Legislature(2013 - 2014)SENATE FINANCE 532
03/05/2013 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
March 5, 2013
9:07 a.m.
9:07:18 AM
CALL TO ORDER
Co-Chair Kelly called the Senate Finance Committee meeting
to order at 9:07 a.m.
MEMBERS PRESENT
Senator Pete Kelly, Co-Chair
Senator Kevin Meyer, Co-Chair
Senator Anna Fairclough, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Kara Moriarty, Executive Director, Alaska Oil and Gas
Association; Damian Bilbao, Director of Finance, British
Petroleum; Dan Seckers, Tax Counsel, ExxonMobil.
SUMMARY
SB 21 OIL AND GAS PRODUCTION TAX
SB 21 was HEARD and HELD in committee for further
consideration.
SENATE BILL NO. 21
"An Act relating to appropriations from taxes paid
under the Alaska Net Income Tax Act; relating to the
oil and gas production tax rate; relating to gas used
in the state; relating to monthly installment payments
of the oil and gas production tax; relating to oil and
gas production tax credits for certain losses and
expenditures; relating to oil and gas production tax
credit certificates; relating to nontransferable tax
credits based on production; relating to the oil and
gas tax credit fund; relating to annual statements by
producers and explorers; relating to the determination
of annual oil and gas production tax values including
adjustments based on a percentage of gross value at
the point of production from certain leases or
properties; making conforming amendments; and
providing for an effective date."
9:07:41 AM
Co-Chair Meyer discussed the agenda for the day. He noted
that increasing oil production in Alaska was the top
priority.
KARA MORIARTY, EXECUTIVE DIRECTOR, ALASKA OIL AND GAS
ASSOCIATION (AOGA), introduced herself and shared
information about the organization. She provided a
PowerPoint presentation titled "Oil and Gas: Fueling
Alaska's Economy" dated March 5, 2013 (copy on file). She
read from a prepared statement titled "AOGA Testimony to
Senate Finance on CSSB 21(RES)" dated March 5, 2013 (copy
on file):
The industry's greatest challenge today, which we
share with the State is the decline of oil production
from the North Slope. We believe that the greatest,
most urgent issue facing this Legislature in 2013 is
how you will address this problem. We cannot fix the
basic, inherent properties of any oil and gas field,
that is that the resource is finite and production
will eventually decline. We can fix some of the
economic principles that drive the development of more
and new resources. Corrections to the ACES tax regime
will remove impediments to development and exploration
and assist the industry in investing in projects that
could both extend the life of TAPS and open up new
resources to long term development. When we look to
the future Alaskans see a robust industry on the North
Slope growing like it is the rest of the United
States. We want the jobs here and not in the Lower 48.
We want to create developments that will last for
decades more, creating jobs for our children and
opportunities for our communities to flourish.
Alaskans want to see the industry continue to support
the education and skills training that are needed to
qualify for many of those jobs. A healthy oil and gas
industry is one that sees the economic benefits of
continuing to invest in projects in Alaska and keeping
its employees here, where they volunteer their time,
talent and treasure to make Alaska a better place to
live for us all.
Ms. Moriarty addressed "The Tax "Give Away" Fallacy" (page
2 of the prepared AOGA statement):
We hear all too often of the $2 billion dollars that
will be a "give away" to the industry should the tax
regime be changed. It is a simple and effective
communication that completely misstates the reality of
the tax structure and its impact on the industry. It
is simple to calculate how a change in a tax rate will
impact amount of taxes collected if all "other" things
remain constant. For example, if production does not
decline further, if lifting costs don't rise, if the
$2 billion dollars of annual investment by the
industry to slow that decline continues, and if oil
and gas prices do not shift. All of these "other"
items seem to be considered a given in these
calculations and it is assumed they will remain
unchanged in the future - the pundits of the "give
away" theory want you to believe it's that simple. But
it is not.
However resourceful the State's revenue estimators
are, they cannot control decline, lifting costs,
future investment, or the price of crude oil. As the
rest of the nation swims in new industry investment
and development, Alaska languishes. The costs of
operations continue to rise as North Slope fields
decline. The $2 billion a year of industry investment
spent in wrestling decline must now compete with more
lucrative projects elsewhere, and with growing US
production and supply of oil and gas and the future
price of that oil and gas is anyone's guess. Naysayers
to these necessary and fundamental changes to our tax
structure look only to the downside simple
calculations they take from a Revenue Sources Book
they forget is only a "guesstimate" of future revenue.
The upside potential of that change, though, is very
real. If a restructuring and tax rate reduction make
investments here more competitive, companies will want
to make more investments her for that upside. Deciding
to make long-term investments in Alaska's North Slope
requires the industry to see potential upside to their
investments and assessing the essential risks of those
investments are offset by the opportunities afforded
in success. Without that potential opportunity in
Alaska, investment dollars will be spent elsewhere,
where risks are less and opportunity is greater.
9:12:21 AM
Ms. Moriarty spoke to "Core Principles to Address North
Slope Production Decline" on page 3 of the AOGA statement:
As you consider potential solutions to the challenge
that production declines creates for Alaska, AOGA
believes Governor Parnell's four "core principles"
offer an excellent cornerstone for this:
· First, tax reform must be fair to Alaskans.
· Second, it must encourage new production.
· Third, it must be simple, so that it restores
balance to the system.
· Fourth, it must be durable for the long term.
We believe the addition of a fifth such principle
would be required to meet Alaska's goals, because the
challenge is not that there are too many companies
pursuing opportunities, but that here are too few.
Alaska should therefore avoid tax changes that
artificially create "winners" and "losers."
Ms. Moriarty shared that she would speak to several
features of the CS and would outline some of the issues
that it did not address.
9:13:21 AM
Ms. Moriarty discussed slide 6 of the PowerPoint
presentation titled "CSSB 21(RES) Component: Progressivity"
and continued reading from page 3 of the AOGA statement:
AOGA endorses the elimination of progressivity. The
impact of Progressivity as part of the ACES tax rate
in industry investment decision making is the single
most influential component of Alaska's tax structure
negatively impacting investment decisions related to
Alaskan projects. Taxes are paid by the industry in
virtually every jurisdiction in which we function and
so we are very familiar with how they work. But the
uniformity and consistency in the application of tax
impacts as they relate to investment decision making
found in almost every jurisdiction is missing in
Alaska. As my member companies have testified in the
past, investment decisions are driven by combining
high and low case scenarios where costs and revenues
are estimated and best case cash flows and worst case
cash flows are measured, risked and analyzed. Each
potential project, in every jurisdiction, is measured
and compared and only some are funded. As your
consultant, Roger Marks pointed out yesterday, the
international investment climate is characterized by
plenty of opportunities, fluid capital, but finite
capital. To choose what they can and cannot fund,
companies have compared each potential project, no
matter the jurisdiction, by application of a uniform
investment decision measuring formula. When Alaska's
tax system is quantified and added to this measure for
proposed Alaskan projects the best cases are always
burdened with an excessively high tax rate and as the
assumed high cases get better, the burden only
increases.
Progressivity brings extraordinary complexity to the
tax, not only in calculating what the tax is, but also
in analyzing what the amount of the progressivity is
for any particular item that affects a taxpayer's
Production Tax Value (PTV). This complexity exists
because the tax rate for progressivity depends on the
taxpayer's PTV per barrel, and then the resulting rate
is applied to the very same PTV that set the rate.
This circularity in the tax calculation leads to
bizarre effects. For instance, simply the fact that
oil prices fluctuate during a year instead of
remaining perfectly flat increases the tax due even
though the average of the fluctuating prices is the
same as the flat price - and the greater the
fluctuation, the greater the tax from progressivity
becomes. There is no objective economic or financial
reason for the tax to go up; instead, this occurs
entirely because the progressivity calculation is
circular.
The repeal of progressivity is consistent with all
four core principles outlined above. Its removal
improves fairness because operators that increase
margins through efficiency would no longer be
automatically penalized. Its removal encourages new
production because it reduces the tax burden on
investment, as discussed above. Its removal is a
significant step toward simplicity. And, lastly, its
removal enhances durability because it satisfies the
three preceding core principles.
9:16:54 AM
Ms. Moriarty moved to slide 7: "CSSB 21(RES) Component:
Increasing the Base Tax Rate" and read from page 4 of the
prepared AOGA statement:
AOGA does not endorse increasing the base tax rate to
35%. Let's go back to the industry investment decision
process again. Increasing the base tax rate, besides
burdening every investment case with a higher tax
rate, now adds an additional burden to the worst case
scenarios when oil prices are low or project costs are
high. When applying the current base tax rates to the
investment cases for a proposed project, until one
assumes a price collapse occurs and the minimum fixed
rates apply, even when little revenue is assumed to be
generated, the base tax applies. The burden of a 35%
versus a 25% rate is easy to envision as every middle
case and every worst case scenario is burdened with an
additional 10% tax rate. This assumed cost will
negatively impact the potential returns deemed
available for any Alaskan project and drive
investments to be made elsewhere. Increasing the base
tax rate is contrary to the second core principle;
there is not any reasonable argument that suggests
increasing the base tax rate would encourage new
production.
Ms. Moriarty added that beginning in 2007, AOGA had
vocalized that the 25 percent base tax rate was too high.
She turned to slide 8: "CSSB 21(RES) Component: Tax
Credits" and read from page 5 of the AOGA statement:
In general, tax credits, because they act to offset a
part of the costs of certain investments when the
expenditure is made are an important tool in reducing
the deemed risks of those expenditures. Industry makes
investments to seek returns. Costs of any kind,
including taxes reduce those returns, so the offset of
tax cost by a tax credit provides immediate benefit to
the investment return calculation. Whether those costs
are for drilling a well, building a facility to gather
new oil, or installing a pipe to gather oil, a tax
credit represents an immediate and direct reduction in
the amount that a potential investor puts at risk in
spending money on equipment and facilities that
benefit production.
Those tax credits are directly related to production
as investments must actually be made for the credit to
be utilized and those investments will positively
impact production. It is important to note that there
is no tax credit liability for the State at all until
an investor invests here. The investment has no other
purpose than creating return by positively influencing
production. So it costs the State nothing to offer the
credit until the investment is made and at that point
the tax credit has already succeeded in what it is
supposed to do - namely to attract investment dollars
here for investments that will act to increase
production and reduce decline.
Ms. Moriarty discussed the proposal to repeal the Qualified
Capital Expenditure (QCE) tax credit on page 5 of the
prepared AOGA statement:
A. Repeal of the Qualified Capital Expenditure ("QCE")
Tax Credit.
AOGA does not support the repeal of the Qualified
Capital Expenditure Tax Credit. Even while the
elimination of progressivity would improve the
competitiveness of Alaskan investments from the
present ACES tax, the elimination of the QCE Credit
would claw back one important financial incentive and
a part of ACES that actually acts to improve the
competitive environment. The QCE Credit depends
entirely on how much is invested here, and provides
benefits for investments even when oil prices are
lower. While the benefit from ending progressivity,
which depends on the price of oil relative to a
producer's lease expenditures, helps when oil prices
are higher the QCE provides benefits when prices are
not. In this mid-range of oil prices the loss of QCE
Credit would outweigh the benefit from the end of
progressivity.
Repeal of the QCE credit is contrary to the second
core principle. Furthermore, because every producer's
costs are different and prices will impact them
differentially AOGA, fears the repeal of the QCE
Credit is worse than creating "winners" and "losers"
because it only creates "losers" artificially among
producers, and we see no sound tax policy
justification for doing so.
For these reasons, AOGA believes the elimination of
the QCE tax credits would be a mistake. Instead of
that, one possibility might be to expand the scope of
the "well lease expenditure" tax credit under AS
43.55.023(l) so it is available to producers on the
North Slope. This credit has several meaningful
advantages. First, it focuses investment incentives on
subsurface intangible-drilling expenditures, which are
a reasonable proxy for direct spending on well
activity and, in turn, production. Second, the credit
is clear because it uses already established concepts
in the federal Internal Revenue Code. Third, it is
fair because it applies equally to well-related
spending in all areas of the state, without creating
winners and losers merely on the basis of geography.
Ms. Moriarty noted that the well lease expenditure credit
was used heavily in Cook Inlet.
9:22:13 AM
Ms. Moriarty detailed slide 9: "CSSB 21(RES) Component: Tax
Credits" and read from page 6 of the prepared AOGA
statement:
B. The $5 dollar per barrel tax credit.
AOGA is not certain that the potential benefit of a $5
dollar per barrel tax credit under AS 43.55.024(i)
will be offset by other burdens.
There are multiple issues to balance when taking in
the numerous proposed changes found in CSSB21. The
removal of progressivity, the increase in base rate,
early sunset of the QCE credit all create interrelated
issues and while a $5 dollar per barrel tax credit
would provide benefits both in real tax costs and in
investment decision making, the weight of the benefit
in respect to the other changes is hard to measure.
AOGA applauds the concept of tying incentives to the
goal of increased production and as such allowing a
tax credit per barrel. One must consider, though, what
the $5/bbl credit will mean to a small producer with
little production as opposed to the legacy producers
that already have established large scale production.
In view of the investment decision making process and
the Alaskan tax structure's impact on it, we are not
certain that this benefit is offset by the other
burdens contemplated when striving for the goal of
increasing production.
Ms. Moriarty addressed slide 10: "CSSB 21(RES)/Component:
Tax Credits" and read from on page 7 of the prepared AOGA
statement:
C. Small-Producer and Exploration Credits.
AOGA endorses the proposal to extend the small-
producer tax credit under AS 43.55.024 and exploration
tax credits under AS 43.55.025 from the present sunset
dates in 2016 to a later date.
The State had sound policy reasons for creating these
small producer and exploration tax credits, and those
reasons are just as valid today as they were then.
AOGA believes these credits have increased the
likelihood of participation by new industry players
and act to increase the opportunities that could be
found by expanding exploration. The purpose of the
small-producer tax credit was to attract new players
to Alaska who might otherwise have been deterred from
coming here by presumptions of increased risks and of
higher-than-average costs and expenses. The success of
the credit in attracting new participants is a fact
that cannot be denied. AOGA sees this success in its
own membership, and in other companies that have come
here and are now active. Smaller producers often have
a different perspective about the opportunities around
them, and as such can bring with them new ideas and
opportunities. New participants with new ideas can
only strengthen and improve the Alaskan petroleum
industry and help the state stem the decline in
production. We know from testimony that the small
producer tax credit has made a material difference in
individual companies' decisions to do business and
invest in Alaska.
The purpose and justification for the exploration tax
credits under AS 43.55.025 are equally clear. Huge
parts of this state remain unexplored or
underexplored. Again, these tax credits are only
earned when actual expenditures for exploration occur.
The credits tangibly reduce the risks faced by an
explorer and as such incentivize them to go out and
search for oil and gas that is much needed. Increased
exploration leads to increased development and these
credits act to increase exploration and should be
extended as well. Just as with the QCE credits for
capital investments, there is no exploration tax
credit without real money having first been spent on
exploration work that qualifies for these tax credits.
9:25:04 AM
Ms. Moriarty turned to slide 11: "CSSB 21(RES) Component:
Tax Credits" and read from pages 7 and 8 of the AOGA
statement:
D. Limiting the transferability of "carried-forward
annual loss" tax credits.
AOGA does not support the limitation on
transferability of these losses. We have some
reservation about the proposal to bar almost
completely the transferability of the current
"carried-forward annual loss" tax credits under AS
43.55.023(b). New participants and new explorers are
many times not yet producing in the state or only
producing small volumes of oil and gas and as such
have little or no production tax liabilities. The
ability to transfer their losses to others allows them
to monetize the investments they have already made,
both reducing their cost exposure on the original
expenditure and hopefully at the same time acquiring
additional capital for more investment. These credits
arise every year for any active explorer until it
finds oil or gas and finally incurs production taxes
to apply the credit against. At present explorers can
only realize immediate benefit from these credits by
selling them to other taxpayers or cashing them in at
the state Oil and Gas Tax Credit Fund established in
AS 43.55.028.
Under the Bill as proposed, transfers would cease and
explorers would have to hold on to losses for up to 10
years for possible use against taxes on their own
production. The potential that a loss could not be
offset against tax expenses or monetized in the near
term places more risk on the decision to invest and as
such makes such activities less likely to occur. If
the transferability must cease, then the cost of the
expiration of the loss carry forward after only 10
years, where on the North Slope exploration success to
production can easily take longer, is another factor
that negatively impacts investment decisions. Although
the annual addition for interest will allow the losses
to retain some value, we also believe that a 15 year
period before expiration of the loss carry forward is
the minimum timeframe that should apply if
transferability is removed.
9:27:29 AM
Ms. Moriarty moved to slide 12: "CSSB 21(RES) Component:
Tax Credits" and read from pages 8 and 9 of the AOGA
statement:
E. The "Anti-stackable" section
AOGA does not think this new section is necessary. In
Section 22 of the CS, AS 43.55.025 is amended by
adding a new subsection to read:
(q) An exploration expenditure incurred after
December 31, 2013, to explore for oil or gas
located north of 68 degrees North latitude that
is the basis for a credit under (a)(1), (2), or
(3) of this section may not also be the basis for
a credit claimed under AS 43.55.023 or this
section.
AOGA does not understand why this new section is being
proposed as it is our understanding the concern this
new language is to trying address is already covered
in existing statutes.
F. New credit for Manufacturing
AOGA supports the new proposed manufacturing credit.
Although this credit is directed to the incentivizing
of development and manufacture of drilling and
exploration methods and materials, it may not have a
great impact on the reduction of the current
production decline. However, it is a step in the right
direction to incentivize jobs and additional
investment, and having more jobs and investment in
Alaska is never a bad thing.
9:28:54 AM
Ms. Moriarty discussed slide 13: "CSSB 21(RES) Component:
Gross Revenue Exclusion (GRE)" and read from page 9 of the
AOGA statement:
4. Gross Revenue Exclusion.
AOGA endorses the proposed 30% gross revenue exclusion
or GRE, but has concerns on breadth of applicability.
The GRE would, in calculation of the taxable
Production Tax Value, exclude 30% of the Gross Value
at the Point of Production of what we'll call "non-
legacy" production. Thus the GRE provides incentive
for finding new oil and getting it produced. As much
as AOGA supports this proposal we are also concerned
that it is too narrowly focused. This narrow focus and
application to only certain areas, especially those
outside existing Units where the best prospects of new
oil are likely to be found, needlessly restricts the
benefits that such a proposal could have on increasing
production. Fields likely to lose out on getting any
GRE are Prudhoe Bay, Kuparuk, Lisburne, Milne Point,
Endicott, Niakuk, Point McIntyre, and Alpine; as well
as the Prudhoe Bay satellite fields Aurora, Borealis,
Midnight Sun, North Prudhoe Bay, Orion and Polaris and
the Kuparuk satellites Meltwater, NEWS, Tabasco, Tam
and West Sak.
Econ One Research, Inc. has previously provided this
body a presentation entitled Analysis of Alaska's Tax
System, North Slope Investment and The
Administration's Proposal, HE 72. In that presentation
oil and gas resources described as "Economically
Recoverable @ $90/bbl" total 29.1 billion barrels of
oil and barrel-equivalents of gas of which 3 billion
are in the central North Slope where all the currently
producing and therefore ineligible fields are. Of this
3 billion barrels, an estimated 2.5 billion or more
stands to come from Prudhoe Bay, Kuparuk and other
legacy fields already in production. The Governor's
second "core principle" for tax legislation is that
"it must encourage new production." But, in order to
get results from such encouragement, the tax
legislation must incentivize the best opportunities
that Alaska has for getting results. The GRE as
proposed may get some results but in terms of what it
attempts to "encourage," it leaves out at least 80 -
90 percent of the 3 billion barrel opportunity in the
central North Slope that Econ One has identified.
AOGA is continuing to search for ways to adapt the
Gross Revenue Exclusion to include legacy fields in a
way that might be acceptable to the Administration and
the Legislature. It may turn out, however, that a
different approach may be necessary to "encourage new
production" from legacy fields.
9:31:07 AM
Ms. Moriarty pointed to slide 14: "CSSB 21(RES) Component:
Competitiveness Review Board" and relayed that AOGA did not
support the concept. She read from page 10 of the AOGA
statement:
Oil and Gas Competitiveness Review Board
The proposed Board provides an oversight and review
process that we believe would be burdensome to the
industry and contravenes the Governor's principles
relating durability in the long term. The perspective
that the proposed changes found in the Bill would
provide a long term solution to problems we know exist
are placed in jeopardy because the very certainty that
is required for sound investment decision making would
be placed in question with each annual report of the
Board. Instead of moving forward with projects that
might help stem decline, industry resources would be
used to assist the Board in collecting and
understanding complex information of long term
consequence on a quarterly basis. Finally, the
documentation and information the Board might request
or require is of the highest proprietary value to oil
and gas companies and confidentiality concerns and
related complexities would hinder the efforts of the
industry as well as the Board. While we appreciate the
ability to represent industry on the proposed board,
our concerns cause AOGA to question both the viability
and the effectiveness of the proposed Board and as
such we cannot support its proposed formation.
9:32:44 AM
Ms. Moriarty detailed slide 15: "Components Not Addressed
in CSSB 21(RES)" and read from pages 10 and 11 of the AOGA
statement:
There are several significant problems in the present
ACES tax that are not addressed in CSSB 21, and I will
address a few of them this morning.
A. Minimum tax for North Slope production. AS
43.55.011(t) sets a minimum tax that is targeted
solely against North Slope production. That tax is
based on the gross value of that production instead of
the regular tax based on "net" Production Tax Value.
The rationale for adopting it was to protect the State
against low petroleum revenues when prices are low.
The minimum tax only complicates potential new
investors' analyses of what their tax would be if they
invest here instead of someplace else, and
consequently it has, if anything, driven investments
away. AS 43.55.01 1 (t) should be repealed or
consideration given to significantly reducing the rate
of the minimum tax.
B. Statute of limitations & statutory interest. Here
we have two concerns that are interrelated, but not in
an immediately obvious way.
The statute of limitations under AS 43.55.075(a) is
six years from the date when the tax return was filed
for the tax being audited, while the limitations
period for other taxes under AS 43.05.260(a) is three
years from the filing date of the tax return. Under
both statutes, the period may be extended by mutual
consent of the taxpayer and the Department of Revenue
(DOR).
The statutory rate of interest under AS 43.05.225(1)
for tax underpayments is "five percentage points above
the annual rate charged member banks for advances by
the 12th Federal Reserve District as of the first day
of that calendar quarter, or at the annual rate of 11
percent, whichever is greater, compounded quarterly as
of the last day of that quarter[.]" Currently the
Federal Reserve rate is very low, so 11% APR is the
applicable rate.
We are asking that, if the Department chooses to not
exercise its authority in providing certainty to the
taxpayer to allow them to be able to calculate the
correct amount of tax due, then the doubling-up of
that uncertainty through statutory interest should be
lessened - either by shortening the period for making
Department "determinations" from six years back to the
usual three, or by eliminating the 11% minimum
interest rate on the statutory interest rate, or both.
C. Joint-interest billings. Our concern about joint-
interest billings is also primarily a problem caused
by the approach the Department has chosen to take with
its tax regulations. Instead of starting with the
joint-interest billings that participants in a unit or
other joint operation receive from the operator, the
regulations reflect an assumption that each non-
operating participant has information, in addition to
the operator's billings to them, that allows them to
determine which expenditures are deductible as allowed
"lease expenditures" under AS 43.55.165 and which are
not. This assumption is wholly unrealistic. And even
if there were some merit to it, the regulations opt to
audit each participant separately regarding that
participant's interpretation of which expenditures are
deductible and which are not, instead of auditing the
system of accounts used by the operator and telling
all participants which cost items in that accounting
system are deductible and which are not. In other
words, instead of one audit of the expenses by a joint
venture for any given period, the Department audits
each participant separately for its respective share
of the same pool of expenses.
We are not asking for legislation to put the
Department's regulations on a different track. But
there are some in the Department who believe that the
repeal by the 2007 ACES legislation of AS 43.55.l65(c)
and (d) -which specifically authorized the Department
to rely on joint-interest billings means the
Department cannot legally rely on them now. While we
disagree with this position (which is also at odds
with what the Department testified to during the
enactment of the 2007 ACES legislation), we do think
it would be appropriate to restore language
specifically authorizing the Department to rely on
joint-interest billings if it chooses to do so.
9:37:11 AM
Ms. Moriarty concluded with slides 16 through 17: "AOGA
Supports Components of CSSB 21(RES)" and "AOGA Concerns
with CSSB 21(RES)." She read from page 12 of the AOGA
statement:
We support the proposed elimination of progressivity,
but we have great concern with the increase in the
base tax rate to 35%, and with the mixed proposals for
tax credits allowing a new $5 per barrel credit but
removing qualified capital credits. The trade-off
between repealing progressivity and losing the QCE
credit is not a net benefit for industry at low oil
prices, and will create a greater barrier to
investment from existing and new independent players.
We also agree with the comment by Roger Marks
yesterday when in one slide he pointed out the tax
system should not favor investing in certain cost
fields over others, which in our view is the same as
saying we encourage the legislature not to devise a
tax system that creates "winners" and "losers".
The concept of the Gross Revenue Exclusion has
considerable potential, but its narrow focus misses 80
-90 percent of the opportunity in the central North
Slope described by Econ One. We will continue to work
with you and the Administration to find a fair and
reasonable way to expand its scope, or to find an
alternative that will address the central North Slope
appropriately.
The reasons that led the State to create the small-
producer tax credit under AS 43.55.024 and the
exploration tax credits under AS 43.55.025 remain
valid today. We are pleased that CSSB21 will provide
some minimum extension to the sunset date for the
small-producer and exploration tax credits.
We believe it is up to you, and the Governor, to shape
a competitive oil fiscal policy that is supported by
strong principles that will work to arrest North Slope
production decline and will lead Alaska towards a
prosperous future for the long-term. Overall, the Bill
represents a base for significant and crucial tax
structure reform that move toward Governor Parnell's
four "core principles" - fairness for Alaskans,
encouraging new production, simplicity with balance,
and durability for the long term, but as I have
outlined today, AOGA members believe there is still
many structural changes that should be included for
this bill to truly change investment behaviors to the
benefit of Alaskans. You have a difficult task ahead
and AOGA stands ready to assist you throughout this
process.
9:38:39 AM
Co-Chair Meyer recognized that AOGA did not support
progressivity and surmised that the organization did not
support a bracketed progressivity. He opined that
progressivity was currently out of control. He asked
whether AOGA would want a mechanism in place to address
high oil prices. He believed the failure to address the
issue currently meant it would need to be addressed at a
later time, which may not be advantageous. He believed that
oil companies would take comfort that Alaska had addressed
prices on the high-end with the bracketed progressivity,
showing that it had a more stable tax policy than other
investment locations.
Ms. Moriarty responded that the challenge was for the state
to create the policy it wanted for a range of prices. She
stated that AOGA supported the elimination of
progressivity, but the organization had supported
bracketing in the past depending on the tax structure. She
added that AOGA's preference would be no progressivity. She
recognized that the policy call was difficult to make.
9:41:03 AM
Co-Chair Meyer asked which of AOGA's suggestions was more
apt to achieve the goal of increasing oil in the pipeline.
Ms. Moriarty responded that the best strategy was a more
competitive tax system. She relayed that it was difficult
to pick one component of a tax system and encouraged
relying on the legislature's consultants. She shared that
AOGA members had communicated the importance of
competitiveness with other investment locations. She
pointed to several challenges facing Alaska including
distance-to-market, high cost environment, and other. She
stressed that the most competitive environment would result
in the most production.
Senator Dunleavy asked whether the AOGA membership had
discussed other policies that may impact the desire to
invest in Alaska. He wondered if AOGA members believed that
the state's spending policy or any other behaviors were a
deterrent to investment.
Ms. Moriarty responded that several factors were out of the
state's control including the high cost environment,
distance-to-market, and other; however, taxes and
regulation were controllable. She relayed that AOGA
member's felt that the current tax structure was the
largest impediment to increasing investment and production.
She noted that other issues could be improved, but
increasing the competitiveness of the tax structure would
make the most significant difference.
9:44:56 AM
Senator Bishop requested a copy of Ms. Moriarty's
testimony. Ms. Moriarty replied that she would provide the
testimony to the committee.
Senator Bishop asked for upcoming testifiers to show what
increased investment and production would look like if
competitiveness increased.
9:45:58 AM
Senator Hoffman discussed that most members felt the need
to examine the progressivity aspects of the bill. He
referred to prior testimony by PFC Energy that there were
jurisdictions looking at forms of progressivity, primarily
to address times when oil prices were high. He believed
there was value in considering the issue in order to avoid
further deliberation about oil taxes in the future. He
recalled that changes had been made to the tax structure
many times in the past. He believed there was potential to
consider progressivity; he was dismayed to see that AOGA
did not support any forms of progressivity. He believed the
option could help to avoid revisiting tax structure issues
in the future. He pointed to numerous slides in the AOGA
presentation that expressed various forms of opposition to
the current and proposed tax structures. He wondered
whether AOGA believed there were components in the CS that
would work.
Ms. Moriarty replied that slide 16 summarized the
components of the legislation that AOGA supported; slide 17
outlined its concerns. The organization recognized that the
legislature would make changes and form what it felt was
the best policy for the state.
Senator Hoffman observed that the governor and the Senate
Resources Committee had both presented a bill that they
believed represented the best policy for Alaska. He
perceived that AOGA was vastly opposed to major portions of
the current version of the bill.
Ms. Moriarty agreed that AOGA had concerns with some of the
components included in the current bill. The organization
believed that there were structural changes that would
allow a more competitive environment for oil production in
Alaska; AOGA did not believe the current bill would meet
the legislature's expectation of a significant change in
investment behavior. The organization had concern over
portions of the original bill as well. She stated that AOGA
looked forward to working with the committee and the
legislature to create the best tax policy for Alaska.
9:50:02 AM
Senator Hoffman wondered whether AOGA had addressed how
much investment would be required to increase oil
production and what the range would be. He recalled that
the legislature had discussed making similar changes to the
tax structure on April 16 of the prior year. He relayed
that Dale Pittman of ExxonMobil had testified; he cited a
question that had been posed to Mr. Pittman:
Taking into consideration the bottleneck in the
processing facilities and other technological
challenges in recovering more oil regardless of the
tax rate, how much investment do you believe is needed
to increase production so we can stabilize the flow in
the pipeline and if possible reach 600,000 barrels a
day?
Senator Hoffman shared that Mr. Pittman had stated that it
would require an investment of $3 billion to $5 billion per
year to have enough new production to stabilize the flow
rate.
Ms. Moriarty stated that AOGA was unable to weigh in on
some issues on investment levels, price forecasts, and
other due to antitrust reasons. She relayed that the two
most recent fields (Oooguruk and Nikaitchuq) had cost
approximately $1 billion; the fields were producing 10,000
to 15,000 barrels per day. She had heard Mr. Pittman state
that three or four fields like Oooguruk and Nikaitchuq
would need to come online each year if the production
decline was 40,000 barrels per day per year.
9:53:22 AM
Senator Hoffman believed that a cost of $3 billion to $5
billion in order to increase production to 600,000 barrels
per day was a staggering number. He did not know if the
amount would be achievable through any legislation.
Co-Chair Meyer offered that Senator Hoffman's questions
would be good to pose to the industry during its testimony
throughout the day.
Senator Olson discussed testimony from a consultant that
the continuation of the 20 percent capital credit would
provide more investment incentive than the GRE. He asked
for AOGA's perspective. Ms. Moriarty replied that if the
GRE was expanded it would work like a 20 percent tax credit
in some ways. She stated that it was difficult to say which
option would be preferable without seeing the other tax
structure components as well.
9:55:30 AM
Senator Dunleavy stated that one of the cornerstones of the
governor's proposal was to allow durability into the
future. He wondered how AOGA would construct a durable
policy without some form of progressivity and flexibility.
Ms. Moriarty answered that it was important to take an
entire policy into consideration. She stated that other tax
regimes that AOGA's members competed against did not change
from year to year. She referenced the effectiveness of a
prior Econ One slide showing how current investments had
changed in Alaska compared to the Lower 48 and
internationally as the price of oil increased. She
communicated that the other regions were seeing major new
investment, whereas investment levels in Alaska had
remained relatively flat. She stated that a durable tax
policy would offer the industry a return on its investment
and a steady cash flow to the state for the long-term.
9:57:59 AM
Co-Chair Kelly discussed slide 59 of a prior PFC Energy
presentation that focused on reimbursing the royalty and ad
valorum tax related to government take [PFC Energy
presentation: "Senate Finance Committee: Alaska Fiscal
System Discussion Slides" dated March 4, 2013]. He
suggested that Alaskans wanted predictable and reasonable
systems that allowed for a generous government take. He
asked AOGA to analyze the slide and follow up with the
committee.
Ms. Moriarty agreed.
9:59:26 AM
Vice-Chair Fairclough echoed an earlier request for a copy
of Ms. Moriarty's prepared remarks. She pointed to slide
[15] titled "Components Not Addressed in CSSB 21(RES)." She
asked the department to provide its understanding of the
reliance on the joint interest billing. She believed the
goal was to save the department from reinventing the wheel
every time it audited a particular section of findings. She
spoke to statutory limitations and cautioned that DOR had
provided an example related to the transition from the
Petroleum Production Tax (PPT) to ACES; Federal Energy
Regulatory Commission (FERC) findings and transportation
costs had changed. Additionally, in 2010 structural changes
related to amounts owed continued to result from the 2007
tax return. She communicated that if the system continued
on a net profit tax, the auditing division needed
sufficient time for the work. She believed that unless
there was a move to a gross system, moving the number was
unadvisable.
Vice-Chair Fairclough addressed slide 14 related to the
competitiveness review board. She wondered whether the
Alaska Oil and Gas Conservation Commission (AOGCC) would be
an appropriate venue for the board. She had envisioned that
the entity would be an investment board that would look at
beneficial partnerships for Alaska versus looking at the
state's global competitiveness. She believed that AOGCC had
the confidence of the industry and legislature in its
review of oil and gas statistics and the function of how
wells operate. She was interested to know whether varied
production in the scenarios skewed data to make smaller
producers less viable. She noted that the legislature had
not been shown a significant number of models on various
production levels. She wondered whether varied production
levels would skew the 35 percent and $5 per barrel credit
scenario.
10:03:39 AM
Co-Chair Meyer stated that PFC Energy and Roger Marks,
Legislative Consultant, Legislative Budget and Audit
Committee would look at the issues raised by Vice-Chair
Fairclough.
Senator Olson asked whether AOGA would support the
competitiveness review board if it included an AOGA member.
Ms. Moriarty responded that the current bill allowed AOGA
to hold a seat on the board. She stated that the
organization had too many concerns with the current
structure of the board.
DAMIAN BILBAO, DIRECTOR OF FINANCE, BRITISH PETROLEUM,
introduced himself and expressed appreciation to the
committee for the invitation to participate. He presented
the PowerPoint: "BP Testimony to Senate Finance" dated
March 5, 2013. He relayed that the presentation would focus
on how Alaska did or did not compete for investment in the
global marketplace. He spoke to BP's history in Alaska; the
company had operated production on the North Slope for over
35 years. He discussed the company's makeup and relayed
that over 80 percent of its employees in Alaska were Alaska
residents. He discussed that Prudhoe Bay continued to be
the largest oil field in North America; when the field had
begun producing experts estimated that it contained
approximately 9 billion barrels of oil. He furthered that
the company had produced over 12 billion barrels from the
area and saw potential for the production of an additional
2 billion barrels. He stated that the CS took a positive
step forward in defining the policy that would allow the
additional production to occur. He furthered that the CS
provided an opportunity to increase Alaska's
competitiveness by decreasing the base rate and including
the GRE, which did not apply to legacy fields. He felt that
SB 21 would make Alaska more competitive in the oil and gas
market.
10:07:57 AM
Mr. Bilbao looked at slide 3 titled "Decline is Enemy #1,"
which showed DOR's December 2012 production forecast. He
noted that production had declined at a rate of 6 percent
to 8 percent since 2000. He stated that the graph depicted
two different futures: the first showed a continued 7
percent decline in production, the second included new oil
and production. He stressed that Alaska was not currently
competing for investment on the global level; investment
was flowing to other jurisdictions.
10:09:19 AM
Mr. Bilbao highlighted slide 4 from an Econ One
presentation titled "Estimated Capital Spending for
Exploration and Development Alaska North Slope vs. United
States and Worldwide Spending 2003 - 2012." The graph
compared total spending on the Alaska North Slope, the
United States, and Worldwide from 2003 to 2012. The slide
also included the WC ANS Crude index to show how the
jurisdictions compared over time. He stressed that the
price of oil had the greatest impact on investment. He
pointed out that the different investment alternatives
increased together as the price of oil increased between
2003 and 2007. He stated that investment in 2006 was
approximately twice what it had been in 2003; the other
jurisdictions were largely aligned at the time. He relayed
that the alignment had stopped in 2007. He pointed out that
the price of oil continued to increase in 2008, but as
worldwide spending continued to increase, the spending in
Alaska began to flatten. He communicated that when the
price of oil dropped to an average of $60 per barrel in
2009, global investment fell back into alignment; however,
as the price of oil began to increase investment in the
Lower 48 and worldwide surpassed investment in Alaska. He
reiterated that despite the increase in oil prices and
increased investment globally, spending in Alaska had
remained flat. He emphasized that BP looked for
opportunities that delivered the greatest return when
considering where to invest.
10:12:33 AM
Mr. Bilbao continued with slide 5 from an Econ One
presentation titled: "Crude Oil Production Alaska North
Slope vs. United and OECD Countries 2003-2012." The graph
showed that production in the North Slope, the Lower 48,
and Organisation for Economic Co-operation and Development
(OECD) countries was all in alignment in 2003. Production
began to decline over time; however, as the price of oil
and investment increased, production and investment began
to flatten and increase in the Lower 48 and OECD countries.
Production in Alaska continued to decline at a 6 percent to
8 percent rate and was approximately half of the 2003
level. He addressed why Alaska had fallen behind. He
emphasized that Alaska had rich resources and talent, but
lacked competition because of current policy.
10:14:59 AM
Mr. Bilbao discussed a PFC Energy slide titled: "Alaska
Peer Group Government Take at $110/bbl Market Price" (slide
6). The slide showed various investment locations (e.g.
U.S. Gulf of Mexico, Brazil, and other) compared by
government take (including all taxes and royalties). The
slide placed Alaska just behind of Norway as the location
with the second highest government take. He stressed that
the policy did not attract investment. He stated that when
investment options were considered, Alaska was discussed
last. He relayed that an average government take placed
Alaska in the "middle of the pack," but did not overcome
the unique geographic and cost challenges. He stressed that
under the current circumstances Alaska failed to compete.
He emphasized that Alaska needed to be in the top quartile
in order for companies to consider investment in the state.
He communicated that the conversation needed to center on
the appropriate policy that would make Alaska a preeminent
destination for investment.
Mr. Bilbao detailed slide 7 titled "In Summary":
· Alaska currently fails to compete globally for
investment
· Positive shift in the conversation to a policy that
focuses on Alaska's future
· The CSSB 21 (RES) structure could work, however:
o the base rate is too high
o the GRE does not apply to legacy fields
Mr. Bilbao elaborated that BP did not see any benefit to
the proposed GRE in the current CS. He stated that the CS
continued to reflect a tax increase in the prices BP used
to model its business and opportunities.
10:19:14 AM
Co-Chair Meyer responded to Mr. Bilbao's statement that the
base rate in the CS was too high. He pointed out that the
base rate was tied to the $5 per barrel tax credit. He
stated that the finance committee model showed that the two
items offset each other.
Mr. Bilbao responded that slide 4 showed the impact that a
25 percent base rate with the credits had on investment in
Alaska relative to other jurisdictions. He stated that 25
percent was a high base rate; BP understood that it would
be offset by credit. The company also recognized that under
the CS the burden of earning the credits shifted to the
producers related to production. He communicated that BP
saw the CS as a tax increase.
Co-Chair Meyer asked for the dollar amount of investment in
the state by BP and overall. He guessed the number was
close to $100 billion. Mr. Bilbao would follow up with the
information.
Co-Chair Meyer believed the information would be valuable.
Senator Dunleavy asked if BP would increase investment in
Alaska if the base tax rate was lowered and the proposed
GRE was extended to legacy fields. Mr. Bilbao responded
that the final legislation would be reviewed, the company's
current model focused on the CS. He relayed that the base
rate was the company's primary concern. He pointed to slide
4 and highlighted that the investment profile for Alaska
was uncompetitive. He furthered that if a new policy made
Alaska globally competitive, investment would flow to
destinations that competed most effectively for the
capital.
Senator Dunleavy asked if BP would invest if the right
policy was in place.
10:22:28 AM
Mr. Bilbao responded that BP would absolutely invest if
Alaska was competitive. He stated that Alaska's subsurface
certainty, talent, and infrastructure were not present in
many global locations. He communicated that policy was the
only reason Alaska was not competing with the rest of the
world. He relayed that if the policy was corrected and
Alaska became competitive, an increase in investment would
occur.
Vice-Chair Fairclough had heard from media that capital
investment on the North Slope was currently at an all-time
high. She asked for comment on the statement.
Mr. Bilbao replied that the current level of investment and
employment was very high on the North Slope. He detailed
that 5 out of 6 people working on the North Slope were
focused on projects that sustained rate rather than
bringing on new rate. He furthered that the majority of
investment was aimed at renewing the 30-year old
infrastructure. He expounded that before ACES had been
implemented, BP's rig fleet rate was approximately 11 rigs
per year; subsequent to the implementation of ACES, BP's
rig rate decreased to approximately 5 or 6 per year. He
added that production levels had been impacted as a result.
10:24:46 AM
Vice-Chair Fairclough referred to BP's regular and contract
employees in Alaska and Mr. Bilbao's testimony that over 80
percent of BP's employees were Alaskan residents. She
wondered if the contract employees were included in the 80
percent figure.
Mr. Bilbao replied that the 80 percent figure applied to
BP's employees. He stated that some of BP's contractors had
a similar ratio, but others did not. He relayed that the
company was committed to continuously improving the
figures; contractors were encouraged to follow the
company's lead.
Vice-Chair Fairclough asked about local hire related to
BP's contractors. Mr. Bilbao responded that he would follow
up with the information.
Vice-Chair Fairclough asked why the company's investment
costs had increased, while production had remained the
same. She referred to Mr. Bilbao's testimony that
investment equaled production. Mr. Bilbao replied that
inflation pressures were factored into costs of operating
on the North Slope. He did not have a specific breakdown
related to cost increases.
10:27:14 AM
Vice-Chair Fairclough asked whether the capital credits
were part of the scenario. Mr. Bilbao replied that the
spending reflected the direct contribution from the
corporations. He expounded that there was a tax result
related to where credits were obtained and how the
company's tax payment was calculated. He did not know what
percentage of the total spending was a capital credit. He
explained that the company looked at its cash flow and
spending on an absolute basis; BP looked at the total
impact on the business of what it believed to be an
excessively high tax.
Vice-Chair Fairclough wondered whether the company looked
at the total take on a project, the base tax rate, or a
spread on the tax rate when considering investment. Mr.
Bilbao responded that BP looked at the economics of a
project and the cumulative impacts of the tax policy on the
project. The company also considered what the cumulative
impact would be on the cash flow of the business. The
company considered the quality of an individual opportunity
and the impact to the overall business.
10:29:10 AM
Senator Dunleavy asked whether BP's ideal investment
portfolio would consist of exploration or if a vast
majority focused on accessing discovered oil. Mr. Bilbao
responded that BP's focus was on legacy oil fields. He
elaborated that most of the opportunity on the North Slope
existed in currently producing areas. He stated that the
greatest opportunity for locating a new oil field was in an
existing field. He furthered that the company's rig fleet
produced the equivalent of multiple new smaller satellites
each year. He communicated that it was important to include
the continuing source of production in order to offset what
otherwise would be a decline of much greater than 6 percent
to 8 percent. He remarked that a significant amount of
investment was needed to maintain the current decline rate.
Senator Dunleavy asked for verification that an exploration
credit would not currently interest BP. Mr. Bilbao
responded that BP did not engage in exploration on the
North Slope.
Senator Bishop requested an example of capital investments
that could improve production on the North Slope in an
amenable investment climate. Mr. Bilbao replied that BP had
more resources in Alaska than it did anywhere else other
than the Lower 48. He emphasized that the company was not
lacking in opportunity; BP did not have a policy that made
the opportunities competitive globally.
10:31:31 AM
Senator Dunleavy asked when the uptick in investment would
occur following the implementation of new legislation. He
wondered if durability and flexibility factored into the
decision to increase investment.
Mr. Bilbao responded that the right policy should be
applicable at any oil price. For example, if the policy
returned 65 percent to the government the percentage would
remain the same regardless of the cost of oil. He reminded
the committee that the price of oil had never averaged
greater than $110 dollars per barrel. He pointed to slide 4
related to spending and noted that the price of oil had
increased from 2008 to 2010. He stated that given the right
policy BP could respond relatively quickly, particularly
around drilling opportunities. He elaborated that some of
the larger scale infrastructure expansion would take a
couple more years, but activity should be expected in the
near-term.
10:34:05 AM
Senator Hoffman wondered whether BP (as a member of AOGA)
was concerned about what would happen in 5 to 7 years if
the tax policy was not successful and Alaskans felt that
oil revenues had been given away. He noted that BP did not
explore in the North Slope. He stated that given data
provided to the committee by DOR it was contemplating the
removal of the current progressivity clause. He stated that
from FY 11 to FY 15 there were estimates that progressivity
would bring in $11.3 billion to the state, which averaged
to $2.25 billion per year. He noted that he did not vote
for ACES, but believed that eliminating progressivity would
lead to great expectations for Alaskans to level off oil
production to 600,000 barrels per day (or to the governor's
expectation of 1,000,000 barrels per day).
10:36:27 AM
Mr. Bilbao directed attention to slide 3. He stated that
BP's greatest concern was that production would continue to
decline. He pointed to slide 4 and stated that Alaska was
competing for the great opportunity on the North Slope. He
stated that the status quo was not attracting investment
and that a new policy was necessary to deliver a different
future for the state.
Senator Hoffman repeated his question. He believed that
giving up $2.25 billion per year for 5 years created the
expectation that more oil would be added to the pipeline.
He stated that many Alaskans felt that there should be no
reduction without new production. He wondered whether BP
was concerned about what would happen if new production did
not occur. He reiterated that giving up over $11 billion in
a 5-year period raised expectations by Alaskans.
Mr. Bilbao understood the challenge facing the committee.
The company's concern was that the production decline would
continue. He detailed that declining production raised the
costs of operations and made opportunities such as heavy
oil difficult to impossible. He stressed the importance of
creating a policy that would attract investment. He noted
that the current future under ACES was continued decline.
10:40:29 AM
Senator Bishop requested commitment from the industry to
provide information on projects that would increase
production.
Co-Chair Kelly remarked on the production decline occurring
under ACES. He stated that the current system was too
complicated and took too much. He surmised that the goal of
the former policy makers had been to extract more from the
producers. He believed it was important to look at what
would be best for Alaska and how to fill the pipeline. He
was comfortable reducing the government take in order to
achieve increased production. He stressed his interest in
increasing productivity.
Co-Chair Meyer discussed slide 3 and testimony that BP was
not exploring on the North Slope. He surmised that any
increased investment by BP would involve extracting more
oil out of the existing Prudhoe Bay reservoir. He looked at
slide 2, which indicated that cumulative Prudhoe Bay
production had exceeded 12 billion barrels. He wondered how
much oil BP believed was still remaining. He wondered what
incentive would allow for more oil extraction from the
field.
10:44:29 AM
Mr. Bilbao responded that recent assessments showed $2
billion barrels of recoverable oil remaining in Prudhoe
Bay. He shared that the remaining oil was more difficult to
extract. He stated that the legislature's consultants had
shared information about the impact of higher cost
developments relative to the different tax considerations.
He expounded that investment would flow to Alaska in a more
competitive nature if a policy was in place that made
Alaska competitive. He communicated that the CS structure
could work; however, BP believed the base rate was too
high. He suggested that the committee consider the decline
that was occurring with the 25 percent base rate under ACES
and credits that would be necessary to offset the high tax
rate. He relayed that the company would provide a model
once a policy had been decided upon.
10:46:12 AM
Senator Dunleavy discussed the history of production in
Prudhoe Bay. He pointed to a peak in production in the late
1990s followed by a natural decline that had not been
stopped by an increase in investment. He wondered whether
there had been any investment at the time to produce more
oil. He referred to Mr. Bilbao's testimony that the
environment was a function of price. He pointed to ACES and
the current price and tax policy increases. He surmised
that it was necessary to examine what had occurred in the
past 5 years under ACES. He asked for verification that BP
believed the decline could be stemmed or increased for an
undetermined period with investment and current
technologies.
Mr. Bilbao replied that investment flowed to the best
opportunities. He stated that more production would result
if Alaska was competitive on a global level. He emphasized
that the tax policy needed to incentivize all potential
investors.
Senator Dunleavy pointed out that decline had existed under
prior tax structures. He surmised that the prices at the
time had not warranted investment. He asked for
verification that the current price environment made
investment worthy to BP.
Mr. Bilbao responded that there had been opportunities
taken at lower prices because costs had also been lower
(e.g. North Star and Prudhoe Bay satellite developments,
which had been competitive globally). He stressed that
investment would flow towards opportunities when they were
competitive and the economics worked. He pointed to slide 5
that showed spending compared to other jurisdictions. He
emphasized that Alaska was not competing globally for
investment; therefore, production continued to decline.
10:50:06 AM
AT EASE
11:01:55 AM
RECONVENED
DAN SECKERS, TAX COUNSEL, EXXONMOBIL, provided testimony
regarding SB 21. Exxon supported the prior AOGA and BP
testimony. He stated that Alaska's fiscal regime was not
competitive. The company believed it was up to the
legislature to decide whether ACES or a revised tax system
was the right course for Alaska in the near-term and into
the future. He stated that a revised tax structure could
enable Alaska to compete globally for capital investments;
Exxon hoped the legislature would chose to revise the
system. He relayed that Exxon believed the legislation,
including the elimination of progressivity, made
significant progress towards increasing Alaska's
competitiveness. He stated that the high marginal rates
resulting from progressivity adversely affected the
investment climate, capital intensive investments needed in
the state, and the optimization of operations on the North
Slope.
Mr. Seckers stated that eliminating progressivity would fix
one of the most penalizing aspects of Alaska's fiscal
policy. He mentioned the GRE and shared that Exxon
supported tying incentives to increasing production. He
communicated that most of the near-term investment in the
legacy fields would not be in new exploration or benefit
from the GRE. He emphasized that the legacy fields were the
cornerstone of Alaska's future. Exxon believed that
increasing investment to maintain the health and strength
of the legacy fields was as important as encouraging
development and exploration in any new field.
Mr. Seckers addressed the $5 per barrel credit included in
the legislation. He relayed that Exxon supported tying
incentives to increasing production and supported AOGA's
concerns that the $5 per barrel credit may not sufficiently
offset the significant increase caused by the increase to
the base tax rate. He stressed that the policy should
provide balance across a wide spectrum of prices. He
reiterated the company's support for the legislation, but
noted that it also had concerns. He underscored that Exxon
believed the base tax rate was much too high; the increase
from the current 25 percent up to 35 percent under the bill
was "going in the wrong direction." He stated that Alaska
faced obstacles that other markets did not, including high
cost, Arctic environment, distance to market, and other.
The company believed that global attractiveness was crucial
to increasing investment.
Mr. Seckers spoke to the company's support for tax credits.
He stated that credits provided a useful tool to offset
costs for expensive investments needed in Alaska and helped
to balance a fiscal regime over a broad range of prices.
The company supported efforts by the Parnell administration
and the legislature to increase Alaska's global
competitiveness. Exxon recognized the difficult challenge
facing the legislature to balance long-term revenue needs,
budget concerns, and to increase production. He stressed
that the need for Alaska to develop a competitive and
stable fiscal system was one of the most critical issues
facing the state. Exxon believed that the CS represented a
crucial step in the right direction; however, it believed
more needed to be done. He communicated that Alaska
remained an essential component in Exxon's global
portfolio; it had done business in the state for over 50
years and looked forward to many more years. He concluded
that it was up to the legislature to decide whether ACES or
a new tax system was the right answer to bring critical
investments to the state; Exxon hoped a new system would be
implemented.
11:09:29 AM
Co-Chair Meyer agreed that ACES required changes, but
Alaskans needed assurance that increased production would
occur. He stated that no one had provided a guarantee that
the changes would result in increased production. He
pointed out that some individuals believed making changes
was unnecessary if production did not increase. He asked
about Exxon's current activities in Alaska; he understood
that the company was not undertaking exploration. He asked
about potential prospects Exxon had in Alaska that would
promote more production.
Mr. Seckers replied that Exxon remained bullish in Alaska
and was moving ahead with development at Point Thompson.
The company was also the largest lease holder in Prudhoe
Bay and the largest owner of known commercial gas on the
North Slope. He stated that Exxon was exploring in and
around the legacy fields to increase overall recovery in
the area. The company believed that a small increase in the
total recovery from Prudhoe Bay would dwarf any new field
found on the North Slope. Exxon supported efforts by
operators going forward and would work to do everything it
could under the policies implemented by the legislature. He
did not have specifics to provide, but the company believed
that the more competitive the tax policy was the more
investment would increase from existing and new companies.
11:12:16 AM
Vice-Chair Fairclough stated that Alaska's tax policy
changed multiple times in the past decade. She asked why a
change to the current policy would incentivize Exxon to
increase investment. Mr. Seckers responded that company
valued stability and agreed that the state's history of
reexamining its tax structure was troubling from a
statutory and regulatory point of view. The company hoped
that the legislature would determine that Alaska was not
currently competitive going forward and that a durable
policy would be implemented that was balanced over a wide
range of prices. Exxon appreciated the deliberate
examination the legislature had undertaken.
Vice-Chair Fairclough remarked that Alaska's unstable tax
structure would be a ding against its global
competitiveness; however, she had been convinced that
Alaska was not competitive in attracting investment capital
under the current tax structure. She noted that she had not
supported ACES because of her belief that it took too much.
She recalled that when ACES had passed, the legislature had
not known that the system would take close to $1.5 billion
per year over what was expected. She asked about the
difference between the GRE and cost recovery. She pointed
to testimony that the company valued the qualified capital
credits.
11:15:39 AM
Mr. Seckers replied that tax policy was just math; it was a
way to get to a bottom line. He stated that a GRE could
work and is based on production. The exclusion included a
timing value; making an investment and recovering the money
later through the GRE. Alternatively, a tax credit is more
immediate; therefore, the impacts are more pronounced on a
present value basis. He opined that the goal for policy
makers was to create a policy that was balanced over a wide
range of prices. He believed there were a variety of
different options that could work, but it came down to how
competitive the state wanted to be.
11:17:03 AM
Co-Chair Meyer stated that the goal was for the new policy
to last 10 to 15 years. He understood there was the
potential for a world crisis to dramatically increase the
price of oil. He wondered if Exxon would feel comfort
knowing that a new tax policy addressed the possibility
with a type of bracketing progressivity. He discussed that
without addressing the potential for much higher oil prices
the policy may need to be revisited again in the future.
Mr. Seckers replied that the policy considered by the state
should balance over a wide range of prices. He understood
that many other jurisdictions faced the same question and
had remained relatively stable for many years. He was not
convinced that an immediate adjustment would be necessary
if a good policy was put in place at present; it was
difficult to project for an unknown global catastrophe in
the distant future, which could also decrease the price of
oil. The company hoped the legislature would create the
best policy for the present time that was as balanced as
possible to withstand price fluctuations.
Co-Chair Meyer surmised that Exxon was not opposed to a
bracketed progressivity at high oil prices as long as the
total package made Alaska's investment climate stable and
competitive. Mr. Seckers replied that Exxon was responding
to the CS that had eliminated progressivity, which it
supported. He communicated that the company had supported
legislation the prior year (HB 110), which had included a
bracketed progressivity. Exxon believed the elimination of
progressivity in the CS was a positive and critical step
forward. He reiterated his prior comments that Exxon's
primary concern was that the structure was balanced and
competitive.
11:20:52 AM
Vice-Chair Fairclough wondered whether Exxon was involved
with any global tax system that was not regressive. She
mentioned the regressive nature of past taxes. She
discussed that progressivity had been one answer, but she
did not believe it had worked well. She pointed to other
previous tax legislation; HB 110 would have placed a cap on
progressivity. She addressed the Senate Resources Committee
version of SB 21, which had proposed a 35 percent base tax
and a $5 per barrel credit. She noted that the committee
had heard skepticism at best regarding the structure. She
wanted to find a non-regressive taxing structure. She
stressed that committee members were working to find a
solution supported by constituents, which included a fair
share for Alaska. She did not believe the state's current
share was helping it compete for investment. She believed
the 35 percent base tax/$5 per barrel credit had looked
like an attractive solution.
Mr. Seckers appreciated the struggle facing committee
members. He imagined that Exxon was actively engaged in
some locations with progressive elements. He would follow
up with detail on the question.
11:23:25 AM
Vice-Chair Fairclough wondered whether Exxon would be
supportive if the legislation allowed the administration to
negotiate participating areas for a term of 5 to 15 years.
Mr. Seckers asked for clarification on the question.
Vice-chair Fairclough asked if the company would support
the contracting of a specific price for a period of 5 to 15
years to create increased certainty. Mr. Seckers replied
that Exxon valued long-term stability; many jurisdictions
where the company worked had the stability. He believed the
goal could be accomplished in Alaska without radical
changes. He furthered that the legislature had the ability
to make any proposed change prospective only; it could
grandfather-in certain tax treatments on existing
investments or fields. He stressed that the legislature did
not have to change anything with respect to existing
investments. He noted that many options existed that would
achieve certainty. He stated that the company valued
certainty and durability in any fiscal regime.
11:25:43 AM
Senator Hoffman recalled that when ACES had been considered
it had initially not been regressive at the lower end. He
pointed out that there were ways to implement something
similar; however, he believed progressivity would still
need to be looked at. He asked if Exxon was less concerned
with the regressive nature at the low-end than it was with
high progressivity.
Mr. Seckers answered that progressivity was the most
crippling part of ACES.
Senator Hoffman asked whether Exxon would continue to have
major concerns about the legislation if it was non-
regressive and minor tweaks were made. Mr. Seckers replied
that the company would look at any proposal advanced by the
legislature. He stated the company shared the legislature's
goal for a globally competitive and attractive system.
11:27:17 AM
Co-Chair Meyer asked whether the current CS [(CSSB 21(RES)]
made Alaska competitive on a global basis. Mr. Seckers
responded that the CS represented a strong step forward in
improving the state's competitiveness; however, there were
continued concerns about the legislation including a high
base rate. He opined that the bill was a significant
improvement over ACES. Whether the bill made Alaska as
competitive as it desired was a question the legislature
would need to decide. The company sensed that given
Alaska's obstacles the state should be as attractive and
competitive as possible.
Co-Chair Meyer noted that the committee would examine the
35 percent base rate. He reminded Mr. Seckers that the base
rate had been offset by the $5 per barrel credit; the
credit was only available if oil was produced. He surmised
that in Exxon's opinion, the $5 credit did not sufficiently
offset the higher base rate.
Mr. Seckers replied that Exxon believed the current 25
percent base rate was too high. He emphasized that
increasing the rate to 35 percent was a step in the wrong
direction. He stated that the $5 credit was simple and
creative; however, Exxon shared AOGA's concerns that the
policy may not be as competitive as it should be.
Co-Chair Meyer discussed the afternoon's schedule.
ADJOURNMENT
11:29:43 AM
The meeting was adjourned at 11:30 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 03 05 13 CSSB 21 Senate Finance KM.ppt |
SFIN 3/5/2013 9:00:00 AM |
SB 21 |
| 3-5-13 BP-Bilbao Testimony to SFC.pdf |
SFIN 3/5/2013 9:00:00 AM |
SB 21 |
| SB 21 Exxon - ACES - Alaska's Investment Climate Under ACES - PDF Written Testimony Given To Senate Finace -3-5-13.pdf |
SFIN 3/5/2013 9:00:00 AM |
SB 21 |
| SB 21 Moriarty Testimony 030513.pdf |
SFIN 3/5/2013 9:00:00 AM |
SB 21 |