                
MR. TANGEMAN  said Senator Wielechowski  was correct in  that the                                                               
companies have a duty to  produce; however, there is a difference                                                               
between duty  to produce  and duty to  invest. The  department is                                                               
looking   for  additional   investment  in   order  to   increase                                                               
production. There are incredible  investments going on outside of                                                               
Alaska,  which  is  capital  the  department  will  go  after  by                                                               
lowering taxes.  The department wants  companies to  exceed their                                                               
duty to produce by making  a more favorable investment climate in                                                               
the state by lowering taxes.                                                                                                    
                                                                                                                                
4:11:55 PM                                                                                                                    
SENATOR WIELECHOWSKI disagreed that the  duty to produce and duty                                                               
to invest are different. He  maintained that the administration's                                                               
belief that companies  do not have a duty to  invest is doing the                                                               
state a disservice and putting it  at risk. He opined that it was                                                               
not legally  accurate. He also wanted  to know of any  project or                                                               
field  that is  not economic  under  ACES and  that would  become                                                               
economic under SB 3001.                                                                                                         
                                                                                                                                
COMMISSIONER  BUTCHER  said those  are  questions  best asked  to                                                               
individual companies. He hoped the  companies could provide their                                                               
insight on the bill.                                                                                                            
                                                                                                                                
SENATOR  WIELECHOWSKI  pointed  out   that  the  duty  to  manage                                                               
Alaska's resource  belongs to the  state of Alaska, and  it's not                                                               
up  to the  industry  to  determine what  is  economic, it's  the                                                               
state's job and the department needs  to figure it out. The state                                                               
can't push  billions of dollars  across the table  without having                                                               
any  idea  if projects  are  economic  or  not. If  projects  are                                                               
economic, there is an obligation  to produce and to develop. That                                                               
determination should not be left  up to the oil industry, because                                                               
that would be turning the state's sovereignty over to them.                                                                     
                                                                                                                                
COMMISSIONER  BUTCHER  maintained that  DOR  does  not have  that                                                               
information;  the   Department  of  Natural  Resources   and  the                                                               
companies would have information about what is economic or not.                                                                 
                                                                                                                                
SENATOR STEDMAN  noted previously during  similarly-related major                                                               
legislation,  the administration  had consultants  to provide  an                                                               
economic  analysis on  different field  sizes. He  asked if  that                                                               
would  be done  for this  bill  regarding the  legacy fields.  He                                                               
suggested that  Gaffney Cline had done  that in the past  and had                                                               
provided  an  updated  analysis during  the  regular  legislative                                                               
session,  including capital  costs, current  oil prices,  and net                                                               
present values.                                                                                                                 
                                                                                                                                
COMMISSIONER BUTCHER  replied that the department  would be happy                                                               
to do that.                                                                                                                     
                                                                                                                                
CO-CHAIR PASKVAN asked who would be the advisor to do so.                                                                       
                                                                                                                                
COMMISSIONER  BUTCHER reported  that it  would be  the department                                                               
and Gaffney Cline, depending on the issue.                                                                                      
                                                                                                                                
CO-CHAIR  PASKVAN  suggested  that   the  administration  has  no                                                               
intention of providing  an advisor to the  committee for economic                                                               
information.                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER offered to do that.                                                                                        
                                                                                                                                
CO-CHAIR  PASKVAN  asked if  the  30  percent exemption  for  new                                                               
fields was reasonable.                                                                                                          
                                                                                                                                
COMMISSIONER BUTCHER said yes.                                                                                                  
                                                                                                                                
CO-CHAIR PASKVAN  described those  who would  be exempted  as the                                                               
areas  outside  the  legacy  fields  that  don't  have  roads  or                                                               
pipelines or treatment facilities.                                                                                              
                                                                                                                                
COMMISSIONER BUTCHER agreed.                                                                                                    
                                                                                                                                
CO-CHAIR PASKVAN  asked why  there would  be a  greater exemption                                                               
for the legacy fields rather than those without infrastructure.                                                                 
                                                                                                                                
COMMISSIONER BUTCHER  clarified that there is  a lesser exemption                                                               
for legacy fields.                                                                                                              
                                                                                                                                
MR. TANGEMAN  explained how the  exemptions were applied.  The 30                                                               
percent  exemption   is  applied  to   the  base  rate   and  the                                                               
progressivity rate,  whereas the 40 percent  exemption is applied                                                               
only to the progressivity rate.                                                                                                 
                                                                                                                                
4:18:20 PM                                                                                                                    
CO-CHAIR PASKVAN noted  that the governor's letter  had no fiscal                                                               
impact at $110  per barrel in FY  12 and FY 13. He  pointed out a                                                               
negative fiscal  impact to the state  of about a $1.5  billion at                                                               
$110 per barrel in the bill.                                                                                                    
                                                                                                                                
MR. TANGEMAN replied  that under the scenario if SB  3001 were to                                                               
pass  and no  new  production  was brought  on  line, the  fiscal                                                               
impact would  be a negative  $1.5 billion. That figure  was based                                                               
on the Revenue Sources Book  forecast. He restated the governor's                                                               
goal, which is  to make a meaningful change to  the tax regime in                                                               
order to spur investment.                                                                                                       
                                                                                                                                
SENATOR FRENCH  recalled the first Resource  Committee hearing of                                                               
the session  when he pointed out  that it was hard  to change oil                                                               
taxes. He asked if Commissioner Butcher agreed.                                                                                 
                                                                                                                                
COMMISSIONER BUTCHER agreed.                                                                                                    
                                                                                                                                
SENATOR FRENCH  suggested that  it is far  harder to  raise taxes                                                               
than it  is to lower  them. He opined  that it was  unlikely that                                                               
oil taxes would  be lowered in the face of  industry inaction. He                                                               
asked why  oil companies didn't  have to  earn the tax  break. He                                                               
related  that the  state has  been involved  in the  oil industry                                                               
since before statehood.  He suggested that the state  and the oil                                                               
industry become partners with mutually enforceable obligations.                                                                 
                                                                                                                                
COMMISSIONER BUTCHER  opined that  if taxes  are lowered  and the                                                               
oil companies  don't do what  they say they  are going to  do, it                                                               
will be far  easier to raise taxes than it  would be under normal                                                               
circumstances. He suggested that current taxes are high.                                                                        
                                                                                                                                
CO-CHAIR  PASKVAN asked  if the  commissioner  knew the  existing                                                               
fields' net  present value, internal  rates of return,  and other                                                               
core financial information under SB 3001.                                                                                       
                                                                                                                                
COMMISSIONER BUTCHER said he did not know that information.                                                                     
                                                                                                                                
CO-CHAIR PASKVAN asked if that  was important information to have                                                               
before considering a tax change.                                                                                                
                                                                                                                                
COMMISSIONER BUTCHER said it was.                                                                                               
                                                                                                                                
CO-CHAIR PASKVAN  asked why the administration's  consultants are                                                               
not  providing  that  information.  He  suggested  it  was  DOR's                                                               
responsibility to provide that information.                                                                                     
                                                                                                                                
COMMISSIONER BUTCHER  related this was  the first chance  DOR has                                                               
had to  present to the committee  since 2011. He offered  to work                                                               
with the committee  on providing that information.  He noted that                                                               
the   DOR's  economists   agree,  in   general,  with   what  the                                                               
legislature's consultants have been saying.                                                                                     
                                                                                                                                
SENATOR WIELECHOWSKI  discussed a  model from Gaffney  Cline that                                                               
the  administration used  during  ACES which  showed  at $80  per                                                               
barrel in Prudhoe  Bay, assuming CAPEX increases  at 300 percent,                                                               
an internal  rate of return  of 123  percent. He wondered  if the                                                               
legislature could have copy of that model.                                                                                      
                                                                                                                                
COMMISSIONER BUTCHER said he would check and see.                                                                               
                                                                                                                                
4:25:24 PM                                                                                                                    
SENATOR  STEDMAN provided  an  estimation for  FY  2013 of  gross                                                               
stock just  under $23 billion in  the "oil patch," with  costs of                                                               
about $7.5 billion,  and royalties of about  $3 billion, yielding                                                               
a total  of $11  billion. He  suggested when  discussing economic                                                               
starvation it be thought of "in  scale." He maintained there is a                                                               
difference   between   existing    production   and   incremental                                                               
production in the legacy fields.                                                                                                
                                                                                                                                
He  requested  an  economic analysis  by  the  administration  of                                                               
incremental  production, capital  costs being  at risk  under the                                                               
current tax  structure, and how  the tax structure would  need to                                                               
change in order to get  incremental production up. He opined that                                                               
would be  an easier  discussion than  dealing with  legacy fields                                                               
that will continue to produce  regardless of what the legislature                                                               
does.  He reminded  the committee  that  previous testimony  from                                                               
Exxon stated that  they would do in-field drilling  in the legacy                                                               
fields  because   it  is  profitable,  regardless   of  what  the                                                               
legislature does. He suggested separating the two discussions.                                                                  
                                                                                                                                
COMMISSIONER  BUTCHER stressed  the  he was  not suggesting  that                                                               
companies were experiencing economic  starvation, rather that the                                                               
administration was  looking for  ways to  make the  economics for                                                               
marginal  fields and  in-field  fields, more  economic and  leave                                                               
less oil in the ground.                                                                                                         
                                                                                                                                
MR.   TANGEMAN  addressed   Senator  Wielechowski's   comment  on                                                               
modeling during  the ACES discussion  that showed  certain fields                                                               
economic at  $60 or $80.  He pointed out  that oil is  $60 higher                                                               
now  and  there  are  more  fields  that  are  economic,  but  he                                                               
questioned  if   they  were   competitive.  He   debated  Senator                                                               
Wielechowski's comment  that "it  is the state's  job to  set the                                                               
rate."  He  questioned  what  the  economic  threshold  was,  and                                                               
stressed the importance of Alaska's having a competitive rate.                                                                  
                                                                                                                                
SENATOR STEDMAN maintained that the  rate depends on the price of                                                               
oil or the economic environment.  He stated that the conversation                                                               
must be cognizant of the  public's interest and how they perceive                                                               
this  issue. It  is more  accurate to  say that  the state  has a                                                               
fiscal  system that  is  extremely "elastic"  and  as oil  prices                                                               
advance,  it  puts  Alaska at  a  competitive  disadvantage.  The                                                               
question is "at what point does the adjustment need to be made."                                                                
                                                                                                                                
COMMISSIONER BUTCHER  agreed. High  oil prices were  not expected                                                               
when ACES was implemented.                                                                                                      
                                                                                                                                
CO-CHAIR  PASKVAN asked  if there  is a  target internal  rate of                                                               
return that the administration is trying to achieve.                                                                            
                                                                                                                                
COMMISSIONER BUTCHER  said no. The administration  is focusing on                                                               
what would  make Alaska more  competitive. Even with  the passage                                                               
of  SB 3001,  Alaska  would  still be  among  the most  expensive                                                               
producing countries.  Companies reported  that HB 110  would have                                                               
made a  difference and  resulted in billions  of dollars  more in                                                               
investment. The administration is aiming  for a tax level that is                                                               
more reasonable and meaningful and would bring more investment.                                                                 
                                                                                                                                
CO-CHAIR PASKVAN asked  what the current internal  rate of return                                                               
is for production.                                                                                                              
                                                                                                                                
MR.  TANGEMAN asked  if  Co-Chair Paskvan  meant  actual rate  of                                                               
return.  If so,  he said  it would  be company  specific and  the                                                               
administration is not privy to that kind of information.                                                                        
                                                                                                                                
CO-CHAIR PASKVAN restated  his question to say,  "With respect to                                                               
existing  production,  are  you   trying  to  achieve  a  greater                                                               
internal rate of return than currently exists."                                                                                 
                                                                                                                                
COMMISSIONER BUTCHER replied that lower  taxes would result in an                                                               
improved internal rate of return.                                                                                               
                                                                                                                                
MR. TANGEMAN shared an example  of Russia's plan for $500 billion                                                               
of investment  due to a lower  tax rate and an  improved internal                                                               
rate of return.                                                                                                                 
                                                                                                                                
CO-CHAIR PASKVAN  questioned how  the department would  know that                                                               
lower taxes would  result in an improved internal  rate of return                                                               
if  they were  not privy  to what  the current  internal rate  of                                                               
return is.                                                                                                                      
                                                                                                                                
4:34:08 PM                                                                                                                    
SENATOR  FRENCH said  he  had the  same  rhetorical question.  He                                                               
noted there were  also problems in Russia,  like forced takeovers                                                               
as  experienced by  ConocoPhillips.  He gave  another example  of                                                               
companies having their assets nationalized in Argentina.                                                                        
                                                                                                                                
He  pointed out  that  the  focus should  be  on  the numbers  in                                                               
Alaska. He  wondered why the  state does not yet  know companies'                                                               
internal   rates  of   return.  Internationally   recognized  tax                                                               
attorneys  have suggested  that the  state have  access to  those                                                               
numbers  before making  tax decisions.  He suggested  obtaining a                                                               
subpoena to find out those numbers.                                                                                             
                                                                                                                                
COMMISSIONER BUTCHER said that is  proprietary information and he                                                               
was not aware  of any state having access  to companies' internal                                                               
books. He suggested it would  not be "business friendly" to force                                                               
companies to open their books.                                                                                                  
                                                                                                                                
SENATOR FRENCH disagreed. He stated  that it does not make Alaska                                                               
un-business  friendly, but  rather a  partner. He  suggested that                                                               
DOR  might want  to have  access  to that  information before  it                                                               
comes to the legislature to suggest a change in taxes.                                                                          
                                                                                                                                
COMMISSIONER BUTCHER countered that  Senator French used the word                                                               
"subpoena," not "ask."                                                                                                          
                                                                                                                                
SENATOR FRENCH inquired if DOR had asked for the information.                                                                   
                                                                                                                                
COMMISSIONER  BUTCHER   replied  that  DOR  has   not  asked  for                                                               
proprietary information.                                                                                                        
                                                                                                                                
SENATOR FRENCH suggested DOR try asking.                                                                                        
                                                                                                                                
MR. TANGEMAN wondered if that  question was asked during the ACES                                                               
debate, which lasted only three-and-a-half  weeks. He pointed out                                                               
that  taxes  can  be  changed  in a  short  amount  of  time.  He                                                               
concluded that tax changes were made without that information.                                                                  
                                                                                                                                
4:37:45 PM                                                                                                                    
SENATOR   FRENCH  asked   if  Mr.   Tangeman  had   reviewed  the                                                               
transcripts from ACES.                                                                                                          
                                                                                                                                
MR. TANGEMAN said not all of them.                                                                                              
                                                                                                                                
SENATOR  FRENCH encouraged  Mr. Tangeman  to do  so. He  reported                                                               
that the  legislature had  a consultant who  used every  piece of                                                               
public  information   available  to  build  a   model  which  was                                                               
presented to the oil industry  to analyze, with the invitation to                                                               
come  back  to  the  legislature  if  there  something  that  was                                                               
inaccurate. The oil  companies never came back  because the model                                                               
was not  inaccurate. He  emphasized that  the legislature  did as                                                               
much  homework as  possible in  open session,  without issuing  a                                                               
subpoena, with an  invitation to the companies  to correct errors                                                               
in the model.                                                                                                                   
                                                                                                                                
SENATOR STEDMAN  added that  the Senate  spent some  time dealing                                                               
with this issue  during the regular legislative  session and came                                                               
out with a targeted  rate for new oil and changes  to ACES to try                                                               
to  fix some  of the  structural problems.  There was  not enough                                                               
political support  for that work. At  the end of the  session the                                                               
Senate came  up with  a structure that  would leave  ACES intact,                                                               
but deliver an economic adjustment  for new oil. Two options were                                                               
considered,  one   of  which  was  removing   progressivity.  The                                                               
consultants provided  a better way of  doing that in the  form of                                                               
an exclusion  allowance for  new oil that  would not  create cost                                                               
allocation issues  and reduce government  take. He  described the                                                               
process the Senate went through to arrive at their conclusions.                                                                 
                                                                                                                                
He asked  how DOR  arrived at  SB 3001. He  stated that  the bill                                                               
contains cash flow  projections in FY 13 found in  HB 110 at $1.5                                                               
billion at $110  per barrel oil. He inquired if  DOR "backed into                                                               
that to get to that number  or was there another methodology that                                                               
created it."                                                                                                                    
                                                                                                                                
COMMISSIONER  BUTCHER agreed  that  it  was close  to  HB 110;  a                                                               
couple hundred million different. He  explained that DOR took the                                                               
structure  the Senate  worked on  for  the new  fields and  began                                                               
working on it internally for the existing fields.                                                                               
                                                                                                                                
4:43:14 PM                                                                                                                    
SENATOR WIELECHOWSKI  related the  economic analysis  done during                                                               
ACES consisting of seven hypothetical  fields with internal rates                                                               
of return,  net present value,  satellite fields,  legacy fields,                                                               
and heavy oil.  He discussed the model created  by Gaffney Cline,                                                               
as well as  presentations by Roger Marks, Dan  Dickenson, and the                                                               
oil industry, all  of which were made public.  He suggested using                                                               
that model to determine information about legacy fields.                                                                        
                                                                                                                                
He recalled a  conference call last year  by ConocoPhillips where                                                               
the  company said  they were  investing hundreds  of millions  of                                                               
dollars in Alaska  all at "very good rates of  return" and Alaska                                                               
offered  "strong  cash  margins."  He  inquired  if  Commissioner                                                               
Butcher thought those statements were inaccurate.                                                                               
                                                                                                                                
COMMISSIONER  BUTCHER replied  that ConocoPhillips  could provide                                                               
that information.                                                                                                               
                                                                                                                                
SENATOR  WIELECHOWSKI asked  if the  commissioner disagreed  with                                                               
ConocoPhillips'  statement that  they are  investing hundreds  of                                                               
millions in Alaska at very good rates of return last year.                                                                      
                                                                                                                                
COMMISSIONER  BUTCHER  said  he  did not  know  the  details.  He                                                               
maintained  that the  company has  said  that a  tax change  will                                                               
result  in   billions  of  dollars  more   investment  than  they                                                               
currently are investing in Alaska.                                                                                              
                                                                                                                                
CHAIR  WIELECHOWSKI  asked  if   his  previous  statement  showed                                                               
ConocoPhillips' support for a tax break.                                                                                        
                                                                                                                                
COMMISSIONER BUTCHER reiterated that  it would involve talking to                                                               
the companies themselves to find out.                                                                                           
                                                                                                                                
MR.  TANGEMAN  pointed  out  that  Alaska is  only  one  part  of                                                               
ConocoPhillips' portfolio.  He returned to the  discussion of the                                                               
Gaffney Cline model used during ACES  and commented that it was a                                                               
very  good   model;  however,   it  was   based  on   theory  and                                                               
assumptions.  He  suggested when  looking  at  what has  occurred                                                               
since then, the numbers used were not positive enough.                                                                          
                                                                                                                                
4:48:50 PM                                                                                                                    
CO-CHAIR PASKVAN  asked if the  information DOR is  presenting to                                                               
support SB 3001 is superior to information used to support ACES.                                                                
                                                                                                                                
COMMISSIONER BUTCHER  predicted that  if DOR has  a month  to lay                                                               
out information it would contain equal detail.                                                                                  
                                                                                                                                
CO-CHAIR  PASKVAN  asked  if the  commissioner  believed  it  was                                                               
possible to have a high internal  rate of return with the current                                                               
tax structure, with respect to the existing fields.                                                                             
                                                                                                                                
COMMISSIONER BUTCHER said yes.                                                                                                  
                                                                                                                                
MR. TANGEMAN  asked what Co-Chair  Paskvan would consider  a high                                                               
rate of return.                                                                                                                 
                                                                                                                                
CO-CHAIR  PASKVAN noted  that Commissioner  Butcher's answer  was                                                               
"yes." However,  he previously  stated he did  not know  what the                                                               
internal rate of returns was.                                                                                                   
                                                                                                                                
SENATOR STEDMAN pointed out that  the effects of the mechanics in                                                               
the  bill  are  different  than   what  the  Senate  expected  on                                                               
incremental  oil. The  mechanics  used with  legacy fields  don't                                                               
work with  incremental oil. He  requested a  sensitivity analysis                                                               
run  on  the  40  percent  exclusion as  it  drops  to  zero.  He                                                               
questioned  how  rapidly  $1.5   billion,  the  negative  number,                                                               
approaches zero.  The Senate spent a  lot of time trying  to hold                                                               
current production cash flow change at  zero, at $100 oil, on the                                                               
recommendation of one of the consultants.                                                                                       
                                                                                                                                
CO-CHAIR PASKVAN asked  about page three of the  fiscal note, the                                                               
columns that address the "forecast  plus 10 percent." He inquired                                                               
where  the 10  percent comes  from  - existing,  new, or  federal                                                               
fields.                                                                                                                         
                                                                                                                                
MR. TANGEMAN reported  that the tables are  based on hypothetical                                                               
numbers.  The  analysis was  done  last  year  and was  based  on                                                               
certain types of fields coming on line.                                                                                         
                                                                                                                                
CO-CHAIR PASKVAN  asked if the  top chart  on 10 percent  is from                                                               
existing fields.                                                                                                                
                                                                                                                                
MR.  TANGEMAN  replied that  it  is  just  10 percent  above  the                                                               
forecast by the department. It is just more oil in the pipeline.                                                                
                                                                                                                                
CO-CHAIR PASKVAN asked if any of this is for new fields.                                                                        
                                                                                                                                
MR. TANGEMAN  said the  department does  not make  projections on                                                               
new fields.                                                                                                                     
                                                                                                                                
CO-CHAIR  PASKVAN assumed  then that  there can  be a  10 percent                                                               
increase above  current production on existing  fields. He voiced                                                               
concern  that  the  director  of  the Division  of  Oil  and  Gas                                                               
testified  less than  a year  ago to  the U.S.  Senate that  "the                                                               
natural  field  declines cannot  be  replaces  without access  to                                                               
production  from federal  lands in  the OCS.  There are  no known                                                               
conventional sources  on state  or native  lands that  are likely                                                               
sufficient  to replace  the decline  in  the existing  production                                                               
rates." He asked who was right.                                                                                                 
                                                                                                                                
MR. TANGEMAN replied that the NPRA  could be factored into the 10                                                               
percent.                                                                                                                        
                                                                                                                                
CO-CHAIR  PASKVAN  clarified  that  if  production  is  increased                                                               
50,000  to 60,000  barrels a  day for  an entire  year the  state                                                               
still receives $400 million less in revenue.                                                                                    
                                                                                                                                
MR. TANGEMAN said that is correct  due to the generous tax credit                                                               
system.                                                                                                                         
                                                                                                                                
4:55:52 PM                                                                                                                    
CO-CHAIR PASKVAN  requested that  the chart  be shown,  in dollar                                                               
terms  and in  volumes, the  difference between  the current  tax                                                               
system and the proposed tax system.                                                                                             
                                                                                                                                
MR. TANGEMAN restated the request.                                                                                              
                                                                                                                                
CO-CHAIR PASKVAN clarified the request.                                                                                         
                                                                                                                                
MR. TANGEMAN  said he would run  the numbers and get  back to the                                                               
committee.                                                                                                                      
                                                                                                                                
SENATOR STEDMAN related  that it has been said that  there are $5                                                               
billion  worth of  projects that  the industry  would go  forward                                                               
with if  the tax  was changed  for the  legacy fields.  He shared                                                               
that there was  testimony from Exxon about what it  would take to                                                               
stem the decline  of their fields. He requested to  know what the                                                               
department's  estimate is  on what  it would  take in  dollars of                                                               
capital investment per year to stem the decline.                                                                                
                                                                                                                                
COMMISSIONER BUTCHER said  it was a difficult  question to answer                                                               
because the department doesn't have  that information. He said he                                                               
would talk to DNR.                                                                                                              
                                                                                                                                
SENATOR STEDMAN  recalled testimony  from Mr. Pittman  from Exxon                                                               
which gave  the committee  a feel  for the  magnitude of  what it                                                               
would take to stem the decline,  roughly $3 billion to $5 billion                                                               
a year;  not $5  billion over  8 years, but  a larger  number. He                                                               
questioned what the break even analysis  would be and what was in                                                               
the best interest for the state of Alaska.                                                                                      
                                                                                                                                
COMMISSIONER  BUTCHER  agreed  that   more  investment  would  be                                                               
needed.                                                                                                                         
                                                                                                                                
5:01:07 PM                                                                                                                    
SENATOR   WIELECHOWSKI  asked   the  administration   to  address                                                               
provision 4 on  page 4 of the fiscal note.  He suggested the $400                                                               
million loss  in FY 13  and a $400 million  gain in FY  14 should                                                               
probably be  changed to  zero. Also, in  provision number  5, the                                                               
loss of between  $200 million and $400 million  should be changed                                                               
to  show  an increase  every  year  reflecting the  yearly  CAPEX                                                               
increase.                                                                                                                       
                                                                                                                                
CO-CHAIR  PASKVAN  concluded  that   it  was  important  for  the                                                               
committee to find  out when they will be hearing  from an advisor                                                               
to  the administration  in order  to find  out information  about                                                               
internal rates  of return, net present  values, reasonable ranges                                                               
of government take,  and opinions on investments  needed. He said                                                               
he was not  interested in myths of  declining production, capital                                                               
expenditures, and employment numbers.                                                                                           
                                                                                                                                
[SB 3001 was held in committee.]                                                                                                

Document Name Date/Time Subjects
SB3001_Version A.pdf SRES 4/19/2012 3:30:00 PM
SB3001
SB 3001_Transmittal Letter from Gov Parnell.pdf SRES 4/19/2012 3:30:00 PM
SB3001
SB3001_Fiscal Note_1-4-041812-REV-Y.pdf SRES 4/19/2012 3:30:00 PM
SB3001
SB3001 DOR Overview_4-19-2012.pdf SRES 4/19/2012 3:30:00 PM
SB3001