Legislature(2021 - 2022)ANCH LIO DENALI Rm
11/15/2021 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Assessment of Recent Trends in Upstream Oil & Gas and the State of Alaska's Competitive Position, by Gaffneycline | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
Anchorage, Alaska
November 15, 2021
1:10 p.m.
MEMBERS PRESENT
Representative Josiah Patkotak, Chair
Representative Zack Fields
Representative Calvin Schrage
Representative Sara Hannan
Representative George Rauscher
Representative Mike Cronk
Representative Tom McKay
MEMBERS ABSENT
Representative Grier Hopkins, Vice Chair
Representative Ronald Gillham
COMMITTEE CALENDAR
PRESENTATION(S): Assessment of Recent Trends in Upstream Oil &
Gas and the State of Alaska's Competitive Position, by
GaffneyCline
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
MICHAEL CLINE, Strategy Advisor/Legal Counsel
GaffneyCline
London, United Kingdom
POSITION STATEMENT: Presented an informational PowerPoint
titled, "Assessment of Recent Trends in Upstream Oil & Gas and
the State of Alaska's Competitive Position."
ACTION NARRATIVE
1:10:24 PM
CHAIR JOSIAH PATKOTAK called the House Resources Standing
Committee meeting to order at 1:10 p.m. Representatives
Rauscher, Fields, McKay, Patkotak, and Cronk (via Teams), were
present at the call to order. Representatives Hannan and
Schrage arrived as the meeting was in progress.
^PRESENTATION(S): Assessment of Recent Trends in Upstream Oil &
Gas and the State of Alaska's Competitive Position, by
GaffneyCline
PRESENTATION(S): Assessment of Recent Trends in Upstream Oil &
Gas and the State of Alaska's Competitive Position, by
GaffneyCline
1:12:11 PM
MICHAEL CLINE, Strategy Advisor/Legal Counsel, GaffneyCline,
presented an informational PowerPoint titled, "Assessment of
Recent Trends in Upstream Oil & Gas and the State of Alaska's
Competitive Position." He explained that GaffneyCline does
management and technical consulting for the oil and gas
industry, and that the presentation would be a high-level
overview of industry trends and Alaska's competitive position.
He began his presentation with slide 3, "Agenda," which read as
follows [original punctuation provided]:
? The Oil and Gas Industry Today
Alaska in the Global Context
? Considerations for Alaska's Oil and Gas Taxation
Policy
MR. CLINE presented slide 4, "The Oil and Gas Industry Today,"
and moved immediately to slide 5, "Volatility and Disruption in
the Oil & Gas Industry, which read as follows [original
punctuation provided]:
? The oil & gas industry has been battered by deeply
disruptive events in recent years, including the oil
price collapse of 2014-2016, the COVID-19 pandemic,
the emergence of alternative energy platforms, and a
related shift in the longterm prospects of the
industry.
? Oil and gas companies have performed poorly, while
investors have demanded better financial performance
and action on energy transition.
Divestments and restructurings have occurred
and are ongoing, a renewed focus on capital
discipline and investor returns has meant fewer
projects are sanctioned, and there is a laser
focus on strategy and core assets.
? Resource owners are finding it challenging to
attract capital and good operators.
? For governments and states, lower prices and
decelerating demand has meant reduced revenues and tax
receipts and contraction of the tax base.
MR. CLINE presented slide 6, "Crude Oil Price Volatility: 2000-
2021 Key Events Timeline," which displayed a graphic
representation of the events on slide 5 over time. Notable
points on the line graph read as follows [original punctuation
provided]:
2003-08: Supply uncertainty due to Iraq war and onset
of Asian demand growth drives prices upwards
2008-09: Demand uncertainty due to financial crisis
causes price crash, but resilient demand supports
price recovery
2011: Price rises due to supply uncertainty from the
Arab Spring
2015-16: A price environment re-set due to:
strengthening Dollar, retained OPEC production levels,
growing global inventory, a weakening economy, and
removal of Iran economic sanctions
2020-21: Price fall due to COVID-19-related demand
destruction and 'supply war' double whammy, followed
by price recovery as demand re-starts
Fracking sparks US Shale Oil Production and
contributes to 2014-16 price collapse
2018+: Banks begin to restrict lending to fossil fuel
projects
1:23:40 PM
REPRESENTATIVE RAUSCHER pointed out the downward trend in oil
prices beginning in May 2008, and he asked whether prices are
still trending downward.
MR. CLINE replied, "It's the million-dollar question that
everybody's trying to answer." He said countries without their
own energy supplies, such as European countries, may experience
difficulties. He hypothesized about demand being met by oil and
gas, versus growing renewable energy platforms, and he said
renewals are also trending upward but are not replacing fossil
fuels quickly enough to meet demand.
1:28:06 PM
REPRESENTATIVE FIELDS asked whether it's reasonable to suspect
that oil won't remain much higher than $60 per barrel,
considering shale production.
MR. CLINE expressed that Representative Fields' perspective is
reasonable.
1:29:48 PM
MR. CLINE presented slide 7, "Energy Transition and Oil & Gas,"
which read as follows [original punctuation provided]:
? Many technologies essential to the transition to
alternative energy platforms are still in development,
and face significant hurdles in terms of addressing
intermittency, energy storage and the sheer complexity
and cost of implementation.
? While the transition period is uncertain (circa 20-
to-40 years), the trends are clear:
Innovation and investment focus are leading to
new applications and rapid cost reduction.
Renewables and other sources of clean power
generation are growing rapidly, electric vehicles
are established and on the cusp of rapid growth,
and decarbonisation has been elevated to 'core
strategy' for businesses from ExxonMobil to
Blackrock.
The debate is no longer whether energy
transition will happen but how quickly it will
happen.
? For resource-rich governments and states, the
question is how to address the knock-on impacts of
energy transition and, in particular, how to optimize
oil and gas resources in a responsible manner while
transitioning to alternative energy platforms.
1:36:55 PM
MR. CLINE presented slide 8, "Energy Transition is an Issue for
the Capital Markets," which listed 50 financial institutions,
and which read as follows [original punctuation provided]:
? The Institute for Energy Economics and Financial
Analysis maintains a tally of the number of financial
institutions/companies who have decided to eliminate
or significantly reduce their financial support for
oil & gas and coal.
Over 80 global financial institutions are
restricting lending and over 100 have announced
their divestment from fossil fuels including
coal, oil, LNG, gas, oil sands and arctic
drilling.
1:40:26 PM
REPRESENTATIVE RAUSCHER referred to "recent actions from the
U.S. President," which he characterized as "worrisome," and he
asked whether those actions have significantly impacted
investment compared to a year ago.
MR. CLINE expressed that some actions by President Joe Biden
have increased the regulatory burden on some oil projects.
1:44:04 PM
REPRESENTATIVE FIELDS asked what institutions are still lending
to oil and gas companies.
MR. CLINE replied that lenders that see opportunity, especially
when there exists tightness in the market, are still lending for
oil and gas projects.
REPRESENTATIVE FIELDS asked what specific institutions are still
lending.
1:46:42 PM
CHAIR PATKOTAK interjected that it's important to consider the
cost of financing oil and gas development projects when it comes
to discussions on tax policy.
1:47:40 PM
MR. CLINE presented slide 9, "Oil & Gas Portfolio Restructuring
due to Energy Transition," which displayed a line graph of the
carbon dioxide emission intensity of several oil and gas
companies over time, and which read as follows [original
punctuation provided]:
? Oil and Gas companies are now restructuring their
portfolios to respond to growing climate change
pressures.
? But is Big Oil simply shifting carbon to 'Little
Oil' and claiming credit?
? In any event, restructuring will occur over an
extended period, along with the energy transition
process.
1:50:25 PM
REPRESENTATIVE FIELDS asked whether the carbon dioxide emission
trends on slide 9 are self-identified goals of each company, or
analysis of the direction and rate each company is actually
trending.
MR. CLINE replied that he believes the data points are goals
announced by the companies, and that the companies are creating
their own metrics.
1:51:48 PM
MR. CLINE presented slide 10, "Decelerating Demand and the
Competition for Investment Dollars," which read as follows
[original punctuation provided]:
? The trends relevant to Alaska and other oil
producers are increasingly clear:
The lowest cost producers (Saudi Arabia and
Gulf countries) will have an increasing advantage
in a lower demand environment, with strong
drivers to maximize production to meet budgetary
requirements, and a goal to extract as much value
as possible from their oil and gas resources
while they can.
Shale oil will remain a potent force with its
ability to react quickly to demand/price spikes,
which will restrain upward price pressure.
Decelerating demand and a muted price
environment will likely mean less upstream
investment and activity through 2050, especially
for 'big ticket' long lead time investments.
? For oil and gas producers such as Alaska, the
competition for oil and gas investment dollars is
fierce and getting fiercer.
Oil and gas companies will impose high
profitability / return hurdles for upstream
investment.
Oil and gas companies are making decisions
today that will determine the extent to which
Alaska is able to monetize its oil and gas
resources in the future.
1:56:26 PM
MR. CLINE presented slide 11, "Government Actions to Promote
Investment and Production," which read as follows [original
punctuation provided]:
? Governments compete on the global stage for
exploration and development capital, which provide the
long-term basis for tax revenues.
? In response to such changes in market conditions, it
is common for proactive governments to reassess
existing fiscal terms and to consider incentives to
ensure continued exploration and development in the
domestic energy sector.
? There have been substantial changes made to upstream
oil and gas terms stemming from the change in market
conditions in 2014 as well as some responses to the
price decrease observed in 2020.
? It should be noted that due to the time required to
review and approve fiscal changes, particularly at a
national legislative level, there is often a delay in
their implementation and a time lag after
implementation before they have effect.
1:59:33 PM
REPRESENTATIVE RAUSCHER asked what the future prediction for
Alaska is.
MR. CLINE responded that there are large projects in development
in Alaska. He said Alaska needs to be able to attract many
diverse types and sizes of companies.
2:02:31 PM
REPRESENTATIVE MCKAY asked whether there is a country or state
that Alaska could emulate in diversifying industry.
MR. CLINE replied that Norway has been very successful in
attracting different kinds of assets, and the United Kingdom is
a good example of having large companies migrating out, with
small companies migrating in.
2:04:35 PM
MR. CLINE said his presentation would now focus more on Alaska
than on the larger oil and gas industry. He presented slide 13,
" Alaska's Oil and Gas Sector is Maturing and Facing Headwinds,"
which read as follows [original punctuation provided]:
? Alaska has been a destination of choice for many
leading oil and gas companies with its attractive
resources, access to market, skilled workforce and
service company base.
? In recent years, however, Alaska's oil and gas
sector has faced challenges:
Key assets like Prudhoe Bay are maturing and
producing far less oil.
Bringing new assets on stream to replace
declining production from maturing fields has not
been straightforward (consider Willow as an
example).
Alaska is a difficult and high-cost operating
environment, with only a short window of time
each year for key activities when ice roads are
available.
At the same time, Alaska has faced the same
headwinds as others globally.
? SB 21 (MAPA) introduced the Per Barrel Tax Credit to
reverse investment and revenue declines.
Since MAPA became law, the production decline
trend appears to have stabilized
Fiscal changes typically take time to take
effect and can be overwhelmed by events.
MR. CLINE presented slide 14, " Maturing Assets lead to Oil
Production Decline from 1980s' Highs," which displayed a graph
showing the oil and gas production rate from 1960-2020, and
which read as follows [original punctuation provided]:
? Alaskan crude oil production averaged 448 MBPD in
2020, equivalent to 4% of US oil production.
75% less than peak production of more than 2 MMBPD
in 1988.
? Exemplified by Prudhoe Bay, where production of
circa 1.5 MMBPD during the 1980s has declined
steadily, reaching 215 MBPD in 2020.
? Other assets are also maturing with production in
decline, save for Oooguruk + Nikaitchuq + Point
Thomson.
Production from this grouping commenced in
2008, reaching circa 34 MBPD in 2020.
? Alaska's newest fields, Point Thomson and Greater
Moose's Tooth Unit began regular production in April
2016 and May 2018, respectively.
? Despite declining production, oil and gas continues
to provide substantial revenue.
? During 2014-16, petroleum revenues decreased from
US$4.8 billion to under US$0.9 billion); circa 11,700
jobs were lost*.
2:09:40 PM
REPRESENTATIVE MCKAY asked whether the 11,700 job loss was in
Alaska or in the United States.
MR. CLINE replied that it was in Alaska, and he said the figure
was from a 2018 report from the McDowell Group.
2:10:18 PM
REPRESENTATIVE RAUSCHER asked for the timeframe of the job loss.
MR. CLINE responded that the report was in 2018, and that the
period of job loss was from 2014-2016.
2:11:01 PM
MR. CLINE presented slide 15, "Sustaining Petroleum Revenues for
Alaska," which read as follows [original punctuation provided]:
? To reverse or offset crude oil production declines,
not only must existing projects be nurtured and
sustained for as long as economically feasible, new
projects must be sanctioned and brought online to
'fill the gap.'
The economy and many high paying jobs for
Alaskan families are reliant upon continued oil
revenues.
Alaska is focused on alternative energy
platforms to drive the economy in the future, but
oil revenues are critical to subsidize the
decades-long transition to alternative energy
platforms.
? ConocoPhillips' Willow project is key.
An US$8 billion development expected to create
more than 2,000 construction and 300 permanent
jobs if sanctioned, and become the largest
project on the North Slope since Alpine in the
late 1990s.
Resources estimated at circa 600 MMBOE are
envisaged to produce over 160 MBOED at peak from
a new stand-alone processing facility tied into
TAPS.
In August 2021, a federal court vacated the
Bureau of Land Administration's 2020 approval.
? Aside from Willow, other projects include Oil
Search/Repsol's Pikka project, which envisions
production of 80 MBPD from Phase 1, at a US$3 billion
development cost, and up to 120 MBPD when fully built-
out at a cost of ~US$6 billion.
MR. CLINE presented slide 16, "Protecting the Petroleum Tax Base
and the Economy," which read as follows [original punctuation
provided]:
? Petroleum-related revenues are a significant
contributor to Alaska and have been and will continue
to be under pressure as the industry changes with a
move toward alternative energy systems, increasing
asset maturity, and other factors.
? To sustain those revenues and the high paying jobs
provided by the industry, Alaska needs the
participation of as many companies as possible, from
the very large to the small, to explore, develop and
produce its diverse resource base and sustain and
build the tax base.
Large projects like Willow and Pikka are
essential and require significant investment,
application of human and technical resources, and
an appetite for risk - which typically requires
large companies making long-term strategic
commitments.
Mature assets are essential too, and the
participation of smaller, nimble companies is key
to optimizing these assets and tax revenues from
them.
? Attracting oil and gas investment and participation
is a 'competitive activity', with major producers in
the US and globally competing for the same
participants and investment dollars considerations
around tax burden and overall costs are critical in
that competition.
2:16:37 PM
REPRESENTATIVE RAUSCHER asked whether there exist brokers to
assist oil companies in establishing developments.
MR. CLINE said, "I think that the power broker is, in essence,
the state." He said that by understanding its assets and
developing competitive processes, with the right financial
terms, and then offering attractive assets for development, the
state would attract good competition.
2:19:48 PM
MR. CLINE moved to the next section of the presentation,
"Considerations for Alaska's Oil and Gas Taxation Policy," and
presented slide 18, "Tax Policy Considerations," which read as
follows [original punctuation provided]:
? Alaska's strategy to extract more revenues from the
oil & gas sector will need to consider not only near-
term revenue capture objectives, but also medium- and
longterm impacts on oil and gas development and
production and the tax base.
Ensure that companies are not discouraged from
taking on big investment, step-change
developments that will replace declining revenues
from existing fields; and
Ensure that existing companies and new entrants
continue to invest in mature fields, and so
extend the productive life of existing assets.
? Global experience suggests that if the taxes are too
high:
Companies will seek to exit and/or go into
'harvest mode', and Invest in other more tax
friendly jurisdictions.
All of which will contribute to reduced
investment and activity in the oil and gas sector
and to production declines.
? Tax policy must be crafted and sufficiently nuanced
to support effective revenue capture while maintaining
healthy participation across the different asset
types.
2:24:29 PM
MR. CLINE presented slide 19, "The Existing Tax Credit and
Alaska's Competitive Position," which read as follows [original
punctuation provided]:
? For Alaska, the key has always been striking the
right balance between tax revenue capture and
maintaining a healthy and vibrant oil and gas sector
that is competitive with other major oil and gas
producers around the world.
? Is Alaska competitive with its current tax structure
in today's global supply and demand market?
? This is a complex question but the indications
suggest that Alaska has a competitive fiscal system at
this time.
Stabilization of production levels from the
steady decline pre-MAPA is positive.
New entrants taking over large mature assets
and the willingness of companies to invest in big
projects like Willow and Pikka are positive.
Important to note that Alaska's competitiveness is
not a given or static the competitive landscape
changes constantly and continuing assessment is
necessary to ensure that Alaska's fiscal terms capture
robust revenues for the state, while at the same time
promoting exploration, development and production of
vital oil and gas resources.
2:26:50 PM
REPRESENTATIVE RAUSCHER asked why oil companies don't want to
invest when oil prices are extremely low, considering how much
cheaper transportation is, then they invest when prices rise.
MR. CLINE explained that oil and gas companies undertake long-
term projects, and they tend to be very cautious about long-term
or expensive projects when operating in a volatile environment.
2:31:17 PM
REPRESENTATIVE MCKAY commented that the More Alaska Production
Act (MAPA) was passed six to eight years ago, and he said that
should be enough time to assess whether it was effective. He
commented on the "pro-oil, pro-fossil fuel, pro-Alaska" Trump
administration, and he expressed the belief that the Biden
administration is antagonistic towards Alaska, due to the
closing of the Arctic National Wildlife Refuge (ANWR) leasing
program and the halting of ConocoPhillips Alaska, Inc.'s Willow
project by a federal judge. He opined that "$4, and $5, and $6
gasoline" won't be tolerated, and he talked about the strength
of the country and how the U.S. can't have a "weak" oil
industry." He asked Mr. Cline to comment on his opinions.
MR. CLINE replied that GaffneyCline has not done a detailed
analysis on MAPA, and he said there are many factors, including
the COVID-19 pandemic, that have been disruptive to the
industry. He said he suspects there is enough capacity in oil
and gas production to "take the edge off" in the markets.
2:39:00 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:30 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Presentation Gaffney Cline Assoc. for HRES 11.15.2021.pdf |
HRES 11/15/2021 1:00:00 PM |
Presentation Gaffney Cline Assoc. for HRES |