Legislature(2011 - 2012)BUTROVICH 205

03/30/2011 03:30 PM RESOURCES


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

Document Name Date/Time Subjects
SB 85_AVCG Thompson Testimony 033011 FINAL.pdf SRES 3/30/2011 3:30:00 PM
SB 85
SB 85_Armstrong Testimony.pdf SRES 3/30/2011 3:30:00 PM
SB 85