Legislature(2013 - 2014)SENATE FINANCE 532
03/05/2013 01:30 PM 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
1:33 p.m.
1:33:52 PM
CALL TO ORDER
Co-Chair Meyer called the Senate Finance Committee meeting
to order at 1:33 p.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
Scott Jepsen, Vice President, External Affairs,
ConocoPhillips; Bob Heinrich, Vice President, Finance,
ConocoPhillips; Todd Abbot, President, Pioneer Natural
Resources Alaska; Ed Kerr, Vice President of Land and
Business Development, Armstrong Oil and Gas; Ken Thompson,
President, Alaska Venture Capital Group; Senator Hollis
French; Senator Cathy Giessel.
PRESENT VIA TELECONFERENCE
Ken Thompson, President, Alaska Venture Capital Group.
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."
1:35:10 PM
SCOTT JEPSEN, VICE PRESIDENT, EXTERNAL AFFAIRS,
CONOCOPHILLIPS, discussed the PowerPoint, "Senate Finance
Committee CSSB21" (copy on file).
Mr. Jepsen displayed slide 2, "Topics."
-Alaska Challenges
-CSSB21 vs. ACES (Alaska Clear and Equitable Share
Act)
-Observations
Mr. Jepsen spoke to slide 3, "North Slope Investment
Challenges."
Challenged oil remains
- Complex, high cost wells
- Smaller reserve targets
- Fault blocks, flank oil
- Satellites, viscous oil
- Facilities handling ~ three times as much water
as oil
- Significant resource
ACES tax structure
- High average & marginal tax rates
- Progressivity eliminates upside
- Tax credits attempt to offset high tax rates and
high costs. Applies to both new and legacy fields
BOB HEINRICH, VICE PRESIDENT, FINANCE, CONOCOPHILLIPS,
stated that ConocoPhillips saw many impediments to
investment under ACES. He remarked that ACES had high
marginal tax rates, and had a negative impact on
investment. He pointed out the chart on slide 3, which
showed the state, federal, and industry share across a
range of prices on a marginal basis. He also noted the
progressivity surcharge, which eliminated the upside that
was traditionally seen at higher oil prices. He looked at
the graph on the bottom right corner, which showed
ConocoPhillips per barrel earnings since the time that ACES
was implemented. He noted the changes in crude oil prices
that had an almost 100 percent swing upward since ACES was
implemented. He noted that the ConocoPhillips Alaska net
income per barrel only moved from $22 to $25, which was a
less than 10 percent movement. He stressed that the extra
money went to the state, because of the progressivity
surcharge in ACES.
Mr. Heinrich addressed slide 4, "Changes to ACES to Improve
Alaska's Investment Climate."
Eliminate progressivity
Create a flatter tax rate over a broad range of prices
-Producer and State share proportionately as prices
fluctuate and margins change
Create a flatter tax rate over a broad range of prices
-Producer and State share proportionately as prices
fluctuate and margins change
Issues
-Tax increase at lower prices - base rate too
high
-GRE will have minimal impact on legacy fields.
1:43:03 PM
Mr. Heinrich discussed slide 5, "ACES vs. CSSB 21." He
stated that the graph represented ConocoPhillips modeling
work the comparison on a producer-share basis across a
range of prices. He explained that the "producer-share"
meant the percentage of available cash after cost and taxes
that were retained by the producers. He felt that the
representation was an inverse of what the state's
consultant had presented when discussing the state or
federal take. He remarked that the producer-share
calculations depended on many factors including the assumed
cost structure for both a capital and operating costs. He
stated that the Fall 2012 Revenue Sources Book was used in
determining the calculations for FY14. He explained that
the graphic represented the result of FY14 only, as if CS
SB 12 were in effect for the full FY14. He explained that
the first year was used, because the data became less
reliable in forecasting. He felt that the one-year snapshot
reflected a better view of what was actually expected in
the results. He pointed out that the resulting producer
share was represented by the blue line, which was basically
flat across a range of prices starting at approximately $60
per barrel. He stressed that ConocoPhillips liked the range
of the curve, because it represented a consistent split of
results across a wide range of prices. He explained that
the gross minimum tax would kick in under both ACES and CS
SB 21.
Mr. Jepsen spoke to slide 6, "Gross Revenue Exclusion."
GRE targeted primarily at new fields and extensions of
existing fields
-Extensions identified as participating area (PA)
expansions
-Legacy field PA expansions included
-Increase to 30 percent is an improvement, but less
effective than tax credits
GRE will likely not have significant impact on legacy
fields
Legacy Fields are…
-Greatest investment opportunity resides inside
existing legacy PAs
-About 90 percent of North Slope 2012 production
-Lion's share of estimated future production
-Key to offsetting ANS decline
Mr. Jepsen addressed slide 7, "Observations."
CSSB21 an improvement over ACES
-Provides relatively flat tax rate with slightly
progressive nature over a broad price range
-Elimination of progressivity solves the high marginal
tax problem
-Makes Alaska more attractive for investment at
$100+ prices
-Increase in gross revenue exclusion (GRE) positive
CSSB21 changes for an improved investment climate
-Reduce base tax rate
-Create incentives for both new and legacy fields
-Few legacy field projects would qualify for GRE
-Consider tax credits associated with production
1:50:50 PM
Co-Chair Meyer noted that the intent of the legislation was
to incentivize more oil production. He felt that the GRE
process already encouraged greater oil production, but
pointed out that GRE currently only applied to new oil
fields. He wondered if there would be a greater incentive
to pursue development and production, if the GRE also
applied to the legacy fields. He further queried if it were
better to maintain the capital cost credits, and attach the
credits to actual drilled wells. He felt that capital
credits were too expensive, and were projected to be almost
$900 million in the following year. He remarked that the
capital credits did not result in greater production, but
noted that ACES was not an incentive to produce anyway. Mr.
Heinrich responded that GRE increased cash flow over the
long term for a particular investment. He pointed out that
long-term cash flow was key to ConocoPhillips' investment.
He furthered that ACES decreased the long-term cash flow.
He felt that the issue could be resolved in the base tax
structure, rather than creating a separate tax structure
for a different class of investment. He remarked that a tax
credit tracked investment, but felt that the credit could
be focused on associations with production. He stressed
that the combination of the base tax rate and investment
incentives were impacts on ConocoPhillips willingness to
invest in development and production in Alaska.
Mr. Jepsen added that tax credits helped the capital-
intensive projects. He remarked that some projects would
need new roads, new pads, new facilities, and new
pipelines. He pointed out that the GRE was much less
effective for those projects, than the capital credits. He
stressed that the legislature needed to find a balance
between the GRE and capital credits.
1:55:49 PM
Co-Chair Meyer remarked that progressivity was not included
in the legislation. He wondered if ConocoPhillips would
like to see bracketed progressivity at very high prices.
Mr. Jepsen replied that a flat tax rate over a broad range
of prices was most important, because the state and
industry would share equitably as the margins fluctuate. He
furthered that there would be an extreme amount of revenue
for the state at the $200 per barrel price level with a 65
percent share. He
Senator Dunleavy wondered if ConocoPhillips would invest in
Alaska to develop the oil that proposed to exist in the
ground, with the proposed policy change. Mr. Heinrich
replied that the chairman of ConocoPhillips recently stated
that if the investment climate in Alaska were to change to
the point where it would differentiate itself,
ConocoPhillips would invest more money in Alaska.
Mr. Jepsen furthered that Alaska published extensive
information about ConocoPhillips operations in Alaska, so
its changes in investment and behavior would be very
transparent.
Co-Chair Kelly referred to a previous presentation
regarding reimbursement of the royalty. He asked for
ConocoPhillips' opinion regarding that presentation. Mr.
Jepsen agreed to provide that information.
Senator Bishop inquired how much it cost to drill per well.
Mr. Jepsen responded that the cost was variable, but that
it was around $13 million.
Senator Bishop queried how much the cost would be for a
standard well, without any lateral attachments. Mr. Jepsen
replied that ConocoPhillips had a plot that showed how well
costs had increased, on average, over the prior ten years.
He agreed to provide that information.
2:01:17 PM
Senator Bishop requested some theoretical examples of what
ConocoPhillips might do to increase production. Mr. Jepsen
replied that ConocoPhillips was advancing and progressing
current projects, and furthered that longer term projects
could look attractive and they were already doing work with
viscous oil.
Co-Chair Kelly remarked that there were current discussions
throughout the state regarding the opinion that tax policy
could not reverse the decline in oil production. He
wondered how ConocoPhillips felt about that perspective.
Mr. Jepsen referred to back up material, not on file, that
reflected the activity over the ten years prior. He pointed
out the new fields that came on production since 1997, and
the graph used DNR data. He noted a significant amount of
investment and production from new fields. He explained
that the decline rate was fairly significant, but, on an
absolute basis, was slightly more manageable than ten years
prior. He felt that there was currently an opportunity to
level the decline, under the right tax framework, and right
set of opportunities. He did not want to make promises
regarding decline rates, because there were various factors
that contributed to oil production. He stressed that
approximately 270,000 barrels had been produced from the
new fields.
2:06:33 PM
Co-Chair Kelly queried the intent of the graph. Mr. Jepsen
replied that the graph represented all the various fields
that have been brought on stream since 1997.
Co-Chair Kelly inquired if there was a policy that prompted
the increase. Mr. Jepsen responded that during this time,
ELF was trending toward zero, and many of the fields had
zero severance tax. He stated that there was a reasonable
tax policy in the state, which was a royalty regime that
provided both an upside and downside to producers.
Co-Chair Meyer requested that the slide be provided for
committee members.
Senator Hoffman directed the presentation back to slide 7
and wondered if the first bullet referred to a reduction
from 35 percent or from 25 percent base rate. Mr. Jepsen
stated that the comments were in regard to the 35 percent
base rate, which was outlined in CS SB 21. He stressed that
the 35 percent base rate was too high.
Senator Dunleavy queried how ConocoPhillips felt about 20
percent. Mr. Jepsen replied that at the end of the day, it
would depend on what the overall tax structure looked like.
Mr. Heinrich interjected that the 25 percent rate was a
point at which Alaska could be considered competitive.
Vice-Chair Fairclough requested an explanation of the gross
revenue exclusion (GRE) versus the capital credits. She
inquired how dollars versus production related to the gross
revenue exclusion. Mr. Jepsen asked for clarification.
Vice-Chair Fairclough wondered if ConocoPhillips would
rather have a GRE or a capital credit. Mr. Jepsen responded
that tax credits probably provided the biggest "bang for
the buck." In terms of addressing the high cost in Alaska,
the capital credits were a better mechanism.
2:12:56 PM
Vice-Chair Fairclough observed that many thought that
capital investment and employment were high on the North
Slope, and asked if that point of view was accurate. Mr.
Jepsen replied that there was a lot of work going on the
North Slope, and stated that the work was associated with
rebuilding the oil fields. He stated that most of the
fields were expected to have been fully depleted and
abandoned, but were still active. He stated that the work
was also related to maintenance and radial work. He
stressed that most of the employment was related to
renewal. He stated that the capital investment was high,
because of inflation. He referred to a slide (not on file)
that was presented to the House Finance Committee. He
stated that the slide showed capital investment by year,
and then showed the capital investment on an inflation
adjusted basis. He remarked that the capital investment was
constantly in motion, because investment depended on
various factors.
Vice-Chair Fairclough inquired if the dotted line was the
actual investment. Mr. Jepsen responded in the affirmative.
Vice-Chair Fairclough wondered if the spike in investment
was relative to the price of oil or whether there were
other factors. Mr. Jepsen replied that the spikes were a
result of large projects and expanded projects.
2:17:17 PM
Mr. Heinrich interjected that the grey shaded area
reflected the price at the particular time. He pointed out
that ConocoPhillips' capital programs had expanded over
several years.
Vice-Chair Fairclough queried what the inflation adjustment
would like in ten or five year increments. She specifically
wondered how much money was lost over inflation from price
or costs. She shared that steel costs were rising, and
wondered if the inflation represented new increases in
capital investment, or if it only referred to retrofitting
and refurbishing. Mr. Jepsen responded inflation impacts on
investment were a mixture of capital investments and
refurbishing.
Senator Bishop referred to Mr. Jepsen's earlier comments
regarding the material impact of GRE and wondered where the
capital credits should be applied. Mr. Jepsen understood
the sensitivity regarding the capital credits. He felt that
the capital credits should be targeted towards well-work
related issues.
Senator Hoffman observed that ConocoPhillips's camps were
full with workers. He wondered if there was a breakdown for
the numbers of rebuilding and repair, versus potential
development and new field development. Mr. Jepsen responded
in the negative.
Senator Hoffman wondered if the vast majority of expenses
related to rebuilding and repair. Mr. Jepsen related that
the information could be determined by extrapolating the
age of the fields, and inferring what the activities may
have been. He remarked that, during the particular
timeframe, there was not much work related to replacement
of pipelines, etc.
2:22:47 PM
AT EASE
2:28:20 PM
RECONVENED
TODD ABBOT, PRESIDENT, PIONEER NATURAL RESOURCES ALASKA,
began his displayed the PowerPoint, "Senate Finance
Committee Testimony re: CS SB 21(RES)" (copy on file).
Mr. Abbot discussed slide 2, "Looking Forward Statements."
Except for historical information contained herein,
the statements, charts and graphs in this presentation
are forward-looking statements that are made pursuant
to the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. Forward-
looking statements and the business prospects of
Pioneer are subject to a number of risks and
uncertainties that may cause Pioneer's actual results
in future periods to differ materially from the
forward-looking statements. These risks and
uncertainties include, among other things, volatility
of commodity prices, product supply and demand,
competition, the ability to obtain environmental and
other permits and the timing thereof, other government
regulation or action, the ability to obtain approvals
from third parties and negotiate agreements with third
parties on mutually acceptable terms, international
operations and associated international political and
economic instability, litigation, the costs and
results of drilling and operations, availability of
equipment, services and personnel required to complete
the Company's operating activities, access to and
availability of transportation, processing and
refining facilities, Pioneer's ability to replace
reserves, implement its business plans or complete its
development activities as scheduled, access to and
cost of capital, the financial strength of
counterparties to Pioneer's credit facility and
derivative contracts and the purchasers of Pioneer's
oil, NGL and gas production, uncertainties about
estimates of reserves and resource potential and the
ability to add proved reserves in the future, the
assumptions underlying production forecasts, quality
of technical data, environmental and weather risks,
including the possible impacts of climate change, and
acts of war or terrorism. These and other risks are
described in Pioneer's 10-K and 10-Q Reports and other
filings with the Securities and Exchange Commission.
In addition, Pioneer may be subject to currently
unforeseen risks that may have a materially adverse
impact on it. Pioneer undertakes no duty to publicly
update these statements except as required by law.
Mr. Abbot addressed slide 3, "Presentation Overview."
-Pioneer overview
-Importance of a healthy industry
-Competition for capital
-CS SB 21(RES)
-Incentives for Alaskan investments
-Closing thoughts
Mr. Abbot discussed slide 4, "Pioneer Natural Resources."
Corporate overview:
- $19 Billion enterprise value
- Member of the S&P 500
- Investment grade rating
- ~3,500 employees
- $3 Billion capital budget
- $2 Billion cash flow from operations
- Leading performer in peer group
Alaska Operations Overview:
- 1st independent operator on North Slope
- 70+ full-time Alaska employees
- $14+ million in annual wages (employees)
- 150 - 300 Alaska contract workers
- ~$180 million 2013 capital budget
- ~6,000 BOPD gross production
- Net investor in Alaska
Mr. Abbot stated that Pioneer spent more money than it made
in Alaska.
2:30:34 PM
Mr. Abbot addressed slide 5, "Pioneer Alaska Profile:
Oooguruk."
Exploration:
- 11 exploration wells '02 -'05
- 1 commercial project
Oooguruk Quick Facts:
- 70 percent Pioneer (operator) : 30 percent Eni
- ~$1 billion capital invested
- 12+ million barrels produced
- ~$270 million in credits received
(~7percent of total credits issued by the state)
Mr. Abbot discussed the timeline at the bottom of the
slide. He related that the proposed changes represented a
fourth change in fiscal structure for Pioneer since it had
been in Alaska.
Mr. Abbot spoke to slide 6, "What's Next?"
Nuna Project:
Nuna-1 well drilled in 2012
1~50 MMBO of resource potential
Nuna-2 drilling underway
Phase I development overview
-Q3 2013 sanction decision
-~$1 Billion capital required
-2015 first oil
-14 MBOPD peak production
-Jobs and economic impact
Potential for 2nd drill site
Must compete for limited capital against low-risk,
fast-cycle projects in Lower 48
Mr. Abbot stated that the projects were currently in
appraisal. He shared that Pioneer had recently completed
the drilling of their second appraisal well. A frack fleet
was currently mobilized to complete that project, and there
would be a production test, once the project was complete.
He stressed that the resource was a 50 million barrel type
of resource, with 14,000 barrels per day at peak
production. He stressed that there would be $1 billion
worth of capital, and provide many jobs for the state. It
was a relatively near-term project, and had potential for
upside with a second drill side. He remarked that the
project needed to compete with other projects in the lower
48 states.
Mr. Abbot discussed slide 7, "Pioneer Competitive Resource
Opportunities." He stated that Pioneer was planning to
spend $3 billion in capital in the upcoming year. He noted
that most of the share would go to Wolfcamp/Spraeberry,
which was an old and mature basin. It had continued growth
thanks to technology and new ideas. He shared that the
Pioneer chairman had recently declared that he felt that it
would become the largest oil basin in the world. He stated
that the 2013 production growth in that basin would
increase by 75,000 to 80,000 barrels per day, which was a
15 to 20 percent production growth for a very mature field.
He stated that the Eagle Ford Shale would see approximately
$575 million in investment, and the Barnett Shale would see
continual aggressive drilling. He stressed that there was a
deep inventory with 20 percent and above growth rates.
2:35:26 PM
Mr. Abbot spoke to slide 8, "CSSB 21(RES) Comments."
Governor's Guiding Principles:
-Tax policy must be fair to Alaskans
-Any changes to oil taxes should, when taken together,
be geared to foster new production
-Changes should result in a more simple tax system and
restore balance to our fiscal system
-Tax policy must make Alaska competitive for the long-
term
Positives:
-Elimination of progressivity
-Small producer credit extension
-Gross revenue exclusion (GRE)
-Escalating loss carry forward credit
-$5 per barrel tax credit
Negatives:
-Loss of capital credits
-Increased base tax rate
-Complicated carry-forward loss calculation
-Disadvantages new entrants
Mr. Abbot discussed slide 9, "Relative Rankings and Policy
Consideration." He stated that the slide represented the
big companies that contribute to the industry in Alaska. He
pointed out that there was a broad array of people and
companies. He remarked that each company was a driver in
the financial market. He stressed that traditional
independents were rewarded for production growth and debt
management. He stated that while the smaller independents'
production may not seem significant, they have a
significant economic impact. He stressed that many
companies may have moved their investment to North Dakota,
if the small independents were not a part of the industry.
2:40:24 PM
Mr. Abbot spoke to slide 10, "Eagle Ford Operators and
Companies." He stated that the slide showed a list of all
of the different investors in the Eagle Ford Shale in
Texas. The companies that were highlighted in red and blue
were also businesses in Alaska. He pointed out that there
was a large number of independent businesses on the list,
and furthered that independent businesses drilled over 90
percent of the wells in the US in 2010. He remarked that
the large resource plays were driven by small and midsize
companies that were becoming innovative and attempting to
challenge some of the harder assets. He stressed that many
of the fields were not driven by the large companies taking
a dominant position.
Vice-Chair Fairclough directed the presentation to slide 9
and inquired why the three companies were in red. Mr. Abbot
replied that those companies were considered "small" and
"independent" companies.
Mr. Abbot discussed slide 11, "Typical New Project
Profile." The red bars were the facilities under
construction and were usually a multi-year process; the
green bars reflected drilling activity; and the dotted line
was project production.
Mr. Abbot spoke to slide 12, "Mid-Sized Producer." He
stated that the slide depicted how Pioneer would evaluate a
new project. He explained that the hashed bars showed the
discounted, after tax cash flows for each year under ACES.
He furthered that the red and green bars reflected what
would occur under the current proposal. He stressed that
the loss of the credits would result in greater capital up
front. He stated that Pioneer was a net investor, and had
not yet turned a profit, so their taxes would be due in the
future. He remarked that the benefits of the current
proposal would not occur for many years down the line.
2:46:42 PM
Mr. Abbot discussed slide 13, "New Entrant-Stand Alone
Project." He pointed out that a new entrant would face a
worse situation than a company like Pioneer, under the new
proposal. He remarked that the proposal would be more
beneficial to a large producer that had a current tax
liability, than to a smaller company.
Mr. Abbot spoke to slide 14, "Industry Spending on North
Slope." He stated showcased the impact of credits directly.
He stated that the slide showed a five year history on
capital expenditures by category, and where the credit were
applied. He pointed out that 43 percent of the credits were
directed at new wells, and 42 percent of the credits were
directed at facilities to allow those wells to produce. He
stressed that the production was declining, but that did
not mean that the credits did not have a positive impact.
Mr. Abbot discussed slide 15, "Fostering New Production:
Why Credits Matter."
Benefits to State
-Credits directly encourage activity in Alaska
-Jobs, direct and indirect (9x multiplier)
-More wells
-More oil
-More royalties, taxes and throughput
Benefits to Developer
-Reduces investor risk
-Improves small project economics
-Improves financial performance
-Doesn't increase debt
-Builds healthy industry
-Strengthens competitiveness
2:51:45 PM
Mr. Abbot spoke to slide 16, "CSSB 21(RES) Closing
Thoughts."
Pros
-Eliminates progressivity
-Shares upside potential
-Improves competitiveness
-GRE reduces tax for new oil
-Extends small producer credit
Cons
-Elimination of credits increases investor risk
Requires more upfront capital
-Increased base tax rates
-Does not simplify tax calculations
Complex carry-forward loss calculations
-Does not strongly motivate additional investment
CS SB 21(RES) suggestions
-Targeted credits for new facilities/well related
costs
-Allow targeted credits to be redeemable/ transferable
-Allow credits to be taken against any payment to the
state
Mr. Abbot stressed that credits were important for the
smaller oil companies. He stated that a healthy debate
needed to be held regarding how the credits were targeted
and added that the credits should be transferable.
2:55:09 PM
Co-Chair Meyer pointed out that capital credits had gotten
the desired result in the past and asked how the committee
could make sure that a similar mechanism would get more oil
in the pipeline. Mr. Abbot responded that for a company to
claim the credits it had to be moving forward with new
development and production.
Senator Bishop noted that, according to slide 14, 42
percent of the credits were for facilities. Mr. Abbot
agreed.
Senator Bishop inquired what those percentages equated to
barrels of oil produced. Mr. Abbot did not have that data.
Senator Bishop noted that was the important question and
thanked Mr. Abbot for Pioneer's effort to hire Alaskans.
Co-Chair Meyer asked if Pioneer had built their own
processing plant. Mr. Abbot replied that Pioneer shared a
facility with KRE.
Co-Chair Meyer recalled that there were five producers in
Pioneer's location.
2:59:37 PM
Senator Hoffman inquired if Pioneer was suggesting that
there should be changes to the way the credits currently
apply. Mr. Abbot responded that some of the credits for
projects encouraged new production, but some were not. He
felt that the focus for credits should be on new wells and
facilities.
Senator Hoffman stated that the goal should be new
exploration and that without exploration there would be no
new oil. He inquired if exploration was a priority among
the three categories. Mr. Abbot replied that exploration
was extremely risky and that a large amount of capital was
spent on a project.
Senator Hoffman observed that the purpose was to get more
oil in the pipeline. He acknowledged that the costs for
explorers was high and noted that the governor's goal was
to get new barrels of oil on the line. He inquired if the
credits were more valuable to Pioneer than the other
options in the resources committee. Mr. Abbot responded
that the credits were more valuable to Pioneer. He opined
that development, and not exploration, would get new oil in
the pipe line.
3:05:01 PM
Senator Hoffman wondered if the well drilling and
development dollars add more oil to the pipeline. Mr. Abbot
replied in the affirmative.
Senator Hoffman asked how facilities encouraged new oil in
the line. Mr. Abbot replied that he was unsure, but noted
that a large investment applied to most projects.
Vice-Chair Fairclough observed that new exploration could
put new oil in the pipeline eventually. She stressed that
the most immediate oil was in currently fields, but felt
that it was merely a short-term solution. Mr. Abbot
responded that slide 11 showed that the capital cost was
post-sanction dollars. He remarked that the capital cost
did not include the exploration or appraisal phase. He
remarked that there were many years of appraisal and
exploration before the investment return could be obtained.
He felt that the credits should be focused on the near-
term, mid-term, and long-term.
Vice-Chair Fairclough noted that there were different
investment strategies for different forms of oil
production.
3:09:48 PM
ED KERR, VICE PRESIDENT OF LAND AND BUSINESS DEVELOPMENT,
ARMSTRONG OIL AND GAS, read from a prepared testimony (copy
on file):
Thank you for giving me the opportunity to speak with
the Senate Finance Committee today about the oil and
gas industry on the North Slope. We are a strong
supporter of SB 21 we believe that the passage of this
bill will not only result in significant investment on
the North Slope, it will serve as a catalyst to
increasing production as well. Some of you may have
heard Bill Armstrong make a presentation to the Senate
Resources Committee a couple of weeks ago. If you
heard that presentation you probably already know that
it has been our opinion that you in the Senate have
been inundated with so much information that I cannot
begin to imagine how you can process it all. I have
been in this business for more than 30 years and have
experience in numerous states and some various other
regions in the world and I have to tell you, it is
incredibly difficult to keep up with all of the
information that is being provided with regard to SB
21.
For this reason I will not have a power point, I would
rather talk to you and see if you think I have
anything to add with respect to how Alaska can
increase its production in a manner that is fair to
Alaskans and is something that the oil companies can
work with. Today I would like to keep things pretty
simple and keep to the fundamentals. The only thing
that really tells the story on the North Slope is what
does its production profile look like and is there
anything on the horizon that will help it.
As I was trying to get ready to talk with you about
this I had an internal fight with myself. It reminded
me of my high school English class when we read the
Dickens classic, A Tale of Two Cities. The first part
of opening line of the book is "It was the best of
times, it was the worst of times." Guys this describes
the oil industry on North Slope and where it is at
this point in time better than anything I can think
of.
I know revenues to the State have been up over the
last few years and I know that you as members of the
legislature have an important duty to make certain
that the State gets its fair share and maximizes the
state's fiscal position. The hard part of the story is
when you look to the future and the fact that while
the North Slope is one of the most remarkable
petroleum provinces in the world, it is the only
petroleum province in the US that is not enjoying the
benefit of the amazing technological advancements in
horizontal drilling and stage frack technology. I know
you have seen the same graph in probably ten different
presentations of the North Slope's production decline
while Texas and North Dakota have production
increases. Last Friday the ADN reported on the front
page that Texas has doubled its production since 2010,
doubled its production in 3 years, amazing (especially
given the fact that Alaska has experienced about a 6
percent annual decline during that period), and we all
know North Dakota passed Alaska last year to become
the second largest producer in the United States. I
never thought I would see that. I know someone can
look at that data set and feel that this is the worst
of times because as we all know the states revenue is
only as good as the production and if the production
keeps dropping at this rate, soon the state will have
big issues with its budget.
I don't know how long TAPS can last at the current
decline rate and frankly that's not the question
anyone should be asking, we should be asking, "How in
the heck can we have one of the greatest petroleum
provinces in the world and get beat out by North
Dakota in daily production. Guys as a petroleum system
North Dakota is a Jr. High team and Alaska is
Professional team, there is no way this should happen,
but it has and we have to ask ourselves how did we get
to this spot and what will it take for Alaska to take
its rightful spot as the top producing state in the
nation.
Before I give you any more of my thoughts I should
probably take a second to tell you a little about
Armstrong Oil & Gas and what we have done in Alaska.
We are an independent oil and gas company headquarter
in Denver, Colorado. We would probably be considered a
bit of new type of company for the North Slope as we
are privately owned, we carry no debt and as such we
do everything out of our own pockets, every decision
we make is based on the bottom line and not what some
stock analyst on Wall Street thinks or says.
I am a minority owner in Armstrong and have been
involved in Alaska since the beginning. We began
studying the North Slope diligently in the late 90s,
we made our first lease acquisition in the early
2000s. Our business model is to establish significant
exploration and development projects through the
utilization of all of the technology available to our
industry. It is our opinion that we have the best
scientist in the world these scientists have an
extremely broad and diverse experience level that
affords us a perspective that most people do not have.
Most of our Geoscientist spent their early years with
Exxon.
At any rate the first concept we pulled together on
the North Slope was what is today the O3 field. We
initially established the concept through acquisition
of leasehold and technical data and then we brought in
Pioneer to help us develop the field. Subsequently we
brought a company called Kerr McGee into to help us
define and develop what is today known as the
Nikaitchuq field that is operated by ENI. We currently
operate the North Fork Gas Field in South Central
Alaska and on the North Slope we are partners with
Repsol E&P USA where we currently have 3 rigs running
on the North Slope.
If I can I would like to take second to apologize for
the lack of a polished presentation for you today.
The fact is I am not that good of a public speaker and
I didn't know I was coming here until a few days ago,
so my apologies. What you will hear from me are
observations of what we as a company have found is the
number one critical attribute any area needs in order
to have a successful thriving oil and gas industry
that will either sustain itself or grow even larger.
The most critical barometer for the health of a
producing region is the rig count (it is the canary in
the mine). Depending on the week, you see Alaska's
fluctuate between 6 and 14. Let me put that in
perspective, the Permian Basin not all of Texas, just
the Permian Basin is at 430. That is around 43 times
greater than all of Alaska by itself. Assuming each
area drills and completes a well in a couple of months
that means in one year the Permian Basin brings on an
additional 2580 wells while all of Alaska would bring
on about 60. With this metric in mind it is easy to
see how Alaska is drifting the wrong direction with
its production. You can apply this metric to any basin
or state and you will get the same answer (North
Dakota is at 178 rigs, Oklahoma has 190), in order for
Alaska to continue to be considered relevant in the
petroleum industry something must be done to make it
competitive with the other states and regions of the
world.
When I look at some of the public companies I see such
amazing results. Pioneer recently reported it had over
36,000 net resource locations with potential in excess
of 8BBO. EOG Resources has had oil production growth
of 35 percent in 2010, 52 percent in 2011 and 39
percent in 2012, they have a drilling inventory that
will keep them busy for the next 15 years even if they
do no new business. My point is that this story is
occurring in tons of companies all through the lower
48, states like Pennsylvania are on the rise and the
state of Alaska needs to do something to make itself
more competitive. We feel like SB 21 is a great start
to getting Alaska competitive with the rest of the
world.
I think it is important to note that SB 21 needs to be
passed as it is and possibly with some minor
improvements in order to make certain Alaska becomes
competitive with the rest of the world. We need to
make certain the GRE stays in place as it is and is
not limited to the first 7 years. A study of the new
fields on the North Slope show how time consuming and
difficult it is to bring fields on line and as such
you need the GRE to be effective throughout the life
of the field. The monetizing of the EIC will serve to
continue to encourage new entrants with new ideas to
come to the North Slope.
The fact is the North Slope is remote, cold,
expensive, with tremendous regulatory issues and SB 21
is needed or Alaska will not be considered competitive
with the rest of the world. It is next to impossible
to convince a substantial company to come to the North
Slope to develop new fields when the states own
experts rate the state of Alaska worse than Kazakhstan
for new field development. It is important to note
that by supporting SB 21 as a new entrant we are
actually helping the state's fiscal position. We are
walking away from the cash reimbursement from the
state of the LCF and QCE, so that we can have a stable
tax regime. At the end of the day the state has only
upside with regard to the new field portion of SB 21.
We do think SB 21 simplifies the tax code, we think it
is fair to Alaskans, that it is durable and that it
makes Alaska competitive. I believe that you need all
parts of SB 21 for the state to be successful. The
state needs the legacy field provisions of SB 21 to
pass so that the fields like Prudhoe Bay and KRU can
provide quick immediate barrels into TAPS and keep the
transportation costs on TAPS from increasing.
The state also desperately needs SB 21 to pass so that
new entrants will be encouraged to come to the NS and
invest, this is the future of the North Slope.
Currently 92 percent of all production from the North
Slope comes from 2 operators, I know of no other
significant petroleum province in the world that has
this fact set. As a comparison the top 20 operators
in Permian make up 47 percent of the basins production
and when I asked our research guys how many make up 92
percent, I was told that the number was so high that
it would take a tremendous amount of time to figure
that out. On the North Slope the top two operators
drilled 86 percent of all of the wells in the basin,
in the Permian Basin the top 20 operators make up 35
percent of all wells drilled.
None of this is the operators fault they are doing
their job, but it does show that there is a desperate
need for more players on the North Slope and in order
to have any impact this change needs to be done now.
As an example from the time we started working on O3
until the first production came out of the field it
took 10 years, so as you can see something needs to be
done right now.
Further evidence of the North Slope not being
competitive can be found within its lease sales. Since
we made our first bid in Alaska in 2001, a very
successful sale would be one that is considered to
bring in around $10MM with around 6 successful
bidders, compare this against the GOM sales that have
more bidders and as an example on the last Central GOM
sale had one tract that brought in $157MM that one
tract being well in excess of the last 10 state North
Slope Lease sales. This is evidence of a system that
needs fixing.
So enough about the negative news. The good news is I
can tell you from the perspective of the company that
brought Pioneer, ENI and Repsol to the North Slope
that there are a lot of companies that would
desperately like to do business on the North Slope but
they have shied away because of the ACES tax system.
To be sure the costs concern them and I believe we
need to work hard to streamline the permitting of
projects on the North Slope, but I believe the primary
thing that keeps them away is the current ACES tax
system.
SB 21 is a huge step in the right direction to getting
new entrants on the North Slope as well as getting
production from new fields up and running, increasing
the life of TAPS and providing high paying jobs for
Alaskans in the process. There is an incredible step
function change in our industry that is going on right
before our eyes and if Alaska doesn't make the changes
provided for in the Governor's bill this revolution
has the potential to pass over Alaska. So these are my
thoughts, but I would really like to talk about this
with all of you. This is an amazing time in our
business and I want to make certain that you guys ask
any question at all that you feel should be discussed.
I love this business and think that is the best way to
get the heart of the discussion so please ask me any
questions you want about taxes, permitting, potential
of the North Slope (it is huge) or anything else you
want to talk about.
3:31:38 PM
Senator Dunleavy wondered how the landscape of the North
Slope would look like in 5 years, if the bill were to be
adopted. Mr. Kerr responded that Armstrong would move
forward with new projects, if the bill was adopted.
Senator Dunleavy inquired if Armstrong would be producing
more oil if the bill passed. Mr. Kerr responded in the
affirmative, but stressed that there were many permitting
issues that must be addressed.
Co-Chair Meyer noted that the state was trying to deal with
permitting issues.
3:34:33 PM
Senator Bishop wondered if the Baakan or Eagleford had any
tax credits. Mr. Kerr responded that they did not have tax
credits. He remarked that those locations had quick
turnover time, and made money relatively quickly.
Conversely, the North Slope presented challenges, because
of its remoteness. He furthered that Armstrong would rather
forgo the credit in favor of a more reasonable tax rate.
Senator Bishop queried the turnaround time in North Dakota
from the deal with the landowner to the drilling time. Mr.
Kerr replied that the turnaround time could be a short as
three months.
Senator Bishop requested slide 4 of Econ One's presentation
and offered that he felt that the committee substitute made
Alaska competitive with the other states.
Co-Chair Kelly requested a description of Texas' oil tax
regime. Mr. Kerr replied that that it was a flat tax rate.
He stated that Armstrong did not currently have any
production in Texas.
Co-Chair Kelly queried Mr. Kerr's opinion about a 63
percent government take. Mr. Kerr asked for further
clarification.
Co-Chair Kelly wondered how he felt about replacing ACES
with a flat government take across all prices and
production. Mr. Kerr stated that it would be inappropriate
for him to respond, because he did not have the parameters
in order to form a responsible opinion.
3:39:07 PM
Senator Dunleavy inquired if Armstrong was saying it
accepted the committee substitute. Mr. Kerr responded that
if he had to choose between the proposal and ACES, he would
choose the proposal. He stated that pioneer had 40,000
locations and that he looked through Alaska with a
different lens.
Vice-Chair Fairclough inquired if the bill had a positive
effect on "wildcat" companies. Mr. Kerr replied that the
proposal was better than ACES. He furthered that Armstrong
was trying to plan for long-term full-cycle economics.
Vice-Chair Fairclough queried if Armstrong was currently
producing in Alaska. Mr. Kerr responded that Armstrong was
producing in Southcentral Alaska, with approximately 13.5
million cubic feet per day.
Vice-Chair Fairclough wondered if Armstrong usually saw
development and production through, or if Armstrong sold
locations. Mr. Kerr responded that Armstrong did both of
those things.
Vice-Chair Fairclough inquired what the best component
under CSSB 21 (RES) compared to ACES. Mr. Kerr replied that
it was the elimination of progressivity and how the tax was
calculated.
Co-Chair Meyer wondered if Armstrong or Repsol was the
operator on the North Slope. Mr. Kerr replied that Repsol
was the operator on the North Slope.
Co-Chair Meyer stated that Armstrong was the operator in
Cook Inlet, and therefore was an operator and a producer.
Mr. Kerr agreed with that summation.
3:43:24 PM
AT EASE
3:48:45 PM
RECONVENED
KEN THOMPSON, PRESIDENT, ALASKA VENTURE CAPITAL GROUP (via
teleconference), introduced himself.
3:50:37 PM
Mr. Thompson spoke to slide 2, "Why Consider Our Company's
Perspectives?"
1) Most active exploration company exploring and
developing sole on North Slope state lands
a) Drilled 10 of 36 exploration wells on state
lands in 2007-12 (more than COP, BP, XOM, ENI,
Repsol, Armstrong combined)
b) 105,000 leased acres in 3 core areas in JV
partnership with Ramshorn Exploration (affiliate
of large Nabors Industries)
2) ~$200 MM invested to date in Alaska North Slope
projects…3 discoveries, acquired discovery
3) Mustang development project under construction…$577
MM capital, 44 MMBO
4) Three other development projects in
permitting/conceptual engineering stages. >$1.5
billion capital
5) First production and cash flow to state and our
companies…startup of Mustang in 3Q 2014
6) On investment of $200 MM, received refunded tax
credits totaling $69 MM but State will receive back
this amount in the first year of Mustang production,
and $1.2 billion over field life.
7) Experience in bringing other independents to Alaska
and in raising capital for Alaska
Mr. Thompson discussed slide 3, "North Slope Drilling
Results and Success." He explained that the slide showed
the activity since 1999, which was the year of the first
lease. He shared that most of the drilling had occurred
during the recent three to four years.
Mr. Thompson spoke to slide 4, "What Difference can Our
Company make?" He shared that it was interesting that the
smaller fields could add up to over 50,000 barrels of oil a
day. He pointed out that the developments he was showing on
the slide could offset decline. He stated that if the major
companies had incentives in legacy fields, the Alaska curve
would turn upward. He opined that Alaska needed exploration
and production.
3:59:10 PM
Mr. Thompson discussed slide 5, "We See Positives in SB 21
CS to Help Grow Production."
1) Increases "Carry Forward Loss Credit (CFL)" from 25
percent to 35 percent and interest on unused credits.
Positive: incrementally more future cash flow to
re-deploy into facilities and drilling
2)Extends "Small Producers" credits from 2022, reduces
small producers' tax bill by $12 MM/yr.
Positive: more cash flow for small producers to
re-deploy into facilities and drilling
3) Specifies 20 percent QCE tax credit certificate
payment in single year vs. 2 but does eliminate QCE on
12/31/13
Positive: more immediate cash to put into Mustang
development facilities and drilling 2014
Negative: no QCE payment in 2015 to re-deploy
into Mustang development drilling
4) Eliminates progressivity factor, increases base tax
rate from 25 percent to 35 percent but provides $5/bbl
produced bbl credit
Positive: Eliminating progressivity simplifies
tax calculation and will be a public relations
plus for AK
Negative: Increase in base tax rate from 25
percent to 35 percent not expected, but partially
offset by…
Positive: $5/bbl produced bbl credit better
balances relative state/producer takes at low oil
prices
5) For new oil, increases "20 percent GRE" to 30
percent GRE and amends definition of leases that can
be included for this GRE
Positive: Should incentivize new oil production
on more leases, also help during low oil price
cycles
6) Removes old distance limitations and allows for a
30 percent "Exploration Incentive Credit" for
exploration wells drilled that target new oil
discoveries regardless of location
Huge Positive: For exploration companies like
ours-will result in more companies and more oil
on State lands
7) Overall, thanks for the changes in the CS, this
should help in attracting new capital and leveling oil
production
4:04:50 PM
Co-Chair Meyer wondered if the $5/bbl was a good offset
against the rise from 25 percent to 35 percent. Mr.
Thompson replied that it only partially offset the
decrease, but furthered that the CS was more attractive at
oil prices.
SB 21 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
4:08:32 PM
The meeting was adjourned at 4:08 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 21 AVCG BRPC Senate Finance Hearing Thompson 030513 FINAL SLIDES.pdf |
SFIN 3/5/2013 1:30:00 PM |
SB 21 |
| SB 21 Conoco Phillips Senate Finance Committee 2013-03-05 Final.pdf |
SFIN 3/5/2013 1:30:00 PM |
SB 21 |
| SB 21 Pioneer Testimony 0305 FINAL.pdf |
SFIN 3/5/2013 1:30:00 PM |
SB 21 |
| SB 21 Kerr Testimony.docx |
SFIN 3/5/2013 1:30:00 PM |
SB 21 |