Legislature(2017 - 2018)BUTROVICH 205
04/17/2017 01:00 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 111 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
April 17, 2017
1:00 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator John Coghill, Vice Chair
Senator Natasha von Imhof
Senator Bert Stedman
Senator Shelley Hughes
Senator Kevin Meyer
Senator Bill Wielechowski
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
COMMITTEE SUBSTITUTE FOR HOUSE BILL NO. 111(FIN)(EFD FLD)
"An Act relating to the oil and gas production tax, tax
payments, and credits; relating to interest applicable to
delinquent oil and gas production tax; relating to carried-
forward lease expenditures based on losses and limiting those
lease expenditures to an amount equal to the gross value at the
point of production of oil and gas produced from the lease or
property where the lease expenditure was incurred; relating to
information concerning tax credits, lease expenditures, and oil
and gas taxes; relating to the disclosure of that information to
the public; relating to an adjustment in the gross value at the
point of production; and relating to a legislative working
group."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 111
SHORT TITLE: OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
SPONSOR(s): RESOURCES
02/08/17 (H) READ THE FIRST TIME - REFERRALS
02/08/17 (H) RES, FIN
02/08/17 (H) TALERICO OBJECTED TO INTRODUCTION
02/08/17 (H) INTRODUCTION RULED IN ORDER
02/08/17 (H) SUSTAINED RULING OF CHAIR Y23 N15 E2
02/08/17 (H) RES AT 1:00 PM BARNES 124
02/08/17 (H) Heard & Held
02/08/17 (H) MINUTE(RES)
02/13/17 (H) RES AT 1:00 PM BARNES 124
02/13/17 (H) Heard & Held
02/13/17 (H) MINUTE(RES)
02/17/17 (H) RES AT 1:00 PM BARNES 124
02/17/17 (H) Heard & Held
02/17/17 (H) MINUTE(RES)
02/20/17 (H) RES AT 1:00 PM BARNES 124
02/20/17 (H) Heard & Held
02/20/17 (H) MINUTE(RES)
02/22/17 (H) RES AT 1:00 PM BARNES 124
02/22/17 (H) Heard & Held
02/22/17 (H) MINUTE(RES)
02/22/17 (H) RES AT 6:30 PM BARNES 124
02/22/17 (H) Heard & Held
02/22/17 (H) MINUTE(RES)
02/24/17 (H) RES AT 1:00 PM BARNES 124
02/24/17 (H) Heard & Held
02/24/17 (H) MINUTE(RES)
02/27/17 (H) RES AT 1:00 PM BARNES 124
02/27/17 (H) Heard & Held
02/27/17 (H) MINUTE(RES)
02/27/17 (H) RES AT 7:00 PM CAPITOL 106
02/27/17 (H) Heard & Held
02/27/17 (H) MINUTE(RES)
03/01/17 (H) RES AT 1:00 PM BARNES 124
03/01/17 (H) Heard & Held
03/01/17 (H) MINUTE(RES)
03/01/17 (H) RES AT 6:00 PM BARNES 124
03/01/17 (H) Heard & Held
03/01/17 (H) MINUTE(RES)
03/06/17 (H) RES AT 1:00 PM BARNES 124
03/06/17 (H) Scheduled but Not Heard
03/06/17 (H) RES AT 6:30 PM BARNES 124
03/06/17 (H) Heard & Held
03/06/17 (H) MINUTE(RES)
03/08/17 (H) RES AT 1:00 PM BARNES 124
03/08/17 (H) Heard & Held
03/08/17 (H) MINUTE(RES)
03/08/17 (H) RES AT 6:00 PM BARNES 124
03/08/17 (H) Heard & Held
03/08/17 (H) MINUTE(RES)
03/09/17 (H) RES AT 5:00 PM BARNES 124
03/09/17 (H) -- MEETING CANCELED --
03/10/17 (H) RES AT 1:00 PM BARNES 124
03/10/17 (H) Heard & Held
03/10/17 (H) MINUTE(RES)
03/11/17 (H) RES AT 12:00 AM BARNES 124
03/11/17 (H) -- MEETING CANCELED --
03/13/17 (H) RES AT 1:00 PM BARNES 124
03/13/17 (H) <Bill Held Over from 3/11/17>
03/14/17 (H) RES AT 3:00 PM BARNES 124
03/14/17 (H) -- Continued from 3/13/17 Meeting at
1:00 PM --
03/15/17 (H) RES RPT CS(RES) NT 4DP 4DNP 1AM
03/15/17 (H) DP: PARISH, DRUMMOND, JOSEPHSON, TARR
03/15/17 (H) DNP: TALERICO, BIRCH, RAUSCHER, JOHNSON
03/15/17 (H) AM: WESTLAKE
03/20/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/20/17 (H) Heard & Held
03/20/17 (H) MINUTE(FIN)
03/21/17 (H) FIN AT 9:00 AM HOUSE FINANCE 519
03/21/17 (H) Heard & Held
03/21/17 (H) MINUTE(FIN)
03/21/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/21/17 (H) Heard & Held
03/21/17 (H) MINUTE(FIN)
03/22/17 (H) FIN AT 9:00 AM HOUSE FINANCE 519
03/22/17 (H) -- Continued from 3/21/17 at 1:30 PM --
03/22/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/22/17 (H) Heard & Held
03/22/17 (H) MINUTE(FIN)
03/23/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/23/17 (H) Heard & Held
03/23/17 (H) MINUTE(FIN)
03/24/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/24/17 (H) Heard & Held
03/24/17 (H) MINUTE(FIN)
03/25/17 (H) FIN AT 10:00 AM HOUSE FINANCE 519
03/25/17 (H) Heard & Held
03/25/17 (H) MINUTE(FIN)
03/27/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/27/17 (H) Heard & Held
03/27/17 (H) MINUTE(FIN)
04/07/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
04/07/17 (H) Heard & Held
04/07/17 (H) MINUTE(FIN)
04/08/17 (H) FIN AT 1:00 PM HOUSE FINANCE 519
04/08/17 (H) Moved CSHB 111(FIN) Out of Committee
04/08/17 (H) MINUTE(FIN)
04/09/17 (H) FIN RPT CS(FIN) NT 4DP 4DNP 2NR 1AM
04/09/17 (H) DP: GARA, GUTTENBERG, SEATON, FOSTER
04/09/17 (H) DNP: WILSON, THOMPSON, PRUITT, TILTON
04/09/17 (H) NR: ORTIZ, GRENN
04/09/17 (H) AM: KAWASAKI
04/10/17 (H) MOVED TO BOTTOM OF CALENDAR
04/11/17 (H) TRANSMITTED TO (S)
04/11/17 (H) VERSION: CSHB 111(FIN)(EFD FLD)
04/12/17 (S) READ THE FIRST TIME - REFERRALS
04/12/17 (S) RES, FIN
04/13/17 (S) RES WAIVED PUBLIC HEARING NOTICE,RULE
23
04/13/17 (S) FIN WAIVED PUBLIC HEARING NOTICE,RULE
23
04/14/17 (S) RES AT 3:00 PM BUTROVICH 205
04/14/17 (S) Heard & Held
04/14/17 (S) MINUTE(RES)
04/15/17 (S) RES AT 9:00 AM SENATE FINANCE 532
04/15/17 (S) Heard & Held
04/15/17 (S) MINUTE(RES)
04/15/17 (S) FIN AT 9:01 AM SENATE FINANCE 532
04/15/17 (S) <Pending Referral> Uniform Rule 23
Waived
04/15/17 (S) FIN AT 2:00 PM SENATE FINANCE 532
04/15/17 (S) <Pending Referral> Uniform Rule 23
Waived
04/15/17 (S) RES AT 2:00 PM SENATE FINANCE 532
04/15/17 (S) Heard & Held
04/15/17 (S) MINUTE(RES)
04/17/17 (S) RES AT 1:00 PM BUTROVICH 205
WITNESS REGISTER
KARA MORIARTY, President and CEO
Alaska Oil and Gas Association (AOGA)
Anchorage, Alaska
POSITION STATEMENT: Spoke in opposition to HB 111.
DAN SECKERS, Tax Counsel
ExxonMobil
Anchorage, Alaska
POSITION STATEMENT: Spoke in opposition to HB 111.
DAMIAN BILBAO, Vice President of Commercial Ventures
BP Alaska
Anchorage, Alaska
POSITION STATEMENT: Spoke in opposition to HB 111.
PAUL RUSCH, Vice President of Finance
ConocoPhillips
Anchorage, Alaska
POSITION STATEMENT: Spoke in opposition to HB 111.
CASEY SULLIVAN, Director of Government and Public Affairs
Caelus Energy LLC
Anchorage, Alaska
POSITION STATEMENT: Spoke in opposition to HB 111.
JEFF HASTINGS, Chair and CEO
SAExploration (SAE)
Anchorage, Alaska
POSITION STATEMENT: Spoke in opposition to HB 111.
PAT GALVIN, Chief Commercial Officer
Great Bear Petroleum
Anchorage, Alaska
POSITION STATEMENT: Spoke in favor of a stable tax system.
ACTION NARRATIVE
1:00:28 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 1:00 p.m. Present at the call to
order were Senators Stedman, Hughes, Coghill, and Chair Giessel.
HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
1:00:51 PM
CHAIR GIESSEL announced consideration of HB 111 [CSHB
111(FIN)(efd fld) was before the committee]. She noted that HB
111 was first heard on April 14, 2017, and two hearings were
held on April 15. The first hearing today will have invited
testimony, and the hearing at 5:00 p.m. will allow for public
testimony.
Senators Wielechowski and Von Imhof joined the committee.
1:01:13 PM
KARA MORIARTY, President and CEO, Alaska Oil and Gas Association
(AOGA), Anchorage, said her presentation has been unanimously
approved by oil-producing AOGA members. The association
represents the majority of oil and gas producers, refiners, and
exploration companies in Alaska, as well as the Alyeska Pipeline
Service Company, which transports oil from the North Slope to
Valdez.
1:03:01 PM
MS. MORIARTY referred to slide 3 of her presentation and said
that the oil and gas industry is Alaska's economic driver, which
may seem like a bold statement, but one third of all jobs in
Alaska can be attributed to that industry. For every direct job,
she said, another 20 jobs are created in the state's economy.
Her data is from three years ago, and it will be updated by the
end of May. With current low oil prices, it is still the largest
contributor to the state's unrestricted revenue. At low prices,
Senate Bill 21 [passed in 2013] provides a higher tax to the
state than ACES would have. The industry was cash-negative in
2016, but state and local governments received over $2.1 billion
in revenue. "No other industry in Alaska comes even close to
this level of economic activity," she stated.
MS. MORIARTY said policy makers often make goals, and the
industry often looks at how a policy will impact measures of
success, including production, investment, competitiveness,
revenues, and "fair share." Four out of those five can be
measured objectively, but fair share is subjective and in the
eye of the beholder, she explained. She said that production is
extremely important. Last fiscal year there was a three percent
increase in production. It was the first increase in production
in almost 14 years. She said the industry is on track for
another stable year in production. March of 2017 was a good
month for the industry and for Alaska. The average production in
March was 565,000 barrels per day through TAPS [Trans-Alaska
Pipeline System].
1:06:00 PM
MS. MORIARTY said that was higher than any month since December,
2013. It is higher than any March since 2012, so it is not
necessarily seasonal. It is a trend, she said, and is really
remarkable. The volumes this year so far are right around
558,000 barrels per day. This first quarter is the highest since
2013. "So, good news for us." She said her next chart is older,
and it was used in 2012 by a former legislative consultant. It
shows what investment has been in that decade and oil prices. As
prices spiked, investment followed it in the Lower 48 and was
relatively flat in Alaska. A chart from the Department of
Revenue (DOR) shows the spending stayed relatively flat from
2007 to 2012 but spiked after the passage of Senate Bill 21.
SENATOR MEYER joined the committee.
1:08:00 PM
MS. MORIARTY stated that it is remarkable how the spending has
stayed the same vis-à-vis oil prices. "It's just something that
we wanted to point out to you." Why is investment important?
Alaska needs it, she said. She showed oil production projections
from the Energy Information Administration from October, 2016,
and pointed out the projections for Alaska production without
new investment. It does not include any new projects, and it is
following a trend line without new investments. The red line
represents TAPS minimum throughput, which is around 300,000
barrels per day. She said that the Alyeska Pipeline Service
Company is aggressively pursuing ways to manage the pipe below
that minimum, "in fact, even today they have to do temperature
monitoring, more frequent pigging, additional investment, heat
into the line." Admiral Barrett (President of the Alyeska
Pipeline Company) has said that the engineering problem of
economically transporting smaller amounts of oil is yet to be
solved, but it does not mean that it won't happen.
1:09:48 PM
MS. MORIARTY said there are exciting recent discoveries. One of
AOGA's main selling points when marketing is that Alaska has
about one third of the nation's reserves. "So, it's not like
Alaska is running out," she said, but the remaining oil is
challenging and more expensive to produce. Over the last 12 to
18 months there have been many major discoveries, and she is
excited about them. If Smith Bay, Conoco's Willow project,
Armstrong's unit, and Hilcorp's Liberty project come online in
ten years, the average daily production will be over 500,000
barrels in the next decade.
MS. MORIARTY said the previous slide would look different if
that oil gets produced. She said stability is important, and she
noted that Castle Gap Advisors told the committee that changes
occur. It is just a matter of the changes being in the right
direction with regard to stability. For the past 12 years there
have been many changes to Alaska's tax policy. She provided a
chart of those changes. In the industry's view, five out of
seven changes are tax increases, some significant, and
increasing taxes is the wrong direction. Some say that industry
has asked for over half of these changes, and that is simply not
true. "We actually opposed over half of the changes." The
industry had major concerns with components of Senate Bill 21,
as well. She presented a chart showing what regions do as oil
prices changed over the past 15 years. Alaska is not on the
chart from January, 2016, but if IHS Energy was aware of House
Bill 247, Alaska would have been the only orange box
representing an increase in government take in that column. Not
many regions were increasing taxes that year.
1:13:48 PM
MS. MORIARTY said another parallel when looking at the chart is
what Alaska does for other industries that rely on a commodity
price. What does Alaska do when other commodity prices fall out?
She asked about fishing, mining, or emergencies. The industry
never came to Alaska, she said, asking for anything more. "We
were just asking to not make any changes in this low-price
environment." Regarding fair share, as a mom with three kids she
knows that fair is in the eyes of the beholder. This is the
government take today; it is not the government take under HB
111, she noted. At every oil price, the state takes more money
than industry and the federal government, even as companies are
cash-negative. HB 111 would increase the state's portion at a
variety of prices.
1:15:43 PM
MS. MORIARTY said it is important for the Department of Revenue
to share the governor's four goals and concerns for tax reform.
The first goal is to transition Alaska away from the business of
providing cash credits and rebates to the oil and gas industry.
The second is to reduce the state's liability related to
potential large future investments. The third is to defer the
state's direct participation in the cost of a new project until
it comes into production, and fourth is to have the oil industry
participate as part of the overall fiscal plan for Alaska. Maybe
the fourth goal should be that the oil and gas industry should
participate more, because it already participates in the fiscal
plan for Alaska, she stated. This bill will just add more to
that level of participation.
MS. MORIARTY said individual companies will talk about which
components of HB 111 will impact them the most, but AOGA wants
to summarize its view of the bill. It is important for the
public to recognize that the bill eliminates more than cash
credits. She stated that there is a lot of attention on Alaska
getting out of the business of making cash payments to the
industry, but the payments are not something the industry
created; the state created the policy of cash payments to those
who produce less than 50,000 taxable barrels per day. The bill
removes that policy. It eliminates "another portion of the gross
value reduction, which was already reduced last year in House
Bill 247." It devalues the net operating loss and eliminates the
sliding scale per barrel credit, which is not and never has been
a cashable credit. She has heard during this legislative session
that the sliding scale credits were generous and that it would
not be a big deal to eliminate them. She said it is important to
remember that the sliding scale credits are a fundamental part
of the tax system. They are not credits in the true meaning of
what the public thinks credits are. When Senate Bill 21 was
originally drafted, the tax rate was 25 percent, and during the
modeling the department and the legislature discovered that it
was a very regressive tax, and the effective tax rate was
dramatically lower at low prices. So, they worked together, she
said, to create nothing more than a math formula that kept the
effective tax rate stable at about 25 percent over a range of
prices, and they created an element of progressivity in the
system. "Like most net tax systems, we never pay the full tax
rate; trying to create a system where industry pays 35 percent
or higher would be draconian, at best," she added.
1:20:04 PM
MS. MORIARTY said the math formula was created to keep the
effective tax rate at about 25 percent using this per-barrel tax
credit. Consultants have described it that way, and the DOR
recognizes it as does the current tax director. He testified in
June, 2015, saying that the sliding scale credits are integral
and are offsets to an otherwise high tax rate. He said that it
is hard to consider them a credit in the context of an
inducement to doing work. She stated that her point is that
changing or eliminating them will change the structure of SB 21
and will be an immediate tax increase on fields that provide
over 90 percent of current production.
1:21:37 PM
MS. MORIARTY said a key aspect to recognize is there are other
provisions that alter SB 21, such as changing the base tax rate,
creating progressive higher tax brackets, changing the NOL [net
operating loss] credit to a carry-forward loss deduction,
eliminating the 10 percent GVR [gross value reduction],
hardening the minimum tax floor, and creating burdensome ring
fencing for the administration of costs and deductibility of
costs. She added that most of the provisions have nothing to do
with cash credits, "and we would argue most of these go way
beyond the governor's stated goals."
1:22:43 PM
MS. MORIARTY addressed the NOL conversion and said HB 111
eliminates cash payments to the industry by changing the net
operating loss credit, because that is really the only credit
after HB 247 goes into effect that will remain on the North
Slope. The proposal is "that we'll just simply convert those
credits to a deduction, add a little bit of an uplift for time
value of money, and we'll be good to go." However, legislative
consultants and companies have confirmed, through modeling, that
there is no way the industry can be made whole by converting the
NOL from a credit to a carry-forward loss deduction. There will
not be 100 percent trade off, she explained, even with uplift,
because of "the way our tax structure works." If the goal is to
preserve as much value for the NOL credits as possible, the bill
needs to have mechanisms to allow for continued new investment.
Companies absolutely need to recover 100 percent of their costs
with some type of uplift.
1:25:15 PM
MS. MORIARTY referred to page 18 of her presentation and said
some people have suggested that the carry-forward deductions are
a subsidy, because cash credits are a subsidy. "Well, that's not
true." Net operating loss deductions allow for the recovery of
essential costs when companies lose money, so it is just how a
net-based system works. The NOL encourages continued investments
for those losing money, because they can recover the money. The
recovery of a NOL is critical, and impeding the recovery by
decreasing the value or adding a time limit "does affect the
timing of when that benefit is realized, and it doesn't matter
if you're a producer or an explorer or an investor," she stated.
1:27:40 PM
MS. MORIARTY noted that not allowing the full recovery of costs
means it is not a net-based tax system, "because companies will
be paying more than the net." Carry-forward deductions are the
only proper way to account for spending money in a net-based
system; you have to recognize the need for full cost recovery,
she declared. There are other changes to SB 21, and frankly,
they don't have much to do with refundable, cashable tax
credits. On the section changing gross value at the point of
production, the committee's own consultant pointed out that this
provision is a flaw, she said, because it prevents part of a
taxpayer's real cash expenditures from ever being used.
MS. MORIARTY said HB 111 is a significant tax increase. There is
no way to get around that. She said she thinks both consultants
on Saturday called it an incredible tax increase, and one said
the fiscal note from the Department of Revenue might be a little
low. She said she wants to leave the committee with pictures,
because AOGA is preparing for a really fun anniversary in June.
She showed the Prudhoe Bay discovery well when it was surrounded
by a pristine environment. The anniversary is for the start of
production and the completion of TAPS, which was a project that
people said could not be done. They did it anyway, she noted,
and it changed the landscape of Alaska's economy. She also
showed a photo of Smith Bay exploration work last winter, where
people are saying it is too expensive and will never be done.
She asked that the version of HB 111 that passed the Housebe
voted down.
1:30:05 PM
SENATOR STEDMAN referred to page 12 of the presentation and
noted that the spring forecast is $55. He asked if the industry
or DOR could "count the cash and split up in bars, and we can
compare it." There are no numbers indicated, and he asked to see
how the cash flow will match with the bars on the chart. He said
that it would be nice to actually look at the dollars collected
and the expenses that the industry "has participated in."
CHAIR GIESSEL said she will request that.
SENATOR STEDMAN referred to the PPT [Petroleum Profits Tax of
2006] when there was about $2.5 billion in lease expenditures,
"and we're trying to double it to stimulate production." "If we
take historic '14, it looks like the operating costs have
dropped about $300 million, but the capital costs from '14 to
this recent spring update is about $1.6 billion." He said that
the point of his question is, "if we have right at about $2
billion in capital expenditures, where in '14 we had right under
$4 billion, and to keep the old field alive, I guess my concern
is the next several years, as far as production versus capital
expenditures, and I was wondering if she had any comments on
that." It is something we have tried to keep an eye on over the
years, regardless of the tax structure, he added. Old fields
take a lot of money to keep running.
MS. MORIARTY responded that specific investments should be
addressed by the companies. It is an important component, and
they have done everything they can to become more efficient. It
is not unusual for companies to seek efficiencies, she added.
That means the contracting community has also reduced their
costs, because they need the business. When prices go back up,
there will be a corresponding increase in those costs, because
those contractors will be looking to recover.
1:33:50 PM
SENATOR VON IMHOF referred to page 17 of the AOGA presentation
stating that a mechanism needs to be established to maintain as
much value as possible. Ms. Moriarty also said the per-barrel
credit is fundamentally important to maintain a competitive tax
structure, yet by putting together the different presentations,
it is the same per-barrel credit that gets in the way to fully
realize the NOL. "How do we address that conundrum?"
MS. MORIARTY said that is something that AOGA is looking at and
trying to identify ways that that could happen. She said she is
hopeful that the legislative consultants can help the committee
with that. It could come down to the ordering of how the credits
are applied, she said, and what could be allowed to pierce the
minimum tax floor. There are lots of levers, and looking at
recalculating the tax and those mechanisms, "you might get to
the answers. We don't have a perfect solution identified for
you."
SENATOR STEDMAN said it looks like there is a fundamental flaw
in Alaska's tax structure dealing with the per-barrel credit,
and it creates anomalies that inhibit the ability to allow these
costs to go forward in a normal cost recovery process. It is
important for viewers to realize that this is done everywhere in
the world on a net tax system; this is not out of the ordinary
to recover costs, he explained. What is out of the ordinary is
the cash payments that have the state in its financial jam, as
opposed to carrying them forward to use against production at
the time of production. It will be challenging to work through
this, which is a fundamentally fatal flaw. How do we get back to
treating our oil basin like other sovereigns around the world
where we don't disadvantage the industry by not allowing them
full-cost recovery? If we don't allow that, we will be at a
disadvantage and less attractive.
MS. MORIARTY said it is important to remember that the per-
barrel credits have never been cashable and have to be earned in
the current year, so there has to be a reordering of how the tax
system works to allow for as much as possible retaining that
value of the current NOL system.
CHAIR GIESSEL thanked her and said that was a great hearing on
Saturday from the consultant.
1:38:08 PM
DAN SECKERS, Tax Counsel, ExxonMobil, Anchorage, said it is
troubling that the industry is being asked to testify on an
attempted tax increase, especially when the industry is
struggling. This would be the seventh change in under 13 years,
he added. It is not helping and is undermining confidence in the
tax system. He said to make no mistake, the bill is nothing more
than an adverse tax increase. It is a significant rewriting of
SB 21, especially with today's prices, which many believe will
be the same in the future. He said ExxonMobil believes SB 21 is
working as intended, because investments and production is up,
and it's been a help to the economy. Alaska needs to remain
globally competitive, and the committee substitute will not help
attract investments but will make matters worse. Ms. Moriarty
did a great job highlighting concerns with the bill, and he will
not belabor what the committee has already heard.
MR. SECKERS said it sounds great for revenue, but how will it
work with the interplay on the North Slope and between various
companies? He asked if the committee has given it enough
attention to what this really will do? The bill has been pushed
pretty quickly. He said many of the features of the bill have
been brought up before. There are some hidden little mine fields
that have been brought in through HB 247 by the administration.
Most of those are bad ideas, he opined, and that is why they
were not enacted last year. "Why would you want to enact them
again this year?" He said the committee substitute will not help
the economy; it will do the exact opposite. It sounds good to
drop the tax rate from 35 to 25. If that happened and the per-
barrel credits were taken away, isn't that SB 21 as proposed?
Those two components were there, he said. "Why isn't that
acceptable? Didn't you guys support that then?" The answer is
no, he said. He told the committee to go back and look at the
testimony by ExxonMobil. "We opposed that," he said, because the
rate is too high, especially with current prices. The sliding
scale per barrel credits were put in to mitigate what is a very
high rate of tax.
MR. SECKERS said he saw Mr. Marks' testimony, and he was
fascinated how he showed the competitive lines. Removing the tax
credits and lowering the tax rate should go hand in hand, but it
will raise the tax on industry on the North Slope by up to 300
percent for the price ranges that will occur in the foreseeable
future. "As policy makers, you honestly think that that's going
to make Alaska more competitive or less?" He asked if the
industry will spend more money if the cost of doing business
goes up. "Why would our industry react differently than if you
did that to, say, fishermen, restaurant owners, or Walmart?" He
said Exxon is big, but hardening the floor will deny companies
that made money this year that need to recover costs from prior
years today in this current environment. It will discourage
investment and it will create a disincentive to make those
investments.
MR. SECKERS said the NOL is a very troubling piece of the
puzzle. He believes that NOLs are not subsidies. The tax is
based on a net system, and the recovery of loss is a central
component since it balances revenues and expenses. It affects
the competitiveness of a project tremendously. He said to ask if
it is in the best interest of the state. A NOL is not a badge of
honor; it means that a company was making critical investments,
even though they were losing money, to employ Alaskans, with the
expectation that they can get it back without limitation. "But
it gets worse than that. Ask yourself from a practical
perspective how will this actually work, okay?" This bill would
require ring fencing to be put around fields that lose money,
which sounds great in theory. He suggested putting a ring fence
where "you can only recover your costs against that one field."
The consultants have shown that when you start doing that, it
changes the investment portfolio and the rate of return on that
field. He said the likely thing that will happen is that if the
bill goes into effect, he will get a call from his manager
asking if investments will put the company in a loss. He said he
will not be able to predict the future, but maybe the investment
doesn't go forward since the economics have changed. "What does
that mean? Is the investment going to stall now and wait? I can
only drill so many months in a year…might as well wait until the
fall." He said maybe the investment never goes forward, and "who
wins in that environment?"
1:46:26 PM
MR. SECKERS asked how the bill will affect the dynamics between
partners. He said if two companies want to invest in a field, it
will drive one of them into a loss, but not the other one, so
"are they going to see eye-to-eye on how that investment will
go?" He said he is not talking about the one having better
capital rating or better borrowing. He said he is talking about
the tax policy driving a very distinct conversation between the
partners, "and who's going to win in that environment? How's
that going to turn out? I don't know." He asked if anybody has
thought about that. "What happens if I have two companies that
are spending? They're going to put another field out there.
Company A is spending a lot more. Company B is maybe not
spending so much." Company A gets to enjoy immediate recovery of
all their costs in that year, he explained. He said his company
files a consolidated segment-based tax. It isn't a field-by-
field tax but one on activities on the North Slope as a whole to
encourage going to a producing field from a nonproducing field.
MR. SECKERS said a producing field helps fund exploration,
because a company will say, "I got more money coming from here;
I can use it here." Ring-fencing in this state could really
change the economics on investments. He asked what policy the
state is trying to drive to. Alaska will reward companies that
spend less, because they can write off their costs today, and
penalize companies that spend more and drive them into a loss.
"If that's what you want, that could be a practical outcome of
the policy you put in place," he opined. He asked the committee
what the problem is they are trying to solve. He said he has
heard the concern of companies buying other companies, and they
will acquire losses. If that is the issue, don't apply a shotgun
to a solution that only requires a 22. He told the committee not
to penalize everything in the North Slope.
1:48:53 PM
MR. SECKERS said this is a unique environment, and "they say
ring fencing is common in other parts of the world." He noted
that he has not practiced international law in a long time, but
his understanding is that most of them-not all of them-when they
ring fence, they ring fence a project. "We have a slope-wide tax
basis, not a project filing basis, so how's this going to work?"
If there are five fields, for example, and four are producing
and one has a loss, the four can be consolidated. That changes
the fundamental structure of SB 21 in the segment reporting.
"You're being asked to underwrite a tax that's been on the books
for 11 years in a matter of a week and a half," he said. The
bill was pushed through without anybody looking at the economic
consequences, other than nice words. The gross value at the
point of production can't go below zero, but the administration
never really describes what that will do. He said he files a
consolidated tax return. "I'm sorry, it's not our fault that the
oil is located far away in many places," he added. This policy
will say that the state wants his company to explore in the far-
reaching fields, "and I'm sorry it costs so much to get it to
market." It's not Texas or North Dakota, and it is expensive.
"So, what's the policy of the state going to be?" If a field has
economic issues, it gets buffered by the revenue of another
field. This policy will encourage exploring, "but shame on you
if you're too far away from any of the existing facilities,
because if you do, and prices fall, bingo, we're going to raise
your taxes on that field-and that field alone." He said he is
concerned about the policy of the state-to sit there and drive a
policy that is a step change to attack a single field. This will
have implications for any field that comes on far away from
existing facilities. Enacting this legislation is a leap in the
wrong direction, he concluded, and will double or quadruple
ExxonMobil's taxes at low prices, which is when Alaska wants
investments. He said we are all struggling, but he questioned
raising taxes on a struggling company.
1:53:19 PM
SENATOR STEDMAN said he believes Mr. Seckers is referring to the
current tax structure where "we're in a minimum tax
environment." Under the proposed bill, "we'd be outside the
minimum tax, therefore dropping into another set of
calculations," which would increase the dollars the industry
would be paying the state. "So, we basically have two separate
tax structures on top of each other, one being the minimum tax
somewhere in the high sixties and down, and north of that price,
falling into the 35 percent net profits tax."
MR. SECKERS said he is correct. What happens in the current
price range is that a lot of companies are in the minimum tax,
and this would triple their taxes. For companies that are not in
the minimum tax, "then that will get lumped out of that," and
there could be a mathematically infinite tax increase.
SENATOR STEDMAN said there was a spring forecast a couple of
days ago. The net profit that we are talking about splitting up
is $1.3 billion. Of that, the state's minimum tax spread was
about $38 million. "Therein lies the discussion of the minimum
tax and where it should be applicable, where it shouldn't, and
how do we deal with it." He said he does not have any answers,
but it is exciting to see the profitability come back so robust
in the oil basin, "because when they're not healthy, neither are
we." He said he does not want to see a tax change every time the
price forecast changes. Since the PPT, the legislature has never
looked at ring fencing on the micro level, but the state
basically ring-fences Cook Inlet and middle earth, which is the
center part of the state. North of 68 degrees, everything was
consolidated, because the state wanted to get to more remote
locations, like Smith Bay and Pt. Thomson. He suggested being
very careful with the ring fencing in order not to negatively
impact the economics.
MR. SECKERS agreed with his comments. He said not to be swayed
by what sounds good in concept while not understanding how it
will actually work. Part of the attraction of high tax rates is
in consolidating the economics on the North Slope. One field can
help the development of another, and ring fencing would cut that
avenue off. It can cause some disconnect between partners, and
there is no winner.
SENATOR WIELECHOWSKI asked if Mr. Seckers thinks SB 21 is
adequate for getting the kind of investment Alaska needs in
order to increase oil production.
MR. SECKERS said he believes that the forecast shows that
production is up. He said a lot of people fixate on production
tax and see that the state is giving it away or selling it at a
deep discount. That is one piece of the puzzle, and people need
to look at the entire economic model. The industry pays a high
regressive royalty, and they pay property tax when they start
work, which is a regressive tax. They are also subject to income
tax. He said SB 21 is working and has been beneficial to the
state.
SENATOR WIELECHOWSKI asked if that is a change in his position,
because he testified previously that SB 21 would not increase
investment and production.
MR. SECKERS said he initially opposed it, but everybody knows it
is a radical improvement over ACES. When it changed, he said it
would lead to more investment and increased production. The rate
is still high. "I don't believe our testimony has changed in
that regard," he stated.
2:00:56 PM
SENATOR STEDMAN said his previous comment about the $1.3 billion
increase in production tax value and the $38 million going into
the minimum tax, we do pick up royalties of $88 million, "so you
need to add those two together to see the whole magnitude of
what's going on." If projects don't go forward, Alaska does not
get the royalty, he added. Then he said he had just looked at
the wrong column, and he clarified that it is a $438 million
revenue increase to the state, not $88 million.
2:02:52 PM
DAMIAN BILBAO, Vice President, Commercial Ventures, BP Alaska,
Anchorage, said BP is opposed HB 111 because it is a tax
increase and takes Alaska "out of the game" for investments. It
would impact BP cash flow by approximately $90 to $180 million
when oil is between $55 and $65 per barrel. That financial
impact is about what BP spends on drilling in any given year.
Policy matters, and Senate Bill 21 has made Alaska more
competitive. Alaska is competing with other places, and in the
last few years the competition has become domestic. The tax
increase will make production more expensive and will require
more technology to offset the taxes.
2:05:00 PM
MR. BILBAO showed two graphs by consultants Wood Mackenzie
comparing investments in different regions. The comparisons are
indexed to a common starting point of 2003, he said. The Lower
48 investments surged beyond global growth and Alaska growth. As
oil prices grew, investments moved with it. As oil prices began
to decline in 2014, Alaska investments grew when other regions
declined. He said his company believes that is because of SB 21.
After 2014, production increased in other regions and flattened
out in Alaska. "We've seen, over the last two years, a
fundamentally different production profile in Alaska than we've
seen in any other place that we operate."
2:07:45 PM
MR. BILBAO turned to a US government graph showing production
from 1990 and pointed out the 2014 increase in tight oil
production, and he said that reflects technology. "You see a US
Lower 48 growth in production of almost 5 million barrels of oil
per day." In the mid-1980s, Alaska accounted for about 25
percent of US oil production. Today, it is less than 5 percent.
As investment is allocated, there are many other places, even in
the US, where that investment can go, "and you can see how
technology is making that investment grow in the Lower 48." In
the last year, rigs are returning to the Lower 48 and they are
three times more efficient than they were a few years ago.
2:09:11 PM
MR. BILBAO said that for legal reasons there is no Y axis on the
next chart, which represents the "17 different locations across
the BP upstream portfolio and the amount of cash they generated
in 2016." The chart represents free cash before federal taxes,
he explained. Alaska reflected a cash loss within the BP
upstream portfolio. Alaska is different because of its location,
and that affects BP's bottom line. There are three things that
move the investment: efficiency, use of technology, and fiscal
policy. "We saw SB 21 make Alaska more competitive and we saw it
attract investment." It delivered additional production, but at
these oil prices, "you can see how Alaska performed within BP."
2:11:07 PM
MR. BILBAO said fiscal policy is entirely within the sovereign's
control. He showed a graph representing four different North
Slope decline rates. A black line represents the version [of HB
111 tax policy] that was presented last week. "I think that
averages out to about 5 percent decline," he said. The line is
highlighted against a 2 percent decline and did not assume a
flat production going forward. He said the 2 percent decline
reflects SB 21. The graph also shows an 8 percent decline, which
is more of what was happening prior to SB 21. Without material
investment, the fields on their own perform at a decline rate in
the mid-teens, he stated, which is conservative. For each
decline, the royalty is calculated at a fixed price. He said his
point is that depending on the rate of decline, there will be a
fundamentally different royalty value to the state. If Alaska's
tax policy continues to deliver a 2 percent decline, the total
royalty value to the state would be over $12.5 billion, versus a
revenue sources book of around $10.5 billion. The more historic
8 percent decline would have a $9.5 billion royalty value.
2:13:53 PM
MR. BILBAO noted that Alyeska warns of a technological challenge
when the rate is less than 300,000 [barrels per day] of oil
through TAPS, which should be considered while looking at
decline rates. He said BP has principles of tax policy that
Alaska should adopt. A policy should encourage more oil down
TAPS from all players, he said. It should extend the life of
"backbone" fields, Prudhoe Bay and Kuparuk, which make up the
vast majority of oil down TAPS. A new or smaller field requires
oil to layer on top to flow efficiently. A policy should
encourage more independents, which is good for the state and for
the industry. He finds that SB 21 delivers more production from
the legacy fields, and there has been more material discovery on
the North Slope in the last few years than has been seen in a
very long time. A policy cannot pick winners and losers, because
there are unintended consequences from differentiating between
one field or one company and another. The industry is very quick
to act on those unintended consequences, he stated, and it is
best to avoid them. He is proud that BP is celebrating 40 years
of Prudhoe Bay production, and he believes there's many more
years to play for-with the right policy, but not with HB 111.
2:16:02 PM
SENATOR VON IMHOF referred to page 6 of the presentation and
said that the green line is the decline in production under
Senate Bill 21, and that line does not go below the 300,000-
barrel threshold needed for TAPS.
MR. BILBAO said 300,000 is not a hard line but the start of less
efficiency and more difficult operations of TAPS. The slower the
oil flows down TAPS, the more problems arise, but Alyeska is
focused on solving the problem. The 2 percent is indicative of a
more competitive policy like SB 21. Lower costs extend the life
of legacy fields and mitigate risks of the midstream challenge
by years, not months.
2:18:05 PM
SENATOR STEDMAN recalled that prior to SB 21, there was ACES,
and the forecast was a 2 percent decline going out for decades.
The green line is not surprising, and the red line would be
extremely alarming. He asked which projects can be directly
related to SB 21 tax policy. He said he has never gotten a
complete list of projects. As the fiscal terms get more
favorable to the industry, they create a stimulus. That is
pretty basic, but he would like to know if the industry can
pinpoint which barrels are attributable to that policy.
MR. BILBAO said the fundamental difference with today's policy
is that it challenges the industry to do more. The per-barrel
credit effectively places the additional burden on the producer
to go find a way to deliver more production in the same field.
There is something incredibly energizing about what is happening
now. Anybody in any company is managing the fields and
facilities differently, and the results speak for themselves.
The fact that more oil flowed down TAPS in 2016 than in the year
before is unbelievable. He said he remembers "being in this body
a few years ago during the SB 21 debate being challenged whether
there would be any new oil that resulted from SB 21, much less
flat production." It is remarkable that they are all sitting
here today talking about that and looking at "1-Q-2017 numbers,"
he said. It is the way we are working together. One of the
biggest changes is actually on base management. There have been
new pads, but the way industry has managed the base, and the
people in the office who have done that, is almost
revolutionary.
SENATOR STEDMAN said a consultant noted that Alaska has one of
the most complex tax systems. He asked Mr. Bilbao to explain
upstream, midstream, and downstream and if BP has any exposure
to anything besides upstream. Price is about $10 above what is
shown in the chart. We all want to be in the black, he said.
2:22:54 PM
MR. BILBAO said the chart includes regional pictures, not just
production of oil and gas fields. In Alaska, the chart reflects
BP's upstream producing fields and the midstream investments in
the pipeline and the ships. The graph reflects cash flow
delivery for that region. In Alaska, BP has been cash-flow
negative for the last couple of years, he said, but it has been
working hard to be more efficient. He expects BP to be in the
black in 2017, but it is not a sustainable business model. "We
believe we've turned the corner, but we'll have to see where we
are at the end of the year."
SENATOR WIELECHOWSKI asked where Alaska ranks on the chart for
profits in 2016.
MR. BILBAO said if the chart depicted profits, it would still be
in the red.
SENATOR WIELECHOWSKI asked if the recent Journal of Commerce
article was incorrect to say that BP made $85 million, with most
of that in Alaska.
MR. BILBAO said that is part of the picture. The company files a
20F that reflects its upstream business, so when talking about
Alaska, BP includes its midstream ownership of TAPS and the cost
of ships. It all costs money, so BP incurred a loss in 2016, and
referenced a correction article by the same publication on that.
SENATOR WIELECHOWSKI asked about the internal rate of return and
net present values in Prudhoe Bay. What do they look like under
SB 21 and HB 111 using forecast numbers?
2:25:50 PM
MR. BILBAO said BP does not provide the economic returns for
individual projects. "You are talking about a wide range of
investment opportunities," he said, like new pad construction,
new rigs, and opportunities in other fields. In Alaska there are
a lot more projects that BP wants to progress, and the most
important thing is that BP continues to focus on making Prudhoe
Bay and its Alaska businesses competitive, independent of price.
In the past the company has tended to rely on price "to save
us." It is trying to move away from that and to where it drives
the performance and makes the business more competitive. If BP
makes the business more competitive, it will compete for more
capital and more projects. If costs go up, that makes the
business less competitive.
SENATOR WIELECHOWSKI asked how to determine competitiveness.
What rate of return is a competitive number for BP? He said he
would like the legislature to know what these numbers are under
different taxes. How can the legislature make sure that BP is
getting the return that it needs?
2:28:12 PM
MR. BILBAO said it is important to consider the financial impact
and the economic impact of a tax policy. "If I own a house and I
am struggling to pay the mortgage, it doesn't really matter that
renovating the bathroom is a good return investment," if there
is no money to pay for it, he said. If BP is not making money,
it will be challenging to compete for an investment opportunity.
It is important to consider both. For what the legislature
should be looking at, it should be looking at the amount of oil
flowing down TAPS. That is an outcome, and the policy in SB 21
is meant to encourage a certain outcome, and that is production,
and that is what the state is getting. Also, there are more
players on the North Slope, which is the result of SB 21. The
policy has been successful. He said if the state is trying to
support a project, it is trying to pick one project over
another, and the industry will be quick to react to the
unintended aspects of that, which you would not want. He said
not to get into the game of picking losers and winners. The
current policy is good for investment.
SENATOR WIELECHOWSKI said if BP does a deal with Conoco, the
"numbers people" will figure out a reasonable rate of return.
What is a reasonable rate of return to encourage production and
investment? What is a reasonable net present value, so the
legislature knows what to shoot for in a tax structure?
MR. BILBAO said he doesn't have a number; he can only tell the
committee the consequences of state policy. The current policy
encourages investment and exploration, but the policy of HB 111
would not do a lot of that.
2:32:10 PM
SENATOR WIELECHOWSKI asked what financial metrics the policy
makers should be looking at.
MR. BILBAO said projected economic metrics don't drive the
outcomes. The financial and development outcomes tell the state
if its policies are working. Either companies are producing
more, or they are not. If they are getting a 3 percent or a 30
percent rate of return, as long as they are out there producing
for you, then your policy is working. The metrics should not
matter to a sovereign. "Right now, you're generating the outcome
you want," he said.
2:33:39 PM
CHAIR GIESSEL said she was in Alaska when TAPS was built, so she
is interested in making sure that the flow continues. She added
that she is very, very pleased to see the leveling out of the
decline. It was more than a 3 percent increase when considering
BP pulled it up from its decline, but how many Alaskans have
lost their jobs at BP?
MR. BILBAO answered that over the last three years, the number
of employees went from 2,700 to 1,700 due to divestment of
certain fields, and he does not know about contractors and the
multiplier effect. It is significant; those are our friends and
neighbors. About 80 percent of BP employees are Alaska residents
or qualify for the Alaska PFD, he added.
SENATOR HUGHES noted that Mr. Bilbao said that BP experienced a
loss in 2016. She asked what that was.
MR. BILBAO said there was about $80 million profit on the field
side and a loss of $200 million "on the pipe and shipping side."
If you only care about the $80 million, "our view is that HB 111
would take care of that as well and wipe that out."
2:36:40 PM
SENATOR STEDMAN said if Alaska gets the policy right, it gets
the jobs. It is an extremely complex tax system. It seems like
we will be in the minimum tax for the foreseeable future, and
the net profits tax will probably not be implemented. He asked
about the inefficiency the state is imposing on BP and state
employees with this overly complex tax code.
MR. BILBAO said that nothing is as difficult as changing the tax
code, reeducating people, and building new models.
2:38:41 PM
PAUL RUSCH, Vice President of Finance, ConocoPhillips,
Anchorage, said Senate Bill 21 is working and has resulted in
increased investment in Alaska. Referring to page 2 of his
presentation, he said the ERD (extended reach drilling) rig was
sanctioned in 2016. It is a game changer for ConocoPhillips on
the North Slope. It will reach more resources, he explained, and
will be operating in 2020. He said Greater Moose's Tooth 1 was
sanctioned in 2015, and work is progressing for first oil in
2018, including a busy construction season this winter. It will
cost $900 million and should produce 30,000 barrels of oil per
day. He expects a GMT2 [Greater Moose's Tooth 2] project in
2018. Each will provide about 600 to 700 construction jobs
during development. Other projects represent about $3 billion in
gross of expenditures and about 50,000 barrels per day. He noted
the exploration work announced earlier this year at the Willow
site. It is still under appraisal, but it is expected to provide
200,000 barrels per day. ConocoPhillips is active in the
December 2016 lease sale.
MR. RUSCH referred to a bar chart on the capital expenditures of
ConocoPhillips, which is up to $1 billion. The percentage of
spending in Alaska relative to total ConocoPhillips capital has
gone from 6 percent to 20 percent since 2012, driven by the
reductions in expenditures around the world and low prices.
ConocoPhillips has had smaller reductions in Alaska than
elsewhere. This is an indication that Alaska is competing
favorably under Senate Bill 21.
2:44:04 PM
MR. RUSCH turned to page 3 of his presentation. He said the net
cash flow is on the left side, and it shows that the state
always has the largest share. When investors are losing money,
the state is still making some, so the government take is
infinite. The next chart shows the percentage increase in
production taxes under HB 111 relative to the current system. It
is a significant increase in taxes, especially in the $50 to $80
price range. The bill was described as a modest tax increase
that was fixing the tax credit problem, and the chart shows that
the bill is a large increase in production taxes.
2:46:58 PM
MR. RUSCH showed his next chart of the competition that Alaska
is facing for investment dollars. It focusses on unconventional
oil in the Lower 48 and Canada. The data are specific to
ConocoPhillips but are likely indicative the industry. It
portrays the cost of supply for 15 billion barrels, and each bar
represents a specific set of resources, he stated. On the left
are projects that have a cost of supply in the single digits,
and it goes up to $50 per barrel. It captures all costs:
development, operating, and fiscal terms. Unconventional
resources are represented by the yellow bars, and ConocoPhillips
has 7 billion barrels of unconventional resources in the Lower
48 with a cost of supply of about $35 per barrel. He said Alaska
cost of supply is close to $50 per barrel. The company has a
cheaper alternative to Alaska, so it is trying to bring down the
costs. He said the cost of supply for the CD5 project in Alaska
was brought down from $66 to $40 per barrel.
2:50:24 PM
MR. RUSCH said production taxes are part of the cost of supply,
so they can make Alaska projects less competitive to the Lower
48 alternatives. He presented the key concerns with HB 111 on
slide 6. The main concern is an increase in cost since the
company has lower cost opportunities. Additionally, HB 111 puts
an end to the three-year interest period that was established
last year, and it is punitive because it applies a high interest
rate for a time that is largely controlled by the state. The
audit process in Alaska has a six-year statute of limitations,
and that is set by the state. Beyond that is an appeal process,
which is largely controlled by the state, so it could be six to
nine years before an audit is resolved, he said. This schedule
can lead to tax assessments that are larger than the initial
audit findings. As part of HB 247, the interest was effectively
doubled, but it reduced the audit period. Under HB 111,
incentives for shortening the audit period have been removed.
2:53:11 PM
MR. RUSCH said there has been a lot of discussion on hardening
the floor, and there is some confusion on whether this is a hard
floor. Testimony from last year suggested that "we did not have
a hard floor." The recent advisory bulletin put out by DOR
attempts to harden the floor, which conflicts with the SB 21
statutes. He stated that any efforts to harden the floor will
erode the value of tax credits or the GVR benefits.
2:54:20 PM
MR. RUSCH suggested that the NOL provisions in HB 111 need some
improvement. ConocoPhillips is not eligible for the reimbursable
credits, but it supports the change in the NOLs from a credit to
a carry-forward deduction. However, there are issues in the
ability to fully recover these expenses. The combination of the
ring fencing and the reduction in value after seven years will
erode the value of the NOLs. He said that ring fencing will
reduce the value of a discovery like Willow, and the disclosure
requirements of NOLs are too broad and effectively release the
entire tax return, which could disclose the cost of a drilling
rig, for example, violating antitrust rules. Alaska has a
complex tax system, and the ring fencing could create
administrative burdens. He concluded that SB 21 is working, and
increasing taxes will make Alaska less competitive.
SENATOR STEDMAN referred to page 3, which looks like it was
created after the 2016 fall revenue source book. He asked for
the calculation to be run with updated figures, because at low
prices royalties become more dominant for the state, "and
clearly we're coming out of a state of low prices, so it would
give us a better feel to have the spring forecast numbers. He
expressed appreciation for including percentages on the chart.
2:59:17 PM
SENATOR WIELECHOWSKI referred to slides 3 and 4, and at $60 per
barrel, it shows the state getting 46 percent of the take, and
it looks like that is $5 billion, which would be over $2
billion, and the next slide shows a 100 percent tax increase. He
asked if the state's production tax increased by 100 percent to
$4 billion.
MR. RUSCH said numbers on slide 3 includes all taxes and
royalty, not just production tax. The tax increase on slide 4
includes only the production tax.
3:00:36 PM
SENATOR WIELECHOWSKI asked what increase Mr. Rusch calculates
for all taxes.
MR. RUSCH said he did not have that figure. He said he tried to
be very transparent. The bill addresses production tax, not
royalty or other taxes.
SENATOR WIELECHOWSKI said it is confusing, because the previous
chart includes all of that. What would the total take be at $60
per barrel? Is it a lot less than 100 percent?
MR. RUSCH said he did not know.
3:02:54 PM
CASEY SULLIVAN, Director of Government and Public Affairs,
Caelus Energy LLC, Anchorage, said Caelus Energy is a privately-
held independent exploration and production company that started
in 2011 and came to Alaska in 2014. [CEO] Jim Musselman has had
a series of worldwide successes. First with Triton Energy, which
was faltering, and Mr. Musselman arrived and quickly moved it to
one of the largest independent companies headquartered in the
US. Triton brought a difficult deep-water field near Equatorial
Guinea from exploration to development in 14 months. Mr.
Musselman and his team then started Kosmos, which had a
significant discovery with the Mahogany 1 well that is now part
of the Jubilee field. It is a deep-water play, he added, and it
went from exploration to production in 40 months. The team
consists of worldwide, successful oil finders and producers.
MR. SULLIVAN said that Pioneer Alaska, "kind of our legacy
company here," came to Alaska in 2002 and was the first
independent on the North Slope. The net profits tax system
encouraged new independents, and it worked in many ways, and
Caelus is an example of that. Caelus Energy has operated the
Oooguruk unit since 2008. That field is a structure that Mr.
Musselman found attractive, and it took five years to go from
sanction to production, a record time for an offshore island, he
noted. "We are already working and finding great success here in
Alaska."
MR. SULLIVAN said Mr. Musselman is in Alaska because it is
abundant with resources. Many had shied away from investing
here, but the passage of Senate Bill 21 was a signal that Alaska
was open for business. That occurred at the same time Pioneer
was looking to divest. "We're glad he made that decision, and we
hope that Alaskans are too," he stated. He showed a map of the
North Slope, with the areas in blue representing Caelus Energy
lease holdings. The middle area is the flagship Oooguruk unit,
and it produces 5 million gross barrels of oil annually. Caelus
Energy was responsible for about 25 percent of the recent annual
increase in production. Good policy allows it to invest and use
technology to increase reservoir capacity. On the eastern shore
is about 350,000 acres of exploration area. "We immediately shot
a great deal of high-resolution, 3-D seismic into that area," he
said, and there are very exciting prospects to explore for in
the next couple of years. He pointed out the Smith Bay area on
the map that Caelus Energy acquired in 2015. He said most of
this activity happened after SB 21, because it is a balanced
system that encourages legacy and independent fields on the
North Slope. Caelus is the type of company Alaska was looking
for, and he hopes it will be here for the next 40 years.
3:09:36 PM
MR. SULLIVAN said the discussion often focusses on what the new
projects will cost the State of Alaska instead of on the
benefits to the state. The Nuna development is the onshore
companion to the Oooguruk field and has up to 150 million
barrels, which should produce 25,000 barrels per day at peak
production. It was discovered, appraised, and shelved under the
ACES tax regime, but the Caelus team has looked at it and
realized it is an opportunity to get new oil into the pipeline
as soon as possible, he said. There is a 22-acre pad and road,
and there are two wells ready to go. One of the wells delivered
an IP [initial production] rate of 2,800 barrels a day, so
Caelus needs investor confidence now, so it can get right to
work in constructing the modules and installing some of those
flow lines. For Alaskans, this project will deliver 300 jobs
during construction and 300 during production, he said. Under
House Bill 247, "which is sort of what we live under," and
Senate Bill 21, Caelus Energy would earn about $151 million in
refundable credits, but the state would get back-in the
lifecycle of this field-close to $2 billion in royalties and
taxes.
3:11:32 PM
MR. SULLIVAN said the project that has been in the news is Smith
Bay, which is truly a world-class discovery. Other companies had
been in the area doing seismic work, and Caelus Energy used that
data for an exploration program. "I can't say enough about the
Alaskan contractor workforce-they are able to get into these
remote environments…and explore and do it safely and swiftly."
It is really remarkable, he added. In Caelus Energy's leases
alone, there are close to 6 billion barrels of oil, and maybe
with the surrounding area there are 10 billion barrels. Caelus
Energy looks at analogs of projects and believes that the
recovery factor is 30 or 40 percent, so that makes about 2
billion recoverable barrels. He said he has heard that Smith Bay
will drown the state in ongoing deferred taxes and net operating
losses, and that is valid, but a project like this is of
national and state significance that can provide oil and jobs
for the next 40 or more years. "This is a really exciting time
for Alaska, not just Smith Bay, but Willow, Nanushuk - this is
exciting times, and policy does matter." At the peak, there will
be thousands of construction jobs for the pipeline, roads, and
facilities, he said, and there will be close to 200,000 barrels
per day during the peak. That means $28 billion to Alaska in
royalties, wages, and taxes. The company hopes to build another
well this winter, but it is dependent on what happens in the
legislature, he advised.
3:14:26 PM
MR. SULLIVAN said the next generation of development from Caelus
Energy can add billions of barrels and thousands of jobs. He
showed a slide that represents the tension in the current policy
debate. Will the legislature create a policy that encourages
development and puts Alaskans to work and provides more revenue
to the state, "or are we going to create a policy that is going
to lock up those resources for future generations for a short-
term gain?" He said the current policy is balanced and attracts
investment. Caelus Energy opposes HB 111 as it stands, as it
represents a significant tax increase and will hamper new field
development.
3:15:29 PM
MR. SULLIVAN said Caelus Energy has been very transparent about
what prices it needs to get projects moving, which is somewhere
in the mid-sixties. His chart on page 8 shows that the price
needs to be higher "to be able to take those projects off the
shelf." He stated that Alaska's tax director, Ken Alper, said
the impacts of the policy on new oil would be a tax increase at
lower prices due to the hard floor.
3:16:55 PM
MR. SULLIVAN said that because Caelus Energy is not subject to
the minimum tax floor now, it is able to use credits to go
beneath that. Hardening the floor creates an infinite tax
increase, because the tax goes "from zero to the adjusted 3.2."
Referring to the next slide of his presentation, Mr. Sullivan
said the original profits-based system leveled the playing field
for new and legacy operators, and that was the goal. New
developments have a much higher hurdle, and enalytica, the
legislature's former-consultants said that the NOL credit aimed
to equalize tax impacts. It did, but this bill considers it an
alternative to that credit. Senate Bill 21 created a competitive
system and made a conscious effort to encourage new oil and new
players. Last year, House Bill 247 was billed as reforming Cook
Inlet, but it made significant changes to the North Slope and to
new players through the GVR and the capped credits.
3:18:06 PM
MR. SULLIVAN said Caelus Energy is not insensitive to the
situation that Alaska is in; these low-price environments impact
everyone. "If we're out of the cashable credit business, that's
one future," but he asked the state to make sure that it takes
care to make the small players as whole as possible. The shift
from a NOL credit to a deduction is a major tax increase because
of the low price and the hard floor. The bill also time-limits
the carry forward, which is a valid conversation, but it can
become a permanent loss in deduction value. "Hey, you're going
to spend a dollar today, but tomorrow you'll get half of it or
you're going to lose some of it. Sorry." That does not make
great policy, he exclaimed. In the bill, there is no uplift,
which was recommended by consultants to help the time value of
money. The hard-minimum tax floor for the GVR fields is a
significant tax increase: from zero to 3.2. The $5 per-barrel
credit for GVR fields enacted in SB 21 was an incentive for new
fields. It was meant to be an offset to high royalty rates, he
stated. "We would encourage that you consider that continue to
be allowed to be used against the floor," he added. Every regime
allows for cost recovery, and if Alaska doesn't, it will be at
the bottom rung of competitiveness.
3:20:33 PM
MR. SULLIVAN stated that Alaska's policy goal should be more
production. "Let's get more in the pipe." The fiscal system
should be competitive to keep players moving forward, including
full recovery of costs. Caelus Energy is 100 percent Alaskan,
but it competes for capital against other types of projects "in
different variations." He asked policy makers to encourage the
secondary market. There is an opportunity to be able to redeem
tax certificates with another taxpayer, and that should be
allowed in a way that works for both parties, he said. The last
couple of vetoes were very impactful to his company and to
Alaska's reputation. Is Alaska open for business? He asked that
the legislature help make good on those outstanding tax
certificates in a way that gets Alaskans back to work.
3:22:10 PM
CHAIR GIESSEL said it sounds like Caelus Energy acknowledges
that Alaska cannot afford to give cash credits any more.
MR. SULLIVAN said it would be great to continue the program,
because small producers could recoup their costs in a timely
way. Legacy producers spend a dollar and they can offset that in
their next month, he explained. "We spend a dollar and we have
to wait sometimes a year and a half, if not more, to be able to
recoup that same level of cost." He said Caelus Energy is not
encouraging the removal, but it knows that the state is in a
tough position. The company is running its economics without
cashable credits, because it has not been paid in the last
couple of terms.
3:23:24 PM
SENATOR WIELECHOWSKI referred to the statement by Castle Gap
Advisors on page 9 of the presentation regarding every regime
allowing the deduction of costs. He asked if that is true in a
gross tax regime like in Texas and North Dakota.
MR. SULLIVAN said that the statement refers to net tax systems.
SENATOR WIELECHOWSKI said Alaska's tax director, Mr. Alper, has
testified that a project like Smith Bay could cost $10 billion.
With a 35 percent net operating loss cashable credit, that would
be an enormous outlay for the state. What alternatives are there
to cashable credits?
3:24:34 PM
MR. SULLIVAN said that is a good question. The cashable credits
are capped, so "we would only get $70 million for that, and
there are some of those loss carry-forwards," but the state
would get the reward of jobs and royalties. The State of Alaska
could do other things. For example, Caelus Energy does not need
to be in the business of owning a road to Smith Bay or owning a
pipeline, so infrastructure development can play a critical
role. A $10 billion project without the road could be a $9
billion project. Processing facilities do not need to be owned
by Caelus. Native corporations could partner with industry, but
those come with a cost, too, he acknowledged.
SENATOR STEDMAN recalled that only one other regime in the world
has cashable credits, so, clearly, it is an anomaly. It is a
sizable obligation that the state cannot meet, and that is why
it needs to change course and get back into the norm of how
things are structured worldwide, he said. He looks forward to
working with Caelus Energy to come up with something in order to
go forward with Smith Bay. This is a $10 billion enterprise that
is several years out, and he asked what financial help the state
has provided thus far.
MR. SULLIVAN said Caelus Energy is not afraid of cashable
credits going away even though they lower the entrance hurdles
of new projects, but if there are changes, please make the
system competitive. Moving from a credit to a deduction is not
equal. "What we're trying to figure out is how you make that
deduction work in a way that is less complex but works also for
the new entrants."
SENATOR STEDMAN said he was asking about Smith Bay in
particular, because it is a game changer and might be the size
of Kuparuk or bigger.
MR. SULLIVAN said the program was over $100 million to execute,
so the state would carry 75 to 80 percent of those costs through
its NOL and exploration credit program. The company has
certificates for a portion of those costs, and it will probably
receive certificates for the second part of those costs. The
state is not on the hook for anything yet, because it has not
paid.
3:28:43 PM
SENATOR STEDMAN said that the people at home should recognize
that the state has been helpful and aggressive in increasing
production by not putting the entire burden on the industry.
There are billions out in credits, and sometimes the state does
not get due recognition for those cash credits or the many other
types of credits.
3:29:12 PM
SENATOR MEYER asked when the Nuna site will produce.
MR. SULLIVAN answered that the Nuna oil development is on a
cutting edge in that it is getting price opportunity in the mid-
fifties, but it is waiting to see what happens in the
legislature. "If we could buy pipe this spring, we could
actually install that next winter, install the modules, and
we're confident in first oil by late 2018, early 2019." He said
they would predrill a number of those wells, so they would get
into peak production fairly quickly.
SENATOR MEYER asked if the price of oil needs to be $70.
MR. SULLIVAN said the price needs to be in the mid-sixties for
some time "to really help progress that project."
3:30:35 PM
SENATOR WIELECHOWSKI asked what sort of uplift percentage rate
is fair for a project like Nuna or Smith Bay. He asked about the
timeline.
MR. SULLIVAN said fair and customary are two different things.
Uplift rates vary. Some are 10 percent compounded, and some are
the cost of capital, which is closer to 15 or 20 percent. He
suggested working with consultants to find a balance to benefit
the state and the companies. The goal is to drill an appraisal
well in Smith Bay, which is like a development well. It will be
fracked and will "flow that back to the surface." If it shows
that there are quantities for deliverability, "we'll engage in
the EIS process," which takes three years. It will be six to
seven years before first oil, he concluded.
CHAIR GIESSEL asked if drilling "this winter" means 2018.
MR. SULLIVAN said yes, the company would mobilize all the
equipment at Pt. Lonely and then drilling would most likely
commence January to March of 2018.
CHAIR GIESSEL asked if it will be a year before conducting a
flow test and knowing if this project is even profitable.
MR. SULLIVAN said yes. There is oil, but he does not know "if we
can flow that oil."
SENATOR COGHILL said the state is considering the value of cash
input. "Just like you have to deal with the cost/value question,
you can see that we're struggling with it as well." He asked how
ring fencing will impact Caelus and if it will cut it off from
other partnerships.
MR. SULLIVAN said the previous testifiers articulated the
difficulties with ring fencing. It would really hamper Caelus
Energy's investment cycle and investments in outer areas if it
could not recoup those costs against current producing fields.
Credits in Alaska have supported new independents, and "in many
ways we are kind of the poster child of that, and everything
that is on this slide really did receive a great deal of benefit
from the State of Alaska, and that might not have happened
without some of those assistance." He said Caelus Energy is not
unappreciative of the help the state agencies have provided to
move projects forward.
3:35:08 PM
JEFF HASTINGS, Chair and CEO, SAExploration (SAE), said SAE is
managing partner of Kuukpik SAE, which is a joint venture with
the village of Nuiqsut. He noted that his team was founded in
Alaska and has been partnered with the Kuukpik Corporation for
over 20 years, employing an average of 400 people per year. The
Kuukpik SAE joint venture is a consistent revenue source for the
corporation, the village, and hundreds of other Alaskan
families. He said the company preferentially hires Native
Alaskans, and it has over an 80 percent Alaska hire rate.
Kuukpik SAE primarily uses Alaska subcontractors and suppliers.
3:36:56 PM
MR. HASTINGS said the core business of Kuukpik SAE is collecting
seismic data; "we create the images, so the doctor can see how
to operate on the patient." It is typically the first to enter
exploration areas, "so we're kind of the pointy end of the
spear." The images are used to afford greater success in
drilling wells and is critical to any exploration program, he
added. Through SB 21, new seismic technology is producing higher
resolution images of the subsurface, which has a direct
correlation to new discoveries.
3:38:18 PM
MR. HASTINGS said the next slide shows the 190 Alaskan suppliers
that support our efforts every year. Then he showed an example
of how Alaskans benefit from a single seismic program. The Aklaq
program earned $49 million for Alaskan contractors and
suppliers, he noted. Seismic creates images of the subsurface so
companies can decide where to lease and where to drill. Kuukpik
SAE does not drill or develop oil, but its data is typically
sold or licensed to oil companies. "That ultimately was
contemplated in the tax credit system when it was first
created," he stated. There were special provisions to encourage
companies to collect seismic data so there would be more
exploration drilling. The state agreed to pay tax credits to
companies to invest in seismic work, and when the data is used
by an oil company, the state "gets a piece of that action-or a
refund for a particular tax credit." The state will also own the
seismic data, he explained, and it can do whatever it wants with
the data after 10 years.
3:40:55 PM
MR. HASTINGS showed a chart of historic seismic investment and
programs in the state from 2012 to 2017. The vertical axis shows
the dollars spent, and he noted that after SB 21, seismic work
increased. "It allowed us to compete for global dollars and
create the type of environment that the seismic data resulted in
new reserves in Alaska." It was not only legacy producers, but
it was independents going to work. These were seismic companies
that were creating the seismic data with no intent on producing,
he explained. The chart shows the tax appropriation cut in the
fall of 2016 and the second cut in the summer of 2017. The
vetoes in 2015 and 2016 had several negative effects on the
seismic industry. Capital spending slowed down with contractors,
and there was no visibility or confidence in the state's
willingness to settle what it owed. The capital that was
available to small companies, like Kuukpik SAE, is all but dried
up, he said. Many contractors are waiting to be paid for work
done up to two years ago. "You asked the companies to invest in
seismic and exploration drilling, and the companies did just
that," he said. They did so because the state was willing to
help fund them, and now the state is not paying the bills and
rules are being reinterpreted, which has resulted in a stalled
system. The seismic sector is typically the first to go.
3:44:24 PM
MR. HASTINGS said there is no clear timeline for paying tax
credits. "When will the 0-25 credits be processed?" The seismic
tax credits are simple applications and have been sitting in DOR
for over a year. He explained that recent interpretations of the
regulations have eliminated a thin secondary market; the DOR tax
division advisory bulletin, 2017-01, said that legacy field
producers cannot use any of the tax credits to reduce their tax
below the 4 percent minimum. It effectively eliminates his
company's ability to sell the few certificates it has been
issued to other qualified taxpaying companies.
3:45:33 PM
MR. HASTINGS said the state can help by creating a timeline for
processing the seismic exploration credits. It was never
envisioned that a seismic explorer would drill for oil, he
stated, the obligation was to fund the seismic program and
provide the data to the state. Also, "we need to reestablish the
secondary market" by allowing tax credits to be used by
producers to reduce their tax below the 4 percent minimum.
Alaska needs to restore confidence and show that it can be
competitive. The state created the program, which is the first
step in putting more oil down the pipeline.
3:46:59 PM
MR. HASTINGS said his company has answered the call and has
delivered the data, and now the state has to live up to its end
of the deal. Kuukpik SAE has two options, and one is to file for
bankruptcy and leave its vendors hanging. He noted that he has
an office in Senator Meyer's district and has been in Alaska
since 1986. His company chose, instead, to restructure and work
with its subcontractors to find a way to extend the payments to
allow the state time to pay its bills. By restructuring, the
company eliminated 98 percent of shareholder equity, many of
which were held by employees. Seismic data is the basis for
exploration, so "you can think of us as the canary in the coal
mine. We've been hit hard by the state's unwillingness to pay
for the exploration tax credit, and if the canary's having
problems breathing, the rest of the miners are going to have the
same effect." There have been difficult choices, and HB 111 will
further damage the industry.
CHAIR GIESSEL said she appreciated his testimony.
SENATOR VON IMHOF referred to the applications for tax credits
that DOR has been holding and asked about their value.
MR. HASTINGS said the .023 credits that are currently being
processed under the 120-day statutory minimum is about $32
million. The .025 credits are around $44 million.
SENATOR VON IMHOF asked about the connection of the tax credits
and HB 111.
MR. HASTINGS said his point is that there is already an issue
with the tax credit payments. By creating ring fencing around
where capital expenses can be used, "then how does an
exploration company transfer those credits back in if there is a
secondary market?"
SENATOR MEYER said it is depressing, because it sounds like
there is not much activity on the North Slope these days.
MR. HASTINGS said his 2018 forecast has the same or less seismic
activity as in 2017, which is down from the apex.
SENATOR MEYER said seismic has to occur before any discovery, so
it is not a good sign. He asked how much the state owes him.
MR. HASTINGS said, "We currently have certificated $24 million
worth of .023 credits, and we are an assigner of another $77
million worth of credits that have yet to be issued."
3:53:36 PM
SENATOR STEDMAN said that is not a fun position for anyone to be
in, but no sovereign gives an open-ended call to the treasury-
nowhere in the world. There are limits put on severance tax, or,
in this case, there is a credit bank that we fund, and there's a
calculation for that for the minimum funding, and we're funding
that. He said his point is that it is getting caught up in a
down draft, because it is just not done to have open-ended calls
on the treasury, or there would be no treasury. "So, how do we
work ourselves out of this mess?" There needs to be a solvent
state and a solvent industry to move forward, and there has been
good news lately. There is more oil out there to find. This is
not the end, it may be the beginning. "So, we'll try to work
through these budgetary issues, but we have a mechanism that was
put in place to protect the treasury on the downside, and I
recognize, at the end of the day, these credits either are
directly paid by the state or they're sold and someone else
deducts it, and at the end of the day it comes out of the cash
flow coming to the state." He said he does not have any answers
to that, but it is not up to just one branch of government.
3:55:45 PM
MR. HASTINGS said that the Colville River area "has been shot
over and shot over for decades," and companies are making large
discoveries now with new technology and [higher] resolution
seismic data. Bills such as SB 21 allowed the state to
participate financially so that that type of technology could be
used to increase production, and that needs to continue to
happen. He said everyone understands not having an open-ended
treasury bill, and the legislature worked hard to put the proper
appropriations into the budget that were vetoed and cut. He said
that when his company is faced with the same types of scenarios,
it finds a way to bridge that gap. The state has a huge savings
account and has billions of dollars of in-ground reserves that
the state will get royalty for, he said. The commodity price is
depressed, but the state has the assets available to find a way
to pay its bills.
3:58:26 PM
SENATOR HUGHES asked if Kuukpik SAE had made any arrangements
with producers regarding credits prior to the advisory bulletin.
She asked if that would handle the $100 million.
MR. HASTINGS said the company had a secondary market that it was
selling credits to. There was a willing buyer and a willing
seller, and it was a very equitable deal. "We were satisfied
with the monies that we were recovering even though they weren't
large lump sums; they were enough to help cash flow our
company."
SENATOR HUGHES asked if the advisory bulletin came out in
January.
MR. HASTINGS said the one he referenced came out about two weeks
ago.
SENATOR HUGHES asked if that was "enough to turn this around for
you."
MR. HASTINGS said the downward arrow on his slide represents all
seismic programs that were acquired by a seismic explorer, a
seismic company, an independent, or a legacy producer. Although
the commodity price is dropping, "we're seeing a deterioration
in the confidence in the Alaska industry." He noted that the
committee has heard all day long what SB 21 did for the state.
As the confidence begins to erode, people take global dollars to
other places. He said his company might be able to sustain
itself "in a two-seismic program environment," but to put more
oil down the pipe, which is what we are all here to do, "we need
to do something to incentivize people to go to work."
SENATOR HUGHES asked if a provision to allow producers to use
Mr. Hastings' credits would increase the activity. The chart
shows a decrease in activity. "If we're doing away with the
capital credits, would this provision not only help you recoup,
but also increase the activity, because, as Senator Meyer
brought up, that really has so much to do with what we might see
in the future and is important to be ongoing?"
MR. HASTINGS said he worked as a prime contractor and seismic
explorer. When he was a seismic explorer, "those are capital
dollars that we commit to a program and then we license to the
industry." If there is a market that includes a secondary market
or a payment plan that can be depended on, from the state,
"then, yes, we would invest in more seismic programs."
SENATOR MEYER asked if Alaska is the only place he works.
MR. HASTINGS answered that his company started in Alaska in
2008, and that forced it into a more global market. It now
services about 15 countries worldwide, but Alaska is still the
foundation of the company.
PAT GALVIN, Chief Commercial Officer, Great Bear Petroleum,
Anchorage, said the committee has not heard from a true
exploration company yet today, but that is what Great Bear
Petroleum is. It is exploring on the North Slope and has
expended $250 million to date on three exploration wells and on
about 500,000 acres of 3-D seismic, which has identified a
number of very attractive conventional prospects where Great
Bear intends to do exploratory drilling next winter. The company
is under same stress as other companies since it has no cash
flow, he said, and it has a tremendous obligation to its
creditors. Great Bear borrowed against the tax credits, but the
state did not pay, "so we have no cash to pay the lenders." He
needs to know if the state is going to identify a plan to pay
off the tax credits in a reasonable period of time.
MR. GALVIN noted that HB 111 ends the cash payments for tax
credits. His concern is if his company will "be able to recover
our costs of exploration when we actually have production and
recover that against our revenue before the tax is calculated."
He said, under his company's economic model, being able to
deduct those expenses if they are not available as a credit will
be "an absolutely essential part of our recovery for our
investors." It will be the number one consideration as it tries
to attract other investors. There are other provisions in HB
111, that are problematic, he added, but there are a lot of
moving parts, so he will not go through the bill's specifics.
There is political pressure to change the oil tax system, and
Great Bear Petroleum respects that. As a company that will be
subject to the tax system, it needs stability and something that
it can rely on. The last 10 years have not been stable, and the
state needs equilibrium.
4:08:55 PM
SENATOR HUGHES asked how ring-fencing affects explorers.
MR. GALVIN said it depends on how it will be defined. As a new
company, Great Bear does not have production, but its portfolio
of prospects is likely to come on line in a series as opposed to
all at once, so as the company invests in capital for the
initial development it will be spending a significant amount of
additional capital just to put the infrastructure in place,
which would then be used for the economics of the next project.
If the projects are ring-fenced, it could significantly affect
the ability to spread the costs from the additional production
and make it not economic. The identity of his company was
originally tied to the unconventional resource "that we see on
our acreage-the shale resource." The shale resource can be
developed eventually, and it may be huge, but unconventional oil
development in Alaska at current prices is not economic for the
initial investment and the infrastructure required. He said the
company believes that by developing conventional resources, that
infrastructure can then be used to economically develop the
unconventional oil. Ring fencing may preclude that option.
4:11:12 PM
SENATOR MEYER stated that when Great Bear came to Alaska, Mr.
Galvin was the commissioner [of the Alaska Department of
Revenue], and there were high hopes that the company was going
to drill a lot more than three wells. He asked if the company
has only drilled three wells because the original plan was to
target unconventional oil.
MR. GALVIN answered that there was "strong misconception about
some initial testimony that was done by our founding president
who is no longer with the company." The president testified as
to what an unconventional development would look like, and he
provided information showing that hundreds of wells would be
required in order to develop an unconventional resource, similar
to projects in Texas and the Bakken [formation]. Mr. Galvin
explained that the testimony was not a statement of what Great
Bear was going to do in the next three to five years. "It was a
statement of if we make a discovery and are able to develop the
unconventional resources, this is what's going to come, and the
state better be prepared to support that if it wants to see that
take place."
MR. GALVIN noted that Great Bear did drill the first two wells
and identified that the shale resource does exist, but it then
encountered the cost environment on the North Slope, and the
drop in oil prices, making the unconventional play beyond its
reach. However, Great Bear was fortunate that it identified the
need for 3-D seismic and was able to acquire that each year for
the last five years. The seismic identified a number of
conventional prospects "that we believe will be able to support
the economics of the North Slope, even in today's price
environment." What the president said may happen, but it will be
"a number of years out, once we've built out the infrastructure
in that area."
CHAIR GEISEL announced that a hearing for public testimony will
be held at 5 p.m. today, and she held HB 111 in committee.
4:14:15 PM
There being no further business to come before the committee,
Chair Geisel adjourned the Senate Resources Committee meeting at
4:14 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AGENDA - 4 - 17 - 17.pdf |
SRES 4/17/2017 1:00:00 PM |
|
| HB 111 - Testimony - AK Oil & Gass Assoc- 4 - 17 - 17.pdf |
SRES 4/17/2017 1:00:00 PM |
HB 111 |
| HB 111 - Testimony - BP - 4 - 17 - 17.pdf |
SRES 4/17/2017 1:00:00 PM |
HB 111 |
| HB 111- Testimony - ConocoPhillips - 4 - 17 - 17.pdf |
SRES 4/17/2017 1:00:00 PM |
HB 111 |
| HB 111 -Testimony - Caelus - 4 -17 - 17.pdf |
SRES 4/17/2017 1:00:00 PM |
HB 111 |
| HB 111 - Testimony - SAE - 4 - 17 - 17.pdf |
SRES 4/17/2017 1:00:00 PM |
HB 111 |