Legislature(1993 - 1994)
11/04/1994 09:30 AM Senate O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE & SENATE SPECIAL COMMITTEES ON OIL & GAS
November 4, 1994
9:30 a.m.
MEMBERS PRESENT
Representative Joe Green, House Chairman
Representative Pete Kott, House Vice-Chairman
Representative Gary Davis (via teleconference)
Representative Jerry Sanders
Senator Loren Leman, Senate Chairman
Senator Judy Salo
Senator Bert Sharp (via teleconference)
MEMBERS ABSENT
Representative Harley Olberg
Representative Joe Sitton
Representative Jerry Mackie
Senator Rick Halford
Senator Al Adams
OTHER LEGISLATORS PRESENT
Representative Con Bunde
Representative Brian Porter
Senator Drue Pearce
Senator Jim Duncan
COMMITTEE CALENDAR
Briefing on "Perceptions of Alaska: Alaska Oil & Gas Market
Research Report," by Gaffney, Cline & Associates
WITNESS REGISTER
PAUL FUHS, COMMISSIONER
Department of Commerce & Economic Development
P.O. Box 110800
Juneau, AK 99811-0800
BILL CLINE
Gaffney, Cline & Associates
Energy Advisors
16775 Addison Road, Suite 400
Dallas, TX 75248
PETER GAFFNEY
Gaffney, Cline & Associates
Energy Advisors
16775 Addison Road, Suite 400
Dallas, TX 75248
LARAINE DERR, COMMISSIONER
Department of Revenue
P.O. Box 110400
Juneau, AK 99811-0400
CHARLES LOGSDON
Chief Petroleum Economist
Oil & Gas Audit Division
Department of Revenue
550 West 7th Avenue, Suite 570
Anchorage, AK 99501
MARTY RUTHERFORD, DEPUTY COMMISSIONER
Department of Natural Resources
P.O. Box 107005
Anchorage, AK 99510-7005
GEORGE FINDLING, MANAGER
Government Relations
ARCO Alaska, Inc.
P.O. Box 100360
Anchorage, AK 99510
ACTION NARRATIVE
TAPE 94-13, SIDE A
Number 002
CHAIRMAN JOE GREEN called the meeting to order at 9:30 a.m. He
noted that the House Committee did not have a quorum.
Number 020
CHAIRMAN LOREN LEMAN introduced the members of the Senate
Committee. He noted that the Senate Committee had a quorum.
Number 039
PAUL FUHS, Commissioner, Department of Commerce & Economic
Development, explained that Gaffney, Cline & Associates was hired
because of the importance of the oil and gas industry to the
state of Alaska. He said that in a recent commerce department
input/output model of the state, about 83 percent of the state's
income comes from oil and gas revenues annually. He said
Gaffney, Cline & Associates was hired to give an analysis of how
Alaska compares to the rest of the United States and the rest of
the world with regard to tax structure, leasing, permitting and
regulation. He also asked them to work with the oil industry to
determine its perceptions of Alaska. He said after reading the
report, he believed state government and industry needed to do
better to work together.
Number 074
CHAIRMAN GREEN recognized the Chairman of the State Oil & Gas
Commission, Dave Johnson, and Commissioner Russ Douglas.
Number 075
BILL CLINE, Gaffney, Cline & Associates, gave a background of the
firm, Gaffney, Cline & Associates. He said the firm was formed
in 1962. It provides technical and management advice to the oil
industry worldwide. He said the scope of work the firm undertook
was basically to assess and summarize the general industry
conditions and to compare Alaska to other environments with
respect to how effectively it competes for the investment capital
of the oil companies. The firm also sought to identify the
strengths and weaknesses of Alaska's competitive position and to
comment on potential competitive strategies to improve or enhance
Alaska's position in the rest of the world. He said Alaska has
become increasingly less competitive due to the high cost of
operations, what the industry perceives as difficult fiscal
terms, and what industry perceives as difficult regulatory
conditions.
Number 169
PETER GAFFNEY, Gaffney, Cline & Associates -- (tape inaudible).
Number 229
MR. CLINE stated that since 1983, there has been a steady rise in
world oil demand. He referred to the report's three separate
scenarios with respect to future world oil demand: High demand,
medium demand, and low demand. He said there was a measurable
increasing slope in terms of total world oil demand despite a
huge detraction that is occurring in Eastern Europe and the
former Soviet Union. He referred to the non-OPEC oil supply and
said the price was going to decline in the future. He said OPEC
is a very important factor in the oil demand scenarios. He
predicted that oil prices will go up to $25 per barrel, although
he did not know when it would happen. He said although oil
companies are looking forward to the future, they have to live
with the price as it is now. He said there is an industrywide
consensus that the industry is facing flat prices in nominal
terms and declining prices in real terms. He said governments
are also facing these dilemmas. He said governments are reacting
proactively to the changes by trying to adjust their legislation,
fiscal conditions, and regulatory policies in order to offset
this scenario. He stated currently the integrated companies are
enjoying an emergence from the recession in the U.S. and Western
Europe. He said governments are still concerned with how to deal
with the former Soviet Union, how to reenter Latin America, and
the ongoing process of cutting costs. He referred to independent
oil companies and said they are focusing on areas where they have
competitive strength and they are enjoying better U.S. gas
prices. He stated a continuing issue the independents face is
whether to keep their operations in the U.S. or whether they
should pursue projects abroad. He addressed national oil
companies and ministries. He said their current problem is
competing with the former Soviet Union for the industry's
attention. He said nationals are refocusing on natural gas and
the current trend worldwide is to move from offshore projects to
onshore projects since companies cannot control price, but can
control cost. He said opportunities have risen because of
geopolitical changes. He said the key locations for onshore
production are Latin America, the Middle East, Russia, and the
former Soviet Union. He referred to the geopolitical changes
that have occurred in the 1990s . He said many places that were
formerly inaccessible were now accessible. He discussed drilling
trends. He said companies are moving away from the Arctic
International/U.S. balance, which are high cost. He said natural
gas was a growing business and environmentally attractive to the
industry, but as a viable substitute for fuel, it competes with
coal and requires large increments of investment. He said in the
current environment there is a pressure for high cost or low
value production. He stated there are also pressures on the
companies to fund OPEC, and to loosen fiscal terms wherever they
can. He said industry is looking for ways to insulate itself
from the effects of oil prices. He said industry is shifting
away from traditional reserves replacement to a cash flow focus.
He referred to the countries that Alaska competes with for
exploration funds. He said Alaska not only competes with
countries that do 2 million barrels per day, but also much
smaller countries in Latin America and Asia. He compared the
exploration and drilling activity of Norway (average 20
exploration wells per year) and Indonesia (average 16 exploration
wells per year) to Alaska (average 16.5 exploration wells per
year). He said that Asian-Pacific offshore drilling activity
averaged 204 barrels in the first quarter of 1994 compared to 100
for the first quarter of 1974. The United States averaged 16.5
exploration wells per year.
TAPE 94-13, SIDE B
Number 003
MR. CLINE said Alaska competes with the United Kingdom for
exploration activity. He said the United Kingdom was a
"legislation-led" province. He referred to 1989 and the dramatic
drop off of exploration activity in the North Sea. He said the
government recognized the decline and in May 1993 shifted from
encouraging exploration activity to encouraging development
activity.
Number 013
MR. GAFFNEY said the drop off in drilling in the North Sea in
1989 has cost the United Kingdom about 500,000 barrels per day
over the last three to four years.
Number 046
MR. CLINE discussed the oil industry's perceptions of Alaska. He
said it was perceived that Alaska is for major companies only
because it is an ultra-high cost environment. He said the fiscal
environment in Alaska is tough under low price conditions. He
said a fiscal environment is especially difficult in a more
regressive environment, one that is revenue, as opposed to
profit-oriented, taxation. He stated that Alaska is seen by the
industry as having significant environmental hurdles, more so
than anywhere else. He said the geology in Alaska is good but
not spectacular. He indicated that Alaska has more competitors
and those competitors are getting even more competitive.
Number 067
MR. GAFFNEY discussed the concept of progressive legislation. He
said oil companies agree that what helps most is to have
legislation which does not kill off exploration drilling
incentive. He said it is best to keep the industry working and
developing when the price is down and the cost is high, then when
things get good, cream off a higher proportion at the top.
Number 081
MR. CLINE addressed exploration and production decision criteria.
He said companies look for adequate geology and the size of the
economic opportunities. He stated they also look at logistics
and cost and legislative and political risk. He said industry
also looks at how difficult it is to conduct business in the
prospective environment.
Number 108
MR. GAFFNEY -- (tape inaudible).
Number 113
MR. CLINE referred to charts which compared perceptions of Alaska
against perceptions of Norway, the United Kingdom, Venezuela and
Russia. He indicated that the charts were based upon one
person's perception of the countries used in the graphs. He
addressed fiscal barriers and incentives. He said the economics
for projects in Alaska are highly leveraged to costs and prices.
He referred to graphs and discussed the Niakuk field costs and
imported legislation from the United Kingdom, Norway, Indonesia
and Australia and plugged it into the Niakuk scenario. He stated
the graphs illustrated that Alaska is very sensitive to costs and
oil prices.
Number 211
MR. GAFFNEY stressed the elimination of regressive legislation
given the Niakuk scenario.
Number 237
MR. CLINE said that unless the tax burden is fairly sensitive to
the economics afforded a project, once a company goes into a low
price/high cost environment there will be a huge barrier to
reinvestment in the area. He referred to graphs of economic
models to illustrate his point.
Number 379
MR. CLINE addressed regulatory barriers and incentives in Alaska.
He said there was a labyrinth of regulatory agencies and bodies,
as well as powerful environmental groups. He said there was
extensive judiciary involvement in the regulatory process, which
was unusual. He said the ANS Export Ban is significant because
it impacts markets negatively. He addressed Alaska's advantages.
He discussed the state's political, legislative and currency
stability. He said prospectivity comes at a big price because of
the cost of operating in Alaska. He addressed the transparency
of the process and mentioned that it was easy and clear to
understand. He addressed current industry initiatives such as
the large block concession proposal and exploration incentive
credits. He said other areas such as the United Kingdom,
Venezuela, and Indonesia are competing aggressively for the
industry's investment and risk capital. He said in Alaska high
geologic promise is offset by the high cost/low value production,
the powerful environmental groups, closed industry structure, the
regressive tax system, and the litigious reputation of state
government. He said there has been an improvement in the
relationship and cooperation between state and industry as well
as a growing awareness of the competition for industry capital.
He recommended broadening the appeal of Alaska to both new and
older oil companies by participating in road shows.
TAPE 94-14, SIDE A
Number 005
MR. CLINE encouraged the development of Alaska's natural gas
resources. He observed that regardless of the future of oil
prices, now is the time to initiate changes that will lower the
economic threshold and retain higher levels of economic rent from
a larger number of projects and developments. He recommended
creating an industry administrator for the state. He encouraged
the state to pursue a wider participation with the industry as a
whole so it is aware of what is going on in other parts of the
world. He recommended the state reassess fiscal and licensing
terms and regulatory processes. He encouraged the state to
obtain and keep contact with federal officials. He recommended
the industry and the state create a project where the goals are
the same.
Number 093
MR. GAFFNEY recommended the state encourage development by
finding common ground with the industry.
Number 112
LARAINE DERR, Commissioner, Department of Revenue, said the
project to change the oil and gas production tax regulations
began in the fall of 1992. She said the project grew out of the
general dissatisfaction and frustration with existing
regulations, which had been in effect since 1981. She said those
regulations are complex and they often result in significant
disagreements over the correct amount of production tax. She
said the regulations were the main reason the state has such a
large amount of taxes receivable. She said taxpayers wanted
revised regulations with more certainty so they could file a more
complete and accurate tax return. She stated the state wanted
revised regulations to speed the tax collection process and
reduce the lengthy and expensive audit process. She said on
November 16, 1993, Governor Hickel announced the proposed
revisions to the oil and gas regulations, which would bring
stability and certainty to the state's biggest taxpayers. She
stated the revisions were not well-received by the oil and gas
industry. She said that while the regulations were drafted to be
revenue-neutral in total, and to provide taxpayers with
certainty, that was not what the industry perceived. She
explained the major changes in the regulations that were in the
process of being adopted. She said one section involves the
value of oil and gas. She said the new regulations allow for
transportation deductions from value. She stated there was a
significant clarification of return on investment calculations.
She said there was a clarification of when a new field is in
commercial production and when it goes to a higher tax rate. She
stated there was a new clarification for how a well day is
counted for the Economic Limit Factor. She emphasized that there
were a lot of people involved in the creation of the new
regulations and that it has created an open, healthy dialogue
between the Department of Revenue and the oil and gas industry.
She said currently the regulations are in the Department of Law
and should go to the Lieutenant Governor by November 15, 1994.
CHAIRMAN GREEN asked who the new regulations would benefit.
Number 192
COMMISSIONER DERR said there would be a better working
relationship between the oil and gas industry and the state,
which would benefit both sides and be revenue neutral.
Number 197
SENATOR JUDY SALO asked if someone could elaborate on the method
of transportation costs.
Number 201
CHARLES LOGSDEN, Chief Petroleum Economist,Department of Revenue,
said the statute calls for actual transportation costs to be
deducted from the price at the point of sale to determine "Alaska
value." He said a fixed dollar amount per million dollar
investment has been established as a deduction against the sale
price.
Number 237
REPRESENTATIVE CON BUNDE asked if there were people in the
Department of Revenue with experience in the oil and gas industry
and if the Department of Revenue perceived that Alaska is a
difficult place to do business for the oil and gas industry.
Number 247
MR. LOGSDEN said the accountants are primarily from the public
accounting sector but that some have worked for oil companies.
Number 259
MARTY RUTHERFORD, Deputy Commissioner, Department of Natural
Resources, said she had some concerns about the report because
she felt it contains little quantitative data and appears
somewhat anecdotal in nature. She stated the report does not lay
out a clean path toward making improvements. She said the lack
of reference material to support some of Gaffney, Cline &
Associates' observations makes it difficult for agencies to
analyze how they might make improvements. She felt the state
should focus more specifically on details, like how Alaska
specifically compares to its competitors. She said it would be
helpful to develop a long term fiscal plan in order to provide a
very clear picture for the industry about how the state will
address its financial realities.
Number 319
COMMISSIONER FUHS said there has been an oil and gas caucus
formed in both houses of Congress. He said the work of the
National Energy Council was very important. He stressed the
importance of a national energy policy.
Number 370
SENATOR DRUE PEARCE stated that Alaska is a member of the
National Energy Council. She said its members represent 85
percent of energy production in the United States. She said when
the state of Alaska did the tax study in 1990, it discovered that
people do not know about any of the opportunities in Alaska. She
stated the legislature has an opportunity to sell oil and gas
prospects. She said the legislature has to take a more active
role in pursuing that opportunity.
Number 494
GEORGE FINDLING, MANAGER, GOVERNMENT RELATIONS, ARCO ALASKA said
ARCO finds the Gaffney, Cline & Associates report to be an
incisive, good analysis. He said it fairly reflects the
perceptions about Alaska. He said he felt that Alaska is not in
the near-crisis stages, as the report would lead the committee to
believe. He said the Gaffney, Cline & Associates report is a
good starting point for both the state and industry. He said
ARCO encourages other industry competitors to come to Alaska. He
said that ARCO feels strongly about communicating with the state.
Number 564
REPRESENTATIVE BRIAN PORTER asked if the current statutory
structure was such that regulations could be developed that would
reflect the recommendations of the Gaffney, Cline report.
Number 575
COMMISSIONER FUHS -- (response inaudible).
Number 581
CHAIRMAN LEMAN asked if the positiveness reflected in the report
was symbolic or real.
Number 605
MR. CLINE said the steps that the state makes now, towards more
projects, will not manifest themselves for five to seven
years.... (end of tape).
TAPE 94-14, SIDE B
Number 018
REPRESENTATIVE BUNDE said he was interested in hearing specific
recommendations for demonstration projects.
Number 022
MR. GAFFNEY -- (response inaudible).
Number 026
SENATOR PEARCE asked if there was any other country which had a
better experience in trying to get those companies already in the
country to come to the table to help come up with incentives and
demonstration projects.
Number 049
MR. GAFFNEY -- (response inaudible).
Number 057
SENATOR PEARCE asked if Alaska would be better off trying to
"string the pearls" or trying to get even more new exploration.
Number 060
MR. GAFFNEY said he was biased towards protecting the discoveries
already in place.
Number 069
CHAIRMAN GREEN referred back to the Niakuk operation. He asked
if it was representative or was there a more representative
75,000 - 100,000 barrel field that would steepen the slope
between the three different crude prices.
Number 076
MR. CLINE said he expected the relationship to remain along the
lines published in the report.
Number 081
CHAIRMAN GREEN said several times the point was made that there
may be a different method of sharing the benefits from
development. He wondered if the industry, which is going to be
payout conscious, and the state, which is more in tune with a
longer period project, are headed for a collision.
Number 089
MR. GAFFNEY said payout has become an issue. He said the state
should be looking for what fits the requirements of Alaska, yet
is still attractive to industry.
Number 105
SENATOR SALO asked what was meant when Mr. Gaffney said
exploration credit was not enough.
Number 107
MR. CLINE said on its own, exploration incentive credit is not
enough. He said it does not do anything towards going after
undeveloped discoveries.
Number 120
CHAIRMAN GREEN indicated that another hearing would take place on
the Gaffney, Cline report, although he was uncertain as to the
date.
Number 127
CHAIRMAN LEMAN said the next hearing would be before the 19th
Legislature convenes on January 16, 1995. He said he would like
the industry to come with suggestions as to the projects
discussed at this hearing.
Number 136
CHAIRMAN GREEN adjourned the meeting at 12:03 p.m.
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