Legislature(2005 - 2006)BUTROVICH 205
03/02/2006 01:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Anadarko Petroleum | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB 305 | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 2, 2006
1:35 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
Senator Albert Kookesh
MEMBERS ABSENT
All members present
OTHER MEMBERS PRESENT
Senator Hollis French
Senator Gene Therriault
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
02/28/06 (S) Heard & Held
02/28/06 (S) MINUTE(RES)
03/01/06 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
MARK HANLEY, Public Affairs Manager
Anadarko Petroleum
POSITION STATEMENT: Presented Anadarko's position on SB 305.
ACTION NARRATIVE
st
CHAIR THOMAS WAGONER reconvened the March 1 meeting of Senate
Resources at 1:37:34 PM on March 2, 2006.
SB 305-OIL AND GAS PRODUCTION TAX
1:37:34 PM
CHAIR THOMAS WAGONER announced SB 305 to be up for
consideration. He said that Mr. Hanley would present Anadarko's
position on SB 305.
^ANADARKO PETROLEUM
MARK HANLEY, Public Affairs Manager, Anadarko Petroleum, said
Anadarko is a large "independent" - meaning it is not integrated
and doesn't have downstream facilities or refineries. It also
does not have gas stations, which is the reason most people
don't know its name. Anadarko has a market capitalization of $23
billion and has over 3,000 employees worldwide.
Anadarko is listed on the S&P 500 Exchange; it came to Alaska in
the early 90s and first partnered with Exxon in an offshore
well, called Thetis Island. Since then, it has partnered with
many other companies in Alaska from BP to EnCana. (A map
displayed Anadarko's ownership positions in its Alaskan fields.)
It is now partnering with a new worldwide gas company to Alaska
- the BG Group.
MR. HANLEY said that Anadarko has 2.2 million net acres in
Alaska, probably running neck and neck with ConocoPhilips in
terms of net acreage on the North Slope. He thought that Alaska
still had a lot of different plays and the company had prepared
a regional model to try and understand how the whole system up
here works. He explained:
Just to give you a rough idea of what we think about
Alaska. We think it's a world-class petroleum basin.
We think it has significant remaining resource. It is
probably not in the - you know, we don't think there's
a Prudhoe Bay to be found out there, but we think
there are a number of Alpine size fields - 400 MB and
an awful lot of, you know, 50 MB to 150 MB fields out
there. So that we think there is a lot of resource,
but it's not huge and some of it is far from
infrastructure in interesting areas.
As you see, we think there are anchor-type fields - an
anchor field being something that would support its
own facilities. So you wouldn't have to come back into
an existing facility to tie in. You could support the
cost of producing your own oil and treat it. That's
generally where Anadarko is looking. We tend to look
for larger fields, an anchor field. They tend to be
further from infrastructure and they tend to be higher
risk, but also higher reward.
We see Alaska as a favorable political environment. We
do business around the world and I would say that
despite the fact that we are going through a tax
change that has some implications for us, generally
speaking this is a very favorable political
environment. We've had very good reception on a lot of
issues for exploration interests. We're trying to
increase the tundra travel seasons to try and get
regulations reduced to improve our ability to go out
and do our work. So, generally speaking we see this as
a favorable political environment.
As I talked about earlier, we see the abundant new
entrants as partnering opportunities here in Alaska
and we see that as a good thing.
He said that Alaska is very under-explored and everyone would
benefit from more wells getting drilled, no matter what company
does it, because the new information would either confirm or
condemn assumptions. New companies coming to Alaska all have a
slightly different idea and that benefits the state as well as
the industry.
1:44:48 PM
CHAIR WAGONER asked when Totale drilled its exploration well.
MR. HANLEY replied it drilled a well three years ago.
CHAIR WAGONER said he thought that work fell under SB 185
rd
[exploration incentive legislation from the 23 Legislature].
MR. HANLEY replied that it did. He continued on saying that
Alaska has other challenges, such as the fact that it is a
maturing basin and that it has high costs relative to other
places and a lack of infrastructure and competition for
facilities. He also emphasized that from first thought to first
production takes longer in Alaska than anywhere else Anadarko
does business around the world - largely because of the winter
season. In other places, three wells can be drilled in one year,
but it would take three years for them to drill the same number
of wells in Alaska. However, he added that lengthening the
tundra travel season has mitigated that somewhat, but some of
the issue was still if you're farther from the market, it's
going to cost you more. This long lead-time has an impact on
what this bill does. You can count on the credits for recovering
some of your money faster, which helps your net present value,
or you can talk about reducing your costs.
The last challenge he wanted to mention was the lack of a gas
market. Anadarko supports getting a gas line built because it
would improve both gas and oil exploration because when you
drill for oil, a lot of times you find gas. So having a market
for that gas instead of it being just a cost now would improve
the economics for oil.
1:47:27 PM
MR. HANLEY said he felt the Governor did a good job balancing
the issues and priorities of both the state and the companies in
the PPT. Under this system, the state would pick up more money,
and even though Anadarko would pay more, most of its exploration
economics are improved.
MR. HANLEY further summarized:
So, that means everything else being equal, we might
be able to drill more wells. So, that's a positive
thing for us. That could create more revenue for the
state, as well.
That balanced with the fact that at low oil prices,
the state is actually going to pick up some of the
risk. It will, as you've seen in some of the
presentations before, at lower oil prices, the
companies will pay less than they do under the current
system. So, balancing off the fact that we are paying
more with the fact that exploration economics have
improved and we have some downside risk protection,
we've given up the upside, essentially, is what it's
done. We think this is a good balance.
MR. HANLEY stated another important factor that most people
don't recognize is that the big oil companies are not one big
monolith. He described their relationship as a "tenuous truce"
and that while they all support lower taxes as a way to improve
their exploration economics, there are differences between the
companies. Some big companies have said the tax rate is quite
tilted towards the small guys, but some of the smaller players
have a little overactive imagination and were concerned that
this bill was negotiated by the big three oil companies who were
looking out for their own interests. Sometimes those interests
are aligned with Anadarko's, but many times they are not.
He said he had modeled generic small and medium-sized fields
very much like Dr. Van Meurs' presentations, but he came out
with different numbers, especially regarding his chart, 11.6. He
used this to illustrate his point that they need to get together
on the same page regarding assumptions and how the models were
put together.
1:51:46 PM
MR. HANLEY showed the committee his models of the bill's 20/20
proposal for an existing producer and a new entrant and a 20/25
for an existing producer. He explained that Anadarko, an
existing producer, already has income at its Alpine field and
would benefit from the $73 million allowance and the proposed
system looked worse for an existing player at 20 and 25 percent
than the current system. Anchor field-type prospects had a small
improvement with a larger tax rate and at real high prices, no
one would be better off than with the existing system.
1:57:08 PM
MR. HANLEY'S main point, however, was that Anadarko sees
increased economic opportunity for exploration and development
projects under the current bill. But as the tax rate is raised,
if that is all that's done, the economics are decreased and
could actually be less beneficial than the current system for
small fields and it would make a large field less valuable.
MR. HANLEY said he had heard on the "look-back" that Anadarko
made investment decisions at low prices and prices have been
high and they have been able to capture some of the value
because of that. However, he countered that Anadarko hadn't had
production, yet, on developments that were made under that other
system.
1:59:11 PM
SENATOR ELTON said he could make the argument that the look-back
goes too far back and that it should go back only to when prices
went up.
MR. HANLEY replied that that was the state's policy call and
that some people had not recovered at all on those previous
decisions. He stated the price is important and when the markets
fell last time, it had a big impact and companies are now paying
down on debt to get ready for the next downswing.
He said the $73 million look-back is very important to the
smaller producers and Anadarko, particularly, where it could be
used immediately against Alpine. It would help the explorers
that don't have production, and even though it might take a
company three to five years before it finds something, it
wouldn't cost the state a dime during that time. The allowance
can only be used against production and can't be carried
forward.
2:07:31 PM
He said that the ability to transfer the credits was a good
concept, but the company that buys them at 90 cents to the
dollar benefits - while the state still loses the dollar and the
company it wants to benefit loses the 10 cents. He thought the
idea of a refundable credit was appropriate because that would
cut out a middleman and wouldn't cost the state any more money.
He also suggested expanding the use of the credits to be applied
against, for instance, corporate taxes or bidding at a lease
sale.
2:11:50 PM
He summarized that raising the tax rate could cut back on
exploration and companies would have to find larger fields to be
economic enough to develop. Dr. Van Meurs' chart showed better
numbers for a small field case than Anadarko's and he suggested
that everyone should start with the same assumptions and numbers
for accuracy of comparison. He also advised that the state would
get more revenue with credits than taxes.
2:15:36 PM
SENATOR BEN STEVENS commented that he didn't think the five
largest producers would share their internal modeling with
competitors or the state.
MR. HANLEY suggested using a public model that wasn't specific
to any one company. His concern was that they were so far apart
right now on the baseline that it was problematic.
SENATOR BEN STEVENS asked him to rank the bill's four mechanisms
- the rate, the credit, the floor and the transition period in
terms of their impact on his company.
MR. HANLEY replied that he would try to do that, but right off
he could say that hammering existing production with a big tax
increase to improve exploration economics was a double-edged
situation for Anadarko, because it does both. The $73 million is
quite important, because it's worth a 5 percent tax rate
decrease. He thought their exploration economics would go down
with a 25/25 ratio and that more credits would be required to
make up for the same tax increase.
2:19:37 PM
SENATOR STEDMAN returned to the net present value slide where
the lines cross at about $32 and asked if they should try to
make the lines more horizontal.
MR. HANLEY responded that that chart was showing that below the
$32 wellhead value, at a 25/20, their prospects looked better,
because the state would be picking up more risk.
SENATOR STEDMAN said he thought the crossover point needed to be
established as a matter of policy.
2:28:33 PM
SENATOR THERRIAULT said the state had made positive regulatory
changes, expanded the winter season and now the price was up on
the commodity and yet lawmakers keep hearing from other
companies that the state is barely attractive on a worldwide
basis. He remarked that Anadarko was here before those changes
were put in place and it continues to pick up acreage and says
Alaska has a politically favorable environment and asked him to
comment on its view compared to other companies'.
MR. HANLEY replied that Anadarko thinks Alaska has a lot of
resource potential. However, it has a lot of prospects that are
uneconomic and something has to be done to help those. For
instance a 150 MB field, if it is 100 miles from existing
facilities, is probably not economic - the same for a 500 MB
field. He thought the rising price helped and new companies were
coming to the state. He said that every company has its niche
and different parts of the proposal would affect some of those
prospects more favorably than others. Every company also has a
basic philosophy about the minimum size field it will look at -
everything else being equal. Some of the larger companies would
say, "If we don't have a billion barrels of recoverable oil in a
prospect, if we don't think it's in that magnitude, then we're
not going to focus on it." The size of the company sometimes
drives what they are looking for and he thought Alaska needed a
mix of companies.
2:37:43 PM
SENATOR THERRIAULT asked him to comment on the drive of the
companies to replace reserves either through increased
exploration or just purchasing other companies.
MR. HANLEY responded that Anadarko has the need to book those
reserves and different companies had different requirements.
They all need to book the reserves, but Anadarko tends to drill
more for them.
2:39:00 PM
SENATOR THERRIAULT asked him to comment on his level of concern
with the terms that aren't defined in SB 305.
MR. HANLEY replied that the details needed to be worked over.
2:42:05 PM
SENATOR BEN STEVENS stated that for the amount of money that has
been spent on running different scenarios by business analysts
and consultants they could have funded a Hollywood movie called
"Dueling Economists" and the scenarios, while useful, were all
"what if" scenarios. He exhorted that legislators must get back
to the objective of the bill, which was to maintain a healthy
oil industry for the next 25 years or they would waste millions
more. This bill reaches that objective of having something for
all companies.
CHAIR WAGONER said this was the last of the stakeholders'
presentations and thanked everyone for their comments. He
adjourned the meeting at 2:45:47 PM.
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