Legislature(2005 - 2006)BUTROVICH 205
02/28/2006 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| British Petroleum Alaska (bp) – Ken Konrad, Vice President; Angus Walker, Vice President, Bp Alaska Gas; Tom Williams, Alaska Tax Counsel | |
| Bp – Ray Hall, Senior Tax Economist | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 28, 2006
3:34 p.m.
MEMBERS PRESENT
Senator Thomas Wagoner, Chair
Senator Ralph Seekins, Vice Chair
Senator Ben Stevens
Senator Fred Dyson
Senator Bert Stedman
Senator Kim Elton
MEMBERS ABSENT
Senator Albert Kookesh
OTHER MEMBERS PRESENT
Senator Gene Therriault
Senator Hollis French
COMMITTEE CALENDAR
SENATE BILL NO. 305
"An Act repealing the oil production tax and gas production tax
and providing for a production tax on the net value of oil and
gas; relating to the relationship of the production tax to other
taxes; relating to the dates tax payments and surcharges are due
under AS 43.55; relating to interest on overpayments under AS
43.55; relating to the treatment of oil and gas production tax
in a producer's settlement with the royalty owner; relating to
flared gas, and to oil and gas used in the operation of a lease
or property, under AS 43.55; relating to the prevailing value of
oil or gas under AS 43.55; providing for tax credits against the
tax due under AS 43.55 for certain expenditures, losses, and
surcharges; relating to statements or other information required
to be filed with or furnished to the Department of Revenue, and
relating to the penalty for failure to file certain reports,
under AS 43.55; relating to the powers of the Department of
Revenue, and to the disclosure of certain information required
to be furnished to the Department of Revenue, under AS 43.55;
relating to criminal penalties for violating conditions
governing access to and use of confidential information relating
to the oil and gas production tax; relating to the deposit of
money collected by the Department of Revenue under AS 43.55;
relating to the calculation of the gross value at the point of
production of oil or gas; relating to the determination of the
net value of taxable oil and gas for purposes of a production
tax on the net value of oil and gas; relating to the definitions
of 'gas,' 'oil,' and certain other terms for purposes of AS
43.55; making conforming amendments; and providing for an
effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 305
SHORT TITLE: OIL AND GAS PRODUCTION TAX
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/21/06 (S) READ THE FIRST TIME - REFERRALS
02/21/06 (S) RES, FIN
02/22/06 (S) RES AT 3:30 PM BUTROVICH 205
02/22/06 (S) Heard & Held
02/22/06 (S) MINUTE(RES)
02/23/06 (S) RES AT 3:30 PM BUTROVICH 205
02/23/06 (S) Heard & Held
02/23/06 (S) MINUTE(RES)
02/24/06 (S) RES AT 3:30 PM BUTROVICH 205
02/24/06 (S) Heard & Held
02/24/06 (S) MINUTE(RES)
02/25/06 (S) RES AT 9:00 AM BUTROVICH 205
02/25/06 (S) -- Reconvene from 02/24/06 --
02/25/06 (H) RES AT 10:00 AM SENATE FINANCE 532
02/25/06 (S) Heard & Held
02/25/06 (S) MINUTE(RES)
02/27/06 (S) RES AT 3:30 PM BUTROVICH 205
02/27/06 (S) Heard & Held
02/27/06 (S) MINUTE(RES)
02/28/06 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
RICHARD OWEN, Production Manager and Vice President
ExxonMobil Alaska
Anchorage Alaska
POSITION STATEMENT: Delivered ExxonMobil's presentation on PPT.
DAN SECKERS, Tax Counsel
ExxonMobil Alaska
Anchorage AK
POSITION STATEMENT: Commented on SB 305.
MARTY MASSEY, Joint Interest Manager for the United States
ExxonMobil
Anchorage AK
POSITION STATEMENT: Commented on fiscal contract negotiations
related to SB 305.
TOM WILLIAMS, Tax Counsel
BP Alaska
Anchorage AK
POSITION STATEMENT: Commented on SB 305.
ACTION NARRATIVE
CHAIR THOMAS WAGONER called the Senate Resources Standing
Committee meeting to order at 3:34:36 PM. Present were Senators
Elton, Dyson, Stedman, Ben Stevens and Chair Wagoner.
SB 305-OIL AND GAS PRODUCTION TAX
CHAIR WAGONER announced SB 305 to be up for consideration and
that this was the second day of the stakeholders meeting. The
first presenters would be from ExxonMobil - Richard Owen, Marty
Massey and Dan Seckers.
RICHARD OWEN, Production Manager and Vice President, ExxonMobil
Alaska, introduced Marty Massey, Joint Interest Manager for
ExxonMobil U.S., who was leading the gasline contract
negotiations, and Dan Seckers, ExxonMobil tax counsel for
Alaska. He said if this measure were simply a tax increase,
ExxonMobil would actively oppose it. At current prices, he
expected ExxonMobil's production tax payments would increase by
$50 million to $100 million per year. But the proposed system
balances revenues to the state and producers across a range of
oil prices. It provides incentives for new investments and
includes a transition provision for recent investments. Most
importantly, the PPT provides a predictable and durable tax
system which, along with the appropriate gas pipeline fiscal
contract terms would allow Alaska natural gas pipeline project
to move to the next phase.
Specific concerns about the bill centered around whether the
high tax rate and resulting increase in taxes would hinder the
full development of the remaining oil resources on the North
Slope.
ExxonMobil in Alaska
MR. OWEN said that ExxonMobil has had a presence in Alaska for
over a century and has invested more than $11 billion in the
state's economy. Over the years, EM explored most of the
hydrocarbon plays in Alaska and participated in the 1968 first
Prudhoe Bay discovery well. He is proud of the role EM has
played n Alaska through exploration, initial field developments,
construction of TAPS, development of new technology and the
promotion of efficient reservoir management practices.
Currently, EM has working interests in Prudhoe Bay,
Kuparuk, Endicott and Granite Point. We are the
operator of the Point Thomson Unit and the largest
interest holder in the Prudhoe Bay field. Our current
working interest production is approximately 180,000
B/D and we are the largest owner of discovered gas
resource. Our production from Alaska represents
approximately 4 percent of EM's worldwide oil and gas
production. Our Alaskan production is primarily from
Prudhoe Bay and the near-by satellite fields. Prudhoe
Bay, along with Point Thomson, has significant
remaining potential, but it comes at higher cost and
risk.
3:38:33 PM
SENATOR SEEKINS arrived.
MR. OWEN continued:
Historical Context
One of ExxonMobil's objectives in both the gas
pipeline fiscal contract negotiation and the debate 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. To
that end, any change in the fiscal regime for oil has
a direct impact on how we view the stability of the
Alaskan fiscal environment, which in turn, impacts how
we evaluate ongoing investment decisions.
We understand the State's desire to obtain additional
tax revenue at higher prices. One of the most
challenging tasks that the Legislature can undertake
is how to change the oil tax system without damaging
the industry. As Governor Murkowski has correctly
stated on many occasions, the North Slope is one of
the most expensive places in which our industry
operates. Tax systems need to be carefully designed to
ensure that the desired objectives are achieved and
that any change does not result in unintended
consequences, such as reduced investments and lower
reserve recovery.
3:40:33 PM
One of the many questions that we are asked is why are
ExxonMobil and other producers Seekins durability and
predictability for oil in parallel with negotiating a
fiscal contract for a gas pipeline. The answer is
fairly simple. The gas on the North Slope is contained
in the same reservoirs as the oil and is produced
through the same facilities. For a gas project to be
viable, we need the fields that produce both oil and
gas to be viable - underpinned by predictable and
durable fiscal terms. A commitment of billions of
dollars to build the natural gas pipeline requires
confidence that the base oil business will remain
healthy for the long term.
3:41:17 PM
Existing System-ELF
With that context in mind, I'd like to make a few
comments about the current oil production severance
tax system - the Economic Limit Factor or ELF and, in
particular, how it has been effective at encouraging
investment and mitigating production decline.
The ELF was designed to allow the state to increase
the production tax while not stifling investment in
marginal fields. The ELF scared down the production
tax rate when a field became more marginal, reducing
the economic limit to which a field could be produced
and ultimately allowing more reserves to be recovered.
The 1989 ELF amendment significantly increased the
production tax on Prudhoe Bay and Kuparuk while
providing an incentive to encourage the development of
smaller fields. That 1989 amendment worked as intended
with many small and marginal fields coming on stream
over the past 17 years. The ELF lowered the tax rate
on those fields supporting their commercial viability.
While we would like to have more Prudhoe Bay's and
Kuparuks, we, and the rest of industry, haven't found
any. Consequently, the focus for the past ten years
has been on the development of these smaller satellite
fields. Satellites are generally not economic as
stand-alone developments and have required both new
technology and connection to existing infrastructure
to be commercially viable. Many of these fields
produce viscous oil contained in lower quality
reservoirs requiring significantly higher costs, which
adds to the risks for development. This is especially
true for the Polaris and Orion viscous oil
developments with oil that literally flows like
molasses. Developing these fields has required new
technology, more expensive drilling and completion
techniques, new production-equipment and extensive
modifications to existing facilities to process these
viscous production streams.
Since 2000, ExxonMobil has invested over $250 million
in the engineering, drilling and construction of
associated facilities for the development of Aurora,
Borealis, Midnight Sun, Polaris and Orion. Significant
additional capital is required over the next several
years to fully develop these resources. These fields
are mitigating the decline of oil production on the
North Slope, contributing 50,000 B/D gross and are
expected to recover over 500 million barrels gross.
Under the ELF formula many of these smaller satellite
fields paid little or no production tax. Even though
these fields were paying little production tax, they
did and continue to and contribute substantial amounts
to the state in royalties, property taxes and income
taxes, and in jobs for Alaskans.
Over the past five years, we and other working
interest owners have also extended the primary Prudhoe
Bay enhanced oil recovery (EOR) technology to some of
these satellite fields. Since 1998, Since ExxonMobil
has invested over $30 million in tertiary recovery
projects at Point McIntyre, Eileen West End and
Borealis, which are expected to produce an additional
60 million barrels gross. While tertiary projects
recover additional oil, the production profile results
in a slower oil recovery and longer payout periods.
These satellite EOR projects are in the early stages
of development. The major investments have been made,
but the oil production benefits will not be received
until many years out. The ELF provision of the
existing production severance tax made these
economically challenged projects commercially viable.
3:44:40 PM
Taken together, the recent Prudhoe Bay satellite and
EOR development projects developed over 560 million
barrels. While the resulting state's production tax
under ELF was relatively minor, the state's royalty
oil would total 70 million barrels, what at today's
oil price is worth roughly $4 billion. The bottom line
is that the ELF system has worked well for industry
and for the state of Alaska by encouraging significant
new investment.
However, it is also recognized that ELF can be
considered a somewhat regressive system in that it
does not reflect profitability or cost in the division
of gross revenues between the state and producers as
oil prices rise and fall. The assumption that a well
is marginal at 300 B/D does not necessarily hold in
the current high oil price environment. Yet this
assumption typically contributes to a reduced ELF
factor based on the current formula. As a global oil
and gas producer, ExxonModbil operates across a wide
array of fiscal systems. It is most important that the
system recognize the quality of the resource so that
the potential development will be commercially viable
and attract capital. When I say the quality of the
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 that are re-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 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, as stated earlier, we are concerned
that the administration's proposal is weighted towards
a higher tax, which may prevent some of Alaska's
challenged resources from being developed.
3:47:14 PM
MR. OWEN continued to comment on the PPT proposal:
This proposal represents a tax based on profits,
which results in a sharing of the risks and the
rewards across a range of prices. The state will
receive a higher share of the revenues when
prices are high and will accept lower taxes
during periods of low prices. The proposal moves
from the regressive ELF system to a progressive
system. ExxonMobil affiliates have significant
experience in profit-based progressive systems
around the world and they work well as long as
they are properly taking into account the nature
of the resource base.
PPT system: Transition
This bill represents a major-step change in Alaska's
current production tax system. The bill appropriately
addresses this step-change by including a transition
plan so that recent investment decisions are not
adversely impacted. This bill provides a transition
allowance over the next six years based on capital
investments made in the last five years. We believe
this transition plan is appropriate because the
benefits from these recent investments have no yet
been fully received. Oil and gas companies invest
large sums of money years ahead of first production
and are at risk for price, development cost,
production rates and ultimate reserve recovery. In
most cases it takes many years, often more than five
years, for a return on oil or gas investment to occur.
3:49:10 PM
For example, satellite and tertiary recovery
investment decisions made 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, the ELF,
so that these challenged and costly projects could be
made commercially viable. It is not appropriate to
suddenly increase the taxes on these investments
without providing some form of consideration. The
transition provisions recognize that past investments
were made under the ELF structure and somewhat reduces
the increased tax treatment to which these projects
will now be subjected. To avoid penalizing these
recent investments, the transition provisions included
in this bill are essential.
3:50:17 PM
CHAIR WAGONER asked for examples of any other state or country
that have transition provisions for a change in taxation.
DAN SECKERS, Tax Counsel for ExxonMobil Alaska, replied with
several examples. One example was our own federal government
that repealed percentage depletion for integrated oil companies
in its 1975 Tax Reform Act. It provided provisions allowing
those with contracts to continue to use percentage depletion for
the duration of those contracts.
Another example was when investment tax credits were repealed by
the federal government in the 1980s - at first a company was
allowed to recover an investment over five years and then the
law was changed to three years. That tax credit was still
allowed for five years, but additional investments were no
longer eligible for them and got less favorable depreciation.
3:52:15 PM
SENATOR STEDMAN said he didn't hear an answer to the question
and asked again what countries use transition provisions in
relation to the oil industry.
MR. OWEN replied that ExxonMobil has production sharing
contracts around the world and tax changes don't apply to them,
because their activities are covered by those contracts. He said
he would look for examples of this type of transition
arrangement.
3:53:15 PM
SENATOR BEN STEVENS asked if he meant the terms of their
contracts around the world locked in their royalty payments and
severance taxes for a period of time so that any modification
wouldn't apply to them.
MR. OWEN replied yes; most of those contracts are single
government-type arrangements with severance tax, royalty and
income tax built-in and, "It doesn't change over time."
SENATOR BEN STEVENS asked how long a typical contract ran.
MARTY MASSEY, Joint Interest Manager for the United States,
ExxonMobil Corporation, replied that it varied across the board
and depended largely on the quality and life of the resource -
but some are for 50 to 60 years. Some contracts are written
until every barrel has been produced out of the entire block.
SENATOR BEN STEVENS asked if the contractual terms that are
entered into prior to production are locked in during the life
of that contract.
MR. MASSEY replied yes.
SENATOR STEDMAN asked if reopeners are a standard clause in
those contracts.
MR. MASSEY replied that ExxonMobil's contracts have been
negotiated around the world and their terms vary accordingly.
Some of them have reopeners and some of them don't - depending
on what allowed the investment to go forward.
3:55:50 PM
SENATOR SEEKINS remarked, "Some of those reopeners, I think, are
called revolutions, Senator Stedman - regime changes."
3:56:08 PM
SENATOR THERRIAULT arrived.
3:56:59 PM
SENATOR SEEKINS recapped his understanding of ExxonMobil's
testimony:
I made this investment decision when I knew the
severance tax was going to be an average of 7 percent
based on the ELF or however it came down. Now, we're
going to go to 14.5 percent with the 20/20 program,
roughly. That's a rough approximation from what I've
heard. So...I'd like to have some consideration for
that. I'm not entitled to it under any government
program. It isn't that I'm going to lose some of my
other standard deductions in either state or federal
income tax. It's just good faith.... Am I correct?
MR. OWEN replied yes. It is just a mechanism by which to achieve
some consideration for previous investments. However that
concept may be deceptive, because some of them were made in
fields, which may have been paying no production tax at all and
would now be paying 20 percent. Part of it is the underlying
health of the investment climate and if they would regret some
of the investments they made. They want a transition plan so
they can move from one tax regime to another.
SENATOR SEEKINS remarked that they wouldn't regret it as much if
oil stays at $60-plus a barrel as they would if it declined to
what more people are predicting will be the long-term rate.
MR. OWEN replied that was right. When those decisions were made,
the focus was on what the price risk would be, not on what the
tax structure would be.
3:59:15 PM
MR. OWEN said that he was also concerned that the 20/20 rate may
not support development of all opportunities remaining on the
North Slope, which are now primarily complex development of
viscous and heavy oil. He explained:
These opportunities have challenged economics and with
investment credits of 20 percent will enhance the
present value economics of new investments. The 20
percent tax rate will result in a lower overall cash
flow. The impact on all of the economic parameters
must be carefully weighed before a decision to
progress an investment is made. The combination of a
20 percent credit along with a 20 percent tax rate may
not be adequate to support the development of all of
the remaining opportunities. It's with this in mind
that we recommend that the legislature not increase
the proposed tax rate or reduce the proposed tax
credits.
MR. OWEN said that this bill also addressed many of the long-
standing issues that have divided the state and the industry
over the years. He said:
It made little sense in the past and 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
marketplace. SB 305 allows 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. This
will provide certainty to a producer on the value in
which to pay its royalty and production taxes and will
reduce the administrative and audit costs to both the
state and industry.
Under current prices, ExxonMobil and industry will pay
more in taxes as compared to the current production
tax system. However, as I said in my opening comments,
we need predictability and durability under which to
gauge investment decisions. No one wants to invest
money in a project only to have the rules changed,
reducing the attractiveness of the investment. The
transition provision is an important feature of the
bill necessary to provide relief for the abrupt change
caused by the new PPT system.
The administration decided to weight the proposal to a
higher tax, which may make it difficult to progress
the remaining future development opportunities. It is
most important that the quality of the resources be
factored into the design of the tax system. Given our
view of the resources, we would not support a higher
tax rate or lower credits than proposed in the bill.
SB 305 seeks to balance revenues to the state and the
producers across a range of oil prices and provides
incentives for new investments, which is a clear
objective of the State of Alaska. And most importantly
for ExxonMobil, we believe the new system, coupled
with appropriate gas pipeline fiscal contract terms
will lead to a predictable and durable tax system
which will enable the Alaska Gas project to move
forward to the next phase. Potential changes to he
features of the PPT bill must be carefully considered
to avoid upsetting the balance contained within the
bill.
In conclusion, this bill is important for Alaska and
the producers. It is one part - a very important part
of a series of related issues that the legislature
will need to address to ultimately provide the
necessary fiscal environment to stimulate oil
production and to progress the Alaska gas pipeline
project.
The fiscal contract that is being finalized under the
authority of the Stranded Gas Development Act will
incorporate this PPT legislation by reference in order
to provide fiscal stability. We are currently working
with the Administration on how best to incorporate
this bill into the fiscal contract.
4:03:33 PM
CHAIR WAGONER stated that some people have said the tax credits
aren't high enough and asked if he would support a higher credit
rate.
MR. OWEN replied that he understood the balance this bill
created between the tax rate, the credit rate, the transition
and other provisions. Higher tax credits would change the bill
and its impacts would need scrutiny. However, he said, in
general, incentives help investment.
4:04:45 PM
SENATOR STEDMAN said he has heard a lot of discussion on
predictability and durability of the tax regime for business in
the state and he understands that the proposal is progressive
and the royalty and property taxes are regressive, but together
they are fairly neutral. He asked Mr. Owen to comment on that.
MR. OWEN stated that he would have to review a new proposal to
see if it provided the same balance this bill has.
SENATOR STEDMAN asked if it was in the best interest of both
parties to have a fair system that would not put one party or
another at a disadvantage in the long run.
MR. OWEN replied yes and ExxonMobil wants a system that is
viewed as fair and equitable by all parties. He thought everyone
was looking at the proposal across a wide range of prices to see
whether they believe it achieves that end.
4:08:18 PM
SENATOR ELTON said he struggles with some of Mr. Owen's
conclusions. A major one is what the state does now with the oil
tax will enable the Alaska gas project to move forward to the
next phase and, "We don't know what the next phase is on this
side of the table."
Senator Elton elaborated that Mr. Owen has testified that he was
working with the administration currently on how to best
incorporate this bill into a fiscal contract he felt like he was
being asked to make a decision without knowing what Plan B was -
assuming the oil tax was Plan A. That situation compels him to
look at the tax as a stand-alone issue. He asked if they
wouldn't prefer the legislature to just consider a fair stand-
alone oil tax that could be rolled into a gas pipeline contract.
MR. MASSEY replied yes, the legislature should look at how this
tax would do what the State of Alaska wants in terms of
encouraging investment and allowing the remaining opportunities
to come on stream. He explained:
What we want to communicate with you is that as part
of the gas pipeline fiscal contract negotiations, we
believe this bill, if incorporated in the contract,
will provide the predictability and durability we need
to advance to the next phase of a gas pipeline
project. I know at this point in time, many of you
don't have the terms... of what we've negotiated with
the fiscal contract. And I hopeful within the next
couple of weeks here we're able for everyone to see
what the gas pipeline contract terms look like....
That was the reason for our comments.
SENATOR ELTON asked if he is suggesting that he doesn't see a
gas pipeline contract happening without this bill.
MR. MASSEY replied that this bill provides on the oil side what
they need to progress the gas pipeline. If it were changed in
some way, it would have to be reevaluated. He also speculated
that if the legislature determined what would encourage
investment and maintain a healthy oil business for the state,
that would probably work for the fiscal contract. He said:
We're on the verge of commercializing this gas. We're
going to invest billions of dollars for this thing to
go forward. We need to make sure we understand the
fiscal regime under which we're going to make those
investments.
4:13:55 PM
SENATOR DYSON asked if he meant to imply that if the legislature
and the governor offered them a 30-year contract under existing
oil tax law, ExxonMobil wouldn't have been able to go forward
with the contract.
MR. MASSEY replied that the governor never made that offer to
ExxonMobil, but he recognized that the state's oil tax system
needed to be overhauled.
SENATOR DYSON said, "I think you just said no," and asked if
this bill did anything, particularly concerning investment
credits, to make a gas pipeline contract more probable.
MR. OWEN replied that one aspect of it that does help is the
credits and how they apply to Pt. Thompson, particularly,
because it would be a major contributor of the gas for a
pipeline project.
SENATOR DYSON asked if it would be clearer to say this tax
system is necessary to progress the pipeline if it is a
provision in the contract that extends for 20 or 30 years.
MR. OWEN replied that is exactly what he is saying. He wants to
incorporate this bill in with the contract because alone, it
provides no certainty that the tax won't be changed in the near
future.
4:16:51 PM
SENATOR THERRIAULT referred to page 10 of Mr. Owen's comments on
the valuation issue and said he understands that there are
different systems - the Department of Revenue's and the
Department of Natural Resources' - and they may result in as
much as a $1 difference in the value of a barrel of oil and the
PPT proposal is the lower of them. He asked if the price
differences in the methodologies are correct.
MR. OWEN replied that small differences do occur and those are
largely due to whether prices are rising or falling and are not
a fault of the formula, itself.
SENATOR THERRIAULT said he thought this part of the bill still
wasn't clear to him and the committee might want to consider
using the higher number of the different methodologies. He asked
if Mr. Owen had an opinion on the $73 million tax-free
allowance.
MR. OWEN replied no. He elaborated that he understood the
administration proposed a $73 million allowance to address some
of the barriers for new entrants into the market and he agrees
that there are barriers to exploration and development in
Alaska, but he does have some concerns about whether that would
create an unlevel playing field, especially in forming
partnerships. He felt it was the administration's policy
decision.
4:20:11 PM
CHAIR WAGONER said the allowance doesn't impact big corporations
the same as small ones and asked if there are other ways to put
that incentive in the bill.
MR. OWEN replied that should be addressed by the administration.
4:21:08 PM
CHAIR WAGONER asked if the $73 million allowance would
incentivize ExxonMobil to do more.
MR. OWEN replied that the $73 million would be the first of
their deductions. It wouldn't play in the exploration step.
SENATOR THERRIAULT said, relative to the look back provision,
that yesterday BP used a graph of expenditures for development
of one of their fields that was relatively flat for four years
and then spiked in the fifth year. He asked if ExxonMobil's
expenditures had been flat or had peaks, as well.
MR. OWEN replied about their expenditures over the last five
years had been relatively flat at about $190 million per year.
MR. MASSEY added that it's important to understand not only the
level of investment, but also the kinds of things they are
investing in. ExxonMobil has been investing in developing
viscous oil fields and those take a long time to receive the
benefits from those investments. That's why the transition
provision is so important.
4:23:18 PM
CHAIR WAGONER asked what additional incentive would help for
developing viscous oil.
MR. OWEN replied that an increase in credit would help improve
the cash flow of any investment because it represents the
ability to offset some of the upfront investment. High credits
help the cash flow economics, although that is not the only
parameter they look at when making decisions. The tax rate takes
a lot of cash out of the project.
4:24:55 PM
SENATOR THERRIAULT asked if this level of credit encourages
ExxonMobil to spend additional dollars on the gas pipeline. What
level of incentive causes them to change their decision.
MR. OWEN replied that it is very complex question. They have a
whole range of resource opportunities, some are more challenged
than others. They also have a whole range of investment
parameters in looking at whether a project is commercially
viable or not. "We are that the tax rate that is being proposed
at the moment and the credit rate - that combination may not
allow us to develop all of the resource on the North Slope."
4:28:23 PM
SENATOR STEDMAN asked if the industry is sensitive to how the
government take is sliced up, because consultants have lumped
them together in one category.
MR. OWEN replied that they are focused on what their return is
and are less focused on how the government take might be divided
up.
MR. MASSEY added that there are varying levels of take across
the globe and there is a good reason. They look at the quality
of the resource that is within a basin and figure out how much
the government could take and still attract investment. The
countries that have a lot of investment activity have the
balance right.
4:29:54 PM
SENATOR STEDMAN said they would have more debate on comparing
investment climates. He asked how unique he thought Alaska is.
MR. OWEN replied that is the heart of the question. The
resources are becoming more unique. Kuparuk and Prudhoe Bay have
been developed and the remaining resources are smaller and
challenged opportunities in a harsh environment.
SENATOR STEDMAN said Norway and Britain come up a lot as a
comparison and asked if those are just a rabbit trail. As policy
makers, they are trying to strike a balance. He stated,
"Clearly, we want the oil industry to stay here and we want you
to expand. We've got the same general goals." But, he felt a
real hesitation in their willingness to share information with
the legislature.
MR. OWEN replied that you can find different levels of
government take around the world. Some of those have low
government take and are struggling and others have high
government take and are doing well. The ones that work have
found the right balance between their tax system and their
resources. Alaskans need to find the right system that will work
in Alaska. He wasn't sure that studying more countries over seas
would help in those deliberations.
SENATOR ELTON asked if tradability of the credits makes this a
better bill than if they weren't there from the perspective of a
major producer on the North Slope and of a smaller company.
MR. OWEN replied that tradability of credits is an important
feature, especially for the smaller companies that have to get
through the first expensive years. It's less important for large
companies with lots of assets. He would hope to have the
production to offset the credits.
4:36:11 PM
SENATOR THERRIAULT said the legislature doesn't want the tax
system to become destabilized with changing gas and oil prices,
because that would drive investment away or create pressure from
constituents to change the system, which is what is happening
with ELF today. He understood that at least one company advanced
a tax proposal that was progressive with regards to price and he
asked what opinion Mr. Owen had about the currently proposed
flat 20 percent tax whatever the price of oil and gas goes to.
MR. OWEN agreed that they are after a system that would create a
healthy industry that is fair to all parties at a range of
prices and the legislature needs to make sure the PPT meets the
needs of both parties. The question of increased progressivity,
price tiers and things like that have been discussed, but aren't
in the proposed bill from the administration. Producers would
have to look at any other proposals and ask if it would still
allow them to move forward with predictability and durability.
SENATOR THERRIAULT asked if tax incentives are constitutional.
He mentioned the Kuno v. Daimler Chrysler case that is currently
before the U.S. Supreme Court could turn tax incentives across
the nation on its head.
MR. OWEN responded that he was not familiar with the case,
neither was Mr. Seckers.
SENATOR THERRIAULT said one of the legislative consultants said
that shut down costs would be part of the life of a field, but
the bill allows shut down and removal of facilities that have
been in place for 30 years to be against the production tax. He
wasn't sure of the legitimacy of something like that or dragging
the expense forward to the point where production starts going
down naturally and any revenue the state might receive goes to
expenses of shut down costs.
MR. OWEN replied that as shut down costs occurred they would
flow through lease expenditures and be a deduction for the PPT.
This is distinct from reserves, which are usually done as book
entries when you haven't actually spent the money.
SENATOR THERRIAULT asked if he saw differentiating between new
facilities they put in place under PPT versus all of the old
infrastructure that has been in production for 30 years.
MR. MASSEY replied they are trying to put a system in place that
will be here for many years. He was not anticipating major
abandonment costs. They would be paying tax for 30 to 50 years
under this new system until abandonment would occur. So, he
thought it would be appropriate for those investments to be
included under this bill.
CHAIR WAGONER explained that one of the reasons Senator
Therriault asked that question is while his field is younger,
Cook Inlet has four platforms that are currently shut in and
they are concerned about how those expenditures will be
accounted.
MR. MASSEY responded that his comments were directed to Prudhoe
Bay that would be there for a long time.
4:46:05 PM
SENATOR ELTON asked if he deducted demobilization from net
profit.
MR. OWEN replied that he didn't think abandonment costs would
generate a credit; rather they would be lease expenditures.
Reserves are usually carried as book entries and this bill is
about modeling cash investments.
SENATOR ELTON asked on if the demobilization deposits to an
account would be deducted from gross profit.
MR. MASSEY replied when earnings are set aside, the money has to
be set aside from earnings in a particular year. Money is not
set-aside in an account, it comes out of your cash flow in a
given year.
MR. SECKERS added from a federal tax point of view, you can't
take an expense for dismantlement on the tax return until the
expense was actually incurred.
4:48:52 PM
SENATOR ELTON asked if the state determines net profits under
PPT, they would not include anything that was set aside for
future abandonment.
MR. OWEN replied yes.
SENATOR STEDMAN asked if there is anywhere else on the planet
with which to compare Alaska and how can legislators establish a
comfort range without doing that.
MR. OWEN replied that the legislature's and the governor's
consultants have provided a large data base showing government
take across a range of countries and different environments.
Going through the committee hearings is exactly the right
process. He thought that once the legislature goes through the
same deliberations the governor did, they would come up with a
similar conclusion.
4:52:53 PM
SENATOR THERRIAULT said that he tried to get people who had
worked for the industry to be part of the legislature's team for
perspective. One of the things they have told them to expect is
when people are in a deal-making mood to put everything on the
table and see what you can add to it. He asked what they asked
to have added to the deal.
MR. MASSEY replied nothing was added after the major provisions
of the gas contract were completed on Saturday.
As Richard said, we think it will give us the balance
we need, the predictability and durability we need
when we write it into the fiscal contract to allow the
gas to go. When you think about it, that's got to be
the major thing that we're working on - getting the
gas to go. And in the end we got comfortable with it.
SENATOR THERRIAULT asked how many dollars are spent in Alaska
procuring equipment as opposed to spent out-of-state.
MR. OWEN replied that most of their investments in Alaska are
operated by others and those procurement activities are
conducted by others. Most of their dollars flow through joint
venture accounts to operators in Alaska.
SENATOR THERRIAULT said he was trying to understand the economy
that would come into being with the buying and selling of
credits and said the smaller independents that don't have
production on which to offset their credits would be marketing
them. They would be bought at somewhat of a discount, so there
would be some leakage of the investment money that would have
occurred to the state treasury. He asked if they should rely on
the market or should the state have a refund so the treasury has
no loss.
MR. OWEN replied that he thought any leakage would be lost from
the new entrant who wasn't able to capture the full value of
their credit.
SENATOR THERRIAULT explained that the new company would get 90
cents on the dollar and the company that bought it gets the full
dollar. But the dollar gets expensed back to what would have
accrued as PPT tax. So it, in effect, comes out of the treasury.
Instead, an explorer could make their investment. They don't
have PPT tax to offset, so they would just come to the state for
a rebate directly from the treasury.
MR. OWEN replied that could probably be done, but that would be
a policy question for the legislature.
SENATOR THERRIAULT asked if they got into a low price scenario
where the state wasn't generating a lot of taxes, would
producers likely stop playing in the credit-buying market.
MR. OWEN replied that that was a hypothetical question that was
difficult to answer, because he wouldn't know what the market
would look like or any number of other things.
SENATOR THERRIAULT asked if they currently buy credits under the
existing system.
MR. OWEN replied yes.
SENATOR THERRIAULT said he wanted the department to give them an
idea of what the going rate is for credits.
CHAIR WAGONER asked if those credits had been purchased under SB
185, exploration credits.
MR. OWEN replied yes.
5:01:10 PM Recess 5:49:41 PM
^British Petroleum Alaska (BP) - Ken Konrad, Vice President;
Angus Walker, Vice President, BP Alaska Gas; Tom Williams,
Alaska Tax Counsel
CHAIR WAGONER announce that BP Alaska would start its
presentation with Current Realities on the North Slope
Ken Konrad, Vice President of Gas for BP Alaska introduced ANGUS
WALKER, Commercial Vice President, BP Alaska, who recognized
that the PPT and the subsequent gas contract were some of the
most important things coming before the legislature. He
introduced Ray Hall, Senior Tax Economist, and Tom Williams, Tax
Counsel, who is widely credited as the creator of the economic
limit factor (ELF).
MR. WALKER started on slide 6, which was a view of production
from the North Slope since 1977 through 2005. It has produced
over 15 billion barrels of oil to date. BP has invested $24
billion creating the business it has today and has paid $32
billion in tax to the state of Alaska and $24 billion in tax to
the federal government.
Since peaking in 1988, production has declined on an average of
6 percent per year. The ELF has worked as intended and the
production profile shows small wedges that come from satellite
fields that would have otherwise been challenged to develop. ELF
has and continues to encourage investment in these small or less
productive fields and has played a significant role in stemming
overall North Slope decline.
He referenced slide 8 that shows two DOR scenarios for oil
development on the North Slope. One was production if the gas
line wasn't built and the other showing a forecast of oil
production assuming a gas pipeline is built.
He agreed with DOR that the future without gas looks very
different than with it. Without gas, the future is definitely
shorter and less exciting. "But, it's clear, also, to us that
the foundations of the gas business will be on top of the oil
business and to have a healthy gas business, we need to maintain
a healthy oil business for the next 45 years. Both parts of the
business must be health."
5:56:40 PM
To keep the business healthy, Mr. Walker said the decline must
be stemmed. If BP were to stop investing on the North Slope
today, the fields that have been developed would decline at 15
percent or greater per year. But, BP and industry is investing
as an industry $1 billion to $1.5 billion per year in existing
fields.
5:59:43 PM
CHAIR WAGONER asked at what point in barrels per day does the
pipeline cease to be economically viable to operate.
MR. WALKER replied that is not known, but significant
investments will have to be made as certain flow rates get
reached. He said that 17.5 billion barrels are left of known oil
and gas resource, but the challenge is developing it and getting
to market. He emphasized that nothing in his presentation
relates to ANWR and that the impact of the tax on the major
producers should be an important part of their consideration
along with the smaller investors. He said that the real
opportunity is to exploit the known resource on the North Slope,
which is three times larger than the estimate of what is left to
be found.
6:04:43 PM
He concluded with a picture of their 50-year vision, which shows
that the future is very different than the past. The challenges
of the decline on the North Slope and development of a viscous
resource are enormous, but a good fiscal regime is key.
^BP - Ray Hall, Senior Tax Economist
RAYMOND HALL, Senior Tax Economist, BP Alaska, said he would try
to put Alaska in a global context and compare it to similar tax
regimes around the world. He said it is critical to understand
the context in which it was designed. Critical factors are the
basin maturity, basin cost structure, the nature of the
opportunities themselves, where is the basin located in terms of
markets. In general, a higher tax burden will result in less
investment and, conversely, lower tax burden will result in
greater investment. The regime should be equitable and should
provide returns to the investor consistent with the risks he is
undertaking. It should be simple, although most are not simple.
The PPT is a step in the right direction, being simpler than
ELF. Stability is another important characteristic. The tax
should be levied on profits and not revenues. He pointed out
that royalty is a tax on revenue.
Trends can be noticed in mature basins that the royalty burden
is alleviated or removed altogether. Perhaps the most important
feature is that the regime must be competitive and efficient. It
should reflect the nature of the opportunities that are present.
Context is critical.
6:12:12 PM
Slide 4 indicated that the United States is the second largest
producer of oil and gas in the world with the vast bulk of it
coming from the Lower 48 states. Norway is the sixth largest
producer of oil and gas and UK comes in at ninth. The tax rate
comparison slide showed the ELF at 56 percent and the PPT at 61
percent.
SENATOR FRENCH clarified that those figures accounted for total
government take including federal; and in reality the PPT
accounted for a 5 percent increase in total government take, but
the federal tax would go down.
6:15:27 PM
SENATOR BEN STEVENS clarified that they are referencing industry
financials, not just BP.
MR. HALL agreed.
SENATOR THERRIAULT reflected that ConocoPhillips said the total
government take went up to 67 percent under the PPT and some of
Dr. van Meurs' graphs indicate just under 60 percent. He asked
if BP had conferred with other companies and if they have a
disagreement on the total government take.
MR. HALL replied that there are different numbers. This graph
represents marginal take, which is the take on the extreme -
meaning if a company made an extra $100, how much of that would
go to the government. He said he could check them against
ConocoPhillips' numbers.
6:17:20 PM
MR. HALL said the marginal tax rates tell only part of the
story. One should also contemplate the treatment of capital cost
relief. For example, in the UK, following tax reform in 2002, a
company gets 100 percent relief for capital investment. This
translates into no tax whatsoever until the project has secured
payback on the investment. Norway has a combination of "uplift"
and a high tax rate that results in 93 percent relief for every
$1.00 spent. The UK has no royalty at all. Both UK and Norway
levy all their taxes on profit. He reiterated that companies
look for tax based on profit rather than revenue.
MR. HALL said the UK wants to be self-sufficient in its energy
needs. So, the initial development of the basin proceeded very
rapidly in the 1970s. Self-sufficiency was secured by 1980 and
has endured until now. But, UK will need to start importing oil
and gas within the next few years. Government policy has been
focused on maximizing development and exploration in the Basin.
He said in 1993 the tax was substantially reformed which reduced
the marginal rate on new developments from in excess of 80
percent down to 30 percent. That attracted more investment than
any other basin in the world, 142 licensees. The 30 percent rate
has endured for nearly 10 years.
6:23:15 PM
CHAIR WAGONER asked if there was a lag between development and
production when the UK tax cut took place in 1993.
MR. HALL replied he yes, but the rate at which it increased
subsequent to the tax change in 1993.
SENATOR ELTON asked when the marginal tax rate in the UK went
from 30 to 40 in 2002 did that include a claw back provision on
the 100 percent capital allowances.
MR. HALL replied that the important change in 2002 that
accompanied that increase was that the government changed the
way it allowed depreciation. Prior to 2002, only 25 percent of
investments could be written off per year. It took a significant
number of years for that investment to secure relief against
tax. The UK government gave the companies the ability to offset
their investments fully in the year it occurred. He clarified
that:
There was no need for a transitional arrangement. If
you make an investment in a new project in the UK, you
pay no tax on that project until you have secure
paper, which is to say, very unusual if you look
around the world.
CHAIR WAGONER said that is similar to Alaska's royalty
reduction.
6:27:14 PM
SENATOR SEEKINS disclosed that his daughter's husband is
employed by BP.
MR. HALL explained regarding slide 9 that indicated lower tax
created much more development and production. In short, he said:
The government reduced it share of the pie, but
produced a much-increased pie that it more than
compensated for the reduction in the headline rate.
So, it just sort of demonstrates that if we can focus
on making the pie as big as possible, that's a much
more productive conversation than getting into a
discussion around who gets what slice.
6:30:19 PM
He thought there were far more differences between Alaska and
Norway than there are similarities. Norway has some wonderful
large fields that have been discovered and they are much less
mature than in the UK.
In Norway, oil production has peaked, but gas production is
growing rapidly and will probably keep going for the next three
or four years before it starts to flatten out. However, one of
the big differences in Norway is the role of the state, which
directly owns one-third of the resource and owns a significant
stake in the two largest players. It is able to sustain a high
tax rate because it is essentially going from one pocket of the
state to the other pocket of the state. "This is a very
important distinction and I think it explains a lot...."
Norway is also trying to encourage new companies into their
basin and has recently introduced an incentive for exploration
such that if you are a newcomer and not currently paying tax and
you spend $100 on exploration, they will send you a check at the
end of the year for $78. They are also trying get more acreage
to new entrants to encourage them. But if you talk to new
entrants, the 78 percent tax rate is a major continuing barrier
to attract new entrants into the basin when just next-door at
the UK, they would pay a much lower tax.
The Gulf of Mexico (GOM) had the most active global exploration
in 1993 to 2004 and the second highest volume of discovered
reserves of any basin the world. It had rapid growth in
production despite a challenging deep-water environment. A key-
enabling factor has been the low tax rate of 45 percent that
applies there. The deep-water royalty relief is 35 percent. He
emphasized that production of oil is very leading edge because
of the depth and extreme weather conditions there. But, this is
an example of a low tax rate encouraging and promoting high
activity levels.
6:35:33 PM
SENATOR ELTON said that previous testimony has acknowledged that
nobody expects to find any more big fields in Alaska. He thought
it might be easier to make an investment decision in the Gulf,
not because of the tax rate, but because of the possibility of
finding larger quantities of oil.
MR. WALKER responded that the Alaska resource base is huge, but
it is challenged by comparison. It is that challenge combined
with the fiscal terms that not attracting investment.
SENATOR ELTON restated that he heard before that Alaska has no
other huge bodies of gas and oil and he asked if larger
companies weigh the possibility of finding a larger resource
base in their decision on where to develop.
MR. WALKER replied that he was right. There is a fundamental
difference between the resource base in the Gulf of Mexico where
there is a good chance of finding some large fields through
exploration. In Alaska, the fields that can be found will be
small and possible marginal. Activity needs to be stimulated on
the 14 billion barrels of oil they know exists.
It's a different resource base, but we would advocate
the principal is the same. We still need investment
dollars and they need to be spent on developing the
oil and gas that's discovered already rather than
exploring for new oil and gas, which is clearly more
appropriate in the Gulf of Mexico.
6:38:01 PM
MR. HALL continued by comparing Alaska to Alberta, Canada, where
an investment boom is taking place in their heavy oil industry,
about $10 billion annually. Alaska's investment is between $1
billion and $1.5 billion. In Alberta, production is expected to
exceed 2 million barrels a day in a few years and go on to in
excess of 3 million barrels a day within the next 10 years.
To encourage that development, the Canadian government
introduced a major fiscal reform in 1995 consisting of 1 percent
royalty until a project achieves payback, which includes an
allowance for a nominal return based on the risk-free Canadian
bond rate. Federal and state taxes have to be paid in addition
and those take the marginal rate to 39 percent; post payback the
rate would increase because of the higher royalty to 54 percent.
The federal tax rate already has a phased reduction that will
reduce the marginal tax rate further so that by 2007 it will be
around 35 percent. The top tax rate post payout would be around
50 percent. "This reform has had a major impact in stimulating a
huge amount of investment and a huge amount of activity in this
heavy oil province."
6:41:41 PM
MR. HALL said that slide 13 compared tax rates in other states
and Canada. Albert heavy oil has 39 percent pre-payout, GOM has
45 percent and most of the other 48 states are around the low 50
percents. Alaska with the proposed changes would be 61 percent,
the highest marginal tax rate in North America.
6:42:30 PM
SENATOR FRENCH asked how BP is comfortable with Alaska's tax
rate if it's the highest in North America.
MR. WALKER replied that is what concerns BP. Alaska needs to
attract twice as much capital as it is attracting today to stem
the decline and to extend the Slope another 50 years. The PPT
structure has merit and could serve Alaska well over the long
term, but the 20 percent tax rate is too high. "That is one of
the key points in our testimony today."
6:44:25 PM
SENATOR ELTON asked of how much of the government take in the
three states of Texas, Oklahoma, California is attributed to
royalty oil. It seems that a large part of Alaska PPT is royalty
oil.
MR. HALL said he didn't have those figures with him. In summary,
he said there is a clear correlation between stable fiscal
policy and basin activity and Alaska is moving to the position
where it will have the highest marginal tax rate in North
America and in combination with the highest cost structure in
North American may not be conducive to investment.
SENATOR ELTON said his whole theme is higher taxes mean lower
production and asked to explain his use of "may."
MR. WALKER replied that there is a hard link between fiscal take
and activity.
MR. KONRAD added that the PPT has many positive attributes, and
BP will stand by their word on the 20/20, but he didn't know if
that would ultimately attract capital to the basin.
6:50:01 PM
SENATOR BEN STEVENS asked to go to slides 5, 6 and 13. He
explained why the marginal rate that applies to profit in the UK
comparison is not valid in Alaska - because the UK has 100
percent cost recovery and that puts it in another realm where
all the capital costs have been absorbed. In Alaska, the cash
flow or marginal revenue is taxed immediately, but in the UK it
wouldn't be taxed until all capital costs were fully recovered.
MR. HALL replied there are many different ways of expressing
relative taxes and he chose to do it on a marginal tax rate,
because that is simpler. Another way to do it would be to look
at the average tax rate or the overall government take over the
life of the project. But he thought those would give the same
relative positions and Alaska's ranking would be unchanged.
6:53:38 PM
SENATOR BEN STEVENS said the only other country with a higher
cost structure than Alaska is Canada's heavy oil sands.
MR. HALL responded that the example he showed the committee was
just a heavy oil tax regime. There are other tax regimes in
other provinces of Canada. But they are less than the proposed
change in Alaska.
SENATOR BEN STEVENS didn't disagree, but wanted to point out
that other regions with a higher cost structure appear to have
incentivized investment by deferring royalty until after payout
and deferring the tax rate to prepay out and basing them on the
rate of return (ROR), a more complicated system.
MR. HALL said the ROR isn't that complicated and was used widely
in production sharing contracts around the world; a lot of the
new ones are being negotiated are based on an ROR mechanism.
"Canada has gone down that road in a major way and it has proven
to be very successful."
SENATOR BEN STEVENS observed:
I just find that the information is intriguing in the
fact that the areas that have had the most increase in
production...that are in the top producing regions of
the globe - the areas that have had the largest
increases in production may also have a higher tax
rate, but they have a significant mechanism for
capital cost recovery, whether it be a CCR or an
uplift agreement or a ROR mechanism that is not
imbedded in this proposal. Those are the areas that
have attracted the investment to increase production.
We should consider that if our objective is to
maintain or increase production.
SENATOR STEDMAN asked if the ROR is a fairly progressive system
versus the regressive nature of the royalty and tax scenario.
MR. HALL responded that with ROR, the tax burden is much less
with low price than it would be at high prices. Also, marginal
projects would have a lower tax burden because the overall tax
take is based on the rate of return creating an automatic
balancing mechanism.
SENATOR STEDMAN asked what kind of stimulus Alaska should use to
extend production out 50 years.
MR. WALKER replied that the balance of the PPT components must
be right and only time will tell. Basically he feels that the
tax burden is at the high end of the scale, but the credit
system effectively stimulates investment.
SENATOR BEN STEVENS said they have to look at how other
countries attract investment.
SENATOR THERRIAULT asked if he meant they should look at other
systems or the overall take.
SENATOR BEN STEVENS clarified that he meant they have to keep in
mind how different regimes approached adding production and why
they may have had a higher tax system as the end result. They
offered greater up-front incentives than what Alaska has ever
had or what is contained in the bill.
SENATOR THERRIAULT asked if he participates in ROR systems and
what is the rate of return. Does it vary widely?
MR. HALL replied BP participates in a number of ROR production
sharing contracts - Angola, Azerbaijan, in particular. They vary
significantly and are matched to the individual opportunities
within each of the countries. Government take will vary
significantly.
SENATOR THERRIAULT said the problem with the current system is
because it wasn't sensitive to price and that's unfair to the
state. The system, itself, caused the instability which brought
them to changing the tax.
MR. WALKER remarked that there is very little profit to be made
in Alaska at low prices and, therefore, at medium to high
prices, they have to make a reasonable profit. That is why
progressivity in Alaska is very dangerous.
SENATOR THERRIAULT countered that at high prices, the state's
take might go down. That's not stable for the government.
7:07:36 PM
SENATOR FRENCH said that earlier he mentioned BP had invested
$24 billion to create their Alaska business and they had paid
over $32 billion in taxes to the state of Alaska and $24 of tax
to the federal government. The number missing was how much his
company had profited.
MR. WALKER replied, "We were asked exactly the same question in
the House and we said that we'd go back and look. I think it's a
public record - our profits. So, therefore, we would go back and
make that available."
SENATOR STEDMAN said the tax could be considered unfair to one
side or the other at different times and they didn't want a tax
that would put the industry in the position of retarding its
growth.
MR. WALKER responded that he shares that concern. One of the
great things about profit-based structures is that they are
taxes on profit. He hoped a system that was designed on that
would be durable.
7:10:22 PM
MR. WALKER used his last five slides to explain the effects of
PPT on BP's business in Alaska.
7:10:56 PM
SENATOR FRENCH couldn't resist mentioning that part of his
equation required him to calculate their profit, but yet he
didn't have that figure handy.
MR. WALKER responded that he wanted their profits for the last
30 years.
SENATOR FRENCH asked if he had it for all the relevant periods
he was illustrating.
MR. WALKER replied that he used real data to project profit for
2006. [He explained his graphs of government take.] The proposal
allows BP to make a modest profit at low prices, but at medium
to high prices, the government take is increased. At $30, the
government take is 70 percent on BP's business in Alaska.
7:13:38 PM
SENATOR ELTON asked what the cross-over point is for ELF and
PPT.
MR. WALKER replied for BP it is $30 - ANS, West Coast.
SENATOR ELTON was startled that BP doesn't make a profit at $20
per barrel. "You just need to convince me."
7:15:44 PM
MR. WALKER replied that he would be happy to show him and he
wished it were different. Back at his charts, he reiterated that
Alaska is a tough place to make money at low to medium prices,
because of the cost environment and the fiscal regime. The
reason people invest in Alaska is that in the years when price
is higher, they will make more. Those years have to cover the
lean years. "We need to leave a reasonable profit for the
industry at medium and high prices, because we certainly don't
get it at low prices."
7:16:29 PM
SENATOR FRENCH referenced a DOR chart that indicates at $20 a
barrel, industry profit is 22 percent. He asked him to reconcile
those figures with BP's.
MR. WALKER replied they should check whether the DOR figures
include capital depreciation, a key element in profit
calculations.
7:19:20 PM
SENATOR THERRIAULT asked what happens at $100 a barrel.
MR. WALKER answered that he would have to develop numbers at
$100.
7:21:07 PM
MR. WALKER concluded his remarks saying that decline is a
problem and large increases in investment are required to stem
the tide - up to $100 billion would be required in their Alaska
business. He believed the PPT system has merit and could work
well for Alaska and the industry for a long time to come but,
"Clearly the numbers have to be right." Higher taxes mean less
investment and the 20 percent tax rate will not maximize
investment and production from ANS. Finally, he said, "Oil needs
gas and gas needs oil. For gas to work, we need a healthy oil
business and we need a healthy oil business that's going to be
there for another 40 or 50 years to underpin gas."
MR. WALKER thanked the chairman for the opportunity to testify.
7:23:15 PM
SENATOR STEDMAN asked if fiscal regimes around the world are
upping their take.
MR. HALL replied yes, but it's a bit patchy. It's important to
take a long-term view. Six years ago the price of oil was $10.
History shows that you don't get sustained periods of high
commodity prices. They go in cycles and prices will eventually
go down.
7:25:31 PM
SENATOR THERRIAULT said the PPT proposes using the producers'
royalty settlement agreement of DNR and Department of Interior,
but they can vary as much as $1. He understands that this is the
lowest number. He asked him to comment on the different
valuation methodologies.
TOM WILLIAMS, Tax Counsel, BP, replied that there are three
settlements with DNR - Arco, BP and Exxon. ConocoPhillips is
heir to the Arco settlement. Everyone else on the North Slope
who has a royalty settlement has chosen one of the three. They
don't come to the same netback value, but they all have a
provision that allows DNR to reopen the methodology that is
being used to calculate the netback price. The idea for the BP
royalty settlement came from the administration and using the
Department of Interior settlement is only available if you don't
have state lands. The point is that BP is already using this
methodology to report to the state so, "We don't have to
reinvent a wheel."
This legislation gives the Department of Revenue a lot of
discretion about what methodology it would use. BP wants a
system that they understand and report and pay and know it was
done right. The royalty approach in the PPT has a mechanism to
allow for changing markets and that is lacking in some of the
other approaches.
CHAIR WAGONER thanked them for their presentation and adjourned
the meeting at 7:32:07 PM.
| Document Name | Date/Time | Subjects |
|---|