Legislature(2011 - 2012)SENATE FINANCE 532
03/21/2012 01:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB192 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| = | SB 192 | ||
SENATE FINANCE COMMITTEE
March 21, 2012
1:10 p.m.
1:10:34 PM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 1:10 p.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
Damian Bilbao, Head of Finance, Developments and Resources,
British Petroleum (BP) Inc.; Dale Pittman, Vice President,
Production, ExxonMobil Alaska, ExxonMobil Production
Company.
SUMMARY
SB 192 OIL AND GAS PRODUCTION TAX RATES
SB 192 was HEARD and HELD in Committee for further
consideration.
1:11:11 PM
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax;
and providing for an effective date."
DAMIAN BILBAO, HEAD OF FINANCE, DEVELOPMENTS AND RESOURCES,
BRITISH PETROLEUM (BP) INC., continued his PowerPoint
presentation from the morning meeting: "BP Testimony to
Senate Finance" (copy on file). He responded to an earlier
question concerning Slide 3, which included both the
operating and capital budgets. He clarified that the
decline included a 4 percent inflation rate for both
operating and capital.
Co-Chair Stedman observed that the growth could be modified
under budgetary pressures. Mr. Bilbao replied that was
correct. He pointed out that there could be opportunities
to modify both budgets. He added that investment that
resulted in increased production would be necessary in
order to avoid the 6 percent decline depicted in the slide.
Senator Thomas referred to Slide 4. He recalled that Dr.
Pedro Van Meurs had indicated that Alaska's Clear and
Equitable Share (ACES) rendered Alaska non-competitive
internationally. He referred to a letter from Bill
Armstrong, President of Armstrong Oil & Gas, which
indicated that producers were leaving the Gulf of Mexico
and Alaska due to aging oil fields. He opined that given
large amount of oil that still remained in the legacy
fields; the reasoning was hard to accept. He pointed out
that Cathy Foerster from the Alaska Oil and Gas
Conservation Commission (AOGCC) and Kevin Banks from the
Department of Natural Resources (DNR) had called the
decrease of production in mature fields a natural
transition. He pointed out that the decline in production
had begun long before the passage of ACES, and wondered why
it should currently be considered the only cause for the
decline. He asked how it would cost to increase production.
Mr. Bilbao agreed with the previous testimony; that the
major producers were leaving aging fields under ACES. He
stated that globally, Alaska was still the third largest
resource base for BP. He relayed that when the allocations
for global projects were discussed it was beneficial that
Alaska prove competitive. He stated that BP had three areas
of focus in Alaska; the need to increase efficiencies, to
develop technologies, and tax change. He noted that Prudhoe
Bay had produced 44 percent more oil than originally
estimated. He shared that BP had a deep hopper of
opportunities being explored. He offered that BP could
continue working in Alaska for another thirty years.
1:18:01 PM
Co-Chair Stedman stated that previous testifiers had
indicated the three major producers in the state were
operating under harvest mode; companies were extracting
cash from Alaska as quickly as they could. He wondered if
BP agreed. Mr. Bilbao responded that the company believed
that more activity could be happening in Alaska. He stated
that PFC Energy's statement that ACES did not encourage
investment and growth was consistent with the view of BP.
He asserted that the fiscal environment in Alaska's should
reflect a desire to be competitive in the global market.
Senator Thomas appreciated that ACES presented challenges,
but he highlighted that did not explain the lack of
production 18 years prior to the passages of the
legislation. He asserted that the state had a
responsibility to ensure that changing the tax structure
would result in more investment. Mr. Bilbao maintained that
there had been significant activity during the years prior
to ACES. He said that projects prior to ACES had required
significant time and money, for example the drilling
operation on Northstar Island. He stated that the
environment of Alaska had once inspired investment, even at
a high price, but no longer did under ACES. He concluded
that due to ACES Alaska was no longer considered in
conversations concerning new investments.
1:21:47 PM
Senator McGuire questioned what investment strategies were
considered by producers when entering a high price oil
environment. She furthermore queried how the company made
investment decisions and how Alaskan projects stood up
against other proposed projects. She likened the discussion
in the boardroom to the consideration of retirement options
of high-risk stock or safer bonds that families would
consider when budgeting. She requested an overview of the
investment changes that would occur as a result of changes
in the tax structure.
Mr. Bilbao replied that fundamentally the question of ACES
was about the allocation of investment dollars. He said
that funds were not unlimited, and that BP had an
obligation to its shareholders. He added that the
opportunities to access new areas and develop new projects
globally were tremendous. He felt that the conversation
would come down to how significant the changes in Alaska
proved to be: was business more efficient, were there new
technologies which had enabled new projects, and had the
fiscal environment changed. He relayed that if none of the
above had changed then the business would remain as before;
if change could be calibrated then the investment picture
would change. He maintained that little would change
without an alteration to ACES. If the base business was
healthy, heavy oil pilot programs and additional major
projects would be easier to support. He concluded that the
base business; the investment and renewal for the next 50
years, including investment in on-going activity, were the
foundation for future projects.
1:26:38 PM
Senator McGuire asked what differentiated Alaska's fiscal
terms from other countries in which the company was
currently investing. Mr. Bilbao replied that the company
examined the tax credits as part of a broad discussion. He
said that there was a starting presumption, from a macro-
view, of an understanding of which basins provided a more
attractive investment in a high price environment. He noted
that the Gulf of Mexico was a high price environment that
was a more attractive investment destination when compared
to Alaska. He asserted that BP had a responsibility to do
what it could pertaining to business and technology, but
needed help from the legislature to change the tax
structure.
1:28:27 PM
Mr. Bilbao testified that, like ACES, SB 192 did not
created meaningful tax change that would inspire future
investment. He referred to Slide 5, which illustrated the
similarities between ACES and SB 192.
Co-Chair Stedman requested further discussion of the slide.
Mr. Bilbao explained that the bottom axis on the chart
represented the production tax value per barrel (PTV/bbl.)
and the vertical axis, the production tax rate per barrel.
Mr. Bilbao explained that PTV/bbl. included the sales price
of oil off of the North Slope, with a deduction for
transportation as well as capital and allowable expenses,
defined the production tax value per barrel on a yearly
basis.
Co-Chair Stedman clarified that royalties were included in
the equation. He offered that when the PTV/bbl. was at $80
it indicated that the price of oil was at $120 per barrel.
He stated that one of the challenges for the committee
during the SB 192 presentations was that the price of oil
as understood by the general public was quite different
than what was represented on industry charts. Some charts
illustrated the Alaska North Slope (ANS) West coast price
and others the PTV/bbl. For example the PTV/bbl. price
would be $130 per barrel and at the same time the ANS West
coast would be $170; a $40 spread.
Mr. Bilbao agreed. He stated that some of the figures that
had been seen during previous testimony had under-
represented industry internal costs. He felt that Slide 5
gave a rough estimate of the difference between the sales
price of the oil and the PTV/bbl.
Co-Chair Stedman concluded if the chart on Slide 5 were
converted to ANS West coast, the figures would range from
$30 to $105, which would truncate all projections north of
$105. He explained that there had been hypothetical
discussions about, using for discussion $150 ANS West
coast, freezing the split of profit oil between the
industry and the state. Under the hypothesis everything to
the right hand side of the lower axis would become
irrelevant.
Mr. Bilbao replied that BP had not considered that
perspective and could not provide exact numbers. He relayed
that the intent of the slide had been to give the committee
a sense of the differences between SB 192, HB 110 and ACES.
1:32:17 PM
Co-Chair Stedman emphasized that for the sake of clarity,
the price high of oil per barrel should remain at
approximately $150. He pointed out that it was natural for
people to visually gravitate to the right-hand side of the
chart and it would be more productive to truncate the price
at the northern end of the axis. He shared that the
committee would be working from $150 and south, in an
attempt to come up with a freezing of the split of profit
oil.
Co-Chair Stedman reiterated that $150 would be a safe
number to end the charts. He offered that consultants had
testified that industry was profitable at $100 per barrel
oil and felt that the committee needed to concentrate on
prices greater than $100 per barrel. He noted that ACES
became more difficult for industry as the price moved past
$100 per barrel.
1:35:12 PM
Mr. Bilbao disagreed with the previous testimony by PFC
Energy, which used a flat per barrel cost. He asserted that
costs tended to go up. He said that from a cash flow
perspective, the base would be positively affected by tax
change. He said that business was not as robust as the net
income dollars that had been discussed. Capital
expenditures overtime were treated different than cash
flow. He stated that the $70 dollar range given in earlier
testimony by ConocoPhillips was closer to the view of BP
than the figures given by PFC Energy.
Co-Chair Stedman asked whether the discussion concerned $70
ANS West coast, or $70 PTV/bbl. Mr. Bilbao believed that
the figure used had been based on ANS.
Co-Chair Stedman informed the committee that moving forward
there would be discussion based on less than $100 per
barrel. He reiterated that previous consultants had
cautioned the committee from moving too much cash below
$100 ANS West coast per barrel. He thought that a constant
x axis would clarify the discussion for the public.
1:39:05 PM
Co-Chair Stedman asked if the tax rate on the slide was the
nominal rate after credits. Mr. Bilbao clarified that the
nominal rate had been used. He said that the chart
incorporated everything without distinguishing between
individual elements.
Co-Chair Stedman asked which companies were represented by
the numbers on the chart. Mr. Bilbao explained that the
slide illustrated industry overall.
Co-Chair Stedman asserted that it was important that the
committee clearly understand what they were looking at
because when looking at homogenized fields, which brought
in the non-taxpaying producers that consumed upwards of
$400 million in credits against the treasury, the tax rate
was shifted down. When only legacy field taxes were
examined the rates increased leading to a misunderstanding
between the state and the major producers. Mr. Bilbao said
he would get back to the committee on the specifics.
1:41:58 PM
Mr. Bilbao referred to Slide 6, which implied that the
individual elements of SB 192 did not provide meaningful
tax relief.
Co-Chair Stedman probed the industry definitions of
"meaningful" and "significant". He referred to earlier
testimony by Senator Hoffman that the legislation would
provide incentives of up to $3 to $4 billion, which the
committee believed was both significant and meaningful. He
requested further clarification of the elemental changes
necessary in SB 192 in order to meet the industry's needs.
Mr. Bilbao replied that the state would know the definition
of meaningful when the tax incentives resulted in increased
investment and production. He believed that a change in the
progressivity rate would be the number one element to shift
the fiscal environment and encourage investment. The second
element would be bracketing around the tax rates.
Co-Chair Stedman noted that progressivity was the number
one issue and that bracketing was a possible solution.
Mr. Bilbao clarified that rate of the bracketing of the
progressivity, in addition to progressivity, was too high.
He testified that the 25 percent base rate was too high.
1:45:42 PM
Co-Chair Stedman emphasized that the difficulty faced by
the committee lie in the testimony from consultants
cautioning against dropping progressivity below $100 per
barrel. He agreed that there were problems with
progressivity at higher rates.
Co-Chair Hoffman noted that support groups had indicated
that there was no incentive for producers above $100
because the state received too large a share. The issue was
how far down the high end the state should go. He
reiterated his morning question to ConocoPhillips regarding
how lowering to $130 per barrel would affect the high end.
He observed that billions would be saved at the high end.
Oil companies had testified that there was no incentive at
the high end and this was the problem the committee was
attempting to address. He said if prices rise, the industry
would see substantial return. He pointed out that
international turmoil could increase the price per barrel
to $200, which would increase credits to nearly $12
billion. He felt that the numbers were significant.
1:48:25 PM
Mr. Bilbao agreed that $4 billion was significant, but that
the high end was south of $130 per barrel. He acknowledged
that there were always opportunities for the price to go
up, but stressed the need to consider both the low and the
high end. He argued that the current base business was at
$100 and could go down just as easily as it went up.
Co-Chair Hoffman rebutted that the problem was that changes
were being considered to a tax structure for a field that
could be operational for 40 - 50 years. He recalled prices
as low as $9 per barrel, when no one thought oil would go
to $100 per barrel in a 25 year time frame, which it did.
He asserted that, unless the discussion concerned the
reduction of taxes for industry, the need for a stable tax
structure was never mentioned by industry.
1:50:54 PM
Co-Chair Stedman agreed that progressivity was on the table
for discussion along with new production. He observed that
there could be one tax structure for new production and
another for existing. He pointed out that SB 192
legislation contained a two-tier structure that considered
both current and new production.
Mr. Bilbao spoke to the two-tier structure of new and
existing production. He agreed that the health of legacy
fields was primary. He warned that trying to differentiate
between the two would create unintended consequences. He
referred to testimony by Commissioner Cathy Foerster,
AOGCC, before the Senate Resources, February 14, 2012:
"The health of all the fields on the North Slope
depends, to a certain degree, on the health of Prudhoe
Bay."
He argued that all production needed to be incentivized and
should be separated. He suggested that the consultants
reconsider the assumptions that were being used for cost
projections. He said BP believed that the assumptions used
were half of what they should be. He noted that the
drilling rigs currently in the legacy fields delivered the
largest discoveries year after year.
1:54:14 PM
Co-Chair Stedman wondered how new production would be
incentivized without differentiation between new and
existing fields.
Mr. Bilbao said that new production would be incentivized
if the base business was healthy. Healthy light oil
business would encourage viscous and heavy oil business,
and would underpin a gas business. He asserted that
everything started with the legacy fields.
Co-Chair Stedman noted that they would have more
conversations with consultants on the issue. He understood
that, in order of importance, separation of old and new
production was second after progressivity. He solicited
comments on minimum tax decoupling and the petroleum
information system.
Mr. Bilbao reiterated that a tax increase would not be
helpful in encouraging more investment. He added that an
increase in the minimum tax would not increase additional
investment.
Co-Chair Stedman inquired whether Mr. Bilbao could offer
constructive suggestions concerning how the state could
protect itself from exposure to a negative production tax
value moving forward.
1:58:31 PM
Mr. Bilbao replied that the best thing that the state could
do in the short term with meaningful tax change would be to
look to increase drilling. He added that the state should
incentivize drilling and well-work on the North Slope
through meaningful tax change.
Co-Chair Stedman felt that the state and industry agreed on
the need for increased production. He probed Mr. Bilbao's
thoughts concerning the state's exposure on the high end to
capital credits and immediate write-offs for industry. Mr.
Bilbao declared that he would be happy to continue with the
presentation. He asserted that the more simple the plan for
industry to incorporate into an economic model, the better.
2:01:08 PM
Senator McGuire spoke to bracketing. She understood that
making the most profit possible was of the utmost
importance to industry. She felt that bracketing was a fair
concept because companies were not taxed at a higher
marginal rate. She inquired of the nature of the
conversation surrounding bracketing in the company
boardroom.
Mr. Bilbao responded that if the price of oil was at $60
dollars for the year and spiked to $100 in December it
would cause the company to go back to the beginning of the
year to adjust the total tax payment. He said that
bracketing provided the benefit of simplicity; if the
company could plan for the year knowing that it would not
have to pay back the difference in tax due to fluctuation
oil prices. He reiterated that the company would be
focusing on cash flow to establish how future business
decisions were made.
2:04:46 PM
Senator Thomas felt that the subject of decoupling should
be addressed and that the separate tax for oil and gas
should be determined quickly. He expressed concern with the
current amount of gas being used in the field and the
amount of light oil being withdrawn which reduced the
amount of heavier oil over time. Mr. Bilbao replied that
decoupling was important, but not imperative. He furthered
that the light oil business from the legacy fields remained
the foundation for the company moving forward. He stressed
that the conversations related to progressivity were more
important to have at the current time.
2:06:49 PM
Senator Thomas understood that focusing on light oil was
easy. He asserted that the focus should be on the heavy
oil. He pointed out that BP had for some time had a plant
in place in Prudhoe Bay that had experienced a degree of
success. He felt that there should be some focus on heavy
oil and natural gas. Mr. Bilbao replied that the priority
should be on light oil from the legacy fields because that
was the majority of production generated by the company. He
furthered that investment in light oil could contribute to
the heavy oil business. He felt that there were remaining,
significant light oil opportunities within the legacy
fields. He remarked that there had been no oversight of
heavy oil opportunities and with meaningful tax change
those opportunities could be explored.
2:09:29 PM
Mr. Bilbao continued to Slide 7, which spoke to three key
issues important to BP: ACES was not working, more
investment was needed to increase production, and the
policy crafted should focus on long-term solutions. He
believed that industry could help provide long-term
solutions through its control of efficiency and technology,
but that the issue of tax change was wholly in the per-view
of the legislature.
2:10:12 PM
Mr. Bilbao addressed Slide 8, which illustrated the
drilling activity challenged by ACES. He believed the
numbers on the slide could be improved through meaningful
tax change.
Co-Chair Stedman noted that the slide depicted what was
below ground. He asked if the companies processing
facilities above ground were gas constrained. Mr. Bilbao
replied that BP was constantly examining opportunities to
ensure that facilities were producing as much as possible.
He furthered that there was data that informed those
efforts and that the project would be financially
beneficial under ACES or not. He said that there were two
ongoing efforts to ensure the facilities were optimized for
production: the ongoing fine tuning of the kip and the
expansion necessary to support major projects.
2:12:28 PM
Co-Chair Stedman surmised that the state faced challenges
below ground and above ground related to the current tax
structure. Mr. Bilbao responded that opportunity was
waiting for both; under a different tax environment.
Mr. Bilbao presented Slide 9. The bar graph detailed the
rise in operating and capital costs as depicted in the
Department of Revenue (DOR) Source Book - Fall Forecasts.
He relayed that the rise in costs was not solely activity
led, but could also be contributed to inflation.
Co-Chair Stedman wondered if BP anticipated an increase in
capital expenditures moving forward. Mr. Bilbao replied
that he would provide the information to the committee.
2:14:44 PM
Co-Chair Stedman remarked that the slide showed the
aggregate capital expenditures through 2.7 billion for all
involved companies. He opined that the committee was
challenged by its inability to break the numbers down by
company. He furthered that it would be helpful to produce a
capital expenditures graph that compared producing to non-
producing legacy fields. He noted that industry has access
to information that was unavailable to the committee. He
was encouraged by the aggregate numbers into 2015, but the
inability to examine the Prudhoe Bay numbers specifically,
as they constitute 50 percent of production, was a
challenge.
2:16:56 PM
Mr. Bilbao relayed that he could not provide data for
Prudhoe Bay specifically, but believed that DOR could
answer any questions.
2:17:58 PM
Senator Olson asked if the 50/50 split between capital and
operating expenditures would remain unchanged by the
production of heavy oil. Mr. Bilbao reminded the committee
that the slide represented the gross number for industry
and not BP specifically. He assumed that as the light oil
business continued to decline the proportions would alter.
Senator Olson wondered if the numbers were significantly
different would the industry expect the legislature to come
back to the table to craft a different tax structure for
companies solely developing heavy oil.
Mr. Bilbao replied that it would depend on how meaningful
the any tax change crafted by the legislature proved to be;
the challenge that surrounded heavy oil from a fiscal
perspective remained unknown. He reiterated that industry
could focus only on the efficiency and technological
challenges, but that it was too early to give a definitive
answer.
2:20:03 PM
AT EASE
2:32:41 PM
RECONVENED
Mr. Bilbao reviewed slide 10, which illustrated the base
business challenges faced by industry. He testified that BP
believed that the lifting cost figure used by PFC Energy
was inaccurate by half.
Co-Chair Stedman assured Mr. Bilbao that PFC Energy would
work with BP to make the necessary adjustments in the
lifting cost figures.
Mr. Bilbao continued to Slide 11, which reiterated that
more opportunities require efficiency, technology and tax
change. He contended that as much as $5 billion in growth
would occur with meaningful tax change.
Co-Chair Stedman understood that it would take more than $5
billion over a period of years for any meaningful change to
the decline curve. He questioned the amount of capital
costs it would take to reach the goal of additional
production of 600,000 barrels a day, 50 percent of which
would come out of Prudhoe Bay, regardless of the tax
structure. Mr. Bilbao responded that increased production
would not occur under ACES. He added that the increase in
investment would bring new jobs to the industry. He
furthered that there were additional opportunities being
discussed by the company than those represented on the
slide.
2:40:09 PM
Co-Chair Stedman noted that the committee had requested
guidance form consultants on the magnitude of the capital
expenditures that would be required to stem the 6 percent
decline to 4, or even 0. He expressed concern for
diminishing marginal returns for the state. He understood
that amount was significantly above $5 billion. He wondered
if the number dropped to $3 to $4 billion annually, would
BP return to the committee with recommendations on how to
stem the decline regardless of the tax structure. Mr.
Bilbao responded that he could not give specifics, but
stressed that Alaska had a potential for more projects in
light and heavy oil, and gas. He reiterated that the
fundamentals were in place but that what was needed was the
financial support for the projects.
2:41:59 PM
Mr. Bilbao spoke to long-term policy issues cited on Slide
13. He repeated the testimony of Cathy Foerster,
Commissioner, AOGCC, before the Senate Resources Committee,
February 14, 2012 regarding the health of all the fields on
the North Slope:
"The health of all the fields on the North Slope
depend, to a certain degree, on the health of Prudhoe
Bay. Prudhoe Bay is the central nervous system and the
circulatory system (of the North Slope)."
Mr. Bilbao referred to statements by CERA, White Paper
Industry Context, 1999:
"Companies evaluate exploration and development
prospects in terms of the value (to shareholders) a
prospect can generate. Government take, in the form of
taxes, royalties, or other production-sharing or
profit-sharing requirements, adds to upstream costs,
and thus the level of government take is an important
component of the investment decision."
2:43:45 PM
Mr. Bilbao informed the committee that regardless of which
companies were doing the analysis; Alaska continued to stay
at the bottom of the list of investment destinations. He
continued to Slide 15, which reiterated:
· ACES was not working
¾Production adding activity remained flat
· More investment was needed
¾Base business in legacy fields was the foundation for
the future
· Focus on the long-term now
¾Only the legislature could correct failed fiscal
policy
2:45:10 PM
Senator Ellis asked what the ideal tax base rate would be
for BP. Mr. Bilbao responded that the legislature should
consider returning to a 20 percent base rate.
Senator Ellis understood that the next step for BP, if a
bill similar to HB 110 were passed, would be a discussion
surrounding the significant reduction of the base tax rate.
Mr. Bilbao answered that HB 110 should go further in the
quest for meaningful tax change. He maintained that a
change of great magnitude was necessary for increased
investment. He stated that BP would always encourage the
state to be more competitive with other parts of the world.
Co-Chair Stedman interjected that it was unlikely that a 20
percent tax was responsible for past unlawful activities
surrounding oil taxes. He said that some current lawmakers
felt that 25 percent was reasonable and were extremely
reluctant to enter into the base tax debate.
2:47:56 PM
Mr. Bilbao concluded that ACES was not serving the
corporation. He reiterated that drilling on the North Slope
was flat and that five out of every six jobs on the slope
focused on renewing the kip and adding production. He added
that the company would like to continue to make sure the
infrastructure was healthy and renewed, but also to ensure
that new oil was flowing. More investment was needed, which
would start with the base business in the legacy fields.
The company was not satisfied with a pipeline that was two-
thirds empty.
2:49:38 PM
DALE PITTMAN, VICE PRESIDENT, PRODUCTION, EXXONMOBIL
ALASKA, EXXONMOBIL PRODUCTION COMPANY, spoke first of the
company's commitment to Alaska. He stated that Alaska had
always been, and continued to be, a critical part of the
corporation's business. The corporation was the largest
lease holder for discovered gas resources in the state,
operated Point Thompson, and was the largest investor in
Prudhoe Bay. He shared that the corporation's presence in
the state dated back to the 1920s. ExxonMobil has had
continuous business in Alaska for the last 50 years. The
corporation expected to continue working in the state for
years to come and remained committed to long-term
responsible resource development.
Mr. Pittman addressed the testimony given by ConocoPhillips
and BP regarding investment commitments. He assured the
committee that the corporation supported ConocoPhillips at
Kaparuk, and BP at Prudhoe Bay, and their continued
commitment to invest in Alaska, and to pursue all
additional opportunities and investment that would become
viable through meaningful tax reform. He believed that
there was a significant need for change in Alaska's oil tax
structure. He said that oil production from existing fields
would decline by approximately 40,000 barrels per day in
2012 alone, and had been declining at that rate for many
years in the past. He challenged the state to stem the
decline. He opined that the 40,000 barrel per day loss
equaled nearly $3 to $5 billion. He warned that production
under a new tax regime would take 5 to 10 years to
implement. He cited the Nikaitchuq oilfield. He stated that
Nikaitchuq field streamed in 2011 after 6 years in the
planning and execution phase and cost approximately $2
billion. The field was expected to reach peak capacity of
25,000 barrels per day by 2015. He emphasized that the
addition of two projects, equivalent to Nikaitchuq, each
year could stem the current decline in production.
2:53:17 PM
Mr. Pittman asserted that without meaningful change in oil
taxes, investment would not be forthcoming. He testified
that he was unaware of any new development streaming within
the next 3 years. He felt that the state was "woefully"
behind in attracting new investment. He stated that under
the current tax structure, the taxes were too high to
provide the doubling of annual investment necessary to
effectively create change. He emphasized that with the
current price of oil, Alaska should be at near record
levels of activity.
Mr. Pittman related that investment decisions were akin to
risk management decisions, particularly for long-term
projects. The corporation assed the broad based investment
risk by examining the following aspects: commercial,
technical, fiscal and regulatory. He testified that oil and
gas companies depended on and expected upside potential to
offset inherent downside risks of capital intensive
investments. He asserted that the current tax regime took
away the upside potential, leaving investors at a
disproportionate risk on the low-side; leaving two choices:
not to invest or invest in low-risk activities. Higher
risk opportunities would be delayed. The tax reform as
proposed by the administration would restore balance to the
risk profile and favorably impact decision making for
Alaska's investors. ExxonMobil firmly believed that
meaningful change to ACES would attract additional
significant investments, which would lead to greater
development, increased production and reliable long-term
revenue for the state. He declared that Alaska depended
heavily on resource development but was currently burdened
by a tax regime that did not support the resource
development business. He said that the most onerous
inhibition to investment was progressivity.
2:56:41 PM
Mr. Pittman acknowledged the magnitude of the challenge the
committee faced in crafting sound policy. He allowed that
under ACES the state had enjoyed strong, short-term revenue
increases, but maintained that ACES had failed to sustain,
or attract, investment that would ensure oil development
into the future. He affirmed that SB 192 was a slight
improvement over existing law, but not enough. The fiscal
regime needed to encourage strong growth of both new and
existing resources. He added that it was critically
important that the state and industry become better aligned
on the issue of development.
Mr. Pittman shared that time in the oil industry was
measured in decades and generations, not business cycles.
The current production rates were the product of government
policies, technical work and investment decisions made
years ago. The sound policies made in 2012 would directly
affect the increase of production rates into the future. He
furthered that the reform should result in a competitive,
stable, and predictable fiscal environment that would
encourage current and future development.
Mr. Pittman reiterated the legislature's careful
examination of the issue was appreciated. He shared that it
was critical to strike the right balance between the level
on government take and insuring an active, healthy, long-
term oil industry in the state.
3:00:06 PM
Co-Chair Stedman spoke to the corporation's concern for
progressivity at high oil prices and the concept of
freezing the split between the industry and the state at
$130 to $150.
3:00:56 PM
Mr. Pittman shared that the corporation was mainly focused
on the total government take. He stated that there were
variables in the equation that would never be controlled.
He agreed that progressivity was a lever for the state, as
well as the base rate and the credits. He stressed that the
corporation cared only about the total government take
because that was what informed the total cash available for
investment in the future. He offered that it made no
difference if the credits were offered upfront and resulted
in higher taxes later, or vice versa; viable future long-
term investment opportunities ultimately depended on the
level of government take.
3:02:01 PM
Co-Chair Stedman reminded the committee that prior
testimony had indicated that at $100 per barrel, existing
fields were profitable for the industry, infield drilling
was profitable, and that an adjustment north of $100
dollars should be considered for current production.
Additionally, there had been a request for incentives for
new production which had been drafted into SB 192.
3:02:57 PM
Mr. Pittman responded that the corporation would continue
to pursue low risk activities under ACES. He argued that
the challenge lie in creating a broader pool of viable
opportunities to choose from. He expressed concern that,
even at $100 dollars per barrel, not as much money was
being spent by the industry in Alaska compared to other
areas of the world. He suggested that the committee
visualize a broad opportunity pool for companies already
working in the state and those that would be attracted in
the future.
3:03:57 PM
Co-Chair Stedman understood that a two-tiered tax structure
would not concern ExxonMobil, provided the legislature
offered a form of credit incentive for new production
outside of existing infrastructure.
3:04:25 PM
Mr. Pittman expressed concern with the definition of each
tier in the two tier tax structure. He reiterated that
there was considerable potential in Prudhoe Bay, Kaparuk
and Alpine. He qualified that the potential was not
currently viable because the projects were technically
challenging and high risk. He warned that whatever new
production meant to be incentivized in the bill should be
fed by both tiers.
3:05:07 PM
Co-Chair Stedman mentioned decoupling, which was currently
costing the state $80 million per year.
3:05:56 PM
Mr. Pittman stated that he could not comment on the
specifics of decoupling. He commented that the issue was
not a concern to Exxon Mobil until the corporation began
producing gas. He expressed concern about the
administrative burdens that would accompany decoupling. He
suggested that the issue should be addressed when the state
moved forward with real gas development.
3:06:52 PM
Co-Chair Stedman stated that that the legislature had no
knowledge of who made use of incentives in the Alaska
Gasline Inducement Act (AGIA), that were available on the
first day of the open season, or what it cost the state. He
added that inducements existed that could of significant
cost to the treasury. He opined that the legislature and
DOT could not gage the exposure to the treasury due to the
confidentiality clauses in AGIA.
3:08:16 PM
Mr. Pittman replied that he had no knowledge about recent
open seasons.
3:08:42 PM
Co-Chair Stedman noted that another problem was that the
inducements were healthy, and were transferable, possibly
to another project. Mr. Pittman replied that he had no
knowledge about how the inducements would work in the
future under the AGIA license.
Co-Chair Stedman stated that the committee was working with
DOR to learn more on the issue, but that DOR was unaware of
the details as well. He highlighted that there were
potentially billions of dollars at stake for the state.
3:09:53 PM
Mr. Pittman stated that gas development was important to
Exxon Mobile and hoped future conversations with the
legislature surrounding the issue were fruitful.
3:10:06 PM
Co-Chair Stedman declared that there was language in the
bill to implement a petroleum information system to ensure
that the public had access to information. He reported that
DOR had been working to clarify the language, but that the
language would now need significant modification in light
of new information the department had received from
industry.
3:11:03 PM
Mr. Pittman expressed concern that the state could receive
duplicate information. He reminded the committee that the
corporation was not obligated to provide proprietary data.
He referred further questions on the issue to Alaska Oil
and Gas Association (AOGA).
3:11:24 PM
Co-Chair Stedman stated that the committee would work with
the DOR to insure that there were no redundancies in the
information.
3:11:46 PM
Senator Thomas felt that an arrangement that would result
in more production should contain more specifics for the
long-term. He thought that the exchange of information
presently taking place would not result in an agreement
that would equally satisfy both industry and the state. He
asserted that the conversation should include more
projects, the amount of production from those projects and
the timeframe of the projects. He surmised that only then
could an informed business model that would offset concerns
that the state would simply spend money to flatten, and not
reverse the decline in the long-term. He requested a
thumbnail sketch of the projects that had not been put into
place under ACES, and how much they would have produced.
3:14:33 PM
Mr. Pittman replied that the projects before the committee
had been identified under the current fiscal regime. He
assured the committee that as the financial viability for
projects was increased, more projects would be added. He
said that when the corporation put to task its specialists
to search for more opportunities the projects would be
found. He pointed out that the state may have given credits
in the past, but the $5 million dollar investment would
generate considerable future income to the state.
3:15:27 PM
Senator Thomas expressed concern that the decline would
offset any increase when using the numbers currently under
discussion. He thought that more clear and specific
language concerning what the projects would produce would
be more productive for solidifying a fair business
arrangement.
3:16:12 PM
Senator Olson understood that ExxonMobil was not currently
interested in decoupling. He directed attention to the
possibility that the governor could spend $400 million on a
gasline in the future, which boosted the eminence of gas
production becoming an issue for the corporation. He
wondered how ExxonMobil could be indifferent to what the
structure would be for gas taxes. He asked why the state
should wait to tackle the decoupling issue.
3:17:39 PM
Mr. Pittman replied that in his previous comments he was
referring to the trigger point for the system surrounding
gas. He informed the committee that major discussions
concerning fiscal policy pertaining to gas development were
expected in the future. He stated that Exxon Mobile
welcomed the discussion about decoupling. The corporation
did not want to trigger additional costs, move cost, or
change cost allocation before it was necessary.
Senator Olson pointed out that delaying the conversation
increased the cost of devising and implementing a plan. He
thought that inflation should be a consideration.
Mr. Pittman clarified that the point of discussion was the
fiscal policy that would be in place to address gas
production when it started. He contended that he did not
see the correlation between the cost today and the cost in
the future, unless the discussion was about cost
allocation.
Senator Olson explained he wanted to settle the decoupling
issue now so that the state would be aware of revenue that
could be expected in the future.
3:19:02 PM
Co-Chair Stedman interjected that there were $100s of
millions being invested in Point Thomson and that the
industry had required assurances that the state had not
intended to block the ability of the deduction of gas
expenditures to be carried forward to the time of an actual
gas sale. Mr. Pittman acknowledged the concern.
ADJOURNMENT
3:20:46 PM
The meeting was adjourned at 3:20 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 192 032112 BP-Bilbao.pdf |
SFIN 3/21/2012 1:00:00 PM |
SB 192 |