02/21/2012 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB192 | |
| Analysis of Royalty Modification (focus on Economic Analysis) Presentation by Department of Natural Resources | |
| SB176 | |
| HB144 | |
| HB185 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 192 | TELECONFERENCED | |
| += | HB 144 | TELECONFERENCED | |
| += | HB 185 | TELECONFERENCED | |
| = | SB 176 | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 21, 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
COMMITTEE CALENDAR
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax; and
providing for an effective date."
- HEARD & HELD
- Analysis of Royalty Modification (Focus on Economic Analysis)
Presentation by Department of Natural Resources
- HEARD
SENATE BILL NO. 176
"An Act exempting sand and gravel and marketable earth mining
operations from the mining license tax; and providing for an
effective date."
- MOVED CSSB 176(RES) OUT OF COMMITTEE
COMMITTEE SUBSTITUTE FOR HOUSE BILL NO. 144(RES)
"An Act requiring the Department of Natural Resources annually
to deliver to the legislature and the governor a report on
fishing stream access."
- MOVED CSHB 144(RES) OUT OF COMMITTEE
COMMITTEE SUBSTITUTE FOR HOUSE BILL NO. 185(RES)
"An Act relating to an exemption from authorizations that may be
required by the Department of Environmental Conservation for the
firing or other use of munitions on active ranges."
- 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
02/10/12 (S) Heard & Held
02/10/12 (S) MINUTE(RES)
02/13/12 (S) RES AT 3:30 PM BUTROVICH 205
02/13/12 (S) Heard & Held
02/13/12 (S) MINUTE(RES)
02/14/12 (S) RES AT 3:30 PM BUTROVICH 205
02/14/12 (S) Heard & Held
02/14/12 (S) MINUTE(RES)
02/15/12 (S) RES AT 3:30 PM BUTROVICH 205
02/15/12 (S) Heard & Held
02/15/12 (S) MINUTE(RES)
02/16/12 (S) RES AT 3:30 PM BUTROVICH 205
02/16/12 (S) Heard & Held
02/16/12 (S) MINUTE(RES)
02/17/12 (S) RES AT 3:30 PM BUTROVICH 205
02/17/12 (S) Heard & Held
02/17/12 (S) MINUTE(RES)
02/21/12 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 176
SHORT TITLE: EXEMPTIONS FROM MINING TAX
SPONSOR(s): WAGONER
01/27/12 (S) READ THE FIRST TIME - REFERRALS
01/27/12 (S) RES, FIN
02/15/12 (S) RES AT 3:30 PM BUTROVICH 205
02/15/12 (S) <Bill Hearing to Continue 2/17/12>
02/17/12 (S) RES AT 3:30 PM BUTROVICH 205
02/17/12 (S) Heard & Held
02/17/12 (S) MINUTE(RES)
02/21/12 (S) RES AT 3:30 PM BUTROVICH 205
BILL: HB 144
SHORT TITLE: REPORT ON FISHING STREAM ACCESS
SPONSOR(s): GARA
02/07/11 (H) READ THE FIRST TIME - REFERRALS
02/07/11 (H) FSH, RES
02/24/11 (H) FSH AT 5:00 PM CAPITOL 120
02/24/11 (H) Moved Out of Committee
02/24/11 (H) MINUTE(FSH)
02/25/11 (H) FSH RPT 4DP 2NR
02/25/11 (H) DP: MILLER, KAWASAKI, AUSTERMAN,
THOMPSON
02/25/11 (H) NR: PRUITT, JOHNSON
04/01/11 (H) RES AT 1:00 PM BARNES 124
04/01/11 (H) Moved CSHB 144(RES) Out of Committee
04/01/11 (H) MINUTE(RES)
04/04/11 (H) RES RPT CS(RES) 8DP
04/04/11 (H) DP: GARDNER, MUNOZ, P.WILSON, HERRON,
DICK, KAWASAKI, FEIGE, SEATON
04/12/11 (H) TRANSMITTED TO (S)
04/12/11 (H) VERSION: CSHB 144(RES)
04/13/11 (S) READ THE FIRST TIME - REFERRALS
04/13/11 (S) RES
02/17/12 (S) RES AT 3:30 PM BUTROVICH 205
02/17/12 (S) Scheduled But Not Heard
02/21/12 (S) RES AT 3:30 PM BUTROVICH 205
BILL: HB 185
SHORT TITLE: EXEMPT DISCHARGES FROM USE OF MUNITIONS
SPONSOR(s): T.WILSON
03/10/11 (H) READ THE FIRST TIME - REFERRALS
03/10/11 (H) RES
03/18/11 (H) RES AT 1:00 PM BARNES 124
03/18/11 (H) Heard & Held
03/18/11 (H) MINUTE(RES)
03/28/11 (H) RES AT 1:00 PM BARNES 124
03/28/11 (H) Moved CSHB 185(RES) Out of Committee
03/28/11 (H) MINUTE(RES)
03/29/11 (H) RES RPT CS(RES) 7DP 1NR
03/29/11 (H) DP: FOSTER, MUNOZ, P.WILSON, HERRON,
DICK, FEIGE, SEATON
03/29/11 (H) NR: GARDNER
04/01/11 (H) TRANSMITTED TO (S)
04/01/11 (H) VERSION: CSHB 185(RES)
04/04/11 (S) READ THE FIRST TIME - REFERRALS
04/04/11 (S) RES
04/13/11 (S) RES AT 3:30 PM BUTROVICH 205
04/13/11 (S) Heard & Held
04/13/11 (S) MINUTE(RES)
02/17/12 (S) RES AT 3:30 PM BUTROVICH 205
02/17/12 (S) Scheduled But Not Heard
02/21/12 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
DAN SULLIVAN, Commissioner
Department of Natural Resources (DNR)
Juneau, AK
POSITION STATEMENT: Provided department background on royalty
issues and plans of development.
BILL BARRON, Director
Division of Oil and Gas
Department of Natural Resources (DNR)
Juneau, AK
POSITION STATEMENT: Testified on royalty modification issues in
Alaska.
KEVIN BANKS, Petroleum Market Analyst
Division of Oil and Gas
Department of Natural Resources (DNR)
Juneau, AK
POSITION STATEMENT: Explained royalty as an economic mechanism
in Alaska and answered questions about its applications.
JOANNA BALES, Deputy Director
Tax Division
Department of Revenue (DOR)
Anchorage, AK
POSITION STATEMENT: Answered questions about application of
state's mining tax relative to SB 176.
ASHLEY BROWN, Attorney
Civil Division
Department of Law (DOL)
Anchorage, AK
POSITION STATEMENT: Had no further comments on SB 176.
REPRESENTATIVE LES GARA
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Sponsor of HB 144.
ED FOGELS, Deputy Commissioner
Department of Natural Resources (DNR)
Anchorage, AK
POSITION STATEMENT: Commented on access issues relative to HB
144.
REPRESENTATIVE TAMMIE WILSON
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Sponsor of HB 185.
KEVIN WARD, regional counsel
U.S. Army, Northern Regional Environmental Office
Denver, CO
POSITION STATEMENT: Supported HB 185.
SETH BOSANG, Assistant Attorney General
Civil Division
Environmental Section
Department of Law (DOL)
Representing the Alaska Department of Environmental Conservation
(DEC)
Anchorage, AK
POSITION STATEMENT: Agreed that HB 185 is intended to make state
and federal law consistent.
KARLA HART, representing herself
Juneau, AK
POSITION STATEMENT: Opposed HB 185.
ACTION NARRATIVE
3:35:26 PM
CO-CHAIR JOE PASKVAN called the Senate Resources Standing
Committee meeting to order at 3:35 p.m. Present at the call to
order were Senators Wielechowski, McGuire, French, Stedman, Co-
Chair Wagoner and Co-Chair Paskvan.
SB 192-OIL AND GAS PRODUCTION TAX RATES
PRESENTATION BY DEPARTMENT OF NATURAL RESOURCES: ANALYSIS OF
ROYALTY MODIFICATION (FOCUS ON ECONOMIC ANALYSIS)
3:36:30 PM
CO-CHAIR PASKVAN announced the consideration of SB 192. He asked
DNR Commissioner Sullivan to provide introductory comments to
the presentation of the economic analysis of royalty
modification.
^Analysis of Royalty Modification (Focus on Economic Analysis)
Presentation by Department of Natural Resources
3:37:00 PM
DAN SULLIVAN, Commissioner, Department of Natural Resources
(DNR), said he had asked permission to provide an overview of
things he is doing in some of the areas this committee was
interested in. He said an overview is important because it will
put into context some of the more detailed issues that Mr.
Barron and his team will soon be testifying on about royalty
issues and plans of development. He complimented his team for
their work today and emphasized that the goal of DNR is to be
responsive, respectful and informative with regard to the
legislature as it grapples with some of the most critical issues
facing the state.
3:38:43 PM
COMMISSIONER SULLIVAN said this committee shares an important
strategic goal with the DNR and the Parnell administration: to
increase the numbers of companies and investors in Alaska in
terms of hydrocarbon exploration, development and production in
both Cook Inlet and the North Slope. All kinds of companies are
needed to do that from the super majors, the legacy producers,
to the small and nimble companies focusing on all kinds of
resource development plays whether it's new large fields, legacy
fields, smaller conventional pools of oil or unconventional
plays such as shale, heavy or viscous oil. He said the USGS
would have estimates of North Slope unconventional hydrocarbons
coming out soon.
Given the importance of the issue, the commissioner said over
the last year that DNR has taken unprecedented actions to
"relentlessly get out and tell the Alaska story to all types of
companies" in the U.S. and overseas. They have been focusing on
four things: Alaska's amazing resource base, investment
incentives, tax reform, and lease terms. The department had
follow up meetings with its technical lead by Mr. Barron.
3:41:52 PM
While the department is out making the case for Alaska, they
gain intelligence on what these companies think about Alaska.
Literally all of them see Alaska's resource base as a world
class structure on the North Slope. Some of the more negative
feedback was about the cost of doing business in Alaska from
drilling wells, remoteness, infrastructure, short exploration
season to high tax rates. He acknowledged all the new players on
the North Slope and in Cook Inlet and he vowed to continue
focusing on telling the story.
COMMISSIONER SULLIVAN said once they get here he wanted to
advance responsible development policies that help spur action
and Mr. Barron had done a good job of that over the past year.
In general, that means using a business-like in dialogues to
establish commitments and benchmarks for development and then
working hard to hold lessees to these commitments and having
consequences when they are not met. He said the state is aligned
with these companies in a lot of areas - for example the CD5
issues, some of the federal OCS issues and EIS issues at Point
Thomson.
Other times they are not aligned and that is when they try to
guard the state's interest and work constructively. For example,
the commissioner said he revised the lease terms with regards to
the very significant North Slope lease sale. Some have been as
short as 5 years, which is kind of tough given the short
exploration seasons and the different challenges with
exploration on the North Slope, and as long as 10 years. He also
raised the rent rate from $10 (for the first 7 years) to $250 an
acre for years 8, 9 and 10 if adequate work hadn't been
performed to encourage exploration and production, particularly
on the North Slope, or give up the lease. He also accelerated
work commitments in last spring's lease sale in Cook Inlet where
he knew hydrocarbons were present.
3:45:30 PM
SENATOR STEVENS joined the committee.
3:46:27 PM
COMMISSIONER SULLIVAN said the second area he had worked on was
unit applications and that last year several applications came
in to unitize large areas of North Slope acreage, and with Mr.
Barron's help, they dramatically decreased the size of what
would be accepted in terms of unitized acreage and required firm
and aggressive work commitments. The acreage they didn't accept
to unitize just went back out for lease. Several tens of
thousands of acres were denied unit status in the December lease
sale and were put back out to lease. One unit application was
denied outright, because the previous work commitments weren't
met and all of that acreage went back out to lease.
3:48:23 PM
COMMISSIONER SULLIVAN said they have been trying to cooperate
with the federal government to accelerated responsible resource
development by testifying in front of Congress and by meeting
with senior federal officials in Washington, D.C., on a whole
variety of issues. For instance DNR played a very critical role
in developing a white paper that was sent to the federal
administration resulting in a CD5 reversal. He said all of this
relates to the broader strategic goal of his five-part 1 million
barrels a day within 10 years strategy.
3:50:10 PM
BILL BARRON, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), testified on several aspects of royalty
modification. Basically, he said, royalty is the sovereign's
share regardless of the activity of the developer; it is a
driver of the Permanent Fund and of the General Fund. In the
last several years, royalty has gained the state $2-3 billion a
year.
CO-CHAIR PASKVAN said in this context, royalty is the
representation of Alaska's ownership interest in the resource.
MR. BARRON said that was absolutely correct.
CO-CHAIR PASKVAN said the term "royalty" might be used in other
jurisdictions and then it may be applicable to a private
ownership as compared to state ownership in Alaska. Now they
were looking at the potential for a company to receive royalty
modification based upon an economic analysis.
3:52:27 PM
MR. BARRON replied that was correct. He said the unmodified
royalty rates throughout the state are 12-16 2/3 percent. The
elevated royalty (16 2/3 percent) are primarily in the North
Slope and portions of the Beaufort, because those areas are very
well known hydrocarbon producing areas.
He explained that the royalty modification statute is long-
standing but a very much unused opportunity in the state. It was
amended in 1995 and basically gave the DNR the opportunity to
look at three classifications of areas: the cost of development,
the volume of the oil or gas in the field and the price of the
product, itself. New fields and pools were added, the reason
being that the commissioner at the time identified a lot of new
discoveries and new developments that were smaller. It was again
amended in 2003 and designed to allow more public interest and
participation in the process. Part of that was to push Liberty
in Badami.
MR. BARRON said in 1995, product price was $15-18/barrel; today
it's $124/barrel. In 2003, the first uptick in product price
happened at $25-30/barrel. What was going on in the industry at
those two times? In 1995, Milne Point was shut-in, because the
oil price low. There had only been one new unit on the North
Slope and that was North Star. Overall world-wide production was
declining primarily due to low oil prices. In 2003, TAPS dropped
below 1 million barrels a day for the first time and there
seemed to be a bit of a surge on North Slope unit approvals,
probably tied to lease terms that were coming due. Oil prices
were beginning to climb, but there hadn't been any use of
royalty modification by the industry.
3:56:05 PM
MR. BARRON said companies have three opportunities to bring in
applications for royalty modification and the division believes
that it should be the last thing touched in any negotiations
with companies in terms of revenue to the state.
3:56:39 PM
The first category that a company can apply for royalty
modification in is if it is a field or a pool that has no
previous production; it has to be reasonably well delineated
(DNR's jurisdiction), and it has to be a field that in the
company's opinion would not otherwise be economic if it did not
receive royalty modification. If it is granted through this
process, the royalty can't be reduced below 5 percent.
CO-CHAIR PASKVAN commented that means that the commissioner as
part of this process can reduce the royalty by more than 50
percent.
MR. BARRON replied that was correct.
3:57:51 PM
SENATOR FRENCH asked if a company says a field is not
economically feasible, how the division makes its decision.
MR. BARRON asked him to hold that question until after the
presentation walked through that very point, because is the real
heart of what he was going to talk about.
SENATOR FRENCH responded that he would wait.
MR. BARRON continued that the second opportunity for royalty
modification is when a field is just about at the end of its
life. Again, it is the whole premise of uneconomic, and then it
can't go below 3 percent.
3:59:18 PM
He said the last opportunity to request royalty relief is when
the field is shut-in and a company wants to reestablish
production.
CO-CHAIR PASKVAN asked what the liability for production tax is
if one is making an application for royalty modification.
MR. BARRONS replied that as part of the application process, the
department runs the economics on whatever tax fiscal system is
in place at the time. Royalty modification is not designed to be
applicable at a project level (pool), but rather to an entire
field. He said the DNR can hire a consultant, if they deemed it
appropriate (at the cost of the applicant) to make sure the
department's work is transparent and for verification. He said
the relief mechanism is usually an adjustment based on price
change of the oil and gas; it can be based on other relevant
factors including the production rate, the ultimate recovery,
development and operating costs.
4:02:20 PM
So edging in toward Senator French's question about just the
application review process; the department doesn't solicit these
applications. The companies come forward asking for royalty
modification. Part of the stipulation is that it is incumbent
upon them to submit a significant amount of technical and
financial data to prove to the department that the field is
uneconomic. All of this information is held in confidence; that
is a very important part of this statute.
MR. BARRON said that the department does not blindly accept this
information; it goes through an incredibly rigorous process of
"stochastic modeling" and looking at things like net present
values, rates of return, break even analysis, operating costs of
the area and if capital costs are reasonable. They come up with
their own assessment of whether or not a prudent investor would
carry the project forward. Sunk costs (costs in the past) are
typically excluded, because the department evaluates the
forward-looking set of economics.
4:05:07 PM
CO-CHAIR PASKVAN asked him to define "forward-looking" company
more fully.
MR. BARRON answered that "forward-looking" means that you are
looking forward and not including anything in the past. A lot of
times companies do two sets of economics; one is point-forward
economics to see if their investments from today forward make
sense, and at the same time they will run "full field" or "full
history" economics for internal purposes (that includes all the
sunk costs). The reason sunk costs are excluded in this
assessment is because they are looking at costs that impact net
present value. Once the department is done with its modeling,
Mr. Barron said, they issue a preliminary finding as a public
notice and then there is a 30-day public comment period. They
evaluate the public comments and respond to them and then issue
a final finding.
4:06:38 PM
MR. BARRON next talked about the decision parameters in terms of
economics. He said they primarily use the "expected monetary
value (EMV)," a stochastic (statistical) term used when
different distributions of different variables are used to
determine the expected value of a project. For a simple example,
if you have a decision tree with two branches; one is at 90
percent probability and one is at 10 percent (both adding to 100
percent). The 90 percent probability has a value of $10; the 10
percent may have a value of $100. Your expected monetary value
is .9 times $10 and .1 times $100, added together.
4:07:42 PM
CO-CHAIR PASKVAN said he was describing a Monte Carlo analysis
that looks at multiple factors to arrive at EMV.
MR. BARRON said yes. The key parameters they look at are:
product price, potential reserves and production rates, the
capital costs and the operating costs. The key is that all of
these have uncertainty.
CO-CHAIR PASKVAN referred to the Nikaitchuq royalty case from
October 30, 2006, that said "granting royalty modification
should influence the behavior of the applicant." What does that
mean when performing their economic analysis?
MR. BARRON replied in that document, the behavior they are
trying to influence is the decision of the company to either
proceed with the development of the field or not. If they grant
royalty modification and the company moves forward with the
field, that is the change of decision. Otherwise the field would
not be developed.
4:09:34 PM
SENATOR WIELECHOWSKI asked when a company takes out a lease in
the State of Alaska, at what point in time are they obligated to
develop it or can they just sit on it forever.
MR. BARRON replied when a company takes out a lease, they have
been granted the exclusive right to hold that acreage for the
term of the lease. There is no requirement for them to do
anything during the primary lease term; they can sit on it. At
the end of the life of that term, the state takes the property
back and it can be put back into a lease sale. As the
commissioner mentioned, that is one thing they were very
cognizant of in the current lease sale and modified the lease
terms to increase the opportunity of development by increasing
the cost after year 7 to $250 an acre instead of $10. There is a
choice: you can hold the land but it will cost you a significant
amount.
SENATOR WIELECHOWSKI asked if it is the best policy for the
state to lease land that is wildly economic and let companies
sit on that land for seven or eight years and not develop it.
4:11:58 PM
MR. BARRON replied that in a primary lease term the land may or
may not be known to be productive. The heart of the lease sale
is to offer state land to companies to do adequate exploration
and to then take that exploration and knowledge and, if it is
something that can be developed, to move into the development
phase.
SENATOR WIELECHOWSKI asked if he knew of other jurisdictions
that try to encourage exploration by different means through
their lease terms.
MR. BARRON replied that many jurisdictions, internationally and
domestically, have many different ways of trying to encourage
companies to do adequate exploration and development.
SENATOR WIELECHOWSKI asked if they have no obligation to do a
single thing to develop or do a single seismic test under
current Alaska law.
MR. BARRON answered that was correct under the primary lease
term.
CO-CHAIR PASKVAN asked him to define "primary lease term."
4:14:00 PM
MR. BARRON said the primary lease term in the case of the North
Slope is for 10 years. If a company is deemed the highest bidder
in a lease sale, they are granted the right for a 10-year
timeframe. During that timeframe, the state's objective is to
have them do as much exploration work as possible to establish
the productive potential of the land. Once they have deemed it
to be commercial hydrocarbons, they ask the division for
unitization, which is when they establish work commitments and
financing criteria during their first primary phase of
unitization. That's typically a five-year timeframe. This is
where the department has made modifications in its negotiations
with companies this year to drive that discussion forward. In
the first year or two, they have an obligation to the state and
if they aren't performed (i.e. drill a well), you will lose the
bond and the acreage. Once that field is in production, that
production holds the lease.
SENATOR WIELECHOWSKI asked if Kuparuk is producing 150,000
barrels a day and the producer said they were going to lower
production to 1,000 barrels a day until they get tax breaks, was
he saying the state couldn't take action.
MR. BARRON replied he thought that would be correct; that land
is held by production. Companies have an opportunity to discuss
on an annual basis their plans of development (tomorrow's
presentation), but in theory and practice once a lease has
production on it, it is held by that production.
4:16:29 PM
SENATOR STEDMAN asked if he knew of any cases when industry
turned down the volume for reasons that weren't mechanically or
constraint driven on a productive lease.
MR. BARRON answered not that he was aware of.
SENATOR WIELECHOWSKI asked what kind of internal rate of return
he would expect for a project to be deemed economic for a
producer.
MR. BARRON replied that DNR's keeps its economic assessments
very internal in royalty modification cases. That is done,
because they don't want to encourage the industry to work its
numbers in a way that would slant them toward royalty
modification. He said the department looks at each project
differently so that the parameters they use for one are
different than the parameters for another, because their
reserves are different, the product profiles are different, the
escalation curves may be different and all of their operating
conditions could be different. Each one has its own hurdle rate.
They are trying to find at what point in time, if they were to
give royalty modification, what it would be to change the
behavior of that company to go from a nonproducing asset to a
producing asset.
CO-CHAIR PASKVAN asked if a duty to produce is part of that
prudent producer obligation.
4:20:07 PM
MR. BARRON said that was an interesting question and he was
trying to understand the difference between the two concepts. He
didn't think any sovereign had the right to force a company to
produce uneconomic assets. So, while company may be prudent and
may have a duty to produce, the question would be at what point
in time any sovereign has the right to force a company to
produce an uneconomic asset.
CO-CHAIR PASKVAN said he assumed that when he does the Monte
Carlo simulation on granting royalty relief, he would look at
net present value and internal rate of return. If he comes to
the determination that a prudent investor would develop this
field based upon the department's modeling, doesn't that
determination also create a duty to produce?
4:22:00 PM
MR. BARRON responded that thinking through the royalty
modification context, when the division does its assessment and
deems that a prudent investor or operator would move forward
with the development without royalty modification, the
application is denied. The first threshold of an assessment is
that it's not on production. At that junction, they then have a
choice to make: if they choose not to develop the field after a
period of time, that land is relinquished and returned to the
state.
In the case of the other two aspects of royalty modification, if
the field is already on line and it is essentially either almost
dead or is dead, that is the state's opportunity to increase
production by modifying the royalty. It's not reasonable to
think a company is purposely withholding production. It's not in
their best interest or that of their shareholders' and it's
against the concept of capitalism and entrepreneurship.
SENATOR WIELECHOWSKI asked if OPEC had ever withheld production.
MR. BARRON replied that is market manipulation and market
control; and whether anyone in the state is withholding
production is not the crux of this committee's question. OPEC is
a cartel; it is not an individual company that is based on
capitalism; they are trying to control an entire market and not
produce economically the reserves of the field that they are
operator on.
4:24:47 PM
CO-CHAIR PASKVAN said a decade ago the division director said in
a document dated January 3, 2002 that this state had an
oligopoly.
MR. BARRON responded by urging them to think back a little bit
about what that meant. In terms of operations on the North
Slope, clearly there are three primary players; there are two
new players and there is an opportunity to have at least one
more this year two more after that. At the time that document
was presented, there were issues on access, cost structure and
available resources for new entries into the market to break in.
The context was a little bit different and the thrust of that
dialogue probably had nothing to do with royalty modification.
It had to do with if there was a need for additional competition
on the North Slope, and the DNR and the DOG have made great
strides in the last several years to increase the competitive
nature on the Slope.
CO-CHAIR PASKVAN said he had talked about his in-house economic
models for performing the analysis for royalty modification and
he assumed that he believed it's reasonably accurate and
effective.
MR. BARRON agreed yes.
CO-CHAIR PASKVAN asked if the DOG used that model to assess the
homogenized oil industry in Alaska, for example taking FY13 and
using the parameters the department knows about the oil industry
to determine net present value, internal rates of returns and
those types of Monte Carlo analyses.
4:28:11 PM
MR. BARRON replied no, not to his knowledge. That would be a
huge undertaking and be exceptionally complicated for one field,
to say nothing of how much more complicated it would be to do it
for the whole state of Alaska. The next slide showed numerical
distributions of various variables; the first one was product
price and was basically a normal distribution of production
rates and production, operating costs and capital costs, which
in this presentation are demonstrated as triangular, and they
all have high end and low end truncations. Each one of those
could be looked at a little bit differently. In some areas
operating costs can be used as a uniform distribution (the same
throughout time). A Monte Carlo run uses all of these
distributions; and including a production decline is very
complicated if you want to take it to a well level or a field
level. "Doing it on a statewide basis would be an incredible
task."
4:36:08 PM
SENATOR WIELECHOWSKI said they have heard talk that if they pass
an oil tax reduction there will be an investment of $5 billion
over five years and it will generate 90,000 barrels of oil a
day. Some of them in the building also ran some numbers and
concluded that the state would pick up 60 percent of the costs,
so it would actually be an investment of $2 billion by the oil
industry. That would generate a net present value of over $3
billion and an internal rate of return of about 92 percent.
"Does that sound like an economic project to you under ACES?"
MR. BARRON answered yes.
SENATOR WIELECHOWSKI asked if he thought that project should go
forward under ACES and the terms of the leases.
MR. BARRON responded that part of the answer is the discussion
of what it is being compared to relative to the company and its
desire to advance its commerciality. The DOG doesn't necessarily
look at that. In terms of royalty modification, if a project
came to them and had a 92 percent rate of return in its
application, he guessed it would probably be rejected.
SENATOR WIELECHOWSKI asked if something was wrong with the
system, assuming the numbers are correct, that there are fields
out there that can generate a net present value under ACES of $3
billion at a rate of 92 percent ROR, and they are not being
developed.
MR. BARRON replied that he would welcome the opportunity to look
at the facts and figures he was discussing. He didn't know of
any field that is not currently producing with those economics.
4:33:08 PM
SENATOR FRENCH asked what sorts of improvements he sees in
taking royalty from 12 percent down 5 percent (if that's a
typical case).
MR. BARRON answered that involves a field-by-field assessment of
how big the resource plays in it and the longevity of that
field. The current product price and what it's going to do may
actually have a greater swing than the royalty modification
itself. What you think the escalations or de-escalations on
operating costs and capital costs are, what the company's plans
are over the next 10, 20 or 30 years in terms of what they think
is required for capitalization. These are the kinds of in-depth
discussions the department has with these companies in terms of
overall long-term field development.
SENATOR FRENCH said many of their questions come back to the
current ACES debate and the fact that the state has suddenly
gone from one exploration well last year to a much more robust
exploration season this year and maybe next, and now they are
hearing questions about whether they will develop. It seems like
this is exactly what royalty modification is for and he was
trying to a get a feel for how big a lever royalty modification
is.
MR. BARRON asked Mr. Banks to field that question.
4:35:37 PM
KEVIN BANKS, Petroleum Market Analyst, Division of Oil and Gas,
Department of Natural Resources (DNR), explained that Director
Barron's caveats about responding to the question were
important, because every project is so different. Looking at
Pioneer's application in the Oooguruk Unit, their royalty relief
(12.5 to 5 percent) moved the IRR dial only a couple of
percentage points at relatively higher prices (for the time). At
a $60 price, the IRR change was about 1.5 percent; at lower
prices it was a little bit more. The royalty relief mechanism,
because a fairly small slice of the pie is being changed, has a
somewhat moderated effect on the economics.
4:37:10 PM
SENATOR WIELECHOWSKI asked if he was aware of any projects,
fields or developments under current lease that are uneconomic
under the current tax structure.
MR. BARRON answered that the Pioneer project may fall within
that category, because it has been granted royalty modification.
The Eni or any project even though it has royalty modification
probably is not in that category because it takes effect at a
$40-$43 basement. Some fields in Cook Inlet possibly, but they
are under a completely different royalty and tax code and
probably shouldn't be part of the dialogue at this juncture. He
didn't know of any uneconomic fields that were uneconomic under
the current tax structure, because no one has come forward to
apply for royalty modifications.
SENATOR WIELECHOWSKI asked if the administration had done any
analysis of fields to see whether they are economic or
uneconomic under the current tax structure.
MR. BARRON replied that he was not aware of any activity like
that being done or not being done.
4:39:09 PM
MR. BARRON reviewed a short list of royalty modification
applications that had come in:
-BP at Milne Point in 1995 - that was denied.
-Unocal for 10 platforms in Cook Inlet 1997 - did not pursue,
but it wouldn't have fallen into any of the buckets, because 10
platforms was beyond the scope of any specific field or pool.
-Phillips' application for Tyonek Deep in Cook Inlet in 1999,
but it was withdrawn voluntarily. It might have qualified,
because the Deep unit had never been produced from that
facility.
-Pioneer for Oooguruk in 2005 - it was granted and royalty was
reduced to 5 percent until their NPSL lease has payout.
CO-CHAIR PASKVAN asked him to define NPSL payout.
MR. BARRON answered that means "net profit share lease," the
lease term for payout. There's one lease within the Oooguruk
field that is an NPSL lease and when that lease has payout, the
reduction goes away; the state has audit rights on Pioneer's
books to make sure the payout has taken place.
-Kerr-McGee came forward in 2006 with the Nikaitchuq and Kakivik
Units and the application was denied. After looking at it very
seriously, the department felt it could have moved forward
without royalty relief.
-Chevron came forward with Ivan River and Stump Lake in the
Kenai area in 2007 and it was withdrawn.
-Eni came forward with the Nikaitchuq Unit again in 2007 - this
was approved based on a different assessment and analysis that
had the most to do with the trigger point of product price and
volume. If the field falls below 4,000 barrels a day within the
first 120 months, they get their royalty modification. If the
product price drops below $42.64, they get royalty modification.
He said Eni's production to date is around 7,000 barrels a day
and they do not enjoy royalty modification, because neither one
of the two triggers have been satisfied.
4:43:54 PM
He said two modifications have been granted since 1995 and only
one is being used. The division is very careful to not grant
reduction to a field forever; at some point the state has to
recapture its sovereign share.
CO-CHAIR PASKVAN asked if he assumed that all other operations
are currently economically profitable.
MR. BARRON replied that one could make that assumption and that
conclusion, but it's important to understand that the three
categories of applications fall within very discreet bounds;
that a field has never been on production and the other two are
at the very end of field life or when a field has been shut in.
While they could assume that all fields are currently
economically viable, none of them are at the end of the life of
the field and don't qualify to make an application for
reduction.
SENATOR WIELECHOWSKI asked if he saw any benefit to changing the
law to allow for royalty relief in the case of a heavy oil
project, for example, within Prudhoe Bay that is very
profitable.
MR. BARRON replied that they would have to be incredibly
cautious about structuring something like that. Heavy oil might
be a good example of royalty modification by a participating
area (PA). It would be very difficult to structure the language
if someone were to put gas injection in the crest of a
structure. The question would be how to assess what production
to apply royalty relief to; that production would also have to
be audited for accuracy in a greater field.
CO-CHAIR PASKVAN said one of the Nikaitchuq applications had an
analysis that indicated at $60 a barrel that the operator would
experience "very large profits." Is that accurate?
MR. BARRON deferred to Mr. Banks.
4:48:19 PM
MR. BANKS said that was in reference to the Kerr-McGee project
that was eventually denied. He recalled that that project was
quite a bit different than the one proposed by Eni somewhat
later. A couple of factors formed the conclusions for the Kerr-
McGee application. One had to do with the taxpayer situation at
the time. Kerr-McGee was owned by Anadarko and had existing
production going on; so their PPT tax situation was different
than Eni's simply because there was an existing tax upon which
credits and deductions could be taken (that weren't available to
Eni in the same way). The other important factor for the Kerr-
McGee project was the prices at the time were relatively low
($40-$50) and the costs they had predicted in the go-forward
economics were substantially less than what Eni proposed
somewhat later. So at just a slight increase in price the
project would be profitable and the downside risk for the
project was rather small as well. The two conclusions were
combined in evaluating this project.
[SB 192 was held in committee.]
4:51:11 PM
At ease from 4:51:11 to 4:51:43 p.m.
SB 176-EXEMPTIONS FROM MINING TAX
4:51:43 PM
CO-CHAIR WAGONER called the Senate Resources Committee meeting
back to order and announced SB 176 to be up for consideration.
It had been heard on February 17 when there was some discussion
about whether the tax would still apply to possible future
mining of rare earth elements by removing "marketable earth"
from the definition of "mining." He asked Ms. Bales if she could
respond to that concern.
4:52:39 PM
JOANNA BALES, Deputy Director, Tax Division, Department of
Revenue (DOR), said she did confer with the Department of Law
(DOL) about Senator Wielechowski's question and apologized that
the confusion was more hers, but they agreed that rare earth
elements are taxable under the current definition of "mining" as
a "valuable metal ore or a mineral." Their interpretation of
"marketable earth," historically, has been that it is things
such as top soil and peat. She said whenever they have confusion
with interpretations, they also go to the dictionary definitions
and in this case the definition of "earth" is "soil." So they
felt confident that excluding "marketable earth" does not
exclude the rare earth elements.
4:54:05 PM
ASHLEY BROWN, Attorney, Civil Division, Department of Law (DOL),
said he didn't have any more comments [on SB 176].
CO-CHAIR PASKVAN moved to report SB 176 [CSSB 176( ), 27-
LS1201\B] from committee with individual recommendations and
attached fiscal note. He disclosed that he has an interest in a
gravel operation in Interior Alaska.
CO-CHAIR WAGONER withdrew his objection to adopting the CS, and
finding no further objections, announced that CSSB 176(RES)
moved from the Senate Resources Standing Committee.
4:55:05 PM
At ease from 4:55 to 4:57 p.m.
HB 144-REPORT ON FISHING STREAM ACCESS
4:57:27 PM
CO-CHAIR WAGONER announced HB 144 to be up for consideration
[CSHB 144(RES), 27-LS0220\I, was before the committee].
CO-CHAIR PASKVAN moved to bring HB 144 before this committee for
purposes of discussion.
CO-CHAIR WAGONER objected for discussion purposes.
4:58:25 PM
REPRESENTATIVE LES GARA, sponsor of HB 144, testified that
people have lost their public access to fishing streams
throughout the country. For instance, people can no longer
access 180 miles of the Missouri River and in Wyoming and
Montana, ranchers and movie stars are famous for being able to
close off fishing streams' access to people. Alaskans are lucky,
but we're slowly losing fishing stream access, especially along
the road system where roughly half of the Salcha River in
Fairbanks is thus endangered, along with over one mile of
Montana Creek and Willow Creek in the Valley and over one mile
of the Anchor River on the Kenai Peninsula.
REPRESENTATIVE GARA said when the state owns the land there is
access in the smaller rivers where one can wade up to the high
water mark, but other big rivers are mostly in wilderness status
(nobody has wanted to develop them) and privately owned by
Native corporations and other private property owners. And one
day they will be developed, which is fine. That is the private
property owners' right. But HB 144 asks the Department of
Natural Resources (DNR) and the Alaska Department of Fish and
Game (ADF&G) to say what they have done to maintain and protect
public access in the prior year and what their plans are for the
next year. The goal is to remind them that they have a duty to
promote and maintain public access, and if we are going to start
to lose it, it's much cheaper for the state to try and negotiate
a voluntary easement purchase before the land is developed
rather than after. That is the problem in Missouri, Wyoming and
Montana. Once the land has been developed, you can only buy tiny
parcels back. In Alaska, before the landowners decide they are
going to do something with the land, it would be smart for the
state to at least approach the landowner, and the legislature
could appropriate whatever funds it thought appropriate, about
the public access. If they say yes, easements are wanted to the
river and along it and in places where the rivers are too deep
to wade. He said this is a simple bill and it maintains the
state's heritage of sport and other sorts of fishing and helps
in subsistence fishing, too.
5:02:06 PM
With time being too short for a lot of testimony, he listed
letters of support from the Alaska Fly Fishers, the Outdoor
Council, the Kenai River Sportfishing Association, and a number
of other individuals.
SENATOR STEDMAN said this request is for an annual report and
that seemed like a lot of work and asked if it could done every
four or five years.
REPRESENTATIVE GARA replied that the department already knows
where public access is being lost and the report won't change
much from year to year unless new access has been successfully
accumulated. It takes a long time to negotiate a piece of
easement and having an annual requirement will force them to
think it through every year.
5:04:18 PM
ED FOGELS, Deputy Commissioner, Department of Natural Resources
(DNR), said the conservation of public access is a very
important part of DNR's obligation and they take it very
seriously. Whenever they sell land, they make sure to conserve
access to public waters, whether they are streams or lakes; also
when they convey land out of state ownership, to municipalities,
for instance, they retain easements for public access to public
water bodies. This bill wouldn't significantly affect their
workflow or workload and it would give the legislature an
accounting of what they had accomplished over the year and what
they hope to accomplish for the following year.
CO-CHAIR WAGONER closed the public hearing.
CO-CHAIR PASKVAN moved to bring CSHB 144(RES), version I, before
the committee. There were no objections; Co-Chair Wagoner
removed his objection.
SENATOR WIELECHOWSKI moved to report CSHB 144(RES) from
committee with individual recommendations and attached fiscal
note(s). There were no objections and it was so ordered.
5:07:23 PM
At ease 5:07 to 5:10 p.m.
HB 185-EXEMPT DISCHARGES FROM USE OF MUNITIONS
5:10:49 PM
CO-CHAIR WAGONER announced HB 185 to be up for consideration.
CO-CHAIR PASKVAN moved to bring CSHB 185(RES), 27-LS0506\X,
before this committee for purposes of discussion.
CO-CHAIR WAGONER objected for discussion purposes. He invited
the sponsor to present the bill.
5:11:43 PM
REPRESENTATIVE TAMMIE WILSON, sponsor of HB 185, explained that
in 2008 the state sought Environmental Protection Agency (EPA)
approval of its Clean Water Act program. Title 46 now excludes
the firing or other use of munitions in training activities
conducted on active ranges including: active ranges operated by
the U.S. Department of Defense or a military agency unless it
results in a discharge into waters of the United States.
She said that HB 185 was vetted by the EPA, the Department of
Environmental Conservation (DEC), the Department of Defense
(DOD), and the state Department of Military & Veterans Affairs
(DMVA). It clarifies section (e)(7) such that it cannot be
misinterpreted to restrict military exercises on ranges other
than instances where the federal Clean Water Act would apply. It
reduces the chance of litigation in trying to interpret waters
within the U.S.
5:12:55 PM
KEVIN WARD, counsel, U.S. Army, Northern Regional Environmental
Office, Denver, said he was representing the Department of
Defense Regional Environmental Coordinator and the military
services in Alaska, and that they all supported HB 185. The
committee had a couple of questions at the last hearing and he
reiterated his answer that HB 185 adds clarity to current Alaska
Clean Water Act statute so that application of it to military
ranges will be determined in accordance with the federal Clean
Water Act. Secondly, he said this bill has absolutely no effect
on Alaska's primacy of the Clean Water Act program, which it
received from the EPA. This amendment has been coordinated with
the EPA and it has no objection to it.
CO-CHAIR PASKVAN said he was trying to figure out why they were
going through this process and asked what differences there are
between the federal and state standards for discharge into
waterways.
MR. WARD replied that this bill changes language in the existing
Alaska statute that reads: "Unless it results in a discharge
into waters of the United States." to: "Unless otherwise
regulated by the federal Water Pollution Control Act." This will
not result in any different standards, effluent limitations or
water quality criteria between the military and any other member
of the regulated community. The real purpose for this change is
at the phrase "waters of the United States," which is a term
that has been much debated and disputed not only in Congress but
within EPA, the Corps of Engineers and the courts. The courts
decisions, despite their many efforts, have not resulted in
great clarity as to what the meaning of that phrase is and its
meaning may change over time. So rather than have the
application of the state Clean Water Act be determined by a
phrase that is ambiguous and may be further be interpreted in
different ways by the courts, he simply felt that they would
have more clarity and confidence in what situations need to
comply with the state act if it simply refers to the generic
federal act.
CO-CHAIR PASKVAN said he was trying to understand how Alaska
would retain its primacy position as permitting agency if it
defers to federal standards (as compared to state standards).
MR. WARD replied that this amendment will not have any effect on
Alaska's primacy. Alaska received primacy from the U.S. EPA
forward state program about two years ago. EPA has reviewed this
proposed amendment and does not object to it. So Alaska will
remain the permitting agency. The way the requirements will
apply to the military ranges will be if and when the federal act
would apply, so there will be consistency between the Alaska act
and the federal act. The reason that is important to the
Department of Defense is so that it will not be faced with
different requirements when they do or don't have to obtain
permits for their ranges in different jurisdictions in different
states. But if a permit is required, it would be a state permit.
The state departments will also take over the schedule component
for looking at military ranges and determining which permits
will be required in about October 2012.
CO-CHAIR PASKVAN said he understood what he was saying in terms
of primacy in the sense that the State of Alaska retains its
position as the permitting authority, but he perceived the
substantive issue beyond who processes the paperwork was that it
removes substantive Alaskan standards and defers them to the
substantive standards of the federal government. And the river
ways and the federal government has been a hot topic in Alaska
over the last year.
5:21:42 PM
MR. WARD responded with an example of how this might apply. If a
citizen group wanted to assert that a military range required a
Clean Water Act permit pursuant to the state act, they might
assert that there is a discharge to waters of the United States.
Since it is an ambiguous term and is interpreted different ways,
an Alaska court might say yes, this is a "waters of the United
States" under Alaska statute even though it might not be waters
of the United States under the federal act.
5:22:03 PM
SETH BOSANG, Assistant Attorney General, Civil Division,
Environmental Section representing the Alaska Department of
Environmental Conservation (DEC), said he agreed with the
testimony so far that this bill really is intended to make state
and federal law consistent. As it stands right now, there is at
least a potential that state law on this subject would be
broader than federal law and the intention is to make state and
federal law consistent.
CO-CHAIR PASKVAN said this where he was trying to understand the
difference between the Alaska law on this subject and the
federal law that Alaska is ceding to it. Why does it need to be
done?
5:23:21 PM
MR. BOSANG responded that this would not affect the state's
primacy and the state would continue to be the permitting
agency. The only thing it would affect is whether or not a
permit is required and it removes some potential ambiguity where
a court could construe the terms "waters of the United States"
in a way that people may not have intended or anticipated. So
the substantive standard that would apply would remain the same.
SENATOR WIELECHOWSKI said that last year, they asked the
legislative drafting attorney, Alpheus Bullard, about it and he
said the definition of "waters of the U.S." is actually found in
Alaska regulations at 18 AAC 83.990(77). Did Mr. Bosang agree?
Mr. Bullard was also asked to explain what the bill does and he
said it wasn't clear to him.
MR. BOSANG said he didn't know the answer.
MR. WARD answered that he believed that was correct. If it is
not in the state regulations, there is certainly a definition in
the federal regulations. The term has been defined various ways
through policy and court decisions; but a definition that may
look simple on its face has over time become not as simple as
people would like.
CO-CHAIR PASKVAN asked if this addresses whether a permit
application even needs to be presented. In other words, if it's
under the federal law and it's a discharge into federal waters,
there is a potential that there would be no permit application
necessary; but assuming that there was one, the only involvement
that the state has is that it would be the permitting agency
applying purely federal law.
5:27:16 PM
MR. WARD answered that he had accurately stated that the
threshold issue that this addresses is whether or not a permit
is required. Because if a permit is not required as a threshold
matter pursuant to the federal Clean Water Act for a military
range, then one would not be required pursuant to the state act
and that is the consistence they were looking for. If a permit
is required, then it is a state permit and state standards,
procedures and criteria apply to determine the terms of the
permit.
5:28:07 PM
KARLA HART, representing herself, described herself as a private
citizen with a passion for clean water. She was concerned that
this bill was a bit of a sleeper that because of its complexity
might bite us at some point when water is polluted potentially
with very persistent and dangerous toxins, leads and other
things that could be with us for a long time. Alaska's clean
water is too important to its economy and allowing an exemption
to military ranges of our clean water standards seems like a
degradation of the state's regulation over clean water overall.
CO-CHAIR WAGONER closed public [testimony] and held HB 185 in
committee.
5:29:58 PM
Finding no further business to come before the Senate Resources
Standing Committee, Co-Chair Wagoner adjourned the Senate
Resources Standing Committee meeting at 5:29 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Nikaitchuq_Final_Finding_2008.pdf |
SRES 2/21/2012 3:30:00 PM |
SB 192 |
| Nikaitchuq_Final_Finding_2006.pdf |
SRES 2/21/2012 3:30:00 PM |
SB 192 |
| SRES_DNR-DOG_Royalty_Mod_slides_2_21_12.pdf |
SRES 2/21/2012 3:30:00 PM |
SB 192 |