Legislature(2011 - 2012)BUTROVICH 205

02/10/2012 03:30 PM RESOURCES


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03:34:06 PM Start
03:35:45 PM SB192
05:02:49 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ SB 192 OIL AND GAS PRODUCTION TAX RATES TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Bills Previously Heard/Scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                       February 10, 2012                                                                                        
                           3:35 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Joe Paskvan, Co-Chair                                                                                                   
Senator Thomas Wagoner, Co-Chair                                                                                                
Senator Bill Wielechowski, Vice Chair                                                                                           
Senator Bert Stedman                                                                                                            
Senator Lesil McGuire                                                                                                           
Senator Hollis French                                                                                                           
Senator Gary Stevens                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Cathy Giessel                                                                                                           
Senator Joe Thomas                                                                                                              
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 192                                                                                                             
"An Act relating to the oil and gas production tax; and                                                                         
providing for an effective date."                                                                                               
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 192                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX RATES                                                                                   
SPONSOR(s): RESOURCES                                                                                                           
                                                                                                                                
02/08/12       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/08/12       (S)       RES, FIN                                                                                               
02/10/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
JEFF STEPP, Staff                                                                                                               
Senator Joe Paskvan                                                                                                             
Aide, Senate Resources Standing Committee                                                                                       
Alaska State Legislature                                                                                                        
Juneau, AK                                                                                                                      
POSITION  STATEMENT: Introduced  SB  192 as  aide  to the  Senate                                                             
Resources Standing Committee.                                                                                                   
                                                                                                                                
BRYAN BUTCHER, Commissioner                                                                                                     
Department of Revenue (DOR)                                                                                                     
Anchorage, AK                                                                                                                   
POSITION STATEMENT: Commented on SB 192.                                                                                      
                                                                                                                                
BRUCE TANGEMAN, Deputy Commissioner                                                                                             
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, AK                                                                                                                   
POSITION STATEMENT: Commented on SB 192.                                                                                      
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:34:06 PM                                                                                                                    
CO-CHAIR  JOE  PASKVAN  called   the  Senate  Resources  Standing                                                             
Committee meeting  to order at 3:34  p.m. Present at the  call to                                                               
order Senators  Wielechowski, McGuire, French,  Stevens, Co-Chair                                                               
Wagoner and Co-Chair Paskvan.                                                                                                   
                                                                                                                                
            SB 192-OIL AND GAS PRODUCTION TAX RATES                                                                         
                                                                                                                                
3:35:45 PM                                                                                                                    
CO-CHAIR PASKVAN announced SB 192  to be up for consideration and                                                               
presented the hearing  agenda. He said that SB  192 will initiate                                                               
a  discussion  about the  progressive  feature  of the  ACES  tax                                                               
system. The  bill's sponsor  and the  oil industry,  itself, have                                                               
advanced the argument  that the upside is taken away  at high oil                                                               
prices  because  of  progressivity.  SB  192  is  a  vehicle  for                                                               
engaging in that discussion. His  aide, Jeff Stepp, would explain                                                               
the  bill today.  The department  had not  been asked  to comment                                                               
today, but they  would have the opportunity to do  so in the very                                                               
near future.                                                                                                                    
                                                                                                                                
3:36:58 PM                                                                                                                    
CO-CHAIR  WAGONER moved  to bring  SB  192, version  27-LS1305\M,                                                               
before the committee. There were  no objections and version M was                                                               
before the committee.                                                                                                           
                                                                                                                                
3:37:49 PM                                                                                                                    
JEFF  STEPP, staff  to Senator  Paskvan  and Aide  to the  Senate                                                               
Resources Standing Committee, presented  SB 192 to the committee.                                                               
He said  the current production  tax structure known  as Alaska's                                                               
Clear and Equitable  System (ACES) requires companies  to pay tax                                                               
upon  "the production  tax value"  generally only  when they  are                                                               
making  profits from  oil and  gas  production in  the state.  In                                                               
addition, tax credits are provided  for capital expenditures with                                                               
higher  credits available  for certain  oil  and gas  exploration                                                               
investments.  The  progressive feature  in  ACES  means that  the                                                               
state, as  the resource  owner and  tax collector,  receives more                                                               
production  tax revenue  when  oil prices  are  high relative  to                                                               
underlying costs; similarly it  significantly lessens the state's                                                               
share of revenue  when per barrel margins decline due  to low oil                                                               
prices.                                                                                                                         
                                                                                                                                
It  has been  the  persistently  high price  of  crude since  the                                                               
passage  of  ACES which  creates  the  potential for  the  upside                                                               
potential  being taken  away at  very high  oil prices.  When the                                                               
request for SB  192 was made, the directions to  the bill drafter                                                               
were  simple:  please  draft  a  new bill  that  allows  for  one                                                               
continuous progressivity rate under ACES.  That is to say, change                                                               
the two steps so that there is  one .4 percent rate above $30 PTV                                                               
(eliminate $92.50 ARM  and remove the statutory  maximum tax rate                                                               
of 75 percent).                                                                                                                 
                                                                                                                                
3:39:30 PM                                                                                                                    
SENATOR STEDMAN joined the committee.                                                                                           
                                                                                                                                
MR. STEPP said  SB 192 was analyzed by the  Department of Revenue                                                               
in the  fiscal note  and was  described by  them such  that their                                                               
language was  incorporated directly  into the  sponsor statement.                                                               
It says:                                                                                                                        
                                                                                                                                
     SB  192 makes  a  change to  the  progressive tax  rate                                                                    
     portion  of the  production tax  in AS  43.55.011(g) by                                                                    
     removing  the second  trigger  of  the progressive  tax                                                                    
     rate calculation  that lowers the progressive  tax rate                                                                    
     to .1  percent on  production tax  values of  $92.50 or                                                                    
     greater. The  bill also  removes the  statutory maximum                                                                    
     tax  rate  of  75  percent  under  the  production  tax                                                                    
     statutes. The  bill retains the initial  trigger of $30                                                                    
     in production tax value at  which point the progressive                                                                    
     tax  rate  is  calculated  as  .4  percent  per  dollar                                                                    
     increase in production tax value.                                                                                          
                                                                                                                                
MR.  STEPP remarked  that he  was still  reading from  the fiscal                                                               
note  that said  given 2011  DOR oil  price production  and lease                                                               
expenditure  forecast through  FY2018 (incorrectly  referenced in                                                               
the fiscal  note as FY2017), the  tax rate changes from  the bill                                                               
are not projected to have a  direct revenue impact. The fall 2011                                                               
forecast  through the  time  period covered  by  the fiscal  note                                                               
ranges from  $106 barrel  to close  to $110  barrel of  ANS crude                                                               
oil.  Combined  with  anticipated  production  levels  and  lease                                                               
expenditure   projects,   DOR's   forecast   doesn't   anticipate                                                               
production  tax values  meeting or  exceeding $92.50  of PTV  per                                                               
barrel.  Therefore,  based  on DOR's  most  recent  forecast  the                                                               
progressivity  rate changes  in SB  192 will  not impact  revenue                                                               
expectations.                                                                                                                   
                                                                                                                                
MR. STEPP  continued reading  from the fiscal  note that  said if                                                               
oil prices  were to  increase or if  production were  to increase                                                               
with no corresponding increase  in lease expenditures, production                                                               
tax  rates and  therefore revenue  could be  increased from  this                                                               
bill.                                                                                                                           
                                                                                                                                
3:42:08 PM                                                                                                                    
With current  production levels and  current transport  costs and                                                               
lease expenditure levels, much of  North Slope crude oil would be                                                               
subject to  a production  tax increase  under SB  192 at  $120 to                                                               
$130 per barrel and above.  Without a maximum production tax rate                                                               
as is advanced  currently in this bill, tax  rates could continue                                                               
to escalate  until they exceed  100 percent.  Marginal government                                                               
take  exceeds  100  percent at  approximately  $140  barrel  when                                                               
holding all  other assumption constant.  This means that  at $140                                                               
barrel, the government would take  more than 100 percent of every                                                               
dollar  that the  oil price  increases. That  is the  end of  the                                                               
fiscal note.                                                                                                                    
                                                                                                                                
In   conclusion,  Mr.   Stepp  said,   while  some   assume  this                                                               
legislation  would result  in  a tax  increase  on the  industry,                                                               
DOR's  fiscal note  seems to  assert  "based on  our most  recent                                                               
forecast progressivity rate changes in  this bill will not impact                                                               
revenue expectations." The fiscal note  says quite clearly on the                                                               
front  page that  through  FY18  SB 192  would  not increase  the                                                               
amount of revenue paid by the  industry or collected by the state                                                               
by one single penny.                                                                                                            
                                                                                                                                
3:43:16 PM                                                                                                                    
He said that  in the final paragraph of the  fiscal note analysis                                                               
scenarios were presented in which  progressivity rates may become                                                               
a burden  to industry,  but said  it was  important to  note that                                                               
this scenario was not part of  DOR's projections. The risk to the                                                               
industry  then  appears  to  be  low. Still  that  risk  will  be                                                               
addressed by  this committee in forthcoming  discussions about SB                                                               
192.                                                                                                                            
                                                                                                                                
MR. STEPP said SB 192 has an effective date of January 1, 2013.                                                                 
                                                                                                                                
3:43:53 PM                                                                                                                    
COMMISSIONER BRYAN  BUTCHER, Department  of Revenue  (DOR), State                                                               
of Alaska,  said he had  been asked to lay  out what they  see as                                                               
the problem  and he appreciated  the opportunity. Facts  to begin                                                               
the  conversation include:  oil prices  are climbing  to all-time                                                               
highs (starting  in mid-2000), the TAPS  throughput has continued                                                               
its  steady decline,  other oil  producing  regions are  enjoying                                                               
production and employment booms  (the reasons are fairly obvious;                                                               
extra developments  have become  economic with higher  oil prices                                                               
and  technological improvements)  and competition  is high  (many                                                               
areas to invest around the world).                                                                                              
                                                                                                                                
3:46:13 PM                                                                                                                    
He said  that folks have  wondered if we  are running out  of oil                                                               
and  according  to the  Alaska  Department  of Natural  Resources                                                               
(DNR)  and  the U.S.  Geological  Service,  it's not  a  resource                                                               
issue.  We're  still  a   very  resource-rich  state.  Cumulative                                                               
production from  the North  Slope through 2010  has been  over 16                                                               
billion  barrels and  it's estimated  that there  are 40  billion                                                               
barrels of  conventional oil still  there. There is  estimated to                                                               
be 200-300 trillion cubic feet  (tcf) of conventional natural gas                                                               
and tens of billions of barrels  of heavy and viscous oil as well                                                               
as  large shale  oil  and gas  plays. The  heavy  and shale  oil,                                                               
although they are known to  exist, are more speculative and there                                                               
are questions about  when they will be economic and  what will be                                                               
needed  to  make them  economic  (things  that  DNR and  DOR  are                                                               
currently working on).                                                                                                          
                                                                                                                                
CO-CHAIR  PASKVAN  noted  that  Senator Joe  Thomas  was  in  the                                                               
audience.                                                                                                                       
                                                                                                                                
COMMISSIONER  BUTCHER said  according to  the federal  government                                                               
the North  Slope is  not even  considered to  be a  mature basin,                                                               
with  over 70  percent of  state land  up there  being "minimally                                                               
explored."                                                                                                                      
                                                                                                                                
Other important points  to consider he said where  that the state                                                               
has never  been in this  position before Prudhoe Bay  and Kuparuk                                                               
was  the largest  untapped oil  reservoir when  it first  started                                                               
producing in North America over 30  years ago. Over 90 percent of                                                               
what was  being produced  was oil  mixed in  with some  water and                                                               
gas; that has  now completely flipped to over  90 percent natural                                                               
gas  and water  with less  than 10  percent oil.  There is  still                                                               
plenty  of  oil to  be  produced  but  not  nearly as  easily  or                                                               
inexpensively as when it first started.                                                                                         
                                                                                                                                
COMMISSIONER BUTCHER  said the state  has a lot  more information                                                               
on  the  PPT/ACES  issues  in  terms  of  operating  and  capital                                                               
expenses than  it had  when those debates  were taking  place and                                                               
hopefully the added information would  play a valuable role going                                                               
forward.                                                                                                                        
                                                                                                                                
He noted  that members  should have copies  of "Alaska's  Oil and                                                               
Gas  Fiscal Regime"  prepared  by  the DOR  that  tried to  bring                                                               
together a  comparison of oil producing  regions' fiscal regimes.                                                               
It  was not  an  easy task  with all  of  the variations  between                                                               
different types of taxes, royalties  and tax credits, but the one                                                               
thing they  do know  is that Alaska  continues to  decline faster                                                               
than the department had forecasted.                                                                                             
                                                                                                                                
3:50:47 PM                                                                                                                    
Slide 5  showed the largest  oil producing jurisdiction  in North                                                               
America with a price bouncing between  $10 and $30 from the 1970s                                                               
through the 1990s,  then spiking up in 2004 and  2005 and peaking                                                               
in 2008 and  having a precipitous drop and then  building back up                                                               
again.  North Dakota  looked  fairly constant  but  has begun  to                                                               
increase  and  will probably  pass  Alaska  in production  in  12                                                               
months.  Alberta  bounced  around  with  periodic  increases  and                                                               
decreases over  the decades, but  the production curve  has moved                                                               
upward at a  higher angle since 2005 when  more production became                                                               
economic. Most  interesting were the lines  indicating Alaska and                                                               
Texas  that  were  dealing  with  same  decline  curve,  but  the                                                               
difference became when Texas figured out  a way to turn the curve                                                               
around (and Alaska didn't).                                                                                                     
                                                                                                                                
SENATOR FRENCH said last time they  were together he had asked if                                                               
the new  production in Texas  was from conventional oil  or shale                                                               
and the commissioner had indicated  it was from conventional oil.                                                               
Senator French said  he had asked for some  "source documents" on                                                               
that and asked if he had those yet.                                                                                             
                                                                                                                                
COMMISSIONER BUTCHER  answered no,  but he  would get  those from                                                               
his office  today, but he  had a chart now  that was part  of the                                                               
response. It  shows the Eagle Ford  Shale is where almost  all of                                                               
the oil  shale in Texas had  been coming from and  up until 2009,                                                               
production  had been  anywhere  from 787,000  barrels  a year  to                                                               
308,000  barrels  a   year;  in  2010,  the  last   year  he  had                                                               
information on, it  got up to 4.3 million barrels  for the entire                                                               
year. In January  through November of 2011, not on  the chart, it                                                               
jumped up  to 21.8 million barrels.  That is expected to  go much                                                               
higher in 2012, possibly as high as 300,000 barrels a day extra.                                                                
                                                                                                                                
So,  when  he  talked  to  the  Texas  Railroad  Commission,  the                                                               
equivalent  of the  Alaska Oil  and  Gas Conservation  Commission                                                               
(AOGCC) in  Alaska, and enquired if  the curve up had  to do with                                                               
shale oil,  the executive director's explanation  was "Absolutely                                                               
not." This was all conventional  oil that became more economic at                                                               
high oil prices that flattened curve  out and crept it up. And he                                                               
said to  watch 2011, 2012 and  2013 when it would  really move up                                                               
and it would be due primarily to shale oil.                                                                                     
                                                                                                                                
3:55:07 PM                                                                                                                    
SENATOR WIELECHOWSKI  said Texas  has a reserves  tax on  the oil                                                               
that is  in the  ground and  that when the  price of  oil becomes                                                               
very high, then the oil companies want  to get the oil out of the                                                               
ground  as quickly  as possible.  Did he  know the  percentage of                                                               
that oil or if it has any impact on what is happening in Texas?                                                                 
                                                                                                                                
COMMISSIONER BUTCHER replied no.                                                                                                
                                                                                                                                
3:55:43 PM                                                                                                                    
BRUCE TANGEMAN, Deputy Commissioner,  Tax Division, Department of                                                               
Revenue (DOR), said that issue  will be part of their comparisons                                                               
to other oil producing areas that  is coming up. The reserves tax                                                               
is one that Alaska doesn't have that other regions do.                                                                          
                                                                                                                                
SENATOR STEDMAN asked  if Texas has similar barriers  to entry as                                                               
Alaska does.  Are they  land locked  with ice?  Do they  have one                                                               
pipeline to  get it  out? Do they  have basically  one subsurface                                                               
owner? So everything  else is equal expect for  our tax structure                                                               
or is this a more complex question?                                                                                             
                                                                                                                                
COMMISSIONER  BUTCHER replied  that Alaska  is more  complex than                                                               
just  taxes. Obviously  labor  is  easier to  get  and Texas  has                                                               
mostly private  land without the  extra permitting; but  with the                                                               
exception of the  new shale play, Texas doesn't have  the size of                                                               
reservoirs that Alaska has.  And it  costs a lot more money to do                                                               
business up  on the North Slope  in Alaska than it  does in Texas                                                               
or Alberta or North Dakota and that  has to be factored in to the                                                               
equation  when  a  company  looks  at  where  it's  going  to  do                                                               
business.                                                                                                                       
                                                                                                                                
MR. TANGEMAN said  in slide 6 they  can look back now  on how the                                                               
change from gross to net tax  affects the state, and 2008 capital                                                               
planning by the private sector  would have probably been in place                                                               
when that change took place.                                                                                                    
                                                                                                                                
3:59:11 PM                                                                                                                    
CO-CHAIR PASKVAN  said he  was looking at  the fall  2011 Revenue                                                               
Sources  Book on  page 31  that shows  CAPEX at  $2.3 billion  in                                                               
FY11, $2.7 billion in FY12 and  $3.0 billion in FY13 - indicating                                                               
that CAPEX is a progressing expenditure.                                                                                        
                                                                                                                                
MR. TANGEMAN  said that was  correct, but numbers in  the Revenue                                                               
Sources Book  are a forecast; numbers  on slide 6 are  the actual                                                               
numbers  and  another  slide comparing  the  forecast  to  actual                                                               
spending  would show  that the  department has  been historically                                                               
overly optimistic (similar to the production curve).                                                                            
                                                                                                                                
SENATOR STEDMAN said  it would be helpful to have  the actual and                                                               
the projected  numbers for  the years beyond  FY13. He  said they                                                               
are  expecting  a  CAPEX  of  $3,356,000 in  FY  13  and  he  was                                                               
preparing the  state to pay credits  on those and wanted  to make                                                               
sure the numbers sync-up.                                                                                                       
                                                                                                                                
MR.  TANGEMAN pointed  to FY12  in the  Revenue Sources  Book and                                                               
said CAPEX is  13 percent below last  year's actual expenditures.                                                               
He  said they  are missing  that $2.7  billion forecast  severely                                                               
right  now and  stated that  they had  only been  in the  net tax                                                               
system  for four  or  five  years and  they  are  obviously on  a                                                               
learning curve.                                                                                                                 
                                                                                                                                
4:03:11 PM                                                                                                                    
COMMISSIONER BUTCHER added that this  monthly picture was more of                                                               
a snap shot  for the benefit of the committee.  It's more insight                                                               
than definitive information.                                                                                                    
                                                                                                                                
4:03:50 PM                                                                                                                    
SENATOR STEDMAN asked if they  could have the graph restated with                                                               
the additional  data in  the Source  Book along  with projections                                                               
that aren't in the Source  Book and some analysis on expectations                                                               
versus  reality,  because  there  is a  huge  difference  in  the                                                               
numbers.                                                                                                                        
                                                                                                                                
COMMISSIONER BUTCHER responded they would be happy to do that.                                                                  
                                                                                                                                
SENATOR FRENCH said  he understood that the  Revenue Sources Book                                                               
figures come from industry. So it  looks like we'll get back to a                                                               
healthy  CAPEX and  a decrease  in  OPEX -  although it's  always                                                               
possible that something could change.                                                                                           
                                                                                                                                
COMMISSIONER  BUTCHER said  that could  very well  happen and  he                                                               
hoped it  would. The  point he  was trying to  make is  that they                                                               
receive most  of their production  forecasting from  operators as                                                               
well and it always tends  to be overly optimistic. Companies look                                                               
forward to  production and  spend levels  that aren't  decided by                                                               
their boards of directors, yet,  and historically the information                                                               
the  state gets  tends to  be on  the optimistic  side. The  same                                                               
thing  happens  when  they  are  trying  to  project  what  their                                                               
spending  will  be, because  these  are  operators working  at  a                                                               
particular place  that are  looking forward to  what is  going on                                                               
and  don't have  a  direct  role in  the  decision-making of  the                                                               
company on a corporate level.                                                                                                   
                                                                                                                                
SENATOR WIELECHOWSKI asked to see the  data going back to 2000 if                                                               
possible. Did he know what the CAPEX was from 2000 to 2006?                                                                     
                                                                                                                                
MR. TANGEMAN replied  going back to the gross tax  days, they did                                                               
not receive the same information they are receiving now.                                                                        
                                                                                                                                
SENATOR WIELECHOWSKI  said he  had seen  older charts  with CAPEX                                                               
and recalled  that they showed  a drop of  about 40 percent  at a                                                               
time when  we were hitting  all time  record highs under  the old                                                               
tax system  and he thought  it would be important  information to                                                               
see.                                                                                                                            
                                                                                                                                
4:06:57 PM                                                                                                                    
SENATOR  WIELECHOWSKI   asked  what   kind  of   information  the                                                               
department  asks   the  companies  to  provide   for  making  its                                                               
forecasts. Do they have to say  which fields they are planning on                                                               
producing? How much in each  particular field? Is there a penalty                                                               
for not giving accurate information for the forecasts?                                                                          
                                                                                                                                
COMMISSIONER BUTCHER  replied that  they work with  every company                                                               
that is producing and every operator,  not just on a well to well                                                               
level, but  on a field-wide  level to gather as  much information                                                               
as possible. They  also work with DNR and the  Alaska Oil and Gas                                                               
Conservation   Commission  (AOGCC)   to   make   sure  that   the                                                               
information  they  are  getting  is actually  going  through  the                                                               
permitting necessary  to get there  (things they can  check out).                                                               
He didn't  know of penalties,  but would be surprised  because it                                                               
is such a speculative issue.                                                                                                    
                                                                                                                                
MR. TANGEMAN said as soon as  you attach a penalty would see very                                                               
low  CAPEX estimates,  because they  would want  to come  in over                                                               
consistently. The  goal is to  get the most  accurate information                                                               
possible  and that  comes through  a give  and take  process with                                                               
their partners.                                                                                                                 
                                                                                                                                
SENATOR WIELECHOWSKI  said he agreed  that it's important  to get                                                               
accurate information to manage the  resource. He said it would be                                                               
helpful  for the  state  to try  to determine  the  cause of  the                                                               
decrease in CAPEX, because if it  was because of a delayed permit                                                               
it could be addressed. If a  company said they aren't spending on                                                               
a particular field  because it's no longer  profitable under ACES                                                               
that  would  also be  helpful  to  know.  He  said he  has  asked                                                               
information for some time about  which fields or projects are not                                                               
being developed  because of  the oil  tax structure  versus other                                                               
impediments, but hadn't had a response.                                                                                         
                                                                                                                                
4:10:08 PM                                                                                                                    
MR. TANGEMAN said  DNR is changing how it  handles permitting and                                                               
some of its  leases and that would probably be  a presentation on                                                               
its own. When  Senator Stedman mentioned CAPEX in  FY12 and FY13,                                                               
the  projections that  are new  to the  state are  the explorers.                                                               
They do not have a tax  liability and they are not producing yet.                                                               
But they have all heard the  great enthusiasm with which they are                                                               
exploring and  taking advantage of the  incredibly generous suite                                                               
of  tax credits  Alaska has.  The department  is not  forecasting                                                               
production from  those speculative plays  yet and is  just taking                                                               
CAPEX into account.                                                                                                             
                                                                                                                                
For instance,  the first  Great Bear  presentation last  year was                                                               
very  optimistic with  200  wells and  hundreds  of thousands  of                                                               
barrels  flowing within  the next  couple of  years, but  as they                                                               
learned how the  state and process works and that  the shale play                                                               
is brand  new, they had revised  their plan down to  kick off six                                                               
wells this winter.                                                                                                              
                                                                                                                                
4:13:03 PM                                                                                                                    
CO-CHAIR PASKVAN asked if he  agreed that companies' CAPEX aren't                                                               
influenced necessarily by  tax policy but rather  by national and                                                               
international conditions and corporate philosophy.                                                                              
                                                                                                                                
COMMISSIONER BUTCHER  answered yes; it's  a number of  things and                                                               
every company works with different dynamics.                                                                                    
                                                                                                                                
MR. TANGEMAN added  he has heard that some folks  believe the tax                                                               
regime  contributes  very  little  to  CAPEX  decisions,  but  he                                                               
thought it did.                                                                                                                 
                                                                                                                                
SENATOR WIELECHOWSKI said Prudhoe Bay  is somewhat unique in that                                                               
it has the Prudhoe Bay Operating  Unit Agreement and he asked how                                                               
that  impacts investment  decisions. Are  there similar  types of                                                               
agreements for Kuparuk or any of the larger fields?                                                                             
                                                                                                                                
COMMISSIONER  BUTCHER  said  that  would be  a  more  appropriate                                                               
conversation to have with DNR.                                                                                                  
                                                                                                                                
SENATOR  WIELECHOWSKI said  his basic  understanding is  that the                                                               
Prudhoe Bay Agreement requires agreement  by all three producers:                                                               
BP, ConocoPhillips and  Exxon. So one essentially  has veto power                                                               
over the other two.                                                                                                             
                                                                                                                                
4:15:48 PM                                                                                                                    
MR. TANGEMAN  also deferred that  answer to DNR. He  continued to                                                               
slide 8 that  showed the forecast versus actual  numbers noting a                                                               
mistake: you  need to move the  fiscal years to the  right or all                                                               
the colored  lines to the  left. He  emphasized that the  net tax                                                               
system is still  a new process for the state  in general, but the                                                               
forecasts have consistently been optimistic.                                                                                    
                                                                                                                                
4:17:25 PM                                                                                                                    
CO-CHAIR PASKVAN  asked if he  believed it  was a mistake  in the                                                               
Revenue Sources to forecast a $3.0 billion CAPEX for FY13.                                                                      
                                                                                                                                
MR. TANGEMAN  responded by pointing  back to slide 7  that showed                                                               
13  percent under  FY11 through  the  first six  months of  FY12.                                                               
There are  six months left  to go and if  it rebounds back  to 13                                                               
percent or more then it will be back on track.                                                                                  
                                                                                                                                
4:18:51 PM                                                                                                                    
SENATOR STEDMAN asked  the department to break out  the CAPEX for                                                               
the three  legacy fields of  Prudhoe Bay, Kuparuk and  Alpine. He                                                               
also  asked them  to  explain when  and the  timing  of how  they                                                               
integrate with  the industry  and come up  with the  forecast for                                                               
CAPEX and how  many years out the companies file  as far as their                                                               
targeted years and how many times a year that is updated.                                                                       
                                                                                                                                
MR. TANGEMAN replied that part  of their Monday presentation will                                                               
be on just that.                                                                                                                
                                                                                                                                
COMMISSIONER BUTCHER  said their  analysis of ACES  was presented                                                               
in a simplistic  fashion broken into two pieces:  the tax credits                                                               
and the progressivity of the  production tax. The tax credits are                                                               
very popular  and appear  to be  going up on  a yearly  basis. He                                                               
remarked  that the  governor was  focusing  on the  progressivity                                                               
side  because that  is the  point at  which large  companies make                                                               
production  decisions and  believes something  has to  change. He                                                               
said DNR Commissioner  Sullivan had done a good  job going around                                                               
and talking  to every possible  oil company  he could to  drum up                                                               
support  for the  December lease  sale that  was successful,  and                                                               
during that time  he heard from both companies  that did business                                                               
here  but  don't  anymore  and  companies  that  had  never  done                                                               
business up  here that the taxes  are too high, that  there is no                                                               
high end  and that  DOR is  hurting DNR's  ability to  bring more                                                               
companies into  the oil  patch. It seems  to be  a corporate-wide                                                               
feeling.                                                                                                                        
                                                                                                                                
4:23:16 PM                                                                                                                    
SENATOR STEDMAN said  he had indirectly heard  those comments but                                                               
was puzzled because  an explorer might come in and  absorb the 30                                                               
or 40 percent credit and then  flip their business to an existing                                                               
producer, so  why wouldn't the  producer in the free  market just                                                               
pay the fellow less for his asset?                                                                                              
                                                                                                                                
COMMISSIONER  BUTCHER replied  that  a company  has to  determine                                                               
that even paying  less for leases still is more  valuable to them                                                               
than what their capital could do in another state or country.                                                                   
                                                                                                                                
MR. TANGEMAN expanded they might  be able to realize a short-term                                                               
purchase but  their cash flow model  would have to deal  with the                                                               
high production tax for the next 30 years.                                                                                      
                                                                                                                                
SENATOR FRENCH said  he had listened to the  same arguments about                                                               
lowering  taxes and  wanted some  real examples  of places  where                                                               
lowering  taxes resulted  in  more production.  He  asked for  an                                                               
example of a project  that is on hold because of  ACES - how much                                                               
would it cost  and how much oil  would it make - so  he could see                                                               
the barriers.                                                                                                                   
                                                                                                                                
COMMISSIONER  BUTCHER replied  absolutely;  they  have had  those                                                               
conversations with  companies. The companies need  an opportunity                                                               
to  testify in  front of  the legislature  about what  a material                                                               
change in taxes is going to do for them, too.                                                                                   
                                                                                                                                
SENATOR  FRENCH   said  he  had   specifically  asked   for  that                                                               
information, but  the industry  doesn't have  to wait  until they                                                               
are  in  front  of  the   committee;  it  has  other  avenues  of                                                               
communication  like  a  letter  or  an  advertising  campaign,  a                                                               
brochure. He hoped they were not  waiting to be formally asked in                                                               
front of a committee.                                                                                                           
                                                                                                                                
SENATOR WIELECHOWSKI  said the  administration had  proposed this                                                               
bill over a year  ago and asked if in the year  he promoted it he                                                               
didn't have a  single example of a project that  has been delayed                                                               
or put off because of the tax structure.                                                                                        
                                                                                                                                
COMMISSIONER BUTCHER replied that was  not what he was saying. He                                                               
said from  the very beginning  that the  state will lay  out what                                                               
they believe  the problem is  and what they believe  the solution                                                               
is,  but companies  have to  come  forward and  explain what  the                                                               
material  difference is  and they  have been  waiting for  over a                                                               
year to do that.                                                                                                                
                                                                                                                                
MR.  TANGEMAN added  that industry  had been  on record  over the                                                               
Interim  about  some  "very  hefty  investment  potential  of  $5                                                               
billion  for  ConocoPhillips and  $5  billion  for BP"  and  they                                                               
listed projects that would be economic with a reduction in tax.                                                                 
                                                                                                                                
4:29:24 PM                                                                                                                    
SENATOR WIELECHOWSKI  said he wanted  "to see the  projects" that                                                               
are  delayed, how  many barrels  of oil  they will  produce, what                                                               
their net  present value is,  what their internal rate  of return                                                               
is. "I want  to see the numbers," he said,  "because personally I                                                               
have a hard  time giving $2 billion in tax  breaks without having                                                               
the data."                                                                                                                      
                                                                                                                                
He said  he keeps hearing  from other companies that  the state's                                                               
fiscal terms  are discouraging  investment and  he pulled  up the                                                               
2010 Fraser Institute  Report, one the DOR relied  on, that asked                                                               
645  oil company  executives if  Alaska's fiscal  terms encourage                                                               
investment  or  discourage  investment;  and 74  percent  of  the                                                               
respondents   said  Alaska's   fiscal  terms   either  encouraged                                                               
investment or was not a  deterrent to investment, 17 percent said                                                               
it  was  a  mild  deterrent,  6 percent  said  it  was  a  strong                                                               
deterrent and 3 percent said they would not invest.                                                                             
                                                                                                                                
COMMISSIONER BUTCHER responded that  it's difficult to break that                                                               
down  unless you  have  the details  on who  is  looking for  tax                                                               
credits and who is looking at progressivity.                                                                                    
                                                                                                                                
SENATOR STEDMAN asked if lawmakers  shouldn't consider the Fraser                                                               
Report valid or not spend a lot of time on it.                                                                                  
                                                                                                                                
COMMISSIONER  BUTCHER  replied   it  was  a  snap   shot  of  the                                                               
perception; in fact,  the 2011 Frasier Report  has Alaska looking                                                               
worse than in 2010.  It is "a beauty slide that  gives a sense of                                                               
what folks  see as Alaska," but  it didn't have as  much value as                                                               
digging into some of the details.                                                                                               
                                                                                                                                
SENATOR STEDMAN said he agreed.                                                                                                 
                                                                                                                                
CO-CHAIR PASKVAN said the Fraser  Institute Report defined fiscal                                                               
regime and asked if that definition excluded production taxes.                                                                  
                                                                                                                                
COMMISSIONER BUTCHER replied yes.                                                                                               
                                                                                                                                
CO-CHAIR  PASKVAN   reasoned  that  the  Fraser   Report  is  not                                                               
assessing  the issue  they are  addressing,  which is  production                                                               
tax.                                                                                                                            
                                                                                                                                
COMMISSIONER  BUTCHER  replied correct;  he  was  using it  as  a                                                               
company view of Alaska more than a specific report.                                                                             
                                                                                                                                
4:33:01 PM                                                                                                                    
MR. TANGEMAN said  including the production tax,  the biggest tax                                                               
involved,  would  definitely  skew  the numbers.  To  be  Alaska-                                                               
specific  the survey  would  have  to ask  do  you  like the  tax                                                               
credits. Alaska is  a great place to invest for  an explorer that                                                               
has  no  intention  of  ever producing;  they're  going  to  find                                                               
something and flip it.                                                                                                          
                                                                                                                                
SENATOR  STEDMAN  said  it  was   refreshing  to  see  that  they                                                               
recognize some of  the data and presentations they  are using are                                                               
less than useful in trying to fix this problem.                                                                                 
                                                                                                                                
MR.  TANGEMAN agreed  absolutely, and  splitting out  the credits                                                               
from the production tax is  a huge discussion that doesn't always                                                               
get fleshed out in the surveys.                                                                                                 
                                                                                                                                
4:34:58 PM                                                                                                                    
CO-CHAIR PASKVAN  said another  way to  say that  is if  you only                                                               
focus on  one component  of load  on industry  you can  very much                                                               
deceive the listener.                                                                                                           
                                                                                                                                
COMMISSIONER BUTCHER agreed.                                                                                                    
                                                                                                                                
4:35:40 PM                                                                                                                    
COMMISSIONER  BUTCHER  said slide  10  emphasized  a few  of  the                                                               
changes that  happened as a result  of ACES that tripled  the ELF                                                               
tax and raised tax credits.                                                                                                     
                                                                                                                                
CO-CHAIR PASKVAN asked  if they are intending the $100  to be the                                                               
ANS crude price in the application of progressivity.                                                                            
                                                                                                                                
COMMISSIONER BUTCHER answered  yes; they are just using  it as an                                                               
example.                                                                                                                        
                                                                                                                                
4:36:32 PM                                                                                                                    
MR. TANGEMAN expanded  if you lay these two scenarios  out in the                                                               
income  statement format  with  the  price of  oil  and back  out                                                               
transportation costs  (under ACES  you would  also back  out OPEX                                                               
and CAPEX) that calculation would  result in $29. Whereas the ELF                                                               
system would be a lot easier to  calculate the tax was also a lot                                                               
lower.                                                                                                                          
                                                                                                                                
CO-CHAIR PASKVAN  said if you start  with the ANS crude  price at                                                               
$100 and  subtract royalty and $27  ($10 each OPEX and  CAPEX and                                                               
$7 downstream transportation) you get $20 not $29.                                                                              
                                                                                                                                
COMMISSIONER BUTCHER said  they were looking at  a taxable barrel                                                               
after royalty.                                                                                                                  
                                                                                                                                
MR.  TANGEMAN got  him to  $100 minus  $27 which  results in  $73                                                               
(PTV) where the tax calculation starts.                                                                                         
                                                                                                                                
CO-CHAIR  PASKVAN said  he still  has  trouble with  $29; if  you                                                               
start out  with ANS  at $115, subtract  royalty and  $27.50, then                                                               
you're still significantly less than $29.                                                                                       
                                                                                                                                
MR. TANGEMAN reasoned that he was  backing out the numbers to get                                                               
the $73,  which the tax  is then calculated  on, and that  tax is                                                               
$29.                                                                                                                            
                                                                                                                                
CO-CHAIR WAGONER  said he wanted  to see a  third bar put  in for                                                               
PPT, because  they jumped  from ELF into  the current  system and                                                               
left out what was in the middle.                                                                                                
                                                                                                                                
4:39:50 PM                                                                                                                    
COMMISSIONER BUTCHER said he had a  slide coming up that did just                                                               
that.                                                                                                                           
                                                                                                                                
SENATOR  STEDMAN  said  they  need  to agree  on  the  format  so                                                               
everyone understands what  is on the table  to discuss, otherwise                                                               
they would  be going in  circles. He  suggested using a  top down                                                               
approach since that is how  taxes are calculated. The legislature                                                               
looks at net cash flow.                                                                                                         
                                                                                                                                
COMMISSIONER BUTCHER said  it's important to look  at the numbers                                                               
two different ways;  it's important for the state to  look at the                                                               
state take,  but to increase  the investment climate you  have to                                                               
look at it from the point of view of the company as well.                                                                       
                                                                                                                                
SENATOR STEDMAN said  his concern was with the chart  on left has                                                               
the credits and the immediate write  off of CAPEX; that needed to                                                               
be discussed  because it amounted  to maybe one billion  per year                                                               
and,  as Senator  Wagoner referenced,  a reworking  of the  other                                                               
chart, and  so they don't  suffer from "benchmark error"  in that                                                               
the ELF  was so far out  of line on a  worldwide perspective that                                                               
it is worthless to him to use as a reference.                                                                                   
                                                                                                                                
CO-CHAIR PASKVAN said it would  help the discussion about whether                                                               
the $29 was  accurate or not if they used  a different benchmark.                                                               
If  the analysis  is $29  for  the State  of Alaska  and $71  for                                                               
industry would he consider that fair?                                                                                           
                                                                                                                                
MR. TANGEMAN  replied that  is not what  this slide  was showing,                                                               
but he  would get him the  spreadsheet that would walk  him penny                                                               
for penny through those numbers.                                                                                                
                                                                                                                                
4:45:22 PM                                                                                                                    
COMMISSIONER BUTCHER said  slide 11 showed how  other states rank                                                               
Alaska  (referencing  Mr.  Gerking's discussion  last  week  that                                                               
making  an  effective tax  comparison  would  be an  enlightening                                                               
exercise). The State of Montana had  a comparison of a half dozen                                                               
or  so  oil  producing  jurisdictions and  it  showed  Alaska  as                                                               
"strikingly high"  in effective  tax rate  compared to  any other                                                               
state on the chart.                                                                                                             
                                                                                                                                
4:46:28 PM                                                                                                                    
CO-CHAIR PASKVAN said  he didn't think that was  what Mr. Gerking                                                               
said.  But in  any event,  this is  a very  narrow comparison  as                                                               
compared to  a broad analysis  and he  didn't want the  public to                                                               
think it was anything more.                                                                                                     
                                                                                                                                
COMMISSIONER BUTCHER  said that  was correct and  this is  just a                                                               
snapshot of many  snap shots that emphasized  the complexities of                                                               
comparison  exercise  but also  emphasized  how  Alaska paled  in                                                               
comparison  to  most  other jurisdictions  it  is  competing  for                                                               
capital dollars with.                                                                                                           
                                                                                                                                
4:48:26 PM                                                                                                                    
MR. TANGEMAN said he thought Mr.  Gerking was looking for an easy                                                               
effective tax rate  to calculate as it's not an  apples to apples                                                               
comparison.                                                                                                                     
                                                                                                                                
CO-CHAIR PASKVAN  said even the  department's own  publication of                                                               
January 2012  didn't show  Montana as  a jurisdiction  to compare                                                               
Alaska  to  and  he  was   concerned  they  were  focusing  on  a                                                               
jurisdiction that isn't a peer to Alaska.                                                                                       
                                                                                                                                
COMMISSIONER BUTCHER  said the point  of this slide is  that when                                                               
someone wants  an easy  slide that  compares effective  tax rates                                                               
across jurisdictions it's just not that simple.                                                                                 
                                                                                                                                
MR. TANGEMAN said  several of the jurisdictions  on that snapshot                                                               
are in the department's documents.                                                                                              
                                                                                                                                
SENATOR WIELECHOWSKI  said this does nothing  but confuse things.                                                               
He asked if they agreed  that Mr. Gerking studied the correlation                                                               
between tax increases and production  rates over 50 years and was                                                               
unable  to find  any. Did  they have  any research  to rebut  his                                                               
testimony?                                                                                                                      
                                                                                                                                
COMMISSIONER  BUTCHER replied  that didn't  watch every  word Mr.                                                               
Gerking said  and wouldn't get into  a he said/he said  issue. He                                                               
sat  through the  legislature's  two-day  Wood Mackenzie  seminar                                                               
that said  tax reductions  resulted in  more investment  over all                                                               
scenarios.                                                                                                                      
                                                                                                                                
CO-CHAIR PASKVAN said  the question was not on  investment but on                                                               
production.                                                                                                                     
                                                                                                                                
MR. TANGEMAN responded  that it seemed to put  very little weight                                                               
on the price of oil, which  he thought was interesting because he                                                               
does, especially in  trying to figure out  why declines continued                                                               
under ELF, which  he thought was because the price  of oil was $9                                                               
to $20.                                                                                                                         
                                                                                                                                
4:52:46 PM                                                                                                                    
CO-CHAIR PASKVAN asked the source  of his information that he was                                                               
relying on as the "elastic point"  for price that would drive the                                                               
issue.                                                                                                                          
                                                                                                                                
MR.  TANGEMAN  replied that  is  his  personal opinion  and  just                                                               
common sense.                                                                                                                   
                                                                                                                                
SENATOR STEDMAN  said Prudhoe  Bay is  declining because  it's an                                                               
aging  field; it's  a normal  decay curve  in an  elephant field.                                                               
It's not abnormal. He just didn't  agree that the reason for down                                                               
volume is because the price  is down. Volumes have been declining                                                               
for the  last 20 years!  They are trying to  stop it and  turn it                                                               
around. He  would challenge the  department to  bring information                                                               
forward that would  show declining production in  Prudhoe Bay and                                                               
Kuparuk was  caused by  the price and  not natural  evolution and                                                               
decay  of  the field.  He  also  challenged  them to  produce  an                                                               
analytic model  that would show  a field like either  Prudhoe Bay                                                               
or Kuparuk that would stay at  its peak production when it opened                                                               
up.  They all  have a  rapid rise,  then humped  over and  a long                                                               
tail. That  is what is  used in laying  out the cash  flow models                                                               
for the decisions.                                                                                                              
                                                                                                                                
4:54:51 PM                                                                                                                    
COMMISSIONER BUTCHER said  in every conversation he  has had with                                                               
a company  the price of  oil and the amount  of money to  be made                                                               
off of  oil is  a large  component in deciding  to go  forward or                                                               
not. In a depleting field on  the North Slope it's not a question                                                               
that it's much more expensive to  produce a barrel of oil than it                                                               
used to  be and  certain kinds  of oil is  produced at  $100 that                                                               
wouldn't be  produced at $30  or would  be produced at  $200 that                                                               
wouldn't be produced today.                                                                                                     
                                                                                                                                
SENATOR  STEDMAN agreed  with  that, but  he  disagreed with  the                                                               
characterization of the long 20-year  decline in Prudhoe Bay that                                                               
it was directly  a price sensitive issue when it  was the natural                                                               
decay of the field itself.                                                                                                      
                                                                                                                                
MR.  TANGEMAN  clarified that  he  agreed,  and that's  why  it's                                                               
important to  look at  Texas because they  were producing  for 80                                                               
years  and when  oil prices  rocketed their  production flattened                                                               
out (like  Alaska). Nobody debates  that Alaska has  a tremendous                                                               
resource in the North Slope.                                                                                                    
                                                                                                                                
4:57:30 PM                                                                                                                    
SENATOR MCGUIRE  asked the  department to run  a few  models with                                                               
respect  to Cook  Inlet and  how SB  309 affected  it because  it                                                               
shares some similarities;  it's an aging field of  50 years, many                                                               
people believed that  all of the easy gas was  taken out, nothing                                                               
left  and  that  the  price  itself  would  govern  any  kind  of                                                               
investment. Her  understanding is,  after the largest  Cook Inlet                                                               
lease  sale in  state  history and  now the  second  jack up  rig                                                               
coming up, that it is experiencing a boom.                                                                                      
                                                                                                                                
CO-CHAIR  WAGONER said  he wanted  to see  details on  why Texas'                                                               
production levels kicked up if  those comparisons are going to be                                                               
used. How  many wells  were brought  back on  line that  were not                                                               
producing and brought  back on line because of the  price of oil?                                                               
He knows  those wells and that  they don't produce much,  maybe a                                                               
half to three barrels a day, and those add up at this price.                                                                    
                                                                                                                                
CO-CHAIR PASKVAN thanked the presenters  and suggested that using                                                               
more  common   numbers  would  help   everyone  come   to  better                                                               
conclusions.                                                                                                                    
                                                                                                                                
[SB 192 was held in committee.]                                                                                                 
                                                                                                                                
5:02:49 PM                                                                                                                    
There being no further business to come before the committee,                                                                   
Co-Chair Paskvan adjourned the Senate Resources Standing                                                                        
Committee meeting at 5:02 p.m.                                                                                                  

Document Name Date/Time Subjects
SB192_DOR - Defining The Problem_2-10-12.pdf SRES 2/10/2012 3:30:00 PM
SB 192
SB192_Fiscal Note_DOR-TAX-02-09-12.pdf SRES 2/10/2012 3:30:00 PM
SB 192
SB 192 Sponsor Statement_02-10-2012.pdf SRES 2/10/2012 3:30:00 PM
SB 192