Legislature(2005 - 2006)CAPITOL 124
02/28/2006 12:30 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB488 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 488 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 28, 2006
12:34 p.m.
MEMBERS PRESENT
Representative Jay Ramras, Co-Chair
Representative Ralph Samuels, Co-Chair
Representative Carl Gatto
Representative Gabrielle LeDoux
Representative Kurt Olson
Representative Paul Seaton
Representative Harry Crawford
Representative Mary Kapsner
MEMBERS ABSENT
Representative Jim Elkins
OTHER LEGISLATORS PRESENT
Representative Ethan Berkowitz
Representative Eric Croft
Representative Les Gara
Representative Berta Gardner
Representative Reggie Joule
Representative Vic Kohring
Representative Norman Rokeberg
COMMITTEE CALENDAR
HOUSE BILL NO. 488
"An Act repealing the oil production tax and gas production tax
and providing for a production tax on the net value of oil and
gas; relating to the relationship of the production tax to other
taxes; relating to the dates tax payments and surcharges are due
under AS 43.55; relating to interest on overpayments under AS
43.55; relating to the treatment of oil and gas production tax
in a producer's settlement with the royalty owner; relating to
flared gas, and to oil and gas used in the operation of a lease
or property, under AS 43.55; relating to the prevailing value of
oil or gas under AS 43.55; providing for tax credits against the
tax due under AS 43.55 for certain expenditures, losses, and
surcharges; relating to statements or other information required
to be filed with or furnished to the Department of Revenue, and
relating to the penalty for failure to file certain reports,
under AS 43.55; relating to the powers of the Department of
Revenue, and to the disclosure of certain information required
to be furnished to the Department of Revenue, under AS 43.55;
relating to criminal penalties for violating conditions
governing access to and use of confidential information relating
to the oil and gas production tax; relating to the deposit of
money collected by the Department of Revenue under AS 43.55;
relating to the calculation of the gross value at the point of
production of oil or gas; relating to the determination of the
net value of taxable oil and gas for purposes of a production
tax on the net value of oil and gas; relating to the definitions
of 'gas,' 'oil,' and certain other terms for purposes of AS
43.55; making conforming amendments; and providing for an
effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 488
SHORT TITLE: OIL AND GAS PRODUCTION TAX
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/21/06 (H) READ THE FIRST TIME - REFERRALS
02/21/06 (H) RES, FIN
02/22/06 (H) RES AT 12:30 AM HOUSE FINANCE 519
02/22/06 (H) Heard & Held
02/22/06 (H) MINUTE(RES)
02/23/06 (H) RES AT 12:30 AM HOUSE FINANCE 519
02/23/06 (H) Heard & Held
02/23/06 (H) MINUTE(RES)
02/24/06 (H) RES AT 12:30 AM HOUSE FINANCE 519
02/24/06 (H) Heard & Held
02/24/06 (H) MINUTE(RES)
02/25/06 (H) RES AT 10:00 AM SENATE FINANCE 532
02/25/06 (H) Joint with Senate Resources
02/27/06 (H) RES AT 12:30 AM CAPITOL 124
02/27/06 (H) Heard & Held
02/27/06 (H) MINUTE(RES)
02/28/06 (H) RES AT 12:30 AM CAPITOL 124
WITNESS REGISTER
RICHARD OWEN, Alaska Production Manager
ExxonMobil Corporation;
Vice President, ExxonMobil Alaska Production
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 488.
MARTIN MASSEY, U.S. Joint Interest Manager
ExxonMobil Corporation
Houston, Texas
POSITION STATEMENT: Testified in support of HB 488.
DAN SECKERS, Alaska Tax Counsel
ExxonMobil Corporation
Anchorage, Alaska
POSITION STATEMENT: Testified that research has indicated that
under PPT, ExxonMobil's tax would increase by approximately $100
million.
KEN KONRAD, Vice President of Gas
BP Alaska
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 488.
TOM WILLIAMS, Alaska Tax Counsel
BP Alaska
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 488.
ANGUS WALKER, Commercial Vice President
BP Alaska
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 488.
RAYMOND HALL, Senior Tax Economist
BP Group
Aberdeen, Scotland
POSITION STATEMENT: Testified that removing ELF and replacing
it with the proposed PPT is a move in the general direction of
improved simplicity. Discussed the fiscal regimes of Norway and
the U.K., and compared them to Alaska.
ACTION NARRATIVE
CO-CHAIR RALPH SAMUELS called the House Resources Standing
Committee meeting to order at 12:34:37 PM. Representatives
Ramras, Samuels, Gatto, Olson, and Seaton were present at the
call to order. Representatives LeDoux, Crawford, and Kapsner
arrived as the meeting was in progress. Also in attendance were
Representatives Berkowitz, Croft, Gara, Gardner, Joule, Kohring,
and Rokeberg.
HB 488-OIL AND GAS PRODUCTION TAX
CO-CHAIR SAMUELS announced that the only order of business would
be HOUSE BILL NO. 488, "An Act repealing the oil production tax
and gas production tax and providing for a production tax on the
net value of oil and gas; relating to the relationship of the
production tax to other taxes; relating to the dates tax
payments and surcharges are due under AS 43.55; relating to
interest on overpayments under AS 43.55; relating to the
treatment of oil and gas production tax in a producer's
settlement with the royalty owner; relating to flared gas, and
to oil and gas used in the operation of a lease or property,
under AS 43.55; relating to the prevailing value of oil or gas
under AS 43.55; providing for tax credits against the tax due
under AS 43.55 for certain expenditures, losses, and surcharges;
relating to statements or other information required to be filed
with or furnished to the Department of Revenue, and relating to
the penalty for failure to file certain reports, under AS 43.55;
relating to the powers of the Department of Revenue, and to the
disclosure of certain information required to be furnished to
the Department of Revenue, under AS 43.55; relating to criminal
penalties for violating conditions governing access to and use
of confidential information relating to the oil and gas
production tax; relating to the deposit of money collected by
the Department of Revenue under AS 43.55; relating to the
calculation of the gross value at the point of production of oil
or gas; relating to the determination of the net value of
taxable oil and gas for purposes of a production tax on the net
value of oil and gas; relating to the definitions of 'gas,'
'oil,' and certain other terms for purposes of AS 43.55; making
conforming amendments; and providing for an effective date."
12:36:31 PM
RICHARD OWEN, Alaska Production Manager, ExxonMobil Corporation;
Vice President, ExxonMobil Alaska Production, relayed that if HB
488 was simply a tax increase, ExxonMobil Corporation
("ExxonMobil") would actively oppose it. At current prices,
ExxonMobil expects its production tax payment would increase by
$50-$100 million per year. However, ExxonMobil is prepared to
move forward under the proposed system since it balances
revenues to the State of Alaska and producers across a range of
oil prices, provides incentives for new investment, and includes
a transition provision for recent investments. He remarked that
most importantly for ExxonMobil, the Petroleum Production Tax
(PPT) proposal provides a predictable and durable tax system,
which along with the appropriate gas pipeline fiscal contract
terms will allow the Alaska Natural Gas Pipeline project to move
forward to the next phase. As far as specific concerns about
this bill, they center around whether the high tax rate and
resulting increase in taxes will hinder full development of the
remaining oil resources on the North Slope.
12:38:38 PM
MR. OWEN noted that ExxonMobil has had presence in Alaska for
over a half century, investing more than $11 billion in the
State of Alaska's economy. ExxonMobil's activities date back to
1954 when it conducted a comprehensive study of the territory's
oil and gas potential. Over the years, ExxonMobil explored most
of the major hydrocarbon plays in Alaska including: the Gulf of
Alaska, St. George and Navarin Basins, Norton Sound, Beaufort
Sea, Cook Inlet, and of course, the North Slope where it was a
participant in the 1968 Prudhoe Bay number one discovery well.
ExxonMobil is proud of the role it has played in Alaska -
exploration, initial field development, construction of the
Trans-Alaska Pipeline System (TAPS), development of new
technology, and the promotion of efficient reservoir management
practices.
MR. OWEN further noted that currently, ExxonMobil has working
interests in Prudhoe Bay, Kuparuk River Unit, Endicott, and
Granite Point. It's the operator of the Point Thomson Unit and
the largest interest holder in the Prudhoe Bay. ExxonMobil's
current working interest oil production is approximately 180,000
barrels per day (B/D), and it's the largest owner of discovered
gas resources. ExxonMobil's Alaska production represents
approximately 4 percent of its worldwide oil and gas production,
and is primarily from Prudhoe Bay and near-by satellite fields.
He remarked that Prudhoe Bay and Point Thomson have significant
remaining potential, but at higher cost and risk.
MR. OWEN stated that one of ExxonMobil's objectives in the gas
pipeline fiscal contract negotiations has been to reduce the
risk associated with fiscal change by working with the State of
Alaska to establish a predictable and durable fiscal environment
in which to make long term investment decisions. Any change in
the fiscal regime for oil had a direct impact on how ExxonMobil
views the stability of the Alaska fiscal environment, which
impacts how it evaluates ongoing investment decisions. He
relayed that ExxonMobil understands the State of Alaska's desire
to obtain additional tax revenue at higher oil prices. He
opined that one of the most challenging tasks that the
legislature can undertake is how to change the oil tax system
without damaging the industry. He remarked that as Governor
Murkowski has correctly stated on many occasions, the North
Slope is one of the most expensive places in which the [oil and
gas] industry operates. He added that tax systems need to be
carefully designed to ensure that the desired objectives are
achieved without resulting in unintended consequences, such as
reduced investments and lower reserve recovery. One of the many
questions that ExxonMobil is asked is, why is it and other
producers seeking durability and predictability for oil in
parallel with negotiating a fiscal contract for a gas pipeline.
12:41:43 PM
MR. OWEN answered that the gas on the North Slope is contained
in the same reservoirs as the oil and is produced through the
same facilities. He explained that for a gas project to be
viable, ExxonMobil needs the fields that produce both oil and
gas to be viable, underpinned by predicable and durable fiscal
terms. A commitment of billions of dollars to build the natural
gas pipeline requires confidence that the base oil business will
remain healthy for the long-term. In regard to the current oil
production severance tax system, the Economic Limit Factor
(ELF), he opined that it has been effective at encouraging
investment and mitigating production decline. He stated that
the ELF was designed to allow the State of Alaska to increase
the production tax while not stifling investment in marginal
fields. The ELF scaled down the production tax rate when a
field became more marginal, reducing the economic limit to which
a field could be produced and ultimately allowing more reserves
to be recovered. He further stated that the 1989 ELF amendment
significantly increased the production tax on Prudhoe Bay and
the Kuparuk River Unit, while providing an incentive to
encourage the development of smaller fields. That 1989
amendment worked as intended, with many small and marginal
fields coming on stream over the past 17 years. The ELF lowered
the tax rate on those fields, supporting their commercial
viability.
MR. OWEN relayed that while ExxonMobil would like to have more
Prudhoe Bays and Kuparuk River Units, it and the rest of the
industry haven't found any. Consequently, the focus for the
past ten years has been on the development of these smaller
satellite fields. Satellites are generally not economic as
stand alone developments and have required both new technology
and connection to existing infrastructure to be commercially
viable. He stated that many of these fields produce viscous oil
contained in lower quality reservoirs requiring significantly
higher costs, which adds to the risks for development. He added
that this is especially true for the Polaris and Orion viscous
oil developments, with oil that literally flows like molasses.
Developing these fields has required new technology, more
expensive drilling and completion techniques, new production-
handling equipment, and extensive modifications to existing
facilities to process these viscous production streams. He
informed the committee that since 2000, ExxonMobil has invested
over $250 million in the engineering, drilling, and construction
of associated facilities for the development of Aurora,
Borealis, Midnight Sun, Polaris, and Orion. He added that
significant additional capital is required over the next several
years to fully develop these resources.
12:44:39 PM
MR. OWEN remarked that today these fields are mitigating the
decline of oil production on the North Slope, contributing
50,000 B/D gross and are expected to recover over 500 million
barrels gross. Under the ELF formula, many of these smaller
satellite fields paid little or no production tax. Even though
these fields were paying little production tax, they did, and
continue to, contribute substantial amounts to Alaska in
royalties, property taxes, income taxes, and jobs for Alaskans.
Over the past five years, ExxonMobil and other working interest
owners have also extended the primary Prudhoe Bay enhanced oil
recovery (EOR) technology to some of these satellite fields. He
informed the committee that since 1998, ExxonMobil has invested
over $30 million in tertiary recovery projects at Point
McIntyre, Eileen West End, and Borealis, which are expected to
produce an additional 60 million barrels gross. While tertiary
projects recover additional oil, the production profile results
in slower oil recovery and longer payout periods. These
satellite EOR projects are in the early stages of development.
The major investments have been made, but the oil production
benefits will not be received until many years out. The ELF
provision of the existing production severance tax made these
economically challenged projects commercially viable.
MR. OWEN stated that taken together, the recent Prudhoe Bay
satellite and EOR development projects developed over 560
million barrels gross. While the resulting production tax under
ELF was relatively minor, Alaska's royalty oil would total 70
million barrels, which at today's oil prices is worth roughly $4
billion. He opined that the ELF system has worked well for
industry and the State of Alaska by encouraging significant new
investment. However, he explained it's also recognized that ELF
can be considered a somewhat regressive system in that it does
not reflect "profitability" or "cost" in the division of gross
revenue between the state and the producers as oil prices rise
and fall. He said that the assumption that a well is marginal
at 300 B/D does not necessarily hold in the current high oil
price environment, yet this assumption typically contributes to
a reduced ELF factor based on the current formula. He added
that as a global oil and gas producer, ExxonMobil operates
across a wide array of fiscal systems.
12:47:10 PM
MR. OWEN relayed that it's most important that the system
recognize the quality of the resources so that the potential
developments will be commercially viable and attract capital.
The quality of resource pertains to the size and nature of the
oil and gas reservoirs, the cost and technology required to
develop those reservoirs, the distance to market, as well as the
tax and royalty system that applies, including the long-term
stability of that system. He explained that countries that are
experiencing significant industry investment have achieved the
proper balance in their fiscal regimes. He informed the
committee that ExxonMobil's assessment of the remaining oil
resource suggests future growth opportunities will come from:
complex EOR projects; development of smaller, more marginal oil
accumulations; and the innovative development of viscous and
heavy oil resources. These opportunities will require the
development and application of new technology, higher unit
development costs, and more complex operations to deliver a
given production rate. These resources are much lower in
quality as compared to Prudhoe Bay and Kuparuk River Unit,
though they face the similar challenges associated with arctic
conditions and distance to market. Therefore, he reiterated
that ExxonMobil is concerned that the administration's proposal
is weighted towards a higher tax, which may prevent some of
Alaska's challenged resources from being developed.
MR. OWEN, in regard to the administration's PPT proposal,
explained that this proposal represents a tax based on profits,
which results in a sharing of the risks and the rewards across a
range of prices. The State of Alaska will receive a higher
share of the revenues when prices are high and will accept lower
taxes during periods of low prices. The proposal moves from the
regressive ELF system to a progressive system. He added that
ExxonMobil affiliates have significant experience in profit-
based progressive systems around the world and they work well,
as long as they have properly taken into account the nature of
the esource base. In regard to the key features of the PTT
proposal, he commented that HB 488 represents a major step-
change in Alaska's current production tax system. He opined
that the bill appropriately addresses this step-change by
including a transition plan so that recent investment decisions
are not adversely impacted. The bill provides a transition
allowance over the next six years based on capital investments
made in the last five years. He stated that ExxonMobil believes
that this transition plan is appropriate because the benefits
from these recent investments have not yet been fully received.
12:50:04 PM
CO-CHAIR RAMRAS inquired as to the amount of money ExxonMobil
has invested over the past five years.
MR. OWEN replied approximately $800 million. In further
response to Co-Chair Ramras, he said that ExxonMobil has
generated over $22 billion in corporate profits over the past
five years.
CO-CHAIR SAMUELS inquired as to the profits ExxonMobil has
generated over the past five years in Alaska.
MR. OWEN explained that ExxonMobil doesn't separate its profits
by state, but stated that ExxonMobil's production in Alaska
represents about 4 percent of its worldwide production.
CO-CHAIR RAMRAS asked how much [money] ExxonMobil has invested
as well as earned in Alaska.
MR. OWEN answered that ExxonMobil has invested $800 million.
Its worldwide profits have been approximately $22 billion per
year. He said that ExxonMobil's worldwide earnings in 2005 were
$36 billion and added that it invested $170 million in Alaska.
In response to Co-Chair Ramras, he answered that BP produced
180,000 barrels of oil.
12:52:23 PM
MR. OWEN restated that ExxonMobil believes that this transition
plan is appropriate because the benefits from these recent
investments have not yet been fully received. Oil and gas
companies invest large sums of money years ahead of first
production and are at risk for price, development cost,
production rates, and ultimate reserve recovery. He added that
in most cases, it takes many years, often more than five years,
for a return on oil or gas investment. For example, satellite
and tertiary recovery investment decisions during the last five
years were made under the ELF structure anticipating a lower tax
relative to that proposed under the PTT bill. He opined that
the State of Alaska appropriately provided this incentive so
that these challenged and costly projects would be commercially
viable. He remarked that it's not appropriate to suddenly
increase taxes on these investments without providing some form
of consideration. The transition provision recognizes that past
investments were made under the ELF structure and somewhat
reduces the increased tax treatment to which these projects will
now be subjected.
12:53:23 PM
MR. OWEN remarked that to avoid penalizing these recent
investments, the transition provisions included in this bill are
essential.
REPRESENTATIVE GARA commented that a few countries have
increased their taxes in recent years and asked which of those
countries where ExxonMobil invests have granted a credit for
investments prior to the tax change.
MR. OWEN answered that he didn't have that information with him.
In most cases, when countries make a major change in their tax
provisions, they provide some kind of transition arrangement in
order that there isn't just this step-change in the tax system.
MARTIN MASSEY, U.S. Joint Interest Manager, ExxonMobil
Corporation, explained that ExxonMobil has contractual
arrangements with countries such that the terms are solidified
for the lifetime of the resources. Countries might change tax
regimes, but it has no impact on those arrangements. He added
that in many cases there is some sort of a transition.
REPRESENTATIVE BERKOWITZ asked for an example of a regime that
has changed its taxing, and the corresponding lookback.
MR. OWEN clarified that the lookback investment attempts to
consider the impact of the higher tax rate on the revenue stream
from previous investments. He added that to some extent, it's
recognizing a transition from the current average tax rate to a
substantially higher one. Rather than adversely impacting some
of those recent decisions, a transition arrangement arises. He
explained that one of the easiest ways to generate the
transition arrangement is by means of a production profit tax,
which is a deduction for recent spending on investments over the
previous five years.
REPRESENTATIVE BERKOWITZ commented that when there's an
assertion made that there's a certain course of conduct that's
taking place in other jurisdictions, it would be helpful if [the
State of Alaska] could get some substantiation for that in order
that it have a more superior method of devising its own policy.
MR. MASSEY responded that ExxonMobil already has contractual
arrangements with regimes around the world, which results in the
predictability and stability of its investments regardless of
changes in price.
REPRESENTATIVE BERKOWITZ said it would be helpful to know what
those regimes are and the nature of those contractual
arrangements. He added that it would also be helpful to know of
regimes where ExxonMobil doesn't have contractual arrangements,
what the regimes are, and the lookback provisions that have been
made.
12:57:21 PM
CO-CHAIR RAMRAS asked what the effective ELF rate ExxonMobil is
paying to aggregate the oil production in Alaska is.
DAN SECKERS, Exxon Tax Counsel, ExxonMobil Corporation, replied
that for ExxonMobil's Alaska operations, it's approximately 9
percent.
REPRESENTATIVE SEATON commented that there was a recent 10
percent tax rate increase in the United Kingdom (U.K.). He
asked, "Did they make any kind of backward looking adjustment on
that, or do you have investments in the U.K.?"
MR. OWEN confirmed that ExxonMobil does have investments in the
U.K., but added that he didn't have that data with him.
REPRESENTATIVE SEATON inquired as to whether ExxonMobil has a
contractual arrangement with the U.K. such that ExxonMobil
remained at the previous [tax] rate, even though the U.K. has
increased its tax rate.
MR. MASSEY explained that ExxonMobil doesn't operate under a
contractual arrangement in the U.K. He added that the U.K.
[tax] system has been in place, and oil and gas investment
activities have existed there, for many years. He said, "You're
basically operating under a system that has been modified year
after year." ExxonMobil pays the taxes under the current system
[in the U.K.]
1:00:11 PM
MR. OWEN discussed the tax rate and investment tax credits. He
expressed ExxonMobil's concern that a 20 percent tax rate will
not support the growth opportunities remaining on the North
Slope, which he described as primarily complex EOR projects,
development of small oil accumulations, and innovative
development of viscous and heavy oil resources. He noted that
these opportunities have challenged economics. While the
investment tax credit of 20 percent will enhance the present
value economics of new investments, the 20 percent tax rate will
result in lower overall cash flow. He stated that the impact on
all economic parameters must be carefully weighed before a
decision to invest is made. The combination of a 20 percent
credit along with a 20 percent tax rate may not be adequate to
support development of all of the remaining opportunities.
1:01:17 PM
MR. OWEN strongly recommended that the legislature not increase
the proposed tax rate or reduce the proposed tax credits. He
discussed another feature of the PPT bill, which is royalty
settlement methodology. HB 488 addresses many of the
longstanding issues that have divided the State of Alaska and
the industry over the years. For example, too many years and
too much money have been spent in disputes over how to value a
single barrel of crude oil or a single molecule of gas. He
opined that it made little sense in the past and it makes little
sense today for the State of Alaska to have separate divisions
determining the value of oil and gas - one for royalty and one
for taxes. There is only one value in the market place. He
explained that HB 488 allows the State of Alaska to value a
producer's oil and gas using the producer's royalty settlement
agreement, which was negotiated with, and approved by, the
Department of Revenue (DOR). This will provide certainty to a
producer on the value on which to pay its royalty and production
taxes and will reduce the administrative and audit costs to both
the State of Alaska and the industry.
1:02:27 PM
MR. OWEN noted that under current prices, the industry will pay
more in taxes as compared to the current production tax system.
However, ExxonMobil needs predictability and durability under
which to gauge investment decisions. He said that no one wants
to invest money in a project to have the rules changed, reducing
the attractiveness of the investment. He remarked that the
transition provision is an important feature of this bill
necessary to provide relief for the abrupt change caused by the
new PPT system. The State of Alaska decided to weight the
proposal to a higher tax, which may make it difficult to
progress the remaining future development opportunities. It's
most important that the quality of the resources be factored
into the design of the tax system. He informed the committee
that ExxonMobil wouldn't support a higher tax rate or lower
credits than proposed in the bill.
1:03:22 PM
MR. OWEN explained that HB 488 seeks to balance revenues to the
State of Alaska and the producers across a range of oil prices
and provides incentives for new investments, which is a clear
objective of the State of Alaska. Most importantly, ExxonMobil
believes that the new system, coupled with appropriate gas
pipeline fiscal contract terms, will lead to a predictable and
durable tax system, which will enable the Alaska gas pipeline
project to move forward to the next phase. He noted that
potential changes to the features of the PTT bill must be
carefully considered to avoid upsetting the balance contained
within the bill. He concluded that HB 488 is important for
Alaska and the producers. It is one part - a very important
part - of a series of related issues that the legislature will
need to address to ultimately provide the necessary fiscal
environment to stimulate oil production and to progress the
Alaska gas pipeline project.
1:04:23 PM
MR. OWEN explained that the fiscal contract that is being
finalized under the authority of the Stranded Gas Development
Act will incorporate this PPT legislation by reference in order
to provide fiscal stability. ExxonMobil is currently working
with the administration on how best to incorporate this bill
into the fiscal contract. He noted that the fiscal contract
will soon be released for public and legislative comment.
Following the regular session, ExxonMobil understands that the
governor will call a special session so the legislature can vote
on the contract. He further noted that for that reason, it's
important that HB 488 be enacted in its present form prior to
that special session. ExxonMobil has been in Alaska for over 50
years and its future business plans show continued activity in
Alaska for at least 50 years. He informed the committee that
ExxonMobil is on the verge of taking the next step to
commercialize Alaska's North Slope gas and asked the committee
to support the administration's efforts in this regard.
1:05:27 PM
CO-CHAIR SAMUELS stated that the first $73 million made is tax-
free and inquired about ExxonMobil's position on that.
MR. OWEN responded that ExxonMobil understands why the
administration proposed a $73 million allowance - it is trying
to reduce the barriers for new entrants and explorers in the oil
and gas [industry] in Alaska. To some extent, ExxonMobil
believes that HB 488 has the potential to create an unlevel
playing field. However, he reiterated that ExxonMobil
understands - and agrees with - what the administration is
trying to do.
1:06:57 PM
REPRESENTATIVE BERKOWITZ commented that a threat - if the
legislature adjusts the oil tax, the producers will walk away
from the gas pipeline - is implicit in Mr. Owen's testimony. He
asked, "Is that an accurate assessment?"
MR. MASSEY said he wouldn't characterize it as a threat.
ExxonMobil believes that the administration has proposed a bill
that provides the predictability and durability that it needs.
The focus of the negotiations has been to arrive at a
predictable, durable regime, under which companies are able to
make their investments. He added that ExxonMobil believes that
the tax rates may be too high and that there may be development
opportunities on the North Slope that will not go forward
because of the tax rate the governor/administration selected.
REPRESENTATIVE BERKOWITZ remarked that the only people who are
unaware of what's in this proposed gas pipeline bill is the
legislature. It is being asked to craft a gas tax without
having seen a pipeline deal, which he opined, is going to be a
difficult thing to do. He relayed that he'd feel more
comfortable if the gas pipeline bill were produced in order that
the legislature conduct an analysis how it fits into an oil and
gas tax.
1:08:55 PM
CO-CHAIR SAMUELS clarified that the legislature is discussing HB
488 and instructed the committee to refrain from discussing
extraneous oil and gas issues.
1:09:58 PM
REPRESENTATIVE GARA commented that for the tax system to be
fair, the legislature needs to research what the resulting
profit margins would be for the various companies. The current
profit margins are "massive." He relayed that consultants have
advised that producers need to be able to project, with some
comfort, in the range of 15 percent or more profit margin on
development. He inquired as to the profit margin ExxonMobil
needs to project in order for a project to be a "go."
MR. OWEN informed the committee that ExxonMobil doesn't consider
single parameters in its economic analyses. ExxonMobil
considers a range of parameters: internal right of return, net
present value, actual value, the amount of money the project
would generate, the quality of the resource, and the technical
and geological risks that exists. [The economic analysis]
depends on all of those parameters and/or risks weighed
together, which results in how ExxonMobil feels about moving
forward with an investment. In further response to
Representative Gara, in regard to ExxonMobil's earnings, he
explained that when one looks at them as cents earned on dollars
of sales, they vary from 1 cent per dollar of sales up to about
20 cents per dollar of sales. 1 cent per dollar of sales is
like the automotive industry, while 20 cents per dollar of sales
is like the pharmaceutical industry. The oil industry, and
Exxon Mobil, are around 8-10 cents per dollar of sales, which is
right in the middle of the pack. He clarified that there's a
lot of money being invested and there are a lot of sales, so the
total earnings are very large numbers. However, when the
numbers are normalized on the cents per dollars of sales,
they're actually in line with most of the [industries].
1:13:09 PM
REPRESENTATIVE GARA remarked that under the current system,
ExxonMobil can anticipate essentially a 0 percent production tax
for most fields it develops. He surmised that ExxonMobil's
profits have probably increased by "hundreds of percent" as oil
prices increased from $20 [per barrel] to $60 [per barrel]. He
observed that the aforementioned doesn't seem to have affected
ExxonMobil's current investment decisions because they seem
somewhat similar this year to what they were three years ago.
He said:
In the face of that, why should we believe that
adopting a new tax structure that slightly increases
the tax and gives you a 20 percent credit is going to
cause you to change your investment behavior, more
than a system that charged you essentially a 0 percent
tax on new fields and in which you've seen profits go
up multiple fold, but investments haven't gone up
multiple fold.
1:14:09 PM
MR. OWEN surmised that Representative Gara's question is whether
this [bill] would change ExxonMobil's investment into the
future. He responded that ExxonMobil believes that this 20
percent tax rate is a significant increase and may lead to it
not developing all of the resources that exist on the North
Slope. He added that when ExxonMobil considers some of its
near-term investments, this PPT proposal results in a credit
which helps the present value of investments, but [the PPT
proposal] significantly increases the tax which is paid over the
long-term. When one considers the analysis that the
administration's consultant conducted, it was all around certain
size opportunities and quality opportunities. He relayed that
there are some marginal investments in which it's not clear
whether this proposal will allow all of them to go forward due
to the tax rate. In near-term, ExxonMobil is continuing to
advance. Prices are currently quite high and ExxonMobil is
currently investing similar to previous years, although it has
increased its activity in drilling. In the long-term, when
ExxonMobil faces the challenged areas - heavy oil opportunities,
EOR, and very small pools - they are going to be marginal
investments. He reiterated that ExxonMobil is concerned about
this [proposed] tax rate.
1:16:22 PM
CO-CHAIR RAMRAS inquired as to how much [money] ExxonMobil
donated back to the communities in Alaska in 2005.
MR. OWEN answered approximately $500,000. He added that
ExxonMobil currently has about 20 employees in Alaska, which
isn't a large employee base.
CO-CHAIR RAMRAS requested that Mr. Owen inform the committee as
to what the ELF tax payment was in 2005, or projected in 2006,
versus what it would be under the PPT regime.
1:18:30 PM
MR. SECKERS replied that in 2005, ExxonMobil's production tax
was approximately $300 million. He added that research has
indicated that under PPT, ExxonMobil's tax would increase by
approximately $100 million. Under PPT, the tax would be
calculated by subtracting ExxonMobil's cost associated with
producing the particular revenue from its total revenue.
1:20:12 PM
REPRESENTATIVE CROFT commented that it makes a great deal of
difference whether the legislature is talking about a stand
alone PPT law of general application wrapped into a 10-, 15-, or
20-year contact, or as a precondition to the gasline contract.
He asked, "Does ExxonMobil see passage of HB 488 in it's current
form or something very near it, as a precondition to the gas
agreement that you've apparently concluded?"
1:21:49 PM
MR. MASSEY responded that "precondition" and "threat" are not
words that he would use. He added that once the terms of the
contract are written, consistent with the bill, it will allow
ExxonMobil to move to the next phase of the gas pipeline.
REPRESENTATIVE CROFT asked, "Do you have a legal right under
whatever you've signed on the gasline agreement to pull out if
we make significant changes?"
MR. MASSEY responded that the administration has arranged to
first address the bill. Once the bill is addressed, how the oil
bill is written into the contract and the actual contract itself
will be made available for public comment, legislative review,
and a decision to ratify it in order that the governor is able
to sign it.
REPRESENTATIVE CROFT remarked that it either is or isn't a
component of the gas pipeline agreement, which [the legislature]
hasn't seen.
MR. MASSEY stated that it is ExxonMobil's position that the oil
fiscal stability will be addressed in the gas pipeline contract.
1:25:37 PM
CO-CHAIR SAMUELS clarified that HB 488 does nothing for fiscal
certainty, which will be a separate discussion.
REPRESENTATIVE LEDOUX observed that ExxonMobil keeps using the
terms "predictability" and "durability." She asked, "Actually,
wouldn't any bill, as long as it was encompassed in a contract,
provide you with predictability?"
MR. OWEN answered that one of the fundamentals is the health of
the oil industry. The reason that ExxonMobil wants to see the
predictability and durability long-term is that the underlying
healthy oil business is needed for the gas business. He noted
that oil and gas are inextricably linked.
REPRESENTATIVE LEDOUX clarified that as long as that was
encompassed in some sort of contractual provision, it would
provide predictability and durability.
1:27:36 PM
REPRESENTATIVE SEATON noted that ExxonMobil said that its ELF
was approximately .9 in Alaska. He inquired as to whether the
ELF stimulated Alaska investment or whether PPT, with the credit
and full allowance, will better stimulate ExxonMobil's
investment in Alaska.
MR. OWEN confirmed that the ELF encouraged investment.
ExxonMobil invested and developed a large number of satellite
fields and progressed EOR projects. He said that the way in
which PPT is structured provides some incentive. There are some
projects that would do better under ELF, and some projects that
would do better under PPT. Under PPT, there may be some
projects that aren't commercially viable.
1:29:37 PM
REPRESENTATIVE SEATON clarified that HB 488 applies to gas
production across the state, not just the North Slope gas
pipeline.
1:30:48 PM
MR. MASSEY relayed that ExxonMobil's focus on the gas side has
been to define the terms through the gas pipeline fiscal
contract. ExxonMobil recognizes and understands that gas needs
to be dealt with in the PPT deal because there may be some gas
that isn't part of a fiscal contract. With its North Slope gas,
ExxonMobil intends to work with the administration and the
legislature on how to deal with it and the royalties and taxes
associated with the gas through the fiscal contract.
1:31:28 PM
REPRESENTATIVE SEATON asked, "At this point in time, do you even
care whether gas is changed from the gas ELF system and gas
credit system to the PPT system? Is this PPT system that is set
for oil totally applicable to gas production?"
MR. MASSEY, in regard to gas on the North Slope, relayed that
it's ExxonMobil's position to deal with that through the fiscal
contract.
1:32:14 PM
REPRESENTATIVE SEATON clarified that ExxonMobil is not concerned
about gas in this PPT bill because its gas is going to be
associated with the contract on the North Slope.
REPRESENTATIVE ROKEBERG inquired as to whether ExxonMobil
expects any changes in its investments due the change in
leadership in the company.
MR. OWEN replied no. He noted that ExxonMobil is continuing
with the way it currently does business and opined that it's
been a very seamless transition. ExxonMobil will continue to
evaluate opportunities with its partners on the North Slope.
1:33:18 PM
REPRESENTATIVE ROKEBERG inquired as to whether, under the terms
of PPT, ExxonMobil would be receptive to an increased tax credit
for viscous oil in the frontier exploration.
MR. OWEN replied that there are opportunities that exist that
ExxonMobil is concerned about, which would be difficult to
progress under the current 20 percent tax rate and 20 percent
credit rate. Therefore, there may be some opportunities that
would be enabled if there were higher credits for those
activities and likewise for exploration. He noted that there
are already incentives for exploration and credits for
explorations that exist. In regard to heavy oil, ExxonMobil
thinks it's one of the opportunities in which it's going to be
difficult to progress, as well as more challenging than some of
the others. He said, "If you're asking me will extra credits
help projects move forward, I think the answer is yes."
REPRESENTATIVE ROKEBERG continued that if the legislature were
to increase the tax credit for something specific, would
ExxonMobil be receptive to a change in the tax rate that would
be more aggressive in the account of high oil prices.
1:35:23 PM
MR. OWEN explained that at this stage, ExxonMobil has looked at
this proposed bill and it has some reservations about the tax
rate and whether it will allow all of the development
opportunities. ExxonMobil believes that this bill currently
balances the needs of the State of Alaska's with the needs of
the producers. Therefore, he stated that ExxonMobil is able to
move forward with this bill. He noted that any changes to this
bill will have to be looked at very carefully to see what impact
they will have on the overall ability to progress the resource
base. He clarified that Representative Rokeberg discussed two
different concepts - differentiating credits and increased
progressivity on the price - which would have to be looked at to
determine how they balance out in terms of whether a healthy
industry is maintained.
REPRESENTATIVE ROKEBERG asked how this tax would effect the
Point Thomson development.
MR. OWEN answered that the most likely development of Point
Thomson option is through the gas pipeline.
1:38:15 PM
REPRESENTATIVE BERKOWITZ stated that DNR just filed an
application for a right-of-way through Point Thomson and asked
whether ExxonMobil had any comment on that.
MR. OWEN relayed that ExxonMobil has been waiting for DNR to
issue it for public comment, and now that it has been issued,
ExxonMobil will review it and then comment on it.
1:38:43 PM
CO-CHAIR SAMUELS, in regard to the royalties, asked whether
ExxonMobil thinks that private royalties should be treated
differently than State of Alaska royalties by the industry.
Currently in HB 488, the private royalties and state royalties
are treated differently in terms of cost recovery from the
industry. He asked, "How do you balance out the fact that the
royalties from the State of Alaska get treated one way and the
private royalties get treated another way?"
MR. OWEN responded that it's not an area that ExxonMobil has
really delved into.
1:39:54 PM
REPRESENTATIVE GARA relayed that the money from the production
tax eventually is deducted from the State of Alaska corporate
income tax. He clarified that when the committee asks how much
more money will it raise, the committee means in total, not how
much more money will it raise in the severance tax prior to that
being deducted from the State of Alaska corporate income tax.
He further clarified that the committee is referring to the
total net to the State of Alaska, not the pre-deduction net.
REPRESENTATIVE SEATON further clarified that the tax would be
due monthly and that there's a provision that if a company pays
90 percent of the tax, it won't owe interest on it until March
of the following year. Federally, if one underpays his/her
taxes, he/she owes interest, but there isn't a penalty if he/she
is at that 90 percent. He asked, "Do you have any problems with
proceeding in that same like manner with the state?"
1:42:04 PM
MR. MASSEY stated that under the current bill, there's a
provision that allows ExxonMobil to pay its taxes based on 90
percent. If ExxonMobil is within that 90 percent, it would not
have any interest or penalties due, which is very similar to the
federal law. The federal law has a number of different tests
one can use - 100 percent of the prior year's tax and 90 percent
of the current year's tax.
1:42:53 PM
REPRESENTATIVE SEATON, in regard to the federal tax, clarified
that if a company is within 90 percent, it doesn't owe a
penalty, but it still owes interest on the tax due. He asked,
"If this is due monthly, why should the state say you're not
going to owe interest on the underpayment?" He furhter asked,
"Is there any reason that you can see why the State of Alaska
shouldn't work under that same system?"
MR. MASSEY answered that it's more of a policy call for the
State of Alaska.
1:44:50 PM
MR. SECKERS, explained that in 2005, using current prices,
ExxonMobil's production tax gross revenue from Alaska would have
been approximately $3.1 billion. From that, the royalty that
ExxonMobil would have paid would be subtracted. Under ELF, $500
million in royalties would have been subtracted from the $3.1
billion total revenue. He added that the gross revenue for 2005
would have been about $2.8 million. He said that the effective
tax rate for ExxonMobil's gross operations in Alaska under the
aggregated ELF would have been around 11.2 percent.
ExxonMobil's tax in 2005 would have been approximately $350
million. Under PPT, ExxonMobil would start with the taxable
revenues and subtract the $73 million allowance, subtract its
total lease operations expenses, which would have been
approximately $400 million. Next, ExxonMobil would apply the
flat tax rate of 20 percent, resulting in a $537 million dollar
tax. The credit is only 20 percent of ExxonMobil's qualified
capital expenditures, which is approximately $190 million.
ExxonMobil's credit would have been approximately $40 million,
leaving it an extra tax bill of approximately $500 million, with
an effective tax rate close to 16 percent.
REPRESENTATIVE GARA remarked that's the additional production
tax ExxonMobil will pay, but then it's deducted from its
corporate income tax. He clarified that the committee wants to
know how much extra the State of Alaska will receive.
MR. SECKERS responded that if ExxonMobil then subtracted it from
its corporate income tax, it would probably remove approximately
another. The maximum tax rate in Alaska is 9.4 percent.
Assuming that ExxonMobil was at that rate, the maximum
additional reduction it would get would be approximately 9
percent of that total amount, which would be approximately
another $50 million.
CO-CHAIR SAMUELS added that ExxonMobil would save [money] in
federal taxes also.
MR. SECKERS informed the committee that under the current
aggregated ELF system, the corporate income tax would be
approximately $100 - $120 million for the State of Alaska.
1:50:14 PM
REPRESENTATIVE GATTO clarified that what ExxonMobil's figures
show is that under PPT, it's going to pay more taxes.
MR. SECKERS noted that it's never advantageous to pay more taxes
just to get the deduction.
REPRESENTATIVE GATTO asked, "What is your penalty, not just from
the State of Alaska, but overall?"
1:53:33 PM
CO-CHAIR RAMRAS remarked that he advocates this transition to
PPT, and said the committee is discussing total government take
and the state taking more at the expense of the federal
government. He opined that it's beneficial to Alaska and
perhaps detrimental to the portion of Alaska revenues which are
paid to the federal tax return. He requested that ExxonMobil
discuss the shift in tax payments to the State of Alaska as well
as the deductibility on the federal return.
1:55:49 PM
MR. SECKERS explained that from the gross revenue, the first
government take that ExxonMobil pays would be a royalty to the
State of Alaska. Of that total revenue, ExxonMobil would pay
property tax, which is about 2 percent, corporate income tax,
and production tax. Production tax is a deductible item for the
calculation of state income tax. He mentioned that Alaska looks
at ExxonMobil worldwide income and takes a portion of that based
on a number of factors. When ExxonMobil calculates its
worldwide taxable income on its federal return, it takes
deductions for the amount of severance tax it paid to Alaska as
well as other taxes it paid. Then ExxonMobil calculates the
federal taxable income based on that. It is reduced by what
ExxonMobil paid to the State of Alaska, but it's not dollar for
dollar, because it's a deduction off of the tax.
1:57:50 PM
CO-CHAIR SAMUELS relayed that the committee has gotten the
impression that at $60 per barrel, the biggest loser in this tax
plan was ConocoPhillips and the second biggest loser was the
federal government. He asked whether that was correct.
REPRESENTATIVE CRAWFORD observed that the oil and gas industry
is cyclical. The higher the highs are, the lower the lows are.
He noted that current prices are really high and said that he
would like to know what PPT, as proposed, would collect at $12,
$24, $36, and $48 per barrel as well as at the current prices.
He said, "I don't trust that oil prices are going to stay as
high as they are today. I think that they're headed down at
some point and I think they're going to head down like a rock."
2:00:17 PM
REPRESENTATIVE SEATON referred to the effective tax rate of PPT
versus the current ELF. At $20 per barrel, effectively it's at
half the current tax rate, which would be 7 percent under ELF
and 3.5 percent under PPT. He asked, "How significant is that
downside protection at low oil prices in the PPT formula for
Exxon[Mobil]?"
MR. OWEN remarked that PPT is a tax on profit or profitability,
so it's hard to design a profit-based tax system that doesn't do
that. He described it as progressive by nature; as profits
become lower, the take becomes lower too. It's all part of the
shift from one system to another system, and there's a natural
progressivity with a PPT system in that it provides lower tax
take for the State of Alaska at lower prices and higher tax take
at higher prices. He opined that it's important because it's
part of the step to a new structure.
REPRESENTATIVE SEATON reiterated his interest in determining how
significant the downside protection when prices are low or lower
is in agreeing to a PPT-style system. He asked, "Does that
really matter much to you at all?"
2:02:54 PM
MR. OWEN confirmed its significance. He added that ExxonMobil
has considered this [PPT] system and ExxonMobil believes that
it ultimately provides balance across a range of prices,
including both low and high prices. He expressed ExxonMobil's
understanding of the desire to shift from a regressive ELF
system to a more progressive PPT system.
2:03:37 PM
REPRESENTATIVE BERKOWITZ inquired as to ExxonMobil's long-range
forecast for the price of oil and the associated probability.
MR. OWEN declined to answer.
REPRESENTATIVE BERKOWITZ explained that the committee is
attempting to put together a tax rate/tax proposal that's
supposed to be sustainable over a wide range of time and prices.
MR. MASSEY responded that ExxonMobil doesn't have an idea as to
the future price [of oil]. He opined that the key is whether
the legislature has designed a system, given its assessment of
the resources that remain to be developed on the North Slope,
that will attract investment to those opportunities and enable
them to move forward. He explained that ExxonMobil doesn't use
one price, rather it looks at investments across a range of
prices in order that it can understand how viable an opportunity
is going to be.
The committee took an at-ease from 2:07:05 PM to 2:20:55 PM.
KEN KONRAD, Vice President of Gas, BP Alaska, informed the
committee that last week, after more than two years of
negotiations and a lot of hard work on all side, BP reached a
very finely balanced agreement with the administration on a
predictable and durable fiscal contract with the State of
Alaska. The fiscal contract will establish clear rules
governing payments-in-lieu of taxes BP would make to the State
of Alaska, including a PPT payment incorporated by reference
from this legislation. He noted that once ratified, the fiscal
contract will enable a gas pipeline to advance in partnership
with the State of Alaska as an equity participant. Much of
what's contained in the PPT legislation was born in part out of
the fiscal contract negotiations BP has been in with the
administration.
MR. KONRAD said oil and gas co-exist in the same underground
reservoirs. They are produced together through the same wells,
flow together through the same flowlines, and are processed
together in the same facilities. Some fields have more oil than
gas and some fields have more gas than oil or condensate. He
noted that it is exceedingly rare that one is produced without
the other. Because oil and gas co-exist physically and are
produced together through the same investments made in well and
facilities, they are also linked economically.
2:24:08 PM
MR. KONRAD continued that this inextricable physical and
economic linkage is widely recognized by governments and
investors around the world. North American royalty contracts
cover both oil and gas. Internationally, production-sharing
contracts include terms for both oil and gas. He relayed that
general oil and gas tax laws across the U.S. and internationally
always address both oil and gas. Governments want to know how
much money they will receive from oil and gas production.
Similarly, investors need to know how much they will pay
governments when oil and gas is produced and sold, and make
their investments accordingly. The economic linkage of oil and
gas is particularly acute in Alaska when considering a gas
pipeline, given the unique operating challenges on the North
Slope and the criticality of economies of scale. He informed
the committee that the producers and the State of Alaska
currently have a problem. Alaska North Slope (ANS) oil
production has been declining for over 15 years and has been on
an unsustainable trajectory. He noted that investment by the
industry has been insufficient to limit decline.
2:25:37 PM
MR. KONRAD conjectured that unless the entire industry, in
partnership with the State of Alaska, is able to maintain
economic levels of oil production to support and maintain vital
North Slope infrastructure for many decades to come, a gas
project can't be successful - it simply can't be burdened with
the cost of uneconomic oil production. Investors need
confidence that the fiscal regime will be sufficiently
competitive to attract the enormous amounts of additional
capital needed to maintain economic levels of ANS oil production
for decades. He said that providing this confidence benefits
both the State of Alaska and investors against its common enemy
- production decline. Building a gas pipeline is effectively a
commitment by the major producers to maintain vital North Slope
infrastructure for another 40-50 years, which he opined is a
daunting challenge. He relayed that there is a question as to
whether there will be enough investment to stem the long-term
decline in ANS production, sufficient oil production to keep the
unit costs of operating the Trans-Alaska Pipeline System (TAPS)
at an economically viable level, and sufficient oil production
to cover the operating and maintenance investment costs of
operating aging production facilities. He said that answer can
be yes because BP knows the oil is up there. Billions of
barrels of oil that might otherwise be left behind in producing
fields can be accessed. Viscous oil in and around existing
infrastructure that was discovered decades ago holds promise.
Exploration near existing fields and beyond in areas like
National Petroleum Reserve-Alaska (NPR-A) may have potential.
2:27:19 PM
MR. KONRAD remarked that the aforementioned is all very
difficult. ANS production is declining for a reason - not for
lack of oil, but for a lack of profitable ways to extract it.
The totality of industry costs and taxes are high. However, BP
believes that with the right technology and the right fiscal
regime, these historically unprofitable investments can be made
viable so industry can convert resources into production to
sustain ANS infrastructure. He relayed that this is why oil
taxation policy should appropriately balance risks and rewards
to enable this additional investment. Even prior to this
proposed tax increase, investment has been insufficient to
prevent ongoing production decline. He opined that the
legislature needs to very carefully consider the impacts of a
very large tax increase on future investment and long-term
production. He further opined that this is an important
decision and it shouldn't and can't be a shortsighted decision
based on next year's budget or political calculus.
2:28:33 PM
MR. KONGRAD posed the questions whether North Slope investment
will increase or decrease as a result of significantly higher
taxes and whether the long-term decline in oil production will
increase or decrease as a result. He also asked what the
"knock-on" revenue effects on royalty, State of Alaska corporate
income tax, and ad valorem taxes (AVT) if investment is
impacted; and whether a high tax rate at modest prices is
appropriate. He discussed the evolution of PPT and the fiscal
contract negotiations. Since the onset of the fiscal contract
negotiations and years before, BP has sought to make clear the
importance of having a competitive and durable fiscal platform
for both oil and gas to underpin a massive gas investment. He
stated that including both in the fiscal contract is important
for two fundamental reasons among others. First, it provides
confidence that the level of taxation will be competitive to
enable the additional investments needed to mitigate the ongoing
decline in ANS oil production, so vital infrastructure can be
maintained for another 40-50 years. Second, it protects BP from
after the fact tax increases on its business after a gas
pipeline has been built and it has no choice but to pay and
produce regardless. He noted that is what happened as TAPS
entered service some 30 years ago. He reiterated that both a
competitive and durable tax regime are essential and should
align well with the goals of the State of Alaska.
MR. KONRAD said that in the summer of 2005, the administration
advised BP that although it respected the importance to
investors of having competitive and durable rules for both oil
and gas in the fiscal contract, it didn't see the ELF regime as
properly suited as a long-term solution. The concern being the
tax base underpinning ELF was declining with time. He explained
that the concept of a PPT-type structure was proposed by the
administration to fix the so-called ELF problem. BP responded
that if populated with balanced numbers, PPT could be a viable
long-term structure with potentially positive attributes for
both the state and the industry. In this regard, BP agreed to
move off its preferred position, which was to simply utilize the
existing ELF-based system for the duration of the fiscal
contract. At that time, the mutually agreed upon goals of both
sides for PPT included: all barrels should be subject to
taxation, the state should receive a balanced and proportionate
share of the price/profit upside, and additional investment
should be stimulated to reduce long-term production decline.
2:32:12 PM
MR. KONRAD relayed that proposals were discussed intermittently
through year-end, and it was clear that there was a significant
difference of opinion as to what numbers would create a balanced
PPT that met these goals. During that time, the State of Alaska
initially proposed and held to a 20 percent tax rate. The
sponsor group had proposed a tax rate of 12.5 percent, which BP
estimated would have increased State of Alaska revenues by
hundreds of millions of dollars per year at current prices and
tens of billions of dollars over the long term relative to ELF.
BP believes that it would also have stimulated more investment,
more jobs, and most critically, more long-term production.
MR. KONRAD stated that on Saturday, February 18th, following a
long and, at times, difficult negotiation, BP was able to agree
[with the administration] and conclude the gas portion of the
fiscal contract with the state. The following day, BP made
another PPT proposal for the Alaska to consider in advance of
the planned executive meeting. He said that this proposal made
a very substantial move towards the administration's position,
while providing more support for investors at low to moderate
prices, where everyone agrees Alaska investments are extremely
challenged. On Monday, February 20th, the governor outlined to
BP executives his 20/20 PPT proposal. The proposal BP had made
to the administration the day before was rejected. BP has
agreed with the governor that it will not oppose rates and
figures in the proposed PPT legislation. BP has made the
extremely difficult decision to accept the governor's terms as a
means to finalize a fiscal contract. BP believes that this PPT
is at the far outer fringe of what should be seen as a
reasonable or plausible range of outcomes. He remarked that BP
also needs to be very frank with this legislature by saying
upfront that it doesn't believe the 20 percent rate will
maximize investment or in turn maximize long-term production.
He opined that although the PPT structure has significant merit,
and BP supports it, the overall size of the tax increase
outweighs other benefits and goes well beyond optimum.
2:35:11 PM
CO-CHAIR RAMRAS asked what happened with TAPS 30 years ago.
TOM WILLIAMS, Alaska Tax Counsel, BP, explained that there's a
list of one dozen changes that were made in the decade after the
pipe was ordered in 1968 that impacted Prudhoe Bay, the
pipeline, or both. He noted that the changes are published in
the Anchorage Chamber of Commerce report. There was a 3
percent/4 percent severance tax and disaster severance tax that
had been enacted following the flood in Fairbanks. It replaced
a stepped-rate severance tax/consolidated severance tax in 1972.
There was also a cents per barrel floor that was put in and a
credit for state royalties on the cents per barrel floor, which
had the effect of setting a floor on the combined royalty and
severance tax revenues. In 1973, after there was legislation in
Congress and threatened legislation in Congress about the delays
over building the oil pipeline due to litigation, a special
session was called by Governor Egan, in which AS 43.56 property
tax was enacted. In addition, the conservation tax was enacted,
the right-of-way leasing act was amended, the cents per barrel
royalty credit was repealed, and the rates were changed. In
1974/1975, the severance tax was changed to say that if the
sales price that someone is selling his/her oil and gas for
doesn't represent the prevailing value, the department could
require the tax to be paid on the basis of that prevailing
value. Previously, it had been on the basis of prevailing
price. Also in 1975, there was an enactment of a temporary 2-
year tax on oil and gas reserves. In 1977, ELF was enacted and
a tax increase replacing these tiered steps with a base rate of
12.25 percent times the ELF for oil, and a base rate of 10
percent for gas, with a slight different ELF formula for ELF.
In 1978, there was separate accounting. He added that there
were also a couple of changes to the income tax, which had
impacts on Prudhoe Bay. They were not directly targeted, but
they did have adverse effects.
2:38:56 PM
REPRESENTATIVE BERKOWITZ inquired as to who was present at the
PPT negotiations.
MR. KONRAD responded that BP, ConocoPhillips, and ExxonMobil
were present at the PPT negotiations, along with the
administration.
REPRESENTATIVE BERKOWITZ inquired as to whether it's BP's
understanding that the legislature establishes the tax.
MR. KONRAD confirmed yes and added that it was always the intent
that the legislature would endorse and approve [the tax].
REPRESENTATIVE BERKOWITZ expressed his concern in regard to Mr.
Konrad's characterization of this as a negotiation.
MR. KONRAD clarified that BP was negotiating with the
administration.
CO-CHAIR SAMUELS clarified that HB 488 is before the committee
and the legislature will make the final determination.
2:41:56 PM
REPRESENTATIVE CRAWFORD relayed that he's not convinced that a
20/20 regime is the correct one. It seems to him that the
higher the legislature makes the credit, the more incentive
there is for companies to drill and produce. Therefore, he
surmised that the legislature should possibly increase the
credit. He said that BP stated that at 12.5 percent, the State
of Alaska would maximize its tax dollars or revenue over the
long term. In regard to the 12.5 percent tax rate, he noted
that he'd like to see the charts that BP used to make that case
during negotiations with the governor. He remarked that he
wants to maximize the revenue for the State of Alaska as well as
have a healthy oil industry. He reiterated that he would like
to see BP's charts that exemplified how a 12.5 percent tax rate
would be more beneficial than a 20 percent tax rate.
MR. KONRAD clarified that BP thought [the 12.5 percent] tax rate
would maximize investment, not that it was optimum.
REPRESENTATIVE CROFT, in regard to what happened in the 1970s,
explained that the State of Alaska had a tax system for Cook
Inlet, which was not ready for Prudhoe Bay. He said that he
keeps hearing the idea that the legislature needs to lock-in and
take away the right to change the tax structure for 30 years, or
some discrete period of time, because of something that happened
in the 1970s. He inquired as to whether it's BP's position that
changes in the 1970s created a tax regime for the pipeline that
it couldn't make an adequate profit on. He added that it seems
to him there has been a "pretty unbroken series" of tax
concessions. He said that every time the industry has brought
forward a particular instance in which a tax concession was
needed, the legislature responded.
2:47:33 PM
MR. KONRAD responded that the gas pipeline is a large, risky
project and that stability and risk reduction is important to
that project.
REPRESENTATIVE CROFT noted that the legislature has been able to
establish a tax structure which is responsible as well as to
give concessions where they're needed over the last 30 years,
and he believes that the legislature will be able to do so [in
the future].
2:48:31 PM
REPRESENTATIVE SEATON, in regard to HB 488 pertaining to oil and
gas, mentioned that he was presuming that the tax structure for
ANS pipeline gas would be negotiated at a different time. He
remarked that what he's hearing from BP is that even though the
base tax rate of oil is 12.5 percent and the base tax rate of
gas is 10 percent, in rolling gas into the PPT bill, the
consideration isn't on current production of gas, rather on the
future [production of gas]. He questioned whether BP is going
to analyze PPT as it applies to gas production and whether it's
beneficial, other than in the case of a potential pipeline.
MR. KONRAD answered that today BP plans to focus entirely on oil
and added that it expects to begin debate when the fiscal
contract is released in 2-3 weeks.
2:50:13 PM
REPRESENTATIVE SEATON explained that his problem with the bill
is that there is a tax on both oil and gas and no one is
discussing the ramifications of PPT on gas in Alaska. He
expressed his concern regarding rolling gas into HB 488 without
any known analysis to the committee of what the effect on the
current gas industry would be. He noted that ELF for gas is
different than ELF for oil.
CO-CHAIR SAMUELS interjected that Representative Seaton's
question would be more appropriate for DOR.
2:51:54 PM
CO-CHAIR SAMUELS mentioned that BP only produces gas on the
North Slope.
MR. KONRAD confirmed that BP only produces gas on the North
Slope.
REPRESENTATIVE SEATON asked whether BP cares that current gas is
in HB 488.
MR. KONRAD said BP does care that current gas is in HB 488.
REPRESENTATIVE SEATON surmised that BP is only interested in gas
in relation to a future contract, not in the current gas
production.
MR. KONRAD corrected that BP is interested in all of it because
of the common goal.
CO-CHAIR SAMUELS added that BP's gas tax structure will be in a
contract.
MR. KONRAD further added that it's also important that the
industry be successful because BP is designing a project that's
dependent on a third of its throughput from gas that hasn't yet
been found and developed.
2:53:25 PM
REPRESENTATIVE ROKEBERG mentioned that as a member of the
Anchorage business community in the 1960s and 1970s, there was
significant discussion regarding the lack of stability of
petroleum taxes at that time. He added that other factors
included: stop and start, ability to move forward on TAPS,
typical oil patch problems, and volatility of prices.
2:55:09 PM
CO-CHAIR SAMUELS requested that Mr. Konrad state BP's position
on the connectivity between [HB 488] and the gas contract,
realizing that the legislature could pass [HB 488] and vote no
on connectivity. The legislature could also pass [HB 488], vote
yes on connectivity, and no on the gas pipeline contract because
it doesn't like that particular contract.
2:56:37 PM
MR. KONRAD informed the committee that BP supports full review
of anything related to the fiscal contract by the
administration, full legislature, the people of Alaska, and the
court systems. He remarked that has nothing to do with fiscal
stability, rather being competitive and attracting investment
for 40 more years. Because this is a large, quite risky, and
low return investment, BP is trying to reduce the risks and
fiscal stability of its payments is important in allowing the
project to advance.
REPRESENTATIVE CRAWFORD inquired as to how HB 488 will affect
gas.
CO-CHAIR SAMUELS asked BP's view if there isn't a gasline.
2:59:49 PM
MR. KONRAD, in response to Representative Crawford, informed the
committee that BP doesn't have gas in Cook Inlet or Nenana.
CO-CHAIR SAMUELS asked what BP's view would be on the language
on gas in HB488 if a liquified natural gas (LNG) line or third
party pipeline were proposed.
MR. KONRAD said BP hasn't looked at it through that lens.
3:01:32 PM
ANGUS WALKER, Commercial Vice President, BP Alaska, noted that
BP only has leases on the North Slope and in the Beaufort Sea.
He referred to slide 1, a profile of historical production from
1977 through 2005. The North Slope has produced over 15 billion
barrels of oil to date, and while BP looks back with envy at the
days of peak production, it is clear that the business today is
very different than it was 20 years ago. He stated that to
date, BP has invested $24 billion to create the Alaska business
existing today. BP has paid over $32 billion of tax to the
State of Alaska and $24 billion of tax to the federal
government. In total, BP estimates that the North Slope
participants have generated $120 billion in taxes for the State
of Alaska and the federal government since first production in
1977. In addition, as an industry, more than 34,000 jobs are
generated in Alaska every year.
3:05:43 PM
REPRESENTATIVE BERKOWITZ inquired as to how much profit BP has
made during that time period.
MR. WALKER responded that he doesn't have that number [with
him], but would be able to make it available.
3:06:05 PM
MR. WALKER continued that the harsh reality is that since
production peaked in 1988, production has declined at an average
of 6 percent. He noted that natural decline of these fields is
around 15 percent. The industry has managed to stem decline to,
on average, 6 percent over the last ten years by investing $1-
$1.5 billion per year in the North Slope [oil and gas] business.
He stated that ELF has worked as intended. Many of the smaller
fields on the North Slope would not have been developed without
ELF. While not all of this production pays production tax, it
all pays property tax and royalty and state income tax. He
remarked that ELF has and continues to encourage investment in
these small or less productive fields, and has played a
significant role in stemming overall North Slope decline.
However, BP recognizes that ELF was designed as a surrogate for
profitability and while it has been effective, it is not perfect
in today's price environment. It is for that reason that BP is
supportive of adopting the PPT structure proposed by the
administration.
3:07:43 PM
MR. WALKER relayed that one of the most important issues for the
committee to consider is the impact PPT will have on the decline
of the Alaska North Slope. He referred to slide 2 from Roger
Marks' presentation last week. He explained that it shows two
forecasts of future production - the lower blue forecast
represents a future without gas and the upper pink line
represents a future where the oil business is revitalized by
gas. In response to Representative Croft, he clarified that the
blue line is without a gas line.
CO-CHAIR SAMUELS added that doesn't include the barrels of oil
equivalent (BOE), just the excess oil stimulated through gas
exploration and development.
MR. WALKER confirmed that Co-Chair Samuels was correct and added
that he is referring to oil only.
3:09:07 PM
MR. WALKER, in regard to what it will take to keep the oil
business healthy, said the simple answer is to stem decline. He
explained that the black line on slide 3 displays the history of
North Slope production and the colored lines look forward to the
future. With no investment, the natural decline of the fields
would be the lower red line and within 10 years, the business
would be gone. In response to Representative Croft, he further
explained that the slide represents the North Slope in totality.
The production is gross production on the North Slope and the
investments are gross investments by industry.
3:11:24 PM
MR. WALKER mentioned that the green line assumes that [the
industry] carries on investing at the rate it is currently
investing, which is $1-$1.5 billion per year and the decline
continues along the same historic trend. [The industry] has
declined at an average of 6 percent per year for the last 15
years. He added that there's no reason to believe that wouldn't
be the same story in the future with the same investment into
the industry. In that scenario, the industry has a life out to
2025, which he noted is not long enough to support a gas
pipeline project. In order to support the gas pipeline project,
he said that the oil business needs to be healthy and the life
of the oil business has to be extended for as long as possible -
at least until 2050. The oil industry would need to stem
decline of the North Slope to an average of 3 percent per year,
which BP estimates would require $2-$3 billion of capital - or
twice the capital that's currently being invested. In response
to Representative Guttenberg, he clarified that the assumption
in the case of the red line/zero investment line is that there
are no new oil fields; in the case of the 3 and 6 percent
decline lines, with higher investments, that oil will either
come from the existing fields, or it may come from new oil
fields.
3:13:47 PM
MR. WALKER relayed that BP shares the challenge of keeping
Alaska competitive and believes that Alaska's part is to
maintain stability and keep it attractive to investors, while
the industry's part is to provide technology, innovation, and
investment. In BP's opinion, the tax regime the legislature
approves will directly impact how attractive Alaska is and what
the future decline will be. He opined that it's in the interest
of all that Alaska focus on growing the pie, rather than taking
an increasing share of a declining pie. In response to the
question, where will the industry find all this oil to stem
decline, he said Alaska has a huge resource base. To date, BP
has produced 15 billion barrels, but there are 17.5 billion
barrels remaining that it's aware of. The remaining 14 billion
barrels consist of: 3.5 billion barrels of light oil in the
existing reservoirs, 1 billion barrels of viscous oil which BP
has started to produce, 3 billion barrels of heavy oil lying in
shallow formations below the permafrost, and 6 billion barrels
of gas which BP is working "so hard" to get to market.
3:15:34 PM
CO-CHAIR SAMUELS added that currently in the bill, there isn't
an exclusion or extra tax credit for heavy oil. He explained
that in Alaska, there is a method for royalty reduction
negotiations. He said that instead of talking about a different
tax/cost recovery method for heavy oil, where there already is a
royalty reduction, and realizing that the chances of making a
profit are smaller, the State of Alaska wants to incentivize
that through a royalty reduction, rather than going through the
battle of cost-shifting back and forth and a constant fight
between the industry and the State of Alaska. He asked, "Do you
think that's a realistic "big picture" view of how [the State of
Alaska] could incentivize the heavy oil development through
royalty reduction, rather than cost recovery?"
3:17:12 PM
MR. WALKER responded that BP considered very long and hard about
whether there should be a separate credit for viscous heavy oil
versus conventional activity, and it recommended very strongly
to the administration that that be the case. He opined that all
of the work of the analysts has shown that heavy and viscous
oils are very difficult to produce and need extra help. Having
different levels of credit would work because it has very
capable processes in place for tracking where it spends capital.
In regard to royalty relief, he stated that many countries are
introducing either royalty abolition or royalty reduction where
they want to stimulate activity on an enduring basis. As a
result, investors can make large investments, knowing what the
rules are for the future. He said, "Absolutely, if you could
find a way of changing royalty and make that enduring, then it
would be a very effective thing to do."
3:18:42 PM
MR. WALKER continued that the scale of this known resource
greatly exceeds that expected from future exploration. Future
discoveries are expected to be of the order of 50-150 million
barrels. He noted that it's not to say that exploration should
stop, rather exploration to stem the decline of the North Slope
can't be relied upon. While BP isn't exploring in the
conventional sense, it is adding barrels. BP is not only
looking to develop its share of the 1.75 billion barrels, but
it's also looking to make it even bigger. Every time BP
increases the recovery efficiency by just 1 percent, it accesses
an additional 600 million barrels. He noted that every 1
percent is equivalent to another Alpine.
3:19:50 PM
REPRESENTATIVE CROFT asked what Mr. Walker meant when he said
that BP is not exploring in the traditional sense.
MR. WALKER answered that BP is exploring in the sense that it's
spending large amounts of its capital applying innovative
technologies within the boundaries of the field which it
currently operates. He added that some of these technologies
are risky. For example, the $100 million BP is going to spend
at Endicott on its innovative EOR program. If it works, BP
could apply that across the whole of the North Slope.
REPRESENTATIVE CROFT stated that a tax regime has a particular
effect on the level of investment. Expanding the exploration in
the summer or a reduction in the TAPS tariff would have as much
impact, particularly those two combined, as a change in the tax
structure. He said tax structure isn't the only thing that
moves the legislature along those lines - there's significant
things that the legislature can do in terms of regulations or in
terms of the cost of bringing the oil to market.
3:21:59 PM
MR. WALKER remarked that at the end of the day, BP needs to get
more barrels through the pipeline and whatever it can do to do
so helps. Some of that is going to come from exploration, but
the United States Geological Survey (USGS), on every resource
assessment that BP has seen, says that it doesn't have the big
exploration prospects or fields left to be found in Alaska.
Therefore, the explorers will be finding things, and BP hopes
they find things because it wants them to fill up TAPS. He
added that BP wants them to keep as much oil going through the
system as possible. He further added that the harsh reality is
that BP can't rely on exploration, but it will help.
REPRESENTATIVE CROFT inquired as to whether reducing the TAPS
tariff would help fill the [pipe]line.
MR. WALKER said the TAPS tariff is set by the tax settlement
methodology (TSM) and reflects the costs of running TAPS.
REPRESENTATIVE CROFT asked whether a reduction would help spur
innovation.
MR. WALKER surmised that it would, theoretically, if that was
the appropriate thing to do.
3:23:09 PM
REPRESENTATIVE GARA stated that Mr. Walker talked about the
possibility of a different tax on heavy oil than regular oil and
the way the proposal is currently structured, it's the same tax
regardless of whether the oil is heavy or light. He asked,
"What would you say about a system that taxed conventional oil a
little bit higher than is being proposed, but then had a
special, lower tax for harder to develop fields and heavy oil?"
MR. WALKER acknowledged that there are many other structures
that could be thought of and BP is open to consider those.
REPRESENTATIVE GARA mentioned that he's heard generalizations
regarding the price of oil which is necessary to make heavy oil
commercially viable. Acknowledging that it's different from
field to field, he requested a "general thumbnail" of the price
at which BP believes that heavy oil production on the North
Slope would be profitable.
MR. WALKER responded that it's very different from field to
field. He surmised that Pedro van Meurs' analysis showed that
the point at which one can make heavy oil economic is
significantly higher than it is for conventional oil because of
the course and flow rates involved.
3:25:04 PM
CO-CHAIR SAMUELS asked what BP thought would be the most
efficient way, if it was cost neutral, to avoid the litigation
and the constant conflict between the State of Alaska and
industry, if the legislature wanted to incentivize heavy oil.
MR. WALKER answered something that is clear and durable. The
abolition of royalty would be clear, durable, and easy to
administer. As soon as complexities are introduced, the systems
have to be designed to match. He opined that systems can be
managed where costs for different fields are being tracked in
order that the credit system BP proposed would be the next
easiest thing to administer, and the final complexity would be
having different tax rates for different fields. He clarified
the order - royalty abolition, then differential credits, then
different tax rates. He acknowledged the importance of
something that genuinely stimulates investment.
3:26:56 PM
REPRESENTATIVE ROKEBERG opined that it's time for the
legislature to negotiate with the producers. He expressed his
interest in a proposal that would increase the tax rate as a
matter of progressivity on the high side, and to raise tax
incentives for viscous oil, heavy oil, and frontier exploration.
He asked, "Could we not balance that by keeping within the same
structure?" He added that therefore, there's a linkage between
any tax increase with a credit increase outside the realm of
royalty reduction because those wouldn't be in the same specific
area of taxation. He further asked, "Should we balance it
within this bill?"
3:28:30 PM
MR. WALKER replied that there are many levers in [HB 488] and
the governor's proposal sets all of the levers in a certain
place. He mentioned that it's important that it's balanced and
there is an enduring tax system that is able to offer the
appropriate compensation for those who take a risk by investing
in the industry.
3:29:26 PM
REPRESENTATIVE CRAWFORD, in regard to enduring, attempted to
clarify whether Mr. Walker is referring to the ceiling and not
the floor on taxes.
MR. WALKER said that it's within [the legislature's] purview to
offer incentives to stimulate any particular activity.
3:30:08 PM
MR. WALKER informed the committee that to develop the 14 billion
barrels that BP knows about would require well in excess of $100
billion. He noted that kind of investment can only come from
the major oil companies of the world. He said:
It thus mystifies us why so much of the testimony
given to this committee by Pedro van Meurs focused on
the impact of PPT on new entrants when the future of
the North Slope is dependent on making Alaska
attractive to major oil companies.
MR. WALKER concluded that this is the reality of the industry,
the 6 percent decline, and the large capital investments that
the industry is going to have to make to stem that decline.
3:31:18 PM
REPRESENTATIVE GATTO, in response to $100 billion to [develop]
14 billion barrels, surmised that the first barrel would be a
lot cheaper than the last barrel, and that BP has no intention
of getting the very last barrel, which he said could easily cost
$1 million. He asked, "In your estimate of that 14 billion
remaining, how much is a reasonable amount to get out before you
just give up?"
3:31:48 PM
MR. WALKER clarified that the $100 million is a "headline"
number. He said BP doesn't know what it will take and whether
it's even possible to produce some of that oil. With a 3
percent decline to 2050, BP would produce 7.5 billion barrels of
the 17.5 [billion barrels] left.
REPRESENTATIVE GATTO remarked that the other oil, not classified
as heavy, but solid, that exists on top is an enormous resource.
He asked, "Is there anything that you have/that anyone has even
suggested as a way to tap into that, prior to the time when you
simply exhausted your presence in Prudhoe Bay?"
3:33:06 PM
MR. WALKER acknowledged that is a huge challenge to develop that
very heavy, solid oil. He noted that BP has a team of people
working collaboratively across the industry. [The team] is
looking at all of the technologies that have been applied in
Venezuela and Canada. He added that over the next 10 years, BP
is going to conduct a series of pilots on the North Slope in
order to test which technology is appropriate for the North
Slope for implementation in an Arctic environment and the kinds
of reservoirs in Alaska. After that period of trials, BP hopes
to have identified the technology and the way it can apply it to
exploit that resource base. He noted that's a huge resource
base - 20 billion barrels in place. At the moment, BP is
assuming up to 15 percent recovery. If one is able to get 25
percent of it, that would be an extra 2 billion barrels.
3:34:11 PM
REPRESENTATIVE GARA stated that over the last few years,
according to State of Alaska projections, as oil has gone from
$20 per barrel to $60 per barrel, profits have increased six
fold on the North Slope from approximately $1 billion to $7
billion this year. That hasn't affected the major producers'
investment decisions in a similar way - investments haven't
increased as much as profits have. He asked, "What can you tell
us about why they're giving you $73 million tax-free under this
proposed bill, and whether that $73 million in profit that we
give you tax-free will lead to increased investment given the
track record?"
MR. WALKER said that the $73 million has not been put in HB 488
for [BP's] benefit. He said, "We don't like it." He elaborated
that the $73 million provision creates an uneven playing field
for the incremental investments that BP makes versus the
incremental investments that a small company would make.
REPRESENTATIVE GARA said that the additional money BP has
received in the past few years hasn't increased its investment
substantially. He asked whether he is reasonable in assuming
that offering $73 million tax-free in profit won't lead to a
substantial increase in investment.
MR. WALKER informed the committee that the inclusion of the $73
million will make no difference to BP's investments in Alaska.
He added that the structure of the tax, the ultimate structure
of the fiscal regime, will make a difference in its investments
and the industry as a whole.
3:36:53 PM
REPRESENTATIVE BERKOWITZ mentioned his assumption that BP has
conducted an analysis as to the optimal incentive. He asked,
"If taxes decreased to zero, would you be able to tell me that
all kinds of development would happen in Alaska?" He said, "Or
if the taxes increased to 100 percent, I'm sure you'd say
everything would stop and there's a continuum along these." He
expressed his curiosity in regard to what that continuum
resembles for BP.
MR. WALKER responded that it's too difficult because BP is
unable inform [the legislature] as to the correct structure -
where the tipping point is when BP gets exactly the correct
balance between industry take and state take to stimulate the
future that BP desires. He added that large increases in taxes
won't attract large increases in investment in Alaska.
REPRESENTATIVE BERKOWITZ inquired as to whether it would be less
true if they are masked with large increases in tax incentives
for investment/exploration development.
MR. WALKER replied that BP looks at the package as a whole - the
increase in tax with the benefit that it would get for
investing. He noted that BP is currently investing between
$600-$700 million per year, and $450 million of that is in the
upstream, thus it would benefit from this credit. He relayed
that BP takes that into account when it calculates its tax.
REPRESENTATIVE BERKOWITZ expressed his frustration regarding the
lack of information provided for the legislature. He relayed
that the legislature doesn't know whether a 15, 20, 25, 30, or
50 percent tax incentive makes a difference.
MR. WALKER responded that BP doesn't know what the balance point
is. He mentioned that the core principle is that if taxes are
increased, there will be a reduction in investment because
Alaska will be less competitive.
3:40:07 PM
REPRESENTATIVE BERKOWITZ, in regard to the percent of market
value, described the "mother of all models," which is a
combination of probability and outcome determination. He
relayed that it seems to him that when the legislature is
discussing billions of dollars, that somewhere someone has run
that kind of modeling. He expressed his skepticism in regard to
that kind of modeling not being made available to the
legislature, which makes him question a lot of the assumptions
that are being put forward.
MR. WALKER relayed that BP is able to model the impact on its
business with certain development scenarios. He referred to
DOR's production curves, in which it has modeled four different
cases for different outcomes, depending on the amount of
resource that's developed. He added that BP can't predict the
link between the fiscal regime, the resource, and the investment
made, but there's definitely a link - it's cause-and-effect.
3:41:45 PM
REPRESENTATIVE BERKOWITZ, in regard to investment decisions,
commented that the parameters seem to revolve around market
conditions, cost of extraction, and the fiscal regime. The
focus that the legislature has had in the hearings thus far has
solely been on the fiscal component of it. He said that the
cost component of extracting Alaska's resource will decrease in
part because the TAPS settlement is going to be restructured
shortly. He noted that there is also a significant change in
the market - there's no longer highs of $30 [per barrel], rather
lows of $30 [per barrel] are being projected. He opined that in
that new regime, there should be a greater impact on investment
decisions and whatever "tinkering" around the legislature might
do with the tax rates on the margin in the severance tax. He
expressed his wish that there'd be more attention paid to that
component of BP's investment decisions, rather than solely
making it seem as if the legislature "tinkers" with 5 or 10
percent on the severance tax.
MR. WALKER corrected that the legislature isn't "tinkering" with
it, rather doubling it, and even tripling it if BP were not to
invest. It's a significant increase in tax and the burden on
the industry. He reiterated that he is unable to inform the
committee as to what the link is between the increase in tax and
BP's investment, or the tax reduction and what it does to the
investment, but assured the committee that there's a link.
3:43:43 PM
CO-CHAIR SAMUELS commented that Mr. Walker is correct in saying
that the legislature is considering, depending on what the
effective tax rate is, doubling or tripling it, depending on the
investment level. He clarified that the total government take
is not being doubled or tripled, it's 5-10 percent and the
legislature is only tweaking one component.
3:44:57 PM
CO-CHAIR RAMRAS asked what the severance tax rate is that BP
pays when it aggregates its Alaska oil fields.
MR. WALKER answered that it's currently 5.5 percent. He noted
that under the 20/20 provision, it would increase to 13.2
percent. If BP chose not to invest capital in that year, then
it would be 17 percent.
CO-CHAIR RAMRAS further asked, "If you chose not to invest any
capital, why wouldn't it be 20 percent?"
MR. WALKER answered because BP receives deductions for operating
expenses.
3:46:11 PM
REPRESENTATIVE BERKOWITZ remarked that the operating expenses
are currently deductible under the corporate income tax. The
deductible under the federal income tax is the basis for BP's
state corporate income tax, and then there's another subsequent
opportunity to deduct the operating expenses again.
MR. WILLIAMS explained that it's a different tax. BP deducts
its expenses for state income tax and federal income tax
purposes - two different taxes. If one is taxing a net income
or profit, then in order to calculate that, one has to look at
what the expenses are. He remarked that if as a philosophical
matter, that's unacceptable, this structure isn't a good one to
be pursuing. He added that it's a function of the structure of
the proposal before the committee - it's on net value, not on
gross value. The ELF was the gross value approach in attempt to
deal with rising costs over time. The PPT structure attempts to
deal with rising costs directly by subtracting them out. He
noted that it's the standard of measure that the legislature
chooses to use on which its going to levy the tax.
3:47:40 PM
MR. WALKER, in response to Representative Seaton, explained that
the pink on slide 5 is the assumption that once a gas pipeline
is built, BP will want to fill its capacity in it. He added
that is yet to find gas. He noted that slide 5, "A 50 year
vision," is the graphic BP uses when it describes its vision for
its business in Alaska. It displays BP's net production from
the Alaska North Slope from 1977 to what it hopes it will be out
to 2050. He said that the future will be very different than
the past with three businesses - light oil, viscous/heavy oil,
and gas - built on top of each other, all of which must be
healthy. He noted that in the past, there was only one business
- the light oil business.
3:49:55 PM
CO-CHAIR RAMRAS requested that Mr. Walker explain how the
transition provision is strategic in this 50-year vision.
MR. WALKER responded that the transition provisions in the PPT
bill aren't strategic over a vision for 50 years. The
transition provisions are a recognition of the very significant
increase in tax that the PPT bill represents, and a compensation
for the fact that BP had made some very large investments.
CO-CHAIR RAMRAS inquired as to whether Mr. Walker would be able
to quantify how much that was over the last five years.
MR. WALKER replied that over the last five years, BP has spent
$3.5 billion, $2.4 billion of which was in the upstream business
and therefore, would carry forward from the transition
provisions which are in the bill.
3:51:21 PM
REPRESENTATIVE BERKOWITZ, in regard to the $2.4 billion,
questioned whether any of it has been accommodated under the ELF
structure. He noted that some of that $2.4 billion is five
years old and has had five years of benefiting from ELF. He
opined that there should be some "laddering".
MR. WALKER clarified that the five years is a recognition of the
significance of the tax increase and with BP having made major
investments, it softens the "blow" of it. He noted that it's
part of the package which was negotiated with the governor.
REPRESENTATIVE GARA commented that it's his position that in the
past five years, BP has benefited financially from [the
legislature's] decision to under-tax its oil. He suggested that
Mr. Walker explain how [the five years] isn't a second benefit.
MR. WALKER informed the committee that BP doesn't make any
profit at low [oil] prices. At $20 [per barrel], BP makes zero
profit. BP is in Alaska because in the "good years" it makes a
decent profit. He relayed that BP has to have a few "good
years" to compensate for the "lean years."
3:53:51 PM
REPRESENTATIVE CROFT described his conception that in the
decline of major oil fields, independents become more important.
He asked, "Why am I mistaken about that for Prudhoe Bay?" He
opined that the paradigm should be one in which the major
companies hand off their big finds in order that the independent
companies exploit it.
3:54:41 PM
MR. WALKER acknowledged Alaska's huge resource base, which is
yet to be exploited. BP's conviction that Alaska needs major
oil companies is due to the scale of the investments and the
technological challenge, in order to fully exploit the resource
base. He added that it's not to say that the independent/small
companies are not important. They have a real role to play and
will do things which BP won't focus on - like exploring for
these small [oil] fields which are yet to be discovered. In
further response to Representative Croft, he relayed that BP is
on the verge of some major investments. He said, "You could
almost say the basin is going to recreate itself on the back of
viscous oil and gas." He noted that the normal life cycle of a
basin is not "playing out" on the North Slope.
3:56:18 PM
MR. WALKER mentioned that once the [gas] pipeline is built, it
will be BP's intention to keep its share of the pipe full. He
clarified that the shaded portion of slide 5 represents the gas
it would take to fill up the pipeline.
REPRESENTATIVE LEDOUX, in regard BP not making a profit at $20
per barrel, asked if [HB 488] was in effect, at $20 per barrel,
whether the State of Alaska would receive any revenue.
MR. WALKER replied that under the current system, at low [oil
prices] BP still pays royalty, corporate income, property, and
production taxes. Therefore, at low [oil] prices, BP still pays
considerable revenues to the State of Alaska and the federal
government, regardless of whether it is making a profit.
REPRESENTATIVE LEDOUX asked, "What about under this new PPT at
$20 per barrel?"
MR. WALKER answered that at $20 per barrel, BP would make a
small profit. The nature of that change is that at low prices,
the State of Alaska receives slightly less and BP makes a small
profit, estimated to be approximately 5 percent of the total
take. When the legislature moves from $20 per barrel at the
status quo to the PPT, BP will actually make a small profit.
REPRESENTATIVE LEDOUX asked, "At $20 per barrel, is the State of
Alaska better off under the current system, or better off under
this new PPT?"
MR. WALKER responded that at $20 per barrel, the State of Alaska
would get more revenue under the current system. He surmised
that a well-constructed profit-based tax would be better for the
State of Alaska in the long term to stimulate investment and
activity.
3:58:45 PM
REPRESENTATIVE SEATON commented that BP's graph displayed 25/50
as the crossover point at which the State of Alaska is taking
more on the production tax side under ELF than it would under
PPT. He continued that if the legislature remained at DOR's
long-time projection and with the 5-year clawback provision, the
State of Alaska would not only be receiving less [money], but
would actually be paying $170 million per year in tax credits.
3:59:45 PM
CO-CHAIR RAMRAS explained that BP isn't allowed to receive the
credit when the price of oil falls below $40 per barrel.
MR. WALKER confirmed that Co-Chair Ramras is correct. The
transition credit wouldn't be available until the price of oil
was above [$40 per barrel].
REPRESENTATIVE GATTO inquired as to whether the clawback
provision is eliminated if the price of oil remains above $40
per barrel for the next five years.
MR. WALKER explained that the bill is structure in a way such
that if the price of oil is above $40 per barrel, on average
through the year, then BP will receive the benefit of the
transition credit. If the price of oil is below $40 per barrel,
then that credit rolls forward to a future year in which the
price of oil is high.
CO-CHAIR RAMRAS suggested that BP "rethink it" and added that it
reads poorly.
4:01:11 PM
MR. WALKER responded that it was a result of a negotiated
outcome. BP's early proposals to the administration didn't have
any transitions provisions in them because the headline tax rate
was more reasonable - 12.5 percent. He continued that BP faces
enormous challenges in creating this future, and attractive and
stable fiscal terms are key in making this happen; without it
BP's vision will not come true.
4:01:56 PM
RAYMOND HALL, Senior Tax Economist, BP Group, opined that when
fiscal regimes are being compared, it's important to focus on
the basin in context. For example, how mature the basin is, the
cost structure that prevails in the basin, what the geology
looks like, how big and risky the prospects are, whether there's
infrastructure in the basin, and how close it is to markets. He
remarked that as a general rule, one can make the observation
that a high tax burden will generally equate to lower investment
levels and conversely, a lower tax rate will generally equate to
higher investment levels. He relayed that BP is looking to see
whether the regime is equitable for both the investors and the
government. BP is also looking to see whether the regime is
simple to understand and administer. He noted that most
countries don't score very well on the simplicity criteria. He
said that Alaska has a fairly complex "cocktail of taxes."
Removing ELF and replacing it with the proposed PPT is a move in
the general direction of improved simplicity.
4:07:04 PM
CO-CHAIR SAMUELS, in regard to the allocation of overhead and
cost recovery, asked, "Do you think that we invite a lot of
litigation down the road?" He further asked, "How do you
mitigate that under the context of you want the plan to be
simple and understandable?"
4:07:44 PM
MR. WILLIAMS replied that one of the things that mitigates it is
that the wheel has already been invented in this area. BP is
the operator of Prudhoe Bay and incurs expenditures on behalf of
itself and its partners operating the unit. BP bills those out
to its partners and doesn't have a license from its partners to
spend their money. Things like that don't show up in those
joint venture billings to BP's partners. There's a set of
accounting rules which have been agreed upon for the Prudhoe Bay
operating unit regarding what goes in and out. He said this
legislation allows flexibility for DOR to examine those rules.
CO-CHAIR SAMUELS inquired as to whether the State of Alaska
would be able to access those audits.
MR. WILLIAMS explained that the legislation grants [DOR] the
authority to ensure that the audit system is as it's represented
among the partners, and also is working as it's intended. The
[DOR] also has the authority to deal with situations in which
there may be partners, but they're not substantial enough for it
to be in their economic interest to incur the cost of an audit.
4:11:43 PM
CO-CHAIR SAMUELS relayed that he's been approached by some who
want to have more in statute and some who want to have more in
regulation. He asked, "What would be your view as far as the
rules on cost and overhead allocation?"
MR. WILLIAMS informed the committee that there are operating
agreements. He mentioned that there's also the Council of
Petroleum Accountants Societies (COPAS), which is a set of
accounting principles for billing between partners.
4:13:00 PM
CO-CHAIR SAMUELS expressed his concern regarding the possibility
of COPAS in statute, and if/when the [principles] are changed,
[the legislature] would have to return to the process yet again.
MR. WILLIAMS relayed that the objective is as much certainty as
possible in order that the tax functions as the State of Alaska
expects, and the industry is aware of what it owes and is able
to calculate it correctly. He remarked that the problem with
being simple is that this is a tax of general application. He
noted that this is aiming to attract new [investors] to Alaska.
REPRESENTATIVE BERKOWITZ mentioned that [the legislature]
immediately assumed that it had to go in a PPT direction. He
further mentioned that he hasn't heard much discussion as to
whether that's the only course the legislature could take, or
whether there are better courses. He asked, "Do increases in
the corporate income tax make sense? Are there other options?"
4:16:01 PM
MR. WALKER responded that there are a number of different
options that [the legislature] could look at in terms of
changing [the State of Alaska's] fiscal regime. He opined that
the key issue is how to stimulate investment on Alaska's North
Slope to mitigate the historical decline. He added that PPT,
with the structure that was presented by the administration,
could work very well for Alaska over the long term, granted [the
legislature] "gets the numbers right." He said, "It's a well-
considered proposal, it's a well-considered structure and we
believe it would work, provided that the numbers are right."
REPRESENTATIVE GARA mentioned that BP has chosen to compare [the
State of Alaska] to one regime that taxes at a higher rate,
Norway, and four regimes that tax at a lower rate. He relayed
his understanding that most places with substantial reserves of
oil have a 60 percent or higher tax rate. He asked for examples
of "bigger oil-producing places" which have a higher than 60
percent rate. He further asked, "Can you tell us why you've
chosen not to compare Alaska to the places with higher taxes?"
4:18:16 PM
MR. HALL explained that his presentation is based on comparing
tax and royalty regimes in which the basin is at a similar stage
in its life cycle. He note that Alaska started out in the
1970s, similar to Norway and the U.K. To that extent, [Norway
and the U.K.] are comparable and all three of these basins have
already entered a decline, a mature phase. He further noted
that a production-sharing contract regime has different
dynamics. For example, the overall level of take is quite low,
and a lot lower than Alaska. Conversely, at high [oil] prices,
the take may well be higher. He mentioned other factors
including the cost structure and the size of the resource.
4:19:42 PM
MR. WALKER added that BP was conscious of Pedro van Meurs'
report as he chose Norway and the U.K. as the two boundary
conditions for his analysis. He opined that it's appropriate
that BP focuses on the same regimes.
REPRESENTATIVE GARA expressed his concern regarding comparisons
being made to places in which the taxes are lower and not to
places in which the taxes are higher. He opined that it's
creating the impression that [the legislature] is adopting a
very high tax, rather than adopting a very low tax in comparison
to many other places [the committee] is not discussing.
MR. WALKER replied that it's certainly BP's opinion that [the
legislature] is adopting a high tax for the resources on the
Alaska North Slope.
4:21:06 PM
MR. HALL discussed the principles of a fiscal regime designed
for profit, in which the preference is to see taxes levied on
profits, rather than on revenues. He mentioned the changes BP
has seen in a number of mature basins, in which taxing has moved
away from revenues/royalties to exclusively profits. He
remarked that competitive is probably the most important
attribute. In designing a fiscal regime, one must ensure that
the regime reflects the realities of the basin including: cost
structure, level of maturity, what the exploration resembles,
whether one is able to make discoveries and whether they will be
small, whether it's high or low risk, whether it requires new
technology or whether it can be done with conventional
technology. Therefore, there's a whole range of factors that
need to be considered in assessing whether the basin is
competitive. He noted that there are hundreds of different
fiscal regimes around the world and there is no one regime
that's best for all circumstances.
4:22:49 PM
MR. HALL explained a chart which ranks the leading oil and gas
producers around the world in 2004. The U.S. is number two in
the world, while Norway is number six, and the U.K. is number
nine. Therefore, these are very important basins in terms of
production of both oil and gas. He noted that the Lower 48 is
still a massive producing province on a global basis. In regard
to the marginal tax rates which apply in these basins, he
informed the committee that there is a marginal tax rate of 45
percent in the Gulf of Mexico and 50 percent in the U.K.
4:24:45 PM
REPRESENTATIVE GARA expressed his understanding that in some of
these countries, the oil is privately owned and one pays an
additional portion to the private owner. He asked, "For the
countries where the oil is privately owned and you're making a
private payment, is that included in the rate?"
MR. HALL replied that it's included in the rate, but there's
virtually no privately-owned petroleum in the U.K. or Norway.
He said that under the current ELF regime, Alaska's tax rate is
56 percent, and the proposed PPT would increase its tax rate to
61 percent. Norway's tax rate is 78 percent. He relayed that
the manner in which capital is treated and depreciation operates
also needs to be considered. For example, in the U.K., a
company receives 100 percent relief from its investment as it
spends it. For a new project in the U.K., a company won't pay
any tax until that project has achieved payback on the
investment. He noted that Norway provides uplift of 30 percent.
REPRESENTATIVE BERKOWITZ expressed his understanding that
production rates in the U.K. and Norway are in decline, despite
these massive incentives for investment. He opined that
incentives for large-scale projects are of minimal utility in
creating investment.
MR. HALL relayed that in his experience, the simplest way to
incentivize investment is by means of a low tax rate. He
commented that a low headline tax rate predominantly attracts
investment. He noted that there has been a trend in mature
basins away from taxes on revenues to taxes on profits. When
the U.K. started in the 1960s, there was a royalty with a rate
of 12.5 percent which applied to all production. That was
progressively abolished for new developments in 1983 and for all
developments in 2003. Similarly in Norway, there was a royalty
rate ranging from 8 to 16 percent. That was abolished for new
developments in 1986, on all gas production in 1992, and will be
phased out for all oil fields by the end of this year. He
mentioned that there are provisions to exempt the Gulf of
Mexico's production in deep water from royalty. It applies up
to the first 88 million barrels of cumulative production.
4:29:13 PM
REPRESENTATIVE BERKOWITZ, referring to recent controversy
regarding short payment of royalties in the Lower 48, asked
whether that would affect these numbers.
REPRESENTATIVE GARA asked, "Aren't these places that you're
comparing us to much more mature than Alaska is?"
MR. HALL contended that they'd straddle Alaska. He remarked
that Norway is probably significantly less mature than Alaska
and the U.K. is at an equivalent state of maturity. There is
still significant offshore exploration potential left in the
U.K., on the order of 9 billion BOE. In Norway, the exploration
potential is significantly greater than that, on the order of 20
billion BOE. He noted that there are large parts of Norway that
are yet to be explored.
4:31:17 PM
MR. HALL, in regard to the U.K. production profile, explained
that there was an initial peak in the early 1980s, followed by
decline and a second peak in the 1990s. Government policy in
the U.K. has always been focused on trying to ensure that the
basin is self-sufficient - all the requirements to consume oil
and gas are met by domestic consumption. The real challenge the
basin currently faces is that it's likely that the U.K. will
become a major importer of oil and gas in the years ahead. He
relayed that the overall direction of policy has been to
maximize recovery and encourage exploration and as many players
into the basin as possible. He noted that the U.K. has 142
licensees. The resource ownership is spread amongst a large
number of players.
4:33:08 PM
MR. HALL stated that the U.K. has been very successful in
attracting exploration activity. During the mid to late 1990s,
there were more exploration and appraisal dollars spent in the
U.K. than virtually any other basin in the world. It has
subsequently fallen due in part to a tax increase in 2002. The
U.K. attracts a disproportionate amount of exploration activity
"on the back of" an attractive and appropriate fiscal regime.
He explained that there was a very significant fiscal reform in
1993, which reduced the marginal tax rate from an excessive 80
percent to 30 percent, enduring for approximately 10 years. For
that 10-year period, the tax regime for oil and gas producers
was exactly the same as the tax regime for any other part of
British industry. He stated that this tax regime led to a
dramatic increase in investment in the basin and production.
4:35:19 PM
CO-CHAIR SAMUELS observed that the upper trend started earlier
and asked whether there were other factors involved.
MR. HALL responded that it's very difficult to say what the
evolution of the production would have been had the tax not
changed, but there's a great deal of anecdotal evidence from the
major producers and the new entrants that came into the basin,
citing the tax change as the principle enabling factor leading
to their dramatic increase in investment in the basin.
4:37:00 PM
CO-CHAIR SAMUELS asked whether the U.K., in addition to
decreasing the tax rate, provided incentives in the five-year
period between 1989 and 1994.
MR. HALL responded that when this change occurred in 1993,
essentially all incentives were swept away for new investment
and projects. It was the tax regime that applied to any other
industry.
CO-CHAIR SAMUELS remarked that in PPT, [the legislature] is
examining the tradable tax credits. He noted that as the tax
rate dropped in the U.K., it also had incentives.
4:38:22 PM
MR. HALL responded that for a new entrant in the basin in the
U.K. in the 1990s, there were no specific incentives that came
along without investment. There was simply a very low tax rate
of 30 percent.
REPRESENTATIVE BERKOWITZ inquired as to whether there was
anything else happening in the early 1990s that would have
affected exploration and production.
MR. HALL responded that there was a continuous profile of
activity. He noted that there was the Piper Alpher disaster in
the North Sea in 1988, which led to a significant focus on
safety. As a result, the focus on new developments was diluted
during that time period.
4:39:33 PM
REPRESENTATIVE BERKOWITZ asked, "If you were to draw that line
backwards prior to 1985, would the slope of the line, aside from
that dip that happened as a result of the environmental
problems, would that be more linear?" He surmised that the dip
at that point was a deviation from where events would have gone
and that there was a factor that brought the production down.
MR. HALL replied that one very important factor is oil price.
He said, "If we go back in real terms in 1980, the oil price was
significantly higher than it is now. In real terms the price in
1980/1981 was about $90 in today's money." He noted that there
was a catastrophic collapse in the oil price in 1986, falling to
$10 [per barrel] in nominal terms. That huge change in the oil
price, in the span of about 18 months, transformed the economics
overnight - there was a worldwide crisis in the industry. He
added that a lot of investments which were previously economic
when the oil price was $90 [per barrel], overnight, were no
longer economic.
4:41:17 PM
REPRESENTATIVE BERKOWITZ asked, "Of the factors that led to the
increase in production, which would you weigh as more
significant: the increase in market price or the reduction in
the tax rates?"
MR. HALL contended that it's comprehensively the reduction in
the tax rate.
REPRESENTATIVE GARA said he'd much rather have long, stable
production at a high tax rate than short-term production at a
low tax rate with nothing left in 20 years. He surmised that if
[the U.K.] kept the rate at 80 percent, production would have
increased slightly, remained level, and lasted much longer. He
further surmised that [the U.K.] reduced [the marginal tax rate]
to 30 percent and produced all of its oil in a span of 15 years
and all of a sudden, it declined in 2005. He asked, "Is that a
possibility of what happened - you spent all of your oil because
you attracted it at a low tax rate?"
MR. HALL disagreed. He explained that since the production
peaked, a lot of the major operators are finding that the fields
in production, as they mature, are beginning to decline much
faster than anticipated. He noted that there was also a tax
increase in 2002, which led to a reduction in investment, which
also had an impact on the subsequent evolution of production in
the basin. This is what happened to the government tax revenue
from the oil and gas industry over a similar period. The tax
change occurred in 1993 and subsequently, the tax yield from the
basin increased. For example, in 2001, the overall tax yield in
the basin was five times what it was in 1991, even though the
oil price was broadly the same in real terms. He further
explained that it's an example of a government cutting taxes and
tax rates and encouraging investment and activity, which led to
higher production, which gave the government more tax. He said
that this is a classic example of how cutting tax can benefit
all of the parties engaged in the industry.
4:45:20 PM
MR. HALL contended that the differences between Norway and
Alaska are much greater than the similarities. Eleven of the 14
largest fields in the North Sea are in Norway. These fields are
of very high quality and have very good reservoir
characteristics. He noted that the Statfjord field has a
recovery factor of 70 percent. He further noted that Norway is
very close to the major markets in Europe. Norway's overall
production is still growing, although oil production has been
declining for the last 3-4 years. However, gas production is
still rising very dramatically. He surmised that Norway's
production will continue to increase for another 3-4 years. He
noted that the state plays a very significant role in Norway
through its ownership of resources. The Norwegian state
directly owns one third of the resources in existing fields.
There are two major Norwegian companies, which have a very large
state ownership - Statoil, which is 70 percent owned by the
Norwegian state and until 2000, was 100 percent owned; and Norsk
Hydro, which is 44 percent owned by the Norwegian state. He
relayed that this is important in the context of the
implementation of policy. When the state owns so much of the
resource base, directly or indirectly through its agents, it
tends to own a lot of the prime acreage, operate all of the key
fields, and make most of the key decisions, which effect
development of the basin. He said it's easier to sustain a high
tax rate when the majority of the participants paying that tax
are government. This largely explains why Norway has been able
to hold its tax rate at the level it has - the state has such a
strong role in the basin. The international oil companies own
about one third of the resource base in Norway. However, there
is no state company or state-owned company in the U.K.
4:49:50 PM
REPRESENTATIVE ROKEBERG inquired as to the amount the British
government, as well as the royal family, own of BP.
MR. HALL answered that the British government doesn't have any
ownership in BP. In further response to Representative
Rokeberg, he relayed that there's a history of the British
government having a large stake in BP. He opined that the
government's remaining stake in BP was diluted in the 1980s so
it got rid of its remaining stake in BP in the 1980s.
REPRESENTATIVE SEATON asked, "What difference does it make to
the profitability or the investment by an international oil
company that two thirds of the oil in those basins are owned by
another state or a different oil company?" He remarked that if
they're willing to pay those tax rates and develop those fields,
he would presume that if it wasn't a profitable venture for them
and they wanted to participate, Statoil and Norway State would
be developing all of the oil there.
4:51:32 PM
MR. HALL said the big difference between the perspective of an
independent company and a government investing is that
governments tend to have much lower cost of capital. Therefore,
[governments] are able to afford projects that companies can't.
REPRESENTATIVE SEATON added that if there's some relationship
that changes, the international oil companies are still
participating at that tax rate in those fields.
MR. HALL said the companies that are in Norway are there because
they like the quality of the opportunities. One can gain access
to some very large, high quality fields and reserves. He noted
that there are relatively few foreign companies involved in
Norway and there are only 34 foreign licensees. The Norwegian
government is taking significant steps to encourage more
companies to enter the basin. For example, it recently
announced an exploration incentive about 18 months ago. If one
is not paying tax in Norway and is a new company/new entrant,
spending $100 on exploration in a given year, the government
will reimburse $78 at the end of that year. He remarked that
the exploration drilling density on the U.K. side of the median
line in the North Sea looks completely different from the
corresponding exploration drilling density on the Norwegian
side. He reiterated that there has been a very low exploration
density in Norway and the government is concerned with
attracting more exploration activity into the basin. He said
the view across the industry is that [the Norwegian government]
will continue to struggle to attract new companies, even with a
tax of 78 percent; one can make more money elsewhere for the
same investment.
4:54:44 PM
REPRESENTATIVE ROKEBERG surmised, "Is that not why the Norwegian
government spun off their interest in Norse Hydro and Statoil,
which are now two publicly traded companies, so [the Norwegian
government] could generate more private sector participation?"
MR. HALL surmised that the Norwegian government is trying to
make Statoil, in particular, act like an international oil
company. In addition to developing resources in Norway, Statoil
now has a very active international investment program. Statoil
is diversifying and trying to create a company which is
comparable to all other international oil and gas companies.
MR. WALKER added that Norway can afford to charge such a high
marginal tax rate because it has the resources that companies
are still willing to invest in. Norway has been growing its
production for 30 years. Oppositely, [Alaska] has been
declining for 15-17 years at 6 percent, and the investment isn't
flowing to Alaska to stem that decline. He said, "To envy the
tax rate of a country with such high quality resources, I would
offer to you would be a dangerous thing to do."
REPRESENTATIVE LEDOUX inquired as to whether BP had the
opportunity, when Norway was instituting its taxes, to negotiate
with or speak to the Norwegian government, and if so, what BP
told it about its tax structure.
4:56:40 PM
MR. HALL relayed that in recent years, there have been a number
of efforts made by the industry to engage in dialog with the
Norwegian government to convince them to reform its tax system,
encourage more investment, and encourage more companies to enter
into the basin. The Norwegian governor has yet to respond. He
said Norway is a small country, with a small population and a
fantastic resource base, unlike the U.K., which has a large
population and is consuming most of what has been produced.
Norway is able to export nearly all of that production and earn
a fabulous amount of income from doing so. Therefore, [Norway]
hasn't seen the same pressures that the U.K. faces.
REPRESENTATIVE LEDOUX asked if BP has been telling the Norwegian
government the same thing it has been telling the Alaska - if
its taxes remain high, it's going to discourage investment.
MR. HALL confirmed yes and added that the figures support that
on exploration. He reiterated that the U.K. has been very
successful in attracting exploration funds. Throughout the
1990s, there was more exploration and appraisal investment in
the U.K. than in virtually any other basin in the world. In
contrast, the investment in Norway has been much lower. There
was only one large discovery in Norway during that period and
outside that discovery, there hasn't been much success. Hence,
the Norwegian government is now very much actively addressing
the need to encourage more exploration activity. He relayed
that [Norway] is still focusing on incentives in hope that it
doesn't have to adjust the headline tax rate. He surmised that
Norway will struggle to attract more exploration dollars into
the country until it addresses the headline tax rate.
4:59:08 PM
MR. HALL discussed the deepwater province of the Gulf of Mexico.
During the period of 1993-2004, the Gulf of Mexico had the
highest level of exploration and appraisals of any basin. He
noted that [BP] has been very successful in discovering reserves
[in the Gulf of Mexico], which had the second highest volume of
discovered reserves during that period. The aforementioned has
translated into very rapid growth in production. In the mid-
1990s, [BP's] production [in the Gulf of Mexico] was
approximately 200,000 barrels per day. [BP's production] has
already increased to approximately 1.5 million barrels per day
and is projected to be 2.5 million barrels per day within a few
years. He explained that the fiscal regime has played a part in
bringing this about. The tax rate in the Gulf of Mexico is 45
percent at its highest. If one receives deepwater royalty
relief, [the tax rate] is about 35 percent. He stated that [the
Gulf of Mexico] is an example of a low tax environment in the
U.S., which has been very successful at attracting investment
and exploration dollars and translating that into production.
MR. HALL said [the Gulf of Mexico] isn't an easy environment and
BP is using some very challenging technology. He said water
depths are absolutely phenomenal. BP has developed fields in
excess of 2,000 meters of water with cutting edge technology.
He opined that this is very important to the U.S. in order to
boost domestic production and in the context of the global
concern regarding energy security. He described it as an
example of a low/stable tax involvement encouraging activity.
He discussed heavy oil in Alberta, Canada, and stated that in
the mid-1990s investment was fairly modest in this basin. It
significantly increased, and by 2005 the investment was $7
billion in one year. The prediction is for that to increase to
nearly $10 billion in a few years. He noted that investment in
Alaska is approximately $1-$1.5 billion. He explained that oil
price has had an impact, but that it's important to highlight
the very key fiscal reform that the Canadian government
introduced in the mid-1990s. Essentially, the way the regime
works is that the royalty rate is 1 percent until that project
has secured payout. That payout calculation includes an
allowance for a risk-free rate of return. In addition to that,
one will pay the federal and state taxes, which total
approximately 39 percent. In regard to post-payouts, the
royalty rate is increased to 25 percent. He explained that the
marginal tax rate on this heavy oil production is at a maximum
of 39 percent pre-payout, and at a maximum of 54 percent post-
payout. He added that it needs to be recognized that there
already are phased reductions in federal tax in Canada, which
will reduce both of those rates by approximately 4 percent by
2007. Thus, if one invests in heavy oil in Canada, in a few
years the pre-payout will be approximately 35 percent, and post-
payout will be approximately 50 percent.
5:04:25 PM
MR. HALL continued that this is leading to a huge increase in
activity, both in investment and in production. By 2010,
production from the heavy oil province in Alberta, Canada, is
expected to reach approximately 2 million barrels per day.
REPRESENTATIVE GARA, in regard to the 50 percent tax rate,
inquired as to whether that's exclusively for heavy oil.
MR. HALL confirmed yes; that is a regime which is specifically
designed to encourage heavy oil.
5:05:25 PM
MR. HALL discussed various fiscal regimes in North America in
comparison to Alaska under the current ELF and the proposed PPT.
Marginal tax rates include: 39 percent pre-payout in Alberta;
45 percent in Gulf of Mexico deepwater; low 50s percent in
Colorado, Wyoming, Texas, Oklahoma, and California; and 61
percent [under the proposed PPT] in Alaska [compared to 56
percent under the ELF]. He concluded that in comparing fiscal
regimes, one needs to go beyond just looking at headline tax
rate by looking at the context of the basin. He acknowledged
the clear relationship between the fiscal policy and the overall
level of basin activity. A higher tax burden will generally
lead to less investment, while a lower tax burden will encourage
investment - as demonstrated by the U.K., Gulf of Mexico, and
Alberta. He said one of the risks that might emerge is Alaska
being perceived as having the highest tax rate as well as cost
structure in North America. He surmised that those two elements
may make it difficult for Alaska to attract the investment it
needs to ensure that its potential is fully developed.
5:08:09 PM
MR. WALKER defined government take as the ratio of the total
taxes BP pays to the total taxes plus the profit it makes - the
government's share of the proceeds from the industry. In
Alaska, BP pays a royalty, production tax, property tax, and
income tax, and in addition, a federal income tax. He noted
that some of the Alaska taxes are deductible for federal income
tax. He discussed a chart which displayed the total government
take at different oil prices for both the current ELF-based
system and PPT. He noted that the status quo, which is the
current ELF-based system is the blue dashed line and the 20/20
PPT is the green line. At low prices, BP doesn't make a profit.
He mentioned that regardless, BP continues to pay royalty,
property tax, and state income tax, which results in a
government take of greater than 100 percent.
5:11:52 PM
REPRESENTATIVE BERKOWITZ inquired as to the number of barrels BP
produces in Alaska.
MR. WALKER answered that this year, BP expects to produce
approximately 262,000 barrels per day. He noted that 262,000 is
BP's net share and not all of that goes down TAPS because some
is used as natural gas liquids (NGLs) on the [North] Slope for
injecting for EOR, and BP moves some gas over to the Northstar
Unit for enhanced oil recovery. Therefore, the sales volume is
probably closer to 250,000 barrels per day on average.
REPRESENTATIVE GARA stated that according to the DOR, which has
a model displaying corporate profits at various [oil] prices, at
$20 per barrel, it's projected that next year, North Slope [oil]
companies will make approximately $950 million in profit on $4.3
billion in gross revenue, which is a 20 percent profit margin.
He added that BP is estimating something quite different.
5:13:34 PM
MR. WALKER clarified that BP is discussing profit in the true
sense of profit after it has deducted the associated expenses
that accompany that profit. He stated that BP's annual expenses
in Alaska total $1.1 billion.
5:14:31 PM
MR. WALKER explained that in calculating its profit, BP has to
[subtract] all of the expenses, capital costs incurred to
produce/develop those barrels, transportation costs - the net
cost of flowing through the pipeline as well as the shipping,
and the taxes it pays.
5:15:35 PM
REPRESENTATIVE BERKOWITZ stated that ConocoPhillips Alaska, Inc.
estimated its total costs as approximately $10 per barrel and
added that he can't imagine BP's cost differing significantly.
MR. WALKER reiterated that to calculate the profit, one needs to
factor in the total cost, operating cost, capital cost,
transportation cost, tax cost of royalty, production tax,
property tax, state income tax, and federal income tax.
5:16:13 PM
MR. WALKER continued that under PPT, the government take is
approximately 70 percent at the moderately high price of $30 per
barrel. He described this government take as very high. At
current oil prices, the government take is approximately 60
percent. Under the [PPT] regime, it would be approximately 61
percent at $60 [per barrel]. He advocated that it's very
important that BP makes a good, reasonable prices when the [oil]
prices are high. He said that if [the legislature] takes that
away, there's no reason to be in Alaska.
5:17:36 PM
REPRESENTATIVE SEATON surmised that Mr. Walker is saying that
BP's investment over time on the North Slope is based on the
anticipation that oil will be $50 or $60 per barrel.
MR. WALKER replied that BP is presenting the reality of its
business today, with the kind of costs that it has to produce
oil on the North Slope. He said, "It's absolutely the case that
in Alaska you have a few good years, as you look back through
history, and then you have a lot of years where we've made a
very marginal return." He added that BP needs those good years
to average out [the bad years] and receive a reasonable return.
He said Alaska is a mature business with a challenged resource.
In BP's opinion, [the legislature] should be concerned about
overtaxing the industry, rather than under taxing it.
5:19:13 PM
MR. WALKER discussed the impact of moving from the status quo of
the ELF-based system to PPT. At $20 per barrel under ELF, BP
doesn't make a profit. At $60 per barrel under ELF, BP's share
is greater than the State of Alaska's share, which is how the
system is currently designed.
CO-CHAIR RAMRAS, in regard to PPT, remarked that [the
legislature] has the opportunity, if it handles things
correctly, to be partners with the oil companies in risk as well
as to reap the [benefit] during high cycles of oil prices.
5:21:08 PM
MR. WALKER, in response to Representative Rokeberg, informed the
committee that BP has investments all over the world and each
investment will have a different set of characteristics. When
[oil] prices are low in Alaska, BP is "making a loss" and is
being carried by other places around the world. When [oil]
prices are high, BP has to make a good/reasonable profit in
order to make Alaska attractive to be in BP's portfolio. In
response to Representative LeDoux, he explained that the normal
convention is that the industry makes a profit and the
government takes a share. When the government take is above 100
percent, the industry profit is negative. Therefore, the total
tax reduced by BP's loss is greater than 100 percent.
5:23:41 PM
REPRESENTATIVE GARA stated that by DOR's [calculations], there
is a much greater corporate share than state share at $40 and
$60 per barrel, even under PPT.
5:24:53 PM
MR. WALKER, in regard to the impact on government take under
PPT, noted that at $20 [per barrel], BP would make a very modest
profit, which he acknowledged as the impact of introducing a
profit-related tax. At $60 [per barrel], BP and the State of
Alaska's shares are approximately equal. He stated that the
overall impact of PPT and the tax rates that have been chosen in
the bill is to "squeeze" BP's profit from the status quo to PPT.
He said, "We're paying more tax, therefore we have less profit."
5:26:09 PM
MR. WALKER discussed what the impact of PPT would be on future
investments. He acknowledged that it's true to say that in most
cases the rate of return increases with the PPT system.
However, rate of return is just one economic measure and BP
considers a suite of economic measures: rate of return, net
present value, and total cash flow from any project. He
remarked that at the end of the day, BP would be paying more
tax, therefore it would be making less [of a profit]. Instead
of going to the investor, the money would be going to the state.
MR. WALKER said decline is a problem. Alaska has been in
decline because profitability has been insufficient to attract
capital, not due to a lack of resources. He noted that large
increases in investment are required. To stem ongoing decline
and attract the required investment of $50-$100 billion, PPT
must work for the major investors. He noted that capital is
mobile, and international investment flows to basins where it
can earn a profit. He opined that profit-based taxes are
superior to revenue-based taxes. He further opined that the PPT
structure has merit and could serve Alaska well for the long-
term. He further noted that higher taxes means less investment.
He opined that the 20 percent tax rate is very high and will not
maximize investment and production on the Alaska North Slope.
REPRESENTATIVE BERKOWITZ asked, "What rate would?"
MR. WALKER answered that it's very difficult for BP to say which
one would, but certainly lower than 20 percent.
REPRESENTATIVE BERKOWITZ, in response to BP's statement that
[the 20 percent tax rate] isn't going to maximize investment,
surmised that there's a point at which BP believes it will
maximize investment.
MR. WALKER said the existing tax regime is attracting between
$1-$1.5 billion to the North Slope. In order to stem decline
and create a future that underpins gas, $2-$3 billion needs to
be attracted to the North Slope. He commented that the concept
of adding an additional $1 billion of tax onto the existing tax
bill goes against the notion of attracting more investment.
5:30:09 PM
REPRESENTATIVE BERKOWITZ relayed that some of the independent
[companies] will point to the high cost of transportation
through TAPS and on BP, ExxonMobil, and ConocoPhillips tankers
as being a significant barrier to entry. He noted that it goes
beyond the State of Alaska's tax as well as some of the
privately erected barriers to entry.
MR. WALKER agreed that small companies/independents have a very
important role to play. He reiterated that the majority of the
investment is going to have to come from the major [oil]
companies.
5:32:01 PM
MR. WALKER noted that oil needs gas and gas needs oil. In order
for the gas project to proceed and for the gas [industry] to be
healthy, it needs to be underpinned with a healthy oil
[industry].
REPRESENTATIVE GARA requested information regarding BP's
statement that it doesn't make a profit at $20 per barrel.
MR. WALKER assured Representative Gara that BP is losing money
in Alaska at $20 per barrel. He noted that BP has a portfolio
of assets and Alaska is only one of them.
REPRESENTATIVE GATTO commented that in order to have maximum
investment, the tax [rate] needs to be reduced to 0 percent and
in addition, a bonus needs to be offered.
5:33:59 PM
CO-CHAIR RAMRAS asked, "As good corporate citizens, how much
does BP give back to the communities across the state annually?"
MR. WALKER answered that in 2005, BP gave $7.6 million [to
Alaska]. He added that will be substantially higher in 2006.
CO-CHAIR SAMUELS asked, "Do you think that all royalty owners
should be treated the same under the law?"
MR. WILLIAMS responded that the private royalties are
problematic because the typical royalty owner doesn't bear a
share of the costs. However, the cost of producing oil from
that private land reduces the tax burden for the oil company.
He asked, "How do you allocate the benefit of those costs? Do
you allocate any benefit of those costs to the royalty interest,
which isn't paying any of those costs?" He answered, "You could
say no, why not have a flat-rate royalty, say 5 percent tax for
private royalties where the landowner is the royalty collector."
Eventually, when one gets to the end of fuel life or there are
low oil prices for a temporary period of time, the working
interest owner, the oil company, may have zero PPT. At the same
time, the royalty owner pays in full because it's based on the
gross value of the royalty. On the hand, the royalty owner
isn't paying any tax. He mentioned that if the [legislature's]
goal is to have the royalty owners' share to be the same under
the new system as it was under the old [system], then a tweak
needs to be made to HB 488. He stated that the simplest thing
is to break it out as a separate rate for private royalties.
[HB 488 was held over]
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 5:38 PM.
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