Legislature(2013 - 2014)HOUSE FINANCE 519
04/09/2013 09:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| HB63 | |
| HB76 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
| + | SB 18 | TELECONFERENCED | |
| + | SB 7 | TELECONFERENCED | |
| + | SB 57 | TELECONFERENCED | |
| *+ | HR 8 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 76 | TELECONFERENCED | |
| += | HB 63 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
April 9, 2013
9:01 a.m.
9:01:20 AM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 9:01 a.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative Lindsey Holmes
Representative Scott Kawasaki, Alternate
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
Representative David Guttenberg
ALSO PRESENT
Bill Armstrong, Owner and President, Armstrong Oil and Gas;
Kara Moriarty, Alaska Oil and Gas Association (AOGA); Casey
Sullivan, Public Affairs Director, Pioneer Natural
Resources; Cecil Elliot, Staff, Representative Mike Hawker;
Daniel George, Staff, Representative Bill Stoltze; Diane
Blumer, Commissioner, Department of Labor and Workforce
Development; Paul Dick, Director, Employment Security
Division, Department of Labor and Workforce Development;
Brynn Keith, Acting Deputy Commissioner, Department of
Labor and Workforce Development.
PRESENT VIA TELECONFERENCE
J. Patrick Foley, Land and External Affairs Manager,
Incoming President, Pioneer Natural Resources, Alaska; Ken
Thompson, Brooks Range Petroleum, Anchorage.
SUMMARY
HB 63 EXTEND BAR ASS'N BOARD OF GOVERNORS
CSHB 63(FIN) was REPORTED out of committee with a
"do pass" recommendation and with one zero fiscal
note from the Department of Administration and
with an accompanying letter of intent from the
House Judiciary Committee.
CSHB 76 (FIN)
UNEMPLOYMENT; ELEC. FILING OF LABOR INFO
CSHB 76(FIN) was REPORTED out of committee as
amended with a "do pass" recommendation and with
one new fiscal impact note from the Department of
Labor and Workforce Development and one new zero
fiscal note from the Department of Labor and
Workforce Development.
HR 8 TASK FORCE ON SUSTAINABLE EDUCATION
HR 8 was SCHEDULED but not HEARD.
CSSB 7 (FIN)
CORPORATE INCOME TAX
CSSB 7 (FIN) was SCHEDULED but not HEARD.
CSSB 18 (FIN) am
BUDGET: CAPITAL
SB 18 (FIN) was SCHEDULED but not HEARD.
CSSB 21 (FIN) am(efd fld)
OIL AND GAS PRODUCTION TAX
CSSB 21 (FIN) am(efd fld) was HEARD and HELD in
committee for further consideration.
CSSB 57 (FIN)
LITERACY, PUPIL TRANSP, TEACHER NOTICES
CSSB 57 (FIN) was SCHEDULED but not HEARD.
CS FOR SENATE BILL NO. 21(FIN) am(efd fld)
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
providing a tax credit against the corporation income
tax for qualified oil and gas service industry
expenditures; relating to the oil and gas production
tax rate; relating to gas used in the state; relating
to monthly installment payments of the oil and gas
production tax; relating to oil and gas production tax
credits for certain losses and expenditures; relating
to oil and gas production tax credit certificates;
relating to nontransferable tax credits based on
production; relating to the oil and gas tax credit
fund; relating to annual statements by producers and
explorers; establishing the Oil and Gas
Competitiveness Review Board; and making conforming
amendments."
9:01:38 AM
Co-Chair Stoltze noted that the current meeting's
testifiers were smaller companies than the oil and gas
producers that the committee had talked to the prior day.
He pointed out that some companies had been unable to
attend the meeting, but had sent in letters that would be
distributed to members and included in the record.
BILL ARMSTRONG, OWNER AND PRESIDENT, ARMSTRONG OIL AND GAS,
discussed the North Slope of Alaska. He stated that he was
in big support of the intent of SB 21 and that it
represented a very courageous move to tackle a politically
hot tax bill. He stated that Armstrong Oil and Gas's
activity in Alaska was unique and that he had operated in
the state for 12 years; most of the company's time was
dedicated to its efforts in Alaska. He shared that the
first independent field on the North Slope, which was the
Oooguruk field, had been thought up and dreamed up in his
office; furthermore, his company had brought Pioneer
Natural Resources to the table to develop the field. He
pointed out that second independent development on the
North Slope also originated from Armstrong Oil and Gas's
office in Denver; the company had conducted all the
geological and geophysical engineering work and had brought
in Eni Petroleum to operate the field.
Mr. Armstrong related that Armstrong Oil and Gas, along
another group of partners, were the operators that were
developing a gas field on the Cook Inlet; the field was now
the sixth largest in the inlet and was supplying gas to
South-Central Alaska. He believed that Armstrong Oil and
Gas was the largest lease holder on the North Slope that
was outside of the legacy fields. He related that his
company was in an aggressive "wildcat" drilling program
with a Spanish company, Repsol, which had been brought to
the table on some of its ideas; the program had drilled
$250 million worth of wells on the North Slope the prior
year and would drill another $250 million worth of wells
this year.
9:07:38 AM
Co-Chair Stoltze requested a description of Repsol and its
dynamics. Mr. Armstrong replied that Repsol was a semi-
major out of Madrid, Spain and was the largest employer in
that country. He stated that Repsol was not quite as big as
ConocoPhillips, but was a very large, multi-billion dollar
company; additionally, the company was very well respected
globally and was arguably one of the best exploration
companies in the world.
Mr. Armstrong believed that as a private company, he had
spent more money in Alaska than possibly any other
individual in the history of the oil and gas industry in
the state. He explained that he did not work for a big
company, did not have stock options, and did not receive
promotions and that costs for his company in Alaska came
out of his wallet. He shared that Armstrong Oil and Gas was
a great oil finding company and conducted the hard work
regarding finding new drill locations; the company
conducted all the geological and geophysical work and ran
down all the dead ends that typically did not work. He
relayed that Armstrong Oil and Gas drilled a lot of dry
holes, which was very disappointing; the company did all
the hard work and then managed risk by bringing in larger
companies. He expounded that Pioneer Petroleum, Eni
Petroleum, and Repsol were examples of the larger companies
that Armstrong Oil and Gas had brought to Alaska.
Mr. Armstrong shared that he was always pitching Alaska to
other companies and that he had always believed in "putting
your money where your mouth is"; therefore, he had put a
lot of money into Alaska because he was a "massive"
believer in the potential of the state. He related that
Alaska had fantastic resources and that he was a "walking,
talking, chamber of commerce for the State of Alaska." He
spent time talking to bigger oil and gas companies and knew
what they said about the pitfalls, problems, assets, etc.
of the Alaska; these companies said that Alaska had
problems. He related that the bigger oil and gas companies
knew about the bad weather in Alaska, understood that the
infrastructure was controlled by ConocoPhillips and British
Petroleum (BP), acknowledged the tough environmental
regulations, and recognized that the permitting was slow;
however, most importantly, these companies thought that
Alaska's Clear and Equitable Share (ACES) tax law made
Alaska a non-player for them as an investment.
Mr. Armstrong stated that the major oil and gas companies
thought that ACES was too confiscatory on the high end
regarding prices and that when they had an option to go
other places, they did so. He shared that some of these
major companies questioned why he was in Alaska and stated
that his response was that laws can be changed. He
explained that the major companies' issues with Alaska were
all man-made and were above ground; facilities access and
permitting issues could be solved and tax law could be
changed. He related that you could find more resources in
Alaska by mistake than you could find on purpose in other
places.
9:12:08 AM
Mr. Armstrong related that he originally prepared a
PowerPoint presentation, but that it would have been very
similar to the presentations of AOGA, Exxon Mobile, Pioneer
Natural Resources, etc.; therefore, he had decided to not
present the PowerPoint. He pointed out that the only number
that the legislature needed to focus on was the number 10,
which was the number of rigs that were actively drilling in
Alaska currently. He explained that a rig count included
rigs that were actually drilling in a certain region and
offered that the count had always been the easiest,
simplest, and cleanest way to measure the health of an oil
industry in a particular region. He shared that Texas
currently had over 820 rigs drilling. North Dakota
currently had 200 active rigs and Oklahoma likewise had
200. He opined that the number of active drilling rigs in
Alaska compared to active rigs in some of the Lower-48
states was "pathetic" and "ridiculous." He offered that
people thought of great fishing, good scenery, big country,
and big oil when they thought of Alaska, but that the state
was an "afterthought" currently regarding oil and gas
because no one was coming here to invest; furthermore, the
committee should consider the reason for the lack of
investment currently. He pointed out that the legislature
had as much control over what happened in the state as
anyone and that it needed to question why people were
leaving the state and not arriving droves; the answer was
the tax laws in the state. He offered that Alaska's tax
regime was not the only problem, but it was the foremost.
9:14:58 AM
Mr. Armstrong believed that SB 21 was a "massive" move in
the right direction; it was not perfect, but was much
better than ACES. He spoke to the current version of the
bill, which was HCS CSSB21 (RES) and related that the 35
percent base tax rate, the loss carry forward, the gross
revenue exclusion (GRE), the $5 per barrel (bbl) credit for
explorers, and the small producer credit that were in the
current version had hit a very nice sweet spot. He stated
that the 35 percent base tax rate was higher than the
majors wished to see, but that it was a big improvement
over the progressivity problem that was associated with
ACES. He shared that the GRE, the $5 per bbl credit, and
the small producer credit opened the door for areas outside
of the legacy fields, which was where he thought the future
of Alaska's oil and gas industry was. He reported that the
boom occurring in the Lower-48 was changing the dynamics of
the world's oil industry and that it represented a massive
windfall for all the states involved. He discussed
hydraulic fracturing technology, which was commonly
referred to as "fracking," horizontal-drilling technology,
multi-stage fracking technology, and other various
technologies that were being used to extract oil in the
Lower-48 and pointed out that none of those methods were
being used in Alaska; however, the rocks in Alaska were
well suited for these technologies. He concluded that HCS
CSSB21 (RES) was a massive step in the right direction.
Co-Chair Stoltze inquired if Mr. Armstrong was saying that
advances in technology alone would not "do it" for Alaska.
Mr. Armstrong replied in the affirmative and added that
technology combined with the ACES tax structure still did
not work. He reported that Alaska was competing with every
other oil region in the world and that the ACES structure
had a tax rate somewhere right around the level of
Venezuela and Russia. He felt that he had a unique
perspective that a lot of the testifiers before the
committee did not have.
Representative Costello inquired what types of leases Mr.
Armstrong had, as well as his tax rate on royalty and
severance tax. Mr. Armstrong stated that he should have
been clearer earlier, but that his company was not in the
legacy fields; it was working was in the areas that were
the future of Alaska, which most people agreed were good
areas to go "chase." He explained that there was no
"corporate give away" in the areas outside of the existing
units because there was nothing to give away and expounded
that these areas did not have any production; what was
being discussed was future income that had yet to be
realized.
Mr. Armstrong responded to Representative Costello's
question. He stated that Armstrong Oil and Gas's royalty
rate was one-sixth on all its leases and compared that to
the one-eighth royalty rate inside the legacy fields.
Co-Chair Stoltze inquired if the royalty rate was 16.7
percent versus 12.5 percent. Mr. Armstrong replied that it
was 16.667 percent versus 12.5 percent.
9:19:15 AM
Representative Costello opined that Alaska had laws that
were great for the explorers and observed that Armstrong
Oil and Gas would eventually be looking to move an
exploration development into production. She queried what
kind of response Armstrong Oil and Gas had received from
potential partners to Alaska as it looked into moving into
the production phase of a development. Mr. Armstrong
related that all of them were appalled by ACES and the high
progressivity with high oil prices. He shared that when he
had brought Pioneer Natural Resources and Eni Petroleum to
the North Slope, Alaska had been under the Economic Limit
Factor (ELF) tax regime and that ACES had not been in place
at the time. He further explained that when he had brought
Repsol to Alaska, HB 110 had been written by the governor
and passed by the House. He offered that Repsol had been
"looking at the tea leaves" and thought that tax reform was
on the way; as a result, Repsol had chosen to come to
Alaska. He explained that Repsol had come to the state
because they were playing the "Wayne Gretzky" approach to
hockey, which was that "you don't play where the puck is
now, but you play where the puck is going to be."
Mr. Armstrong continued to respond to Representative
Costello's question and related that potential partners
that he was talking to currently viewed SB 21 as
competitive. He stated that potential partners thought that
SB 21 would put Alaska in line with other investment areas,
but that they still had other issues with Alaska such as
high costs, inaccessibility, and bad weather.
Co-Chair Stoltze attested that news of impending help or
doom was a strong signal. He recalled introducing a bill
that would have made modifications on the film tax credit
and was told in testimony that he had killed the industry
by talking about the bill.
Representative Gara offered that Mr. Armstrong has stated
in a prior committee that one of the big impediments to
independents in Alaska were the majors and inquired what he
had meant by the statement. Mr. Armstrong replied that one
of the impediments in Alaska was that the majors controlled
the lion's share of almost all of the facilities. He
offered that the only facilities in Alaska that were not
controlled by the majors were the processing facilities and
pointed out that the Trans-Alaska Pipeline System (TAPS)
was an open access pipeline for anyone; however, the
ability to get to TAPS was one of the aspects that stood in
the way. He pointed out that the majors had a lot of land
holdings that trades were difficult to be made on, as well
as seismic work that was difficult, if not impossible, to
make trades for.
Representative Gara inquired if Mr. Armstrong was
referencing seismic work that crossed the major companies'
lands. Mr. Armstrong replied that he was referencing
seismic that had already been shot and made available to be
purchased.
Mr. Armstrong continued to respond to Representative Gara's
question and related that he got along well with guys from
ConocoPhillips and BP, but offered that the majors did not
want the independents to be in Alaska. He opined that
although ConocoPhillips claimed that they wanted the
independents in Alaska, its actions had demonstrated that
it did not.
9:24:49 AM
Representative Gara inquired how the majors not wanting the
independents in Alaska manifested itself in the form of
deterrence. Mr. Armstrong replied that he did not want to
get into a "major bashing" exercise because they were not
the independents' foremost problem; the foremost problem
was the state's current tax law.
Representative Gara queried if Mr. Armstrong had brought
Repsol to Alaska in 2011 or 2012. Mr. Armstrong thought
that it was 2011. Representative Gara inquired if Repsol
had bid on leases at that time. Mr. Armstrong responded in
the affirmative.
Representative Gara inquired if Mr. Armstrong had helped
bring Pioneer Natural Resources to Alaska as well. Mr.
Armstrong replied in the affirmative. Representative Gara
inquired if Pioneer Natural Resources had moved ahead with
production that had started when ACES was in effect. Mr.
Armstrong replied in the affirmative.
Representative Gara observed that every oil company in the
world would like taxes to be lower all the time, but that
he was a little skeptical. He acknowledged that reform
might be needed in some areas, such as at high oil prices.
He recalled that when Repsol had come to Alaska, its press
release had stated that Alaska had low exploratory risk,
great rocks, and had great potential; furthermore, the
release stated that some potential was disappearing around
the world, and that Alaska was a stable, Organisation for
Economic Co-operation and Development (OECD) area that did
not nationalize oil companies. He asserted that nowhere in
the 2012 press release did Repsol claim that Alaska's tax
laws were out of whack; the release led him to believe that
Repsol was interested in coming to Alaska. He offered that
only when HB 110 was being debated later on did Repsol say
that it wanted lower taxes.
Representative Gara wondered why he should not be skeptical
that people wanted lower taxes when the "carrot" of lower
taxes was dangled in from of them. Mr. Armstrong responded
that when Repsol had partnered with his company, HB 110 had
been submitted by the governor and passed by the House; as
a result, Repsol had assumed that the Senate would also
pass the bill. He expounded that Repsol had anticipated
lower taxes when it had partnered with him and pointed out
that a press release only reflected a fraction of what a
major oil company was thinking. He observed that Repsol had
released a later press release in which it stated that it
needed some version of a modified tax scheme in Alaska.
Representative Gara noted that in Repsol's initial press
release, it had announced a $768 million development
program in Alaska and inquired if the company had started
that program. Mr. Armstrong responded in the affirmative.
Representative Gara surmised that an oil company coming up
to Alaska and investing and buying leases under an existing
law would not know that the law would change and queried
why he should believe Mr. Armstrong's statement that Repsol
knew the law would change. Mr. Armstrong replied that oil
companies made decisions all the time where uncertainty was
involved. He questioned what the oil price would be in
another year and whether Repsol would be nationalized in a
foreign country or have a spill in the Gulf of Mexico; he
explained that things like this represented a calculated
game that "all of us" play all the time. He offered that
the word was out that Alaska had a broken oil and gas tax
system and that Repsol had made a calculated move to be
where the "puck was going to be."
9:29:15 AM
Representative Gara noted that he liked Mr. Armstrong, but
that he did not believe what he was asserting. He explained
that Repsol had come in to Alaska and had been interested
in it and that only after the tax reform bill started
moving did the company say that it was something they would
really like; he opined that any oil company would say that.
Representative Gara inquired about the rig counts. He
stated that in Alaska, the rigs could horizontally drill
for 3 miles or more and that technology was being worked on
that could horizontally drill even further. He asserted
that a lot of the drilling rigs that Mr. Armstrong had
referenced in the Lower-48 fit in the back of a pickup
truck. He opined that the rig sizes in Alaska were
massively different than they were in the areas where
fracking was being done and inquired if that was correct.
Mr. Armstrong replied that in some cases that was true, but
not in all cases.
Representative Gara asserted that in the major oil
producing states, such as Texas and Wyoming, the overall
increase in production was not because of the production of
conventional oil, but was related to the "fracking
revolution"; he inquired if that assumption was correct.
Mr. Armstrong responded in the affirmative.
Co-Chair Stoltze interjected and inquired which part of the
question Mr. Armstrong was agreeing to. Mr. Armstrong
replied that he was agreeing that the increase in
production in the Lower-48 was predominantly due to
advancements in technology and the exploitation of the
unconventional reservoirs; furthermore, he agreed that
Alaska did not have that activity yet, but that it should.
He explained that Alaska had just as good, if not better,
geology, rocks, and formations as many of the successful
plays in the Lower-48.
Representative Gara thought that fracking would come to
Alaska, but did not know that for sure; however, he had
heard that Alaska's fracking rocks were very good and that
there was exploration being conducted. He stated that it
was not a compelling case to him when investment had gone
up in the Lower-48 due to technology advances and fracking,
but conventional oil production was not going up. Mr.
Armstrong replied that for the most part, there was not
anyone pursuing unconventional plays in Alaska and offered
that everyone who understood geology and engineering would
state that Alaska was a fantastic candidate for
unconventional drilling. He opined that a question to ask
was why unconventional plays were not being pursued in
Alaska. He asserted that other Alaskan oil players would
attest that the state had these resources underground that
needed to be developed and pointed out that it was
indisputable that the recourses were not currently being
developed.
Representative Gara noted that Great Bear Petroleum had
moved ahead with fracking exploration and that the company
had indicated that its early drilling results had been very
promising. He acknowledged that Great Bear Petroleum was
not a major and would have to partner with someone, but
offered that fracking drilling had moved forward in Alaska;
although fracking in the state was not progressing as fast
as it was in the Lower-48, it was coming up here.
9:33:58 AM
Co-Chair Stoltze noted that the committee had invited Great
Bear Petroleum to attend the proceeding multiple times and
that the company had chosen not to attend.
Mr. Armstrong responded to Representative Gara's comments
and related that unconventional plays were difficult and
involved lots of trial and error. He shared that any
successful unconventional play in the Lower-48 typically
involved a whole number of players who had to "unlock" the
code and that the timelines on these plays involved a
lengthy learning curve. He opined that Great Basin [Great
Bear] was drilling, but that the chance of it finding a
"needle in the haystack" on its first couple of wells was
low. He stated that there were dozens of people like
himself and dozens of companies like Repsol working in the
Lower-48 that were not in Alaska. He offered that Alaska
needed those companies and players up here to try to unlock
the code because doing so would result in a boom for the
state; Alaska would not see 800 drilling rigs running like
there were in Texas, but that it might see 75 rigs.
Representative Holmes noted that the committee was trying
to determine if the current version of the bill, which was
HCS CSSB21 (RES), was getting it right and opined that Mr.
Armstrong was saying that the legislation was getting it
right; furthermore, the committee wanted a feel for what
passing the bill or something similar would mean on the
ground. She inquired what Mr. Armstrong would expect to
see, from his company's perspective as well as others, on
the ground and in what timeframe if the bill were to pass.
Mr. Armstrong replied that HCS CSSB21 (RES) was getting it
right, but noted for the record that there was no clear
right or wrong. He offered that the target was amorphous
and that if the state missed it a little with HCS CSSB21
(RES), the legislation could always be tweaked in the
future. He pointed out that he could only speak for his
current partner on the North Slope, which was Repsol. He
shared that Repsol was about half of the way through its
$768 million obligation and that Armstrong Oil and Gas and
Repsol had several accumulations that it was ready to take
to development once SB 21 passed. He explained that the 2
developments would involve a capital expenditure in excess
of $2.8 billion and pointed out that the developments would
not be commercialized under ACES, but would sit there. He
believed that $2.8 billion would be just the beginning of
their investment, but pointed out that it was already a
large investment on its own.
Mr. Armstrong reported that the oil business was like any
other business and that success begot other success. He
opined that once the industry saw that companies in Alaska
liked the tax laws and were having success, the other
companies would follow to the state. He offered that there
would be a whole new level of attention on to Alaska, but
that it would not happen overnight; however, he was
confident that more companies would be coming to Alaska.
9:39:30 AM
Representative Holmes did not want to change taxes for tax
changing purposes. She explained that if the committee
changed taxes, it would be because it wanted to see more
production, did not want the decline rate, and wanted a
steady, predictable future, so that the legislature would
know what it could count on year-by-year to fund schools,
roads, and keep people working.
Co-Chair Austerman did not want to leave the impression
that the majority of the committee did not believe Mr.
Armstrong's testimony and remarked that most of the
legislature understood the risk in gambling. He opined that
Repsol had made a bet and taken a gamble and thought that
the company had made the "right" gamble; furthermore, he
anticipated that Repsol and Mr. Armstrong, as well as their
work outside of the legacy fields would carry the state in
the long-term. He opined that the small players were
carrying places like Texas and Wyoming, where there was a
long-term development of oil. He pointed out that the
committee would move forward with something, but that it
did not know exactly what that was yet.
Representative Wilson stated that she had not been in the
legislature when ACES had been passed and inquired how many
rigs there were on the North Slope before that policy had
been enacted. Mr. Armstrong replied that he was not sure
about the number of rigs at the time.
Co-Chair Stoltze interjected that AOGA would probably be
better suited to answer the question.
Mr. Armstrong replied that he was not aware of the exact
number of rigs, but that it not a massive number even
before ACES; however, the same thing had been occurring in
every state in the Lower-48 at the time.
Co-Chair Stoltze interjected that oil had been $60 per bbl
at the time. Mr. Armstrong replied that Co-Chair Stoltze
was correct and added that the technology advances and
fracking in general also did not exist at the time. He
concluded that the Lower-48 states had boomed, while Alaska
had not; therefore, asserting that ACES did not do any
damage because there were not a lot of rigs in Alaska prior
to the policy was not a fair argument to bring up. He
pointed out that there was currently a boom in the oil
business because the price of oil was over $100 per bbl and
that the boom involved a combination of technology and high
oil prices.
Representative Wilson noted that Pioneer Natural Resources
had come to Alaska under the ELF tax regime. She inquired
if Pioneer Natural Resources would have still come to
Alaska if ACES had been in place at the time and if there
was no HB 110. Mr. Armstrong related that Pioneer Natural
Resources would not have come to Alaska if ACES was in
place because it was his company's idea; furthermore, he
would have passed on Alaska completely if ACES had been in
place at the time. He concluded that his company would
never have come up with the idea to bring Pioneer Natural
Resources to Alaska had ACES been in place because the
first thing a business did analyze was the potential
profit. He stated that it did not make sense to go to a
place where even if you had success, the returns paled in
comparison to another place and opined that both Pioneer
Natural Resources and Eni Petroleum would not be in Alaska
had ACES been in place when his company was coming up with
the ideas.
9:44:50 AM
Representative Wilson discussed testimony on the different
types of tax credits. She offered that testimony had
indicated that Alaska had pretty much got its exploration
credits right, but that there were issues with development
and production in the state. She inquired if it was correct
that an issue in Alaska was that explorations were not
reaching development stage. Mr. Armstrong replied in the
affirmative and related that ACES was warped in 2 ways. He
explained that the progressivity in ACES "crushed" any
producer as oil prices rose. He thought that the qualified
capital expenditure credit, while well intentioned, had
unwittingly made the state a partner with the oil companies
and expounded that had the price of oil gone down, the
credits could have crippled the state's finances. He
observed that the way that HCS CSSB 21(RES) was crafted the
credits were all tied to production, which was a much
better way of handling the credits; this way paying less in
production taxes would be linked to success and production.
He noted that the oil companies would still pay corporate
tax, royalties, and lease bonuses. He concluded that the
way HCS CSSB 21(RES) was being approached was more
sustainable and durable for business.
9:47:45 AM
Representative Munoz inquired what the effect of SB 21 not
passing would be on Repsol and Armstrong Oil and Gas in
Alaska. He responded that he could not speak for Repsol,
but that he could speak for Armstrong Oil and Gas;
furthermore, if SB 21 did not pass, the fields that the
company had found over the last 2 years would be non-
commercial and would not be developed.
Representative Kawasaki asked whether Mr. Armstrong had
been involved in the Pioneer Natural Resources royalty
relief. Mr. Armstrong responded in the negative and
explained that Pioneer Natural Resources had been the
operator, while Armstrong Oil and Gas had been the
originator; however, Armstrong was involved with the
testimony that Repsol had submitted to the state on royalty
relief. He offered that the royalty relief concept was
wonderful and that it allowed the fields that were on the
bubble of being commercial a chance to be developed.
Representative Kawasaki agreed that the royalty relief was
part of the state's tool box, but that it did not get used
that often. He acknowledged that royalty relief was
recently used in Pioneer Natural Resource's Oooguruk
development.
Representative Kawasaki inquired why a partner, explorer,
and producer like Armstrong Oil and Gas would not pitch the
royalty relief to companies like Repsol, Eni Petroleum, and
other groups that it was involved with. Mr. Armstrong
replied that his company did pitch royalty relief to its
partners and that although it was a nice aspect of Alaska
to tell them about, in most cases, it was not enough with
ACES still in place.
9:51:01 AM
Co-Chair Stoltze indicated to Mr. Armstrong that he was
welcome to correspond with the committee regarding any
provisions in the legislation.
Mr. Armstrong appreciated the opportunity to express his
opinion on HCS CSSB 21(RES). He thought that Alaska was on
the precipice of bringing a lot of players to the state and
that there was a real potential of turning the decline
curve around. He explained that if you were not drilling
wells, you were not finding oil and pointed out that
Prudhoe Bay had been found by accident; in process of
chasing the Lisburn idea, the Ibishak Reservoir in Prudhoe
Bay had be found. He furthered that the Kuparuk River was
an Ibishak test that did not work and that Alpine Field was
a Kuparuk play that had stumbled into the Alpine sand. He
concluded that Alaska needed more drilling activity.
Co-Chair Stoltze apologized to the testifiers that were
still waiting and offered that other testimonies would
likely be shorter because a lot of the questions had been
asked.
KARA MORIARTY, ALASKA OIL AND GAS ASSOCIATION (AOGA), began
a presentation titled "House Resources Committee HCS CSSB21
(RES) April 9, 2013 Kara Moriarty, Executive Director"
(copy on file). She spoke to slide 2 titled "AOGA Member
Companies" and related that AOGA was a professional trade
association that represented 15 member companies. She
reported that you could see from the slide that AOGA's
member companies represented the majority of exploration,
production, development, refining, transportation, and
marketing of oil and gas in Alaska. She related that when
AOGA testified on tax numbers, there had be a 100 percent
consensus from all its member companies and that the
comments she would make, as well as the detailed written
comments that were submitted for the record, had all been
approved unanimously.
Ms. Moriarty spoke to slide 2 titled "Alaska North Slope
Production." She pointed out that Alaska's great challenge
currently, which the industry shared with the state, was
the decline of oil production on the North Slope. She
related that with respect to oil and gas taxes, the great
issue facing Alaska was that there was a fundamental
tradeoff between the short-term and long-term benefits and
the results for Alaskans. She offered that the challenge
would lie in striking a balance between the size of the
economic development activity that occurred in the state
and the rate of taxation on that activity; furthermore,
AOGA's role in the current meeting as the trade association
for the industry would be to share its perspective about
how close Alaska was to achieving that balance. She stated
that AOGA, individual companies, the legislature's
consultants, and the administration's consultants had all
testified that the current tax structure was not
competitive with the opportunities that were present across
the globe.
Ms. Moriarty continued to speak to slide 2 and explained
that because the present tax structure was not competitive
or attractive, investment had shifted to regions elsewhere
in order to get more money for shareholders. She related
that if a restructuring and tax-rate reduction made
investments in Alaska more competitive, companies would
want to make investments in the state, even if there were
no specific guarantees, because shareholders would demand
it.
9:55:39 AM
Ms. Moriarty spoke to slide 3 titled "HCS CSSB21 (RES)
Component: Progressivity."
AOGA supports the elimination of ACES progressivity
1) Progressivity under ACES takes away too large a
share.
2) Progressivity guts the upside potential for Alaska
investments.
3) Progressivity makes it difficult to analyze and
quantify the tax effect.
Ms. Moriarty spoke to slide 3 and opined that repealing the
ACES progressivity would be a material step forward in
improving Alaska's attractiveness because progressivity was
the single most negative component of the current tax
structure. She spoke to the first bullet point and related
that at current prices, which about $100 per bbl, the
current tax rate under progressivity was over 40 percent.
She discussed the second bullet point and related that it
occurred because the more the upside was realized as the
price of oil increased, the more progressivity took that
upside away. She addressed the final bullet point and
expounded that when a plan of development had several
elements in it, progressivity made it almost impossible to
analyze and quantify the tax effect of any single element
because the progressivity for all of the elements together
was greater than the sum of the progressivity of each one
separately.
Ms. Moriarty discussed slide 5 titled "HCS CSSB21 (RES)
Component: Increasing the Base Tax Rate."
AOGA does not endorse increasing the base tax rate to
35%
1) A higher tax rate would be a step in the wrong
direction.
2) Increasing the base tax rate is contrary to the
Governor's second principle. It would not encourage
new production.
3) The lower the tax rate, the more attractive
Alaska's system will be to investors.
Ms. Moriarty shared that AOGA felt that raising the base
rate to 35 percent would be a step in the wrong direction
because it had consistently testified since 2007 that the
25 percent base rate was too high even without
progressivity.
9:57:41 AM
Ms. Moriarty turned to slide 6 and 7 titled "HCS CSSB21
(RES) Component: Tax Credits."
1) AOGA does not support the repeal of Qualified
Capital Expenditure Credits (QCE) if it was the only
change, but CS offers other incentives that tend to
offset this loss.
2) AOGA supports the new credits for new
production.
· Gross Revenue Reduction for "non-legacy" fields
· Sliding Scale for legacy fields
3) AOGA supports the extension of the small producer
tax credit.
4) AOGA supports maintaining the ability to utilize
the loss carry-forward annual loss credit
Ms. Moriarty addressed slide 6 and stated that HCS CSSB21
(RES) offered a package of tax credits and new incentives
to spur production. She addressed the first sub-bullet
point and related that the gross revenue reduction was a
new concept that balanced the loss of the QCE credit; it
was coupled with the tax credit of $5 per bbl of oil that
fell in the new production categories as outlined in the
bill. She spoke to the final sub bullet point and stated
that the bill also included a sliding scale tax credit for
legacy fields that started at $8 per bbl when the gross
value at the point of production was less than $80 dollars.
She reported that the sliding scale credit would decrease
by $1 per bbl for each $10 increment above the $80 and
would reach zero when the gross value at the point of
production was at $150; in doing this, HCS CSSB21 (RES)
filled a gap that the Senate passed version of the bill had
missed by providing a tax incentive for 80 percent to 90
percent of the remaining oil potential that was on state
lands on the North Slope.
Ms. Moriarty spoke to slide 7 and related that HCS CSSB21
(RES) would delay the sunset of the small producer tax
credit from 2016 to 2022, which was something that AOGA had
specifically advocated for in previous committees
throughout the current legislative session; this extension
had been included in the original version of the bill. She
stated that HCS CSSB21 (RES) also maintained the change to
the loss carry-forward credit that would allow a company
that spent more money than it made in Alaska to take the
loss in the form of a credit that was redeemable by the
state or transferable to another tax payer; furthermore,
AOGA believed that this particular tax credit was extremely
valuable to the current and future new producers in
reducing the up-front risk that was associated with new
field development. She relayed that AGOA believed that
Alaska's tax policy should not create winners and losers
among different types of companies unless there was a very
sound policy reason for doing so. She concluded that AOGA
supported HCS CSSB21 (RES)'s changes to the tax credit
system.
Ms. Moriarty discussed slide 8 titled "HCS CSSB21 (RES)
Components: Statutory Interest & Joint Interest Billings."
AOGA supports change in statutory interest
· Lowers risk/makes Alaska more competitive
AOGA supports the use of Joint Interest Billings as a
starting point
· Using Joint Interest Billings as the initial
source for lease expenditures is more efficient
and provides consistency of what are expenses
are all
Ms. Moriarty spoke to slide 8 and related that there were
two other elements in the bill that she wanted to briefly
mention. She pointed out that HCS CSSB21 (RES) addressed a
concern that AOGO had raise during testimony in previous
committees; she addressed the bill's changes to statutory
interest and spoke from a prepared statement (copy on
file).
A six-year statute of limitations for auditing and a
minimum interest rate of 11% compounding quarterly can
nearly double-up any underlying tax liability that the
audit may find. The heightened risk this causes is a
material factor in terms of Alaska's competitiveness
relative to other places. That risk - and not just
the reward that an investment can make under the tax
laws - is an integral element in an investor's
comparison of investment opportunities here versus
elsewhere. We endorse this change, which serves to
compensate the State reasonably for any lost use of
funds that it suffers from a tax underpayment.
Ms. Moriarty continued to discuss slide 8 and the joint
interest billings component. She pointed out that the
question of using joint interest billings as the initial
source of a tax payer's lease expenditures was not about
how much a tax payer would be able to deduct; using joint
billings as the initial source was more efficient and
eliminated uncertainty and AOGA supported its use as the
starting point for the auditing process.
Ms. Moriarty stated that there were several areas of the
tax structure that AOGO believed needed to be changed in
order to improve the structure's efficiency, but that in
the interest of time, she would not discuss them in oral
testimony; however, AGOA had highlighted a few of the
things that it believed were missing from the bill in its
written testimony.
10:02:21 AM
Ms. Moriarty concluded on slide 9 titled "HCS CSSB21
(RES)."
Current bill is a significant improvement over ACES.
· Repeals high ACES progressivity
· Maintains key credit provisions while creating
incentives for new production from legacy and
non-legacy fields
· Reforms interest rate for tax underpayments
· Restores ability to administer the tax more
effectively
Principal downside: higher base tax rate
Ms. Moriarty spoke to slide 9 and its first bullet point.
She relayed that HCS CSSB21 (RES)'s repeal of the high ACES
progressivity would eliminate a great deal of complexity in
the tax, as well as the uncertainty in analyzing the tax
effect on all types of projects. The bill would also extend
or broaden existing tax credits for small producers and
would create a gross revenue reduction; it also created a
system of per barrel tax credits that was directed at new
development and production, as well as more production from
legacy fields on the North Slope. She addressed the slide's
principal downside component and stated that AOGO believed
that even a 33 percent tax rate fell on the high side and
that a lower rate would generate greater investment that
would result in more production.
Co-Chair Stoltze surmised that any member of AOGA had veto
power over its comments. Ms. Moriarty responded in the
affirmative and furthered that AOGA needed unanimous
consent before any written comments were submitted. She
expounded that if one member company of AOGA disagreed with
a particular section of the testimony, that section was
removed.
10:04:32 AM
CASEY SULLIVAN, PUBLIC AFFAIRS DIRECTOR, PIONEER NATURAL
RESOURCES, provided a PowerPoint presentation titled "House
Finance Committee Testimony re: HCS CSSB 21(RES) April 9,
2013" (copy on file). He spoke to slide 2 titled "Forward
Looking Statements."
Except for historical information contained herein,
the statements, charts and graphs in this presentation
are forward-looking statements that are made pursuant
to the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. Forward-
looking statements and the business prospects of
Pioneer are subject to a number of risks and
uncertainties that may cause Pioneer's actual results
in future periods to differ materially from the
forward-looking statements. These risks and
uncertainties include, among other things, volatility
of commodity prices, product supply and demand,
competition, the ability to obtain environmental and
other permits and the timing thereof, other government
regulation or action, the ability to obtain approvals
from third parties and negotiate agreements with third
parties on mutually acceptable terms, international
operations and associated international political and
economic instability, litigation, the costs and
results of drilling and operations, availability of
equipment, services and personnel required to complete
the Company's operating activities, access to and
availability of transportation, processing and
refining facilities, Pioneer's ability to replace
reserves, implement its business plans or complete its
development activities as scheduled, access to and
cost of capital, the financial strength of
counterparties to Pioneer's credit facility and
derivative contracts and the purchasers of Pioneer's
oil, NGL and gas production, uncertainties about
estimates of reserves and resource potential and the
ability to add proved reserves in the future, the
assumptions underlying production forecasts, quality
of technical data, environmental and weather risks,
including the possible impacts of climate change, and
acts of war or terrorism. These and other risks are
described in Pioneer's 10-K and 10-Q Reports and other
filings with the Securities and Exchange Commission.
In addition, Pioneer may be subject to currently
unforeseen risks that may have a materially adverse
impact on it. Pioneer undertakes no duty to publicly
update these statements except as required by law.
Mr. Sullivan indicated that slide 2 represented legal
terminology that specified that anyone who invested in
Pioneer Natural Resources based on comments in the
presentation did so at their own risk.
Mr. Sullivan discussed slide 3 titled "Pioneer Natural
Resources."
Corporate overview:
· $19 Billion enterprise value
· Member of the S&P 500
· Investment grade rating
· ~3,500 employees
· $3 Billion capital budget
· $2 Billion cash flow from operations
· Leading performer in peer group
Alaska Operations Overview:
· 1st independent operator on North Slope
· 70+ full-time Alaska employees
· $14+ million in annual wages (employees)
· 150 - 300 Alaska contract workers
· ~$180 million 2013 capital budget
· ~6,000 BOPD gross production
· Net investor in Alaska
Mr. Sullivan addressed slide 3 and stated that Pioneer
Natural Resources had produced about 12 million barrels
from the Oooguruk field to date. He spoke to the slide's
final bullet point and related that a net investor in
Alaska meant that all the revenues that Pioneer Natural
Resources generated currently went right back into the
fields that it was developing and appraising.
Co-Chair Stoltze noted that the meeting's schedule had been
switched and understood that Mr. Foley was probably in the
queue for a slightly later time.
J. PATRICK FOLEY, LAND AND EXTERNAL AFFAIRS MANAGER,
INCOMING PRESIDENT, PIONEER NATURAL RESOURCES, ALASKA (via
teleconference), stated that he would replace Todd Abbot as
the president.
Mr. Foley discussed slide 4 titled "Pioneer Alaska Profile:
Oooguruk."
Exploration:
· 11 exploration wells '02 -'05
· 1 commercial project
Oooguruk Quick Facts:
· 70% Pioneer (operator) : 30% Eni
· ~$1 billion capital invested
· 12+ million barrels produced
· ~$270 million in credits received
(~7 % of total credits issued by the state)
Mr. Foley recalled comments that sometimes credits were
granted that did not result in new oil, but asserted that
every dollar that Pioneer Natural Resources had spent and
accepted credits for had resulted in new oil in the
development of Oooguruk. He pointed out that there was a
timeline on the bottom of the slide that depicted Pioneer
Natural Resources business in Alaska. He related that
Pioneer Natural Resources had come to Alaska in 2002 during
the ELF tax regime and that its production tax rate under
that system would have been zero. He explained that
immediately after Pioneer Natural Resources had sanctioned
the Oooguruk project for development, the PPT tax came into
play, which quickly evolved to ACES. He stated that ACES
had added a very troubling progressivity component to the
tax system and shared that SB 21 would represent the fourth
fiscal regime that Pioneer Natural Resources had
encountered in its 12 years of business in Alaska.
10:11:18 AM
Mr. Foley discussed slide 5 titled "What's Next?"
Nuna Project:
· $100 Million appraisal program
· ~50 MMBO of resource potential
· Phase I development overview
· Q3 2013 sanction decision
· ~$1 Billion capital required
· 2015 first oil
· 14 MBOPD peak production
· Jobs and economic impact
· Potential for 2nd drill site
· Must compete for limited capital against low-
risk, fast-cycle projects in Lower 48
Mr. Foley spoke to slide 5 and stated that the Nuna Project
was within the Oooguruk unit and would currently focus
exclusively on the Torok interval; the project would
initially be developed with a single onshore drill site. He
explained that with respect to the Nuna Project, Pioneer
Natural Resources had drilled 2 grassroots wells, fracked
them, and had tested production. He stated that in order to
stay on schedule, Pioneer Natural Resources was queuing up
the Nuna Project for sanction approval and internal
financial approval in the third quarter of 2013. He pointed
out that for a company like Pioneer Natural Resources on a
development like Oooguruk, the royalties, production
payments, and taxes to the state would not be large;
however, it would have a substantial economic impact in the
form of jobs.
Mr. Foley discussed slide 6 titled "Pioneer Competitive
Resource Opportunities."
WOLFCAMP / SPRABERRY
· $1,650 MM Drilling Program
· 627 MMBOE Proven
2013 Production (Growth):
75-80 MBOEPD (+14 - 21%)
Barnett Shale Combo
· $185 MM Drilling Program
· 33 MMBOE Proved
2013 Production (Growth):
9-12 MBOEPD (+22 - 41%)
Eagle Ford Shale
· $575 MM Drilling Program
· 116 MMBBOE Proved
2013 Production (Growth):
38-42 MBOEPD (+36% - 50%)
> 40 rigs running
> 20,000 drilling locations
Mr. Foley spoke to slide 6 and related that Pioneer Natural
Resources' focus was in Texas.[All of the developments and
information on the slide are depicted overlaid on a map of
Texas.] He explained that Pioneer Natural Resources would
have about a $3 billion total capital budget for all the
U.S. and that "90 some percent" of that would be spent in
Texas. He stated that the slide depicted some of the
competing projects that Pioneer Natural Resources had when
it asked for funding and that the company's 2 big projects
were the Eagle Ford Shale and the Wolfcamp/Spraberry, which
were both in Texas. He stated that Pioneer Natural
Resources had about 3000 employees in Texas.
Mr. Foley discussed slide 7 titled "Relative Rankings and
Policy Considerations." He stated that the slide was a
graphical depiction of who the players were in Alaska and
what their sizes were; it showed "super giants" like Exxon
Mobile all the way down to companies the size of Pioneer
Natural Resources and smaller. He recalled Ms. Moriarty's
remarks that had cautioned the legislature against
designing a system that was helpful for some and harmful
for others. He questioned which players on the slide the
state wanted to remain in Alaska and continue to make large
investments and opined that the state wanted all of
players, and several more.
Mr. Foley discussed slide 8 titled "Eagle Ford Operators
and Companies." He stated that the slide represented a
picture of Pioneer Natural Resources' competitors in the
Eagle Ford play. He explained that in the box on the left,
the companies that operated in Alaska were color-coated;
the major companies were shown in blue and the smaller,
independent companies were shown in red. He shared that the
take away from the slide's list of companies was that not
many of them showed up in color and expounded that not many
of the companies were doing business in Alaska. He offered
that it would be great if Alaska's fiscal system encouraged
all of the companies on the slide to come and do business
in the state. He pointed out that one of the reasons
companies were not investing here was the fiscal system,
but that the costs in Alaska were greater than they were in
some of the other places that they could do business in.
Mr. Foley continued to discuss slide 8 and stated that the
chart on the right showed the operating and capital costs
by state or geographic area; Alaska fell near the bottom of
the chart. He stated that Pioneer Natural Resources
typically pursued projects that had capital requirements of
about $20 per bbl and annual operating expenses in the $10
to $20 per bbl range.
10:16:23 AM
Mr. Foley discussed slide 9 titled "Typical New Project
Spend Profile." He related that he wanted to help the
committee to see the world through Pioneer Natural
Resources' eyes and show the committee what the economics
of a project like Nuna would be. He explained that the
slide showed the capital costs and production rate that
would result from a typical project that smaller companies
considered for investment; it was a $1 billion capital
project with 50 million bbl in total reserves that had a
peak production of about 5 million bbl of oil per year,
which was equal to 13,700 bbl of oil per day. He relayed
that the take-away from the slide's chart was that a
typical project would have substantial facility investment
for almost 4 years, would have about a 5 year drilling
program, and would not reach peak oil production until 8
years after the investment began.
Mr. Foley discussed slide 10 titled "Fostering New
Production: Why Credits Matter."
· Benefits to State
· Credits directly encourage activity in Alaska
ƒJobs, direct and indirect (9x multiplier)
ƒMore wells
ƒMore oil
ƒMore royalties, taxes and throughput
· Benefits to Developer
· Reduces investor risk
· Improves small project economics
· Improves financial performance
ƒDoesn't increase debt
· Builds healthy industry
· Strengthens competitiveness
· Loss Carry Forward Credit
· Redeemable / transferable
· Reduces upfront risk
· Assists new investment
· Small Producer Credit
· Simple
· Predictable
· Improves project economics
· Low financial impact to State
· Included in original SB 21
· $5 / bbl Credit
· Rewards production
· Levels government take
Mr. Foley discussed slide 10 and encouraged the committee
to keep the loss carry forward credit in HCS CSSB21 (RES);
under this version of the legislation, the credit allowed
companies to take a loss and monetize it and go to the
state to be reimbursed for the loss. He reminded the
committee that Pioneer Natural Resources Alaska had started
in 2002 and that 10 or 11 years into the business, it had
yet to generate a profit. He spoke to the small producer
credit and explained that it had been designed in PPT as a
way to level the playing field. The small producer credit
was a tax-avoidance credit that did not pay money directly
to companies; if a tax liability was not generated, the
credit had no value or cost to the state. He explained that
a company like Pioneer Natural Resources Alaska would be
paying the minimum gross tax, but because the minimum gross
tax was less than $12 million, the company paid no tax; HCS
CSSB21 (RES) had an extension of the small producer credit
through 2022, which Pioneer Natural Resources strongly
supported.
Mr. Foley continued to address slide 10. He discussed the
$5 per bbl credit and stated that it was very helpful for a
small company because it would be building its business
once it had production.
10:20:51 AM
Mr. Foley discussed slide 11 titled "Mid Sized Producer
Adding New Field."
New Field Assumptions:
•50 MMBO field
•~$1 Billion CapEx
•$10-$20/bbl variable OpEx
•$100 ANS West Coast (nominal)
Mr. Foley spoke to slide 11 and related that it used the
profile of the hypothetical project that he had depicted on
slide 9. He remarked that the profile of the slide's
project was very similar to that of the Nuna Project and
added that the slide was from the perspective of a company
like Pioneer Natural Resources; in other words, because it
was a net tax system, all of the other attributes of the
business as far as cost and production needed to be
integrated. The slide depicted adding a new field that was
similar to Nuna on top of a base production that was what
Oooguruk was to Pioneer Natural Resources. The slide ran 3
different cases that showed what the investment opportunity
would look like under original SB 21, under the version of
SB 21 that was passed by the Senate, and what it looked
like under HCS CSSB21 (RES). He related that the red bars
represented the decreasing value because credits were
eliminated, as well as other attributes.
Co-Chair Stoltze surmised that from Pioneer Natural
Resources' perspective, the bill had improved with each
version that was depicted on the slide and inquired if that
was correct. Mr. Foley responded in the affirmative and
expounded that from his company's perspective, for a new
project like Nuna, the bill had gotten better each step of
the way.
Mr. Foley continued to discuss slide 11. He shared that
when the administration had first introduced the SB 21,
Pioneer Natural Resources had believed that for a company
like itself, a project like Nuna was $52 million worse off
than it was under ACES; however, every version of the bill
had improved. He explained that a project like Nuna was
only $8 million worse of under the Senate passed version of
SB 21 than it was under ACES; finally, under HCS CSSB21
(RES), the bill had evolved to the point where the project
would be $27 million better off than it was under ACES. He
pointed out that original version of SB 21 had a 25 percent
base tax, a small producer credit extension, a 20 percent
GRE and that as it evolved, the tax rate had gone up to 35
percent and the $5 per barrel credit and the ability to
monetize the loss carry-forward credit had been introduced.
He furthered that in CSSB21 (RES), the tax rate had
hopefully been lowered to 33.5 percent and the small
producer credit had been reintroduced. He explained that
the value of the small producer credit represented
approximately one-third of the difference between CSSB21
(RES) and the Senate passed version of the bill and that
the change in the base tax from 35 percent down to 33
percent represented about two-thirds of the increased
value; the take-away was that the type of project that was
on the slide was very sensitive to even small changes to
the tax rate.
10:24:51 AM
Mr. Foley discussed slide 12 titled "HCS CSSB 21(RES)
Closing Thoughts."
· Pros
· 33% Base / $5 bbl credit
· Keeps tax rate flat across price ranges
· GRE
· Rewards new oil production
· Small producer credit extension
· Levels playing field
· Loss carry-forward credit monetization
· Rewards investment in Alaska
· Cons / 'Wish List'
· Elimination of capital credits
· Increase GRE for challenged leases to 30%
· Add targeted credits for facilities/well related
costs
· HCS CSSB 21(RES)
Mr. Foley discussed slide 12 and stated that the extension
of the small producer credit was important for Pioneer
Natural Resources Alaska to incubate its business. He
related that when the small producer credit had originally
been created under ACES, the intent had been to level the
playing field and explained that all of the current
producers at the time had a large amount of lease holdings,
infrastructure, employees, and data. He furthered that one
of the small attributes of the original PPT program was to
encourage new investors to come to Alaska with a little bit
of a leg-up and strongly urged the committee to extend the
small producer credit to continue to encourage new
companies to invest in Alaska.
Co-Chair Stoltze thanked Mr. Foley for the succinct closing
on letting the committee know what targets of the bill were
important to Pioneer Natural Resources; knowing the impact
points was helpful because certain aspects of the bill
would impact different people in different ways.
Representative Gara noted that people were still waiting
for modeling that would assist with formulating amendments
and inquired if the amendment process could be delayed a
day in order to allow time to get the needed modeling.
Co-Chair Stoltze noted that he was still waiting for
information as well and that the schedule for the
amendments would be a moving target.
Representative Gara noted that amendments could feasibly be
done on Thursday. Co-Chair Stoltze indicated that his
office would set the schedule, but that he appreciated the
input.
Co-Chair Stoltze requested Mr. Thompson to keep his
comments brief. He apologized for the rush and explained
that the committee was being summoned to the House Floor.
10:28:45 AM
KEN THOMPSON, BROOKS RANGE PETROLEUM, ANCHORAGE (via
teleconference), began to speak to the presentation titled
"House Finance Committee Comments on SB 21" (copy on file)
and stated that he would provide the perspectives from an
exploration company's approach.
Mr. Thomson discussed slide 2 titled "Why Consider Our
Company's Perspectives?"
1) Most active exploration company exploring and
developing solely on North Slope state lands
a) Drilled 10 of 36 exploration wells on state
lands in 2007--12(more than COP, BP, XOM, ENI,
Repsol, Armstrong combined)
b) 105,000 leased acres in 3 core areas in JV
partnership with Ramshorn Exploration (affiliate
of large Nabors Industries)
2) ~$200 MM invested to date in Alaska North Slope
projects…3 discoveries, acquired discovery
3) Mustang development project under construction…$577
MM capital, 44 MMBO, 15,000 BOPD…future level of
capital spending/yr same as Pioneer Natural Resources
and one--third the level of COP capital spending
4) Three other development projects in permitting
/conceptual engineering stages…>$1.5B capital
5) First production and cash flow to state and our
companies…start-up of Mustang in 3Q 2014
6) On investment of $200 MM, received refunded tax
credits totaling $69MM but State will receive back
this amount+ in the first year of Mustang
production…and $1.2 billion over field life
a) All credits have been redeployed on the North
Slope for new drilling or seismic to find,
develop oil…none sent Outside
b) Credits redeployed has allowed in some years
the drilling of 3 exploration wells instead of
2…or 2 wells instead of only 1
c) Payment of credits in cash versus just an
allowance against taxes critical to AVCG which
has no current production
7) Experience in bringing other independents to Alaska
and in raising capital for Alaska
a) Seeking additional capital for Mustang and 3--
5 year exploration program…started fundraising 18
months ago, Sept 2011
b) Sent materials to 210 firms, but only 19
wanted to consider Alaska…and after further
review, only 2 firms remain interested
c) Biggest hurdles we heard: 1) complex and high
gov't take of AK fiscal regime, 2) flow of
capital to Lower 48 source rocks
d) Two firm remain and we hope to finalize
deal…belief in our confidence that Legislature
will make positive change in 2013
Mr. Thompson spoke to slide 2. He addressed bullet point
number 6 and related that over $100 million would be
returned to the state in the first year of production from
the Mustang development; the state would fully recover the
credits that it had paid out to Brooks Range Petroleum. He
discussed the Mustang development and shared that it would
represent 7 million bbl of royalty oil to Alaska that would
reflect about $700 million in revenue to the state;
furthermore, that revenue would be about 10 times the
amount of the credits that the state had issued to Brooks
Range Petroleum.
Mr. Thomson continued to address slide 2. He spoke to
bullet point number 7 and related that he had been working
over the last several months to try and bring more capital
and independents to Alaska. He stated that ACES was more
complex, burdensome, and had a higher government than any
other state's tax regime in the U.S. and pointed out that
many companies had not wanted to talk to Brooks Range
Petroleum regarding investing in Alaska. He discussed table
11 of an Econ One analysis that showed that under ACES, the
rates of return and cash margins were far superior in the
Bakken shale play than they were in Alaska; however, under
SB 21 the rates of return and cash margins were better in
Alaska than in the Bakken.
Mr. Thomson addressed slide 4 titled "What Difference Can
Our Company Make" and stated that the graph was significant
because it showed just the discoveries that Brooks Range
Petroleum had made as a small start-up company. He pointed
out that the Mustang development was producing about 15,000
bbl per day and that Brooks Range Petroleum would be at
about 50,000 bbl of oil per day from all its developments
if its reserves were confirmed. He referenced table 20 of
an Econ One report that stated that 40,000 bbl of new oil
would be needed to fully cover the state revenue
differences that may result between SB 21 and ACES. He
shared that slide 4's graph showed that one new exploration
company that produced 50,000 bbl per day would make up for
the differences between SB 21 and ACES. He thought that
independents would come to Alaska as a result of the bill
and that the state's oil production could be leveled;
additionally, if the majors increased their spending in the
legacy fields, Alaska's oil production could turn upward
like it had in other states.
10:34:50 AM
Mr. Thompson discussed slide 4 titled "We See positives In
SB 21 To Make Alaska More Competitive."
1) Eliminates progressivity factor, increases base tax
rate from 25% to 33% but provides $5/bbl produced bbl
credit
· POSITIVE: Eliminating progressivity simplifies
tax calculation and will be a public relations
plus for AK
· NEGATIVE to POSITIVE: Base tax rate went from
25% to 35% not expected…a balance at 33% now in
bill is reasonable
· POSITIVE: $5 produced bbl credit better
balances relative state/producer takes at low
oil prices and flat take at higher prices
2) Increases "Carry Forward Loss Credit(CFL)" from 25%
to 33% and is monetizable and transferrable
· POSITIVE: incrementally more future cash flow
to re--deploy into facilities & drilling
3) SB 21 originally extended "Small Producers Credits"
from 2016 to 2022…reduces small producers' tax bill by
$12 MM/yr…and latest version keeps the SPC extension
to 2022 which is very positive for new players
· NEGATIVE TO POSITIVE: SPC REINSTATED TO
2022…more cash flow for small producers to re--
deploy into facilities & drilling
4) Specifies 20% QCE tax credit certificate payment in
1 year vs. 2 but does eliminate QCE on 12/31/13 on NS
only
· NEGATIVE: goes away 12/31/13 on North Slope…for
BRPC, no QCE thru 2015 to redeploy into Mustang
development project
· POSITIVE: IF EXTENDED to 12/31/15 for at least
small producers…Mustang project was sanctioned
assuming QCE…but OK to limit QCE per company
per year to $50MM in order to control impact on
state treasury. Been helpful to CI small
producers!
5) For new oil, introduces "20% Gross Value Reduction
(GVR)" and amends definition of leases that can be
included for this GVR 43.55.160…
· POSITIVE: Should incentivize and rewards new
oil production on more leases, also helps
during low oil price cycles
6) SB 21 originally had a 30% "Exploration Incentive
Credit" for NS exploration wells drilled that target
new oil discoveries regardless of location…similar to
Cook Inlet…please re--instate this through 12/31/18
but OK to cap
· HUGE NEGATIVE: Doesn't matter to legacy field
owners, but a huge negative for small
exploration companies like ours
· HUGE POTENTIAL POSITIVE: REINSTATE THIS CREDIT,
but to minimize impact on state treasury, limit
to $25 MM credit per year per company…and limit
the time for five years through 2018 then
"retest" if incentive has generated more
exploration
Mr. Thomson discussed slide 4. He spoke to bullet point
number 3 and related that the biggest thing to Brooks Range
Petroleum as a small company was probably the extension of
the small producer credits to 2022. He explained that
Brooks Range Petroleum did not have cash flow like the
majors and would have its first production in the fourth
quarter of 2014; extending the credit would help Brooks
Range Petroleum get established and started in Alaska. He
discussed bullet point number 4 and related that most of
the work for the Mustang project would take place in 2014
after the QCE had expired; the extension of this credit
through the end of 2015 would help small companies.
Mr. Thomason continued to speak to slide 4 and bullet point
number 6. He related that Brooks Range Petroleum had not
received one dollar in exploration credits in its 6 year
drilling history and stated that currently on the North
Slope, an exploration had to be 22 miles from existing
units in order to qualify for exploration credits.
Co-Chair Stoltze stated that the 84 hours he had previously
referenced was the time that the House Finance Committee
had left and that the remaining 46 to 48 hours would be
spent on the House Floor for advancement requirements and
transferring bills to the other body. He related that he
wanted to give the other body a chance to look at the bill
as well and that the committee would do its best in its
deliberations.
CSSB 21 (FIN) was HEARD and HELD in committee for further
consideration.
10:40:39 AM
RECESSED
1:34:55 PM
RECONVENED
1:35:11 PM
RECESSED
4:31:53 PM
RECONVENED
Co-Chair Stoltze discussed the bills before the committee.
HOUSE BILL NO. 63
"An Act extending the termination date of the Board of
Governors of the Alaska Bar Association; and providing
for an effective date."
4:32:24 PM
CECIL ELLIOT, STAFF, REPRESENTATIVE MIKE HAWKER, understood
that the committee had a CS to offer.
Co-Chair Stoltze stated that there was a CS for HB 63 and
inquired if the sponsors had seen it. Ms. Elliot responded
in the affirmative, but added that Representative Hawker
preferred a clean sunset bill rather than establishing
policy in a sunset bill; however, the sponsor would defer
to the will of the committee.
Representative Costello MOVED to ADOPT the proposed
committee substitute for HB 63, Work Draft 28-LS0309\O
(Bailey, 4/8/13).
Representative Holmes OBJECTED for the purpose of
discussion. She wanted to ensure that Section 3, which
mandated continuing legal education for members of the
Board of Governors of the Alaska Bar Association, only
applied to the lawyer members. She believed that there were
non-lawyer members on the board and inquired if that was
correct.
Co-Chair Stoltze interjected that there were 3 non-attorney
members on the board.
Representative Holmes was not sure if the non-attorney
members should be required to take mandatory legal
education.
Co-Chair Stoltze indicated that there had been equal
protection questions regarding requiring the attorney
members to take continuing legal education, but not
requiring the public members to do so. He additionally
referenced a letter of intent from the House Judiciary
Committee regarding the legislation and the Alaska Bar
Association.
Representative Holmes inquired if the mandatory continuing
legal education would apply to non-attorney members of the
board. Co-Chair Stoltze replied in the affirmative.
Representative Costello asked what the voluntary continuing
legal education requirements were for the board.
DANIEL GEORGE, STAFF, REPRESENTATIVE BILL STOLTZE, replied
that currently members of the Board of Governors of the
Alaska Bar Association were required to take 3 hours of
continuing legal education, which could only be mandated by
the Supreme Court; however, the Alaska Bar Association and
an audit had made recommendations to increase that.
Additionally, there was the voluntary hour component that
had a current recommendation of 9 hours; this provision in
the bill stated that members of the board "shall complete"
the recommended hours.
4:36:06 PM
Representative Gara would consider the bill and listen to
what people had to say on the House Floor; however, he did
not want to hold up the bill and removed any objection he
may have made.
Co-Chair Stoltze commented that Representative Gruenberg
might have some thoughts on the bill.
Representative Holmes WITHDREW her OBJECTION.
There being no further OBJECTION, Work Draft 28-LS0309\O
was ADOPTED as a working document.
Co-Chair Stoltze inquired if the fiscal note in members'
packets was the most recent note. Mr. George stated that
the Alaska Bar Association did not receive funding from the
legislature.
Representative Costello discussed one zero fiscal note from
the Department of Administration.
Representative Holmes MOVED to REPORT CSHB 63(FIN) out of
committee with individual recommendations and the
accompanying fiscal note.
There being NO OBJECTION, it was so ordered.
CSHB 63(FIN) was REPORTED out of committee with a "do pass"
recommendation and with one zero impact fiscal note from
the Department of Administration.
4:38:13 PM
AT EASE
4:39:05 PM
RECONVENED
Co-Chair Stoltze spoke to the letter of intent for HB 63
from the House Judiciary Committee.
Representative Holmes MOVED to ADOPT the letter of intent
for HB 63 from the House Judiciary Committee.
There being NO OBJECTION, it was so ordered.
Co-Chair Stoltze noted that the letter of intent would
accompany the bill to the House floor.
CSHB 63(FIN) was REPORTED out of committee with a "do pass"
recommendation and with one zero fiscal note from the
Department of Administration and with an accompanying
letter of intent from the House Judiciary Committee.
Co-Chair Stoltze communicated that Co-Chair Austerman would
continue the meeting.
4:39:44 PM
AT EASE
4:48:13 PM
RECONVENED
HOUSE BILL NO. 76
"An Act relating to electronic filing of certain
information with the Department of Labor and Workforce
Development; relating to surcharges, rate increase
reduction, prohibition on the relief of certain
charges, the unemployment trust fund account, and the
offset of certain unemployment compensation debt under
the Alaska Employment Security Act; relating to the
definition of 'covered unemployment compensation debt'
in the Alaska Employment Security Act; and providing
for an effective date."
Representative Holmes MOVED to ADOPT Amendment 1 to the
legislation. The amendment would change the sunset date
from 2018 to 2016 (page 6, line 3).
Representative Kawasaki OBJECTED for the purpose of
discussion.
Representative Holmes noted that the amendment changed the
5-year sunset date to a 3-year sunset and would provide a
3-year try out period to make sure the bill worked as
intended.
Vice-Chair Neuman asked about the meaning of 291 in
layman's terms. ["291" was most likely made in reference to
AS 23.20.291, which is the statute that Section 6 of the
bill addressed.] Representative Holmes responded that the
commissioner would probably be better suited to answer the
question, but understood that it was associated with a
formula that determined year-by-year whether the tax rates
for the unemployment insurance needed to be raised; Section
6 of the bill gave the Department of Labor and Workforce
Development, in certain circumstances, some discretion that
it did not currently have.
Representative Wilson inquired why the sunset date was
being reduced by 2 years. Representative Holmes replied
that she was not entirely sure what Section 6 did, but that
it used a 3-year average in the formula calculation and
thought that given the level of uncertainty involved, 3
years would provide a feel for how the bill was working
without being too worried about the level of the fund. She
concluded that the 3-year sunset period was not a magic
number.
Representative Wilson inquired if the intent of the
original sunset in 2018 was to do the same look back.
Representative Holmes replied that it was her understanding
that the look back was consistent with Section 6 of the
bill.
Representative Gara noted that he had a question for the
commissioner that was unrelated to the amendment.
Representative Kawasaki WITHDREW his OBJECTION.
There being NO further OBJECTION, Amendment 1 was ADOPTED.
4:52:18 PM
DIANE BLUMER, COMMISSIONER, DEPARTMENT OF LABOR AND
WORKFORCE DEVELOPMENT, deferred the question to Mr. Dick.
Representative Gara queried how much the surplus was
currently, as well as the difference between income coming
in and expenses going out for the past year or two.
PAUL DICK, DIRECTOR, EMPLOYMENT SECURITY DIVISION,
DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT, replied that
the fund was a reserve concept and that the idea of a
surplus was not really applicable to the orientation of the
fund; however, the department did believe there was room
for the exercise of discretion that was in Section 6 of the
bill to allow for some reduction in the tax rates so that
the reserve would remain solvent in the short-term and
long-term future.
Mr. Dick inquired what the second part of the question had
been. Representative Gara queried what the surplus was now,
as well as what the expenses and income were. Mr. Dick
responded that the past several years there had been
greater benefits paid out than revenues. He pointed out
that FY12 was the last fiscal year on record and that the
revenues were close to the benefits in that year. He
thought that the department was coming out of a recession
where there was a high cost of benefits, but that the trend
was turning around; he offered that this was a typical
business cycle that the department had seen over the years
for unemployment insurance and claims. He added that there
were years of high benefits that exceeded the revenue, but
that the department was seeing that turning around as the
economy came out of recession.
Representative Gara understood that FY12 was roughly even
in terms of revenues and benefits and inquired how much the
deficit had been the year before, as well as what the
surplus was. Mr. Dick believed the deficit had been
approximately $10 million out of $170 million collected and
that the current trust fund balance was $251 million.
Representative Kawasaki offered that the term surplus was a
misnomer and inquired if the fund had ever been in the
negative since 1983. Mr. Dick replied that the fund had
never been in the negative.
Representative Kawasaki further queried if there had been
years that the fund had put out more money than it had
taken in. Mr. Dick replied in the affirmative.
Representative Kawasaki observed that there were very few
mechanical formulas that had worked successfully, but that
this fund seemed to be one. He observed that the fund
seemed well managed and expressed concern that tinkering
with it would risk its solvency.
4:57:45 PM
Representative Munoz inquired if the suspension of the
increase would ultimately be due from the employer if a
commissioner had determined that the increase was
suspended. She further inquired if the payment would be
ultimately due.
BRYNN KEITH, ACTING DEPUTY COMMISSIONER, DEPARTMENT OF
LABOR AND WORKFORCE DEVELOPMENT, answered that ultimately,
the tax would be collected. What the bill did as designed
was defer that collection during a period of economic
recovery in order to give employers more time to recover;
furthermore, the fund would try to get to the "magical" 3
percent to 3.3 percent reserve rate that included the
surplus that the department talked about. She explained
that the department wanted to be at the surplus when there
was an economic downturn; the system was designed so that
that surplus was a buffer when the fund was paying out more
money than it was taking in.
Representative Munoz requested an explanation of the
training programs that "this" funded. Ms. Keith replied
that the training funds for both the State Training and
Employment Program (STEP) and the Alaska Technical
Vocational Education Program (TVEP) were from taxes that
came off of employees' wages; it was the same amount
irrespective of the unemployment insurance taxation. She
expounded that any changes that would made in terms of the
bill would be moot in relation to the contribution to STEP
and TVEP; what would affect the 2 programs was how many
individuals were working, what the average wage was, and
other factors in the economy.
Representative Costello discussed one zero fiscal note from
the Department of Labor and Workforce Development and one
fiscal impact note from the Department of Labor and
Workforce Development.
Representative Costello MOVED to REPORT CSHB 76 (FIN) out
of committee with individual recommendations and the
accompanying fiscal notes.
There being NO OBJECTION, it was so ordered.
CSHB 76(FIN) was REPORTED out of committee as amended with
a "do pass" recommendation and with one new fiscal impact
note from the Department of Labor and Workforce Development
and one new zero fiscal note from the Department of Labor
and Workforce Development.
5:01:04 PM
AT EASE
5:02:14 PM
RECONVENED
CS FOR SENATE BILL NO. 18(FIN) am
"An Act making, amending, and repealing
appropriations, including capital appropriations,
supplemental appropriations, reappropriations, and
other appropriations; making appropriations to
capitalize funds; and providing for an effective
date."
SB 18 was SCHEDULED but not HEARD.
SENATE BILL NO. 7 am
"An Act relating to the computation of the tax on the
taxable income of a corporation derived from sources
within the state."
SB 7 was SCHEDULED but not HEARD.
CS FOR SENATE BILL NO. 57(FIN)
"An Act relating to parental involvement in education;
adjusting pupil transportation funding; amending the
time required for employers to give tenured teachers
notification of their nonretention; and providing for
an effective date."
SB 57 was SCHEDULED but not HEARD.
HOUSE RESOLUTION NO. 8
Establishing the Task Force on Sustainable Education
in the House of Representatives.
HR 8 was SCHEDULED but not HEARD.
ADJOURNMENT
5:02:14 PM
The meeting was adjourned at 5:02 p.m.