Legislature(2011 - 2012)SENATE FINANCE 532
02/28/2012 03:30 PM Senate RESOURCES
| Audio | Topic |
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| Start | |
| SB192 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 192 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 28, 2012
3:33 p.m.
MEMBERS PRESENT
Senator Joe Paskvan, Co-Chair
Senator Thomas Wagoner, Co-Chair
Senator Bill Wielechowski, Vice Chair
Senator Bert Stedman
Senator Lesil McGuire
Senator Gary Stevens
MEMBERS ABSENT
Senator Hollis French
OTHER LEGISLATORS PRESENT
Senator Cathy Giessel
Senator Dennis Egan
Senator Joe Thomas
COMMITTEE CALENDAR
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax; and
providing for an effective date."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 192
SHORT TITLE: OIL AND GAS PRODUCTION TAX RATES
SPONSOR(s): RESOURCES
02/08/12 (S) READ THE FIRST TIME - REFERRALS
02/08/12 (S) RES, FIN
02/10/12 (S) RES AT 3:30 PM BUTROVICH 205
02/10/12 (S) Heard & Held
02/10/12 (S) MINUTE(RES)
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02/24/12 (S) -- MEETING CANCELED --
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02/27/12 (S) Heard & Held
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02/28/12 (S) RES AT 3:30 PM SENATE FINANCE 532
WITNESS REGISTER
KARA MORIARTY, Executive Director
Alaska Oil and Gas Association (AOGA)
Anchorage, AK
POSITION STATEMENT: Said that all AOGA members believe
meaningful changes to the tax system are necessary to stem the
decline in oil production.
RICK ROGERS, Executive Director
Resource Development Council (RDC)
Anchorage, AK
POSITION STATEMENT: Said that meaningful tax change is needed to
increase oil production and that CSSB 192( ) is an improvement
but doesn't move the needle enough.
DAVE CRUZ
Cruz Companies
Anchorage, AK
POSITION STATEMENT: Opposed SB 192 and supported HB 110.
MARK HYMAN
Beacon Occupational Health and Safety Services Inc.
Alaska Support Industry Alliance
Anchorage, AK
POSITION STATEMENT: Commented on changing the ACES tax structure
to increase oil production.
DOUG SMITH, President and CEO
Little Red Services
Alaska Support Industry Alliance
Anchorage, AK
POSITION STATEMENT: Commented on changing the ACES tax structure
to increase oil production.
ACTION NARRATIVE
3:33:52 PM
CO-CHAIR JOE PASKVAN called the Senate Resources Standing
Committee meeting to order at 3:33 p.m. Present at the call to
order were Senators Stedman, Wielechowski, McGuire, Stevens, Co-
Chair Wagoner and Co-Chair Paskvan.
SB 192-OIL AND GAS PRODUCTION TAX RATES
3:34:13 PM
CO-CHAIR PASKVAN announced the consideration of CSSB 192 ( ),
labeled 27-LS1305\B. He outlined the agenda, which included
invited testimony from three of Alaska's resource trade
associations: Alaska Oil and Gas Association (AOGA), Resource
Development Council (RDC), and the Alaska Support Industry
Alliance (the Alliance).
3:35:30 PM
KARA MORIARTY, Executive Director, Alaska Oil and Gas
Association (AOGA), said AOGA is a professional trade
association fostering the long term viability of oil and gas
development for all Alaskans. They represent a diverse
membership and evaluate public policy proposals before taking a
position.
SENATOR PASKVAN recognized Senator Giessel.
MS. MORIARTY said AOGA represents long time employers in Cook
Inlet with Marathon and Tesoro and the newest companies, Apache
and Hilcorp, as well as XTO that has been producing from two
existing Cook Inlet platforms. Moving northeast to Valdez, they
represent one of the smallest refineries in the United States,
Petro Star, Inc., and the largest employer in Valdez, Alyeska
Pipeline Service Company. Moving up the Richardson Highway to
Fairbanks and North Pole, they have three members with the North
Pole Refinery that Petro Star operates as well as Flint Hills'
Refinery, and Alyeska continues to maintain a significant office
and workforce in the Fairbanks area. Their companies have
interests all across the North Slope, both onshore and offshore,
from legacy companies such as BP and Exxon to the two newest
producers, Pioneer and Eni Petroleum to the newest explorer,
Repsol. And although Chevron divested its assets in Cook Inlet,
it still holds interests in the North Slope. Finally, they also
represent Shell and Statoil that are focused on developing
federal resources. All told, AOGA members hold active leases for
more than 1.2 million acres of state land. There is little doubt
that they represent the majority of oil and gas exploration,
production, development, transportation, refining and marketing
activities in Alaska.
3:39:18 PM
She said one of the key purposes of AOGA or any professional
trade association is to provide a forum for the discussion of
matters of general interest to its members and it is their
policy before taking a position on tax matters to have 100
percent consensus. AOGA did not support the changes that were
made to the production tax system in 2006 and 2007. They believe
then and now that the current tax system makes Alaska
uncompetitive for investment dollars for long term development
and production. All member companies believe meaningful changes
to the tax system are necessary to stem the decline in oil
production.
MS. MORIARTY stated that AOGA does not support the CS to SB 192.
One of the most egregious provisions is that as the price of oil
increases and as a higher tax is implemented all prior dollars
are taxed at that higher rate. This could be addressed by a
bracketing concept that sets tax rates at different levels as
the price increases so that each level is taxed only once and at
a set rate, but the CS does nothing to change the onerous
provision and thus continues an imbalance in the risk/reward
investment environment in Alaska.
She said the Senate Bi-partisan Working Group recently issued a
press release outlining what it wants from oil reform stating
three things:
1. increased oil production
2. more jobs for Alaskans
3. sustained state revenue over the long term.
And while AOGA supports all of those tenets, in essence they all
boil down to just one - increased production. Without it, having
sustained revenue will be difficult and without revenue, jobs in
Alaska are in danger. This CS creates potential deficits as
early as 2015 that will grow larger in each succeeding year. In
2006 and 2007, many companies testified that ACES wouldn't
attract the investment Alaska needs to change the production
curve and it hasn't. In fact, production is significantly lower
today than what Alaska was forecasting when it passed ACES in
2007.
One only needs to look to Cook Inlet for guidance, Ms. Moriarty
said, where the legislature reacted to production concerns with
bold and meaningful tax reforms targeted at making the Inlet
commercially attractive. By all accounts, those reforms have
been successful.
3:43:52 PM
MS. MORIARTY said that Alaska needs to appreciate the North
Slope production problem with the same level of concern and
react with similar bold and meaningful reforms. The overall
government take in Alaska is too high and they supported the
governor's proposal as a first step in providing meaningful
reform. She offered to answer questions.
3:44:56 PM
SENATOR WIELECHOWSKI asked if HB 110 is a good first step, what
other steps are needed if they pass a bill like it.
MS. MORIARTY answered that aside from addressing progressivity,
the base rate should be lowered, the small producer tax credits
should be extended and interest rates should be lowered. The
change has to be comprehensive as laid out in the governor's
bill.
SENATOR WIELECHOWSKI asked what she thought of the amendments
and if she supported or opposed any one in particular.
MS. MORIARTY answered that AOGA has looked at the amendments,
but was uncomfortable coming to a conclusion without knowing how
they would fit together in a complete package.
SENATOR STEDMAN said it appeared that a Cook Inlet system would
satisfy AOGA, but from the state treasury's perspective Cook
Inlet has huge capital credits and virtually nothing on the
other side for tax revenue. So, in his opinion Cook Inlet is
broken, but in the opposite respect of north of the Brooks
Range.
MS. MORIARTY said they aren't advocating Cook Inlet as a model
for the North Slope, just saying that changes were made to spur
exploration and development there and they hoped the same thing
kind of thinking would apply on the North Slope.
SENATOR STEDMAN asked if they were advocating that the treasury
run negative on the North Slope.
MS. MORIARTY answered that they were advocating for the right
balance for the state and the industry.
3:48:23 PM
CO-CHAIR PASKVAN asked when she says government take is too high
what her understanding was of government take of ANS crude at
$100 or $120 under current cost structures.
MS. MORIARTY answered that she didn't have those figures in
front of her, but federal tax, state royalty, production tax,
corporate income tax and property tax are included in government
take and today it is much higher take than it was five or six
years ago.
CO-CHAIR PASKVAN asked what government take would be acceptable
to them including the federal portion.
MS. MORIARTY replied that they don't have a magic acceptable
number. It has to be the right balance and it is out of balance
right now. Governor Hammond used to advocate for a third, a
third, a third and they are not close to that standard.
SENATOR WIELECHOWSKI asked if she agreed with the governor and
the DOR commissioner who recently said that ACES is competitive
at $60 to $80 and that it gets high at around $100.
MS. MORIARTY answered that they agree that even at $60 to $80
oil, some fields in Alaska are still marginal and their tax rate
could still be too high. They agree with the governor that as
progressivity kicks in Alaska gets a higher percentage
especially at higher prices. They believe that Alaska could be
more competitive.
SENATOR WIELECHOWSKI asked if faced with the choice of passing
this bill or nothing what her position would be.
MS. MORIARTY replied that AOGA opposed this bill in its current
form.
SENATOR WIELECHOWSKI asked if there was any sort of happy medium
between this bill and HB 110 that would satisfy her members.
MS. MORIARTY replied until they put it in writing she couldn't
answer that question.
3:52:13 PM
RICK ROGERS, Executive Director, Resource Development Council
(RDC), introduced himself and said that one of their directors,
Dave Cruz, Cruz Construction, was in the audience. He said he
would reserve some of his time for Mr. Cruz to share his
perspective.
MR. ROGERS said RDC is a statewide membership-funded
organization, but unlike AOGA, it represents a broader spectrum,
the five major resource industries in the state: forestry,
fisheries, mining, tourism and oil and gas. Additionally, they
have communities, all 12 regional Alaska Native corporations,
organized labor, utilities, support businesses and all the folks
that recognize the important role that resource development
plays in the state's economy.
3:54:34 PM
MR. ROGERS said there's a sense of urgency and broad support for
a meaningful adjustment to the production tax for increasing
TAPS through-put and that some of the most vocal proponents for
oil production tax reform are coming from the non-oil and gas
members. The broader business community is fearful of what the
accelerating decline curve means to the overall economy in
Alaska and is convinced that ACES retards investment and
contributes to the decline. The governor's 10-year budget
projection has a sobering outlook a few years out.
He said the Senate seems to be focused on imposing the highest
tax politically possible on the producers and that squeezing the
last dollars from a productive private sector with an ever
expanding state budget is not going to lead Alaska to a
prosperous future. Taxing ourselves to prosperity is not a
strategy. CSSB 192 is an improvement, but it does not move the
needle enough.
MR. ROGERS said this is a historic turning point for Alaska and
they find it unfortunate that rhetoric characterizes tax reform
as a give-away. From their view, the objective is to empower the
private sector to increase Alaska's productivity for the
ultimate benefit of its citizens; he hoped that leadership could
explain that a high tide will lift all ships and that royalties
will increase only with increased production. They hoped the
legislature as a whole could overcome what its consultant, Pedro
van Meurs, referred to as difficult political issues.
MR. ROGERS said according to DOR statistics, at $100 oil the tax
in Alaska since 2005 has essentially tripled. The RDC supported
HB 110, because industry has said its passage will result in at
least $5 billion in new investment in Alaska and he couldn't
imagine the oil industry making a $5 billion public commitment
and then not following through. For instance, ConocoPhillips'
capital investment is flat in Alaska compared to its capital
investment in the Lower 48 that has increased by 104 percent.
What the RDC really looks at is whether tax changes will result
in meaningful investments by the private sector and they don't
think CSSB 192 ( ) will move that needle.
4:02:31 PM
SENATOR STEDMAN stated that Mr. Rogers' inference that the
Senate is only interested in the highest possible tax rate was
not helpful. That was not the direction they were heading. But
there have been discussions about the tax structure at higher
rates; just yesterday they looked at north of $200 when much of
the incremental profit would go to the state, not industry. On
the other end of the scale, the State of Alaska offers a lot of
up-front credits. He asked Mr. Rogers how much he thought the
state should supplement capital projects for the industry.
MR. ROGERS replied that he stood corrected and was grateful that
CSSB 192 did not reduce or remove exploration credits. However,
the problem with exploration credits is that they are further
out in the time line and the legacy fields need immediate work.
He said the levers must work in concert with each other, and
while they can incentivize exploration, eventually the new
resource would have to be brought into production and would be
affected by whatever tax regime existed at the time.
SENATOR STEDMAN asked if he thought the State of Alaska should
be in the position of paying 100 percent of capital costs for
industry at oil prices over $200 barrel as it is currently.
4:06:59 PM
MR. ROGERS responded that he was not prepared to comment on
that.
SENATOR STEDMAN said that's part of the balancing act. A lot of
people are concerned about the steepness of progressivity, but
on the other side of the tax regime, the state pays a
substantial amount of upfront costs to the industry - amounting
to $850 million in the 2013 budget, plus the immediate write
off, which by some calculations is worth over $1 billion (at
$110 barrel). As the price escalates, the state has substantial
risk exposure with reimbursing capital costs. It's not fair to
ask the state to lower one end of the scale and leave it exposed
on the other end.
MR. ROGERS said those issues must all be addressed in one
package, not just individually.
4:09:22 PM
SENATOR STEDMAN said he understood from previous testimony that
industry likes Cook Inlet's tax structure and think it should be
replicated on the North Slope! But, Cook Inlet has a negative
cash flow into the state treasury and the problems in the Arctic
are different. Clearly, the State of Alaska should not be in a
position of paying the industry 100 percent of capital costs. It
has already put over $4 billion into the oil basin and yet they
hear from industry that Alaska is closed for business. That
attitude has a negative indication through multiple industries.
MR. ROGERS clarified that what he was saying was that the
production tax north of the Brooks Range is not competitive on a
global scale and is hampering business. Production is decreasing
while oil prices are very robust and other jurisdictions in
declining reservoirs have production that is level or
increasing. The North Slope should be having more activity when
prices are where they currently are.
4:12:31 PM
CO-CHAIR PASKVAN asked what he thought a reasonable rate of
government (including federal) take is.
MR. ROGERS replied that the industry is comfortable with that
level of government take in HB 110.
CO-CHAIR PASKVAN asked if they had come up with a rate under
which anything would be acceptable and above which it would be
rejected.
MR. ROGERS reiterated that they have accepted the revenue curve
in HB 110.
CO-CHAIR PASKVAN said he was talking about the government take
analysis.
MR. ROGERS said they look at total government take as a
combination of federal taxes, royalties, state corporate taxes
and property taxes.
CO-CHAIR PASKVAN said he was referencing Mr. Rogers' reference
to the DOR's publication on the oil and gas fiscal regime that
trebled under ELF and asked if he had analyzed what the ratio is
under the current cost structures.
MR. ROGERS answered no. He said he had relied on the DOR's
information and that his point had been to show the relativity
of the significant changes that have been made over the last
five years and that the mark was overshot.
4:15:10 PM
SENATOR MCGUIRE pointed out that industry has paid over $73
billion in royalties as a result of renewed activity in Cook
Inlet and commented that philosophically, the goal shouldn't
always be to bring money into the government. Part of setting a
good tax policy in a capitalist society is finding the balance
between allowing dollars to flow in the private sector and the
jobs to be created there.
4:17:32 PM
DAVE CRUZ, Cruz Companies, Anchorage, said he graduated from
high school 36 years ago and got an opportunity to work on the
pipeline and 31 years ago he launched what is now Cruz
Companies. His companies build ice roads, provide drilling
support services, tundra transport and mobile camps in Alaska,
as well as private and public heavy civil construction, roads,
airports and tug and barge services. They currently provide
well-paying jobs in Alaska for 93 people and 110 people in North
Dakota where they provide drilling support, rig moving and heavy
lift cranes. Cruz Companies went to work in North Dakota 17
months ago, because Alaska didn't have enough work. Cruz
Companies and all the jobs it has generated wouldn't have
happened if Alaska didn't have a healthy oil industry at one
time. Oil pays for 90 percent of the state's government and no
other resource is as significant.
MR. CRUZ said that Steven Forbes, editor and chief of Forbes
Media, said to the Anchorage Economic Development Corps that
Alaska's oil tax structure was one of the world's worst, second
only to North Korea, and that HB 110 would remedy the tax
provisions strangling the oil industry in Alaska, not CSSB 192.
He said in exchange for lowering taxes, the oil industry has
offered a $5 billion investment to increase production. The
Senate didn't move on it, but instead went to look at Norway's
model. They should have been looking at the Lower 48 model that
even during a recession seems to be working well. He related
that Baker Hughes' rig counts indicate that California has 43
rigs working, Colorado has 69, New Mexico has 81, Pennsylvania
has 105, Louisiana has 139, North Dakota has 187, Oklahoma has
198, Texas has 920, and Alaska has a rig count of 9 as of last
Friday with 4 sitting idle.
He said Alberta, Canada, provides a glimpse of what could happen
to production in Alaska if meaningful changes are made to the
oil tax structure. The industry there was idle in 2009 and
thousands of people were out of work. The government adjusted
the tax structure creating incentives to bring the industry
back. It is now rebounding and 11,700 wells will be drilled this
year; 700 rigs are operating there now.
MR. CRUZ said there is no comparison between the cost of
production in Alaska and in other states. To negotiate a
drilling project in Alaska will cost a couple million dollars
and almost a year's time. In North Dakota a drilling project can
be negotiated in a month and actually receive a state drilling
permit in one week. North Dakota has a road and rail structure
and private land is used for their ventures. They don't wait on
a pipeline to move oil; they truck it to a gathering center and
rail it to the East Coast every day.
He said that not one well they have worked on at Prudhoe has
come into production and his main competitor has experienced the
same thing. In North Dakota there is a 90 percent chance that a
well they are working on will be in production within 60 days.
In Alaska, the same thing takes years.
MR. CRUZ summarized that in 1975, the largest non-governmental
employee in Alaska was the Southeast timber industry with
multiple saw mills, two thriving pulp mills, thousands of well-
paying jobs, but they were legislated out of business. The
market did not shut them down. Governor Hickel taught Alaskans
that they can control their destiny and they can change the
production decline, too.
4:25:45 PM
CO-CHAIR PASKVAN recognized that Senator Egan and Senator Thomas
were present.
4:26:44 PM
MARK HYMAN, Beacon Occupational Health and Safety Services Inc.,
said he would give testimony on behalf of the Alaska Support
Industry Alliance along with Doug Smith, another member of the
Alliance. Beacon provides medical, safety and training services
and their clientele embraces the many diverse industries in
Alaska as well as municipal, state and federal agencies. This
includes many of the contractors, producers and explorers that
represent the oil and gas industry in Alaska. Additionally, he
was the immediate past president of the Alaska Support Industry
Alliance that has nearly 500 member companies that employ 38,000
people.
At Beacon, he said, many of the new hires that are heading to
the North Slope provide services for things like physicals, drug
and alcohol testing and safety training. They also provide
infield support of year-round medical clinics, safety
professionals, onsite training and site control services. They
have full time facilities in Anchorage, Kenai and Dead Horse and
employ roughly 250 full-time employees. Their success as an
Alaskan owned, Alaskan grown company is directly attributable to
the major oil producers on the North Slope who have been
exceptional corporate partners over the years.
MR. HYMAN said there is no doubt that there has been an increase
in overall activity this year on the North Slope and the
potential of Shell's offshore activity is coming this summer.
However, none of it is going to stem the current rate of decline
through TAPS any time soon. Dramatic change in the tax structure
is needed to increase investment from the current producers and
to encourage new producers to invest there.
MR. HYMAN said not all Alliance members work on the Slope, but
they are all interested in a strong oil and gas industry,
because they are engineers, suppliers, accountants, IT, banks
and many other services that don't directly contract with a
producer or work on the North Slope but indirectly support the
contractors and producers that do. These Alaskan based
businesses, union and non-union, Native corporations included,
are all interested in a strong Alaskan oil and gas economy,
because of the benefits it brings to the state as a whole.
4:32:16 PM
DOUG SMITH, President and CEO, Little Red Services, said his
business challenges aren't different than many Alliance
members'. His company started in 1983 and has 140 employees; 70
percent are Alaska residents and 10 percent are previous
residents who moved out of the state while being employed by
them. Their primary concern is how the industry's uncertain
future challenges making good capital decisions. For instance, a
new hot oil unit built for Arctic needs is only available from
one vendor in Red Deer, Canada, and the one he got in December
cost $2 million. Three years ago, the same unit was $1.5
million. The $.5 million difference was not related to the price
increase in steel or parts, but to demand coming from Alberta
last year. There is no potential rate increase to offset the
impacts from the additional costs like this. This piece of
equipment has a 20-year life span and it's hard for anyone to
see ahead 20 years to say it was a good decision or not. He said
the state needs to bring some certainty into its fiscal policy
to allow for sound evaluation of long term projects and
investments.
He said they are now considering refinancing their senior debt
and the number one question they get from banks is what is going
to happen with the tax structure in Alaska and how will that
affect the future of your business and cash flow. He asked them
to remember that when they look at making changes to the tax
structure.
4:38:01 PM
SENATOR STEDMAN said he heard what they were saying about
employment being down and costs being up, but legislators get
conflicting information. For instance, employment in the oil
basin is at its maximum, the DOR expects capital expenditures to
go from $2.7 to $3.8 billion and barge and freight companies
have indicated that shipment dollars are going towards
maintenance items. Legislators had also been told that bunk
houses and planes in the oil patch are full and the processing
facilities are running at capacity. So they struggle with
conflicting information.
4:41:39 PM
MR. SMITH agreed that the process is difficult to understand. He
lost about 10 percent of his employees due to decreased work
during the recession, but they found ways keep working. One way
was delivering new infield technology to redirect water flood by
injecting bright water polymer to increase oil recovery from
existing BP wells.
MR. SMITH said he wanted someone to get the forecast right,
because DOR's projections during ACES discussions were 100,000
barrels off from what oil production actually is today. ACES
might not have passed if they had a better idea of what was
going to happen in the economy. A conservative estimate going
forward is needed so Alaska can have its best shot at getting
into a more competitive posture.
CHAIR PASKVAN asked if his business was eligible for the capital
expenditure credit.
MR. ROGERS answered no. He added that once they pay the federal
government its share that the remainder should be fairly split
between industry and the state.
CO-CHAIR PASKVAN commented that he heard in 2008 when oil went
up to $140 barrel that all the costs for the support structures
dramatically increased, too, and in 2009 when oil declined, the
majors suppressed the prices.
MR. ROGERS responded that his company prices are less now than
they were in 2004 and he offered to show copies of their
contracts. Some industries may have over-escalated prices more
than what was fair and may be seeing themselves at the back of
the line now, but a lot of them did not participate in that. He
felt if you want to be a long term partner you have to treat
each other with mutual respect and the state has to decide how
to be a partner rather than a "pickpocket."
SENATOR STEDMAN said the DOR charts from yesterday's
presentation were for the legacy fields and didn't include
everyone up there. There had been discussion on fixing ACES at a
high price, but outside of that there had also been discussions
on how to tax incremental oil production to flatten the decline
curve first and then get it back up to 600,000 incrementally.
Pedro van Meurs suggested a $25 allowance to the industry on
incremental production and Senator Wagoner was working on a tax
holiday methodology. They were trying to zero in on what they
perceive is the most challenging problem, but the problems with
ACES are a lot deeper than they have time to deal with this
winter.
MR. ROGERS said he appreciated that and his organization's
members were trying to education themselves so they could remain
objective.
CO-CHAIR PASKVAN thanked the participants and held SB 192 in
committee.
4:50:55 PM
CO-CHAIR PASKVAN adjourned the Senate Resources Standing
Committee meeting at 4:50 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AOGA_Feb 28 2012.pdf |
SRES 2/28/2012 3:30:00 PM |
SB 192 |