Legislature(2013 - 2014)HOUSE FINANCE 519
04/09/2013 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
| += | SB 18 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 9, 2013
1:36 p.m.
1:36:28 PM
CALL TO ORDER
Vice-Chair Neuman called the House Finance Committee
meeting to order at 1:36 p.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative Lindsey Holmes
Representative Scott Kawasaki, Alternate
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
Representative David Guttenberg
ALSO PRESENT
Sara Obed, Director, Government Relations, Doyon Limited;
James Mery, Senior Vice President, Lands and Natural
Resources, Doyon Limited; Michael Pawlowski, Advisor,
Petroleum Fiscal Systems, Department of Revenue; Barry
Pulliam, Managing Director, Econ One Research Inc.; Bruce
Tangeman, Deputy Commissioner, Tax Division, Department of
Revenue.
PRESENT VIA TELECONFERENCE
Tara Sweeney, Arctic Slope Regional Corporation, Anchorage;
Michelle Anderson, President, Ahtna Inc., Glennallen; Helvi
Sandvik, President, NANA Development Corporation; Kim
Reitmeier, President, ANCSA Regional Association.
SUMMARY
CSSB 18(FIN) am
BUDGET: CAPITAL
CSSB 18(FIN) am was SCHEDULED but not HEARD.
CSSB 21(FIN) am(efd fld)
OIL AND GAS PRODUCTION TAX
CSSB 21(FIN) am(efd fld) was HEARD and HELD in
committee for further consideration.
CS FOR SENATE BILL NO. 21(FIN) am(efd fld)
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
providing a tax credit against the corporation income
tax for qualified oil and gas service industry
expenditures; relating to the oil and gas production
tax rate; relating to gas used in the state; relating
to monthly installment payments of the oil and gas
production tax; relating to oil and gas production tax
credits for certain losses and expenditures; relating
to oil and gas production tax credit certificates;
relating to nontransferable tax credits based on
production; relating to the oil and gas tax credit
fund; relating to annual statements by producers and
explorers; establishing the Oil and Gas
Competitiveness Review Board; and making conforming
amendments."
1:39:02 PM
TARA SWEENEY, ARCTIC SLOPE REGIONAL CORPORATION, ANCHORAGE
(via teleconference), spoke to the legislation. She read
from a document (copy on file) titled, "Testimony of Arctic
Slope Regional Corporation by Tara Sweeney, Senior Vice
President of External Affairs on CSSB 21 HRES Version K."
ASRC is Alaska's largest Alaskan-owned company, with
approximately 10,000 employees nationwide, of which
nearly half are Alaskan jobs. ASRC represents 11,000
Iñupiat shareholders of the North Slope, and we have
been successful in striking a balance between
representing the business interests with the
subsistence needs of our shareholders. We have five
major business lines: 1) energy support services, 2)
petroleum refining and marketing, 3) government
services, 4) construction, and 5) resource
development.
The work performed by ASRC's family of companies
within the oil and gas industry on the North Slope
returns tangible benefits to our shareholders and
thousands of Alaskans. We are a $2.6 billion company
and our enterprise is heavily invested in this state.
I appreciate the opportunity to introduce to you some
of the members of our family of companies.
ASRC Energy Services performs an array of oil field
engineering, operations, maintenance, construction,
fabrication, regulatory, permitting and other services
to some of the world's largest integrated oil and gas
companies. With more than 3,000 Alaska employees,
Energy Services provides more jobs in Alaska than any
other locally-owned employer and has emerged as the
state's largest oil field services company. ASRC
Energy Services also has a presence in Louisiana,
California, Utah, Hawaii, Indiana, Washington, and a
growing presence in North Dakota.
Another member of our family of companies is Petro
Star. Petro Star is the only Alaskan-owned refining
and fuel marketing company. Petro Star's two
refineries located in North Pole and Valdez, draw
crude supply from the Trans Alaska Pipeline System
(TAPS) to produce highway, off-road and marine diesel,
as well as jet fuel and home heating oil. The North
Pole refinery supplies the mining industry, military
operations at Eielson Air Force Base, and it provides
heating oil to communities throughout Interior
Alaska. The Valdez refinery produces and transports
marine fuels to coastal communities reaching as far as
St. Paul Island. The Valdez refinery also produces
ultra-low sulfur diesel, and it supplies jet fuel to
commercial cargo carriers refueling at Ted Stevens
Anchorage International Airport and to the military
operating at Joint Base Elmendorf-Richardson. Through
its operations in Dutch Harbor, Petro Star supplies
fuel to the largest commercial fishery in the United
States. In addition to its refining and distribution
assets, Petro Star also operates fueling stations,
convenience stores and heating oil distributorships.
We are a service provider and refiner. We are also a
resource owner, developer and explorer in this state.
Some of our ownership interests are subject to Section
7(i) of the Alaska Native Claims Settlement Act
(ANCSA), and our ability to explore, develop and
produce on those lands benefit every region in this
state. The absence of a stable tax regime and
positive investment climate for the oil industry has a
material impact on how we develop or not develop those
lands.
As a result of our land entitlement under ANCSA, ASRC
owns nearly five million acres on the North Slope. In
most cases, ASRC's subsurface holdings were primarily
selected for their natural resource potential.
We have a significant royalty position in the Colville
River Unit (CRU), home of the Alpine oil field, one of
the largest oil producing fields on the North Slope.
While the Alpine field production peaked four years
ago, the CRU satellite developments have helped slow
the rate of decline. These satellites currently
account for nearly 35 percent of the oil production in
the CRU and are processed through the main Alpine
facility. Additional development in the CRU is
challenged by a complex and unfriendly permitting
regime that impedes timely development.
ASRC has also invested in the exploration and
development of State-owned lands on the North Slope.
With investment in the Badami and Placer Units, our
exploration company experiences the same tensions
regarding the State tax regime similar to other small
producers and independent explorers.
As part of our investment in the Badami Unit, ASRC
Exploration, LLC (AEX) owns a 32.5% working interest.
AEX and operator Savant Alaska continue to work toward
increased production. However, due to the high cost
environment and current low throughput, it is
extremely important that the Small Producer Credit
stay intact and be extended in order for continued
investment in the Badami Unit.
The tax reform discussion highlights good perspectives
and has spurred meaningful debate. We ask that as you
go forward you remain mindful of the Alaskan companies
involved in the industry. There has been a lot of
focus on the multi-national and independent explorers
and small producers, so sometimes the local voice gets
muffled in the process.
As an employer, service provider, resource owner,
explorer, producer and developer, ASRC is in a unique
position to provide comments. I submit our comments
from the perspective of a local company with an
enterprise involved in the value chain of oil
development in this state, from exploration through
refining product and all services in-between.
This committee substitute is an improvement over the
current ACES and also the Senate version. There are
several provisions we support and areas that still
need improvement.
· We support the repeal of progressivity.
· We support the base rate change from 35% to 33%.
· The community sharing provision is a good start, and
we encourage the Legislature to continue to consider
linking it to a percentage of the tax, versus the
current language of a legislative appropriation. We
feel this is a more objective approach to sharing
revenues with Alaskan communities.
· We support the 35% Loss Carry Forward (LCF) Credits,
as currently written. They enable explorers, small
producers, majors and organizations like ASRC to
receive carry-forward loss credit, through a transfer,
refund or tax deduction. This flexibility is
attractive to us.
· We support the Gross Value Reduction (GVR) formula
contained in the bill. It makes investment
opportunities even in marginal fields more attractive
for companies like ASRC. It encourages development of
new production for all producers, as well as new
entrants.
· We support linking the $5 per barrel tax credit to the
production subject to the GVR for the reasons listed
above; this creates a more level playing field for all
players.
· We support the 10% service credit because it
stimulates the economy within the service industry.
Our subsidiary, ASRC Energy Services, employs
thousands of Alaskans, and this credit could help us
revamp our fabrication and construction services in
the state.
· We support the AIDEA bonding capability - this will
give new entrants another avenue to finance facilities
that have the capability to bring new production
online.
· The sliding scale provision for non-GVR production
provides for tax benefits to producers at low oil
prices and increases the State's 'take' at higher oil
prices. This, again, provides the right type of
incentives in a changing price environment, and the
State benefits on the upside swing of prices.
· Refining the definition of Lease Expenditures on what
counts for tax filings provides necessary clarity to
both the explorers, producers and the Alaska
Department of Revenue.
· Finally, I want to impress upon the committee the
importance of the small producer credit to ASRC. The
extension of this credit to 2022 goes a long way for
the "little guy". Through our subsidiary, AEX, this
extension improves our ability and that of the other
small producers, to maintain or grow existing
production. This extension makes it more attractive
for companies like AEX to explore for and develop oil
and gas deposits on leaseholds outside of our units
that could add new production to our unit positions.
This is good. Elimination of this credit would impact
how we choose to invest our capital in this company,
or if it makes more sense to invest in other parts of
our business.
There are two areas of concern for us. First, the
expiration of the Qualified Capital Expenditures (QCE)
in 2014 is too soon. We support a phase out program
over a slightly modified period, like 2015. This is
important because investments planned with the credit
as part of project financing will require replacement
of this source of investment capital or the project
will be shelved. Phasing this out over a longer
period makes more sense for the current explorers and
potential developers.
Finally, deletion of the proposed modification of the
Exploration Tax Credit (ETC) that eliminated the 3-
mile buffer for drilling and extended the deadline for
ETC's to 7/1/2022 would remove any incentive for a
small producer to add new production to its unit or
create other opportunities for new production.
In closing, on behalf of Arctic Slope Regional
Corporation, I want to thank you for your leadership
on this issue. We appreciate your dedication to
public service and taking the time to work to
reinforce Alaska's economic foundation. While some
may be looking at this issue through a narrow lens, we
have the fortune to see this issue from several
important viewpoints. ASRC strategically plans for a
sustainable future in Alaska and we support a healthy
and robust oil industry here. Thank you for the
opportunity to provide our perspective.
Ms. Sweeney continued to discuss the members of the
corporation including Petro Star. She noted that Petro Star
was the only Alaskan owned refining and fuel marketing
company. The company owned two refineries located in North
Pole and Valdez, which drew crude supply from the Trans-
Alaska pipeline to produce highway, off road and marine
diesel as well as jet fuel and home heating oil. The North
Pole refinery supplied the mining industry, military
operations at Eielson Air Force Base and provided heating
oil to communities throughout Interior Alaska. Petro Star
also produced ultra-low sulfur diesel fuel and supplied jet
fuel to commercial cargo carriers refueling at Ted Stevens
Anchorage International Airport and to the military
operating at joint base Elmendorf Richardson.
Ms. Sweeney continued that Petro Star supplied fuel to the
largest commercial fishery in the U.S. Fueling stations,
convenience stores and heating oil distributorships were
also operated by Petro Star. The company was a refiner,
resource owner, developer and explorer in Alaska. The
ability to produce on Native settlements benefitted every
region in the state with ownership of approximately five
million acres on the North Slope. She spoke to the
significant royalty position in the Colville River Unit
(CRU), home of the Alpine oil field. While the Alpine Field
Production peaked four years ago, the CRU satellite
developments helped slow the rate of decline. The
satellites accounted for nearly 35 percent of the oil
production in CRU and were processed through the main
Alpine facility.
Ms. Sweeney explained that additional development in the
CRU was challenged by a complex and unfriendly permitting
regime. She pointed out the Arctic Slope Regional
Corporation (ASRC) investment in exploration and
development of state-owned lands on the North Slope.
Tensions regarding the state tax regime were experienced by
her company. The high-cost environment and current low-
throughput required that the small producer credit stay
intact and be extended in order for continued investment in
the Badami unit. She stated that the tax reform discussion
highlighted good perspectives and spurred meaningful
debate. She requested consideration of the Alaskan
companies in the oil industry.
1:43:18 PM
Ms. Sweeney stated that ASRC provided comments with the
perspective of a local company. She relayed that HCS CSSB
21(RES) was an improvement over the current system. They
supported the 33 percent tax, and other items related to
the bill. She spoke in support of the repeal of
progressivity. She supported the community sharing
provision and she encouraged the legislature to consider
linking it to a percentage of the tax versus the current
language, which was a more objective approach to sharing
revenues with Alaskan communities. She supported the 35
percent loss carry forward credit, which enabled owners to
receive carry forward loss credit through a transfer,
refund or tax deduction.
Ms. Sweeney continued that ASRC supported the GVR formula
in HCS CSSB 21(RES), which allowed investment opportunities
in marginal fields to be more attractive for companies like
ASRC. The GVR formula encouraged the development of new
production for all producers including new entrants. She
supported linking the $5 per barrel tax credit to the
production subject to the GVR, which created a more level
playing field. She supported the 10 percent service credit,
which stimulated the economy within the service industry.
She supported the Alaska Industrial Development and Export
Authority (AIDEA) bonding capability, which allowed new
entrants another avenue to finance facilities. The sliding
scale provision for the non-GVR production provided tax
benefits for producers at low oil prices and increased the
state's take at higher oil prices.
1:46:33 PM
Ms. Sweeney stressed the importance of the extension of the
small producer credit to ASRC. The extension of the credit
to 2022 would improve the ability of small producers to
maintain or grow existing production. The extension made
exploration for oil and gas deposits on lease holds outside
of current units that could potentially add new production
to the unit positions. Elimination of the credit would
impact capital investment. She expressed concern regarding
expiration of the Qualified Capital Expenditures (QCE) in
2014. She supported a plan that would phase out QCE's by
2015. She supported the deletion of the proposed
modification of the Exploration Tax Credit (ETC) that
eliminated the three mile buffer for drilling. She stated
that ETC would remove any incentive for a small producer to
add new production to its unit or create other
opportunities for new production.
1:49:40 PM
Co-Chair Stoltze thanked ASRC for their contribution.
1:50:09 PM
MICHELLE ANDERSON, PRESIDENT, AHTNA INC., GLENNALLEN (via
teleconference) shared information about the company. She
noted that 55 miles of the Trans-Alaska Pipeline System
(TAPS) crossed Ahtna land. She pointed out that Ahtna
provided pipeline maintenance, construction and oil-spill
response over the last 40 years. She stated that Ahtna
encouraged the legislature to remain focused on the goal of
increased production from both legacy and new oil fields by
lowering the base tax rate from 35 percent to 33 percent
and extending the small producer credit to 2022.
Ms. Anderson reported to the committee that 56 percent of
Alaskan's supported oil production tax reform. She stated
that SB 21 would help all Alaskans have a prosperous future
by making Alaska more attractive for private sector
investment. She noted that continuation of ACES would lead
to continued declines in throughput. She supported revision
of the new frontier basin tax credits by stemming the
exploration terms and eliminating the 3 mile limit, making
it comparable to the Cook Inlet Basin.
Vice-Chair Neuman asked Ms. Anderson to provide her written
testimony.
1:53:20 PM
SARA OBED, DIRECTOR, GOVERNMENT RELATIONS, DOYON LIMITED,
provided information about the native corporation, which
was headquartered in Fairbanks. She stated that land owned
by Doyon Limited spanned the Brooks Range in the north to
the Alaska Range in the south and extended to Norton Sound.
She stated that Doyon Limited had 18,700 shareholders and
2,700 employees. She shared that Doyon Drilling was the
premier company that owned 7 advanced drill rigs
specifically designed to operate in Alaska's northern
climates. The company prided itself as an industry leader
among support service contractors in Alaska. She continued
to discuss the company's structure and work. She testified
in support of the oil tax reform effort. She stated that
the company was comprised of beneficiaries and participants
who knew oil and gas exploration was declining.
1:57:09 PM
JAMES MERY, SENIOR VICE PRESIDENT, LANDS AND NATURAL
RESOURCES, DOYON LIMITED, spoke about areas the company was
exploring for hydrocarbons in Interior Alaska (middle
earth). He pointed to exploration credits that were not
addressed in the bill that sunset in 2016. He also
addressed a cap on production tax that applied only to
middle earth. He shared that the company was conducting
frontier exploration. He believed that areas in middle
earth were capable of generating billions of barrels of
oil. He noted that Doyon Limited's efforts were focused on
finding oil for the Trans-Alaska Pipeline System (TAPS).
Another company goal was to find gas for local use. The
company's risk was shared with the state through the
expiring exploration credits programs. Without state
assistance, the company's exploration efforts would not
have been successful. He noted exploration in the Nenana
Basin, where the company held 400 thousand acres in state
leases.
2:00:55 PM
Mr. Mery continued to discuss the company's exploration
efforts. He shared that Nenana was the company's highest
priority and was also exploring the Yukon Flats. He
mentioned two seismic programs at Stevens Village. Success
in the Yukon Flats could lead to renewed exploration near
the Canadian border. These areas enjoyed significant
exploration by major oil companies a generation ago,
including Arco Alaska, Shell, ExxonMobil, Amoco and
Chevron. Smaller companies followed with new hydrocarbon
finds. He believed that the five areas mentioned held
hundreds of millions of barrels of recoverable oil.
Mr. Mery respectfully requested a five year extension of
the 30-40 percent exploration credits. Without the state
sharing the risk, exploration by Doyon Limited would likely
cease. He mentioned legislation passed last session that
placed a cap of 4 percent of the gross value production for
a limited period of time on new production from middle
earth. The provision was critically important to Doyon
Limited in navigating unknown permitting and litigation
risks during the capital investment recovery phase of new
projects lacking production infrastructure. He advocated
for an extension of the sunset date to 2027.
2:05:13 PM
Vice-Chair Neuman requested written testimony from Doyon
Limited.
Representative Wilson asked about the 4 percent tax on new
production and how certainty regarding taxes provided an
opportunity for the company to move forward. Mr. Mery
answered that it was certainty and a lower rate for a set
period of time that allowed for exploration and production.
The simplicity and certainty helped the company in their
exploration efforts.
Representative Wilson asked if location and tax certainty
were related. Mr. Mery replied that tax certainty was
advantageous in any location. The situation was exaggerated
in the case of his company because of their exploration
risk.
Representative Wilson was interested to know if middle
earth was different than the North Slope. She asked if the
company would not move forward if the two items mentioned
in Mr. Mery's testimony were not in place. Mr. Mery
responded that the state was a great partner with respect
to the exploration credits. If the items were not extended
the company may not move forward with frontier exploration.
Representative Wilson asked if other private entities might
be willing to partner with Doyon Limited. Mr. Mery replied
that his company was the only one interested in frontier
exploration in Alaska. His company had more reasons to
pursue frontier exploration because of their unique
location.
2:08:05 PM
HELVI SANDVIK, PRESIDENT, NANA DEVELOPMENT CORPORATION (via
teleconference), spoke in support of the legislation. She
stressed that it was critical to address tax reform in the
current session. She communicated that the company's
shareholders made significant investment in the oil
industry. She noted that her company was one of the largest
employers in the state, employing approximately 4000
Alaskans. She noted the company's practice of reinvesting
in new facilities and equipment to sustain Nana oil field
services for the next 40 years. She spoke to the value of
leveraging the experience gained from work in the oil
sector leading to significant investments in other state
industries. The company's priority was natural resource
development and support.
Ms. Sandvik expressed alarm at the decline in business
activity in companies serving the sector. Alaska talent was
migrating elsewhere to pursue economic opportunity in the
oil sector. She hoped that her children would have the
ability to work and live in Alaska. She recognized the
increase in activity seen in the Lower 48 and international
locations. Those locations created an environment that
invited investment as opposed to discouraging it. Without
investment, Alaska will see no financial return. She
believed that SB 21 lent the most promise for new
investment and increased production. She mentioned the
crisis in the North West Arctic Borough with an
unemployment rate of approximately 15 percent. She spoke to
limited infrastructure and high energy costs.
2:12:32 PM
Ms. Sandvik expressed that her only hope for the future was
an increase in economic activity, opportunity and
stability. She urged the committee to remember that the
future of Alaskans depended on the decisions made in this
legislature. She opined that the bill struck a balance
between Alaska's short and long term needs. She supported
the middle earth amendments discussed by Doyon Limited that
would strengthen future development opportunities in areas
of the state with limited exploration and development. She
urged the passage of SB 21 to create a stable climate to
serve all Alaskans well into the future.
Vice-Chair Neuman asked Ms. Sandvik to provide written
testimony.
2:13:52 PM
KIM REITMEIER, PRESIDENT, ANCSA REGIONAL ASSOCIATION (via
teleconference) testified in favor of SB 21.
My name is Kim Reitmeier, President of the ANCSA
Regional Association. The ANCSA Regional Association's
membership includes the CEOs of the 12 land-based
regional Alaska Native Corporations. Our corporations
are owned by over 100,000 Alaska Native people and
were formed under the Alaska Native Claims Settlement
Act of 1971. Our mission is to collaborate in creation
of a sustainable socioeconomic future for Alaska
Native people.
I would like to thank Co-Chair, Rep Bill Stoltze for
extending a personal invitation to our Regional
Corporations to participate today. You've heard from
of our Regional Corporations this afternoon;
unfortunately, many of our CEOs are traveling today,
and extend their regards for not being able to
participate in this very important legislative
discussion.
On March 28th the ANCSA Regional Association issued a
press release calling for a robust oil and gas
industry with a stable tax regime. Tax reform for the
oil and gas industry that truly results in increased
production will give communities across the state
access to important economic opportunities. We can't
stress enough the importance of new and increased
production with long-term benefits to Alaskans. We
hope that the final bill will benefit all Alaskans,
including our rural residents.
Our membership recognizes the importance of a robust
oil and gas industry for our state, and for our
people, to thrive. It's about sustainability - and
without it the entire state treasury is in jeopardy.
Alaska Natives have lived here for 10,000 years, and
we will be here for 10,000 more. A healthy oil and gas
industry is vital for all Alaskans. As you go forward,
we ask that you be guided by the values of
responsibility to our communities and cooperation to
sustain our connection to the land; and have tangible
results for all of Alaska.
In closing, on behalf of ANCSA Regional Association, I
would like to thank you for your leadership on this
issue. We appreciate your dedication and work to
ensure Alaska's economic future. Thank you for the
opportunity to provide our comments.
Representative Edgmon thanked the ANCSA Regional
Association for prioritizing the survivability of rural
Alaska.
Representative Wilson asked if the benefits of the
legislation outweighed the risks. Ms. Reitmeier answered in
the affirmative. Representative Wilson asked if additional
jobs would become available for all Alaskans as a result of
the legislation. Ms. Reitmeier answered yes.
2:18:04 PM
AT EASE
2:19:52 PM
RECONVENED
MICHAEL PAWLOWSKI, ADVISOR, PETROLEUM FISCAL SYSTEMS,
DEPARTMENT OF REVENUE, introduced Econ One's presentation
on oil production decline rates. He stressed the goal of
mitigating those decline rates.
BARRY PULLIAM, MANAGING DIRECTOR, ECON ONE RESEARCH INC.,
provided a PowerPoint presentation titled "Additional
Comments on HCS CSSB 21(RES)" (copy on file). He explained
that he had reviewed various decline rates in preparation
for the presentation. He pointed to slide 2 and the red
line projecting production on the North Slope under rates
ranging from 6 percent long-term to no decline (blue line).
He noted that a 6 percent decline rate would include a
reduction from 500 thousand to 100 thousand barrels of oil
per day. Mitigation of the decline rate to 3 percent would
change the overall production considerably by adding
approximately 900 million barrels of total recovery over
the next 30 years.
Mr. Pulliam continued that a further reduction to 1 percent
would add another billion barrels. If decline could be
stemmed altogether, the recovery would include 5.5 billion
barrels of total recovery over the next 30 years.
2:24:16 PM
Representative Wilson asked if the graph depicted the
barrels of oil required to prevent a decline in production.
Mr. Pulliam clarified that the graph followed the long term
decline path and would include production of approximately
3 billion barrels. If decline was stemmed, the oil
companies would recover an additional 2.5 billion barrels,
or 5.5 billion total barrels.
Mr. Pawlowski added that the Department of Natural
Resources (DNR) estimated production in legacy fields at
approximately 3 billion barrels. There was an estimated 3
billion barrels that were yet to be discovered on state
lands. The chart took into account legacy fields and
undiscovered oil.
Representative Wilson asked if the state could predict
ample oil resources through 2042 in the absence of a
decline rate.
Mr. Pulliam replied in the affirmative. He added that the
question was about oil discovery and recovery.
Representative Gara asked about responses to questions the
committee had posed. He pointed to a question related to a
comparison in revenue between HCS CSSB 21(RES) and ACES
using a range of realistic prices.
2:27:59 PM
Mr. Pawlowski apologized for not including the range of
questions in the presentation. He offered to present the
information using different price scenarios.
Representative Gara stated that he would appreciate answers
to his questions.
BRUCE TANGEMAN, DEPUTY COMMISSIONER, TAX DIVISION,
DEPARTMENT OF REVENUE, stated that the department provided
responses to members' questions over the weekend. He
interpreted that Representative Gara wished to receive data
regarding a 3 percent decline rate. He pointed out that the
department had worked hard on the issues for the committee
and he apologized for the misinterpretation.
Mr. Pawlowski surmised that the department must address the
questions.
Representative Gara noted that his questions were in
writing.
Representative Wilson added that she had not received
answers to her questions either.
2:31:06 PM
Mr. Pawlowski apologized.
Mr. Pulliam pointed to slide 3 titled "Impact of New
Drilling on Production 10 New Wells Drilled Annually 2013 -
2042." He modeled a decrease of a 6 percent decline rate to
3 percent, which would require additional development. The
additional requirement would occur over time and the
expected recovery was depicted in slide 3. The slide
illustrated an increase of 10 wells annually. The wells
were expected to produce at a rapid rate initially and then
decrease over time. He expressed that the plan outlined in
the slide would allow for the needed 30 million barrels of
development per year, which would stem the decline at 3
percent.
Mr. Pawlowski added that the focus of barrels per day for
production targets must be supplemented by the production
levels of already existing wells. Wells that were drilled
in previous years were still contributing to production,
which created the "layering effect" illustrated in slide 3.
Ten wells drilled annually would create the production
needed to limit the decline from 6 percent to 3 percent.
Mr. Pulliam agreed that the chart displayed wells that
contributed to already existing production.
Representative Wilson interpreted the chart to show that of
the 300 wells drilled, only 26 would produce.
2:35:18 PM
Mr. Pulliam replied that the base level of production was
represented by the color red and depicted 1000 producing
wells. Each additional year's color represented 10 wells.
Representative Wilson asked if the state required 600 wells
to prevent any decline whatsoever.
Mr. Pulliam opined that the goal of 20 additional wells per
year was realistic.
Representative Wilson clarified that the state would
require 600 new producing wells to stem decline between
2013 and 2042.
2:37:09 PM
Mr. Pulliam moved to slide 4 "Impact of New Drilling on
Production 20 New Wells Drilled Annually 2013 - 2042." He
explained that the increase in wells drilled would stem
decline to approximately 1.5 percent annually.
Representative Edgmon asked what the slide depicted inside
and outside of the legacy wells. He recalled earlier
testimony from Pioneer that 11 oil wells must be drilled to
arrive at one functioning well.
Mr. Pulliam responded that the data in slide 4 assumed
successful development of the drilled wells.
Representative Edgmon asked if the chart accounted for
location of the well.
Mr. Pulliam responded that the chart did not represent a
prediction, but instead the activity necessary to stem
decline.
Representative Edgmon understood that the effort of HCS
CSSB 21(RES) was to increase development and activity.
2:38:40 PM
Vice-Chair Neuman asked if DOR staff could respond to
questions like Representative Edgmon's. Mr. Tangeman
replied that he had staff online responsible for noting the
important questions posed.
Representative Gara asked how many oil wells existed on the
North Slope in 2006.
Mr. Pulliam asked if Representative Gara was referring to
producing or new wells drilled.
Representative Gara responded that he was interested in the
wells drilled annually in 2006. Mr. Pulliam replied that
approximately 100 wells were drilled annually in 2006.
Representative Gara noted that the decline rate was between
5 and 8 percent per year between 2004 and 2007 despite the
fact that 100 wells were drilled annually.
Mr. Pulliam responded that that the base level was much
greater between 2004 and 2007. In 2013 the base level was
500 thousand barrels per day, as opposed to 1 million
barrels per day in 2004 - 2007.
2:40:38 PM
Vice-Chair Neuman asked if a new well meant a new site.
Mr. Pulliam replied that he was referring to a new well.
Additional production could be obtained from an existing
well.
Representative Thompson asked if the graph on slide 4
depicted 20 new producing wells versus 20 wells drilled
annually.
Mr. Pulliam replied 20 new producing wells.
Representative Kawasaki wondered about the assets provided
in the 100 existing producing wells. He wondered how many
new wells were built and capped or reworked and capped. He
asked the cost per company for the 20 producing wells
drilled annually.
Mr. Pulliam estimated the cost to be $15 million per well.
He anticipated that the combination of production and
injector would cost $25 to $30 million.
Representative Kawasaki clarified that the total cost was
approximately $300 million for the industry.
Mr. Pulliam responded $600 million annually for 20 new
producing wells per year.
2:43:20 PM
Representative Gara thought that the number of wells
drilled was not one-to-one. He clarified that the
anticipation was for 20 new producing wells.
Mr. Pulliam replied in the affirmative.
Representative Gara wondered how many exploratory wells
were required to find 20 producing wells.
Mr. Pulliam responded that he heard testimony that a
handful of exploration wells drilled led to approximately
20 wells.
Representative Gara expressed difficulty understanding Mr.
Pulliam's answer. He recalled testimony stating that 20
wells must be drilled to arrive at new oil.
2:45:06 PM
Mr. Pulliam disagreed. He stated that once a pool of oil
was found, multiple wells were then drilled. He added that
much of the initial work was performed above the ground
with the use of seismic tests prior to drilling.
Representative Kawasaki expressed surprise because prior
testimony stated that "dry holes" were part of the
industry's cost. He understood that the industry was aware
of the location of 2 billion barrels of recoverable oil and
the committee hoped for the production of that oil.
Mr. Pulliam replied that drilling in an exploration and
appraisal fashion would eventually yield a pool of oil. The
pool would be initially located through seismic test, which
advanced in recent years. He noted that once the oil was
discovered, the reservoir would be further developed
leading to multiple wells. He noted the difference between
drilling in a new area without any existing discoveries.
Drilling in those areas was often referred to as
wildcatting and could potentially lead to dry holes.
2:48:11 PM
Representative Munoz understood that it would take between
three to five years to see new production in the state. She
wondered about the possibility of transitioning the credits
to depreciate over a three to five year period.
Mr. Pulliam asked if she was speaking about capital
credits.
Representative Munoz nodded.
Mr. Pulliam replied that the capital credits would be
eliminated with the passage of HCS CSSB 21(RES) at the end
of 2013.
Representative Munoz asked if there were other deductible
expenses that could be depreciated over time in HCS CSSB
21(RES).
Mr. Pulliam responded that the option of depreciating
capital over time was proposed, but he did not advocate for
that choice. He opined that HCS CSSB 21(RES) proposed a
cleaner and more robust system. He stated that a
depreciation of capital would complicate the system
considerably.
Mr. Pawlowski elaborated that the capital depreciation idea
might lead to a tax increase for certain types of
development over the current system (ACES).
2:52:13 PM
Representative Gara heard rumors that Alaska was unique in
allowing all of the deductions and capital expenditures to
be taken in one year.
Mr. Pulliam replied that petroleum taxes based on the net
were commonly deducted in one year. He suggested that the
question be posed to Mr. Mayer from PCE.
Representative Gara understood that the United States taxed
on the gross, which allowed deductions to come out of their
income tax. He wondered if those deductions came out of
income tax rather than royalty.
Mr. Pulliam answered that Alaska's severance tax was a net
tax, while the Lower 48 had a gross tax. The income tax in
Alaska and the Lower 48 capital was depreciated over time.
Representative Gara pointed to a gross tax in the Lower 48
the deductions given for capital were derived from the
income tax, which depreciated over a number of years. In
Alaska the main deduction was on the profits tax, which
came in one year.
Mr. Pulliam stated that Alaska had a fundamentally
different tax rate than in the Lower 48.
Representative Gara clarified that the gross tax on oil in
the Lower 48 with an income tax that also applied, the
deductions for capital were deducted over a number of
years.
Mr. Pulliam replied that it was correct in the Lower 48 and
in Alaska. In both places the capital deduction was
depreciated over time. Against the severance tax the
capital deduction was not an issue in the Lower 48, but in
Alaska was deducted in one year.
Representative Gara asked if there was a place in the Lower
48 where capital expenses could be deducted in one year.
2:56:05 PM
Mr. Pulliam replied that there was not a place in the Lower
48 with a tax system similar to that of Alaska.
Representative Wilson understood that even in the event of
an oil discovery, a well must first compete with other
projects for investment. She stated that Alaska must revise
the tax structure to allow for better competition.
Mr. Pulliam replied in the affirmative.
Representative Wilson stated that a small producer would
benefit most from a change in the tax structure.
Mr. Pulliam replied that smaller companies would often look
for capital outside of the firm where large companies
possessed efficiencies.
Representative Wilson noted that the state was competing in
a global market.
Representative Costello asked if increased production from
legacy fields had been included in slide 4.
Mr. Pulliam answered that the analysis assumed that the
legacy fields were producing in the base production. The
colorful wedges were representative of development outside
of the legacy fields.
Mr. Pawlowski added that the first two slides related to
production. The decline was based on the currently
producing legacy field infrastructure. He noted the
possibilities for additional production from those legacy
fields.
3:00:26 PM
Representative Costello clarified that the industry's
interest in Alaska would equate to wells drilled. The
increase in wells would stem the decline.
Mr. Pawlowski answered that the intent was to provide
information on the scale of activity. The administration
believed that the number of wells proposed in slide 4 was
achievable.
Representative Costello clarified that the slide should
indicate 10 annual production wells.
Mr. Pulliam moved to slide 5: "Estimated Average 2013 -
2042 State Oil Revenues ($2012 Billion Dollars) Under
Potential Production and Tax Scenarios ACES v. HCS CSSB
21(RES) $100 West Coast ANS ($2012)." The graph's blue bars
depicted a 33 percent base tax rate. He explained that the
graph illustrated state revenues under ACES with a 6
percent decline and displayed annual average revenue of
$3.3 billion. With the passage of HCS CSSB 21(RES) and a
decline rate of 3 percent the revenue would increase to
$3.6 billion annually. With a 1 percent decline rate, the
revenue would increase to $4.4 billion annually. With a
zero percent decline rate the revenue would increase to $5
billion annually. The slide assumed that all of the barrels
produced over the base decline would be developed with the
GRE.
Mr. Pulliam continued that the green bars depicted the
revenue impact difference with a 35 percent base rate. The
revenue would increase by approximately $100 million
annually with the increased base tax rate.
Representative Gara requested modeling an assumption using
$120 per barrel.
3:04:36 PM
Mr. Pulliam replied that the graph's bars would all
increase with the use of $120 per barrel and the gap
between the ACES bar and the others would narrow with the
increased price of oil.
Representative Gara asked why $100 had been used in the
presentation.
Mr. Pulliam replied that the figure was a typical reference
price used in presentations that was comparable to the
price of oil in 2013. He offered to run the data using
alternative price scenarios.
Vice-Chair Neuman requested the data run using $110, $120
and $130 as the price of oil.
Mr. Pulliam clarified that his use of $100 per barrel of
oil was stated in "real" dollars. He assumed 2.5 percent
inflation annually.
3:06:01 PM
Mr. Pawlowski clarified that early reductions in state
revenues were illustrated in the fiscal note. Slide 5
depicted average state revenues over 30 years.
Representative Gara pointed to the use of a 6 percent
decline rate under current law when ConocoPhillips
testified to a projected 3 percent decline rate under ACES.
He pointed to Prudhoe Bay, Kuparuk, Alpine and other
fields. Econ One used low price of oil and a 6 percent
decline rate. He believed the presentation was crafted to
provide a result that the consultants wanted to show.
Mr. Pulliam moved to slide 6: "Estimated Average 2013 -
2042 State Oil Revenues ($2012 Billion Dollars) Under
Potential Production and Tax Scenarios ACES v. HCS CSSB
21(RES) $100 West Coast ANS ($2012)." Slide 6 depicted a 3
percent decline rate. The long-term decline on the North
Slope was 6 percent.
Vice-Chair Neuman clarified that individual companies might
anticipate 3 percent decline, but the data was based on
overall throughput through the Trans-Alaska Pipeline with a
6 percent rate of decline.
Mr. Pulliam replied in the affirmative. The scenarios
depicted in slide 6 utilized a 3 percent decline until
2017, which was consistent with DOR projections.
Mr. Pawlowski stated that the additional development
predicted above the decline was included for all GRE
barrels, which would derive lower revenue per barrel for
the state. The slide illustrated the lowest possible tax
rate at the prices to underrepresent the potential revenue
understanding that production from the legacy fields would
incur a higher revenue rate.
Mr. Pulliam discussed slide 6 and the 3 percent decline
scenario. Under ACES, a 3 percent decline rate would yield
$4.3 billion per year. If the decline was stemmed to 1
percent, revenue would increase to $4.5 billion annually.
He added that a decrease from 3 to 1 percent required 10
additional new producing wells per year.
Mr. Pawlowski clarified that the consultants were not
presenting base rates as recommendations.
3:11:14 PM
Representative Holmes asked for verification that the
slides included a 3 percent decline until 2017 and were
then adjusted.
Mr. Pulliam replied in the affirmative.
Representative Holmes asked about different tax rates. She
noted that the zero percent decline rate under the
different tax rates were the same, yet the 1 percent
decline rates appeared to be "off."
Mr. Pulliam replied that the slide assumed that the
incremental oil was taxed at the lower GRE rate.
Representative Holmes clarified that slide 5 assumed a six
percent base for the various percentages of decline,
whereas slide 6 assumed a 3 percent decline moving from 1
percent to zero percent.
Mr. Pulliam replied in the affirmative.
Representative Wilson pointed to slides 5 and 6. She
wondered about potential comparisons to other slides in the
presentation.
Mr. Pulliam recommended that slides 5 and 6 be compared to
slide 2. He noted that the different production scenarios
provided a valuable comparison with the various decline
rates when used within ACES and HCS CSSB 21(RES).
Representative Wilson asked for verification that
production would continue through 2042.
Mr. Pulliam replied in the affirmative.
3:14:41 PM
Representative Gara pointed to slide 6. He understood that
the difference between the 33 percent and 35 percent
decline rate was $200 million per year, yet the slides in
the Econ One presentation depicted a $100 million per year
difference.
Mr. Pulliam answered in the affirmative. He elaborated that
both figures were correct and compatible. His presentation
depicted inflation-adjusted dollars where the $200 million
difference was illustrated in nominal dollars.
Representative Gara wondered about the practice of placing
ACES in a 6 percent decline rate while HCS CSSB 21(RES)
illustrated a lower decline rate. He wondered if Mr.
Pulliam received industry input on the projected decline
rate if HCS CSSB 21(RES) passed.
Mr. Pulliam replied that the scenarios were intended for
illustrative purposes only.
Representative Gara asked if Econ One would provide
modeling for committee members' questions.
Vice-Chair Neuman would speak to Co-Chair Stoltze about the
request.
Representative Gara believed that modeling scenarios would
be helpful for the committee.
Representative Thompson expressed appreciation for the
department's cooperation and quick response.
3:18:02 PM
Representative Kawasaki asked about Alberta's tax reduction
and the availability to access the relevant data.
Mr. Pawlowski replied that the data was located in a larger
packet of responses. He offered to present it to the
committee members. He noted that the data was an excerpt
from an Exon One presentation for the public. He pointed
out that the information could be found on BASIS with a
search for the February 13, 2013 in the presentation
related to benchmarking.
Representative Gara clarified the process for submitting
questions.
Vice-Chair Neuman replied that the questions must be
submitted to the Co-Chair Stoltze' office for efficiency.
CSSB 21(FIN) am(efd fld) was HEARD and HELD in committee
for further consideration.
CS FOR SENATE BILL NO. 18(FIN) am
"An Act making, amending, and repealing
appropriations, including capital appropriations,
supplemental appropriations, reappropriations, and
other appropriations; making appropriations to
capitalize funds; and providing for an effective
date."
CSSB 18(FIN) am was SCHEDULED but not HEARD.
ADJOURNMENT
3:20:22 PM
The meeting was adjourned at 3:20 p.m.