Legislature(2011 - 2012)BUTROVICH 205
03/30/2011 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB85 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 85 | TELECONFERENCED | |
| += | SB 49 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 30, 2011
3:32 p.m.
MEMBERS PRESENT
Senator Joe Paskvan, Co-Chair
Senator Thomas Wagoner, Co-Chair
Senator Bill Wielechowski, Vice Chair
Senator Bert Stedman
Senator Hollis French
Senator Gary Stevens
MEMBERS ABSENT
Senator Lesil McGuire
OTHER LEGISLATORS PRESENT
Senator Cathy Giessel
Senator Joe Thomas
COMMITTEE CALENDAR
SENATE BILL NO. 85
"An Act providing for a tax credit applicable to the oil and gas
production tax based on the cost of developing new oil and gas
production; and providing for an effective date."
- HEARD AND HELD
SENATE BILL NO. 49
"An Act relating to the interest rate applicable to certain
amounts due for fees, taxes, and payments made and property
delivered to the Department of Revenue; relating to the oil and
gas production tax rate; relating to monthly installment
payments of estimated oil and gas production tax; relating to
oil and gas production tax credits for certain expenditures,
including qualified capital credits for exploration,
development, and production; relating to the limitation on
assessment of oil and gas production taxes; relating to the
determination of oil and gas production tax values; making
conforming amendments; and providing for an effective date."
- ITEM REMOVED FROM AGENDA
PREVIOUS COMMITTEE ACTION
BILL: SB 85
SHORT TITLE: TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT
SPONSOR(s): SENATOR(s) WAGONER
02/07/11 (S) READ THE FIRST TIME - REFERRALS
02/07/11 (S) RES, FIN
02/25/11 (S) RES AT 3:30 PM BUTROVICH 205
02/25/11 (S) Heard & Held
02/25/11 (S) MINUTE(RES)
02/28/11 (S) RES AT 3:30 PM BUTROVICH 205
02/28/11 (S) Heard & Held
02/28/11 (S) MINUTE(RES)
03/07/11 (S) RES AT 3:30 PM BUTROVICH 205
03/07/11 (S) Heard & Held
03/07/11 (S) MINUTE(RES)
03/09/11 (S) RES AT 3:30 PM BUTROVICH 205
03/09/11 (S) Heard & Held
03/09/11 (S) MINUTE(RES)
03/25/11 (S) RES AT 3:30 PM BUTROVICH 205
03/25/11 (S) Heard & Held
03/25/11 (S) MINUTE(RES)
03/28/11 (S) RES AT 3:30 PM BUTROVICH 205
03/28/11 (S) Heard & Held
03/28/11 (S) MINUTE(RES)
03/30/11 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
BART ARMFIELD, Vice President of Operations
Brooks Range Petroleum Corporation
POSITION STATEMENT: Testified in support of SB 85.
MARK R. LANDT, Executive Vice President
Land & Administration
Renaissance Alaska, LLC
POSITION STATEMENT: Testified on SB 85, and highlighted the
significant challenges to develop the Umiat Oil Field.
KEN THOMPSON, Managing Director
Alaska Venture Capital Group LLC.
POSITION STATEMENT: Testified on SB 85, and provided perspective
on how to re-incentivize investment and increase Alaska's
competitiveness relative to other oil basins.
ED DUNCAN, President and Chief Operating Officer
Great Bear Petroleum, LLC
Austin, Texas
POSITION STATEMENT: Testified on SB 85, and focused on how unit
definition and pooling rules and regulations would apply to
unconventional resource development.
RYAN MOYNAGH, Vice President of Finance and
Chief Financial Officer
Great Bear Petroleum LLC
POSITION STATEMENT: Testified on SB 85 focusing on the
application of the development cost credit in unconventional
plays, and the proposed oil and gas competitiveness review
board.
GEORGE PIERCE, representing himself
Kasilof, AK
POSITION STATEMENT: Testified that SB 85 was the only way to go
and a good start.
PAUL KENDALL, representing himself
Anchorage, AK
POSITION STATEMENT: Testified on SB 85 and offered his
perspective on the future of energy.
ACTION NARRATIVE
3:32:59 PM
CO-CHAIR THOMAS WAGONER called the Senate Resources Standing
Committee meeting to order at 3:32 p.m. Present at the call to
order were Senators Stedman, French, Wielechowski, Stevens,
Paskvan, and Wagoner. Senator McGuire was excused.
SB 85-TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT
3:33:59 PM
CO-CHAIR WAGONER announced SB 85 to be up for consideration.
[CSSB 85( ), version 27-LS0484\E, was before the committee].
3:34:12 PM
BART ARMFIELD, Vice President of Operations, Brooks Range
Petroleum Corporation (BRPC), observed that SB 85 was drafted to
provide tax support for new field development, to encourage new
throughput into TAPS, and to encourage more production. As
currently drafted, the .023 credits and the balance of the
qualified capital credits would bridge the tax impacts for BRPC.
But the largest impact is that it would encourage and increase
the activities associated with surface projects that are
required to support field development. Things like gravels
roads, inter-field pipelines and surface facility construction
are the lifeblood of new field development. He highlighted the
diversity on the North Slope in operating area and business
agendas and observed that that the correct tax policy wasn't
necessarily going to be a one-size fits all. However, the design
should ultimately be to increase throughput and generate stable
tax revenues for ongoing state operations.
3:36:32 PM
MR. ARMFIELD urged the committee to keep an open mind regarding
the options, and to take time to realize that TAPS throughput
was declining at an alarming rate with very few projects in the
wings to make any near-term course corrections. It's quite
possible that a variety of items will be needed to allow
existing Alaskan companies and new entrants an opportunity to
select the best options for their individual companies. He
concluded that SB 85 provides an option for Brooks Range
Petroleum in that it covers the impact associated with taxes
through discovery drilling, delineation, gravel roads, pipelines
and facilities.
SENATOR FRENCH asked if the Brooks Petroleum Corporation that
was quoted in the Petroleum News last week was his company or
another one.
MR. ARMFIELD replied he couldn't say one way or the other
because he wasn't familiar with the article.
SENATOR FRENCH related that the company was quoted saying that
the state had been a good partner for new explorers.
3:41:14 PM
MARK R. LANDT, Executive Vice President, Land & Administration,
Renaissance Alaska, LLC, said his testimony would address the
significant challenges Renaissance foresees in developing the
Umiat Oil Field. He applauded Alaska's efforts to incentivize
drilling in the Cook Inlet, and suggested that similar
leadership and progressive action was required to revitalize oil
and gas activities on the North Slope. He highlighted that
Alaska was going to become increasingly dependent on the
discovery and development of smaller fields, technically
challenged resources, and known reserves that are remote from
existing infrastructure.
He explained that the Umiat Oil Field was discovered in the late
1940s and remains undeveloped today because of remoteness, low
reservoir energy, and the fact that part of the reservoir is in
permafrost. Renaissance has addressed these challenges with
technology, but remoteness is still a key challenge.
3:44:50 PM
MR. LANDT said Renaissance has also focused on a plan of
development and contracted with third parties on pipeline
routing costs, facility layout and cost, horizontal/lateral
development techniques and obtained an independent reserve
report. The report estimated 250 million barrels of recoverable
oil from the shallow zones at Umiat with peak field production
of about 50,000 barrels per day. In addition, the University of
Alaska, Fairbanks (UAF) has a $3 million DOE grant to confirm
cold gas injection as the preferred maintenance mechanism. He
explained that one of the development considerations is to bury
the pipeline on the shoulder of the road to lower costs and
lessen the visual impact. The oil is produced cold to eliminate
the risk of melting the permafrost and then heated to pipeline
specifications at the TAPS connection.
He said the project's unique characteristics and distance from
infrastructure has made it difficult to compete for investment
capital. Clearly there is risk, but the Roads to Resources and
specifically the Department of Transportation preparing the
environmental impact statement for the transportation corridor
between Umiat and TAPS goes a long way to reduce the risk. The
current estimate to bring Umiat to production is $1.3 billion,
and to date Renaissance has spent $43 million. He concluded that
the proposed amendments to ACES to create development tax
credits under SB 85 will make Alaska more competitive as an oil
producing state.
SENATOR STEDMAN asked how much Renaissance had received from the
state in credits.
MR. LANDT answered Renaissance Umiat received a little more than
$15 million in tax credits.
SENATOR STEDMAN asked if that was inclusive or if more was due.
MR. LANDT explained that some of the credits were under appeal.
Responding to a further question, he said if Renaissance
prevails on all the appeals the credits will total about $18
million on the $43 million in expenditures.
3:49:46 PM
KEN THOMPSON, Managing Director, Alaska Venture Capital Group
LLC., (AVCG), said this was the parent corporation and owner of
Brooks Range Petroleum Corporation (BRPC), Alaska's main
exploration company. He said he would provide his perspective on
re-incentivizing investment and increasing the competitiveness
of Alaska relative to other oil basins. The common goal is to
make a larger pie of revenues with both the state and industry
sharing fairly.
MR. THOMPSON said that over the last few years the tax credits
have been very helpful, but fundamental improvements to ACES are
needed. The experiment has continued long enough to see
production decline even though the resource base in the Cook
Inlet and on the North Slope is sufficient to level the decline.
He said the "next frontiers" for major developments on the North
Slope are:
· Exploration with smaller fields sharing regional processing
facilities.
· Low-permeability sands that would perhaps have 10-20
percent recovery.
· Source rock shales. AVCG has studied this for over nine
months and has substantial acreage to the west of the North
Slope that has high potential. Geological studies are
underway looking at a project the next winter or two.
· North Slope viscous oil for which there is substantial
upside potential.
· Major projects in existing fields, including North Slope
offshore oil and natural gas, which are most probably for
the major producers.
SENATOR PASKVAN asked him to define "regional processing
facilities" and the concept of "sharing" in that context.
MR. THOMPSON explained that for smaller fields it's difficult to
get economies of scale in facilities. AVCG would like to share
facilities at some of the major fields like Prudhoe Bay and
Kuparuk, but many are at capacity, particularly for handling
natural gas, water and water injection. AVCG would like to build
its own scaled up, modular facilities that can accommodate other
nearby exploration and production companies. The capital credits
proposed under SB 85 could facilitate that construction. With
the right fiscal structure, AVCG would be willing to post
processing rates and allow others to see the costs. This would
only be practical and fair for new facilities.
3:57:20 PM
CO-CHAIR PASKVAN asked if he saw the potential in Alaska to have
multiple regional processing facilities.
MR. THOMPSON answered yes, and AVCG intends to test the concept
of getting other companies to feed into their facility.
CO-CHAIR WAGONER recognized that Senator Joe Thomas had joined
the committee.
CO-CHAIR PASKVAN asked how much each of the regional processing
facilities is estimated to cost.
MR. THOMPSON replied the cost estimate for one facility that
would potentially process 25 million barrels of oil was $238
million. The costs haven't been optimized and that was the only
facility that AVCG analyzed.
3:59:47 PM
Continuing with the presentation, he displayed a map of the
240,000 acre AVCG joint venture leasehold portfolio. He pointed
out that drilling was currently taking place near the Kuparuk
River Unit, a small scale development was under consideration at
Ivishak and seismic work was planned next winter on a large area
to the east. He clarified that BRPC handles the field operations
for the joint venture.
MR. THOMPSON said his main job was to attract new investors and
capital to Alaska and that gives him good insight as to what is
being said on the street about Alaska. For example, Dana
Petroleum was asked to participate in AVCG's North Slope
operations, but elected to invest in the North Sea instead
because that tax and fiscal regime is far better than Alaska's.
Each new field development in the North Sea is exempt from high
taxation until it has earned $1.3 billion in profit. He noted
that AVCG ended up buying Dana Petroleum, and was still looking
for another partner.
AVCG recently approached a major independent because of their
technology in oil source rock shales and low permeability sands.
That company said no to Alaska, but it does have a major gas
discovery offshore Israel where the tax rates are low until 200
percent of the capital investment has been recovered. In another
effort, AVCG showed its properties to companies that attended
the Houston North American Prospect Exposition. One hundred
companies stopped to look, 11 expressed interest in coming to
Alaska, and 1 is still interested. All 11 of those companies are
invested in North Dakota where the incentives are good,
including deferred severance tax for the first 18 months.
4:04:27 PM
SENATOR FRENCH asked if he had considered updating the
information on slide 5 in light of the recent news that the
United Kingdom was taking steps to increase their oil taxes.
MR. THOMPSON responded that the U.K. increases and decreases
their tax depending on activity, and he can guarantee that
industry will stop spending when the taxes are increased. If
Alaska makes the right changes, it can potentially attract
companies that no longer want to invest in the U.K.
SENATOR FRENCH asked him to comment on the news that the Madrid-
based company Repsol was pledging to make substantial new
investments on the North Slope.
MR. THOMPSON said he didn't know much about the deal and how
much Repsol would actually invest, but he understands that they
and other companies saw the potential for change and were coming
on the bet.
4:08:05 PM
CO-CHAIR PASKVAN referred to the North Dakota and Alaska
comparisons on slide 5, and asked if the reserve estimate of 13
billion barrels for Prudhoe Bay was a conventional oil reserve.
MR. THOMPSON replied most of the reserves in North Dakota are in
the Bakken and for the most part it's considered an
unconventional oil resource. To get things going, North Dakota
literally had a tax holiday; there were no severance taxes for
the first 18 months of production for new wells that were
drilled horizontally and fracked. He offered his belief that
some of the shales on the North Slope would also be able to use
that technology.
CO-CHAIR PASKVAN asked if he had an estimate of the shale oil
reserves in the central North Slope area.
MR. THOMPSON answered no, and suggested he ask Great Bear
Petroleum.
Continuing with the presentation, he displayed data from the
Frasier Institute 2010 Global Petroleum Survey that compared 133
jurisdictions worldwide in terms of overall attractiveness for
investment, and noted that Alaska was in the middle. Although
there is nothing intrinsically wrong with being in the middle,
he said Alaska probably needs to be in the top quartile to level
production.
MR. THOMPSON said AVCG supports the SB 85 development cost
credit for a credit of up to 100 percent of qualified capex. But
because AVCG develops facilities in modular stages, it would
like the 100 percent credit to apply to all capex in the
approved field development plan rather than just until the start
of production. He suggested that perhaps this could be limited
to two years after initial production startup. He reiterated
that to level production, comprehensive change must address all
the "next frontiers." Because SB 49 addresses all oil sources,
he asked the committee to consider merging it with SB 85.
4:13:30 PM
SENATOR STEDMAN asked if he was suggesting the committee
consider a 100 percent capex credit.
MR. THOMPSON replied his understanding was that it could add
credits up to 100 percent for the capital expenses until the
start of production. That would be particularly helpful on
things like regional processing facilities.
SENATOR STEDMAN said there's a difference between allowing 100
percent recovery of expenditures before escalating to a higher
royalty or higher base tax or higher progressivity and having a
100 percent capital credit. If the state is going to pay for all
the capital that's invested, he questioned the point at which it
should take an equity ownership position as a sovereign.
MR. THOMPSON responded that's something the state should
probably always consider, but sharing in part of the risk via
the capital credits is a good alternative.
SENATOR STEDMAN clarified that he wasn't advocating the state
change its fiscal structure and start taking an equity ownership
position, just pointing out that some of the requests for
capital credits were excessive.
CO-CHAIR PASKVAN asked if Alaska shale could be developed in a
process substantially similar to the shale oil development in
North Dakota, and if the development costs were potentially
comparable.
MR. THOMPSON replied the North Dakota shales may be more similar
to the Eagle Ford shales in Texas where the development is long
horizontal wells. AVCG's 100,000 acre holding to the west could
be prospective in shales, but in the near term the focus will be
on the 16 conventional exploration plays on that same acreage.
Any focus on shales probably wouldn't be until 2013.
4:20:32 PM
CO-CHAIR PASKVAN asked how the cost structure in Alaska compares
to the Eagle Ford shale oil development.
MR. THOMPSON said Great Bear Petroleum may have an answer, but
AVCG wouldn't finish its cost analysis until later in the year.
Continuing the presentation, he reiterated the notion of merging
SB 49 and SB 85. In particular, AVCG supports the following:
· Revise the progressivity surcharge to the "bracketed tax
structure" with calculations made annually rather than
monthly.
· Cap the total tax at 50 percent when oil prices top
$92.50/bbl
· For new field development outside existing production
units, set a base tax rate of 15 percent instead of 25
percent and a total tax cap at 40 percent.
· Accelerate the payment for exploration and other qualified
capital investments to one year versus two years to
stimulate exploration activity.
· Increase the tax credits for qualified capital investments
from the current 20 percent to 40 percent.
· Extend the small producer tax credit for another 5 years to
May 1, 2021. HB 110 does that.
4:23:48 PM
MR. THOMPSON recapped that there are some great "next frontiers"
of development including: smaller field exploration with
regional processing; lower-permeability sands & source rock
shales; growing existing fields bigger; and viscous oil. The
concern with SB 85 is that it alone will not stem the production
decline. SB 49 merged with SB 85 is the comprehensive change
that's needed for everyone to share in a much bigger pie of
revenues.
SENATOR STEDMAN asked how much of every dollar would the state
and the federal government return if the capital credit was
increased to 40 percent and there was an immediate write off.
MR. THOMPSON said the combined government take can exceed 70
percent, but with the credits Alaska is sharing part of the
risk. He reiterated that since the credits started, AVCG has
redeployed them directly into the drill bit and seismic. They
would continue to do that with the additional credits.
SENATOR STEDMAN said he didn't hear an answer, but it would have
to be calculated if the committee decided to go down that road.
CO-CHAIR WAGONER thanked Mr. Thompson and said perhaps the
committee could discuss his suggestions in more detail at some
later time.
4:27:52 PM
ED DUNCAN, President and Chief Operating Officer (COO), Great
Bear Petroleum, LLC ("Great Bear"), Austin, Texas, said he and
Mr. Moynagh would provide their perspective of SB 85 and respond
to questions. He noted that the technical information on the
company was the same as when they presented to the committee
about a month ago.
MR. DUNCAN said Great Bear has most recently been working on a
commercial model of Alaska's fiscal regime that can be "flexed"
to accommodate changes proposed under SB 85 and HB 110. Of
particular interest is how unit definition and pooling rules and
regulations will apply to unconventional resource development.
Great Bear's specific business focus in Alaska is unconventional
resource play development of both oil and gas. It is
volumetrically the largest oil and gas play yet to be developed
in Alaska and provides the state the best opportunity to build a
growing production profile over the long term. Great Bear was
undertaking a permitting process that would lead to an
exploration program this year.
4:34:26 PM
RYAN MOYNAGH, Vice President of Finance and Chief Financial
Officer (CFO), Great Bear Petroleum LLC, thanked the committee
for the opportunity to discuss aspects of SB 85 that directly
impact Great Bear. He said that their view is that the lessee
should not be burdened or impacted by lack of success or lack of
activity from previous operators. Certainly one thing they would
like to see is that the application of the cost credit would not
be impacted by a qualification under sustained production.
He highlighted that the definition of "pools" and "fields" was
more appropriate for conventional oil and gas fields.
Unconventional resources are different in geologic nature and
cannot be appropriately defined using conventional terminology.
He asked the committee to review whether or not the definitions
in the legislation really capture the unconventional
perspective.
CO-CHAIR WAGONER said the committee was trying to address that
point and the Alaska Oil and Gas Conservation Commission (AOGCC)
was reviewing how other jurisdictions define what a production
unit is in shale plays.
MR. MOYNAGH said the intent of the legislation is to increase
oil production, and Great Bear wants to make sure that all
players, regardless of business strategy, have access to the
incentives.
4:39:24 PM
He said that one difference between conventional and
unconventional development is the window for qualified
development expenditures under the tax credit. Those costs are
sort of quarantined between the first discovery well and the
start of sustained production as determined by the AOGCC.
Conventional field development typically requires a very large
up-front capital expenditure to bring the field into production
followed by minimal maintenance capex going forward, whereas
unconventional development activity requires sustained capital
expenditure throughout the life of the project. Under the
current wording, the proportion of development costs of an
unconventional prospect would be quite small in comparison to
the capital expenditure that would be incurred over the life of
the project. Part of Great Bear's business strategy is to bring
production on as quickly as possible, but there may be instances
where the legislation may dis-incentivize early production or a
stage development. The legislation may sometimes force people to
delay product sanctioning or start up in order to qualify more
costs, which isn't necessarily good for all parties concerned.
Great Bear would welcome anything that expedites the development
and brings oil production forward as quickly as possible.
4:42:10 PM
MR. MOYNAGH characterized the oil and gas review board as an
excellent idea, because it's an overwhelming task for any one
person or even the largest of companies to understand and
compare the nearly 200 fiscal regimes the world over. However,
it is incredibly important to understand the reality of one's
fiscal competitiveness and how it is viewed by others. He was
pleased to learn of the efforts in the Division of Oil and Gas
to produce commercial models that are available to the industry.
Anything that can be done to advance the understanding of the
fiscal regime is to be encouraged.
Ultimately, Alaska's fiscal competitiveness will be judged on
the basis of its success in attracting new investment.
Exploration going forward is the leading indicator of whether or
not the fiscal regime is being competitive on a global scale. He
encouraged review in light of how industry is mobilizing.
CO-CHAIR WAGONER thanked Mr. Moynagh and Mr. Thompson for taking
time to express their views on SB 85.
MR. THOMPSON said Great Bear was happy to be in Alaska and feels
the future there is bright for the oil and gas industry. Their
plans are to play a large role in that future.
4:47:21 PM
GEORGE PIERCE, representing himself, said his opinion is that SB
85 is the only way to go and a good start. By comparison, HB 110
gives too much away. The talk is about investments and
incentives. Making an investment is always a challenge, and the
incentive is the potential to make billions of dollars. He
suggested the committee level the playing field and give
Alaskans their fair share. "We don't want the taxes lowered," he
stated. Give a little to get new investors, but make it
worthwhile to Alaskans.
4:50:11 PM
PAUL KENDALL, representing himself, said all the laws need to be
scratched and an "Open for Business" sign posted, because energy
will be so volatile in the future that there won't be models of
predictability. New territory is ahead as carbon-based energy is
left behind. He cautioned that legislators were being played by
industry that was portending brave new oil frontiers, and that
it was folly to believe that the big oil companies didn't own
the playing field.
MR. KENDALL said Alaska has a chance to lead the world and he
would suggest the state invest in 100,000 electric vehicles for
use in the Anchorage area. This would save about 2.5 million
barrels of oil per year and keep $400 million in the community.
Clearly the new economy will be to replace carbon-based
energies.
In conclusion he expressed concern about transparency in
conducting the public's business, and that his emails to
legislators were never acknowledged.
CO-CHAIR WAGONER thanked Mr. Kendall and closed public
testimony. [SB 85 was held in committee.]
4:56:38 PM
There being no further business to come before the Senate
Resources Standing Committee, Co-Chair Wagoner adjourned the
meeting at 4:56 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 85_AVCG Thompson Testimony 033011 FINAL.pdf |
SRES 3/30/2011 3:30:00 PM |
SB 85 |
| SB 85_Armstrong Testimony.pdf |
SRES 3/30/2011 3:30:00 PM |
SB 85 |