Legislature(1995 - 1996)
02/01/1995 03:37 PM Senate RES
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SENATE RESOURCES COMMITTEE
February 1, 1995
3:37 P.M.
MEMBERS PRESENT
Senator Loren Leman, Chairman
Senator Drue Pearce, Vice Chairman
Senator Steve Frank
Senator Rick Halford
Senator Robin Taylor
Senator Georgianna Lincoln
COMMITTEE MEMBERS ABSENT
Senator Lyman Hoffman
OTHER MEMBERS PRESENT
Senator Judy Salo
Senator Bert Sharp
Representataive George Davies
Representative Norman Rokeberg
COMMITTEE CALENDAR
Oil and Gas Incentives for Development and Production of Oil and
Gas
SENATE JOINT RESOLUTION NO. 6
Relating to federally held property in those states, including
Alaska, admitted to the Union since 1846.
PREVIOUS ACTION
SJR 6 - No previous action to consider.
WITNESS REGISTER
Ken Thompson, President
ARCO Alaska
P.O. Box 100360
Anchorage, Ak. 99519
POSITION STATEMENT: Briefed Committee on oil and gas incentives.
Jim Palmer, Director
External Affairs
BP Exploration Alaska
P.O. Box 196612
Anchorage, AK 99519
POSITION STATEMENT: Briefed Committee on oil and gas incentives.
Jim Branch, Alaska Production Manager
Exxon Company, U.S.A.
P.O. Box 196601
Anchorage, AK 99519
POSITION STATEMENT: Briefed Committee on oil and gas incentives.
Pete Nelson, Alaska Land Manager
Texaco
P.O. Box 7812
Universal City, CA 91608
POSITION STATEMENT: Briefed Committee on oil and gas incentives.
Kevin Tabler, Land Manager
Alaska Business United
UNOCAL
P.O. Box 7600
Los Angeles, CA 90051
POSITION STATEMENT: Briefed Committee on oil and gas incentives.
Ralph Dartez, Production Manager
Marathon Oil Co.
P.O. box 196168
Anchorage, AK 99519
POSITION STATEMENT: Briefed Committee on oil and gas incentives.
Bernie Smith, Manager
Alaska Government Affairs
Tesoro
P.O. Box 196272
Anchorage,AK 99519
POSITION STATEMENT: Briefed Committee on oil and gas incentives.
Dave Lappi, President/Owner
Lapp Resources Inc.
4900 Sportsman Dr.
Anchorage, AK 99502
POSITION STATEMENT: Briefed Committee on oil and gas incentives.
David Johnston, Chairman
Alaska Oil & Gas Conservation Commission
121 W. Fireweed Lane, Suite 207
Anchorage, AK 99503-2035
POSITION STATEMENT: Briefed Committee on oil and gas incentives.
John Landrum, Manager
Phillips Alaska
P.O. Drawer 66
Kenai, AK 99611
POSITION STATEMENT: Supported oil and gas incentives.
Jim Eason, Director
Division of Oil and Gas
Department of Natural Resources
P.O. Box 107304
Anchorage, AK 99510-7304
POSITION STATEMENT: Advised Committee in broad terms on oil and
gas issues and thanked the legislators for all their past fruitful
interactions with him in his capacity as Director.
ACTION NARRATIVE
TAPE 95-3, SIDE A
Number 001
CHAIRMAN LEMAN called the Senate Resources Committee meeting to
order at 3:37 p.m. and announced the hearing on oil and gas issues
to be before the Committee. He said this is a follow up to the
November 4 meeting where the Gaffney Cline and Associates report
was discussed.
KEN THOMPSON, President, ARCO, Inc., said his testimony is a
condensed version of the written testimony he had given the
Committee. He is testifying concerning ARCO's views on ways to
improve communication and working relationships between the oil
industry and the government and to suggest ideas that could make
new oil and gas investments in Alaska more globally competitive.
He said ARCO has recently settled longstanding tax disputes with
the State of Alaska and had reached agreements which allow them to
avoid the disputes in the future. As a result, his company and the
government have formed more of a true partnership. He believes
that Governor Knowles and the Legislature are sincere in wanting to
work with ARCO.
MR. Thompson said ARCO sees tremendous future opportunity in Alaska
and they will continue to explore and invest in new development.
ARCO's 5-year capital plan calls for $1 billion of new investment
in Alaska. They also see potential incremental investments that
could be added to their plan if they can be made more competitive
with worldwide investment opportunities.
He emphasized that he is not asking for tax or royalty changes on
existing production from currently active reservoirs in Prudhoe
Bay, Kuparuk, or Point McIntyre, because he knows the State of
Alaska is depending on those revenues. He is asking that there be
no new tax increases on the existing production considering that
there have already been 13 tax increases since prior to Prudhoe Bay
start-up.
He urged that the oil industry and the government have more open
communication and noted that is the single most important
recommendation in the Gaffney-Cline report. A special committee
with AOGA has come up with recommendations for industry and
government to discuss, among them are: to not "cry wolf" to the
State and to share information openly, to look for innovative
options all can live with, to share a full range of information on
new projects needed for more informed decision making.
ARCO is actively bringing new exploration partners to Alaska and is
currently seeking partners on seven high risk exploration projects
on State leased lands here.
Number 200
Mr. Thompson said he believes that royalty and tax changes for new
investment projects are needed if they are to add incremental
investments beyond those in their current 5-year plan. They are
considering net profits concepts, variable royalty rates tied to
oil prices and well production rates or field sizes.
They would like to participate in an Oil and Gas Tax and Royalty
Conference consisting of industry, the Legislature, and the
administration, he said. Further encouragement might come from
"project partnering" for specific projects which will not move
forward without joint innovation between the state and the company.
"Partnering" means using a mutual gains approach to reach
beneficial goals. He used the United Kingdom as an example of how
the partnering concept helped their declining production
dramatically in the last eight years.
Project partnering can move forward by the State continuing the
process of developing a viable fiscal plan. They need to
understand what Alaska's competition is doing to attract
investment. He said ARCO could share information they have on
investment incentives offered by 70 different countries. He also
noted we must not lower environmental standards.
In closing, Mr. Thompson said that ARCO Alaska has agreed to
participate in a tax and royalty conference to discuss both tax
laws and royalty changes when the governor and the Legislature
convene one. ARCO will also continue to assist the congressional
delegation in efforts to open ANWR to environmentally responsible
oil and gas exploration and production. They are also supporting
lifting the North Slope oil export ban. ARCO Alaska also has
agreed to keep the state informed of their efforts to assess one of
their largest potential resources in Alaska - natural gas.
Mr. Thompson said ARCO would do its best to help create a better
win/win partnership with the State where we share common goals to
sustain economic development, more stabilized revenues, and more
jobs.
Number 323
SENATOR LINCOLN asked when the 5-year plan began and have they had
them before and have they been on target.
Mr. Thompson answered that the 5-year plan began in 1995. They
have had 5-year plans in the past which have changed dramatically
with oil prices. He said their plan is available to the Committee.
Number 335
JIM PALMER, BP Exploration, said they expect to invest more than a
half billion dollars in capital in Alaska. He cited why Alaska is
disadvantaged in the fiercely competitive environment for scarce
capital - remoteness, declining production, high transportation
costs, restricted markets, state budget deficit, and a history of
antagonism that exists between the industry and the State.
Opportunities that do exist on the North Slope consist of marginal
new oil fields or marginal projects within existing fields.
Mr. Palmer said that industry and government must work together to
compete globally for investment capital. Recently enacted tax
regulations have helped to clarify how to value oil for tax
purposes for companies that refine their own oil, but there is
still vagueness for companies, like BP, that sell or trade the oil
they produce on the North Slope. Vagueness equals uncertainty,
uncertainty equals risk, and risk equals competitive disadvantage
in efforts to attract capital to Alaska. Additional measures are
needed and BP is proposing a sliding scale royalty for the Badami
discovery.
Number 410
SENATOR LEMAN asked if their intent was for the state to receive at
least as many proceeds from the Badami field under the sliding
scale royalty proposal as it would under the current 12 1/2%
system. Mr. Palmer said the intent was to get additional revenue
for both of them - 100% of $0 is $0.
Number 432
SENATOR HALFORD asked what under existing law would the severance
tax be at Badami. Mr. Palmer answered that he understood it to be
12 1/2% for the first 5 years, and then 15% as modified by the ELF.
Senator Halford asked how the modification of the ELF would affect
the royalty. Mr. Palmer said it would not affect it at all,
because they are two different schemes.
SENATOR HALFORD asked how the ELF would modify the severance tax.
Mr. Palmer answered it was modified by the production of the field.
Senator Halford said he didn't disagree with making the system of
taxation more profit sensitive, but he thought severance should be
the focus, not royalty which would open a lot of issues, especially
with the Permanent Fund.
JIM EASON, Director, Division of Oil and Gas, commented that Badami
reserves are unknown so it is impossible to tell at this stage what
the severance tax would be. It could be $0 which he thinks is
likely.
Number 474
SENATOR PEARCE asked if the future investments he mentioned
included moving forward on Badami. MR. PALMER said that part of it
is, but most of it is in their Prudhoe, Kuparuk, and Milne Point
productions.
SENATOR PEARCE asked when the Keystone tanker fleet has to be
replaced, would that capital investment come out of Alaska's
portion of capital for the company? MR. PALMER said he thought
that would come out of their Alaskan assets and said he would check
on it.
SENATOR FRANK asked if they had cost projections based on certain
assumptions. MR. PALMER answered they do and that one of the
assumptions is the price. If they would have done a Badami-like
project a number of years ago, it would have been $700 - $800
million. Their charge is to get total development costs under $300
million.
Number 503
SENATOR TAYLOR said he was encouraged by their discussion and was
feeling more and more like a partner all the time. He hoped that
like a true partnership both the liability and ownership would be
shared. To continue talking about severance taxes is not really
partners, he continued. Partners know what was spent and the cost
of things. They are still reaping the benefits of a successful
partnership 20 or 30 years into a field.
Number 517
JIM BRANCH, Production Manager, Exxon Alaska, said three things the
State could do to improve the current climate for the oil and gas
industry are fiscal reform; tax and regulatory stability and
clarity; and improved cooperation between the state and industry.
He elaborated that fiscal reform through reevaluation of spending
priorities and ultimate spending reductions should be the state's
top concern. Also, the potential for unanticipated tax laws and
regulations is very important. Inconsistent application of tax
laws and regulations poses risk and reduces the likelihood of a
project getting the go-ahead. Better cooperation and communication
between the state and industry are necessary to avoid disputes that
are debated through costly litigation. There should be an
alternative process to resolve differences, he added.
Incentives should be designed to generate incremental new
developments or additional production from existing fields through
increased recovery. They should not be too limited or too focused,
but should generally be applicable to all members of industry, Mr.
Branch advised.
TAPE 95-3, SIDE B
SENATOR LEMAN said the Committee would be happy to receive specific
ideas for incentives as they are developed.
Number 572
PETE NELSON, Texaco, said the recent administration lacked the
appropriate policy to encourage industry to use favorable
provisions. She cited two incidents between Texaco and the
Division of Oil and Gas to illustrate her point. One was when the
Division required Texaco to provide historical well data which
Texaco was unable to obtain. Texaco applied for and was granted
certification for exploration incentive credit for its Colville
well in 1988. The Division of Oil and Gas is reconsidering its
grant of the certification even though there are no provisions in
the law or regulations to do so. The Division is attempting to
void any credits Texaco has and require payment of $1.8 million
including interest.
MS. NELSON said Texaco appreciates the Committee's interest in the
industry.
Number 512
KEVIN TABLER, UNOCAL, said Cook Inlet is where their infrastructure
base and manpower is best defined, although they do have working
interests in fields on the North Slope, also. The Cook Inlet, with
its mature and declining fields, low margin properties, high
operating cost and regulatory uncertainty, creates a very
challenging environment in which to stay profitable. He mentioned
specifically changes in effluent discharge standards for platforms
and facilities and requirements for tanker escorts that are under
review at this time. Although these are federal guidelines, the
state has significant input. Platform abandonment regulations are
also under review at this time. Product price is sometimes the one
factor that limits remaining development opportunities with
marginal fields.
Number 467
Relief for marginal fields in Cook Inlet in the form of reducing or
eliminating the State's royalty could make them economically
viable. Reducing royalty based on capital investment for other
properties would create value for the state and industry. A
sliding scale royalty structure tied to price, production or a
combination of both should be considered.
Number 452
New field development incentives should include reducing royalty
rate or eliminating it until payout, allowing recovery of capital
costs by the risk bearing parties before the state receives its
royalty share, and tying the reduction in royalty rate to the
amount of capital expenditure incurred.
MR. TABLER urged the State to broaden the application of
exploration incentive credits. Great movement in the right
direction was achieved with SB 308 last year, he said. Additional
legislation which will enhance the lease/sale process can provide
stability and reliability for planning.
Incentives and regulations pertaining to coalbed methane
development should be encouraged as an area with huge potential, as
this is a high risk venture.
Review of existing statutes and regulations are needed to assess
what alternatives are already in place and a new mind-set created
in all departments throughout the state.
Three issues significantly affect UNOCAL in the Cook Inlet - the
Coast Guard is currently being urged by fishermen and conservation
groups to impose requirements for tractor tugs and pilot vessels in
the Inlet. Tugs would cost $5 million per tug per year. He
thought there were other ways to address this issue through use of
navigational aids.
Another issue, Mr. Tabler said, is water quality. Revision of the
State of Alaska Water Quality Regulations (phase I and II); EPA's
Coastal Effluent Guidelines for Oil and Gas Industry and EPA's Cook
Inlet/Gulf of Alaska General National Pollutant Discharge
Elimination System permit is needed.
The third issue that concerns UNOCAL is Platform and Pipeline
Abandonment Regulations. On September 14, 1994, testimony was
given during public hearing to support new regulations which would
significantly reduce the cost of platform and pipeline abandonment.
Number 363
SENATOR LEMAN asked how many of the 15 platforms mentioned were in
the Kenai Peninsula Borough. MR. TABLER said they are all in the
Borough.
SENATOR SALO asked if they currently have to have a pilot on-board
all their ships up the Inlet. MR. TABLER said they have hired
pilots on board.
Number 345
RALPH DARTEZ, Marathon Oil, said their wells are in the Cook Inlet
area and that they are in mature fields. Since all of the major
geologic formations had been explored and no new large discoveries
made, he felt that field extensions in existing fields and small or
moderate size exploration prospects were what they are looking at.
Remaining investment opportunities in these mature fields are very
sensitive to product price and the remaining field life.
Platform and field abandonment is an area of uncertainty and needs
to be clarified. Development of an independent appeals process for
tax disputes could provide a means for reducing uncertainty for the
taxpayer. Title 38 already delegates some authority to DNR to
consider royalty reductions for fields where weak economics
threaten the future life of the field. He thought this incentive
should be aggressively pursued by the state.
Regulatory pressure continues to be the major threat to the mature
fields. Water and air quality regulations should be thoughtful and
add value and not automatically exceed the federal requirements.
Land access is Marathon's number 1 concern. They are very happy
with the passage of SB 308 which gives some certainty to the
lease/sale process.
In summary, Mr. Tabler said, initiatives have to be developed that
either stimulate growth or sustain what there is now. Development
of an independent appeal process for tax disputes is also
important. Tax credits and royalty suspensions could be more
liberally applied for marginal fields or to stimulate more marginal
new field developments. We need to preserve the certainty of SB
308 to ensure timely, dependable access to lands, he said. We need
to ensure that statutes and regulations carefully consider the
impact to industry and add value.
Mr. Tabler urged the Legislature to work with the Administration to
"scope" a framework for acceptable initiatives.
Number 210
BERNIE SMITH, Tesoro Alaska Petroleum, said the company has a
refinery in Kenai and is in negotiation with the Division of Oil
and Gas over its state royalty contract. Since 1969, Tesoro has
spent more than $236 million on capital improvements in Alaska.
They employ directly 850 people and pay about $11 million annually
in state and local taxes.
The Legislature should try to give clear direction so that royalty
gas and oil can be managed in a way that encourages in-state energy
self-sufficiency. For example, royalty oil can't be exported
unless its surplus in-state and non-competitive sales must be made
that offers benefits to the citizens of the state.
JOHN LANDRUM, Manager, Phillips Alaska, said in general he
supported most of the comments made by other industry
representatives.
Number 139
DAVE LAPPI, Lapp Resources Inc., said he thought Alaskans have the
unique opportunity of developing their resources for their own use.
For example, he thought that many rural Alaska villages could be
served by locally produced natural gas which would eliminate the
villages need to transport large quantities of expensive imported
diesel fuels. Natural gas would eliminate the need to clean up
frequent oil spills and the expense of fixing and upgrading many of
the fuel storage tanks now in the villages. Increasingly stringent
emissions and air quality regulations would be easier to meet if
gas were the primary fuel.
Mr. Lappi commented that most of the gas acreage the state has is
not under lease. He thought it important that interesting areas be
explored through exploration licensing. He also thought the state
would be better served by reducing the cost of the cash bonus bid
and the annual rental payment and get the acreage into the hands of
private explorers who can do something with it.
Number 80
Mr. Lappi was also concerned with the "sudden death syndrome" which
are provisions in the state's bidding, leasing, and annual rental
and royalty payments procedures where if a payment is inadvertently
missed by even a few hours, you can lose your entire interest in a
lease. He thought this was overkill.
Bonding requirements should be more competitive for small projects.
Seismic surveys should be made public after 5 years or after the
companies who shot the surveys relinquished their licenses
pertaining to the survey.
TAPE 95-4, SIDE A
Number 001
Mr. Lappi noted that the Division of Oil and Gas, as well as most
other divisions, seem to take an adversarial approach to their role
in the industry rather than advocacy. The state should try to
structure itself to become more of an advocate for the industry
through regulation and permit reform. If Alaskans are going to be
involved in the industry as owners and operators of the oil and gas
fields, it would help to change the state's vending and commerce
regulations so that venture capital for exploration would be easier
to get.
DAVID JOHNSTON, Chairman, Alaska Oil and Gas Conservation
Commission, said the state should get serious about creating
incentives and creating more of a partnership with industry. He
mentioned royalty reductions, and more certainty and more timely
permitting.
Number 137
JIM EASON, Director, Division of Oil and Gas, expressed his
"profound appreciation" to be able to appear before this committee
and others and the Alaska Legislature to address these issues.
On listening to the many speakers today, he said, he heard a number
of themes that make up a tapestry he would like the committee to
consider when looking at possible incentives. He urged them to
look at the history of incentives the state has used and see how
they have worked or haven't worked. Some of them, for various
unforeseen reasons, didn't work very well or had "unintended
consequences." He said there is a wealth of information to draw
from in other jurisdictions as with Ken Thompson and ARCO's study.
Mr. Eason noted there had been a lot of talk about disincentives,
but very little factual information has been shown for them to
allow them to make a reasonable comparison of royalty and tax rates
across those jurisdictions. He said information was their greatest
ally. There was a large group of interests at stake here, from the
smallest independent to the largest capitalized integrated oil
company in the world. They also have a wide range of interests.
It has been a constant theme to "bring new blood to Alaska."
Number 238
SENATOR LEMAN asked him for his thoughts on any legislative changes
he might have and thanked him for working with the Committee the
past years. He said they would likely have follow-up meetings on
these issues.
SRES 2/1/95
SJR 6 TRANSFER FED. LAND TO POST-1846 STATES
SENATOR TAYLOR, sponsor, said Gordon Harrison had researched this
issue and as far back as 1802 the Federal Government started
withholding, as new states would enter, some land. The only
changes in the resolution were to change the date from 1846 to 1802
and to change the additional historic information within the body
of the resolution. The bottom line is still the same, he said.
All states should be treated equal. We have not been treated
equal, nor have our sister states, to the extent that our lands
have been withheld.
This resolution calls upon Congress to make full fledged states of
the Union out of each of the states that entered after 1802 and in
particular those states entering in after 1846 which have the most
significant amounts of federal property.
SENATOR PEARCE moved to adopt the CS to SJR 6. There were no
objections and it was so ordered.
SENATOR PEARCE moved to discharge CSSJR 6 (RES) from Committee with
individual recommendations. There were no objections and it was so
ordered.
Number 377
SENATOR LEMAN thanked everyone for their participation and
adjourned the meeting at 5:33 p.m.
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