Legislature(2013 - 2014)BUTROVICH 205
02/20/2013 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
| *+ | SJR 3 | TELECONFERENCED | |
SB 21-OIL AND GAS PRODUCTION TAX
3:32:16 PM
CHAIR GIESSEL announced SB 21 to be up for consideration.
DAMIAN BILBAO, Head of Finance, BP Exploration Alaska, Inc.,
Anchorage, Alaska, introduced himself and said today they would
walk through a conversation around the impact of ACES on how BP
evaluates business in a bit more detailed way than they
typically do. It's also important to understand the context of
how ACES is affecting the analysis of their business
opportunities and Mr. Williams would walk through that.
3:34:45 PM
THOMAS WILLIAMS, Senior Tax & Royalty Counsel, BP Exploration
Alaska, Inc., Anchorage, Alaska, introduced himself and said
there are three primary changes that SB 21 would make to ACES.
It would repeal progressivity, change the system of tax credits
that now exists, which threatens to harm some producers even if
it may help others, and it creates a new gross revenue exclusion
for new production that they feel is innovative, but largely
misdirected.
MR. WILLIAMS explained that progressivity is a sliding scale tax
that runs quickly up to a 25 percent rate and the rises more
slowly and is in addition to the base rate and that repealing it
is a good idea for a number of reasons, but he wanted to
describe two significant unintended effects that seem largely
unknown and even less understood.
3:36:33 PM
He used eight slides to describe how progressivity works; the
following is a copy of his written comments:
If you look at this first slide, you will see the tax
calculation for a hypothetical producer with 10,000
barrels of oil who sells it on the West Coast for $100
a barrel and receives a million dollars. It costs
$150,000 - or $15 a barrel - to transport that oil
from the field in Alaska to the West Coast, which
leaves $850,000 as the gross value at the point of
production or "GVPP." The producer had $300,000 of
allowable lease expenditures, or field expense, to
produce the oil, which leaves a taxable production tax
value, or "PTV," of $550,000 or $55 a barrel. The base
tax is 25 percent of the PTV, or $137,500.
The progressivity rate equals four tenths of a
percentage point times the difference between $30 and
the producer's PTV per barrel. Here the difference
between $30 and $55 is $25, and $25 times four tenths
of a point per dollar equals 10 percent. Ten percent
of $550,000 is $55,000 of progressivity tax. That plus
the base tax of $137,500 equals a total tax of
$192,500. So far there is nothing here that is new to
you.
So now let me begin to show you something you probably
have not seen before. This scenario is not about what
the producer has actually produced, but about an
evaluation of what could happen from the development
of a new reservoir or field if the investment is made.
And let's suppose that this producer sees three
different ways that she could potentially improve this
investment. One is that she knows of a buyer willing
to pay a premium of a dollar a barrel for the oil
delivered on the West Coast; the second is a way to
save $20,000 in transportation costs; and the third is
a way to cut the costs for field operations by
$30,000. If she can do all three, what is the change
in the tax?
In this slide we see the three changes. The extra
dollar a barrel in the price increases the sales
revenue from the oil to $1,010,000. The transportation
savings reduces that cost from $150,000 to $130,000.
Between the increased price and the transportation
savings, the GVPP of the oil back in the field is
$880,000 instead of $850,000. And the reduction in
upstream lease expenditures raises the taxable PTV by
another $30,000, for a total increase in PTV of
$60,000 from $550,000 to $610,000.
The 25 percent base tax is now $152,500 instead of
$137,500. And with PTV per barrel now $61, the
progressivity rate is $61 minus $30, or $31, times
four tenths of a percentage point per dollar, or 12.4
percent. Twelve-point-four percent of $610,000 is
$75,640, and the total tax is $228,140 instead of
$192,500. This is an increase of $35,640.
I have highlighted this change in yellow and recorded
it in the upper right corner of the slide in order to
keep it on screen so we can remember what it was,
because in this scenario the producer next asks what
the tax change is separately for each of these
improvements to the investment. This next slide shows
the change resulting only from the extra dollar in the
West Coast price.
3:40:16 PM
SENATOR MICCICHE asked why the field expense changed from $300
thousand to $270 thousand.
MR. WILLIAMS answered because they are assuming that there is a
way this producer sees to improve the efficiency of the field by
$30,000.
The higher price increases the sales proceeds by
$10,000 to $1,010,000. And as you go down the "As
Revised" column you see this $10,000 flowing down into
the $860,000 GVPP and then into the taxable PTV,
raising it to $560,000. The 25 percent base tax on
$560,000 is $140,000. The progressivity rate is $56
minus $30, or $26, times four tenths of a percentage
point per dollar, which is 10.4 percent. Ten-point-
four percent of $560,000 is $58,240 and the total tax
is $198,240, an increase of $5,740 from the base case.
3:41:47 PM
The next slide shows the change in tax from the
$20,000 savings in transportation costs. The $20,000
again flows straight down into the taxable PTV,
increasing it from $550,000 to $570,000.
The progressivity rate is now $57 dollars minus $30,
or $27, times four tenths of a percentage point per
dollar, or 10.8 percent. That plus the 25 percent base
rate on $570,000 of PTV yields a total tax of
$204,060, an increase of $11,560 from the base case.
Finally, this next slide shows the effect of saving
$30,000 in field expense. The PTV increases by $30,000
to $580,000 and the progressivity rate is 11.2
percent. The base tax and progressivity add up to
$209,960, an increase of $17,460 from the base case.
3:42:33 PM
And here at last, this slide shows what it is that you
probably have not seen before. The sum for the three
changes separately is $34,760. This is less than the
$35,640 change in tax when all three are factored in
at once. In other words, with progressivity, the whole
is greater than the sum of its parts. And that's not
all. The amount of tax that is calculated for each
individual part changes depending on what order you
look at them. Here's a slide that looks at the $20,000
savings in transportation cost and the $30,000
reduction in field expense together.
The two cost reductions together increase PTV by
$50,000, to $600,000. The base tax on that is
$150,000; the progressivity for $60 of PTV per barrel
is $60 minus $30, or $30, times four tenths of a
percentage point per dollar, or 12 percent, times
$600,000, which is $72,000. The total tax change from
the two is $29,500. From the previous cases where we
considered each cost reduction separately, the tax
increase with transportation only was $11,560 and for
field expense only was $17,460.
If we look at transportation first, it is equivalent
to looking at it standing alone, and we have already
calculated what that is - $11,560. So $11,560 of the
combined $29,500 tax increase is from the change in
transportation cost, and the rest - $17,940 - is for
the change in field expense. But this means the field
expense is almost $500 greater than what it is when
it's standing alone.
3:44:35 PM
And if you reverse the order, then the field-expense
tax increase is the same as when it stands alone, but
now the tax increase for the transportation savings is
different, $12,040, instead of the $11,560 when it
stands alone or is taken first. Either one cost stays
the same as what it was when it is factored separately
and the other one changes or it's the other way
around. Either one is an equally valid approach.
MR. WILLIAMS commented that reversing the order that these
deductions are taken changes the field expenses figure.
[Continuation of written testimony] What we have done
here on this sixth slide is to look at the pair of
cost savings for downstream transportation and
upstream lease expenditures, and we've looked at that
pair first ahead of the change in market price. But if
we go back to the previous slide, we see that if we
take transportation first and subtract its $5,740 from
the total $35,640 tax effect for all three, then that
leaves a different number - $29,900 for this pair of
changes instead of the $29,500 on slide six when that
pair was calculated back first.
3:46:43 PM
SENATOR FRENCH asked if a clearer regulation stipulating which
order the calculations are made would help.
MR. WILLIAMS replied that a regulation wouldn't help, because
they are not talking about what is being put on the return, but
rather how a producer would model its potential investments. You
often look at particular components; in this case he chose a
market price change, a transportation cost change and an
upstream field cost change. These numbers would be adjusted to
see what the sensitivity is. The point is when you try do that,
by the very nature of the mathematical properties this tax
prevents you from coming up with a single valid number that is
the tax effect for any one of the changes; it depends on the
sequence when you look at it.
3:48:07 PM
[Mr. Williams continued to read prepared comments.]
There is nothing special about this particular pair of
changes that creates this difference. There would be a
similar difference if we pair price with
transportation or price with lease expenditures. With
either one, we'd get one set of tax effects for this
pair if we calculate them first, and a different set
of tax effects if we calculate the effect of the
unpaired change first. And, as here, within each pair,
there is a different cost for each change in that
pairing depending on whether its effect is calculated
first or the other's effect is calculated first.
3:48:20 PM
These examples involve a triplet of categories of
change that could be made to improve the economics of
the project: an increase in price, a reduction in
transportation costs to market, and greater efficiency
in field operations. But I have simplified these
examples by using lease expenditures generically as a
single cost category. In the real world a would-be
investor would look at capital expenditures separately
from operating costs because the timing for when the
two kinds of cost are incurred is different and -
especially important in the context of analyzing tax
effects - the capex generates a 20 percent Qualified
Capital Expenditure tax credit in addition to changing
the PTV and the progressivity rate. So there are
really four categories of change to look at: changes
in sales price, changes in transportation costs,
changes in operating expense, and changes in capital
expenditures. And that is what a real producer would
be looking at.
But, for each one of these four categories, its
respective tax effect can be calculated separately
from the other three, either ahead of them or after
them. And each such triplet of changes has the same
analysis and the same variations in tax effect for
individual changes that we have seen in the entire
analysis that we have just gone through in this and
the four earlier slides - namely, the tax effect for
the entire triplet being greater than the sum of the
effects for the individual categories in it; the
different amount for the unpaired category in each
triplet relative to the pair of other categories,
depending on whether the effect of the pair is
calculated first or second; and within each such pair,
the different amount depending on which category in
that pair is calculated first. Each of these numerous
variations and combinations will divide the $35,640
total tax effect up into a different set of amounts
calculated for the four categories. Yet even with all
those sets of calculated amounts for the categories,
none of those sets will add up to the tax effect for
all the changes taken together as a whole.
3:50:31 PM
SENATOR FAIRCLOUGH asked if BP had resolved its outstanding tax
issues with the department, because the scenarios Mr. Williams
was putting forward seemed to be valid and could be argued from
either way. And she asked as the state audits their financial
disclosures, if there were problems resolving audits because of
these particular calculations.
MR. WILLIAMS replied that confidentiality on tax matters in
Alaska was not entirely clear and therefore, he would
"respectfully decline to answer that." They being audited on
all the taxes they pay for every tax period.
SENATOR FAIRCLOUGH said she wanted to hold the question for the
Department of Revenue (DOR). She was wondering about the
possibility of debating whether the calculation was favorable to
two different people, the state being one perspective and the
industry being another.
3:52:27 PM
MR. WILLIAMS said that wouldn't be a fruitful exercise, because
mathematically there is no correct answer. That is the point. In
this case they are not talking about an assessment; they are
talking about looking at an investment and how to tweak the
parameters and look at the sensitivity to see the pluses or
downsides with different risks, but those effects can't be
quantified. Regulations can't account for all the possible
scenarios you can envision to change all the possible scenarios.
3:53:28 PM
SENATOR MICCICHE said he thought Senator Fairclough was saying
that the complication of the tax code delivers its own problems
and part of it is that the answer is not consistent.
MR. WILLIAMS elaborated his point was that you get a correct
amount when you look at all of them together; it's only when you
try to figure out how much is from the different changes that
you're testing that you cannot get a correct answer for each
individual cause.
SENATOR MICCICHE commented that inherent in ACES is that the
state is paying BP for having less than efficient operations and
penalizing them for becoming more efficient.
MR. BILBAO remarked that BP always strives to make their
operations more efficient, regardless - as does every business,
but there is a tax consequence of doing that and that is part of
what Mr. Williams was trying to outline. Efficiency in Alaska
would have a different level of impact than the same type of
efficiency identified in another jurisdiction.
3:56:06 PM
MR. WILLIAMS continued reading from his prepared comments:
These bizarre effects are not mere abstract
curiosities. If you are an investor and you have a
variety of ways to try to improve the performance of
an investment, these effects from progressivity mean
there is no single correct answer about how much each
one changes the tax and improves the investment. The
more ways you have to improve the investment, the more
the change in tax for each one depends on where you
put it in the sequence of calculating the changes for
all of the opportunities. This is because each
opportunity in that sequence not only increases the
PTV, but it also increases the progressivity rate
applicable to the base case PTV plus all the PTV that
has been added by the prior opportunities in the
sequence. So, you layer on and take a higher
percentage of the pile with that last layer added;
that is why you can't identify a single amount and why
it depends on the order.
Interestingly, the Department of Revenue has exactly
the same problem when it audits a taxpayer and makes
multiple changes to figures reported on the tax return
and increases the amount of tax. The auditor can
quantify the whole tax increase from all the changes,
but he or she cannot make a definitively correct
determination of the amount of any one of those
changes. A taxpayer might have an interesting time in
an appeal having an auditor admit, issue by issue,
that there is no correct amount for each one.
3:58:17 PM
There is a second important consequence of
progressivity that was generally unintended or is
greater than intended. I call it a tax on price
volatility, because it increases the tax when prices
change during a tax year even though the total PTV is
exactly the same as if the prices had stayed constant
at the average price for the year.
3:59:10 PM
On this slide we see such a "flat price" scenario. To
fit conveniently within the space available in a
slide, the table omits columns for West Coast prices,
transportation costs and field expenses, and starts
instead with the PTV that is calculated from them.
Here the PTV is $61.25 per barrel, and with 2 million
barrels of production a month, the amount of the
taxable PTV is $122.5 million a month.
Progressivity starts when the PTV per barrel exceeds
$30, and it reaches 25 percent at a PTV per barrel of
$92.50. I have chosen $61.25 as the PTV per barrel in
this base case because it is half way between $30 and
$92.50. The progressivity rate at this price is $61.25
minus $30, or $31.25, times four tenths of a
percentage point per dollar, or 12.5 percent. This
also is half way between the zero rate at $30 and the
25 percent rate at $92.50. As you can see, each month
the PTV is $122.5 million, the progressivity rate is
always 12.5 percent, and the progressivity tax is
exactly the same for each month as $15.31 million.
Total progressivity for the year is $183.75 million.
4:00:29 PM
In this next slide the left half is exactly the same
as the previous one with the flat-price scenario. The
right half of the table shows what happens when there
are six months in the year when the PTV per barrel is
$30 and six when it is $92.50. In this case the first
three months and the last three have the $30 PTV per
barrel, and the middle six from April through
September have the $92.50. This price profile
resembles what actually happened with West Coast
prices for North Slope oil during 2008, when they
peaked at the all-time record of $144.59 a barrel on
July 3rd.
For the six months when the PTV per barrel is $30, the
progressivity tax rate is zero because $30 of PTV per
barrel minus the $30 threshold for progressivity is
zero. So, as you can see, there is no progressivity
tax for the first three months of the year and the
last three. In the middle six, the PTV per barrel is
$92.50. That is $62.50 higher than the $30 threshold,
so the progressivity rate is four tenths of a
percentage point times 62.50, or 25 percent. At $92.50
a barrel, the progressivity tax on two million barrels
a month is $46.25 million, so the total progressivity
tax for the six non-zero months is $277.5 million. The
progressivity tax under the changing-price scenario is
51 percent higher than the $183.75 million of
progressivity for the flat-rate scenario.
4:02:19 PM
This tax increase is entirely the result of the fact
that prices changed during the year instead of being
flat. You can see this for yourselves. The total PTV
for the year in the right-hand column is $1,470
millions of dollars, or $1.47 billion - exactly the
same as in the flat-price scenario on the left. Total
production for the year is exactly the same - 24
million barrels. Dividing $1.47 billion of PTV by 24
million barrels equals $61.25 per barrel, exactly the
same, but progressivity on one side is 51 percent
higher.
4:03:58 PM
And if you look at the monthly calculations in the
changing-price scenario, you can see that the monthly
progressivity tax will be exactly the same for each of
the $30 months no matter what order you put those
months in. The same is true for the $92.50 months. So
this phenomenon is different from what I showed you
earlier about the whole being greater than the sum of
its parts, because here there are no changes in the
actual progressivity calculation for a $30 month or a
$92.50 one.
The bottom line here is this. The year under the
changing-price scenario is just as profitable as the
flat-price one, and for the same amount of production.
The tax base to which progressivity applies is exactly
the same for the year. Yet the tax is 51 percent
higher when prices change during the year. Now, I have
chosen these PTV-per-barrel figures so they would show
the greatest amount of tax increase resulting from
prices that are not flat all year long. I did this
because, if I showed you an example with a smaller
effect, someone would surely ask me what the maximum
effect could be. My example gives you that answer at
the same time it explains the phenomenon.
4:04:39 PM
Those of you who were here in the Legislature in 2009
may recall the surprise of the Department of Revenue
when the actual ACES tax collected during its first
full year of operation - the 2008 calendar year - came
in about half a billion dollars higher than the
Department had forecasted. This tells you why: 2008
was a very volatile year for prices. While that
volatility did not generate the maximum 51 percent
increase that my example illustrates, it did produce a
very substantial increase in progressivity tax - on
the order of half a billion dollars - from the mere
fact that prices fluctuated during 2008, instead of
being flat at the volume-weighted average price for
the year.
So, to summarize: Progressivity has two major
unintended consequences. First, when you are analyzing
combinations of steps to take to improve an investment
opportunity, the whole is greater than the sum of its
parts. Second, if you, as a potential inventor, do not
take into account the effect from price volatility
during each year in an investment's life, the
progressivity could turn out to be 50 percent higher
than what you have estimated. Both of these effects
promise to increase the risks and reduce the
competitiveness of an Alaskan investment relative to a
comparable one elsewhere.
These negatives of progressivity complement what AOGA
told you during its testimony last Monday. Without
repeating that testimony here, I will only list AOGA's
main points. One, progressivity sacrifices the one
advantage Alaska has from its economic remoteness -
namely, the greater improvement in financial
performance for investments here if prices turn out
better than projected. This sacrifice occurs because
progressivity taxes away more and more of that
improvement the better it turns out to be. And two,
progressivity makes the tax extraordinarily complex
and inconsistent to compute, and to analyze. For these
reasons BP fully endorses the proposed repeal of
progressivity that Senate Bill 21 proposes.
4:06:44 PM
[Mr. Williams continued] Let me now turn to the second
main feature in this bill - the changes it proposes to
the present system of tax credits, and in particular
to the sunset of the credit for "qualified capital
expenditures" or "QCE" at the end of this calendar
year. The first, and probably most important
observation I can offer about tax credits in general
is they would not be so significant for the economics
of oil and gas production here if the production tax
were not so high.
Second, the QCE tax credit depends solely on how much
a company invests for oil and gas exploration,
development and production in Alaska. Period. If you
want to address the North Slope decline curve, there
have to be investments here leading to more production
- not just by finding and developing new fields and
new reservoirs, but also by getting more recovery out
of fields already in production. The QCE tax credit is
a direct incentive for making these investments. And
it costs the State nothing unless there are
investments: if investment is zero, then 20 percent of
zero is zero. The QCE tax credit arises only when it
succeeds, and costs nothing if it doesn't.
The QCE tax credit is not affected by oil prices, the
costs of transporting oil and gas to market, nor the
operating costs of the field. Consequently, its value
to a business like BP's is the same for a given amount
of QCE expenditure, regardless of the price and the
transportation and field operating cost scenarios that
the business estimates in its investment decisions.
And it is the same regardless of how prices and those
other costs actually turn out. Progressivity, on the
other hand, is dependent on prices and costs in a
twofold way: one in determining the amount of PTV that
is subject to tax, and again in calculating the tax
rate that progressivity will apply to that PTV.
4:08:26 PM
[Mr. Williams continued] Thus, the point where the
cost of losing the QCE credit begins to outweigh the
benefit from repealing progressivity depends both on
the price of oil and, for each individual producer, on
that producer's own unique portion of the lease
expenditures for the North Slope. For BP's own
business and expenditures, this crossover comes at a
higher price level - in the mid to upper 90s - than
that which Econ One and others are presenting for
North Slope producers as a whole.
So, the improvement to our investment economics from
the repeal of progressivity stands to be substantially
undone by the sunset of the QCE tax credit. Since I am
a tax man who is here to testify about this tax, I
would ask, please, for your patience for just a few
minutes if you have questions regarding this point, so
I can quickly finish up and Mr. Bilbao can testify.
The third major feature in SB 21 is its proposed
"gross revenue exclusion" or "GRE," which is something
new. It would exclude from the taxable PTV (production
tax value) a percentage of the gross value at the
point of production for additional or new volumes of
oil or gas being produced. This concept could have
significant potential, and indeed it may prove very
valuable for explorers and others who can bring new
fields and reservoirs into production.
Unfortunately, the proposed GRE aims away from the
significant opportunities for new production that BP
has identified for its business. SB 21 would allow a
GRE only for production "from a lease or property that
does not contain land that was within a unit on
January 1, 2003[,]" or if it does have land that was
in such a unit before 2003, "the oil or gas is
produced from a participating area established after
... 2011 [that] does not contain a reservoir that had
previously been in a participating area established
before ... 2012." This means that new units and new
participating areas are eligible and old units and old
participating areas are not.
4:10:41 PM
SENATOR DYSON asked if "new participating area" is a different
stratum that was not produced before, so it ends up being a new
field within the unit, because this GRE gives an incentive to
those new areas and the state wants new production. But, he
inferred from what Mr. Williams said, it doesn't incentivize
going back and producing more from the existing wells in the
existing strata.
MR. WILLIAMS responded that he was correct.
SENATOR DYSON said industry should be doing work-overs on their
own wells without getting more incentives.
4:12:31 PM
MR. WILLIAMS remarked that he would address a number of those
points in the next two paragraphs.
CHAIR GIESSEL asked if it would be helpful to BP if SB 21 was
altered to allow an extension of an existing PA.
MR. BILBAO replied that BP will look at the bill in its entirety
and consider it in the context of its business opportunities. As
in ACES, if you try to pick one piece to evaluate, the other
pieces don't hold together: if you take away the credits, you
would recognize very quickly that the very high tax rate creates
a concern. Mr. Williams just articulated that because their
reservoir is already covered by PAs, it is not applicable.
CHAIR GIESSEL asked if they had modeled SB 21 as proposed.
MR. BILBAO said yes.
CHAIR GIESSEL asked if they find it better than ACES.
MR. BILBAO replied yes; eliminating progressivity is a great
step forward for many reasons. SB 21 makes a good first step at
making Alaska more attractive, but at certain oil prices, it
would not make Alaska more competitive.
4:15:48 PM
SENATOR MCGUIRE asked if using the structure of SB 21 -
eliminating progressivity - but now including GREs, which many
like because it delivers some results that Alaskans have asked
for, as opposed to the credits which some are concerned are
being misapplied - protects the state from exposure (estimated
to be as high as $1 billion). If the GRE was be increased or if
the definition of these PAs was expanded, is there room for the
bill to have some merit for BP?
MR. BILBAO answered that the impact has to affect their
investment decisions at a range of prices not just one, because
that is the way they look at their business. They will consider
various evolutions of the bill and speak to it in its entirety.
They believe fundamentally that the governor's principles are
met most effectively when the policy is in place for all
different good projects for all the different producers to move
forward.
CHAIR GIESSEL said that was a wonderful closing statement and
thanked him for presenting today. She welcomed Scott Jepsen and
Bob Heinrich from ConocoPhillips Alaska to the table.
4:18:33 PM
SCOTT JEPSEN, Vice President, External Affairs, ConocoPhillips
Alaska, said this is the same presentation they gave to the TAPS
Throughput Committee and it summarizes some of the salient
elements with regard to Alaska, ACES and SB 21.
SENATOR FAIRCLOUGH said she appreciated BP's detailed
explanation on evaluating opportunities under different pricing
scenarios and different reductions.
MR. JEPSEN said the first topic he would cover was Alaska's
production challenge. Turning to slide 3 he explained that it
showed production going up significantly in the Lower 48, which
has been driven predominantly by production coming out of Texas
and North Dakota (also shown). However, it also showed the North
Slope's constant decline for the last decade. The natural
question would be: what is driving those production increases in
the Lower 48 and does it apply to potentially turning around the
production decline in Alaska?
Clearly, he said there is resource availability: everyone is
familiar with what is happening with the shale plays; there is
also additional investment in some of the conventional plays,
and technology is playing a role. Some of the shale production
would not have been possible without the evolution in fracking
technology and some of that technology is being applied to
conventional sand stones, as well. So, huge reinvestments are
being seen in older basins.
MR. JEPSEN said another thing that has happened is that the
price has gone up significantly - a fourfold increase since
2002. And lastly they have a good tax environment. An investor
in the Lower 48 will enjoy the upside as prices go up.
4:22:24 PM
Alaska compared to the Lower 48 has the resource and technology
has contributed significantly to developing it on the North
Slope, and it will continue to play a significant role. However,
the costs are high: Alaska is remote; it has a hostile
environment in the wintertime and is a very difficult place to
operate in the summertime, because essentially you are operating
in a wetland. And last, Alaska has a high tax that takes away
the upside; the progressivity in ACES is very punitive and as
prices go up and costs decrease industry doesn't see much return
on overall revenue. ACES really takes away the incentive to
invest much more than what they are currently investing.
MR. JEPSEN said slide 4 summarized how ConocoPhillips thinks
about making investments in basins as a whole. Its investment
criteria are as follows:
-Exploration prospectivity: don't see it here compared to other
places in the world. Alaska doesn't rank where it used to.
-Costs: Alaska is high cost: far from market, high
transportation costs; winter is a hostile environment; logistics
are expensive and difficult; summer is wet and special
techniques are necessary. Drilling and production is much easier
in Texas and Oklahoma where you simply open a gate, push the
bulldozer through, plow a road, clear out some dirt and drill a
well.
-Cycle time: If you find a place where you want to drill a well,
for instance an extension in Kuparuk called "2S'" IT will
require a new gravel pad, pipelines and extending a road out
there; it will take a minimum of three years before it comes on
stream. An extreme example like CD5 took seven years to permit
and 3-4 more years to get it on stream. That takes deep pockets
and a lot of staying power to invest in Alaska.
-Taxes: Alaska's tax environment doesn't incentivize more
investment above what is happening today.
-Legacy oil fields are a big positive: If you want to make a big
change in Alaska's production decline that is the place where a
focus needs to be.
4:27:27 PM
ConocoPhillips is drilling new wells on the North Slope but
maybe not at the pace lawmakers would like to see.
SENATOR DYSON asked if he is limited by availability of rigs.
MR. JEPSEN said with a better tax environment they could get the
rigs up here.
SENATOR DYSON said his experience is that Lower 48 rigs need a
lot of refitting before coming up here.
MR. JEPSEN said that was correct; they need modifications for
Alaska's environment.
SENATOR DYSON said he would like to know what can be done to
bring more rigs up.
MR. JEPSEN answered that eliminating progressivity in SB 21
would be a good step.
SENATOR DYSON said it was represented to them today that credits
taken to date are somewhere around $3 billion from the Legacy
fields on North Slope and asked if that was far off.
MR. JEPSEN said that didn't jibe with his recollection of what
ConocoPhillips had experienced. He deferred to Mr. Heinrich.
4:30:45 PM
BOB HEINRICH, Vice President, Finance and Administration,
ConocoPhillips Alaska, remarked that a number as large as $3
billion sounded more like the total tax credits from the ACES
structure, which would be for all the participants; less than
half of that had been taken by participants on the North Slope.
SENATOR DYSON said he understood the total was about $6 billion,
$3 billion within the unit and $3 billion outside, but he wanted
to know for sure.
4:31:17 PM
SENATOR MCGUIRE said she was shocked at the lack of rig count in
Alaska compared to its neighbors in Texas and Alberta and asked
what credit would create a stampede like SB 309 did for Cook
Inlet. What types of things would be effective in bringing up
more rigs?
MR. JEPSEN said for starters tax credits should apply towards
drilling and work over well expenditures and infrastructure.
Make sure the incentives apply to legacy fields.
SENATOR MCGUIRE said the gross revenue exclusion is probably
what will be passed and she didn't want to pass another bill
that doesn't deliver the kind of results they want, which is to
have more production in TAPS, which will come from the Legacy
fields in Prudhoe Bay for the next 3-5 years.
MR. JEPSEN appreciated her comments and said he wanted to give
it more thought rather than a quick off-the-cuff response.
4:36:25 PM
SENATOR DYSON said they struggle to get good information. One of
the participants in the unit said last year that credits are
fine, but they make their plans for 10 or 20 years out based on
the tax rate; the rest is just frosting. But now that same
person was saying you've got to go back to the credits that we
had before. "So, you can see why we struggle."
MR. JEPSEN said eliminating progressivity was very significant;
they have stated before and again that the tax credits don't
offset progressivity. Under ACES the tax credits did not improve
the investment climate overall, although they were useful for
some parties, in particular.
4:38:30 PM
SB 21 takes care of the most deleterious parts of ACES by
elimination progressivity, but that alone doesn't entirely
separate it from making investments in other locals, and it
doesn't address the fact that Alaska is still a very high cost
place to do business.
MR. HEINRICH added that from ConocoPhillips' experience, the tax
credits represent a very small reduction of their overall tax
liability, which has been in the high rates lately.
SENATOR FRENCH went back to slide 5 and asked what a
realistically achievable decline curve is for the legacy fields.
MR. JEPSEN said he could give a better answer if he knew what
the tax would be.
SENATOR FRENCH said back in 2006 they got a slide from BP saying
basically that you can have three different decline curves: one
that is horrible if you don't invest much, one that is better if
you invest a medium amount and one that is stronger with more
investment, and asked what would it take to flatten the decline
curve or make it slightly sloping downward.
MR. HEINRICH said he would have to get back to him on that, but
slide 10 is the result of their modeling work on SB 21 (green
line) compared to ACES (red line) on a producer share basis
(percentage of the available cash after costs and taxes). It's
pretty much the inverse of what they might hear from the
consultants about the state's share. Care is needed in looking
at these types of calculations to understand how the data is
presented. The actual calculation will depend on your cost
assumptions, your capital assumption which will vary from field
to field, and from producer to producer.
ConocoPhillips used 2012 Senate Resources data to model all the
producers' tax liability in aggregate. The graph represents
FY2014 only as though SB 21 was in effect for the full fiscal
year. It's not a five year average nor is it a full field life
average. They chose the first year, because it is easier to
explain, but also because from their perspective the first year
of any forecast is much more reliable in terms of what they can
expect to see. It shows a cross over (where producer starts
retaining more cash) between ACES and SB 21 at around $93. This
means as you head prices higher than $93 there is a tax
reduction from the share of cash retained by the producer under
SB 21. But it also means that below $93, SB 21 by itself
represents a tax increase for producers. So they are evaluating
the "tradeoff."
4:43:58 PM
SENATOR MICCICHE asked if they used the GRE in their analysis.
MR. JEPSEN answered that none of their production would qualify
for a GRE in 2014.
SENATOR MICCICHE asked if he thought that was the primary reason
for the difference in Econ One and ConocoPhillips analysis on
the crossover.
MR. HEINRICH replied that it's more around cost assumptions and
presentation; one is done on a 5-year average v. a single fiscal
year; and also the costs assumed for the assumptions could be
different. ConocoPhillips used data from DOR, because they have
access to it.
MR. JEPSEN said that raised a good point, that this analysis is
very sensitive to an individual producers' cost structure and
it's hard to generalize it to all producers across the North
Slope.
4:45:21 PM
MR. HEINRICH said slide 11 was a recap and that the tax credits
structure helps with the overall effective tax rate, but it's
not enough to offset the negative effects of the progressivity
surcharge. SB 21 is a good step in setting the stage for
improving the investment climate; eliminating progressivity
solves the problem of the high marginal taxes and makes Alaska
more competitive at higher prices (where we are at today and
above), but it disadvantages Alaska at the lower prices (below
$93). Elimination of the investment incentives doesn't result in
a differential tax structure. You can overlay the same tax
structures you see in Texas and North Dakota here, but with the
Alaska's high cost environment, it is still at a disadvantage.
The GRE is not broad enough; if it applied to more things in the
legacy fields, it would help bring more production from there
and they really need to be part of the equation short term.
4:47:23 PM
CHAIR GIESSEL asked if they were able to identify areas in the
same well bore in the legacy fields that they had passed through
to get to a more hefty pay level that would become economic with
a GRE applying to "new oil."
MR. JEPSEN replied that they had identified the resource base in
fields like the Kuparuk and Prudhoe Bay unit pretty well, but
didn't know if the presented incentives would be sufficient to
spur investment in things like the more difficult parts of West
Sak. But if ConocoPhillips significantly expands its investment
in West Sak, it won't be as significant as making that same
investment in the legacy fields. They try not to pick winners
and losers; rather make them general. They want to find the most
prolific highest productivity profitable fields to invest in,
and they will do that; but it doesn't mean they will not invest
in fields like West Sak where they have 15,000 barrels a day
now. It is not a high rate producing operation.
4:49:26 PM
SENATOR DYSON observed that Mr. Jepsen missed the intent of the
chair's question; Senator Giessel was talking about within the
unit and the other producing zones that have not been developed.
DNR is saying you can have a participating unit within the
existing field that taps another stratigraphic trap there. The
understanding is that the state will give a company a GRE for
the new strata and the question is why that is not enough.
MR. JEPSEN explained that most of the identified satellite
fields inside the Kuparuk River Unit have been identified and
many are on production; Tarn, Meltwater, West Sak, and Kuparuk
all have their own PAs. Opportunities inside the Kuparuk field
to create a new PA are slim, although BP would know better about
Prudhoe Bay.
He didn't think the future lies in trying to incentivize the
small potentially newer PAs inside of existing fields. It's back
to trying to incentivize additional investment beyond what they
are doing today in the legacy fields.
SENATOR DYSON asked if they are already in the unit, why do they
need more to produce from their existing wells in the legacy
fields where billions [of barrels] are still left.
MR. JEPSEN replied that it's not just a function of whether or
not they are doing it today; it's a function of getting two or
three more rigs up there. There is competition for capital
around the world. If a company can get twice the return and be
exposed to higher profit margins in a different locale, what
would you do? So they are talking about whether Alaska can
attract that discretionary investment.
SENATOR DYSON said but the infrastructure is there; the wells
are on the pad. He thought they were talking about producing
more from the existing unit at Prudhoe Bay. Can you invest in a
green field somewhere else and get more return than harvesting
the 3-5 billion they are told is available?
4:52:40 PM
MR. JEPSEN responded that Eagleford, for example, could serve as
an illustration of a Lower 48 green field. Pads are not needed
there; they don't need roads and if they need one they can just
bulldoze it in. They don't have to drill from centralized well
pads. The cycle time to drill that is probably the same as or
less than it is to drill a well in Prudhoe Bay.
SENATOR DYSON asked if his answer was yes.
MR. JEPSEN replied yes.
SENATOR FRENCH said he wanted to talk about gas handling in the
legacy fields. To what degree the legacy fields are gas
constrained and what would it take to overcome that?
MR. JEPSEN replied that in optimizing production in a field they
look at the "incremental gas/oil (GOR) ratio." A low GOR gets
shut in or throttled back. When the drill new wells they are not
unable to produce that oil, but most of those wells have much
lower GORs and the amount of oil that is shut in is very small.
But trying to build facilities or facility expansions to handle
that volume of gas for that very small volume of oil is just not
economic. They look at this constantly. Many facilities
expansions have happened at Kuparuk, Prudhoe Bay and Alpine.
SENATOR MICCICHE said he was frustrated last year when the state
spent a lot of money on a man named Gerking who said there is a
relationship between tax policy and investment, which he thought
was counter to what all they know about tax policy. Is there a
list of projects they have in mind that at a certain level of
profit the tax revisions would allow to be developed? Alaskans
want to know that a reduction in tax policy will increase rig
count or development resulting in more oil.
MR. JEPSEN said that was a good question and asked to get back
to him on that.
4:56:26 PM
CHAIR GIESSEL thanked them for speaking today and invited
ExxonMobil to come forward.
4:56:37 PM
DAN SECKERS, Government Relations Manager, ExxonMobil Alaska,
said he was ExxonMobil's tax counsel based in Alaska, had no
power point and would cut to the chase by taking questions
immediately. He said previous testimony from BP underscored
ExxonMobil's concerns with progressivity. Alaska's fiscal regime
is uncompetitive and needs to be addressed, and he welcomed the
opportunity to be here.
He said that SB 21 makes significant progress in drawing
investment back to Alaska. Eliminating progressivity, alone,
will dramatically improve Alaska's investment climate. However,
the gross revenue exclusions (GRE) should be expanded to all
fields including the legacy fields, because a majority of the
work in the near term will be in areas that will not generally
yield a new PA. He said you want to incent all production,
because a small recovery of additional reserves in Prudhoe Bay
will dwarf any other discovery that is on the horizon in Alaska.
This is critical.
SENATOR DYSON asked if he had to trade GREs in the legacy fields
for the investment credits which he would choose.
MR. SECKERS answered that tax calculations are just math to get
to a bottom line calculation and that a GRE can function in many
respects as a tax credit. The tax credits are more incentivizing
on a present value basis, because the result is immediate versus
a delay in getting the production to apply them to. But both are
critical and both can work; the key is to come up with a
balance.
SENATOR DYSON asked which of the two mechanisms would be more
likely to get at production sooner, which is more in the state's
interest than ExxonMobil's.
5:01:47 PM
MR. SECKERS replied that tax credits would provide a present
value impact of a greater amount than a GRE. He said, however,
the elimination of credits is concerning, because they are very
important in helping with present values. The base rate is also
still too high. Why? Benchmarking government take against other
regimes like North Dakota and Texas is useful, but it's not the
whole picture. Alaska is burdened by a lot of issues that other
states don't have like high costs and Arctic conditions. But, as
policy makers, legislators should ask what they can do to bring
all investors to Alaska and if the current path they are on is
the right course for a long term solution or is change needed.
He would pick the later.
SENATOR FRENCH asked what a realistically achievable decline
curve would be for the legacy fields.
MR. SECKERS answered that ExxonMobil isn't an operator at
Prudhoe Bay; BP speaks for Prudhoe Bay and ConocoPhillips speaks
for Kuparuk. ExxonMobil is the operator at Pt. Thomson and they
are doing everything they can do there.
SENATOR MCGUIRE said that growing up in Alaska she had a sense
of partnership with industry and with TAPS; perhaps it's because
they sort of built the state together by making Alaska the major
domestic supplier of crude oil to the country; roads were paved
and great schools were built, and she felt a sense of
accomplishment. But in the last decade, she had seen animosity
and division between the state and industry and she hoped that
in their partnering now they could continue to mature going into
the next chapter of their development. She hoped all were
aligned on increasing production and all can agree that ACES
didn't increase production. Those who supported it thought the
qualified investment credit would increase it, but it just
increased investment not production.
SENATOR MCGUIRE said with the next tax system they want to
incentivize production. They don't want to deplete Prudhoe Bay
by creating a stampede, but to get back to some level of
sustainability so the state can manage its budget. What can they
do?
5:09:06 PM
MR. SECKERS said ExxonMobil shares the same concerns and he also
thought a change in policy would increase production. He said a
good policy shouldn't pick winners or losers and promised to
talk within AOGA and get a unified voice and get back to them
with ideas.
CHAIR GIESSEL said she appreciated Senator McGuire's question,
because they are wrestling with the fact that they have been
offering these very magnanimous credits - no one had addressed
the GRE yet - and yet the production curve continues to go down.
They are trying to align with industry and that is why this was
crafted. She asked how it doesn't align, because she was having
trouble believing that ExxonMobil doesn't have the financial
fortitude to be able to forward fund a development without
credits from the State of Alaska.
MR. SECKERS said he didn't address the tax loss carry forward,
because he hoped ExxonMobil would never be there, but it is an
interesting proposal. He shared AOGA's comments that the
restrictions on transferability diminish some of that.
Why isn't eliminating progressivity enough? From a pure tax
perspective, he said Exxon looks at the bottom line: you can
give us all the deductions in the world, but if our taxes
triple, it hasn't really helped that much. Yes, ACES did provide
these credits, but their taxes also were raised quite
substantially - and that had quite a bit to do with it. Their
hope is to work with the legislature as policy makers to craft a
policy that would lead to this new production through
investment.
5:14:12 PM
SENATOR FRENCH asked if it takes all three partners to agree to
a major investment at Prudhoe Bay.
MR. SECKERS replied that as tax counsel, it was hard for him to
say for certain, but it takes a certain level of vote and it
generally requires all three companies to do that. When projects
pencil out, they generally go forward, and ExxonMobil has been
supportive of all of them.
SENATOR FRENCH said as an example, last year as HB 110 was
working its way through the system, representations were made
about investments BP and ConocoPhillips would make if it passed;
ExxonMobil did not join in those representations.
MR. SECKERS said their response now, as then, is that Alaska is
"a very important part of our portfolio." Their goal is to make
every investment they can that pencils out and believe that
improving Alaska's fiscal climate would increase investments
from all companies.
CHAIR GIESSEL asked what an equitable tax structure is in his
mind.
MR. SECKERS said he didn't have an answer; the company has not
looked at it from that point of view. In general they think the
legislative consultants were doing a great job and have given
them some indication of where Alaska ranks among competitors. As
policy makers, the legislature needs to design a policy with
that information. ExxonMobil will invest everything it can under
the policy they create.
CHAIR GIESSEL thanked him for joining the committee.
5:18:09 PM
At ease from 5:18 to 5:22 p.m.
5:22:24 PM
CHAIR GIESSEL opened public comment.
CHARLIE POWERS, Resource Development Council (RDC) member,
Kodiak, Alaska, supported SB 21 saying that incentives attract
investment like that used for Cook Inlet gas development, the
Alaska film industry, the Home Energy Rebate Program, and North
Dakota's exploration. He had noticed that disincentives like the
Alaska cruise ship tax and ACES discourage investment, and that
many of his neighbors seem to harbor a mentality of "sticking it
to the oil companies" that likely comes from the Exxon Valdez
and high fuel prices. People in Kodiak seemed to think that the
oil industry didn't affect Kodiak's economy directly, but this
year he hears more folks joining other business leaders in
asking what is going to happen to fishing communities when
throughput continues to drop. People are realizing that in the
absence of one industry's ability to foot the bill the industry
they are in will have to pick up the slack.
5:25:33 PM
SKIP REIERSON, representing himself, Seward, Alaska, said as a
38-year resident of Alaska he supported SB 21 to help reverse
the decline of North Slope oil production and the potential
adverse impacts it has. He wonders how about fishing, timber and
mining would cope with the same tax structure that is in place
for oil.
5:27:22 PM
MIKE LEONARD, representing himself, Fairbanks, Alaska, said he
is a retired member of Teamsters Local 959 and he represents
working and retired Alaskans who are concerned about the future
of the state and the decline in North Slope oil production. He
urged them to consider Governor Parnell's plan in SB 21 as a
good start. He also urged them to consider that any plan for oil
tax reform must be fair to all Alaskans; it must encourage new
production; it must be simple and restore balance to the system;
it must be durable and long term to ensure opportunities for
future generations, and it must promote and include a commitment
to Alaskan hire for all Alaskans.
5:28:48 PM
DANIEL FINNEY, Teamsters Local 959-Fairbanks, Fairbanks, Alaska,
supported SB 21. They want to ensure a good solid future for all
Alaskans and make sure the Alaska hire provision is in place. He
said Alaska has a great product that is in demand, but others
have the same product to offer. They want Alaska to be
competitive again.
5:30:41 PM
CARL COLBY, representing himself, Fairbanks, Alaska, said he was
a member of Teamsters Local 959-Fairbanks and represents working
Alaskans who are concerned about the future of the state and the
decline in North Slope oil production. He supported SB 21. He
said that Alaska's high oil taxes are pricing us out of the
market and Alaska must make an effort to make itself more
competitive.
JIM PLAQUET, Events and Membership Coordinator, Alaska Support
Industry Alliance, Fairbanks, Alaska, supported SB 21. He said
he is also a 40-year member of the Operating Engineers Local
302. He agreed with Governor Parnell that the state legislature
must act this year to address production taxes in order to spur
oil industry investment. The government take remains too high
under ACES and encourages a harvest mode that realizes short
term gain for the state at the expense of increased long term
production and revenue.
He said that billions of barrels of oil remain in the North
Slope fields that will be challenging and expensive to develop.
Today's high oil prices should be spurring that investments
just has they have led to a new boom in oil production
elsewhere: for example Texas that has 830 active drilling rigs
when Alaska has 6; North Dakota that has 174; Oklahoma has 183;
and Pennsylvania has 80 drilling rigs. The single biggest reason
is that ACES that passed in 2007 has stifled investments.
ROGER BURGRAFF, Alaska Miners Association, Fairbanks, Alaska,
supported SB 21 as written. He said its incentives will
encourage investment in the Alaska petroleum industry that will
produce more oil and keep the pipeline full.
5:37:27 PM
ROBERT TOTH, representing himself, Fairbanks, Alaska, said he is
a member of Carpenters Local 1243 and has also been a commercial
fisherman; he didn't support SB 21 as written. Progressivity is
a bit of a problem he said; it was done before the oil prices
spiked in 2006, so the top end is too high. But the tax
structure can be changed without scraping the whole thing. He
pointed out that the pipeline shouldn't have been built over 36
inches in diameter, in which case we would still be producing 1
million barrels a day. But the oil companies invest on net
present value, but sometimes they make false assumptions about
the future; the state, on the other hand, knows it has oil to
sell in the long term, so our stuff has to be long term.
MR. TOTH said Alaska will not out-compete North Dakota and Texas
for oil rigs where they wouldn't be drilling at under
$85/barrel. At $60/barrel most investment won't happen. The
Bakken just doesn't pay and is driven by prices. The production
in Alaska will increase as the price for oil brings us back into
the market; heavy oil isn't going to be there for a while.
MR. TOTH said our tax structure is somewhat discouraging, but it
could be changed without a massive overhaul. It is not
discouraging companies. BP is in harvest mode but it is all
about going after the next big play.
CYNTHIA HENRY, representing herself, Fairbanks, Alaska,
supported SB 21 saying she had owned a retail business for more
than 30 years and even though they have no connection to the oil
industry, her family depends on a healthy Alaskan economy. A
decline in pipeline throughput indicates that something is wrong
with the state's current tax policies.
5:41:09 PM
LISA HERBERT, Executive Director, Fairbanks Chamber of Commerce,
Fairbanks, Alaska, supported SB 21. She said increased oil
production is one of the chamber's top critical priorities to
encourage through taxation and regulatory policy changes.
She said the Chamber supports the governor's four key guiding
principles, continued vetting of SB 21, and exercising due
diligence to reform oil taxes in a fair and meaningful way.
RICK POLLOCK, representing himself, Anchorage, Alaska, supported
SB 21. He is vice president of global projects for Lynden
International and a lifelong Alaskan who cares very much for the
economic vitality of the state. He as on the ground and sees oil
patch activity throughout the world, and without hesitation he
could say that the only location that is struggling to find
investment dollars geared towards increasing production activity
is Alaska. He believed this struggle is directly tied to ACES
and that it is essential to reform it.
RICK CANOY, business representative, Teamsters Local 959,
Fairbanks, Alaska, said he represents several hundred employees
who work for companies that support oil production efforts.
Their jobs are affected by the continued decline in oil
production and he encouraged them therefore to consider SB 21 as
a good start. He said this is an opportunity to reform a tax
structure that is not viable and is pricing Alaska out of the
market.
5:46:39 PM
JOHN DICKENS, representing himself, Bethel, Alaska, supported SB
21. He thought Alaska was on the verge of a financial apocalypse
that no one can comprehend. Corporations are not some faceless
entity; they are organizations of human beings called
shareholders. A lot has changed since the pipeline was built and
a lot of markets were not open back then. Capital is invested to
get return. Why would anyone want to invest Alaska even if the
tax rates were the same? Our weather and logistical challenges
are so much more difficult that it would be a violation of
fiduciary responsibility to invest money in Alaska, especially
with the current tax structure, which is just insane.
5:49:22 PM
ERIC FOX, Vice President of Operations for Camp Services, Nana
Management Services, Subsidiary of Nana Development Corporation,
a business arm of Nana Regional Corporation, Anchorage, Alaska,
supported SB 21. He supported changes in the oil tax structure
to bring more business to the Nana subsidiaries that work in the
oil industry that in turn bring economic opportunities to Nana
shareholders. Unemployment is a real problem in most of the 11
villages in the Nana region as it is in most of rural Alaska and
the current tax structure is having a negative impact on all of
them. Alaska's investment climate is driving away business; we
don't have a lack of oil.
5:51:40 PM
PRISCILLA SIMMONS, representing herself, Anchorage, Alaska,
supported SB 21. She said she grew up in Alaska and received an
outstanding public education here. She now works in mechanical
and process engineering in support of Alaska's oil industry. Her
generation is very concerned about the tremendous decline in
North Slope production and the decrease in overall development
and exploratory wells over the last few years. The entire state
needs a vibrant oil industry to provide revenue, job
opportunities and growth for our educated work force.
KENNETH CARON, representing himself, Anchorage, Alaska,
supported SB 21. He came to Alaska in 1975 and worked two years
on TAPS, 33 years on the Alaska radar system and spent 20 years
on the Yukon River. He supported SB 21 because the state needs
jobs. During the building TAPS there were so many jobs that
everyone could find good work. He suggested asking how much more
oil would have to go through the pipeline to equal the amount of
revenue that we get today and then judge for ourselves if we can
trust the oil companies to make the investment and develop to
reach that threshold.
5:55:57 PM
RACHAEL PETRO, President and CEO, Alaska State Chamber of
Commerce, Anchorage, Alaska, supported SB 21. This year chamber
members chose reforming oil tax policy to encourage new
production as its top legislative priority. Additionally, 13
local Chambers of Commerce - Anchorage, Bethel, Chugach/Eagle
River, Haines, Fairbanks, Juneau, Kenai, Ketchikan, Kodiak,
Palmer, Seward, and Sitka - have resolutions supporting
meaningful oil tax reform. They represent thousands of
additional businesses and Alaskan citizens who are gravely
concerned about Alaska's economic future.
5:57:48 PM
GRAHAM GREEN, representing himself, Anchorage, Alaska, supported
SB 21. He and his wife are lifelong Alaskans and their four kids
go to Anchorage public schools; he works for the oil and gas
industry as his family did. But his brother moved to North
Dakota two years after working in the Alaska oil patch for 30
years and now runs a successful welding business. The state is
uncompetitive and that has to change. He urged learning from the
lessons of the past and change the things they can control.
6:00:24 PM
JIM AYERS, representing himself, said he served as chief of
staff for Governor Tony Knowles and had various other positions
in government. He supported the direction SB 21 was going, but
he hoped they would bring some industry leadership in to talk
about what they are going to do for Alaska. Don't let them sit
in their offices in other states or other countries since you're
going to do all this for them.
MR. AYERS explained that during his time with the state he dealt
former President Bob Malone with BP in negotiations over several
issues including orphan sites and Chairman Lee Raymond of
ExxonMobil over a variety of things from the Valdez settlement
to adopting escort tugs, providing university scholarships,
establishing moratoriums in a variety of important areas, as
well as constructing modules (controversial in Canada). And
there was no better gentleman than Jim Mulva with
ConocoPhillips. Those guys taught him this: taxes is matter of
discussion and has been since the first oil came out of the
ground and it will continue to be so. It's a matter of big time
negotiation. Tax breaks may or may not result in expanded
exploration or oil development enhancement or jobs.
He advised if you're going to consider give-backs, breaks or
incentives, bring industry leaders in and have them be clear
about what the performance will be for the incentives they are
suggesting.
6:03:09 PM
GARY DIXON, Vice President, Teamsters Local 959, Anchorage,
Alaska, supported SB 21. He said he represents workers from all
over Alaska who are concerned about the future of the state and
the decline on the TAPS throughput. He urged them to, "Please
make us competitive again."
CARL PORTMAN, representing himself, Anchorage, Alaska, supported
meaningful oil production tax reform this session. He said
Alaska needs to position itself as "a most compelling place for
investment." He said the private sector is the foundation of
Alaska's economy and the oil industry is the state's biggest
economic engine. "ACES is broken and it is redirecting capital
to more attractive oil and gas jurisdictions elsewhere." SB 21
is a big step in the right direction.
6:06:41 PM
PAUL FRIESE, representing himself and family, Wasilla, Alaska,
supported SB 21. He said he is vice president of sales for
Lynden in Alaska. He moved here in 1984 to work and go to
school. In the late 80s he watched as the state struggled with
oil at $10 a barrel. It's hard for him to imagine that at $100 a
barrel we are facing a similar situation unless some reforms are
made immediately to the oil tax. He said the oil and gas
industry supports everybody from the restaurants to the
retailers. Currently three of his kids are in college and they
all want to make Alaska their home.
BRIAN HOVE, representing himself, Anchorage, Alaska, supported
SB 21. The oil industry has provided him with a standard of
living that has been greater than it otherwise would have been;
he hasn't paid any income tax or state sales tax for the last 33
years. When he moved to Alaska in 1980 he was 18 years old and
even then he could see the opportunity here. Now he looks around
at the 18 year olds and asks himself if they feel the way he did
in 1980. He just doesn't know, but he believes that we have a
responsibility to make sure there is opportunity for future
generations of Alaskans.
6:10:17 PM
PAUL GLAVINOVICH, representing himself, Anchorage, Alaska,
supported SB 21. He said it is common knowledge that Alaska is
dependent upon the petroleum industry for upwards of 90 percent
of its tax revenue and the current decline in production is
cause for acute concern. It is only the recent high price that
has kept Alaskans from raiding its various savings accounts.
He said he is more than familiar with the investment criteria
that drives the successful production of the earth's resources
and any investment in the extraction industry, be it mining or
oil and gas, and it all involves a degree of risk. The
investment community deploys its assets in those areas of the
greatest potential for acceptable returns. And Alaska is or is
rapidly becoming a non-competitor in that criterion.
6:12:13 PM
KATY CAPOZZI, representing herself, Anchorage, Alaska, supported
SB 21. She was concerned about the decline in TAPS throughput
while we know for certain that there is still a lot more oil
available to be produced on the North Slope. At the same time,
places like California and North Dakota have enjoyed massive
investment and production in their oil fields. She said there is
no reason why during historically high oil prices that Alaska
shouldn't also be enjoying the increased investment in
production.
RADA KHADJINOVA, representing herself, Anchorage, Alaska,
supported SB 21. She came to Alaska in 1993 from Russia and now
has three degrees from UAA including a graduate level degree in
environmental regulation and permitting. She wants to continue
using her skills and expertise to live and work in Alaska and
wants the same for her friends and family. No matter what kind
of rhetoric is being used, she said the facts remain the facts
and those are that what we have been doing thus far is not
working, because production continues to decline. Alaska is not
competitive with other oil producing nations or other oil
producing states. Legislators should go over the bill with a
fine toothed comb.
JIM SYKES, representing himself, Palmer, Alaska, opposed SB 21
in its current form. He wasn't in favor of the net profits tax
when it was enacted, but on the other hand it hasn't been
audited and we don't know exactly where we are. And it does
appear to be working. What troubles him about SB 21 is that it
gets rid of progressivity, which is one of the most successful
parts of the tax. It might need adjusting or to be capped at the
high end, but we have a constitutional obligation to get the
maximum value from our resources. He agreed with the speaker
that said we need to get away from politics and into the problem
solving mode. He has heard some assumptions that need to be
checked against the facts. Both OPEX and CAPEX have increased in
the past several years and employment has increased to record
highs.
He said that most of the rest of the oil that is going to be
produced from state lands is in the legacy fields and many of
those have the highest profits for any oil company anywhere in
the world. They need to demand the evidence of what the actual
economic rent is that we get from those fields. Throughput in
1988 was over 2 million barrels per day; we're actually making
about twice the money off of about one-quarter of the oil. So,
it's really more about price than throughput. We need to
maximize the value of our one-time resources.
6:19:56 PM
RON JOHNSON, representing himself and his wife, Fairbanks,
Alaska, said he is a retired Fairbanks professor and that he
opposed SB 21. He favors increased throughput in TAPS, but SB 21
doesn't ask for any specific throughput increase or investment
to qualify for the tax breaks. What evidence do we have that
lowering tax rates will increase TAPS throughput? For example,
from 1996-2006, Kuparuk's throughput went down by about 7
percent a year - as the tax rate went down from 12 percent to 1
percent. If we use that logic, maybe we should raise the tax
rates to increase the throughput.
He asked where the analysis was to back the governor's bet that
lowering the tax rate by more than 20 percent will increase
throughput by more than that to make up for the loss in tax
revenue due to the tax rate going down. He urged them to assess
how much extra drilling success is needed to recoup the losses
from reduced tax rates and the likelihood that industry will
make the necessary investments.
MR. JOHNSON said there is also the time value of money. If we
change from ACES to SB 21, maybe the state will lose $10 billion
in tax revenue over the next half dozen years. So, are we going
to get back more than $15 billion in revenue over the next 10
years to make up for it? He wanted them to assess these details
in determining whether SB 21 will increase revenues, but he
didn't think it would.
DAVE HARBOUR, representing himself, Anchorage, Alaska, said he
serves as publisher of Northern Gas Pipelines, a 10-year old
energy web page in Alaska, and chairs oil and gas conferences
throughout the U.S. and Canada. He has served with state and
municipal governments, the Alaska University and the oil
industry. He wanted to provide some historical comments. Back in
1969, at the time of the Prudhoe Bay lease sale, Alaska was
about 10 years old. It hadn't fully developed or defined what
Alaska's constitutional requirement for developing maximum
benefit for the people for its natural resource really meant.
The decade of the 70s was a period of dissension as taxes
increased almost every year (as the legislature struggled to
define maximum benefit), followed by a period of tranquility. In
1981, Governor Hammond and the legislature had unique a press
conference in that it was non-partisan and was attended by
virtually all the leaders of the legislature. In it they
announced that in a unified way they had established a "fair
share" of oil and gas revenue that was roughly about one-third
of total revenues among the state, the federal government and
the oil industry. Once that was done - and the tradeoff for
doing that was repeal of the separate accounting methodology for
corporate income tax as well as the oil industry's agreement to
change the severance tax from 12.25 to 15 percent - there
followed a 20 year period of relative tranquility and high
investment, the best evidence of which is that Prudhoe Bay and
TAPS were financed on the basis of 9.6 billion barrels of
proved reserves (and as we know about twice that has been
produced).
He summarized that the legislature would be well advised not to
pick a percentage, but rather analyze where we stand and put us
in the median of competing oil and gas jurisdictions with an
offset for the high cost of doing business here, the need for a
800-mile pipeline to move the oil down to tidewater, and the
fact that many of our competitors located at tidewater are in
the temperate zone.
6:26:11 PM
JIM PALMER, representing himself and his family, Eagle River,
Alaska, supported SB 21. He remembered the beginnings of North
Slope production and the onslaught of royalties and taxes into
the state treasury. He also remembered the many legislative
battles over taxes, fair share, all of which he thought weakened
Alaska's competitive place in the world's oil markets. We are
now at a critical point in the state's history when the governor
and the legislature have an opportunity to finally fix the
detrimental ACES provisions and put Alaska in a place where it
effectively and over longer term seizes investment capital for
both production and exploration.
He said we can no longer depend on high oil prices to sustain
state spending; production is the key. He urged them to fix the
progressivity provisions of ACES and fashion a bill that
effectively makes Alaska competitive. Marginal changes are not
enough.
6:28:26 PM
SENATOR FAIRCLOUGH thanked Mary and Jim for taking the time to
call in.
MARY BRAHM, representing herself, Eagle River, Alaska, supported
SB 21. She is on professional staff with the Chugiak Eagle River
Chamber, but testified for herself. She agreed with the
Chamber's position on Resolution 2010-1 that passed in February
2010. It supported the re-evaluation of ACES and encouraged the
Alaska state legislature to create the most competitive
environment with fiscal certainty in order to attract
sustainable reinvestment in North Slope oil production. Again,
in 2013, they established the revision of ACES as their highest
priority in order to reverse declining production and increase
investment on the North Slope. She said the state needs a $106
price in order to cover its operating budget. Her children and
grandchildren want to make Alaska their home and that is
dependent upon the state's ability to prosper and grow.
6:30:42 PM
JOE HEGNA, past president, Chugach/Eagle River Chamber of
Commerce, Eagle River, Alaska, supported SB 21. The Chamber has
identified the oil and gas production tax as its number one
priority, because it is clearly the state's most important
issue. They support the governor's four key principles on oil
and gas production and SB 21 addresses them. The Chamber
believes the current production tax rate discouraged development
investment and the progressivity component is the most
problematic component. It has also concluded that a significant
change in the production tax is needed now. He, personally, is
concerned about the current short term tax and spend approach
that Alaska has; it will eventually kill the future of his
grandchildren and maybe even his children.
6:32:18 PM
JOHN SIMS, Vice President, Chugach/Eagle River Chamber of
Commerce, Eagle River, Alaska, supported SB 21. He was born and
raised in Alaska and is a father of three. He is continually
concerned about the declining production of oil on the North
Slope. Even a basic understanding of the decision making process
in the corporate environment shows clearly that Alaska holds the
key to its own success. Alaska has the highest industry costs
and tax rate in the nation, and only the most profitable
projects in a company's portfolio get funded. The state can keep
its current policy that limits investment or it can show
businesses and residents that their main focus is on securing a
long term solution, he supported the governor's four principles
for guiding this legislation.
6:33:07 PM
STUART COHEN, representing himself, Juneau, Alaska, said he had
lived in Juneau for 30 years and has a business called
"Invisible World" that does business in South America and Asia.
Before that he was in the oil business in eastern Kentucky where
a good well might be two or three barrels a day. He agreed with
a lot of the general things he had heard: oil is important and
we all want the state to thrive and for the treasury to be full.
The question they are addressing is if this bill specifically
moves us towards increasing production and throughput. But the
answer is no; it gives a tax break for the existing oil in
Prudhoe Bay, but experts have said that even when oil taxes were
much lower oil companies had decided not to reinvest here and
harvested the profits from Prudhoe Bay oil.
And from listening to testimony you would think that these guys
were losing money hand over fist, but in actuality [the oil
business] is still extremely profitable and the infrastructure
is in place. He supported some sort of tax break on new
production and on new investment, which are already giving, but
he didn't see the point of giving a tax break for a field that
the oil companies have already decided to milk, especially with
no guarantees to us about what they would do to increase
production.
The other problem with SB 21 is that it creates an instant
budget crisis. His kids are in the public schools here just like
very one else's who testified and the question is how much will
oil production have to increase to make up for the budget
shortfall that it will instantly create and how long that will
take to happen.
PETE STOKES, representing himself and his three children,
Anchorage, Alaska, supported SB 21. He is a petroleum engineer
for Petrotechnical Resources of Alaska, on the board of the
Alliance, and a chairman of the University of Alaska Fairbank's
College of Engineering and Mines Advisory and development
Council. SB 21 is a good start in attracting more investment and
making Alaska more competitive, especially eliminating
progressivity. Other modifications could include no increase of
tax in the $50-90 range, incentives for new production within
the existing PAs, allowing new explorers to continue to sell
loss carry forward credits (taking this away limits their
ability to raise and explore for new production).
6:39:09 PM
PHILLIS SPENCER-BELZ, representing herself, Anchorage, Alaska,
said she has a small business and a daughter in private school.
She is an Arctic Slope Regional Corporation Inupiat shareholder
and said these tax breaks don't seem fair to her. If the state
is handing them out, why not give them out to all the
shareholders all the Alaska Native Claims Settlement Act
corporations, and all Alaskans - along with a job since lack of
Native hire is also an issue.
ROCK HENGEN, President and General Manager, NANA Worley Parson,
LLC, Anchorage, Alaska, supported SB 21. He had three points to
make: in 2008, they achieved their peak growth with 650
employees. The work was based upon projects they had won in
2007. Today they have approximately 400 employees. The lack of
opportunities within the oil and gas industry has had a
significant impact on their ability to get back on their feet.
In addition, the supply and demand environment that currently
exists in Alaska's oil and gas industry has made it difficult to
retain employees. Changes are needed that will encourage growth
in the industry. He has lost many valued employees to the heated
oil and gas market in the Lower 48, because they cannot compete
with the compensation that market offered.
Finally, the picture of an insecure future that is currently
presented in Alaska has created a challenge for their company to
attract employees. Without it, talented people look elsewhere to
establish their lives. Real change needs to occur that will
create the environment for real growth in the oil and gas
industry.
6:42:36 PM
JASON BRUNE, representing himself, Anchorage, Alaska, supported
SB 21, but said it doesn't go far enough. He serves as the
chairman of the Consumer Energy Alliance Alaska Board of
Directors, Vice Chair of the Alaska branch of the Alaska Miners
Association, said he is on the board of the State Chamber of
Commerce and on several other non-profits that depend on the oil
industry contribution for much of their on-going support.
He said that the state's royalty is our fair share of each
barrel of oil. Taxes are a choice of the legislature. Previous
legislatures have chosen to be punitive and he hopes this
legislature is different. Alaska's cost of business is one of
the highest on earth. To lure more investment dollars, our taxes
should be some of the lowest on earth. Investment dollars follow
the best rates of return.
A couple of years ago he served as co-chair of the governor's
resources energy and environment transition team. After many
meetings and lengthy discussions there was unanimous agreement
that increasing throughput in TAPS should be the number one goal
of Alaskans. A conclusion in the report said, "Specific emphasis
must be placed on addressing the negative investment climate
caused by progressivity."
6:44:49 PM
PAULA EASLEY, representing herself, Anchorage, Alaska, supported
SB 21. She asked if anyone remembered how it was living in
Alaska in the 1980s; when stores were boarded up and schools
were closed. She dreads the thought of that happening again. She
hoped this legislature would solve the issue once and for all.
CHAIR GIESSEL thanked everyone for their comments and held SB 21
in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 21 ConocoPhillips Heinrich Jepsen SRES 2013.02.20.pdf |
SRES 2/20/2013 3:30:00 PM |
SB 21 |
| SB 21 Testimony BP Bilbao Williams SRES 2013.02.20.pdf |
SRES 2/20/2013 3:30:00 PM |
SB 21 |
| SB 21 Written Testimony BP Williams SRES 201.02.20.pdf |
SRES 2/20/2013 3:30:00 PM |
SB 21 |
| SB 21 Supp Letter LindaLeary 2013.02.18.pdf |
SRES 2/20/2013 3:30:00 PM |
SB 21 |
| SB 21 Written Testimony CEA StevePratt 2013.02.18.pdf |
SRES 2/20/2013 3:30:00 PM |
SB 21 |
| SB 21 Written Testimony GailPhillips 2013.02.18.pdf |
SRES 2/20/2013 3:30:00 PM |
SB 21 |
| SB 21Written Testimony RDC RickRogers SRES 2013.02.18.pdf |
SRES 2/20/2013 3:30:00 PM |
SB 21 |
| SB 21 Written Testimony DaveHarbour SRES 2013.02.20.pdf |
SRES 2/20/2013 3:30:00 PM |
SB 21 |
| SB 21 Supp Letter FAI Chamber LisaHerbert 2013.02.20.pdf |
SRES 2/20/2013 3:30:00 PM |
SB 21 |
| SB 21 Supp Testimony CynthiaHenry 2013.02.20.pdf |
SRES 2/20/2013 3:30:00 PM |
SB 21 |