Legislature(2005 - 2006)SENATE FINANCE 532
04/04/2006 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
April 4, 2006
9:07 a.m.
CALL TO ORDER
Co-Chair Lyda Green convened the meeting at approximately
9:07:13 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice-Chair
Senator Fred Dyson
Senator Lyman Hoffman
Senator Donny Olson
Senator Bert Stedman
Also Attending: SENATOR GARY STEVENS; SENATOR TOM WAGONER; STEVE
MARSHALL, President BP Exploration Alaska, Inc.; AGNUS WALKER,
Commercial Vice President, BP Exploration Alaska, Inc.; TOM
WILLIAMS, Senior Tax Counsel, BP Exploration Alaska, Inc.;
RICHARD OWEN, Production Manager, ExxonMobil, and Vice
President, ExxonMobil Alaska Production;
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
SB 305-OIL AND GAS PRODUCTION TAX
The Committee heard from industry representatives. The bill was
held in Committee.
9:07:29 AM
CS FOR SENATE BILL NO. 305(RES)
"An Act providing for a production tax on oil and gas;
repealing the oil and gas production (severance) tax;
relating to the calculation of the gross value at the point
of production of oil or gas and to the determination of the
value of oil and gas for purposes of the production tax on
oil and gas; providing for tax credits against the tax for
certain expenditures and losses; relating to the
relationship of the production tax on oil and gas to other
taxes, to the dates those tax payments and surcharges are
due, to interest on overpayments of the tax, and to the
treatment of the tax in a producer's settlement with the
royalty owners; relating to flared gas, and to oil and gas
used in the operation of a lease or property under the
production tax; relating to the prevailing value of oil or
gas under the production tax; relating to surcharges on
oil; relating to statements or other information required
to be filed with or furnished to the Department of Revenue,
to the penalty for failure to file certain reports for the
tax, to the powers of the Department of Revenue, and to the
disclosure of certain information required to be furnished
to the Department of Revenue as applicable to the
administration of the tax; relating to criminal penalties
for violating conditions governing access to and use of
confidential information relating to the tax, and to the
deposit of tax money collected by the Department of
Revenue; amending the definitions of 'gas,' 'oil,' and
certain other terms for purposes of the production tax, and
as the definition of the term 'gas' applies in the Alaska
Stranded Gas Development Act, and adding further
definitions; making conforming amendments; and providing
for an effective date."
This was the fourth hearing for this bill in the Senate Finance
Committee.
9:07:41 AM
Representatives of BP Exploration, Alaska gave a presentation
utilizing a handout titled, "BP Presentation on CSSB 305 (PPT),
Alaska State Legislature, Senate Finance Committee, 4th April
2006" [copy on file].
STEVE MARSHALL, President, BP Exploration Alaska, Inc.
introduced his co-presenters and made the following statement.
Over the last few weeks as we've been working through the
various committees, both on the House and Senate side, and
being in Juneau meeting with a number of legislators, I've
become increasingly concerned about the direction the bills
are taking. Seems to be and to BP that things are heading
in the wrong direction.
There is clearly a focus on short-term revenues to the
State. My worry is that is being done at the jeopardy of
the longer-term revenues. And to some extent I suppose we
have not done as good a job as we could have in convincing
those that we've talked to about the linkage between tax
rate, investment and that investment linkage to production.
The common ground that the industry and the citizens of
Alaska and the legislature have in common is production.
Our singular purpose, if you boil it down to something very
simple, is to maximize the recovery of oil and gas from the
oil fields in Alaska, and in our case, on the North Slope.
The natural decline of an oil field or a gas field is
inevitable. It's something in the range of 15 percent for
the fields that we have on the North Slope. Through the
efforts of our staffs and teams and the investments and the
ideas and the innovation and the technology, we are able to
arrest that decline to about six-percent.
For the industry that represents about a billion and a half
dollars investment per year; capital investment, wells,
flow lines, new facilities, to be able to not only produce
oil and gas but to also handle the water, the solids, the
inevitable challenges that come with working in mature
fields 20 to 30 years old.
In addition to that we spend as an industry, in excess of
somewhere in the range of $2 billion just to operate those
fields. So again the ongoing maintenance, keeping the wells
productive, stimulating the wells to make sure they
maximize the production, that represents the investment.
About a billion and a half capital, something in the range
of about $2 billion just to operate those fields.
What I think is happening right now is that all of those
efforts, because there are no big projects, they get lost.
The wells that we drill every year, the side tracks of new
wells, about 100 penetrations is the hard peddling we do.
It's a bit like, if you think the industry is like a
millpond, the ducks just sailing along and the oil keeps
coming. Actually we're paddling very hard underneath the
surface … to offset that decline.
I think the decline is somewhat masked by the high prices
we're experiencing. That's the good news. It benefits us
all, clearly the industry, BP is no exception, we're making
very good profits - very good profits. There is no doubt
about that. Resetting the balance there I think is
something that is clearly the challenge before us:
achieving that balance.
But the high prices are I think offsetting a very worrying
trend. The industry's track record, I wish I could say was
exemplary in meeting its forecasts, not only our own
internal forecasts, but also the DNR forecasts. We've
experienced over the last four or five years, we have
missed those in a negative sense every year.
Why is that? I think it's from a number of reasons:
drilling wells that have taken longer, projects that have
been delayed maybe for technological reasons, maybe for
other external factors, operational upsets, small discrete
investments that may take a little longer to mature. Every
year as we submit our business plan it includes many many
discrete individual investments. The $600 million that
we're spending this year probably represents maybe a
hundred different projects. All of which have their own
economics and their own relative attractiveness. It's our
job to mature those to the point where we're confident we
can actually deliver on what we say we're going to do
there.
Any time we change one factor, that could be a
technological factor or any other factor, it makes the
relative competitiveness of those investments less
attractive. Clearly tax is one aspect of that. So I think
the delays to projects, all it does is further undermine
the production. It accelerates the decline and when we lose
that momentum it's very difficult, if not impossible to get
back.
I think we've shown as individual companies and as an
industry, once we lose the a particular project for
whatever reason it's delayed, we have nothing there to kind
of put in its place. We'll get that production eventually,
but it just slides further into the future. That's the
underlying decline that we're seeing exaggerated.
Now BPs plans over the next ten years are to spend $14
billion. That was the plan that we put together in the
summer of last year. It clearly represents a significant
investment in gas. But that gas only represents about half
of that $14 billion. There's another $7 billion tied to oil
projects. That represents almost a doubling of upstream
investment - the investment on the North Slope and what
we've experienced in the last few years.
We spend quite a considerable amount in the last few years
on what we call our midstream. One billion dollars on new
tankers, the four new tankers that are coming into the
fleet [and] the modernization of the pump stations on the
pipeline, are just two examples where we're modernizing our
infrastructure. Modernizing our infrastructure for the next
30 years, but at the same time, investing to lower unit
costs.
That's one of the big challenges that Alaska faces: an
incredibly high fixed cost of infrastructure to get oil to
market. Unlike many places, the distance to market is a big
handicap for Alaska. The actual cost of doing business is
high, but it's not extraordinarily high. The cost to get
the product, oil or gas, is considerably higher than just
about anywhere else BP operates. I suspect the same is true
for anybody in the industry.
That two-times spend that we're looking at there is what I
want to make sure we're not putting in jeopardy. The 20/20
proposal that the governor proposed a few weeks ago, I have
to say was at the outer edge of where BP had been thinking.
Prior to that time, we'd been talking about 12 1/2 percent
as a production tax. So 20 percent represents a big change.
And 20/20 - 20 percent tax and 20 percent credit, in 2006
and with oil prices that we currently have, and with the
capital plans that we currently have this year, $600
million, it represents about a 13 percent production tax.
If you strip it down, the tax and the credit represents
about a 13 percent tax - effective tax on production.
Under ELF [economic limit factor], under the same
circumstances, the same scenario, that's about 5 1/2
percent. So it's essentially a doubling of that tax rate.
The Senate bill, as it currently stands, represents almost
a three-fold increase in production tax over ELF. So
perhaps that's one way of explaining our concern about -
less about the revenues for the State, but more about what
impact that will have on future investment.
That's our mission. That's what the 1,700 direct and 5,000
indirect employees working for BP do everyday is paddle
very hard to keep maximizing that production.
Certainly our thinking prior to the governor's bill coming
out was that an approach that provided the State with
considerable upside at high prices. That we accepted and
recognized the State's need for that [as] something that we
supported [and] providing some protection at the downside
under low prices. Agnus will show that certainly in the $20
to $25 price range, our business makes very little profit
if any. We'll come to that in more detail because I know
that's been an issue that's had quite a bit of press
recently and I think is worth an examination of what's
really driving the business there. We want to provide as
much transparency on that as we possibly can.
Our approach was to provide the State with upside at high
prices, something the State has not enjoyed and needs to
and should [and] some protection at the downside. The
middle ground is where we thought the game needs to be won
or lost. Preserving to the extent we can the investment and
the investment climate over that mid-range of prices that
we've been operating under for the last two years is the
area where we're most concerned about. So we would argue
for something less than 20 percent in that range. But that
would be true progressivity. What it boils down to is
increasing the size of the pie, not just increasing the
slice of the pie that the State gets.
I think that where we all win is a bigger pie that we can
all share in. I worry that the focus so far has been just
on increasing the slice of the pie. That to me would be
less than [an] optimal outcome for the State of Alaska.
9:20:06 AM
Senator Hoffman referenced the witness' comment that the Senate
Resources Committee substitute provisions for a 25 percent tax
and 20 percent credit would result in a tax increase of three
times that of the current rate. He asked if this calculation
includes the progressivity factor.
9:20:23 AM
Mr. Marshall responded that progressivity is not included in the
assertion.
9:20:27 AM
Senator Hoffman asked the percentage of the increased tax
including the progressivity.
9:20:33 AM
AGNUS WALKER, Commercial Vice President, BP Exploration Alaska,
Inc., responded that he did not have figures, but that the
impact would be "obviously significantly more".
9:20:45 AM
Senator Dyson requested comments pertaining to provisions of the
committee substitute that would be "less attractive" in
encouraging investment, particularly relating to credits and
transition provisions.
Senator Dyson relayed a "rule of thumb" that five times the
amount of credits is equal to one percentage of tax. He invited
the testifiers to express their agreement or disagreement with
this theory. He asked also if the rule would apply to oil prices
of both $60 per barrel and $25 per barrel.
9:22:06 AM
Mr. Marshall affirmed that the tax rate would "always out trump"
credits. Credits assist in mitigating tax. A formula providing a
20 percent tax and a 20 percent credit calculates to
approximately 13 percent tax. The tax rate is "always out
trumped" by production. If successful in attracting additional
investment, a situation could result in which no Petroleum
Production Tax (PPT) revenue would be collected, but more income
would be generated for the State.
9:23:49 AM
Mr. Walker provided his testimony referencing the aforementioned
handout and utilizing a visual aid. The document includes
information shown on the visual presentation interspersed with
written testimony.
9:24:28 AM
Page 5
DOR Production Forecasts
[Line graph depicting ANS Oil Production (mbd) for the
years 1978 through 2015. Actual production is shown
for the years 2005 and earlier; projected production
forecasts for years following 2000 are shown for Fall
01, Fall 03, Fall 05 and Spring 06.]
· Historical basin decline has been around 6%
· Flattening of production from 2002-2004 due to
Alpine & Northstar
· Decline since 2004 has mirrored historical basin
decline
Mr. Walker noted the decline in production has been occurring
since 1988.
Mr. Walker pointed out that the Department of Revenue forecasts
have been systematically adjusted and that previous forecasts
were too "optimistic" and forecasted higher production rates
than was actually realized. The Spring 2006 forecast also
predicts higher production than would actually occur.
Mr. Walker stressed that this should be of concern to all
parties. Production of 100,000 barrels per day equates to
$500,000 in revenues to the State of Alaska.
9:27:15 AM
Mr. Walker surmised that certain factors were proving more
difficult than industry had anticipated, thus causing production
rates that were "failing to meet" forecasts. Development of
viscous oil is an example that some projects are requiring more
time to execute. Additionally, the environment at Northstar is
challenging. A significant investment was made in another field,
which has provided no return.
9:28:16 AM
Mr. Walker reported that the forecasts are made utilizing a
number of "real projects" with "real reserves" located on the
North Slope. However, the forecasts are not based on a realistic
capital forecast. "No restraint" is exercised in the preparation
of these forecasts to consider whether industry has available
capital, capacity, and support structure to undertake projects.
9:29:30 AM
Page 6
Investment Offsets Decline
[Line graph showing the downward trend from approximately
1.75 Millions of barrels per day to less than .5 million
for years 1990 to almost 2050. Delineated for the years
following 2005 are projections of a 15% Decline rate of 1.3
billions of barrels produced and Zero Investment; the
Status Quo with a 6% Decline rate, 3.6 Billions of barrels
to be produced and an investment of $1 - $1.5 billion per
year; and a 3% Decline rate with 7.5 Billions of barrels to
be produced and an investment of $2 - $3 billion per year.]
DOR Spring Forecast cannot be met without significant
additional investment
The vast majority of that investment must be made in
existing fields
Mr. Walker outlined the history of decline in production on the
North Slope. If no additional investments were made, production
from existing facilities would end by 2012 or 2013. In
actuality, investments are currently made at $1 to $1.5 billion
per year. A continuation of this rate would continue the trend
of a six-percent annual decline in production.
Mr. Walker stressed that BP Exploration desires a "healthy oil
business" in Alaska for decades in the future and that would
enable the construction of a natural gas pipeline. To accomplish
this, annual investment must be $2 to $3 billion per year.
Mr. Walker considered the issue to be how to double the current
level of investment.
9:32:42 AM
Mr. Walker reiterated that the Department of Revenue Spring 2006
forecast would be revised to reflect a lower production rate
because the projected rate requires a significantly higher
investment than currently being made.
9:33:09 AM
Senator Hoffman asked the average amounts invested by BP
Exploration and the industry as a whole in the past five years.
9:33:23 AM
Mr. Walker reported that the industry has been investing between
$1 and $1.5 billion annually. Of that amount, BP Exploration has
been investing approximately $400 million annually in "upstream
operations". The company is also investing in "midstream"
activities. The total investment of BP Exploration is $3.5
billion for the previous five years.
9:34:13 AM
Senator Hoffman asked about the company's stated objective to
increase investment an additional one billion dollars regardless
of proposed changes to the tax structure. He asked if this is a
result of higher oil prices.
9:34:43 AM
Senator Hoffman asked the underlying reason to increase
investment in future years, given that only $400 million was
invested annually in the past five years.
9:35:06 AM
Mr. Walker clarified that the investment figures quoted on the
graph represent the total industry.
9:35:43 AM
Senator Olson asked if the cited investment amounts are limited
to investments made in North Slope activities or whether they
also include investments in the transportation process, such as
the pipeline and ships.
9:36:15 AM
Mr. Walker replied the figures represent the investment industry
has made in North Slope activities only. Industry is also
investing in other aspects of the business to ensure it is
"healthy."
9:36:34 AM
Senator Olson asked if the renovation of tanker ships is
included in these efforts. his
9:36:45 AM
Mr. Walker responded that those expensed are not included in
these figures. This data pertains only to upstream activities.
Mr. Walker repeated that the future of the resource development
would be determined by industry's "ability to attract
investment."
9:37:22 AM
Page 7
A 50 year vision
[Graph delineating BP Net Production (mboe/d) of Light Oil,
Viscous Oil, Heavy Oil, and Gas, for the years 1975 through
2050.]
Mr. Walker spoke to efforts BP Exploration is undertaking to
address the issue of declining production. The strategy is to
create a 50-year future for the business by focusing on known
resources. Accomplishing this would be challenging but possible.
One challenge would be to "normalize" the viscous and heavy oils
to transport to market. Production of viscous oil has started
and efforts have started for production of heavy oil. The
company also intents to take natural gas to market.
9:38:46 AM
Mr. Walker contended that the "future is very different from the
past". Future activities would involve three businesses: light
and heavy oil, and gas. All must be interdependent and each must
be "healthy" for the long term future of the North Slope.
9:39:13 AM
Mr. Walker told of many challenges that must be met and
overcome. These efforts are underway. Technology is being
identified to increase productivity from existing fields; to
develop the state's vast viscous resource and transport it to
market from the arctic environment. The company is working to
ensure its fleet of ship and the pipeline infrastructure is
adequate for future use.
Mr. Walker remarked that BP Exploration employs 200 people in
Alaska.
9:40:33 AM
Mr. Walker relayed the BP Exploration plan to expend $14 billion
in the next ten years. A significant portion of that investment
would be related to natural gas development. The investment in
oil resources in the North Slope would double.
9:40:56 AM
Mr. Walker expressed concern that the future of these plans
would be jeopardized by the proposed increased taxes.
9:41:09 AM
Page 8
Production Drives Revenue
[Spreadsheet expounding on the information depicted on Page
6 regarding the decline in production and industry
investment amounts. Operating Expenses are listed at $30
billion for 1.3 billion barrels produced; $50 billion for
3.6 billion barrels produced; and $100 billion for 7.5
billion barrels produced. Also shown is State Revenue
(estimate) Assuming 20/20 $40 ANS of $10 billion from a
decline rate of 15% and $1 billion Industry Investment; $30
billion from a decline rate of 6% and $20 billion Industry
Investment; and $60 billion from a decline rate of 3% and
$60 billion Industry Investment. Pie charts for the three
scenarios demonstrate the portion of revenue derived from
the proposed PPT compared to All other non-PPT state
revenue.]
Maximizing State Revenue means maximizing Production
Mr. Walker outlined the additional information contained on this
page. Industry would incur the operating expenditures "to keep
North Slope running for the duration."
Mr. Walker pointed out that if successful in achieving a three-
percent decline in production goal, a $60 billion investment
would be required. This amount is three-times the current
forecast. Additionally, $100 billion in operating expenses would
be required; an amount twice the current forecast.
9:42:50 AM
Mr. Walker relayed that private business interests outside the
oil industry caution against underestimating the impact of the
oil industry on the economy of Alaska.
9:43:24 AM
Mr. Walker stressed the direct impact of oil development on
State revenue. Property tax, royalty and income tax revenues are
all based on production. Production through a pipeline is the
significant factor.
9:44:18 AM
Mr. Walker, referencing the pie charts, noted that revenues
generated from the proposed PPT would comprise less than one-
quarter of total State oil revenues. A severance tax of zero
could be adopted if determined to be the best method to
facilitate investment in Alaska. Such investment could provide
the State with higher income from property taxes and royalty
tax.
9:45:09 AM
Mr. Walker stated that the current six-percent production
decline is historically driven by the current economic limit
factor (ELF) tax structure. According to the basic law of
economics, less investment would be made if the proposed 20/20
PPT structure were adopted. This would result in an investment
decline of six to 15 percent.
9:45:53 AM
Mr. Walker contended that State officials should be considering
methods to double the current rate of investment in Alaska
rather than how much to increase taxes.
9:46:12 AM
Senator Hoffman returned to Mr. Walker's earlier comment that a
production reduction of 100,000 barrels of oil would cause a
revenue reduction of $500 million. Senator Hoffman asked the
price of oil this calculation is based upon.
9:46:29 AM
Mr. Walker replied the current price of $60 per barrel was used
in this analogy.
9:46:35 AM
Senator Hoffman asked if the reverse would be true that the
State would receive $500 million for each 100,000 barrel
production increase.
9:47:26 AM
Mr. Walker responded that the factors change over time. The
aforementioned calculation is based on an economic model over
the next 40 years. Although production declines, operating costs
do not; therefore costs per barrel increases.
9:48:16 AM
Page 9
US Marginal Tax Rates
North America: Tax Rate Comparison
Alaska is already the highest cost region to operate
[Bar graph listing the Marginal Tax Rate percentages of
other states and Canada as follows:
Alb.1 39%
GOM 45%
CO 51%
WY 52%
KS 53%
TX 53%
NM 53%
OK 53%
CA 53%
Alb.2 54%
AK (ELF) 56%
LA 57%
(Alb: Alberta Heavy Oil - pre and post-payout)
Marginal Tax Rate percentages of PPT proposals are also
listed as follows:
20/20 61%
Senate:
<$40 63%
$100 67% Increases with oil price]
Alaska will have the highest marginal tax rate
Mr. Walker answered his own question that the tax rate is
important.
Mr. Walker defined the marginal tax rate as applying to
additional earnings after all costs are covered.
9:49:21 AM
Mr. Walker noted the states listed are the top ten producers in
the United States. Alaska currently has the second highest tax
rate under the existing ELF system.
9:49:53 AM
Mr. Walker pointed out that the original 20/20 proposal would
increase the marginal tax rate to 61 percent, which would be the
highest rate in the United States. The marginal tax rate under
the Senate Resources Committee substitute would be higher still
and the progressivity provision would allow for continued
increases for higher oil prices.
9:50:39 AM
Senator Stedman asked the marginal tax rate of the Senate
Resources Committee substitute at a price of $100 per barrel not
including the progressivity factor.
9:50:55 AM
Mr. Walker answered that the marginal tax rate would remain 63
percent and would not increase with price increases.
9:51:21 AM
Senator Stedman indicated he would have additional questions at
a later time.
9:51:28 AM
Mr. Walker declared it "unthinkable" that high tax rates would
yield additional investment.
9:51:45 AM
Mr. Walker directed attention to Alberta and the Gulf of Mexico
where "business is booming" and investment is attracted. Alberta
is "open for business" and imposes a royalty tax of only one
percent.
9:52:36 AM
Senator Bunde identified the need for fiscal certainty as a
complication to the legislature in determining specifics of a
PPT structure. A few Alaskans would be making a decision that
would remain unchanged for many years. He asked about fiscal
certainty for the citizens of Alberta and the amount of time
before current decisions could be changed.
9:53:26 AM
Mr. Walker was unsure of the exact terms of the tax structure in
Alberta, although he assumed the government had some assurances.
Alaska is in the unique position of wanting a $20 billion
natural gas pipeline, which is a "driving need" for long term
fiscal certainty.
9:54:04 AM
Senator Stedman agreed that the marginal tax rate for Alaska
would be "huge", but reminded that royalty and property tax
rates are utilized as a method of "selling our resources". The
figures cited in this presentation are similar to those reported
by the Department of Revenue. However, the aggregate corporate
profit margin would be 35.5 percent on prices of $40 per barrel
under the 20/25 PPT proposal contained in the Senate Resources
Committee substitute compared to 37.9 percent under the current
ELF system. This difference in profit is marginal. He recognized
that the profit margin is different for each company and could
be lower for BP Exploration.
Senator Stedman acknowledged that, at $60 per barrel, the
current aggregate profit margin is approximately 42.8 percent
and would be 32.7 under the 20/25 method. However, with prices
of $20 per barrel the profit margins would be 18.5 percent and
23 percent respectively. The profit margins would actually
increase under the proposed system.
Senator Stedman emphasized this information should be considered
along with the issue of "top down view of government take versus
industry take and where is this balance point." The balance
point would be determined through the use of taxes and royalties
and would be utilized as a "selling point" of resources in the
global market. This differs from the scenario of an income tax
imposed by the federal government.
9:57:03 AM
Co-Chair Wilken recalled that the legislature commissioned the
Wood McKenzie Group a couple years prior to provide an analysis
of the investment climate of oil and gas activities in Alaska.
Mr. Walker contended that Alaska is one of the most expensive
places to produce and transport the resources; however, the
commissioned report concluded that Alaska is also one of the
most profitable locations. He asked if the witness agreed with
this finding.
9:57:58 AM
Mr. Walker responded that industry must be profitable to invest.
The real issue is whether opportunities exist in Alaska to
attract industry capital. These opportunities, "obviously" do
not exist due to the annual six-percent declining in production
on the North Slope. The focus should be to determine the proper
fiscal system necessary to attract investment, rather than how
much the State could "take" from oil companies. The issue should
be "what is right for Alaska."
9:59:15 AM
Mr. Marshall gave his recollection that the aforementioned study
made a comparison of the profitability of individual projects.
Projects in Alaska include high costs to transport the resource
through the pipeline and on ships. These are unique expenses.
Production in Alaska is attractive due to the profits that could
be realized at higher oil prices.
Mr. Walker agreed with Senator Stedman that achieving balance is
the goal. However, providing adequate product to sell is also
important. He cautioned against creating a situation in which
less product is sold.
10:01:36 AM
Senator Dyson asked if the marginal tax rate depicted on Page 9
reflects all government "take", or just those taxes levied by
state governments.
10:01:53 AM
Mr. Walker replied this includes corporate income tax and
royalty. The data also includes federal taxes.
10:02:13 AM
Senator Dyson requested a listing of the amount of recoverable
oil in the states shown. He expected this information is
factored into business decisions as well.
10:02:39 AM
Senator Dyson relayed that a representative of a partner company
to BP Exploration operating on the North Slope informed him that
the "present lifting cost", the cost of producing a barrel of
oil, from Prudhoe Bay is currently between $13 and 14, and could
increase to $15 or $16 with the change of the tax structure. He
asked if the witness agreed with this estimation.
10:03:09 AM
Mr. Walker alluded to difficulties in providing a response. The
"break even point" for BP Exploration operations is $22 per
barrel. Operating expenses for each barrel produced equals
approximately $10, capital costs are $6 per barrel and taxes
amount to $7. Profits are achieved after those expenses are
covered. Business is becoming more difficult and expensive.
10:04:56 AM
Senator Dyson took offense to comments suggesting greed is the
motivation for changing the current tax structure. In actuality,
legislators are attempting to obtain a "fair return" to Alaskans
for the loss of a "one-time" resource. The issue is not about
how much money could be collected to spend on government, but
rather what amount would be fair to the people of Alaska.
10:05:57 AM
Mr. Walker responded that tax rate is only one factor in
attracting investment in Alaska. Consultants have utilized
various figures and comparisons. He expressed concern that this
information provides an "impression that's the answer". The
quantity and quality of oil and gas yet to be discovered and
developed must be considered. The country of Norway has a
significantly high tax rate but has experienced 20 years of
continuous production growth. The reservoirs and wells at that
location are very productive. A similar sized reservoir located
in Western Texas or Alaska would require more wells to
"liberate" the oil and gas, which involves higher capital costs
and provides lower profitability.
10:08:10 AM
Senator Bunde addressed the underlying principles in the
assumptions used in this process. He asked if the witness agreed
that the long-term oil price would likely be approximately $40
per barrel.
10:09:56 AM
Mr. Walker answered that BP Exploration is "not in the business"
of forecasting future prices. The corporation takes risks with
regard to future oil prices. The "prevailing view" of the
industry is that prices would decline from the current levels.
10:10:37 AM
Page 12
PPT Impacts
Government Take (%)
[Pie Charts and spreadsheet depicting the distribution of
funds based on the price per barrel as follows:
Price per barrel - $20
State
Status Quo 143%
PPT (20/20) 97%
Federal
Status Quo 1%
PPT 18%
BP
Status Quo 0%
PPT 0%
Price per barrel - $40
State
Status Quo 40%
PPT (20/20) 44%
Federal
Status Quo 23%
PPT 22%
BP
Status Quo 37%
PPT 34%
Price per barrel - $60
State
Status Quo 32%
PPT (20/20) 40%
Federal
Status Quo 25%
PPT 22%
BP
Status Quo 43%
PPT 38%
Mr. Walker indicated this should address Senator Stedman's
concern regarding relative share. At prices of $20 per barrel,
proceeds are insufficient under the existing tax system to allow
BP Exploration to earn a profit. The "breakeven point" is
currently $22.50 per barrel.
Mr. Walker surmised that the information generated and utilized
by the Department of Revenue as "corporate profit" and which
Senator Stedman referenced is not actually corporate profit as
industry considers it to be. He is working with the Department
of Revenue to "clean up" the information, which is misleading.
BP Exploration financial information is accurate, although it
differs from the Department.
10:13:39 AM
Senator Stedman appreciated the collaboration between the
company and the Department of Revenue. The Department
information coincides within one percent of the figures provided
by BP Exploration.
10:14:07 AM
Mr. Walker stated some discrepancies exist. The Department of
Revenue calculates industry earning a reasonable profit at oil
prices of $20 per barrel.
10:14:29 AM
Senator Stedman clarified the comparable figures are based on
prices of $40 and $60 per barrel. He agreed the discrepancy is
greater at $20 prices.
10:14:53 AM
Mr. Walker remarked that accurate information is needed to base
decisions on.
10:15:02 AM
Senator Bunde asked if the status quo indicated on the pie
charts pertains to the current tax structure, rather than five
years in the future with the ELF system eliminated.
10:15:23 AM
Mr. Walker answered the information is based on 2006 data and
assumes an effective ELF tax rate of 5.5 percent.
10:15:40 AM
Mr. Walker continued detailing the pie charts. At oil prices of
$40 per barrel, the State share is still greater than the BP
Exploration share. At $60 per barrel, the BP Exploration share
is greater than the State's, as it should be under a regressive
tax. A regressive tax provides "relative assurance" to the State
during lower oil prices.
10:16:54 AM
Mr. Walker pointed out that the initial 20/20 PPT proposal does
not include progressivity. At $20 price per barrel, the federal
government would receive more than under the ELF status quo
system. BP Exploration would not earn a profit.
10:17:27 AM
Mr. Walker continued outlining the shares received by the State,
federal government and BP Exploration at prices of $40 and $60
per barrel under the 20/20 proposal. In each instance, PPT would
provide the greatest share to the State.
10:18:52 AM
CSSB 305: Key Issues
· The increase of the base tax rate to 25% will be a
serious barrier to investment
· The proposed progressivity in the tax rate combined
with the significant base rate increase in moving from
WLF to PPT (25/20) is inappropriate given Alaska's
circumstances
· Several of the newly introduced terms are unbalanced
and will cause problems
· Failure to provide for the full transition will harm
the State's reputation with investors
· The current version of the Bill adds significant
complexity to one of the most complex fiscal regimes
in the world
· We do not believe this Bill as drafted achieves the
mutual goal of increasing investment & stemming
decline
· Alaska has lots of oil & gas but production is
declining! Decline is our common enemy!
· Significant additional investment is required to stem
decline
· Maximizing production will maximize State revenues and
benefits to Alaska
· With a 20% tax rate Alaska will have the highest tax
rate & the highest cost structure in the US …… (25% is
even worse!)
· The bill as drafted will not maximize benefits to
Alaskans
· The UK and Alberta have successfully attracted
significant investment and increased production by
reducing taxes and are thus great role models
Mr. Walker overviewed this information provided in addition to
the presentation handout.
10:22:05 AM
Senator Stedman perceived an indication that industry predicts
implementation of the "two for one" provision would be
problematic. The goal is to decrease the declining production
rate at Prudhoe Bay. He asked a "one and a half to one" or a
"two and a half to one" or other variation would provide more
enticement for industry to increase investment from $1 billion
to $2 billion annually.
10:23:00 AM
Co-Chair Green asked if Senator Stedman's comments pertained to
the tax rate or the PPT system.
10:23:06 AM
Senator Stedman answered he was speaking to both issues.
10:23:08 AM
Mr. Walker responded that BP Exploration was "still formulating
our views on this". However a provision to allow for transition
would be appropriate. He understood the logic of linking
transition benefits to future investment. The provision could be
simplified in a manner in which the corporation could support.
10:24:04 AM
Senator Stedman asked whether BP Exploration intended to provide
an example of an acceptable provision. He requested input on
this matter from both smaller and larger producers.
10:24:36 AM
Senator Bunde expressed interest in further considering the
State's reputation with investors. He understood the witness'
testimony that if a five-year transitional period, such as that
contained in the original PPT proposal, were not adopted the
reputation with investors would be harmed.
10:25:20 AM
Mr. Walker informed that a "common base" for investors includes
a transitional period. The Governor's proposal was not the only
acceptable option, but some transitional provisions must be
allowed for.
10:25:53 AM
Mr. Marshall announced that BP Exploration would provide
detailed comments on several provisions in the bill. The
underlying issue is the relative economic attractiveness today
compared to any scenario. This is a key differentiator. The tax
rate is a significant factor; however, other factors could
ameliorate the impact of the tax structure change.
10:27:25 AM
Senator Stedman understood the different impact of a 25 percent
tax rate. Econ One, the consultant retained by the legislature
is calculating the impacts of 25 percent and 30 percent credits.
He requested input from BP Exploration on this and an assessment
of how "helpful" increased credits would be.
10:28:42 AM
Mr. Walker gave his initial reaction that higher credits "are
good". The corporation's original proposal to Governor Murkowski
included a 12.5 percent tax rate and a 25 percent credit for
many facilities. BP Exploration supports a credit rate higher
than the tax rate. A credit system to "incentify" investment
would be beneficial to Alaska; however, the credit rate could
not be increased to an amount to fully compensate for the tax
rate.
10:29:53 AM
Mr. Walker asserted that the language of this legislation is too
complex for the fiscal regime. He recommended amending the bill
to provide greater simplicity.
10:30:23 AM
Mr. Walker declared that the provisions of the Senate Resources
Committee substitute would not achieve the mutual goal of
increasing investment. The State and industry should be
"entirely aligned" in determining what is in the best interest
for Alaska.
10:30:55 AM
Mr. Walker addressed the proposed retroactive effective date of
the tax structure change. This is not appropriate. The effective
date should be no sooner than July 1.
10:31:29 AM
Mr. Walker concluded his presentation by saying that a better
tax system could be achieved and offering to work with the
legislature to accomplish this.
10:33:30 AM
Senator Stedman requested further discussion on the issue of
base allowance. The current proposal would provide for no tax
levied on production of 5,000 barrels or less and tax levied on
an expediential curve for production rates up to 30,000 barrels.
He asked the opinion of BP Exploration on this provision.
10:34:31 AM
Mr. Walker replied that the resulting $73 million tax-free
provision was not considered for the benefit of BP Exploration.
The focus should be in establishing a regime that would benefit
all producers. A rate that is appropriate for this corporation
should be appropriate for all producers. The Senate Resource
Committee substitute excludes large producers from the base
allowance benefit. A new tax system should have a "level playing
field".
10:35:48 AM
Mr. Marshall informed that original discussions on this issue
were focused on providing a geographical specific base allowance
applicable to all producers operating on the North Slope. A
different system could be adopted for operations located in Cook
Inlet.
10:36:25 AM
Senator Stedman noted the proposed 95 percent "true-up"
provision that would require producers to submit 95 percent of
the estimated tax on a monthly basis. He requested comment from
industry on this issue as well as any other "burdens" or issues
of concern.
10:36:48 AM
TOM WILLIAMS, Senior Tax Counsel, BP Exploration Alaska, Inc.,
testified that he was previously employed as Assistant
Commission of the Department of Revenue. The 95-percent true-up
provision is "extremely unfair". Federal taxpayers remit
quarterly payments of estimated tax with a true up of the actual
tax due March of the following year. No penalty is assessed on
underestimated taxes.
10:38:01 AM
Mr. Williams stated that the proposed PPT structure "resembles"
an income tax. The provisions of the Senate Resources Committee
substitute would require the taxpayer to predict the tax with
95-percent accuracy, based on future oil prices. Additionally,
costs, which would be accounted as deductions, would be unknown.
Mr. Williams continued that capital costs would be accounted as
credits and would reduce the tax liability. However
unanticipated events during the year, such as a delay in
obtaining equipment, would result in different capital
expenditures than planned. Lower production rates could result
in lower operating costs. Lower operating costs would garner
lower deductions. These issues and challenges are similar to
those encountered with federal corporate income tax returns.
Mr. Williams detailed the accommodations provided for federal
returns, including a nine-month period to reevaluate estimated
taxes. This legislation, in comparison, would require
significant accuracy each month. The true-up should be 90
percent and cumulative to the end of the calendar year. This
method would be "workable" and would provide the State regular
cash flow.
10:43:28 AM
Senator Stedman surmised the corporation prefers the true-up
provision contained in the original PPT proposal to the Senate
Resources Committee substitute.
10:43:37 AM
Mr. Williams corrected that the legislation introduced at the
request of the governor would create the same difficulties.
Although the true-up is 90 percent, penalties would still be
assessed for underestimations.
10:44:03 AM
Senator Stedman informed he would review this matter.
Senator Stedman asked the corporation's position on the proposal
to increase the oil spill surcharge fee rate by one cent and
implement other changes to the existing program.
10:44:25 AM
Mr. Williams explained the Senate Resources Committee substitute
proposes to lower the surcharge collected for the Oil and
Hazardous Substances Spill Response (470) Fund from the current
amount of two cents to one cent. The balance of this fund is $50
million and therefore has "gone to sleep", and the surcharge
would not be levied unless the balance was reduced.
Mr. Williams concluded that a reduction in the surcharge amount
would "move away from where the State would want to be." In an
incident in which the fund were drawn against, it should be
replenished expeditiously, rather than remain below
replenishment for an extended period. The proposed reduction
would double the length of time before the fund was replenished.
10:46:10 AM
Senator Olson, referencing the pie charts on Page 12, realized
that industry profits and the State benefits from high oil
prices. However, residents of the election district he
represents would be impacted by the high price. He requested
consideration of the greater context of the issue. He also asked
the impact of the proposed increase from a 20 percent tax to a
25 percent tax.
10:48:06 AM
Mr. Walker responded that a 25 percent tax would place a
"significant additional burden on industry". Revised pie charts
demonstrating the impact of a 25/20 PPT would be prepared and
provided.
Senator Olson surmised that high oil prices are in the best
interest of industry.
Mr. Walker agreed and furthered that high oil prices are in the
best interest of all parties.
Senator Olson countered that high prices are not in the best
interest of local consumers.
Mr. Walker advocated for the State's decisions in expending its
revenue generated from the high oil prices.
10:49:26 AM
Co-Chair Green announced that the Committee could develop a list
of questions for BP Exploration.
10:49:52 AM
Mr. Walker indicated he would be available to address these.
10:50:02 AM
Co-Chair Green intended input "from all sides" of the proposed
PPT issue.
AT EASE 10:49:50 AM / 10:57:25 AM
10:57:41 AM
RICHARD OWEN, Production Manager, ExxonMobil, and Vice
President, ExxonMobil Alaska Production, read testimony into the
record as follows.
I am here today to discuss ExxonMobil's concerns with the
committee substitute to SB 305. Before I go into our
specific concerns, I would like to take a few minutes to
describe ExxonMobil's history in Alaska, how tax systems
impact investments, and our assessment of the remaining
resource potential on Alaska's North Slope.
ExxonMobil has had a presence in Alaska for over half a
century, investing more than 11 billion dollars in the
State's economy. Currently, ExxonMobil has working
interests in Prudhoe Bay, Kuparuk, Endicott, and Granite
Point. We are the operator of the Point Thompson Unit, and
we are the largest interest holder in the Prudhoe Bay
field. Our current working interest oil production is
approximately 180,000 B/D (Note: EMWI 159,000 EMNI), and we
are the largest owner of discovered gas resource. We are
proud of the role our company has played in Alaska through:
exploration; initial field developments; construction of
TAPS [Trans-Alaska Pipeline System]; development of new
technology; and the promotion of efficient reservoir
management practices. Today, our production from Alaska
represents approximately 4% of ExxonMobil's worldwide oil
and gas production.
Our Alaska production is primarily from Prudhoe Bay and
near-by satellite fields. Prudhoe Bay, along with Point
Thomson, has significant remaining potential, but it comes
at a higher cost and risk.
One of ExxonMobil's objectives - in both the gas pipeline
fiscal contract negotiation and the discussion on oil taxes
- has been to reduce the risk associated with fiscal
changes by working with the State of Alaska to establish a
predictable and durable fiscal environment in which to make
long term investment decisions. Changes in the fiscal
regime for oil directly impacts how Senator Elton evaluate
ongoing investment decisions. Tax systems need to be
carefully designed to ensure the desired objective of
resource development is achieved. To that end, it is
critical to take into account the quality of the remaining
resource otherwise a change may result in unintended
consequences, such as reduced investments and lower reserve
recovery.
When I say quality of resource, I mean: the size and nature
of the oil and gas reservoirs; the cost and technology
required to develop those reservoirs; the distance to
market; as well as the tax and royalty system that applies,
including the long-term stability of that system. Countries
experiencing significant industry investment have achieved
the proper balance in their fiscal regimes. ExxonMobil's
assessment of the remaining oil resource suggests future
growth opportunities will come from: complex enhanced oil
recovery (EOR) projects; development of smaller, more
marginal oil accumulations; and the innovative development
of viscous and heavy oil resources. These opportunities
will require the development and application of new
technology, higher unit development costs, and more complex
operations to deliver a given production rate. These
resources are much lower in quality as compared to Prudhoe
Bay and Kuparuk, though they face the similar challenges
associated with arctic conditions and distance to market.
Therefore, we are concerned the Administration's original
proposal is weighted towards a higher tax, which could
prevent some of Alaska's challenged resources from being
developed. The committee substitute contains even higher
tax rates, which may prevent more of these challenged
resources from being developed.
On February 28, I testified before the Senate Resources
Committee about our key concerns with SB 305 as originally
proposed. On March 18, I testified again before the Senate
Resources Committee about how the proposed changes
incorporated in the committee substitute bill exacerbate
our concerns. I do not intent to cover all of my previous
testimony, but I will provide comments on these areas: the
increase of the base tax rate and addition of a progressive
tax rate component; the committee substitute's transition
provisions; and the elimination of royalty settlement
agreements as a determination of market value.
SB 305, as originally proposed, would represent a
significant tax increase on the industry. And as I just
outlined, we are concerned the higher tax rate could
prevent some of Alaska's remaining challenged resources
from being developed. The committee substitute bill
increases the already high cost base tax rate to 25% and
then further increases it as oil prices increase.
Higher tax rates discourage investment. Companies are
willing to accept the risks of long-term, capital intensive
investments when there is a corresponding opportunity for
upside potential through a variety of factors, such as
increased production or higher prices. When you limit or
reduce the benefit companies can achieve from the upside
factors, you reduce the attractiveness of those investment
opportunities. The proposal to increase the already high
base tax rate and then further increase it as oil prices
increase, reduces or limits the upside potential, which
will result in companies recalibrating investment
decisions. Reduced investment will result in reduced
resource recovery, diminished state revenues, and fewer
employment opportunities, with a resultant negative impact
on the state's economy. Again, let me reemphasize this
point. While higher taxes may bring in additional revenues
in the short-term, any reduction in investment and
subsequent production will significantly impact those
revenues in the longer term. We think the focus of the tax
bill should be encouraging investment and growing
production, which is not accomplished with the higher tax
rate and increasing the tax rate with oil price.
I would now like to discuss the committee substitute's
transition provisions. The benefits from a typical oil and
gas investment take many years to be realized. Satellite
and tertiary recovery investment decisions by our company
during the last five years were made under the ELF
structure, anticipating a lower tax relative to that
proposed under the PPT bill. The State appropriately
provided this incentive so these challenged and costly
projects could be commercially viable. SB 305, as
originally proposed, recognized it is not appropriate to
suddenly increase taxes on these prior investments without
providing some form of consideration. The Senate Resources
Committee included transition provisions in the committee
substitute bill, but proposed a deduction based on recent
investments with the pace of the deductions linked to
future spending. As I stated, the purpose of the transition
is to address the sudden increase in taxes on recent
historical investments. Future investments decisions will
be made under the new tax system based on the balance
between the new tax rate and the credit rate. For this
reason, we think the Administration's proposal of providing
a deduction based on recent investments, not linked to
future spending, is more appropriate.
Finally, I would like to express our disappointment that
the provision allowing the use of a producer's royalty
settlement agreement to determine the value of oil and gas
has been removed from the committee substitute bill. That
provision addressed a longstanding issue that has divided
the State and the industry over the years. Too many years
and too much money have been spent in disputes over how to
value a single barrel of crude oil or a single molecule of
gas. It made little sense in the past and it makes little
sense today for the State to have separate divisions
determining the value of oil and gas - one for royalty and
one for taxes. There is only one value in the market place.
SB 305, as originally proposed, allowed the State to value
a producer's oil and gas using the producer's royalty
settlement agreement, which was negotiated with, and
approved by, the Department of Natural Resources. That
provision was important to industry as it provided
certainty to a producer on the value on which to pay its
royalty and production taxes while reducing the
administrative and audit costs to both the State and the
industry. We urge this committee to reinstate that
provision.
In summary, the quality of the resources, the risks
undertaken by a producer, and the impact on the State's
overall investment climate must be factored into the design
of the tax system. While industry needs predictability and
durability under which to gauge investment decisions, the
attractiveness of that predictably and durability is lost
if it comes at too high a cost.
Despite our concerns with the original SB 305, we are
prepared to move forward under that system as originally
proposed, since it sought to provide a balance of revenues
to the state and producers across a range of oil prices,
provided sufficient incentive for producers to undertake
exploration and development risks, and included reasonable
transition provisions for past investments. And, most
importantly for ExxonMobil, oil fiscal contract terms
consistent with the Administration's proposal would provide
the predictability and durability necessary to advance the
gas project to the next phase. Potential changes to the
Administration's PPT bill should be carefully considered to
avoid upsetting the balance contained in the bill - changes
would require a reexamination to ensure the underlying
health and stability of the oil business is sufficient for
a gas pipeline project.
As I mentioned, the proposed committee substitute
exacerbates our key concerns regarding both tax rates and
certainty. For these reasons and the need to move ahead
with the review of the Gas Pipeline Fiscal Contract, we
urge this committee to support SB 305 as originally
proposed.
11:08:38 AM
Senator Stedman referenced the witness' testimony to the
potential impact of a PPT system on negotiations for a natural
gas pipeline, as well as exploration and development over the
next five years. While he recognized the potential impact on oil
development, he questioned the influence of either a 20/25 or
20/30 PPT system or the status quo would have on the
establishment of a natural gas pipeline.
Senator Stedman cited data of the Department of Revenue,
calculating that at a price of $40 per barrel, profitability
would decline under a PPT system. However, the decline would be
relatively minimal; from $3.8 billion to $3.4 billion. The
disparity increases with higher oil prices.
Senator Stedman contended that Alaskan's, as the owner of the
resource, should receive a fair share of profits. However, the
tax system should also ensure that, at lower oil prices,
industry would be unable to produce and expand operations.
11:11:41 AM
Senator Hoffman qualified that the figures listed by Senator
Stedman do not include progressivity. Progressivity would change
the amounts significantly.
11:12:05 AM
Senator Stedman agreed that progressivity levied on $60 per
barrel prices would impact profits. At below $40 per barrel
prices, progressivity would not be triggered. The actual
impacts would be studied during this process.
11:12:51 AM
Mr. Owen expressed concern for the "health" of the "oil
business" in the long term, which depends on more than just
profitability.
11:13:38 AM
Senator Bunde identified the underlying issue of the long term
viability of the oil industry is based on the price of oil. He
asked the Exxon Mobile prediction of the long term price of oil.
11:14:05 AM
Mr. Owen responded that the company would not share its outlook
on prices. A range of prices is utilized in its forecasting.
Market conditions do support the current prices.
Senator Dyson ascertained the witness' implication that the
original version of the bill, introduced at the request of
Governor Murkowski, could not be improved.
11:15:05 AM
Mr. Owen responded that improvements possibly could be made to
the original version. ExxonMobil has offered suggestions on some
aspects through the Alaska Oil and Gas Association. The company
has had ample time to review the Governor's proposal and the
balance it would create between producers, explorers, large and
small parties, etc. The original bill is acceptable and would
provide the necessary predictability and stability.
11:15:48 AM
Senator Dyson asked if the witness deemed the original version
superior to the committee substitutes under consideration in
this Committee and the House of Representatives.
11:16:05 AM
Mr. Owen affirmed.
11:16:10 AM
Senator Dyson asked how the recommendations of the Alaska Oil
and Gas Association were presented to the Committee.
11:16:25 AM
Mr. Owen replied that the Association testified primarily about
the "mechanics" of the bill.
11:16:38 AM
Co-Chair Green informed that the Association testified before
the Senate Resources Committee.
11:16:46 AM
Senator Stedman noted that the issue of the royalty settlement
agreements was addressed significantly in the Senate Resources
Committee. He requested the witness explain why ExxonMobil was
dissatisfied with the provisions relating to this issue included
in the committee substitute. This matter could be easily
overlooked.
11:17:48 AM
Mr. Owen paraphrased his earlier testimony, explaining that the
royalty settlement agreements provide "a very clear and well
defined" process to value production. This process has been
successful and has agreement by the Department of Natural
Resources. It provides producers the ability to calculate value
as well as dispute resolution through a re-opener process for
destination value and deductible costs.
11:18:27 AM
Senator Stedman surmised the witness' assessment that excluding
the existing royalty settlement agreement provisions would
result in a more cumbersome process for industry that is subject
to disputes and litigation.
11:18:46 AM
Mr. Owen affirmed that if the language were removed from
statute, royalty provisions would have to be completely
recreated. Industry would prefer the ability to value according
to the provisions of the royalty settlement agreement.
11:19:12 AM
Senator Stedman commented that this issue could be worthy of
discussion.
11:19:31 AM
Co-Chair Green asked the witness would respond to questions
compiled by the Committee.
11:19:50 AM
Mr. Owen answered he would be available to do so.
11:19:53 AM
Senator Stedman referenced the impact of a credit rate of 20
percent, 25 percent or 30 percent in relation to the decline in
production. He asked ExxonMobil's position as to whether a
higher credit percentage would assist in mitigating the
situation.
11:20:53 AM
Mr. Owen responded that credits are beneficial and reduce the
"barrier to investment" in offsetting some upfront costs for
investment. However, the "total project" is also important,
including "revenue stream". If the overall tax rate is too high
and "takes so much of that revenue stream" it would impact the
"attractiveness" of those projects. A balance is necessary.
11:21:50 AM
Senator Stedman spoke to previous testimony as well as the
modeling complied by Econ One and the declining production from
the North Slope. The Committee has been told that regardless of
its actions regarding tax rates and credit rates, Alaska could
never adequately compete in "Exxon's world" against competitors
worldwide that have "vastly" wider pools of resources. Alaska is
at a competitive disadvantage due to the size of its oil
reserves. He asked if the witness agreed with this assertion.
11:22:47 AM
Mr. Owen responded that ExxonMobil is "very active" in Alaska
has drilled extensively, and supports Prudhoe operations. The
company is pursuing "all economic opportunities" available and
would continue to invest in the state and toward progress in
overcoming technical challenges. He disagreed that Alaska is not
competitive, but rather stressed that Alaska has ExxonMobil's
investments and the company intends to retain those investments.
The issue is whether the new tax structure would allow this.
11:24:49 AM
Senator Dyson distributed an article published in The Economist
on the fiscal regime of the North Sea.
ADJOURNMENT
Co-Chair Lyda Green adjourned the meeting at 11:25:15 AM
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