Legislature(2011 - 2012)SENATE FINANCE 532

02/28/2012 03:30 PM RESOURCES


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03:33:52 PM Start
03:34:13 PM SB192
04:50:55 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Location Change --
+= SB 192 OIL AND GAS PRODUCTION TAX RATES TELECONFERENCED
Heard & Held
AOGA, RDC, The Alliance
-- Testimony <Invitation Only> --
            SB 192-OIL AND GAS PRODUCTION TAX RATES                                                                         
                                                                                                                                
3:34:13 PM                                                                                                                    
CO-CHAIR PASKVAN  announced the  consideration of  CSSB 192  ( ),                                                               
labeled  27-LS1305\B.  He  outlined the  agenda,  which  included                                                               
invited  testimony   from  three   of  Alaska's   resource  trade                                                               
associations:  Alaska Oil  and Gas  Association (AOGA),  Resource                                                               
Development  Council  (RDC),  and  the  Alaska  Support  Industry                                                               
Alliance (the Alliance).                                                                                                        
                                                                                                                                
3:35:30 PM                                                                                                                    
KARA   MORIARTY,  Executive   Director,   Alaska   Oil  and   Gas                                                               
Association   (AOGA),  said   AOGA   is   a  professional   trade                                                               
association  fostering the  long term  viability of  oil and  gas                                                               
development   for  all   Alaskans.  They   represent  a   diverse                                                               
membership and  evaluate public policy proposals  before taking a                                                               
position.                                                                                                                       
                                                                                                                                
SENATOR PASKVAN recognized Senator Giessel.                                                                                     
                                                                                                                                
MS. MORIARTY  said AOGA  represents long  time employers  in Cook                                                               
Inlet with Marathon  and Tesoro and the  newest companies, Apache                                                               
and Hilcorp,  as well  as XTO  that has  been producing  from two                                                               
existing Cook  Inlet platforms. Moving northeast  to Valdez, they                                                               
represent one  of the smallest  refineries in the  United States,                                                               
Petro Star,  Inc., and  the largest  employer in  Valdez, Alyeska                                                               
Pipeline  Service Company.  Moving up  the Richardson  Highway to                                                               
Fairbanks and North Pole, they  have three members with the North                                                               
Pole Refinery  that Petro Star  operates as well as  Flint Hills'                                                               
Refinery, and Alyeska continues  to maintain a significant office                                                               
and  workforce  in  the  Fairbanks  area.  Their  companies  have                                                               
interests all across the North  Slope, both onshore and offshore,                                                               
from legacy  companies such  as BP  and Exxon  to the  two newest                                                               
producers,  Pioneer and  Eni Petroleum  to  the newest  explorer,                                                               
Repsol. And although  Chevron divested its assets  in Cook Inlet,                                                               
it still holds  interests in the North Slope.  Finally, they also                                                               
represent  Shell  and  Statoil  that are  focused  on  developing                                                               
federal resources. All told, AOGA  members hold active leases for                                                               
more than 1.2 million acres of  state land. There is little doubt                                                               
that  they represent  the majority  of oil  and gas  exploration,                                                               
production, development,  transportation, refining  and marketing                                                               
activities in Alaska.                                                                                                           
                                                                                                                                
3:39:18 PM                                                                                                                    
She said  one of  the key  purposes of  AOGA or  any professional                                                               
trade association  is to  provide a forum  for the  discussion of                                                               
matters  of general  interest  to  its members  and  it is  their                                                               
policy  before taking  a  position  on tax  matters  to have  100                                                               
percent consensus.  AOGA did  not support  the changes  that were                                                               
made to the production tax system  in 2006 and 2007. They believe                                                               
then  and   now  that  the   current  tax  system   makes  Alaska                                                               
uncompetitive for  investment dollars  for long  term development                                                               
and production.  All member companies believe  meaningful changes                                                               
to  the tax  system  are necessary  to stem  the  decline in  oil                                                               
production.                                                                                                                     
                                                                                                                                
MS. MORIARTY stated that AOGA does  not support the CS to SB 192.                                                               
One of the most egregious provisions  is that as the price of oil                                                               
increases and  as a higher  tax is implemented all  prior dollars                                                               
are  taxed at  that higher  rate. This  could be  addressed by  a                                                               
bracketing concept  that sets  tax rates  at different  levels as                                                               
the price increases so that each  level is taxed only once and at                                                               
a  set rate,  but  the  CS does  nothing  to  change the  onerous                                                               
provision  and thus  continues an  imbalance  in the  risk/reward                                                               
investment environment in Alaska.                                                                                               
                                                                                                                                
She said the  Senate Bi-partisan Working Group  recently issued a                                                               
press release  outlining what  it wants  from oil  reform stating                                                               
three things:                                                                                                                   
1. increased oil production                                                                                                     
2. more jobs for Alaskans                                                                                                       
3. sustained state revenue over the long term.                                                                                  
                                                                                                                                
And while AOGA supports all of  those tenets, in essence they all                                                               
boil down to just one  - increased production. Without it, having                                                               
sustained revenue will be difficult  and without revenue, jobs in                                                               
Alaska  are in  danger.  This CS  creates  potential deficits  as                                                               
early as 2015  that will grow larger in each  succeeding year. In                                                               
2006  and  2007,  many companies  testified  that  ACES  wouldn't                                                               
attract  the investment  Alaska  needs to  change the  production                                                               
curve and it  hasn't. In fact, production  is significantly lower                                                               
today than  what Alaska  was forecasting when  it passed  ACES in                                                               
2007.                                                                                                                           
                                                                                                                                
One only needs  to look to Cook Inlet for  guidance, Ms. Moriarty                                                               
said, where  the legislature reacted to  production concerns with                                                               
bold  and meaningful  tax reforms  targeted at  making the  Inlet                                                               
commercially  attractive. By  all  accounts,  those reforms  have                                                               
been successful.                                                                                                                
                                                                                                                                
3:43:52 PM                                                                                                                    
MS.  MORIARTY said  that  Alaska needs  to  appreciate the  North                                                               
Slope  production problem  with  the same  level  of concern  and                                                               
react  with  similar bold  and  meaningful  reforms. The  overall                                                               
government  take in  Alaska is  too high  and they  supported the                                                               
governor's  proposal  as a  first  step  in providing  meaningful                                                               
reform. She offered to answer questions.                                                                                        
                                                                                                                                
3:44:56 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  if HB 110 is a good  first step, what                                                               
other steps are needed if they pass a bill like it.                                                                             
                                                                                                                                
MS. MORIARTY  answered that aside from  addressing progressivity,                                                               
the base rate  should be lowered, the small  producer tax credits                                                               
should  be extended  and interest  rates should  be lowered.  The                                                               
change  has to  be comprehensive  as laid  out in  the governor's                                                               
bill.                                                                                                                           
                                                                                                                                
SENATOR  WIELECHOWSKI asked  what she  thought of  the amendments                                                               
and if she supported or opposed any one in particular.                                                                          
                                                                                                                                
MS. MORIARTY  answered that  AOGA has  looked at  the amendments,                                                               
but was uncomfortable coming to  a conclusion without knowing how                                                               
they would fit together in a complete package.                                                                                  
                                                                                                                                
SENATOR STEDMAN said  it appeared that a Cook  Inlet system would                                                               
satisfy  AOGA, but  from the  state  treasury's perspective  Cook                                                               
Inlet  has huge  capital  credits and  virtually  nothing on  the                                                               
other side  for tax  revenue. So,  in his  opinion Cook  Inlet is                                                               
broken,  but in  the  opposite  respect of  north  of the  Brooks                                                               
Range.                                                                                                                          
                                                                                                                                
MS. MORIARTY  said they aren't  advocating Cook Inlet as  a model                                                               
for the North  Slope, just saying that changes were  made to spur                                                               
exploration and development  there and they hoped  the same thing                                                               
kind of thinking would apply on the North Slope.                                                                                
                                                                                                                                
SENATOR STEDMAN asked  if they were advocating  that the treasury                                                               
run negative on the North Slope.                                                                                                
                                                                                                                                
MS. MORIARTY  answered that  they were  advocating for  the right                                                               
balance for the state and the industry.                                                                                         
                                                                                                                                
3:48:23 PM                                                                                                                    
CO-CHAIR PASKVAN asked when she  says government take is too high                                                               
what her  understanding was  of government take  of ANS  crude at                                                               
$100 or $120 under current cost structures.                                                                                     
                                                                                                                                
MS.  MORIARTY answered  that  she didn't  have  those figures  in                                                               
front of  her, but  federal tax,  state royalty,  production tax,                                                               
corporate income tax and property  tax are included in government                                                               
take and  today it is  much higher take than  it was five  or six                                                               
years ago.                                                                                                                      
                                                                                                                                
CO-CHAIR PASKVAN  asked what government take  would be acceptable                                                               
to them including the federal portion.                                                                                          
                                                                                                                                
MS.  MORIARTY replied  that they  don't have  a magic  acceptable                                                               
number. It has to  be the right balance and it  is out of balance                                                               
right  now. Governor  Hammond used  to  advocate for  a third,  a                                                               
third, a third and they are not close to that standard.                                                                         
                                                                                                                                
SENATOR WIELECHOWSKI  asked if she  agreed with the  governor and                                                               
the DOR commissioner  who recently said that  ACES is competitive                                                               
at $60 to $80 and that it gets high at around $100.                                                                             
                                                                                                                                
MS. MORIARTY  answered that they  agree that  even at $60  to $80                                                               
oil, some fields in Alaska are  still marginal and their tax rate                                                               
could still  be too high.  They agree  with the governor  that as                                                               
progressivity   kicks  in   Alaska  gets   a  higher   percentage                                                               
especially at  higher prices. They  believe that Alaska  could be                                                               
more competitive.                                                                                                               
                                                                                                                                
SENATOR WIELECHOWSKI  asked if faced  with the choice  of passing                                                               
this bill or nothing what her position would be.                                                                                
                                                                                                                                
MS. MORIARTY replied  that AOGA opposed this bill  in its current                                                               
form.                                                                                                                           
                                                                                                                                
SENATOR WIELECHOWSKI asked if there  was any sort of happy medium                                                               
between this bill and HB 110 that would satisfy her members.                                                                    
                                                                                                                                
MS. MORIARTY  replied until they  put it in writing  she couldn't                                                               
answer that question.                                                                                                           
                                                                                                                                
3:52:13 PM                                                                                                                    
RICK  ROGERS, Executive  Director,  Resource Development  Council                                                               
(RDC), introduced himself  and said that one  of their directors,                                                               
Dave Cruz,  Cruz Construction,  was in the  audience. He  said he                                                               
would  reserve  some of  his  time  for  Mr.  Cruz to  share  his                                                               
perspective.                                                                                                                    
                                                                                                                                
MR.   ROGERS   said   RDC  is   a   statewide   membership-funded                                                               
organization, but unlike AOGA, it  represents a broader spectrum,                                                               
the  five  major  resource industries  in  the  state:  forestry,                                                               
fisheries, mining,  tourism and  oil and gas.  Additionally, they                                                               
have  communities, all  12 regional  Alaska Native  corporations,                                                               
organized labor, utilities, support  businesses and all the folks                                                               
that  recognize  the  important role  that  resource  development                                                               
plays in the state's economy.                                                                                                   
                                                                                                                                
3:54:34 PM                                                                                                                    
MR. ROGERS said there's a sense  of urgency and broad support for                                                               
a  meaningful adjustment  to the  production  tax for  increasing                                                               
TAPS through-put and  that some of the most  vocal proponents for                                                               
oil production  tax reform  are coming from  the non-oil  and gas                                                               
members. The  broader business community  is fearful of  what the                                                               
accelerating  decline  curve  means  to the  overall  economy  in                                                               
Alaska  and  is  convinced  that   ACES  retards  investment  and                                                               
contributes  to  the  decline.   The  governor's  10-year  budget                                                               
projection has a sobering outlook a few years out.                                                                              
                                                                                                                                
He said  the Senate seems to  be focused on imposing  the highest                                                               
tax politically possible on the  producers and that squeezing the                                                               
last  dollars  from a  productive  private  sector with  an  ever                                                               
expanding  state  budget  is  not  going  to  lead  Alaska  to  a                                                               
prosperous  future.  Taxing  ourselves  to prosperity  is  not  a                                                               
strategy. CSSB  192 is an improvement,  but it does not  move the                                                               
needle enough.                                                                                                                  
                                                                                                                                
MR. ROGERS said  this is a historic turning point  for Alaska and                                                               
they find  it unfortunate that rhetoric  characterizes tax reform                                                               
as a give-away. From their view,  the objective is to empower the                                                               
private  sector   to  increase  Alaska's  productivity   for  the                                                               
ultimate benefit of its citizens;  he hoped that leadership could                                                               
explain that a  high tide will lift all ships  and that royalties                                                               
will  increase only  with increased  production.  They hoped  the                                                               
legislature as a whole could  overcome what its consultant, Pedro                                                               
van Meurs, referred to as difficult political issues.                                                                           
                                                                                                                                
MR. ROGERS said according to DOR  statistics, at $100 oil the tax                                                               
in Alaska since  2005 has essentially tripled.  The RDC supported                                                               
HB 110, because  industry has said its passage will  result in at                                                               
least  $5 billion  in new  investment in  Alaska and  he couldn't                                                               
imagine the  oil industry making  a $5 billion  public commitment                                                               
and  then not  following through.  For instance,  ConocoPhillips'                                                               
capital  investment is  flat in  Alaska compared  to its  capital                                                               
investment in  the Lower  48 that has  increased by  104 percent.                                                               
What the RDC  really looks at is whether tax  changes will result                                                               
in meaningful  investments by the  private sector and  they don't                                                               
think CSSB 192 ( ) will move that needle.                                                                                       
                                                                                                                                
4:02:31 PM                                                                                                                    
SENATOR  STEDMAN  stated  that  Mr. Rogers'  inference  that  the                                                               
Senate is  only interested in  the highest possible tax  rate was                                                               
not helpful.  That was not  the direction they were  heading. But                                                               
there have  been discussions  about the  tax structure  at higher                                                               
rates; just yesterday  they looked at north of $200  when much of                                                               
the incremental  profit would go  to the state, not  industry. On                                                               
the other end of  the scale, the State of Alaska  offers a lot of                                                               
up-front credits.  He asked  Mr. Rogers how  much he  thought the                                                               
state should supplement capital projects for the industry.                                                                      
                                                                                                                                
MR. ROGERS replied that he  stood corrected and was grateful that                                                               
CSSB 192 did  not reduce or remove  exploration credits. However,                                                               
the problem  with exploration  credits is  that they  are further                                                               
out in the  time line and the legacy fields  need immediate work.                                                               
He said  the levers  must work  in concert  with each  other, and                                                               
while  they  can  incentivize  exploration,  eventually  the  new                                                               
resource would  have to be  brought into production and  would be                                                               
affected by whatever tax regime existed at the time.                                                                            
                                                                                                                                
SENATOR STEDMAN  asked if he  thought the State of  Alaska should                                                               
be in  the position of  paying 100  percent of capital  costs for                                                               
industry at oil prices over $200 barrel as it is currently.                                                                     
                                                                                                                                
4:06:59 PM                                                                                                                    
MR.  ROGERS responded  that he  was  not prepared  to comment  on                                                               
that.                                                                                                                           
                                                                                                                                
SENATOR STEDMAN said  that's part of the balancing act.  A lot of                                                               
people are  concerned about the  steepness of  progressivity, but                                                               
on  the  other  side  of  the   tax  regime,  the  state  pays  a                                                               
substantial amount of  upfront costs to the  industry - amounting                                                               
to  $850 million  in the  2013 budget,  plus the  immediate write                                                               
off,  which by  some calculations  is worth  over $1  billion (at                                                               
$110 barrel). As  the price escalates, the  state has substantial                                                               
risk exposure  with reimbursing capital  costs. It's not  fair to                                                               
ask the state to lower one end  of the scale and leave it exposed                                                               
on the other end.                                                                                                               
                                                                                                                                
MR.  ROGERS  said those  issues  must  all  be addressed  in  one                                                               
package, not just individually.                                                                                                 
                                                                                                                                
4:09:22 PM                                                                                                                    
SENATOR STEDMAN  said he understood from  previous testimony that                                                               
industry likes Cook Inlet's tax  structure and think it should be                                                               
replicated on  the North  Slope! But, Cook  Inlet has  a negative                                                               
cash flow into the state treasury  and the problems in the Arctic                                                               
are different.  Clearly, the State of  Alaska should not be  in a                                                               
position of paying the industry  100 percent of capital costs. It                                                               
has already put  over $4 billion into the oil  basin and yet they                                                               
hear  from industry  that  Alaska is  closed  for business.  That                                                               
attitude has a negative indication through multiple industries.                                                                 
                                                                                                                                
MR.  ROGERS  clarified that  what  he  was  saying was  that  the                                                               
production tax north of the Brooks  Range is not competitive on a                                                               
global scale and is hampering  business. Production is decreasing                                                               
while  oil prices  are  very robust  and  other jurisdictions  in                                                               
declining   reservoirs  have   production   that   is  level   or                                                               
increasing. The North  Slope should be having  more activity when                                                               
prices are where they currently are.                                                                                            
                                                                                                                                
4:12:31 PM                                                                                                                    
CO-CHAIR  PASKVAN asked  what  he thought  a  reasonable rate  of                                                               
government (including federal) take is.                                                                                         
                                                                                                                                
MR. ROGERS  replied that  the industry  is comfortable  with that                                                               
level of government take in HB 110.                                                                                             
                                                                                                                                
CO-CHAIR PASKVAN  asked if  they had  come up  with a  rate under                                                               
which anything  would be acceptable  and above which it  would be                                                               
rejected.                                                                                                                       
                                                                                                                                
MR. ROGERS reiterated  that they have accepted  the revenue curve                                                               
in HB 110.                                                                                                                      
                                                                                                                                
CO-CHAIR PASKVAN  said he was  talking about the  government take                                                               
analysis.                                                                                                                       
                                                                                                                                
MR.  ROGERS  said  they  look  at  total  government  take  as  a                                                               
combination of  federal taxes,  royalties, state  corporate taxes                                                               
and property taxes.                                                                                                             
                                                                                                                                
CO-CHAIR PASKVAN  said he was  referencing Mr.  Rogers' reference                                                               
to the  DOR's publication on the  oil and gas fiscal  regime that                                                               
trebled under ELF and asked if  he had analyzed what the ratio is                                                               
under the current cost structures.                                                                                              
                                                                                                                                
MR.  ROGERS answered  no.  He said  he had  relied  on the  DOR's                                                               
information and  that his point  had been to show  the relativity                                                               
of  the significant  changes that  have been  made over  the last                                                               
five years and that the mark was overshot.                                                                                      
                                                                                                                                
4:15:10 PM                                                                                                                    
SENATOR  MCGUIRE pointed  out  that industry  has  paid over  $73                                                               
billion  in royalties  as a  result of  renewed activity  in Cook                                                               
Inlet  and commented  that  philosophically,  the goal  shouldn't                                                               
always be to  bring money into the government. Part  of setting a                                                               
good tax  policy in a  capitalist society is finding  the balance                                                               
between allowing  dollars to flow  in the private sector  and the                                                               
jobs to be created there.                                                                                                       
                                                                                                                                
4:17:32 PM                                                                                                                    
DAVE  CRUZ, Cruz  Companies, Anchorage,  said  he graduated  from                                                               
high school  36 years ago and  got an opportunity to  work on the                                                               
pipeline  and  31  years  ago   he  launched  what  is  now  Cruz                                                               
Companies.  His  companies  build  ice  roads,  provide  drilling                                                               
support services,  tundra transport  and mobile camps  in Alaska,                                                               
as well  as private and  public heavy civil  construction, roads,                                                               
airports  and  tug and  barge  services.  They currently  provide                                                               
well-paying jobs in Alaska for 93  people and 110 people in North                                                               
Dakota where they provide drilling  support, rig moving and heavy                                                               
lift  cranes. Cruz  Companies went  to  work in  North Dakota  17                                                               
months  ago,  because  Alaska  didn't   have  enough  work.  Cruz                                                               
Companies  and  all  the  jobs it  has  generated  wouldn't  have                                                               
happened  if Alaska  didn't have  a healthy  oil industry  at one                                                               
time. Oil  pays for 90 percent  of the state's government  and no                                                               
other resource is as significant.                                                                                               
                                                                                                                                
MR.  CRUZ said  that Steven  Forbes, editor  and chief  of Forbes                                                               
Media,  said to  the  Anchorage Economic  Development Corps  that                                                               
Alaska's oil tax  structure was one of the  world's worst, second                                                               
only  to North  Korea,  and  that HB  110  would  remedy the  tax                                                               
provisions strangling the oil industry in Alaska, not CSSB 192.                                                                 
                                                                                                                                
He  said in  exchange for  lowering taxes,  the oil  industry has                                                               
offered  a  $5 billion  investment  to  increase production.  The                                                               
Senate didn't  move on it, but  instead went to look  at Norway's                                                               
model. They should  have been looking at the Lower  48 model that                                                               
even  during a  recession seems  to be  working well.  He related                                                               
that Baker  Hughes' rig  counts indicate  that California  has 43                                                               
rigs working,  Colorado has 69,  New Mexico has  81, Pennsylvania                                                               
has 105,  Louisiana has 139,  North Dakota has 187,  Oklahoma has                                                               
198, Texas has  920, and Alaska has  a rig count of 9  as of last                                                               
Friday with 4 sitting idle.                                                                                                     
                                                                                                                                
He said Alberta, Canada, provides  a glimpse of what could happen                                                               
to production  in Alaska  if meaningful changes  are made  to the                                                               
oil  tax structure.  The  industry  there was  idle  in 2009  and                                                               
thousands of  people were  out of  work. The  government adjusted                                                               
the  tax  structure creating  incentives  to  bring the  industry                                                               
back. It is now rebounding and  11,700 wells will be drilled this                                                               
year; 700 rigs are operating there now.                                                                                         
                                                                                                                                
MR.  CRUZ  said  there  is  no comparison  between  the  cost  of                                                               
production  in  Alaska  and  in  other  states.  To  negotiate  a                                                               
drilling project  in Alaska  will cost  a couple  million dollars                                                               
and almost a year's time. In  North Dakota a drilling project can                                                               
be negotiated  in a month  and actually receive a  state drilling                                                               
permit in one  week.  North Dakota has a  road and rail structure                                                               
and private land  is used for their ventures. They  don't wait on                                                               
a pipeline to  move oil; they truck it to  a gathering center and                                                               
rail it to the East Coast every day.                                                                                            
                                                                                                                                
He said  that not  one well  they have worked  on at  Prudhoe has                                                               
come into production and his  main competitor has experienced the                                                               
same thing. In  North Dakota there is a 90  percent chance that a                                                               
well they  are working on will  be in production within  60 days.                                                               
In Alaska, the same thing takes years.                                                                                          
                                                                                                                                
MR. CRUZ  summarized that in  1975, the  largest non-governmental                                                               
employee  in  Alaska  was  the  Southeast  timber  industry  with                                                               
multiple saw mills,  two thriving pulp mills,  thousands of well-                                                               
paying  jobs,  but they  were  legislated  out of  business.  The                                                               
market did  not shut them  down. Governor Hickel  taught Alaskans                                                               
that  they can  control their  destiny  and they  can change  the                                                               
production decline, too.                                                                                                        
                                                                                                                                
4:25:45 PM                                                                                                                    
CO-CHAIR PASKVAN recognized that  Senator Egan and Senator Thomas                                                               
were present.                                                                                                                   
                                                                                                                                
4:26:44 PM                                                                                                                    
MARK HYMAN, Beacon Occupational  Health and Safety Services Inc.,                                                               
said  he would  give testimony  on behalf  of the  Alaska Support                                                               
Industry Alliance  along with Doug  Smith, another member  of the                                                               
Alliance. Beacon  provides medical, safety and  training services                                                               
and  their  clientele embraces  the  many  diverse industries  in                                                               
Alaska as  well as  municipal, state  and federal  agencies. This                                                               
includes many  of the contractors,  producers and  explorers that                                                               
represent the  oil and gas  industry in Alaska.  Additionally, he                                                               
was the immediate  past president of the  Alaska Support Industry                                                               
Alliance that has nearly 500  member companies that employ 38,000                                                               
people.                                                                                                                         
                                                                                                                                
At Beacon,  he said, many  of the new  hires that are  heading to                                                               
the North Slope provide services  for things like physicals, drug                                                               
and  alcohol  testing  and safety  training.  They  also  provide                                                               
infield   support   of   year-round   medical   clinics,   safety                                                               
professionals, onsite  training and  site control  services. They                                                               
have full time facilities in  Anchorage, Kenai and Dead Horse and                                                               
employ  roughly  250 full-time  employees.  Their  success as  an                                                               
Alaskan owned, Alaskan grown company  is directly attributable to                                                               
the  major  oil  producers  on  the North  Slope  who  have  been                                                               
exceptional corporate partners over the years.                                                                                  
                                                                                                                                
MR. HYMAN said there is no  doubt that there has been an increase                                                               
in  overall  activity  this  year  on the  North  Slope  and  the                                                               
potential  of Shell's  offshore activity  is coming  this summer.                                                               
However, none of it is going  to stem the current rate of decline                                                               
through TAPS any time soon.  Dramatic change in the tax structure                                                               
is needed to  increase investment from the  current producers and                                                               
to encourage new producers to invest there.                                                                                     
                                                                                                                                
MR. HYMAN  said not all Alliance  members work on the  Slope, but                                                               
they  are  all interested  in  a  strong  oil and  gas  industry,                                                               
because  they are  engineers, suppliers,  accountants, IT,  banks                                                               
and  many other  services  that don't  directly  contract with  a                                                               
producer or  work on the  North Slope but indirectly  support the                                                               
contractors   and  producers   that  do.   These  Alaskan   based                                                               
businesses,  union and  non-union, Native  corporations included,                                                               
are  all interested  in a  strong  Alaskan oil  and gas  economy,                                                               
because of the benefits it brings to the state as a whole.                                                                      
                                                                                                                                
4:32:16 PM                                                                                                                    
DOUG  SMITH, President  and CEO,  Little Red  Services, said  his                                                               
business   challenges  aren't   different   than  many   Alliance                                                               
members'. His company  started in 1983 and has  140 employees; 70                                                               
percent  are  Alaska  residents   and  10  percent  are  previous                                                               
residents  who moved  out of  the state  while being  employed by                                                               
them.  Their  primary concern  is  how  the industry's  uncertain                                                               
future challenges making good capital  decisions. For instance, a                                                               
new hot  oil unit built for  Arctic needs is only  available from                                                               
one vendor  in Red Deer, Canada,  and the one he  got in December                                                               
cost  $2  million.  Three  years  ago, the  same  unit  was  $1.5                                                               
million. The $.5 million difference  was not related to the price                                                               
increase in  steel or  parts, but to  demand coming  from Alberta                                                               
last  year. There  is no  potential rate  increase to  offset the                                                               
impacts  from  the additional  costs  like  this. This  piece  of                                                               
equipment has  a 20-year life  span and  it's hard for  anyone to                                                               
see ahead 20 years to say it was  a good decision or not. He said                                                               
the state  needs to bring  some certainty into its  fiscal policy                                                               
to  allow  for  sound  evaluation   of  long  term  projects  and                                                               
investments.                                                                                                                    
                                                                                                                                
He said  they are now  considering refinancing their  senior debt                                                               
and the number one question they  get from banks is what is going                                                               
to happen  with the  tax structure  in Alaska  and how  will that                                                               
affect the future  of your business and cash flow.  He asked them                                                               
to remember  that when  they look  at making  changes to  the tax                                                               
structure.                                                                                                                      
                                                                                                                                
4:38:01 PM                                                                                                                    
SENATOR  STEDMAN  said  he  heard what  they  were  saying  about                                                               
employment being  down and  costs being  up, but  legislators get                                                               
conflicting  information. For  instance,  employment  in the  oil                                                               
basin is at its maximum,  the DOR expects capital expenditures to                                                               
go  from $2.7  to $3.8  billion and  barge and  freight companies                                                               
have   indicated  that   shipment  dollars   are  going   towards                                                               
maintenance  items.  Legislators had  also  been  told that  bunk                                                               
houses and  planes in the oil  patch are full and  the processing                                                               
facilities  are  running  at  capacity.  So  they  struggle  with                                                               
conflicting information.                                                                                                        
                                                                                                                                
4:41:39 PM                                                                                                                    
MR. SMITH agreed that the  process is difficult to understand. He                                                               
lost  about 10  percent of  his employees  due to  decreased work                                                               
during the recession,  but they found ways keep  working. One way                                                               
was delivering new infield technology  to redirect water flood by                                                               
injecting  bright water  polymer  to increase  oil recovery  from                                                               
existing BP wells.                                                                                                              
                                                                                                                                
MR.  SMITH said  he wanted  someone  to get  the forecast  right,                                                               
because DOR's  projections during  ACES discussions  were 100,000                                                               
barrels  off from  what oil  production actually  is today.  ACES                                                               
might  not have  passed if  they had  a better  idea of  what was                                                               
going to  happen in  the economy.  A conservative  estimate going                                                               
forward is  needed so Alaska  can have  its best shot  at getting                                                               
into a more competitive posture.                                                                                                
                                                                                                                                
CHAIR PASKVAN asked if his  business was eligible for the capital                                                               
expenditure credit.                                                                                                             
                                                                                                                                
MR. ROGERS answered  no. He added that once they  pay the federal                                                               
government its  share that the  remainder should be  fairly split                                                               
between industry and the state.                                                                                                 
                                                                                                                                
CO-CHAIR PASKVAN  commented that he  heard in 2008 when  oil went                                                               
up to $140  barrel that all the costs for  the support structures                                                               
dramatically increased, too,  and in 2009 when  oil declined, the                                                               
majors suppressed the prices.                                                                                                   
                                                                                                                                
MR. ROGERS  responded that his  company prices are less  now than                                                               
they  were  in 2004  and  he  offered  to  show copies  of  their                                                               
contracts. Some  industries may  have over-escalated  prices more                                                               
than what  was fair and may  be seeing themselves at  the back of                                                               
the line now, but  a lot of them did not  participate in that. He                                                               
felt if  you want  to be a  long term partner  you have  to treat                                                               
each other  with mutual respect and  the state has to  decide how                                                               
to be a partner rather than a "pickpocket."                                                                                     
                                                                                                                                
SENATOR   STEDMAN   said   the  DOR   charts   from   yesterday's                                                               
presentation  were  for  the legacy  fields  and  didn't  include                                                               
everyone up there. There had been  discussion on fixing ACES at a                                                               
high price, but  outside of that there had  also been discussions                                                               
on how to  tax incremental oil production to  flatten the decline                                                               
curve first  and then  get it back  up to  600,000 incrementally.                                                               
Pedro  van Meurs  suggested a  $25 allowance  to the  industry on                                                               
incremental production and  Senator Wagoner was working  on a tax                                                               
holiday methodology.  They were  trying to zero  in on  what they                                                               
perceive is the most challenging problem, but the problems with                                                                 
ACES are a lot deeper than they have time to deal with this                                                                     
winter.                                                                                                                         
                                                                                                                                
MR. ROGERS said he appreciated that and his organization's                                                                      
members were trying to education themselves so they could remain                                                                
objective.                                                                                                                      
                                                                                                                                
CO-CHAIR PASKVAN thanked the participants and held SB 192 in                                                                    
committee.                                                                                                                      

Document Name Date/Time Subjects
AOGA_Feb 28 2012.pdf SRES 2/28/2012 3:30:00 PM
SB 192