02/01/2005 05:00 PM House OIL & GAS
| Audio | Topic |
|---|---|
| Start | |
| HB32 | |
| Overview of Alaska Oil and Gas Association | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 32 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 1, 2005
5:33 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Lesil McGuire
Representative Ralph Samuels
Representative Berta Gardner
Representative Norman Rokeberg
MEMBERS ABSENT
Representative Nancy Dahlstrom
Representative Beth Kerttula
COMMITTEE CALENDAR
HOUSE BILL NO. 32
"An Act making a special appropriation for a grant to Arctic
Power to promote the opening of the Arctic National Wildlife
Refuge for oil and gas exploration and development; and
providing for an effective date."
- MOVED HB 32 OUT OF COMMITTEE
Overview of Alaska Oil and Gas Association
- HEARD
PREVIOUS COMMITTEE ACTION
BILL: HB 32
SHORT TITLE: APPROP: GRANT TO ARCTIC POWER FOR ANWR
SPONSOR(s): REPRESENTATIVE(s) KOHRING
01/10/05 (H) PREFILE RELEASED 12/30/04
01/10/05 (H) READ THE FIRST TIME - REFERRALS
01/10/05 (H) O&G, FIN
02/01/05 (H) O&G AT 5:00 PM CAPITOL 124
WITNESS REGISTER
KEVIN HAND, Executive Director
Arctic Power
Anchorage, Alaska
POSITION STATEMENT: Testified on behalf of Arctic Power in
favor of HB 32
JUDY BRADY, Executive Director
Alaska Oil and Gas Association
Anchorage, Alaska
POSITION STATEMENT: Presented a briefing on Alaska's current
oil and gas fiscal system
TOM WILLIAMS, Chairman
Alaska Oil and Gas Association Tax Committee
Anchorage, Alaska
POSITION STATEMENT: Presented a briefing on Alaska's current
oil and gas fiscal system
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 5:33:11 PM. Representatives Kohring,
McGuire, Samuels, and Gardner were present at the call to order.
Representative Rokeberg arrived as the meeting was in progress.
HB 32-APPROP: GRANT TO ARCTIC POWER FOR ANWR
CHAIR KOHRING announced that the first order of business would
be HOUSE BILL NO. 32, "An Act making a special appropriation for
a grant to Arctic Power to promote the opening of the Arctic
National Wildlife Refuge for oil and gas exploration and
development; and providing for an effective date."
5:34:52 PM
CHAIR KOHRING, speaking as the sponsor, explained that HB 32
appropriates $1.2 million from the general fund (GF) to fund
Arctic Power, a private nonprofit organization that advocates
for the opening of Arctic National Wildlife Refuge (ANWR) [to
oil exploration and development]. He said, "[The appropriation]
is to fund [the Arctic Power] budget, or at least a portion of
their budget, so that they can advertise and cover related
expenses as it relates to advocating for the opening of ANWR and
encouraging congressmen to vote in the affirmative on
legislation that they'll have before them in [Washington D.C.]."
He noted that the bill also includes a $100,000 appropriation to
the Native Village of Kaktovik for community outreach in an
effort to gain the community's support of the opening of ANWR.
CHAIR KOHRING remarked that he views [the proposed appropriation
to Arctic Power] as a small amount of money when one considers
the potential payoff. He stated that there are estimates of as
much as ten billion barrels of oil in the Arctic National
Wildlife Refuge (ANWR). He opined that, if [the U.S. Congress]
is able to get legislation passed and signed into law, the
potential return will be phenomenal and well worth the
investment of $1,200,000. He remarked that [the legislature] is
trying to open the Coastal Plain of ANWR for oil exploration and
development, not ANWR as a whole. He said, "In the course of
exploring and developing that area, we're expecting that there
will likely be some additional unforeseen discoveries that could
be added to the potential that is estimated up there that could
further reduce our country's need for imported oil and help with
our trade deficit and perhaps even improve our national
security."
CHAIR KOHRING noted that Arctic Power has been in existence for
12 years and it received a $1.8 million appropriation from the
legislature two years ago. He said, "We really feel that the
timing is critical on this, too. We have a very opportune
situation here where ... Congress is very amenable to opening
ANWR.... We've got a substantial number of prodevelopment
people who believe in enhancing our oil and gas industry, and
that like to support ANWR. So the time is right to really push
this issue now. And then of course President [George W. Bush]
is very supportive as well and he's pledged to sign legislation
if it were to be produced from Congress."
5:37:58 PM
KEVIN HAND, Executive Director, Arctic Power, said that Arctic
Power is a "nonprofit, grassroots organization of citizens and
businesses from across Alaska and across the nation advocating
for responsible exploration and development of the region which
contains [the Coastal Plain] of the Arctic National Wildlife
Refuge." He noted that Arctic Power has active education and
advocacy programs that are currently underway in Washington D.C.
The programs provide information such as caribou numbers, and
statistics on the nation's dependence on foreign oil to the
Alaska delegation and other members of Congress. Arctic Power
facilitates congressional tours to ANWR, and sends delegations
of Alaskans to Washington D.C.
MR. HAND remarked:
There is no one else out there focused on advocating
on behalf of Alaska for ANWR, besides ... of course
our congressional delegation. We know that we ...
could not list on one piece of paper all the groups
out there that are opposing us in this endeavor.... We
are outspent many times over by the environmental
organizations; it's an impossibility, unfortunately,
to match their resources."
MR. HAND noted that [the U.S. House Committee on Resources] put
out a press release today with new poll results showing that a
majority of Americans support responsible development ANWR. He
said, "The amount of support with Americans is ... up
considerably when they are given a 'common sense' approach to
responsible development of ANWR." He said that the poll was
facilitated and paid for by Arctic Power.
5:45:32 PM
MR. HAND said that Arctic Power has a database that contains a
record of every meeting that has ever taken place between an
Alaskan and a member of Congress regarding the issue of ANWR.
He also said that Arctic Power assembles advocacy pieces with
state-by-state statistics including information on predicted
revenue and jobs generated. He described several coalitions and
alliances that Arctic Power has built in Congress and with other
grassroots organizations. He outlined other work performed by
Arctic Power that "sort of [goes] unnoticed, ... under the
radar," including providing talking points and advocacy
materials to legislators.
MR. HAND remarked:
We're going to face considerable challenges this year.
The green community is not going to go away without a
fight. I understand that ... they're going to come
out with a new caribou study to combat and ... inflame
the environmental argument in that regard.... And
these attacks are only going to increase as we come to
fruition here, come to a vote on the floor of the
House and the Senate. Arctic Power is ready; we just
require the resources to accomplish all that we are
asked to do by the delegation.... Private fundraising
has been undertaken in earnest. ... We definitely
believe ... that the benefits to Alaska far outweigh
any costs.
5:52:04 PM
REPRESENTATIVE SAMUELS moved to report HB 32 out of committee
with individual recommendations and the accompanying fiscal
note. There being no objection, HB 32 was reported from the
House Special Committee on Oil and Gas.
^Overview of Alaska Oil and Gas Association
5:52:41 PM
JUDY BRADY, Executive Director, Alaska Oil and Gas Association
(AOGA) informed the committee that AOGA is a private, nonprofit
corporation with 18 members.
5:58:00 PM
TOM WILLIAMS, Chairman, Alaska Oil and Gas Association Tax
Committee, stated that he and Ms. Brady are here to provide the
committee with a briefing about what Alaska's current oil and
gas system is and how it works. He made four points: Alaska's
revenue forecasts always count on new production; producers need
to spend money to increase production and for the state to make
money; state government policy decisions will affect the level
of investment in oil exploration and development; and the aim is
to take a healthy share of the profits while remaining
competitive in the world market for oil and gas investment
dollars. He said that the legislators need to consider the
following questions about Alaska's fiscal system: does it
protect the state's interest even when the prices are low; does
it make the state more competitive or less competitive for
investment dollars; and does it encourage or discourage new
investment.
6:01:16 PM
MR. WILLIAMS referred to a pie chart showing that oil revenue
provides at least 75 percent of the unrestricted general purpose
revenue of the state, and the two elements most critical to the
oil revenue forecast are price and value. The state cannot
control the price but can control the volume.
MR. WILLIAMS stated that there are four elements to Alaska's
present fiscal system: royalty, which paid over $1 billion to
the GF and just under $500 million to the permanent fund last
year; production tax, which contributed over $600 million to the
GF; property tax, which contributed $47 million to the state and
$218 million to municipalities; and the income tax, which
equaled just under $300 million.
6:03:12 PM
MR. WILLIAMS explained that royalty is the state's ownership
share. He said, "It doesn't involve a inherent sovereign right
of the state but merely its right as a landowner to make a
contract for the use of its land." He noted that until 1979
virtually all of the leases had a standard one-eighth royalty
clause but starting in 1979 some leases were offered with higher
royalty rates and the State had the option to receive the
royalty either "in kind" as physical oil or gas, or "in value"
based on what the value of the oil or gas in the field, called a
"netback value". He clarified how to calculate the netback
value by subtracting the transportation costs and the pipeline
tariff from the spot price.
6:06:18 PM
MR. WILLIAMS explained that the production tax, also known as
the severance tax, is an excise tax on the act of actually
producing the oil or gas. The tax "comes off the top" and is
based on the gross value of the oil or gas in the field as it is
being produced. He said that the gross value is the value at
the custody meter where the oil goes from the field into the
pipeline; field costs are not deductible for production tax or
for royalty. The gross value is equal to the product of the
netback value and the taxable volume. Taxable volume is equal
to the total volume amount minus the state's royalty share. The
amount of production tax is the product of the Economic Limiting
Factor (ELF) multiplied by both the base rate and the gross
value.
MR. WILLIAMS clarified that the base rate is 10 percent for gas
and 12.25 percent for oil during the first five years of a
field's production then it changes to 15 percent. He explained
that the ELF is a number between zero and one that is calculated
for each field. For oil, it is based on field size and well
productivity; larger fields have larger ELFs and therefore
higher tax rates, and more productive wells have larger ELFs and
higher tax rates. The gas ELF is based only on well
productivity.
6:08:13 PM
MR. WILLIAMS then turned attention to the property tax, which he
said is independent of the price of oil and gas. Instead it is
based on the assessed value of the taxable property, which is
determined each year by the state assessor. The state property
tax applies only to property that is used in oil and gas
exploration, production, or transportation by a pipeline that is
not a gas-utility transmission or distribution line. He noted
that the tax is 20 mills per dollar or 2 percent of the value as
assessed by the state. When property is within a municipality,
that municipality can tax the property at the same rate that it
taxes the local residents' properties. The municipality tax
counts as a credit against the state tax.
6:09:58 PM
MR. WILLIAMS next discussed corporate income taxes. He said
that this tax applies to all for-profit corporations in Alaska
"except for the ones that aren't treated as corporations;
Subchapter S corporations and limited liability corporations are
treated as partnerships, so they're invisible for tax purposes
and they don't count." All the corporate taxpayers have the
same rates and the same tax brackets. He explained that all
multistate corporations use apportionment to determine their
taxable Alaskan income. He presented an example of how this tax
would apply to a business such as WalMart, and then he explained
how the tax would apply to a fictional worldwide oil company
named Oilco. He said, as paraphrased from the handout: "The
apportionment is the average of three numbers: the percentage of
worldwide property in Alaska, the percentage of worldwide sales
in Alaska, and the worldwide production in Alaska."
MR. WILLIAMS said:
One of the things that's interesting is how these
pieces fit together. Royalty is sensitive to price
volatility; if the market price of oil goes up a
dollar or down a dollar, the rise flows straight back
to the wellhead because the transportation costs
essentially are the same. So your netback value in
the field goes up a dollar. If it falls by a dollar
in the marketplace the netback value basically falls
by a dollar. So the oil royalty is very vulnerable
with oil prices. ... The production tax is a similar
sort of thing; it's sensitive to [oil prices]. The
one protection in the production tax against very low
prices is ... a cents-per-barrel floor against a
severe downsize. Basically if your percentage of
value gets down below this floor price, an 80 cents-
per-barrel tax rate kicks in instead.
6:15:10 PM
MR. WILLIAMS reiterated the "take aways", information he wanted
the legislators to remember: Royalties are the mainstay of
Alaska's revenue system; they're almost half of the GF
unrestricted revenues and are the largest source of oil and gas
revenue at present. He noted that every oil field on state land
pays state royalty, which comes off the top and doesn't take
into account the cost of exploring, developing a field or the
costs of operating the field. Royalty in kind gives the state
opportunities to develop or encourage value-added industry;
there are several refineries in Alaska because of what the state
has done with its royalty oil. He remarked that while oil
prices and royalties go up and down, they don't go away until
production stops.
6:16:11 PM
MR. WILLIAMS summarized the "take aways" for property taxes: the
bulk of it goes through municipalities, and it is independent of
the price of oil and gas.
MR. WILLIAMS listed the key points for corporate taxes: the same
tax, same tax brackets and the same tax rates apply to oil
companies as they do for other Alaskan corporate taxpayers. He
explained that all the corporate taxpayers use apportionment to
determine how much income was made from the Alaska piece of the
business.
MR. WILLIAMS reviewed each tax's sensitivity to oil price
volatility: royalty taxes are sensitive; production taxes are
sensitive but have a cents-per-barrel floor against severe
downside; property taxes are immune; and income taxes are
moderately sensitive.
MR. WILLIAMS said, as paraphrased from the handout:
The corporate income tax ... is somewhat insulated
against gyrating oil prices. This is because most of
the oil companies operating in Alaska ... are
vertically integrated. This means that, in addition
to their "upstream" profits from producing oil and
gas, they also have "downstream" profits from refining
and the marketing of refined products. Some may also
have significant petrochemical businesses. Income
from all of these sources goes into the "pie" of
worldwide income out of which a "slice" is apportioned
to Alaska. It is not uncommon to see profit margins
in the "downstream" refining, marketing and
petrochemical businesses being squeezed when oil
prices are skyrocketing and "upstream" profits are
soaring; but conversely, when oil prices are in the
tank, these "downstream" businesses may tend to be
countercyclical to those for the "upstream". There is
a natural dampening effect that helps keep the income
tax from swinging too far in either direction as oil
prices rise or fall.
6:19:08 PM
MR. WILLIAM shifted attention to the ELF. He said that from a
producer's point of view, the field life has four stages. He
said that in stage 1, royalty and production taxes come off the
top with low production costs and a large operating margin,
which is the oil companies' goal.
MR. WILLIAMS said:
One thing that happens is that oil and gas
[production] changes over time; it's a depleting
resource. There's nothing new being created in the
ground as you take it out, and so that means that in
the natural course of things, you're going to have to
work harder and harder to get the next barrel of oil
... or the next cubic foot of gas out of the ground
than the one you just produced. Another thing that
happens is that reservoirs change; over time you get
more gas coming up with every barrel of oil, and
that's more cost to separate it and manage it and put
it back in the ground. And also over time you tend to
have more water coming up with each barrel, and again
that means more cost to separate the water and dispose
of it properly. It's interesting ... how different
Prudhoe Bay ... is now from when it started just over
25 years ago. When Prudhoe Bay first came onstream it
... [produced] 1,200,000 barrels a day [b/d] from 120
wells: 10,000 [b/d] per well. ... Today it's producing
just under 400,000 [b/d] of oil and there's over 1,000
wells. When it started production the gas that came
up that had to be disposed was about 1 billion cubic
feet a day. Now we're injecting over 7.5 billion
cubic feet a day and handling 8.5 billion cubic feet a
day.... In 1979 the water that we had to inject ...
was 23,000 [b/d]; last year it was 1,500,000 [b/d].
So the field was very different. The costs for
Prudhoe Bay have gone up, the volume [of extracted
oil] has gone down.
6:21:48 PM
MR. WILLIAMS explained that the production costs have increased
over time, which can happen to any field. He continued:
In 1976 there was a big stalemate in the legislature
over whether Alaska should have separate accounting or
not. The Department of Revenue [DOR] did not want to
have a separate accounting income tax because we
thought ... a production tax would be easier to
administer and would avoid all kinds of messy disputes
and litigation about trying to unwind transactions
between affiliates in a vertically integrated oil
company. ... The tax administrators [were concerned
about] ... the possibility that there could be some
creative accounting in the pricing of these things so
that ... the profits ended up being in the subsidiary
that was running ... outside of Alaska's jurisdiction.
... We didn't go down that path; [production] tax is
nice and simple.
6:23:32 PM
MR. WILLIAMS said that the problem with the high rate production
tax is that it comes off the top. At the beginning of a field's
life it doesn't make much difference, but over time the
situation changes: production costs rise and the operating
margin is squeezed. He explained that new investments will
become uneconomic and a field will be "thrown into the red".
The operator has the option of operating at a loss, which is
sometimes done if the prices might come back up, and sometimes
it's done because it's more expensive to terminate the project
and restore the land.
MR. WILLIAMS stated that the production tax can accelerate a
company into operating at a loss, "stage 4". If the production
tax was removed the companies would have an operating margin
again and therefore make a profit. He remarked that the DOR
wanted to have a high production tax but not to put the oil
companies out of business. He said that the ELF was the answer
to this dilemma. The original ELF proposal is based on the
total current production (TP) and the amount of production
needed to cover production costs (PEL). The PEL divided by the
TP equals the percentage of the current production that is
needed to cover the production costs. Subtracting this fraction
from one produces the "gravy percentage", which is the
percentage of the production representing the producer's
operating margin. He explained that the tax shrinks when
production costs rise.
MR. WILLIAMS quoted from a 1977 DOR report titled "Alaska's Oil
and Gas Tax Structure: A Study with Recommendations for
Improvement" which read [original punctuation provided but
formatting changed]:
The Department of Revenue recommends [the ELF] as a
means of eliminating effects of the production tax on
the economics of oil production operations. ... [T]he
Department of Revenue recommends an Economic Limit
Factor [ELF], based on the ratio of the rate at the
true economic limit to the current production, as a
mechanism for scaling down the tax rate as the
production declines toward the economic limit.
6:31:02 PM
MR. WILLIAMS said that the legislature added an exponent to the
ELF in 1977 legislation. He explained:
The reason it was put in was Prudhoe Bay could show
that it needs 1,000 [b/d] to break even, and it was
producing 10,000 [b/d] per well. Under the Knudson
formula, which was the original formula, that fraction
would be 0.1 ... subtracted from one gave you an ELF
of 0.9. That was too big a tax break in the eyes of
the legislature. The exponent took it away. Whether
you left the presumption of 300 [b/d] to break even or
showed you needed 1,000 [b/d], when you calculate it
under the [Knudson] formula, the ELF is 0.95 either
way.
6:32:06 PM
MR. WILLIAMS, at the request of Representative Gardner, repeated
his explanation of the ELF calculation. He then said that in
1989 there was another change to the ELF equation. This added
another exponent to the equation by taking into account the
field size as represented by the fraction of 150,000 b/d over
TP. He stated, "The exponent from the original formula that
carries over turns into a turbocharger; it accelerates the
effect of the first exponent." He said that if a field produces
over 150,000 [b/d], the ELF will increase closer to one. If the
field produces less than 150,000 [b/d], the ELF drops toward
zero.
MR. WILLIAMS presented the reasons for the 1989 ELF change: to
get more revenue for the state; to give the producers an
incentive for operating small fields; to give an incentive for
drilling for West Sak heavy oil; and Prudhoe Bay and Kuparuk
could afford it.
6:34:59 PM
MR. WILLIAMS then presented the effects of changing the ELF:
"The legislature was told that it would reduce the rates for all
fields except Prudhoe Bay and Kuparuk, and the marginal fields".
He stated that probably any other field that would be discovered
in Alaska will be considered marginal unless it was a super
giant. He commented that the legislature was told specifically
that Endicott would have reduced taxes under the bill even
though it produced 100,000 b/d. He explained that this is a
different concept of marginal than the standard, dictionary
concept.
MR. WILLIAMS said that another effect of changing the ELF was
that production tax rates could go to zero and be eliminated
entirely. A third effect was that small fields would pay less
tax even with a same well productivity. A fourth effect was
that the revenue gains would change.
6:37:14 PM
MR. WILLIAMS said that with the introduction of field size to
the ELF, it became important whether fields stood alone or
lumped together. He remarked, "There was a provision put in the
1977 law, before Prudhoe Bay or anything on the slope started
producing, that said where you have economically interdependent
operations being conducted, you can lump together the various
pieces of whatever you need to recognize the whole operation.
... It didn't make much difference if you lumped together or
not." He showed an example where, before the 1989 changes to
ELF, there was little difference between stand-alone fields and
those that had been lumped together. However after changes were
made to ELF in 1989, he said, "suddenly both fields are a lot
bigger by being combined than either was separately." He then
showed an example of two fields under the new ELF formula and
noted how it "rewards smallness".
6:39:15 PM
MR. WILLIAMS, in response to Representative Samuels, explained
that when calculating the apportionment factor for a company,
the percentage of worldwide sales in Alaska would include the
actual refined products that are sold in Alaska as well as the
pipeline tariffs.
6:40:28 PM
REPRESENTATIVE ROKEBERG asked about the numbers from the Wood
Mackenzie study, titled "Global Oil and Gas Risks and Rewards
2004," that are mentioned in the handout.
MS. BRADY stated, "We've referred in these remarks to both the
2002 study and the 2004 study that Representative Samuels just
announced with Senator Therriault, that they're going to
release. We asked for the same ability to release information
and we are in the same situation as the ... legislature talked
about today. We are still reviewing those figures to see what
they mean. But the figures that we have ... in there we have
permission to release."
REPRESENTATIVE ROKEBERG commented that he missed the press
conference and he doesn't know what was released today.
MS. BRADY responded that she has permission to talk about the
information that [is included in the handout].
REPRESENTATIVE ROKEBERG remarked that he signed a
confidentiality agreement and therefore he is constrained to
asking questions.
CHAIR KOHRING noted that he has a copy of the news release that
he can share.
6:42:31 PM
REPRESENTATIVE ROKEBERG paraphrased the page 29 of the handout,
which read:
As in the 2002 study, Alaska's tax regime (state,
local and federal) tends to stay in the middle of the
pack worldwide, although at higher roil prices, it
moves the State into a more competitive position.
This is positive. It reinforces the concept that
governments can influence through their tax policies.
REPRESENTATIVE ROKEBERG commented:
This seems to indicate that, Mr. Williams, the
testimony you gave before the [House Ways and Means
Standing Committee] last spring indicates the policy
of the state when you were with the state
administration was to create a situation in our
multiple sources of petroleum revenues a greater take
for the state of Alaska when the prices are low, and a
sliding scale, if you will, or a scale situation where
its prices increase the percentages of the state take
would go down albeit the gross revenues would go up
but the percentages would go down. And there's been
some criticism about that. Would you care to comment
about that ... in terms of any ... arguments that you
can bring before the committee?
6:44:17 PM
MR. WILLIAMS responded,
First of all, that is how Alaska works. And part of
the reason for protecting the downside is that, in the
1970s ... and the early 1980's ... oil was just as big
a percentage of the budget as it is now. And if it
goes down, our revenue is impacted; it would not be
the right time to be cutting taxes even further
because the oil companies are also being squeezed....
When oil revenues fell to less than a billion dollars
a year in 1986 ... the people needed government
services and that would be the wrong time to be doing
a cut for the oil companies.... To keep the revenues
there we end up, unfortunately, taking a larger piece
of what's available, a higher percentage. It's
balanced out, if you have long-term expectations....
This regressive aspect of the tax gives encouragement
to people who are Wildcatters because they're hoping
that when oil prices are high they're going to have
[large operating margins].... If the state's taking
away the upside then it's reducing their expectations
about what they might get.
6:46:15 PM
MR. WILLIAMS, in response to Representative Rokeberg, explained
that the production tax is about a quarter of the total
petroleum revenues that the state receives. He said that it was
higher in the past "because the fields were higher and more
robust and they had higher economic limits factors." He
explained that when fuel is at a low price, it reduces the
wellhead, or netback, price. The royalty and production tax
continue to come off the top, but the costs don't come down just
because prices have, so the operating margins get squeezed.
6:48:45 PM
REPRESENTATIVE MCGUIRE asked how other countries take into
similar problems without using an ELF.
MR. WILLIAMS replied that Alaska's [ELF system] is unique. He
remarked that the real question is whether investments are being
made in Alaska.
6:51:27 PM
MS. BRADY commented that oil will continue to be the mainstay
for Alaska's economy, and once the gas pipeline and ANWR are
opened it will continue to be strong for the next 50 years. She
returned to the topics of price and volume of oil. To
illustrate the state's lack of influence over the price of oil,
she described instances where the state has weathered several
high and low oil prices swings over the last few decades. She
said, "We can't do very much about prices ... but we can do
something about volume." When the ELF changes were made in 1989
the state [taxed the Prudhoe Bay and Kuparuk fields the most]
because those two fields were producing 2.1 million b/d, and the
state knew that in the future the fields would not [produce such
high volume of oil] because the costs would increase.
MS. BRADY opined that if there had not been any [further
investments after 1989], [the oil industries] would be producing
less than 300,000 b/d, and therefore the State of Alaska would
not have the budget that it has now. She then remarked that
[companies began to drill for] heavy oil in 1997, almost 10
years after the 1989 ELF changes. She said, "On the basis of
the promise that there would be no tax on those [heavy oil]
fields, it took about 10 years for them to be developed and
starting to produce ... and now we're starting to get talk about
taxing them again after the investments have been made." She
noted that by 2003, the satellite fields, the heavy oil
production, and the Wildcat exploration began to be a larger
part of the [total industry] investments.
6:55:37 PM
MS. BRADY turned attention to another graph which depicted the
investments that DOR predicted the state will need in the
future. She commented that the DOR forecasts that the state
will drop from about 900,000 b/d to about 800,000 b/d between
2005 and 2015. Noting that this would be the least amount of
production the state has dropped since 1989, she stated that "by
normal course of events" the [declining fields] will be
producing only 200,000 b/d by 2015. She remarked that the big
fields will continued to be the state's "bread and butter"
fields, but she opined that the reliance will become more and
more on satellite fields, fields that were previously discovered
but not developed, heavy oil fields and Wildcat exploration.
She said that in 1989, "All [the state's] oil was coming from
Prudhoe and Kuparuk, nothing else counted. They were hoping for
more, that's why the legislature said, 'Okay, we're going to hit
the big fields hard [with taxes] but everything else is going to
be home free because we need that production.'"
6:57:12 PM
MS. BRADY posited, "If we don't get this production, no matter
what the prices are going to be, we're going to be in a world of
hurt. If we're getting the money that we need ... for new
production then we are competitive. If we're not, then we need
to start figuring out why...."
MS. BRADY said:
We believe right now that the state's tax system is
working the best a tax system can work. It's not the
perfect tax system but it is pretty darn close.
You're getting investments in heavy oil, in
satellites, in fields ... and in Wildcat. So we are
getting the investments that we need right now with
this tax system. The state is getting a consistently
high return overall, especially on the medium prices
and even at high prices.... So we are very much hoping
that the fiscal system will stay the way that it is
and ... that you keep in mind that we continue to need
these four kinds of investment.
6:58:51 PM
REPRESENTATIVE SAMUELS asked how the state audits worldwide tax
returns.
MR. WILLIAMS replied that the DOR allows the companies to use as
a substitute its financial book income which is the sum of two
parts: the amount reported to the Internal Revenue Service for
the U.S. business, and the financial accounting income for the
rest of the world.
7:00:08 PM
MR. WILLIAMS, in response to Representative Samuels, reminded
the committee that whether the company needs 300 b/d or 1,000
b/d [to break even], the ELF was still 0.95. He said, "The
formula worked very well; it was extremely clever."
7:01:28 PM
REPRESENTATIVE ROKEBERG asked Ms. Brady, "Would you care to
comment on the statements made by the governor about his
communication with AOGA as an organization regarding his
potential administrative order, and what in fact you perceive to
be his message? ... Can you describe what he warned you or asked
you to do?"
MS. BRADY replied, "No, I wouldn't." She further explained that
AOGA sent a letter to the governor, which they also released to
the press, "that relates not only what ... [AOGA's]
understanding of what he asked us but what our response was....
We're perfectly open to giving that letter to anybody who wants
[one]. We are sorry for the misunderstanding on both sides."
7:02:51 PM
REPRESENTATIVE SAMUELS asked if AOGA would support the creation
of more exploration credits for those companies that are making
money at a high end.
MR. WILLIAMS responded that credits must be designed to
influence the explorers. He opined that the current credits
don't take into account the types of costs that are used to make
the decision whether to explore or not. He said that the DOR
has attempted to fix this through regulations, but
"unfortunately it was presented in a way to [legislators] ...
that makes that difficult." He emphasized his belief that the
legislature should design credits to influence the oil
industry's explorers, and that the ELF is more of an incentive
than past credits. He said that the industry would prefer a
system that "makes Alaska attractive"; the fact that Alaska
takes a smaller percentage at high oil prices makes oil
development more attractive for a company that has a lot of
money out at risk for many years.
MR. WILLIAMS noted that there are four different kinds of
development investments: in-field, satellites, heavy oil, and
Wildcats, and said that the economics of each of these
investments is different from the other. He explained that the
Wildcatters have to put a lot of money upfront and wait to see
if they can recover it, while other explorers drill and see an
immediate payout. He stated that offering an incentive in one
of these [types of development investments] can have carry-over
effects [to the other types]. He emphasized the importance of
determining these effects before acting.
7:07:46 PM
MS. BRADY recalled that in the 1980s the oil prices were very
high then very low, with a median price of about $18 [per
barrel], and even in the last four years the median price has
been $23. She said that [for the oil industry], years of high
oil prices make up for the years when the prices were low.
7:09:48 PM
REPRESENTATIVE MCGUIRE remarked that [there are rumors that]
perhaps oil companies were misusing the ELF formula. However
she said that it appears that the effects of aggregation were
discussed and the legislature understood that ELF would change
the aggregation behavior [of the oil companies].
MR. WILLIAMS replied:
That was a consequence of making field size such a
powerful part of the formula in the ELF. Suddenly to
aggregate or not to aggregate became very much more
important. The DOR has in fact adopted a regulation
[15 AAC 55.027] that allows companies to come in that
are proposing to share facilities, typically a
satellite situation, and get a ruling from the
department saying that the satellite will have a
separate ELF from the field that owns the facilities
it's going to share. And so those rulings have been
granted. That's ... how the administrative response
has been to deal with the issue; there's standards
that are set out in the regulation about what are the
criteria the department will use because the statutory
phrase is "economic interdependence", not
"interrelatedness".... That means each depends on the
other, not that they influence each other.
7:12:31 PM
CHAIR KOHRING commented that he would be willing to explore
potential legislation to offset the effects of the increased
tax. He said perhaps the legislature can offset the effects of
the increased taxes through incentive legislation such as tax
credits or royalty reduction.
7:13:51 PM
REPRESENTATIVE ROKEBERG asked that the committee meeting time be
changed, and noted that he will not be at the next meeting.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
7:15:00 PM.
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