Legislature(2013 - 2014)BUTROVICH 205
02/05/2013 03:30 PM Senate SENATE SPECIAL COMM ON TAPS THROUGHPUT
| 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 | |
SB 21-OIL AND GAS PRODUCTION TAX
3:33:50 PM
CO-CHAIR MICCICHE stated the purpose of the meeting was to hear
from the oil industry on SB 21.
He noted the presence of Senator Giessel.
3:34:47 PM
KARA MORIARTY, Executive Director, Alaska Oil and Gas
Association (AOGA), explained that AOGA represents 16 companies
who account for the majority of oil and gas exploration,
development, production, transportation, and refining of oil and
gas on shore and off shore in Alaska. She said her comments have
been unanimously approved by all members of AOGA.
She agreed with Senate President Charlie Huggins' comment in the
Anchorage Daily News, January 31, when he stated, "The most
pressing issue facing Alaska is the downturn in oil production
on Alaska's North Slope." She applauded Senator Huggins, the
committee, and Governor Parnell for recognizing this as a
serious issue.
She drew attention to a chart of the most recent forecast of
production decline from the Department of Revenue (DOR). She
contrasted it with the forecast from 2000 when everyone was
focused on oil price and the state was facing a billion dollar
shortfall at a time when the budget was significantly less than
it is today. In the past, DOR projected that ten years from now,
50 percent of our oil production would be from new oil.
She pointed out that DOR's updated forecast includes a new risk
modeling into their forecast, but noted that the forecast for
currently producing fields assumes that the current level of
investment in producing fields will continue, which is by no
means guaranteed.
She informed the committee that Alaska's production decline rate
has remained at around 6 percent per year for the last decade,
or at least 40,000 barrels a day per year. She maintained that
the accelerated decline is unacceptable, especially at a time of
record and sustaining high oil prices over the last five years.
3:38:17 PM
MS. MORIARTY turned to a graph that showed competition at high
oil prices. Production in Texas started to level off as oil
prices increased. North Dakota has caught up and surpassed
Alaska in production. California is about to surpass Alaska.
Alaska now supplies only 8 percent of the nation's oil
production. She showed how Alaska is headed out of medal
contention in daily oil production.
She related that in November 2012, the most recent month of
statistics on the U.S. Energy Information Agency's website,
production in Texas was 2.1 million barrels per day, North
Dakota was 731,000 barrels per day, and both Alaska and
California were at 553,000 barrels per day.
She reminded the committee that she represents a diverse
membership, ranging from companies exploring and operating in
Cook Inlet and on the North Slope, to companies hoping to
develop Arctic Outer Continental Shelf (OCS) resources, to three
in-state refineries, as well as the Trans-Alaska Pipeline System
(TAPS).
3:40:33 PM
MS. MORIARTY pointed out that current production is over 100,000
barrels per day less than when production from the North Slope
began in 1977, and Alyeska Pipeline Services Company would like
to see that decline change. Alyeska faces increasing daily
demands and challenges related to providing safe and reliable
transportation of oil to market. All members of AOGA share those
concerns. Two of the three in-state refineries rely solely on
North Slope crude delivered through TAPS. Low throughput
increases the costs of refining, especially in Interior Alaska.
For example, about 20 years ago, when the oil reached North Pole
refineries, it was about 110 degrees Fahrenheit and now it
ranges in the 30-degree range. Having to heat the oil increases
energy costs.
3:42:21 PM
She spoke of the challenges in Cook Inlet of attracting workers
back to the area and finding enough drilling equipment for new
production there.
She related that the Arctic OCS is believed to have an estimated
27 billion barrels of oil and 130+ tcf of natural gas. Even if
there is a successful exploration season in 2013, it will be 12
to 15 years before production is seen from the Chukchi Sea. The
pipeline needs to be healthy and viable then, as well as today.
MS. MORIARTY discussed producers of the existing non-legacy
fields on the North Slope and the developers of any new fields
that may be discovered there. She said they need as much
production as possible flowing from the legacy fields through
TAPS in order to keep the costs affordable to ship their oil to
refineries. Unaffordable high transportation costs could cripple
the economics of any new fields that might be found, as well as
economics of non-legacy fields currently in production.
She compared the North Slope oil province to a tree, with the
two great legacy fields being its trunk and with the other
fields being branches rising out of the trunk. If one peels the
bark off all the way around the trunk and makes it unhealthy,
all the other branches will become unhealthy, too, no matter how
robust they might have been if the trunk stayed strong.
3:44:29 PM
She said that Governor Parnell recognizes that as a state,
Alaska needs increased oil production in all fields because the
current throughput is unacceptable. He has identified four core
principles that "any tax reform proposal must adhere to": the
tax must be fair to Alaskans, must encourage new production,
must be simple, so it restores balance to the system, and it
must be durable for the long term. She said that AOGA endorses
these principles.
She encouraged the committee to ask:
· What is the state's goal and desired outcome?
· Does the state's policy reflect the constitutional
mandate of developing the natural resources here for the
maximum benefit of Alaskans, both today and tomorrow?
· Is the policy short, mid or long term?
· Will it encourage additional investment across a wide
spectrum of projects/companies?
· Will it encourage development through a fair and
predictable regulatory environment?
· Will it encourage development through land sales and
competitive lease terms?
She emphasized that the challenge facing Alaska is not in having
too many companies pursuing the opportunities that they see
here, but in having too few. To be effective, any reform measure
needs to avoid tax changes that artificially create winners and
losers.
3:46:17 PM
MS. MORIARTY shared thoughts on SB 21:
Senate Bill 21 takes some positive steps towards the
goal of more production; such as the Gross Revenue
Exclusion concept and eliminating progressivity, which
has led to Alaska being uncompetitive. There are some
other provisions that need further consideration in
order to fully achieve the goals set out in this
legislation.
We support the proposed elimination of progressivity.
We have reservations with what the bill proposed for
tax credits - most importantly with the proposed
repeal of tax credits for qualified capital
expenditures (QCE). The trade-off between repealing
progressivity and losing the QCE credit is not
beneficial to industry with a rising cost structure
and low oil price environment, although it would be
helpful with high prices.
We strongly support the GRE (gross revenue exclusions)
concept but have concerns over its limited
applicability to new fields only, which is further
compounded by the loss of QCE credits as a driver for
additional investment. We believe the GRE and tax
credit restructuring proposed in the bill could and
should be expanded and better tailored to fit the
majority of projects for legacy fields that would
increase the amount of oil and gas from them.
We also believe the reasons that led the state to
create the small producer tax credits under AS
43.55.025 are also still valid today, and the bill
would be improved by extending these tax credits or
making them permanent. Similarly, the bill would also
be improved by addressing the upcoming end of the tax
caps for Cook Inlet production and non-Cook Inlet gas
sold for in state use, which will otherwise occur at
the end of 2021. Addressing these known issues now,
before they become imminent, would strengthen the
durability of the reformed tax.
The members of AOGA desire the same outcome that the
Governor and the people of Alaska want - more oil in
the pipeline providing a solid future for our industry
and continued revenues to the state for the benefit of
all Alaskans.
3:48:53 PM
Our member companies want to do business in Alaska.
Some have been exploring and producing in Alaska for
decades, while others have arrived more recently. Both
groups have a strong desire to be able to remain in
Alaska long term for their own and the state's mutual
benefit.
Overall, the bill as introduced represents a
cornerstone for significant and crucial tax reform.
It will take a monumental effort just to replace oil
from declining fields with a mixture of new production
and new stimulation to legacy fields, and bring the
decline to a stop. AOGA stands ready and willing to
help Alaskans, the Governor, and this legislature in
the remaining work to achieve the four "core
Principles." We all need to work together to make this
happen.
3:50:15 PM
CO-CHAIR MICCICHE commented that everyone he has spoken to in
the 28th Legislative Session shares concern about the decline of
throughput. The committee was formed for that very reason and is
looking as SB 21 to consider throughput issues, not tax issues.
He stated that there are two philosophies in the state: those
who believe production decline can be reduced, and those who
believe arresting the decline is unlikely and are concerned that
without guarantees, it is a giveaway of state revenue. He asked
how the legislature can ensure for Alaskans that the probability
of increasing throughput in TAPS is not only a probability, but
a relatively high probability, if Alaska were to become more
competitive.
MS. MORIARTY suggested looking at other oil producing regions.
Alaska is not competitive due to its tax structure. Other
regions have been successful increasing production, even in old,
declining fields. She said to ask what kind of policy Alaska
wants, one with more production over the long term, or to take
as much as they can in the short term. She argued that the state
can have more production over the long term in a competitive
environment.
3:52:11 PM
CO-CHAIR DUNLEAVY asked if Ms. Moriarty proposed rolling Cook
Inlet into the tax concept.
MS. MORIARTY clarified that AOGA supports the fact that SB 21
has left Cook Inlet harmless and has left the tax structure
there alone. However, if the bill was to revisit tax credits,
there are several tax credits in Cook Inlet that are set to
expire in 2021 that AOGA believes would be good to keep by
extending them or making them permanent. She suggested it would
be better to make those changes now instead of right before they
expire because companies make investment decisions years out.
CO-CHAIR DUNLEAVY stated that the mandate of the committee is to
look at TAPS and issues related to North Slope resources.
CO-CHAIR MICCICHE thanked Ms. Moriarty for her testimony.
3:54:41 PM
THOMAS BARRETT, President, Alyeska Pipeline Service Company,
introduced himself. He stated that the steady decline in oil
production on the North Slope is a crucial issue for Alyeska, as
the pipeline operator, and for the people of Alaska.
3:55:17 PM
At ease
3:56:23 PM
MR. BARRETT said throughput decline is a significant problem for
the state. During the time the committee is meeting, throughput
will decline by over 2,000 barrels. Since the legislature has
convened, throughput has declined by over 725,000 barrels.
He related that TAPS is an 800 mile pipeline that runs from
Prudhoe Bay to the marine terminal at Valdez. It was designed as
a warm oil pipeline set to move 1.5 million barrels per day. It
had a peak production of over 2.1 million barrels per day in
1988. Circumstances have changed; throughput and temperatures
continue to decline. At 580,000 barrels a day, segments of crude
oil in the pipe will be below 32 degrees Fahrenheit during the
winter months.
He reported that, so far, TAPS has delivered over $170 billion
over the past 35 years to the state treasury. More than 90
percent of government services are paid for by oil revenue. Some
experts suggest that without TAPS, Alaska's economy might be
half of its present size.
He said in 2012 average daily throughput decreased by 6 percent.
He showed a graph of steadily declining throughput. Declining
flow increasingly challenges Alyeska's outstanding personnel who
run the pipeline every day all year long.
3:58:58 PM
MR. BARRETT showed a temperature profile of the pipeline for the
last two weeks. He explained as throughput declines, the
temperature declines, leading to increased ice and wax buildup.
He said it ideal to operate above 40 degrees. Severe cold in the
interior is currently a big challenge.
CO-CHAIR MICCICHE asked about the cause of warming between pump
stations 7 and 10.
MR. BARRETT replied that heat is added at pump stations 3, 4, 7,
8, 9, and just before the refinery.
CO-CHAIR MICCICHE summarized that the lower the throughput, the
more Alyeska has to spend on energy to operate the pipeline.
CO-CHAIR DUNLEAVY asked who ends up paying that cost.
MR. BARRETT said it comes out of operating costs and is passed
on to the state and to the owners.
He shared an example of a challenge due to decreased throughput
from the point of view of an operator. He explained about
scraper pigs that clean wax out of the pipeline. Wax can damage
valves and cause corrosion. He gave an example of what happened
at pump station 9 on New Year's Day when a pig was trapped by a
large amount of wax caused by extremely cold temperatures. The
operators did an excellent job of managing and solving the
problem and there was no interruption in throughput. He
concluded that it is a challenged to manage problems related to
throughput. He stressed that adding more heat will not solve
complex problems created by decline in flow. Currently, Alyeska
is experimenting with ways to remove water from the oil before
it enters the pipeline.
He questioned if finding ways to move only 3,000 barrels a day
is a desirable outcome for Alaska. He showed a slide that says,
"Taking action today, preparing for tomorrow."
4:04:30 PM
CO-CHAIR MICCICHE talked about minimum flow issues and concluded
that Alaskans, under ACES, are paying more to ship less oil
every day. He asked if Mr. Barrett agreed.
MR. BARRETT said he would frame it as "the cost of moving a
barrel of oil down the line as the throughput goes down, is
headed up."
He noted that even though Alyeska has "true grit" -
determination, ingenuity, and partnership - it needs help with
increasing throughput. He emphasized that more production from
fields near to existing infrastructure is highly desirable
because it can come online into the pipe sooner.
4:06:51 PM
CO-CHAIR DUNLEAVY asked if OCS comes on line and the transport
system is the same, will the oil have to be heated.
MR. BARRETT explained that oil comes into the line at 105
degrees; however, TAPS is half above ground where there are
temperature concerns.
CO-CHAIR DUNLEAVY asked if the decreased volume of oil is the
cause of the oil cooling off faster.
MR. BARRETT said the flow rate is also slowing down so there is
more exposure to the cold.
CO-CHAIR DUNLEAVY assumed that TAPS could continue to run with
decreased volume, but costs would increase.
MR. BARRETT agreed that there would eventually be an economic
limit. He added that with the current configuration, a gravity
flow, warm oil pipeline, Alyeska can manage the flow into the
mid-300 barrels per day range, but it would be more costly.
Alyeska is evaluating the ability to change the pipeline to a
cold, dry flow. He emphasized that it is not as simple as some
might think. Adding heat will not solve the problem and adds
other complications.
He reported in 2012, Alyeska operated at 99.8 percent
reliability - uninterrupted cash flow - with the safest year on
record and a superb environmental record. He predicted the
uninterrupted cash flow would not continue into the future.
4:11:36 PM
CO-CHAIR MICCICHE asked Mr. Barrett to define a cold, dry
system.
MR. BARRETT explained that currently the system is wet; the oil
has water in it. In a cold, dry system, the water would be
distracted from the oil before it entered the pipe. The science
is being evaluated now.
He mentioned Alyeska's safety performance and environment record
is very good. He shared a personal story from having read No
Easy Day. He maintained the only easy day for Alyeska was
yesterday, and to repeat that will be hard. He said the easy day
for TAPS and Alaska was yesterday. He suggested it was time to
change the paradigm or Alaska will not be able to sustain what
it had in the past.
4:14:23 PM
MR. BARRETT showed a slide of a statute at the Valdez terminal
that says, "We didn't know it couldn't be done." He pointed out
that TAPS is Alaska's pipeline. Alyeska's personnel will
continue to do its part and is determined to do a good job. He
asked for the committee's support to move forward to increase
production and throughput in TAPS.
CO-CHAIR MICCICHE appreciated the quote and the presentation. He
said the committee would be working on some of the operational
issues after passing SB 21 on to another committee.
CO-CHAIR MICCICHE introduced Mr. Smith, saying that the
committee seeks to allow a cross section of people who are
operating on the North Slope to testify. So far, the committee
has heard from the public, industry support agencies, and the
industry.
4:16:39 PM
DOUG SMITH, President and CEO, Little Red Services (LRS), and
President, Alaska Industry Alliance (AIA) stated that he was
testifying on behalf of AIA, representing 600 companies and
about 35,000 employees, most of whom are dependent on a
successful oil tax policy.
He noted that it is early in the analysis of SB 21. The
committee is focused on production in TAPS. He said that if
there was an interruption in the flow of oil in TAPS, there
would be ramifications felt in the North Slope. He recalled in
2011 when there was an interruption and LRS provided the freeze
protection capacity on the North Slope. He pointed out that
problems caused by decreased oil flow affect activity in the
winter on the North Slope.
He termed increasing production a "bridge building opportunity"
toward future production on the North Shore and other areas. He
spoke of a goal to stem decline in order to provide a time
window to get to the next resource to put into TAPS.
He related that there is pressure to move support services to
the Lower 48. He mentioned the 410 wells waiting to be drilled
in North Dakota and said Alaska drilled that many wells in the
last three years. He said AIA must follow the investments of the
companies they work for.
4:20:49 PM
MR. SMITH suggested making a fair, equitable, and durable tax
policy now. He said he was opposed to too many additional
consultants. He recalled information provided in 2007 by Gaffney
Kline that forecast almost $4 billion in capex for drilling up
to 2012, and an incremental improvement in production of over
200,000 barrels per day by 2012. He said that prediction was
very far off. He cautioned to look at the track record of
experts, at what investment capital is doing, and at the market,
in order to keep jobs and move the economy in the right
direction.
4:22:31 PM
SENATOR MCGUIRE thanked Mr. Smith for diligently following the
issue. She requested suggestions and recommendations from AIA.
MR. SMITH read four considerations:
· Ensure our tax policy adjustments do not increase taxes in
the range where producers will stress test the economics of
investment opportunities, thought to be in the $80 to $85
range.
· Ensure our tax policy does not disincentive development
within existing PA's where the largest production
improvement opportunities exist.
· Oil policy must support the new entrants like Pioneer and
ENI who are producing oil into TAPS and spending millions
in our state economy. Our policy must encourage them to
continue that investment trend.
· A new tax policy must make Alaska competitive for
investment but protect Alaska's interest. A fair and
balanced approach will be durable.
4:26:56 PM
CO-CHAIR MICCICHE asked if LRS is expanding to areas outside of
Alaska.
MR. SMITH said safety is of the utmost importance to LRS. He
spoke of industries outside of Alaska that are not as focused on
safety like they are in Alaska. Until that changes, LRS is not
interested in going Outside. He spoke of recent efforts to
encourage oil companies to have allegiance to Alaskan
contractors. He said they moved LRS manufacturing from Canada to
Anchorage and spent $2 million on a hot oil unit.
CO-CHAIR MICCICHE asked how many people LRS employs.
MR. SMITH said 148, of which, 98 live in Alaska and 70 percent
are Alaska hire. He said LRS works closely with NIT to identify
people with CDL's, Hazmat, and tanker endorsements. Last month
LRS hired two wounded war veterans.
4:29:21 PM
CO-CHAIR MICCICHE reminded the audience that Alaska has a
citizen legislature and most legislators have jobs. He announced
that he works for ConocoPhillips, so to avoid any appearance or
perception of conflict of interest, he will hand the gavel over
to Co-Chair Dunleavy who will lead the proceedings.
4:30:18 PM
At ease
4:35:30 PM
SCOTT JEPSEN, Vice President, External Affairs, ConocoPhillips
Alaska introduced himself. He stated that he would be presenting
on Alaska's production challenge, investment considerations and
Alaska's cost environment, and ACES and SB 21.
He showed a graph depicting Alaska's oil decline while the Lower
48 continues to increase in oil production. Over the past few
years there has been an oil production resurgence in the Lower
48. He addressed the causes for that: a resource of conventional
and unconventional plays, improved technology, higher oil
prices, and an equitable tax environment. Alaska has the
resource, the technology, and high oil prices, but not a
favorable tax environment. The tax environment in Alaska takes
away the upside as oil prices increase. Costs for exploration
are also high in Alaska.
MR. JEPSEN showed a slide that emphasizes that Alaska legacy
fields still provide significant opportunity. The legacy fields
are about 90 percent of North Slope production and the lion's
share of estimated future production. Legacy fields are key to
offsetting ANS decline.
4:40:50 PM
CO-CHAIR MICCICHE noted on the previous slide that Alaska's
North Slope production is erratic compared to other areas in the
Lower 48.
MR. JEPSEN attributed variable production on the North Slope to
weather variation and major turnarounds. Also, some fields came
on line between the dates shown - 2005 to 2012.
MR. JEPSEN discussed investment criteria, or, how Alaska rates.
He looked at exploration prospectivity, costs, cycle time, taxes
and legacy field opportunities. The first four investment
criteria are considered unfavorable, with only legacy field
opportunities favorable. He mentioned a pending well in the
Chukchi Sea, which is a federal operation with a better tax
environment.
He said Alaska is disadvantaged by development costs. The cycle
time for drilling a well takes longer.
SENATOR GARDNER asked if the state adopts a favorable oil tax,
would it offset the other four adverse investment criteria. She
also wondered if the ACES credits had an impact on exploration
development costs.
MR. JEPSEN believed there were some things that could improve
Alaska's investment climate. Changing the tax environment is
one. However, SB 21 eliminates investment credits. Alaska could
offer investment credits for new production, including in legacy
fields, that will level the playing field when it comes to cost
and cycle time. He noted that ACES credits have not been a game
changer for ConocoPhillips.
SENATOR GARDNER asked Mr. Jepsen if he considers the credits
under the current regime to be level.
MR. JEPSEN suggested if progressivity were eliminated under ACES
and the tax credits kept, it would be a significant improvement
in the business climate.
SENATOR GARDNER asked if that would enough to negate high
exploration, development and production costs.
MR. JEPSEN said yes, with progressivity removed.
4:46:01 PM
MR. JEPSEN stated that legacy fields have significant
opportunities for investment. The state can improve Alaska's
investment climate by changing taxes and putting capital expense
incentives in place.
CO-CHAIR MICCICHE saw several areas the committee could address:
tax rates, and the permitting/regulatory environment. He
inquired if the state could have a role in decreasing
transportation costs.
MR. JEPSEN said Mr. Barrett spoke of ways Alyeska tries to keep
costs down. He didn't know if the state has much to say about
setting tariffs and about the Federal Energy Regulatory
Commission's (FERC) role.
CO-CHAIR MICCICHE concluded that increased production reduces
transportation costs.
4:48:09 PM
MR. JEPSEN agreed that the tariffs are a strong function of
throughput.
He turned to a graph that PFC Energy presented last week. It
shows high cost and high government take challenges in Alaska as
compared to the Lower 48. He said the playing field could be
equalized through investment incentives in Alaska.
SENATOR GARDNER looked at Alaska's development costs on the
graph and wondered if they included ACES credits. The intention
of the credits was to "share the risk." She noted the state's
participation was about $1 billion a year.
BOB HEINRICH, Vice President, Finance, ConocoPhillips Alaska,
said he did not know the origin of the data on the graph. He
explained that ConocoPhillips includes the benefits they receive
from capital credits. He said that much of the $1 billion credit
is going toward explorers, not those in the development stage.
4:50:47 PM
CO-CHAIR DUNLEAVY inquired why ConocoPhillips reports a greater
profit margin per barrel of oil in the Lower 48 than in Alaska.
MR. HEINRICH replied that the ConocoPhillips' numbers are often
misused. He agreed on an oil-for-oil basis, they do achieve a
much better profit and cash margin in the Lower 48 than Alaska
due to the lower cost structure and the access to markets.
SENATOR GARDNER asked if Alaska offers good rates of return and
strong cash margins.
MR. HEINRICH explained that the cash margins ConocoPhillips
receives in Alaska are significantly less than what it receives
in new projects in West Texas - Eagle Ford, and North Dakota. He
defined the cash margin as taking the net income per barrel and
adding back depreciation per barrel. It is in the range of $30
to $35 in Alaska; in the Lower 48 it is in the $40 to $45 range.
SENATOR GARDNER asked if there are projects in Alaska that
ConocoPhillips is not doing because of the current tax regime.
MR. JEPSEN recalled ConocoPhillips' testimony last year about
the challenges under ACES, when Northeast West Sak was
mentioned. It is a very highly challenged development that
requires new roads, pads, pipelines, and over 100 wells to fully
develop it. Based upon the investment climate with ACES,
ConocoPhillips decided to do only part of that project.
SENATOR GARDNER asked to define "problematic under ACES."
MR. JEPSEN explained that it means ConocoPhillips will take a
look at it periodically and decide whether or not it meets
investment requirements.
4:53:41 PM
MR. JEPSEN related that the easy oil in the legacy fields is
gone. He shared an experience from when he came to Alaska in
1982. Companies are now focused on challenged oil which requires
complex, high cost wells. Most fields are faulted and the oil
isolated. Multi-lateral wells have to be drilled in order to
target five or six sands. Flank oil around reservoir edges is
currently being pursued. In the 80's if the reservoir was less
than 15 feet thick it was not economic to develop. Now it is
common to develop 10 foot sands due to improved technology. He
concluded that in order to stem the decline, Alaska needs a
better investment climate.
MR. JEPSEN discussed costly water handling due to the abundance
of water in wells on the North Slope. He said a billion dollars
does not go as far as it used to. He compared a picture of the
initial Alpine development, with a cost $1.4 billion, to the CD-
5 drill site, that will cost about $1 billion, with much less
capacity. He said inflation has created this situation. He
agreed that oil companies focus on costs and concluded that
Alaska is disadvantaged by high costs.
4:59:20 PM
MR. HEINRICH focused on government and industry marginal share
under ACES as prices increase. The marginal share is the change
in distribution of cash for every dollar increase in price. He
explained that the state's share also includes the effect of
royalties, property taxes, and state income tax. The graph
illustrates the effect of progressivity with the producer
receiving less and less as the price of oil increases. He noted
that oil companies do evaluate projects across a range of
prices. The difference in marginal take at different prices
impacts investment decisions.
CO-CHAIR MICCICHE referred to a press release about the high
barrel of oil equivalency (boe) ConocoPhillips earns in Alaska.
He wondered if the company earns more per barrel of oil
equivalency in Alaska than in the Lower 48.
MR. HEINRICH replied that the numbers do confuse sometimes.
ConocoPhillips has 90 percent of their business in Alaska from
oil production. Only 10 percent of boe is from gas in Alaska,
largely from Cook Inlet. He said that in the Lower 48, over 70
percent of their business is from gas and gas liquids
production. When you compare recent depressed gas prices in the
Lower 48, and the lower price received per barrel for natural
gas liquids, to oil price revenue in Alaska, it is a hard
comparison to make. On a boe basis, when blending gas and oil
together, ConocoPhillips does have a higher net income per
barrel in Alaska. When comparing oil to oil, the net income per
barrel is much higher in the Lower 48.
MR. JEPSEN emphasized that ConocoPhillips is not investing in
natural gas in the Lower 48 anymore.
CO-CHAIR MICCICHE requested a breakdown of oil and gas boe.
MR. HEINRICH offered to provide that information.
5:05:00 PM
SENATOR GARDNER said progressivity was designed so that as the
tax rate increased, the tax payer could make a capital
investment in which the state participated, thus lowering their
tax rate. She asked if that provision has had any impact on
ConocoPhillips' investment decisions.
MR. JEPSEN replied that the extremely high tax rate under ACES
impacts overall investment decisions in the Basin. He added that
ACES impacts cash flow long term. ConocoPhillips looks at more
metrics than just NPV or IRR. It also looks at undiscounted cash
flow. Alaska's investment system is impaired because once a
project is on line "your cash flow takes a pretty significant
hair cut from there on out." Consequently, ConocoPhillips is
investing in Alaska at a moderate rate and developing resources,
but is not investing its discretionary cash flow.
SENATOR GARDNER restated her question. She asked if the ability
to reduce the tax rate under ACES has resulted in an investment
that has been beneficial to ConocoPhillips.
MR. JEPSEN explained that ConocoPhillips takes tax credits and
progressivity into account, but also progressivity. They also
look at projects for the long term regarding cash flow. Tax
credits are only a part of the equation because they reduce the
amount of tax, but do not impact the amount of capital that is
required.
SENATOR GARDNER asked what ConocoPhillips' hurdle rate for oil
investments is.
MR. JEPSEN said that is confidential information.
5:07:50 PM
CO-CHAIR DUNLEAVY asked about a gas-to-liquids approach to
monetizing gas.
MR. JEPSEN replied that ConocoPhillips is not now pursuing gas-
to-liquids options in Alaska. The current focus is on the
evaluation of a large diameter, large scale LNG plant using ANS
gas.
MR. HEINRICH turned to a slide about annual earnings per barrel
by the state and by ConocoPhillips. It shows the annual average
crude oil price from 2007 to 2011. ConocoPhillips Alaska's net
income remained flat during that time due to progressivity,
whereas the state had a 90 percent increase.
5:09:43 PM
MR. HEINRICH showed a graph that represents the producer share
under SB 21 and under ACES. The producer share calculation
depends on cost structure and capital credits. The graph shows
results for FY 2014 as though SB 21 were in effect. The
crossover point is about $93 per barrel. To the left of $93
represents a tax increase to the producers.
The shape of the curve is similar to other fiscal structures
found in the Lower 48, but does not tilt the equation to
encourage investment due to high costs in Alaska. He suggested
ways to make Alaska investments more favorable.
5:13:09 PM
SENATOR GARDNER asked if the statement "does not encourage
investment relative to ACES in a downward trending oil price
environment" is part of the risk calculation, or if
ConocoPhillips sees the world as having a downward trending oil
price environment.
MR. HEINRICH replied that it is a complement to the statement
"makes Alaska more competitive at $100+ prices" and is not a
perspective on an outlook.
CO-CHAIR MICCICHE commented that Alaskans are going to expect
that the committee needs to fully understand the effects of the
data presented. He assumed that the various entities would work
together on the data and models.
SENATOR FAIRCLOUGH said the legislative consultant is also
trying to reconcile models.
5:15:00 PM
CO-CHAIR DUNLEAVY noted there were graphs that needed to be
reconciled.
MR. JEPSEN appreciated that effort.
MR. HEINRICH listed observations related to ACES and SB 21. He
commented that under ACES, progressivity takes the upside and
discourages investment. The tax credit investment incentives are
positive, but they do not offset the negative effects of
progressivity.
He said that there are positive elements to SB 21, but noted
that there were also areas for improvement. It is a positive
step toward improving Alaska's business climate and it solves
the high marginal tax problem. It makes Alaska more competitive
at higher oil prices.
He stressed that the bill does not contain sufficient investment
incentives for legacy fields to offset Alaska's high cost
environment. It does not encourage investment relative to ACES
in a downward trending oil price environment.
5:17:10 PM
CO-CHAIR DUNLEAVY asked, if the right fiscal environment was
created, would ConocoPhillips invest in Alaska.
MR. JEPSEN said they would - under the right investment climate,
which was dependent on tax changes.
5:18:31 PM
CO-CHAIR DUNLEAVY returned the gavel to Co-chair Micciche.
CO-CHAIR MICCICHE requested that committee members submit
amendments related to throughput increases. He Alaska to stay
engaged and involved. He cautioned Alaskans to not assume where
members are on the issues. He opined he would like to see some
changes made before he could support SB 21.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Senate Special Committee on TAPS Throughput COP Testimony 2013-02-05.pdf |
STTP 2/5/2013 3:30:00 PM |
SB 21 |
| 02 05 13 TAPS Committee AOGA Presentation.pdf |
STTP 2/5/2013 3:30:00 PM |
SB 21 |
| TAPS Throughput Committee - Trans Alaska Pipeline System - LowFlow -Tom Barrett testimony - 2-5-13.pdf |
STTP 2/5/2013 3:30:00 PM |
SB 21 |
| TAPS Throughput Committee - Trans Alaska Pipeline System - Tom Barrett testimony - 2-5-13.pdf |
STTP 2/5/2013 3:30:00 PM |
SB 21 |
| TAPS Throughput Committee - Trans Alaska Pipeline System -Safety Infographic -Tom Barrett testimony - 2-5-13.pdf |
STTP 2/5/2013 3:30:00 PM |
SB 21 |
| SB 21 TAPS Throughput Commitee -written testimony -Doug Smith-Little Red Services-2-5-13 testimony.PDF |
STTP 2/5/2013 3:30:00 PM |
SB 21 |
| SB 21 TAPS Throughput Commitee -written testimony for AOGA -Kara Moriarty 2-5-13.PDF |
STTP 2/5/2013 3:30:00 PM |
SB 21 |