Legislature(2007 - 2008)BUTROVICH 205
10/24/2007 10:00 AM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB2001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
October 24, 2007
10:05 a.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Lyda Green
Senator Gary Stevens
Senator Lesil McGuire
Senator Bill Wielechowski
Senator Thomas Wagoner
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Bettye Davis
Senator Joe Thomas
Senator Hollis French
COMMITTEE CALENDAR
SENATE BILL NO. 2001
"An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to the issuance of
advisory bulletins and the disclosure of certain information
relating to the production tax and the sharing between agencies
of certain information relating to the production tax and to oil
and gas or gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas auditors
and their immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund; providing
for retroactive application of certain statutory and regulatory
provisions relating to the production tax on oil and gas and
conservation surcharges on oil; making conforming amendments;
and providing for an effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB2001
SHORT TITLE: OIL & GAS TAX AMENDMENTS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
10/18/07 (S) READ THE FIRST TIME - REFERRALS
10/18/07 (S) RES, JUD, FIN
10/19/07 (S) RES AT 9:00 AM BUTROVICH 205
10/19/07 (S) Heard & Held
10/19/07 (S) MINUTE(RES)
10/20/07 (S) RES AT 8:00 AM BUTROVICH 205
10/20/07 (S) Heard & Held
10/20/07 (S) MINUTE(RES)
10/21/07 (S) RES AT 1:00 PM HOUSE FINANCE 519
10/21/07 (S) Heard & Held
10/21/07 (S) MINUTE(RES)
10/22/07 (S) RES AT 11:30 AM BUTROVICH 205
10/22/07 (S) Heard & Held
10/22/07 (S) MINUTE(RES)
10/23/07 (S) RES AT 9:00 AM BUTROVICH 205
10/23/07 (S) Heard & Held
10/23/07 (S) MINUTE(RES)
10/24/07 (S) RES AT 10:00 AM BUTROVICH 205
WITNESS REGISTER
CLAIRE FITZPATRICK, Senior Commercial Vice President
BP Exploration (Alaska)
Anchorage AK
POSITION STATEMENT: Testified on SB 2001.
MIKE UTSLER, Senior Vice President for Greater Prudhoe Bay
BP Exploration (Alaska)
Anchorage AK
POSITION STATEMENT: Testified on SB 2001.
KEVIN MITCHELL, Vice President of Finance and Administration
ConocoPhillips Alaska
Anchorage AK
POSITION STATEMENT: Testified on SB 2001.
JIM TAYLOR, Vice President of Commercial Assets
ConocoPhillips Alaska
Anchorage AK
POSITION STATEMENT: Testified on SB 2001.
BO DARRAH, President
Brooks Range Petroleum Company
Anchorage AK
POSITION STATEMENT: Opposed SB 2001.
MARK SHARP
Fairbanks AK
POSITION STATEMENT: Supported SB 2001.
JERRY WALKER
Fairbanks AK
POSITION STATEMENT: Opposed SB 2001.
RICH SIEFERT
Fairbanks AK
POSITION STATEMENT: Supported SB 2001.
TOM LAKOSH
Anchorage AK
POSITION STATEMENT: Opposed SB 2001.
MERRICK PEIRCE
Fairbanks AK
POSITION STATEMENT: Opposed SB 2001.
TOM MALONEY
Anchorage AK
POSITION STATEMENT: Supported SB 2001.
PAUL KENDALL
Representing himself
POSITION STATEMENT: Testified on SB 2001.
TONY TENGS
Juneau AK
POSITION STATEMENT: Supported SB 2001.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 10:05:33 AM. Present at the call
to order were Senators Green, Stevens, Wagoner, Wielechowski,
and Chair Huggins.
SB2001-OIL & GAS TAX AMENDMENTS
10:06:25 AM
CHAIR HUGGINS announced SB 2001 to be up for consideration.
CLAIRE FITZPATRICK, Commercial Senior Vice President for BP in
Alaska, introduced Mike Utsler, Senior Vice President for BP in
Prudhoe Bay.
She said that the debate is about Alaska's economic future;
production is declining and the state and BP have a common
objective in trying to minimize that. BP wants to focus the
conversation on Alaska's resources and associated costs and
geography. BP supports the net tax basis although the rate is
too high; the principle behind the tax was to encourage
investment and get more barrels into the pipeline. BP makes
investments for the short, medium and long terms; it won't say
no to investment because of an increase in taxes or walk out on
the business. Ultimately it is a decision for the state to make
about tax policy, and whether it is increasing or decreasing the
desired effect; tax policy changes the scale and pace of an
activity.
10:10:06 AM
SENATOR STEVENS asked for clarification of Ms. Fizpatrick's
position within BP.
MS. FITZPATRICK replied that she looks after financial
reporting, planning, taxes, supply chains, and other financial
areas; her position is similar to that of a CFO.
10:11:44 AM
She said that BP's key message is that production is the major
factor in determining state revenue for the future years, and
the goal is to stem the decline. Changes in production impact
royalties, which can be more important than taxes. A fiscal
policy dependent on price is not the best approach. Investment
in development is key to stemming the decline. BP is concerned
about fiscal stability because three tax changes in three years
doesn't seem stable.
10:13:04 AM
SENATOR WAGONER asked Ms. Fitzpatrick to list the changes.
MS. FITZPATRICK said the first was the Economic Limit Factor
(ELF) aggregation, the objective of which was to increase
revenue to the state. The PPT change came second and the
proposed PPT change would be the third.
SENATOR WAGONER responded that the ELF aggregation was not a
change in tax structure, but a change in administrative policy.
MS. FITZPATRICK replied that that was his perspective.
SENATOR WIELECHOWSKI asked when the last change was before those
being discussed.
10:15:03 AM
MS. FITZPATRICK replied there had been a period of stability
previous to that and offered to give more detail later.
SENATOR WIELECHOWSKI said he heard 1989 mentioned as the last
year in which a change was made and only one change since 1989
seemed pretty stable to him.
MS. FITZPATRICK said she bases current investment decisions on
current news.
10:16:14 AM
SENATOR WIELECHOWSKI asked if BP has a defined pool of money it
uses to invest around the world or if the amounts invested are
flexible.
MS. FITZPATRICK replied BP doesn't have an infinite pot of
money. Its financial group decides what investment framework is
appropriate for the entire company. It considers debt rates
because the company is severely impacted by prices. The
investment community expects to see prudence. BP made a
strategic decision to invest in Libya, but that didn't take
money away from other locations. Alaska gets money by presenting
the London office with a robust business plan; a good plan will
mean more money over time.
10:18:18 AM
SENATOR WIELECHOWSKI said he was trying to figure out if Alaska
is in competition with other countries or if any profitable
project would be developed. His concern was that a higher profit
margin elsewhere would mean respectively less-profitable
projects wouldn't be developed.
MS. FITZPATRICK responded that she would attempt to answer that
question later in the meeting.
CHAIRMAN HUGGINS remarked that Senators McGuire, Stedman,
Hoffman, and Thomas were present.
10:20:40 AM
MS. FITZPATRICK said that there are resources that haven't been
discovered in Alaska, but the bulk of opportunity within Alaska
is within its known resources. BP is working on how to actually
extract them economically. The debate should be around creating
the environment that basically allows them to be accessed.
10:21:19 AM
She then referenced a slide showing how production has declined
in recent years, as well as the related investment numbers; BP
invested in 100 wells on the North Slope in 2007 and hopes to
invest in 100 more in the next year.
SENATOR WAGONER asked if those wells are exploratory in nature.
MS. FITZPATRICK replied that BP does not use true exploratory
wells.
SENATOR WAGONER asked how many wells deal with heavy and viscous
oil.
MS. FITZPATRICK replied BP isn't currently producing the
thickest heavy oil; it has only one such pilot well.
10:24:15 AM
MIKE UTSLER, Senior Vice President for BP Exploration in Prudhoe
Bay, said a percentage of BP's program is geared towards
developing viscous oil in Prudhoe Bay.
SENATOR STEVENS asked how the unknown is defined.
MS. FITZPATRICK replied that she examines production
projections; 70 percent of production in coming years will come
from the Prudhoe and Kuparuk fields, which will include the
viscous and the heavy oils. The exploratory opportunities are
unknown by nature; the response to that question will thus
change over time.
SENATOR STEVENS asked if she was including the land becoming
exposed through global warming in her estimates.
MS. FITZPATRICK replied that she does not take her calculations
to extremes.
10:28:24 AM
SENATOR WIELECHOWSKI asked if her figures were in 2006 dollars
or actual dollars per year.
MS. FITZPATRICK replied that the history of spending was in
actual dollars spent.
SENATOR WIELECHOWSKI asked if the rate of decline will increase
or decrease with the Alaska's Clear and Equitable Share plan
(ACES). He added that there were many years of low production
taxes, and when the tax increased so did the production.
MS. FITZPATRICK said she couldn't predict what the decline would
be if the current bill was passed. The economic outcome is one
of the factors she takes into consideration, and overall it's a
hugely complicated balancing act, and all decisions aren't made
at the same price. Increasing taxes will decrease economics and
the decline curve will probably become steeper, she opined, but
then added that technology has changed so BP can do more and now
prices have gone up.
10:31:43 AM
SENATOR WAGONER said he doesn't want to have to recoup revenue
in hindsight and asked how the state would keep that situation
from happening again.
MS. FITZPATRICK said the current PPT was designed to stimulate
investment and her personal view is that BP's investment has
increased. The oil industry doesn't revolve on annual cycles; so
the effect of investments doesn't show immediately.
10:33:19 AM
SENATOR WAGONER asked what percentage of the investment increase
is the result of inflation costs.
MS. FITZPATRICK replied that she would address that issue later.
She said that 800 wells have been drilled in Prudhoe Bay in the
last 10 years. Drilling a well now is different than 10 years
ago; to get the same production rate a company must drill more
wells in the future.
SENATOR STEVENS asked if BP alone drilled 800 wells.
MS. FITZPATRICK replied that was the total number drilled by all
investors in the bay.
10:35:41 AM
CHAIR HUGGINS asked for an explanation of what water in the
wells means.
MS. FITZPATRICK replied that she would cover that issue later in
her presentation if that was alright. She then showed another
slide regarding how declining production decreases state
revenues. She stated that 6 percent is the current decline; the
DOR is forecasting 1 percent over 10 years and 3 percent over 20
years.
SENATOR WIELECHOWSKI asked for how she got the $25 billion and
$70 billion figures.
MS. FITZPATRICK explained how those numbers were estimates based
on what the administration had presented.
10:38:18 AM
SENATOR WIELECHOWSKI asked how accurate the numbers were.
MS. FITZPATRICK replied that she hasn't had the opportunity to
fully scrutinize them.
SENATOR WIELECHOWSKI asked if she could create a fiscal model
for the legislature.
MS. FITZPATRICK said she would be happy to do so; the model is
not complicated.
SENATOR WIELECHOWSKI said perhaps the Department of Revenue
(DOR) should do so.
MS. FITZPATRICK said she is trying to work with the DOR.
10:40:42 AM
MR. UTSLER explained that Prudhoe Bay is still the largest
producing field in North America. BP believes Prudhoe Bay has
another 50 years of possible production and it is at the heart
of that future. He then described the area.
SENATOR WIELECHOWSKI asked him to detail the number of wells and
their success rates.
MR. UTSLER replied that the 2,500 wells include dry holes;
currently 1,200 of them are active.
SENATOR WIELECHOWSKI asked if 50 percent is a high success rate.
MR. UTSLER replied no; an 80 percent success rate is what BP
expects. Historically, that is the range in Prudhoe Bay.
SENATOR WIELECHOWSKI asked how that compares to success rates in
other parts of the world.
MR. UTSLER replied that 80 percent is consistent around the
world.
10:47:30 AM
SENATOR MCGUIRE asked if he has worked in tar sands.
MR. UTSLER replied no, but he has studied them.
SENATOR MCGUIRE said she and Senator Wagoner were in such an
area, and the technology just wasn't there. The Calgary heavy
oil industry is now taking off. She asked if that area could be
compared to Prudhoe Bay.
MR. UTSLER replied that BP believes in an exciting heavy oil
future for Alaska, but there are technical and fiscal
challenges. He said he would talk about the ability to leverage
the Alberta technologies, and emphasized that a robust supply of
light oil is needed to develop heavy oil; the latter can't be
developed independently.
10:51:03 AM
SENATOR STEVENS said he wanted to confirm the speculation that
moving west from Prudhoe Bay would lead to finding more gas and
less oil.
MR. UTSLER replied that BP believes that the development of the
hydrocarbon basin of the North Slope basin suggests that in
moving westward, the probability of finding oil with associated
gas is greater. Because of the fundamental nature of the
depositional environment, BP would expect a more gas-rich
terrain, probably including associated liquids.
10:53:00 AM
SENATOR WAGONER noted that when he was at an oil and gas
symposium in Anchorage, BP made a presentation on viscous and
heavy oil, which would be useful to the committee.
MR. UTSLER replied that he would be sharing some of that
information with them and a group was being put together to
address the issue of heavy oil.
10:54:38 AM
He then talked about a slide showing the cumulative recovery
since 1977 with changes in technology noted along the way.
Originally Prudhoe Bay was expected to be a 25-year oil field,
he said, and currently it may produce for a total of 80 years.
Such a field requires tremendous investments and technological
developments. Over time, $19 billion in capital has been spent
to develop the greater bay, not including operating costs.
SENATOR WAGONER asked if that number included all partners'
investments.
MR. UTSLER replied that it did.
SENATOR WIELECHOWSKI asked what the total profit has been over
the Prudhoe Bay's development period.
MR. UTSLER replied that he didn't have an answer; the field has
been profitable in some years, but not others. Overall it is
profitable and continues to justify increasing investment.
11:01:59 AM
He then referenced water production in the drilling process, and
explained that water and gas must be separated and re-injected
to maintain pressure. Even though oil production is declining,
the amount of fluids is actually increasing; but, much of it has
no economic value and disposal is costly. However, it allows BP
to continue to produce oil for a longer period of time.
He said that Prudhoe Bay has the largest gas plant complex in
the world and managing it has many challenges.
11:04:07 AM
SENATOR WIELECHOWSKI asked how many barrels of oil have been
produced from Prudhoe Bay.
MR. UTSLER replied that 11.5 billion barrels have been produced.
SENATOR WIELECHOWSKI asked if the cost was $1.55 per barrel.
MR. UTSLER replied that would be the capital costs; operating
costs would add to that. He said he would return to that topic
later in the presentation.
11:05:32 AM
He referenced another slide to show the well bores that have
been drilled, and how the field is in an anticline. He then
explained the geography of the reservoirs, and how the oil is
recovered from them.
11:07:30 AM
SENATOR WAGONER asked at what pressure reduction the gas cap
loses efficacy.
MR. UTSLER replied that the issue is complex; overall, when
there is no more gas in the oil, the oil becomes harder to lift.
That situation would require a new sort of mechanism for
removing the oil from the ground.
SENATOR STEVENS asked if the existence of a gas line would
inhibit oil extraction.
MR. UTSLER replied that BP is working with the Alaska Oil and
Gas Commission (AOGC) to determine the optimal level of gas off-
take; regardless, there will be an impact to production decline
of oil reservoirs. That can be offset somewhat by water, but it
is only partially effective. The oil industry and the state are
working together to figure out that issue.
CHAIR HUGGINS commented that the answer is always dynamic.
MR UTSLER agreed.
CHAIR HUGGINS asked if CO2 could be injected as a substitute.
11:11:39 AM
MR. UTSLER replied that CO2 flooding could be used to enhance
oil recovery from some reservoirs. The disadvantage is that
there will be an additional cost to remove the CO2.
11:12:36 AM
He explained that only 30 wells re-inject gas back into the gas
cap; part of the reservoir is produced with gravity drainage. He
then explained the mechanisms of oil extraction and how water
flooding helps that.
11:14:04 AM
SENATOR WIELECHOWSKI asked how Mr. Utsler defined a successful
return rate.
MR. UTSLER replied that success means finding projected
hydrocarbons and bringing them to the surface; technical success
doesn't necessarily mean economic success. BP looks at the well
modeling and the costs to drill and develop versus the volume
the well will recover; that results in an economic life
scenario.
SENATOR WIELECHOWSKI asked for an average barrel number.
MS. FITZPATRICK responded that sometimes assessments are done on
a single-well basis, but often assessments have to be done on a
program basis to keep the calculations from becoming too
unwieldy.
11:16:29 AM
MR. UTSLER explained that BP has drilled 70 wells in Prudhoe Bay
in 2007 on the basis of a program expectation.
11:17:04 AM
CHAIRMAN HUGGINS called an at-ease due to technical
difficulties.
11:26:18 AM
CHAIR HUGGINS called the meeting back to order.
MR. UTSLER said even a field with 30 years of history presents
challenges in moving forward.
11:28:13 AM
He then referenced a slide regarding water injection projects
and pressure history. Pressure began to flatten over a recent
period and now BP is looking at different, more specific ways of
injection. The longer the pressure profile can remain flattened
the better the recovery. BP has had to initiate seawater
injection, putting 900,000 barrels of filtered, cleaned and
chemically treated seawater into the reservoirs. Seawater
injection was started in 1985. As the field has evolved, water
produced from drilling wasn't enough and BP brought back
seawater injection.
11:32:29 AM
He said that BP and the state are dealing with a common enemy,
in terms of declining production. There is a need to continue to
find ways of recovering oil to keep the industry going; fields
need continued investment. Just a 1 percent improvement means
250 million barrels of oil over the next 50 years.
11:34:22 AM
CHAIR HUGGINS commented that BP is now handling as much water as
oil and that salt water is now being used. He added that the
that technology has extended the life of the field significantly
and the challenge is that they are much more significant than
people realize.
SENATOR WAGONER asked for the dollar amount that BP budgets per
well in the field.
MR. UTSLER replied that BP uses a range of different types of
wells, and said he would explain those different wells and their
cost structures later in the presentation.
SENATOR STEVENS asked if BP had expected a recovery rate of 45
percent but is currently operating at 57 percent.
MR. UTSLER agreed. The original estimates pointed to a 45
percent rate.
SENATOR STEVENS asked if 1 percent equal 250 million barrels.
MR. UTSLER replied yes.
SENATOR STEVENS asked what important discoveries they came from.
MR. UTSLER replied for example that the Liberty field BP is
proposing to develop is a 100-million barrel resource. That was
discovered years ago and it's going to take five to seven years
to develop. It would get 30,000 to 40,000 barrels of production
for the 100 million barrels.
11:39:50 AM
He then referenced another slide and discussed how BP is working
for the future; it is trying to develop a mechanism that allows
water to move into restricted areas, and is looking at injecting
polymers that solidify with rising temperature and swell to form
a plug for the water. It is also experimenting with different
techniques in three particular wells, and might recover 1.8
million barrels more.
He then explained another mechanism that involves injecting
miscible gas to wells, which picks up molecules of oil as it
moves through the water.
11:47:07 AM
SENATOR GREEN asked how they know for sure that the water is
going to the desired pipe.
MR. UTSLER replied that in a miscible sense on the diagram, she
would see a fine surface of oil [irreducible oils] left as water
is moved through. As the gas comes through, as opposed to water,
it is attracted to the surface of oil. It actually literally
strips off a few more drops. That mechanism is costly and
inefficient in the sense that it doesn't bring large barrels
with it, but it brings more. So, one can take irreducible oil
saturations of 19 - 20 percent down to 16 or 17 percent.
SENATOR GREEN asked if BP developed the polymer procedure.
MR. UTSLER replied that it was developed by the industry and
several different companies were testing it.
SENATOR STEVENS asked if the companies could recover both the
polymer and the miscible gas.
MR. UTSLER replied that the company doesn't recover the polymer;
it wants it to stay in the ground. In theory the miscible gas is
stripped during use and it has to be re-enriched before re-
injection into the ground. BP constantly has to use existing
product to be able to return the miscible gas to the reservoir.
11:51:40 AM
He emphasized that there is a continuing challenge against the
backdrop of a continually declining reservoir; this challenge is
how to encourage the type of investment it will take to get the
production.
11:52:46 AM
MR. UTSLER then referenced a slide showing underlying decline
and how that will continue if new investments are not made.
Contributions from new wells have greatly increased production,
he said. The oil production would be half of what it is today if
BP had stopped drilling in 2003. Keeping the decline in check is
very costly.
SENATOR WAGONER asked if oil would stop flowing in six years if
there was no technological advancement, and commented that that
seemed unlikely to him.
MR. UTSLER replied that the field would not disappear within
that period of time, but maintaining a set level of production
begs the question of when that production would become
uneconomic.
11:57:52 AM
SENATOR WIELECHOWSKI asked for clarification on the investment
chart before the committee.
MR. UTSLER replied in clarifying BP's investment figures. He
explained that each year the problem of declining production
worsens.
12:00:20 PM
CHAIR HUGGINS asked him to explain an element of the graph.
MR. UTSLER said that the 400 wells drilled by 2007 have
contributed 50 percent of the total production stream.
CHAIR HUGGINS stated that Alaskans need to understand that new
production within the legacy fields needs to continue and
investment is needed.
MR. UTSLER agreed and added that activity in the legacy fields
needs to be not only maintained, but accelerated. Their capital
spending in greater Prudhoe Bay over the past four years has
increased from $400 million per year to next year's proposed $1
billion. They are spending more money to mitigate that decline.
CHAIR HUGGINS said that the consequences of misunderstanding the
importance of the legacy fields could be dramatic.
SENATOR WIELECHOWSKI asked if the numbers on the chart were in
real dollars or discounted.
MR. UTSLER answered that the numbers were meant to be equally
weighted. It is meant to demonstrate $250 million spent in 2002
versus $250 million spent in 2007 has resulted in the decline.
SENATOR WIELECHOWSKI asked how much the dollar value declined
between 2002 and 2007.
MS. FITZPATRICK said that she would be happy to get back to him
with that number.
12:05:22 PM
SENATOR MCGUIRE asked for an explanation of a dip in exploration
in July 2006.
MR. UTSLER explained that the dip was a result of a partial
shutdown of Prudhoe Bay due to an oil leak.
12:06:20 PM
SENATOR STEDMAN asked if it isn't normal for the major producers
to move out and let smaller companies enter the field in the
case of oil production decline.
MR. UTSLER replied that the question was a complex one;
normally, a smaller operator couldn't afford to pay to manage
the infrastructure on a field like Prudhoe Bay. It will likely
remain in the hands of the larger companies, and smaller
independents will play off that infrastructure.
CHAIR HUGGINS announced a recess at 12:10:00 PM and called the
meeting back to order at 1:15:09 PM.
MR. UTSLER recapped his technical review of the legacy fields
and the challenges of finding the resource and carrying it into
the future.
1:16:09 PM
He referenced a slide regarding seismic imaging and directional
drilling enabling development, and explained how BP has
developed a way to drill vertically and then in another
direction. This method has allowed BP to unlock smaller and
smaller resources. He explained that up to five lateral bores
can be drilled using one vertical well.
SENATOR STEVENS asked if BP could laterally drill from existing
wells.
MR. UTSLER replied that it could, by using coil drilling. BP
could drill out about 8,000 feet today and drill within three
feet of a target. He then talked about the use of injection
wells and the high costs of those, and how they are most
effective in producing the viscous oil in the western region of
Prudhoe Bay.
1:22:18 PM
He explained that viscous oil is lighter than heavy oil, which
is the consistency of peanut butter. Viscous oil can be pushed
with water, but heavy oil cannot. The biggest challenge in
developing viscous oil is the needed technology.
1:24:44 PM
CHAIR HUGGINS asked about the cost differential in terms of
processing different types of oil.
MR. UTSLER replied that viscous oil means another $15 million in
facilities costs.
CHAIR HUGGINS commented that the entire business of getting
viscous oil to market is complicated.
MR. UTSLER gave an example of how viscous oil wells are more
expensive to drill and that it couldn't be done 10 years ago. If
you were to drill five vertical wells to get to five zones, each
well is on an average of $5 million to $6 million - or about $25
million to $30 million. Using the new technology, they could
drill one well bore for $13 million to $15 million. Offsetting
that, though, they would have to drill three additional injector
wells at a cost of about $5 million each. The facilities to
handle the viscous oil including pipe, separation and heat
necessary to handle viscous oil wells would cost another $15
million plus. Collectively it's a higher cost and the only way
to develop viscous oil at scale currently is to use this type of
technology. It takes two times as long to drill as conventional
wells, around 60 days. So they can only reasonably drill five to
six a year. Only three rigs currently on the North Slope can
drill this kind of well. This is how greater Prudhoe Bay will
continue to be developed.
CHAIR HUGGINS asked, "When you drill laterally, is that in your
tabulation as well or is it just a lateral drill?"
MR. UTSLER explained that viscous oil is predominantly located
in the legacy fields in between and on the western plains of
Prudhoe Bay. Since 2000 these technologies have helped four new
reservoirs to start producing. He said that BP is working as
operator with its working interest owners to develop the viscous
oil potential. By the end of this year or the beginning of next
year they will have a $2.1 billion proposal to develop new
facilities at the surface to deal with the viscous oil, the
development and drilling of new viscous wells and all the
facilities necessary to support that. This will unlock 250
million plus or minus barrels of new oil.
1:30:42 PM
SENATOR MCGUIRE commented that Alaskans have a sense that
there's no hope for the future of the oil fields, and people say
that BP is not investing in Alaska. Hearing talk about new
developments is exciting and hopefully it will make people more
optimistic.
MS. FITZPATRICK said some of BP's investments aren't necessarily
visible, but they are there regardless and there is a future for
oil in Alaska.
MR. UTSLER added that BP believes in the 50-year future of
Alaskan oil production, and is adding new employees all the time
to plan for tomorrow and the future. It has a lot of pride in
the oil field work as well as much awareness and sensitivity to
the environment.
SENATOR WAGONER remarked that the sensitivity is due to a zero-
tolerance policy, and the industry has not always been so
sensitive.
1:34:28 PM
MR. UTSLER went on to describe the tremendous potential of heavy
oil production in Alaska, and showed slides about the history of
such production.
1:36:23 PM
He explained that heavy oil isn't as valuable as light oil in
the marketplace; the differential is up to $14/barrel. Most
refineries are not designed to process the heavy oils and would
need retooling, so the oil is more costly to refine for use in
the marketplace as well.
1:38:09 PM
SENATOR WAGONER said it would seem more appropriate to try a
preliminary process in the field; transportation of heavy oil
will eat into the profit.
MR. UTSLER said it is not economically feasible. It will have to
be mixed with lighter oils to be thin enough to move through
TAPS. Getting it out of the reservoir has to be figured out
first. Each step requires development of expensive technologies.
1:40:47 PM
MR. UTSLER said the majority of that resource base sits in the
legacy fields. Injecting diesel, solvents, and steam stimulates
production.
SENATOR WAGONER asked how deeply buried the heavy oil is.
MR. UTSLER replied that it is between 1500 and 3000 feet below
the surface, below the permafrost. The heavy oil will require
many more wells and a way to mix the heavy oil with the light
oil at roughly a one to one ratio to move through the Trans-
Alaska Pipeline System (TAPS).
1:43:58 PM
SENATOR WIELECHOWSKI asked how much the increased capital costs
for heavy oil would be.
MR. UTSLER replied he couldn't estimate that number at this
stage in the process; BP is still developing its first well.
MS. FITZPATRICK added that the first models showed that the
wells weren't economic, and the numbers are not fully understood
yet.
1:45:21 PM
SENATOR WAGONER asked if the liquids from a potential natural
gas pipeline could be used to help drill heavy oil.
MR. UTSLER replied that it would be an economic decision; there
wouldn't be sufficient natural gas liquids distilled to create
the dilutants needed for the heavy oil.
1:47:35 PM
CHAIR HUGGINS commented that Senator French had joined the
committee.
SENATOR WIELECHOWSKI said he wants to see BP move forward to
profitability and he urged them to get together with the DOR and
come up with a scheme.
MS. FITZPATRICK said BP has been working with the DOR, but they
are still working out the details of the plan.
MR. UTSLER said that so far, BP has drilled one heavy oil well;
it is called the CHOPS (Cold Heavy Oil Production) well. It
produces sand along with the oil, which creates flow paths and
could increase the production rate. This is still in the
development phase.
1:50:33 PM
MR. UTSLER said that, using the state's data, drilling a heavy
oil well costs $16/barrel.
SENATOR WAGONER asked why he used the state's data, because BP's
data is more accurate.
MS. FITZPATRICK replied that BP wanted to keep the calculations
simple, and the state's data looks reasonable to BP although the
company does anticipate that costs will be going up.
1:51:57 PM
MR. UTSLER explained the higher operating costs in Alaska
compared to the average U.S. cost structure which would
disadvantage the product's profitability.
SENATOR WIELECHOWSKI asked if the production tax was included in
the $16-dollar figure quoted.
MS. FITZPATRICK replied yes.
SENATOR WIELECHOWSKI asked how much of the Alyeska pipeline BP
owns.
MS. FITZPATRICK replied that the company owns about one-third;
BP views profitability from an upstream perspective.
SENATOR WIELECHOWSKI asked how BP chooses one profitable project
over another.
MS. FITZPATRICK replied that investment decisions aim to balance
their global portfolio. The factors of cost, fiscal position,
geological and technical risks, and the existence of other
opportunities are weighed. There is no single criterion.
MR. UTSLER added that BP's is not an unlimited investment pool.
The company starts with a list and works through it. Each year a
whole new set of projects comes forward; the investment is
incremental.
CHAIR HUGGINS said that there is not one single template for all
situations.
1:58:58 PM
MS. FITZPATRICK said the quality of the resource is known. The
engineering needs will continue to be difficult and BP has not
yet proved it can get the heavy oil.
2:00:44 PM
She then referenced the blue line on a slide indicating oil
production decline and how the future of oil production is
critically dependent on existing large fields and additional
investments. She said the blue line didn't adequately show the
difference between light and heavy oil, but explained that the
IRS attempted to differentiate the two with the windfall profit
tax and abandoned doing it, because they couldn't do it
successfully. Both Norway and the UK have had many years of
conversations trying to establish how it could be done, but
hadn't managed it yet. The interdependence of heavy oil and
light oil is complicated. She stated, "Speaking from my own
perspective, there are many days I know sitting in the office
that I wish it could be differentiated more easily simply for me
in terms of managing performance. It's not possible."
MS. FITZPATRICK went to the mustard-yellow line indicating
additional investments in existing fields and commented that BP
estimates about half of that is coming from heavy oil and the
other half from light oil. That was the basis of some of her
arithmetic for the $25 billion versus $70 billion estimate. She
reiterated that new technology is key, but there is no guarantee
that that will deliver and new investment is needed to keep even
the low estimate number and certainly to move it above that
number. Of the two new developments, they hope Pioneer will come
on next year with Oooguruk and that they can progress on the
Liberty field in the next year or two. However, she pointed out
that those were on federal lands as opposed to state lands; so
they wouldn't be subject to PPT - but she thought the DNR used
those numbers in its long-term forecasts.
She reiterated two key issues - the interdependence of light and
heavy oil and the facilities and infrastructure. She explained
that the North Slope was built with a 25 to 30-year life in mind
and now BP is looking at the next 50 and hopefully many years
beyond that. So it is appropriate to consider whether the
infrastructure is the right one for the next 50 years or if
another would be more efficient and fit for the purpose of the
up and coming mixed hydrocarbon streams. This investment would
be substantial and wouldn't come through in terms of more
barrels, but not having it could impact the cost structure of
the barrels that are actually getting produced.
SENATOR WIELECHOWSKI commented that this chart she is
referencing goes out only 19 more years, but she said that BP is
planning to be here for 50 years. He asked if she had modeling
somewhere that shows BP can sustain production for 50 more
years.
MS. FITZPATRICK replied that the chart came from the DOR and she
does have a chart and schematic with a lot of assumptions in it
that goes out 50 years. All of its facilities on the North Slope
have it on the wall.
2:05:37 PM
She then showed another slide regarding the fields from which
the oil will be produced and how they would affect state
revenue. She pointed out that 70 percent of the barrels will
come from Prudhoe and Kuparuk.
She went back to the question of how BP makes its investment
decisions. She said they use a mixture of things, but no magic
template; clearly costs are a part of it. The global steel
shortage will impact the cost structure; there is also a finite
supply of rigs on the North Slope. If BP wants to increase its
rig count, it would be in direct competition with the other
producers. If they get another one up there, it would need a
significant revamp to fit the purpose or build new ones. Those
discussions would happen in today's supply environment. So, if
she wants those things, the market is competitive and the prices
are going up.
2:07:24 PM
SENATOR MCGUIRE asked about the degree to which stability of the
political environment impacts BP's decisions.
MS. FITZPATRICK responded that political environment does impact
decisions in terms of post-tax cash flow and fiscal policy.
SENATOR MCGUIRE said that people in the public and the capitol
want to negotiate what the profits will be.
MS. FITZPATRICK said she is well aware of that fact.
SENATOR MCGUIRE said that people are also thinking about the
possibility of another company doing the same business.
2:12:32 PM
SENATOR WAGONER commented that the replacement of BP's pipeline
was estimated at $255 million and asked if a more recent
estimate was available.
MR. UTSLER replied that the pipe has been ordered and would be
replaced in the upcoming winter season, at around the same cost
as originally proposed. However, there are inflationary costs
associated with the manpower needed.
MS. FITZPATRICK thanked Senator Wagoner for his question, and
commented that all costs don't increase at the same rate at the
same time. She added that BP will continue to develop, but there
is a question of scale and pace; attracting investment is key.
SENATOR WIELECHOWSKI said he planned to look at the state's data
on the issue, and since the state and BP are partners, he would
like to see the company sit down with administration.
MS. FITZPATRICK agreed, and she said she would like the DOR to
share its models with her. A number of things in the proposed
bill concern BP, and any sort of changes made should be assessed
as to whether they would increase or decrease the risk in
meeting objectives.
2:21:46 PM
SENATOR MCGUIRE asked if there had been any discussion about
whether BP would prefer to address the question of tax rates now
or in 2011.
MS. FITZPATRICK replied that from her perspective, from what
they understood the purpose of PPT to be in terms of increasing
investment, she hadn't had any indication that is not yet
working. So she thought it was too early to say; she will design
a business plan around whatever the law is. The current law is
PPT and it has a review date on 2011; she will respect that law.
SENATOR MCGUIRE said she didn't disagree and that the committee
will focus on the practicalities of the issue. However, there is
an overarching political dilemma regarding the way in which
previous decisions were made, and the committee needs to find a
way to encourage the public trust. It is a reality and it cannot
be changed. She said it is in BP's best interest to encourage
this trust as well.
SENATOR GREEN said that there is nothing to keep the legislature
from addressing the tax issue every year.
2:25:56 PM
CHAIR HUGGINS said that the numbers are important to the issue,
and the people that rely on BP for business are an important
component of the issue; he appreciates seeing the data about
those people from BP.
SENATOR GREEN noted an upcoming meeting pertinent to the issue.
MS. FITZPATRICK quoted some data regarding the number of jobs
tied to the oil industry in Alaska.
2:29:47 PM
SENATOR WAGONER thanked the presenters, and asked if Bill Allen
and Rick Smith were representing BP when they were lobbying.
MS. FITZPATRICK responded that BP is not under investigation.
CHAIR HUGGINS called an at-ease at 2:32:05 PM and called the
meeting back to order at 2:43:33 PM.
KEVIN MITCHELL, Vice President of Finance and Administration for
ConocoPhillips (CP) Alaska, said that CP is Alaska's largest
producer and leaseholder, and a major explorer and industry
community supporter.
2:46:03 PM
He said that industry and the state should be in partnership; it
is too early to determine whether the PPT is doing what it was
expected to do, and thus too early to make any changes. An
increase in taxes will mean the industry will make a claim that
investment will be inhibited.
He said that his presentation would show how an increased PPT
would impact investments; that hadn't been done in previous
testimony. He then showed a chart for the 2007 fiscal year and
the projections from when the Economic Limit Factor (ELF) system
was in place. He explained that the PPT is delivering higher
revenues than expected, and that prices of oil have been higher
as well. However those prices have been offset by higher costs.
Prices, production and costs have all differed from predictions,
but such variances are a part of business.
2:50:26 PM
He explained that actual results always differ from the budget
because of prices, volumes and costs. It is difficult to budget
with run-up in prices and the inflation rates of goods and
services; it's important to think about the bigger picture of
revenue shaping up to expectations. PPT contains a safeguard for
the state of a 10 percent minimum gross tax on the legacy
fields. This makes the tax very regressive by increasing it when
industry is suffering the most and when prices decline. The 10
percent floor can be triggered by lower prices or higher
investments.
2:53:15 PM
CHAIR HUGGINS asked if that conversation had been held with the
administration.
2:53:55 PM
MR. MITCHELL replied that the administration does understand the
argument. He then showed a chart explaining how the tax floor is
calculated, and gave an example. He explained how the additional
investment in the example did not attract any incentive.
SENATOR WAGONER said that the credit is still there, but they
weren't able to use it all.
MR. MITCHELL replied that was correct, but depending on the
spend profile over a period of years; they might not ever get to
use it.
CHAIR HUGGINS suggested, "It's a disincentive."
2:57:55 PM
MR. MITCHELL agreed and showed the next page which was more like
reality. He scoped out what a Kuparuk budget might look like
using DOR assumptions for volumes, prices, operating expenses,
and capital expenses. It indicated the net tax to the state
would be $408 million. Investments are not getting the benefit
of the credits and features meant to incentivize. He said that
the reality is that the tax will have the same impact in a
higher investment climate.
JIM TAYLOR, Vice President of Commercial Assets for
ConocoPhillips (CP), said that CP participates on all levels of
production and exploration in Alaska. He showed an excerpt of
the DOR's projection for the industry, and said that since 1999
CP's exploration wells have led to new fields and satellites
with a minimal footprint, yielding 6,000 barrels a day.
3:05:34 PM
SENATOR WAGONER asked if certain fields on the diagram were ones
that had been discovered but not put into production yet.
MR. TAYLOR said that he was not sure; the point is that CP wants
to see those fields explored. He then explained different
elements of the diagram, and talked about which fields oil will
come from in the next decade; investments need to be made in the
legacy fields.
3:08:06 PM
He said that there's a lot of challenge in future opportunities
and a lot of needed technological advances. The viscous oil is a
large resource base and unlocking its potential is a major
focus.
SENATOR WIELECHOWSKI asked about CP's progress in technology for
producing viscous oil.
3:09:33 PM
MR. TAYLOR replied that he has spent time in Canada and there
are a lot of emerging technologies there; it's a matter of using
them appropriately and having a good economic scenario. Alaska
has taken some steps towards meeting this challenge. What makes
the recovery of viscous oil so challenging is that the costs are
higher from the start, and the production profile starts out
lower and remains flatter over time. The Century project in
Canada epitomizes the shallowest of heavy oils; such deposit
projects have the advantage of having the infrastructure built
already and by having to take small steps along the way.
However, as oil prices increase, so do opportunities.
3:12:07 PM
He then talked about the challenges associated with getting the
heavy oil out of the ground, and how it has a lot of associated
sand production. He said anything they do that would affect the
economics for marginal fields can delay or defer investment
there or cause it to become uneconomic. These are real
situations they are dealing with today.
SENATOR WAGONER asked what CP will do with the sand.
MR. TAYLOR said there is a plant for disposing of byproducts of
production, which are re-injected in similar zones from which
they came.
3:14:45 PM
He said a sizable oil target remains in the legacy assets and
that price and the advances in technology have presented this
investment opportunity to the industry. He showed them examples
of the West Sak wells that have been completed in the Kuparuk
area. He pointed out that a single well bore has three different
well bores that penetrate a variety of stacked sands. The length
from the original well bore to the final length of the well can
range anywhere from a mile to a mile and a half. They extend
long distances and need technology to make it possible to
penetrate the thin sands.
Also because sand production as a byproduct is a possibility, he
showed them various completion techniques that can prevent that
sand from coming into the wells. They add complexity, cost and
risk.
3:18:46 PM
CHAIR HUGGINS asked for elaboration on water versus oil
production.
MR. TAYLOR said in Kuparuk and Alpine, CP is producing 250,000
gross barrels of oil daily with an associated 650,000 gross
barrels of water; the ratio is approximately three to one. In
addition, CP is injecting seawater as an enhanced recovery
mechanism, so the combined handling is close to 1 million
barrels of water daily. He then referenced a table showing the
six projects that CP is currently dealing with; the company has
a large portfolio of options. Four out of the six are satellite-
type projects, and the majority dealt with heavy or viscous oil.
The projects are significant if aggregated.
3:22:23 PM
CHAIR HUGGINS asked if Mr. Taylor was talking about the project
modeling.
MR. TAYLOR replied that he was.
CHAIR HUGGINS asked about Mr. Taylor's confidence in the model
data in question.
MR. TAYLOR said the data came from consultants who used a wide
range of possible projects, but the costs in reality might be
higher and the economic results may depend on the investor's
actions.
SENATOR WIELECHOWSKI asked how what percentage of Field A was on
the North Slope.
3:24:58 PM
MR. TAYLOR referred to a chart that showed six different
projects of an aggregated 50,000 to 60,000 barrels a day. There
are 2 billion barrels of oil remaining in the legacy fields, and
the viscous and heavy oil target could range between four and 20
billion barrels. While there are significant viscous and heavy
oil reserves, they represent a larger target than can be
simulated and they do rely heavily on conventional oil; the
gross minimum could cause an obstacle to investments.
MR. TAYLOR then referenced another diagram showing how different
projects would look under different prices. Under the current
PPT, developments are advancing well, he reported.
3:28:11 PM
SENATOR WIELECHOWSKI asked if Dr. Finiza's estimates were done
at $40-dollar stress rate.
MR. TAYLOR replied yes, and said that the calculations showed
that projects would not be economic at $40.
SENATOR WIELECHOWSKI asked for the net present value.
MR. TAYLOR replied that he was portraying the investors' view of
the black solid line with the zero MPV at some hurdle discount
rate. Anything above that line would meet or exceed that hurdle
and create value; anything below it would not. He explained how
these projects are challenged with higher development costs and
technical reserve risk. An increase in tax has erosion effects
on investment that could turn a project uneconomic because
investors didn't receive deductibility.
SENATOR WIELECHOWSKI asked for clarification of net present
value between Project 2 on the previous page and Project 5 on
the current one.
3:31:23 PM
MR. TAYLOR explained that anything below the indicated line
destroys MPV value and those above have value-added
characteristics.
SENATOR WIELECHOWSKI said that the two projects seemed close
together on the graph, and looked identical under PPT tax rates.
MR. TAYLOR responded that he would have to compare tax effects
and lifting costs on different graphs.
CHAIR HUGGINS commented that the graph didn't do justice to the
numbers used.
MR. TAYLOR agreed. He said that his main point was that the
gross minimum may have unintended consequences, and he wasn't
sure that it captured the full reality of the situation. It may
need to be reexamined.
3:34:12 PM
MR. MITCHELL said that transitional investment expenditure (TIE)
credits were introduced into PPT legislation to provide
compensation to investors who had invested under a prior tax
structure and who will invest in future years. He then gave an
example of how TIE credits would work on a development field and
explained that a company doesn't get the benefit of it without
continuing investments.
3:37:49 PM
CHAIR HUGGINS asked if the TIE credits had a 2008 sunset date.
MR. MITCHELL replied that they have a five-year sunset period.
They are on a two-for-one basis, so a double expenditure is
required over the five years. If the sunset were in 2008, their
value would erode.
CHAIR HUGGINS said that in his opinion the TIE credits are
disproportional or punitive and the punitive factor should be
examined.
MR. MITCHELL agreed. He said he would then briefly discuss CP's
position on the legislation. The bill includes an increased
level of transparency between the state and the industry, and CP
is supportive of that. However, a handful of areas cause them
concern including provisions on exploration confidentiality.
Some of the explorers will find these be anticompetitive, he
said. Cost deductions are another concern and he suggested that
lease expenditure deduction should be defined in statute. He
urged a full and thoughtful discussion about what the bill wants
to accomplish.
SENATOR WIELECHOWSKI asked if CP wanted continued inclusion of
dismantlement costs.
MR. MITCHELL relied that the PPT allows for a proportionate
share of dismantlement costs. These are necessary expenses in
the full life of the field, and CP would view dismantlement
costs as a legitimate part of doing business on the North Slope.
SENATOR WIELECHOWSKI asked if including dismantlement costs
would encourage investment.
3:44:16 PM
MR. MITCHELL replied that those make up just one cost component
that is factored into the overall economic decision. Including
them would help slightly, but at the initial start of the field
they don't make a huge impact. He explained that such inclusions
are crucial to attracting investors to such a harsh climate.
MR. MITCHELL said that CP absolutely believes that the industry
must be aligned with the state and currently there is not enough
information to make changes in the PPT. The risk of not getting
the right solutions also exists. The third tax change is
significant, and no one wants to have to revisit the issue. The
10 percent legacy floor will have a real effect.
3:47:36 PM
CHAIR HUGGINS said that the presenters had pointed out
unintended consequences, and that those are some things to pay
attention to. Great Alaskans are writing the regulations for the
PPT, and that takes time. The state does owe CP answers, and it
will get them. He commended the administration for recognizing
and addressing investment decline, and said that the industry
has to bear the brunt of the good and bad.
SENATOR WAGONER said that he would like a response letter
regarding prior comments.
MR. TAYLOR replied that none of CP's employees were currently
under investigation, and the company's intention is to continue
to be active in the process.
CHAIR HUGGINS called a recess at 3:52:32 PM and reconvened the
meeting at 6:15:55 PM. He announced that the committee would
take public testimony.
6:16:20 PM
BO DARRAH, President of the Brooks Range Petroleum Company
(BRPC), said that his company is the newest explorer on the
North Slope, and his message is to hold with the status quo. His
company is dependent on outside investors; it agreed to explore
under ELF and it doesn't believe the proposed system will
attract business or cause the producers to make additional
investments. As a non-producer, BRPC don't realize any profit
now so its investments are high risk. Its end goal is to be a
producer, so it's looking at the bill from that perspective.
BRPC probably shares the same view of ACES as the major
producers. His opinion is that three tax increases in three
years is not the answer; the tax is good now and enough time
hasn't elapsed to fully judge it. The state is jeopardizing its
reputation by changing it again.
6:25:13 PM
SENATOR STEVENS thanked Mr. Darrah for his confidence in the
industry, and asked where BRPC's exploratory wells will be
located.
MR. DARRAH said that the company is drilling east of Newitsit
and also north of Prudhoe Bay.
CHAIR HUGGINS said that one of the challenges the state faces is
that the average citizen only thinks of the big three producers
and loses track of the BPRCs of the world; the company's size of
exploration is the future for Alaska.
MR. DARRAH said the benefits of PPT do help start-up companies
but ultimately his company hopes to be in the big game.
6:28:37 PM
MARK SHARP, representing himself, said that he testified 18
month ago that PPT was flawed from the start, because the net
profits would lead to a gross overstatement of expenses and
understatement of profits. Clearly PPT was best for the industry
and the 24th Legislature abdicated its responsibility in passing
it. The state needs to set the policy standard and make the
industry adhere to it. He favored a gross tax.
CHAIR HUGGINS said he recalled that the administration was
recently in Fairbanks and asked if Mr. Sharp attended the
meetings.
MR. SHARP replied that he did, and said that the gross portion
of the governor's proposed tax doesn't kick in until oil prices
reach $30 a barrel; so it appears to him that the tax is more
net-based than a hybrid.
6:35:36 PM
JERRY WALKER, representing himself, said he was a board member
of the Alaska Support Industry Alliance. He said that the
legislature's role is to recognize the importance of fiscal
stability, and that means it shouldn't keep changing the rules.
The legislature should not change the PPT, but rather work to
increase investment in Alaska.
6:37:39 PM
RICH SIEFERT, representing himself, said that he agreed with Mr.
Sharp, and has always advocated a production tax. The state is
experiencing a peak oil crisis, and that factor will serve as a
driver to keep the price of oil high. That will make capital
available, which is what the legislature is looking for; it's a
good bet to assume that the availability of profits from oil
sales will render incentives unnecessary.
CHAIR HUGGINS said that some members of the committee were
familiar with the peak oil idea, and agreed that and it is very
important.
6:41:52 PM
TOM LAKOSH, representing himself, said he wanted to see focus on
what lessees are required to develop in the ground; there's no
correlation between tax breaks and oil a company hopes to
produce. There should also be focus on how the Department of
Natural Resources (DNR) and the Alaska Oil and Gas Conservation
Commission (AOGCC) will regulate hydrocarbons. He recommends
setting rates of parity with the industry in Norway and to focus
on providing an infrastructure that will help all Alaska. He
noted that the termination of the Point Thomson leases was a
good example; there shouldn't be a "scatter-gun" approach in
giving out more money. He also suggested the legislature pursue
a carbon tax.
6:48:12 PM
MERRICK PEIRCE, representing himself, said he's pleased the
governor had the courage to call the special session to question
how the sale of oil is taxed. Article 8 of the State
Constitution requires that the state's oil and gas be sold such
that they return the maximum benefit to the people; clearly that
isn't happening now. It was frustrating to testify last year
because of the things that have since come to light, and it was
frustrating that the legislature killed a bill that would have
allowed the DOR to offer competitive salaries to hire tax
auditors. Currently, $23.5 billion worth of the state's oil
resources are leaving the state annually without anything to
show for it. Fairbanks has high property taxes and high prices
for heating oil, and the state infrastructure is failing.
Clearly Alaska is not getting a reasonable rate of return. He
said he would like the committee to answer the following
questions that hadn't been addressed:
1. Where are the core comparisons that show net profit is better
for the state and development than a gross tax with simple price
escalators and capital credits, and how solid is the data for
those comparisons?
2. Oil production is declining from the North Slope, has been
declining for decades, and is continuing to decline under PPT.
According to the consultants that are working on the bill,
fifteen-year forecast levels are even lower than in prior
forecasts. With world conditions unfavorable to oil investment
in other areas and prices remaining high, where is the data
showing Alaska is getting fair value?
3. Everyone knows that TAPS tariffs increased substantially
after PPT was passed. This increased big oil's tax burden to the
state while at the same time diminishing incentive for
independent oil companies to develop on the North Slope due to
higher tariffs. Does it make sense to give away production taxes
before correcting that disincentive for independents to develop
fields on the Slope?
MR. PEIRCE said he looked forward to hearing the committee
discuss how the state will diversify the economy and create
well-paying jobs by stopping the give-away of billions of
dollars every year by underselling and under-taxing the state's
oil. He added that he didn't hear anyone standing up for Alaska
when the producers run propaganda advertisements that the state
is actually paying for through tax deductions. The producers are
claiming that allowing billions of dollars to leave the state to
multinational corporations is somehow good for the Alaskan
economy. That's not true and that propaganda must be challenged.
CHAIR HUGGINS asked if Mr. Peirce had attended the recent
administration's presentation on this bill up in Fairbanks. One
of its tasks was to give an overview with emphasis on why they
selected a net component versus a gross component for the tax
concept.
MR. PEIRCE replied that he did. He said the presentation by the
administration was "didactic." It was advanced that the issue
was very complex and the average member of the public just was
able to fathom it. He share that an acquaintance in the oil
industry who really cares about Alaska said if you come up with
a complicated scheme such as a net profit system of taxation,
the oil industry will always have better talent - whether it be
lawyers or tax auditors - that the State of Alaska will have. It
doesn't really matter to the oil industry if the rate is 22.5
percent or 25 percent; it would always find a way to profit from
tax laws more than the state.
6:57:22 PM
SENATOR GREEN questioned an explanation in previous testimony
that advertising was not deductible.
MR. PEIRCE recalled that in part of that discussion an amendment
was offered on the House floor that made it illegal for the oil
industry to deduct lobbying expenses under PPT; and that measure
failed. He didn't know about advertising.
SENATOR GREEN remembered that both advertising and media aren't
allowable deductions.
6:59:01 PM
TOM MALONEY, representing himself, described his background in
accounting and finance, and said that lots of discussion centers
around the taxation of legacy fields such as Prudhoe Bay and
Kuparuk. He said that 100 percent of the capital costs for the
infrastructure were paid for by private funds. Some fields have
become uneconomic, so those owners took on all the risk. New
fields will be required, and for that to happen there needs to
be more tax relief. If the state wants to tap heavy oil, it must
recognize that those fields cost more and produce less than the
legacy fields. The legislature needs to define tax rules for new
investments. He asked the committee to think about what can be
done to stem production decline, and said he'd like the existing
producers to continue to bring capital investment to the state;
PPT would encourage that.
7:03:54 PM
PAUL KENDALL, representing himself, said he wanted to thank the
governor because AGIA opened up discussion that had been
neglected. He said he has been watching the development of the
hydrogen industry closely, and believes there is some interest
there. Hydrogen fueling stations are being built around the
world so there should be caution in terms of the oil pipeline.
The state should think about what it would do if the oil
companies decided to pull out and prepare for the worst-case
scenario. The workers like him in the oil field have little
impact or reward, and there is a small number of people that
reap all the benefit. He said he would prefer to see a gross
tax.
CHAIR HUGGINS announced an at-ease at 7:14:01 PM and called the
meeting back to order at 7:20:06 PM.
7:20:07 PM
TONY TENGS, representing himself, questioned whether everyone
who says they're representing themselves actually is because the
oil companies are making a full-court press; he said he hopes
the committee factors in that possibility. He said he is for
simplicity and a gross tax and hoped the legislature comes up
with a fair deal for the state.
CHAIR HUGGINS said that it is always nice to hear from citizens,
and agreed that the system isn't perfect. There being no further
business to come before the committee, Chair Huggins adjourned
the meeting at 7:26:42 PM.
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