Legislature(2011 - 2012)SENATE FINANCE 532
04/20/2012 10:00 AM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
SB 3001-OIL AND GAS PRODUCTION TAX
10:04:38 AM
CO-CHAIR PASKVAN announced the continuation of the presentation
of SB 3001 by the Commissioner of the Department of Revenue,
Bryan Butcher.
BRYAN BUTCHER, Commissioner, Department of Revenue, continued
the presentation on SB 3001. He began with key provisions in the
bill as listed in a Power Point presentation. He related that
the third key provision of SB 3001 is that the maximum tax rate
is changed from 75 percent to 60 percent. The fourth provision
is to extend the 40 percent well lease expenditure credit to the
North Slope. The final key provision of the bill is to allow
capital credits to be redeemed in the year earned. Currently,
the capital credits are spread over two years. He noted that
smaller companies requested that change in order to make it
easier on their cash flow. The change would also make it easier
for the department to administer. It would be revenue neutral by
the third year.
10:06:03 AM
SENATOR FRENCH asked for more information about the
retroactivity of credit changes in the bill.
COMMISSIONER BUTCHER offered to provide that information during
the sectional analysis.
SENATOR STEDMAN inquired about extending the 40 percent wellhead
expenditure credits to the North Slope. He requested an analysis
that would back up the need for that change. He noted that
previous committee work concluded that there was no need to
extend those credits. Instead, it was found that there were too
many credits given.
COMMISSIONER BUTCHER noted that the change was a piece from 2010
legislation, HB 280, and was incorporated into HB 110. At that
time the companies said the economics of including the 40
percent well lease credits would allow them to extract more oil
from existing wells. He suggested that producing companies on
the North Slope could provide more information.
10:08:20 AM
SENATOR STEDMAN suggested having a discussion of the risk of
exposure to the state due to numerous large credits. He pointed
out that recommendations from consultants contradict the
information related to extending well lease credits because it
allows too much reimbursement from the state on capital costs.
He said if the goal is to make the industry happy, the
percentage could be increased to 50 percent, but at some point
the state has to look at its risk exposure. He requested backup
information on that decision that includes rates of return and
capital expenditure (CAPEX).
COMMISSIONER BUTCHER said he would be happy to provide that
information. He noted that the goal is not to make the companies
happy, but rather to incentivize more investment, development,
and production.
SENATOR WIELECHOWSKI related a criticism that the tax structure
is too complex. He inquired if adding a new provision whereby
the ACES tax plus a 40 percent revenue exclusion for
progressivity is calculated, is making the process more or less
complex.
COMMISSIONER BUTCHER said it was making the tax structure
slightly more complex.
SENATOR WIELECHOWSKI suggested that the ACES calculation does
not apply anywhere any more. He suggested cutting progressivity.
COMMISSIONER BUTCHER agreed that was an option. He said an
attempt was made to take the same structure the Senate used on
the new fields and apply it to what was thought to be material
to the existing fields. He noted it could be done in a number of
ways.
CO-CHAIR PASKVAN explained the 40 percent well lease expenditure
credit: for every dollar the oil company invests, they are
receiving 40 cents in credit. He questioned why the state is not
getting an equity ownership if it is paying 40 percent. He
requested an explanation for the increase from 20 percent to 40
percent.
10:12:34 AM
BRUCE TANGEMAN, Deputy Commissioner, Department of Revenue,
addressed Co-Chair Paskvan's question. He explained that the
credit would be available to the tax payers, whereas a lot of
credits are being enjoyed by companies that do not have any tax
liability. Changing the credit from 20 percent to 40 percent
would benefit those companies that do pay taxes, resulting in a
quicker return on the state's investment.
CO-CHAIR PASKVAN related that Alaska was considered one of the
most aggressive systems in the world regarding its credit
structure. He wondered how it rates now and if there is a need
to go any further.
COMMISSIONER BUTCHER reported that SB 3001 would have an
immediate benefit in terms of short term production. He stated
that other Organization for Economic Co-operation & Development
economic (OECD) countries do not have the healthy credit
environment Alaska has. Some of the countries with profit share
agreements that take the concept of a credit, but include 100
percent of the costs a company has, go far and above what Alaska
does.
SENATOR STEDMAN clarified that not only would companies have a
40 percent credit, but they would have an immediate write off of
their capital expenditures.
COMMISSIONER BUTCHER agreed.
SENATOR STEDMAN suggested at $200 per barrel the capital cost
would be borne by the state and the federal government. He did
not know what the percentage would be at $120 per barrel, which
is where it is at today.
COMMISSIONER BUTCHER offered to provide that information.
10:15:50 AM
SENATOR STEDMAN assumed the 40 percent credit was analytically
driven. He asked if the analysis had been done.
COMMISSIONER BUTCHER explained that the analysis was done on a
bill that was drafted and presented before he was commissioner.
He said he was sure that information was available.
CO-CHAIR PASKVAN asked if the committee could have that
information later today.
COMMISSIONER BUTCHER said yes.
SENATOR MCGUIRE suggested that the department continue to work
on this issue by running its own numbers, hiring its own
consultants, and looking at tax systems in order to determine
what would be best for Alaska. She termed SB 3001 a "half-baked
bill" that is unfair to the legislature, the public, and the
producers.
She described the process used to vet HB 110 and the resulting
votes. The end result was a solution that would have included
existing oil and incremental oil, but the votes weren't there.
She defended the model used for HB 110, whereas there is no
model being used in SB 3001. She expressed frustration that SB
3001 was unfair because the department didn't fully understand
it and it was a tremendous waste of government money and time.
She stated that she remains committed and philosophically
aligned with the governor to help Alaska remain competitive. She
reiterated why the current process is not working.
COMMISSIONER BUTCHER explained that in SB 3001 the governor is
attempting to work within the framework the Senate used. It is
not HB 110, but a combination of the pieces from both bills.
SENATOR STEDMAN followed up on Senator McGuire's comments. He
related that the premise the Senate was operating under before
SB 3001 was that there would be a tax structure for legacy
fields and incremental production, and new production would be
incentivized separately. This bill is a bastardization of that
process because there is a 40 percent allowance on the main
field, which doesn't fit into the main concept of the Senate's
view. There was never any discussion of having gross allowances
on the main production pool. He emphasized that one of the
fundamental building blocks is broken in SB 3001.
10:22:28 AM
CO-CHAIR PASKVAN interjected that, in part, the question is how
one uses the governor's tax bill to address government take at
high oil prices without giving away billions at moderate oil
prices. He did not see the structure in SB 3001 that would allow
a solution.
COMMISSIONER BUTCHER responded that when a state is trying to
change a high tax structure, the tax rate must be reduced at the
point companies must make investment decisions on existing
fields, not on fields that may exist in ten years.
MR. TANGEMAN responded to Senator McGuire's question as to why
this bill is necessary as presented. The tax structure must be
"simple and stable." He explained that the bill was put together
to work within the existing tax structure. He pointed out that
the state has been "beat up" on the fact that that the tax
division is always behind. Today, the state understands ACES as
well, if not better, than the industry. It is important to know
that the state understands ACES and is making changes so as not
to lose ground.
10:26:21 AM
CO-CHAIR PASKVAN returned to the discussion as to whether there
are economic advisors or other advisors that are advising the
administration about tax structures and might be able to address
government take at high and very high oil prices. He understood
that there were no advisors available.
COMMISSIONER BUTCHER reported that there are economic advisors
working internally in DOR.
CO-CHAIR PASKVAN asked if, at $120 per barrel oil, the industry
is receiving about $2 billion.
COMMISSIONER BUTCHER did not know if it was that high.
CO-CHAIR PASKVAN asked if it was that high including credits. He
inquired if the commissioner was advancing SB 3001 as a "take it
or leave it" proposal.
COMMISSIONER BUTCHER responded that the industry is receiving
$1.7 billion.
CO-CHAIR PASKVAN reiterated his questioned about whether the
bill was a "take it or leave it" proposal.
COMMISSIONER BUTCHER explained that the task at hand is to
figure out where that sweet spot is for companies to see a
material change in order to increase investment.
10:29:06 AM
SENATOR WIELECHOWSKI recalled testimony from DOR and the
governor in the past saying that ACES was competitive in the $60
to $80 range. He pointed out that SB 3001 was handing half a
billion dollars to the industry at $80 per barrel oil. He asked
why that should happen when ACES is competitive at that range.
COMMISSIONER BUTCHER noted it is competitive to the point where
it is not as punitive as it is at high oil prices, but it is
still higher than any other jurisdiction in North America.
Making the reduction will increase the investment climate.
SENATOR STEDMAN talked about a discussion whereby a company
would provide $5 billion of capital enhancements for incremental
oil production to slow the decline curve. Yet, another company
maintained it would take $3 billion to $5 billion a year to
achieve that goal. He asked the department what it would take in
capital investment to slow the decline curve and where the break
even analysis is. He concluded that there is no substance in SB
3001, only philosophical commentary.
COMMISSIONER BUTCHER reported that DOR would talk to DNR to
obtain those figures. He maintained that it is impossible to
predict where the breakeven point will be in the future.
SENATOR WIELECHOWSKI asked if the 40 percent well lease
expenditure credit would be stackable on top of the net
operating loss, equaling 65 percent in development credits.
MR. TANGEMAN replied that the well lease expenditure credit
would only affect current producers.
SENATOR WIELECHOWSKI inquired what the number of development
credits an existing producer would be getting under SB 3001.
MR. TANGEMAN offered to get back to the committee with that
information.
SENATOR WIELECHOWSKI suggested the number was 40 percent, plus
25 percent in credits. He understood that the exploratory
credits are in the 80 percent range.
MR. TANGEMAN offered to get back to the committee with that
information.
SENATOR WIELECHOWSKI questioned that if state picks up 80
percent of the exploration cost, 65 percent or more for the
development cost, and is lowering taxes, at what point does the
state, as a sovereign, receive a share.
MR. TANGEMAN pointed out that the state has a significant
interest already in the form of royalties. He stressed that the
bill is not a giveaway. He shared oil prices since PPT was
passed and said DOR thinks there is a problem, unlike the
Senate, which believes that ACES will be fine for the next ten
years. He said that DOR's goal is to incentivize investment and
turn the decline curve around.
CO-CHAIR PASKVAN followed up on that statement by quoting
Commissioner Butcher from January, 2011:
While it is untenable to blame a tax system for the
lack of industry investment, it is equally untenable
to claim that the tax system is a reason increased
activity or investment occurs. An economic recession
stifled investment in business activity in the United
States and much of the developed world for over a
year. The economic activity of the past three years
may not have been the best benchmark by which to judge
the impact of a tax system.
He asked if Commissioner Butcher still believes that is true
today.
COMMISSIONER BUTCHER said there are many factors that play a
role in less investment and taxes are certainly one of them. He
said he has learned a lot since he made that statement.
CO-CHAIR PASKVAN asked if his statement was still true today or
not.
COMMISSIONER BUTCHER replied that there is some truth in it, but
there are a lot of other factors, as well. He said the major
role taxes play in investment has become much clearer.
10:37:30 AM
SENATOR STEDMAN recapped that the administration is comfortable
at $80 oil and below. The work the Senate did was on $100-plus
oil, so it seems that there is a $20 spread to discuss. He
related that the Resources Committee would like to see a sliding
scale in dollars and a cap, with a cutoff at $200.
COMMISSIONER BUTCHER believed that the upcoming slide would show
that information. He offered to provide specific dollar amounts.
SENATOR STEDMAN suggested increments of $10 and an analysis of
capital costs as a result of the new tax structure.
He agreed with Senator Wielechowski's request for more
information about the total amount of credits and the "stacking"
of them under the new tax.
COMMISSIONER BUTCHER stated that the 40 percent credit would be
in lieu of the 20 percent capital credit. He offered to provide
more information.
SENATOR STEDMAN requested the information in writing in a table
format.
CO-CHAIR PASKVAN agreed. He asked if that information could be
provided later this afternoon.
SENATOR MCGUIRE also agreed. She said she wanted to see a
definition of the credits and hypothetical ranges with new North
Slope fields and how the numbers interact.
COMMISSIONER BUTCHER said that information is included in the
up-coming slide presentation. The estimate of the 40 percent
well expenditure lease credit is included in the fiscal note at
$200 million to $400 million a year.
10:43:07 AM
SENATOR STEDMAN reminded the commissioner that he, Senator
Wagoner, and Senator McGuire worked previously in the Senate
Resources Committee to incentivize Cook Inlet in order to
increase gas production and in doing so, nearly zeroed out the
revenue to the state. He said he would like to revisit that
issue for the sake of the state treasury. He compared that
situation to oil exploration in the Arctic and cautioned the
approach in this bill.
COMMISSIONER BUTCHER did not believe that situation was in the
bill. Cook Inlet shows a very low tax rate, which is not
proposed in SB 3001.
CO-CHAIR PASKVAN noted the public needs an explanation of the
gross revenue exclusion.
COMMISSIONER BUTCHER addressed where the pieces of SB 3001 came
from and how it became a hybrid of other tax proposals. Gross
revenue exclusion was introduced in HB 276 by the Senate Finance
Committee during the regular session as a way to incentivize
production. The production cap of 60 percent was introduced by
the Senate Resources Committee as a way to limit the state's
take at high oil prices. The well lease expenditure credit was
introduced and enacted in 2010 through the Cook Inlet Recovery
Act or HB 280.
10:46:22 AM
MR. TANGEMAN explained how the gross revenue exclusion works. He
showed a chart that depicts an income statement from the Fall
2011 Revenue Sources Book (RSB). Column D reflects the ACES tax
structure and column E reflects SB 3001. The chart is for
existing fields.
He gave an example of a reduction and worked out the
calculations. He pointed out that the base rate remains the same
and the progressive tax rate is calculated on the full
production tax value (PTV). The exclusion is taken off of the
gross value. The adjusted progressive tax rate is then applied.
The increase to the capital credits is included. He concluded
that there is only one new calculation for existing wells; for
new fields there would be one additional calculation.
CO-CHAIR PASKVAN asked if the credits are included. He assumed
all credits are compressed into one year. He wondered about an
additional $200 to $400 million increase for the 40 percent
credit.
MR. TANGEMAN explained the $300 million increase shown on line
30 is the mid-point of the 40 percent tax credit. He pointed out
that the chart applied to taxpayers only, so exploration tax
credits are not included.
SENATOR STEDMAN asked if the state receives $400 million less
from total credits.
MR. TANGEMAN agreed.
SENATOR STEDMAN asked about the capital expenditure line and
what was excluded. He opined that there should be about $500
million more included in total CAPEX.
MR. TANGEMAN explained that the chart shows FY 13 capital and
operating expenditure estimates.
SENATOR STEDMAN asked if it was the entire capital expenditures
applicable to the production tax. He inquired if non-producing
entities were excluded.
MR. TANGEMAN replied that the chart is shown on page 104 of the
RSB.
SENATOR STEDMAN asked Mr. Tangeman to answer the question.
MR. TANGEMAN answered yes. He said they are the deductible lease
expenditures.
10:52:03 AM
SENATOR FRENCH referred to the negative $1.464 billion on the
chart, which is the difference between what ACES would collect
and what would be collected under SB 3001. He calculated that it
would be a loss of about $4 million a day, or $167,000 per hour
that the state would be asking the citizens of Alaska to give up
in exchange for "something." The hope is for more investment and
for more production. He pointed out if ACES was in place,
instead of this bill, every four days the state could build a
new high school or pay for statewide pre-kindergarten. He
suggested if oil wells cost $20 million on the North Slope,
every 5 days the industry should be drilling a new well,
totaling 73 new wells a year.
He suggested putting in benchmarks to ensure new production, or
putting the money in escrow. The state is in a relationship with
a partner and partners set benchmarks. He voiced concern that SB
3001 does not do that.
10:55:20 AM
COMMISSIONER BUTCHER said the department has a philosophical
difference of opinion. He stressed that "simplicity" was an
important theme and noted the process of incentivizing companies
to invest in Alaska requires simplicity.
SENATOR FRENCH asked if there should be no strings attached and
no benchmarks. He suggested there should be measurable,
deliverable investment activity. He maintained that both the
legislature and the department agree that there should be more
investment in Alaska.
COMMISSIONER BUTCHER stated that the disagreement is on whether
or not there are high oil taxes in Alaska and he suggested that
Senator French does not believe that.
SENATOR FRENCH requested that they not characterize each other's
opinion on philosophy.
COMMISSIONER BUTCHER agreed.
SENATOR FRENCH asked if Commissioner Butcher expects more
investment from the bill.
COMMISSIONER BUTCHER said yes. He continued to say that the
companies should step forward and make a convincing case for the
change in tax structure.
SENATOR WIELECHOWSKI asked for the commissioner's best estimate
of how many new barrels of oil will be produced if the
legislature passes the bill.
COMMISSIONER BUTCHER did not have a specific number. He said
that when taxes are reduced there will be more investment. He
noted the need to hear from companies about investment
prospects.
CO-CHAIR PASKVAN asked how many barrels of oil it would take to
collect the $1,464.1 billion figure, shown on slide 5, back to
the state.
COMMISSIONER BUTCHER said he would have to get back to the
committee with that information.
SENATOR PASKVAN asked if that information could be provided
later in the day.
COMMISSIONER BUTCHER believed so.
10:59:55 AM
SENATOR WIELECHOWSKI referred to previous testimony that showed
no correlation between reduced taxes and increased production.
He proposed a resolution to be included in the bill that said,
"If you produce X number of barrels, in addition to what you are
already producing, then you get your tax breaks."
COMMISSIONER BUTCHER thought the administration would be open to
anything that would result in a material change in the tax
structure that would achieve the goal of more investment.
SENATOR STEDMAN referred to proposed structural changes during
ACES and the lack of support by the department. He asked if the
department supports structural changes and clean-up in ACES.
COMMISSIONER BUTCHER related that he did not understand "how the
department disappeared."
SENATOR STEDMAN explained that the governor moved forward on
ACES without DOR input.
COMMISSIONER BUTCHER replied that changing the ACES structure
does make it difficult for the department. If the change is a
means to an end, with a material change, the department is
willing to take it on. If it is a more complex structure that
adds more administrative work, and is not a material change,
then the department sees it as just another structural change to
taxes.
11:02:29 AM
At-ease from 11:02 a.m. to 11:17 a.m.
11:17:56 AM
CO-CHAIR PASKVAN announced the continuation of the presentation.
COMMISSIONER BUTCHER turned to effective production tax rates,
post-credits, for existing production. He highlighted a graph
that compares ACES, HB 110, and SB 3001.
COMMISSIONER BUTCHER related information about marginal
government take for existing production. The biggest difference
between HB 110 and SB 3001 is that, with a bracketed approach,
the marginal rate was reduced slightly more.
He compared the absolute profit of ACES, HB 110, and SB 3001. He
described how the profit of each entity is shown and what their
total profit would be under each program.
11:22:10 AM
SENATOR FRENCH asked if the difference between ACES and SB 3001
profit at $120 oil was $1.7 billion.
COMMISSIONER BUTCHER said yes.
SENATOR FRENCH asked for clarification of profit at different
oil prices.
DANIEL STICKEL, Chief Economist, Department of Revenue, answered
questions related to SB 3001. He explained the figures on slide
5 are meant to present an illustration of how the production tax
is calculated based on $109 oil. It looks at companies that are
paying the tax and is consistent with the revenue forecast. The
absolute profit charts are a homogenized example as if all
companies were one company.
SENATOR FRENCH asked, if the same approach is taken for each
slide, would the results would be the same.
MR. STICKEL opined that there would be a similar, but not exact,
result.
SENATOR WIELECHOWSKI asked if credits were included.
MR. STICKEL said yes.
COMMISSIONER BUTCHER continued to explain the share of profit by
percentages under the three scenarios as shown on slides 11 -
13.
COMMISSIONER BUTCHER discussed the effective production tax
rates on new fields, post-credits, under each bill.
He related information about marginal government take for new
fields under the three scenarios.
He turned to a breakdown of profit shares of profit for new
fields under the three bills by percentage.
11:28:17 AM
COMMISSIONER BUTCHER summarized the provisions in SB 3001. He
related that the provisions in the bill represent "meaningful
change", which is needed to incentivize development of Alaska's
oil resources and to stimulate jobs and economic activity. He
noted that producers have committed to additional investment
contingent on meaningful change. He said he has not talked to
any individual companies about their view of how this will take
place, but the department has spoken to Alaska Oil & Gas
Association (AOGA), which sees the bill as meaningful change.
SENATOR WIELECHOWSKI requested a list of all the commitments the
department has received from companies regarding new development
if the legislation passes.
COMMISSIONER BUTCHER agreed to provide that information. He
referred to a letter from Repsol and Armstrong addressing what
new field development would mean in terms of their investment.
He noted the hesitation of companies to provide dollar promises
that are not run through their board rooms. It is easier to
obtain what a reduced tax materially means to them.
SENATOR WIELECHOWSKI asked if the commissioner has any
commitments for new development.
COMMISSIONER BUTCHER noted only Repsol's discussion of $9
billion.
SENATOR STEDMAN pointed out the importance of separating new
production, such as Repsol's, from incremental or legacy
production. He requested separate information regarding
commitments for new development.
CO-CHAIR PASKVAN thought it would be most important for the
committee to see a comparison between new and legacy field
promises.
COMMISSIONER BUTCHER said he would provide that information. He
related that short-term increased production would come from
existing fields and long-term increased production would come
from existing and new fields.
SENATOR FRENCH recalled the focus that former legislation has
lent to the state. He listed commonalities between the different
pieces of legislation, such as how to deal with new oil. He
suggested focusing now on aging conventional reservoirs. He
wanted examples of those kinds of reservoirs in other states
that had their production turned around due to lowered taxes.
He predicted that it would be very difficult to get new oil out
of existing fields, and the future of those fields lies with
heavy oil.
11:33:53 AM
SENATOR FRENCH inquired about new oil and the need for more
information on shale oil. He opined it was not true that it will
take 10 years to access shale oil.
SENATOR MCGUIRE said her previous comments were not punitive,
but meant to find results about a complex issue. She did not
think a forced special session was the best way to get results.
She requested that the department consider the Senate Finance
Committee charts to help understand the process that was used.
She recalled efforts on HB 110.
COMMISSIONER BUTCHER said that the department could review that
information.
SENATOR MCGUIRE noted that there are not that many areas that
are legacy fields. She suggested looking for research about
incentivizing companies to increase volume from legacy fields.
11:38:20 AM
CO-CHAIR PASKVAN related information that says increasing
production in legacy fields is unlikely. He referred to a
statement from DOR in 1994 that stated that production decline
is irreversible. He noted that page 3 of the fiscal note shows
an increase in production. He questioned where that would come
from. He requested information about reversing decline in legacy
fields, as well as investment evidence to show that legacy
fields do not stay in the harvest mode.
COMMISSIONER BUTCHER thought the companies could provide this
information.
CO-CHAIR PASKVAN asked if DOR believes that a 10 percent
increase above current forecast can be attained.
COMMISSIONER BUTCHER said he believes that increase is possible.
SENATOR STEDMAN recalled testimony from ConocoPhillips that said
there are technology barriers to increasing production,
regardless of the tax structure. He suggested reviewing that
information. He inquired if it was possible to get to 700,000
barrels per day in the legacy fields.
CO-CHAIR PASKVAN related that Senator Stedman was referring to
March 1, 2012, testimony to the Senator Resources Committee by
Scott Jepson, Vice President for ConocoPhillips, who said that
the technologies were lacking. He asked for information about
legacy fields' ability to increase production.
COMMISSIONER BUTCHER said he thought the goal of getting to 1
million barrels a day was laudable; he wished only to flatten
out the decline curve.
11:43:57 AM
SENATOR STEDMAN said the record could be checked for Jepson's
testimony. He recalled it was during a Senate Finance Committee
meeting. He opined that it should be possible to quantify what
it would take to get to and stabilize 600,000 barrels a day.
CO-CHAIR PASKVAN said the entire committee agrees there is more
work to do and it needs more analysis as to how to get there.
CO-CHAIR PASKVAN reviewed the topics of yesterday's meeting:
government take, internal rates of return, net present value,
basin progressivity, and engineering constraints of oil
throughput. He suggested that if the administration is not
looking at those issues, the motivation behind the legislation
would seem to be lacking. Many Alaskan's are wondering what that
motivation is.
COMMISSIONER BUTCHER pointed out that the department looked at
all of the issues Co-Chair Paskvan mentioned when developing the
bill.
CO-CHAIR PASKVAN focused on page 3 of the fiscal note regarding
the production tax revenue forecast for FY 13. He asked if an
increase of 50,000 to 60,000 barrels per day could be called
"forecast plus 10 percent."
COMMISSIONER BUTCHER said yes.
CO-CHAIR PASKVAN maintained that even producing 18 million more
barrels in a year would result in half a billion dollars short
in production tax.
COMMISSIONER BUTCHER thought it should be looked at long term
because there will be more investment and development and
eventual production. Looking at it short term would show a
reduction in revenue.
11:48:06 AM
SENATOR STEDMAN commented that $5 billion over seven or eight
years was insignificant. The consultant said one would have a
hard time seeing it on the chart. He suggested that there is a
need for $5 billion every year. He noted no testimony from the
industry on the possibility of that happening.
COMMISSIONER BUTCHER agreed that more than $5 billion would be
needed. He stated that $5 billion was not a cap and new
production will bring in much more as a result of the bill. He
opined that it would be difficult for a company to come forward
with a dollar figure.
SENATOR STEDMAN maintained that DNR and DOR should be able to
provide a financial estimate of what it would take to increase
investment, rather than rely on the industry to do so. He
continued to say that if there is no way of obtaining that
information, then the legislature needs to know that, rather
than pass legislation and check back in ten years.
He recalled what happened from the impacts of Kuparuk. He said
the Senate Finance Committee will have its consultants review
the history of Kuparuk and see how effective driving the
severance tax to zero was. He said he was not optimistic that it
would be very positive.
11:50:16 AM
CO-CHAIR PASKVAN addressed one component of the governor's bill
that addresses new fields. The Senate found the testimony
compelling from Repsol Armstrong when they predicted $9 billion
from new field production, which he termed the "sweet spot" in
oil production. He reiterated a request for information on
existing fields.
COMMISSIONER BUTCHER agreed that new fields are a positive step
in ten years. He stressed that the state needs to correct the
decline curve now.
CO-CHAIR PASKVAN was more optimistic when increased
unconventional production, such as shale and heavy oil, and new
fields are considered. He did not think the appropriate message
to Alaskans was that oil production was shutting down, and he
spoke of a promising future for Alaska.
SENATOR WIELECHOWSKI requested more specific information about
how passing this bill would result in more development in the
near-term future.
COMMISSIONER BUTCHER said there were companies in the field that
said they could produce in the short term.
SENATOR WIELECHOWSKI pointed out that SB 3001 is being touted by
the administration as solving the short-term problem. He asked
the commissioner if he could name a single project that would
occur if the bill is passed.
COMMISSIONER BUTCHER countered that the administration is not
saying that this legislation solves the short-term problem, but
will improve it. Also, the legacy fields will be able to produce
more oil due to improved economics. He said he did not have the
specific project information.
SENATOR WIELECHOWSKI reiterated his previous question about
naming a single project.
COMMISSIONER BUTCHER clarified that when he says that SB 3001
would improve the investment climate and production, both short
term and long term, that testimony will be supported by the oil
companies.
11:55:56 AM
SENATOR MCGUIRE requested that the oil companies and DOR need to
be clearer with their information and figures. In past
discussions, definitive information was provided. She did not
disagree with the premise of the bill; however, she said she
needed specific information from the companies, such as proof of
capital expenditures.
COMMISSIONER BUTCHER agreed. He related that the governor also
said that companies have to make a compelling case.
CO-CHAIR PASKVAN offered that committee members were looking at
Gaffney Cline for answers in support of the governor's bill.
SENATOR WIELECHOWSKI said he had great discomfort with the
administration and legislature setting policy based on what the
industry says. The industry will always ask for more tax breaks.
The state should hire experts to help them set policy by
analyzing data. He agreed to get Gaffney Cline back to do so.
COMMISSIONER BUTCHER countered that he did not base the bill on
what the industry said, but on the high tax level in Alaska and
declining investment. The state does need to consider oil
companies' input.
SENATOR WIELECHOWSKI noted that the state has dealt with oil tax
structure for thirty years, beginning with ELF where there was a
zero percent production tax rate on all new fields. By 2006
there was a zero percent tax rate on 15 out of 19 fields. Oil
hit record prices from 2000 to 2006. Kuparuk was at a 1 percent
tax rate and an 8 percent production decline. BP said the role
of Alaska is to be a cash cow. Low taxes got Alaska to a point
in time where there were losses in production, jobs, and in
investment. He discounted the philosophy that if the state
lowers taxes, companies will invest more. The state experienced
thirty years of that philosophy and it cost hundreds of billions
of dollars. He did not wish to return to that failed policy.
COMMISSIONER BUTCHER noted that oil was $20 per barrel during
that time. Oil is now at $120 per barrel and it is a different
world today.
CO-CHAIR PASKVAN recalled a quote from Lord John Brown from BP
in 2002 that referred to high oil prices when prices were at
$20. It said that BP was going to strip the excess cash flow out
of Alaska. He cautioned saying Alaska is in a different
environment today because oil prices are higher.
12:05:07 PM
SENATOR FRENCH commented that the administration asserted that
oil prices were at $20 per barrel when the Kuparuk tax rate
reached 1 percent and that is not factually true. In 2006 when
Kuparuk's tax rate approached 1 percent the price per barrel of
oil was in the $50 to $60 range. The economics were based on $20
and oil prices increased rapidly yielding a windfall at that
field. He reported working at Kuparuk for eight years. He
welcomed the proposed study on the Kuparuk field.
SENATOR STEDMAN recalled when the Senate Finance Committee had
their consultants run gross revenue numbers at 2010 oil prices
on the opening Artic fields. He suggested that when DOR
discusses oil price they consider production as well. He said
DOR will be surprised when they consider the gross value of the
current oil basin. He maintained that there is no way Kuparuk
was a marginal field. He voiced concern that there is no time to
do an effective analysis. He concluded that Alaska has an
extremely valuable oil basin.
12:07:52 PM
CO-CHAIR PASKVAN said he looked forward to receiving detailed
information from DOR at the next meeting. He hoped that the
committee and the administration could find common ground based
upon modeling data.
[SB 3001 was held in committee.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| 02-14-12_DOR_Response_New Slide 6 - ds.pdf |
SRES 4/20/2012 10:00:00 AM |
SB3001 |
| DOR - 5 years of forward-looking capital expenditure estimate.pdf |
SRES 4/20/2012 10:00:00 AM |
SB3001 |