03/10/2010 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB337 | |
| HB308 | |
| HB369 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 308 | TELECONFERENCED | |
| *+ | HB 337 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 369 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
March 10, 2010
1:05 p.m.
MEMBERS PRESENT
Representative Craig Johnson, Co-Chair
Representative Mark Neuman, Co-Chair
Representative Bryce Edgmon
Representative Kurt Olson
Representative Paul Seaton
Representative Peggy Wilson
Representative David Guttenberg
Representative Scott Kawasaki
Representative Chris Tuck
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 337
"An Act relating to interest on certain underpayments or
overpayments for the oil and gas production tax, to certificates
for certain oil and gas production tax credits for qualified
capital expenditures, and to alternative tax credits for
expenditures for certain oil and gas development and exploration
activities for the oil and gas production tax; relating to the
use of the oil and gas tax credit fund to purchase certain tax
credit certificates; and providing for an effective date."
- HEARD & HELD
HOUSE BILL NO. 308
"An Act relating to the tax rate applicable to the production of
oil and gas; relating to credits against the oil and gas
production tax; and relating to the period in which oil and gas
production taxes may be assessed."
- HEARD & HELD
HOUSE BILL NO. 369
"An Act relating to an in-state natural gas pipeline, the office
of in-state gasline project manager, the Joint In-State Gasline
Development Team, and the In-State Gasline Steering Committee;
and providing for an effective date."
- MOVED CSHB 369(RES) OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HB 337
SHORT TITLE: OIL AND GAS PROD. TAX: CREDITS/INTEREST
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/10/10 (H) READ THE FIRST TIME - REFERRALS
02/10/10 (H) RES, FIN
03/10/10 (H) RES AT 1:00 PM BARNES 124
BILL: HB 308
SHORT TITLE: OIL AND GAS PRODUCTION TAX
SPONSOR(s): JOHNSON
01/19/10 (H) READ THE FIRST TIME - REFERRALS
01/19/10 (H) RES, FIN
02/08/10 (H) RES AT 1:00 PM BARNES 124
02/08/10 (H) Heard & Held
02/08/10 (H) MINUTE(RES)
02/10/10 (H) RES AT 1:00 PM BARNES 124
02/10/10 (H) Heard & Held
02/10/10 (H) MINUTE(RES)
02/15/10 (H) RES AT 1:00 PM BARNES 124
02/15/10 (H) Heard & Held
02/15/10 (H) MINUTE(RES)
02/17/10 (H) RES AT 1:00 PM BARNES 124
02/17/10 (H) -- MEETING CANCELED --
03/10/10 (H) RES AT 1:00 PM BARNES 124
BILL: HB 369
SHORT TITLE: IN-STATE PIPELINE/COORDINATOR /TEAM
SPONSOR(s): CHENAULT
02/23/10 (H) READ THE FIRST TIME - REFERRALS
02/23/10 (H) RES, FIN
02/26/10 (H) RES AT 1:00 PM BARNES 124
02/26/10 (H) Heard & Held
02/26/10 (H) MINUTE(RES)
03/01/10 (H) RES AT 1:00 PM BARNES 124
03/01/10 (H) Heard & Held
03/01/10 (H) MINUTE(RES)
03/08/10 (H) RES AT 6:00 PM BARNES 124
03/08/10 (H) Heard & Held
03/08/10 (H) MINUTE(RES)
03/10/10 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
PAT GALVIN, Commissioner
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Introduced HB 337 on behalf of the
administration.
MARILYN CROCKETT, Executive Director
Alaska Oil and Gas Association (AOGA)
Anchorage, Alaska
POSITION STATEMENT: During the hearing on HB 308, suggested
changes to Version E and said the bill is an important first
step in a comprehensive review of Alaska's Clear and Equitable
Share (ACES) legislation.
GREG VIGIL, Executive Vice President
Savant Alaska, LLC
(No address provided)
POSITION STATEMENT: During the hearing on HB 308, provided
information about how Alaska's Clear and Equitable Share (ACES)
has affected his company both positively and negatively.
MARK LANDT, Executive Vice President - Land & Administration
Renaissance Alaska, LLC
Anchorage, Alaska
POSITION STATEMENT: During the hearing on HB 308, supported the
increased access to capital credits for new explorers that would
be provided by both HB 308 and HB 337.
MARK HANLEY, Public Affairs Manager
Anadarko Petroleum Corporation
Anchorage, Alaska
POSITION STATEMENT: Supported HB 308 and reviewed the problems
his company has had with ACES and operating in Alaska.
DALE PITTMAN, Alaska Production Manager
ExxonMobil Production Company
Anchorage, Alaska
POSITION STATEMENT: Testified that HB 308, Version E, is a good
first step toward examining Alaska's production tax structure.
BRIAN WENZEL, Vice President-Finance
ConocoPhillips Alaska, Inc.
Eagle River, Alaska
POSITION STATEMENT: Supported HB 308 as a step in the right
direction for creating a more favorable investment climate.
TOM WRIGHT, Staff
Representative Mike Chenault
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: During the hearing on HB 369, explained on
behalf of the sponsor, Representative Chenault, the differences
between Versions S and E.
REPRESENTATIVE MIKE CHENAULT
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Spoke as the sponsor of HB 369.
ROBERT SWENSON, Project Manager
In-State Gas Project
Alaska Mental Health Trust Land Office
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: During the hearing on HB 369, answered
questions.
ACTION NARRATIVE
1:05:57 PM
CO-CHAIR CRAIG JOHNSON called the House Resources Standing
Committee meeting to order at 1:05 p.m. Representatives Seaton,
P. Wilson, Edgmon, Neuman, and Johnson were present at the call
to order. Representatives Guttenberg, Kawasaki, Tuck, and Olson
arrived as the meeting was in progress.
HB 337-OIL AND GAS PROD. TAX: CREDITS/INTEREST
[Contains discussion of HB 308]
1:06:26 PM
CO-CHAIR JOHNSON announced that the first order of business is
HOUSE BILL NO. 337, "An Act relating to interest on certain
underpayments or overpayments for the oil and gas production
tax, to certificates for certain oil and gas production tax
credits for qualified capital expenditures, and to alternative
tax credits for expenditures for certain oil and gas development
and exploration activities for the oil and gas production tax;
relating to the use of the oil and gas tax credit fund to
purchase certain tax credit certificates; and providing for an
effective date."
1:06:34 PM
PAT GALVIN, Commissioner, Department of Revenue (DOR),
introduced HB 337 on behalf of Governor Parnell, saying it is
the administration's bill regarding oil and gas taxes. He said
HB 337 would introduce four distinct concepts, the first being a
30 percent credit for all well-related work. Under current law,
capital credits are 20 percent for capital expenditures and
exploration incentive credits are 30 or 40 percent for work done
outside of existing fields. This first concept would make it a
30 percent credit for all well-related work, including well
workovers and other well work within existing fields that does
not currently qualify for a credit under the existing production
tax. In response to Co-Chair Neuman, he said this credit would
apply to all well-related work statewide and would include the
re-conditioning of old wells.
COMMISSIONER GALVIN said the second concept of HB 337 would
allow for these credits to be applied in the first year, the
year in which they are earned, as opposed to current law in
which the credits are spread over two years.
1:09:12 PM
REPRESENTATIVE SEATON noted that the purpose of credits is to
stimulate work and the taking of risk. Given that looking for
new reservoirs is riskier than work done within existing fields,
he said it seems to him that this differential incentive is
being eliminated. He inquired whether making these two types of
work equal will stimulate workover within current reservoirs
instead of exploration beyond the current reservoirs.
COMMISSIONER GALVIN responded he does not believe the premise
behind the current differential in credits is to incentivize
exploration at the expense of in-field work. The state
recognizes that risk is an inherent aspect of the economic
analysis. Because of the uncertainty of the reward of any
particular investment, the state's current system has a higher
credit on the exploration side because those risks are higher.
However, it does not mean that the decisions on whether to do
in-field work are not driven by an economic evaluation that
would be impacted by adding credits. In other words, there are
likely investment decisions for in-field well work that are not
at a decision-making threshold under the current system, but for
which additional credits would become a "green light". The
intent is to move the bar to get more well work than would be
done without the credit and is not being seen as diverting
investment away from exploration towards in-field work. The
intent is to enhance the in-field work in addition to enhancing
exploration.
CO-CHAIR JOHNSON encouraged Representative Seaton to ask this
question of industry representatives when they present testimony
to the committee.
1:13:33 PM
REPRESENTATIVE GUTTENBERG noted that HB 337 would provide for a
pre-drilling conference between the taxpayer and the Department
of Natural Resources (DNR). He asked whether this occurs now.
COMMISSIONER GALVIN replied yes, it happens under the
exploration incentive credit program.
1:14:09 PM
COMMISSIONER GALVIN continued his introduction of HB 337, noting
the third component of the bill would eliminate the existing
requirement that a company make additional investments in future
years to qualify for state reimbursement of a credit. This is
for companies that do not have current production tax
obligations to put their credits against and are looking for
ways to get compensated for those credits. Companies that are
currently working in the state immediately get the full value of
that credit by writing it off on their current tax obligations.
Thus, there is a disparity in the value that this credit holds
for these participants. A company that is looking to
potentially partner as just an investor in an exploration well
may be looking at the outcome of that investment as a
determining factor in whether to invest again in Alaska. If a
company does not know whether it will get the full value for
that credit, the company will discount the value of it in its
economic analysis on whether to invest in this exploration well.
That is not in the state's interest because at the end of the
day it is going to reduce the state's revenue by the same dollar
amount. By eliminating that reinvestment risk, the state gets
the same impact to itself while boosting the value of that
credit to these potential investors.
1:16:40 PM
COMMISSIONER GALVIN said the fourth component of HB 337 would
provide for the waiver of interest charged on tax underpayments
that are a result of retroactive regulations implementing the
[2007] Alaska's Clear and Equitable Share (ACES) legislation. A
provision in ACES provided that the regulations implementing the
bill would be retroactive to the effective date of the bill.
Currently, the Department of Revenue can waive a penalty that
may apply to an underpayment if the department determines a good
faith effort was made by the company to fully pay its obligation
while not yet aware of what the regulation would say at the time
payment was made. However, current statute does not allow the
department to waive interest that may accrue on that
underpayment. This provision would provide for the waiver of
that interest when it is the result of a retroactive regulation
and the department finds the taxpayer in good faith made what it
believed was a full payment.
CO-CHAIR JOHNSON noted there are elements in HB 337 that are
similar to HB 308.
1:18:52 PM
REPRESENTATIVE SEATON inquired whether the interest applies only
to the production tax credit.
COMMISSIONER GALVIN answered yes and the provision can be found
in Section 1 of the bill.
1:19:27 PM
REPRESENTATIVE SEATON referenced the standard deduction clause
that was in effect until December 2009 and inquired whether the
proposed change in law is only from 12/31/09 until now and
whether it excludes Prudhoe Bay and Kuparuk.
COMMISSIONER GALVIN responded that a number of regulations have
been put in place as a result of ACES beyond just the definition
of qualified lease expenditures. He presumed that that is what
Representative Seaton is referring to as being of less impact to
those at Prudhoe Bay and Kuparuk that had the so-called standard
deduction that drove their operating expenditures. There is a
large range of regulations having to do with production tax
liability, he said, and given the nature of the regulation
development process, he does not expect there to be a wide
deviation between what companies paid in tax and what will be
the actual tax due as a result of the regulation change.
1:21:51 PM
REPRESENTATIVE SEATON requested the committee be provided with
an indication of the anticipated difference between what was
paid and the actual tax that becomes due.
COMMISSIONER GALVIN replied the Department of Revenue is not in
the position to estimate what that number would be. The
department expects the taxpayers had a good understanding of
what the tax would be and would have prepared their taxes at the
time based upon that expectation. Now that the retroactive
regulations have been prepared, he said it may be more
appropriate to ask the question of the taxpayers to see what
they think the difference will be.
CO-CHAIR JOHNSON pointed out that the penalties and interest
would be additional income to the state, not a liability, and
therefore the state is not put in any sort of jeopardy.
COMMISSIONER GALVIN added that the Department of Revenue did not
include anything in the fiscal note in regard to this provision
because anticipated interest payments or penalties are not
incorporated into revenue projections. Additionally, the
department is not in a position to identify that there would be
any particular impact as a result of this. The department put
this provision in the bill as an element of fairness, not
because a significant dollar swing is expected.
1:24:50 PM
CO-CHAIR JOHNSON held over HB 337 and noted the committee will
decide which vehicle to advance - HB 337 or HB 308. He said the
committee will work with the administration to take the best of
both bills and advance something that everyone can live with.
The committee took an at-ease from 1:24 p.m. to 1:25 p.m.
[Co-Chair Johnson passed the gavel to Co-Chair Neuman.]
HB 308-OIL AND GAS PRODUCTION TAX
[Contains discussion of HB 337]
1:25:58 PM
CO-CHAIR NEUMAN announced that the second order of business is
HOUSE BILL NO. 308, "An Act relating to the tax rate applicable
to the production of oil and gas; relating to credits against
the oil and gas production tax; and relating to the period in
which oil and gas production taxes may be assessed." [Before
the committee was Version E, the proposed committee substitute
for HB 308, labeled 26-LS1328\E, Bullock, 2/5/10.]
CO-CHAIR NEUMAN opened public testimony.
The committee took an at-ease from 1:27 p.m. to 1:28 p.m. to
deal with technical difficulties in the teleconference system.
1:29:44 PM
MARILYN CROCKETT, Executive Director, Alaska Oil and Gas
Association (AOGA), noted that AOGA is a trade association
composed of 14 member companies with interest in Alaska. She
thanked the sponsor for introducing HB 308 and said the bill is
an important first step in a comprehensive review of Alaska's
Clear and Equitable Share (ACES) legislation [enacted in 2007].
1:31:44 PM
MS. CROCKETT began her PowerPoint presentation by stating that
AOGA sees three problems with ACES [slide 3], the first being an
excessive tax rate. While many presentations have been given
about the amount of industry investment in Alaska, she said a
more telling statistic is the amount of new in-field drilling in
Alaska [slide 4]. New in-field wells decreased from 166 in 2007
to 147 in 2009. She related that North Slope operator, "BP",
has publically said its in-field drilling will be more than 50
percent lower in 2010 than it was in 2007. She further related
that according to a "ConocoPhillips" presentation at a recent
conference, about 450 million barrel-of-oil equivalents (BOE)
were added to North Slope reserves in the last five years, but
only 35 million since ACES was enacted. The telling component
of that is that giant fields have the worst fiscal terms under
ACES. The news for exploration wells is not good either, she
added. The number of exploration wells drilled on the North
Slope has declined from 11 in 2007 to only 8 in 2009.
1:33:08 PM
MS. CROCKETT said her recollection of the companies operating in
Alaska does not agree with the 2/16/10 testimony of Kevin Banks,
Director of the Division of Oil & Gas, in which he stated that
independents are flocking to Alaska. She maintained the
independent companies conducting exploratory drilling on the
North Slope have been around for a couple of years and are not
new players that have arrived since the enactment of ACES. She
added that Mr. Banks' testimony also prompts the question of
what companies are out there that could be investing in Alaska
but are not, and noted that of the 20 largest U.S. drillers by
footage in 2009, only 7 have operations in Alaska or interest in
fields in Alaska [slide 5].
MS. CROCKETT said another disturbing trend is the closure of oil
and gas leases [slide 6]. She related that last year
"ConocoPhillips" relinquished 800,000 acres of its leases in the
National Petroleum Reserve-Alaska (NPR-A). A total of 2 million
acres of state and federal leases on the North Slope were
released in 2009 and over 1.2 million acres were released in
2008.
1:35:33 PM
MS. CROCKETT, in response to Representative P. Wilson, stated
that the company names shown in black on slide 5 are companies
that operate in Alaska or have working interest ownership in a
field in Alaska ["XTO, Anadarko, ConocoPhillips, BP, ExxonMobil,
Shell, Marathon"]. The company names shown in blue do not have
operations in Alaska, have not participated in lease sales in
Alaska, and are not drilling exploratory wells in Alaska
["Chesapeake, EOG Resources, EnCana, Devon, Noble, Questar,
Williams Production, Ultra Resources, Concho Resources,
Southwestern Energy, Apache, Petrohawk, Laredo Petroleum"].
1:36:38 PM
REPRESENTATIVE TUCK, in regard to slide 5, surmised that while
only 7 of the 20 largest drillers in the U.S. are in Alaska,
there are other smaller companies that are drilling in Alaska.
MS. CROCKETT responded correct. She understood that two
companies not on this top-20 list, but that are conducting
exploration activities in Alaska, will be testifying today. The
point of slide 5 relates to the question of why are not more of
these 20 largest U.S. drillers conducting operations in Alaska.
She clarified that the seven companies shown in black are either
explorers, producers, or working interest owners in a currently
producing field. In further response, she noted there are only
three companies conducting exploration on the North Slope that
are not on this list of 20 largest drillers.
1:38:23 PM
MS. CROCKETT, in response to Representative Kawasaki, explained
that the companies shown on slide 5 are explorers as well as
producers. She clarified that the company names shown in black
have operations in Alaska and the company names shown in blue
are not exploring or active in Alaska but are active in the
Lower 48. She said these are the top 20 companies for the
amount of footage drilled, so they are the 20 largest drillers
in the U.S. for the year 2009.
1:39:34 PM
REPRESENTATIVE SEATON inquired which of these 20 companies
operates exclusively in coalbed methane or shale natural gas.
MS. CROCKETT replied she does not know because she is unfamiliar
with some of the companies. However, she does know that some of
these 20 are actively pursuing shale gas opportunities in the
Lower 48, but that is not their sole interest.
1:40:11 PM
REPRESENTATIVE GUTTENBERG noted that numerous things would add
to the figures being shown, such as the total number of wells
drilled, whether it is private or public land, or that wells
drilled in Alaska tend to be deeper than elsewhere. He asked
whether another slide will speak to this.
MS. CROCKETT answered she does not have a slide in this regard,
but the compelling thing for AOGA is that these companies are
very active and are drilling lots of wells in the Lower 48.
However, the companies shown in blue are not drilling any wells
in Alaska and have not bid on any lease sales in Alaska, and the
question is why.
CO-CHAIR NEUMAN concurred with Ms. Crockett.
REPRESENTATIVE KAWASAKI said he would appreciate getting the
aforementioned information offered by Ms. Crockett. He
understood shale gas requires the drilling of hundreds of wells
as compared to reservoir gas and he does not think Alaska has
any shale gas plays.
MS. CROCKETT agreed to provide this information.
1:42:23 PM
MS. CROCKETT returned to her presentation, reiterating that a
great deal of lease acreage has been released by companies in
Alaska [slide 6].
CO-CHAIR JOHNSON presumed that released means the lease has been
given back to the state because the company does not plan to
develop that acreage.
MS. CROCKETT responded correct.
1:43:26 PM
MS. CROCKETT said AOGA entitles the second problem with ACES the
impossible plight of non-operators [slide 7]. She recalled that
in testimony before the legislature in 2007 regarding ACES, AOGA
expressed its concern about future conflicts that could result
from the [Department of Revenue] not using the joint interest
billings in working interest ownership and in fields where a
company has other partners. A non-operator is a working
interest owner that is not the operator of a particular
oilfield. A non-operator pays the operator from a joint
interest billing and uses that invoice to file its tax return.
The problem is that a non-operator does not have access to some
of the detailed information that the operator has.
MS. CROCKETT explained that the level of detail complicates
things even further. Over 20,000 cost codes are used to
allocate cost in the Prudhoe Bay unit, but the Department of
Revenue's regulations for implementing ACES only have 336 cost
code categories in which a company can deduct its lease
operating costs. Thus, there is a great deal of uncertainty,
especially for non-operators, about what can or cannot be
deducted. There is virtually no way for a Prudhoe Bay non-
operator to determine which of the 20,000 cost codes fits into
the 336 categories. Additionally, one part of a cost code may
fit into one category and another part into another category.
MS. CROCKETT said the point is that ACES is a very complicated
and complex production tax system and the regulations that have
been developed and that are continuing to be developed are
equally complicated. When making investment decisions for the
future, neither the operator nor the non-operator will have a
great deal of confidence in what the actual taxes will be, and
this will complicate and influence investment decisions.
1:46:21 PM
CO-CHAIR NEUMAN surmised that an investment may not be made
because of this uncertainty.
MS. CROCKETT replied correct; the question is what kind of
influence this has when a company sits down to make a decision
for investments in the future.
1:47:33 PM
REPRESENTATIVE KAWASAKI recalled that during consideration of
ACES there was discussion about the complexity that would be
added by going from a simple gross system to a profits-based
system. Some members at the table today voted for a standard
deduction, he related, the idea being to simplify the system.
He inquired whether AOGA is advocating for something like a
standard deduction system.
MS. CROCKETT answered no, AOGA is not advocating for a standard
deduction system. Her point is that a complicated system is
already in place through the joint interest billings and the
unit operating agreements, and this system is a well-tested
system of accounts that everyone is familiar with. She said the
Department of Revenue actually has the ability to rely on the
joint interest billings because this ability was not removed by
ACES. However, the department also had the flexibility to adopt
another system, which is what it did, and that is the point of
the comments she is making. Creating another more complicated
system instead of using information that is readily available
does not seem to be productive from AOGA's point of view.
1:49:58 PM
MS. CROCKETT continued her presentation, noting that the third
problem with ACES is the inability of taxpayers to determine
with certainty the amount of tax [slide 8]. She related that
the Department of Revenue's regulations have a set of provisions
that the company can use in determining its tax; however, those
regulations will also state that the department can determine
something else. Therefore, the taxpayer does not have any great
deal of certainty even though it has gone through the list of
provisions spelled out in the regulations; this, then, gets back
to the investment decisions.
1:51:06 PM
MS. CROCKETT discussed the six provisions proposed by HB 308
[slide 9]. Regarding the Alaska hire provision, she said AOGA
believes the Alaska industry already has a good track record of
Alaska hire because it makes good business sense to do so.
Should this provision is adopted, she would suggest that
Department of Labor and Workforce Development standards be used
rather than creating a new and substantially different process.
She further cautioned that while the rebate is a good idea, it
would create additional complexity and ambiguity.
1:52:12 PM
MS. CROCKETT, in regard to the progressivity provision, allowed
it is no secret that AOGA has opposed progressivity since
Governor Frank Murkowski first introduced it in the Petroleum
Production Tax. While AOGA continues to oppose progressivity,
it acknowledges that lessening the steepness of the slope would
reduce its negative effects; so, to that extent, Version E would
represent an improvement over the present situation.
MS. CROCKETT offered AOGA's support for the proposed 30 percent
tax credit for well-related expenditures.
1:52:48 PM
MS. CROCKETT said AOGA endorses the proposal in Version E to
change the statutory rate of interest because the present
interest rate is punitive in purpose and bears little, if any,
relation to either the state's or the taxpayer's actual harm
from not having had the money.
MS. CROCKETT stated AOGA agrees with the proposed provision that
there be no interest on tax underpayments arising from
retroactive application of new regulations. It is highly unfair
to have interest accrue on tax underpayments that arise directly
from the retroactivity of a newly adopted tax regulation. Also,
in light of the punitively high rate of the current statutory
interest, the accrual of interest on such an underpayment
starting from the date the original tax was due would also
present constitutional issues. In response to Co-Chair Neuman,
she said AOGA recommends that Version E's proposed time period
of 30 days for a taxpayer to determine and pay any additional
tax that is due after a retroactive regulation becomes effective
be changed to the second calendar month after the month in which
the retroactive regulation becomes effective, except when the
regulation becomes effective in the first quarter in which case
it should be May 1 because the beginning of the year is a busy
time when true-up payments are being determined.
1:54:53 PM
MS. CROCKETT further stated that AOGA supports Version E's
proposed change to the statute of limitations. She concluded by
saying that Version E would not eliminate all the problems that
ACES has, but it would be a good first step in improving ACES.
MS. CROCKETT, in response to Representative Tuck, said that the
last paragraph on page 6 of her written testimony provides
AOGA's suggestions for improving the provision in Version E
regarding no interest on tax underpayments that arise from the
retroactive application of new regulations.
The committee took an at-ease from 1:56 p.m. to 1:57 p.m.
1:57:06 PM
GREG VIGIL, Executive Vice President, Savant Alaska, LLC
("Savant"), began his PowerPoint presentation by noting that
Savant is a relatively small company founded in 2006, but it is
an Alaska-only company in terms of its focus and scope [slide
2]. He said Savant has licensed quite a bit of seismic in the
state as a result of the charter agreement between some of the
"majors" in the state, and is focused primarily on the eastern
side of the North Slope east of Prudhoe Bay Field.
MR. VIGIL said Savant drilled an offshore exploration well in
2006 called "Kupcake #1", which was a dry hole. Following that,
the company entered into a farmout agreement with BP Exploration
(Alaska) Inc., which provided Savant with exclusive access to
the Badami Unit. A year ago Savant opened an Anchorage
operations office staffed by several Alaska-resident employees
who deal with field operations. In March 2009, the company
commenced the Red Wolf exploration well from Badami gravel. An
apparent discovery has been made in two zones of that well and
flow tests will be conducted this summer.
MR. VIGIL stated that to date Savant has invested or caused to
be invested over $43 million in Alaska exploration and
development. The company just finished drilling its first
Badami re-redevelopment well, which is a horizontal sidetrack in
the existing Badami Sand Participation Area.
1:59:41 PM
MR. VIGIL said Savant came to Alaska because the North Slope
contains a prolific hydrocarbon system that has multiple stacked
pays available in that geologic section [slide 3]. The North
Slope's lightly developed east side presents opportunities for
Savant. Under ACES, the current 45 cents per dollar from
qualified capital expenditure and net operating loss provides
Savant with significant incentive and is instrumental to the
company's continued investment in the state. The existing
Badami infrastructure is also very advantageous to Savant in
that it provides a competitive advantage in terms of turnaround
times for production from first drilling.
MR. VIGIL summarized Savant's tax credits under ACES [slide 4].
He said the company has redeemed about $3.4 million in credits
to date in cash from the state. Savant currently has credits of
about $8 million that will be redeemed the second quarter of
2010, and tomorrow it will be filing an application for $6.6
million of tax credits. From its inception to date, Savant has
acquired, earned, or redeemed approximately $19 million in ACES
tax credits. He said the secondary market for ACES tax credits
is relatively thin at best, and he believes that both HB 337 and
HB 308 attempt to correct this unintended consequence.
2:01:38 PM
MR. VIGIL reviewed Savant's plans for the next year [slide 5].
He said the company will finish its drilling operations at
Badami in the next 30 days or so. This summer it will restart
production at the Badami plant, resuming some production from
the existing wells along with the two new wells that it drilled.
Results of the two new wells will be evaluated and additional
delineation and development wells will potentially be drilled
winter 2011. He said Savant is transitioning from an explorer
to a producer, which means that Savant is for real and is in
Alaska to stay.
MR. VIGIL offered Savant's view of the ACES tax credit system
[slide 6]. In regard to exploration incentives, he said this
tax credit system has provided meaningful inducement for Savant
to take risk in the state. Any enhancements to the ACES system
would only improve the company's ability to continue exploring
and investing in Alaska. Savant generally supports the
governor's proposed amendments [HB 337] because they would
improve some of these exploration incentives, which would be
beneficial to his company. Speaking to prior testimony about
other independents that explore in the Lower 48, he said these
credits are little known or understood in the Lower 48 and
getting the word out would be to the state's benefit.
2:03:48 PM
MR. VIGIL, in regard to the progressivity feature of ACES, said
Savant Alaska, LLC has remained silent on this issue because it
is not yet a producer. However, now that it will be
transitioning to production mode in 2010, Savant sees
progressivity as a disincentive to itself, as well as to all the
producers in the state, in that it results in diminishing return
per incremental barrel produced.
MR. VIGIL explained that slide 7 is a pictorial graph of the
ACES progressivity disincentive that Savant sees in its economic
models. Under the ACES disincentive to success, Savant's
economic models drive the company to under-perform as opposed to
over-perform under certain economic assumptions, which is not
good policy in Savant's opinion.
2:04:53 PM
MR. VIGIL, in response to Representative Seaton, said the
vertical axis on the graph in slide 7 represents the oil rate,
or offtake, from development at Badami. In response to further
questions from Representative Seaton, he noted that the
progressivity under ACES is on a net income per barrel basis.
As a constant price, there is an incentive to under-produce on
rate because it results in lower overall net income per barrel
for the development and therefore a lower overall severance tax
liability. Under the current system, an optimization model can
take place that dissuades a company from peak-producing a field
and to instead slowly develop the field over time to incur less
overall severance tax liability. He said he is pointing this
out because Savant thinks there should not be a disincentive to
develop a field, and progressivity, as currently constructed,
creates a disincentive.
2:07:44 PM
REPRESENTATIVE GUTTENBERG presumed that the calculation Mr.
Vigil is talking about would occur with any level of
progressivity.
MR. VIGIL responded yes. The slope of that progressivity has an
impact on any given economic model. Changing only that
variable, such as making the slope shallower or the hurdle rate
lower, definitely affects the outcome of the model. The nature
of progressivity is such that it is going to create this
disincentive.
2:08:30 PM
REPRESENTATIVE GUTTENBERG surmised that even if there was no
progressivity a company would still have to determine whether it
needs to produce more oil today or tomorrow, assuming that the
prices would be different.
MR. VIGIL replied that under a constant prices and costs
economic analysis, lack of progressivity would lead Savant to
develop a field, at least on the maximum net present value
analysis or discounted cash flow rate of return; thus, Savant
would be inclined to try to develop the field as quickly and
efficiently as possible to maximize net present value for all
stakeholders.
2:09:36 PM
MR. VIGIL, in response to Representative Tuck, explained that
the assumption used in the graph on slide 7 is that for a given
quantity of oil, the area under the red curve is equal to the
area under the green curve. Using a constant prices and costs
economic analysis, the graph shows that under the current
progressivity of ACES, there is more benefit to the producer to
produce a field or a well along the lines of the green curve as
opposed to the red curve. Due to the progressivity nature, a
lower net present value is derived by over-achieving and
following a true net present value approach because a company
would have a higher severance tax liability under the red curve
development as opposed to the green curve development. This is
especially true for a company that is crossing over from the
explorer phase into the producer phase.
2:11:36 PM
REPRESENTATIVE TUCK asked Mr. Vigil to provide an example of how
many years it would take for the two lines to cross.
MR. VIGIL answered it would depend on the profile of any given
well or field; in Savant's case, it would be on the order of
five years.
REPRESENTATIVE TUCK presumed this would be proportionally the
same regardless of whether the scenario is five, ten, fifteen,
or twenty years.
MR. VIGIL responded yes; the intent of the slide is to show that
this progressivity feature creates this incentive when looking
at two different economic models.
2:12:39 PM
REPRESENTATIVE TUCK inquired whether Savant Alaska, LLC also
participates in operations outside of Alaska.
MR. VIGIL replied yes; the original parent company name in the
Lower 48 is Savant Resources, LLC. The nature of the parent
company's business is to form specific-purpose entities for
different plays in basins that it gets involved in; it has
developed resources from Washington State to Kentucky.
REPRESENTATIVE TUCK asked what percentage the Alaska operation
is of the parent company's overall operations in the U.S.
MR. VIGIL answered it is about 50:50 right now in terms of
investment.
2:13:40 PM
REPRESENTATIVE SEATON, in regard to the slide 7 graph, asked
whether this would not also be a factor that would occur on any
profits-based tax. For example, a company that produces more at
one time would have higher profits so more taxes would be paid
versus spreading production out over time which would create
less profit margin and thus less tax.
MR. VIGIL responded yes, that is a fair statement. In response
to another question from Representative Seaton, he said that
since its inception in Alaska, Savant Alaska, LLC has drilled
about 35,000 feet of hole between its 3 wells.
2:15:29 PM
REPRESENTATIVE KAWASAKI inquired whether Savant Alaska, LLC is
part of any of the closed leases that were mentioned in AOGA's
testimony.
MR. VIGIL replied that Savant dropped a few leases around the
Kupcake exploratory well that was a dry hole, although he does
not have an exact number of acres. He said the acreage was
dropped because Savant felt like it had condemned that acreage.
2:16:23 PM
REPRESENTATIVE SEATON noted that the original version of HB 308
had a provision that would have let the Alaska Retirement
Management (ARM) Board purchase the tax credit certificates at
an 8 percent discount from the price. He asked whether this
rate would be attractive to Savant at the secondary market.
MR. VIGIL answered Savant has never sold its credits on the
secondary market; it has always redeemed them with the state
because of the company's forward spend. However, to the best of
his knowledge, those terms would be the most competitive that he
is aware of.
2:17:25 PM
CO-CHAIR JOHNSON inquired whether Savant Resources, LLC has run
across regimes similar to Alaska's in any of the Lower 48 states
where it is conducting business. He further asked Mr. Vigil to
rank Alaska in terms of ability and complexity to do business.
MR. VIGIL responded that in regard to severance tax, Alaska is
unique with its progressivity feature, and the state's overall
take is certainly the highest and most regressive. His company
typically deals in constant severance tax terms in the Lower 48,
meaning the severance tax is fixed regardless of the amount
produced.
2:18:16 PM
CO-CHAIR JOHNSON inquired whether Savant Resources, LLC expects
to continue its 50:50 investment in Alaska.
MR. VIGIL replied Savant Alaska has a significant amount of
money in the ground and is committed to get this plant re-
started and make this project work. [Savant Alaska's]
investment decisions are not the same as a major oil and gas
company which has a portfolio of investment projects. [Savant
Resources, LLC] formed this company and financed it accordingly,
so those investment decisions have already been made and those
dollars are committed to the project and will be invested in
Alaska.
CO-CHAIR NEUMAN presumed it is a make-or-break situation.
MR. VIGIL answered correct.
2:19:06 PM
MARK LANDT, Executive Vice President - Land & Administration,
Renaissance Alaska, LLC ("Renaissance"), noted he is commenting
on both HB 308 and HB 337. He said Renaissance was formed in
November 2006, is headquartered in Houston, Texas, and has
completed the initial funding of a business plan that solely
focuses on growth in Alaska. His company's major area of focus
is the Umiat oil field on the North Slope. ARC Financial
Corporation, a private investment management firm located in
Calgary, Alberta, is the lead investor on the project and is
focused exclusively on the energy sector with currently about
$1.4 billion under capital.
MR. LANDT noted that the Renaissance team has extensive oil and
gas industry experience and over 80 years of experience directly
working in Alaska. The team is composed of proven oil finders
and value creators in Alaska and other basins worldwide. Under
previous employers, the team members have identified, captured,
funded, and developed oil and gas projects resulting in
cumulative recoverable reserves of over a billion barrels. Many
of the team members worked together on the discovery and
development of the Alpine oil field on the North Slope. Since
its formation, Renaissance has acquired U.S. Bureau of Land
Management and state oil and gas leases on 19,358 acres located
on the Umiat oil field in the National Petroleum Reserve-Alaska
and the Gubik gas field on the North Slope.
2:21:15 PM
MR. LANDT informed members that since 2006 Renaissance has spent
in excess of $40 million completing exploration and evaluation
operations in Alaska. A significant amount of these funds was
focused on evaluating the existing oil field in Umiat with a
modern three-dimensional survey. He said the tax credits under
ACES are a significant reason why Renaissance has stayed in
Alaska, and the availability of those credits will play a
critical role in attracting the required investment to develop
the Umiat oil field. To date Renaissance has applied for a
total of $19.2 million in tax credits: it has received $1.3
million from the state based on the future-spend, $7.45 million
from North Slope taxpayers, and has $7.6 million in
certificates. A majority of the $7.6 million in tax
certificates was received in July 2009, but to date Renaissance
has been unable to monetize those certificates.
2:22:07 PM
MR. LANDT pointed out that Umiat is a known oil accumulation
with potential for near-term development and a potential supply
of meaningful oil to the Trans-Alaska Pipeline System (TAPS).
He said Renaissance believes it is on a path to commerciality,
based upon its work and the activities being conducted by the
State of Alaska. In these types of developments it is common to
have a lull in spending for two to three years for pre-
engineering and permitting of the project before commencement of
development drilling. Therefore, Renaissance will need to
monetize its existing tax credits with one of the existing
producers on the North Slope. However, none of the producers
are currently willing, on reasonable terms, to acquire tax
credits from Renaissance. There is no liquid market for the
credits, and one producer has indicated it would only consider
acquiring the credit at 50 cents on the dollar, he related. The
other producers have indicated they are not acquiring credits at
this time for various reasons, including a lack of clarity on
the regulations.
2:23:32 PM
MR. LANDT said Renaissance supports the increased access to
capital credits for new explorers. Renaissance also supports
the repeal of AS 43.55.028(e)(2) and AS 43.55.028(e)(3), as set
forth in Section 12 of HB 337. He said this statute requires an
explorer to have future spend within 24 months after applying
for the tax credit for the State of Alaska to purchase the
explorer's certificate. Renaissance supports the repeal of this
statute because it would provide greater certainty for new
investors in Alaska. Financial institutions and other
investors, including ARC Financial Corporation, need to have
greater certainty on when the tax credits can be received, from
whom, and on what terms in order for value to be determined;
otherwise it is not an incentive. The playing field needs to be
leveled between the new and existing operators. The state pays
100 percent of the tax credits regardless, so it does not cost
the state any additional money. He urged elimination of the
unfair double standard in which the state rewards the North
Slope producers with discounts that they have received from the
explorers.
2:24:54 PM
REPRESENTATIVE SEATON asked whether Mr. Landt would support
letting the Alaska Retirement Management (ARM) Board purchase
unlimited quantities of tax credits on the secondary market at
an 8 percent discount.
MR. LANDT responded he is supportive of anything that would
expand the market for the tax credits. Based upon the terms
Renaissance has considered before from the tax producers, that
would be a better term. However, since the state is still
paying 100 percent for the tax certificates, he does not see why
Renaissance must go through a third party market.
2:26:01 PM
MR. LANDT, in response to Representative Guttenberg, agreed to
provide members with a copy of his written statement.
REPRESENTATIVE KAWASAKI commented that the exploration tax
credit has been in effect since October 2009 and in regard to
clarity there should be an explanation forthcoming soon.
REPRESENTATIVE TUCK inquired what percentage of Renaissance's
new investments since 2006 have been in Alaska versus other
operations in the Lower 48.
MR. LANDT said his company's business model is to focus
exclusively in Alaska, so every penny of capital that has been
expended has been in either the Cook Inlet or Umiat.
2:27:42 PM
REPRESENTATIVE KAWASAKI said the state is pushing for a road to
Umiat, which he thinks will help in monetizing known oil
resources. He requested Mr. Landt to expand on his previous
statement about Renaissance being on "a path to commerciality".
MR. LANDT replied that since acquiring the leases in 2006 and
2007, Renaissance has been de-risking the process by bringing
modern technology to the project, which included a three-
dimensional seismic program covering the entirety of the Umiat
structure. A number of engineering studies have now been done
to provide cost estimates based upon facilities, development
drilling, and a pipeline over to the Trans-Alaska Pipeline
System (TAPS). Renaissance is trying to narrow the cost range
in terms of what this project is ultimately going to cost, as
well as de-risk the reserves. With the tax credits and support
on the road, he said Renaissance thinks it has a project that
could move forward. Current plans are to start the permitting
process on the field development itself. That will run
simultaneously with the environmental impact statement for the
transportation corridor over to TAPS.
2:30:28 PM
MARK HANLEY, Public Affairs Manager, Anadarko Petroleum
Corporation ("Anadarko"), stated Anadarko is partners with
ConocoPhillips and has 22 percent ownership in the Alpine field;
thus, Anadarko has production. Anadarko is participating with
ConocoPhillips in most of the NPR-A exploration, including the
CD-5 drill pad that was just denied a permit. Anadarko is also
exploring for gas in the Foothills where it has access to about
4 million gross exploration acres, which is 1.3 million net
acres to Anadarko. On a worldwide basis, Anadarko is considered
a relatively large independent, with about 50 percent of its
business in the U.S.
2:32:00 PM
MR. HANLEY said he thinks it is a given that production on the
North Slope is declining and eventually the immense Kuparuk and
Prudhoe Bay fields will be depleted. The goal for both the
state and his company is to make money, so keeping the decline
rate as low as possible is critical to everyone. The issue and
question is whether the investment is enough to keep that
decline rate slow or even reverse it, and he suggests not. For
example, just to offset one year of decline requires bringing on
one new project every year or two that produces about 20,000
barrels a day at its peak, given that projects generally come on
for five years to reach their peak and then decline. If there
is not enough investment, something needs to be done to increase
it. As a company, Anadarko will invest where it can make money.
Overall, something is not right, and one thing that can be
controlled is the tax rate, unlike distance from infrastructure.
2:34:57 PM
MR. HANLEY addressed the positives under the current system of
Alaska's Clear and Equitable Share (ACES), saying Anadarko
thinks the net system is a good system because it takes into
account higher-cost fields and newer exploration. However, any
system, even a net system, can have tax that is still too high.
Anadarko also thinks the credits are a good thing because the
credits help with the net present value by cutting the costs in
half. He cautioned, however, that some in the industry view
this as going to a store that has doubled its prices while
holding a 50-percent-off sale. He explained that in the
Foothills Anadarko is lucky to drill one 10,000-foot well per
year looking for gas. To gain an understanding of one prospect
can take four wells, which takes four to five years. The costs
in Alaska are generally more than double than elsewhere; for
example, one rig in the Gulf of Mexico can drill four wells in
one season. Thus, while the credits are helpful, Anadarko is
still challenged in Alaska on a net present value basis because
of the short operating season.
2:37:09 PM
MR. HANLEY handed out a graph entitled, "Comparison of Estimated
Production Tax Revenue From ACES, PPT and ELF for FY 2007 - FY
2010" [page 15 from a 2/4/2010 presentation by the Department of
Revenue]. He noted that under the ACES system the state has
collected about $2 billion more for each of those years than it
would have collected under the Economic Limit Factor (ELF)
system. He acknowledged that there was not enough investment
under ELF and argued that taking $2 billion more out of industry
does not improve industry's economics or encourage more
investment. Even with the ACES credits, the state is netting
out more money than it did under ELF.
2:38:50 PM
MR. HANLEY said that while ACES has numerous good parts, it is
too much overall. He reminded members that when originally
testifying about the petroleum production tax (PPT), Anadarko
said PPT would improve its exploration economics slightly over
ELF, but would hammer the existing fields, including Anadarko's
Alpine field; thus, on balance, PPT was not great but it was
okay. Anadarko testified that ACES was even worse than ELF and
that is what is shown by the department's graph.
MR. HANLEY offered Anadarko's support for HB 308, saying the
credits help, particularly in-field. The progressivity slope is
too high and needs changes. He provided an example of how
progressivity works: Under the federal income tax system a
company making $50,000 might be in the 20 percent tax bracket.
An income of $50,001 might jump the company into the 25 percent
tax bracket, but that 25 percent would apply only to that one
dollar. However, under ACES, that 25 percent tax would apply to
all $50,001. Instead of just applying the extra progressivity
to the dollar amount over the $30 per barrel trigger, the
progressivity also applies to the $30, which is a disincentive.
He said it could be argued that there is somewhat of an
incentive to keep a company's per barrel profits at $30 per
barrel or under, as was indicated by [Mr. Vigil].
2:40:59 PM
MR. HANLEY stated that even if the tax rate is reduced and the
progressivity maintained, or if the base rate is taken down, the
tax would still be too high overall. Alaska is not getting the
investment and it is hard for Anadarko to compete. For example,
Anadarko just announced a 500-million-barrel discovery in the
Gulf of Mexico where there is a 12.5 percent royalty rate and no
severance tax and no corporate income tax. For a lot of the
places Anadarko does business, Alaska does not compete and what
that means is that Alaska must have bigger prospects to be able
to sustain this higher tax regime, but in its explorations
Anadarko is seeing a lot of smaller, 50-100 million barrel
fields.
2:42:15 PM
MR. HANLEY pointed out that Anadarko is almost a victim of its
own success with announcements of discoveries in Ghana, Brazil,
and the Gulf of Mexico. Additionally, Anadarko is conducting
substantial drilling in the Marcellus Shales. The company is
putting a lot of cash into things that come out right away or
within a year and a half; whereas, in Alaska, Anadarko has a
well that will take three to four years to test drill. He noted
that unlike Renaissance, Anadarko and its partners are able to
apply credits against their Alpine income right away. However,
a partner with no production in Alaska would be unable to
monetize the credit should Anadarko and its partners sit out one
year while analyzing well data. Changing this would not affect
the state, but would provide a benefit to the people spending
the money. He urged members to look at how much the state needs
just to offset the decline. He said Anadarko supports the
provisions of HB 308 given that production is declining and
investment is inadequate.
2:44:32 PM
CO-CHAIR NEUMAN agreed that the production decline could be a
difficult situation in the future.
REPRESENTATIVE SEATON noted that there is nothing the state can
do about the competitive advantages of places where there are no
corporate or state taxes and drilling can be done year around.
He noted, however, that there is very little exploration and
investment in Cook Inlet despite a very low tax rate. He asked
how this is explained and what is to say this would not happen
elsewhere in Alaska if taxes are lowered there.
MR. HANLEY answered that Anadarko did operate in Cook Inlet, and
he thinks there are multiple factors of which one is the
resource potential; Anadarko did not see significant resource
potential left in Cook Inlet. If legislators think there are
resources to be found in Alaska, then the state must still be
able to compete, he advised. A 50-million-barrel field in the
Gulf of Mexico is a big find, but the same size field on the
North Slope is not economic if it is more than 10 miles from
existing infrastructure. It is just a recognition that there
are these challenges and if the taxes are reduced, starting with
HB 308, there would be more investment in Alaska, although it
may still need to go a bit lower. While he thinks there is
resource potential on the North Slope, he said it is challenged
for numerous reasons, and one thing that can be controlled is
the severance tax.
2:48:22 PM
REPRESENTATIVE OLSON inquired whether Anadarko is acquiring its
tax credits from its partners.
MR. HANLEY responded Anadarko has purchased some credits but not
all. As a small producer on the North Slope, the statute only
allows Anadarko to reduce its tax by 20 percent using these
credits. Thus, Anadarko has only a limited amount of tax
credits that it can actually purchase, although it has purchased
some. It is easier to have the state purchase the credits at
face value so there is no paperwork. In further response, he
said the state sees the same impact and changing this part of
the statute would allow other explorers to receive full value
for the money they are spending. For those explorers looking at
only one prospect that does not pan out, there is nothing left
to spend and the explorer may be unable to sell its credits.
2:50:31 PM
REPRESENTATIVE GUTTENBERG asked what happened during the years
of ELF when the tax rate was so low, yet there was no
exploration. He noted that this was the time period when Mr.
Hanley was a member of the legislature and asked why the tax
rate was not changed then.
MR. HANLEY replied that when he left the legislature the price
of oil was $10 per barrel. At some point the price is so low
that things are uneconomic, he said. Revenue for both the
industry and the state has gone up because the price of oil has
gone up, which has made prospects more economic. However, a
company must still compete and show a certain rate of return;
so, if a project elsewhere is better a company will go there.
Technically, he continued, a company can be losing money and
still have to pay severance taxes, which is why the net profit
system makes sense. For example, a system with just a fixed
rate on the production times the price is a regressive system -
if a company makes $100, but it cost $100 to produce the oil and
the severance tax rate is 10 percent, the company still pays $10
even though it had no income. Although ELF tried to address
some of that, it was not a particularly elegant solution to some
of the problems.
CO-CHAIR NEUMAN quipped that during the time of $10 oil the cost
of running state government was about $9.50 and now with $75 oil
the cost of government is $74.
2:53:00 PM
REPRESENTATIVE KAWASAKI inquired whether Anadarko is party to
any of the closed leases depicted on the map that was presented
by Ms. Crockett.
MR. HANLEY answered yes, Anadarko gave up a couple hundred
thousand acres, as well as some acreage in some other areas. He
explained that Anadarko sees what is most likely and decides
whether to pay rent on it. Some sites are so far out that the
thought may be never for drilling. He noted that not as many
wells are being drilled and only two exploration wells are being
drilled this winter.
2:54:38 PM
REPRESENTATIVE KAWASAKI referred to slide 16 from the same
2/4/10 Department of Revenue presentation that Mr. Hanley took
his graph from. He noted that slide 16 shows higher North Slope
capital and operating expenditures for the same time period [of
FY 2007 - FY 2010]. Therefore, he opined, the current mantra of
higher taxes means less jobs does not seem to play out.
MR. HANLEY allowed that some things have been done because the
price of oil went up. He suggested, however, that a lot of work
has been spent on pipeline replacement during this same time
frame. Right after the first petroleum production tax (PPT) was
passed, some things happened that required a lot of maintenance
work. While he is not discounting that there have been ups and
downs, the question is what the spending is on and whether it is
actually producing more oil. The older fields have higher costs
just to maintain existing production, and the same applies to
the aging TAPS pipeline. Anadarko will not spend money just for
the purpose of getting credits, he said. Income must be
received from that expenditure. Spending will not happen if it
does not make sense to spend as a company.
MR. HANLEY said the big picture to him is that money is being
spent, yet total production is still declining in Prudhoe Bay,
Kuparuk, and the North Slope. While the number of workers is a
consideration, he urged members to not lose sight of whether the
decline is being offset and whether there are things in the
state's control that can be used to attack it. While there is a
risk to whether lowering taxes will actually result in more
production, he said he thinks the lower the taxes the more
likely more production. He pointed out that to the extent the
state has risk, the risk happens at higher prices when
progressivity kicks in. Therefore, the state has some
flexibility in changing the progressivity rate because that is
at the high end of prices, not the low end. He suggested this
is a risk worth taking should new investment and increased
production not happen.
2:58:28 PM
CO-CHAIR NEUMAN commented that throughput in TAPS, and jobs and
production, probably run at about the same level.
CO-CHAIR JOHNSON, in response to Representative Kawasaki, said
Pioneer Natural Resources Alaska, Inc. ("Pioneer") was invited
to testify, but had a conflict.
REPRESENTATIVE KAWASAKI related that when Pioneer Oil Company
went on line at the Oooguruk Unit it applied for royalty relief
to make the economic model work. [Under HB 308], portions of
the two-year-old ACES legislation would be completely gutted
because it is being said there is less investment. Given there
are now royalty relief provisions in statute, he asked why
smaller companies like Anadarko do not apply for royalty relief
to prove to the state it is not marketable.
MR. HANLEY responded he cannot speak for Pioneer Oil Company,
but pointed out that they were during the ELF period.
3:00:24 PM
REPRESENTATIVE SEATON, in regard to exploring for oil, inquired
how big of a deal it is to not be able to sell the gas that
comes with the oil.
MR. HANLEY replied it is pretty important. He said he thinks
having a gasline will help with oil recovery, exploration, and
gas exploration.
REPRESENTATIVE SEATON further inquired whether this is another
one of the qualifications where the Gulf of Mexico has gas sale-
ability while Alaska does not.
MR. HANLEY answered yes.
CO-CHAIR NEUMAN pointed out that written testimony from Ken
Sheffield of Pioneer is in the committee packet.
3:02:34 PM
DALE PITTMAN, Alaska Production Manager, ExxonMobil Production
Company ("ExxonMobil"), noted that he commenced his position as
Alaska Production Manager in June 2009 and has been with
ExxonMobil for nearly 30 years. He said he is looking forward
to continuing the current progress to develop and operate Point
Thomson. He paraphrased from the following written statement
while making a PowerPoint presentation [original punctuation
provided]:
ExxonMobil has been working in Alaska for more than 50
years. We have been a key player in Alaska's oil
industry development, spending and investing well over
$20 billion dollars during that time. As you know, we
are currently active with our co-owners at Prudhoe
Bay, Kuparuk, Duck Island and Granite Point. We are
also excited about our progress at Point Thomson and
remain on track to achieve a 2014 production startup.
We look forward to being a part of Alaska for many
years to come.
3:03:57 PM
At the outset, let me say that ExxonMobil supports the
presentation you heard today from the Alaska Oil and
Gas Association. I do not intend to repeat the
thorough technical comments from that testimony.
As for our specific comments, I would like to state,
consistent with our prior testimony during the
hearings on both the PPT and ACES, that ExxonMobil
believes Alaska's current production taxes are too
high to result in the additional investment needed to
maximize the development of Alaska's resources. It is
our belief that even the proposed 20 percent tax rate
that was in the original PPT bill would not encourage
the full development of Alaska's resources.
Alaska is rich in undiscovered resource potential. To
date, Alaska has produced more than 15 billion barrels
of oil from the North Slope, and according to the DNR
there are approximately 6 billion barrels of known
resources remaining. These resources represent a
known opportunity, but their development is at risk
under the current tax system. Oil production today is
one-third of the peak oil production of more than 2
million barrels per day in 1988, and annual production
continues to decline.
3:05:24 PM
Spending on the North Slope has remained relatively
flat since the enactment of ACES, as you have heard in
prior testimony. But the majority of that investment
has been for maintenance or production enhancement
efforts for existing operations, not for new
exploration and development opportunities. In fact,
the industry currently invests more than $1 billion
per year just to maintain North Slope oil production
at the current decline rate of about 6 percent
annually. Without that continued investment, the
annual production decline would not be 6 percent, but
would actually be closer to 12-15 percent annually.
What this means is in just 10 years, the majority of
future oil production will need to flow from new
investments - investments that are at risk today under
Alaska's current production tax regime.
Let me explain.
Time in the oil and gas industry is not measured in
business cycles. It is measured in decades and in
generations. Today's production rates are the product
of government policies, technical work, and investment
decisions that in many cases were made decades ago.
Increasing production rates in the decades to come
will result from sound policies, decisions, and
commitments that are made today. As policy makers,
you will need to decide whether Alaska's current high
production tax regime is the right course for Alaska
or - given the current high costs and steadily
declining oil production rates we face - if another
course is necessary to harness the remaining resource
potential.
3:06:37 PM
It is important to recognize that any decision made
today impacts much more than tax revenue in the
future. Decisions made today impact jobs for Alaskan
workers, revenue for many Alaska businesses, and
infrastructure that benefits Alaskan communities and
extends the life of production in existing fields.
To encourage full development of Alaska's resources,
we believe production taxes should be lowered. The
high base tax rate and the higher taxes due to the
additional progressivity tax are major disincentives
to the high risk investment opportunities required in
Alaska.
3:07:17 PM
Companies like ExxonMobil are willing to accept the
risks of long-term, capital intensive investments when
there is a stable tax structure that allows and
encourages investment and ensures a corresponding
opportunity for upside potential. Upside factors such
as increased production and higher prices should be a
benefit for risks taken, because companies are
certainly negatively impacted when lower than expected
production or prices occur. When you take away the
upside potential that companies can achieve you reduce
the overall attractiveness of those capital intensive
investments.
Alaska faces significant challenges. Costs are high,
exploration is down and production continues to
decline. We all need to work together to achieve the
right balance - a balance that maximizes the benefit
to Alaskans while encouraging industry to continue to
invest in Alaska.
3:08:09 PM
We advocate a collaborative approach to develop a
sustainable long-term resource development policy that
will encourage the needed investments to build the
future of Alaska for many generations to come.
Alaska's resource development policy should identify
and characterize state-wide resource potential,
identify key issues challenging exploration and
development, and encourage investment needed to
mitigate production decline. Such a policy should
also consider key factors that impact resource value,
such as research and technology, exploration and
development costs, regulatory and environmental
considerations, and land access. A reassessment of
Alaska's high production taxes is a critical part of
that long-term resource development policy.
3:09:03 PM
Committee Substitute to House Bill 308 is best
characterized as a first step toward what we believe
should be a comprehensive examination of Alaska's
production tax structure.
It will take everyone working together to achieve that
long-term policy. Government leaders, industry
representatives, contractors and citizens all stand to
benefit from developing Alaska's resources.
ExxonMobil looks forward to working with the
Administration, the legislators, industry and the
people of Alaska in the future pursuit and development
of Alaska's oil and gas resources.
3:09:41 PM
REPRESENTATIVE P. WILSON agreed that it will take comprehensive
examination and working collaboratively, which has been tried in
the past. She inquired whether Mr. Pittman believes that this
time collaborative work can be done so that both the state and
industry benefit, and that things will not be like they were in
the past.
MR. PITTMAN responded that as a newcomer he cannot judge the
past and allowed that it is very complex problem. He said
ExxonMobil focuses on large, long-term projects and therefore
looks at 30- to 50-year time horizons, although some in the
industry are looking for returns in the next two to five years.
The state must appeal to both types of investors, he advised, as
well as those that are middle-term investors. While he does not
understand all of the taxes and their implications, he is
worried that it is bigger than everyone in this room. He
suggested that the state needs a long-term policy that people
can understand as they begin to make those investment decisions.
3:12:30 PM
REPRESENTATIVE SEATON related that when ACES was being
considered, the mantra from ExxonMobil and others was that taxes
needed to remain stable and should not be changed. This is now
an intermediate change, because once a gasline goes through
there will need to be negotiation on those taxes. He asked
whether Mr. Pittman is now saying that stability on the tax
system does not mean anything and the taxes should be changed.
MR. PITTMAN replied he appreciates that view and has heard it
before. He said ExxonMobil is suggesting that someone needs to
make that investment decision knowing what that tax structure is
going to be for the next 30 years. If this is it, and it will
never be changed, ExxonMobil can make those decisions now.
ExxonMobil has stated its opinion that the taxes are too high
and that it would help the state to lower those taxes. He said
he thinks it would be beneficial if the state could tell people
what taxes will look like for the next 30 years and that those
taxes will not change, at least from the investment decisions
that are made today. Taxes and fiscal policy are only one part
when making a decision. The other parts include resource
potential in a prospect, whether it is gas or oil that is being
looked for, and political stability.
3:14:22 PM
CO-CHAIR NEUMAN commented that ExxonMobil did ask for a stable
tax base and the legislature increased taxes with ACES, and now
after a couple of years there is concern by folks like the
sponsor and the governor that production may have been affected.
He inquired whether industry is receptive to the provisions in
HB 308, such as more and different credits.
MR. PITTMAN answered absolutely. He added, however, that there
is still a benefit to stability and he does not want people to
think that ExxonMobil is looking to change taxes every two years
only if it benefits the company.
3:15:25 PM
REPRESENTATIVE SEATON pointed out that there is the stable
system under statute to apply for royalty relief if a project is
uneconomic. He asked whether the royalty relief is not
functional for ExxonMobil such that it prefers to have the taxes
changed.
MR. PITTMAN responded that the hypothetical answer to this
hypothetical question is that ExxonMobil has to look at the
economics of that particular project. If royalty relief is
needed to move the project forward, ExxonMobil would obviously
entertain that. He said his overall message, however, is that
legislators must strike the right balance for Alaska and the
right balance for the state's investors, and then find a way to
make that a stable policy that can be counted on for the future.
CO-CHAIR NEUMAN remarked that in regard to royalty relief there
is a price for everything.
MR. PITTMAN agreed.
3:16:53 PM
REPRESENTATIVE KAWASAKI inquired whether the $1 billion in
annual investment mentioned by Mr. Pittman is for the oil
industry as a whole.
MR. PITTMAN replied that the number is very conservative and he
suspects others would say a much larger number. He said his
focus there was on the money ExxonMobil spends just on well
enhancements and workovers to try to keep that decline rate at
the 6 percent level. In further response, he said the $1
billion is ExxonMobil's best guess for the North Slope producers
that it is involved with.
3:17:58 PM
REPRESENTATIVE KAWASAKI asked whether ExxonMobil would be
willing to provide legislators with a 10-year capital spending
plan if the entire legislature agrees not to change anything now
and agrees to not touch taxes for ten years.
MR. PITTMAN answered that that would be a challenge for
ExxonMobil as a company, and certainly for him as an individual.
CO-CHAIR NEUMAN inquired whether there are any guarantees on how
much oil and gas ExxonMobil will find in the next 10 years.
MR. PITTMAN responded no.
CO-CHAIR NEUMAN said he did not think so.
3:18:54 PM
REPRESENTATIVE KAWASAKI asked whether Mr. Pittman's statement on
page 4 of his testimony that exploration is down refers to
ExxonMobil and the folks it does business with dollar-wise, or
is about the number of wells drilled, or about contracts.
MR. PITTMAN replied his personal view is talking about the
decline rate and knowing how the State of Alaska is dependent
upon those revenues. Declines rarely go above 6 percent, and
while it can be larger, he is worried about what things will
look like in 10 years at even a 6 percent rate.
CO-CHAIR NEUMAN recessed the meeting to a call of the chair.
6:05:39 PM
CO-CHAIR NEUMAN called the meeting back to order at 6:05 p.m.
Representatives Kawasaki, P. Wilson, Olson, Johnson, and Neuman
were present at the call back to order. Representative Seaton
arrived as the meeting was in progress.
6:06:34 PM
BRIAN WENZEL, Vice President-Finance, ConocoPhillips Alaska,
Inc. ("ConocoPhillips"), stated that ConocoPhillips supports HB
308 as a step in the right direction for creating a more
favorable investment climate. He qualified that HB 308 does not
address all of the company's concerns with the current ACES tax
structure and the proposed amendments are not an optimal
structure. He added that a more favorable investment climate
would create increased business confidence which would lead to
increased investment in Alaska, which in turn would lead to more
jobs and purchases of goods and services from Alaskans, and more
royalties and production taxes to the state.
6:08:52 PM
MR. WENZEL began his PowerPoint presentation with a map of
ConocoPhillips' assets on the North Slope [slide 2]. He said
ConocoPhillips is a 5 percent owner in Point Thomson, a 36
percent owner in Prudhoe Bay where "BP" is the operator, a 55
percent owner in Kuparuk where ConocoPhillips is the operator,
and a 78 percent owner in Alpine. All of these assets, as well
as the company's assets in Cook Inlet, are subject to various
forms of government take, such as property tax, royalties,
production tax, state corporate income tax, and federal income
tax. On average, government take in Alaska ranges from 65-75
percent, based on oil prices between $70 and $115 [per barrel].
This means that for a given $100 of net cash flow the producer
keeps only $25-$35 and the rest is government take of one form
or another. He explained that progressivity is dramatic when
looking at an incremental dollar. For example, if the price per
barrel goes up by $1, the marginal take on that incremental
dollar can be as high as 93 percent, leaving the producer with
only 7 cents from that $1.
6:09:46 PM
CO-CHAIR NEUMAN requested Mr. Wenzel to address the concept that
while all the forms of government take might total 80 percent,
the producer is left with a 20 percent net margin and most
companies would consider a 3-4 percent margin as doing well.
MR. WENZEL responded that the total take by the various
government forms is 65-75 percent of the net cash flow. While
some people might view the producer's net margin as a
significant margin, it is ConocoPhillips' view that it is the
one taking the risk. At times, larger returns are received and
at other times the returns are zero or negative.
6:11:33 PM
MR. WENZEL returned to his presentation, stating that HB 308
attempts to partially rectify the extreme nature of the
progressivity that creates a marginal tax rate of 93 percent.
MR. WENZEL explained that as a result of investment, the decline
profile shown on slide 3 is shallower than it would otherwise
be. Everyone is looking to the day when technology allows the
development of heavy oil, Alaska North Slope (ANS) gas, and the
Outer Continental Shelf; however, this technology is at least 10
years away. ConocoPhillips is concerned about how to bridge the
gap between now and then so that production does not fall so
precipitously that it creates problems. ConocoPhillips believes
it is going to take another $40 billion in expenditures over the
next decade just to deliver the profile shown on slide 3. Less
investment will mean a faster decline rate.
6:13:36 PM
CO-CHAIR NEUMAN related that at a presentation on 3/9/10,
Alyeska Pipeline Service Company ("Alyeska") said the decline
would reach 300,000 barrels [per day] within 8-10 years. He
asked for an explanation as to why the decline depicted on slide
3 is an additional 20 years out.
MR. WENZEL replied he has not listened to all of Alyeska's
comments, but he understands that Alyeska has said that
significant operating issues [for TAPS] begin at 500,000 barrels
per day and 300,000 barrels per day is worse.
6:14:34 PM
CO-CHAIR NEUMAN offered his understanding that at 300,000
barrels a day the pipeline cannot be operated.
MR. WENZEL answered he must have missed that because he would
have thought Alyeska would say that [TAPS] can be operated, but
it just comes with additional cost and difficulty, which is
something everyone is concerned about. The point is that
Alyeska is questioning whether it will be economic to operate
the pipeline at that point, and ConocoPhillips would agree. He
noted that the data on slide 3 is from the Department of
Revenue, not ConocoPhillips. He said ConocoPhillips would agree
that it is one more reason for not letting production fall too
far before bringing on heavy oil or the Outer Continental Shelf.
CO-CHAIR NEUMAN added it is not just the economic, but also
actual physical properties such as viscosity, water, waxes, and
such.
MR. WENZEL agreed.
6:15:42 PM
CO-CHAIR JOHNSON observed that slide 3 is data forecast by the
Department of Revenue, and Alyeska's forecast at its 3/9/10
presentation was less than projected by the department. He
inquired whether ConocoPhillips has conducted a forecast or is
depending upon the Department of Revenue.
MR. WENZEL responded ConocoPhillips is probably not depending
upon the Department of Revenue exclusively, but it did choose
the numbers depicted on slide 3 because they are public numbers.
ConocoPhillips has not put out its own numbers; it is a way for
the company to get a total industry view as opposed to simply
taking ConocoPhillips' view and factoring it up.
6:16:32 PM
MR. WENZEL resumed his presentation, noting that slide 4 uses
production at the Kuparuk and Alpine oil fields to illustrate
the importance of additional investment. He explained that the
orange-colored portions of the two graphs depict the base
production off the initial asset investment and the green-
colored portions depict the incremental investment. The
incremental investment is additional project development that
increases production beyond what was originally expected and is
the type of investment that helps to mitigate production
decline.
MR. WENZEL pointed out that the new projects being discussed,
such as Point Thomson, Nikaitchuq, Liberty, and Oooguruk, are
relatively small in terms of remaining barrels over the next 40
years from 2010-2050 [slide 5]. According to a 2008 Department
of Revenue forecast, the vast majority of remaining barrels will
come from the core fields of Kuparuk, Prudhoe Bay, and Alpine.
Therefore, when structuring fiscal policy to incentivize
additional barrels, it is the view of ConocoPhillips that those
core fields are what should be looked at.
6:18:40 PM
MR. WENZEL noted that the 2009 Department of Revenue forecast
predicts a 20 percent reduction in production from the core
fields [slide 6]. The department steepened its decline rates
because it is now expecting less recovery. He reminded members
that in a February [2010] presentation the Department of Revenue
showed a slide depicting investment falling off dramatically in
the core fields. He said it is ConocoPhillips perspective that
the two are inextricably tied - loosing investment increases the
steepness of decline.
MR. WENZEL reviewed ConocoPhillips' concerns regarding the
leading indicators of problems in Alaska [slide 7]. He pointed
out that ConocoPhillips has been the state's leading explorer
for many years. However, it will not be drilling an exploration
well in 2010, the first time in 45 years that it has not drilled
an exploration well. Of industry's four wells that are
permitted for 2010, he is unsure whether all of them will
happen. The dramatic decrease in industry exploration wells
[depicted by the graph on the left side of slide 7] cannot be
ignored. He said the [14 percent] decline in industry well
completions [from 2007-2009] is a leading indicator to
ConocoPhillips of problems within the state. If wells are not
being drilled and are not being completed, new barrels of oil
are not being found and brought on.
6:20:55 PM
MR. WENZEL, in response to Co-Chair Neuman, said ConocoPhillips
is not drilling an exploration well in 2010 for a number of
reasons that are combined together when making decisions. One
reason is ConocoPhillips' view of prospectivity in some of its
acreage. Another reason is that ConocoPhillips is spending a
fair amount of money in getting ready for exploration in the
coming years in the Chukchi Sea. An additional reason is the
fiscal system. As ConocoPhillips looks into the uncertainties
of the future, and the average and marginal take by the State of
Alaska, it gets to a point where it does not make sense. He
noted that ConocoPhillips is doing things in-field because that
is seen as a much more efficient way to bring on additional
barrels.
6:22:12 PM
REPRESENTATIVE KAWASAKI inquired as to ConocoPhillips' activity
levels in the other countries in which it operates.
MR. WENZEL responded he does not have a full laundry list, but a
few months ago Larry Archibald, Vice President of Exploration,
stated in a presentation that ConocoPhillips sees its operations
in the Gulf Coast off Texas and in Australia as being more
attractive regimes for its exploration dollars than Alaska.
MR. WENZEL continued his discussion of leading indicators in
regard to drilling activity [slide 8]. He drew attention to the
black line at the top of the graph depicting historic oil prices
and the green line below that which depicts the U.S. oil rig
count [from 2005 through 2009], and pointed out that they move
up and down in tandem, although the oil rig count is somewhat
delayed in its reaction given it takes awhile to get rigs
engaged or disengaged. He said the troubling thing is that the
rig trend for core fields in Alaska, depicted by the red bars on
the graph, is flat or down from second quarter 2006 through
fourth quarter 2008, while the U.S. oil rig count increased
steadily over this same time frame. Additionally, oil prices
went up in late 2009 and the U.S. rig count responded
accordingly, but Alaska's rig count declined. For
ConocoPhillips, this is a leading indicator of problems yet to
come in Alaska, he said.
6:24:39 PM
MR. WENZEL, in response to Representative Kawasaki, explained
that the core fields being depicted on slide 8 are Kuparuk,
Alpine, and Prudhoe Bay, as was also depicted on slide 5. The
core fields represent 90 percent of North Slope production in
2009 and also represent the vast majority of expected remaining
barrels over the next 40 years relative to some of the other
projects that are going on today. He said ConocoPhillips thinks
the core fields are the areas of opportunity in terms of
incentivizing new investment and new production.
REPRESENTATIVE KAWASAKI asked whether the rig count has a direct
correlation to the volume of oil.
MR. WENZEL replied yes, there is probably some natural
correlation but it is not a direct linear formula. As an
industry, the goal is to have more rigs drilling because more
rigs either finds more barrels or brings on more barrels when
conducting in-field drilling.
6:26:32 PM
MR. WENZEL, in response to another question from Representative
Kawasaki, explained that the green line for the U.S. rig count
does not depict the actual number of rigs. He explained that he
normalized the line and forced it to meet the top of the red bar
for Alaska for the first quarter of 2005. The total number of
U.S. rigs is much larger than the red bars; he just brought the
green line down so the correlation could be seen. For example,
the peak number of U.S. rigs for fourth quarter 2008 is 145.
6:28:10 PM
MR. WENZEL returned to his discussion of leading indicators,
saying that the second leading indicator of concern to
ConocoPhillips is the overall spending level. He said
ConocoPhillips has a different view than does the administration
regarding the increasing levels of expenditures which have led
the administration to conclude that it is too early to decide
whether there is a problem coming. He explained that the red
bars on slide [9] represent the industry's total capital and
operating expenditures, which increase from fiscal year 2007 to
2009 and which are forecast to decrease in fiscal year 2010.
The yellow bars adjust those expenditures for inflation and
these bars indicate that in reality those expenditures are flat
over this time frame, which is not indicative of a growing and
vibrant industry.
MR. WENZEL moved to slide [10] and pointed out that investment
is flat in development projects, which are the new production
projects that bring on new barrels. However, investment is
increasing for maintenance/replacement/repair projects, which
are projects that maintain current-level production. Thus, less
and less of the total expenditure is on rate-adding production
that puts more barrels down the pipeline and brings more revenue
to the state.
6:30:15 PM
REPRESENTATIVE SEATON noted that due to deflation the cost of
drilling wells and installing pipe has decreased. In regard to
slide 9, he surmised that this would raise the red bars from the
prior year where the costs were unitized higher.
MR. WENZEL answered the yellow bar, yes. To the extent that
deflation was seen, it would possibly reflect in a higher number
there.
CO-CHAIR NEUMAN asked whether ConocoPhillips' year-to-year
operating expenses have ever decreased.
MR. WENZEL responded they have not in the recent past, but he
does not know further back than that.
6:32:00 PM
MR. WENZEL, in response to Representative Seaton, said the
expenses shown on slide 10 are not adjusted for inflation. He
said he thinks if they had been adjusted, the development
projects would be down a little and the maintenance/
replacement/repair would still be increasing but at a flatter
rate. He pointed out that for 2008 and 2009 more than half of
the expense was going for maintenance/replacement/repair as
opposed to rate-adding.
CO-CHAIR NEUMAN inquired how the declining throughput in TAPS
for the years 2005-2009, would equate to the graph on slide 10.
MR. WENZEL replied there would be a steady downward decline of
production through TAPS, so the costs per barrel are increasing
dramatically. In further response, he said the goal should be
to increase the height of the red bars [on slide 10] over time
because ConocoPhillips believes that will lead to more
production which then lessens the slope of production decline;
however, there would still be production decline.
6:33:40 PM
REPRESENTATIVE WILSON observed that many factors happened at the
same time, such as pipeline leaks that needed to be repaired,
coupled with the economy falling and the declining production.
She asked whether ConocoPhillips had to therefore shift its
money from development to maintenance and repair.
MR. WENZEL presumed the question is whether ConocoPhillips has
some pre-set idea of how much it is going to spend per year in
Alaska. He said that is not case; ConocoPhillips will spend as
needed to affect the necessary repairs and be able to operate
safely. At the same time, the development projects in Alaska
compete independently with other projects around the world and
those funds will be allocated according to where it is most
economic with the least amount of risk and uncertainties. Part
of ConocoPhillips' concern in Alaska is that as that proportion
of maintenance and repair is masked by the overall increase, it
sees a greater decline in the future. ConocoPhillips will get
through this repair of its 30-year-old assets and this bubble
will come off in 3-4 years, but addressing how to incentivize
development projects needs to be started now or it will be even
more difficult in the future.
6:36:12 PM
REPRESENTATIVE SEATON understood that most of the production is
in the core fields, but that does not mean that most of the
investment is necessarily in the core fields. He inquired
whether there is a graph looking at the total investment that
includes Point Thomson and the other development projects.
MR. WENZEL answered he does not have anything that splits out
the investment by core field versus other fields. However,
pointing back to slide 5, he noted that the opportunity is in
the core fields; thus, he recommends setting up a fiscal system
that incentivizes more investment in those core fields. The
opportunity in Point Thomson, Nikaitchuq, Liberty, and Oooguruk
is relatively small in terms of remaining barrels. He said HB
308 makes sense because it expands the tax credit system to
apply to investments in those core fields.
REPRESENTATIVE SEATON requested Mr. Wenzel to provide the
committee with material that looks at the total investment for
both core and new projects.
6:38:08 PM
REPRESENTATIVE KAWASAKI asked how much of the maintenance
investment [on slide 10] is due to new requirements by the
Department of Transportation & Public Facilities or other state
agencies.
MR. WENZEL responded he does not have those numbers and will get
back to members with that information.
MR. WENZEL commenced his presentation with discussion of a third
leading indicator - oil and gas employment [slide 11]. He
related that the administration sees increasing levels of
employment. Employment peaked in mid-2009, but has fallen in
the last few months. He said ConocoPhillips is of the view that
part of that employment increase is also driven by the increase
in spending on repair and refurbishment activities. He also
noted that usage of the Kuparuk camp is down 20 percent.
REPRESENTATIVE KAWASAKI related that according to the last
[Department of Labor & Workforce Development] report the total
number of nonresident hires in the oil industry is increasing.
He further related that another report regarding economic trends
shows that the largest percentage of increase in the oil sector
of new hires is from nonresidents. He requested Mr. Wenzel to
address this from the perspective of the industry as a whole.
MR. WENZEL offered to speak to this when he gets to slide [16].
6:40:44 PM
MR. WENZEL resumed his presentation and addressed the
administration's talk about additional projects that are being
approved and moved forward. He reminded members that Oooguruk
was sanctioned prior to ACES becoming effective, so there was no
chance to change the investment decision. Both Oooguruk and
Nikaitchuq had royalty relief to help their economics. Liberty
is not subject to the ACES tax system. He said ConocoPhillips
is aware of $2 billion in projects that have been deferred since
the passage of ACES. These projects include the [Prudhoe Bay]
I-Pad and gas partial processing project, [West Sak] 1N and 1P,
and the ultra low sulfur diesel (ULSD) topping plant.
REPRESENTATIVE KAWASAKI inquired with Mr. Wenzel is alleging
that ACES is the cause of the deferral of these projects.
MR. WENZEL replied he is indicating that $2 billion of projects
has been deferred since ACES was passed. While he cannot say
why ConocoPhillips' working interest partners came to their
conclusions, he can say that ConocoPhillips supported these
deferrals and the ACES tax law was part of that decision.
6:42:36 PM
REPRESENTATIVE KAWASAKI asked whether changing ACES would mean
these projects would come off the shelf.
MR. WENZEL answered he cannot promise the projects would come
off the shelf because ConocoPhillips is only a working interest
owner. However, ConocoPhillips supports HB 308 because it
provides additional incentives for these projects and
ConocoPhillips would definitely re-evaluate these projects. If
they met ConocoPhillips' hurdle rates, the company would try to
convince its working interest partners the same.
6:43:35 PM
MR. WENZEL commenced his presentation with a $1 billion
investment example. He said the first example applied to an
offshore project like the Gulf of Mexico or the Chukchi Sea
where there is no production tax [slide 13]. The yellow bars on
the graph are the industry keep of the incremental cash flow of
profits off the project and the red bars are the government
take. It can be seen that as oil prices increase the investor
keep and government take are about the same, making it a win-win
situation. However, for this same scenario of investment and
oil prices in Alaska [slide 14], the investor keep remains
relatively flat even when high oil prices are reached, resulting
in a very unbalanced sharing of the upside. This unbalanced
sharing is caused by progressivity in which the state government
takes a greater share of the net profits as oil price goes up.
He said investors in ConocoPhillips are not looking for a
profile like the one on slide 14; investors are looking for
exposure to upside prices and a profile that is more balanced
like the one on slide 13.
6:45:23 PM
REPRESENTATIVE SEATON offered his hope that Mr. Wenzel is not
suggesting Alaska should have the profile of zero production tax
and no royalty. He pointed out that slide 14 shows there is
protection on the downside at low oil prices when there is no
production tax, something that industry supported.
MR. WENZEL responded ConocoPhillips would suggest that Alaska
find a way to provide a more balanced sharing of the upside. He
said HB 308 by no means creates this profile, but is a step in
the right direction. As long as there is progressivity, there
is always a greater share going to the government on the upside.
In regard to industry support for protection on the downside, he
said ConocoPhillips at that time was not arguing for protection
on the downside. ConocoPhillips saw the natural balance of
having the downside be exposed also, but ConocoPhillips would
much rather be fully exposed or at least have a balanced
approach to the upside. He said investors believe in upside
price appreciation and understand the risk if prices go down.
6:47:56 PM
REPRESENTATIVE SEATON presumed ConocoPhillips would be willing
to have a per barrel flat tax when the price is below $50 as a
balancing mechanism.
MR. WENZEL replied he cannot speak for the whole industry, but
should a more balanced approach be created for the upside,
ConocoPhillips would definitely be willing to talk about shaping
an appropriate tax system that applies to the downside. He said
that can already be seen today in ACES where there are
protections, and in royalty fees which are flat regardless of
oil prices. Additionally, ACES has a graduated floor tax that
currently provides protection for the state on the downside.
REPRESENTATIVE SEATON said it is production tax that is being
talked about here, not the state's ownership share in royalties.
He said he appreciates Mr. Wenzel's comments and as things go
forward he will look at the taxes below $50.
CO-CHAIR NEUMAN stated that other companies that have testified
have said it is not so much production tax but the myriad of
other things that also happened in ACES.
The committee took an at-ease from 6:49 pm. to 6:56 p.m.
6:56:39 PM
MR. WENZEL pointed out that the charts he is displaying show
total government take, not just production tax. Production tax
drives the progressivity. Total government take includes state
income tax, property tax, production tax, and royalty.
MR. WENZEL discussed another leading indicator - production
[slide 15]. He said the historical production decline rate is 6
percent, and Conoco Phillips believes it will take another $40
billion over the next decade just to deliver that 6 percent
decline rate. Without that $40 billion investment,
ConocoPhillips believes the natural decline rate would be 10-16
percent, which would make it very difficult to run TAPS.
6:58:05 PM
MR. WENZEL noted that his whole presentation is about the
importance of investment for delivering production and for
delivering jobs. He pointed out that the Department of Revenue
forecast is for only a 2.5 percent decline rate. Delivering a
2.5 percent decline rate requires finding a way to incentivize
new, additional investment above the $40 billion, he said. It
is not just about whether enough is being invested today, but
also about what is being done to increase investment.
MR. WENZEL addressed Representative Kawasaki's question about
employment [slide 16]. He said 88 percent of ConocoPhillips
direct employees are Alaska residents. However, the vast
majority of people working on ConocoPhillips operative assets
are employees of subcontractors and the majority of those
employees are also Alaska residents [ASRC Energy Services - 81.5
percent, Doyon Universal Services - 92.9 percent, Kuukpik Arctic
Catering - 92.8 percent, Doyon Drilling - 89.8 percent,
Halliburton Energy Services - 74.3 percent, and Nabors Alaska
Drilling - 78.1 percent].
7:00:02 PM
REPRESENTATIVE SEATON, in regard to slide 15, asked what the
liability risk is for dismantling, removal and restoration
(DR&R) should the companies decide not to invest and the TAPS
throughput subsequently goes below the necessary minimum.
MR. WENZEL answered the dismantlement and refurbishment
activities are not a risk, but a reality; the companies have
that obligation at some point in time. It is to the advantage
of both the industry and the state to delay that period as long
as possible because that would mean oil is still being produced
and shipped.
REPRESENTATIVE SEATON inquired whether ConocoPhillips looks at
investing in well-related activities so as not to incur the
significant costs of DR&R sooner rather than later.
MR. WENZEL responded no, that is not part of ConocoPhillips'
consideration in terms of how quickly it might be faced with its
DR&R liabilities. ConocoPhillips knows those are out there and
is accruing for them. ConocoPhillips is very much motivated by
production, just as the state is, and wants to increase
production wherever, whenever, and as quickly as possible. For
ConocoPhillips it is all about how to continue or increase
production in an economic fashion.
[Co-Chair Neuman passed the gavel to Co-Chair Johnson.]
7:02:53 PM
MR. WENZEL reiterated that ConocoPhillips supports HB 308,
saying that while the bill does not go far enough, it is a step
toward creating a more favorable investment climate that builds
business confidence [slide 17]. The bill would reduce
progressivity which would create a more balanced risk/reward
environment, incentivize new investment in core and new fields,
and support increased long-term jobs and investment in riskier
projects. The bill would provide expanded credits for expense
activities which would incentivize well-related activity inside
the core fields. The bill would provide for restoration of the
3-year audit period, something that is important to the state as
well as the taxpayer to ensure that both are aligned in their
interpretation of the tax law and the regulations. The bill
would provide waiver of interest due to delayed regulations,
which is the only fair way to do this. Lastly, HB 308 would
provide a more reasonable interest rate that is more in keeping
with other states and other commercial contracts.
7:05:17 PM
MR. WENZEL summarized, stating that ConocoPhillips sees several
leading indicators that cause it concern. It is past time to
make a change to the production tax system in Alaska because the
government take is too high. The most leveraging way to adjust
that, while still creating a semblance of a balanced sharing of
the upside with the state, is to adjust the progressivity, and
HB 308 attempts to do that. The number of wells and rigs are
down, expenditures on the North Slope are flat after taking out
inflation, development expenditures are down, employment is
trending down, camp usage is down 20 percent, and there are $2
billion in deferred projects that are partly due to ACES.
Production decline is key to everyone, he stressed. It will
require $40 billion over the next decade just to maintain the 6
percent decline rate, yet the state is projecting only a 2.5
percent decline; therefore, a way must be found to incentivize
dramatically more investment on the North Slope. He said HB 308
is an opportunity to create a climate that is more favorable
toward future investment, future jobs, and future revenues for
both the industry and the state.
7:07:04 PM
REPRESENTATIVE SEATON asked whether ConocoPhillips has
estimation that it will be able to declare actual expenses now
that there is no longer the standard deduction for the core
fields. He understood that actual expenses exceeded the
standard deduction that was put in place during the time period
that ACES regulations were not yet adopted.
MR. WENZEL replied he believes the number put out by the
Department of Revenue was $300-$400 million in expenditures that
were not allowable because of the standard deduction. Thus,
those expenditures will come into play and will reduce the
profitability per barrel, which reduces the progressivity going
into 2010. He said it is not a standard deduction like a state
income tax and is not a simple way to take just one deduction
and not have to prove it. In reality, all expenses must still
be proved up to that number, which means it does not save
effort. Rather, it is a cap on expenditures and ConocoPhillips
believes it is an inappropriate cap because all expenditures are
legitimate and should be deductible against a net profits tax.
[Co-Chair Johnson returned the gavel to Co-Chair Neuman.]
7:09:35 PM
REPRESENTATIVE SEATON said he does not disagree with Mr. Wenzel.
He inquired whether Mr. Wenzel knows how much the profitability
numbers will be moved downward.
MR. WENZEL answered he has not done that calculation to see what
it does in terms of changing the production tax value (PTV) per
barrel of oil equivalent (BOE). He offered to provide the
calculation for members.
7:10:37 PM
REPRESENTATIVE KAWASAKI asked how much ConocoPhillips intends to
spend for capital infrastructure in the state of Alaska over the
next 10 years under the current ACES provisions.
MR. WENZEL responded that number has not yet been set.
REPRESENTATIVE KAWASAKI inquired how much ConocoPhillips would
intend to spend on capital infrastructure in the state of Alaska
if HB 308 was passed.
MR. WENZEL replied he cannot say, but that he can say it would
create a more favorable business climate and will, in the view
of ConocoPhillips, incentivize new investment.
7:11:34 PM
REPRESENTATIVE KAWASAKI asked why Mr. Wenzel has not mentioned
the local hire provision of HB 308 as one of the reasons for
ConocoPhillips' support of the bill.
MR. WENZEL answered there was a fair amount of debate on that
provision at earlier hearings and he does not want to start that
debate. If the provision stays in the bill, ConocoPhillips
would be happy to see it there because it has a defensible and
impressive record on Alaska hire. That aside, ConocoPhillips
would support the bill for the reasons he has suggested.
7:12:30 PM
REPRESENTATIVE KAWASAKI inquired whether ConocoPhillips has
calculated how much more money it would have made if ACES and
progressivity not been in place.
MR. WENZEL responded no. He said the question is multi-fold as
to whether to go back to ELF or PPT, and it is not considered a
loss because ConocoPhillips pays its taxes under the law of the
day. However, ConocoPhillips talks to members and recommends
changes it thinks are necessary for creating a healthy and
vibrant oil industry and economy for Alaska.
7:13:19 PM
CO-CHAIR NEUMAN asked whether ConocoPhillips knows how much oil
and gas it is going to produce in the next 10 years.
MR. WENZEL replied no.
CO-CHAIR JOHNSON said he thinks members are asking Mr. Wenzel to
give certainty in an area that no one could give certainty to,
and the crux of the argument is if the legislature does this,
then what will ConocoPhillips guarantee. However, guarantees
are few and far between, whether for the state or industry.
7:14:03 PM
REPRESENTATIVE SEATON inquired at what point ConocoPhillips
would decide that this is an unstable tax regime because it is
being changed every two years or so.
MR. WENZEL allowed that Representative Seaton is correct. At
the time of the most recent change, ConocoPhillips was
definitely concerned, and is still concerned, about the business
climate in Alaska. He said ConocoPhillips is not looking for
stability at the tax system that exists today. While
stabilization of the tax system today would provide certainty
for decision making, he is afraid it would be a negative
decision for ConocoPhillips. He strongly suggested that the
state and legislature find a way to change this tax system and
create one that provides a more balanced sharing of the upside
and a more incentivizing environment.
7:15:51 PM
CO-CHAIR NEUMAN understood that Mr. Wenzel is before the
committee because ConocoPhillips is concerned about the effects
ACES has had over the past two years and would accept changes to
ACES to make a more appropriate business environment.
MR. WENZEL answered correct, ConocoPhillips thinks there is an
opportunity to bring more investment and production to the state
than there would be without the change.
7:16:35 PM
CO-CHAIR NEUMAN held over HB 308.
The committee took an at-ease from 7:16 p.m. to 7:18 p.m.
HB 369-IN-STATE PIPELINE/COORDINATOR /TEAM
7:18:54 PM
CO-CHAIR NEUMAN announced that the third order of business is
HOUSE BILL NO. 369, "An Act relating to an in-state natural gas
pipeline, the office of in-state gasline project manager, the
Joint In-State Gasline Development Team, and the In-State
Gasline Steering Committee; and providing for an effective
date." [Before the committee was Version E, the proposed
committee substitute for HB 308, labeled 26-LS1527\E, Cook,
3/2/10.]
7:19:08 PM
CO-CHAIR JOHNSON moved the committee adopt a new proposed
committee substitute for HB 308, labeled 26-LS1527\S, Cook,
3/10/10 ("Version S"), as the working document.
CO-CHAIR NEUMAN objected for explanation purposes.
TOM WRIGHT, Staff, Representative Mike Chenault, Alaska State
Legislature, explained that the changes incorporated into
Version S are mostly deletions of items from Version E. The
provision for an In-state Gasline Steering Committee was
removed, the duties of the steering committee were moved to
subsection (a) of the provision for the Joint In-state Gasline
Development Team, and the conflicts of interest and ethics
provision for steering committee members was removed.
7:20:15 PM
CO-CHAIR NEUMAN asked whether Representative Seaton's concerns
are addressed by Version S.
MR. WRIGHT responded he would prefer to let the sponsor discuss
those concerns later.
CO-CHAIR JOHNSON inquired why the provision for a steering
committee was removed.
MR. WRIGHT replied a number of members thought the steering
committee would be somewhat cumbersome. The reason for having
the steering committee provision was to ensure good public
participation in the development of the gasline. Removal of the
committee does not preclude the Joint In-state Gasline
Development Team from calling on others with the expertise or
calling on affected communities when the need arises. In
response to Co-Chair Neuman, he added that the sponsor hopes
there will be a lot of public participation in this process.
7:22:27 PM
CO-CHAIR NEUMAN removed his objection to Version S. There being
no further objection, Version S was before the committee.
The committee took an at-ease from 7:23 p.m. to 7:24 p.m.
7:25:01 PM
REPRESENTATIVE SEATON moved Amendment 1 written as follows
[original punctuation provided]:
Page 3, line 18, following "communities,":
Insert "the cost of transporting natural gas to
other locations in the state,"
Page 3, line 26, following "tidewater":
Insert "in the state and to other locations in
the state"
Page 5, line 5, following "state":
Insert "and to other locations in the state"
CO-CHAIR JOHNSON objected for discussion purposes.
REPRESENTATIVE SEATON explained that the proposed Joint In-state
Gasline Development Team would exist for quite some time and
after a North Slope pipeline is constructed to tidewater, a
number of in-state gaslines may be developed. Amendment 1 would
give this team the authority to look at these other in-state
pipelines to provide natural gas to residents at reasonable
cost. He said there are three different places where language
would be inserted into Version S.
7:27:08 PM
REPRESENTATIVE SEATON, in response to Co-Chair Neuman, noted
that the first insertion on page 3, line 18, does not mean the
state would be subsidizing; rather the state would be computing
and looking at plans for delivery and costs.
REPRESENTATIVE MIKE CHENAULT, Alaska State Legislature, sponsor
of HB 369, stated that while he supports the idea of the cost
for transportation, he is concerned that it would dilute the
major focus of costing out an in-state gasline so that it can be
moved forward. The provisions of Amendment 1 would need to
become a part of the process if this process does go forward,
but now may not be the right time to include them. He is
concerned about spending time and effort to study these other
transmission lines rather than getting to the real problem of a
main line for in-state gas.
7:29:51 PM
CO-CHAIR NEUMAN surmised it is the sponsor's intent that once a
big in-state gasline is developed, gas be delivered to as many
communities as possible.
REPRESENTATIVE CHENAULT answered correct.
REPRESENTATIVE SEATON argued that Amendment 1 does not dilute
anything, given all the team duties that are outlined on page 3,
starting at line 11.. The intent and structure of Amendment 1
is for after an in-state gasline is built, so its provisions
would not come ahead of building a gas pipeline.
7:32:24 PM
REPRESENTATIVE CHENAULT reiterated his agreement with where
Representative Seaton is headed because, in time, every area of
the state will need to be looked at. However, his concern is
that the state must first focus on developing and building a
main line before looking at the other options.
CO-CHAIR JOHNSON added that the reason for HB 369 is because the
state has taken its eye off building an in-state gasline. He
said Amendment 1 did not concern him at first, but after hearing
the sponsor's concern he must agree about staying focused,
although he, too, supports where Representative Seaton is going.
CO-CHAIR NEUMAN offered his support for where Representative
Seaton is going, but said he agrees with staying focused.
7:34:41 PM
CO-CHAIR JOHNSON moved that Amendment 1 be divided into three
parts: lines 1 and 2 becoming Amendment 1, lines 4 and 5
becoming Amendment 2, and lines 7 and 8 becoming Amendment 3.
REPRESENTATIVE SEATON said he would consider that a friendly
amendment.
CO-CHAIR NEUMAN opened discussion on the new Amendment 1,
consisting of lines 1 and 2 of former Amendment 1, written as
follows [original punctuation provided]:
Page 3, line 18, following "communities,":
Insert "the cost of transporting natural gas to
other locations in the state,"
7:35:39 PM
REPRESENTATIVE SEATON said that if the bill does not look at the
communities he represents, then they will be out of the picture
forever because there would be no authorization in statute to do
so subsequent to completion of the main in-state gasline. Thus,
he would like to request that lines 16-18 on page 3 of Version S
be deleted, because they would also deflect from the main focus
of constructing an in-state gasline. He noted that lines 16-18
do exactly the same thing for other communities in the state as
Amendment 1 would do for his communities.
7:37:04 PM
REPRESENTATIVE OLSON inquired whether Homer and Seward are
considered coastal communities.
REPRESENTATIVE SEATON offered his belief that the construction
of line 18, page 3, Version S, "Yukon river and coastal
communities" would probably be tied together as the coastal
communities along the Yukon River. Additionally, the pipeline
specified in line 18 is for liquefied natural gas or propane,
not natural gas.
7:38:00 PM
CO-CHAIR JOHNSON inquired whether Representative Seaton is
looking for propane to go to his communities as well.
REPRESENTATIVE SEATON reiterated that the coastal communities on
line 18 are in reference to liquefied natural gas or propane.
His communities would be served by a transmission pipeline after
a mainline has been built from the North Slope and ties into
Southcentral. If it is being said that the parallel language,
"the cost of transporting natural gas to other locations", is
superfluous and detrimental to a pipeline, then the same could
also be said of the language on lines 16-18 which states,
"delivery and costs of natural gas to communities along the
pipeline route, manufacturing opportunities for gas-to-liquids,
plans for delivery and costs of liquefied natural gas or propane
to Yukon river and coastal communities".
7:39:30 PM
CO-CHAIR NEUMAN stated that lines 16-18 relate to being along
the way of a main in-state gasline.
CO-CHAIR JOHNSON removed his objection to Amendment 1, saying
the more this has been explained to him the more he likes it.
CO-CHAIR NEUMAN objected to Amendment 1.
REPRESENTATIVE CHENAULT, after looking at how lines 16-18 are
written, said he can more or less agree with Representative
Seaton. He changed his objection and accepted Amendment 1,
saying he does not want members of the legislature or residents
of Alaska to feel shortchanged.
CO-CHAIR NEUMAN withdrew his objection. There being no further
objection, Amendment 1 was adopted.
7:41:49 PM
REPRESENTATIVE SEATON moved Amendment 2 written as follows
[original punctuation provided]:
Page 3, line 26, following "tidewater":
Insert "in the state and to other locations in
the state"
REPRESENTATIVE SEATON explained there was earlier discussion
about whether tidewater could be a Canadian port or something
else. Amendment 2 clarifies that "tidewater" is a tidewater
port in the state as well as other locations in the state.
7:42:53 PM
CO-CHAIR NEUMAN noted that the duty of the team is to consider
all aspects. He asked how far out those duties would extend;
for example, tankers associated with a liquefied natural gas
(LNG) facility.
REPRESENTATIVE CHENAULT, in regard to Amendment 2, said Version
S states to select a route for an in-state natural gas pipeline
from the North Slope to tidewater. It is his intention the
completion of that pipeline is at tidewater in the state of
Alaska and not in Canada or elsewhere.
7:44:12 PM
CO-CHAIR NEUMAN related that "Shell" intends to put LNG
facilities on floating platforms. He presumed the sponsor's
intent is not to have a floating platform for an LNG export
facility in the northwestern corner of the state, but to bring
gas to the core area of the state through the Railbelt.
REPRESENTATIVE CHENAULT responded his intent is tidewater in the
Southcentral region of the state. He said it is not the
intention of HB 369 to go to the Bering Sea in any form or
fashion with the main pipeline. Additionally, he believes any
ports in the Chukchi or Beaufort seas would be too shallow to
accommodate an LNG tanker. In further response to Co-Chair
Neuman, he said that when originally proposed, the in-state gas
pipeline was to go to Valdez because that is a deepwater port
that can handle tankers large enough to economically carry the
LNG all over the world. Cook Inlet is not as deep as Prince
William Sound, which requires the use of smaller tankers for the
LNG facility that is shipping to Japan.
There being no objection, Amendment 2 was adopted.
REPRESENTATIVE SEATON elected not to offer Amendment 3.
7:48:17 PM
REPRESENTATIVE KAWASAKI moved to adopt Amendment 4 written as
follows [original punctuation provided]:
Page 3, line 22:
Delete "by July 1, 2011, and take actions
necessary"
Page 3, line 23:
Delete "2015."
Insert "2016. The development team shall make a
commercial offering by July 1, 2011. The commercial
offering must consist of the issuance of a request for
proposals to potential in-state natural gas pipeline
project developers who will own the project or a
portion of it. The request for proposals must require
that commercial evaluations in the proposals be based
on engineering and permitting completed by the state
and its contractors and that proposals include
reimbursement for the cost incurred by the state of
engineering work and gathering and interpreting data.
The request for proposals must include notice that
proposals will be analyzed by the state, together with
terms and conditions for selection. The development
team shall report to the legislature on the date the
commercial offering is ready."
Page 4, line 8:
Delete "for construction of"
Insert "to meet construction deadlines for"
Page 4, line 15:
Delete "by July 1, 2011, and report to the
legislature by that date"
Insert "to enable natural gas to flow down the
pipeline by 2016"
CO-CHAIR JOHNSON objected.
7:48:41 PM
REPRESENTATIVE KAWASAKI explained that Amendment 4 is similar to
an amendment to Version E that was offered [and withdrawn] by
Co-Chair Johnson on [3/8/10]. He said Amendment 4 is conforming
language as mentioned by Mr. Bob Swenson, In-state Gas Project
Manager [on 3/8/10]. The amendment would require that the
entity building the pipeline reimburse the state for its
engineering costs.
CO-CHAIR JOHNSON maintained his objection to Amendment 4.
7:50:04 PM
CO-CHAIR NEUMAN said he strongly objects to Amendment 4. He
recalled that during discussions on [3/8/10] there was a problem
with the word must. If the state must receive 100 percent
reimbursement of its engineering expenses through purchase of
the permits for the pipeline, and the purchase offer does not do
this, then this pipeline could not happen. He argued that the
purchaser will be spending billions of its own dollars to build
the gasline and diversify the state's economy; thus, it does not
hurt the state to have its own money in the game, which is
something that states and communities do all around the world.
7:52:37 PM
CO-CHAIR JOHNSON agreed with Co-Chair Newman, saying Amendment 4
could exclude a viable builder of the in-state pipeline. This
should be a decision that is made by members of the legislature
at that time should the purchase offer not be for a 100 percent
reimbursement. He said he wants to send the signal that Alaska
is invested in this project and wants to make it happen. There
could be negotiations at the time to get the money back through
tariffs. He said he objects to Amendment 4 for the same reasons
he had on [3/8/10].
7:53:51 PM
REPRESENTATIVE SEATON, on behalf of Representative Chenault,
moved friendly Amendment 1 to Amendment 4, as follows:
Line 13:
Delete "state"
Insert "Joint [In-state] Gasline Development
Team"
CO-CHAIR NEUMAN objected, reiterating his opposition to the
requirement that the state be reimbursed for 100 percent of its
expenses. In response to Representative Seaton, he removed his
objection to Amendment 1 to Amendment 4, but maintained his
objection to Amendment 4.
There being no objection, Amendment 1 to Amendment 4 was
adopted.
7:57:28 PM
CO-CHAIR NEUMAN said his interpretation of Amendment 4, as
amended, is that if the state does not receive a purchase
proposal that provides 100 percent reimbursement of its
expenses, the in-state project will not go forward.
CO-CHAIR JOHNSON said he does not read the amendment quite like
that, although he did at first and for which he apologizes. He
pointed out that the language says "include reimbursement"; it
does not say full reimbursement. Thus, a proposal of just $1 in
reimbursement would qualify.
CO-CHAIR NEUMAN said he would be more comfortable with line 9
stating "may" require instead of "must" require.
REPRESENTATIVE CHENAULT agreed with Co-Chair Neuman.
8:00:32 PM
CO-CHAIR JOHNSON said it is important to retain the word "must"
on line 9 to ensure proposals are based upon engineering and
sound economics. He suggested the word "may" be inserted on
line 11 after "proposals" because that would accomplish the same
goal of not requiring full reimbursement of the state's
expenses, but still requiring that the commercial proposals be
based upon the state's engineering and permitting. He offered
Amendment 2 to Amendment 4 as follows:
Line 11, after "proposals":
Insert "may"
REPRESENTATIVE KAWASAKI accepted the amendment. There being no
objection, Amendment 2 to Amendment 4 was adopted.
8:03:40 PM
REPRESENTATIVE P. WILSON asked why Representative Kawasaki
believes the following language needs to be included in
Amendment 4: "proposals may include reimbursement for the cost
incurred by the state of engineering work and gathering and
interpreting data."
REPRESENTATIVE KAWASAKI replied the state spends a lot of money
collecting data that is utilized by the public, such as aerial
mapping and right of way information. Since public money is
being used for this project, it is fair to ask that the private
company undertaking this project repay the state in return for
receiving valuable information.
8:06:05 PM
REPRESENTATIVE SEATON added he is more comfortable with
Amendment 4 as now amended because the word "may" allows the
latitude to not collect full reimbursement should the project
not be fully economic.
REPRESENTATIVE OLSON inquired whether the maker of the amendment
objected to the Alaska Gasline Inducement Act's $500 million
signing bonus.
REPRESENTATIVE KAWASAKI answered he does not remember.
8:07:43 PM
CO-CHAIR JOHNSON moved Amendment 3 to Amendment [4] to delete
lines 1-2.
REPRESENTATIVE KAWASAKI objected.
CO-CHAIR JOHNSON opined that removal of the deadline date from
HB 369 would soften the urgency of building the pipeline.
Pressure needs to be continued and the team needs empowerment to
move as quickly and expeditiously as possible.
CO-CHAIR NEUMAN agreed, saying the purpose of HB 369 is to
provide dates and ensure that work toward a pipeline continues
as fast as possible. He would like to see construction ready by
July 1, 2011; therefore, he wants to see deadlines and an
aggressive timeline.
8:09:40 PM
REPRESENTATIVE CHENAULT, in response to Representative Seaton,
said Amendment 4 is the same as an amendment that was seen on
[3/8/10], and it would delay the project. He said he objects to
Amendment 4 and agrees with the co-chair about moving an in-
state pipeline forward on an aggressive schedule. He related
that he told the administration he has no problem with the
proposed fiscal note of $380 million, given that $500 million
was provided for the pipeline project outside of this one.
8:11:38 PM
REPRESENTATIVE KAWASAKI maintained his objection.
A roll call vote was taken. Representatives P. Wilson, Johnson,
Seaton, Olson, and Neuman voted in favor of Amendment 3 to
Amendment 4. Representative Kawasaki voted against it.
Therefore, Amendment 3 to Amendment 4 passed by a vote of 5-4.
8:13:17 PM
CO-CHAIR JOHNSON moved Amendment 4 to Amendment 4 to delete the
entirety of lines 16-22.
REPRESENTATIVE KAWASAKI objected.
CO-CHAIR JOHNSON said this amendment speaks to the same thing of
lengthening the dates, and the purpose is to construct a
pipeline as quickly as possible.
REPRESENTATIVE KAWASAKI withdrew his objection. There being no
further objection, Amendment 4 to Amendment 4 was passed.
8:14:44 PM
CO-CHAIR JOHNSON moved Amendment 5 to Amendment 4 as follows:
Line 5:
Delete "Delete '2015.'"
Line 6:
Delete "2016."
There being no objection, Amendment 5 to Amendment 4 was passed.
8:16:27 PM
REPRESENTATIVE OLSON moved Amendment 6 to Amendment 4 to delete
lines 6-14.
REPRESENTATIVE KAWASAKI objected.
CO-CHAIR NEUMAN supported the amendment.
REPRESENTATIVE P. WILSON said she thinks lines 6-14 are good
because the commercial proposals and the evaluations need to be
based on facts.
[Members discussed the protocol of Amendment 6 to Amendment 4
versus voting for Amendment 4, as amended.]
A roll call vote was taken. Representatives Olson and Neuman
voted in favor of Amendment 6 to Amendment 4. Representatives
Kawasaki, P. Wilson, Seaton, and Johnson voted against it.
Therefore, Amendment 6 to Amendment 4 failed by a vote of 2-4.
8:21:28 PM
CO-CHAIR JOHNSON withdrew his objection to Amendment 4, as
amended.
REPRESENTATIVE OLSON objected to Amendment 4, as amended.
A roll call vote was taken. Representatives Seaton and Kawasaki
voted in favor of Amendment 4, as amended. Representatives
Olson, P. Wilson, Neuman, and Johnson voted against it.
Therefore, Amendment 4, as amended, failed by a vote of 2-4.
8:23:57 PM
REPRESENTATIVE SEATON noted that at an earlier meeting he had
inquired about how an open season would be conducted by the
Regulatory Commission of Alaska (RCA) and whether the pipeline
would be a common carrier or a contract carrier under HB 369.
CO-CHAIR NEUMAN said the information Representative Seaton had
requested about pipeline corridor statutes on common carriers
was delivered just prior to the start of this meeting, and those
corridors are not included in HB 369.
8:25:17 PM
REPRESENTATIVE SEATON clarified he is referring to the July 1,
2011, date on page 4, line 15. He said Mr. Swenson was to
report back about whether the pipeline would be a common carrier
or contract carrier and how HB 369 would deal with that.
CO-CHAIR NEUMAN said he believes that is yet to be determined.
REPRESENTATIVE CHENAULT agreed.
ROBERT SWENSON, Project Manager, In-State Gas Project, Alaska
Mental Health Trust Land Office, Department of Natural
Resources, stated he does not have the expertise to answer the
question. He did visit with Mr. Balash and his understanding is
that an in-state pipeline would be required to be common carrier
pipeline that is regulated by the RCA.
8:27:37 PM
CO-CHAIR NEUMAN presumed that current plans include bringing in
collector pipes and to re-distribute gas throughout the state to
act as a common carrier.
MR. SWENSON responded correct; it is to maximize the
distribution of gas to consumers within the state.
REPRESENTATIVE SEATON inquired whether under RCA jurisdiction
any new gas finds would be excluded from being carried in the
pipeline or rolled into the pipeline.
MR. SWENSON understood that if a producer and a consumer are
using 100 percent of the pipeline and another producer wants
access to that line to provide gas to a consumer, then that
access would have to be allowed in a common carrier system.
Under a contract carrier system, the contract would take
precedence and access to that pipeline would then have to be
through expansion.
8:29:34 PM
REPRESENTATIVE SEATON said he thinks it is very important for
members to be able to tell the people of the state that this is
an open access pipeline under HB 369.
CO-CHAIR NEUMAN commented that having as much deliverable gas as
possible will keep the costs down.
REPRESENTATIVE SEATON said he is unfamiliar with pipelines that
would be regulated by the RCA and since that is the intention
with this pipeline it is good to know that information.
CO-CHAIR NEUMAN opened public testimony, then closed it after
ascertaining that no one wished to testify.
8:31:22 PM
REPRESENTATIVE P. WILSON asked whether the intent is still to
have requests for proposals, given that Amendment 4 failed.
REPRESENTATIVE CHENAULT answered that is exactly what he is
after. When a proposal is put together, decisions will be made
whether to have a pipeline company or the state build the
pipeline. The reason for HB 369 is because he would like to see
the state get to this point sooner rather than later. This
project is only one of several options, but it cannot be an
option without information on whether it is a viable project.
He is interested in providing gas to communities throughout the
state at every opportunity possible. The intent is to get to a
project that can actually be looked at by combining the talents
of the agencies that have been looking at a pipeline over the
past years.
8:35:13 PM
REPRESENTATIVE CHENAULT, in response to Co-Chair Neuman, said it
seems like the state continues to delay on this project and will
be in the position of wishing it had started earlier.
CO-CHAIR NEUMAN opined that HB 369 is about thousands of good-
paying jobs throughout Alaska. This project would empower
communities and enable them to finance their own destinies
rather than relying on state funding, and it is a priority
project for 82 percent of Alaska's residents. He warned that 90
percent of Alaska's revenue is coming from just three companies,
and the state must diversify its economy to change this.
8:38:26 PM
CO-CHAIR JOHNSON moved to report HB 369, Version 26-LS1527\S,
Cook, 3/10/10, as amended, from the committee with individual
recommendations and any accompanying and forthcoming fiscal
notes. There being no objection, CSHB 369(RES) was reported
from the House Resources Standing Committee.
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 8:38 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| PXD Comments CSHB308 031010.pdf |
HRES 3/10/2010 1:00:00 PM |
HB 308 |
| HB 308 Savant AK 3.10.10.pdf |
HRES 3/10/2010 1:00:00 PM |
HB 308 |
| AOGA Presentation 3.10.10.pdf |
HRES 3/10/2010 1:00:00 PM |
HB 308 |
| AOGA Testimony on CSHB308 FINAL.pdf |
HRES 3/10/2010 1:00:00 PM |
HB 308 |
| HB 337.pdf |
HRES 3/10/2010 1:00:00 PM |
HB 337 |
| HB 337 Gov Letter.pdf |
HRES 3/10/2010 1:00:00 PM |
HB 337 |
| HB 337 Fiscal Notes 1.2.3..pdf |
HRES 3/10/2010 1:00:00 PM |
HB 337 |
| CS HB 369 v.S.pdf |
HRES 3/10/2010 1:00:00 PM |
HB 369 |
| HB 308 ConocoPhillips Testimony 3.10.10.pdf |
HRES 3/10/2010 1:00:00 PM |
HB 308 |
| HB 308 ExxonMobil Testimony 3.10.10.pdf |
HRES 3/10/2010 1:00:00 PM |
HB 308 |