Legislature(2013 - 2014)BUTROVICH 205


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03:30:12 PM Start
03:30:45 PM SB21
05:55:55 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Location Change --
Heard & Held
Barry Pulliam - Econ One Research, Inc.
-- Testimony <Invitation Only> --
                SB 21-OIL AND GAS PRODUCTION TAX                                                                            
3:30:45 PM                                                                                                                    
CO-CHAIR MICCICHE  stated that the  purpose of the meeting  is to                                                               
continue  a discussion  on SB  21  with a  presentation by  Barry                                                               
Pulliam from  Econ One Research,  Inc. He reminded  the committee                                                               
that it is  looking at the bill to determine  how it would affect                                                               
TAPS throughput. He welcomed Senator Fairclough.                                                                                
3:32:05 PM                                                                                                                    
BARRY  PULLIAM,  Economist,  Econ  One Research,  Inc.,  began  a                                                               
presentation on the Analysis of  Alaska's Tax System, North Slope                                                               
Investment and the Administration's  proposal. He related that he                                                               
has  been  working for  several  months  with the  Department  of                                                               
Revenue (DOR) and  the Department of Natural  Resources (DNR), as                                                               
well  as  the administration,  on  Alaska's  oil tax  system.  He                                                               
listed the components of his presentation.                                                                                      
MR.  PULLIAM  reviewed  Econ  One's  role  in  the  research.  He                                                               
referred to those  who have helped with the  analysis. He related                                                               
that  he has  provided information  for the  state on  petroleum-                                                               
related matters for  over two decades. He said he  worked for the                                                               
legislature on  tax and gas  development issues between  2005 and                                                               
2008. He  reported that  he has  done work  for other  states and                                                               
industry, as  well. He listed  the key  points he would  cover in                                                               
his presentation:                                                                                                               
   · North Slope Development, Production, and Resources                                                                         
   · Evolution of Alaska's Fiscal and Tax System                                                                                
   · Examination of North Slope Activity Over the Past Decade                                                                   
   · Benchmarking the North Slope Against Other Areas                                                                           
   · Examination of North Slope Investment Opportunities                                                                        
   · Examination of Proposed Changes to Tax System                                                                              
3:37:32 PM                                                                                                                    
MR.  PULLIAM  discussed  the petroleum  industry  in  Alaska.  He                                                               
showed  a chart  that depicts  the impact  of petroleum  on state                                                               
revenues  and   total  state  revenues,  excluding   federal  and                                                               
investment  revenues, from  FY 02  until  FY 12.  The chart  also                                                               
shows how  the production tax  has changed over time.  He pointed                                                               
out that  the petroleum  industry is  the largest  contributor to                                                               
the state's  economy. The  industry accounted  for 92  percent of                                                               
unrestricted   revenues  and   86  percent   of  restricted   and                                                               
unrestricted  revenues over  the  past  decade. Production  taxes                                                               
accounted for 61 percent of petroleum  revenues in FY 12, up from                                                               
27 percent prior to FY 07 when ACES was introduced.                                                                             
CO-CHAIR  MICCICHE  asked  for clarification  on  what  makes  up                                                               
petroleum revenues.                                                                                                             
MR. PULLIAM explained that petroleum  revenue consist of property                                                               
taxes and corporate income tax.                                                                                                 
MR.  PULLIAM  said  that Alaska  has  produced  approximately  16                                                               
billion barrels of crude oil on  the North Slope since 1977. Most                                                               
of  that oil  has come  from two  giant fields,  Prudhoe Bay  and                                                               
Kuparuk, which  account for about  90 percent of  production. The                                                               
production in these  two fields is declining,  though the decline                                                               
has   been  partially   offset   by  the   addition  of   smaller                                                               
He turned to  opportunities that remain in Alaska.  He noted that                                                               
many North Slope  fields are now at mature  stages. However, less                                                               
than  half of  its  potential economic  oil  resources have  been                                                               
produced  to date.  The federal  government estimates  that there                                                               
are about 40 billion barrels  of additional recoverable resources                                                               
that are economic at today's prices.                                                                                            
3:40:54 PM                                                                                                                    
SENATOR  GARDNER asked  if the  40 billion  barrels includes  the                                                               
National  Petroleum  Reserve,   Alaska  (NPRA),  Arctic  National                                                               
Wildlife Refuge (ANWR), and the Outer Continental Shelf (OCS).                                                                  
MR. PULLIAM  said that it does.  He pointed out that  the various                                                               
colors  on  the  graph  pertain   to  different  categories.  For                                                               
example,  ANWR shows  a little  less than  10 billion  barrels of                                                               
recoverable resources. The  category of undiscovered conventional                                                               
resources includes  the OCS, including  the Chukchi  and Beaufort                                                               
SENATOR GARDNER  inquired about the percentage  of unconventional                                                               
resources on land, versus under water.                                                                                          
MR. PULLIAM offered that information in an upcoming slide.                                                                      
SENATOR FAIRCLOUGH asked what price range makes that economical.                                                                
MR. PULLIAM said the data was based on $90 per barrel (bbl).                                                                    
He emphasized  that there is  a lot of  oil left, but  it remains                                                               
challenging due to higher costs to access it.                                                                                   
MR. PULLIAM showed  a chart that depicts the  estimated amount of                                                               
undiscovered onshore  and offshore conventional oil  resources on                                                               
the  North Slope.  He pointed  out that  the Central  North Slope                                                               
(CNS) consists of onshore state  land production. It is estimated                                                               
that  there are  about  3 billion  barrels  left of  economically                                                               
recoverable oil at $90/bbl in the  CNS. He said that the oil sits                                                               
in  relatively small  fields;  30 million  to  60 million  barrel                                                               
He  related that  there are  close to  6 billion  barrels in  the                                                               
Beaufort Sea,  10 billion in the  Chukchi Sea, half a  billion in                                                               
NPRA, and  about 10  billion in ANWR.  The total  of conventional                                                               
resources on the North Slope is just shy of 30 billion barrels.                                                                 
3:44:23 PM                                                                                                                    
MR. PULLIAM noted that there  are also undeveloped unconventional                                                               
oil  resources on  the North  Slope.  Work is  just beginning  on                                                               
Shale  development. The  USGS, in  2012, recently  estimated that                                                               
there are 1  billion bbls of technically  recoverable barrels. He                                                               
cautioned that the  estimates are preliminary. He  said there are                                                               
about 25  billion bbls of in-place  viscous and heavy oil  in the                                                               
North   Slope,  with   an  estimated   15  percent   economically                                                               
CO-CHAIR MICCICHE asked if the  unconventional resources are part                                                               
of the 40 billion recoverable resources.                                                                                        
MR. PULLIAM said yes.                                                                                                           
CO-CHAIR MICCICHE noted the arrival of Senator French.                                                                          
3:46:11 PM                                                                                                                    
MR.  PULLIAM turned  to the  topic of  current and  potential ANS                                                               
producers.  He  listed  the  majors,  the  explorers,  and  other                                                               
producers. He  said the  three large  producers account  for more                                                               
than  90   percent  of  the   state's  current   production:  BP,                                                               
ConocoPhillips,  and  ExxonMobil.  He  related  that  the  majors                                                               
account  for   approximately  9.5  million  BOED   of  production                                                               
worldwide and for more than  90 percent of North Slope production                                                               
- about 400,000 barrels a day net in Alaska.                                                                                    
He  reported that  BP is  involved in  developing resources  from                                                               
existing fields  and in facility  renewal. BP has  suspended work                                                               
in Liberty due to technical  issues. ConocoPhillips is developing                                                               
the Kuparuk  and Colville  River fields and  is expanding  to the                                                               
West  as soon  as  it gets  permits  to do  so.  It has  recently                                                               
received permits  to develop CD5  which is thought to  hold about                                                               
50 million bbls. ExxonMobil's major  focus is on developing Point                                                               
Thomson.  None   of  the  three  major   producers  are  actively                                                               
exploring outside of these areas.                                                                                               
He also discussed  production outside of Alaska by  the big three                                                               
who are focused on high margin areas.                                                                                           
3:49:59 PM                                                                                                                    
CO-CHAIR MICCICHE  asked if there  could be a discussion  on high                                                               
margins and where Alaska stands.                                                                                                
MR.  PULLIAM offered  to provide  that information  later in  the                                                               
SENATOR GARDNER  asked how many  of the companies listed  on page                                                               
15 were exploring in Alaska before 2006.                                                                                        
MR. PULLIAM responded that Armstrong,  Anadarko, and Pioneer were                                                               
exploring before 2006.                                                                                                          
He addressed  non-major current and potential  ANS production. He                                                               
listed activity by  each company. Pioneer and  ENI are developing                                                               
Oooguruk  and  Nikaitchuq,  respectively.  Anadarko,  the  fourth                                                               
largest  producer, acquired  additional  foothill leases.  Repsol                                                               
has  a multi-million  budget and  has  drilled three  exploration                                                               
wells  in 2012.  Brooks Range  is developing  the Mustang  field.                                                               
Great  Bear   is  exploring  shale  potential,   Linc  Energy  is                                                               
exploring Umiat in  NPRA, and Savant is  operating and developing                                                               
3:53:26 PM                                                                                                                    
MR. PULLIAM  discussed offshore explorers  by company.  Shell has                                                               
been  the most  active and  acquired  leases in  the Chukchi  and                                                               
Beaufort Seas. ConocoPhillips also  spent money to acquire leases                                                               
in the Chukchi Sea. Statoil has spent money on offshore leases.                                                                 
SENATOR  FAIRCLOUGH asked  what  percentage  the small  producers                                                               
MR. PULLIAN thought it might be less than 5 percent.                                                                            
SENATOR   FAIRCLOUGH  suggested   it  was   important  that   the                                                               
legislature  look  at  the  larger  producers  regarding  revenue                                                               
impact to the state.                                                                                                            
MR. PULLIAN agreed. He said  that smaller players don't have much                                                               
impact  on state  revenue. He  stressed that  it is  important to                                                               
make the environment  attractive to the large  companies, as well                                                               
as to the small companies.                                                                                                      
SENATOR GARDNER  commented that the  developments in  the Chukchi                                                               
and Beaufort  Seas also have  little impact on  Alaska's treasury                                                               
because they are federal leases.                                                                                                
CO-CHAIR MICCICHE suggested  a discussion on tariff be  done at a                                                               
later date.                                                                                                                     
MR.  PULLIAM pointed  out that  more  oil in  the pipeline  would                                                               
reduce tariff and  would establish a footprint - a  hub and spoke                                                               
operation  -  in  the  offshore   area,  which  would  draw  more                                                               
attention to opportunities in the North Slope.                                                                                  
3:57:17 PM                                                                                                                    
CO-CHAIR MICCICHE  asked if offshore development  would help with                                                               
tying in other state land potential discoveries, as well.                                                                       
MR. PULLIAM said it could,  particularly around the federal/state                                                               
border. He  pointed out that  Northstar development  is currently                                                               
on  both state  and federal  property. Pipelines  are needed  for                                                               
offshore  platforms   and  could   allow  tying  in   of  smaller                                                               
developments. He added  that production in an  area would attract                                                               
the interest of other players. Even  though there is not a direct                                                               
tax benefit, offshore production is still important.                                                                            
MR. PULLIAM  turned to data on  the historical volumes of  oil by                                                               
year. He pointed out that production  peaked in 1988 and has been                                                               
declining since.  Since 2007 North  Slope production  has dropped                                                               
by about  27 percent from  about 700,000  barrels a day  to about                                                               
500,000   barrels  a   day.  The   smaller  areas   have  dropped                                                               
significantly more. He stressed the need to arrest decline.                                                                     
4:01:31 PM                                                                                                                    
He said  the next graph  shows the North Slope  estimate ultimate                                                               
oil recover  (EUR) by discovery year  (1969 - 2010). Most  of the                                                               
oil that  has been discovered  was done so  prior to 1970  in the                                                               
large fields.  Since then  the discoveries have  tended to  be in                                                               
smaller fields.                                                                                                                 
SENATOR FAIRCLOUGH asked  if there was more  exploration prior to                                                               
1970 than after 1970.                                                                                                           
MR. PULLIAM did not know.                                                                                                       
4:03:11 PM                                                                                                                    
SENATOR  McGUIRE requested  more  data  from other  jurisdictions                                                               
with which  to compare Alaska  regarding how many wells  per year                                                               
are drilled.  She recalled hearing  that Texas drilled  115 wells                                                               
compared to 4 in Alaska the same year.                                                                                          
MR.  PULLIAM said  that information  was available  later in  the                                                               
SENATOR McGUIRE  suggested that more drilling  would increase the                                                               
chances  of discovery.  She recalled  that  Shell's discovery  of                                                               
Prudhoe Bay was  an accident. She opined that there  is hope that                                                               
another large field exists.                                                                                                     
MR.  PULLIAM turned  to  the  topic of  the  history of  Alaska's                                                               
production tax system  for the North Slope from 1977  to 2007. He                                                               
related that when production first came  on there was a gross tax                                                               
system with a  maximum rate of 12.25 percent. Most  of the United                                                               
States still operates on a gross tax system.                                                                                    
SENATOR GARDNER  recalled the  debate regarding  the change  to a                                                               
gross  tax when  the legislature  was persuaded  that it  was the                                                               
"way of the future." She  requested Mr. Pulliam's opinion whether                                                               
Alaska would be better served today by a gross tax system.                                                                      
MR. PULLIAM  said he prefers the  "net" system because it  does a                                                               
good job of  aligning the economics between the  producer and the                                                               
state,  making the  system more  efficient, although  it is  more                                                               
difficult  to administer.  He noted  that the  rest of  the world                                                               
operates under a net tax system.  Some states have not changed to                                                               
a net system.                                                                                                                   
He  discussed Alaska's  Economic  Limit Factor  (ELF), which  was                                                               
introduced in 1977 to try and  bring the gross tax rate down when                                                               
fields became  less economic. A  challenge occurred in  2005 when                                                               
ELF  was reducing  the tax  rate to  very low  levels. Trying  to                                                               
address  that concern  was one  reason  Alaska changed  to a  net                                                               
system.  In   2006  the  Petroleum   Production  Tax   (PPT)  was                                                               
introduced, which set  a base tax rate of  22.5 percent, included                                                               
progressivity  at 0.2  percent over  a $40  net price,  and a  20                                                               
percent capital credit. It had a maximum rate of 50 percent.                                                                    
In 2007 PPT  was amended to the current system,  Alaska's Clear &                                                               
Equitable Share  (ACES), and  the base rate  was increased  to 25                                                               
percent,  the trigger  point at  which  progressivity starts  was                                                               
decreased from  $40 to  $30, progressivity  was increased  to 0.4                                                               
percent  per $1  over $30  net, and  to 0.1  percent per  $1 over                                                               
$92.50 net.  The maximum rate was  set at 75 percent,  one of the                                                               
highest ranges in the world.                                                                                                    
4:09:41 PM                                                                                                                    
MR. PULLIAM  reported that the  ACES tax changes  had significant                                                               
effects on state revenue. He  showed the estimated production tax                                                               
revenue  from 2007  to  2012  under ACES,  as  well  as what  was                                                               
projected under PPT and under  a gross tax system. The difference                                                               
between what  was collected under  ACES and what would  have been                                                               
collected under a gross system was about $20 billion.                                                                           
CO-CHAIR  MICCICHE  noted  oil  price  variations  from  2008  to                                                               
MR. PULLIAM agreed that profit is price and volume related.                                                                     
SENATOR GARDNER  requested a graph  that would  depict production                                                               
tax revenue under ACES, PPT, and gross at a stable oil price.                                                                   
MR. PULLIAM said he could  provide that information. He explained                                                               
that  the results  would vary  depending  on the  price that  was                                                               
chosen.   He  suggested   using   three   different  prices   for                                                               
comparison; low, middle, and high.                                                                                              
4:11:58 PM                                                                                                                    
MR. PULLIAM  talked about Alaska  North Slope production  by unit                                                               
from 2001  until 2012. He  showed a  graph broken down  by mature                                                               
units and new units that have  come on line since 2003, primarily                                                               
Oooguruk and Nikiatchuq.                                                                                                        
He turned to  a graph that showed reported  capital spending over                                                               
the last  decade in the  North Slope. Capital  spending decreased                                                               
in the mid-2000s, began to rise  in 2005, and has been relatively                                                               
flat the  last five  years. On the  other hand,  capital spending                                                               
elsewhere in the world has exploded.                                                                                            
CO-CHAIR MICCICHE  connected the tie between  less production and                                                               
more capital spending; compounded reduction in state revenue.                                                                   
MR. PULLIAM added  that per barrel spending  has increased, which                                                               
results  in a  lower  tax  rate and  more  credits. More  capital                                                               
spending or the same level of  capital spending has to be covered                                                               
by less production.                                                                                                             
SENATOR GARDNER  requested information  about any new  wells that                                                               
came  into production  when the  severance  tax was  very low  in                                                               
MR. PULLIAM acknowledged  that there were new wells  at that time                                                               
and  he  offered  to  provide   more  information  later  in  the                                                               
4:14:58 PM                                                                                                                    
MR.  PULLIAM  showed  a  graph   that  depicts  reported  capital                                                               
spending by  North Slope producers,  large and others.  He showed                                                               
another graph  that broke down  that information by  mature units                                                               
and new units. Most of the  increase in capital spending has been                                                               
for the new units. Spending  for mature units has been relatively                                                               
He discussed Alaska North Slope  oil and gas industry employment.                                                               
Employment was stable  until about 2005 when it began  to grow in                                                               
'06 and  '07. It has  remained relatively flat since  then. There                                                               
were major  incidents that occurred  on the North Slope  in 2006,                                                               
such  as corrosion  in  Prudhoe Bay,  resulting  in attention  to                                                               
facility renewal and increased employment.                                                                                      
SENATOR GARDNER asked what role  tax credits played in investment                                                               
decisions during that time.                                                                                                     
MR. PULLIAM  thought the  tax credits, along  with the  tax rate,                                                               
did play a role in making investment decisions.                                                                                 
CO-CHAIR  MICCICHE  asked  if  a   percentage  of  the  increased                                                               
employment was part of the capital deductions.                                                                                  
MR.  PULLIAM  said they  were  operating  expenses, but  still  a                                                               
deduction.  He  added  that he  would  provide  more  information                                                               
regarding how  Alaska fares as a  result of changes in  oil price                                                               
and other economic conditions.                                                                                                  
SENATOR FAIRCLOUGH  inquired if  credits buy exploration  but not                                                               
production under ACES.                                                                                                          
MR.  PULLIAM   distinguished  between  exploration   credits  and                                                               
capital credits.                                                                                                                
SENATOR FAIRCLOUGH asked  if there is information  about the risk                                                               
to Alaska  if the state  continues offering credits that  are not                                                               
being applied against actual production.                                                                                        
MR. PULLIAM offered to provide that data.                                                                                       
4:19:55 PM                                                                                                                    
MR. PULLIAM addressed declining drilling  on the North Slope back                                                               
to  2002.  Alaska  has  been   generally  declining  in  drilling                                                               
activity. In 2002 about 200 wells  per year were drilled and that                                                               
has since decreased to about 150 wells per year.                                                                                
SENATOR  GARDNER asked  if the  drilling  was done  by the  major                                                               
producers during the peak of 2004.                                                                                              
MR. PULLIAM  replied that  most of  the drilling  was development                                                               
drilling done by the majors.                                                                                                    
He turned to  a chart that showed drilling activity  in the North                                                               
Slope  by well-completed  date.  The majors  do  account for  the                                                               
major  portion of  activity. More  recently the  drilling numbers                                                               
increased for ENI and Pioneer.                                                                                                  
SENATOR FAIRCLOUGH inquired if, due  to technology, in the future                                                               
something other than wells might be a measure of exploration.                                                                   
MR. PULLIAM explained  that productivity of the wells  is key. He                                                               
agreed that technology has advanced.                                                                                            
SENATOR  FAIRCLOUGH clarified  that she  was thinking  more along                                                               
the  lines  of  3D  technology  and the  ability  to  look  at  a                                                               
reservoir without having to dig a well.                                                                                         
MR. PULLIAM  agreed, "You can do  a lot more of  your work before                                                               
you ever drill  a well." He said technology  increases the chance                                                               
of finding oil.                                                                                                                 
SENATOR FAIRCLOUGH commented that  since technology has advanced,                                                               
it might be  deceptive to compare the number of  wells drilled in                                                               
the past with future numbers.                                                                                                   
MR. PULLIAM agreed.                                                                                                             
SENATOR  FAIRCLOUGH asked  if the  state has  access to  producer                                                               
information about production credits for potential fields.                                                                      
MR. PULLIAM thought that was a question for DNR.                                                                                
4:24:13 PM                                                                                                                    
SENATOR GARDNER  asked if the chart  includes horizontal drilling                                                               
and companies that produce shale oil, such as Great Bear.                                                                       
MR. PULLIAM  said it  does include  horizontal drilling,  but not                                                               
shale oil. Great Bear is in the "others" category.                                                                              
MR.  PULLIAM  noted  important   points  about  the  timeline  of                                                               
significant  events on  the North  Slope since  2005. He  related                                                               
that in  2005 the  ELF aggregation decision  for Prudhoe  Bay was                                                               
made.  At  the same  time  ConocoPhillips  applied for  the  CD-5                                                               
permit. He  stressed that permitting is  an issue: ConocoPhillips                                                               
just received the CD-5 permit. He  opined that the state is doing                                                               
a good job in the  permitting process, but the federal government                                                               
is not. There  have been federal permitting  delays with offshore                                                               
development, as well.                                                                                                           
SENATOR GARDNER  asked if there  would be another  opportunity to                                                               
ask more questions.                                                                                                             
CO-CHAIR MICCICHE said yes.                                                                                                     
4:29:22 PM                                                                                                                    
MR.  PULLIAM  began  a discussion  of  benchmarking  North  Slope                                                               
activity against  other areas.  He showed  profiles of  crude oil                                                               
production,  capital spending,  petroleum  sector employment  and                                                               
drilling in Alaska's North Slope.                                                                                               
He compared  profiles of crude oil  production, capital spending,                                                               
petroleum sector employment and  drilling in the Northwest Europe                                                               
area (North Sea) to Alaska. He  then compared Alaska to the Lower                                                               
48 in the same areas, followed by a comparison with Canada.                                                                     
4:32:44 PM                                                                                                                    
CO-CHAIR MICCICHE asked when the shale oil surge began in Texas.                                                                
MR. PULLIAM said 2010-11. He  added that shale gas preceded shale                                                               
oil in Texas.                                                                                                                   
CO-CHAIR  MICCICHE  asked  about  conventional  oil  spending  in                                                               
MR. PULLIAM  replied that, in  addition to shale  activity, Texas                                                               
has  spent  a   lot  on  looking  for  new  pockets   of  oil  in                                                               
conventional fields. He added that there  was not a lot of growth                                                               
in California,  but there was a  lessening of the decline  due to                                                               
exploration for new pockets in existing fields.                                                                                 
He related  that Canada  has seen  growth in  production, capital                                                               
spending,  and in  drilling. He  said Australia's  oil production                                                               
has  been declining,  but LNG  production has  increased, as  has                                                               
4:35:09 PM                                                                                                                    
MR.  PULLIAM  turned  to  a  graph  that  compared  locations  by                                                               
indexing. He  defined indexing as using  a base year of  2002 and                                                               
looking at production values and  calibrating them to an index of                                                               
100 in order to see, over time, how production changes.                                                                         
CO-CHAIR  MICCICHE said  it  allows a  comparison  of "apples  to                                                               
MR. PULLIAM agreed.                                                                                                             
SENATOR  GARDNER  thought  the  comparison  should  also  include                                                               
prospectivity measures and a measure of tax take.                                                                               
MR. PULLIAM said  those categories would be included  later on in                                                               
the presentation.                                                                                                               
He continued  with a  look at comparing  crude oil  production in                                                               
Alaska with Europe, Canada, Australia  and the rest of the United                                                               
CO-CHAIR  MICCICHE  asked  about   the  25  percent  increase  in                                                               
production in the Gulf of Mexico between 2008 - 2009.                                                                           
MR. PULLIAM replied  that the increase in the Gulf  of Mexico was                                                               
a result of an increase in  oil price. The decrease in production                                                               
which followed was because of  the drilling moratorium due to the                                                               
Horizon accident.                                                                                                               
MR.  PULLIAM compared  capital  spending in  Alaska  to the  four                                                               
areas,  Northwest  Europe,  Canada,  Australia,  and  the  United                                                               
States. In all four areas capital spending has increased.                                                                       
4:41:05 PM                                                                                                                    
He showed a slide that  compares capital spending for exploration                                                               
and development  of the  North Slope with  the United  States and                                                               
worldwide spending.  It also shows  the price of oil.  He tracked                                                               
spending increases elsewhere when it remains flat in Alaska.                                                                    
SENATOR GARDNER asked if it was full dollar spending.                                                                           
MR. PULLIAM said it was.                                                                                                        
He  showed employment  comparisons of  the North  Slope to  other                                                               
areas. He noted  that Alaska is doing fairly  well in employment,                                                               
even as production is declining.                                                                                                
CO-CHAIR MICCICHE asked how capital  spending for exploration and                                                               
development,   increased  spending   for  labor,   and  decreased                                                               
production relate.                                                                                                              
MR.  PULLIAM said  there  were labor  costs  imbedded in  capital                                                               
He  compared drilling  and development  activity to  other areas.                                                               
Alaska has  not kept  pace with  the rest of  the country  or the                                                               
SENATOR GARDNER  asked about Norway's  high drilling  activity in                                                               
2009,  versus Alaska's  much lower  activity. She  noted Norway's                                                               
high tax and government take.                                                                                                   
MR. PULLIAM replied that he  could not explain that difference in                                                               
numbers.  He commented  that Northwest  Europe is  currently very                                                               
unhappy with its  drilling numbers. He suggested  keeping in mind                                                               
that  Statoil  is  the  big  player  in  oil  in  Norway  and  is                                                               
government owned.                                                                                                               
SENATOR GARDNER  pointed out  that Statoil is  a new  producer in                                                               
4:46:59 PM                                                                                                                    
MR.  PULLIAM moved  into  an analysis  of  the attractiveness  of                                                               
investment under  ACES. He explained  that crude oil  prices need                                                               
to  be  included   in  the  analysis.  He   recalled  the  prices                                                               
considered under the analysis of PPT.                                                                                           
4:48:18 PM                                                                                                                    
At ease.                                                                                                                        
4:57:15 PM                                                                                                                    
CO-CHAIR MICCICHE called the meeting back to order.                                                                             
MR.  PULLIAM showed  a  graph  of oil  prices  over time.  Prices                                                               
peaked  in  2008 and  then  dropped  about $100/barrel  over  six                                                               
month. He opined that the  price range Alaska should now consider                                                               
for analysis is from $80 to  $130 per barrel because it is likely                                                               
to be long  term and sustainable at that  range. Sustained prices                                                               
below  $80 make  many  projects uneconomic  and reduce  supplies.                                                               
Sustained prices  above $130  start to  attract more  oil supply,                                                               
reduce demand for petroleum  products, and encourage substitutes.                                                               
There is  a self-correcting  mechanism that  keeps prices  at the                                                               
$80 -  $130 range. He  concluded that producers will  stress test                                                               
projects near the lower end of that range.                                                                                      
CO-CHAIR DUNLEAVY  asked if there  was a certain  technology that                                                               
the $80 oil price would impact.                                                                                                 
MR. PULLIAM said it would be the horizontal drilling for shale.                                                                 
SENATOR   GARDNER  asked   about   the   impact  of   contractual                                                               
obligations on development  and how they would be  rated, such as                                                               
profit, hurdle rate,  and risk, in addition to oil  price and tax                                                               
MR. PULLIAM said those are all  factors. The price of oil affects                                                               
everyone. Profit  is an  important factor.  The present  value of                                                               
the project, the  discount rate, and margins  are also important.                                                               
The  ability to  throw  off  lots of  cash  is  important, as  is                                                               
reinvestment.  The   stability  of  a  producing   area  is  very                                                               
important. He could  not say which is the  most important factor;                                                               
it depends on the project.                                                                                                      
CO-CHAIR MICCICHE  asked if it's  correct to say that  the stable                                                               
political  climate of  Alaska has  been  rewarded, whereas  other                                                               
areas  of the  world without  political stability  have to  pay a                                                               
MR.  PULLIAM said  yes. He  noted  he has  used similarly  stable                                                               
areas when making comparisons to Alaska.                                                                                        
5:05:40 PM                                                                                                                    
MR. PULLIAM  discussed a summary of  production profiles examined                                                               
for Alaska  and benchmark  developments. He  showed a  graph that                                                               
depicts the percentage of oil expected  to be produced in a given                                                               
year  from various  developments.  He used  Eagle  Ford in  South                                                               
Texas, Bakken,  North Sea, and  Canada as examples  in comparison                                                               
to Alaska.  Opportunities in  each area  are different;  Lower 48                                                               
areas  are very  attractive recently  because a  large amount  of                                                               
production comes on very quickly.                                                                                               
CO-CHAIR DUNLEAVY asked if it was shale production.                                                                             
MR. PULLIAM said yes.                                                                                                           
5:07:32 PM                                                                                                                    
MR.  PULLIAM addressed  the different  factors companies  look at                                                               
when making investment decisions:                                                                                               
   · Producer NPV-12 (Net present value at a 12 percent discount                                                                
     rate per barrel of oil - BOE)                                                                                              
   · Internal Rate of Return (IRR)                                                                                              
   · 5-year Cash Margins                                                                                                        
   · Profitability Index-12 (an index that looks at investment                                                                  
   · Government Take                                                                                                            
   · State NPV-12 Per BOE                                                                                                       
5:09:38 PM                                                                                                                    
MR. PULLIAM turned  to a graph that  depicted investment measures                                                               
related  to  the development  of  conventional  oil reserves.  He                                                               
explained  that gross  royalty  tax  at both  20  percent and  30                                                               
percent and  ACES, for incumbents  and for new  participants, are                                                               
shown. He related  that the old tax system under  PPT was a gross                                                               
5:11:52 PM                                                                                                                    
MR. PULLIAM  discussed NPV-12, IRR, cash  margins, and government                                                               
take across  the different  systems. The take  away from  the top                                                               
left panel  is that on an  NPV basis the ACES  system gets higher                                                               
NPVs in the lower price range.  The NPV drops at the higher price                                                               
range because of progressivity.                                                                                                 
CO-CHAIR MICCICHE clarified  that it was "net  present value back                                                               
to the producer."                                                                                                               
MR. PULLIAM  said the  producer is  going to  look at  costs, how                                                               
many wells  will be drilled, how  the oil will be  produced, what                                                               
profit will  ensue, and what kind  of cash flow the  company will                                                               
receive. The  graph takes  all cash flows  across time  to figure                                                               
out the net  present value at the time that  decision is paid. He                                                               
said the higher the NPV, the better.                                                                                            
5:15:34 PM                                                                                                                    
MR. PULLIAM discussed  the internal rate of return  (IRR). As the                                                               
price increases,  the IRR  increases relative  to the  old system                                                               
and to what  a new participant would see. When  a company invests                                                               
under  ACES,  it  receives  a  credit,  and  additional  spending                                                               
reduces   the  tax   rate.   As  prices   get   higher,  due   to                                                               
progressivity, the value of the  reduction gets higher. Sometimes                                                               
it gets so high that the state pays for the entire investment.                                                                  
SENATOR GARDNER liked  the breakout of data shown  in the graphs.                                                               
She  inquired  if  the  state agrees  to  eliminate  credits,  as                                                               
proposed   in  SB   21,  whether   new   participants  would   be                                                               
MR. PULLIAM said  the opposite would occur.  New participants are                                                               
disadvantaged in that they do not  have the ability to "buy down"                                                               
their  tax rate,  but  they  would have  a  slightly higher  cash                                                               
margin. The bigger  issue is that the flip side  of high IRR's is                                                               
a relatively  flat cash margin  line under ACES. As  prices rise,                                                               
the state receives  an increasing amount of  that rise, resulting                                                               
in lower margins with less  cash available for reinvestment or to                                                               
pay out to shareholders.                                                                                                        
He talked about the graph  on government take. Gross systems have                                                               
a  lower  government  take  and  they  are  declining  over  time                                                               
(regressive system). A  net system with a single rate  would be a                                                               
neutral system.  Royalties make it  slightly regressive.  He said                                                               
ACES is a progressive system.                                                                                                   
5:21:37 PM                                                                                                                    
CO-CHAIR MICCICHE asked if a  new participant is disadvantaged in                                                               
government  take because  of the  buy-down  compact available  to                                                               
larger companies only.                                                                                                          
MR.  PULLIAM  said  new  participants can't  buy  down  taxes  on                                                               
existing production, but  they are subject to  the production tax                                                               
when production  begins. He pointed  out that all of  the metrics                                                               
are worse,  except for a slightly  higher cash margin, for  a new                                                               
participant under ACES.                                                                                                         
MR.    PULLIAM   explained    investment   measures,    comparing                                                               
conventional  oil  production  in Alaska  to  unconventional  oil                                                               
production in the Lower 48.  He compared Bakken, Eagle Ford, ACES                                                               
New  Participant  and  the ACES  incumbent  in  four  categories:                                                               
producer NPV-12/BOE,  internal rate  of return, cash  margins and                                                               
government take. He  pointed out oddities with  IRR and cautioned                                                               
that it is not  good to over focus on a  single measure. He noted                                                               
that IRR is a good comparison measurement.                                                                                      
5:25:21 PM                                                                                                                    
SENATOR  GARDNER  asked for  information  on  the companies'  IRR                                                               
hurdle rates.                                                                                                                   
MR.  PULLIAM  did  not  think  the  companies  would  share  that                                                               
information. He thought they were higher than 12 percent.                                                                       
CO-CHAIR MICCICHE  asked if the  larger, integrated  companies or                                                               
the  smaller, independent  companies generally  require a  larger                                                               
MR. PULLIAM did not know if there  was a general rule on that. He                                                               
spoke  of the  variety of  opportunities and  resources companies                                                               
SENATOR GARDNER inquired if there  should be a comparison between                                                               
unconventional oil  production in Alaska with  unconventional oil                                                               
production elsewhere.                                                                                                           
MR.   PULLIAM   maintained   that  comparing   conventional   oil                                                               
development  in   Alaska  with  unconventional   oil  development                                                               
elsewhere is better because that  is where the investment dollars                                                               
are going. West Texas is also attracting investment dollars.                                                                    
SENATOR   GARDNER   asked   how  higher   production   costs   in                                                               
unconventional plays  in a gross  profit tax system  were treated                                                               
in the analysis.                                                                                                                
MR. PULLIAM said those costs were factored into the analysis.                                                                   
5:29:42 PM                                                                                                                    
MR.  PULLIAM turned  to the  topic  of investment  metrics and  a                                                               
comparison of  conventional oil development  in Alaska  with that                                                               
in the North  Sea (United Kingdom with  Brownfield Allowance). He                                                               
again used  the four categories  for comparison. He noted  it was                                                               
worth looking  at the situation in  the UK due to  the Brownfield                                                               
Allowance  which  was designed  to  attract  investment and  stem                                                               
decline. Government take in the  UK is lower than government take                                                               
found under  ACES. A  significant amount  of investment  is being                                                               
freed up with the Brownfield Allowance.                                                                                         
He  highlighted  the summary  of  investment  measures using  all                                                               
metrics with three different price  points. Also included in this                                                               
comparison is  the state NPV-12/BOE under  the different systems.                                                               
It  compares how  ACES  stacks  up with  the  other entities.  He                                                               
highlighted the pre-Brownfield and post-Brownfield allowance.                                                                   
5:34:45 PM                                                                                                                    
MR. PULLIAM  discussed the administration's proposed  changes. He                                                               
listed the key aspects:                                                                                                         
  · Establishes 25 percent flat net tax rate; no progressivity                                                                  
  · Eliminates the capital credit and state purchase of losses                                                                  
   · Establishes 20 percent gross revenue exclusion (GRE) to                                                                    
     incent production of new oil                                                                                               
   · Losses may be carried forward and applied against tax                                                                      
     obligation when production occurs                                                                                          
   · Extends new entrant credits through 2022                                                                                   
   · No change outside of the North Slope.                                                                                      
He continued to say that the administration's proposal:                                                                         
    · Provides a balance between the state and producers                                                                        
    · Simplifies the tax system and provides clarity for planning                                                               
  · Maintains alignment between state and producer incentives                                                                   
    · Provides incentives for development of new resources                                                                      
      without taxing state treasury                                                                                             
    · Sends an extremely positive message to potential investors                                                                
He pointed out  that Alaska is viewed as an  expensive place with                                                               
a questionable tax system.                                                                                                      
5:40:36 PM                                                                                                                    
MR.  PULLIAM showed  that  under ACES,  the  government take  was                                                               
highly  progressive.  At  $70  oil, government  take  was  at  60                                                               
percent and  it reached close  to 75 percent  at $140. In  SB 21,                                                               
the average government take moves  from progressive to relatively                                                               
neutral. The slight  regressivity is caused by  the gross royalty                                                               
system. In the  price range from $80 oil to  $130 oil, government                                                               
take is within a 3 percent band.  It is more neutral than what is                                                               
found in the Lower 48.                                                                                                          
CO-CHAIR  MICCICHE asked  if there  was a  plan and  a government                                                               
take goal in the process of developing the bill.                                                                                
MR.  PULLIAM  replied  that  government   take  was  one  of  the                                                               
statistics that  was looked at.  He said the  goal was to  have a                                                               
competitive  government take  in  the 60  percent  to 65  percent                                                               
range for  Organization for Economic Cooperation  and Development                                                               
5:43:30 PM                                                                                                                    
MR. PULLIAM turned  to a graph that showed  annual state revenues                                                               
and producer cash flows at $100  West Coast ANS 50 million barrel                                                               
conventional oil  (MMBO) for an incumbent  participant under ACES                                                               
and under  the proposed tax (SB  21). Under SB 21,  as production                                                               
starts in  year 5,  the proposed  cash flows  are higher  for the                                                               
producer  than under  ACES. Earlier  on, investment  outflows are                                                               
bigger because  the state is  not subsidizing that portion  as it                                                               
does under  ACES. For an  incumbent, the  cash flows under  SB 21                                                               
would increase  considerably and  the NPV-12  would be  about the                                                               
same.  The  state would  have  lower  cash  flows under  the  new                                                               
proposal, but the NPV-12 would be  about the same as it was under                                                               
He explained that  the next graph shows the  same comparison data                                                               
but  for a  new participant  in Alaska.  Under SB  21, both  cash                                                               
flows and  NPV-12 increase, which  brings the new  participant up                                                               
to the  level of the incumbent  regarding investment opportunity.                                                               
The state's revenues and NPV-12 will both be lower.                                                                             
5:46:37 PM                                                                                                                    
MR.  PULLIAM showed  a graph  that depicts  the results  from the                                                               
previous two  graphs, but  at different prices  - $80,  $100, and                                                               
$120 West Coast ANS price.                                                                                                      
He  explained that  the  next series  of  graphs show  investment                                                               
measures for  the development of conventional  oil reserves under                                                               
the new tax  proposal. There are increases in  NPV-12 relative to                                                               
ACES,  IRR is  increased  for new  participants,  cash flows  are                                                               
significantly higher under the new  proposal, and government take                                                               
is  significantly lower  and  remains  in the  60  percent to  65                                                               
percent range.                                                                                                                  
MR. PULLIAM  highlighted graphs that show  investment measures in                                                               
Alaska under SB 21 with respect to  the Lower 48.  It puts Alaska                                                               
"in the game" on an NPV  basis and cash flow basis, a significant                                                               
improvement  particularly  to  new participants.  He  noted  when                                                               
comparing the same  investment measures in Alaska under  SB 21 to                                                               
the  United  Kingdom  with   Brownfield  Allowance,  Norway,  and                                                               
Canada, it  is apparent that  the NPV  and cash margins  are much                                                               
more in line.                                                                                                                   
MR.  PULLIAM showed  a graph  that  was a  summary of  investment                                                               
measures for  a new participant  in conventional  oil development                                                               
in Alaska under ACES and  SB 21, in comparison with opportunities                                                               
elsewhere in  the world. He  concluded that  investment prospects                                                               
under  SB  21, relative  to  ACES,  have improved.  He  suggested                                                               
comparing margin increases  under SB 21 with ACES. He  said a $40                                                               
per  barrel  increase  in  oil  price yields  an  $8  per  barrel                                                               
increase in margin.                                                                                                             
CO-CHAIR MICCICHE asked if oil sands were bracketed.                                                                            
MR. PULLIAM  explained that  the oil  sands system  is relatively                                                               
complicated  and  includes  some   "plateauing."  He  offered  to                                                               
provide further information.                                                                                                    
He referred again  to the $8 increase under the  proposed tax and                                                               
noted with gross  revenue exclusion (GRE) the  price increases to                                                               
$18 per barrel. He said  as prices rise, investment opportunities                                                               
are  better  for a  producer,  particularly  a new  producer.  He                                                               
concluded  with the  last graph  that  shows investment  measures                                                               
from the standpoint of the incumbent.                                                                                           
CO-CHAIR  MICCICHE summarized  the  state's goal  to get  maximum                                                               
value for Alaskans, while encouraging  new development. He stated                                                               
that the committee's  task is to look at the  most effective ways                                                               
to  stem  decline. He  requested  that  committee members  submit                                                               
decline-related questions for further discussion.                                                                               
CO-CHAIR MICCICHE thanked Mr. Pulliam for his presentation.                                                                     
CO-CHAIR MICCICHE held SB 21 in committee.                                                                                      

Document Name Date/Time Subjects
Econ One Presentation TAPS Throughput 1-24-2013.pdf STTP 1/24/2013 3:30:00 PM
SB 21