Legislature(2011 - 2012)HOUSE FINANCE 519
03/23/2011 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB110 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 110 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 23, 2011
1:40 p.m.
1:40:58 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 1:40 p.m.
MEMBERS PRESENT
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Co-Chair
Representative Anna Fairclough, Vice-Chair
Representative Mia Costello
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Reggie Joule
Representative Mark Neuman
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Ken Sheffield, President, Pioneer Natural Resources Alaska;
Wendy King, Vice President of External Affairs,
ConocoPhillips Alaska; Dale Pittman, Alaska Production
Manager, Exxon Mobil Alaska; Mark Landt, Executive Vice
President, Renaissance Alaska; Joe Michel, Staff to
Representative Bill Stoltze; Representative Craig Johnson;
Senator Cathy Giessel; Senator Charlie Huggins.
PRESENT VIA TELECONFERENCE
Ed Duncan, President and Chief Operating Officer, Great
Bear Petroleum; Ryan Moynagh, Vice President of Finance and
Chief Financial Officer, Great Bear Petroleum.
SUMMARY
HB 110 PRODUCTION TAX ON OIL AND GAS
HB 110 was HEARD and HELD in committee for
further consideration.
HOUSE BILL NO. 110
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
relating to the oil and gas production tax rate;
relating to monthly installment payments of estimated
oil and gas production tax; relating to oil and gas
production tax credits for certain expenditures,
including qualified capital credits for exploration,
development, and production; relating to the
limitation on assessment of oil and gas production
taxes; relating to the determination of oil and gas
production tax values; making conforming amendments;
and providing for an effective date."
1:41:41 PM
KEN SHEFFIELD, PRESIDENT, PIONEER NATURAL RESOURCES ALASKA,
discussed a PowerPoint presentation titled "Pioneer Natural
Resources, House Resources Committee Testimony re: CSHB110
(RES)" dated March 23, 2011 (copy on file). He appreciated
the opportunity to testify before the committee and hoped
to provide insight on the company's other national
projects. He made forecasts in regard to Pioneer's future
activities. He discussed Slide 3: "Pioneer Alaska Profile."
· Anchorage headquarters
· 60+ full-time employees
· 120 AK contract workers
· World class Oooguruk project
· 1st independent operator on NS
· $1B capital investment
· 120-150 MMBO resource potential (net)
· 2010 Production ~10MBOPD (gross)
· State and NS producer support
Co-Chair Stoltze took the committee role.
Mr. Sheffield continued with his presentation. He discussed
the company history on Slide 4, "Pioneer: 1997-2005
Deepwater/International Focus." He elaborated about the
company's exploration strategy with big investments in the
Gulf of Mexico, Africa, and Alaska. He moved on to discuss
Slide 5, "Why Alaska in 2002?"
· Worldwide exploration focus
· Alaska- large, oil resource potential in the U.S.
· Limited competition for resources
· State actively courting independents
o Exploration credits, low severance tax (ELF)
o Available acreage at a low cost
· Independent mindset
o Quick decision making
o Lower cost structure
1:45:48 PM
Mr. Sheffield discussed "North Slope Exploration History"
on Slide 6. He explained that Pioneer embarked on an
exploration program in Alaska in 2003. Pioneer participated
in eleven exploration wells in a four year period between
2003 and 2007. The exploration led to one commercial
discovery, Oooguruk. He noted that hydrocarbons were
located in almost every exploration well drilled; however,
the quality of the reservoirs was too low.
Mr. Sheffield discussed Slide 7: "8 Years Later - What has
Changed?" on Slide 7.
· Technology
· Oil and gas prices
· Resource play development
· Alaska's severance tax system
Mr. Sheffield addressed "Technology" on Slide 8. He
expressed excitement about horizontal well improvements and
fracture stimulation. Drilling a horizontal well with
hydraulic fracturing unlocked unconventional resources in
shale for both oil and gas.
Mr. Sheffield discussed "Oil and Gas Price History" on
Slide 9. He commented on the oversupply of natural gas in
the Lower 48. Oil prices continue to rise.
1:49:37 PM
Representative Gara asked about Slide 9. He understood that
lower taxes provide incentive. He asked if oil prices
provide comparable incentive. Mr. Sheffield replied that
with increased oil prices, the cost of doing business
increased dramatically. He added that competition increased
substantially.
Representative Gara wondered about the high oil prices and
whether it was more attractive to invest today than under
conditions in 2002 and 2003 when taxes and oil prices were
low. He wondered about profit margin at today's prices. He
queried whether the company could make more money today
even under the current tax regime. Mr. Sheffield responded
that expectations and prices changed. He claimed that the
analysis was difficult to make.
Mr. Sheffield continued with his presentation on Slide 10,
"U.S. Shale Liquids Production." The chart illustrated 50
million barrels of new liquid hydrocarbons produced in the
United States from shale in 2009. He expected that the
volume would dramatically increase over the next few years.
Mr. Sheffield discussed "Alaska's Severance Tax" on Slide
11.
· Pre 2007: ELF (Oooguruk project sanction)
o Low rate fields- no severance tax
· 2007: PPT (Oooguruk construction)
o 20% investment tax credit
o 22.5 % net profits tax
o Moderate progressivity
· 2008: ACES (Oooguruk first production)
o 20% investment tax credit
o 25% base tax rate
o Aggressive progressivity (not indexed)
o Maximum tax rate = 75%
Mr. Sheffield conveyed that the Alaska Clear and Equitable
Share (ACES) tax structure was not competitive with other
areas. He opined that ACES places Alaska projects at a
disadvantage.
1:57:06 PM
Mr. Sheffield introduced Slide 12: "What's Next? Oooguruk
Expansion." He explained the map illustrating the island
drill site and the development wells. He commented on the
well log with production horizons. He highlighted the Turok
area, which was a small volume producing well. Another plan
included the development of onshore drill wells that access
the reserves that underlie the Colville River Delta.
Representative Gara asked whether the Torok well site was
considered an exploration, development, or hybrid well. Mr.
Sheffield responded that he would call it an appraisal
well. The presence of hydrocarbons in the system was known
prior to the project. At question was the economic
viability of the well.
Representative Gara stated that the term "appraisal well"
had not been mentioned in committee meetings. Mr. Sheffield
remarked that the Torok well did not qualify as an
exploration well.
Vice-chair Fairclough wondered how an appraisal well was
permitted in Alaska. Mr. Sheffield did not know the answer
but would provide it to the committee.
Representative Doogan referred to the phrase "low quality"
and wondered what was meant by that phrase. Mr. Sheffield
explained that the reservoir rather than the oil was
qualified as "low quality." The permeability of the
reservoir was of low quality.
Mr. Sheffield continued with his presentation on Slide 13:
"Expansion Project Scope."
· 1 or 2 onshore drillsites connected to Oooguruk tie-in
pad
· 25 development wells envisioned
· Large, but challenged oil resource
· Project contingent upon pilot waterflood success
· Must compete with low risk, high margin projects in
L48
2:01:11 PM
Mr. Sheffield remarked that much had changed over the past
eight years. He discussed Slide 14, "Competition for
Capital - Texas Projects."
· Pioneer resource plays in Texas
o Spraberry: West Texas
o Eagle Ford shale: South Texas
o Barnett shale: North Texas
· Investment characteristics
o Low geologic and project and execution risk
o Short project cycle times and high margins
o Year round operations and simple logistics
o Low severance taxes - no progressivity
o Much lower well and services costs
o Flexibility to ramp up or ramp down activity
Co-Chair Thomas wondered whether the other areas provided
tax incentives. Mr. Sheffield responded that the other
areas did not provide tax credits.
Representative Doogan wondered whether additional costs are
incurred outside of Alaska. Mr. Sheffield replied that most
of the land was private and that royalties ranged from 1/8
to 1/4. The 4.6 percent severance tax is the only charge.
Representative Wilson wondered how long it took to permit a
project in Texas. Mr. Sheffield did not know, but believed
it would take weeks.
Representative Wilson wondered whether royalties on the
land were paid in Texas. Mr. Sheffield replied that the
royalties were paid directly to the landowner and the
severance tax was 4.6 percent.
2:04:41 PM
Mr. Sheffield discussed Slide 15, "Pioneer: 2011 "Back to
Our Roots." The Spraberry field transformed from a
declining field to a growing field due to massive
investment. He highlighted the expansion of the Eagle Ford
Shale field with 2000 drilling locations and 7 rigs, soon
increasing to 19. He mentioned the Barnet Shale Combo with
600 drilling locations and 2 rigs running.
Co-Chair Stoltze asked if the mature fields in Texas
provide hope for extending the life of fields in Alaska.
Mr. Sheffield referred to Slide 15 and explained that the
margins had increased. The combination of horizontal
drilling and hydraulic fracturing result in greater
efficiency. He noted that the existing infrastructure in
Texas is taxed with the increased production.
Representative Guttenberg referred to the rising tide of
commodities. He wondered whether the rising commodities
would create additional available capital. Mr. Sheffield
replied that as commodity prices increased and drilling
ramped up that additional cash flow followed suit. The
company continued to seek new opportunities.
2:09:31 PM
Representative Costello wondered how Alaska could compete
with the scenario presented in other locations. Mr.
Sheffield replied that Alaska's geography affects its tax
structure and the time frames needed to move a project
forward. The state did have one big lever that it could
pull, which was fiscal policy. One deterrent to the Alaska
projects is the progressivity element. The changes in HB
110 were significant steps that would provide the company
with the tools to compete.
Mr. Sheffield discussed Slide 16, "Competition for
Capital." The purple line illustrated on the graph shows
the level of drilling activity in the state. The blue line
illustrated drilling activity in Spraeberry. He pointed out
that Pioneer plans to drill over five times the amount of
wells drilled in Alaska.
Mr. Sheffield provided closing remarks on Page 17 "Closing
Thoughts."
· Oooguruk expansion must compete with L48 resource
plays with:
o Large resource potential in Pioneer's back yard
o Short project cycle time and high margins
o Very favorable fiscal terms
o Much lower capital cost
· Oooguruk expansion
o New project - new barrels in TAPS
o Create ~500 construction jobs
o Create ~100 development jobs
· HB 110 will have a positive, material impact
o Increased investment credits for well related
costs
o Bracketing of progressivity
o Provide administrative certainty
2:13:55 PM
Representative Hawker wondered about the dollar value of
the mentioned expansion project. Mr. Sheffield replied
hundreds of millions. He did not have an approximate number
at the time.
Representative Gara referred to a tax benefit related to
royalty relief for the Oooguruk field. Mr. Sheffield
responded that Pioneer did receive royalty relief at
Oooguruk. He stated that the primary reason for seeking
relief was that the existing lease was burdened by a
royalty plus thirty percent net profits lease.
2:15:46 PM
AT EASE
2:18:49 PM
RECONVENED
Representative Doogan recalled unanswered questions asked
in previous testimony.
WENDY KING, VICE PRESIDENT OF EXTERNAL AFFAIRS,
CONOCOPHILLIPSPHILLIPS ALASKA, discussed a PowerPoint
presentation titled "House Finance HB 110" dated March 23,
2011 (copy on file). She began with Slide 2, "Positive
Impact of HB 110."
· Be more competitive
· Create More Jobs for Alaskans
· Increase Production
Ms. King discussed Page 3, "More Production Key to TAPS
Future." The graph provided a plot of production. The
outline illustrates the anticipation of significant
challenges with low flow in the pipeline. The industry
delivered a 6 percent production decline curve. The
challenges of low flow might be faced in Alaska in the next
decade. She believed it unlikely that new projects will
deliver oil production in the next ten years.
Ms. King discussed Page 4: "Alaska's Decline Rate Highest
in US." She mentioned that a number of states successfully
mitigated and increased their oil production over the last
eight year period. She noted that Texas successfully
mitigated its production decline. Alaska declined more in
the last eight years than any other state.
Ms. King continued with Slide 5: "Alaska Lags Other Major
Oil States:" She noted the comparison between Texas and
Alaska.
2:24:37 PM
Representative Hawker referred to a comment made regarding
a lack of evidence that any Alaska producers moved
investment into the Lower 48. He asked if the tax situation
in Alaska affected the investment strategy for
ConocoPhillips. He wondered whether Alaska was in a
position to compete with shale developments.
Ms. King reflected on an example regarding Eagleford shale
from a recent analyst presentation. She stated that
ConocoPhillips invested $1.4 billion in Eagleford shale,
while Alaska remained flat at $900 million.
Representative Hawker asked what an analyst presentation
was. Ms. King responded that an analyst presentation
included an overview provided by ConocoPhillips regarding
investment criteria and performance.
Representative Wilson referenced Slide 5 and noticed
Alaska's decline throughout a variety of tax regimes. Ms.
King remarked that a different commercial structure was
necessary to "chase the oil" and highlighted Texas as an
example of success. She stated that the fiscal structure in
Alaska has been a deterrent to investment since 2005. She
stressed that ConocoPhillips believed that additional oil
potential exists on the North Slope, although the resource
is challenged.
Representative Neuman asked about the amount of dollars
invested in Alaska in 2003 to produce one million barrels
of oil compared to those invested currently to produce 650
thousand barrels. Ms. King replied that she would address
the question with several slides later in the presentation.
Vice-chair Fairclough requested discussion about Alaska's
recoverable oil. She recalled that 33 percent of
recoverable oil existed in a particular reservoir. She
wondered how Alaska could compete for investment dollars
under the current tax structure. Ms. King provided an
example related to Prudhoe Bay. The original oil estimate
on the field was thirty billion barrels of oil. The
industry accepted less than 100 percent recovery factors.
Recovery factors range from 20 to 40 percent. Recovery
increased by 1 percent in Prudhoe Bay, which amounted to
300 million barrels of oil. She cited 60 million barrels
for one additional percentage of recovery for the Kuparuk
field. The legacy fields through improved technology may be
profitable, yet the cost to the industry is greater.
2:32:05 PM
Ms. King moved on to Slide 6, "Why Isn't Alaska Booming at
$100/bbl?" She explained that the left side of the graph
represents Lower 48 oil production. The Lower 48 declined
from 4.7 million barrels of oil per day to 4.3 million
barrels of oil per day. Production increased substantially
to 4.8 million barrels of oil per day in 2008 with
increased oil prices.
Ms. King explained that the right side of the graph
represents Alaska. Alaska's production declined steadily,
but did not see the uptake noted in the Lower 48. The
analysis provided in the graphs reflects oil rig count,
omitting gas. The oil rig use in the Lower 48 increased
dramatically. The rig drilling on the North Slope, however,
remains flat.
Representative Gara understood that roads in the Lower 48
allow for the development of smaller pools of oil with a
greater number of small rigs. He asked if a greater use of
rigs always translates to greater quantities of oil
produced.
Ms. King responded that the different fiscal structure
available in the lower 48 allows for greater drilling
opportunities. She believed the influence combined the tax
structure and the overall cost to move North Slope oil to
the market. She highlighted the lack of increase in oil rig
activity despite the largest oil price cycles seen in the
industry. The activity occurring in Alaska retained the
flat line indicating rig production.
Representative Gara clarified that a greater number of oil
rigs might be employed to produce a small amount of oil in
an area where roads are abundant. Ms. King replied that
projects in the Lower 48 supported greater activity because
of the combination of the lower cost structure and better
fiscal structure.
Representative Guttenberg asked if the tax regime was the
only important factor in the flat line seen on the right
side of Slide 6. Ms. King responded no. She stated that the
objective of the graph was to provide a comparison of oil
rig activity in the Lower 48 versus Alaska.
2:38:59 PM
Representative Costello was more concerned with production
than rig activity. She wondered whether ConocoPhillips
would increase production in the event that HB 110 passed.
Ms. King could provide no guarantees regarding oil
production. Even if activity and investment are increased,
production cannot be guaranteed. She stated that the
passage of HB 110 may lead to mitigating production
decline.
Representative Costello wondered whether changes in the tax
structure would lead to a greater ability to compete. Ms.
King replied in the affirmative.
Representative Costello queried the marginal and effective
tax rates. She asked about the relationship between actual
and marginal tax rates. Ms. King would speak to the
question later in the presentation.
Co-Chair Stoltze asked for further elaboration of the "no
guarantee" remark made earlier by Ms. King. Ms. King
replied that "dry holes" are sometimes drilled, even with
the best of intentions. She stressed that the geologic
basin is strong in Alaska. She hoped that ConocoPhillips
would be the company to find additional oil in Alaska. She
stressed the importance of a good investment climate.
2:42:28 PM
Ms. King continued with Slide 7: "Is This the Future We
Want for Alaska." The Energy Information Administration
(EIA) provided the projections of Alaska's production over
the next 10 years. The graph compared Alaska to Lower 48
onshore and Lower 48 offshore. The EIA presented strong oil
production from Lower 48 onshore. The anticipated growth is
26 percent over the next decade. The Lower 48 offshore
would continue to grow production by another 44 percent
over the next decade. Alaska, however, is anticipated to
decline another 39 percent over the next decade.
Ms. King moved on to Slide 8: "ELF Generated Significant
Incremental Production." The Economic Limit Factor (ELF)
was the tax structure in place through 2006. She explained
that in 1989 the Department of Revenue (DOR) had a
production forecast illustrated with a grey line on the
graph. The green line represents the oil price. A number of
new developments occurred between 1989 and 2010 including
Midnight Sun, Polaris, Prudhoe Bay, Aurora, Borealis and
Orion. She highlighted the significance of the Alpine
field. While low production was anticipated as early as
1989, the combination of the tax policy, the good rocks,
and the investment levels provided by the industry led to
incremental production. Wells developed in 1989 now
comprise 2/3 to 3/4 of total production.
Ms. King discussed Slide 9: "North Slope Investment Under
ELF." The chart compared industry investment levels under
the ELF tax structure. The industry was investing an
average of $2.7 billion on an annual basis.
Representative Gara referred to DOR charts citing the
highest investment year on the North Slope as 2009 or 2010.
The data in the charts presented by DOR was different than
that provided by ConocoPhillips. He wondered why.
2:47:34 PM
Ms. King replied that different criteria for the presented
numbers such as a 2010 dollar basis and pure capital may
have been used. She added that the red dotted line on the
graph represents recent numbers for the purpose of
comparison.
Ms. King returned to her presentation with Slide 10:
"Alaska Not Competitive Marginal Government Take." She
explained that the study shown was performed for
ConocoPhillips by PFC energy. The graph illustrates
marginal government take at $100 barrel oil price. She
offered to provide an additional graph to the committee
illustrating total government take. Marginal government
take is analyzed by ConocoPhillips. The graph characterizes
a component of the fiscal structure.
Representative Hawker wondered who PFC Energy was. Ms. King
responded that PFC Energy was a consulting firm. She
believed that they were a reputable company that produced
quality work.
Representative Hawker had heard comments and testimony
indicating that marginal government take was an irrelevant
statistic. He wondered whether that was true. Ms. King
believed that it was clearly not an irrelevant statistic.
She noted that the information described an element of
Alaska's fiscal structure and was critical in
ConocoPhillips' investment decisions.
Representative Gara wondered about actual government take
and asked to see a chart similar to Slide 10 exemplifying
taxes paid rather than marginal government take.
2:52:58 PM
Ms. King responded that they did have the requested chart
prepared for average government take and they would provide
it to the committee. She assured that marginal government
take did affect ConocoPhillips.
Representative Gara requested data including actual tax
with last year's oil prices. Ms. King responded that they
would provide the information to the committee.
Ms. King discussed Slide 11: "Progressivity Removes
Upside." The red bars represent ConocoPhillips net income
and the blue bar represents the average oil price. The
company observed that if the oil price increased their
income would not increase in Alaska. ConocoPhillips paid
over $16 billion in taxes and royalties to generate $7.8
billion in net income. Incremental investment decisions are
thus affected. The net income has become desensitized to
oil price, as greater taxes are paid with increases in oil
prices.
Representative Doogan expressed disbelief regarding the
constant net income. He requested further information.
2:57:48 PM
Ms. King replied that the progressivity was so steep that
higher oil prices lead to increased taxes.
Representative Doogan understood that. However, the
company's take continued to increase and he did not
understand how it could stay constant. Ms. King assured
that the numbers presented were accurate.
Representative Costello wondered whether it was possible to
answer the question.
Representative Guttenberg asked if a point in the graph
exists where the company was earning less money. Ms. King
guessed that the confusion for Representative Doogan and
Representative Guttenberg might be benefitted by
understanding the progressivity feature. The progressivity
applies to everything. As the tax rate increases, the
effect is compounded. She mentioned the governor's proposed
bracketing component.
Vice-chair Fairclough remarked that the current plan
involved sweeping back and taxing all of the money instead
of the portion of the additional dollar.
3:01:17 PM
Ms. King discussed "Risk-Based Decision Making" on Slide
12. She informed that the slide was a generic example for
illustrative purposes. The slide presented an example of a
method used by ConocoPhillips. The concept of assessing
risk and uncertainty is conducted by most companies. She
highlighted that delays in Alaska are viewed differently as
they can cost the company an entire year of valuable time.
She noted the effect of progressivity illustrated on the
left side of the slide. She added that the cumulative
probability was illustrated on the right side of the slide.
With the progressive feature, the probability of losing
money on a project increases. One piece of the structure
included was capital credits.
Ms. King discussed Slide 13: "Progressivity Breaks
Risk/Reward Balance." The chart compares a $1 billion
investment in Alaska to the same investment in offshore
Alaska or Gulf of Mexico. For an offshore investment, as
oil price increases, the investor and government share also
increase. Using the same $1 billion investment made in
Alaska, subject to ACES tax structure, the percentage to
the state substantially increases in relationship to the
investors.
Ms. King discussed "Core Fields are Key to State
Production" on Slide 14. The core fields of Prudhoe Bay,
Kuparuk, and Alpine produce approximately 90 percent of
Alaska's oil. The core fields are forecasted to deliver
four billion barrels of oil production.
Ms. King detailed Slide 15: "Investment Reduces Production
Decline." She explained that specialists with
ConocoPhillips look for ways to glean additional oil from
the existing fields. The concept is that "big fields get
bigger." The Kuparuk satellites are generating
approximately 20-25 percent of Alaska's total production.
Subsequent investments from the original development
deliver substantial volumes. She stated that the Alpine
field yields 40 percent of production from satellites
developed subsequent to the original development. She noted
that the technology required to develop these satellite
fields was available through ConocoPhillips if the fiscal
structure was amenable.
Ms. King continued with Page 16 "HB 110 Improves Alaska
Investment Climate."
· Existing Units
o Bracketing Progressivity is critical component
o Moves Alaska toward a more balanced risk/reward
environment
o Incentivizes investment in core fields and
existing units
o Support longer term projects/ longer term
investment
· Improved Well Credits
o Incentivizes well related activity
o Increased drilling/workovers provide additional
short-term jobs
o Support language being clarified to include
workovers
· Administrative Improvements
o Audit period to 4 years - provides improved tax
payment predictability
o Interest - eliminates punitive rate for good
faith tax filings
o Monthly vs. annual progressivity - improves
alignment on cost and revenue calculations
· Effective Date
o COP believes effective dates should be
accelerated by 1 year.
· ConocoPhillips supports HB 110
Ms. King concluded with Slide 17: "Alaska's Oil Future is
at risk." She reiterated that bracketing progressivity was
a critical component of HB 110. She believed that the bill
would incentivize investment in core field and existing
units, which is critical in support of the longer term
projects needed to help offset the production decline.
Improved well credits were considered important to
ConocoPhillips. The administrative improvements in the
original version of the bill such as the audit period, the
interest rate, and the monthly versus annual progressivity
were viewed as positive. The timing was critical. She
commented that high oil prices generate revenue. Active rig
use has increased in the Lower 48, while remaining flat in
Alaska. Production in the Lower 48 continued to increase
while production forecasts in Alaska decline. The expected
future projection is down, while Lower 48 production is
expected to increase. She opined that HB 110 could provide
an important step in changing the picture.
3:10:16 PM
Representative Hawker wondered about the role of additional
front-end credits. He wondered whether increasing credits
that the state is offering the best way to improve
production. Ms. King believed that credits alone would not
lead to improved production, but the combination of
progressivity change and credits were important.
Representative Hawker asked about the difference between
well credits and front-end exploration credits. Ms. King
explained that the existing exploration credits vary
depending upon distance from existing infrastructure. The
governor's bill proposed that the same mechanism used in
the front-end exploration credits is given a 40 percent
well credit for the portion of the capital activity needed
for any well drilled on the North Slope. The purpose of the
well credit is to stimulate additional drilling activity.
Representative Costello referred to Slide 13. She believed
that the graph might present the answer to an earlier
question by Representative Doogan regarding industry
investment. She wondered if the chart exhibited the core
issue that the industry voiced with progressivity as
established by ACES. She understood why the idea might
prove counterintuitive to Representative Doogan. Ms. King
agreed and stated that the graph was used often to explain
the uncertainty with progressivity.
3:15:36 PM
Representative Wilson requested a similar graph
illustrating the potential outcome of HB 110. Ms. King
agreed to provide the requested data.
Vice-chair Fairclough informed that an additional question
by Representative Gara regarding slide 12 and 13 would be
asked.
Co-Chair Stoltze remarked that the requested information
provided by DOR would be distributed shortly.
3:17:31 PM
AT EASE
3:26:13 PM
RECONVENED
ED DUNCAN, PRESIDENT AND CHIEF OPERATING OFFICER, GREAT
BEAR PETROLEUM (via teleconference), introduced himself and
his colleague.
RYAN MOYNAGH, VICE PRESIDENT OF FINANCE AND CHIEF FINANCIAL
OFFICER, GREAT BEAR PETROLEUM (via teleconference),
discussed a PowerPoint presentation titled "Great Bear
Petroleum LLC, Presentation to the House Resources
Committee" dated February 18, 2011 (copy on file).
Mr. Moynagh highlighted the unprecedented high oil price.
He wished to propose a strategy to reverse the decline of
oil production in Alaska. He acknowledged that current oil
production in Alaska was one-quarter of that seen at its
peak. The combination of price and production has disguised
the problem. He expected large implications for the state
if the price of oil drops.
3:31:42 PM
Mr. Moynagh stated that the development of new technology
in the oil industry contributed to great change. The
numbers of opportunities in the oil and gas industry have
increased in the last few years. New emerging markets
opened. The issue then becomes one of which mammoth
resource will be developed to the exclusion of others. He
claimed that his company could not control prices, but
could control volumes. He stressed that Great Bear's
strategy could dramatically increase production levels in
Alaska. Great Bear was committed to invest and reinvest in
Alaska.
Mr. Moynagh discussed Slide 4: "Tough Fiscal Terms Suppress
Activity."
· The most important factor in exploration investment is
Prospectivity, or the likelihood of discovering oil
or gas in commercial quantities. The industry will
focus where the rocks are good.
· Effective conversation from prospectivity to
commercial production ultimately controls the terms
and the size of government revenue.
· Fiscal terms will influence the conversion efficiency
from prospectivity to commercial production
ultimately controlling government revenue.
3:35:15 PM
Mr. Moynagh stated that he did not wish to compare Alaska's
fiscal regime to others in the nation or the world. He
stated that his comments regarding HB 110 related directly
to the needs of Great Bear. He mentioned four key aspects
of HB 110.
· Progressivity
· Tax bracket
· Monthly versus annual computation of progressivity
· Tax credits
Mr. Moynagh opined that HB 110 clearly addressed the taxing
of oil production in Alaska. He detailed Slide 5:
"Recognition of Alaska as a Global Oil and Gas Producer has
Declined."
· The easy conventional oil has been found.
· Remaining large volume potential in unconventional
plays, e.g. heavy oil, shale oil & gas, CBM.
· Costs will continue to rise on perbarrel basis and
economic returns will decline due to
o Field sizes getting smaller
o Challenging operating environment
o Exploration for new play types becoming riskier
o Identified plays such as "shallow heavy oil" and
"oil and gas shale" are expensive
· The ability to deliver unconventional resources to
market rests primarily on commercial risk rather than
technical risk factors.
· Discovery and development of Alaska's remaining
potential would be significantly enhanced by
improvements in Alaska's fiscal terms such as those
terms in HB 110.
Mr. Moynagh added that any reduction in the production tax
would prove positive for the high cost of this
unconventional process.
3:39:19 PM
Mr. Moynagh stated that a combination of tax bracketing and
reduction of progressivity buffers producers from the
cyclicality of the business. The current tax system
prevents producers from benefitting from high oil prices.
The business is cyclical and upside options are necessary
for industry.
Mr. Moynagh discussed moving from monthly to annual
computation of the production tax. The annual computation
allows a company to model and foreword plan its operations.
With the monthly computation, the production tax is
calculated based on actual monthly prices. With an annual
computation, prices and costs are calculated on the same
basis, which provides a "smoothing effect" of the
calculation of the production tax, allowing better ability
to monitor risks.
Mr. Moynagh addressed tax credits. Great Bear endorsed the
application of tax credits. Tax credits entice and
encourage participants to reinvest. He stated that tax
credits ultimately increase production levels.
3:43:20 PM
Representative Wilson asked about Slide 8: "drill 250 wells
per year for 20 years starting 2013." She referred to a
quote stating "we have an aggressive program that supports
250 wills per year for 20 years starting 2013." She asked
if Great Bear would begin drilling in 2013 if HB 110 did
not pass.
Mr. Moynagh answered that the information provided was a
success case production profile. Great Bear must access the
capital markets to obtain the necessary finance to deliver
the production levels presented. A commercial case must be
demonstrated to investors. He believed that the proposals
put forth in HB 110 would have a dramatic impact on the
ability to secure the needed investment capital. Without HB
110, the prospects become more challenging.
Representative Wilson noted that the feedback from prior
presentations that the existing credits were working well
for the drilling of the wells and that the issues exist in
the production aspect rather. She wondered if the 2013 goal
was possible. She wondered if Great Bear possessed the
resources to move forward with the goal.
Mr. Moynagh stated no. The program outlined in 2013 is a
full development program. Great Bear's approximate budget
for 2013 is $2 billion. He mentioned a work program that
will be enacted later in the year. Discussions are ongoing
with a number of parties to refine the composition and the
necessary cost of the program.
3:48:10 PM
Representative Hawker acknowledged his own presence at the
House Resources Committee presentation. He mentioned Slide
9, "Great Bear Petroleum Potential Oil Production Profile."
The slide's graph illustrates production increases
predicted from 2012 through 2028. He asked if the graph
presents the argument that the state should not amend the
progressivity feature of the state's tax regime.
Mr. Moynagh clarified that the purpose of the slide was to
argue that changes in progressivity should be made. The
graph was intended to demonstrate the magnitude and
potential of Great Bear's project. The issue is not
exploration, but instead the ability to commercially
extract them. The graph demonstrates the impact that the
project could have on a state level if the commercial
environment was supportive.
Representative Hawker noted Great Bear's expressed
potential. He asked for clarification of status in Alaska
in terms of equipment and capital. He wondered whether the
capital was contingent on fiscal terms provided by the
state. Mr. Moynagh clarified that Great Bear was currently
demonstrating the viability of the plan to the investment
community. He stated that Great Bear would establish
permanent headquarters in Anchorage. The 2013 program is
contingent upon the significant capital of several billion
dollars raised from the financial markets. Alaska's fiscal
regime will impact access of the markets.
3:53:03 PM
Representative Gara referred to Slide 7, "High Bidder on
537,500 Acres in the 2010 North Slope Areawide Lease Sale."
He assumed that Great Bear anticipated prospects for
development that existed under current law rather than
under the guidelines of HB 110, which was not introduced at
the time that the prospects were initiated. Mr. Moynagh
responded that his company bid for the leases before the
proposed change in legislation. He mentioned his company's
aggressive financing strategy, which is a function of the
proposal of eventual legislative change. Three elements
provide an attractive outcome for all parties: technical,
operational and commercial. The technical and operational
elements of the strategy have been addressed, but the
legislative changes must occur to support an unconventional
operation within the state.
Representative Gara admitted that he may have misunderstood
Mr. Moynagh. He wondered whether the company intented to
invest $2 billion later in the year. Mr. Moynagh responded
that the investment was planned for the 2013 timeframe.
Vice-chair Fairclough referred to an article from Petroleum
News dated March 6, 2011 citing testimony regarding the
investment structure for the new company assembled. She
quoted the article "Great Bear is not looking for investors
or partners except for a possible share in three
dimensional seismic shooting next winter across the North
Slope." She felt that the testimony offered today differed
from that in the article. She requested clarification. Mr.
Duncan replied that the publication's comment was directed
toward an inquiry regarding Great Bear "shopping their
company for sale." The question was directed at significant
joint venture plans for Great Bear. His answer was the
quote stated.
Vice-chair Fairclough wondered whether Great Bear had
drilled a single well on the North Slope. Mr. Duncan
replied that Great Bear had not. He noted that the leases
were not awarded to his company.
Vice-chair Fairclough wondered if Alaska had not awarded
the lease, or payment for the lease was not received.
3:59:22 PM
Mr. Duncan replied that the state had not presented the
final award or request for payment. The company would make
the payment immediately following the state's award or
request for payment.
Vice-chair Fairclough thanked Mr. Duncan and Mr. Moynagh
for their testimony.
Vice-chair Fairclough asked whether the company had a
contract to access the pipeline for production. Mr. Duncan
replied that they did not.
4:00:57 PM
AT EASE
4:05:33 PM
RECONVENED
Representative Wilson requested information from the
Department of Natural Resources (DNR) regarding Great
Bear's lease. Co-Chair Stoltze responded that the
administration would address the inquiry.
4:06:29 PM
DALE PITTMAN, ALASKA PRODUCTION MANAGER, EXXON MOBIL
ALASKA, read from a letter dated March 23, 2011 (copy on
file).
For the record, my name is Dale Pittman. I am the
Alaska Production Manager for ExxonMobil, based in
Anchorage. I want to thank the committee for the
opportunity to express ExxonMobil's views regarding
the Committee Substitute to HB 110, the Governor's
proposed amendments to Alaska's oil and gas production
tax or ACES.
Let me start by saying that Alaska has been and
continued to be an important component of ExxonMobil's
world-wide investment portfolio. We have had a
presence in Alaska for over 50 years and have been a
key player in Alaska's oil industry development,
investing over $12 billion dollars to date. We are the
operator of Point Thomson, hold the largest working
interest at Prudhoe Bay (36.4%) and the largest lease
holder of discovered Alaska gas resources. We expect
to be involved in Alaska for many years to come and
will continue to evaluate potential development
opportunities.
At the outset, so our position is clear, let me say
that ExxonMobil supports the presentation you heard
today from the Alaska Oil and Gas Association. I do
not intend to repeat the thorough technical comments
from that testimony.
As for our specific comments, I would like to state,
consistent with our prior testimony during the
hearings on both the PPT and ACES, and on the proposed
tax reform legislation last session, that ExxonMobil
believes the changes made to Alaska's oil and gas
production tax since 2005 have had a negative impact
on business activity in Alaska and Alaska's overall
investment climate. Alaska's current production taxes
are simply too high to stimulate the additional
investment required to fully develop Alaska's oil and
gas resources.
It is for this reason ExxonMobil is pleased to see
that the Administration recognizes the need for
material change to Alaska's current oil and gas
production tax system. We are encouraged by Governor
Parnell's desire to see increased investments and
further oil and gas development. We support his
efforts to reform ACES and believe CS HB 110 is a good
first step towards what we hope is a thorough review
and revision of Alaska's production tax regime to
allow the state to fully develop its vast resources.
ExxonMobil supports CS HB 110, and if enacted in its
current form, we would expect investment activity in
Alaska to increase, resulting in a corresponding
benefit of more work for Alaskans. With passage of the
Governor's proposed changes to ACES in its current
form, we anticipate that industry will reexamine the
inventory of Alaska North Slope opportunities and move
forward with those projects that are made competitive
by the reduced production tax burden. For example, the
proposed enhanced in-field drilling tax credits and
reduction to the progressivity tax would allow us to
consider additional drilling and well work activity at
the Prudhoe Bay Unit. This kind of developmental
drilling in the core field on the North Slope is
critical to Alaska's future, particularly over the
next five to ten years. Production decline must be
stemmed until new developments can be discovered,
progressed and brought on production.
While the enhanced in-field drilling tax credits and
reduction to the progressivity tax are much needed
revisions to ACES, we would urge earlier effective
dates to accelerate the resulting ramp up in
investment activity, Alaskan jobs and future state
revenues.
However, merely providing additional tax credits while
keeping the overall effective rate of the ACES tax too
high is not the long term solution to improving
Alaska's investment climate. While the system of tax
credits under ACES does provide significant incentives
for investing in capital assets to explore for,
develop, and produce more oil and gas, the deduction
of lease expenditures or the allowance of a tax credit
is simply part of the calculation about how much tax a
producer owes. The bottom line is that, between PPT
and ACES, the industry's production tax obligations
have more than tripled over the past five years.
ExxonMobil supports the Governor's proposal as an
important first step, but additional reform of ACES is
needed.
Additional reforms are needed to improve Alaska's
overall investment climate over the long term.
Evaluation of a further reduction in the production
tax rates should also be considered. Even with the
Governor's proposal, Alaska's production taxes are
high in comparison to other investment alternatives,
making Alaska one of the most expensive states in
which the oil and gas industry does business.
As you have heard in prior testimony or may have read
in recent newspaper articles, spending on the North
Slope has remained relatively flat since the enactment
of ACES. But what needs to be clarified is that the
majority of the investment has been made for
maintenance or production enhancement efforts for
existing operations, not for new exploration and
development opportunities that would bring on new
production. It is also worth noting that costs for
this investment activity have gone up, so while some
may argue there has been additional investment, it
doesn't necessarily translate into more activity. For
example costs to drill a well have increased over the
years, so higher spend on drilling does not
necessarily mean more wells are being drilled.
Alaska is currently producing approximately 600,000
barrels of oil per day from the North Slope. Industry
currently invests more than $1 billion per year just
to maintain current North Slope oil production decline
at six to seven percent. Without that continued
investment, the annual production decline would be in
the range of 12 to 15 percent annually.
The Alaska Department of Revenue is forecasting the
production from Alaska's currently producing fields to
decline by 60,000 barrels of oil per day this year. It
goes on to predict that current field production will
decline to half of its current 600,000 barrels of oil
per day rate in just seven years, as decline of over
300,000 barrels of oil per day. Allow me to put the
challenge of stemming that decline in perspective.
Alaska's newest development, the Nikaitchuq field,
began production early this year. The field has been
more than six years in planning, development and
construction and carries a total cost of over $2
billion. The field is forecasted to reach peak
production of about 25,000 barrels per day four years
from now. So using this as an example, it would take
the startup of two to three Nikaitchuq equivalent
fields every year in perpetuity just to hold North
Slope production at 600,000 barrels of oil per day.
Pioneer's Oooguruk field is another example. It would
take three to four fields the size of Oooguruk every
year to match the forecasted North Slope production
decline.
Clearly, the current outlook for development falls far
short, and new fields are urgently needed to stem this
decline.
Such development will only occur if there is an
improvement in the Alaska investment climate. Alaska
production tax policy is key to fostering a favorable
investment climate.
Alaska's overall high production tax rates discourage
investment. Companies like ExxonMobil are willing to
accept the risks of long-term, capital intensive
investments when there is a stable and competitive tax
structure that encourages investment and ensures a
corresponding opportunity for upside potential. When
you take away the upside potential through a high
progressivity tax you reduce the overall
attractiveness of those capital intensive investments,
which in turn could lead to reduced investment and
resource recovery and, in the long-term, diminished
state revenues. Let me reemphasize this point, while
higher taxes may bring additional revenues in the
short-term, it's reasonable to anticipate that any
reduction in investment will decrease production and
significantly reduce those revenues in the longer
term.
As many of you heard me testify last year, time in the
oil and gas industry is not measured in business
cycles. It is measured in decades and in generations.
Today's production rates are the product of government
policies, technical work, and investment decisions
made years ago. Increasing production rates in the
decades to come will be a direct result from sound
policies, decisions, and commitments that are made
today. The Governor's proposed ACES changes are
clearly a significant step in the right direction
towards much needed reform of Alaska's high oil and
gas production tax system.
Alaska needs a long-term resource development policy
that will encourage increasing investment to maximize
its resource potential while receiving a fair share of
the resource revenues; addressing its high level of
government take is a start. The reform of ACES needs
to result in a competitive, stable and predictable
fiscal environment that will encourage investment,
recognize that the remaining resources are
economically challenged, including both new fields and
resource development opportunities in existing fields.
The primary driver of Alaska's long-term resource
development policy should be to maximize the
development of its resource base, not just maximize
short-term state revenues.
Let me conclude my testimony by reiterate that while
we hope to continue to pursue investment opportunities
in Alaska in the future, the resource and cost
structure in Alaska is becoming increasingly
challenging. Governor Parnell's proposed changes to
ACES are a good start to needed fiscal reform- but
more is still needed.
ExxonMobil looks forward to working with the
Administration, the legislators, industry and the
people of Alaska in the future pursuit and development
of Alaska's oil and gas resources.
4:14:33 PM
Representative Gara requested an estimate number of
exploration wells that Exxon Mobile drilled in the past 10
years excluding Point Thompson. Mr. Pittman replied that
the corporation had not drilled any exploration wells since
1992. The Alaska Oil and Gas Conservation Commission
(AOGCC) did classify two new Point Thompson development
wells as exploration wells, due to the lack of a better
category.
Representative Gara wondered why reducing taxes would lead
ExxonMobil to increase exploration wells when they had not
drilled an exploration well since 1992, when the Economic
Limit Factor (ELF) system was in place. He asked why a
reduction in taxes would now lead to exploration. Mr.
Pittman could not guarantee that the change in tax
structure would lead to exploration wells but he believed
that the change would lead to increased investment. A
constant evaluation and assessment of Alaska's exploration
opportunities remained a part of the global ExxonMobil
portfolio. Although Alaska presents certain challenges,
ExxonMobil is active in arctic areas and will remain poised
to return to Alaska given the right balance of
prospectivity, fiscal terms and regulatory policies.
Representative Gara stated that other major oil companies
share information about their Alaska profits.
ConocoPhillips and British Petroleum have taken in excess
of $15 billion in Alaska profits. He asked to know the
Alaska profits received by ExxonMobil over the last four
years.
Mr. Pittman responded that as a matter of corporate
practice, the company did not divulge profits or earnings.
He did not know what the profits were. He replied that the
company did supply the information to the federal
government and the Department of Revenue (DOR).
4:20:31 PM
Representative Guttenberg referred to comments in Mr.
Pittman's testimony regarding fiscal regime and stability.
He understood the importance of fiscal stability and
wondered how the tax regime and stability worked together
for ExxonMobil. Mr. Pittman replied that ExxonMobil
observed 30 year investments with an expectation of
competitiveness and stability of projects.
Representative Guttenberg wondered if the sanctioning of a
project included the commitment of resources to the
project. He wondered about deeming a project "competative."
Mr. Pittman responded that a better word would be "viable"
as opposed to "competitive." He stated that multibillion
dollar decisions are made on 30 year projects. The
uncertainties that are encountered are sometimes fiscal in
their nature.
Representative Wilson discussed the difference between
exploration wells and production. She wondered whether
there was a method to determine the oil's location without
the need to drill another well. Mr. Pittman replied that
multiple resources such as heavy oil, viscous oil and
frozen gas continue to exist in both Prudhoe Bay and
Kuparuk fields. Today those resources are not economically
viable. The responsibilities of ExxonMobil include
technology, development and operating cost reductions. He
claimed that current drilling practices were unavailable
ten years ago. He expressed amazement about the technology
advances made and the skills built in drilling multilateral
wells.
Representative Wilson mentioned the "straight tax" employed
in states like Texas and North Dakota. She wondered if a
straight tax might be considered for Alaska.
4:26:31 PM
Mr. Pittman opined that simple was better. The challenge
was how to attract as many producers and explorers to
Alaska as possible. Large and small producers look for
different benefits in a tax regime.
Representative Doogan reflected on Mr. Pittman's statement
that "proposed changes provide a good start but that more
was still needed." He asked for elaboration of "more." Mr.
Pittman replied that over the long term it was important to
ensure that projects were economically viable for the
future. Many resources in Alaska will be increasingly
difficult to produce economically. Over the long term,
methods must be sought to increase economic viability due
to the necessary cost of technology advances. ExxonMobil
requires a balance between the state's take to ensure
future viability. The envelope of viable resources in
Alaska requires expansion.
Representative Doogan ascertained that the price of oil
would increase and as the less accessible oil decreases,
the more challenged resource required the state to take
less of the value of the oil. Mr. Pittman suggested that
the state look to the future.
Vice-chair Fairclough asked how ExxonMobil would proceed if
HB 110 passed and the legislature accepted bracketing as a
new method of reducing industry taxes. Mr. Pittman replied
that when he looked at major projects 8 to 10 years out,
known fields and known resources are accessed first.
Vice-chair Fairclough discussed yearly taxation calculation
in the governor's bill. She wondered whether Mr. Pittman
could speak to their opinion on the preferable timing of
calculation. Mr. Pittman replied that tax calculation
includes every dollar of revenue and a yearly taxation
calculation would provide an average and remove the spikes
that result from changes in oil prices. He noted that
quarterly or biannually would also be preferable to monthly
calculations.
4:32:48 PM
Vice-chair Fairclough expressed concern that waiting one
year to average the price might prove difficult for state
revenue forecasts. She thought that a quarterly or biannual
calculation would provide increased certainty when
predicting the future year's budget cycle. She understood
from a producer's auditing that yearly calculation would be
simpler than monthly. Mr. Pittman added that the spikes
prove punitive to the company leading to the suggestion of
a yearly calculation.
Co-Chair Stoltze recalled claims that the U.S. tax code was
the primary agent of influence in behavior both social and
economic. He wondered whether Exxon was immune to the agent
of tax code influence. Mr. Pittman replied that ExxonMobil
observed the appropriate federal tax codes and paid
billions of dollars annually.
Co-Chair Stoltze discussed the difference between U.S. tax
codes and the Alaska tax codes. He wondered how the Alaska
tax code impacted Exxon's behavior. Mr. Pittman replied
that the Alaska tax code was observed as part of the
company's investment decision.
Representative Gara stated that ConocoPhillips attempted to
access National Petroleum Reserve Alaska (NPRA) under the
ACES tax structure. He spoke about other companies who were
willing to risk exploration despite the various tax
structures available in Alaska. He wondered why other
companies were willing to explore areas in Alaska while
ExxonMobil was not. Mr. Pittman did not know, but he
offered that ExxonMobil had not operated in the North
Slope. He added that the event in 1989 led the company to
be cautious. He stated that the company would move forward
with Point Thompson with or without tax changes.
4:38:10 PM
Representative Gara hoped that ExxonMobil would remain
serious about the pipeline. He pointed out the lack of
exploration in the past. He wondered if ExxonMobil would be
hard pressed to commit to exploration even with the passage
of the bill. Mr. Pittman affirmed. He stated that
ExxonMobil had a business model focused on large
accumulation. He spoke of the challenge of balancing a
large accumulation with the uncertainties of operating and
development costs.
Representative Guttenberg referred to Mr. Pittman's comment
"minor pause" in 1989. He discussed that oil companies
might not change their behavior in the event that HB 110
passed. He asked if oil companies might consider leaving
well enough alone, as the profit is so great even without
the passage of HB 110. Mr. Pittman did not think so. He
remarked that Exxon Mobile remained bullish in Alaska and
continues to invest in viable projects, but the company
could offer no guarantees.
Representative Costello discussed her attendance at a
presentation featuring entities that were hopeful about the
prospects in Alaska. She mentioned geologist's testimony
citing that Alaska contains a world class resource. The
legacy companies provide a much different story, one of
lack and turmoil. The tax credits work to incentivize a
particular behavior. She asked if the tax credits in Alaska
truly incentivize production.
4:43:16 PM
Mr. Pittman asked if Representative Costello was referring
to exploration or development tax credits. Representative
Costello listed the available credits. Mr. Pittman replied
that the credits absolutely help incentivize expansion of
infrastructure. He explained that two-thirds of development
was for infrastructure alone. He believed that Alaska would
eventually require methods such as building roads to help
industry access the areas open to exploration.
Representative Costello pointed out the proposed fact that
4.5 billion barrels of oil in the ground. She wondered if
the lack of exploration was the result of current awareness
of the location of the oil reserves. Mr. Pittman replied
that Prudhoe Bay was a well known field and drilling there
would be classified as "appraisal." He noted that true
exploration required a hint as to the presence of oil
because of the rocks available.
Representative Costello asked about marginal tax rate and
wondered whether it was important in making decisions on
production investment. Mr. Pittman replied that the
importance of the marginal tax rate varies from company to
company. The effective tax rate provides important
information.
Vice-chair Fairclough asked about cost recovery and the
company's business model. She wondered about the investment
opportunity time frame and how ExxonMobil captured costs
for return on investment using the 30 year model.
Mr. Pittman responded that 30 year models comprise
significant investments. Investments are viewed in a
variety of time frames.
Vice-chair Fairclough wondered whether costs incurred by
ExxonMobil were allocated to a project or a geographic
unit. She wondered about the corporation's method of cost
calculation. Mr. Pittman replied that the rules varied
across the state and the globe in terms of cost
calculation. He admitted that there was no simple answer to
the question.
Vice-chair Fairclough alluded that the legacy fields were
taking the "gravy" on the top. She wondered whether the
company was accessing "gravy" or recovering costs from
exploration or investment over a longer period of time. She
wondered if the costs were ring-fenced or calculated based
on an investment in cost incurred in a geographic or
unitized lease space. Mr. Pittman replied that ExxonMobil
observed the life of the investment within the same
framework required by regulators.
4:50:22 PM
AT EASE
4:52:06 PM
RECOVENED
MARK LANDT, EXECUTIVE VICE PRESIDENT, RENAISSANCE ALASKA,
read from a statement to the House Finance Committee, dated
March 23, 2011 (copy on file).
Representative Stoltze, members of the committee,
thank-you for the opportunity to speak with you today
on House Bill 110.
Firstly, let me introduce myself and Renaissance
Alaska, LLC (Renaissance). My name is Mark Landt and I
am the Executive Vice President, Land and
Administration for Renaissance, which is headquartered
in Houston, Texas. Renaissance is the Umiat Oil Field
on the North Slope.
Since its formation, Renaissance has acquired BLM and
State oil and gas leases on 19,358 acres located on
the Umiat Oil Field located in the National Petroleum
Reserve-Alaska (NPRA) and the Gubik Gas Field on the
North Slope, Alaska.
Since we last testified on Senate Bill 309, the State
of Alaska has made significant progress in providing
the incentives necessary to encourage drilling and
development in the Cook Inlet, Alaska. Specifically
the Special Credits for drilling the first three wells
drilled to a Pre-Tertiary prospect from a Jack-up
drilling rig and the repeal of the future spend
requirements to monetize the tax credits provided in
SB 309 and the additional 20 percent tax credit for
all drilling in the Cook Inlet basin under HB 280. The
combined tax credits and being exempt from production
tax in ACES, makes the fiscal environment in the Cook
Inlet one of the most competitive in the world.
The State of Alaska has demonstrated tremendous
leadership and acted decisively to revitalize oil and
gas exploration and development activities in the Cook
Inlet. Similar leadership and progressive action is
required to revitalize oil and gas through-put for
TAPS continues to fall and now stands below initial
estimates regarding the economic life of the line.
Alaska will increasingly depend on the discovery and
the development of smaller fields, technically
challenged resources and known reserves remote from
existing infrastructure. This testimony is to address
the significant challenges we see for the development
of the North Slope's extensive, untapped oil and gas
resources and specifically the undeveloped reserves
located at the Umiat oil field.
The Umiat oil field was discovered in the late 1940s
by the U.S. Navy in search of new sources of oil after
World War II. It remains undeveloped to this day in
spite of delineation by 12 legacy wells; the shallow
depth of its consolidated, productive reservoirs;
sweet, light 37
billion barrels of original oil in-place. To this
point, remoteness (92 miles from TAPS), part of the
reservoir in permafrost, and low reservoir energy have
been the main development challenges. All of these
challenges have been addressed through modern
technological advancements such as multi-lateral
horizontal drilling, electric submersible pumps, and
cold gas injection for pressure maintenance to bring
the Umiat development closer to fruition. Remoteness
given the arctic environment is still a key challenge.
Renaissance, through Renaissance Umiat, LLC, controls
the undeveloped Umiat oil field and a portion of the
undeveloped Gubik gas field 12 miles to the east-
northeast. Since acquiring the acreage in 2006 and
2007, Renaissance has de-risked the project through an
86 square mile 3-D seismic survey acquired in 2008 and
extensive geoscience and development cost studies.
Renaissance has also focused on the plan of
development and contracted third parties, including
NANAWorleyParsons, Schlumberger, ASRC, Cardno
(previously Entrix) and Umiaq (subsidiary of UIC) on
pipeline route and cost, facility layout and costs,
horizontal (lateral) development techniques, and
obtained an independent reserve report from Ryder
Scott and Associates (one of the top oil and gas
reservoir engineering firms in the world). This report
has estimated 250 million barrels of recoverable oil
from the shallow zones at Umiat with peak field
production of approximately 50 MBOPD. In addition, the
University of Alaska at Fairbanks has a DOE grant to,
among other things; confirm cold gas injection as the
preferred pressure maintenance mechanism.
One of the development considerations is the ability
to bury the pipeline in the shoulder of the road to
lower the pipeline costs and to have less of a visual
impact to the environment. Since the oil is being
produced cold (28-32 degrees F) and the gravity is 37
degrees, this option to move the oil exists with no
risk of melting the permafrost. The oil would be
heated to pipeline specs at the TAPS connection.
The Umiat oil field is unique. There is no analogy in
the world of light sweet oil being produced at these
shallow depths with a portion of the reservoir in
permafrost. The lack of analogy and distance from
infrastructure has made this project and the multiple
winter seasons required to develop the field. Although
Renaissance feels it has addressed the key technical
concerns, the distance from infrastructure is still a
major risk factor. Your support of "Roads to
Resources" and specifically the Environmental Impact
Statement being prepared by the Department of
Transportation and Public Facilities for the
transportation corridor between Umiat and TAPS is
going a long way to reduce this risk. Current
development cost is estimated to be $1.3 billion
dollars and further technical studies are underway to
finalize the Plan of Development prior to raising the
funding necessary for project development. Renaissance
has spent in excess of $43MM on the Umiat project to
date.
Although Renaissance is solely focused at Umiat, we
must compete for capital in the international
financial markets. We strongly support the proposed
amendments to ACES to increase the tax credits and
reduce the progressivity factor to make Alaska more
competitve as an oil producing state.
4:58:35 PM
Representative Wilson queried the location of Renaissance's
wells. Mr. Landt replied that the company's only project
was the Renaissance Umait Oil Field. Representative Wilson
asked to know the company's proposed start-up date. Mr.
Landt replied that his company could commence construction
in 2013.
Vice-chair Fairclough wondered about an exact dollar amount
that the company sought in tax credits. Mr. Landt explained
that the project existed over 25 miles from an existing
unit at Umiat and would be entitled to 55 percent, 65
percent with the governor's proposal.
Vice-chair Fairclough wondered whether there was a dollar
amount that would incentivize the proposal. Mr. Landt
stated that Renaissance was located over 25 miles from an
existing unit at Umiat, which allowed qualification for the
30 percent exploration credit. The governor's proposal
would increase the company's tax credits from 55 percent to
65 percent. Vice-chair Fairclough asked again for a dollar
amount of tax credit value necessary to incentivize the
project. Mr. Landt replied that the total development costs
are $1.3 billion, but he required additional time to
calculate the exact amount. He offered to provide an answer
to the committee.
Co-Chair Thomas wondered whether any fields existed in
between the Umiat field and the existing unit. Mr. Landt
replied that exploration occurred nearby, but the results
have yet to be released. He knew of a significant amount of
gas reserves in the vicinity.
Representative Hawker retained a personal understanding of
the challenges in the Umiat area. He sincerely respected
the effort and commitment that Renaissance put forth in
investing in the area. Mr. Landt thanked Representative
Hawker.
5:03:15 PM
AT EASE
5:03:51 PM
RECONVENED
JOE MICHEL, STAFF TO REPRESENTATIVE BILL STOLTZE, discussed
the following day's schedule.
Vice-chair Fairclough wondered whether there would be a
second opportunity for the public to testify. Mr. Michel
responded that public testimony was available on Friday
from 3 pm to 6 pm.
Vice-chair Fairclough thanked all of the presenters for
taking time to testify. She thanked the co-chairs for
organizing the testifiers.
HB 110 was HEARD and HELD in committee for further
consideration.
5:09:22 PM
ADJOURNMENT
The meeting was adjourned at 5:09 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| ConocoPhillips HB110 House Finance.03.23.2011.pdf |
HFIN 3/23/2011 1:30:00 PM |
HB 110 |
| Great_Bear_HB_110_Presentation_Juneau_Feb_18_2011[1].pdf |
HFIN 3/23/2011 1:30:00 PM |
HB 110 |
| HB110 Pioneer Testimony032311.pdf |
HFIN 3/23/2011 1:30:00 PM |
HB 110 |
| HB110 Exxon PittmanHFIN.03.23.2011.pdf |
HFIN 3/23/2011 1:30:00 PM |
HB 110 |
| HB110 Ultra Star HFIN032311.pdf |
HFIN 3/23/2011 1:30:00 PM |
HB 110 |
| HB110 Apache Testimony 032311.pdf |
HFIN 3/23/2011 1:30:00 PM |
HB 110 |
| HB110 Marathon HFIN032311.pdf |
HFIN 3/23/2011 1:30:00 PM |
HB 110 |
| Eni HB110 Testimony Ltr.pdf |
HFIN 3/23/2011 1:30:00 PM |
HB 110 |
| HB110 Statoil HFIN032311.pdf |
HFIN 3/23/2011 1:30:00 PM |
HB 110 |
| Renaissance HB110 Testimony Final.pdf |
HFIN 3/23/2011 1:30:00 PM |
HB 110 |
| Conoco Phillips Reponses to Questions HFIN.pdf |
HFIN 3/23/2011 1:30:00 PM |
HB 110 |