Legislature(2003 - 2004)
05/09/2003 08:45 AM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
May 09, 2003
8:45 A.M.
TAPE HFC 03 - 85, Side A
TAPE HFC 03 - 85, Side B
CALL TO ORDER
Vice-Chair Meyer called the House Finance Committee meeting
to order at 8:45 A.M.
MEMBERS PRESENT
Representative John Harris, Co-Chair
Representative Kevin Meyer, Vice-Chair
Representative Mike Chenault
Representative Richard Foster
Representative Mike Hawker
Representative Carl Moses
Representative Bill Stoltze
Representative Jim Whitaker
MEMBERS ABSENT
Representative Bill Williams, Co-Chair
Representative Eric Croft
Representative Reggie Joule
ALSO PRESENT
Representative Ethan Berkowitz; Representative Paul Seaton;
Representative Vic Kohring; Representative Les Gara
PRESENT VIA TELECONFERENCE
Mark Meyers, Director, Division of Oil and Gas, Department
of Natural Resources, Anchorage; Gary Carlson, Senior Vice
President, Forest Oil; Kevin Tabler, Land & Government
Affairs Manager, Union Oil Company; William Nebesky,
Commercial Analyst, Division of Oil and Gas, Department of
Natural Resources, Anchorage
SUMMARY
HCR 5 Establishing a task force to make recommendations
regarding a new design for the official seal of
the State of Alaska.
HCR 5 was scheduled but not heard.
HB 198 An Act providing for a reduction of royalty on
certain oil produced from Cook Inlet submerged
land.
HB 198 was HEARD and HELD in Committee for further
consideration.
HB 232 An Act relating to mercury classics; and providing
for an effective date.
HB 232 was reported out of Committee with a "do
pass" recommendation and with zero note #1 by the
House Labor and Commerce Committee.
HOUSE BILL NO. 232
An Act relating to mercury classics; and providing for
an effective date.
REPRESENTATIVE PAUL SEATON commented that HB 232 would allow
the Homer Chapter of the Kenai Peninsula Boys and Girls Club
to operate and implement the "Homer Mercury Classic". The
classics are not permitted under a gaming permit without
legislation allowing a specific group or area to conduct it.
The Homer Mercury Classic will be held bi-annually, with
winnings awarded in the spring to the person who most
accurately guesses when the temperature reaches 55 degrees
Fahrenheit. The other prizes will be given to the person
who most closely guesses the time and date that the mercury
drops to that temperature each fall. Each entry costs $2
dollars. The proceeds from the classic will be divided
between the Boys and Girls Club of Homer and the classic
winner.
Members of the Boys and Girls Club, who already have the
necessary equipment and expertise to manage the operation,
will monitor the temperature hourly through a weather
station at the Homer Clubhouse. The program that inspired
the classic is called Global Learning and Observation to
Benefit the Environment (GLOBE). GLOBE is an international
program associated with the National Aeronautics and Space
Administration, National Science Foundation, the U.S.
Environmental Protection Agency and the U.S. State
Department. The data collected from schools and other
groups around the world are deposited into a database that
is accessed by the aforementioned organizations to assist
atmospheric scientists in their work. The program allows
children to participate in scientific processes, while
earning money for their program in non-competitive and
educational way.
Three hundred, primarily seven to twelve year-olds, are
involved in the Homer Chapter of the Boys and Girls Club.
The "Clubhouse" provides an excellent place for kids to
"hang-out" in a safe and learning friendly environment.
Representative Seaton urged support for the legislation.
Representative Stoltze noted his appreciation for the
tightness of the title.
Representative Stoltze MOVED to report HB 232 out of
Committee with individual recommendations and with the
accompanying fiscal note. There being NO OBJECTION, it was
so ordered.
HB 232 was reported out of Committee with a "do pass"
recommendation and with zero note #1 by the House Labor and
Commerce Committee.
HOUSE BILL NO. 198
An Act providing for a reduction of royalty on certain
oil produced from Cook Inlet submerged land.
REPRESENTATIVE VIC KOHRING commented that the goal of HB
198, which amends existing statutes in Title 38, would be to
provide for a narrowly defined and specifically targeted
reduction of royalty on oil produced from Cook Inlet fields
and platforms as they approach the end of their economic
lives. Plans to idle two of the 13 current oil producing
platforms in the Inlet act as a reminder of the certainty of
decline and ultimate end of production for those fields.
Premature abandonment of those fields would not be in the
State's best interest. The infrastructure created to serve
those fields is extensive. Decreasing the State's royalty
share from 12.5% to 5% near the end of field's life would
improve the economics of the aging platforms and could
result in a 14-month extension in production.
Representative Kohring suggested that prolonging production
would help to achieve several important policy objectives:
· Use of critical infrastructure to support new
exploration or development of adjacent lands,
· Delaying loss of industry jobs, and
· Increasing the total amount of oil and gas produced
through the aging facilities.
To protect the State's economic interest, royalty reduction
to 5% on oil produced from the targeted fields and platforms
is designed to occur only when production declines below
1,200 barrels per day for the Dolly, Grayling, King Salmon,
and Steelhead Platforms and continues at that level so long
as production does not go above that threshold. For any
quarter, should production go above 750 barrels per day, the
State's royalty share would increase 1% with each additional
100 barrels up to 1,200 barrels. The royalty share for
production over 1,200 barrels would return to 12.5%. Those
trigger production rates generally correspond to different
economics of the two sets of platforms. By encouraging
continued production of marginal fields, HB 198 would
benefit the State and local economies through taxation and
royalties, encourage future development of new oil
discoveries by lowering the costs of industry
infrastructure, as well as taking care of preserving jobs
for Alaskans.
Co-Chair Harris pointed out that the legislation would
extend rig life in the Cook Inlet area. Representative
Kohring acknowledged that it would exclusively affect Cook
Inlet.
Co-Chair Harris inquired if there was any indication that
the rigs would be "shutting down" without the passage of the
legislation. Representative Kohring explained that most of
the rigs are getting to the point where they are no longer
profitable, at which time, the industry will "moth ball"
them.
Co-Chair Harris mentioned the possible loss of revenue in a
year and asked the types of royalties that the State
receives from these breaks. Representative Kohring noted
that Mr. Meyers would be best to address that question. He
added that if the facilities become "moth balled", there
will be no royalties received by the State.
Representative Stoltze asked if these platforms were within
the Kenai Borough taxation jurisdiction. Representative
Chenault replied that they were.
GARY CARLSON, (TESTIFIED VIA TELECONFERENCE), SENIOR VICE
PRESIDENT, FOREST OIL, focused on the maintenance of
critical and scarce infrastructures associated with the
mature oil fields in Cook Inlet. Platforms, the associated
pipelines and related on-shore facilities represent
irreplaceable infrastructure, which may facilitate the
exploration, discovery and development of the undiscovered
reserves. Any delay will provide opportunity to the
industry to develop smaller scale oil and gas product
prospects that would not stand the economics of a new
infrastructure being developed. The operators need to get
creative and they need the cooperation of their vendors to
share the in those efforts.
Mr. Carlson believed that it was appropriate for the State
to step in and act as a partner also. He commended the bill
sponsor for the foresight used in support of the
legislation.
MARK MEYERS, (TESTIFIED VIA TELECONFERENCE), DIRECTOR,
DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES,
ANCHORAGE, stated that the agency had extensively worked
with the bill's sponsor. The plan is modeled closely to
when the operating costs exceeded the revenues. The fiscal
note describes individual platforms and what their current
production is and what their future production might be. He
reiterated that the legislation had been carefully modeled
to minimize the negative fiscal impact while continuing the
life of the platform. It is estimated that reducing the
royalty share by 7.5% could extend the economic life by
approximately 14 months. There is a period of time when the
operations could be profitable for a longer period. At the
current rate of production, they are old infrastructures and
the production is in a steady state of decline. Once the
platforms are pulled out, the overall economic costs and
viability of the projects increases on these platforms. The
value of the entire industry rests on these dates and the
hope is that future exploration will offset other quantities
of oil to offset the date. The bill does not "fix" the
issue of aging infrastructures but it does help and
postpones it in order to buy more time. New discoveries
need to be found.
Mr. Meyers continued that the incremental benefits would be
in sustaining jobs and overall production refined in the
Cook Inlet area.
WILLIAM NEBESKY, (TESTIFIED VIA TELECONFERENCE), COMMERCIAL
ANALYST, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL
RESOURCES, ANCHORAGE, advised that the bill would provide
economic benefit to the State. It has been estimated that
there could be as much as $2.2 million dollars per month in
royalty revenues, $26 million dollars per year.
Representative Whitaker asked about the costs associated
with the fiscal note. Mr. Meyers responded that the note
was modeled from triggering the lower royalty at the trigger
price, assuming the normal decline of the field with the
incremental benefit of extended life, platform by platform.
The royalty would be reduced and would be less but would
also be adding an incremental wedge of royalty for the extra
time the platform is in production.
Representative Whitaker interjected that there is a
"possibility of an increase" to State revenues. Mr. Meyer
acknowledged that was correct, commenting that it would
extend the life of the platform. It could act like an
"insurance policy" and that an incremental assessment would
be made, keeping the entire infrastructure in tact as long
as possible.
REPRESENATIVE ETHAN BERKOWITZ asked if the premise for the
legislation was that production costs were too high and the
only way to keep wells going was if costs were reduced. He
questioned if the only way to reduce costs would be to "give
away" royalty oil. He requested some assurance that other
factors relating to operating costs would still be managed
in a prudent manner. Representative Berkowitz inquired if
there had been consideration given to removing the royalty
reduction if operating costs were somehow reduced in the
future.
Mr. Meyer responded that these platforms are "late in their
life" of production. The level of production does not
provide a lot of space to do major operations on the wells.
He surmised that the State was looking at "skinny" economics
in the first place, which drives smaller operators to be
more efficient. There are considerations in the bill under
Section G(ii), which guarantees that protection be reservoir
related and not a mechanical problem.
Representative Hawker pointed out the loss of revenue
indicated in the fiscal note. He asked what the benefits
would be to the State. Mr. Meyer acknowledged that the
largest benefits are speculative. As the economics of the
platform changes and gets smaller, the larger companies have
more overhead. They may abandon the platforms earlier than
another company. If the State provides incremental value,
that might entice another operator to come in and invest
more money in the facility, in looking at the exploration
potential. It is hoped that notice will be taken of the
advantage of such a prospect and drilling the exploration
wells. Mr. Meyers commented that what the State "gives up"
is relatively small in comparison to the exploration and
operation of the wells. At some point in time, the
platforms will be abandoned. The integrated economics on
the Cook Inlet are operating efficiently and the State can
extend their life by buying enough time for the next stage
of exploration. That economy cannot be quantified.
Representative Hawker summarized previous discussion
regarding reduction to the royalty rate. He inquired if one
premise was that there would be some extension to the
productive life of the wells. Mr. Meyer responded that had
been modeled into the numbers and that there clearly would
be an extension to the life of the platforms. The
legislation will clearly lead to an extension of the
ultimate production of the wells; however, what is not
included in the note, is the current production decline and
that royalty benefit is not known.
Representative Hawker commented that the model and the net
change in revenue do factor into the Department's estimate
of the extended production. Those numbers do not offset the
revenues given up by reducing the royalty rates. Mr. Meyers
acknowledged that was correct, however, the Department has
not captured the up-side. The negative effect has been
minimized regarding the up-side potential. He reiterated
that it is very important to buy time for the facilities.
If there was a shut down, domino-effect data is not
available but is definitely of concern. Experience
indicates that a 30-40 million barrel field discovery is
needed to offset another platform. Those numbers could be
lower if an existing platform was used. He admitted that
the tangible benefits cannot now be proven but that they do
exist.
Representative Hawker reiterated that the Department
believes that there are benefits but that they cannot be
proven, hence, members need to make a judgment call.
Representative Berkowitz pointed out that the legislation
asks that the State share in the downsize. He inquired if
thought had been given to doing a "price trigger" for the
royalty reduction. If the price of the product is high, the
State should not have to forego the royalty share. Mr.
Meyer replied that under AS 35.05.180, a mechanism had been
written and would improve that process. If a typical
economic platform was developed, then the State could
customize it for that field. The problem remains that there
is high administrative overhead with no certainty for
results. One advantage of the current type mechanism is
that it provides relative certainty for operating value in
the royalty production.
Mr. Meyer continued, the State has attempted to look at a
mechanism that was simpler and more predictable for the
company with little downside for the State. When looking at
individual platforms, it does not take into consideration
structure questions. Mr. Meyers noted that the language
would bring the royalty rate back to 12.5% under successful
production increases.
Representative Berkowitz questioned if there were mechanisms
in place that would allow the State to share in the up-side.
He noted that if the price was at $35 dollars per barrel,
the State should not forgo its royalty percentage. That
could be a lot of money and could serve many of the State
funded programs.
Mr. Meyers explained that HB 198 would provide the average
price used for planning purposes. The advantage to that
mechanism is that it is appropriate for royalty reductions
and projects out a certainty for operating value and
profitability to the company, given the production forecast.
The Division is attempting to stimulate more activity. If
the company knows that there are set royalty costs, it can
provide a clear quantifiable number of how much profit is
left in the platform. Mr. Meyers noted that it is indented
to provide a thirty-year life to the platforms.
TAPE HFC 03 - 85, Side B
Mr. Meyers thought that there would be an overall yield
price of $23 dollars per barrel. The price was not
customized platform by platform but rather as a reasonable
assumption for the oil price.
Representative Whitaker asked if a fair characterization
would be that the State would be "giving up some 'upside',
insuring against the downside". Mr. Meyer responded that
sharing in the upside has two advantages:
· The State will return to the 12.5% rate with
increased production.
· If new oil is developed, the State receives the
12.5% royalty on a larger pool of oil that would not
have been developed if the infrastructure had been
removed.
Representative Moses injected that the bill acts like a
"subsidization"; he voiced concern with a formula that
presents a net loss to the State. Alaska cannot afford to
subsidize any industry while at the same time cutting
services. Mr. Meyers acknowledged that the State needs a
diversified oil program with as many producers as possible.
He pointed out how extending the life of the platforms would
encourage newer, smaller companies to invest in oil
exploration in Alaska. He suggested that the bill, while
proposing an initial possible loss, also provides insurance
for further developing of the industry. He concluded that
the investment in the "up side" was worth the possible
return. He emphasized that once a platform is closed, they
cannot be replaced. In the current configuration, these
platforms have been loosing approximately fifty barrels per
day. The bill presents a customized version to encourage
investment.
Representative Moses responded that with the new methods of
drilling, there is a possibility that platforms might be
obsolete before long. Mr. Meyers responded that there are
economic and environmental advantages to drilling off
platforms. New technologies have improved in the Inlet,
however, for bonding, operating platforms and the costs are
on a thin margin, which is the reason that the State has
compromised with the various groups.
KEVIN TABLER, (TESTIFIED VIA TELECONFERENCE), LAND &
GOVERNMENT AFFAIRS MANAGER, UNION OIL, voiced appreciation
for HB 198, which specifically targets those platforms that
are approaching their aging life. He provided his companies
perspective and the benefits of the legislation. Unocal Oil
is the predominate operator in Cook Inlet and operates 10-15
platforms in that area. It is the place where the company's
infrastructure, manpower and capital investments are
continually threatened by global competition investment
dollars. For the last several years, Unocal has
consolidated and restructured their Alaskan operations to
focus on becoming the lowest cost producer in the Cook Inlet
area. The Cook Inlet area, with their mature and declining
fields and low margin properties, has extremely high
operating costs and the regulatory uncertainty creates a
challenging environment. The cost of cutting is a temporary
fix. Mr. Tabler maintained that the only sustainable
solution to longevity would be to increase the reserve base.
HB 198 would not necessarily increase that base of a field
or platform, but it will sustain the economic viability of
the existing infrastructure. That could lead to the
ultimate recovery of more reserves, having an offsetting
effect.
Mr. Tabler added that equally important is the possibility
for oil reduction to increase the attractiveness of making
additional investments in the field. These properties have
to compete internally with other opportunities that Unocal
has. It is certain that if the economic viability is left
unchecked, shut down would be accelerated, leading to a
lower tax base, unemployment, and loss of monetary support
throughout the community.
Mr. Tabler referenced that the cost analysis provided by Mr.
Meyers, which had been based on an analysis supplied by the
companies. He spoke to the "sub-economic" platforms and
that the only thing that allowed those platforms to continue
production comes from other platforms. Operating costs have
to be spread across the rest of the platforms.
Mr. Tabler acknowledged that lay-offs have occurred and that
it would only be a short period before additional platforms
will be suspended. With the mature fields, when royalty
relief is justifiable, the life extension of facilities is
important to the overall infrastructure and is of primary
benefit. In reviewing the language of the bill, different
platforms have different thresholds for economic viability.
Although each platform is different, the State should not
loose site of the overall economics of Cook Inlet. Those
economics are sensitive to not only price but also the
impact cost sharing. Additional costs place an initial
burden on the remaining facilities and therefore shorten
their life. The time to give relief is when they are still
economic and there is still potential to extend the field to
increase production. He maintained that the bill is a clear
and concise vehicle to support future exploration projects.
Mr. Tabler encouraged passage of the bill out of Committee.
HB 198 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting was adjourned at 9:52 A.M.
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