Legislature(1995 - 1996)
02/15/1995 08:04 AM House RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE RESOURCES STANDING COMMITTEE
February 15, 1995
8:04 a.m.
MEMBERS PRESENT
Representative Joe Green, Co-Chairman
Representative Bill Williams, Co-Chairman
Representative Scott Ogan, Vice Chairman
Representative Alan Austerman
Representative Ramona Barnes
Representative John Davies
Representative Irene Nicholia
Representative Eileen MacLean
MEMBERS ABSENT
Representative Pete Kott
COMMITTEE CALENDAR
Presentation by Ken Thompson, President, ARCO Alaska
Presentation by Jim Palmer, Director, External Affairs, BP
Exploration (Alaska)
WITNESS REGISTER
KEN THOMPSON, President
ARCO Alaska, Inc.
P.O. Box 100360
Anchorage, AK 99510
Phone: 265-6132
POSITION STATEMENT: Made presentation to committee
JAMES PALMER, Director
External Affairs
BP Exploration (Alaska) Inc.
P.O. Box 196612
Anchorage, AK 99519
Phone: 564-5485
POSITION STATEMENT: Made presentation to committee
ACTION NARRATIVE
TAPE 95-16, SIDE A
Number 000
The House Resources Committee was called to order by Co-Chairman
Green at 8:04 a.m. Members present at the call to order were
Representatives Austerman and Green. Members absent were
Representatives Williams, Ogan, Barnes, Davies, Kott, MacLean, and
Nicholia.
CO-CHAIRMAN JOE GREEN said the presentation by Ken Thompson from
ARCO Alaska and Jim Palmer from BP Exploration will address a new
concept in state and company relationships. He noted the state is
at a time when some innovative ideas are necessary.
KEN THOMPSON, PRESIDENT, ARCO ALASKA, INC., thanked the committee
for the opportunity to testify on an important matter for industry
and for the people of Alaska. He began by reviewing his agenda.
He said he will be talking about common goals shared by industry
and Alaska and how they can work together to achieve those goals.
He stated key to those goals is the question--can new things for
new projects be done in industry in Alaska to increase the
international competition and make it more competitive in Alaska
versus other countries. He said he will describe tax and royalty
regimes in 70 other countries, showing how they compare to Alaska.
MR. THOMPSON noted he will comment on what it takes to be more
competitive and create more jobs, as well as more revenues, for the
state and industry. Finally, he said he will talk about what
immediate actions can be taken near term, and the next steps to be
taken on a long term basis, to make Alaska more competitive which
could result in better sustained economic development, meaning jobs
and incremental revenues for the state.
(Representatives Williams, Ogan, Davies and Nicholia joined the
committee meeting.)
MR. THOMPSON, referring to overheads, (may be found in the House
Resources Committee Room, Capitol Room 124, and after adjournment
of the second session of the 19th Alaska State Legislature, in the
Legislative Reference Library) stressed the state and ARCO share
important common goals including jobs for Alaskans. He said ARCO
believes they can create new economic activity for those who work
in the industry. He noted each job with ARCO creates three and
one-half jobs in the service sector, as well as jobs in retail. He
explained another common goal is incremental revenues. ARCO
believes there can be incremental revenues created for the state
and for ARCO and the industry derived from new production. ARCO is
not proposing and will not be proposing any changes in producing
reservoirs in existing fields. He stressed ARCO's emphasis will
principally be on marginal development in new fields or on how to
spur an increase in exploration activity.
MR. THOMPSON noted there is some sensitivity about what might be
proposed in regard to the permanent fund in particular. ARCO sees
an opportunity to increase permanent fund contributions through new
activities and new revenues. He stressed ARCO believes that any
proposal industry and state comes up with together should maintain
current contribution levels. Therefore, there is a need to be
innovative. He said any new opportunity can create from zeros to
positives. He noted a recent news report that said, "it is better
to have half a loaf than no loaf."
MR. THOMPSON stated the common goals of jobs and revenues can be
created and achieved through sustained economic development which
can be done through new exploration, marginal developments, and the
extension of field lives. He stressed to achieve sustained
economic development, leading to jobs and revenues, it is very
important to understand how the business environment in Alaska must
become more competitive. He said the industry realizes it has to
do its share such as greatly reducing costs and changing the cost
of living within the company. He pointed out industry is doing
that through new innovations, working together better with its
service companies and partnerships, and also in developing new,
more cost effective technologies in Alaska.
Number 153
MR. THOMPSON discussed what is happening in the rest of the world
in some key areas that have seen new incremental projects brought
on, and areas that have created new jobs and revenues. Australia
introduced a resource rent tax in 1985 for offshore projects,
meaning they have a flat 33 percent corporate income tax, which is
all the burden producers will pay. He noted once producers achieve
a certain rate of return on their investment, then they have
additional revenues they get via a resource rent tax. He said if
a small field is involved or oil prices are low, the resource rent
tax would not be recovered because the rate of return will not have
been met.
MR. THOMPSON told committee members that in Venezuela, the income
tax rate for extra heavy crude development was lowered from 67
percent to 34 percent and there was the removal of onerous tax
provisions for multinational firms. He noted that country has also
improved the bidding structure for marginal fields. He explained
that ARCO currently is in discussions with Venezuela on a large
multi-billion dollar deal and stressed two years ago they would not
have been there.
MR. THOMPSON stated fiscal reformations in Alberta/Canada revived
the oil and gas industry there. He said Norway completely
abolished royalties on new fields in 1986 and removed the sliding
scale state participation for new leases in 1992. He pointed out
the United Kingdom (UK) abolished royalties entirely, going from
12.5 percent royalties to zero royalties on all new fields. In the
UK, they also had a production revenue tax, similar to Alaska's
severance tax, which has gone from several percent to zero to
encourage development in new fields. He noted the changes have led
to a revival of the UK oil industry which was a country that had a
production curve heading down. He said last month the UK achieved
record production in the history of the UK as a result of
establishing incentives.
Number 208
MR. THOMPSON showed an overhead outlining the fiscal regime
comparison as of 1994 on new fields. He noted these countries have
not made changes in their tax and royalty structure on existing
production. He said in the UK, royalties have been eliminated and
they no longer have ad valorem taxes or severance taxes. He stated
Australia has no revenue taxes or ad valorem tax. He noted that in
Australia once a company has invested, and they discover a large
field and recover their investment, there is additional taxation
called a resource rent tax which kicks in and can get up to 5 or 10
percent. He stressed the tax varies tied to the oil price. He
explained currently the total burden in Australia and the UK is
about 33 percent which is received on a profit based taxation, not
revenue based. In Alaska, industry faces 39 percent corporate
income taxes, royalties which average 12.5 percent to 13 percent,
a production tax which varies from 0 percent to 15 percent, and the
ad valorem tax of 2 percent.
Number 245
MR. THOMPSON said ARCO has worked with outside consultants in
looking at the tax and royalty regimes in 70 different oil
producing countries. He pointed out that most of the tax and
royalty regimes in foreign countries fall into two types of overall
systems. He explained the first system is the production sharing
contract. In a production sharing contract, after a company makes
an investment, they get a very high share of the production until
their capital is recovered. After that point, profits are shared
and in many cases that sharing is 50/50. He stated some of those
do have royalty but only after capital is recovered.
MR. THOMPSON told committee members that some countries have a tax
and royalty system similar to the United States and Alaska. Less
than one-third have a tax royalty type fixed system. More than
two-thirds have a variable type of royalty or net profits type of
share. When looking at the larger oil producing countries--those
producing over 200,000 barrels of oil a day--only 3 out of 22 have
a fixed royalty system and Alaska is one. He pointed out that 19
of 22 nations either have a variable type royalty, a net profits
type of system, or a production sharing contract. He said many of
these changes have taken place since the fall of communism. These
countries have become more free market and want to create a better
economy for their own people. For example, while ARCO's capital
budget was trimmed for Alaska, ARCO International is seeing
increased capital budgets for Indonesia, the Middle East, Ecuador,
China, and Algeria.
Number 311
MR. THOMPSON commented on what it takes. First, it takes industry
working with the state to develop that competitive environment to
understand how these other countries are getting more capital to
create jobs and revenues. He said a key is ARCO's support of the
state's effort to achieve a soft landing called Alaska's budget.
He complimented the legislature and the Administration's efforts to
focus on balancing the budget, so that if any incentives are given
today or changes are made, they can be honored in the future
because the state is in a very healthy economic situation. ARCO
believes, emphasizing new projects, that a competitive tax and
royalty structure should be developed in an innovative way.
MR. THOMPSON stated it would also be helpful to transition to a
more flexible regulatory environment, where the state is more
willing to consider alternative business arrangements, when
necessary, to move forward on small or marginal projects. He said
the industry also realizes it must focus on keeping cost structure
low. Industry feels there are things it can do such as innovations
to lower lease operating costs through new technologies. He added
industry feels it is important to bring in new
companies/competitors to Alaska who can help share the risks of
exploration but also believes in doing that, the very high
standards on environmental protection and safety must not be
lowered.
Number 346
MR. THOMPSON commented on immediate actions for the short term
which ARCO recommends. He said ARCO recommends that the
legislative intent for the application of existing incentives be
reviewed and clarified. He stated in doing that, the following
questions will be asked. Are the incentives being used
effectively? Are the incentive used in the way the legislature
intended? Are the incentives obtaining the results expected? He
noted that currently, technical teams at ARCO and other companies
are working closely with the technical teams at the various
commissions to examine many of these incentives and hopes to soon
propose legislation which will address these questions and even
make some of the incentives more clear.
MR. THOMPSON said in regard to the exploration incentive credits,
he has worked every oil basin in the United States (U.S.), and has
worked most of the foreign countries mentioned earlier. He felt
the state's exploration incentive credit is good and could spur
exploration. However, since the incentive credit was approved,
ARCO has applied three times for wildcat wells and has been
rejected three times. ARCO believes the current rules and
guidelines are unclear and what qualifies and what does not qualify
is not clear. He stated a simple change would be defining
exploration by the Internal Revenue Service (IRS) or the Securities
Exchange Commission (SEC) guidelines which might make it very
effective for the exploration incentive credits.
MR. THOMPSON noted that ARCO Alaska has a fixed exploration budget.
The budget in the past was almost $200 million and this year it is
$20 million. He explained the reason for the change is the fiscal
regimes in other countries which allow acceptable rates of return.
He noted even with a fixed budget, ARCO Alaska is the largest
explorer in Alaska, and this year will be drilling four exploration
wells. He said if ARCO Alaska was to use something as simple as
using the IRS or SEC guidelines for exploration and getting the
incentives, ARCO's budget would allow drilling up to six
exploration wells. He pointed out that change could have the same
effect on other companies, perhaps even bring some new companies
into the state, which also allows a statistical higher chance of a
field discovery.
MR. THOMPSON stated the existing lease sale schedule program is not
working well as far as a regular schedule for leasing. A lot of
effort is put forth in getting prepared and sometimes the sales are
delayed or there are major lawsuits involved. He said ARCO Alaska
does applaud the legislature's effort to try to improve the lease
sale schedule through HB 308. He hoped that ARCO Alaska and the
legislature can work together to make HB 308 work.
MR. THOMPSON explained the discovery royalty credit is a credit
given to a new exploration well and the lease of discovery, and
allows royalties to go from 12.5 percent 5 five percent for 10
years. He stated the remaining leases in the field receive no
royalty credits. He noted this credit would provide more of an
incentive if, for example, the credit was applied for five years
from the date of initial production and/or was applied to leases
covering the entire discovery. He said this would make investment
in the new fields more attractive because the credit would lower up
front development costs.
MR. THOMPSON stressed a key recommendation is the review and
support of flexibility in the Department of Natural Resources (DNR)
to provide royalty relief. He said in current law there is a lot
of flexibility in lease sale terms. For example, in lease sale 79
coming up this summer, there is a wide range of lease sale terms
which could be recommended such as a net profits type of term.
This type of term would make that lease sale competitive worldwide.
He stressed the fixed royalty for that lease sale does not make it
competitive. He pointed out there are existing laws which allow
the flexibility but they need to be reviewed and supported.
MR. THOMPSON stated in smaller discoveries, it is very difficult to
move forward with economic investments. Many of the laws and
regulations consider the large Prudhoe Bay type of fields. ARCO
Alaska has several smaller fields and believes there are several
left to discover in Alaska but more flexibility is needed there
also. He said prolonging economic life especially relates to the
Cook Inlet and Kenai Peninsula producers. He noted existing
regulations to prolong economic life do provide royalty relief if
people can show economic need.
MR. THOMPSON said prolonging economic life is a good piece of
legislation but is very difficult to obtain and the administrative
burden is a nightmare. One producer recently applied, for a field
where they were losing money, for royalty relief to extend the
field life which also means peoples' jobs. In that case, the law
stipulates providing data for revenues and costs all the way back
to the date of discovery. He noted the field being discussed was
over 20 years old and had changed hands several times. The
producer could not find the original records all the way back to
discovery, although they had excellent records for the past several
years. The request was denied because the law stipulates all data
back to the date of discovery must be provided. He stressed that
was a field which could have had prolonged economic life for jobs
and revenues. He pointed out the regulation could be modified to
require only the last five years of economic data to show there is
a need.
(Representatives MacLean and Barnes joined the committee.)
MR. THOMPSON said ARCO Alaska also requests the legislature to
support any federal tax incentives for oil and gas development. He
noted there are currently ongoing discussions, at the federal
level, about different types of incentives. He stated when those
incentives come up, ARCO Alaska urges Alaska's support. He noted
that ARCO Alaska also appreciates the state's support in efforts to
open the Arctic National Wildlife Refuge (ANWR) and lift the export
ban.
MR. THOMPSON said these immediate actions for the short term means
the next few weeks and months. He said ARCO Alaska recommends its
technical staffs work with the various commissions and their
technical staffs to address most, if not all of these
recommendations and then bring forward proposals for either
legislation or minor modifications in existing legislation.
Number 479
MR. THOMPSON stated those short term recommendations may not be
sufficient for the long term in regard to sustained economic
development. He commented on recommendations for the long term.
ARCO Alaska urges the legislature to support and participate in a
broad based process to develop recommendations aimed at enhancing
Alaska's long term international competitive position. ARCO Alaska
believes strongly that any of these initiatives should be broad
based, there should be a public consensus that the right thing is
being done, and there should be a bipartisan process involving a
lot of cooperation between the legislature, the Administration, and
the industry. Mr. Thompson noted that many are eager to move
forward to make changes that would make Alaska more competitive and
he appreciates and encourages that enthusiasm. However, he
cautioned it is a complex issue requiring a lot of thought and
public buy-in.
MR. THOMPSON pointed out the first effort should be gathering
information (such as shown earlier) on competitive fiscal regimes.
If there is fixed capital available in the worldwide industry, how
does Alaska capture more of that? He said ARCO has been a customer
in Alaska for over 40 years and is committed to Alaska long term.
He stated ARCO Alaska likes shopping in Alaska but stressed there
are large discount warehouses that have moved in across the street
from Alaska in just the past few years who have very good
merchandise and offer better terms. He advised ARCO Alaska wants
to stay shopping in Alaska and believes by gathering this
information and working together, a regime can be developed which
will be acceptable to the citizens of Alaska and will keep ARCO
Alaska shopping in the state.
MR. THOMPSON said once the information is gathered, it is
recommended that a broad range of options be developed, which can
be narrowed to specific proposals for legislative action, perhaps
at next session. He stated the immediate steps he talked about
earlier, which could improve existing incentives and regulations,
could be done in the next few months. He stressed the long term
recommendations are more complex. These steps say ARCO Alaska
wants to compete in Alaska versus these other countries.
REPRESENTATIVE EILEEN MACLEAN asked Mr. Thompson what type of
options was he talking about.
MR. THOMPSON responded the options could be long term things he
talked about earlier such as net profits type of recoveries versus
a fixed royalty or things such as a variable royalty.
MR. THOMPSON commented on an option ARCO Alaska is not recommending
at this time, but one which shows creativity and a way of
addressing some of the issues being faced when making competitive
investments in Alaska. He said, referring to the next option, that
ARCO Alaska has listened to the concerns about changes regarding
the permanent fund. ARCO Alaska believes this option would work to
protect that fund. He explained where there are zeros now on
marginal fields, this option could create positive values for the
state, the industry, and the permanent fund but also could provide
a floor on permanent fund contributions which is a sensitive issue.
Number 543
MR. THOMPSON explained this option is called a conceptual fixed-
variable royalty which means fixed for the permanent fund and
variable for the industry to make investments competitive. He said
the royalty percentage side of the chart has not been filled in yet
and felt the numbers should be filled in over the next few months
by the joint work earlier talked about. He pointed to another line
which would vary according to oil price. For example, if oil
prices are high, the royalty should be higher and perhaps the
state's share even higher than what it is currently under existing
royalties.
MR. THOMPSON stated there is a realization of the sensitivity
present if industry gets breaks on incentives on small fields--for
example if a company goes out hunting for a 50 million barrel field
and it turns into a billion barrel field. He said the royalty
could easily be tied to field size. In the example, a higher
royalty should be involved because the company would get a good
return on its investment and the state should share even more. He
stated well productivity plays a key role in driving the industry's
economics and making investments.
MR. THOMPSON said currently on leases (past 1979), 6.25 percent of
the royalty goes to the permanent fund. He explained under this
option, that would be fixed for the permanent fund and then it
would only vary and track 50 percent as the royalty varied tied to
higher oil prices, productivity, or field size. He emphasized this
is just one option. Some of the options of net profits and other
types of royalty variance actually could do similar things and
attract investment.
MR. THOMPSON said the best option is one worked out by the
industry, the Administration, and the legislature together and then
is accepted through a public process.
REPRESENTATIVE MACLEAN wondered if she could ask a question.
CO-CHAIRMAN GREEN said he would prefer that Mr. Thompson be allowed
to go through his presentation and then questions could be asked
following that presentation.
Number 577
MR. THOMPSON noted that whatever the new tax royalty regime is
decided for Alaska for new projects, there may still be projects on
the noncompetitive margin. He said for those projects where the
state's new changes are not enough, ARCO will propose a project
partner approach. In this approach, ARCO would come forward with
information shared openly and then the state would decide if this
partner project would be sufficient to meet the approval for moving
forward. He pointed out that ARCO has looked at potential
categories for the project partnering process.
MR. THOMPSON stated one category is new marginal exploration and an
example is Lease Sale 79. ARCO recently sent a letter to DNR
suggesting more of a partnership in approaching Lease Sale 79.
This would get all parties involved much earlier in a public
process to innovate using existing laws and options that would make
Lease Sale 79 prospects even more internationally competitive. He
said another category is marginal development, new field. He noted
that ARCO is drilling the West Colville Delta currently and is
hoping the well results are good enough for ARCO to move forward
without any incentives. On the other hand, if ARCO has
disappointing well results, and since it is a smaller field
discovery, ARCO questions if it would be possible to work together
to innovate what it would take for the jobs and revenue to come
from it.
MR. THOMPSON said another category is marginal development,
existing field such as West Sak, a huge resource. He assured
committee members that ARCO has pieced together technical and
research teams to try to innovate to reduce costs and move forward
on the West Sak. He stated if the cost reductions are not enough,
then, and only then, would ARCO come forward for a project
partnering. He noted another category is fields near abandonment
which ARCO does not have. He pointed out that Cook Inlet and Kenai
producers do have fields near abandonment that perhaps would be
amenable to project partnering.
MR. THOMPSON stressed, in regard to earlier overheads on immediate
actions and steps to be taken on the long term, those changes may
mean that ARCO can move forward without project partnering. He
stated if those changes are not enough, ARCO believes it is a
resource base that should be brought forward and the state should
be allowed to look at it in a very open process (with ARCO) to see
what it will take to move forward.
Number 622
MR. THOMPSON said the question may be asked, is what other
countries are doing working? He stated the UK was a country where
production was on the decline, about one and one-half million
barrels a day, similar to Alaska. He noted the UK's revenues were
declining significantly and jobs in the industry were declining
causing other jobs in the industry to also decline. In the 1980s
and more recently, the UK has completely changed their philosophy
to attract more capital.
MR. THOMPSON stated the UK did have a corporate income tax at 52
percent and to attract new investments, they lowered it to 33
percent. The UK had a royalty of 12.5 percent similar to Alaska.
In 1983, the UK completely eliminated the royalty. At one time,
the UK had a supplementary petroleum duty which was eliminated.
The UK had a petroleum revenue tax that was 45 percent and as high
as 80 percent on some properties. This tax was very similar to
Alaska's severance tax. The UK has now eliminated that tax also.
Therefore, in the UK, when looking at capital investments in the
oil and gas industry, there is only one taxation royalty--33
percent corporate income tax which compares to Alaska's 39 percent
federal and state income tax, severance tax of 0 to 15 percent,
royalties of 12.5 percent, and ad valorem tax of 2 percent.
Number 647
MR. THOMPSON said the question becomes, did these changes work in
the UK? After the changes in the 1980s, industry did respond. He
showed an overhead showing capital expenditures. He stressed since
UK's changes, $45 billion of new investment has come into the
country and most of that investment is in small to moderate sized
fields. He stated since the changes, there have been 23 new fields
on production since 1985 and 12 other new fields will come on line
this year alone, which is a total of 35 new fields. He pointed out
that in Alaska since 1985, four new fields have come on line.
MR. THOMPSON stated in regard to the UK production profile--in the
beginning of the 1990s, the old fields were producing about 1.5
million barrels per day. With the changes, the production has gone
from 1.5 million barrels per day to over 2.5 million barrels per
day. He pointed out that in December, the UK hit a record high
production level for the entire history of their oil and gas
industry.
MR. THOMPSON said this can be done in Alaska if immediate actions
are taken to strengthen existing regulations and incentives. He
stressed if some of the long term actions are taken and if the
legislature, industry, and the Administration work together, he
felt something similar can happen in Alaska. He noted he does not
believe the same steps that UK took should be taken in Alaska.
Rather, there is a need to come up with recommendations that will
be acceptable to the people of Alaska, the legislature, the
industry, and the Administration.
TAPE 95-16, SIDE B
Number 000
REPRESENTATIVE MACLEAN asked how a fixed-variable royalty would
impact the state.
MR. THOMPSON replied (referring to an overhead) if the state
accepted the fixed-variable royalty, the permanent fund
contribution would stay the same and the state's share would be
above the shaded line. It is hoped that this would allow more
smaller and moderate sized fields to be developed and where those
may be zero revenues now, there would be positive revenues. He
stressed if exploration or further delineation in development
results in very large fields, it could be a higher royalty for the
state than what currently exists at the 12.5 percent.
REPRESENTATIVE MACLEAN wondered if the project partnering is
already in place with different companies.
MR. THOMPSON responded ARCO does have partnering projects in place
with many of its service suppliers and contractors. They have sat
down together, talked about the trust and communication desired and
about common goals on how to reach cost saving targets. He said
ARCO has a partnership with the state of California at the Long
Beach unit. In that partnership, the existing royalties would not
make new work there commercial. Therefore, ARCO worked with the
state to develop a net profits type of concept. Once the
California State Legislature approved that, ARCO moved forward with
$100 million of new investment, resulting in a new 100 million
barrels of oil in an old field that was 5 years away from
abandonment. He noted that all of ARCO's projects in China are
partnerships. In Indonesia, ARCO has a production sharing
contract.
MR. THOMPSON stated ARCO is encouraged by recent discussions they
have had with DNR and giving input on Lease Sale 79, including what
options are available to them.
REPRESENTATIVE MACLEAN questioned what type of incentives is ARCO
looking for from the state for marginal exploration and
development.
MR. THOMPSON responded near term would involve reenforcing and
clarifying existing regulations and having ARCO's technical teams
work with the various commissions' technical teams to determine how
those regulations could be clarified or changed slightly and then
come forward with legislation. In the long term, he felt it is
going to take ARCO's technical teams working with the commissions'
technical teams examining some of these other royalty regimes and
tax regimes, determining what might be best for Alaska long term
and suggesting legislation for next session.
REPRESENTATIVE MACLEAN agreed that some existing regulations need
to be changed, especially for the near term. She stated in regard
to ad valorem taxes, what does ARCO recommend the state pursue in
new field development.
MR. THOMPSON stated ARCO has not looked at the details to determine
if that tax should change. He said for some fields near their
economic limit, if the ad valorem was reduced, it would extend the
field life. ARCO does not have a proposal to do that nor does ARCO
have uneconomic fields at this time. He felt that tax change could
be looked at for Cook Inlet or Kenai producers. He noted he is not
aware of any proposals to change ad valorem taxes at this time.
REPRESENTATIVE MACLEAN recommended that ARCO look at that proposal.
REPRESENTATIVE JOHN DAVIES recalled that Mr. Thompson had mentioned
Alaska's corporate income tax is 39 percent, which is a combination
of federal and state. He asked what the proportions are.
MR. THOMPSON replied Alaska has the 9.4 percent and then when the
federal is completed, a deduction is received by having paid the
state income tax, similar to what individuals have. He said the
combination is around 39 percent.
REPRESENTATIVE DAVIES clarified the state is not on the smaller
end.
MR. THOMPSON answered that is correct. He said in addition, the
state has a 12.5 percent royalty, up to 15 percent severance tax
and 2 percent ad valorem tax.
REPRESENTATIVE DAVIES recalled that Mr. Thompson had mentioned
there were some items he was concerned about in regard to
developing a more flexible regulatory environment, again focusing
on smaller new fields. He asked Mr. Thompson to give some examples
of things which might help industry.
MR. THOMPSON said one example is Lease Sale 79. There are
different options under existing laws that allow the commissioner
to choose lease sale terms. The commissioner could choose a high
bonus and a fixed royalty, for example, or he could choose low
bonus and a net profits type of interest that would be shared with
the state. When that option is looked at, areas become much more
competitive with the international environment. He stressed
technical teams are looking at the economics in regard to those
laws, where the commissioner has flexibility in determining what
would make the sale more competitive with foreign exploration and
trying to get more dollars to Alaska.
MR. THOMPSON stated another example involves fields not close to
existing facilities. He said it takes 100 million to 300 million
barrels to be economic. Allowing some flexibility in the royalty
that could be granted by the commissioner would be helpful.
Number 165
REPRESENTATIVE DAVIES stated those examples are more in the line of
incentive and tax royalty structures. He said his question was
geared more toward regulations. He asked if there were specific
regulatory types of things he was concerned about.
MR. THOMPSON stated there are. He mentioned the Alaska Oil and Gas
Association is beginning a project to look at what could be some
changes to make regulations and the process more effective. He
gave an example on something the industry has faced. The industry
reports very diligently any minor spills of any fluids. When a
minor spill happens, the industry has to phone different agencies
and the different agencies have different forms to complete. He
said an idea was a 1-800 number that would be called, then the
other agencies would be notified of that specific spill and there
would be just one form. Therefore, the people involved could spend
all their time and effort on effective cleanup and remediation
versus the regulatory paperwork and administrative burden.
REPRESENTATIVE DAVIES recalled that Mr. Thompson had mentioned that
some of the exploration incentives put into place last legislature
are not working and that ARCO had applied for three wildcat wells
and was turned down. He asked why ARCO was turned down.
MR. THOMPSON stated ARCO had included three exploration wells in
its exploration budget and plans. He stressed there is a lot of
discretion on how that incentive credit is to be applied and a lot
of judgment by members within the Oil and Gas Commission and DNR.
He said it is not clear when you can get the incentive. ARCO
applied in every case and then had discussions on whether or not
the well was appropriate and would it qualify. He noted the
applications involved North Slope exploration wells and one Cook
Inlet exploration well. ARCO felt the wells did apply, but as it
turned out they did not. He said what ARCO is suggesting is the
possibility of doing something as simple as defining the incentives
and determining if a well is an exploration well under IRS or SEC
guidelines. He stressed the state still would have a cap on the
number of credits given every year and when that cap is reached,
the credits would stop.
Number 229
REPRESENTATIVE DAVIES said there was much discussion when the
exploration incentive credits were being debated about how to
define a new field versus a continuing of an existing field. He
asked if the three cases were in that gray area.
MR. THOMPSON stated in some cases, ARCO felt it was very clear a
new field was involved. In others, it could be argued it was an
extension of an existing field, although ARCO felt it would be a
different area--a new area that would not be recovered from
existing fields. He stressed it would be helpful to clarify that
gray area in existing regulations.
CO-CHAIRMAN GREEN expressed concern that if in order to justify one
or more of these incentives it would require the applicant show a
lot of both subsurface and economic criteria that heretofore has
been very confidential. He clarified that Mr. Thompson was saying
that companies would in fact be willing to make this information
available to the extent necessary. He expressed concern about the
information being made available and either the state does not
accept it or there is a delay to the point where a company does not
make the investment. However, this information is now public. He
asked if ARCO believes there is enough impetus to provide this
confidential information to get incentives that companies might be
willing to make those commitments.
MR. THOMPSON stated he can only speak for ARCO and ARCO is willing
to provide the information. ARCO is ready for a true partnership
with the state that would involve the allowing and sharing of more
information so it can be interpreted together. He said he has seen
it happen in other countries and it is very rewarding to work
together and move forward with development. He noted what is
happening now could be a higher risk such as job layoffs, greatly
reduced exploration budgets, etc. ARCO believes that when they
turn over any information, the commission will adhere to the
current confidentiality regulations.
MR. THOMPSON said in preparation for Lease Sale number 79, in
working with the Alaska Oil and Gas Conservation Commission
(AOGCC), ARCO shared maps and seismic sections that have never been
shared before. ARCO wanted to verify its own interpretation that
area would be small to moderate sized fields and if there was oil
there, to illustrate there is a chance of discovery so that these
more flexible terms under existing law could be applied. He
stressed that ARCO realized it was taking a risk to share much of
that information but trusted the individuals involved. ARCO also
realized that if the information was not shared there may be no
loaf instead of one-half a loaf.
Number 306
CO-CHAIRMAN GREEN thought when the word partnering is used, it
conjures up both or multiple partners becoming investors as well.
He clarified that Mr. Thompson was not anticipating the state
actually putting up financing.
MR. THOMPSON said it was partnering through what the state
receives. He noted if the state wants to invest, that is its
decision.
CO-CHAIRMAN GREEN said in determining the economics of a project
and whether or not it would qualify for an incentive, what would be
of paramount interest is the anticipated operating and investment
expenses. He said let us suppose we were on a net profits lease.
If the state went along, would the state be a party to determining
how much is enough? He expressed concern that if two units could
do the activity but three units of costs are projected, the state
would say yes because it extends out the life before the net
profits start to kick in or reduces the amount of net profits which
would come back to the state. He asked if the state would have any
ability to make suggestions or have any control in regard to
expenditures.
MR. THOMPSON replied in the state of California where ARCO had the
partnership on the Long Beach unit, the state was involved in
defining what costs were appropriate and what other expenses would
not be appropriate. Those categories were defined and yearly, the
state audits ARCO's costs to ensure it has complied with what was
in writing as qualifiable costs. He felt that could be done in
this case for net profits. He noted there may be an administrative
burden in doing that--things such as the conceptual fixed-variable
royalty may get the same result without that kind of burden of
administration. He stressed that is what needs to be worked
through in the next few months.
MR. THOMPSON added that under net profits, it does behoove both the
operator and the state to keep the costs as low as possible.
REPRESENTATIVE MACLEAN asked Mr. Thompson to further discuss the
discovery royalty credit.
MR. THOMPSON stated the discovery royalty credit provides that a
lessee, who makes the first discovery of oil or gas on a structure,
pays a royalty of 5 percent for 10 years following the date of
discovery, and then 12.5 percent royalty thereafter. He stressed
it is only on that lease. He said there would be other leases in
the field. He noted a simple idea--on the other leases, the
discovery royalty should be allowed but maybe have it for only five
years.
REPRESENTATIVE MACLEAN clarified that one of the options is to
extend the time period.
MR. THOMPSON replied ARCO has not looked at extending the time on
the discovery lease beyond ten years.
REPRESENTATIVE MACLEAN asked what ARCO's recommendation would be.
MR. THOMPSON said it is an area which needs to be reviewed by
ARCO's technical teams working with the commission to determine
what might be appropriate. He stated something as simple as having
a few years could have an impact but the exact recommendation
should come from the technical teams.
Number 378
CO-CHAIRMAN GREEN stated ARCO is not actually advocating specific
options but are suggesting various options. He added exploration
royalty reduction has been in effect in the state and was repealed
a short time ago. He said this is not a new concept but what ARCO
is referring to is perhaps the leases adjacent to the discovery
lease.
MR. THOMPSON stated on behalf of the employees of ARCO Alaska, he
would like to thank the committee for the opportunity to share
ARCO's ideas.
Number 390
JAMES PALMER, DIRECTOR, EXTERNAL AFFAIRS, BRITISH PETROLEUM
EXPLORATION (ALASKA) INC. (BP), stated "given our common challenges
and shared opportunities as an industry and as a state, it is
particularly fitting that we're gathered here together to explore
how we can work together to attract new industry investment to
Alaska. BP is pleased to be a part of this new dialogue, which we
hope will lead to a new era of cooperation between state government
and the state's largest investors and taxpayers."
MR. PALMER said, "Our industry has gone through an extended period
of unprecedented change--often painful--to arrive at our current
crossroads. We've experienced downsizing, rightsizing,
restructuring, realignment, outsourcing, alliancing, shared
services, streamlining, technological breakthroughs and countless
other innovations and upheavals in the way we do business in order
to remain competitive in the global market."
MR. PALMER stated, "As a result, we've been able to reduce costs in
a climate of declining production, we've been able to hold overall
production decline on the North Slope to less than five percent per
year. We have been able to hold decline to these levels only by
continuing to invest in new and existing fields on the North Slope.
This year we plan to invest more than half a billion dollars of
capital in Alaska, successfully competing within BP for those
funds. These investments generate jobs for Alaskans and revenues
for Alaskan businesses. They help to sustain the flow of revenues
that fund state government spending and fuel future investments in
the Alaskan oil industry. They extend the lives of our North Slope
operations, and they hold one of the keys to Alaska's economic
future."
MR. PALMER continued, "Despite our best efforts within the
industry, however, we remain under siege from a variety of forces
undermining our efforts to attract additional investments to
Alaska. In real terms, the price of oil has been on a downward
trend for the past 15 years. This, combined with declining
production in Alaska, has slowed the flow of revenues that fund
future investments. At the same time, a world of new investment
opportunities--literally as well as figuratively--has been opening
up to the oil industry due to falling political barriers, new
technologies and friendlier relationships with many host
governments in oil provinces around the world. In this global
environment, companies are limiting the scope of their activities
and becoming increasingly selective in choosing which projects to
pursue. Investments are directed to areas offering the highest
returns with the lowest risks."
MR. PALMER stated, "Alaska is disadvantaged in this fiercely
competitive environment for increasingly scarce investment capital
due to our remoteness, our high transportation costs, our
restricted markets, a state budget deficit that casts a cloud of
uncertainty over all of our investments and a history of antagonism
between industry and the state. Furthermore, the opportunities
that do exist on the North Slope consist of marginal new oil fields
or marginal projects within existing fields."
MR. PALMER said, "The first step toward capturing the significant
potential for new investments, revenues and jobs in Alaska in this
emerging era of marginal development on the North Slope is
redefining "us and them" to mean Alaska's unity as we compete
globally for increasingly scarce investment capital rather than our
divisiveness as we fight among ourselves. It is imperative that we
work together to take tangible steps today toward a strong and
stable industry, toward a strong and stable Alaskan economy
tomorrow."
Number 445
MR. PALMER continued, "We are encouraged that the legislature is
taking initiatives such as your hearing today to provide forums for
the dialogue that will enable us to work together to develop win-
win solutions to our common challenges. We are also encouraged
that the Governor has made unity between government and business a
theme of his new Administration and has reinforced his words with
his actions since he took office. The progress the state of Alaska
and BP have made in the past year working cooperatively to lift the
federal ban on North Slope oil exports is testimony to what we can
accomplish together. Ending the ban will truly be a win-win
outcome that will both enhance the flow of revenues to producers
and the state and enhance the competitiveness of Alaskan
investments."
MR. PALMER stated, "Resolution of significant past tax disputes
during 1994 have improved the investment climate in Alaska. We can
now focus our efforts on the future without looking over our
shoulders at liabilities of the past. Recently enacted tax
regulations have helped to clarify how to value oil for tax
purposes for companies that refine their own oil. However, the
same vagueness that led to past disputes continues for companies
like BP that sell or trade the oil they produce on the North Slope.
Vagueness equals uncertainty, uncertainty equals risk, and risk
equals competitive disadvantage in our efforts to attract capital
to Alaska."
MR. PALMER said, "Tax clarity for all producers would reduce our
risk and would be a significant win for us and a significant win
for the state. By helping to minimize our risk, you can strengthen
our position to compete for investments that will benefit us all.
The fiercely competitive global environment in which we operate
makes it an uphill struggle, and the marginal nature of projects we
have to pursue on the North Slope makes the hill even steeper. We
in BP and in the oil industry are doing all we can to compete for
these investments."
MR. PALMER told committee members, "Consider the Badami discovery
about 30 miles east of the producing Endicott field on the North
Slope. This field is typical of the projects in the 100 to 150
million barrel range we expect will be developed over the short and
medium terms. The first hurdle we must clear is confirming the
size and quality of the reservoir. We are currently drilling two
appraisal wells and hope to have the results assessed by this fall.
We believe Badami must hold at least 100 million barrels of
recoverable oil in order to have a chance to make it commercially
viable. If we clear that hurdle, we are still a long way from
having a project. When we first began to evaluate Badami about a
year ago, we identified four primary obstacles: It was too costly,
there was too much time between discovery and production, there
were time consuming regulatory roadblocks, and there was no hedge
against the risk of low prices. All four still remain, and we've
been doing everything within our power to overcome them."
MR. PALMER stated, "The cost hurdle is enormous. Our initial
projection of the development cost, based on doing things the old
way, was $800 million. We must reduce the pricetag by more than
half in order to enable Badami to compete effectively for
development funding. In our effort to reduce costs without
comprising safety or the environment, we have considered a myriad
of innovative development techniques--a buried, chilled pipeline,
facility sharing and remote operations, to name a few. We have
also assembled a team of key contractors who are working with us to
find solutions to the cost challenge."
MR. PALMER explained, "Traditionally, we would be waiting for the
results of this winter's wells before taking this step. However,
traditions that have evolved over the past two decades of North
Slope oil field development will not overcome the challenges posed
by the marginal development opportunities of the future. Timing is
crucial, and it is imperative that we shorten the period between
discovery and production. That is why we have assembled
contractors now rather than later and asked them to work together
as a team. It is also why we initiated discussions with state,
federal and borough regulators months ago instead of later, then we
filed for permits."
Number 512
MR. PALMER said, "This approach unquestionably adds to our up-front
risk. We understand there are no guarantees, but it is a risk we
believe we must assume in order to have a chance to make this
project viable. We also believe it will help to incorporate the
best ideas into the planning process, and we hope it will help to
resolve official and public concerns about the project and help to
expedite the permitting process. There is one other risk that we
must manage, and that is the risk of low prices. That is why we
are interested in a sliding-scale royalty for Badami that would be
sensitive to oil prices. This would help to minimize our risk
exposure to low prices, and it would enhance our prospects for
making development commercially viable."
MR. PALMER stated, "The sliding-scale royalty concept would enable
us to share the risks of low prices and the rewards of higher
prices with you, our co-beneficiary, if you will, in having Badami
developed. Badami is neither competitive nor commercially viable
today. Our shared goal with the state of Alaska must be to make it
competitive and commercially viable so we can share the benefits of
the production, the revenues and the Alaska jobs the project would
generate. If we are to work together to successfully attract
investments to Alaska, we must all be flexible in approaching the
challenges and opportunities posed by each new project. We believe
this suggests a broader discussion in the legislative arena of the
use of royalties as a development incentive tool."
MR. PALMER told committee members, "We believe it is appropriate
for the legislature to consider giving the commissioner of Natural
Resources the authority to adjust royalty terms on new developments
on a case-by-case basis if changes are needed in order to make a
project viable. Some of the criteria that might be considered in
reviewing royalty terms are: Does the project need a major cost
breakthrough in order to be competitive? Even if it overcomes the
initial cost hurdle, will it still be vulnerable to low oil prices?
Could it bring jobs and new technology to Alaska? Could it make
other exploration, appraisal or development projects more
attractive?"
MR. PALMER stated, "We are not suggesting that flexible royalty
terms are necessary--or even appropriate--for every project. But
to the extent that they can be used to enhance the competitiveness
of projects whose funding otherwise might go elsewhere, it is
important that the state have the tool available and ready for use.
Whether to grant flexible royalty terms--and what kind--will be a
judgment call on the state's part. It will be incumbent on
companies like BP that are seeking them, therefore, to be
completely open and forthcoming with the information state
regulators need in order to make that determination. Only then can
we deal with each other in an honest and collaborative manner and
work together toward our common objective of securing new
investments."
MR. PALMER stressed, "This is not the time for demands. It is not
the time for threats or hollow promises, and it is not the time for
brinkmanship or posturing. It is the time, if we are truly
committed to working together to capture Alaska's share of industry
investments, for constructive, open, productive dialogue such as we
are having today that leads to win-win solutions for the industry,
for state government, and for all Alaskans. I pledge BP's
complete, unconditional cooperation and support in this endeavor.
Thank you."
Number 545
REPRESENTATIVE MACLEAN recalled that Mr. Palmer had talked about
tax clarity. She wondered what type of tax clarity he was
referring to.
MR. PALMER responded BP's past disputes, to a large degree,
involved a debate over what was the value of the oil when it was
sold. The regulations recently enacted set tax clarity for
producers who refine their own oil. He said a mathematical
calculation was done and this was called the prevailing value. If
a company paid its severance tax based on that prevailing value
that was assumed correct, similar to the current process for
royalty payments. He stated BP is seeking the same treatment for
sales of crude oil, which would give them certainty so when they
pay a severance tax today, they know that is the payment and there
will not be a debate with the state years from now over whether or
not that payment was correct.
REPRESENTATIVE MACLEAN asked Mr. Palmer to further explain the
sliding-scale royalty concept.
MR. PALMER said BP has had good discussions with the department
regarding the sliding-scale royalty concept and the discussions
revolved around risks of low oil prices. The discussions centered
around the sliding-scale royalty based on oil prices--there would
be a base amount of royalty and a ceiling. In between, there would
be a sliding scale and the royalty rate paid would be based on what
the price of oil was.
REPRESENTATIVE MACLEAN wondered if the sliding-scale royalty would
be used on marginal fields also.
MR. PALMER responded yes and added this concept would be most
appropriate for individual projects. He noted the state would make
a decision on each individual project. He said there is a question
as to whether or not the state has the authority to grant such a
sliding-scale royalty and attorneys are saying different things.
REPRESENTATIVE MACLEAN clarified it would have to go through the
legislative body.
MR. PALMER responded legislative clarification of the authority of
the commissioner would be warranted.
Number 579
CO-CHAIRMAN GREEN noted that Mr. Palmer had mentioned Prudhoe was
declining at upwards of 15 percent, but through other investments
and other fields, BP had been able to lower the overall decline to
5 percent. He asked Mr. Palmer to explain the severity of what a
15 percent decline rate would mean over a 5 year period.
MR. PALMER responded he would be happy to bring forward people who
could speak to that question more knowledgeably than him and added
the producers could provide that information in detail. He added
that Prudhoe did decline but Point McIntyre is performing very
well.
CO-CHAIRMAN GREEN clarified even with these other fields coming on
line, it is still not possible to offset the decline of such a
major field like Prudhoe.
MR. PALMER said that was correct.
CO-CHAIRMAN GREEN clarified that Mr. Palmer subscribes to the same
general philosophy given by ARCO--looking at a variety of
potentials that would help BP invest in Alaska as opposed to going
to the world market.
MR. PALMER replied yes. He stressed BP agrees with everything Mr.
Thompson said and looks forward to working with ARCO and other
producers in Alaska as well as the state.
Number 604
CO-CHAIRMAN GREEN asked if incentives or packages were enacted by
the state, is there a possibility of re-energizing some of those
companies who have left Alaska.
MR. PALMER said he could not speak on what other companies would
do. As an Alaskan, he would hope those companies do come back as
it is important for those who live in the state to have a very
vigorous oil industry. He stressed it is imperative that the state
have additional participants in the industry.
REPRESENTATIVE DAVIES recalled that most of the discussions
revolved around new oil discoveries. He asked Mr. Palmer to
comment on the potential for gas development.
MR. PALMER responded there is a huge resource of natural gas on the
North Slope. He said that resource has been around for a long
time. He noted that all of the producers on the North Slope are
looking to commercialize that resource. The question remains under
what terms can they get a good economic recovery from it. He
pointed out the three companies who are looking at that resource
are engaged in a major effort to look at opportunities to market
that gas. At this time, he could not comment on specific plans.
CO-CHAIRMAN BILL WILLIAMS wondered if the industry was to receive
everything they are asking for, how long would Alaska be
competitive in the oil industry.
MR. PALMER responded since he lives in the state and wants his
children to stay, he hopes the state will remain competitive for a
very long time. He said the world changes and the group gathered
may be having another discussion in 10-15 years but he felt as long
as the state can remain competitive, which may mean different
things in different periods of time, the state will have a viable
industry. He stressed flexibility is very important.
CO-CHAIRMAN WILLIAMS stated partnerships have been previously
discussed. He said the oil is owned by the state of Alaska,
similar to the logging industry where village corporations own the
timber. He noted that some village corporations have sold their
timber outright and took it for stumpage sale. Other corporations
went and took the risk and contracted out the logging. He wondered
if that could be done in this situation.
TAPE 95-17, SIDE A
Number 000
MR. PALMER responded the legislature has the authority to do that.
He said there are many countries in the world who do it that way.
Whether or not a company would decide that it is in their economic
interest to enter into such an arrangement versus the current
arrangement would have to be looked at to make sure there are
people interested in doing such an arrangement.
REPRESENTATIVE ALAN AUSTERMAN recalled reading about a large
natural gas field off Africa or Indonesia which industry is in the
process of developing at this time. He wondered if BP is able to
spend hundreds of millions of dollars over there to pull a lot of
gas out of the ground and sell it as compared to Alaska due to the
structure of the tax basis here and what it costs to do business in
Alaska.
MR. PALMER stressed BP is not involved in that project which is in
Indonesia. He explained his understanding is that it is not a
project yet but rather, the producers have entered into an
agreement with Indonesia to look at a project. He said it is a
similar situation as to what is in Alaska--the resource is there
and the producers are trying to make it commercially viable.
REPRESENTATIVE AUSTERMAN stated in general terms, the economics in
that part of the world must be better than what they are in the
state of Alaska.
MR. PALMER said he could not comment on it because he does not know
the particulars.
CO-CHAIRMAN GREEN asked if there were any other questions. He
thanked Mr. Thompson and Mr. Palmer for their presentations. He
stated the legislature looks forward to working with them both
during this session and during the interim.
REPRESENTATIVE MACLEAN noted for the record that she is going to
chastise Co-Chairman Green for his committee process. She felt
committee members should have the freedom to ask questions during
the discussion because it is very important for members to
understand oil and gas related matters, especially when the matters
concern her district.
CO-CHAIRMAN GREEN said he would talk to Representative MacLean
after the meeting about the matter.
ADJOURNMENT
There being no further business to come before the House Resources
Committee, Co-Chairman Green adjourned the meeting at 9:35 a.m.
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