Legislature(2015 - 2016)HOUSE FINANCE 519
04/01/2016 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB247 | |
| Industry Testimony: Alaska Oil & Gas Association (aoga), Conocophillips, Exxon, Bp, Hilcorp, Caelus Energy Alaska | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 247 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 1, 2016
2:00 p.m.
2:00:25 PM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 2:00 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Kara Moriarty, President and Chief Executive Officer,
Alaska Oil and Gas Association; Scott Jepsen, Vice
President, External Affairs, ConocoPhillips; Paul Rusch,
Vice President, Finance, ConocoPhillips; Dan Seckers, Tax
Counsel, ExxonMobil; Joe Reese, Senior Tax Manager, BP;
Dave Wilkins, Senior Vice President of Alaska, Hilcorp; J.
Patrick Foley, Senior Vice President of Alaska Operations,
Caelus; Representative Lora Reinbold, Representative Dan
Ortiz.
SUMMARY
HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G
HB 247 was HEARD and HELD in committee for
further consideration.
Industry Testimony: Alaska Oil & Gas Association (AOGA),
ConocoPhillips, Exxon, BP, Hilcorp, Caelus Energy Alaska
Co-Chair Thompson relayed the agenda for the day. He asked
Ms. Moriarty to approach the table.
2:03:09 PM
HOUSE BILL NO. 247
"An Act relating to confidential information status
and public record status of information in the
possession of the Department of Revenue; relating to
interest applicable to delinquent tax; relating to
disclosure of oil and gas production tax credit
information; relating to refunds for the gas storage
facility tax credit, the liquefied natural gas storage
facility tax credit, and the qualified in-state oil
refinery infrastructure expenditures tax credit;
relating to the minimum tax for certain oil and gas
production; relating to the minimum tax calculation
for monthly installment payments of estimated tax;
relating to interest on monthly installment payments
of estimated tax; relating to limitations for the
application of tax credits; relating to oil and gas
production tax credits for certain losses and
expenditures; relating to limitations for
nontransferable oil and gas production tax credits
based on oil production and the alternative tax credit
for oil and gas exploration; relating to purchase of
tax credit certificates from the oil and gas tax
credit fund; relating to a minimum for gross value at
the point of production; relating to lease
expenditures and tax credits for municipal entities;
adding a definition for "qualified capital
expenditure"; adding a definition for "outstanding
liability to the state"; repealing oil and gas
exploration incentive credits; repealing the
limitation on the application of credits against tax
liability for lease expenditures incurred before
January 1, 2011; repealing provisions related to the
monthly installment payments for estimated tax for oil
and gas produced before January 1, 2014; repealing the
oil and gas production tax credit for qualified
capital expenditures and certain well expenditures;
repealing the calculation for certain lease
expenditures applicable before January 1, 2011; making
conforming amendments; and providing for an effective
date."
^Industry Testimony: Alaska Oil & Gas Association (AOGA),
ConocoPhillips, Exxon, BP, Hilcorp, Caelus Energy Alaska
Representative Wilson asked if testimony would be based on
the House Resources version of the bill or the governor's
bill.
Co-Chair Thompson thought there might be a combination of
both. He directed industry to provide clarification in
their testimony.
KARA MORIARTY, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
ALASKA OIL AND GAS ASSOCIATION, indicated that the majority
of her comments were based on the committee substitute from
the House Resources committee. She relayed that she would
be referencing the governor's bill version in certain
places in her testimony. She read from a prepared
statement:
"Good Afternoon, Co-Chairs Thompson and Neuman, and
members of the Committee. For the record, my name is
Kara Moriarty and I'm the President/CEO of the Alaska
Oil and Gas Association, commonly referred to as
"AOGA".
AOGA is a professional trade association whose mission
is to foster the long-term viability of the oil and
gas industry in Alaska for the benefit of all
Alaskans. Thank you for the opportunity to testify
today on Committee Substitute (CS) for House Bill 247,
Governor Walker's oil and gas tax proposal.
Although I am here on behalf of a varied and diverse
group of companies, my testimony today represents the
thoughts and sentiments of each and every member. On
matters related to tax, AOGA requires unanimous
consent on testimony.
There is no denying it - as legislators you have a
tremendous challenge in these economic times. And
whether you want to believe it or not, the reality is,
the oil and gas industry is facing similar challenges.
Loss of revenue. Cutting budgets. Laying people off.
Even in the face of these low prices, industry
recognizes the value of investment and jobs to Alaska
and we are doing our part to sustain what we can in
this tough environment - weather the storms and
continue operating at a loss in the interest of longer
term sustainability. Do not make it harder for us to
sustain Alaska's economy and jobs by adding additional
costs and more economic hardship."
Ms. Moriarty turned to slide 2: "Oil & Gas Drives Alaska's
Economy." She read from her prepared statement:
"Alaska's oil and gas industry fuels our state's
economy. No other industry comes even close.
· 1/3 of all jobs in Alaska are attributed to the oil
and gas industry. Over 110,000 jobs.
· For every direct job created by the companies
exploring, producing, transporting, and refining oil
and gas in Alaska - 20 more private and public
sector jobs are created.
· For every dollar in wage created by industry, $8
additional dollars in wages are created.
· And, even though oil and gas revenue constitute 66%
of the state's unrestricted revenue due to low
prices, for FY2017, 2/3 of the state's revenue will
be from one industry.
· In addition to state revenue, last year, the
industry paid $447 million in property taxes to
local governments.
· What other industry or individual Alaskans are
currently contributing 2/3 or have contributed so
much to the state's budget and local governments?
None. No one comes close. Our detractors may not
like it, but the fact is, the oil and gas industry
has been part of the solution and is currently
contributing a significant share to the state's
budget."
2:06:01 PM
Ms. Moriarty advanced to slide 3: "Questions to ask when
considering policy change." She continued to read from a
prepared statement:
"The industry and the state have a long standing,
mutually beneficial partnership, but we are businesses
who respond to the policies you make. So, as you
deliberate changing oil taxes, again, please ask
yourself these four questions:
1) Will this policy change create more production in
Alaska?
2) Will this policy change make Alaska more or less
competitive on a global scale?
3) Will this policy provide stability to the state of
Alaska and to the industry?
4) Will this policy provide predictability?"
Ms. Moriarty continued her statement on slide 4: "Alaska
Oil and Gas Tax Policy Changed 5 times in a decade":
"The House Resources Committee spent over 40 hours
hearing testimony from the Administration, legislative
expert consultants, and industry on the Governor's
proposal. As a result, the Resources Committee
realized the detrimental effects of many of the
original provisions of HB 247, including the $25
million cap on refundable credits, the zeroing out of
tax credits in the Cook Inlet and middle earth, and
the increase and hardening of the floor for minimum
tax. While this improved the CS, the CS nevertheless
is concerning to industry, in part, as it would
represent the 6th major change in tax policy in 11
years.
Two weeks ago, I was on the phone with Jamy
Rosenfield, the Senior Vice President of IHS - a
global consulting firm and co-founder of CERA with
world renowned and best-selling author, Dr. Daniel
Yergin. We were discussing the global downturn and the
economic challenges facing the oil and gas industry
across the globe. When I told him that the state of
Alaska was considering a tax increase and elimination
of key incentives, his response was shock and
disbelief. He was shocked that a state so dependent on
the industry would actually consider increasing taxes
in this price environment.
As your legislative consultant has said, and will
likely testify to later today, he is not aware of any
other region that has considered so many tax changes
in the past decade."
Ms. Moriarty discussed slide 5: "If DOR forecasts hold for
FY 2016, production will increase for the first time since
2002." She provided her statement:
"Objectives like stability and predictability can be
subjective, I understand that. However, production is
production. We either have it or we don't. It won't
matter if prices go back up to $60 or $80 or $100 per
barrel if production goes back to the decline rates of
the past.
So - what has happened to production in the current
fiscal system? If the state's forecast holds for the
next three months, FY16 will see the first increase in
production since 2002. But - you cannot just look at
production today. It's also important to look forward
and consider what the impact of today's investments
will have on future production. The black line is
historical production in Alaska for the last decade,
the red line is the forecast from December 2013, after
we started the current fiscal regime, and the blue
line is the forecast from just last week.
If you look at the chart to the right, to the year
2020, and compare this year's forecast to the forecast
released in the fall of 2013 you will notice that
after just over two years in our current system, the
Department of Revenue is forecasting over 50,000
barrels per day more than what they were forecasting
in 2013. To provide further context, the spring price
forecast is $50/barrel less for 2020 than it was in
the 2013 forecast. Think about that: Even with the
much lower price forecast, the production forecast is
still over 50,000 barrels per day more four years from
now.
There has been a lot of conversation about "new oil"
or oil that qualifies for the gross value reduction or
"GVR". The very purpose of the GVR was to lower the
effective tax rate on new oil as a way to incentivize
more production. It was designed for the new oil to
pay a bit less in tax as an incentive, and it's
working, but it's important to point out that
according to DOR's own estimates, the lion's share of
our future production will continue to come from the
legacy fields that do not qualify for this additional
incentive. Industry will be paying current tax rates
on 91-92% of the future production for at least the
next 15 years."
2:09:59 PM
Ms. Moriarty scrolled to slide 6: "Unprecedented Low Oil
Price":
"The industry, just like the State of Alaska, is
experiencing the repercussions of an unprecedented
drop in oil prices. Prices today are the lowest we've
seen in more than a decade. In less than two years,
the industry has experienced a 70% drop in oil prices.
You are well aware of the impact this has had on the
State of Alaska's revenues. The State has historically
received 85-90% of its revenue from oil. As
significant as that is, it's important to recognize
that the industry receives 100% of its revenue based
on the market prices for what it produces. As my
friends in other industries will tell you, we are
price takers, we are not price makers."
Ms. Moriarty continued to slide 7: "Companies Have Negative
Cash Flow." She continued with her prepared presentation:
"Invariably, companies are forced to operate despite
the current oil price environment, and in doing so,
the oil and gas industry is currently cash flow
negative, meaning, we are not collecting enough
revenue each day (represented by the green line which
represents oil price) to pay our bills (represented by
the blue line).
When businesses do not have enough cash flow to pay
their expenses, it results in cut backs. The oil and
gas industry is no different. We have seen a dramatic
increase in project delays, deferrals, and rigs going
idle. Most painfully, Alaskans have lost jobs, and not
just 40 or 50 of them. Individual companies can give
you their specific job loss numbers, but from June
2015 to June 2016, there will be over 1,000 fewer
direct employees of the oil and gas industry. This
number does not include the multiplier effect."
Ms. Moriarty turned to slide 8: "At current prices,
industry has negative cash flow before tax":
"To add insult to injury, Alaska has been and
continues to be, a high cost environment. High costs
make it even more difficult to navigate during this
unprecedented low price environment. According to the
Department of Revenue's Spring Sources Book, (page 10
specifically), the estimated average cost of producing
a barrel of oil on the North Slope and getting it to
market - before a company pays even one penny of tax -
is $50/barrel.
Yet despite this, here we are, testifying about
legislation to add costs for industry.
Let me be very clear: if additional taxes are levied
on the industry, either in the form of increasing the
minimum tax, hardening the minimum tax floor or
eliminating tax credits, there will be less oil
production and fewer jobs.
It is really quite simple. Industry is cash negative.
They don't have any more money to give for increased
costs from government. Some companies may already be
burning through savings to pay for operations, and the
reserves are not unlimited."
2:13:23 PM
Ms. Moriarty explained slide 9: "Administration Goal is to
Raise Money." She continued with her statement:
"As I mentioned earlier, the Administration's proposal
represents the sixth major tax change in the last 11
years. Prior changes came from unprecedented high oil
prices, or aimed to incentivize development in the
state and make Alaska more competitive.
However, the motivation behind this current proposal
is not to increase production, make Alaska more
competitive or create stability or predictability.
Rather, it is purely driven by the state's desire for
more money, now.
Raising taxes when prices go up, and then raising them
again when prices go down, undercuts stability and
predictability. The Administration acknowledges the
industry is suffering tough economic times; in fact,
according to their testimony, if prices average around
$40/barrel for 2016, the industry will suffer just
over an $800 million "loss" in the state of Alaska.
That is a staggering number. It's remarkable that
serious considerations are being made to increase
taxes on the state's largest private sector economic
driver when that industry is facing a staggering
downturn."
Ms. Moriarty discussed slide 10: "Specific Concerns with
CSHB 247." She relayed her statement:
As I also mentioned earlier, the House Resources
Committee Substitute does not have the same level of
impact as the Governor's original proposal. But it
still causes industry concern.
AOGA supports the current law with simple interest for
overpaid and/or underpaid taxes. It is appropriate in
light of the lengthy statute of limitations which
gives the Department of Revenue six years to audit a
company's production tax. Compounding the interest
over a 6 year period, even at the current rate, would
add more than 25% of the bill before the audit is
done.
Today is April 1, 15 days to tax day. Can you imagine
filing your taxes, utilizing your best interpretation
of the tax code, and 1 - 2 - 3 - 4 - 5 - 6 years
later, the IRS comes back and says, I'm sorry, we have
finally finished auditing your taxes, and not only do
you have to pay the tax bill, you have to pay
compounded interest on top it. This is the situation
industry currently faces with this proposal. There
could be likely scenarios where the interest payment
is more than the actual tax bill.
Another major concern relates to a so-called
"loophole" in calculating a net operating loss (NOL)
tax credit.
NOL tax credits are utilized both on the North Slope
and Cook Inlet and were established in part to help
level the playing field for new companies trying to
get a foothold in Alaska. The NOLs arise before these
companies have enough production to cover their costs,
and the credit allows them to realize a benefit from
their lease expenditures by getting tax-credit
certificates for them.
For companies who qualify for the gross value
reduction, being able to use that reduction in
determining their NOL is a significant factor in their
project economics. Losing the ability to use it will
result in a tax increase for the very companies that
policy makers wanted to attract to Alaska.
Yet another disincentive for future investment is the
setting of arbitrary limits on credits of any dollar
amount per company, especially when even the
"smallest" of projects range in the $500 million - $1
billion range. Eliminating or discouraging cash
rebates for companies that may not yet have production
or profits, would disadvantage new companies that have
invested here in good faith based on the tax policy in
place when the investments were committed.
Phasing out and eliminating two important credits for
Cook Inlet and "middle earth" is also dangerous. Some
argue those credits are no longer necessary, but they
have attracted new companies here, and production has
increased. Some companies have already entered into
contracts and made large financial commitments for
spending over at least the next year. Abruptly
terminating or changing those credits after the fact
will not attract these types of investments in the
future.
The House Resources CS also creates a working group to
specifically focus on Cook Inlet. This group, in
addition to the Oil and Gas Competitive Review Board,
signals to industry that even if changes are made this
session, that additional changes are coming. Once
again, the State will be looking at making a change to
the fiscal system signaling to investors that the
state fiscal regime is not be stable or predictable.
The proposed revisions in Section 17 of CSHB 247
define "outstanding liability to the state" broadly as
"an amount of tax, interest, penalty, fee, rental,
royalty, or other charge for which the state has
issued a demand for payment that has not been paid
when due and, if contested, has not been finally
resolved against the state." Even though the House
Resources CS does try to minimize the impact of this
"outstanding liability" section, it still creates
uncertainty for companies when trying to determine
economics of a project.
Finally, retroactively applying regulations is
concerning and will again, cause additional
instability."
2:19:43 PM
Ms. Moriarty moved to slide 11: "Any change will have a
negative impact on industry." She finished reading her
prepared statement:
"Whether or not the production tax is raised, the oil
and gas industry will still be the largest annual
contributor to state government by far.
The oil and gas industry will contribute 7.5 times
more than the Governor's proposed income tax, 50 times
more than the proposed revenue from mining, and 37
times more than from commercial fishing.
In this environment some companies may find themselves
in the position of borrowing money just to keep the
doors open for business. We cannot emphasize enough
any increase in cost will have a serious negative
impact on industry and Alaska.
The industry is not before you today asking for tax
relief while we struggle though extraordinarily low
prices. We do ask, however, at this trying time, you
do no harm."
Ms. Moriarty concluded her presentation and made herself
available for questions.
Representative Wilson asked why other states did not offer
refundable tax credits. It was her understanding that
Alaska was the only state to offer cash.
Ms. Moriarty recommended that Representative Wilson direct
her question to the legislature's consultant. She thought
he had better knowledge of different systems than she did.
She believed Alaska was one of the few states that had a
net tax system - credits were inherent of a net tax system.
2:21:17 PM
Representative Gara mentioned that when he heard from his
constituents they recognized the fiscal gap and most
thought that everyone needed to step and contribute what
they could. He mentioned two sets of fields on the North
Slope: those that paid a lower tax (Gross value reduction
fields - fields after 2002 and all future fields), and
those fields before 2002. He stated that according to the
Department of Revenue over the long term the gross value
reduction fields (GVR) fields paid no production tax at all
- a net zero production tax until the prices reached over
$73 per barrel of oil. They were not subject to the minimum
tax floor and paid no production taxes. However, the state
was providing credits and the industry was asking that the
credits be maintained. He wondered if, from the state's
perspective of wanting more revenue at higher prices, the
industry should step up to the plate reconsidering the net
zero production tax rate.
Ms. Moriarty relayed that the state set the policy and the
industry responded. The policy was set for the GVR because
the state wanted additional new oil production. The
industry responded and more production could be seen in
smaller fields. She believed that in looking at the
forecast, 91 percent of the state's production in the
following 15 years would come from the legacy fields (the
fields that did not receive the GVR). For Alaska Oil and
Gas Association (AOGA) it was a matter of policy. If the
state wanted incentives to get new oil, the association
would respond to the state's policy. If the state decided
to roll it back, the companies would respond. She added
that in looking at the entire system, rather than focusing
in on one component, the state was collecting revenues from
8 to 9 percent of production from the GVR fields. Royalty
went up as prices went up. Income tax would theoretically
go up because of a higher income tax as prices went up.
Property taxes would also climb. The association would
respond to policy if the legislature decided to change it.
2:24:13 PM
Representative Gara understood the current policy. He asked
if she thought it was fair for the state to have a net zero
production tax up to $73 per barrel of oil for the post
2002 and new fields.
Ms. Moriarty asserted that the state determined its policy
and AOGA only responded to it. If the legislature thought
the policy was unfair then the legislature would need to
change it. She added that if the state wanted to have GVR
oil to account for the 8 to 9 percent, there would be
companies testifying in the current meeting that were part
of the GVR oil that could talk more directly about
fairness. Speaking for the industry collectively, she
responded that if the legislature did not think the policy
was fair it should change it. She reiterated that AOGA
would just respond to the policy rather than commenting on
whether it was equitable.
Representative Gara understood that raising taxes on oil
field companies was not very sensible at a time when
companies were losing money with the price of oil at $20
per barrel. The minimum tax of 4 percent (an emergency tax
of sorts) for the larger fields applied up to $76 per
barrel. At the Prudhoe Bay, Kuparuk, and Alpine fields
companies would only be paying a minimum oil production tax
of 4 percent. He wondered if Ms. Moriarty thought it was
fair for the legislature to revisit the taxes for the
larger fields.
Ms. Moriarty answered that the State of Alaska decided to
adopt a net tax system. The state was taxing on the
economics of the applicable fields. She explained that
costs were very high in those fields. Producers were cash
negative with the current price of oil and would continue
to be so for a while. She furthered that the floor was put
in place to protect the state when oil prices went down.
Without the floor in place today the state would actually
be collecting even less revenue. She emphasized that the
companies that AOGA represented were cash negative. The net
tax was designed to tax on the economics and, the fact
remained that presently the producers were losing money.
Representative Gara did not mean the current day. He meant
when prices adjusted to the $50 or $60 per barrel level and
above when companies were making money. He asked if she
thought it was fair for the state to keep the 4 percent tax
in place up to $76 per barrel for the larger fields.
Ms. Moriarty responded that she was not going to comment on
whether the state's policies were fair. Alaska Oil and Gas
Association was responding to the state's policies. The
state had a net tax in place. It took the specified price
to make a profit (if that was Representative Gara's
assumption at $70 or $76 price per barrel). The law stated
that producers had to pay "the greater of" amount versus
the price of oil minus the cost of transportation, minus
deductible expenses (producers had additional expenses that
were not deductible). Once a calculation was done the
producers were required to pay the higher number.
2:28:00 PM
Representative Gara mentioned that she had gone through her
predictions of production anticipating it to be down below
400,000 barrels in a few years under the existing system
and the forecast. He was aware that fields were coming
online since the law was changed. He noted the CD5 field,
but the announcement of the field coming online came before
the law was changed. Point Thompson was coming online but
was based on a settlement achieved in 2012 prior to the law
changing. There were other fields, Moose's Tooth and Bear's
Tooth, which were being invested in before 2013. He
wondered if there were any fields where investment had not
started prior to the tax law changing.
Ms. Moriarty relayed that about 91 to 92 percent of
production was coming from the legacy fields. All of the
fields were in place and investments were made in previous
tax fiscal systems such as Alaska's Clear and Equitable
Share (ACES), Alaska Petroleum Profits Tax (PPT), or More
Alaska Production Act (MAPA) - the current tax structure.
Prior investments were impacting production, which without
them the state would be currently in a more serious
financial strait than if the state was at the historic 6 to
8 percent decline. She explained that in terms of
production it was necessary to look at investments being
made currently and how they might impact production in the
future. Since the passage of SB 21 [legislation passed in
2013 relating to oil and gas production tax] the industry
had invested almost $5 billion above and beyond what had
been invested in prior years. The impact of investment
might not be realized yet. However, if the state wanted to
raise taxes on an industry that was losing money she
guaranteed that the investments would decrease and
production and jobs would be negatively impacted.
Representative Gara clarified that he was asking questions
about taxes when companies were making profits.
Vice-Chair Saddler asked if the state was paying the oil
industry to take oil out of the state.
Ms. Moriarty responded in the negative. She added that the
producers had to make investments before they could apply
for any credits. She provided an analogous situation. The
state was not paying producers. Producers were leasing the
property from the state, producing oil and gas from those
properties, and after they made investments they were able
to apply for some level of credit based on the system the
state had in place.
2:31:22 PM
Vice-Chair Saddler asked if the state was paying the oil
industry to give away Alaska's oil.
Ms. Moriarty responded in the negative. The state was
paying the industry credit that producers earned by
investing money, then applying for credits according to
statute.
Vice-Chair Saddler asked Ms. Moriarty about other sources
of income to the state that accrue from oil production in
addition to production tax.
Ms. Moriarty relayed that the oil and gas industry paid the
state four different revenue streams including royalties
(the state's share as the land owner), production taxes (a
net tax based on the economics), corporate income taxes,
and property taxes.
Vice-Chair Saddler asked Ms. Moriarty to provide Alaskan's
with assurances that leaving the current tax system in
place was to their benefit.
Ms. Moriarty recognized that it could be a challenging
argument to make when the state was faced with a severe
budget crisis. She posed the question as to how the state
could afford to pay oil tax credits. Her response was that
she was not sure if the state could afford not to pay the
credits. The credits were assuring that the industry was
investing in the future of Alaska. She wondered about a
growth plan for the state, about how Alaska's economy was
going to grow. She mentioned the mining bill and opined
that the miners would tell legislators that one new mine
could produce more revenue than the proposed increase in
the mining tax. She supposed the oil and gas industry was
really no different. The oil tax credits were a way to
incentivize behavior to make additional investments and
produce more oil. If production were to continue to hold
steady and slightly increase over the following couple of
years and prices went up it would be a positive thing for
the state. However, if prices went up but production went
down, there may not be a net benefit for the state. Even
though there might be an increase in price there might not
be a net benefit if production decreased. It was key for
producers but production went down a net benefit might not
occur. For producers keeping the current fiscal system in
place was key to keeping production steady.
Vice-Chair Saddler asked if losses by the industry in
Alaska were being balanced out by business operations
elsewhere in the world.
Ms. Moriarty responded that his questions should be
addressed to specific individual companies. She commented
that the price of oil was low everywhere. It was not just
low in Alaska. Companies were cash negative in Alaska and
were generating less revenue in other regions. It was also
forcing regions to be more competitive because there was
less investment dollars available to invest in current
development as well as future development.
2:35:00 PM
Vice-Chair Saddler commented on the DOR revised Spring
Revenue Forecast. The forecast indicated that by 2026 the
state would have 217,000 or 277,000 barrels a day in the
pipeline. He wondered if it was a fair decline prediction
assuming there were no other capital investments made. He
asked if the industry would continue to produce oil in a
declining production environment without significant
additional capital expense.
Ms. Moriarty responded that it obviously became more
expensive to produce as production declined. She believed
all Alaskans should be concerned that producers were
currently operating the pipeline at less production than
the original start-up in June 1977. She explained that when
Alyeska Pipeline started production it was producing about
700,000 barrels per day. Admiral Barrett could confirm that
there were operational challenges and costs at present at
500,000 barrels per day. For engineers it was an exciting
project. As modifications arise they came at a cost.
Vice-Chair Saddler noted that the models seemed to predict
the effect of the tax credits infinitely without
accommodating practical considerations.
Representative Pruitt asked if she had any knowledge of any
other existing tax regime for which one of AOGA's member
companies operated that was looking at increasing taxes in
the current environment.
Ms. Moriarty thought his questions would be better answered
by the legislature's consultant. She also mentioned a
recent article in the "Economist" on the same issue. There
were a few regions looking at increasing their tax rates
whether having to do with production or royalties. She was
aware that some of her member companies were operating in
those areas such as in Russia and Nigeria. However, she was
not aware of any state in the United States or province in
Canada planning to increase their tax rates.
2:38:05 PM
Representative Pruitt asked Ms. Moriarty if companies would
be able to maintain the same level of investment and
production with increasing taxes.
Ms. Moriarty did not believe AOGA's member companies would
be able to maintain the same level of investment if taxes
were increased or credits were eliminated.
Representative Pruitt asked if Ms. Moriarty thought that
the current tax policy was focused more on production or
general fund monies. Based on her answer to his first
question he wondered if the change the legislature was
contemplating adjusted the focus of the policy of the
state.
Ms. Moriarty stated that the current policy was focused on
getting more oil in the pipeline. It was focused on making
Alaska a competitive environment while allowing a return to
the state and its citizens. If prices were to return to the
same levels as when SB 21 was passed the government take
would be around 62-63 percent. She referred to Governor Jay
Hammond's philosophy of one-third, one-third, and one-
third: one third to the federal government, one-third to
state government, and one-third to industry. At those
prices, SB 21 achieved that ratio. At current prices the
government take was almost 100 percent and for some fields
it was 100 percent. The Alaska Oil and Gas Association
noticed the state looking at tax policy from the
perspective of how to achieve more production, maintain
competitiveness, make the policy simpler, and one other
component. The administration stated that if prices
returned to the $80-$100 range it might not be having a
conversation about changing the current tax policy. The
administration's focus has been on how to get more money in
the current low price environment recognizing that the
industry was losing money. She opined that a change in tax
policy was more about state finances rather than getting
more oil in the pipeline.
2:41:04 PM
Representative Pruitt asked whether investments and
production would increase if prices were to go up again,
based on her answers regarding the potential decrease in
investments.
She could not guarantee what companies would do when prices
increased. However, it would be extremely difficult to
attract capital back to Alaska if the state raised taxes
when prices went up and raised taxes when prices went down.
Most companies would have to plead their case to a board of
directors although for some only one person would need
convincing. The first question from board members would be
whether a company made money in Alaska in the previous
year. The response might be that at $40 oil the company did
not make money, but if prices were to go up it might be
possible to make money. Questions about taxes might ensue
making it more difficult to argue in favor of further
investment in Alaska. She noted that the legislature would
be hearing from Cook Inlet producers in the following week.
She relayed that it would be very difficult to get the
jack-up rig back to Alaska in the following 5 years or at
all if it were to leave the inlet.
2:43:46 PM
Representative Guttenberg emphasized that Alaska owned the
resources although he thought that some people attributed
revenue to the oil industry. He pointed out that the
industry obtained leases for the state's resources. The
state and industry prospered together, rising and falling
together. Alaska had always been a resource extraction
state. Alaska had several different resources including,
furs, fish, timber, coal, gold, and copper. He thought that
Ms. Moriarty viewed the framework based on taxes. He saw
credits as the means of driving behavior. He asked her to
speak to direct production resulting from tax credits. He
commented that he wanted to see production continue in
Prudhoe Bay. He wondered if she could identify credits that
produced more oil. He mentioned consistently hearing
producers talk about being in Alaska for the long-term.
The credits were designed to change behavior. He wondered
if she could expound on when production would stop as a
result of tax credits halting.
Ms. Moriarty responded that the committee would be hearing
from industry participants who would report that their
production was a direct result of the credits. She used
Cook Inlet as an example. The production was down to about
8,000 barrels per day. Some of the legacy rigs were only
producing 600 barrels per day. Legislation that was passed,
often referred to as the Cook Inlet Recovery Act, enticed
companies to Alaska. Some Cook Inlet producers would claim
that the credits were the reason for coming to Alaska.
There had been a 100 percent production increase in Cook
Inlet. There were companies like Hilcorp, BlueCrest Energy,
and Furie Operating Alaska who were either producing or
close to production. In the past there have been other
North Slope producers that have invested and have
experienced an increase in production due to the tax
credits. She could not provide each company's percentage of
production because of confidentiality issues. However, she
suggested looking at the fields and the names of the
companies on the Department of Natural Resources (DNR) area
wide leasing map and those companies had testified in the
past that there had been a direct correlation between the
credits and production.
2:49:07 PM
Representative Guttenberg commented that Cook Inlet was
very different from the North Slope and both were different
from Middle Earth. He thought that how the credits applied
to Middle Earth were very important because not only were
they important for companies doing exploration but thought
it was a game changer for the state in terms of the
diversification of supply. He thought it was key to driving
the cost of energy down throughout the state. He believed
there were many benefits in Cook Inlet and in Middle Earth.
He opined that what Doyon Ltd. and Ahtna Inc. were doing
was very important as well. He had a very tough time
hearing that the administration could only provide
aggregated numbers. Legislators had been told that the
state was paying 85 percent of operating costs. He
commented that anyone would be investing in Alaska if 85
percent of their costs were being paid. He wanted to
understand the economics of each of the industry companies
but he was not able to without more information.
Representative Guttenberg told of receiving an email from
Alyeska Pipeline that reported daily production to be
547,000 barrels per day. He understood that the number was
not a yearly average but a daily high.
Co-Chair Thompson thanked Ms. Moriarty and invited Conoco
Phillips to the table.
2:52:02 PM
SCOTT JEPSEN, VICE PRESIDENT, EXTERNAL AFFAIRS,
CONOCOPHILLIPS, appreciated the opportunity to provide its
perspective on the various tax changes being considered. He
addressed a PowerPoint presentation titled "House Finance
Committee: CSBH247" dated April 1, 2016 (copy on file). He
began with his agenda on Slide 2. He relayed that he would
be presenting some of the company's key concerns with the
original bill, in part, because there had been a great deal
of testimony on the original bill in front of the House
Finance Committee.
Mr. Jepsen turned to slide 3: "Activities Since Tax reform
(MAPA) Passed." Since More Alaska Production Act (MAPA) was
passed in 2013 ConocoPhillips had added 2 rigs to its drill
fleet. There was another order in place for 2 additional
rigs of which one had already been delivered. The second
rig would be delivered later in the current year. Conoco
had already proved and constructed a new drill sight at
Kuparuk, Drill Site 2S (DS 2S), the first new drill site at
Kuparuk in about 13 years. Once it was fully on stream it
would add about 8,000 barrels per day to production from
the field. The cost was about $500 million to construct it
and it added about 250 construction jobs while it was being
built.
Mr. Jepson continued to explain slide 3. He reported that
ConocoPhillips was currently also involved in expanding its
viscous oil operation. It had approved a project called 1H
News - 1H stood for the drill site being developed and News
stood for Northeast West Sack. Once the site was on stream
it would add about 8,000 barrels per day, similar in
magnitude of DS 2S. However, due to the downturn in oil
price CP differed its drilling on the new well. The modules
were built and transported to the North Slope. Currently,
the company had had to respond to what it saw in the world
economic environment. Conoco Phillips decided to defer the
drilling until the following year and estimated having oil
at the site in 2017.
Mr. Jepsen reported pursuing new developments in the
National Petroleum Reserve Alaska (NPRA). The company was
pursuing a development of Greater Moose's Tooth 1 (GMT1), a
project in which the investment decision was made late in
the prior year. The project would cost about $900 million
to construct and would add approximately 600-700
construction jobs and would add about 30,000 barrels of oil
per day once it was on stream. The first oil was
anticipated in 2018.
Mr. Jepson furthered that with GMT1 underway the company
was doing the engineering and ordering long lead materials.
It was also permitting another new development referred to
as GMT 2. Greater Moose's Tooth 2 (GMT2) was about 9 miles
Southwest of GMT1. It was not as far along as GMT 1 in
terms of engineering and cost estimating. However, the cost
would be in excess of $1 billion and slightly larger than
GMT1. There would likely be 600-700 jobs during the
construction phase.
Mr. Jepson reported that ConocoPhillips had also been
active in exploration. The company drilled 2 exploration
wells in NPRA in 2014, acquired seismic data for GMT1 in
2015, and 3 exploration wells would be drill in 2016 in
NPRA. Two of the three wells were about 9 miles West of
GMT2 and the third was being drilled off of the CD5 drill
site. He noted that one major project underway that was
coming on stream at present was CD5. The company had
decided to pursue CD5 before SB 21 was passed in large part
because it had spent about 10 years trying to obtain the
permits. Everything was in place and a decision had to be
made whether to pursue it. ConocoPhillips elected to go
ahead with the project because of all of the other
investments that had been made in trying to get the permits
in place. Also the company had hoped there would be a
change in oil taxes away from Alaska's Clear and Equitable
Share (ACES) to something more reasonable based on the
recent discussions that had been in play.
2:56:23 PM
Mr. Jepsen continued to address slide 3. He pointed to the
activities ConocoPhillips currently had going on in Kuparuk
- it had 5 rigs running. Before the passage of SB 21 the
company only had 3 rigs running. Under the current low
price environment in ConocoPhillips' entire Lower-48
operation it had 4 rigs running and anticipated going to 3
rigs in the following month compared to 5 rigs in Alaska.
Alaska had been differential in terms of its investment
philosophy. He also mentioned that there had been several
comments made about all the new fields coming on stream
since 2002 or 2003 and qualifying for the GVR.
ConocoPhillips added new production at drill sites 2S, 1H
News, and CD5 and had not filed for the GVR on any of the
related production. At drill site 2S and CD5 there was some
production that could potentially qualify for the GVR but
when it took a look at the requirements for measurement,
the cost, and compounding it out with the difficulty in
trying to determine how much oil came from an existing pa
and a new pa, the company decided not to pursue the GVR for
CD5 or DS 2S.
Mr. Jepsen continued that regarding 1H News, there was
testimony on behalf of the state that it thought that the
site would qualify for the GVR but the way the regulations
were written the site did not qualify. He emphasized that
there was no GVR production coming from any of
ConocoPhillips' existing fields and there was no GVR
production in NPRA. However, GMT1 would qualify, and it
would be much easier to isolate the production and prove to
the state where it came from and that it came from a new
participating area.
2:58:06 PM
Mr. Jepsen addressed slide 4: "Capital Spending Trends." He
wanted to discuss the present economic environment that
ConocoPhillips was in and compare it to what it had been in
the past. He pointed to the plot on the bottom left hand
side of the graph representing the steep decline in oil
prices. He suggested comparing the graph to the bar chart
right above it which tracked the corporation's capital
spending during the same period. He noted that in 2014
ConocoPhillips peaked at about $17 billion of capital spend
and as oil prices dropped the capital spend declined to a
current estimate of about $6.4 billion for 2016 - a drop of
about 63 percent since 2014.
Mr. Jepsen moved to the right portion of the slide.
Statistics were provided describing what the company has
been doing in Alaska. He pointed to the top bar chart
depicting what the company has been spending on capital
since 2012. The last year of ACES was 2012. During the
entire time of ACES, from 2007 to 2012, the company was
spending about $800 million per year in Alaska. In
testimony over that period of time the company indicated
that if there was a better investment climate
ConocoPhillips would make more of an investment. The
company stepped up its investment in 2013, 2014, and 2015.
Some of the spending in 2014 was from CD5 but much of it
was from the drill rigs in place and from new investments
such as DS 2S and 1H News. Originally, the company had
announced the capital budget for Alaska in 2016 of about
$1.3 billion. However, due to a steep price drop and in
recognition of being in a negative cash flow position, the
company reduced its costs. The company reduced its Capex
(capital expenditures) in Alaska to about $1 billion for
2016. He remarked that the investment remained healthy and
more than what the company was spending during the years of
ACES and more rigs were running. In terms of discussing
capital, a measure of how many jobs were being created and
how much was being invested in new resources, adding oil to
the field really had to do with how many rigs were running.
ConocoPhillips had managed to keep its rig count high.
Mr. Jepsen moved to the bottom right hand plot which showed
the percentage of ConocoPhillips capital spent in Alaska.
Spending had steadily ramped up to the point of where in
2016 the company was at about 16 percentage of the
corporation's total Capex. He commented that the trend was
significantly different in other regions. The change in
capital seen in Alaska was down about 23 percent from where
the company had anticipated being at the start of the year.
In many other regions of the corporation it was down much
more than that. He reemphasized that ConocoPhillips was
still investing differentially in Alaska and in Alaska the
corporation was in excess of $100 million negative cash
flow in the previous year. He remarked that it was not a
long-term business plan for the company but it hoped to
manage through it and hopefully see a return in oil prices.
Mr. Jepsen advanced to slide 5: "North Slope Investors
Negative at Current Pricing." He thought the slide
summarized what the industry was currently facing and what
the state was facing. In the range of prices currently at
hand industry was in a negative cash flow position. He
noted that the left hand side of the plot represented cash
flow and that the "X" axis showed ANS West Coast price. The
data used to construct the plot came from the Spring 2016
Revenue Sources Book. The orange blocks estimated state
cash flow, the green represented federal taxes, and the
blue showed the producers cash flow. The plot did not
include any reimbursable tax credits the state might pay
back to other producers who were in a non-tax paying
position. The plot represented the free cash flow the state
received and also represented the cash flow position the
industry was in. He reemphasized what Ms. Moriarty stated.
The conversation currently was about potentially increasing
taxes on the oil and gas industry, an industry in a
negative tax flow position. If the state taxed the industry
it meant that there would be less money for investment.
Companies would respond rationally like any company would.
3:02:52 PM
Mr. Jepsen turned the presentation over to his colleague
who would discuss ConocoPhillips' key concerns about the
original bill. He mentioned that they were going to go
through the issues because there had been a fair amount of
testimony in front of the committee on provisions that were
not included in the committee substitute that were included
in the original bill. They wanted to provide
ConocoPhillips' perspective as to why some of the
provisions would not have been very helpful.
PAUL RUSCH, VICE PRESIDENT, FINANCE, CONOCOPHILLIPS,
addressed slide 6 "Key Concerns with Original HB 247". He
relayed that there were several points the company had
raised in the previous testimony to the House Resources
Committee identifying the major concerns that the company
had with the original bill. He wanted to walk through those
concerns. He stated that the first item was increasing the
minimum tax from 4 percent to 5 percent. The industry was
clearly in a position where it was losing money. If taxes
were increased it would come out of somewhere else within
the industry. The second item was the hard minimum tax
floor. He explained that within HB 247 there was a proposal
that was particularly concerning that impacted the use of
net operating losses to go below the floor. In the
company's view the net operating losses were very customary
in federal income taxes and in a number of other fiscal
regimes. By removing the ability to utilize those losses to
go below the floor during periods where the industry was
losing money was a true increase in taxes.
Mr. Rusch pointed to the third bullet point on the slide
surrounding the increase in interest rates that applied to
taxes that were either due to or from the state depending
on the audit position. There was a 6-year statute of
limitations that applied. He relayed that ConocoPhillips
just recently closed out its 2006 production tax audit,
over 9 years from the end of that tax year. Interest would
apply to that entire period. It would be more than 6 years.
He also mentioned that the company had just received its
2009 production tax audit, within the statute of
limitations, but to the date. The system had a built-in
delay on when the audits would be settled.
3:06:02 PM
Representative Gattis referred to the audits. She wondered
about the interest charges that accrued and whether they
were due to the company falling behind. She also asked who
performed the audits.
Mr. Rusch explained that the 6-year period was a statute of
limitations within the current tax law and governed by the
state.
Mr. Jepsen added that the company received its first audit
under the state's control at the time Mr. Rusch mentioned.
Co-Chair Thompson clarified that it was the Department of
Natural Resources' audit.
Mr. Rusch confirmed that it was a DNR audit.
Representative Gattis understood that the state was looking
for money and it was taking the state 6 years to perform
audits. It seemed that if the audit was performed in a
quicker timeframe, especially in the state's current budget
crunch, the state would receive its money in a timelier
manner. She would call on the administration to find out
why audits took so long. She wanted to clarify whether it
was the company's problem or the state's problem.
Representative Gara remarked that in past years the
administration has asked for more auditors in order to
avoid missing the statute of limitations. He reported that
the legislature had not always responded to the requests.
Mr. Jepsen commented that ConocoPhillips tried to pay its
taxes as accurately as possible. However, the system in
place was highly subjective and not crystal clear. There
would always be differences of opinion. In some instances
the state could owe ConocoPhillips money. He thought it
worked better for all parties if the time period for audits
was shortened considerably.
Mr. Rusch continued with slide 6. He pointed to the bullet
point concerning per barrel credits. He explained that, in
the original bill version, there was a restriction on the
use of per barrel credits in the month earned. In the
company's view it meant the state was moving more towards a
minimum tax. The production tax was clearly a yearly tax.
In the current process the company made monthly installment
tax payments. It was based on an estimated tax for the full
year. He added that as part of that estimate the company
took the per barrel credits that it was entitled to,
divided the number by 12, and applied it to the monthly tax
installments. It was a fairly complicated process. At the
end of the year the full allotment of credits would be
applied to the final tax calculation. The way in which the
company was addressing installment payments and the yearly
true up was based on statute and the state's tax
regulations.
3:09:42 PM
Vice-Chair Saddler asked about the impact of the monthly
tax limitation combined with the impact of not allowing the
gross value at the point of production to go below zero. He
understood that there was a combined effect.
Mr. Rusch answered that the restriction on the per barrel
credits was strictly an issue around monthly fluctuations
in price. He noted that at the end of the 2014 or 2015 tax
year there was significant volatility in the oil price
which impacted the number of per barrel credits that could
have been used if the monthly restriction had been applied
as opposed to the full year entitlement.
Representative Munoz asked Mr. Rusch to explain how the
loss credit functioned and whether the losses were specific
to ConocoPhillips' investments in Alaska.
Mr. Rusch asked if Representative Munoz was referring to
the NOL's.
Representative Munoz responded that she was referring to
the 35 percent loss credit, how it worked in conjunction
with the 4 percent minimum, and whether the losses were
specific to Alaska.
Mr. Rusch answered that the 35 percent net operating loss
was specific to Alaska based on the Alaska's production tax
regime. It was completely separate from any state income
tax. He explained that in a year where a company was in a
net operating position from a production tax standpoint,
the company would be paying minimum tax. However, there
would also be a calculated net operating loss. Within the
current tax law a company was allowed to apply the 35
percent net operating loss to its taxes in the following
year or years.
3:11:56 PM
Representative Munoz asked if there was a limit on the
number of years which the credits could be applied.
Mr. Rusch did not believe there was a limit but within the
proposed bill there was a 10 year limit.
Mr. Jepsen thought the provision was in the original
version of the bill.
Mr. Rusch concurred.
Mr. Rusch drew attention to the last bullet on slide 6.
There was a question about confidentiality. He was aware
through various discussions a concern was raised about the
lack of transparency mostly around the reimbursable tax
credits. He understood the challenges the legislature had
around confidentiality. In the original version of HB 247
the confidentiality issue was addressed very broadly
potentially opening up the tax payer's entire tax return to
public disclosure or disclosure governed by confidentiality
agreements. In ConocoPhillips' view it would potentially
open up a number of issues. The company's major concern was
in making sure that, if the legislature had an issue, the
wording was very specific to the particular issue rather
than including broad language.
Mr. Jepsen moved to the final slide, slide 7:
"Observations." He relayed that when ConocoPhillips saw
significant changes in the tax law that occurred every
other year or 18 months it caused the company great concern
about the state's ability to implement a stable oil and gas
fiscal policy. It had only been about 19 months since SB
21 was ratified by the voters and already significant
changes in the state's oil tax were being discussed. Long-
term investment required a durable, predictable, and
reasonable fiscal framework. He relayed that the investment
time horizon in Alaska was much longer than in other parts
of the United States. He opined that with the proposed
changes in the original bill ConocoPhillips thought it sent
a very clear message to the company's corporate folks that
Alaska was not a place that it could depend upon. He noted
that the tax changes since the passage of SB 21 positively
influenced the investments the corporation has made in
Alaska.
Mr. Jepsen discussed the last point on slide 7. In terms of
the committee substitute, the corporation thought it was a
significant improvement over the original version of the
bill. He mentioned that it did have some items that could
potentially represent a cost increase. ConocoPhillips did
not qualify for reimbursable tax credits. Many of the
things that impact the small producers or the non-tax
payers did not affect the corporation. The things that
impacted ConocoPhillips were relatively minor. He concluded
that although the company favored keeping the status quo,
the committee substitute was an improvement. He asked if
there were questions from members.
3:15:17 PM
Vice-Chair Saddler commented that ConocoPhillips was one of
"The Majors" still aggressively exploring in Alaska. He
wondered how the proposed oil tax credits changes affected
the company versus its friendly competitors.
Mr. Jepsen ConocoPhillips did not explore based on
exploration credits. The company was exploring prior to the
credits existing, it was exploring currently, and it would
be exploring after the credits expired. The credits were a
help but not a deciding factor in whether the company was
going to drill a well in NPRA. The ultimate investment the
company was going to make was much larger than any sort of
help it might get with the initial investment credit.
Vice-Chair Saddler mentioned hearing a discussion as to
whether CD5 was influenced by the tax credit issues. He
wanted to provide Mr. Jepsen with the opportunity to answer
the following question. He wondered if the provisions of
the bill have any potential to affect CD5's current or
future economics.
Mr. Jepsen responded that in terms of the committee
substitute he did not see any impacts.
Representative Pruitt asked if there was any other regime
with which the corporation was operating under that was
currently looking at increasing a tax on oil and gas
production.
Mr. Jepsen responded in the negative.
Representative Pruitt asked that if the legislature were to
move forward with the initial version of the bill would it
have an influence on ConocoPhillips' investment in Alaska
and, if so, he wondered what it would look like.
Mr. Jepsen answered that it would have an impact on the
company's investment particularly at low oil prices. If the
cost of doing business increased it would have to come out
of somewhere. It would likely come out of the investments
the company was currently making. The company would have to
take a look at everything it was doing in Alaska and decide
what it would do less of. In the long-term he thought it
sent a chilling message to all investors that Alaska was a
place that when oil prices declined it would increase taxes
and when oil prices rose the state would also increase
taxes. He did not believe it was the message Alaska wanted
to send to investors.
3:17:51 PM
Representative Pruitt wondered how difficult it would be to
return to the current production level of 500,000 barrels
per day if the state went forward with the legislation and
the state witnessed decreased production.
Mr. Jepsen answered, "It depends really how far you let it
go." He elaborated that it was difficult to predict the
future. He reported that there were high tax frameworks
particularly when there were increases in taxes at low
prices. Activity would drop off and rigs would be put
aside. It would be difficult to bring those rigs back. It
would be a function of price, whether the state changed its
fiscal framework again, and what the framework would look
like if it was changed. Representative Pruitt's question
was a very subjective question which he could not answer
with confidence. He remarked that it would place Alaska in
a hole and the state would be risking the loss of a
significant amount of infrastructure.
Representative Guttenberg referred to slide 3. He asked who
ConocoPhillips acquired GMT1 from.
Mr. Jepsen responded that when he stated acquired he meant
that ConocoPhillips shot it - the company hired a
contractor to go out and shoot it - referred to as data
acquisition.
Representative Guttenberg mentioned that typically acquire
meant getting something from someplace else.
Mr. Jepsen understood.
Representative Guttenberg relayed that the legislature had
been complaining for years about audits. It had been a
long-term problem for the legislature as well as for those
being audited. He sympathized.
3:20:09 PM
Representative Gara conveyed that he had bristled when
hearing that Alaska taxed high at low prices and high at
high prices. He did not agree. He remarked, "Certainly
nobody in state government or in the oil industry is doing
very well at current prices. Everybody is losing money at
$30 and $35 per barrel and prices around there." He thought
the state needed to be careful with whatever it did.
However, in looking at ConocoPhillips annual reports and
because of SEC [Securities and Exchange Commission] rules
he believed it was the only oil company that produces in
Alaska that reported its Alaska profits. In prior years the
company's Alaska's profits were in the $2 billion range
while last year the company was down to zero to $400
million in profits without writing off its Chukchi Sea
leases. He asked if he was correct.
Mr. Jepsen responded that it reflected ConocoPhillips' net
income but did not represent the company's cash flow.
Representative Gara asked him to explain his point.
Mr. Jepsen indicated that he brought a handout that might
help in providing a response for Representative Gara's
question.
Representative Gara asserted that no one was saying
ConocoPhillips had earned much money the previous year. He
went on the say that net income was either $400 million or
zero if it wrote off the Chukchi Sea leases. He asked if
he was correct.
Mr. Jepsen responded affirmatively.
Representative Gara's mentioned that Alaska had been told
to tax similar to North Dakota. He had read in the annual
report that the company had lost $1 billion in the Lower
48. He wondered if he was accurate.
Mr. Jepsen did not have the numbers in front of him but
would agree with the report if the representative was
looking at it correctly.
Representative Gara understood that in North Dakota the
company paid a private royalty - private land owners owned
the land unlike in Alaska - and a state tax. He added that
the numbers were on the gross, a percentage of the value,
rather than of profits. He asked if Mr. Jepsen knew the
average private royalty that the company paid in North
Dakota.
Mr. Jepsen responded that the information Representative
Gara was asking about was confidential. He made it clear
that ConocoPhillips was not drilling in North Dakota.
Representative Gara remarked that the call that Alaska
would be more like North Dakota from a few years ago [Mr.
Jepsen interrupted Representative Gara with a response].
Mr. Jepsen clarified that the previous conversation was
held when ACES was being discussed. At the time ACES was
considerably higher than North Dakota. The company was
putting itself in a comparison perspective in terms of what
the tax framework looked like around the United States and
other places around the world. He furthered that currently
in terms of comparative places to invest Alaska was a
pretty good place. However, when prices go up the company
would be paying more than in other places. The good thing
about being in a good place from a competitive point of
view was that the company was seeing more activity in
Alaska than other regions around the world or the Lower 48.
He thought it was due to the current tax policy and because
of some other issues around doing business in Alaska.
Things could change if the state changed its tax policy.
3:23:59 PM
Representative Gara wanted to clarify that at current
prices the state received a 4 percent gross minimum tax on
the older field and a 12.5 percent royalty on the
percentage of the value of the oil. He wondered if the
private royalty and tax the company paid in North Dakota
was substantially higher.
Mr. Jepsen believed the current severance tax in North
Dakota was 5 or 6 percent. Royalty payments were based on
what had been negotiated. It could range anywhere from 12.5
percent to something higher. It was very company specific
and lease specific. The drilling location was a function of
what kind of royalty and taxes were being paid.
Representative Gara indicated he had another question about
North Dakota.
Co-Chair Thompson reminded Representative Gara that
ConocoPhillips was not in North Dakota.
Representative Gara remarked that North Dakota was very
relevant when they wanted to lower their taxes. He asked if
Mr. Jepsen would concede that the gross private royalty and
the tax that the company paid in North Dakota was higher
than in Alaska.
Mr. Jepsen responded that it probably was at preset.
He reiterated that the company's activity in North Dakota
was about nil. ConocoPhillips was drilling in Alaska. If
the legislature wanted to see the kind of actives that
Representative Gara was seeing in other places where there
was a higher tax framework and a tax policy could be set
that would drive those results.
Representative Gara asked if Mr. Jepsen would have any
problem with the state moving the 4 percent minimum floor
modestly higher when prices were in the profitability range
again.
Mr. Jepsen referred back to slide 5 and emphasized that the
state was always making more money than ConocoPhillips even
under the current bill. The company was not there to talk
about what was fair and unfair or whether it had a problem
with the state increasing its taxes. He was there to tell
legislators that if the state took certain actions the
industry would take certain actions. If the state made it a
more hostile environment, a difficult place, or increased
taxes the company would reevaluate its investments in
Alaska. It was a hypothetical question. The state would
need to determine what kind of tax policy it wanted which
would drive investments.
Mr. Jepsen tried to put things in perspective. At the time
discussions ensued about changing ACES $73 was considered a
very low price. Currently it was being discussed as a high
price. He reiterated that he thought the state was better
off under SB 21. He encouraged members to go back and look
at the data. As the price curve had gone down the tax
policy had been beneficial. If the state wanted to discuss
trying to increase taxes again as the prices went up it
would have a direct impact on the company's short-term and
long-term investments.
3:27:12 PM
Vice-Chair Saddler mentioned a provision that had not been
discussed much which was the condition of some of the
credits on Alaska hire percentages. He asked for Mr.
Jepsen's thoughts on the issue and wanted him to provide
ConocoPhillips' Alaska hire percentage.
Mr. Jepsen answered that the provision regarding Alaska
hire did not apply to the company because the company did
not receive the reimbursable tax credits relating to Alaska
Hire percentages. He told of ConocoPhillips of having an
overall percentage of Alaska hire of 70 percent. In
Anchorage the company was up to 85 to 90 percent. On the
North Slope the percentage tended to be lower in part
because people had the option to live outside of Alaska and
in part because the company had to hire people with
specialized skills that do not live in Alaska. He added
that the company asked the question of all of its
contractors and looked at it each time it issued a
contract. The company tried to make a conscious decision
that it had a bias towards Alaska hire and buying.
Representative Gattis asked what motivated the oil
companies to do business and what motivated companies to do
business in Alaska. She did not distinguish oil companies
from any other business. She thought it was more about what
motivated businesses. As a small business owner she looked
at various aspects trying to plan ahead to avoid knee jerk
reactions. She did not see oil companies being any
different than any business that might be sitting in front
of the committee being asked the same questions. She also
did not think it mattered whether it was a business in
North Dakota or Alaska: businesses react the same way.
Co-Chair Thompson thanked the presenters from
ConocoPhillips. He invited the presenter from ExxonMobil to
the table.
3:30:12 PM
DAN SECKERS, TAX COUNSEL, EXXONMOBIL, thanked the committee
for the opportunity to come before the committee. He
stated that the committee substitute before members was a
very concerning piece of legislation. He reemphasized
something he had stated many times in the past. He thought
it was worth repeating in the current economic environment,
which was that ExxonMobil was committed to Alaska and would
continue to actively pursue attractive investment
opportunities. The company has had a presence in Alaska for
over 90 years and invested over $20 billon to-date. Alaska
remained an important component of the company's worldwide
investment portfolio and it looked forward to being in
Alaska for many years.
Mr. Seckers continued that the company recognized the
difficulty the legislature faced as policy makers in
tackling the state's current budget issues while trying to
protect the current revenue streams and trying to make
certain that Alaska remained a competitive place to do
business. ExxonMobil appreciated how difficult and how hard
the legislature's task was. The tax policy decisions
fundamentally impacted the economic health of the state in
all the industries that did business in the state. From
ExxonMobil's view tax policy decisions that would move
Alaska either toward or away from its vision for the future
- its vision of promoting oil and gas development - should
not be taken lightly. The need for Alaska to maintain a
competitive and fiscal regime, one that attracted and
encouraged ongoing investments and future investments
especially in the current low price environment, was one of
the most important issues the state faced. While Exxon
Mobil appreciated the need to close the state's fiscal gap,
it believed that any tax policy change should be weighed
against the potential negative impacts on the state's long-
term investment climate. From the company's perspective,
the question that was before the committee was whether
raising taxes on the oil and gas industry at a time when
the Department of Revenue had confirmed that companies were
reporting significant losses was consistent with Alaska's
future and the legislature's belief that such actions would
help Alaskans weather the economic downturn or make matters
worse.
Mr. Seckers pointed to the committee substitute before
House Finance members. He started by confirming that
ExxonMobil supported the testimony presented by the Alaska
Oil and Gas Association (AOGA) and by ConocoPhillips. He
relayed that while the committee substitute represented a
substantial improvement over the original bill introduced
by the administration it remained a very concerning piece
of legislation. Despite the improvements made by the House
Resources Committee, the committee substitute was troubling
because it would represent another significant change in
Alaska's oil and gas policy within the past 11 years. It
would raise the interest rate on over and under payments of
taxes while not addressing the core issue raised by AOGA
and ConocoPhillips which was the length of time on audits.
It would not improve Alaska's overall investment climate.
It would not lead to more industry jobs or more
opportunities in the state. It would not lead to more
production, or long-term sustainable oil and gas revenues.
In fact, Exxon Mobil believed the committee substitute
would do the exact opposite. For the reasons he has
presented ExxonMobil opposed the committee substitute.
While he mentioned that the company believed the committee
substitute as a whole was troubling he wanted to highlight
two provisions that gave him, as ExxonMobil's tax counsel,
concern. The first was that for any tax policy to be
successful and to meet the state's long-term goal of
sustainable oil and gas production and revenues such tax
policy needed to be stable, predictable, and provide
confidence to tax payers and investors that the underlying
rules of the game would not be changed repeatedly to
adversely affect the economic investments already made and
those being considered for the future. Like any business
large or small ExxonMobil valued a very predictable
environment in which to make long-term investments. The
company's investments were very capital intensive and span
many years. He relayed that any change in the regime that
went forward would affect the viability of those
investments and the company's view of investments going
forward.
Mr. Secker highlighted another significant change being
proposed: The raising of the interest rates. He reported
that in the previous day, like ConocoPhillips reported,
Exxon Mobil received its 2009 assessment 6 years after the
company filed its return. He could not reveal the amount of
interest because it was confidential but he confirmed that
the amount was staggering. ExxonMobil thought it was wrong.
The legislature was proposing to adjust the interest rate,
but the underlying problem was not being addressed. The
effect was lessening the incentive of the state to expedite
audits. The company felt the state was going in the wrong
direction. ExxonMobil thought the current rate worked.
Mr. Seckers reemphasized that the committee substitute
represented a troubling bill. He highlighted a couple of
the provisions that were in the original bill that were
removed by the House Resources Committee because of its
extensive examinations into those provisions and their
damaging effects. He pointed out the hardening of the
minimum tax floor. The committee substitute was a
substantial improvement because it did not attempt to raise
taxes by hardening the minimum tax floor. Preventing
companies from realizing the true economics of their
investments by preventing critical tax credits from being
realized to offset the minimum tax would have represented
an immediate and significant tax increase. It would have
penalized companies who had made prior year investments
even when they were losing money, it would also have
penalized those companies who wanted to continue to make
potential current year investments despite the low economic
environment. For those companies, large or small, that
might have new oil tax credits, expiration drilling
credits, and tax loss credits from prior year investments
and that might be in a loss position today because of
current prices and thus were depending on the credits to
continue funding their current investments - that
provision, alone, could have delayed or possibly denied
that economic investment to those investments at the very
time the companies needed it the most. In order to maximize
investment opportunity in Alaska, he thought it was
critical to provide investors the opportunity to capture
the economic opportunity of those investments especially
given the long-term outlook and the risks involved in the
inherent high-cost environment that was Alaska. That
provision, alone, would have significantly and negatively
impacted Alaska's investment climate in the perception of
the investment climate to any future investor by announcing
to the world that Alaska was willing to adversely affect
the economics of past and future investments solely for
short-term revenue needs.
3:37:47 PM
Mr. Seckers spoke to the raising of the minimum tax. The
change would have resulted in a very substantial tax
increase and a regressive tax increase because it was based
on gross revenues rather than net income. Raising taxes on
companies who were reporting record losses, losses on the
very activity the legislature was trying to tax under HB
247, was not a wise or feasible long-term solution or a
wise long-term tax policy.
Mr. Seckers moved on to discuss another of the provisions
that was removed from the committee substitute: the
application in the termination of the gross revenue at the
point of production. The provision would have also raised
taxes on the industry. He understood that it did not seem
intuitive for the gross revenue at the point of production
to go below negative. However, currently the price of oil
fluctuated. There were costs such as marine transportation
and pipeline costs which were the only deductions that
could be taken to determine the gross value at the point of
production which could cause the gross value to go
negative. If the gross value could not go below zero, then
the economic investments in marine transportation and
pipeline costs would potentially be lost. Companies did not
file a field-by-field tax return but rather a segment
return. He used the North Slope as an example. For the
North Slope it included all of the economics of the North
Slope. Therefore, a loss in one area, would possibly be
offset by income in another to represent the economics of
that segment for a company. The bill provision would have
prevented the gross value at the point of production from
going below negative without an explanation of what would
have happened to those investments costs [deductions]. It
would have changed the substance of the law of how the tax
was determined, how the gross value at the point of
production was applied, and would have been nothing more
than a tax increase.
Mr. Seckers brought up the issue of taxpayer confidential
information. The problem with the original bill was that
the provision would have allowed very confidential and
taxpayer sensitive information to be released. Although
ExxonMobil was partners with BP and ConocoPhillips at
Prudhoe Bay and other fields but they were competitors
domestically and internationally. The companies were bound
by federal law of what they could or could not disclose or
share. ExxonMobil could also not share proprietary
sensitive business information. The provision in the
original bill would have opened the door for the disclosure
of very troubling and possibly unlimited information. He
concluded that he discussed the original bill because he
wanted to acknowledge the improvements made to the original
bill by the House Resources Committee, but to discourage
the legislature from reintroducing those provisions into
any bill under consideration. He opined that reintroducing
any of those provisions would dramatically reduce Alaska's
overall global competitiveness by raising taxes when many
companies were reporting record losses. The losses were on
the very activity the legislature was trying to tax, which
would be poor tax policy. Reintroducing those provisions
would force companies to reexamine short and long-term
investment behavior and was inconsistent with the state's
long-term vision of promoting oil and gas development.
Previously, the state enacted a petroleum production tax in
ACES when prices were rising to raise revenue. He
communicated that enacting those same provisions would send
a clear signal to the entire global investment community
that Alaska's tax policy was to raise taxes when industry
made money and again when it lost money just for short-term
revenue needs. Alaska needed to remain globally competitive
for critical capital investment. He furthered that
increasing or imposing a tax on companies in a negative
cash position would not lead to more jobs, to more
investment, to more production, or to long-term sustainable
state revenues. Alaska remained a very important component
of ExxonMobil's worldwide portfolio. The company had been
in Alaska a long time and wanted to remain in Alaska for a
long time to come. However, as ConocoPhillips had
indicated, when the state raised taxes it raised costs for
companies to do business. Every opportunity that ExxonMobil
looked at in the future would become less attractive and
would diminish.
Mr. Seckers concluded his testimony. The need for Alaska to
maintain a competitive and stable fiscal regime that
attracted and encouraged ongoing critical future
investments especially in the current low-price environment
was one of the most important issues facing the state.
Policy makers needed to decide whether increasing taxes on
companies that were losing money would lead to more jobs,
more investments, more production, and more long-term
revenues was a wise state tax policy. ExxonMobil believe
the answer was, "No." If the committee substitute reverted
back to the original bill the answer would be emphatically,
"No!" He was happy to answer any questions.
3:43:03 PM
Vice-Chair Saddler asked if the changes in the oil tax
credit bill proposed in the committee substitute had any
potential for affecting the likelihood of getting to a
front end engineering decision (FEED) decision for the
AKLNG project.
Mr. Seckers responded that the AKLNG project was obviously
a very critical project and a very expensive project. He
commented that fiscal stability undercutting the state oil
and gas regime was important because a decision could not
be based on an unstable oil and gas structure. Any change
in the structure would have an effect. The company would
look at it very carefully. It was difficult for companies
to want to invest $60 billion when the risk of tax changes
was constantly a possibility.
Vice-Chair Saddler asked about the role that any of the
various credits might have played in the construction of
the Point Thomson unit.
Mr. Seckers responded that Point Thomson was part of a
settlement that was ongoing. It was also an underpinning of
the gas project that ExxonMobil was looking at. In terms of
the credits that Point Thomson enjoyed but prior to SB 21
there was the Capex tax credit that was no longer
available. There were no other credits in play because the
unit was not currently up and running. At the time that it
was running a $5 new oil per barrel credit would be
available to the Point Thomson production.
Vice-Chair Saddler asked Mr. Secker for his assessment of
the effect of not allowing the gross value at the point of
production to fall below zero might have with the monthly
tax regime proposed by the governor's original bill.
Mr. Seckers was uncertain of the context of Vice-Chair
Saddler's question. He responded that he was unsure of the
effect on a monthly basis of the gross value at the point
of production. He suggested that if the gross value at the
point of production went negative on one particular field
the taxpayer, assuming that they had more activity on the
Slope, would consolidate it when they made their monthly
payment with their other filings. The amount of monthly tax
would go up if the deductions were taken away resulting in
a tax increase.
Representative Pruitt asked if there was any other regime
that ExxonMobil was currently operating in that was
proposing to increase taxes.
Mr. Seckers encouraged him to ask the state's consultant
that would be testifying later in the same day. He would
likely have more detail. He responded that to his knowledge
the answer was "no."
3:46:27 PM
Representative Pruitt asked how ExxonMobil's investment in
Alaska would be influenced if the state went forward with
the hardening of the floor and some of the other
adjustments to the actual tax.
Mr. Seckers answered that the provisions in the bill were
troubling and would result in significant tax increases.
The company took into account anytime taxes went up or a
regime became unstable and would affect the company's
investments going forward. He reiterated that when the cost
of doing business in the state increased because of
increased taxes there had to be an offset. Generally, there
were 4 levers that would be evaluated: efficiencies,
scaling back of activity, discretionary spending, and
layoffs. ExxonMobil had not had to lay off its employees
yet. An increase in costs would negatively impact these 4
areas.
Representative Pruitt recognized that reducing investment
would impact the percentage of decline. He wondered if the
state would ever be able to recover once it started seeing
less investment and a decline in production.
Mr. Seckers stated that when costs and taxes were raised
investment behavior changed. It also changed people's
outlook and increased concerns that investments made in the
present would be adversely affected going forward. If
production and investment declined each company would have
to approach its board to determine whether to invest again
in Alaska. He thought it would be a difficult argument to
make to a board of directors if the state had already
raised taxes when prices were down and companies were
losing money. Board members would be looking for
assurances. He concluded it would be difficult to get
investment and production back.
3:49:46 PM
Vice-Chair Saddler wanted to understand how credits given
in one year did not return benefits to the state by
investment. He wondered about the time horizon that the
state should expect to see returns from a state investment
from foregoing some taxes.
Mr. Seckers thought it was a difficult to answer from one
company alone because each company's development scenarios
were different. Credits affected behavior and it depended
on the type of credit and type of investment. The purpose
of credits was to incentivize an activity especially given
Alaska's tax regime. Under SB 21 Alaska's fiscal regime was
rather competitive, whereas, under ACES it was not. Anytime
a tax regime was changed it would have an adverse impact.
The credits were designed to increase activity. It was
particularly important given the fact that Alaska's base
tax rate was 35 percent, almost 3 times higher than any
other state in the country. Alaska had a very complicated
system due in part because it had a high base tax rate. If
Alaska did not have such a high base tax rate or if did not
have the credits and deductions he wondered what the tax
rate would be. Credits had a tremendous impact on
investment and leveled the field. The timeframe of recovery
depended on the type of investment. He assured the
committee that it was an incentive to motivate investment
and increase production which he thought the state was
looking for.
Vice-Chair Saddler wondered if he was accurate in saying
that if the tax credits were designed to incentivize a
decision to drill, a decision was made to drill, oil was
found, and oil was produced the decision would pay
dividends throughout the lifetime of the production through
the well rather than for just one year.
Mr. Seckers responded in the affirmative. He added that the
drilling of the well would give rise to additional property
taxes, additional income taxes, and additional royalties.
He suggested that the focus be more on local government
take. At the current price of oil the local government take
in some instances was over 100 percent. It was an
unsustainable business model for anyone running a business.
Increasing it further would not be sound policy.
Co-Chair Thompson thanked Mr. Seckers for his testimony.
3:53:15 PM
JOE REESE, SENIOR TAX MANAGER, BP, introduced himself and
read from a prepared statement:
Co-Chairs, Members of the Committee: For the record my
name is Joe Reese and I am Senior Managing Tax Counsel
for BP Alaska. I am very pleased to be here today to
provide BP's views on tax policy and, in particular,
the bill before you. BP is a member of AOGA and
supports the testimony provided by AOGA earlier today.
The success of Alaska's oil and gas tax policy is
critical to BP, to the AKLNG Project, and to the many
Alaskans who benefit, both directly and indirectly,
from the successful exploration, development, and
production of Alaska's oil and gas. A durable,
predictable, and administrable oil and gas tax policy
must be in place to unlock those benefits.
BP is committed to maintaining a safe and compliant
business in Alaska that is sustainable. Over the past
two years, there has been a 70 percent drop in oil
price. Under the current market conditions, BP's
business in Alaska is spending more cash than it
brings in, and this is not sustainable. As a result,
BP is evaluating the activity level at PBU [Prudhoe
Bay Unit] in order to adjust expenditures in response
to the lower price environment. Improving our cost
base is essential to maintaining our activity level at
Prudhoe Bay and the long-term viability of an AKLNG
Project.
BP is committed to complying with tax laws in a
responsible manner and to having open and constructive
relationships with tax policy makers. One of the major
costs to BP's business in Alaska is oil production
tax.
At current prices, BP receives no oil production tax
credits from the State of Alaska, nor does Prudhoe Bay
production have any oil production tax credits under
the minimum tax. While BP doesn't currently receive
production tax credits, we don't support limiting the
production tax credits provided in SB 21 because it
would negatively impact the oil and gas industry as a
whole, including the many other companies that have
made investments, created jobs, and added production
in Alaska.
Just as the industry is struggling to make ends meet,
the State also faces severe budget shortfalls. While
reasonable people may disagree about how to improve
the current oil and gas tax policy, now is not the
right time to make changes to increase taxes and
further undercut our ability to maintain the activity
level at Prudhoe Bay. Near-term changes to the State's
oil and gas tax policies will have long-term
consequences for all of us.
Now, I'd like to provide a few comments specifically
about the bill before you:
1. The Minimum Tax: The Resource Committee's CS does
no harm to the 4% minimum tax rate.
2. Change to the interest rate calculation for tax
overpayments and underpayments: Currently, the
interest is calculated at a rate that is 3 %
points above the federal funds discount rate,
using simple interest. The Resource Committee CS
has interest compound at the end of each calendar
quarter. Such a compound rate would reward the
Department of Revenue for being slow in its
audits. This would increase the uncertainty in
Alaska's tax system.
3. Net Operating Loss Tax Credit: The Resource
Committee's CS is an improvement to the
Administration's proposal because it continues to
allow the use of net operating loss tax credits
to reduce the minimum tax. In other words,
companies that made important investments in the
prior year, even when they may have been spending
more cash than they were bringing in, still would
be allowed to recover part of that investment.
NOL tax credits are utilized by a broad range of
companies both on the North Slope and in Cook
Inlet, and changing their value would be a
disincentive for future investment decisions.
4. Confidentiality: Current law allows the
Department of Revenue to publicly disclose
information about tax credits on an "aggregated"
basis for a group of three or more taxpayers, and
the Resource Committee CS does no harm to
taxpayer confidentiality.
5. Retroactivity: The Resource Committee CS allows
for regulations to be applied retroactively to
the effective date of the law. This is neither
predictable nor administrable by the taxpayer and
thus is not sound tax policy.
Again:
· BP is committed to maintaining a safe and
compliant business in Alaska that is sustainable;
· BP is committed to complying with tax laws in a
responsible manner and to having open and
constructive relationships with tax policy
makers; and
· BP supports durable, predictable and
administrable oil and gas tax policy.
Mr. Reese thanked the committee for hearing his testimony
and offered to answer questions.
3:58:38 PM
Representative Pruitt asked if BP had experienced any tax
increases in any other regime it operated under.
Mr. Reese was not aware of any.
Representative Pruitt asked if there were any regimes that
BP operated under that were offering incentives or lowering
their tax.
Mr. Reese was aware that the 2017 UK [United Kingdom]
budget included provisions to reduce the tax in the North
Sea.
Representative Pruitt stated that BP had been vocal in
terms of what to expect in the current year regarding
employment. He thought the company anticipated a 17 percent
reduction in its workforce. If the bill passed he asked if
BP would continue to decrease its workforce and respond
accordingly if the state increased taxes.
Mr. Reese answered that the company was currently in the
process of making a 17 percent reduction. BP was exploring
all available options to reduce costs. The company had
hoped to maintain the level of investments at all of the
locations it participates in Alaska. He added that it was a
very simple equation that if taxes went up increasing costs
it would impact the company's investment decisions.
Representative Pruitt asked if Mr. Reese saw the Alaska
market recovering its current level if investment was
reduced.
Mr. Reese replied that from a tax policy perspective and
from an investment governance perspective BP required a
predictable, durable, and administrable tax policy. It was
difficult for the individuals in the organization that make
the company's investment decisions to continue to ramp back
up or increase expenditures when they were uncertain of the
rules.
4:01:27 PM
Vice-Chair Saddler had seen BP's statistical outlook on the
energy industry for the past couple of years. He had heard
that the large major international oil companies looked out
decades rather than a few years. He asked if the company
saw the cash negative net losses in Alaska as a short-term
blip or a fundamental change in the oil market that Alaska
should take steps to accommodate in its tax policy.
Mr. Reese admitted he was not an economist but offered that
the company did not foresee market conditions changing
significantly in the near-term. Therefore, BP's situation,
being in a negative cash flow position, would remain
constant.
Representative Guttenberg asked about conversations
regarding the minimal level of yearly production increases
needed in order to maintain the facilities and the Trans-
Alaska Pipeline System (TAPS). He asked Mr. Reese to
provide his comments.
Mr. Reese was unaware of such conversations as he dealt
mainly with taxes at BP. He would relay the
representative's question and follow up with a response.
Representative Guttenberg wondered about the liabilities if
production did not increase and something happened to
facilities in the line causing it to shut down.
Mr. Reese replied that he would follow up.
4:03:39 PM
DAVE WILKINS, SENIOR VICE PRESIDENT OF ALASKA, HILCORP,
read from a prepared statement:
For the record my name is Dave Wilkins, I am the
Senior Vice President for Hilcorp Alaska. Mr. Chairman
and members of the committee thank you for the
opportunity to address you today about the committee
substitute for HB 247. I have previously testified on
HB247 in the House Resources Committee on March 1st of
this year.
For those of you who are not familiar with our
company, Hilcorp is the largest privately-held oil and
gas company in the United States. Headquartered in
Houston, TX, Hilcorp has operations in the Gulf Coast
of Texas and Louisiana, the Northeast United States,
and Alaska's Cook Inlet and North Slope. Hilcorp was
founded 1989 and has more than 1,400 full-time
employees. Just over 500 of those employees support
our operations here in Alaska and I am proud to say
that nearly 90 percent are Alaskan residents.
Here in Alaska we operate approximately 53,000 gross
barrels of oil per day and 150 million cubic feet of
gross gas per day from approximately 500 producing
wells, for a total net production to Hilcorp of
approximately 57,000 barrels of oil equivalent per
day.
Hilcorp's assets are primarily (although not
exclusively) older fields with extensive production
histories, steady and predictable performance that
carry incredible opportunity for getting more oil and
gas out of the ground safely and responsibly while
extending production life through efficiency and
thousands of smaller scale projects. We think the
State needs to attract more companies like Hilcorp as
fields and infrastructure continue to age.
That brings me to why Visit before you here today.
Hilcorp's production in Alaska represents
approximately 40 percent of what we produce company-
wide, so our success here in Alaska is critical to
Hilcorp's overall success.
I can say from Hilcorp's perspective, the credits in
question have resulted in more investments here in
Alaska, both on the North Slope and the Cook Inlet
basins. Starting with the Cook Inlet area, it's no
secret that Hilcorp has been a big part in reviving
energy security in Southcentral Alaska.
During the past 4 years, we have invested over $1
billion in projects and have drilled over 50 wells in
the Cook Inlet Area. As a result of this investment
and the increased production, we are sending more oil
to be refined and used in Alaska. On the natural gas
side, due to our significant investment over the past
four years, we are now making gas supply commitments
with local utilities into the year 2023. We stand by
our commitment to serve Alaskan's energy needs first
and are working to ensure a reliable and affordable
energy source for Alaska's largest population hub.
As you are well aware, prior to Hilcorp's entry into
Alaska, there was widespread concern of "brownouts"
and that utilities would need to import natural gas to
meet demand. I have spoken to many who made electric
generator purchases during this time expecting service
interruptions.
Hilcorp's success certainly did not come without
challenges. Developing oil and natural gas in the Cook
Inlet basin carries a very high cost of production
coupled with decline rates that vary from 15-50
percent annually depending on the field. The simple
fact is that if we are not spending money on projects
that bring on new production we cannot curb these
declines. So we believe it is in both our best
interest and the state's best interest that we
continue to spend dollars on trying to produce more
oil and gas.
It's also no secret that Alaska's tax credit system
and the Cook Inlet Recovery act were key drivers in
bringing Hilcorp to Alaska and in our investments to
date. Since 2012," Hilcorp has spent approximately
$3.2 Billion dollars in capital and acquisition costs
here in the State of Alaska. Those investments were
aimed at one primary goal - increasing oil & gas
production. Since 2012, we have increased overall
production by approximately 40 percent. A lot of
people like to ask us how we do it, and the answer is
simple. We have and continue to make significant
investments; investments that were encouraged by the
State's tax credit program and investment that did
just what the credits were meant to do, increase
energy supply for Alaskans.
I would argue that our success has been meaningful to
many, including the State. Increased production levels
of oil and natural gas in the Cook Inlet basin has
resulted in increased royalty rates, property taxes,
jobs and more. One example of this is looking at our
Monopod offshore platform. In January 2012, right
after Hilcorp took over operations, the realized oil
price was approximately $95 per barrel. Production was
approximately 600 barrels of oil per day; a marginal
rate for an offshore platform that has a high
operating cost. Because of this marginal rate and low
profitability, the Monopod qualified for royalty
relief under HB 185 passed in 2003.
The royalty rate was reduced to help maintain
profitability for the platform so it would not be
shut-in and/or permanently abandoned. As the royalty
owner, the state's take from the Monopod at that time
was approximately $90,000 per month again, when oil
was about $95 per barrel. Over the past 4 years,
Hilcorp has done over 150 projects on the Monopod,
most of which were smaller in scope, and has increased
production to a current rate of approximately 3,000
barrels of oil per day.
Because of the increase in production, the state's
royalty share is back up to the standard 12.5 percent
and even with oil prices at $35 per barrel, the
state's royalty take from the Monopod has increased to
approximately a half a million dollars per month.
That's over a 5 times more in royalty dollars going to
the state, despite oil prices declining more than 60
percent. Furthermore, and probably more important, our
success at the Monopod has added 20+ years of
production life and 8 million barrels of future oil
production.
4:10:40 PM
The Monopod is not an isolated anomaly. Since
Hilcorp's entry into the Cook Inlet area in 2012, oil
production has doubled, which has increased oil
royalty to the state of over $70 million. Furthermore,
even though oil prices are lower this year, estimated
oil royalties will be approximately $10 million more
this year than what they were right before Hilcorp's
entry when oil prices were high. Hilcorp's success in
increasing oil production over the last 4 years also
has increased future estimated oil production by 20-30
million barrels, meaning increased future royalties
for the state.
I would offer, we need more results like this: more
production. I will also offer that the state needs a
system in place that is stable, predictable and
incentivizes, not jeopardizes, continued investments.
Hilcorp's Cook Inlet success is a really good example
of the State putting good policy in place aimed at
achieving a positive result and getting one.
I can tell you today that the credits Hilcorp earned
were absolutely reinvested in the resource. Our
current production rates prove it. We have managed to
work our way above the 50K Barrel threshold both
through acquisition and a lot of hard work. Breaking
the 50K per day mark means we can no longer cash in
the very credits that this legislation proposes to
take away. But other budding companies can, and
Hilcorp is a company that always welcomes competition
in the market. We want to help promote a healthy
industry throughout the state. An active industry
means additional service companies will be attracted
to Alaska which creates competition and will help
drive down costs.
A lot of the discussion regarding credits has involved
the Cook Inlet basin, primarily because of the notable
increase in production and activity that the existing
tax structure intended to generate was wildly
successful. Our success in Cook Inlet is what fueled
Hilcorp's interest in expanding to the North, and we
did just that in November of 2014 when we purchased
three of BP's assets on the North Slope: Milne Point,
Endicott and Northstar fields. When we took over
operations, we were producing approximately 36,000
gross barrels of oil per day from these three fields
and now we produce approximately 37,000 gross barrels
of oil per day.
After a year of working with these assets, I am so
excited about the amount of opportunity up there. We
have a comprehensive list of projects we can invest in
projects that will put more oil in the pipeline and
support literally hundreds, if not thousands, of jobs
for Alaskans. We currently have one drilling rig
running on the slope and would like to pick up a
second rig by the end of the year
But, in today's price environment and in the face of
an uncertain state fiscal structure, it is to be
determined what projects move forward and when. We
have to be very thoughtful with every penny we spend.
Investment budgets are shrinking and compete with
other oil and gas producing areas throughout the
world. I want Hilcorp's investment dollars to come to
Alaska. We have to continue to work hard to build
efficiencies and cut costs, while ensuring we do it
safely and without causing harm to the environment.
Cutting costs, not corners, is the only way we will
survive the current downturn.
4:17:48 PM
I know that we are not the only ones faced with
difficult decisions and realities during this
challenging time. I also recognize the members of this
committee and the legislature have much to consider
about what is best for the state and our future. I ask
you today to recognize that change creates
uncertainty, and uncertainty deters investment and
affects jobs. Investment, whether for exploration or
development, is the only way to increase production
and increased production is the only way we can help
get out of this situation.
Over the past 30 years, I have worked in several other
basins throughout the United States, and I can say
with confidence Alaska has changed its tax policy more
in the last few years than other areas have in
decades. I want to keep Alaskans working, I want to
increase production but the company simply is not
going to continue to invest hundreds of millions of
dollars in Alaska, especially in this price
environment, when the fiscal structure continually
changes.
So, in closing I would just like to say again that the
uncertainty we are currently facing threatens our
ability to plan our investments and that the decisions
you make today will impact the economics of the
opportunities to increase tomorrow's production both
in Cook Inlet and on the North Slope.
Mr. Wilkins thanked the committee.
Vice-Chair Saddler stated that the other co-chairs had to
leave the current meeting and that he was given the gavel
to continue with the meeting.
Representative Pruitt understood from Mr. Wilkins'
testimony that approximately 40 percent of Hilcorp's
investment was in Alaska. He wondered if there was another
tax regime in which the company operated that was imposing
additional tax increases at the current time and in the
current price environment.
Mr. Wilkins responded in the negative.
Representative Pruitt felt that Hilcorp was slightly
different than the three major oil companies and would be
adjusting his questions. Yesterday the legislature had
heard from the administration that Hilcorp was heralded for
turning around investment which Mr. Wilkins had highlighted
in his testimony in the Cook Inlet and on the North Slope.
He first asked about how Hilcorp was able to increase
production. He also asked about the impact the bill might
have in Hilcorp's ability to maintain similar increases.
Mr. Wilkins responded to his first question about "how." He
stressed that it was a lot of hard work by some very
dedicated employees. Many of the employees were acquired,
through Hilcorp's acquisition of Chevron, Marathon, and BP.
They were very highly trained, highly dedicated, and highly
motivated employees. He emphasized that all of the credit
went to the employees who paid attention to the small
details. He spoke again about the monopod and the fact that
150 projects were completed. The key with the older assets
was to work them hard and to understand them.
4:22:20 PM
Representative Pruitt asked how the legislation would
impact increasing production. He reiterated that Hilcorp
was different than other companies that had been discussed.
Mr. Wilkens had been talking about increases while the
discussion had been about stemming decline. He wanted to
better understand how he saw the legislation potentially
impacting Mr. Wilkins' ability to increase.
Mr. Wilkins relayed that Hilcorp would live within its cash
flow. His boss would not let him take a loan out to pay the
company light bill or tax bill. Currently the company had
two drill rigs operating, one in Cook Inlet and one on the
North Slope. The company would like to operate more.
However, if the state's policy decision was to increase
taxes it would place pressure on the operation of the
second rig. He would have to decide whether the company
could afford the second rig. He would rather take the money
and drill additional wells in Alaska. It not only made
sense for Hilcorp, it also made future sense for Alaskans.
He saw nothing in HB 247 that encouraged the company to
spend more money in Alaska over the current law. Both
versions would discourage further investment in Alaska.
4:24:25 PM
Representative Munoz thanked Mr. Wilkins for his
presentation and for Hilcorp's success in Alaska. The
legislature appreciated the company's efforts. She
mentioned that Mr. Wilkins had spoken about investing in
Prudhoe Bay and Cook Inlet. In Prudhoe Bay the base rate
was 35 percent and in Cook Inlet there was no production
tax. She asked if he thought it was appropriate for the
State of Alaska to consider a rate similar to the Prudhoe
Bay and the Cook Inlet when the tax cap went away.
Mr. Wilkins responded that whether it was royalty taxes,
property taxes, or income taxes he looked at what the costs
were to Hilcorp. He looked at the total cost of doing
business then decided whether he could afford to do
business. He concurred with what Ms. Moriarty had stated
that the state made policy and industry responded to that
policy. If his costs went up it would likely drive down
activity, capital costs would be reduced, and there would
be a reduction in jobs and production. He also agreed with
ConocoPhillips that any one decision made by the state
would not necessarily cause a corresponding response but
would impact Hilcorp's decisions. He would not be making a
shear investment decision based on the tax structure but it
would certainly be a consideration.
Representative Munoz reported hearing testimony that Cook
Inlet was sufficiently incentivized because of the lack of
a production tax. She asked for his comments.
Mr. Wilkins responded that the tax incentives in the Cook
Inlet did exactly what they were intended to do: increase
production of oil, giving the state additional royalties,
and gas, giving a stable price to the gas supply for homes
and utilities thus, avoiding brown outs. Gas prices could
have double had the state had to bring gas in from
somewhere else. He thought the tax credit system encouraged
many projects and investment money to Alaska resulting in
increased production.
4:27:24 PM
Representative Munoz talked about the minimum tax on the
North Slope. She asked if he thought it would be
appropriate for the state to consider a time certain for
the net operating loss to be carried forward.
Mr. Wilkins replied that the state could make any policy it
wanted and he would react to it. He was new to Alaska
having only been in the state for a year. The idea that oil
companies had a lucrative deal in Alaska lead him to pose
the question as to why more oil companies were not pounding
down the door to do business in the state. He noticed that
more companies have left Alaska than come to Alaska in the
previous 4 to 5 years. He added that Alaska was a difficult
environment to operate in.
Representative Gattis asked if Hilcorp had operations
elsewhere in the world.
Mr. Wilkins answered in the affirmative. He relayed that
the company did business in the Gulf Coast and the
Northeast - primarily in the United States.
Representative Gattis suggested that Hilcorp had other
options. If Alaska took advantage of tax policies that
allowed the company to take fuller and better advantage of
other options (code-speak for the company could pick up and
go somewhere else). Alaska would have no advantage at that
point. The state could tax Hilcorp "until the cows come
home", but if the company was not in Alaska to be taxed it
would not matter. She thought the bigger challenge for
Alaskans to look at was that many industry companies had
other places to do business. She wondered whether Alaska
was open for business. She conveyed that she would
appreciate having Hilcorp's business so the state could pay
for all of the things Alaskans have become accustomed to.
Vice-Chair Saddler thanked Mr. Wilkins for his testimony
and asked him to provide a copy of his written comments to
staff. He invited Mr. Jepsen from ConocoPhillips back up to
the table. There was a correction he would like to make on
the record.
4:30:40 PM
Mr. Jepsen commented that Vice-Chair Saddler had previously
asked about the percentage of Alaska residents employed by
ConocoPhillips. He might have provided some information
that could have been misleading. He relayed that there were
about 1200 employees hired directly by ConocoPhillips and
about 85 to 9o percent of those employees were Alaska
residents.
Vice-Chair Saddler commented that the number had seemed a
little low.
4:31:23 PM
J. PATRICK FOLEY, SENIOR VICE PRESIDENT OF ALASKA
OPERATIONS, CAELUS, would try to respond to the questions
asked earlier in the meeting. He asked members to listen
for and to make their own determinations about whether a
company like Caelus was part of the solution or genuinely
part of the problem. He suspected Caelus was not the
problem. He provided some background information. He came
to Alaska in 1983 and had spent more than half of his adult
life in the state. He had worked in every oil and gas
jurisdiction in the Lower 48 and spent about 4 years
working internationally. He had some experience in the
related issues. He wanted to remind members of who Caelus
was, what the company had accomplished, and to provide some
insight into what the company's future would hopefully look
like. He also wanted to share with members what the
proposed changes to tax policy would have on his company.
Sadly, he thought he might be the expert in net operating
loss transferable credits. He wished he was not in a loss
position. Caelus bought the Pioneer Natural Resources Co.
(Pioneer) assets. Therefore, when he discussed Caelus'
history Pioneer's history was included. He conveyed that he
had personally opened the office for Pioneer 14 years
previously. The company had been in the state for 14 years,
made substantial investments, but had not yet made a
profit. The company was still operating at a loss. He asked
members to consider what a net operating loss meant in the
context of a production tax system. He relayed that all in
meant was that Caelus made more expenditures (the company
invested more capital and paid additional money) every year
than generated revenues. All businesses started out
similarly.
4:33:49 PM
Mr. Foley introduced his PowerPoint Presentation: "House
Finance CS HB 247 (RES) Testimony." He began with slide 2:
"Caelus Energy Alaska: Key Facts & Information." He
reminded members that when he was discussing Caelus he was
also including Pioneer's history. Since the company came to
the state in 2002 it had invested over $2 billion in
capital. In 2016 the company had a capital budget of $300
million. Currently the company had 70 full-time employees
in Alaska and had approximately 400 contractors working on
the Slope at present. When he summed the information
together and took into account the fact that it took 2
bodies to do 1 position and some of the jobs were seasonal
it represented about 600 full time positions.
Mr. Foley spoke to the accomplishments of his company. The
company had produced 23 million barrels of oil since 2008.
In 2015 the company made 4 million barrels of oil. Many
people questioned Caelus' small size and commented about
its safety records and technical expertise. However, he was
proud of the company's safety record, its environmental
record, and its technical standpoint. The company was
drilling some of the longest wells on the North Slope. In
all of its wells the company employed super giant frack
technology. The company pumped about 2.6 million pounds of
proppant in its wells. It was the largest frack job on the
North Slope. Not only was he the expert in Net Operating
Losses, he was also becoming the expert in trying to make
money on tight crummy reservoirs (that was all the company
had). The company's reservoirs, the Torok and the Nuiqsuk,
required very intensive capital and fracking. The company
took reservoir rocks that would make a small amount of
production and employed very large fracks on them (costing
about $10 million to frack a producer). The results were
that the wells had initial production IP rates in the 5000,
6000, and 7000 barrels per day. After a year the wells had
sustained rates of about 1500 barrels per day. Caelus had
found a way to take difficult reservoirs that had been left
behind by other companies on the North Slope and found a
way to be profitable requiring very large capital. The
company was profitable at reasonable prices. However, today
oil was not at reasonable prices. He admitted that his
company was struggling to exist. He thought he could say
the same about every other oil company. He thought it was
probably the same for the State of Alaska. He reported that
in the current day the price of oil was $37 per barrel.
Although the company was struggling to exist it did not
mean the company was at risk of going out of business. It
meant that Caelus was at risk of not being able to make
further capital investments and continue to grow its
business.
Mr. Foley explained that the state received production out
of the producers that received the state's tax credits. The
state also received royalty monies equaling close to $70
million and production taxes of about $60 million to date.
4:37:13 PM
Mr. Foley moved to slide 3: "North Slope Exploration &
Development Program." He pointed to the left top portion of
the slide. He reported that out at Smith Bay in Tulimaniq
Caelus had drilled 2 very exciting exploration wells. The
wells were very expensive and the company would be spending
well over $100 million to drill the 2 wells. He reported
that currently the operations were finishing, the company
was encouraged by the results, and it had started making
plans to be back in the near future to continue its
appraisal. At Oooguruk, the cornerstone of the company's
business, the costs were higher than most of the North
Slope fields because it was a remote island site. The
company produced anywhere from 10 thousand to 20 thousand
barrels per day because of the frack nature of production.
Caelus drilled wells all year, fracked them, and brought
them online. The company saw really high production rates
in the summertime and then they depleted. In the following
year they would drill all over again. He pointed to the
next picture of Nuna, a project in the process of being
developed. It was a project Caelus committed to at higher
oil prices. He admitted that the company was struggling to
keep the pad that had nothing on it. Lastly, the company
had acquired a 325 thousand acre block in the far eastern
portion of the North Slope. It was to the East of Prudhoe
Bay and to the west of Point Thomson. Even before the oil
and gas leases were issued Caelus had begun a high
resolution seismic 3D acquisition program. Caelus was
chasing the same reservoirs at Smith Bay, Oooguruk, Nuna,
and in the East. They were the same type crummy reservoirs
that the company thought it would be the master of
unlocking.
Vice-Chair Saddler asked about the term he had used,
"crummy" reservoir.
Mr. Foley responded, "Sadly I did say crummy."
Vice-Chair Saddler thought there was some technical term he
was missing.
4:39:48 PM
Representative Wilson asked about the odds of Caelus coming
back if the state started changing its tax regime again.
Mr. Foley indicated that he had a slide that specifically
addressed Nuna, potential opportunities, and what would
have to happen for Caelus to move forward with its
investment.
Mr. Foley turned to slide 4: "Alaska: An Attractive
Investment Opportunity?" He had mentioned before that he
had worked internationally as a negotiator and in a
strategic planning group. The group evaluated new
opportunities by answering several questions that were
listed on the slide. The questions included whether the
resource was world class, whether there was access to
infrastructure, whether there were leases available,
whether there was an expert community of contractors, and
whether the regulatory environment could be managed. Alaska
received fairly high marks in the answers to these
questions. However, there were some downsides to investment
opportunities in Alaska. First, Alaska was an expensive,
cold, and remote operating environment. Another question
his group answered was whether Alaska's fiscal regime was
favorable. He relayed that under SB 21 it was very
favorable. The changes currently being contemplated would
make the regime unfavorable. Another question to answer was
whether the fiscal regime was stable and predictable. In
his history he had seen about 5 or 6 tax regime changes in
the prior 10 years. Alaska received very poor marks in
fiscal regime stability. Caelus was a company that went to
outside sources for its capital. The company's investors
needed to have confidence in the system. He reported that
investors were very nervous about continuing to invest in
Alaska.
4:42:43 PM
Mr. Foley advanced to slide 5: "Alaska Oil Tax Policy -
Integrated Tax System." He acknowledged that the slide was
borrowed from enalytica. The slide showed the government's
take over a broad range of prices. He explained that
government take was determined by profit and distribution.
Gross revenues minus costs equaled profit which was then
shared. He relayed that SB 21 reflected a fiscal system
that was flat over a very broad range of prices. He pointed
to the dotted line on the chart that depicted the
government take over a range of prices. He highlighted that
from $70 and up the government take remained shockingly
flat. At the lowest end, reflecting current prices, 100
percent of the take went to the state. There was nothing
left for the investor.
Representative Wilson wondered if there was an issue with
SB 21 or with the price of oil.
Mr. Foley answered that the company was struggling first
because of price. Secondly, the company was concerned about
what would happen in the future. He furthered that under SB
21, an integrated balanced system, companies were allowed
to earn tax credits by doing work. He suggested members to
think of it as an early assistance provided by the state to
fund and move projects forward. In exchange, companies
would pay a larger piece once a project got off the ground
and became profitable.
Representative Wilson had heard of the benefits of SB 21 at
high oil prices such as $90, $100, and $120. The reason a
change was being considered was because the legislature had
not properly considered the regime at low prices of the
present day. She asked if Mr. Foley agreed with her
statement.
Mr. Foley agreed that oil at high prices was the only
scenario people had envisioned. He did not think that
anyone had contemplated oil at $37 per barrel.
4:46:04 PM
Representative Wilson asked if Mr. Foley thought the
changes being considered would fix the situation the state
was in.
Mr. Foley thought the changes exacerbated the problem
rather than helping the problem.
Vice-Chair Saddler asked if the dark blue or purple on the
chart represented the producer take.
Mr. Foley suggested directing the question to enalytica.
The dark blue was not represented in the key.
Mr. Foley moved on to slide 6: "Tax Program Changes &
Impacts to Caelus." He explained that the slide represented
the impacts that the original bill, HB 247, would have upon
Caelus. The slide showed the net present value (NPV) on a
life-cycle basis of the company's current project
inventory. It included Oooguruk and Nuna using strip prices
similar to current prices. Over the course of the following
5 years the price would creep up every year until, in about
5 years, the price would be about $52 and it would be flat
forever. He thought it was unsustainable. The slide tried
to walk through the additive impacts of the various pieces
of the initial bill offered by the administration. The
first impact was the GVR fix. Caelus was one of the company
that earned a net operating loss. The way the statues and
regulations were written they allowed Caelus to basically
increase its net operating loss by applying the GVR. Some
people claimed it was an unintended consequence and needed
to be removed. From his prospective he had assumed it was
an intended consequence because the taxes were starting to
increase under SB 21 and the credit system was changing. He
saw it as something that could balance them. He understood
the legislature's belief and the public's concern and
suspected he would lose on the issue the result of which
would erode the value of his business by about 13 percent.
The bars on the graph demonstrated the impact on an NPV
basis created by each proposed change.
4:49:44 PM
Vice-Chair Saddler asked about his NPV rate assumption and
to define "strip price."
Mr. Foley responded that the graph represented a NPV
discounted at 10 percent. The strip price was what the
financial markets predicted would be the price of oil.
Currently, they predicted that the price would be what it
was at present. It assumed a very modest increase each year
for the following 5 years at about $52 per barrel.
Vice-Chair Saddler remarked that NPV at 10 percent was a
fairly high assumption. He asked Mr. Foley to comment.
Mr. Foley answered that when companies made economic
evaluations they considered what they would look like at
various NPV amounts. The next bar depicted the negative
impact of hardening the floor. At present, because the
company was at a NOL position and because it was a small
start-up business it could actually use all of its credits
to go below the floor. He confirmed there was a gross
minimum tax floor but the credits allow the company beneath
that floor. Presently Caelus did not pay a production tax.
If the legislature changed legislation resulting in the
creation of a 4 percent hard floor it would erode the value
of his business by (plus the GVR fix so they were additive)
31 percent. The next piece showed the impact of a $25
million transferable credit limit which eroded the
company's value down to 77 percent erosion. The final
element of change that impacted the company's value was an
increase in a hard firm floor from 4 percent to 5 percent.
At the end of the day with the proposed changes his
business would be worth 17 percent of what it was worth
prior to HB 247.
Vice-Chair Saddler asked if he had any information
regarding the effect on his business at the $200 million
credit limit.
Mr. Foley reported Caelus having a capital budget of about
$300 million and the company would earn NOL plus EIC
credits equal to about $100 million.
4:52:41 PM
Mr. Foley continued to slide 7: "Nuna: A Project on the
Bubble." He explained that the project was ready to go: the
gravel was installed, all of the engineering design was
complete, and equipment was queued up for purchase.
However, the project was placed on hold due to the oil
price decline. The project would remain on hold until oil
prices recovered and Alaska stabilized its tax policy.
Originally, Caelus had anticipated having first oil for the
Nuna project in the fourth quarter of 2017. Unfortunately
the company would not be able to meet the timeline. He
estimated at least a year delay. He relayed details of the
project. Caelus owned 100 percent of the working interest.
There was just more than 100 million barrels of reserves.
At peak production it would generate 20 thousand to 25
thousand barrels of oil per day. It would employ about 300
fulltime contractors for the first 2 years during
construction. It would have 300 fulltime employees for 4 to
5 years of the drilling phase. He commented on all of the
economic benefits the state would enjoy because of all of
the direct jobs and the 20:1 multiplier effect. In
addition, the project would bring future revenues to the
state of approximately $1.75 million. The payments came
from the integrated fiscal system create by the state.
There would be $900 million royalty payments as well as
$500 million in net profit share lease payments. There
would also be future production tax payments in the amount
of about $250 million and property tax payments of about
$100 million.
Mr. Foley reported that one question regularly posed was
whether the state provided more credits than the company
paid back in production tax. It showed that the Nuna
project at the current prices earned NOL transferable cash
payments of about $250 million and in the future Caelus
would pay that money back. Coincidentally, at the current
price it would equal about $250 million paid in future
production tax payments. He considered it a wash. In
addition, Caelus would pay $1.5 billion in royalty, net
profits, and property tax payments to the State of Alaska.
4:55:54 PM
Representative Gara asked if Nuna was a GVR field.
Mr. Foley answered that both Nuna and Oooguruk were GVR
fields. He reminded members that they were GVR fields at
the rate of 20 percent. At the time SB 21 came about it was
a field intended to be eligible for a 30 percent GVR.
However, SB 21 was written such that it excluded any leases
with a field with a one-eighth royalty. At the time he
believed that his lease would qualify because it was a one-
eighth plus lease. However, it turned out that he was not
eligible for a 30 percent GVR.
Representative Gara asked what oil price Mr. Foley had
assumed in his estimation of $1.7 billion in future
payments.
Mr. Foley responded that the work was done at $70. He noted
that it did not make sense to do it at strip prices because
otherwise Nuna would not likely happen.
4:58:05 PM
Mr. Foley turned to slide 8: "Closing Thoughts." He urged
members, as they contemplated changes, to make sure that
the changes the legislature made would incent the behaviors
that the state wanted. He believed SB 21 was a very
balanced system. He thought that SB 21 and the credit
system were the reasons why Caelus was in Alaska. He
reported that when Caelus had evaluated opportunities in
Alaska it came to the conclusion that there were great
opportunities even though prices were high and the fiscal
regime was unfriendly. Under SB 21 because of the credit
system it incented Caelus to close on the purchase with
Pioneer and to commit to the Nuna project, buy 325 thousand
acres of leases in the East, shoot a high resolution 3D,
and drill 2 exciting exploration wells at Smith Bay.
Representative Wilson asked if he had been consulted by the
administration about any possible proposals and their
potential impact.
Mr. Foley indicated that he had had more than one
opportunity to speak with the administration. He was able
to share his concerns. He could not say anything more than
the bill was what it was.
Representative Wilson asked about the per barrel price it
would need to reach to be profitable and to allow for the
continuation of the project.
Mr. Foley stated that the work was done at $70 per barrel
oil. He was unsure of the price necessary to move on with
the project. He estimated that it was in the neighborhood
of $70 million.
5:00:34 PM
Representative Pruitt asked if he had seen an increase in
taxes in any other regimes Caelus operated.
Mr. Foley relayed that the company only acted in Alaska.
Representative Pruitt referred to slide 7 and pointed to
the $250 million in NOL cash payments from the State of
Alaska as well as the other benefits. He asked about
whether the project would move forward if the legislation
moved forward.
Mr. Foley answered that, in regards to tax law changes, the
company needed to reach a certain economic threshold. The
more erosion the company suffered due to tax change the
more the price would have to increase to offset costs. For
example, if the project was done at $70 per barrel and the
system changed it would take a higher price.
Representative Pruitt asked if the company was looking to
invest in other projects.
Mr. Foley responded in the affirmative. He added that
Caelus' large exploration block out to the East was one of
them. He hoped to drill some wells in the future. He hoped
for a follow up season at Smith Bay which he also hoped
would lead to development. He mentioned that the one
underlying theme that keeps coming about was the concern
that the payment of transferable NOL credits was a drag on
the system. There was a fear that the amount of monies that
the state would have to pay for the credits would be very
high. He argued that it was a problem that sadly was self-
correcting. He explained that at high prices the projects
would go forward and would likely earn credits but it would
be in a time when Alaska's economy was more robust and the
state would have the ability to fund those credits. In a
very low price environment like the state was currently,
sadly the projects would not go forward and there would not
be investments and there would not be NOL's that the state
had to reimburse.
Representative Pruitt asked if Caelus had already received
credits from the state for the Nuna project and Oooguruk
project. He wondered if it was fair to say that if the
projects did not go forward the state paid money on
something it would not receive a benefit.
Mr. Foley responded, "Yes, we have made expenditures on a
project like Nuna. We have incurred losses. We have earned
transferable NOL credits and, you are exactly right, if the
project does not go forward, there would be no future
revenue to the state for that project."
Vice-Chair Saddler thanked Mr. Foley for his testimony. He
directed him to submit his written testimony.
SB 247 was HEARD and HELD in committee for further
consideration.
Vice-Chair Saddler discussed the agenda for the following
meeting.
ADJOURNMENT
5:05:41 PM
The meeting was adjourned at 5:05 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 247 AOGA Presentation HFIN 04 01 16.pdf |
HFIN 4/1/2016 1:30:00 PM |
HB 247 |
| HB 247 Caelus Energy House Finance Apr 1 2016.pdf |
HFIN 4/1/2016 1:30:00 PM |
HB 247 |
| HB 247 Conoco Apr 1 House Finance COP.pdf |
HFIN 4/1/2016 1:30:00 PM |
HB 247 |
| HB 247 Conoco Phillips 2015 Net earnings.pdf |
HFIN 4/1/2016 1:30:00 PM |
HB 247 |
| HFIN CHSB247 Hilcorp Wilkins 4 1 16 FINAL.pdf |
HFIN 4/1/2016 1:30:00 PM |
SB 247 |