Legislature(2005 - 2006)BUTROVICH 205

03/02/2006 01:30 PM RESOURCES

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01:37:34 PM Start
01:37:34 PM SB305
01:44:48 PM Anadarko Petroleum
02:45:47 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Reconvened from 03/01/06 --
Heard & Held
Stakeholder Presentation
The last presentation to be heard is from
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 2, 2006                                                                                          
                           1:35 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Senator Thomas Wagoner, Chair                                                                                                   
Senator Ralph Seekins, Vice Chair                                                                                               
Senator Ben Stevens                                                                                                             
Senator Fred Dyson                                                                                                              
Senator Bert Stedman                                                                                                            
Senator Kim Elton                                                                                                               
Senator Albert Kookesh                                                                                                          
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
OTHER MEMBERS PRESENT                                                                                                         
Senator Hollis French                                                                                                           
Senator Gene Therriault                                                                                                         
COMMITTEE CALENDAR                                                                                                            
SENATE BILL NO. 305                                                                                                             
"An Act repealing  the oil production tax and  gas production tax                                                               
and providing  for a production tax  on the net value  of oil and                                                               
gas; relating to the relationship  of the production tax to other                                                               
taxes; relating to the dates  tax payments and surcharges are due                                                               
under AS  43.55; relating  to interest  on overpayments  under AS                                                               
43.55; relating  to the treatment  of oil and gas  production tax                                                               
in a  producer's settlement with  the royalty owner;  relating to                                                               
flared gas, and to  oil and gas used in the  operation of a lease                                                               
or property, under AS 43.55;  relating to the prevailing value of                                                               
oil or gas under AS 43.55;  providing for tax credits against the                                                               
tax  due under  AS 43.55  for certain  expenditures, losses,  and                                                               
surcharges; relating to statements  or other information required                                                               
to be filed  with or furnished to the Department  of Revenue, and                                                               
relating  to the  penalty for  failure to  file certain  reports,                                                               
under  AS 43.55;  relating to  the  powers of  the Department  of                                                               
Revenue, and  to the disclosure  of certain  information required                                                               
to be  furnished to  the Department of  Revenue, under  AS 43.55;                                                               
relating   to  criminal   penalties   for  violating   conditions                                                               
governing access to and use  of confidential information relating                                                               
to the  oil and gas  production tax;  relating to the  deposit of                                                               
money  collected by  the Department  of Revenue  under AS  43.55;                                                               
relating to  the calculation of the  gross value at the  point of                                                               
production of  oil or gas;  relating to the determination  of the                                                               
net value  of taxable oil  and gas  for purposes of  a production                                                               
tax on the net value of  oil and gas; relating to the definitions                                                               
of  'gas,' 'oil,'  and certain  other  terms for  purposes of  AS                                                               
43.55;  making  conforming  amendments;   and  providing  for  an                                                               
effective date."                                                                                                                
     HEARD AND HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: SB 305                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX                                                                                         
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
02/21/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/21/06       (S)       RES, FIN                                                                                               
02/22/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/22/06       (S)       Heard & Held                                                                                           
02/22/06       (S)       MINUTE(RES)                                                                                            
02/23/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/23/06       (S)       Heard & Held                                                                                           
02/23/06       (S)       MINUTE(RES)                                                                                            
02/24/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/24/06       (S)       Heard & Held                                                                                           
02/24/06       (S)       MINUTE(RES)                                                                                            
02/25/06       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
02/25/06       (S)       -- Reconvene from 02/24/06 --                                                                          
02/25/06       (H)       RES AT 10:00 AM SENATE FINANCE 532                                                                     
02/25/06       (S)       Heard & Held                                                                                           
02/25/06       (S)       MINUTE(RES)                                                                                            
02/27/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/27/06       (S)       Heard & Held                                                                                           
02/27/06       (S)       MINUTE(RES)                                                                                            
02/28/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/28/06       (S)       Heard & Held                                                                                           
02/28/06       (S)       MINUTE(RES)                                                                                            
03/01/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
WITNESS REGISTER                                                                                                              
MARK HANLEY, Public Affairs Manager                                                                                             
Anadarko Petroleum                                                                                                              
POSITION STATEMENT: Presented Anadarko's position on SB 305.                                                                  
ACTION NARRATIVE                                                                                                              
CHAIR THOMAS  WAGONER reconvened the  March 1  meeting  of Senate                                                             
Resources at 1:37:34 PM on March 2, 2006.                                                                                     
               SB 305-OIL AND GAS PRODUCTION TAX                                                                            
1:37:34 PM                                                                                                                  
CHAIR   THOMAS  WAGONER   announced   SB  305   to   be  up   for                                                               
consideration. He  said that Mr. Hanley  would present Anadarko's                                                               
position on SB 305.                                                                                                             
^ANADARKO PETROLEUM                                                                                                           
MARK  HANLEY, Public  Affairs Manager,  Anadarko Petroleum,  said                                                               
Anadarko is a large "independent"  - meaning it is not integrated                                                               
and  doesn't have  downstream facilities  or refineries.  It also                                                               
does  not have  gas stations,  which  is the  reason most  people                                                               
don't know its name. Anadarko  has a market capitalization of $23                                                               
billion and has over 3,000 employees worldwide.                                                                                 
Anadarko is listed on the S&P  500 Exchange; it came to Alaska in                                                               
the  early 90s  and first  partnered  with Exxon  in an  offshore                                                               
well, called  Thetis Island.  Since then,  it has  partnered with                                                               
many  other  companies  in  Alaska  from BP  to  EnCana.  (A  map                                                               
displayed Anadarko's ownership positions  in its Alaskan fields.)                                                               
It is now  partnering with a new worldwide gas  company to Alaska                                                               
- the BG Group.                                                                                                                 
MR.  HANLEY said  that  Anadarko  has 2.2  million  net acres  in                                                               
Alaska,  probably running  neck  and neck  with ConocoPhilips  in                                                               
terms of net  acreage on the North Slope. He  thought that Alaska                                                               
still had a  lot of different plays and the  company had prepared                                                               
a regional  model to try and  understand how the whole  system up                                                               
here works. He explained:                                                                                                       
     Just to  give you a rough  idea of what we  think about                                                                    
     Alaska. We  think it's  a world-class  petroleum basin.                                                                    
     We think  it has significant remaining  resource. It is                                                                    
     probably not in the -  you know, we don't think there's                                                                    
     a  Prudhoe Bay  to be  found  out there,  but we  think                                                                    
     there are a  number of Alpine size fields -  400 MB and                                                                    
     an awful lot  of, you know, 50 MB to  150 MB fields out                                                                    
     there. So  that we  think there is  a lot  of resource,                                                                    
     but  it's  not  huge  and   some  of  it  is  far  from                                                                    
     infrastructure in interesting areas.                                                                                       
     As you see, we think  there are anchor-type fields - an                                                                    
     anchor  field being  something that  would support  its                                                                    
     own facilities. So you wouldn't  have to come back into                                                                    
     an existing facility  to tie in. You  could support the                                                                    
     cost of  producing your  own oil  and treat  it. That's                                                                    
     generally where  Anadarko is looking.  We tend  to look                                                                    
     for larger  fields, an  anchor field.  They tend  to be                                                                    
     further from infrastructure and  they tend to be higher                                                                    
     risk, but also higher reward.                                                                                              
     We see Alaska as  a favorable political environment. We                                                                    
     do  business around  the  world and  I  would say  that                                                                    
     despite  the  fact that  we  are  going through  a  tax                                                                    
     change  that has  some implications  for us,  generally                                                                    
     speaking   this   is   a   very   favorable   political                                                                    
     environment. We've had very good  reception on a lot of                                                                    
     issues  for  exploration  interests.  We're  trying  to                                                                    
     increase  the  tundra travel  seasons  to  try and  get                                                                    
     regulations reduced  to improve  our ability to  go out                                                                    
     and do our work. So,  generally speaking we see this as                                                                    
     a favorable political environment.                                                                                         
     As  I talked  about earlier,  we see  the abundant  new                                                                    
     entrants  as partnering  opportunities  here in  Alaska                                                                    
     and we see that as a good thing.                                                                                           
He said  that Alaska  is very  under-explored and  everyone would                                                               
benefit from more  wells getting drilled, no  matter what company                                                               
does  it, because  the new  information would  either confirm  or                                                               
condemn assumptions.  New companies coming  to Alaska all  have a                                                               
slightly different  idea and that  benefits the state as  well as                                                               
the industry.                                                                                                                   
1:44:48 PM                                                                                                                    
CHAIR WAGONER asked when Totale drilled its exploration well.                                                                   
MR. HANLEY replied it drilled a well three years ago.                                                                           
CHAIR  WAGONER  said he  thought  that  work  fell under  SB  185                                                               
[exploration incentive legislation from the 23 Legislature].                                                                    
MR.  HANLEY replied  that it  did.  He continued  on saying  that                                                               
Alaska  has other  challenges,  such as  the fact  that  it is  a                                                               
maturing  basin and  that it  has  high costs  relative to  other                                                               
places  and   a  lack  of  infrastructure   and  competition  for                                                               
facilities. He also  emphasized that from first  thought to first                                                               
production  takes longer  in Alaska  than anywhere  else Anadarko                                                               
does business  around the world  - largely because of  the winter                                                               
season. In other places, three wells  can be drilled in one year,                                                               
but it would  take three years for them to  drill the same number                                                               
of  wells  in Alaska.  However,  he  added that  lengthening  the                                                               
tundra travel  season has  mitigated that  somewhat, but  some of                                                               
the  issue was  still if  you're  farther from  the market,  it's                                                               
going to  cost you  more. This  long lead-time  has an  impact on                                                               
what this bill does. You can  count on the credits for recovering                                                               
some of  your money faster,  which helps your net  present value,                                                               
or you can talk about reducing your costs.                                                                                      
The last  challenge he wanted  to mention was  the lack of  a gas                                                               
market. Anadarko  supports getting  a gas  line built  because it                                                               
would  improve both  gas  and oil  exploration  because when  you                                                               
drill for oil,  a lot of times  you find gas. So  having a market                                                               
for that  gas instead of it  being just a cost  now would improve                                                               
the economics for oil.                                                                                                          
1:47:27 PM                                                                                                                    
MR. HANLEY  said he felt  the Governor  did a good  job balancing                                                               
the issues and priorities of both  the state and the companies in                                                               
the PPT. Under  this system, the state would pick  up more money,                                                               
and even though Anadarko would  pay more, most of its exploration                                                               
economics are improved.                                                                                                         
MR. HANLEY further summarized:                                                                                                  
     So, that  means everything  else being equal,  we might                                                                    
     be  able to  drill more  wells. So,  that's a  positive                                                                    
     thing for  us. That could  create more revenue  for the                                                                    
     state, as well.                                                                                                            
     That balanced  with the  fact that  at low  oil prices,                                                                    
     the  state is  actually going  to pick  up some  of the                                                                    
     risk.  It  will,   as  you've  seen  in   some  of  the                                                                    
     presentations   before,  at   lower  oil   prices,  the                                                                    
     companies will pay less than  they do under the current                                                                    
     system. So, balancing  off the fact that  we are paying                                                                    
     more  with the  fact  that  exploration economics  have                                                                    
     improved  and we  have some  downside risk  protection,                                                                    
     we've given  up the  upside, essentially, is  what it's                                                                    
     done. We think this is a good balance.                                                                                     
MR.  HANLEY  stated another  important  factor  that most  people                                                               
don't recognize  is that the  big oil  companies are not  one big                                                               
monolith. He  described their relationship  as a  "tenuous truce"                                                               
and that while  they all support lower taxes as  a way to improve                                                               
their exploration  economics, there  are differences  between the                                                               
companies. Some  big companies  have said the  tax rate  is quite                                                               
tilted towards  the small guys,  but some of the  smaller players                                                               
have  a little  overactive  imagination and  were concerned  that                                                               
this bill was negotiated by the  big three oil companies who were                                                               
looking out  for their own  interests. Sometimes  those interests                                                               
are aligned with Anadarko's, but many times they are not.                                                                       
He  said he  had modeled  generic small  and medium-sized  fields                                                               
very  much like  Dr. Van  Meurs' presentations,  but he  came out                                                               
with different numbers, especially  regarding his chart, 11.6. He                                                               
used this to illustrate his point  that they need to get together                                                               
on the  same page regarding  assumptions and how the  models were                                                               
put together.                                                                                                                   
1:51:46 PM                                                                                                                    
MR. HANLEY  showed the committee  his models of the  bill's 20/20                                                               
proposal for an  existing producer and a new entrant  and a 20/25                                                               
for  an  existing  producer.  He   explained  that  Anadarko,  an                                                               
existing producer,  already has  income at  its Alpine  field and                                                               
would benefit  from the  $73 million  allowance and  the proposed                                                               
system looked worse  for an existing player at 20  and 25 percent                                                               
than the current system. Anchor  field-type prospects had a small                                                               
improvement with  a larger tax rate  and at real high  prices, no                                                               
one would be better off than with the existing system.                                                                          
1:57:08 PM                                                                                                                    
MR.  HANLEY'S  main  point,  however,   was  that  Anadarko  sees                                                               
increased  economic opportunity  for exploration  and development                                                               
projects under the  current bill. But as the tax  rate is raised,                                                               
if  that is  all that's  done,  the economics  are decreased  and                                                               
could actually  be less  beneficial than  the current  system for                                                               
small fields and it would make a large field less valuable.                                                                     
MR. HANLEY  said he  had heard on  the "look-back"  that Anadarko                                                               
made  investment decisions  at low  prices and  prices have  been                                                               
high  and they  have  been  able to  capture  some  of the  value                                                               
because of that.  However, he countered that  Anadarko hadn't had                                                               
production, yet, on developments that  were made under that other                                                               
1:59:11 PM                                                                                                                    
SENATOR ELTON said he could  make the argument that the look-back                                                               
goes too far back and that it  should go back only to when prices                                                               
went up.                                                                                                                        
MR.  HANLEY replied  that that  was the  state's policy  call and                                                               
that  some people  had not  recovered  at all  on those  previous                                                               
decisions. He stated the price  is important and when the markets                                                               
fell last time, it had a  big impact and companies are now paying                                                               
down on debt to get ready for the next downswing.                                                                               
He  said the  $73  million  look-back is  very  important to  the                                                               
smaller producers  and Anadarko, particularly, where  it could be                                                               
used  immediately against  Alpine.  It would  help the  explorers                                                               
that  don't have  production, and  even  though it  might take  a                                                               
company  three  to  five  years before  it  finds  something,  it                                                               
wouldn't cost  the state a  dime during that time.  The allowance                                                               
can  only  be  used  against  production  and  can't  be  carried                                                               
2:07:31 PM                                                                                                                    
He  said that  the ability  to transfer  the credits  was a  good                                                               
concept,  but the  company  that buys  them at  90  cents to  the                                                               
dollar benefits - while the state  still loses the dollar and the                                                               
company it wants  to benefit loses the 10 cents.   He thought the                                                               
idea of  a refundable credit  was appropriate because  that would                                                               
cut out a  middleman and wouldn't cost the state  any more money.                                                               
He also suggested expanding the use  of the credits to be applied                                                               
against,  for instance,  corporate taxes  or bidding  at a  lease                                                               
2:11:50 PM                                                                                                                    
He  summarized  that raising  the  tax  rate  could cut  back  on                                                               
exploration and companies would have  to find larger fields to be                                                               
economic enough  to develop. Dr.  Van Meurs' chart  showed better                                                               
numbers for a  small field case than Anadarko's  and he suggested                                                               
that everyone should start with  the same assumptions and numbers                                                               
for accuracy of comparison. He  also advised that the state would                                                               
get more revenue with credits than taxes.                                                                                       
2:15:36 PM                                                                                                                    
SENATOR  BEN STEVENS  commented  that he  didn't  think the  five                                                               
largest  producers  would  share  their  internal  modeling  with                                                               
competitors or the state.                                                                                                       
MR. HANLEY  suggested using a  public model that  wasn't specific                                                               
to any one  company. His concern was that they  were so far apart                                                               
right now on the baseline that it was problematic.                                                                              
SENATOR BEN STEVENS asked him  to rank the bill's four mechanisms                                                               
- the  rate, the credit, the  floor and the transition  period in                                                               
terms of their impact on his company.                                                                                           
MR. HANLEY  replied that he would  try to do that,  but right off                                                               
he could  say that hammering  existing production with a  big tax                                                               
increase  to improve  exploration  economics  was a  double-edged                                                               
situation for Anadarko, because it  does both. The $73 million is                                                               
quite  important,  because  it's  worth  a  5  percent  tax  rate                                                               
decrease. He  thought their exploration  economics would  go down                                                               
with a  25/25 ratio and  that more  credits would be  required to                                                               
make up for the same tax increase.                                                                                              
2:19:37 PM                                                                                                                    
SENATOR STEDMAN  returned to  the net  present value  slide where                                                               
the lines  cross at  about $32  and asked if  they should  try to                                                               
make the lines more horizontal.                                                                                                 
MR. HANLEY responded  that that chart was showing  that below the                                                               
$32 wellhead  value, at a  25/20, their prospects  looked better,                                                               
because the state would be picking up more risk.                                                                                
SENATOR STEDMAN said he thought  the crossover point needed to be                                                               
established as a matter of policy.                                                                                              
2:28:33 PM                                                                                                                    
SENATOR THERRIAULT  said the state  had made  positive regulatory                                                               
changes, expanded the  winter season and now the price  was up on                                                               
the  commodity   and  yet  lawmakers  keep   hearing  from  other                                                               
companies  that the  state is  barely attractive  on a  worldwide                                                               
basis. He  remarked that Anadarko  was here before  those changes                                                               
were put  in place and it  continues to pick up  acreage and says                                                               
Alaska has a  politically favorable environment and  asked him to                                                               
comment on its view compared to other companies'.                                                                               
MR.  HANLEY replied  that Anadarko  thinks  Alaska has  a lot  of                                                               
resource potential. However,  it has a lot of  prospects that are                                                               
uneconomic  and something  has  to  be done  to  help those.  For                                                               
instance  a 150  MB  field,  if it  is  100  miles from  existing                                                               
facilities, is  probably not  economic -  the same  for a  500 MB                                                               
field. He thought the rising  price helped and new companies were                                                               
coming to  the state. He  said that  every company has  its niche                                                               
and different  parts of the  proposal would affect some  of those                                                               
prospects more  favorably than others.  Every company also  has a                                                               
basic philosophy about  the minimum size field it will  look at -                                                               
everything else being  equal. Some of the  larger companies would                                                               
say, "If we don't have a  billion barrels of recoverable oil in a                                                               
prospect, if  we don't think  it's in that magnitude,  then we're                                                               
not going  to focus  on it."  The size  of the  company sometimes                                                               
drives what they  are looking for and he thought  Alaska needed a                                                               
mix of companies.                                                                                                               
2:37:43 PM                                                                                                                    
SENATOR  THERRIAULT asked  him to  comment  on the  drive of  the                                                               
companies   to   replace   reserves  either   through   increased                                                               
exploration or just purchasing other companies.                                                                                 
MR. HANLEY  responded that  Anadarko has the  need to  book those                                                               
reserves  and  different  companies had  different  requirements.                                                               
They all need  to book the reserves, but Anadarko  tends to drill                                                               
more for them.                                                                                                                  
2:39:00 PM                                                                                                                    
SENATOR THERRIAULT asked  him to comment on his  level of concern                                                               
with the terms that aren't defined in SB 305.                                                                                   
MR. HANLEY replied that the details needed to be worked over.                                                                   
2:42:05 PM                                                                                                                    
SENATOR BEN STEVENS stated that for  the amount of money that has                                                               
been spent  on running different  scenarios by  business analysts                                                               
and consultants they  could have funded a  Hollywood movie called                                                               
"Dueling Economists"  and the scenarios,  while useful,  were all                                                               
"what if" scenarios.  He exhorted that legislators  must get back                                                               
to the  objective of the  bill, which  was to maintain  a healthy                                                               
oil industry for  the next 25 years or they  would waste millions                                                               
more. This  bill reaches that  objective of having  something for                                                               
all companies.                                                                                                                  
CHAIR  WAGONER  said  this  was the  last  of  the  stakeholders'                                                               
presentations  and  thanked  everyone   for  their  comments.  He                                                               
adjourned the meeting at 2:45:47 PM.                                                                                          

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