Legislature(2007 - 2008)BUTROVICH 205

01/19/2008 11:00 AM Senate RESOURCES


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11:04:56 AM Start
11:06:37 AM Alaska's Gas: How Our Current Fiscal Policies Stack Up: North American and International Regimes
01:13:40 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Teleconference --
-- Note Time Change --
Alaska's Gas: How Our Current Fiscal
Policies Stack Up; North American and
International Regimesn-- Testimony will
continue at the 1/21 Resources meeting --
Administration: Departments of Revenue
and Natural Resources
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                        January 19, 2008                                                                                        
                           11:04 a.m.                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Charlie Huggins, Chair                                                                                                  
Senator Lyda Green                                                                                                              
Senator Gary Stevens                                                                                                            
Senator Bill Wielechowski                                                                                                       
Senator Thomas Wagoner                                                                                                          
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                              
Senator Bert Stedman, Vice Chair                                                                                                
Senator Lesil McGuire                                                                                                           
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Fred Dyson                                                                                                              
Senator Joe Thomas                                                                                                              
Senator Johnny Ellis                                                                                                            
Senator Hollis French                                                                                                           
Senator Gene Therriault                                                                                                         
Representative Mike Hawker                                                                                                      
Representative Beth Kerttula                                                                                                    
Representative Paul Seaton                                                                                                      
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
Alaska's Gas: How Our Current Fiscal Policies Stack Up                                                                          
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to report                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
MARCIA DAVIS, Deputy Commissioner                                                                                               
Department of Revenue (DOR)                                                                                                     
Anchorage, AK                                                                                                                   
POSITION STATEMENT: Discussed oil and gas fiscal issues.                                                                      
                                                                                                                                
MICHAEL WILLIAMS, Chief Economist                                                                                               
Department of Revenue (DOR)                                                                                                     
Anchorage, AK                                                                                                                   
POSITION STATEMENT: Discussed oil and gas fiscal issues.                                                                      
                                                                                                                                
KEVIN BANKS, Acting Director                                                                                                    
Division of Oil and Gas                                                                                                         
Department of Natural Resources (DNR)                                                                                           
Anchorage, AK                                                                                                                   
POSITION STATEMENT: Discussed oil and gas fiscal issues.                                                                      
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  CHARLIE  HUGGINS  called  the  Senate  Resources  Standing                                                             
Committee meeting  to order at  11:04 AM.  Senators Wielechowski,                                                             
Wagoner, Green, Stevens, and Huggins  were present at the call to                                                               
order. Representatives  Kerttula, Hawker and Seaton  and Senators                                                               
Dyson, Thomas, Ellis, French, and Therriault were also present.                                                                 
                                                                                                                                
 ^Alaska's Gas: How Our Current Fiscal Policies Stack Up: North                                                             
               American and International Regimes                                                                           
                                                                                                                                
CHAIR HUGGINS said discussion today  will be the first chapter of                                                               
setting  Alaska's  new tax  regime  for  gas.  The goals  are  to                                                               
educate  everyone on  where gas  taxes are  headed and  to set  a                                                               
window of when gas tax will be addressed, if necessary.                                                                         
                                                                                                                                
11:06:37 AM                                                                                                                   
MARCIA DAVIS,  Deputy Commissioner, Department of  Revenue (DOR),                                                               
said  there  will  be  a  lot of  information  coming  from  AGIA                                                               
licensing  and "any  other types  of information  you solicit  as                                                               
alternates." She referred  to a March, 2007,  letter from Senator                                                               
Huggins,  which  presaged many  "crux  issues"  that are  now  in                                                               
focus. At  the time of  the letter, AGIA was  under consideration                                                               
and  the issue  was  locking in  a gas  tax  during open  season.                                                               
Concern was  expressed about  taking care of  gas taxes  now. The                                                               
recommendation was to  push ahead with a tax  system that focused                                                               
on oil,  knowing the gas component  may need to be  retooled. The                                                               
letter  also considered  whether Alaska  was competitive.  Alaska                                                               
doesn't want a fiscal system that impairs a gas line, she said.                                                                 
                                                                                                                                
11:09:33 AM                                                                                                                   
MS. DAVIS  said oil and  gas are treated  the same under  the PPT                                                               
[profit-based  petroleum  production  tax of  2006],  because  it                                                               
wasn't  clear during  ACES [Alaska's  Clear and  Equitable Share]                                                               
deliberations if  taxes were  going be gross  or net.  Should the                                                               
taxes be  dealt with the  same way?  ACES continues to  treat oil                                                               
and gas  taxes the same,  because "we did  park the issue  of gas                                                               
taxation during the debate."                                                                                                    
                                                                                                                                
CHAIR HUGGINS  asked the current  tax rate  for gas, and  if that                                                               
was raised during the special session.                                                                                          
                                                                                                                                
MS. DAVIS said the base tax is 25 percent.                                                                                      
                                                                                                                                
CHAIR HUGGINS  asked if that  was raised during the  last special                                                               
session. Many people  have asked him why the gas  tax was raised,                                                               
and he cannot answer that.                                                                                                      
                                                                                                                                
MS. DAVIS said it was 22.5 percent in the PPT.                                                                                  
                                                                                                                                
11:11:06 AM                                                                                                                   
MS.  DAVIS said  oil taxes  were raised  and gas  taxes were  not                                                               
really  considered.  In   order  to  have  a   refined  tax  that                                                               
incentivizes  production and  is fair,  "we needed  to know  more                                                               
about what  that gas  project was  going to  be." An  LNG project                                                               
might have different features than  an overland pipe project, for                                                               
example.  There  are  different economic  drivers  for  different                                                               
projects.  The  legislature  has  a strong  desire  for  economic                                                               
stability, so  when the  state is  ready, the  gas tax  should be                                                               
done right and then locked in.  The time is now approaching - "we                                                               
are at the  beginning of the vortex." There wasn't  a decision to                                                               
increase gas taxes  during ACES but to raise oil  taxes and defer                                                               
gas taxes until it could be done correctly and permanently.                                                                     
                                                                                                                                
11:13:03 AM                                                                                                                   
CHAIR  HUGGINS noted  that gas  taxes  were raised.  He asked  if                                                               
there was a discussion to disconnect the two.                                                                                   
                                                                                                                                
MS.  DAVIS said  yes, and  separate economic  analyses were  done                                                               
before ACES was  even drafted. There is research on  hand, but at                                                               
the time no one  knew if there would be a net or  a gross tax. We                                                               
ended up with a net system,  where it is very challenging to make                                                               
a  distinction between  gas and  oil tax  rates or  progressivity                                                               
formulas. There would  need to be two  separate calculations, and                                                               
the costs  must be  allocated to each  product. There  are fields                                                               
with both gas  and oil, making it a huge  auditing challenge. The                                                               
goal was to  not deal with that  if it can be  avoided. There are                                                               
many reasons why the tax rates weren't segregated, she said.                                                                    
                                                                                                                                
11:15:06 AM                                                                                                                   
CHAIR HUGGINS  said the state received  multiple applications for                                                               
the gas pipeline and only one conformed.                                                                                        
                                                                                                                                
MS. DAVIS said yes, but one is under reconsideration.                                                                           
                                                                                                                                
CHAIR  HUGGINS  asked if  the  lack  of  fiscal certainty  had  a                                                               
bearing on the applications.                                                                                                    
                                                                                                                                
MS. DAVIS said  she has been fully engaged with  ACES, but she is                                                               
not sitting on the team that did that analysis.                                                                                 
                                                                                                                                
11:15:55 AM                                                                                                                   
SENATOR WIELECHOWSKI asked when  the administration wants to make                                                               
the change in gas taxes. He  asked her to address what the public                                                               
is hearing from ConocoPhillips about  working out a tax structure                                                               
for the  next 20  to 25 years.  Is that the  best course  for the                                                               
state to take, and should  it be done administratively or through                                                               
the legislature?                                                                                                                
                                                                                                                                
MS.  DAVIS said  beginning the  gas  tax discussion  here is  not                                                               
inappropriate.  The gas  tax is  going to  be locked  in at  open                                                               
season for ten years if that's  what that taxpayer wants, but the                                                               
provision allows  the company  an option to  accept a  change. It                                                               
doesn't  restrict the  state from  making further  refinements to                                                               
the tax,  but it  affects how  a producer  would analyze  an open                                                               
season, and  it is important  to have  the best tax  structure at                                                               
that time.  The system needs  to be well  thought out and  put in                                                               
place by  then. The  one qualifying  bidder had  hope of  an open                                                               
season in 18 months. That bidder  may or may not be the licensee,                                                               
so to do the  tax now would be premature. The  state needs to get                                                               
through this  session to  decide what the  gas pipeline  goal and                                                               
structure is  and then  dive into the  information and  decide on                                                               
the optimum  structure for gas  and get it  in place by  the next                                                               
session. That  is ideal. She  said she feels hamstrung  right now                                                               
to  provide  the  committee with  the  necessary  information  to                                                               
arrive at the wisest choice for  a gas tax because of not knowing                                                               
if  it will  involve LNG  or gas  overland or  what the  in-state                                                               
component is,  and there are a  lot of pieces. "I  really do feel                                                               
strongly  that  we need  to  honor  the  principle that  we  give                                                               
stability and  certainty to  the industry." It  needs to  be done                                                               
right and then left alone.                                                                                                      
                                                                                                                                
11:19:46 AM                                                                                                                   
MS.  DAVIS  said  she  has   not  been  in  the  group  analyzing                                                               
ConocoPhillips' bid. We  have a gas tax and we  are talking about                                                               
making  changes, but  she does  not know  what kind  of certainty                                                               
that  ConocoPhillips  is  asking  for.  During  passage  of  AGIA                                                               
[Alaska Gasline  Inducement Act]  there was discussion  about the                                                               
ability  of  one  legislature  to  lock  in  taxation  for  later                                                               
legislatures.  During   negotiations  on  stranded   gas,  fiscal                                                               
certainty had  a price tag  of about  $3 billion. There  are many                                                               
things that  ConocoPhillips could  mean by fiscal  certainty. She                                                               
noted that BP and Exxon need to be involved.                                                                                    
                                                                                                                                
11:22:20 AM                                                                                                                   
CHAIR  HUGGINS  said  some  people  say he  is  working  for  the                                                               
producers, but his  "innate feeling is that whomever  is going to                                                               
build the gas pipeline is  the biggest beneficiary to setting the                                                               
tax regime  in Alaska, because  it starts some  certainty factors                                                               
when they're trying  to get the financing and  to get commitments                                                               
for gas, otherwise it creates a major uncertainty for them."                                                                    
                                                                                                                                
11:23:24 AM                                                                                                                   
MS. DAVIS  said stability  aids all  players in  the marketplace.                                                               
Under ACES,  -- not withstanding that  the tax went from  22.5 to                                                               
25 percent -- the progressivity  creates a huge incentive for gas                                                               
owners to  sell their gas at  the same time they  sell their oil.                                                               
Your  starting point  will be  to assess  where things  stand and                                                               
then  decide if  it is  sufficient incentive.  Where Alaska  sits                                                               
today is  not a  bad place  for moving  the gas  project forward.                                                               
What  more  needs to  be  done  remains  to  be seen.  "There  is                                                               
certainty - this is the tax  law." This body can decide to change                                                               
it. She  said any  builder of the  pipeline would  want certainty                                                               
and stability when approaching an open season.                                                                                  
                                                                                                                                
CHAIR HUGGINS asked if the tax is at the right level.                                                                           
                                                                                                                                
11:25:30 AM                                                                                                                   
MS. DAVIS  said Alaska is  the middle of the  international pack,                                                               
but  the fiscal  terms  are  only one  piece.  The rocks,  price,                                                               
transportation, and  the timeframe all  play a big role.  "But if                                                               
you look  at strictly the  fiscal system that  we have …  when we                                                               
assess those in a macro view, we're about middle of the pack."                                                                  
                                                                                                                                
11:26:20 AM                                                                                                                   
CHAIR HUGGINS asked about factoring in delivery.                                                                                
                                                                                                                                
MS.  DAVIS  said  that  is   more  challenging.  Looking  at  the                                                               
TransCanada  proposal, or  any other  proposal,  the full  market                                                               
will be part of the discussion.                                                                                                 
                                                                                                                                
SENATOR WIELECHOWSKI  said producers  - namely  ConocoPhillips --                                                               
want to  negotiate a tax  plan with the administration.  He asked                                                               
if that is acceptable.                                                                                                          
                                                                                                                                
MS. DAVIS said  that was tried and it was  unsuccessful. The plan                                                               
now is to  work with the legislature to deliver  fiscal terms and                                                               
widen the  opportunity to all-comers  to have a shot  at building                                                               
our gas pipeline.                                                                                                               
                                                                                                                                
11:27:58 AM                                                                                                                   
MS. DAVIS  said a  key factor  was that the  state must  not give                                                               
away resource value  which is not necessary. The state  has to be                                                               
intelligent  and make  sure that  what the  state gives  away has                                                               
value for  the industry so  that it incentivizes  their behavior.                                                               
The  state  must know  the  business  as  well as  industry,  and                                                               
getting information was a key goal  of ACES. That makes the state                                                               
a better  negotiator and a  better partner.  In order to  get the                                                               
gas  tax right,  the state  needs to  know all  the variables  in                                                               
production and  the state's location relative  to other entities.                                                               
People today  will speak  to how Alaska's  fiscal terms  stack up                                                               
against others.                                                                                                                 
                                                                                                                                
The committee took an at-ease from 11:31 AM until 11:35 AM.                                                                 
                                                                                                                                
KEVIN  BANKS,   Acting  Director,   Division  of  Oil   and  Gas,                                                               
Department of Natural  Resources (DNR), said it is  a pleasure to                                                               
share  a table  with  someone as  smart as  Marcia  Davis and  to                                                               
follow someone like Cathy Foerster  [AOGCC Commissioner]. He will                                                               
try to  draw a distinction  between the economic  and development                                                               
parameters that  surround the  reservoir at  Prudhoe Bay  and Pt.                                                               
Thomson, and he will discuss  the exploration potential. In terms                                                               
of  impact   of  fiscal  regimes   on  gas,  "we  have   a  wider                                                               
distribution of  individual kinds  of issues  to deal  with, with                                                               
respect to the type of development  that we're going to be trying                                                               
to incentivize."  The challenge will  be to create a  system that                                                               
works  for  widely  different situations.  He  will  discuss  the                                                               
incentives that are in place in Alaska for gas development.                                                                     
                                                                                                                                
11:37:53 AM                                                                                                                   
MR.  BANKS   showed  the  mean  and   distribution  estimates  of                                                               
potential  undiscovered resources  on the  North Slope  - onshore                                                               
and  offshore.  The distributions  are  shown  with a  5  percent                                                               
possibility of  success to  a 95  percent probability.  The "sure                                                               
things" are a smaller predictor  of resources. Only the means can                                                               
be added together; therefore, there  is some range of values that                                                               
surround each  of the  numbers. "These are  not the  numbers that                                                               
Cathy  Foerster  was referring  to  when  she was  talking  about                                                               
reserves. These are  undiscovered, technically recoverable, given                                                               
today's  technologies, but  it doesn't  address  the question  of                                                               
economics."  Some  estimates suggest  that  about  half of  these                                                               
resources  are economically  recoverable -  "but, mind  you, they                                                               
are still undiscovered,  so there is a probability  that they may                                                               
never be found or that we may find more than is listed."                                                                        
                                                                                                                                
MR. BANKS displayed the known reserves  of gas - the potential of                                                               
gas that has  been discovered. The SEC reserve  estimate has been                                                               
used by  the producers  and it is  much lower "than  this 35  … I                                                               
think Michael Williams  told me it was close to  9, or something,                                                               
by his estimate." It represents  gas that is close to development                                                               
capability. That number has not  changed since the late 1980s. He                                                               
surmised that it represents an SEC balance-sheet definition.                                                                    
                                                                                                                                
11:41:52 AM                                                                                                                   
CHAIR  HUGGINS asked,  "On the  fiscal part  of how  much gas  is                                                               
there, that's not disputed, it's the definition?"                                                                               
                                                                                                                                
MR. BANKS  said right. Yesterday Commissioner  Foerster discussed                                                               
SEC  reserves and  how the  Federal Energy  Regulatory Commission                                                               
(FERC) will  treat those.  At an open  season a  pipeline company                                                               
will  want their  suppliers/customers/shippers to  commit gas  to                                                               
supply the  pipeline. The supplier need  not have all of  the gas                                                               
that it  might get over  the next several  years if that  is what                                                               
the commitment requirements are. It  also depends on the strength                                                               
of the company and its chances  of discovering more gas. The FERC                                                               
is  concerned  "that  that  bar  is not  set  so  high  that  the                                                               
competition for  space in  the pipeline in  an open  season isn't                                                               
somehow interfered with."  The FERC has to strike  a balance that                                                               
the  open  season  is  competitive   and  the  pipeline  shipping                                                               
commitments are sufficiently underwritten.                                                                                      
                                                                                                                                
11:43:46 AM                                                                                                                   
MR. BANKS  turned to the Prudhoe  Bay and the Pt.  Thomson units.                                                               
He  said  to keep  in  mind  that  things  are more  blurry  than                                                               
presented. For example, Prudhoe Bay  is a reservoir that is well-                                                               
understood and  well-developed, so  the infrastructure  needed to                                                               
deliver gas to a gas treatment  plant and to a pipeline is mostly                                                               
in place  now. Some  investments will be  required in  the field,                                                               
but it won't be a large part  of the problem that the state needs                                                               
to examine  when deciding cost  structure and  fiscal incentives.                                                               
The challenge is  that the operators at Prudhoe  Bay have already                                                               
begun upgrading  the facilities.  It is  very important  that the                                                               
facilities  that are  there go  through  routine maintenance  and                                                               
upgrade.   Commissioner   Foerster   wants  to   see   aggressive                                                               
development of  the oil so  when a gas  sale occurs, the  loss of                                                               
oil is minimized. "Each time  there's some failure in the systems                                                               
up there and  the flow of oil is interrupted,  that's oil that is                                                               
the opposite of aggressively being  developed. That's oil that is                                                               
pushing out the timeliness of a sale, in some respects."                                                                        
                                                                                                                                
11:46:06 AM                                                                                                                   
MR.  BANKS  said the  reservoir  risks  are relatively  low.  All                                                               
methane  has been  cycled, at  least once  or twice,  through the                                                               
facilities  to  retain pressure  and  enhance  oil recovery.  The                                                               
pipeline will  begin near the  Prudhoe Bay  unit so it  will have                                                               
the highest net back value. The  difference in the net back value                                                               
between  Prudhoe Bay,  Pt. Thomson,  and others  is not  the most                                                               
important issues,  but it  should be  kept in  mind. Much  of the                                                               
market value  of gas is  eaten up by transportation,  which needs                                                               
to be taken into account for determining fiscal systems for gas.                                                                
                                                                                                                                
11:47:22 AM                                                                                                                   
SENATOR HUGGINS  said he shoots his  father's old gun, but  it is                                                               
expensive  to maintain  and upgrade  with modern  innovations. It                                                               
works and it looks  shiny when he gets it back,  but it costs the                                                               
same as  buying a new one.  He suspects that it  is expensive for                                                               
the industry to maintain and upgrade a facility.                                                                                
                                                                                                                                
MR. BANKS said it is probably  not as expensive as developing the                                                               
field from scratch. "This is the distinction I want to make."                                                                   
                                                                                                                                
CHAIR HUGGINS  said there is no  doubt that it is  more expensive                                                               
to start from scratch.                                                                                                          
                                                                                                                                
MR. BANKS  said his old  Subaru is  expensive to maintain,  so he                                                               
understands his  point. Pt. Thomson has  minimal exploration risk                                                               
-  relative to  Prudhoe Bay.  Its reservoir  has been  penetrated                                                               
many times  and "we have a  fairly good idea about  the extent of                                                               
the reservoir. We also know  something about the oil potential in                                                               
other zones  within the unit  area, but we don't  know everything                                                               
that  we need  to  know." Although  there is  a  minimal risk  of                                                               
finding gas and  oil there, there are still  many challenges. The                                                               
high pressure  of the reservoir  adds expense. None of  the wells                                                               
there  have  flowed,  so  there   are  questions  about  how  the                                                               
reservoir will perform under  different production techniques. He                                                               
expects a  few more  exploration wells will  be drilled  that may                                                               
not be  production wells. There  may be wells for  testing before                                                               
full-scale   development.  There   is   a   large  component   in                                                               
delineating this field before going into full development.                                                                      
                                                                                                                                
11:51:21 AM                                                                                                                   
MR. BANKS said  oil production will bear some of  the costs, "and                                                               
because of  the value  of oil it  may be able  to afford  it more                                                               
than the  gas." There is  high exploration risk. There  are still                                                               
questions  about the  resources.  Where Anadarko  is drilling  in                                                               
Gubik and  Chandler, gas has  been discovered, but the  wells are                                                               
so old  that Anadarko  needs to apply  more modern  techniques to                                                               
assess  the reservoir's  potential. It  gets back  to delineation                                                               
and long lead  time. Money will have to spent,  and there may not                                                               
be a commercial resource in the end.                                                                                            
                                                                                                                                
CHAIR HUGGINS asked how much money.                                                                                             
                                                                                                                                
11:53:31 AM                                                                                                                   
MR. BANKS  said, "You're  stepping through  gates." He  has heard                                                               
that exploration wells  are $40 million each. The  next step with                                                               
more infrastructure  and drilling may cost  hundreds of millions.                                                               
Alaska's  net tax  system  goes  a long  way  to incentivize  the                                                               
explorers,  including incentive  credits  and  the potential  for                                                               
credits for investment.                                                                                                         
                                                                                                                                
CHAIR HUGGINS said  Ms. Davis played a leadership  role in ending                                                               
up with the net tax system. He thanked her.                                                                                     
                                                                                                                                
MR.  BANKS said  transportation may  not be  ready for  the first                                                               
open  season.  "We can  expect  …  assurances  of access  on  the                                                               
mainline  and   the  potential  for  expansion   --  even  before                                                               
construction begins --  is important for our  early explorers, so                                                               
they have an opportunity to  get their resource monetized, get it                                                               
to market."  It is  an important  feature of  the gas  line. "The                                                               
fact that  most of  these resources  will have  to be  touched by                                                               
some kind of upstream pipeline  means that the netback value will                                                               
be lower  than it  is at  Prudhoe Bay.  Obviously; you  have more                                                               
tariffs to pay." The proportion of  the market value that goes to                                                               
the delivery to market is exacerbated for explorers.                                                                            
                                                                                                                                
11:56:16 AM                                                                                                                   
MR.  BANKS said  the Division  of Oil  and Gas  is stepping  into                                                               
modeling  independent from  the  AOGCC for  two reasons:  AOGCC's                                                               
relationship  with  the  industry  is  different,  and  they  can                                                               
acquire "more leveraged"  information. Also, gas is  used in fuel                                                               
injection and  viscous oil development  projects and  exported to                                                               
market through  a pipeline.  The state needs  to examine  how gas                                                               
will  fit into  a  host of  applications. He  said  DNR wants  to                                                               
address those  issues to  optimize the modeling.  Gas is  sold to                                                               
other  units  to  use  in   other  reservoirs  for  enhanced  oil                                                               
recovery. The  ownership of one  reservoir may be  very different                                                               
from another, so  the state problem is not so  different than the                                                               
operator's problem.  DNR has a  wider spectrum of issues  that it                                                               
wants  to  examine.  So  having  an  independent  review  of  the                                                               
reservoirs is extremely important.                                                                                              
                                                                                                                                
11:59:01 AM                                                                                                                   
SENATOR  WAGONER  asked about  the  gas  that  is used  in  other                                                               
reservoirs  and if  it can  later  be retrieved.  On the  [Kenai]                                                               
peninsula, retrieval  of gas that  was used in Swanson  River for                                                               
pressurization has been poor.                                                                                                   
                                                                                                                                
MR. BANKS said  the project at Kuparuk has an  agreement with DNR                                                               
about how gas will  be lifted out of Prudhoe Bay.  It will bear a                                                               
royalty and  then it is reinjected.  DNR has deemed a  number for                                                               
how  much is  lost. It  is  mostly gas  liquids, and  there is  a                                                               
certainty  that some  of that  gas  will not  be produced  again.                                                               
There is an accounting arrangement  so that the operators are not                                                               
paying  twice for  the same  gas. At  North Star,  where it  is a                                                               
pressure maintenance  issue, more gas  will be recovered.  So, it                                                               
depends, he said. In the Kenai,  gas is injected into a very huge                                                               
reservoir, so it is like filling a car tire with a bicycle pump.                                                                
                                                                                                                                
12:01:18 PM                                                                                                                   
MR. BANKS said  he will discuss current incentives  that could be                                                               
used   to  enhance   gas   economic   development.  The   royalty                                                               
modification statute allows  for a drop in the lease  rate for an                                                               
undeveloped  field, like  the Nikaitchuq  or Oooguruk.  It allows                                                               
the  DNR commissioner  to modify  state royalty  share down  to 5                                                               
percent   for  undeveloped   fields  that   would  otherwise   be                                                               
uneconomic. Most of the leases in  these fields are 12.5 to 16.66                                                               
percent. Under this  statute, the applicant must  provide a clear                                                               
and  convincing showing  that the  royalty  modification will  be                                                               
efficient  and effective.  "It  has  to work.  It  has to  change                                                               
behavior." It  can't be  a situation whereby  no matter  how much                                                               
royalty relief, the project still wouldn't be economical.                                                                       
                                                                                                                                
CHAIR HUGGINS  asked how many  times the state has  given royalty                                                               
relief prior to 2006 and in 2007, and what it means.                                                                            
                                                                                                                                
MR. BANKS said zero before 2006, one  in 2006 and one in 2007. In                                                               
2006 the  state awarded relief  to Oooguruk, and last  week there                                                               
was  a  best-interest  finding  for  issuing  royalty  relief  to                                                               
Nikaitchuq. For  Oooguruk, the  idea was  to provide  the relief,                                                               
based on price,  until the unit was in payout.  "We actually have                                                               
a net  profit share lease in  the unit. We will  be measuring the                                                               
economics  of the  project through  time, and  at some  point the                                                               
project will  … have recovered its  capital costs and it  will be                                                               
earning more than  its operating costs, and the  state will share                                                               
in those profits.  After that point, the royalty  rate will creep                                                               
back up to the lease rate."  In Nikaitchuq, the state has offered                                                               
royalty  relief at  five percent  when the  market price  for ANS                                                               
falls below $42.00 (adjusted for inflation).                                                                                    
                                                                                                                                
CHAIR HUGGINS asked if others have requested royalty relief.                                                                    
                                                                                                                                
MR. BANKS said there have  been discussions regarding Cook Inlet,                                                               
but no  formal application. There  is not project that  is mature                                                               
enough to get to that clear and convincing standard.                                                                            
                                                                                                                                
12:05:54 PM                                                                                                                   
MR. BANKS  said he will give  a brief refresher on  credits. "Tax                                                               
credits apply  for the qualified  capex for  exploration credits,                                                               
and  then  also the  loss  carry-forward  credit of  25  percent,                                                               
where,  in fact,  the state  participates to  some extent  in the                                                               
commodity  risk of  the resource."  A large  slice of  the market                                                               
value  is  eaten  up  by   transportation,  so  the  price  could                                                               
potentially fall  below zero at  a netback giving  an opportunity                                                               
to be counted as  a loss. The state will be  willing to provide a                                                               
loss carry forward of 25 percent.  There is also the issue of net                                                               
present value  problems where  the state is  giving up  a little,                                                               
and it helps  companies a lot. ACES has a  tax credit fund giving                                                               
100 percent of the credit rather  than a discount when selling to                                                               
others.  There  is   also  the  $12  million   credit  for  small                                                               
producers, "and  that really  will apply, in  some cases,  to new                                                               
people into the  state." The tax is capped at  $00.17 per mcf for                                                               
instate gas sales, but it is  a challenge because the tax rate is                                                               
measured on a  barrel-of-oil equivalent basis. Gas  sales for oil                                                               
producers will lower their oil tax rate.                                                                                        
                                                                                                                                
MR. BANKS  showed a chart  of Prudhoe  Bay effective tax  rate at                                                               
varying oil prices with and without  a 2017 gas sale. Because the                                                               
margin is determined on an average  basis and the price of gas is                                                               
lower,  it effectively  reduces  the tax  rate of  oil.  It is  a                                                               
significant benefit to the industry given by ACES.                                                                              
                                                                                                                                
12:10:00 PM                                                                                                                   
MR. BANKS said AGIA offers a  gas certainty for ten years for gas                                                               
committed  to  the  initial  open  season.  "We  are  willing  to                                                               
establish a royalty valuation methodology  that is different than                                                               
what  is   in  the  lease   now  and  which  is   arguably  today                                                               
complicated."                                                                                                                   
                                                                                                                                
CHAIR HUGGINS asked  to see a model of how  it works, "before you                                                               
do regulations."                                                                                                                
                                                                                                                                
MR.  BANKS said  when it  is  done he  will provide  it, and  the                                                               
administration will try to get input from everyone.                                                                             
                                                                                                                                
MR. BANKS  said the  state's right  to switch  between collecting                                                               
royalty-in-kind vs.  royalty-in-value is to insure  that lessees'                                                               
capacity  is neither  stranded, nor  insufficient. "Under  AGIA …                                                               
the opportunity  for expansion  and access  to the  pipeline, and                                                               
terms  that  are  designed to  assure  rolled-in  rates,  capital                                                               
structure that  should contribute  to low  tariffs, and  as well,                                                               
the $500  million contribution -  that we  make very early  on in                                                               
the project  -- has a  fairly sizable  impact on the  tariff that                                                               
our explorers  will be seeing …  or anyone committing gas  to the                                                               
pipeline."                                                                                                                      
                                                                                                                                
12:12:27 PM                                                                                                                   
CHAIR  HUGGINS said  Ms. Forrester  spoke of  sharing facilities,                                                               
"and that we're at essentially 100  percent … and to give someone                                                               
access, you have to vacate some of your..." He asked about that.                                                                
                                                                                                                                
MR. BANKS said the gas/oil ratio  from a legacy field may be very                                                               
high, and new fields may be  relatively low. If 90 percent of the                                                               
legacy  fields are  gas, "you  have the  makings of  a commercial                                                               
deal there, because you can back out  a tenth of a barrel and get                                                               
nine tenths of  a barrel in place  of it, and so,  in addition to                                                               
paying  for whatever  operating cost  adjustments may  apply, the                                                               
back out  means that  the new  oil coming in  bears a  lower cost                                                               
impact  to the  owner of  the facility."  They have  to back  out                                                               
their oil  because it is running  at capacity, but in  losing one                                                               
tenth  of a  barrel  and paying  for  it with  nine  tenths of  a                                                               
barrel, it is possible that  a person seeking facility access can                                                               
afford it.  It will cost  less than building their  own facility.                                                               
"That's the way I view the economics of facility access."                                                                       
                                                                                                                                
12:14:41 PM                                                                                                                   
CHAIR HUGGINS said  it works, and he hopes that  Pioneer will run                                                               
the gauntlet on that.                                                                                                           
                                                                                                                                
The committee took an at-ease from 12:15:33 PM to 12:33:36 PM.                                                              
                                                                                                                                
12:33:51 PM                                                                                                                   
CHAIR HUGGINS asked for a refresher on AGIA applications.                                                                       
                                                                                                                                
MS.  DAVIS said  the application  deadline was  November 30,  and                                                               
five  applications  were  received.   In  January,  DNR  and  DOR                                                               
determined that only  one was complete. Since  then, an applicant                                                               
has asked  to be reconsidered.  The applications went out  to the                                                               
public and  the legislature. The  public has 60 days  to comment.                                                               
The state is  also analyzing the one application  and will decide                                                               
what to  recommend to the  legislature. The department  will wait                                                               
for  public comment  before it  finalizes  its determination  and                                                               
sends it to the legislature  in March or April. The commissioners                                                               
of DOR  and DNR  will decide whether  to recommend  licensing. It                                                               
may be just TransCanada or one other.                                                                                           
                                                                                                                                
CHAIR HUGGINS  said he wants  to get  it done during  the regular                                                               
session.                                                                                                                        
                                                                                                                                
MS. DAVIS  said staff is  making every day  count, and it  is why                                                               
she is  here on  a Saturday.  The earliest  will be  early March,                                                               
which will  give the body  up to  six weeks. Legislators  will be                                                               
looking at the application during the public comment period.                                                                    
                                                                                                                                
12:38:00 PM                                                                                                                   
SENATOR STEVENS asked what happens to  the 60 days with the other                                                               
applicant under reconsideration.                                                                                                
                                                                                                                                
MS. DAVIS said she doesn't know and would need legal advice.                                                                    
                                                                                                                                
CHAIR  HUGGINS  noted  that  AGIA   doesn't  have  a  system  for                                                               
reconsideration. That process needs to be described.                                                                            
                                                                                                                                
MS.  DAVIS said  AGIA  didn't put  in  all administrative  appeal                                                               
procedures, and it  relies on the existing  appeals law. Citizens                                                               
have a right to seek  procedural reconsideration. She is not sure                                                               
there were provisions  in AGIA regarding the right  to contest or                                                               
litigate decisions, and would have to defer to the AG office.                                                                   
                                                                                                                                
12:39:56 PM                                                                                                                   
CHAIR HUGGINS asked  for a description of that  procedure and who                                                               
is on the gas team.                                                                                                             
                                                                                                                                
MS. DAVIS said  she will provide that. She referred  to a list of                                                               
10 international projects. DOR asked  three consultants to assess                                                               
where  Alaska   was  positioned   with  other  gas   projects  of                                                               
comparable size,  risk, and challenges. The  effort provided more                                                               
understanding of  the different fiscal structures,  she said. The                                                               
chart she provided listed the  largest and most current projects,                                                               
including seven LNG projects, two  gas pipeline projects, and one                                                               
gas-to-liquids project.  They are  not homogeneous  with Alaska's                                                               
project, but Alaska's exact project is unknown.                                                                                 
                                                                                                                                
12:43:26 PM                                                                                                                   
MS. DAVIS  said almost all  of these projects  are profit-sharing                                                               
structures except for two Norway  projects. Throughout the world,                                                               
large  projects  use   profit-sharing  contracts,  because  those                                                               
contracts  get  used  by developing  countries  that  don't  have                                                               
legislative systems, and they aren't  of long duration. Companies                                                               
have more  comfort in dealing  with such countries in  a contract                                                               
mode,  she  stated,  rather  than   in  a  regulatory  mode.  The                                                               
evaluation needs  to be taken with  a grain of salt,  she warned,                                                               
because  ten is  not  a  large number.  The  discounted share  of                                                               
economic  rent  is  the  government share  of  the  "gravy."  The                                                               
average  for these  projects is  80-81 percent.  That is  exactly                                                               
where Alaska is: 81-82 percent - in the middle of the pack.                                                                     
                                                                                                                                
CHAIR  HUGGINS said  Alberta's  activity is  oil  sands, and  gas                                                               
activities had layoffs. He is concerned.                                                                                        
                                                                                                                                
12:47:12 PM                                                                                                                   
MS. DAVIS said the commissioner  and other staff have been there,                                                               
and the DOR has had many discussions with Alberta.                                                                              
                                                                                                                                
MICHAEL WILLIAMS,  Chief Economist,  Department of  Revenue, said                                                               
the  layoffs in  gas relates  to a  new law  that overhauled  the                                                               
royalty system. For oil and natural  gas, Alberta "got rid of the                                                               
provisions  based  on   the  date,  and  they're   now  based  on                                                               
productivity. What did  not change was the cost  recovery for the                                                               
oil sands.  So companies now  can still  get a very  similar deal                                                               
under  the  oil  sands;  whereas,  the  royalty  on  conventional                                                               
natural  gas  is  higher,  and that's  why,  I  believe,  they're                                                               
focusing more on the oil sands."                                                                                                
                                                                                                                                
CHAIR HUGGINS said they raised taxes and asked what happened.                                                                   
                                                                                                                                
MR. WILLIAMS  said the conventional  gas and oil became  far less                                                               
profitable; it was no longer based  on the date that the well was                                                               
studded,  but  on  productivity.  Therefore, many  of  the  wells                                                               
became  unprofitable. He  said it  was expected  that some  wells                                                               
would no  longer be profitable.  Alberta is  closing unprofitable                                                               
wells and moving resources over to oil sands.                                                                                   
                                                                                                                                
12:49:23 PM                                                                                                                   
CHAIR  HUGGINS said  our  tax is  retroactive,  and Alberta's  is                                                               
forecasted  to  2009.  He  said  he put  in  a  bill  to  address                                                               
retroactivity for obvious reasons.                                                                                              
                                                                                                                                
MS. DAVIS said  the Commissioner of the Department  of Labor went                                                               
to Alberta  to investigate workforce  issues. His  impression was                                                               
that things  were booming even  though there  was a shift  to oil                                                               
sands.  He was  even  offered a  job  a couple  of  times. It  is                                                               
booming, but there has been a shift.                                                                                            
                                                                                                                                
12:50:36 PM                                                                                                                   
CHAIR HUGGINS  said it amazed him  to see the number  of placards                                                               
on the  side of  the road  to get  people on  the payroll.  It is                                                               
absolutely booming for everything other than gas.                                                                               
                                                                                                                                
MS.  DAVIS  spoke  to tax  and  royalty  government  comparisons.                                                               
Information has been added from a previous presentation.                                                                        
                                                                                                                                
12:51:25 PM                                                                                                                   
MS. DAVIS said  Alaska's production tax is a net  tax; there is a                                                               
property tax; the  corporate income tax is a  combination of both                                                               
state and federal;  oil and gas are treated the  same. Because it                                                               
is  a net  tax,  the  difference between  costs  of  oil and  gas                                                               
development will come  out in the wash. It only  taxes the margin                                                               
of the profit element.                                                                                                          
                                                                                                                                
CHAIR HUGGINS asked about progressivity.                                                                                        
                                                                                                                                
MS. DAVIS said  the actual tax change was not  a huge impact, but                                                               
progressivity was.  We agreed to take  more of the pie  at higher                                                               
prices and  less at the low  oil price margin. "If  your gravy is                                                               
more than $30, then we're sharing more heavily in it."                                                                          
                                                                                                                                
12:53:56 PM                                                                                                                   
CHAIR   HUGGINS   asked   if   the   administration   will   make                                                               
progressivity part of the equation with gas.                                                                                    
                                                                                                                                
MS.  DAVIS said  having separate  tax rates  with oil  throws the                                                               
state  into   the  difficult  and   costly  audit   challenge  of                                                               
separating oil  and gas costs. If  the decision is made  that the                                                               
gas tax  structure needs  a boost,  it would be  good to  come up                                                               
with a way to do it  without needing separate accounting. It is a                                                               
huge nightmare for  the industry to have  two calculations. There                                                               
are  other tools.  Alberta  has a  royalty range,  from  5 to  50                                                               
percent, no  production tax, and  the corporate tax  is additive.                                                               
Alberta makes no distinction between  oil and gas. Norway doesn't                                                               
either,  but  relies   on  the  net  structure   to  achieve  the                                                               
distinction.  One marginal  gas project  was incentivized  with a                                                               
slightly quicker  depreciation schedule. The United  Kingdom does                                                               
not distinguish between oil and gas.                                                                                            
                                                                                                                                
CHAIR  HUGGINS said  Alaska wasn't  operating under  the Stranded                                                               
Gas Act, but our gas is still stranded.                                                                                         
                                                                                                                                
12:57:05 PM                                                                                                                   
MS. DAVIS  said the  Gulf of  Mexico is  interesting in  that the                                                               
royalty  rate was  raised  twice recently.  The  gulf created  an                                                               
exclusion for the  first 87.5 million barrels  of oil equivalent,                                                               
but failed to put in the  trigger price, so the exclusion applies                                                               
at all  oil prices and  the federal government  tragically missed                                                               
out.  Australia has  royalties  on the  gross,  depending on  the                                                               
productivity, and  the tax  is net,  but there  is an  excise tax                                                               
calculation on a  gross basis. The Netherlands has  a royalty and                                                               
state profit share of 50 percent  of net income. It has an uplift                                                               
feature that  doesn't go as  far as  Alaska goes. ACES  gives 100                                                               
percent deductibility in the first year.                                                                                        
                                                                                                                                
MS. DAVIS  concluded that almost  all of  the taxes are  based on                                                               
the  net income.  The net  structure accommodates  differences in                                                               
the  cost   of  development  and  transportation,   so  they  are                                                               
essentially  identical when  applied to  oil and  gas. There  are                                                               
some exceptions for  a marginal project or a  unique system. That                                                               
is the trend globally.                                                                                                          
                                                                                                                                
1:01:00 PM                                                                                                                    
CHAIR   HUGGINS  said   Alaska   has   a  "really   accelerating"                                                               
progressivity, and he asked if that was accounted for.                                                                          
                                                                                                                                
MS. DAVIS  said yes. "Essentially  where we are at,  comparing us                                                               
to  the tax  and royalty  …  we find  ourselves pretty  similarly                                                               
based as  to where we  talked about with oil  on the gas  side as                                                               
well." The state is higher than  the Gulf of Mexico and the U.K.,                                                               
and  it is  below Norway.  Alaska  is in  the bottom  of the  top                                                               
third,  and that  position  is justified  based  on the  geology.                                                               
Alaska can't  be competitive based  solely on the  fiscal system.                                                               
The companies  are focused on profit.  The state is in  about the                                                               
same position, relative to others, as it is with oil.                                                                           
                                                                                                                                
MR. WILLIAMS said  Alaska has a very powerful  credit system. The                                                               
other governments don't offer credits,  except Alberta and Norway                                                               
offers  cost  recoveries.  Alaska has  positive  attributes  with                                                               
regard to up-front incentives.                                                                                                  
                                                                                                                                
1:03:45 PM                                                                                                                    
MS. DAVIS said there have not  been gas sales yet in Prudhoe Bay,                                                               
but  she  wants  to  give  a  range  of  possibilities  to  show,                                                               
depending on the  differential in price between oil  and gas, how                                                               
beneficial the ACES provision can be.                                                                                           
                                                                                                                                
She described the  progressivity formula. The example  on slide 7                                                               
indicated 300,000  barrels per day,  which is a likely  number in                                                               
the Prudhoe  Bay Unit (PBU) if  a gas sale happened.  Using those                                                               
numbers, there is a $1.2  billion progressivity surcharge if only                                                               
oil is  produced. Gas  price on  a per  barrel oil  equivalent is                                                               
usually lower,  but transportation is  higher. That is  why there                                                               
will be  a lower  number for gas  than oil. "So  when you  do the                                                               
combined  calculation for  progressivity,  and put  what was  oil                                                               
yielding a $1.2  billion progressivity and blend in  a much lower                                                               
number, you've dragged down the number."                                                                                        
                                                                                                                                
1:07:26 PM                                                                                                                    
MS. DAVIS said the progressivity  goes down to $234 million. From                                                               
the  state's perspective  it is  not a  total loss  because there                                                               
will be an increase in the base  tax for gas and royalty for gas,                                                               
so  it  is  pretty  much  a  wash.  At  Prudhoe  Bay,  the  state                                                               
essentially tells the  owners that selling gas  will almost cover                                                               
the added production tax and royalty.  It is a huge incentive. If                                                               
the  gas were  higher,  there  would be  a  differential of  $661                                                               
million, "so  you've got a  boost of  about $600 million."  For a                                                               
$70 per barrel of  oil with a $7 price of gas,  the boost is $360                                                               
million, and  at a  $60 oil  and $6 gas,  there is  no surcharge,                                                               
"and  you've  saved yourself  $175  million."  It runs  a  range.                                                               
"Everyone  needs to  do their  own price  forecasting and  decide                                                               
what the  differential's going to be  between oil and gas  at the                                                               
time of  the gas sale,  but the structure  is there to  provide a                                                               
huge  incentive to  owners  that have  oil on  the  slope and  to                                                               
proceed with a gas sale."                                                                                                       
                                                                                                                                
1:09:49 PM                                                                                                                    
SENATOR WAGONER said the information was very helpful.                                                                          
                                                                                                                                
CHAIR  HUGGINS  said  there have  been  communication  challenges                                                               
between  the  Senate  and   the  administration.  Ongoing  formal                                                               
communications is  important. He said  he is revisiting  the past                                                               
tax regime, including  the standard deduction, which  "we did not                                                               
debate, and  what we  did on  retroactivity. I  hope we  can make                                                               
those kinds  of traits go  away when we  do this, and  some other                                                               
things of that  nature." He asked for  communications, weekly and                                                               
daily.   He   wants   a  closer   friendship   and   professional                                                               
camaraderie.  Senator Thomas  asked about  Cook Inlet.  Customers                                                               
there enjoy baseline  costs from Enstar. Future gas  for Delta or                                                               
Fairbanks will  have a  different tax  structure, "and  what does                                                               
that do to  the prices?" The state  is 10 to 15 years  from a gas                                                               
pipeline,  and he  wants  to  know who  does  the compilation  of                                                               
information of  known reserves. During the  break, several people                                                               
told him they like Ms. Davis and that she is straightforward.                                                                   
                                                                                                                                
There being  no further  business to  come before  the committee,                                                               
Chair Huggins adjourned the meeting at 1:13:40 PM.                                                                            
                                                                                                                                
                                                                                                                                

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