Legislature(2005 - 2006)BUTROVICH 205
03/19/2006 01:00 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Chevron Alaska – John Zager, Manager, Alaska Division | |
| Pioneer Natural Resources – Pat Foley, Manager, Lands and External Affairs | |
| Anadarko Petroleum Corporation – Mark Hanley, Manager, Public Affairs for Alaska | |
| 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 19, 2006
1:00 p.m.
MEMBERS PRESENT
Senator Thomas Wagoner, Chair
Senator Ben Stevens
Senator Fred Dyson (via teleconference)
Senator Bert Stedman
Senator Kim Elton
MEMBERS ABSENT
Senator Ralph Seekins, Vice Chair
Senator Albert Kookesh
OTHER LEGISLATORS PRESENT
Senator Gene Therriault
Senator Gretchen Guess
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
03/01/06 (S) Heard & Held
03/01/06 (S) MINUTE(RES)
03/02/06 (S) RES AT 1:30 PM BUTROVICH 205
03/02/06 (S) Heard & Held
03/02/06 (S) MINUTE(RES)
03/02/06 (S) RES AT 3:30 PM BUTROVICH 205
03/02/06 (S) Heard & Held
03/02/06 (S) MINUTE(RES)
03/03/06 (S) RES AT 3:30 PM BUTROVICH 205
03/03/06 (S) -- Meeting Canceled --
03/04/06 (S) RES AT 10:00 AM SENATE FINANCE 532
03/04/06 (S) Presentation by Legislative Consultants
03/06/06 (S) RES AT 3:30 PM SENATE FINANCE 532
03/06/06 (S) Heard & Held
03/06/06 (S) MINUTE(RES)
03/07/06 (S) RES AT 3:30 PM BUTROVICH 205
03/07/06 (S) Heard & Held
03/07/06 (S) MINUTE(RES)
03/08/06 (S) RES AT 3:30 PM BUTROVICH 205
03/08/06 (S) -- Meeting Canceled --
03/09/06 (S) RES AT 3:30 PM BUTROVICH 205
03/09/06 (S) -- Meeting Canceled --
03/10/06 (S) RES AT 3:30 PM BUTROVICH 205
03/10/06 (S) -- Meeting Canceled --
03/11/06 (H) RES AT 10:00 AM CAPITOL 106
03/11/06 (H) -- Meeting Canceled --
03/13/06 (S) RES AT 3:30 PM BUTROVICH 205
03/13/06 (S) Heard & Held
03/13/06 (S) MINUTE(RES)
03/14/06 (S) RES AT 3:30 PM BUTROVICH 205
03/14/06 (S) Heard & Held
03/14/06 (S) MINUTE(RES)
03/15/06 (S) RES AT 3:30 PM BUTROVICH 205
03/15/06 (S) -- Testimony <Invitation Only> --
03/16/06 (S) RES AT 3:30 PM BUTROVICH 205
03/16/06 (S) -- Meeting Canceled --
03/17/06 (S) RES AT 3:30 PM BUTROVICH 205
03/17/06 (S) Heard & Held
03/17/06 (S) MINUTE(RES)
03/18/06 (H) RES AT 10:00 AM CAPITOL 124
03/18/06 (H) -- Meeting Canceled --
03/19/06 (S) RES AT 1:00 PM BUTROVICH 205
WITNESS REGISTER
JOHN P. ZAGER, General Manager
Chevron - Alaska Area
Anchorage, AK
POSITION STATEMENT: Testified that Chevron cannot support
SB 305, Version Y; urged return to the original PPT terms while
retaining a Cook Inlet provision.
PAT FOLEY, Manager
Lands and External Affairs
Pioneer Natural Resources
Anchorage, AK
POSITION STATEMENT: Voiced concerns about SB 305, Version Y;
said the balance is being tipped to the disadvantage of some
investors as the bill evolves.
MARK HANLEY, Manager
Public Affairs for Alaska
Anadarko Petroleum Corporation
Anchorage, AK
POSITION STATEMENT: Expressed concerns about SB 305, Version Y;
cautioned that there are no credits to compensate for the tax
increase, making the economics worse for exploration.
ACTION NARRATIVE
CHAIR THOMAS WAGONER called the Senate Resources Standing
Committee meeting to order at 1:00:02 PM. Members present were
Senators Ben Stevens, Bert Stedman, Kim Elton and Chair Thomas
Wagoner; Senator Fred Dyson (via teleconference) joined the
meeting in progress. Also in attendance were Senators Gene
Therriault and Gretchen Guess.
SB 305-OIL AND GAS PRODUCTION TAX
CHAIR WAGONER announced SB 305 to be up for consideration. He
brought attention to his memorandum to members regarding
amendments. In packets and under discussion was a proposed
committee substitute (CS), Version Y, labeled 24-GS2052\Y,
Chenoweth, 3/16/06. He noted that members would hear testimony
that day from the companies known as explorers and independents.
1:00:35 PM
SENATOR BEN STEVENS pointed out that page 11, line 13,
subsection (e), is a substantive policy change that allows the
transferable tax credit to be used against corporate income tax
liability. He reported he'd looked in all other draft versions
and it wasn't listed in the memo. Line 13 - which refers to
AS 43.20, the corporate income tax chapter - isn't in the House
version or the governor's version. Nor was it discussed, and
he'd stumbled across it. He said he'd like to find out where
the language came from and how it got inserted.
CHAIR WAGONER replied that he'd check to see where it came from.
1:02:40 PM
SENATOR STEDMAN referred to page 11, lines 7-13, subsection (e).
He asked whether the intent is still to have a maximum reduction
of 20 percent on the tax due, so that someone would always be
paying at least 80 percent of the taxes, regardless of what rate
was set.
CHAIR WAGONER opined that the aforementioned was in the House
bill, not the Senate bill.
SENATOR STEDMAN recalled that it was in the original bill. "I
thought we were still operating under that," he added,
suggesting it could be clarified later. He noted that it ties
in with the whole tax paragraph.
CHAIR WAGONER said he'd check. He announced that Senator Dyson
was on teleconference.
1:04:16 PM
^Chevron Alaska - John Zager, Manager, Alaska Division
JOHN P. ZAGER, General Manager, Chevron - Alaska Area
("Chevron"), noted that accompanying him was Kevin Tabler,
Manager, Lands and Governmental Affairs. Mr. Zager called
attention to a handout and his own testimony March 1 that
Chevron would support the bill and key terms as written, with
one main concern: the possible effect on Cook Inlet, which has
a very different nature from the North Slope. He'd also
emphasized the results when adjustments are made to the bill.
Turning to Version Y, he applauded its recognition that Cook
Inlet cannot support an additional tax. However, he said
Chevron no longer can support the bill in its entirety because
of substantive changes in many areas.
He mentioned the difficulty of crafting one bill to fit every
asset in Alaska, and suggested this bill was drafted primarily
with the North Slope in mind. Mr. Zager reminded members that
his previous testimony addressed the difficult financial
position in Cook Inlet, with issues including production levels
at a fraction of what they used to be; water production that has
risen to over 90 percent; and platforms that are 35 to 40 years
old, which adds greatly to the expense. He pointed out
Cook Inlet has less than 2 percent of Alaska's oil production,
and indicated it's the least profitable. In the overall scheme,
he suggested, it isn't a huge financial impact.
He referred to testimony that ConocoPhillips, the state's
largest producer, employs about 900 people. A big component of
Chevron's expense is its employees as well, Mr. Zager said, with
385 people, including some full-time contractors. He remarked
that Chevron's labor costs per barrel are astronomically higher
than those of the North Slope producers.
SENATOR GENE THERRIAULT joined the meeting at 1:07:47 PM.
MR. ZAGER highlighted another unique aspect of Cook Inlet: its
value to the Southcentral economy. Fueling the economy is the
gas produced there, which heats homes and runs the power
generation. He said the importance of Cook Inlet cannot be
overemphasized in providing that service. Mr. Zager mentioned
power provided to the Kenai Peninsula, where Chevron has roughly
300 employees, hires contractors and other service companies,
and is the "anchor tenant" for the Kenai oil and gas business.
He addressed the codependent nature of Cook Inlet production,
with its small infrastructure supported by the assets of Chevron
and others. Once a asset becomes uneconomic, the fixed overhead
costs will be shared among the few remaining assets; a domino
effect will drive the remaining assets to become even more
uneconomic. Examples include shore bases in the Nikiski area
and onshore treating facilities on the west side, as well as the
Cook Inlet pipeline.
He reminded members that during previous testimony Chevron
presented a couple of options to consider to help Cook Inlet.
Noting that Version Y considers carving out the Cook Inlet oil
production, Mr. Zager remarked, "That is a route we could go";
he pointed out, however, that it's not the only route to achieve
these end results. He emphasized not increasing the tax burden
for Cook Inlet, which is already marginal, and continuing to
provide incentives for additional oil and gas development.
He discussed the importance of Cook Inlet, predicting that
sometime in the next decade, if there isn't additional gas
exploration, the legislature will be considering whether to
build a state-subsidized pipeline to Cook Inlet in order to
provide needed energy to that region. Mr. Zager said he doesn't
see a viable alternative to gas as the energy source there. If
not from there, it will have to be obtained from somewhere else.
Depending on whether the main pipeline has been built, there
could be difficult decisions about how to transport that gas.
1:11:11 PM
MR. ZAGER agreed with many points made by the large producers
during the previous day's testimony with regard to Version Y.
He said the balance in the original bill - which all parties
could live with - is gone. For one thing, the tax rate is
raised from 20 to 25 percent, a clear disincentive for further
investment. In addition, changing the April 1 commencement date
will force producers to guess what taxes they owe, with high
interest rates and punitive penalties for guessing wrong.
Furthermore, the 11 percent interest rate tips the balance too
far in the state's favor with regard to audits; often those
don't happen for two years after the event, and the 11 percent
would be charged retroactively for something unintentional.
This may result in a larger interest penalty than the original
payment, Mr. Zager told members.
He continued, noting the transitional cap is greatly diminished.
Mr. Zager pointed out that in the House bill the transitional
cap is reduced by about 80 percent a year. Version Y is
slightly more favorable, since it's allocated over four years
instead of seven, but the total amount is reduced in a
proportion similar to that in the House bill.
1:13:10 PM
MR. ZAGER continued, saying the standard $73 million deduction
appears to be lost. In Version Y, to his understanding, it is
replaced with a "capital credit" for exploration. From the
previous day's discussion, however, he understood that the
exploration credit would be deleted from the bill, bringing it
back to a "20/20" provision, with no additional incentive for
exploration and without the standard deduction.
He turned to the idea of progressivity, saying it's new to the
proposed CS in the House as well as in the Senate. Noting that
there has been quite a bit of discussion about the intent of
Version Y, Mr. Zager said he'd read it to be a 0.2 percent rise
for every $10 increase in price. He surmised, however, that the
intent was 0.2 for every dollar increase, the range contemplated
by the House. If that is a correct interpretation, Mr. Zager
said, it's a highly significant adjustment to the bill,
especially starting at $40 a barrel instead of $50 a barrel. At
today's prices of around $60, it would be a 29 percent tax
instead of the 20 percent originally proposed by the governor.
He spoke against the idea that taking away the high price and
windfall would result in a lot of extra money that should be
allocated differently. From an investor's standpoint, Mr. Zager
said, it is part of the expected value of any investment.
Offering commercial fishing as an analogy, where some days are
much better than others, he likened this to taking up to half of
the earnings on those good fishing days - which certainly would
affect a fisherman's desire to invest in the business.
He pointed out that in the oil industry the cycle moves in years
or decades. It is tempting to look at good times with regard to
prices, such as now, and say there are windfall profits. In the
overall scheme, however, Mr. Zager said investments are made on
the expected value, distribution and possible outcomes, which
include higher-price scenarios. He cautioned that changes with
regard to the aforementioned would affect investment decisions.
1:16:24 PM
MR. ZAGER reported that other issues include tying escalation to
West Texas Intermediate (WTI). He mentioned selling Alaska
North Slope (ANS) crude, saying in his mind there is often a
"disconnect" of $2 to $6. He questioned having it pegged to
something that doesn't directly relate to the product being
sold. Furthermore, gas production is being pegged to WTI, which
he said is a real stretch. He suggested that if gas is sold
from the North Slope someday, it will be tied to a Henry Hub
price; gas sold in Cook Inlet usually is under longer-term
contracts, and not at all tied to WTI. Mr. Zager urged members
to consider these issues as they look at the bill's provisions.
He said, overall, increasing taxes will make Alaska less
competitive relative to the original proposal, perhaps relative
to world markets and certainly relative to North American
investments, which are usually given a premium as investments
because of their low risk. It will put Alaska at the bottom of
the distribution for North American investments, he cautioned.
1:18:04 PM
MR. ZAGER suggested there is a debate between two schools of
thought: "Let's get the most revenue off the oil and gas
business we can now, while it's still good" versus a "grow the
pie" option in which a longer-term view is taken, with effort to
invest and keep the production coming. Legislators have to
decide which way to go. The first option includes increasing
taxes as much as possible, and will balloon state revenue in the
short term. Mr. Zager said this puts an onus on legislators to
be good stewards of such capital, and to ensure it's well
managed for future generations.
He acknowledged the consultants' good work in coming up with
reasonable expectations, but pointed out that they'll leave one
day and everyone else must live with the decisions. After
legislators vote on behalf of the Alaskan people, investors will
"vote" with their dollars over the coming years. Mr. Zager
noted that with the original bill, the industry said the huge
increase in taxes, though tough to swallow, was manageable - a
position they aren't taking with the current version.
1:23:18 PM
MR. ZAGER concluded by saying Chevron cannot support Version Y.
He urged return to the original PPT terms while retaining a Cook
Inlet provision. Chevron has been in Alaska many years, he
said, and intends to continue with active exploration and
production in the state if a sound and stable fiscal regime can
be offered.
1:24:05 PM
SENATOR STEDMAN highlighted one point of discomfort for Chevron:
the escalator clause that provides for a higher rate as prices
advance.
MR. ZAGER said he'd only referred to the incremental effect on
the PPT and not the total government take. He recalled saying
at $60 a barrel - roughly where it is now - he believed it would
be a 29 percent tax, rather than 25 percent, because of the
escalator. It'd be an additional 4 percent from $40 to $60.
SENATOR STEDMAN agreed it's a substantial tax change for the
industry. He pointed out that under the current scenario from
Econ One's analysis, however, with no escalator and at 25/20,
the government take is 60; with the escalator, it's almost 62.
The current system, by contrast, puts it at under 53 percent.
Thus the biggest magnitude of change is getting from the current
system up to 25/20 - and, under the House version, to 20/20. He
said he wasn't disagreeing with Mr. Zager's numbers, but the
picture looks a little different when viewed in its entirety.
1:27:58 PM
SENATOR STEDMAN suggested Mr. Zager's point about using ANS
rather than WTI should be looked at by legislators.
1:28:40 PM
SENATOR THERRIAULT referred to the issue of whether the state
will act prudently if it receives a lot of money now. He said
the legislature has mechanisms for setting extra revenue aside;
in fact, he is working with Legislative Legal Services currently
on a mechanism to do that.
He asked whether Mr. Zager agreed that the credit encourages the
industry to specifically "grow the Alaska pie." He suggested
the current system makes it fairly easy for companies to
generate money and take it wherever they want in their worldwide
operations in order to get the highest return; it's a business
decision. From the Alaskan perspective, however, the desire is
to have the industry reinvest in Alaska. The PPT is a new
mechanism to provide incentive for that activity.
MR. ZAGER said he believes that's right. There'll be additional
incentives to invest in Alaska, but it will still be measured
against a company's worldwide portfolio, which is dynamic and
constantly changing. Thus it's hard to predict how it will look
five or ten years from now.
He addressed the reinvestment credit, estimating it will have a
positive effect on reinvestment, especially for the smaller
companies. It's really a risk-sharing mechanism. He surmised
that people's desire to share that risk with the state will
depend largely on their risk tolerance and their financial
positions. Mr. Zager said the trade-off for sharing the risk
up front is giving up value on the backside. A lot of bigger
companies are probably willing to make the investment on their
own if they can be exposed to the full range of results. He
pointed out that it was hard to answer specifically.
1:31:24 PM
SENATOR STEDMAN suggested the issue isn't one of trying to
increase state revenue to meet budgetary requirements. Rather,
it's the changing global marketplace and how it puts a value on
a commodity owned by Alaskans, as well as the relationship among
producers and governments that are in flux around the world.
The current system was put in place several decades ago and is
structurally flawed, he said, noting there also is a desire to
build a multibillion-dollar gas line.
SENATOR GRETCHEN GUESS joined the meeting at 1:32:54 PM.
SENATOR DYSON requested that Mr. Zager provide a rough estimate
of his company's profits in Cook Inlet ten years ago, five years
ago and for 2005. He said he didn't want confidential
information, but wanted to know the trend and magnitude of the
profits there.
MR. ZAGER answered that he didn't have the information with him.
Over that time period, however, oil production declined
dramatically, although it's offset by increased oil prices. He
said the company is more profitable now than two years ago, but
he couldn't say about five or ten years ago.
1:34:42 PM
^Pioneer Natural Resources - Pat Foley, Manager, Lands and
External Affairs
PAT FOLEY, Manager, Lands and External Affairs, Pioneer Natural
Resources ("Pioneer"), highlighted the common theme heard from
investors and ascribed to by Pioneer: the governor's initial
proposal held a balance they all could accept, but as the bill
has evolved, the balance is being tipped to the disadvantage of
many investors.
He said Pioneer is new to Alaska, having been here since 2003,
but has jumped in with both feet. He cited a project in the
Beaufort Sea, a $500 million development that will produce
50 million to 90 million barrels of the state's resources.
Slated to start up in 2008, it should have a peak rate of about
17,000 barrels a day - a huge amount for a company like Pioneer,
but an average Kuparuk drill site, relatively minor in the grand
scheme. Mr. Foley mentioned other exploration wells and a
development project in Cook Inlet, saying Pioneer is deeply
committed to the state. He suggested the state should foster an
environment that encourages new entrants.
1:38:31 PM
MR. FOLEY discussed risks, noting that some are beyond a
company's control, but some can be controlled by the way the
state sets its policy. He cautioned that as the tax rate goes
up and investment credit is stripped away, the climate is
turning a bit cold.
1:40:25 PM
MR. FOLEY noted he'd previously testified about the significance
of the $73 million exemption to new entrants and smaller
companies like Pioneer. He encouraged members to find another
mechanism to replace it, since it's no longer in the bill. He
pointed out that at high oil prices, the cost to drill wells
increases for explorers.
1:42:21 PM
MR. FOLEY referred to Senator Ben Stevens' discussion that day
of new language in Version Y relating to a company's ability to
use credits against corporate income tax. Mr. Foley said this
would greatly benefit a company like Pioneer. He also discussed
options for giving or transferring credits, as well as
broadening the pool of companies that might be willing to
purchase credits beyond just the large oil producers. Noting
that companies wrestle with marginal opportunities, he said
policies like PPT will have a huge impact on decisions.
Pointing out that Pioneer employs 26 people in Alaska, Mr. Foley
emphasized the need to craft a fiscal policy that makes it
easier for small companies.
1:45:47 PM
SENATOR DYSON asked whether Pioneer's increase in drilling
expenses has been mostly from fuel costs.
MR. FOLEY replied no. The largest driver is the day rate - the
money the company pays for drilling rigs, which are in limited
supply. He disagreed with the idea that as oil prices increase,
the profit margin rises accordingly. He suggested it's a little
out of phase. People might start large investment programs when
prices go high. They'll be competing for the same scarce
resources, and costs will go up. In response to Chair Wagoner,
he agreed to put his remarks in writing and send them to the
committee.
CHAIR WAGONER called an at-ease from 1:49:43 PM to 1:53:02 PM.
1:53:06 PM
^Anadarko Petroleum Corporation - Mark Hanley, Manager, Public
Affairs for Alaska
MARK HANLEY, Manager, Public Affairs for Alaska, Anadarko
Petroleum Corporation ("Anadarko"), reminded members that
Anadarko's position on the original bill was that it was a
delicate balance, a tenuous truce among companies; it increased
taxes, but provided some downside protection and improved
exploration economics. Mentioning forecasts for declining North
Slope production, Mr. Hanley emphasized that Anadarko wants to
find more oil and stop that trend, a goal shared by many. He
pointed out that the total revenue source from new production
isn't just from production taxes - it includes royalties and
corporate taxes as well.
He presented a slide from Dr. Pedro van Meurs' report, chart
"11.20" showing WTI oil prices, an example of a 150 million
barrel oil field. Mr. Hanley emphasized that even under today's
system there isn't enough drilling on the North Slope.
Production is declining and more is needed. The system needs to
improve exploration economics beyond the current system;
otherwise, there won't be additional investment - new fields.
He gave Anadarko's view that at $36 WTI, the 25/20 "with zero"
is worse than the current system and won't provide incentive for
more exploration. With the $73 million, however, he pointed out
on the slide that the lines converge. Mr. Hanley noted that
Anadarko's previous testimony was based on 20/20, which wasn't
in Dr. van Meurs' chart.
He countered the idea that 25/20 is better than 20/20 for
exploration - an idea he suggested came from Econ One's
testimony indicating a company's economics are better at low
prices. Mr. Hanley acknowledged that the state gets less money
at low prices - the "downside protection" for companies - but
explained, "At the numbers at which we do better, exploration
isn't better because it's not economic."
1:57:54 PM
MR. HANLEY emphasized that a higher tax rate results in poorer
economics for exploration and that the $73 million is highly
important to new or smaller companies. Looking at the bill as a
whole, for his company at 20/20, if the $73 million is reduced,
it's like raising the tax rate to 25 percent. Thus the
$73 million is worth about 5 percent on the tax rate.
Similarly, if 20/20 is raised to 20/25 and the $73 million is
eliminated, it equates to a 30 percent tax rate. If those two
things happened, most of his company's projects would be worse
economically than under the current system - and thus Anadarko
would drill fewer wells.
He pointed out that it's the credits in the original bill that
counter the apparent irony of having the state receive more
money and yet still have exploration, since higher taxes
generally mean less activity. The credits do provide incentive
to invest, but also offset that tax increase.
He explained that 25/25 is worse for exploration economics than
20/20 because there isn't a one-to-one relationship. Rather,
it's a four- or five-to-one relationship, as he recalled from
legislative consultant Daniel Johnston's testimony. Mr. Hanley
said if something is being taken away, something must be given
back. Thus there should be a credit increase, although it's not
a linear relationship. Somewhere around 25/40 keeps the
exploration economics the same, he suggested.
2:01:00 PM
MR. HANLEY discussed progressivity. Still referring to the
Dr. van Meurs' slide, he offered Anadarko's perspective that
with a progressive tax rate, the change from the existing system
would be even greater, since it takes more of the "high side."
Where that high side begins makes a difference. Anadarko takes
a number that is its hurdle rate, takes a low rate to see if
there is even cash flow at that level, and also takes a high
rate - companies generally play for the high side. To the
extent there is a progressive tax increase, Mr. Hanley
concluded, it does affect Anadarko's decisions regarding
exploration.
2:03:03 PM
MR. HANLEY addressed other concerns. Regarding the progressive
rate itself, he said applying a gas-tax increase based on oil
price isn't proper. The two shouldn't be linked directly.
Also, if a price is started at a certain level, it's unclear
whether the tax is based on gross revenues. He pointed out that
the House version bases the tax on the gross, not the net. He
also noted that cost factors have an impact. To the extent
there is no inflation adjustment on the base number, Mr. Hanley
said, he believes there's an assumption that costs wouldn't have
risen - when, in fact, those costs might have gone up.
2:05:06 PM
MR. HANLEY referred to talk that the government take is too low
currently. He cautioned that investment also is too low, at
least with respect to exploration, and that higher taxes won't
improve it. He suggested it's only one factor to consider. He
showed an example, emphasizing that not every field has the same
economics, since some are farther from the infrastructure, for
instance.
2:07:03 PM
MR. HANLEY noted that there are a number of little issues, some
of which may be addressed already. He concluded by expressing
concern that the tax rate is increasing with no credits to
compensate for it, making the economics worse for exploration.
"We want to drill more wells, not less," he added, noting that
there are a lot of marginal prospective areas where an increase
in the economic viability would help.
CHAIR WAGONER remarked, "We'll see if we can tip that the other
way."
2:07:54 PM
SENATOR STEDMAN referred to the escalator issue, saying it's on
the net, like regular PPT. He added that the language is,
regrettably, a little dysfunctional and being worked on. He
provided details, concluding that the intent with the escalator
isn't so much to grab the upside above the $40 range, but is to
keep the state- and federal-government take from ever getting
smaller as the price rises from $50 to $60 to $70 a barrel in
the future. He recognized that it impacts "marginally" the
analysis on the upper end.
2:10:12 PM
SENATOR THERRIAULT urged care in having the escalator applied at
the trigger point. He gave an example, stressing that costs
might rise over time - despite testimony that technological
breakthroughs help to keep costs down - and that the trigger
point could keep rising and never be reached. Turning to Mr.
Hanley's remark that investment is too low even under today's
system, he highlighted his desire for a systematic change to
encourage companies to invest their dollars to "grow Alaska's
pie" for the benefit of companies and the state alike.
MR. HANLEY replied that he thinks the system has worked as it
was presented, with credits that can encourage additional
investment. In the end, however, his company looks at the
economics in Alaska versus somewhere else they might invest. He
emphasized the need to keep the balance.
2:13:41 PM
CHAIR WAGONER recalled that at the previous day's hearing, one
of the major companies said even 20/20 didn't provide enough
incentive for investment to keep production at a higher level.
He surmised Mr. Hanley wasn't insinuating that with respect to
exploration.
MR. HANLEY said no. The tax increase is on existing production,
which doesn't get the benefit of the tax credits for previous
investment that was made. "Forget the look-back for just a
minute," he added. He said Anadarko has a foot in both camps:
it will probably pay more through the existing production at
Alpine, but also views itself as an exploration company.
2:14:57 PM
SENATOR ELTON referred to page 7 of Dr. van Meurs' presentation
the previous day. He recalled that Dr. van Meurs had suggested,
for large companies, 25/20 provides slightly less investment
incentive than the governor's proposal; for smaller companies,
however, there'd be more investment no matter what rate was set.
Senator Elton asked where those assumptions might be wrong.
MR. HANLEY replied that he hadn't seen the slide. Generally,
however, the economics go down as the tax rate rises. He noted
that the slide he himself was showing was Dr. van Meurs' chart.
Mr. Hanley pointed out that 20/20 would help, but not 25/20.
SENATOR ELTON agreed to share the aforementioned with
Mr. Hanley.
2:18:16 PM
SENATOR THERRIAULT explained that the calculations on page 7 of
the Dr. van Meurs' presentation related to whether expected
rates of return would change enough to alter a company's
investment decisions. It's not an exact science, and companies
have different expected rates of return. He indicated the
chairman was working on language for a different mechanism with
respect to the $73 million, which is important to companies like
[Anadarko].
He said there is a possibility somewhere in the process of
considering additional incentives on pure exploration. Noting
that Anadarko's investment over the last five years has been
substantial, Senator Therriault asked whether Mr. Hanley had
given thought to the "two for one" or a multiple to capture
previous investment dollars, and whether this would provide
adequate incentive for investing.
MR. HANLEY indicated he'd rather have four for one. He reported
that Anadarko has invested hundreds of millions of dollars in
the last few years; he cited examples of two [satellite fields]
at Alpine that haven't come on line yet. He acknowledged that
two for one is better than nothing, and stated the intention of
continuing to invest. However, he said the original look-back
approach is preferable. But if not that, anything his company
can do to get credit for money it has spent, and decisions
already made, would be helpful.
SENATOR THERRIAULT recalled that Dr. van Meurs' criticism of the
look-back was that it's "all sunk costs to the company" and that
if the credit mechanism is to shape future investment decisions,
the state should get something out of it too.
MR. HANLEY said it would be helpful, and his company would
rather have it than nothing. However, he believes it would have
a minor impact on whether his company goes forward. For the two
satellite fields, he pointed out, it hadn't been anticipated
that they'd ever pay a severance tax. Thus he views this as
quite a large tax increase. Some fields aren't economically
viable if they have to pay a severance tax, he noted.
2:23:45 PM
MR. HANLEY referred to testimony by ConocoPhillips about what
decisions it would've made two years ago if the company had
known there'd be a new system. Similarly, Mr. Hanley indicated
he feels Anadarko is getting the worst of both worlds for its
two satellite fields, since the company might have waited.
2:24:34 PM
SENATOR STEDMAN returned to the comparison of oil prices at
25 percent versus 20 percent tax, each with a 20 percent credit.
He recalled that Mr. Hanley had said 25/20 isn't better at low
oil prices. Senator Stedman also recalled that one consultant
was zeroing in on the value of the credit mechanism, because
under either scenario the explorers wouldn't be paying a
PPT tax.
MR. HANLEY replied by emphasizing that 25/20 isn't better for
exploration. At those low prices, the projects aren't economic
and his company wouldn't be drilling any of those wells. To the
extent 25/20 versus 20/20 at very low prices might cost his
company less money than under the existing system, however, it
could. Thus the consultants weren't absolutely incorrect.
2:26:15 PM
SENATOR STEDMAN returned to pricing for gas versus oil.
CHAIR WAGONER responded that an amendment suggested by Dr. van
Meurs, which the House put in, addresses that. He said he'd
provide a copy.
MR. HANLEY replied he thinks that's the approach. Eventually,
when there's gas production, there must be someplace such as
Henry Hub to work back from to get the wellhead value. However,
basing a gas-tax increase on what happens with oil prices
doesn't make sense. "I think they've figured out something," he
added.
2:27:56 PM
CHAIR WAGONER informed members that Mr. Robert Mintz, Department
of Law, was working with Dr. van Meurs on some language that the
committee would receive Monday; it would relate to the "two to
one" changes and the different escalator for gas. He noted that
on Monday they also would hear from the public and could pose
questions to Dr. van Meurs. He held SB 305 over.
There being no further business to come before the committee,
Chair Wagoner adjourned the Senate Resources Standing Committee
meeting at 2:28:55 PM.
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