Legislature(2011 - 2012)HOUSE FINANCE 519
04/24/2012 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB3001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 24, 2012
1:27 p.m.
MEMBERS PRESENT
Representative Eric Feige, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Peggy Wilson, Vice Chair
Representative Alan Dick
Representative Neal Foster
Representative Bob Herron
Representative Cathy Engstrom Munoz
Representative Berta Gardner
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Lance Pruitt
Representative Kurt Olson
Representative Dan Saddler
Representative Pete Petersen
Representative Chris Tuck
Representative Anna Fairclough
Representative Craig Johnson
Representative Mike Doogan
Senator Cathy Giessel
COMMITTEE CALENDAR
HOUSE BILL NO. 3001
"An Act relating to adjustments to oil and gas production tax
values based on a percentage of gross value at the point of
production for oil and gas produced from leases or properties
north of 68 degrees North latitude; relating to monthly
installment payments of the oil and gas production tax; relating
to the determinations of oil and gas production tax values;
relating to oil and gas production tax credits including
qualified capital credits for exploration, development, or
production; making conforming amendments; and providing for an
effective date."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: HB3001
SHORT TITLE: OIL AND GAS PRODUCTION TAX
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
04/18/12 (H) READ THE FIRST TIME - REFERRALS
04/18/12 (H) RES, FIN
04/20/12 (H) RES AT 1:00 PM HOUSE FINANCE 519
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04/23/12 (H) Heard & Held
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04/24/12 (H) RES AT 1:00 PM HOUSE FINANCE 519
WITNESS REGISTER
TONY REINSCH, Senior Director
Upstream & Gas
PFC Energy
Washington D.C.
POSITION STATEMENT: Testified and answered questions during the
presentation by the PFC Energy on Global Strategy and portfolio
overviews of major Alaska producers.
ACTION NARRATIVE
1:27:30 PM
CO-CHAIR PAUL SEATON called the House Resources Standing
Committee meeting to order at 1:27 p.m. Representatives P.
Wilson, Herron, Dick, Munoz, Gardner, Kawasaki, Feige, and
Seaton were present at the call to order. Representative Foster
arrived as the meeting was in progress. In attendance from the
House Special Committee on Energy were Representatives Pruitt,
Olson, Saddler, Petersen, and Tuck. Also in attendance were
Representatives Fairclough, Johnson, and Doogan and Senator
Giessel.
HB 3001-OIL AND GAS PRODUCTION TAX
1:27:48 PM
CO-CHAIR SEATON announced that the only order of business would
be a presentation by the PFC Energy on Global Strategy and the
Portfolio Overview of Major Alaska Producers.
1:29:04 PM
TONY REINSCH, Senior Director, Upstream & Gas PFC Energy, stated
he will review the global portfolios of the three major
producers in Alaska: BP Exploration (Alaska) Inc. (BP),
ConocoPhillips, and ExxonMobil Corporation (ExxonMobil). He
said all three companies are in the midst of substantial
strategy changes which impact their global operations and
portfolios. He characterized this as an unusual happening for
companies of this size in the oil and gas sector. This
committee and Alaska have been examining how Alaska fits into
the rapidly changing and unusually dynamic global portfolio
situation for these companies as they move forward to achieve
their target strategies and objectives. Further, the committee
will consider how Alaska can position itself to be part of the
solution rather than potentially becoming part of the problem.
MR. REINSCH began his PowerPoint presentation on "Global
Strategy & Portfolio Overview of Major Alaska Producers" by
reviewing BP [slide 25]. He stated that BP is the second
largest global oil company in the world, second only to
ExxonMobil in terms of annual production. BP secures roughly
half of its global production from Russia and Central Asia, in
particular, in Russia with its joint venture with TNK-BP. The
signature event for BP in the past few years was the Macondo oil
spill in the Gulf of Mexico. This event has resulted in the
company restructuring its portfolio, divesting over $30 billion
in assets - upstream, midstream, and downstream - with the vast
majority of its divestiture being upstream assets. He
highlighted that BP acquired roughly $28 billion in assets in
other jurisdictions and arenas. He concluded that the company
took advantage of this signature event to restructure its
portfolio, which would ordinarily have drawn a very negative
response from analysts and investors. He pointed out that BP
has been able to pare down the non-core elements of its
portfolio, yet still maintain all on-going and prospective
capital projects during its geographic divestiture. As a
result, BP has been able to dedicate its production from the
Macondo oil spill to the fund oil spill reparations for the
damages incurred.
1:35:19 PM
MR. REINSCH summarized that BP has pared down, in terms of the
number of companies and projects; however, it has bulked up in
terms of its future growth. He outlined BP has been focused on
three activities: deepwater development, global gas, and
developing giant oil fields in Russia, Iraq, and Alaska. The
company has committed $20 billion in net investments into 16
projects in the past two years. This type of aggressive capital
spending will likely impact BP's return on capital employed in a
negative fashion; however, it will provide them with a
competitive growth rate in terms of their peers. He reviewed
BP's overview figures: 2011 reserves of 17,330 million barrels
of oil equivalent (mmboe); 2011 production at 3,400 barrels of
oil equivalent per day (mboe/d); April 2012 market
capitalization cap at $133 billion; April 2012 price earnings
ratio of 6.15; 2011 corporate revenue at $375 billion; and 2011
upstream capital, which is estimated at $17 billion.
1:36:40 PM
CO-CHAIR SEATON asked for an estimate of the restructured
company's ability to expand investment in Alaska.
MR. REINSCH explained his presentation would cover an initial
broad overview of each company - identify the drivers - and then
hone in on the Alaska assets and identify four or five
challenges each company faces that could affect development in
the state.
MR. REINSCH turned to a map titled "BP Global Areas of Upstream
Operations" that visually identifies BP's global ventures,
including production in 16 of 26 Countries, in which BP is
currently involved [slide 26]. He described the core as new
venture, focus, harvest, and exit areas. He highlighted that BP
has divested Pakistan and Chilean assets, and BP has tried to
divest Argentina through the sale of BP's joint venture interest
in Pan America Energy (PAE) and it would like to divest in
Argentina. He pointed out the areas on the slide that are
depicted in yellow, represent the majority of company growth.
He stated that a number of harvest areas exist in which BP is
managing mature portfolios or mature field declines - which
would be the case in Alaska. The United Kingdom (UK) would be a
matter of a mature portfolio decline, which is much more
widespread.
1:39:25 PM
REPRESENTATIVE SADDLER asked for a definition of core versus
focus.
MR. REINSCH answered that core would represent the areas of
current material production, or areas in which the majority of
the production occurs versus focus areas, which are areas that
are receiving a considerable amount of capital injection with
the objective of building core areas into focus areas.
MR. REINSCH moved to a map titled "BP Global Production
Portfolio - 2010" [slide 27] with bubbles of various sizes
representing production levels. He noted each circle is
segmented by asset type which includes conventional onshore,
conventional shallow, deepwater, oil sands, other, and
unconventional production. For example, in Trinidad and Tobago
100 percent of BP's production has been conventional shallow
production whereas 100 percent of Russia's production is
conventional onshore production. He highlighted a few of the
major production areas, noting the U.S. is the second largest
producing country, being driven by deepwater developments in the
Gulf of Mexico. He pointed out that BP is a significant gas
producer in the onshore Lower 48, with a growing focus on
unconventional production as is the case for all of the
countries with significant acreage in the Lower 48 basins. He
predicted that the potential in Alaska is tied to Prudhoe Bay
resources and to gas commercialization at some point. The
largest producing country for BP is Russia, representing
approximately a quarter of BP's output with the potential for
development of mature fields and strong interest in Arctic
expansion.
1:43:14 PM
REPRESENTATIVE GARDNER asked Mr. Reinsch to discuss the
limitations arising from the TNK-BP joint venture and whether
the company is a Russian national company.
MR. REINSCH said TNK-BP is a joint venture, which is how BP was
able to enter Russia. BP has only been allowed to operate in
Russia with TNK-BP as a partner. He recalled that about a year
ago BP attempted to execute a joint venture with Rosneft - the
biggest Russian oil company - which was stopped by TNK-BP's
threat of court action. He indicated that the purpose of the
proposed joint venture was to position BP for Arctic development
in the Kara Sea. He concluded by reporting that ExxonMobil
secured the joint venture with Rosneft in November 2011. In
further response to Representative Gardner, responded that TNK-
BP is a private venture.
1:44:56 PM
REPRESENTATIVE TUCK related his understanding that BP may be
leaving Russia.
MR. REINSCH answered that BP wanted the joint venture with
Rosneft. Clearly, not being able to secure the joint venture
will constrain BP, but the company has no intention of leaving
Russia. In fact, Russia has begun to generate good net cash
flow for BP, returns on the investments have been made, and BP
is moving forward in a more comfortable manner despite these
restrictions.
1:46:20 PM
REPRESENTATIVE OLSON asked whether any other company could have
survived the financial problems that resulted from BP's Gulf of
Mexico Macondo event.
MR. REINSCH indicated that perhaps four or five companies could
have survived the $40 billion hit on their portfolios; however
BP has handled it in an artful manner. He suggested that if
analysts had been polled six months after the Macondo oil spill
they would have predicted the company would have been sold since
the share price had dramatically dropped.
1:47:45 PM
MR. REINSCH reported that an interesting development has been
BP's 2011 joint venture with Reliance Energy, LLC - a private
corporation in India - in the deepwater offshore project on the
east coast of India, which is expected to hold a significant gas
resource that it hopes to market to India. He characterized
India as one of the fastest growing energy markets in the world.
This joint venture illustrates how BP has restructured its
company.
1:49:06 PM
REPRESENTATIVE TUCK asked for examples of projects that would
fit into the "Other" asset types. He added none were listed;
however he indicated Mr. Reinsch does not need to answer the
question at this time.
1:49:33 PM
REPRESENTATIVE SADDLER asked whether any non-Chinese companies
are producing oil and gas in China.
MR. REINSCH responded that ExxonMobil, Shell Western E&P Inc.
(Shell), and BP are all hoping to position themselves in China.
He pointed out that BP has tried on two occasions to establish a
joint venture in China, with China National Petroleum
Corporation (CNPC) or the China National Offshore Oil
Corporation (CNOOC) - their deepwater company - similar to the
one it has in Russia; however, BP encountered difficulty in
using the same approach. He suggested that BP is at the point
of strategizing for entry and growth, but all of the major oil
companies have an interest in supplying energy to China or
engaging in the basins. He related that Shell is likely the
most advanced at this point.
1:50:51 PM
REPRESENTATIVE GARDNER noted that the high growth in Angola is
now challenged with startup of several unsanctioned projects.
MR. REINSCH answered that BP's West Africa portfolio has moved
into an almost "treadmill" stage since BP must add new volumes
and projects simply to keep up with the decline in the deepwater
projects under production. He explained the unsanctioned
projects represent projects that BP could bring into production,
but have not yet; however, he anticipated the projects would be
sequenced in and would effectively hold BP's production flat.
REPRESENTATIVE GARDNER asked whether there are any parallels
with Alaska in that framework.
MR. REINSCH responded that there certainly will be the
possibility since the African deepwater assets will go into
rapid decline. He noted the projects are built to have very
short peak periods to keep the net present value figures
competitive in BP's portfolio. In response to Representative
Tuck, Mr. Reinsch confirmed that BP's global production includes
oil and gas.
1:54:04 PM
MR. REINSCH referred to a chart, titled "Total Portfolio
Evolution: BP vis-à-vis the Competition" [slide 28]. He
related that this slide represents BP's peer group - it compares
the annual production on the vertical axis and the blue lines on
the graph show the movement over time for each company
indicated. He noted that BP and ConocoPhillips Company
(ConocoPhillips) are the only two companies who are forecast to
deliver production declines between now and 2015, while all of
the other companies are predicted to deliver volume growth. He
highlighted the analysis covers two periods: 2000-2010 and
2010-2015. He explained that during the first period, BP grew
through Russia, Trinidad and Tobago, liquefied natural gas (LNG)
development, and Angola deepwater development. This expansion
has been offset by declines in Europe - 600,000 barrels of
production loss - and in North America during 2000-2010 with the
Lower 48 onshore declines and Alaska's Prudhoe Bay declines. He
predicted that BP will decline in the short run due to post-
Macondo asset divestiture combined with curbed activity in the
Gulf of Mexico's deepwater.
MR. REINSCH predicted the net effect will be that BP will shrink
over the next few years. He discussed how BP's portfolio is
financed [slide 29]. He described the chart, noting anything
above the line represents a cash deficit and anything below the
line represents a cash surplus. He highlighted this illustrates
that the U.S. has been a leading generator of cash flow for BP
during 2000-2010. The region that has moved most from deficit
to surplus has been the West Africa portfolio, which generated a
significant amount of cash flow as the deepwater developments
moved into production. He reported on the evolution of the
portfolio, which depicts anticipated future growth [slide 30].
He stated this chart examines seven major regions from 2001-
2020, with the dotted line at 2012. He referred to Europe,
noting the initial core for BP has been in steady decline for
the last decade. He summarized that BP has been fighting a
decline rate where stability in production would be a
significant achievement; however, the fight can only be
maintained for a short period of time. He emphasized that North
America, Russia and Central Asia are the major areas of
production for BP. He noted that Sub-Saharan Africa and Angola
projects have been substantial in adding to BP's cash flow, but
these projects are still a relatively small part of their global
portfolio.
2:00:17 PM
REPRESENTATIVE TUCK asked for clarification on whether this is
based on millions of barrels of oil per day equivalent (mboe/d).
MR. REINSCH answered that it is based on thousands of barrels of
oil per day equivalent (mboe/d). In further response to
Representative Tuck, Mr. Reinsch answered that natural gas is
included in the oil equivalent and the analysis includes all
liquids and gas production, including natural gas liquids, crude
oil, and condensate. He indicated that gas is converted to an
oil equivalent in all of PFC Energy's work to a ratio of 6 to 1
- 6,000 thousand cubic feet (MCF) of gas to one barrel of oil.
REPRESENTATIVE TUCK commented that Alaska's tax structure has a
barrel of oil equivalency for natural gas, which he thought was
unique to Alaska.
MR. REINSCH explained that some companies may use slightly
different conversion rates, such as 6.2 or 6.3 to 1; however,
these conversation rates will be stipulated if they deviate from
the standard industry rate of 6 to 1.
2:01:44 PM
REPRESENTATIVE PRUITT referred to Sub-Saharan Africa on the
prior slide represents a substantial amount of their cash flow;
however, he said that slide 30 seems to indicate it does not
represent a substantial amount, which seems incongruous.
MR. REINSCH said that the Angola venture has been well invested
over the years to create an infrastructure for deepwater
development. He stated that the fields are now producing and
Angola operates under production sharing contracts. As
production begins, the amount the company receives would cost
back at an accelerated rate, ranging from 60 to 80 percent of
the revenue, which is effectively a ceiling on capital recovery.
The remaining 20-40 percent is split between the company and the
government on the basis of the fiscal terms for revenue sharing.
Thus during the early years of production there is a
dramatically disproportionate share of cash directed to the
companies as a means for them to recover their investment
capital. He acknowledged that these projects look bad on paper
until production. He highlighted that from the government's
perspective as production comes on the oil companies take 70-90
percent of the revenue being generated while the government
receives a relatively small amount; however the government does
not take any risk in the development. He concluded that the
companies take the risk so they get paid back first, which is
why it seems as though an inordinate amount of cash flow is
coming out of Angola for a relatively small amount of
production.
2:05:51 PM
REPRESENTATIVE SADDLER asked how the tax regimes will change
over the life cycle of a region. He referred to West Africa and
the tax system in place at the start of the development and
asked whether the tax regime investment would "chase the
profitability."
MR. REINSCH responded that an imbalance exists between the
institutional capacity of the governments in Africa, Sub-Saharan
Africa, and parts of South America. He emphasized that he has
not found any oil and gas company who would not prefer stability
and a competent partner to instability and a less competent or
sophisticated partner when developing a basin or oil and gas
resources. However, many of these companies have no idea what
they are getting into so frequently a government will sign a
production contract for development with an expectation of a
certain number of barrels of resource. Later on governments
often will adjust or reallocate the contract if the production
reaches unexpected success. He emphasized that stability in
fiscal terms is important, as the changes will impact the
developers and financiers.
2:09:15 PM
MR. REINSCH discussed "Global Production: Country Growth
Project Analysis" [slide 31]. He explained this chart predicts
the number of projects in 2015 which are anticipated in a
specific jurisdiction. He pointed out the vertical axis
indicates the thousands of barrels of oil equivalent per day
(mboe/d) in 2015 and the horizontal axis lists the number of
projects. He summarized that this chart looks at new sources
and ventures being entered into by BP including oil and gas. He
identified the circles or bubbles on the chart that indicate
crude oil versus gas or liquids versus gas. A bright red bubble
would represent 100 percent gas and a dark green bubble would be
100 percent oil. He reported that Azerbaijan's project is BP's
Azeri-Chirag-Guneshli's (ACG) oil project in the Caspian Sea;
Russia is a mix; and the Asia-Pacific Region consists of more
gas development. He stated in the U.S. that 11 projects are
anticipated: nine deepwater and two in Alaska; however,
hundreds of various wells are not shown in this analysis,
instead, this slide represents the discrete major capital
projects. He said that PFC Energy sees the unconventional gas
and oil sands delivering materiality for BP in a post-2020
timeframe versus being current drivers of BP's portfolio and
growth.
2:12:18 PM
REPRESENTATIVE FEIGE inquired as to what is meant by AGS
weighted.
MR. REINSCH explained it is a typo which should read "AGS gas
weighted." In response to Representative Gardner, Mr. Reinsch
explained that zero percent oil is depicted with red circles and
100 percent oil depicted by dark green circles or bubbles.
2:13:16 PM
MR. REINSCH discussed the BP in Alaska map [slide 32]. He
explained that the purple areas on the slide represent BP-
operated blocks and the blue ones represent BP-non-operated
licenses or areas. He related that overlaid on the map are the
major fields or horizons being developed with green being oil
and red being gas.
CO-CHAIR SEATON asked to have the colors on the slide defined
for those who are looking at charts without colors.
MR. REINSCH pointed out the locations on the North Slope and
explained the operations, including North Star, Liberty, Point
Thomson, and Prudhoe Bay. He summarized "BP Alaska Activity &
PFC Energy Assessment" [slide 33]. He highlighted the greater
Prudhoe Bay area, comprised of a 26 percent working interest
operated by BP, and Point Thomson, which is 32 percent BP
working interest and is a non-operated project. He described
Alaska during the 2010 timeframe, as referenced in the slide,
noting that BP produced about 173 thousand barrels of oil
equivalent per day (mboe/d), which represents 17 percent of BP's
total U.S. production and 5 percent of their global production -
all oil, all gas, all liquids on a global basis. He reiterated
that Alaska within BP's global portfolio only represents 5
percent and that figure is currently declining. He contrasted
this with ConocoPhillips Alaska, Inc. (ConocoPhillips) whose
2010 production of 244,000 mboe/d represents 36 percent of
ConocoPhillips U.S. production and about 14 percent of their
global production. He predicted that the ConocoPhillips
production will rise as a share of their global production as
the ConocoPhillips portfolio becomes more focused. He noted
ExxonMobil - the smallest of the three producers in Alaska -
produced 117,000 mboe/d or 14 percent of ExxonMobil's U.S.
production in 2010. He predicted this will be a smaller share
in 2011 as the XTO Energy Inc. acquisition takes hold. He
related, in terms of materiality, the overall global resources
represent three percent for ExxonMobil, five percent for BP, and
14 percent for ConocoPhillips. In further response to
questions, he reiterated that ConocoPhillips's 2010 production
was 244,000 thousand barrels of oil equivalent per day (mboe/d)
and BP's Alaska percentage was 17 percent.
2:18:56 PM
REPRESENTATIVE SADDLER asked whether that information will be
provided in a chart.
MR. REINSCH offered to provide it.
2:19:27 PM
MR. REINSCH identified the challenges that BP is faced with in
order to achieve the company's objectives and exercise
strategies [slide 34]. He pointed out six core issues. First,
BP must re-establish its operator profile in the global
deepwater arena. Clearly, BP suffered as a global deepwater
operator. He stated that BP acquired the deepwater Devon
development in Brazil, prior to the Macondo incident; however,
Brazil substantially delayed the approval of the project.
Despite the Macondo incident, BP has greater deepwater exposure
than any of its peers. He offered his belief that BP will
continue to rely on deepwater as one of its core growth drivers.
Secondly, BP will need to resolve the shareholder relationship
issues within the TNK-BP Joint Venture. This joint venture has
constrained BP's ability to grow in Russia. Third, BP must
complete the portfolio rationalization process. At some point
BP must start growing again and exploit the assets it has
accumulated. Fourth, BP must determine a path forward in the
Brazil deepwater. One of the major resource discoveries are the
"pre-salt" fields in the Santos and Campos basins, which has
been unfolding in the energy sector, yet it is one of the most
technically challenging to develop. He noted that Brazil's
state owned company, Petrobras, has been awarded operatorship of
all pre-salt developments in the area. Thus BP has been
examining how it can grow since it cannot operate in Brazil.
Fifth, BP must accelerate development of U.S. onshore
unconventional gas resources. BP sold its entire Permian Basin
and Western Canada assets to Apache Corporation (Apache),
thereby downsizing its conventional oil and gas position in the
U.S. at a very high value; however BP still has substantial
resources - 10 trillion cubic feet (TCF) of resources -
remaining in the Shell gas plays to accelerate development.
Finally, BP must accelerate development of its oil sands leases.
He noted BP has significant lease holdings in the oil sands in
Canada. These are asset developments that make a lot of sense
for their portfolio, which would provide a stable asset over
long periods of time to offset their substantial global
portfolio comprised of deepwater development with high
production rates and steep declines. He emphasized that it will
be important for BP to have this balance in their portfolio as
they continue to expose themselves to deepwater development.
2:24:46 PM
CO-CHAIR SEATON asked for the analyst's perspective on the
challenges. He asked how much of an effect a tax change would
mean for the company in the next 3-5 years and if tax regime
changes would be the driving determination for BP.
MR. REINSCH answered that is a simple question with a
complicated nuanced set of answers. First, Alaska has three
assets types: the legacy fields, the new developments of lower
quality crude oil, and natural gas. He suggested that any
company would need to consider these areas separately each with
a set of unique values. He said he has been a fan of tools and
targets in the realm of fiscal regimes. He acknowledged that
incentives are necessary to accelerate production in a legacy or
mature field in decline. He predicted that a change in the tax
royalty regime will impact the economics of those developments
and to the extent it could enhance the competitiveness of the
returns of the projects, it should attract incremental capital
from the corporate budget. He pointed out that all companies
look to maximize the efficient use and allocation of their
available capital resources, which represents the dialogue and
discussion in the business and corporate level. Certainly, a
tax change would improve the climate, but it is unknown as to
whether it would attract the capital investment.
2:29:20 PM
CO-CHAIR SEATON reiterated that it would be good to have advice
about each company on the probability of what would tip the
scales.
MR. REINSCH said that part of the challenge will be the
particular joint venture is operating agreement's structure in
Alaska with respect to the large assets. He noted it is not a
majority rules decision on whether to undertake capital
expenditure programs, but unanimity. Alaska would need to look
for the weakest link. He identified ExxonMobil as the weakest
link, in terms of for whom Alaska is the least relevant in terms
of the current production as part of their global portfolio. He
also suggested that in terms of natural gas assets, it could
also be ExxonMobil, as well. When considering field-by-field
within portfolios, attracting capital to a project development
must be agreed upon by all parties involved. He reviewed the
post-Macondo actions. He said PFC Energy thought it was clear
that BP would need to divest a large part of its portfolio in
order to move forward. In that regard, Alaska absolutely stood
out, since Alaska would have a lot of value for a company who is
an advanced oil recovery specialist. He briefly discussed that
BP divested its Forties Field - its crown jewel asset in the
North Sea - years ago to Apache, since the company is a
specialist in recovering any last bit of value out of an asset.
He stated that an enhanced recovery specialist would want to
operate wherever the company puts its capital. He described
getting into this specific joint operating agreement as a
difficult the environment, plus it wasn't likely BP would want
to leave, but they may have been interested in divesting certain
assets that were less suitable than the direction BP was
heading. He was uncertain about what conversations actually
took place. He acknowledged he is merely sharing PFC Energy's
external thought processes. He recapped that it represents an
environment that doesn't lend itself to what normally would take
place, which is asset churn in and out of the portfolios on a
field-by-field basis. He related the dialogue is different and
it makes Co-Chair Seaton's question more difficult to answer in
a definitive, objective way.
2:33:21 PM
CO-CHAIR SEATON acknowledged it is a difficult question that
requires speculation to answer. He said one of the underlying
assumptions is this will make a difference with all three
parties in the field in [Prudhoe] Bay. He reiterated that if
all the companies must agree to changes it is important to
understand the various and significant pulls for the companies
with respect to their portfolios. He recalled Mr. Reinsch
mentioned the UK's Forties Field in the North Sea. He asked
when it was divested, since that project is as an example of a
mature basin that experienced an increase, following a rate of
decline due to the Apache Corporation's (Apache) technologies.
MR. REINSCH answered that Apache bought the Forties Field from
BP based on an agreement on the remaining reserves. He recalled
that about ten years ago Apache produced the reserves, yet the
remaining reserves are larger than they were when it was taken
over. He did not attribute this additional resource to magic,
but rather that Apache's management and focused ability on the
further development of a field differs from BP's global
portfolio interests. He speculated that it was more important
for BP to put their management towards Russia and deepwater Gulf
of Mexico productions. He likened Apache's work as a classic
example of what enhanced recovery and focused development can
mean to a large mature asset.
2:36:19 PM
REPRESENTATIVE PRUITT queried whether BP has had the ability to
spend what is needed to maintain its investments, and whether it
will impact Alaska's investments if BP does not have the funds
to invest.
MR. REINSCH answered the way BP executed its restructuring post-
Macondo has allowed BP to enter areas in earlier stages of
development and move forward without the financial stress that
had been anticipated. He pointed out BP is involved in high-
cost frontier developments in the lower tertiary - ultra-
deepwater - the Brazil deepwater, noting the TNK-BP Russia
venture is also cash generating. He returned to the chart "How
the Portfolio is Financed: Sources and Uses of Cash" [slide
29]. He stated that what is saving companies is the current
$100 plus per barrel price of oil that has shifted the line
between cash deficit and cash surplus. The vast majority of the
BP portfolio has been in a cash surplus. He stated that BP is
not stressed from a financial or a debt perspective; however,
the dividend and share buyback policies impacted the company's
treasury and cash flow. All of these companies create capital
discipline through hurdle rates that basically have dividend and
share buyback as the opportunity cost of each dollar of capital
invested. The company reaches a point at which either the
internal rate of return or the net present value accruing to the
capital investment cannot compete with the value the company
gets from dividend or buying back shares and the impact that
will have on the share price. He pointed out that the
treasury's function is set the criteria and identify the capital
BP has available and to inform the units it may not have all the
free cash flow and capital at its disposal for upstream oil and
gas development. Within that context Alaska is no more or less
competitive. He said that BP did sell off a certain amount of
producing properties and has seen its production decline so
producing assets have value and while no one is looking to get
rid of producing assets, the state will still compete. He
concluded that BP is not capital constrained.
REPRESENTATIVE PRUITT questioned why BP did not get rid of the
Alaskan assets when BP was divesting its assets.
MR. REINSCH cautioned that PFC Energy was not party to the
discussion; however he would have expected it to be a
consideration. Still, the Alaskan assets may not have been on
the table due the structure of the joint operating agreement in
Alaska. He highlighted that the operating agreement was
structured to keep the three core companies in place, which
might have been a blocking factor. Alaska has benefited over
the decades from the agreement, but it also makes it difficult
for other companies to enter.
REPRESENTATIVE PRUITT and how many companies can step in with
that structure in place that would have the capital to invest.
MR. REINSCH answered it would be a small set, likely 8-10
companies, but there are options.
2:43:54 PM
REPRESENTATIVE SADDLER asked whether the complex ownership
situation in Alaska is unique and if it should be simplified.
MR. REINSCH responded that the joint operating agreement is not
unique and is quite common in global portfolios. He explained
it would not be common for smaller field developments or bidding
on leases, but in a large field like Alaska this structure is
often seen. He could not comment on the complicated unwinding
that would be necessary.
CO-CHAIR SEATON related his understanding that only one other
agreement has the veto power by the participating owners.
MR. REINSCH noted the unanimity aspect is somewhat unique.
2:46:31 PM
REPRESENTATIVE SADDLER inquired as to whether over time some
companies will migrate towards natural gas fields while others
will migrate towards oil development.
MR. REINSCH asked for clarification on whether he is speaking to
these three companies or to other companies.
REPRESENTATIVE SADDLER answered that he is interested in both.
MR. REINSCH responded that the book of how basins mature and how
competitor landscapes changes over time is currently being
played out in both West Texas and Alberta in the western
sedimentary basin. Again, he noted those are onshore basins
with multiple play types and multiple field sizes. He said that
Alaska and the MacKenzie Delta regions are somewhat unique since
they are very large field developments with a very high cost of
capital expenditures. He did not think a small startup company
would move assets to production, nor does Alaska have the
existence of thousands of fields of varying sizes with onshore
asset churn. He suggested that isn't even the environment in
the North Sea, which arguably could be a closer analogy. Even
in the North Sea large numbers of fields consist of different
sizes. Additionally, technology ranges from shallow to
deepwater development, which has become much more widespread
among the service sector and oil and gas companies that have
enriched the competitor landscape. However, the 25-26 largest
publically traded E&P companies or upstream oil and gas
companies account for over 80 percent - moving towards 90
percent - of the North Sea production, including Norway and
Norwegian shelf, the UK and North Sea combined. He summarized
that the number of companies is a relatively small number of
very sophisticated players.
REPRESENTATIVE SADDLER said he is not advocating breaking up
ownership.
2:49:48 PM
REPRESENTATIVE FEIGE referred to the slide 29 chart titled, "How
the Portfolio is Financed: Sources and Uses of Cash." He asked
what price the dotted black line represents.
MR. REINSCH answered that the dotted line reflects the movement
of prices over time and clearly these are data points over the
last decade. He related that is a creation of a line of cash
flow equal to capital expenditures. He explained that if all
else is equal when the oil prices increase the line tends to
shift up so for the same amount of capital expenditure the
company would have an increased cash flow. In response to
Representative Feige, he agreed if the price dropped the line
would go down and regions in cash surplus would shift into cash
deficit.
REPRESENTATIVE FEIGE then referred to the operating agreements
in Prudhoe Bay and said that it seems unlikely an independent
company such as Apache would come in and function on its own.
He asked whether any of the three big producers could afford to
give up the cash flow in Prudhoe Bay.
MR. REINSCH responded that it a qualitative question. He
referred to the materiality numbers for Alaska within the global
portfolios. Clearly, ConocoPhillips would be the company that
would be most reluctant to do so. Additionally, he said he
would argue that Alaska is core to ConocoPhillips, rather than
being in a harvest status, since Alaska is a material part of
this company's global portfolio to a greater degree than for the
other companies. None of the companies have an interest in
moving away from the prospectivity and the opportunities in
Alaska, nor has he heard any of the companies make a suggestion
they wish to exit. However, he has heard the companies say they
have opportunities and need to attract capital. He pointed out
that different kinds of opportunities attract capital and
competition within different parts of each company's portfolio.
He suggested the dialogue is likely that they need to structure
to be robust across a range of prices to move forward and will
see what they can accomplish rather than to say if Alaska
doesn't do what they say they'll leave.
2:53:35 PM
REPRESENTATIVE GARDNER recalled other BP lawsuit issues
including misadventures on the North Slope, and asked whether
some companies would be reluctant to move forward with BP as a
partner.
MR. REINSCH said that BP is considered a competent partner,
although a series of red flags have been raised. Even so, the
company has addressed the issues, and restructured to focus on
efficiency and capabilities versus financial and corrective
actions have been taken.
REPRESENTATIVE GARDNER pointed out BP has had issues including
fines for sacrificing pipeline maintenance for dividend payments
and the threat of a lawsuit with the TNK-BP group. She pointed
out that BP is an operator on the North Slope and asked whether
these problems have made other companies question the
partnership agreement.
MR. REINSCH answered he would be surprised if that were the case
since BP is well regarded as a competent technically-able
competitor. He suggested that a series of incidents have raised
red flags; however, BP has responded by changing its internal
processes, management structures, and putting into place a
different type of internal decision-making process with a
greater focus on efficiency and technical capabilities and a
lesser focus on financial enhancements. He reiterated that BP
has recognized deficiencies and has taken actions to address
them. In further response to Representative Gardner, he
answered that the global players and larger players prefer to
have control over their assets; however, the reality is that no
individual company, including ExxonMobil has the personnel,
managerial project management, or technical capability to
operate everything in their portfolios. He pointed out that is
the reason operator/non-operator positions are a part of this
business. He said it is better for companies to focus their
energies on the parts they operate and to monitor their joint
operator closely. He noted non-operators must shadow everything
the other companies are doing. He concluded that one of the
unique aspects of the arrangement is the companies can make
their opinion known and can stop things.
2:58:10 PM
REPRESENTATIVE TUCK recalled Mr. Reinsch's earlier discussion on
striving to make the legacy fields economically competitive. He
further recalled he had pointed out that BP is not a specialist
in getting the last oil out of an area. He asked whether it
would be beneficial for Alaska to ensure that tax credits are
invested in Alaska. He clarified that the state doesn't know
the company's desire to develop assets elsewhere or if any other
obligations exist. He asked for the best way to ensure the
investments happen in Alaska.
MR. REINSCH responded that question relates to one of his
colleague's area of expertise; however he related his
understanding that Alaska's short term two-to-four-year
requirement is to obtain an increase in production so tools and
targets suggest that the focus should be to reward any increment
to production as directly as possible and implement any fiscal
changes to do so. He cautioned that the farther away from the
targeted activity, the less likely it is that the outcome will
be the one anticipated.
3:00:09 PM
REPRESENTATIVE OLSON noted that 70 percent of BP's stock is held
in pension plans in the UK and U.S. and for that reason alone
the governments have not been taking any action likely to force
the company into bankruptcy. Additionally, Alaska has a
significant amount of stock in the Public Employees' Retirement
System (PERS), the Teachers' Retirement System (TRS), and the
Alaska Permanent Fund. Thus everyone in the room has a piece of
BP. He reiterated that everyone wants to work with them.
3:01:15 PM
CO-CHAIR SEATON asked to focus on the job of incentives of tax
changes to increase production. He returned to Mr. Barron's
chart on the Forties Field. He related his understanding that
the production turned around when BP sold their interest in the
Forties Field to an operator with enhanced oil recovery ability.
He asked why the state would expect a tax regime to have an
effect on BP since this is the same operator who spun off the
Forties Field when BP could not turnaround the decline.
MR. REINSCH answered that the core of the answer goes to the
question of materiality. When BP made the decision to divest
the Forties Field, the field had declined to the point that it
was a fairly small producing asset in a large asset portfolio
and BP was in the process - as does each company - of high
grading its portfolio. He surmised BP assessed where to direct
its management expertise although he acknowledged BP had the
technical ability to focus on the Forties Field. However, the
Forties Field became Apache's number one or number two global
asset. Thus transiting the asset to a smaller company it now
became Apache's core within their worldwide operations, whereas
it had ceased to be that for BP. He emphasized that at 166,000
barrels per day Alaska is very material for BP. He offered his
belief that these volumes are important to these companies, the
legacy fields are a transition asset, the companies prefer not
to divest, and all three have the capabilities to attract
capital and conduct enhanced recovery.
REPRESENTATIVE GARDNER commented that there may be elements of
the decision-making process not related to the internal rate of
return or net present value and possibly elements exist over
which Alaska has no control of whatsoever. She said there may
not be tools in Alaska's tool box that the state hasn't dreamed
of yet.
3:06:39 PM
MR. REINSCH turned to ConocoPhillips Alaska, Inc., to review a
similar set of charts. He described the company overview and
substantive restructuring it underwent from 2010-2012 which he
characterized as remarkable [slide 35]. In March 2010,
ConocoPhillips faced declining production, a declining share
price, and lagging financials so it announced a pathway that
some termed a shrinking-to-grow strategy. The company took a
hard look at their portfolio and divested the elements that were
not going to move the company forward. ConocoPhillips targeted
a $15 billion asset reduction and focused largely on upstream
assets, but also some refining and downstream assets. The
company took returns and paid down debt, issued dividends to
shareholders to retain their loyalty, and positioned itself for
future growth from a smaller, but higher value asset portfolio
on a global basis. In July 2011, ConocoPhillips de-integrated
itself from an upstream, pure exploration and production (E&P)
company and took its downstream and product assets to a separate
stand-alone company called Phillips 66. He characterized the
company in 2006 as one too large to compete with independent
companies such as Apache and Anadarko Petroleum Corporation
(Anadarko), but too small to compete with ExxonMobil Corporation
(ExxonMobil) and Shell Global (Shell) on the basis of
efficiency, since ConocoPhillips was not involved in big capital
projects that would have given it row (c) efficiency numbers.
In 2006, ConocoPhillips bought Burlington Resources, Inc., which
has headed off growing production and reserves; however,
unfortunately, months before the peak of U.S. gas prices. Thus
ConocoPhillips bought a very large conventional gas portfolio in
the U.S. and has been fighting that ever since. He pointed out
their reserves indicate the company is exactly where it was five
years earlier so in many respects they have "returned to where
they came from."
3:13:18 PM
MR. REINSCH offered his belief that ConocoPhillips is still too
large to compete with the independents and too small to compete
on efficiency with the global players. He said their new CEO
has been charged with charting a new strategic path forward.
ConocoPhillips's portfolio has been built on global gas, a
liquid natural gas (LNG) portfolio, a maturing oil sands
portfolio in Canada built around in-situ development based on
steam-assisted gravity techniques - underground as opposed to
the big mining operations other companies have pursued - and on
unconventional resources, including shale gas and shale oil
plays. Currently, of the three companies being reviewed today
within that portfolio, Alaska is the most material to
ConocoPhillips. He characterized Alaska as an obvious role for
ConocoPhillips's portfolio. He pointed out that at $93 billion
ConocoPhillips is smaller than BP and ExxonMobil. He emphasized
that the startling impact of the rationalization program is the
very large negative compound average growth rate over the last
three years of negative 30.68 percent. He explained the result
has been to enhance the importance of Alaska in ConocoPhillips's
global portfolio.
3:12:45 PM
MR. REINSCH provided a map titled "ConocoPhillips: Global Areas
of Upstream Operations" [slide 37]. This map indicates
ConocoPhillips's portfolio, including that it is active in 22
countries, with production in 15, and North America, including
Alaska as its core. He said one of ConocoPhillips's calling
cards, is - uniquely amongst its peer companies - that
ConocoPhillips derives over 75 percent of its production from
Organisation for Economic Co-operation and Development (OECD)
countries. The benefits of that are stability, security, and
protection; however, they are involved in largely mature basins,
which have high costs.
3:13:36 PM
REPRESENTATIVE TUCK recalled him defining the difference between
core and harvest. He noted what may be a harvest for some
companies may be a core for another. He assumed that it may be
the attitude held by the company which determines whether it is
a core or harvest mode. He recalled the core area as the area
of material current production and the harvest area as one to
derive capital to move into the core areas. He asked for
further clarification.
MR. REINSCH replied that the allocation of countries or basins
into these categories requires a bit of art. Part of what PFC
Energy would provide is the role of assets within the different
portfolios. He related from an external, objective standpoint
or perspective and assessment of ConocoPhillips, Alaska is core
and material to this company and this assessment is expected to
remain so into the future - both for its current producing
assets and for the growth opportunities that ConocoPhillips
seeks. Additionally, it has become even more material due to
the downsizing of ConocoPhillips global portfolio. He turned to
BP and ExxonMobil, in particular, and said that setting aside
the gas, Alaska represents a relatively small part of their
portfolio. He pointed out these companies have been managing a
decline as efficiently as possible, which has generated
significant cash flow. He pointed out that part of that cash
flow has been put towards other opportunities in their portfolio
- just as Alaska was built from free cash flow from other
producing jurisdictions. The PFC Energy sees a difference in
Alaska's role within the three portfolios.
3:17:17 PM
CO-CHAIR SEATON recalled that Alaska represents about 36 percent
of ConocoPhillips's U.S. production, but Alaska represents about
two-thirds of their liquid production since U.S. gas is not
valuable. He asked how that affects their materiality with such
a high percentage of liquids rests in Alaska.
MR. REINSCH acknowledged the absolute number is important, but
the fact that ConocoPhillips is liquids-focused in the current
market environment makes it even more important. He suggested
that comparing the numbers three or four years ago might have
changed the opinion - when Henry Hub was $8-9 per barrel,
heading to $12 per barrel and in a high gas future forever. He
pointed out the industry responded by producing a lot of gas
while consumers have been using a lot less, too. He predicted a
time will come in which crude oil prices are in the $40-60 per
barrel range and "much hand wringing" will be made of the fact
that this is a liquids-rich environment where companies should
be producing gas. He characterized this as a reality of market
movement; however, certainly the crude oil intensive nature of
production to date in Alaska is absolutely a "checkmark" for the
importance of these assets within the ConocoPhillips portfolio.
He said, "There's no question about it."
3:19:15 PM
MR. REINSCH turned to a slide titled, "ConocoPhillips Global
Production Portfolio - 2010" [side 37], which indicates the
magnitude of the portfolio and the asset types within the
portfolio. He said what jumps out immediately is the size of
the circles or bubbles in Canada, the U.S., UK, and Norway.
Clearly, this represents the strength of the ConocoPhillips
portfolio, which is strengthened even further by
ConocoPhillips's decision to divest its equity interest in
LUKOIL Oil Company - the Russian oil and gas company . This has
reduced its remaining exposure to the Russian upstream to about
three percent of its total portfolio in 2011, versus over 20
percent just two years prior. He characterized ConocoPhillips
today as a much smaller player with much less exposure.
3:20:20 PM
REPRESENTATIVE FEIGE asked what happened with LUKOIL and
ConocoPhillips.
MR. REINSCH explained the relationship was an equity ownership
as opposed to a joint venture. The value proposition behind
their initial positioning was that by combining these
portfolios, ConocoPhillips would be exposed to new developments
in Russia and LUKOIL would be exposed to new developments
outside Russia through its affiliation with ConocoPhillips.
However, in 2010, the value proposition had not yet been
realized. ConocoPhillips had better places to put its funds and
LUKOIL had not really made any inroads in the international
arena and more importantly, the areas they wanted to go weren't
necessarily areas in which ConocoPhillips was active. The
decision to divest the equity position was part of a larger
portfolio rationalization activity.
3:22:21 PM
MR. REINSCH discussed the "Total Portfolio Evolution:
ConocoPhillips vis-à-vis the Competition" [slide 38]. He
projected ConocoPhillips's production in 2015 was below the 2010
production. He pointed out the Burlington acquisition was
important as was the 20 percent stake in LUKOIL. The
restructuring and significant divestment in assets and joint
venture exposure was expanded from $15 billion to $20-25
billion, which has shrunk the ConocoPhillips portfolio to a much
smaller level than in 2010. He highlighted that selling assets
and giving dividends to shareholders is not a long-term
strategy. The industry and analysts are keenly awaiting the
direction the new executive management team and board of the
newly created independent exploration and production (E&P).
3:24:15 PM
MR. REINSCH discussed the slide titled "How the Portfolio is
Financed: Sources and Uses of Cash" [slide 39]. He stated that
unlike the equivalent chart for BP, this slide illustrates how
much longer a number of the ConocoPhillips operating areas were
in cash deficit positions. He highlighted that the improvement
in crude prices has definitely helped this portfolio move into a
cash surplus situation. He related that the U.S. and Canada, in
particular, have been contributing cash flow in 2009-2010, after
spending most of the decade in a deficit situation.
ConocoPhillips has been using its UK and North Sea portfolio
position as a "cash cow" for financing operations and capital
investments elsewhere.
3:25:32 PM
REPRESENTATIVE TUCK noted the values are different than the BP
chart. He related the angle between cash deficit and cash
surplus seem to be 1:1 ratio. He asked whether the money
ConocoPhillips invests has been a better return on investment.
MR. REINSCH answered no, that the scales on the two charts are
different since the capital expenditure on the BP chart peaks at
$12 billion and this chart peaks at $20 billion since
ConocoPhillips had the big acquisition of Burlington Resources
in 2006. Thus the capital is skewed and was accommodated by the
value changes on the vertical axis. He pointed out the zero
line is still 1:1 ratio. In further response to Representative
Tuck, Mr. Reinsch said it's deceptive.
3:27:37 PM
MR. REINSCH provided the evolution of the portfolio [slide 40].
He recalled that this underscores the dominance of North America
and the important role of the OECD's basins in ConocoPhillips's
portfolio. He pointed out that Sub-Saharan Africa, Russia and
Central Asia, and Latin America have almost nothing in the way
of material production in any of the jurisdictions. He
concluded ConocoPhillips is still a global player, but has a
much more consolidated or narrowly-focused global portfolio and
growth portfolio than BP's portfolio.
3:29:43 PM
MR. REINSCH explained the country growth project analysis [slide
41]. He referred to the red single project in Qatar. He
explained that ConocoPhillips has been involved in an LNG
development in Qatar - the last project that country will
develop under its current and ongoing moratorium on gas
development. He predicted the project will reach peak
production in 2012. He referred to slide 40, to the Middle East
and North Africa region, noting the orange bar represents that
project. He highlighted this as ConocoPhillips's one major gas
development, which is more of a manufacturing development, while
the majority of its other large-scale projects are very oily.
He pointed out that the shale gas and liquids production in the
Eagle Ford basin is largely an oil or liquids play, as opposed
to a gas play.
3:30:53 PM
MR. REINSCH projected that the ConocoPhillips Asia-Pacific
deepwater projects will be a significant producer. He related
the oil sands joint venture with Canadian Cenovus Energy, Inc. -
the spinoff company from EnCana Corporation - when they
separated those two companies from a gas play and oil sands
entity. He shifted to the Alaska-North Slope slide [slide 42].
He described the portfolio as a somewhat larger portfolio -
arguably a more exploration-oriented portfolio - with large
lease holdings in the Chukchi Sea and the National Petroleum
Reserve - Alaska (NPRA), as well as the core assets.
Interestingly, ConocoPhillips executed some creative asset
swapping with Statoil - Norwegian oil company - to introduce its
deepwater expertise into Alaska in exchange for further
positioning ConocoPhillips in the Gulf of Mexico deepwater. He
suggested that marrying these two companies will strengthen
their interests. Additionally, ConocoPhillips has both operated
and non-operated assets in the Cook Inlet area [slide 43].
3:32:05 PM
MR. REINSCH discussed the "ConocoPhillips Alaska Activity & PFC
Energy Assessment" [slide 44]. ConocoPhillips's largest
producing area has been the greater Prudhoe Bay area.
ConocoPhillips and BP had been proposing the Alaska Gas Pipeline
or Denali Pipeline for commercialization of the Prudhoe Bay gas
resources, but that proposal has officially been withdrawn.
This places uncertainty around the gas portfolio, but releases
the resource for consideration in competing or alternate
commercialization prospects.
3:33:04 PM
REPRESENTATIVE GARDNER read from the discussion page, which
read, "Production from material mature Alaska portfolio has been
in slow decline since 2004." She asked why the date was
selected since the field has been in decline longer than that
date.
MR. REINSCH offered to provide a clarification at a later date.
3:34:04 PM
MR. REINSCH turned to the slide, titled, "PFC - Identified
Challenges" [slide 46]. He outlined the challenges for
ConocoPhillips. First, ConocoPhillips needs to compete as a
"pure play" upstream exploration and production company as
rather than being an integrated major. He was uncertain as to
whether ConocoPhillips would return to a competitor space in the
mid-2000s and if it is not successful, whether it would survive.
He pointed out that $93 billion is still a big company, but
questions remain about ConocoPhillips's future. Second,
ConocoPhillips must re-establish a value proposition through
this fairly significant change in strategy direction and
restructuring - one that can compete with peer group members in
light of continuing challenges of production costs, operating
costs. The flipside of this is the OECD intensive portfolio
consists of a lot of mature basin operations and the impact that
will have on their costs. Third, ConocoPhillips must improve
their operational performance. ConocoPhillips has shown
improvements in funding development costs, but continues to rank
near the bottom of its peer group in some pretty key areas such
as net income for BOE, production costs for BOE, and upstream
return on capital employed. He highlighted that ConocoPhillips
has a reasonable portfolio of major capital projects that it is
currently executing on. As those projects move to
commercialization and begin to generate production, volumes
should boost their operational metrics and return on capital
employed figures. He reiterated that one of the challenges
ConocoPhillips currently faces is it is in transition, which
means all aspects of their operation are in transition,
including the performance metrics. Finally, this company must
show it can deliver volume growth on a consistent basis,
relative to its peers - arguably a smaller set of aggressively-
growing independents - such as Apache Corporation and Anadarko
Petroleum Corporation. Certainly, ConocoPhillips appears to
have a portfolio of significant assets to develop. It boasts 10
billion barrels of oil equivalent (BOE) resource to move from
resource to reserves and reserves to production through further
appraisal and project development. Again, ConocoPhillips has
been promising strong organic growth and the question is whether
it can deliver. He suggested that ConocoPhillips's performance
in Eagle Ford basin will be a good indicator; however,
ConocoPhillips needs to be growing production to continue to
please their investors and analysts that the company is moving
forward.
3:38:13 PM
REPRESENTATIVE HERRON stated that ConocoPhillips has a rich
history in Alaska and has provided many things, including a
cancer center. He asked him to grade their road map forward.
In response to a question, he clarified that if the snapshot is
an A, B, or C. He asked whether this is a good plan or an okay
plan.
MR. REINSCH responded he is suggesting that if Alaska wants to
be part of the solution the state must understand that what
ConocoPhillips wants is growth. The more Alaska and the Alaska
portfolio can deliver in near-term and long-term production
gains, the greater Alaska's role will grow in ConocoPhillips's
portfolio in terms of significant relevance and materiality
relative to its peers. He said if someone had asked that
question 24 months ago, he would have given ConocoPhillips a
grade of troubled; however, today the assessment would be that
ConocoPhillips's position has significantly improved. One
significant weakness in the ConocoPhillips's portfolio has been
that it divested in companies; however, this has become their
strength due to the portfolio churn previously mentioned. It
has left ConocoPhillips with a narrower, better focused, and
arguably stronger portfolio to deliver growth moving forward.
He emphasized the question of whether ConocoPhillips can deliver
a two-percent production growth number. This would be a pretty
good performance relative to the integrated majors and be
benchmarked against them or ConocoPhillips will be asked to
deliver five to seven percent growth and be benchmarked against
a smaller more agile set of independents such as Anadarko
Petroleum Corporation - which has been moving towards a 1
million barrel per day mark - at a time when ConocoPhillips has
been dropping back and is now repositioning to grow again.
These are the great uncertainties that the company faces and
investors will determine.
3:42:58 PM
CO-CHAIR SEATON asked whether the challenges, such as reliance
on profit generation from Alaska, includes the ability to
further concentrate the company's profitability in Alaska or if
ConocoPhillips would have a liability - structurally - with too
much focus in one region. He said he's trying to figure out the
relationships of the three players and whether massive
reinvestment would happen with a major tax regime change.
MR. REINSCH offered his belief that Alaska and the Alaska
portfolio is the heart of the wheelhouse for ConocoPhillips. It
is branding itself as a company with substantial material
assets, in safe haven operating environments, close to major
markets. He said, "That's Alaska." He stated that if the
question is whether the company is overexposed to shutdown, that
question is a technical issue he would expect any board
conversation to discuss how to ensure that doesn't happen and
keep the pipeline operating. Similarly, he would expect more
attention will be focused on how to grow more production in
Alaska because of materiality and the core nature of this
portfolio to ConocoPhillips. He said if the question is whether
ConocoPhillips is too heavily leveraged in Alaska and
ConocoPhillips should be looking elsewhere he would answer that
would appear to be counter to the company's strategy.
CO-CHAIR SEATON queried whether there is anything in the
ConocoPhillips's structure that would give Alaska pause in terms
of ConocoPhillips's perspective on massive reinvestment in the
Prudhoe Bay and Kuparuk reservoirs that is different from the
other two companies.
MR. REINSCH reiterated that the Alaskan assets are of more
importance to ConocoPhillips's global portfolio and would
attract more attention and if necessary, some type of strategic
premium within the overall portfolio that isn't seen within the
other two.
3:47:52 PM
The committee recessed from 3:47 p.m. to 4:05 p.m.
4:09:34 PM
CO-CHAIR SEATON reconvened the meeting. He recognized
Representatives Johnson, Doogan, and Fairclough in the audience.
4:10:06 PM
MR. REINSCH turned to the final company to be reviewed,
ExxonMobil Corporation (ExxonMobil). He said he previously
mentioned all three companies have been in a state of transition
and crossroads in terms of their strategies, which is certainly
true for ExxonMobil. He pointed out that most people find it
difficult to fathom a company of this size could ever be in
trouble or have a strategy crisis. However, that was the case
for ExxonMobil 12-18 months ago. ExxonMobil is the largest
global, integrated oil and gas company outside of the national
oil companies. ExxonMobil's average production in 2011 was 4.5
million barrels per day oil equivalent (mmboe/d). Its gross
strategy has been based on scale - basin dominance and execution
excellence. He related that ExxonMobil moves in a large way,
dominates the area and prides themselves on their ability to
develop and produce assets. The flip side is that ExxonMobil
must continually look for and secure opportunities of
significant materiality. The company had been driving its
global volume growth through the commissioning of a series of
large scale liquefied natural gas (LNG) projects in Qatar
exploiting the North field - a gas field offshore in shallow
water that is the largest single gas field on the face of the
earth. However, in the middle of the last decade, Qatar placed
a moratorium on the project since it struggled with what to do
with the revenue the field generated. That moratorium exists
today and Qatar represents ExxonMobil's growth engine. In 2010-
2011 ExxonMobil commissioned the last pieces of that portfolio
so while production continues from Qatar new source production
does not.
4:13:23 PM
MR. REINSCH said at the same time its European and Asia Pacific
portfolios were drifting away as the mature assets moved into
decline. The company was also positioned to venture into the
extra heavy oil development in Venezuela, but unilateral terms
by the government as well as the requirement that PDVSA - the
national oil company - take a 60-percent ownership were terms
that were not acceptable to ExxonMobil. Other areas of interest
to ExxonMobil Corporation include Brazil pre-salts development
of significant scale, but with Petrobras receiving a legislated
requirement to operate all pre-salts development, ExxonMobil
questioned its role in the venture. He summarized that
ExxonMobil doesn't want to invest a lot of capital in a basin in
which it won't be the operator. Additionally, ExxonMobil tried
to position itself in the offshore West Africa Equatorial Margin
Côte d'Ivoire-Ghana, but was rebuffed by the government.
4:15:31 PM
REPRESENTATIVE SADDLER asked about the use of the term
"materiality."
MR. REINSCH answered that "materiality" is defined as a
significant absolute volume volumetric - a meaningful percentage
of resource base or a meaningful percentage of total production.
4:15:57 PM
REPRESENTATIVE FEIGE queried about the term "pre-salt."
MR. REINSCH described "pre-salts." He explained that in Brazil
they found significant accumulations of high quality oils
positioned below very thick salt depositions. In order to
access the resource, the drilling occurs in deepwater depths of
3,000-5,000 feet, but requires drilling through a thick salt
layer to get into the producing horizons. He pointed out that
drilling through the salt layers makes it very difficult to
image what is below. Thus standard seismic techniques do not
happen as efficiently and if anything untoward happens - such as
a blowout or a leak - it can represent a difficult and unique
environment. Some companies produce through salt formations in
the Gulf of Mexico, but nothing on the scale and magnitude of
the multi-billion barrel fields discovered in Brazil. He
described the deepwater sites as technically challenging, big
investment, and big production volumes, which are tailor made
for ExxonMobil. He speculated if PDVSA had not been granted
operatorship over the developments that ExxonMobil would have
been one of two or three companies Brazil would have turned to
in developing its resource.
MR. REINSCH continued to explain how ExxonMobil emerged from the
problems it had been facing, which involved taking an aggressive
move into unconventional shale gas exploitation. ExxonMobil
made two commitments. First, ExxonMobil made a commitment to
immediate growth, which happened with the acquisition of XTO
Energy, Inc. (XTO) - a multi-billion dollar acquisition - that
brought ExxonMobil into shale gas and coal bed methane it had
not previously had exposure to. He characterized this as the
materiality move ExxonMobil is known for, but the surprise was
that ExxonMobil moved into unconventional resources. He
highlighted that ExxonMobil is known for big field, major
capital project developments. He related that XTO has been a
separate company within ExxonMobil, which is absolutely unique
in the history of the company. This means ExxonMobil not only
envisions a U.S. onshore resource play, but a global resource
play. It could mean ExxonMobil will be leading the charge to
access hundreds of trillion cubic feet (TCF) of gas on a global
basis. Another recent move was a joint venture with Rosneft in
Russian Kara Sea in the Russian Arctic. He described this as a
place-holder in the emerging Arctic region portfolio in which
Alaska clearly has a role to play. He predicted this is where
Alaska fits into ExxonMobil. He reported the 2011 reserves
production market capital figures are over the $400 billion
mark, whereas ConocoPhillips is at $93 billion. He
characterized ExxonMobil as a company of a different scale and
magnitude. He also reported ExxonMobil's corporate revenue at
$343 billion.
4:22:16 PM
MR. REINSCH provided a map to indicate ExxonMobil's global areas
of upstream operations [slide 48]. The corporation has global
reach with operations in 41 countries and production from 21
countries. The core projects are in the U.S., Canada, the
Netherlands, Norway, Nigeria, and Qatar. He reviewed the global
portfolio in terms of the relative size of production and asset
type [slide 49]. He pointed out the very large bubbles for the
U.S. and Qatar. The U.S. bubble has grown with the XTO
acquisition. He highlighted that three small scale
unconventional acquisitions have occurred since XTO, which
represent the cornerstone for growth for ExxonMobil. He pointed
out that Qatar represents 20 percent of global output in 2010
and while the commissioning of new liquefied natural gas (LNG)
capacity has come to a temporary end due to the moratorium, the
level of production will continue for some years into the future
delivering significant cash flow to the company as it moves
forward. The UK and North Sea represent a mature declining
asset portfolio. He related that ExxonMobil divested a
significant number of its UK assets to Apache recently. In
Russia, ExxonMobil has been primarily an east coast player with
the LNG natural gas developments in Sakhalin; however,
ExxonMobil is also positioned to consider development in the
northern Arctic region.
4:24:43 PM
MR. REINSCH viewed the chart on production growth and said
ExxonMobil Corporation is the leader [slide 50]. He stated that
BP was poised to take the lead, but fell back with the Macondo
event and divestiture. ExxonMobil has not been in a growth
stance, but its dominant metrics have been shareholder return
through dividends and buyback programs and return on capital
employed. ExxonMobil continues to lead its peer group by a
significant margin. However, in 2011 the return on capital
employed figures slipped back for ExxonMobil as the XTO business
model begins to take a more prominent position within the global
portfolio, which will bring a new mix. He highlighted modest
growth projections of $4.5 mboe/d in 2015, which is not much
different from 2010; however, the company has been guarded as to
how quickly it plans to grow the XTO portfolio. He related it
is U.S. gas market dominated and while it can focus on liquids
rich shale gas clays, ExxonMobil has the option to slow down the
development of that resource base given the other assets and
elements within its global portfolio. The PFC Energy predicts
fairly slow growth in the XTO portfolio, but if ExxonMobil
changes its plan the growth figures could move very quickly.
4:27:45 PM
REPRESENTATIVE PETERSEN asked whether part of the slow growth is
due to the abundance of shale gas which has caused the cost of
gas falling below the cost of production.
MR. REINSCH responded that all companies involved in Lower 48
gas production are considering the situation and strategizing.
Some companies are diverting upstream capital programs to the
liquids rich shale gas developments. Further, a number of
companies are involved in "cash and carry" joint ventures, in
which a total has been brought in as a partner, and the company
has been paying $.50 on the dollar for subsequent drilling and
activity until the remainder of the purchase price is worked
off. He said these ventures are still in place and allow
companies to be less sensitive to the gas prices. He reported
that the majority of the deals are unwound this year, and next
year and he anticipated another ratcheting down of upstream
activity if low prices continue. He concluded that ExxonMobil
has the ability to slow down and wait for market prices to
correct.
4:29:56 PM
MR. REINSCH discussed the slide "How the Portfolio is Financed:
Sources and Uses of Cash" [slide 51]. He acknowledged that the
chart could have been adjusted from $10 billion to $60 billion,
but that would have flattened out the dotted line. He stated
that the U.S. capital expenditure (U.S. Capex) was $60 billion
in 2010, mostly related to the XTO acquisition. He highlighted
that virtually all of the areas except for the U.S. in 2010 have
been in cash surplus situations, in particular, the Africa and
Europe portfolios, which have been generating significant cash
flow volumes for an extended period of time. He noted that
ExxonMobil was one of the first to venture into the West Africa
deepwater projects. He stated that Canada/South America is
really Canada and reflects the significant investment in
Canadian oil sands development, in particular, and the Kearl
integrated sands or Syncrude Canada, Ltd. (Syncrude) capital
expenditures. He pointed out that as this project comes into
production it will represent a significant and long-standing
cash flow generator for the company.
4:31:45 PM
MR. REINSCH reviewed the ExxonMobil "Global Production:
Evolution of the Portfolio" [slide 52]. He noted that
ExxonMobil is not present in Latin America. It is unclear how
ExxonMobil will move forward, but Latin America plays a minimal
role. He pointed out the emerging shale gas play in Argentina
and it is not clear whether ExxonMobil will decide to proceed
there. The Middle East and Africa will be ramping up in 2011-
2012 and represent the Qatar LNG portfolio - 1 mboe/d which will
generate cash flow for years. In North America the significant
impact that XTO has had on ExxonMobil's portfolio represents a
shift in materiality.
4:33:36 PM
MR. REINSCH turned to new source production, "Global Production:
Country Growth Project Analysis" [slide 53]. He said that 2011
will be the last year ExxonMobil will show new source growth out
of Qatar, with a large number of discrete projects being
developed in the U.S. for growth into 2015, as well as a large
number of smaller - 100-150 mboe/d - oily projects in Iraq,
Angola, Nigeria, and Canada.
4:34:26 PM
MR. REINSCH reviewed "ExxonMobil in Alaska - North Slope" [slide
54]. He suggested ExxonMobil's portfolio is similar to BP's
portfolio on the North Slope, including greater Kuparuk, Greater
Point McIntyre, Greater Prudhoe Bay, and the Point Thomson
development, which forms the heart of ExxonMobil's portfolio.
ExxonMobil has been the largest holder of discovered gas
resources on the North Slope, and long-term potential for
ExxonMobil in Alaska which also fits their global strategy - in
terms of a potential for a material development in an area of
LNG [slide 55]. He emphasized that gas development is an area
of ExxonMobil's competence and leadership on a global basis.
4:35:43 PM
MR. REINSCH moved to the final presentation slide, the
challenges faced by ExxonMobil [slide 56]. First, ExxonMobil
has made a significant bet on unconventional resource plays on
shale gas and oil development in the U.S. and globally.
ExxonMobil's move to unconventional resource goes counter to
ExxonMobil's historic growth through organic development. It
was formulated on a major acquisition of a company that
ExxonMobil has been allowing to operate essentially outside of
itself - looking to leverage what it does well - to the benefit
of the larger company. However, with the continued weak gas
environment in the U.S. and substantive concerns over shale gas
exploitation outside of the U.S. and with moratoriums in France
in South Africa, delivering on this is far from a sure thing.
Second, the company has been involved in a suite of significant
Asia-Pacific LNG projects - the largest is Gorgon LNG operated
by Chevron, and Papua New Guinea (PNG) LNG and the potential
Scarborough field in the Carnarvon Basin. All of these projects
sell gas into the energy hungry Asia markets of China, Japan,
and Korea. He pointed out with Qatar at a standstill,
ExxonMobil needs to move forward on the LNG portfolio. Third,
ExxonMobil must maintain leadership in share buy-back and
dividend performance. The company has spent just under $115
billion on share repurchase during 2006 to 2010. However, the
question has been raised whether ExxonMobil can maintain its
leadership position given its emphasis on unconventional
resource play, which has been a different type of model from the
large Capex and cash flow projects that the company has been
involved in. Finally, ExxonMobil must replace volume growth
from Qatar North Field in commercialization within its
portfolio. He stated Qatar contains significant captured gas
resource that remains stranded. The Mackenzie Valley gas
pipeline project was finally approved in 2011, after 24 years of
constant regulatory processes, at a time when it isn't desirable
to move the gas to the Lower 48. He characterized this as a
lesson in how not to conduct business and a lesson the Canadian
government is taking to heart as it looks to other developments
such as the Gateway oil pipeline to the West Coast.
4:40:12 PM
MR. REINSCH pointed out that the stranded aspect of these
various gas resources has rekindled interest in Alaska's LNG
expansion. He reiterated that Alaska is the only jurisdiction
for whom recovery and Henry Hub gas prices would not have any
impact on a LNG development moving volumes to the Asia gas
market. He characterized it as an absolute decision as opposed
to a relevant one. ExxonMobil has significant reserves in the
Caspian region that it has attempted to move forward to
development, but has faced aboveground risks and resource
nationalism challenges. While ExxonMobil was successful in
securing the West Qurna-1 development project in Iraq, it is
also having challenges in moving the project forward due to
obstacles in terms of takeaway infrastructure capacity and the
development of a project of that size in Iraq. He pointed out
that ExxonMobil made an aggressive move into Kurdistan, securing
six exploration blocks in late 2011, which appears to have cost
them a spot in Iraq's fourth licensing round. He characterized
this as a volatile area and it is not clear this is the position
ExxonMobil thought it would have at the onset of the Iraq war.
4:42:35 PM
MR. REINSCH summarized ExxonMobil by referring to slide 47,
titled "ExxonMobil: Company Overview." He suggested that two
stories are similar for ExxonMobil and BP, in terms of placing
Alaska within global portfolios. He related that
ConocoPhillips, is very different. He explained that in
reviewing the portfolios and the trends, all else being equal,
production from Alaska will become less material for BP and
ExxonMobil, and could become more important for ConocoPhillips,
depending on how successful the company is in restarting its
growth engine after two years of asset sales, divestitures, and
shrinkage in their upstream.
4:43:42 PM
CO-CHAIR SEATON asked, given the challenges and structural
differences for ExxonMobil in the declining legacy fields,
whether a change in the tax regime would affect ExxonMobil in
other ways than it would BP and ConocoPhillips.
MR. REINSCH said that addressing the decline in the legacy
fields of Alaska is a competition for capital within ExxonMobil
Corporation as everywhere else. However, ExxonMobil has the
greatest strategic interest in gas commercialization - through
LNG - of these three companies. He suggested that it should be
of more interest to ExxonMobil than building a pipeline to the
Lower 48. With the pipeline set aside, this project could be a
"dial turner" for them. He said one of ExxonMobil's unique
operating practices is that once a project or resource has been
approved and sanctioned for development one team of workers
takes over from the other and it is efficient in that way.
Additionally, ExxonMobil Corporation may be the most disciplined
corporations to avoid capital destruction since every monetary
aspect is considered for its highest value use.
4:48:26 PM
REPRESENTATIVE GARDNER indicated that other consultants have
expressed surprise at the limited information Alaska has
available about the industry, in terms of confidential
information. She described the difficulties in obtaining
information, besides financial information, which companies are
not required to furnish to the legislature. She asked him to
speak to this.
MR. REINSCH answered that the sophistication on behalf of the
government doesn't necessarily guarantee smart decisions. He
pointed out the UK sometimes stumbles and they are the most
interventionist, fiscal policy player in the energy matrix. He
characterized the UK as trying to fine tune projects. He said
the Alberta government engages the industry, still, they have
stumbled and the speed of policy decisions is often overtaken by
events. Having said that, he related there is a time in the
life of a basin development, particularly one of Prudhoe Bay's
magnitude - whose largess was almost unimaginable and the flow
and return to the government was so substantial - that there was
less of a need early on for a true, sophisticated dialogue with
the companies. He suggested this is a different time now, and
while it does not mean that what happened earlier was faulty or
incorrect, these discussions have brought into focus that the
Alaska upstream is getting increasingly complicated. The mix of
assets should not be treated or examined as single-basin,
single-asset decisions. The dialogue has been changing and is
becoming more sophisticated so the dialogue with companies must
get more sophisticated. He stressed that Alaska will need tools
to engage in that dialogue. He suggested using models with the
same output and assumptions helps, as does a continually
improving understanding of the technical aspects of the industry
that the companies must confront. Thus when one hears that a
company is not an oil-producing company, but is a water-handling
company, it could improve the conversation if the legislature
understands the terminology. He summarized by stating that
better data, better integrated-data, and more sophisticated
technical-analysis modeling will improve the dialogue and the
decision-making. He emphasized the expertise needed is
internalized expertise rather than external expertise.
4:54:15 PM
REPRESENTATIVE FEIGE said the state is trying to extend out the
years that the state can enjoy revenue from oil. He asked what
factors will be the most significant ones for the state to focus
on to try to improve oil production.
MR. REINSCH responded that there are three issues on the table.
First, how does Alaska extend the asset life of its producing
legacy fields and stem the decline or reverse it through
aggressive exploitation of the fields. The second issue would
be explore for and or commercialize new field developments. The
third issue would be natural gas commercialization. He focused
on the first, and said Alaska needs to address the decline rate
and improve production. The target for that in many
jurisdictions is to negotiate a decline and incentivize
incremental production. He said it is not unusual and many
companies deal with this using a tried and true method; however,
it is necessary to incentivize the incremental production. At
the end of the day it is critical how a government is perceived
to have secured a fair deal for the people of the state, but it
is equally or more important that the flow continue. He
emphasized that he would focus the attention on this issue. He
emphasized the need for a balance which must be struck in order
to make this decision.
4:57:43 PM
REPRESENTATIVE FEIGE asked whether he could cite examples by any
other countries where a negotiation on a decline rate and
incentives to spur production have occurred.
MR. REINSCH referred to Shell's Mukhaizna field, which was a
field that produced 15-20,000 barrels per day. Occidental
through negotiations on the decline rate agreed to increase
production to 150,000 barrels per day within a three-year
period, which they did. He pointed out a long list of these
types of projects exist, but they are project specific and not
basin development projects.
5:00:06 PM
REPRESENTATIVE FEIGE asked whether the negotiations for the
decline rate were contentious.
MR. REINSCH responded that the nice thing about the negotiations
is the history, so looking at the last three to five years to
determine the rate. The argument by the company has to be that
all capital they have been investing is commercial capital.
Companies don't willingly engage in value destruction so
whatever the company has invested to impact the decline has been
invested in competition with global portfolio opportunities.
That process would provide the state with historic data and
evidence. He stated that it appears to be a situation in which
an avenues exists. He concluded by stating that companies will
know.
5:01:27 PM
CO-CHAIR SEATON related that Alaska's tax regime is based on
individual companies. He asked whether a basin or project
decline rate would be external to the existing tax.
MR. REINSCH answered that the mechanics would involve isolating
the fields in question and carving them out to create a separate
set of arrangements, similar to how the state currently is
incentivizing exploration activity separate from other activity
in the basin. He suggested that a special set of criteria and
fiscal terms for the legacy fields would need to be defined in
this context. He deferred to his colleague to answer in more
detail.
CO-CHAIR SEATON asked for a response in writing of any examples,
which would be helpful to the committee.
5:03:12 PM
REPRESENTATIVE SADDLER asked for an opinion on the bill that is
before the committee and whether it is an effective tool.
MR. REINSCH deferred to his colleague. He did not think this
was his area of expertise.
5:04:15 PM
REPRESENTATIVE DICK suggested Mr. Reinsch has a sense of the
pulse of the companies. He related his understanding that
currently a window of opportunity exists. He asked whether Mr.
Reinsch could estimate and quantify the window of opportunity
and if it is two to three years.
MR. REINSCH related that he has heard a number of opinions on
the state of the Trans-Alaska Pipeline System (TAPS) and its
ability to manage lower flows. He stated that he is an
economist and is not qualified to assess which opinion is
correct; however, he offered his belief that the window is the
length of time that reliable production can flow through the
pipeline and at what volume. He viewed the decision as a set of
developments and not just one. He said there is not any end to
the dialogue since the considerations consist of short, medium,
and long-range considerations, which will develop over time. He
suggested that the legislature will not likely make a decision
and see what happens, that it is more likely to be incremental.
Clearly, the focus needs to be on the one to three year time
frame. He cautioned against fixing something that will take
another two to three years to assess the impact. He also stated
that if the decline is irreversible, decisions on the size of
government can be made.
5:08:30 PM
REPRESENTATIVE PETERSEN returned to the point of negotiating the
decline, and asked how it works.
MR. REINSCH explained how the decline rate can be projected into
the future. He said that the negotiation is around a decline
rate. The historical data is present and can be projected into
the future. That volume of production would be taxed at one
rate while every barrel incremental to the decline would be
taxed differently - in a lighter manner. The incentive would be
to increase the production as far as possible. He suggested
avoiding negotiating something different in the future than has
not historically been seen since the discussion can unravel and
lead to reservoir mechanics and rock fluid properties. He
predicted that the state is interested in more production.
REPRESENTATIVE PETERSEN stated that since there are different
companies with different leases for each field, the negotiations
will need to occur with each company separately; however, one
tax rate could apply to all current production. Another rate
could apply to production past a certain level of cumulative
volumes, which is the structure and formulation or the art of
putting the policy together.
MR. REINSCH answered that the mechanics would apply the same to
each company. The structure and formulation approach would not
change. He related that different negotiations would occur for
new fields or exploratory areas, a different negotiation would
occur.
5:13:08 PM
REPRESENTATIVE P. WILSON questioned whether it is appropriate to
increase taxes if the decline continues.
MR. REINSCH emphasized it does not make any economic sense for a
company to withhold capital that would create value for the
company. Therefore to penalize companies for doing that would
not make any sense. He said the state wants to incentivize them
to drive costs down or change the field development metrics for
the incremental barrels in a way that will attract capital. He
apologized to keep returning to this, but this is how business
is conducted. He predicted if a company is left on its own to
decide there will be a pay set in which production will continue
given the current fiscal system. He sensed the committee is
reluctant to give oil companies more money and hope something
happens. However, if the state could change the economics to
change the commercial comparisons of the investment activity in
this activity versus somewhere else in the portfolio it should
elicit a response, and if it doesn't then nothing existed. He
suggested that this would lead to a different set of
conversations.
5:15:57 PM
REPRESENTATIVE PRUITT related his understanding that a company
would not withhold profit. He asked whether there any reason
why the three companies on the North Slope would not produce the
resource that exists.
MR. REINSCH responded that a more likely scenario would be the
company would decide there was nothing more for them to do for
the legacy fields since the company did not have the capability,
management focus, or technical teams to bring to bear relative
to other opportunities in its portfolio. The logical next step
would be to consider divesting the assets. He said, "These
assets have value. I mean, there's lots of resource left." The
only reason to not to produce it would be if the company reached
a decision that it would be worth much more if it were monetized
today or else a company thinks it could obtain a reasonable
share of the net present value through divestiture. He pointed
out what is tricky with this particular arrangement is the
unanimity issue and to make this an interesting acquisition from
an enhanced oil recovery specialist viewpoint. He suggested
that due to the infrastructure, it would be hard to unwind and
could become a complicated and messy situation. However, he has
never heard of any company who was willing to leave value in the
ground. At the end of the day, companies must answer to the
shareholders and board of directors. They cannot destroy value
and capital since they have a fiduciary responsibility. He
concluded that his answer would be no.
CO-CHAIR SEATON summarized this goes back to an earlier
conversation, which recognizes that different companies have
hurdle rates and may make different decisions, but the companies
will not destroy value. He highlighted that companies may have
strategic reasons for their decisions. He did not want to
suggest that companies are destroying value when they make
economic decisions. He said the state may decide to make
changes to the tax system to make it more economical for
companies, which, in turn, could affect their decisions. He
concluded by stating that is what we are all talking about here
today.
[HB 3001 was held over.]
5:19:20 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 5:20 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES PFC PResentation 4.21.12.pdf |
HRES 4/24/2012 1:00:00 PM |
HB3001 |