Legislature(2011 - 2012)SENATE FINANCE 532

03/16/2012 09:00 AM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 307 SUPPLEMENTAL/CAPITAL/OTHER APPROPRIATIONS TELECONFERENCED
Moved CSHB 307(FIN) Out of Committee
+= SB 192 OIL AND GAS PRODUCTION TAX RATES TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
+ Presentations by Industry TELECONFERENCED
Alaska Oil & Gas Association (AOGA)
Alaska Oil & Gas Conservation Commission (AOGCC)
Alaska Support Industry Alliance
Resource Development Council for Alaska (RDC)
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 16, 2012                                                                                            
                         9:03 a.m.                                                                                              
                                                                                                                                
9:03:57 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stedman called the Senate Finance Committee                                                                            
meeting to order at 9:03 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Lesil McGuire, Vice-Chair                                                                                               
Senator Johnny Ellis                                                                                                            
Senator Dennis Egan                                                                                                             
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Senator Joe  Paskvan; Senator Cathy Giessel;  Kara Moriarty,                                                                    
Executive Director,  Alaska Oil  and Gas  Association; Cathy                                                                    
P. Foerster,  Commissioner, Alaska Oil and  Gas Conservation                                                                    
Commission;  Doug  Smith,  President  and  CEO,  Little  Red                                                                    
Services                                                                                                                        
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Rick Rogers, Resource Development Council, Anchorage                                                                            
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
SB 192    OIL AND GAS PRODUCTION TAX RATES                                                                                      
                                                                                                                                
          SB 192 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
HB 307    SUPPLEMENTAL/CAPITAL/OTHER APPROPRIATIONS                                                                             
                                                                                                                                
          CSHB 307 (FIN) was REPORTED out of committee with                                                                     
          a "do pass" recommendation.                                                                                           
                                                                                                                                
CS FOR HOUSE BILL NO. 307(FIN)                                                                                                
                                                                                                                                
     "An  Act  making supplemental  appropriations,  capital                                                                    
     appropriations,  and   other  appropriations;  amending                                                                    
     appropriations;   repealing    appropriations;   making                                                                    
     appropriations to  capitalize funds; and  providing for                                                                    
     an effective date."                                                                                                        
                                                                                                                                
9:05:01 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman  MOVED  to report  CSHB  307(FIN)  out  of                                                                    
committee  with individual  recommendations. There  being NO                                                                    
OBJECTION, it was so ordered.                                                                                                   
                                                                                                                                
CSHB  307(FIN) was  REPORTED  out of  committee  with a  "do                                                                    
pass" recommendation.                                                                                                           
                                                                                                                                
SENATE BILL NO. 192                                                                                                           
                                                                                                                                
     "An Act relating to the oil and gas production tax;                                                                        
     and providing for an effective date."                                                                                      
                                                                                                                                
9:08:18 AM                                                                                                                    
                                                                                                                                
KARA  MORIARTY,  EXECUTIVE  DIRECTOR,  ALASKA  OIL  AND  GAS                                                                    
ASSOCIATION  (AOGA),  presented a  PowerPoint  Presentation,                                                                    
"Oil and Gas: Fueling Alaska's Economy" (copy on file).                                                                         
                                                                                                                                
Ms.  Moriarty displayed  slide 2,  "AOGA Member  Companies."                                                                    
She stated that AOGA was  a business trade association whose                                                                    
mission was  to foster  the long-term  viability of  the oil                                                                    
and  gas  industry for  the  benefit  of all  Alaskans.  She                                                                    
stated that  the member  companies represented  the majority                                                                    
and  account   for  the   majority  of   the  oil   and  gas                                                                    
exploration,   production,  transportation,   refining,  and                                                                    
marketing activities  in Alaska.  The AOGA  member companies                                                                    
reflected the breadth and scope  of the oil and gas industry                                                                    
across the  state. She emphasized  that AOGA required  a 100                                                                    
percent consensus of all member  companies in order to allow                                                                    
AOGA to  testify on matters  of tax policy. She  stated that                                                                    
the  Alaska Clear  and Equitable  Share Act  (ACES) affected                                                                    
continued production  decline on the  North Slope and  had a                                                                    
negative impact on the economic future of Alaska.                                                                               
                                                                                                                                
Ms.  Moriarty discussed  slide 3,  "Decoupling -  Sections 5                                                                    
and 11 of CSSB 192 (RES)."                                                                                                      
                                                                                                                                
     AOGA Opposes Proposed Language                                                                                             
     -Proposed Language results in a tax increase.                                                                              
     -Recognize need to eventually  resolve the concern that                                                                    
     combining  the  value of  gas  with  that of  oil  when                                                                    
     significant gas sales occur will  reduce the tax on the                                                                    
     oil, unless they are decoupled.                                                                                            
     -AOGA open  to trigger mechanism, but  reserve right to                                                                    
     evaluate proposed language.                                                                                                
                                                                                                                                
Ms.  Moriarty  looked  at slide  4,  "Petroleum  Information                                                                    
Management System, Sections 2 and 3 of CSSB 192 (RES)."                                                                         
                                                                                                                                
     -New section  would blur the current  clear authorities                                                                    
     and  accountability of  DOR  (Taxation  Power) &  AOGCC                                                                    
     (Police Power).                                                                                                            
     -Could   lead   to   companies   providing   the   same                                                                    
     information over  and over or  in different  formats to                                                                    
     different agencies.                                                                                                        
     -Proprietary/confidential   information   may  not   be                                                                    
     adequately safeguarded.                                                                                                    
     -Creates unrealistic  expectations about  public access                                                                    
     to certain specific kinds of information.                                                                                  
     -May create federal disclosure issues.                                                                                     
                                                                                                                                
9:20:56 AM                                                                                                                    
                                                                                                                                
Senator  McGuire wondered  what  possible opportunities  the                                                                    
members of AOGA  would be open to  regarding more meaningful                                                                    
financial disclosure  arrangements. She remarked  that there                                                                    
were  some  concerns  addressed   in  the  Senate  Resources                                                                    
Committee,  with  respect  to  the  Gleeson  Agreement.  She                                                                    
pointed out  that there was  an issue  regarding proprietary                                                                    
agreements,  and stated  that it  was only  "proprietary" if                                                                    
the  company  states it  as  such.  Ms. Moriarty  agreed  to                                                                    
provide that information.                                                                                                       
                                                                                                                                
Co-Chair Stedman  noted that  Commissioner Butcher  would be                                                                    
testifying  to  the  committee at  a  later  date  regarding                                                                    
disclosure  issues.  Ms.  Moriarty  looked  forward  to  the                                                                    
result of the disclosure issues conversations.                                                                                  
                                                                                                                                
Ms. Moriarty  discussed slide  5, "Progressivity  and 'base'                                                                    
tax rate, Sections 5, 7, and 8 of CSSB 192 (RES)."                                                                              
                                                                                                                                
     -25 percent base rate is too high.                                                                                         
     -CS does not provide brackets - brackets are                                                                               
     meaningful.                                                                                                                
     -CS lowers starting slope by merely one-eighth.                                                                            
     -The new cap will not be reached until approximately                                                                       
     $244/barrel.                                                                                                               
                                                                                                                                
Ms. Moriarty  discussed Section  13 of  CSSB 192  (RES). She                                                                    
remarked  that it  was "essentially  impossible" to  know in                                                                    
advance exactly  how successful an investment  would be. She                                                                    
explained that ACES encouraged  investments by rewarding tax                                                                    
payers  to make  the decision  to invest  in Alaska,  rather                                                                    
than  rewarding the  successful  production as  a result  of                                                                    
investment. She  stated that ACES  tax credits  were similar                                                                    
to the tax  credits given to movie  producers. She explained                                                                    
that CSSB 192  (RES) proposed to reward  actual increases in                                                                    
production  from the  prior year's  level. This  reward took                                                                    
the form  of a  $10 a  barrel reduction  in the  tax payer's                                                                    
production tax  value for a  calendar year for  each taxable                                                                    
barrel produced over  the production in the  prior year. She                                                                    
stated that some  North Slope fields may  have decline rates                                                                    
substantially greater than the  6 percent historical average                                                                    
for the North Slope, so under  CSSB 192 (RES) there would be                                                                    
no   reward   for   the  success   in   keeping   production                                                                    
significantly higher than it otherwise would have been.                                                                         
                                                                                                                                
Ms. Moriarty  looked at page  19, sub-Section G of  CSSB 192                                                                    
(RES). She stated  that the proposal would  limit the effect                                                                    
of the $10  a barrel reductions in the  production tax value                                                                    
by prevent the tax payer  from being considered for purposes                                                                    
of  setting the  progressivity tax  rate. She  remarked that                                                                    
AOGA did not  understand why the $10 allowance  would not be                                                                    
applied to  progressivity. She  stated that  Senator Wagoner                                                                    
had proposed  a tax holiday conceptual  amendment that would                                                                    
provide  a   similar,  but  more  effective   reward  for  a                                                                    
producer's success in slowing down  its rate of decline. The                                                                    
conceptual amendment would set  a target level of production                                                                    
for  each year,  by  applying the  decline  rate during  the                                                                    
three most recent years to  the producer's production in the                                                                    
prior year. Therefore, if a  production beats the target for                                                                    
the year,  the above-target  production would receive  a tax                                                                    
holiday  by  excluding  its  gross value  at  the  point  of                                                                    
production from the calculation  of the production tax value                                                                    
for the producer's taxable production  during that year. She                                                                    
stressed  that  the  proposal would  reduce  the  amount  of                                                                    
production  tax values  (PTV)  subject to  the  tax, and  if                                                                    
progressivity  were applicable,  it  would  also reduce  the                                                                    
progressivity tax rate.                                                                                                         
                                                                                                                                
9:31:33 AM                                                                                                                    
                                                                                                                                
Ms.  Moriarty  discussed slide  6,  "New  Minimum Tax  -  or                                                                    
'Floor', Section 13 of CSSB 192 (RES)."                                                                                         
                                                                                                                                
    -Only applies to legacy fields (Prudhoe & Kuparuk).                                                                         
     -Creates  a disincentive  to invest  in legacy  fields,                                                                    
     especially at low prices.                                                                                                  
     -Requires allocation of costs among  the two fields & a                                                                    
     producer's interest in their other fields.                                                                                 
                                                                                                                                
Ms. Moriarty looked at slide 7, "Summary."                                                                                      
                                                                                                                                
     -AOGA Opposes CS SB 192 (RES).                                                                                             
     -Overall government take for  Alaska would still be too                                                                    
     high under this CS.                                                                                                        
     -AOGA   supports   meaningful   changes   -   such   as                                                                    
     progressivity brackets.                                                                                                    
     -Tax Policy does affect business decisions                                                                                 
     -CS   will  not   improve  ability   to  attract   more                                                                    
     investment.                                                                                                                
     -CS will not lead to more production.                                                                                      
                                                                                                                                
Co-Chair  Stedman  noted that  there  was  no limit  to  the                                                                    
amount of  credits in the  current tax structure.  He stated                                                                    
that  FY  12  expected  credits  reaching  approximately  $8                                                                    
million  to  affect the  treasury.  He  stressed that  there                                                                    
needed to  be a  solution, and was  open to  suggestions. He                                                                    
stressed that  it was a  problem to  have an exposure  of an                                                                    
over-abundance of tax credits.  Ms. Moriarty stated that the                                                                    
proposals  would be  evaluated, to  determine the  impact to                                                                    
the State.                                                                                                                      
                                                                                                                                
9:38:57 AM                                                                                                                    
                                                                                                                                
CATHY  P.   FOERSTER,  COMMISSIONER,  ALASKA  OIL   AND  GAS                                                                    
CONSERVATION  COMMISSION, read  from  a prepared  testimony,                                                                    
"Impact of  Section 3, CSSB  192 on  the Alaska Oil  and Gas                                                                    
Conservation Commission" (copy on file):                                                                                        
                                                                                                                                
     The AOGCC, an  independent quasi-judicial State agency,                                                                    
     is  the  State's  permitting and  regulatory  authority                                                                    
     over   hydrocarbon   and   geothermal   wells.      The                                                                    
     Commission's  duties   include  ensuring   the  maximum                                                                    
     recovery  of  hydrocarbon   and  geothermal  resources,                                                                    
     preventing hydrocarbon  and geothermal  waste, ensuring                                                                    
     well  safety,  and  protecting underground  sources  of                                                                    
     drinking  water and  correlative  rights.    Given  the                                                                    
     nature     of    the     Commission's    duties     and                                                                    
     responsibilities, apart  from support personnel,  it is                                                                    
     staffed  by expert  petroleum  engineers and  petroleum                                                                    
     geologists.   Because  its  expertise  is so  carefully                                                                    
     tailored to its  statutory duties and responsibilities,                                                                    
     the  Commission  functions  well   and  Alaska  has  an                                                                    
     unrivaled  record  with  regard   to  well  safety  and                                                                    
     production.                                                                                                                
                                                                                                                                
     Section 3 of the committee  substitute for SB 192 seeks                                                                    
     to  effectuate a  substantial change  in  the AOGCC  by                                                                    
     requiring  the  Commission  to establish,  operate  and                                                                    
     maintain    an    electronic   petroleum    information                                                                    
     management  system  comprised  of  available  and  non-                                                                    
     confidential  information.   The vast  majority of  the                                                                    
     information   the  Commission   must  include   in  the                                                                    
     petroleum information management  system has nothing to                                                                    
     do with  the Commission's  mission or function  - "unit                                                                    
     and joint  operating agreements,"  exploration licenses                                                                    
     and leases,  "work programs and  budgets," "development                                                                    
     plans,"   operating   and  capital   expenditures   and                                                                    
     projections, "oil and gas  sales, revenue and pricing,"                                                                    
     transportation   agreements,   abandonment  plans   and                                                                    
     budgets, resident and  non-resident hiring information,                                                                    
     training  opportunities,  and  other  information  "the                                                                    
     commission  determines necessary  and  relevant to  the                                                                    
     oil  and gas  production  tax and  to the  exploration,                                                                    
     development, and production of  oil and gas resources."                                                                    
     Much of this information  is currently already gathered                                                                    
     and  maintained  by  other state  agencies  or  is  not                                                                    
     available to any state agency.                                                                                             
                                                                                                                                
     After careful  review and  consideration of  Section 3,                                                                    
     the  AOGCC is  of  the view  that  Section 3  radically                                                                    
     changes the  AOGCC's longstanding  role as  the State's                                                                    
     petroleum   technology   and    geology   experts   and                                                                    
     jeopardizes the  Commission's ability to  discharge its                                                                    
     primary  duties and  responsibilities in  those realms.                                                                    
     The  Commission  has  neither  the  expertise  nor  the                                                                    
     infrastructure  to  construct,   maintain  and  operate                                                                    
     information management  systems, computer  systems, and                                                                    
     the  gathering of  information  on  other subjects  not                                                                    
     related   to   the   safe,  efficient   production   of                                                                    
     hydrocarbon  resources from  wells.   Implementation of                                                                    
     Section 3 will create -  at a substantial fiscal outlay                                                                    
     - an  additional distinct state bureaucracy  within the                                                                    
     AOGCC  which duplicates  functions currently  performed                                                                    
     by other state agencies.                                                                                                   
                                                                                                                                
     The  AOGCC's  non-confidential information  is  already                                                                    
     publically available  on its  website.   Other agencies                                                                    
     are   currently   working   to  provide   similar   web                                                                    
     availability  of their  data.   Once those  agencies do                                                                    
     so,   the  information   will  be   far  more   readily                                                                    
     accessible to  the public  on those  websites and  at a                                                                    
     substantially reduced cost.                                                                                                
                                                                                                                                
Co-Chair  Stedman stated  that  there  would be  discussions                                                                    
with the  Department of Revenue  (DOR), and noted  a concern                                                                    
regarding  the information  disclosure  to the  legislature.                                                                    
Commissioner  Foerster  replied  that the  AOGCC  was  doing                                                                    
important work to solve the issue of financial disclosures.                                                                     
                                                                                                                                
9:44:48 AM                                                                                                                    
                                                                                                                                
DOUG  SMITH,   PRESIDENT  AND  CEO,  LITTLE   RED  SERVICES,                                                                    
introduced  himself.  He  encouraged the  committee  to  ask                                                                    
questions.  He  presented  a PowerPoint  Presentation,  "The                                                                    
Alliance and CSSB 192" (copy on file).                                                                                          
                                                                                                                                
Mr. Smith looked at slide  3, "Our Story Hasn't Changed." He                                                                    
stated  that Alliance  members, at  their own  expense, have                                                                    
traveled  to  Juneau more  than  10  times during  the  27th                                                                    
Alaska Legislature. He furthered  that they had consistently                                                                    
advocated  for significant  tax  reform.  He explained  that                                                                    
members  and  their  employees  had  participated  in  every                                                                    
public  testimony opportunity  in 2011  and 2012.  He stated                                                                    
that  the  McDowell  Report confirmed  the  facts  they  had                                                                    
presented:  Alliance companies  average  between 70  percent                                                                    
and  90 percent  Alaska  hire;  Alliance companies  employed                                                                    
non-residents who were  formerly long-term Alaska residents;                                                                    
and record  employment on the North  Slope had not led  to a                                                                    
reduction in the production decline.                                                                                            
                                                                                                                                
Mr. Smith discussed slide 4, "Alliance Member Composition."                                                                     
                                                                                                                                
     -The Alliance is comprised of 460 member businesses.                                                                       
     -35,000 employees.                                                                                                         
     -Our  membership  is  comprised  of  businesses  in  43                                                                    
     different sectors from Automotive to Welding.                                                                              
     -Our  mission  statement  is  to  "promote  responsible                                                                    
     exploration,  development and  production  of oil,  gas                                                                    
     and   mineral  resources   for  the   benefit  of   all                                                                    
     Alaskans."                                                                                                                 
                                                                                                                                
9:50:52 AM                                                                                                                    
                                                                                                                                
Mr. Smith looked at slide 5, "The Current Investment                                                                            
Climate Impact on Alliance Members."                                                                                            
                                                                                                                                
     1. Continued decline in projects.                                                                                          
     -Three  largest  fabrication  shops in  the  state  are                                                                    
     currently operating at a loss,  with little to no work,                                                                    
     in order to keep core employees on staff.                                                                                  
     2. Alaskan  companies are  looking for  work, resulting                                                                    
     in   many   relocating   or  shifting   resources   and                                                                    
     investment   to   the    lower   48   (CIRI,   Solsten,                                                                    
     Fairweather,   Builders  Choice,   Northern  Industrial                                                                    
     Training,  Carlile,  Lynden,  Peak  Oilfield  Services,                                                                    
     Cruz Construction, etc.).                                                                                                  
                                                                                                                                
Mr. Smith discussed slide 6, "Jobs."                                                                                            
                                                                                                                                
     1.  As indicated  in the  McDowell  study, record  high                                                                    
     employment  on the  North Slope  does  not represent  a                                                                    
     thriving oil industry.                                                                                                     
     A.  2000 -  108,000  barrels of  annual production  for                                                                    
     every job.                                                                                                                 
     B.  2010  - 28,000  barrels  of  annual production  for                                                                    
     every job.                                                                                                                 
     2.  Loss of  highly  trained  professionals to  outside                                                                    
     competition.                                                                                                               
     3. Reduction  of jobs based in  Anchorage and Fairbanks                                                                    
     like engineers, fabrication work, etc.                                                                                     
                                                                                                                                
9:57:01 AM                                                                                                                    
                                                                                                                                
Mr. Smith looked at slide 7, "My Company - Little Red                                                                           
Services."                                                                                                                      
                                                                                                                                
    1. Letter in your committee packet (copy on file).                                                                          
                                                                                                                                
          Dear Senator Stedman:                                                                                                 
                                                                                                                                
          I  am writing  on  behalf of  myself  and the  90+                                                                    
          Alaskans we employ at Little  Red Services. We are                                                                    
          requesting your  support of  ACES tax  reform that                                                                    
          will result  in substantial new investment  in our                                                                    
          primary   oilfields   that    are   declining   in                                                                    
          production at a very concerning rate.                                                                                 
                                                                                                                                
          Our company  engages in  work activities  that are                                                                    
          substantially  subsurface,  from   the  well  head                                                                    
          down, and  are usually associated  with production                                                                    
          related activity.  AN issue that  many legislators                                                                    
          are struggling  with is the  employment statistics                                                                    
          that  demonstrate that  employment  is  up on  the                                                                    
          North  Slope  after  the implementation  of  ACES.                                                                    
          This I  believe is  an undeniable fact  and should                                                                    
          be embraced as  such. The concern is  what are the                                                                    
          jobs  and  do  they  result in  new  or  increased                                                                    
          production  benefits.  I   cannot  speak  for  all                                                                    
          sectors of  business conducted on the  North Slope                                                                    
          but I  can provide  a short  view into  a specific                                                                    
          instance  within  our  company  that  indicates  a                                                                    
          shift   from   production    related   effort   to                                                                    
          maintenance.                                                                                                          
                                                                                                                                
          After the  enactment of ACES the  production based                                                                    
          activity of  ConocoPhillips slowed in  Kuparuk and                                                                    
          we had  to remove  a truck from  service resulting                                                                    
          in the layoff of 13  people in 2009. We eventually                                                                    
          found  work   for  the   truck  in   Prudhoe  Bay.                                                                    
          Unfortunately for  Alaska, this  work was  not our                                                                    
          usual  production  related  support.  Instead  the                                                                    
          truck was put  to us heating water from  a lake on                                                                    
          the west  side of  Prudhoe to support  the washing                                                                    
          of snow and  ice from flow lines so  they could be                                                                    
          inspected for corrosion.  This adaptation may help                                                                    
          to  maintain our  revenue but  it also  clouds the                                                                    
          employment view  of the North Slope  and masks the                                                                    
          real issue of the  significant number of jobs that                                                                    
         are related to non-production activities.                                                                              
                                                                                                                                
          A  recent jobs  study  conducted  by the  McDowell                                                                    
          Group  demonstrated  the  negative  trend  in  the                                                                    
          production    and     jobs    relationship.    The                                                                    
          relationship  between production  and jobs  on the                                                                    
          North Slope had steadily  decreased since peak oil                                                                    
          production  in 1988.  In 1987  the barrels  of oil                                                                    
          produced  per  North  Slope  job  was  at  255,000                                                                    
          barrels  per job  (measured on  an annual  average                                                                    
          basis).  In   the  year   2000  North   Slope  oil                                                                    
          production  totaled approximately  108,000 barrels                                                                    
          for every oil and gas  industry job. By 2010 North                                                                    
          Slope  oil  production  had  further  declined  to                                                                    
          approximately  28,000 barrels  for  every oil  and                                                                    
          gas industry job on the North Slope.                                                                                  
                                                                                                                                
          While Alaska has maintained  a reasonable level of                                                                    
          employment,  our  production decline  and  current                                                                    
          levels  of investment  is concerning  and needs  a                                                                    
          response   from  our   legislature  to   stimulate                                                                    
          additional  investment   from  the   existing  and                                                                    
          potential new  producers on  the North  Slope. The                                                                    
          legislature   and  all   Alaskans  are   aware  of                                                                    
          thousand   significant  activity   and  investment                                                                    
          occurring  in  the  other competing  oil  and  gas                                                                    
          regions  of Canada  and the  United States.  It is                                                                    
          our long term future  and fiscal stability that is                                                                    
          of  concern.  Now  we   look  to  our  legislative                                                                    
          leadership to  find the correct balance  of fiscal                                                                    
          terms  that  can  extend our  oil  production  and                                                                    
          bridge   our   fiscal   needs  to   the   possible                                                                    
          development  of gas,  unconventional  oil and  OCS                                                                    
          resources  that will  offset our  declining legacy                                                                    
          fields and Alaska's treasury.                                                                                         
                                                                                                                                
          There  is   no  easy   answer  but   dealing  with                                                                    
          progressivity   and   providing   reasonable   tax                                                                    
          brackets  and base  rates are  good  steps in  the                                                                    
          right direction. We do  not believe industry needs                                                                    
          to be  unfairly subsidized nor should  treasury be                                                                    
          upside  down  on oil  and  gas  activities in  our                                                                    
          state. We do  support measures that place  us in a                                                                    
          competitive   posture   with    other   areas   of                                                                    
          investment  opportunity  in   North  America  like                                                                    
          those  contained in  HB 110.  An effective  fiscal                                                                    
          structure  can only  be measured  in  the form  of                                                                    
          increased   production  that   slows  decline   or                                                                    
          actually  increases levels  of production  for the                                                                    
          next several years.                                                                                                   
                                                                                                                                
          We  applaud  your  commitment  to  the  people  of                                                                    
          Alaska  and dedication  to public  service. Please                                                                    
          act wisely and swiftly  during this session on our                                                                    
          behalf and help us preserve  a healthy oil and gas                                                                    
          industry in Alaska for decades to come.                                                                               
                                                                                                                                
          Sincerely,                                                                                                            
          Douglas Smith                                                                                                         
                                                                                                                                
     -Relocating an  asset from  production-related activity                                                                    
     to   maintenance  activities   that  do   not  increase                                                                    
     production.                                                                                                                
     2. Financing.                                                                                                              
     -Banks  outside  of  Alaska  are  concerned  about  our                                                                    
     current tax  policy and its potential  impact on future                                                                    
     financial forecast of our service company.                                                                                 
                                                                                                                                
Mr. Smith Discussed slide 8 titled "The Future of Alliance                                                                      
members in the oil Business."                                                                                                   
                                                                                                                                
     Oil tax reform must address the following:                                                                                 
     -Existing light oil production                                                                                             
     -New light oil production                                                                                                  
     -Viscous                                                                                                                   
     -Exploration                                                                                                               
    -New companies and investment in the Alaska market                                                                          
                                                                                                                                
Mr. Smith spoke to a slide on page 9 titled "Observations."                                                                     
                                                                                                                                
     Existing production                                                                                                        
     -Low-cost light oil (existing production)                                                                                  
     "Government take of 70-75 percent  is reasonable. It is                                                                    
     maybe  slightly  on  the high  side."  (PVM  slide  28,                                                                    
     presentation to Alaska Support Industry Alliance)                                                                          
                                                                                                                                
10:02:00 AM                                                                                                                   
                                                                                                                                
Mr. Smith explained the slides on pages 10 and 11 titled                                                                        
"Observations."                                                                                                                 
                                                                                                                                
     New production                                                                                                             
     -The  allowance for  production increases  in CSSB  192                                                                    
     does not  reflect the recommendation of  Dr. van Meurs:                                                                    
     "the 60-65 percent government take  for more costly new                                                                    
     light oil resources as proposed in  HB 110 and HB 17 is                                                                    
     a reasonable level  from an international perspective."                                                                    
     (PVM slide 38).                                                                                                            
     -Dr. van  Meurs includes in-field drilling  of existing                                                                    
     fields  as  new  high-cost light  oil  production  (PVM                                                                    
     slide 16).                                                                                                                 
     -Dr. van Meurs "The main  reason for major companies to                                                                    
     be in  a harvest mode  is that projects  outside Alaska                                                                    
     are  more  attractive.  No  large  attractive  projects                                                                    
     available  in Alaska  under  current  fiscal terms  for                                                                    
     major oil companies" (PVM slide 15).                                                                                       
     -Both  Gabon and  Trinidad  applied  an approximate  12                                                                    
     percent drop in  order to attract new  investment in an                                                                    
     effort to offset declining production (PVM slide 31).                                                                      
     a. Marginal government take in  Gabon at $100/bbl is 52                                                                    
     percent.                                                                                                                   
     b. Marginal government take in Alberta is 57 percent.                                                                      
     c.  Marginal government  take in  Alaska under  ACES is                                                                    
     over 80 percent (PFC Energy, slide 49).                                                                                    
                                                                                                                                
Mr. Smith did not see Alaska "giving in" to a harvest                                                                           
mentality and indicated that Alaska's resources oil                                                                             
resources were vast.                                                                                                            
                                                                                                                                
10:05:51 AM                                                                                                                   
                                                                                                                                
Mr. Smith discussed a slide on page 12 titled                                                                                   
"Observations."                                                                                                                 
                                                                                                                                
     1. Viscous (called heavy by Dr. van Meurs)                                                                                 
     -Dr. van Meurs "To be  competitive Alaska would have to                                                                    
     offer government  takes for heavy oil  at 55-60%." (PVM                                                                    
     Slide 42).                                                                                                                 
     2. Exploration                                                                                                             
     -Tax  credits have  stimulated significant  exploration                                                                    
     this season.                                                                                                               
     -Will this  result in the required  investment to bring                                                                    
     new discoveries  to production  under the  current ACES                                                                    
     tax structure?                                                                                                             
                                                                                                                                
Mr. Smith looked at slide 13, "Observations."                                                                                   
                                                                                                                                
     New companies in the Alaska market                                                                                         
     -CSSB  192  does not  simplify  our  tax structure  for                                                                    
     companies looking to invest in  new markets and it does                                                                    
     not make us competitive for new projects.                                                                                  
     -ACES  does not  compete  well  when developing  higher                                                                    
     cost light oil (PVM slide 37).                                                                                             
     -"ACES  inhibits the  development of  new projects  and                                                                    
     resources  that   might  help  stem  or   even  reverse                                                                    
     decline." (PFC slide 28).                                                                                                  
                                                                                                                                
Mr. Smith discussed slide 14, "Observations."                                                                                   
                                                                                                                                
     There is probably a point  where industry and the State                                                                    
     share the pain of low prices:                                                                                              
     -Industry should not  have to give up  total profits to                                                                    
     taxes.                                                                                                                     
     -The State treasury should not  collect zero tax at low                                                                    
     prices.                                                                                                                    
     A healthy partnership should exist  on both ends of the                                                                    
     price spectrum.                                                                                                            
                                                                                                                                
Mr. Smith looked at slide 15, "Observations."                                                                                   
                                                                                                                                
     -Decoupling may be  in the State's best  interest if it                                                                    
     is revenue-neutral to industry.                                                                                            
     -The  Alliance feels  this bill,  in its  current form,                                                                    
     does  not  go far  enough  to  encourage a  significant                                                                    
     shift in investment.                                                                                                       
     -Although we  have touched on  several points  from Dr.                                                                    
     van  Meurs   on  different  types  of   production  and                                                                    
     corresponding  tax  rates  it  would  be  difficult  to                                                                    
     implement the approach.                                                                                                    
     -The method and levers to  be adjusted is the challenge                                                                    
     before the senate but we  support a magnitude of change                                                                    
     that  would place  us in  the middle  of a  comparative                                                                    
     chart produced by PFC Energy.                                                                                              
                                                                                                                                
10:11:50 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  stated that PFC  Energy had been  asked to                                                                    
examine  Gabon  and  Trinidad, so  there  would  be  further                                                                    
information forthcoming  regarding the  issues in  slide 11.                                                                    
He  felt  that  Alaska  had followed  Gabon  and  Trinidad's                                                                    
examples  to stimulate  investment.  He  commented that  the                                                                    
State  did not  have  the ability  to  parse out  individual                                                                    
employment  in the  service  companies,  because they  dealt                                                                    
with  labor issue  on a  macro level.  He added  that Exxon,                                                                    
ConocoPhilips, and British Petroleum  were often referred to                                                                    
as the  "big three"  because the  intricate details  of each                                                                    
company  were unknown.  He  recognized  that the  employment                                                                    
numbers were at maximum capacity,  there was still the issue                                                                    
of incremental  production, which required a  different type                                                                    
of  work  force. Mr.  Smith  replied  that his  company  was                                                                    
fortunate, because  the employment had been  relatively flat                                                                    
over the  years. He felt  that flat employment was  "a win",                                                                    
because there  was declining production.  He noted  that the                                                                    
more concerning  issue was the low  production, despite high                                                                    
employment.                                                                                                                     
                                                                                                                                
10:17:16 AM                                                                                                                   
                                                                                                                                
RICK ROGERS, RESOURCE DEVELOPMENT COUNCIL, ANCHORAGE (via                                                                       
teleconference), read from a prepared testimony.                                                                                
                                                                                                                                
     Good morning Co-Chairs Stedman  and Hoffman and members                                                                    
     of  the committee.  My name  is Rick  Rogers, Executive                                                                    
     Director  of  the   Resource  Development  Council  for                                                                    
     Alaska  (ROC).  ROC  is a  statewide  membership-funded                                                                    
     non-profit  trade association  representing the  common                                                                    
     interest of the Forestry,  Fishing, Tourism, Mining and                                                                    
     Oil  and Gas  industries in  Alaska. Our  membership is                                                                    
     truly  a  broad  cross  section  of  Alaska  businesses                                                                    
     including  the  aforementioned  industries as  well  as                                                                    
     communities,   all   twelve  Alaska   Native   Regional                                                                    
     Corporations,  organized labor,  utilities and  support                                                                    
     business  that recognize  the  important role  resource                                                                    
     development plays in our economy.                                                                                          
                                                                                                                                
     ROC thanks the committee  for this invited testimony. I                                                                    
     regret being  unable to  be with  you today  in Juneau,                                                                    
     and   appreciate  the   LIO   and  staff   facilitating                                                                    
     testimony  from Anchorage.  I have  prepared no  Slides                                                                    
     for today's presentation.                                                                                                  
                                                                                                                                
     ROC is appreciative of  this committee's recognition of                                                                    
     the need to improve  the investment climate in Alaska's                                                                    
     oil and  gas industry to stem  TAPS throughput decline.                                                                    
     I hope to emphasize the  sense of urgency and the broad                                                                    
     base of support from  ROC membership towards meaningful                                                                    
     adjustment  to the  production tax  to  achieve a  more                                                                    
     attractive investment  climate in  Alaska. Some  of the                                                                    
     most vocal  proponents of  production tax  reform among                                                                    
     our  membership are  not directly  involved in  the oil                                                                    
     and  gas industry.  The business  community is  fearful                                                                    
     what continued  TAPS throughput decline will  do to our                                                                    
     economy as a whole.                                                                                                        
                                                                                                                                
     We  are convinced  that  ACES in  its  current form  is                                                                    
     retarding   investment    and   contributing    to   an                                                                    
     accelerating production  decline. Alaska is  sitting on                                                                    
     the edge of  a fiscal cliff. A sobering  outlook can be                                                                    
     found  in the  Governor's budget,  the ten-year  budget                                                                    
     projection that shows  several plausible scenarios with                                                                    
     significant budget  deficits by 2014.  While meaningful                                                                    
     tax reform  will result in short-term  revenue decline,                                                                    
     long  term  it is  imperative  that  we sacrifice  some                                                                    
     short-term tax revenues to reinvigorate production.                                                                        
     From the ROC perspective, this is about acting in the                                                                      
     long-term interest of Alaskans.                                                                                            
                                                                                                                                
10:28:48 AM                                                                                                                   
                                                                                                                                
Senator  Ellis  noted  the  state's  base  tax  rate  of  25                                                                    
percent. He wondered what the  ideal base tax rate would be,                                                                    
from  the  perspective  of  the   members  of  the  Resource                                                                    
Development  Council. Mr.  Rogers replied  that it  would be                                                                    
difficult to determine the base  tax rate without looking at                                                                    
the  progressivity  formula  and the  entire  structure  and                                                                    
regime.                                                                                                                         
                                                                                                                                
SB  192  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
10:30:21 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:30 AM.                                                                                          

Document Name Date/Time Subjects
2012 SB 192 Alliance Presentation.pdf SFIN 3/16/2012 9:00:00 AM
SB 192
2012 SB 192 AOGCC.doc SFIN 3/16/2012 9:00:00 AM
SB 192
2012 SB 192 AOGA Presentation.pdf SFIN 3/16/2012 9:00:00 AM
SB 192
2012 SB 192 RDC Testimony.pdf SFIN 3/16/2012 9:00:00 AM
SB 192