Legislature(2021 - 2022)BUTROVICH 205
09/13/2021 03:30 PM Senate RESOURCES
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| Audio | Topic |
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| Start | |
| Presentation by Gaffney, Cline & Associates: Assessment of Recent Trends on Upstream Oil & Gas and the State of Alaska's Competitive Position | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
September 13, 2021
3:31 p.m.
MEMBERS PRESENT
Senator Joshua Revak, Chair
Senator Peter Micciche, Vice Chair
Senator Gary Stevens
Senator Natasha von Imhof
Senator Jesse Kiehl
Senator Scott Kawasaki
MEMBERS ABSENT
Senator Click Bishop
OTHER LEGISLATORS PRESENT
Representative Tom McKay
Representative Mike Cronk
Representative Geran Tarr
COMMITTEE CALENDAR
PRESENTATION: ASSESSMENT OF RECENT TRENDS IN UPSTREAM OIL & GAS
AND THE STATE OF ALASKA'S COMPETITIVE POSITION BY GAFFNEY, CLINE
& ASSOCIATES
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
MICHAEL CLINE, Strategy Advisor/Legal Counsel
Gaffney Cline & Associates
Cobham, England, United Kingdom
POSITION STATEMENT: Presented an assessment of recent upstream
oil & gas trends and the State of Alaska's competitive position.
ACTION NARRATIVE
3:31:56 PM
CHAIR JOSHUA REVAK called the Senate Resources Standing
Committee meeting to order at 3:31 p.m. Present at the call to
order were Senators Micciche, Kiehl, Stevens, von Imhof, and
Chair Revak. Senator Kawasaki arrived immediately thereafter.
He recognized that Representatives McKay and Cronk were in the
audience.
^Presentation by Gaffney, Cline & Associates: Assessment of
Recent Trends on Upstream Oil & Gas and the State of Alaska's
Competitive Position
PRESENTATION BY GAFFNEY, CLINE & ASSOCIATES: ASSESSMENT OF
RECENT TRENDS IN UPSTREAM OIL & GAS AND THE STATE OF ALASKA'S
COMPETITIVE POSITION
3:32:49 PM
CHAIR REVAK announced the committee would hear a presentation by
Gaffney, Cline & Associates on recent trends on oil and gas and
Alaska's competitiveness in the marketplace.
3:33:06 PM
SENATOR KAWASAKI joined the committee.
3:33:09 PM
At ease
3:34:02 PM
SENATOR REVAK reconvened the meeting.
3:34:17 PM
MICHAEL CLINE, Strategy Advisor/Legal Counsel, Gaffney Cline &
Associates, stated the presentation would cover key developments
in the oil and gas industry that impact Alaska in the global
context and considerations on tax policy.
3:36:45 PM
MR. CLINE paraphrased slide 5:
Volatility and Disruption in the Oil & Gas Industry
• The oil & gas industry has been battered by
deeply disruptive events in recent years,
including the oil price collapse of 2014-2016,
the COVID-19 pandemic, the emergence of
alternative energy platforms, and a related shift
in the long-term prospects of the industry.
• Oil and gas companies have performed poorly,
while investors have demanded better financial
performance and action on energy transition.
Divestments and restructurings have occurred and
are ongoing, a renewed focus on capital
discipline and investor returns has meant fewer
projects are sanctioned, and there is a laser
focus on strategy and core assets.
• Resource owners are finding it challenging to
attract capital and good operators.
• For governments and states, lower prices and
decelerating demand has meant reduced revenues
and tax receipts and contraction of the tax base.
3:39:33 PM
MR. CLINE stated that the chart on slide 6 visually represents
the volatility of oil caused by disruptions ranging from 2000 to
present. From 2015 to 2016, growing inventories of crude oil
worldwide and a weakening of the US economy led to low oil
prices. Shale production in the Lower 48 caused the prices to
drop further.
From 2019 - 2021 widespread economic dislocation caused by COVID
and disputes among OPEC nations have resulted in oil prices
tanking. The transition to other types of energy and the
financial performance of oil has caused banks and investors to
consider project lending carefully.
3:43:16 PM
MR. CLINE moved to slide 7 and presented the following points
regarding the transition of energy:
Energy Transition and Oil & Gas
• Many technologies essential to the transition to
alternative energy platforms are still in
development, and face significant hurdles in
terms of addressing intermittency, energy storage
and the sheer complexity and cost of
implementation.
• While the transition period is uncertain (circa
20-to-40 years), the trends are clear:
- Innovation and investment focus are leading to
new applications and rapid cost reduction.
- Renewables and other sources of clean power
generation are growing rapidly, electric
vehicles are established and on the cusp of
rapid growth, and decarburization has been
elevated to 'core strategy' for businesses from
ExxonMobil to Blackrock.
- The debate is no longer whether energy
transition will happen but how quickly it will
happen.
• For resource-rich governments and states, the
question is how to address the knock-on impacts
of energy transition and, in particular, how to
optimize oil and gas resources in a responsible
manner while transitioning to alternative energy
platforms.
3:47:11 PM
MR. CLINE stated that energy transition is a substantial
financial issue. Investors and developers have firmly grasped
this realization. Over eighty global financial institutions
restrict lending, and over one hundred are divesting from fossil
fuels. Slide 7 provides a partial list of those institutions.
MR. CLINE said that in response to the impact of carbon
intensity, oil and gas companies assess portfolios to decide if
carbon assets should be kept, sold, left undeveloped, or
transferred to smaller companies. Company restructuring is part
of the energy transition process that will occur over time and
cause heavy oil to be valued differently.
3:50:06 PM
MR. CLINE advanced to slide 10 and paraphrased its content:
Decelerating Demand and the Competition for Investment
Dollars
• The trends relevant to Alaska and other oil
producers are increasingly clear:
- The lowest cost producers (Saudi Arabia and
Gulf countries) will have an increasing
advantage in a lower demand environment, with
strong drivers to maximize production to meet
budgetary requirements, and a goal to extract
as much value as possible from their oil and
gas resources while they can.
MR.CLINE added that countries like Saudi Arabia can produce
oil for $9 per barrel, it a fierce competitor.
- Shale oil will remain a potent force with its
ability to react quickly to demand/price
spikes, which will restrain upward price
pressure.
- Decelerating demand and a muted price
environment will likely mean less upstream
investment and activity through 2050,
especially for 'big ticket' long lead time
investments.
• For oil and gas producers such as Alaska, the
competition for oil and gas investment dollars is
fierce and getting fiercer.
- Oil and gas companies will impose high
profitability / return hurdles for upstream
investment.
- Oil and gas companies are making decisions
today that will determine the extent to which
Alaska is able to monetize its oil and gas
resources in the future
3:56:08 PM
MR. CLINE paraphrased slide 11:
Government Actions to Promote Investment and
Production
• Governments compete on the global stage for
exploration and development capital, which
provide the long-term basis for tax revenues.
• In response to such changes in market conditions,
it is common for proactive governments to
reassess existing fiscal terms and to consider
incentives to ensure continued exploration and
development in the domestic energy sector.
MR. CLINE added that incentives offered by governments are often
tax-related, such as Norway's accelerated depreciation and the
UK's tax rate reductions. Many government responses are
structured to be temporary.
• There have been substantial changes made to
upstream oil and gas terms stemming from the
change in market conditions in 2014 as well as
some responses to the price decrease observed in
2020.
• It should be noted that due to the time required
to review and approve fiscal changes,
particularly at a national legislative level,
there is often a delay in their implementation
and a time lag after implementation before they
have effect.
3:58:42 PM
SENATOR MICCICHE asked if the idea of leaving oil in the ground
for future value has been abandoned.
MR. CLINE said he had not heard that argument recently because
the future's outlook has changed. He opined that the current
converse philosophy is to monetize assets sensibly and take
advantage now.
SENATOR VON IMHOF reiterated that the deceleration of demand,
discussed in slide 10, makes it the goal of Saudi Arabia and
Gulf countries to extract as much value as possible from their
oil and gas resources before the pivot to alternative energy
occurs. She opined that this would cause a supply glut over the
next 10-20 years. She asked Mr. Cline if her recapitulation of
slide 10 supports the idea that assets should be monetized.
Senator Micciche didn't make a statement. He asked a question.
MR. CLINE said that is correct. Supply and demand issues are
challenging due to diverse national interests and the complexity
of forecasting demand. OPEC's goal is to take as much advantage
of its resources as possible.
4:02:09 PM
CHAIR REVAK asked if proactive oil states and governments are
incentivizing increased production rather than taxing it as
SB3002 proposes.
MR. CLINE answered there are various ways to incentivize
investment or recapture costs to encourage investment. What has
been done in Alaska is one way. Other countries have used other
measures to promote investment, such as accelerated depreciation
and immediate recapture of costs.
CHAIR REVAK agreed that it has become more difficult to keep
people busy and invested.
4:03:56 PM
SENATOR KAWASAKI said the slide titled Energy Transition an
Issue for Markets mentions that financial institutions have been
divesting or restricting lending to Arctic drilling for several
years. He asked if financial institutions are divesting and
restricting lending to Arctic drilling because it appears
riskier and what are the decision-making factors at that level
of investment.
MR. CLINE opined that Arctic drilling is more challenging and
costly. Also, environmental concerns may increase over time. So,
investors question where to put their money when other assets
are reasonably available. Decision-making is a mix of financial
and other considerations.
4:05:42 PM
SENATOR KAWASAKI asked, from an economic standpoint, how
favorable would Alaska's tax policy need to be to make it an
attractive place to invest, and do financial institutions
consider taxation policy when making determinations to divest.
MR. CLINE answered that tax policy is a factor in the economic
decision-making chain for investors. It is not at the top of the
chain, but it is well known that tax policy influences
investment. Tax policy can improve or worsen an investment
environment.
4:07:47 PM
SENATOR KAWASAKI asked if capital market lenders look far enough
down the economic chain to consider whether tax policy is
favorable; if so, could it stop divestment and rekindle
investment.
MR. CLINE stated his belief that lenders assess to a certain
level where companies invest and whether it is advantageous.
This may occur in the Arctic. For example, in recent years, from
a high-level perspective, offshore exploration was not a
desirable investment; wells were expensive, it was risky, and
prospects were long-term. Companies heavily invested in offshore
oil fields would be considered higher risk from a lender's
perspective. He opined that the view level of a financial
company is to consider whether an oil company is great or
overrated.
4:10:04 PM
MR. CLINE resumed the presentation on slide 13, Alaska's Oil and
Gas Sector is Maturing and Facing Headwinds. He stated Alaska
had been a fantastic place for oil and gas businesses due to the
scale of its resources, market access, skilled workforce, and
deep service company base. In recent years Alaska has faced the
challenges of maturing assets, like Prudhoe Bay, that produce
less than previously. It has also faced the challenges of new
assets, like Willow, where development is being debated. Alaska
is a high-cost environment that is also facing the global price
volatility of oil. He opined that some actions taken by Alaska,
such as the per barrel tax credit, appear to have stabilized
production decline.
4:13:08 PM
MR. CLINE stated that less oil production from maturing assets
coupled with declining oil prices impacted the state. However,
oil production in Alaska is still healthy and provides
substantial revenues to the state.
MR. CLINE said the state should take two actions to offset oil
production declines. It should protect and extend the life of
its maturing assets, so they continue to produce.
Simultaneously, the state should develop new projects to fill
the revenue gap as mature projects continue declining. Another
point for the state to consider is the cost of transitioning to
alternative energy platforms. New developments will be needed to
subsidize transition costs that are estimated to consume fifty-
one percent of oil revenues.
Although Willow is a large investment, it is an example of a new
project that will bring thousands of construction jobs and
hundreds of permanent jobs. It is a 600-million-barrel resource
that would produce 165,000 barrels a day. The Repsol Oil Pikka
Project is another large, expensive undertaking that, if
modified, could assist in sustaining the economy.
4:17:24 PM
MR. CLINE paraphrased slide 16:
Protecting the Petroleum Tax Base and the Economy
• Petroleum-related revenues are a significant
contributor to Alaska and have been and will
continue to be under pressure as the industry
changes with a move toward alternative energy
systems, increasing asset maturity, and other
factors.
• To sustain those revenues and the high paying
jobs provided by the industry, Alaska needs the
participation of as many companies as possible,
from the very large to the small, to explore,
develop and produce its diverse resource base and
sustain and build the tax base.
- Large projects like Willow and Pikka are
essential and require significant investment,
application of human and technical resources,
and an appetite for risk - which typically
requires large companies making long-term
strategic commitments.
- Mature assets are essential too, and the
participation of smaller, nimble companies is
key to optimizing these assets and tax revenues
from them.
• Attracting oil and gas investment and
participation is a 'competitive activity', with
major producers in the US and globally competing
for the same participants and investment dollars
considerations around tax burden and overall
costs are critical in that competition.
4:19:38 PM
MR. CLINE paraphrased slide 17:
SB 3002: The Per Barrel Credit
• SB 3002, Section 6 allows a sliding scale tax
credit against a producer's tax liability for
each barrel of taxable oil.
- The sliding scale is designed to offer a
relatively higher tax credit in lower oil price
environments and less credit (or no credit) in
higher price environments.
- Overall, SB 3002 is intended to reduce the tax
credit available to producers.
- How the tax credit is set is important to avoid
deterring investments and activity.
• Gaffney Cline has not had the opportunity to
model the impact of the proposed provisions, and
suggests careful analysis to ensure that the tax
provisions do not have unintended consequences of
discouraging new entrants and investment.
4:21:23 PM
MR. CLINE paraphrased slide 18:
Tax Policy Considerations
• Alaska's strategy to extract more revenues from
the oil & gas sector will need to consider not
only near-term revenue capture objectives, but
also medium- and long-term impacts on oil and gas
development and production and the tax base
- Ensure that companies are not discouraged from
taking on big investment, step-change
developments that will replace declining
revenues from existing fields; and
- Ensure that existing companies and new
entrants continue to invest in mature fields,
and so extend the productive life of existing
assets.
MR. CLINE added it is important to consider the sensitivities of
different companies when framing tax policy.
• Global experience suggests that if the taxes are
too high:
- Companies will seek to exit and/or go into
'harvest mode', and Invest in other more tax
friendly jurisdictions.
- All of which will contribute to reduced
investment and activity in the oil and gas
sector and to production declines.
• Tax policy must be crafted and sufficiently
nuanced to support effective revenue capture
while maintaining healthy participation across
the different asset types.
4:24:22 PM
MR. CLINE paraphrased slide 20:
The Existing Tax Credit and Alaska's Competitive
Position
• For Alaska, the key has always been striking the
right balance between tax revenue capture and
maintaining a healthy and vibrant oil and gas
sector that is competitive with other major oil
and gas producers around the world.
• Is Alaska competitive with its current tax
structure in today's global supply and demand
market?
• This is a complex question but the indications
suggest that Alaska has a competitive fiscal
system at this time.
Stabilization of production levels from the
steady decline pre-MAPA is positive.
New entrants taking over large mature assets
and the willingness of companies to invest in
big projects like Willow and Pikka are
positive.
• Important to note that Alaska's competitiveness
is not a given or static the competitive
landscape changes constantly and continuing
assessment is necessary to ensure that Alaska's
fiscal terms capture robust revenues for the
state, while at the same time promoting
exploration, development and production of vital
oil and gas resources.
MR. CLINE stated his belief that the More Alaska Production Act
(MAPA) assisted in stabilizing production and attracted both
large and small oil companies to the state.
4:27:26 PM
SENATOR VON IMHOF opined those questions posed in the
presentation, such as Alaska's position in the global market and
determining an optimal tax policy, are concepts that the
legislature may need help answering. She stated it would be
helpful if Gaffney, Cline & Associates returned to present an
in-depth analysis and suggestions for managing Alaska's oil and
gas resources.
MR. CLINE replied that as a consulting agency Gaffney, Cline &
Associates is willing to investigate further.
SENATOR MICCICHE asked if a schedule of replacement exists that
shows what portion of oil will be replaced by renewable energy;
also, what demand will remain for the manufacturing of plastics
and air and shipping transportation. He asked, as innovation and
renewable energy efficiency improve and costs come down, at what
point does the state enter harvest mode.
MR. CLINE answered that replacement schedules are being studied
under a multitude of scenarios. Uncertainty is wide now but will
narrow over time. The best that can be done is to understand
various scenarios, use informed judgment to guide decision-
making, and adjust as needed.
4:31:30 PM
SENATOR MICCICHE asked how Alaska would factor into its
scenarios the unwillingness of traditional funding organizations
to invest in the state.
MR. CLINE replied that Alaska should use global trends and
financial institutions' inclinations to determine how to
optimize assets and projects within those boundaries. If Arctic
exploration were disfavored, then Alaska would need to focus on
what could work for it.
4:33:35 PM
CHAIR REVAK noted that Representative Tarr was in the audience.
SENATOR KIEHL agreed that a detailed analysis is needed. He
recalled that, when current tax policy was a bill seven years
ago, a BP representative said proposed changes would not attract
investment or change the decline curve. That statement was
inaccurate. He asked Mr. Cline if SB3002 makes Alaska's mature
fields more competitive.
MR. CLINE replied he had not studied the proposed amendments. He
recommended that assessment be done before making changes to
legislation.
CHAIR REVAK informed members that Mr. Cline was asked to broadly
address whether production at North Slope is becoming more
expensive and difficult to produce and what considerations
Alaska should contemplate regarding tax policy.
4:36:00 PM
SENATOR STEVENS asked that Alaska be compared globally to its
competitors.
MR. CLINE responded that low all-in cost producers are the most
competitive. The Middle East has lower costs than everyone. The
lower 48 states offer significant competition from shale and
lower transportation costs. Alaska needs to recognize its
challenges and strategize.
SENATOR KIEHL asked what role prospectivity and geology play in
determining Alaska's competitiveness.
MR. CLINE replied that prospectivity is the essential component
of the oil industry. Oil companies will not invest if the rock
is not good. Alaska has attractive resources, even when mature.
This is positive for Alaska in terms of competition. A
challenging operating environment, transportation costs, and
taxes make the resource less attractive.
4:40:05 PM
CHAIR REVAK thanked Mr. Cline for presenting on short notice.
4:40:34 PM
There being no further business to come before the committee,
Chair Revak adjourned the Senate Resources Standing Committee
meeting at 4:40 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SRES Presentation - GaffneyCline AK O&G Taxes 9.13.21.pdf |
SRES 9/13/2021 3:30:00 PM |
SRES Oil&Gas Presentation by GaffneyCline |