Legislature(2015 - 2016)BUTROVICH 205
04/08/2016 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| SB130 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 247 | TELECONFERENCED | |
| += | SB 130 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SB 130-TAX;CREDITS;INTEREST;REFUNDS;O & G
[Contains discussion of companion bill HB 247.]
3:30:38 PM
CHAIR GIESSEL announced consideration of SB 130. She welcomed
invited testimony from the Alaska Oil and Gas Association
(AOGA).
3:30:50 PM
KARA MORIARTY, President and CEO, Alaska Oil and Gas Association
(AOGA), Anchorage, Alaska, said her testimony today on SB 130
represents the thoughts and sentiments of each of the diverse
AOGA members. She related that on matters of tax, AOGA requires
unanimous consent for testimony.
She said there is no denying it; legislators have a tremendous
challenge facing them - cutting budgets, loss of revenue, laying
people off, and the oil and gas industry is facing similar
challenges. Currently, the policy for the oil industry places an
emphasis on production, investment and jobs. While the Industry
is responding and doing its best to weather the storm, it also
recognizes the value of investment and jobs to Alaska, and is
doing its part to sustain what it can in the interest of long
term sustainability for everyone. Changing policies will have
further negative impacts on the industry, which will be costly
for the state in the long term.
She said the legislature has been asked for the sixth time in 11
years to examine and change oil tax policy. No other industry
has had so many changes to its fiscal structure in Alaska, and
she can find no other jurisdiction in the world that has
considered changing oil tax policy more than Alaska has in the
last decade.
Nevertheless, Ms. Moriarty said, here they all are in a low
price environment considering changes to the oil industry, and
the only reason the administration is asking the legislature to
change the policy again is because of low oil prices. More money
is needed for government. Commissioner Hoffbeck said two months
ago that the motivation to look at oil tax credits was the
budget and that the motivation was not to redefine oil and gas
taxes.
But regardless of the motivation, the administration's final
proposal in SB 130 does both: it increases taxes on the industry
to generate more government revenue and it redefines oil and gas
taxes. As they consider SB 130 she encouraged them to ask AOGA
and all the individual companies who will testify, the
administration and consultants four important questions:
1. Will the governor's proposal increase production?
2. Will it make Alaska more or less competitive?
3. Will SB 130 provide predictability?
4. Will SB 130 provide stability?
3:34:34 PM
MS. MORIARTY stated that the last major change in tax policy
occurred three years ago in SB 21 and it was followed by the
referendum to repeal the new law in August, 2014. Voters decided
the state's current fiscal policy was good for Alaska and
industry agreed. Since April, 2013, when the bill passed the
legislature, industry has announced more than $5 billion in
additional spending across the state. That increased spending
could not have happened at a better time as the investments made
in the last 18-24 months are helping the industry, Alaskans, and
the state as a whole get through this low-priced environment.
3:35:15 PM
Objectives like stability and predictability are important in
any business setting; but Ms. Moriarty emphasized, don't lose
sight of the real prize: more oil and gas production.
For the first time since 2002, production has increased (slide
3) from March 2015 to March 2016, an increase of over 4,000
barrels/day (a 1 percent increase).
It is also important to look at the forecast for the outlying
years. Two and a half years ago in December 2013, the production
forecast for this fiscal year was 487,600 barrels per day. In
about three months production will be increased by over 33,000
barrels/day for a total of 520,000 barrels/day even though oil
prices have plummeted. The next few years are forecasted to
bring similar results even though the price forecast today is
$50 less per barrel than the price forecast was in 2013. The
spring production forecast, which was released yesterday, is
still about 55,000 barrels a day more when looking out to 2022.
She concluded that more production is always good for the state
regardless of oil price.
Speaking of prices, she said, they are the lowest in more than a
decade, which of course, has had a huge impact on the state's
revenues. While it is significant that the state has
historically received 85-90 percent of its revenue from the oil
industry, it's important to recognize that her industry receives
100 percent of its revenue from the price of oil. She related
that a friend said, "We are price takers; we are not price
makers."
MS. MORIARTY said these low prices are causing the industry to
be cash-flow negative. This means industry is not collecting
enough revenue each day to cover their daily bills, and the oil
and gas industry is no different than any other business that
does not have enough cash flow to pay its expenses. The cut
backs are seen in the dramatic increase in project delays and
deferrals, rigs going idle, and most painfully, Alaskans losing
jobs.
3:38:22 PM
MS. MORIARTY said industry recognizes that state employees are
also losing jobs in this tough environment. The House's
operating budget estimates 50-75 fewer state employees. But for
the oil and gas industry the job loss has been even more severe.
By the end of June this year, over 1,000 Alaskans will no longer
be working directly for the oil and gas industry and that does
not include the contractor workforce.
MS. MORIARTY added that Alaska is a high-cost environment and
according to the DOR Spring Sources Book (that has up-to-date
numbers) the average cost of producing a barrel of oil on the
North Slope and getting it to market before a company pays even
one penny of tax is around $50/barrel. And despite this they are
here testifying about legislation to add significant additional
cost to the industry by raising the production tax and
eliminating incentives. She said, "Let me be clear. If you raise
taxes and/or reduce credits, there will be a negative impact.
This is not about politics; it's about economics."
MS. MORIARTY said industry is cash-flow negative and some
companies may already be burning through savings to pay for
operations. Their reserves are not unlimited. If a company has
about $100 million to spend in Alaska and the government wants
to take another $10 or $20 million more, they will have no
choice but to further eliminate operating and/or capital
expenditures. This means less investment, less production, less
long-term state revenues, and even more Alaskans without a job.
In the interests of time, she wouldn't belabor each section and
concern they have with the governor's bill, but a few key
concerns will follow.
3:40:11 PM
The first key concern is the minimum tax. The governor's
proposal would increases the minimum gross tax from 4 percent to
5 percent, and although a 1 percent point increase may not sound
significant, it represents at least a 25 percent increase for
those companies who already pay the minimum tax. Additionally,
the governor's proposal will forbid companies from using any
earned or available tax credits to reduce the minimum tax below
the new 5 percent floor. It is likely that there will be
companies, large and small, that have earned new oil tax credits
or loss credits from prior year investments for exploration and
drilling and prior year losses while also operating in the red
due to low oil prices, and using those tax credits is the only
way they can continue to invest in the state. This proposal
would delay or possibly deny vital economic recovery at the very
time companies need it the most. In other words, raising the
minimum tax affects everyone and the proposed increase is a
flagrant money-grab that is large enough to cause substantial
negative impacts on all producers at today's oil prices.
MS. MORIARTY said the smaller companies or newcomers to the
state who have yet to make a profit in Alaska are not required
to pay the 4 percent minimum production tax under the current
law, but under the governor's proposal, they would go from
paying zero (because they don't make a profit) to immediately
being hit with a 5 percent gross value tax.
Additionally, the proposal would change the way the minimum tax
is determined and would prevent producers from taking the actual
tax credits available for a month to the extent they are greater
than the initially estimated amount. Both of these incremental
changes amount to a fundamental change in how the tax is
calculated, which actually accounts for a tax increase.
3:42:35 PM
Another major concern even though the administration has
testified that it is preserving the NOL credits (net operating
loss credits), industry contends that they become virtually
useless under the proposal. It would prevent the use of the NOL
credits to reduce the minimum tax. This change is analogous to
the federal government not allowing a company's losses to be
applied against its corporate income tax. Additionally, the
proposal imposes a 10-year limit on a company to apply unused
NOL credits. All of these changes to the NOL essentially
eliminate the value of the credit in the first place, and that
will impact companies' decisions.
3:44:00 PM
Another change that causes concern is arbitrarily limiting cash
credits to $25 million per company per year. Even the smallest
of projects cost in the $500 million to $1 billion range, and
imposing a $25 million limit per company is unreasonable and be
a strong disincentive for future investment. Eliminating or
discouraging cash rebates for companies that may not yet have
production or profits strongly disadvantages new companies,
especially considering that they invested in good faith when
those investments were made. It is bad business for the state to
basically say after the fact that it is not going to allow
companies to realize the true economics of their developments as
originally promised.
Eliminating two important credits for Cook Inlet and Middle
Earth is also dangerous. As for Cook Inlet, these tax credits
were unequivocally the driver for several key investments in the
region that have already lead to substantial increases in
production and jobs. AOGA does not view these credits as a cost;
they are an investment by the state, which reaps it clear
benefits. For example, one of the Department of Revenue (DOR)
many slides show that the state has paid out over $8 billion in
credits from FY07 to FY16. However, that figure implies a huge
capital investment of $30 to $40 billion by the private
industry, and during that same timeframe, the state has also
collected over $32.8 billion in total additional tax revenues.
MS. MORIARTY said AOGA fundamentally disagrees with the
administration that Cook Inlet has gas that is in search of a
market. DOR, DNR, and enalytica have all testified that
additional investments are necessary to meet the increasing
demand of Alaska's residents. Without continued investment, gas
production will rapidly decline and any decline will inevitably
result in higher utility rates for consumers and increase the
likelihood of gas shortages.
One provision that isn't talked about much, but is still
important, is section 39 that defines the state's outstanding
liability in the broadest of terms. It says that the state could
deny or delay tax credits payments for virtually any outstanding
and alleged liability even if it was with a state agency
completely unrelated to taxes.
3:47:03 PM
MS. MORIARTY said although there are plenty more aspects of this
bill that warrant further discussion, she wanted to conclude by
addressing the proposed increase in the interest rate. It's
crazy for industry to have to compound interest after it takes
the DOR six years to do an audit. AOGA supports the current rate
and believes it is reasonable, particularly considering the
lengthy statute of limitations. Because the DOR has a track
record of taking all six years to complete audits, under this
proposal, there could be scenarios where the interest payment
could be more than the actual tax bill, itself.
She explained that Governor Hammond was first to establish an
equitable policy for Alaska of one-third for the state, one-
third for the industry, and the remaining third for the federal
government. During the ACES regime, government take climbed to a
high level, which in turn was part of the reason SB 21 was
introduced as an effort to normalize total government over a
broad range of prices.
3:48:44 PM
As Mr. Mayer from enalytica described, government take is about
62 percent in a price range of $60-150/barrel. That is why it is
important to look at the production tax in conjunction with the
rest of the fiscal system. As the Division of Oil and Gas
Director, Corri Feige, stated in House Resources testimony,
companies lump taxes and royalties all together in one bucket of
cost, and any increase in production taxes will impact overall
government take. At today's prices, due to the regressive nature
of royalty, government take exceeds 100 percent, and SB 130
would increase government take for all fields and for gas as
well.
Finally, Ms. Moriarty said, the governor's proposal will not add
more oil to the pipeline. There is no plausible scenario under
which increasing taxes by $782 million will result in increased
production. Assuming the state sees a 10 percent production
decline because of less investment, it would also see a
reduction in royalties of $793 million over the next five years,
based on DOR Resource Sources Book data. This demonstrates that
it doesn't matter if prices go back to $60 or $80/barrel if
production declines.
While the administration has testified that SB 130 will provide
certainty and predictability, she could assure them that none of
her member companies sees any certainty or predictability from
it. In fact, the message it would send is that Alaska may be
having a bit of an "identity crisis." She asked how many
companies regardless of industry will beat down Alaska's doors
to invest when they count on their taxes being increased at
times of high commodity prices and then again when prices are
low.
MS. MORIARTY said she is not before them asking for a tax
decrease or for relief while members struggle through these
extremely low oil prices and difficult economic times. She only
asks that the legislature not "kick us while we're down because
of low prices." She asked that their policy encourage explorers
and new entrants and ensures that current producers remain
committed to Alaska.
3:53:21 PM
CHAIR GIESSEL asked if carrying the NOLs forward is a loss of
value to producers and how important the NOL is to them.
MS. MORIARTY answered that the NOLs are extremely important. The
NOL, itself, implies that it's a loss. Being able to apply those
ensures that companies can continue investing when they are not
making money.
CHAIR GIESSEL asked if the state's reimbursement fund for
credits were depleted and companies had to carry forward any of
the credits including the NOLs, what that would mean in terms of
their value.
MS. MORIARTY answered that individual companies could talk
specifically to their own economics, but if they thought they
were going to be able to carry that loss forward and can no
longer do that, it very much changes their economics and whether
they decide to invest in this low price environment.
CHAIR GIESSEL said Mr. Alper showed them a chart yesterday of
his projection of the .028 fund out of which credits are paid. A
formula based in statute (depending on the price of a barrel of
oil) determines how much money is in that fund, and this year
$73 million was appropriated to it. Last year the fund had $700
million, because additional money was appropriated. If the fund
were limited and companies had to carry credits forward, he
didn't know what that would mean in fiscal terms.
MS. MORIARTY answered that each company has different economics
and the DOR commissioner was commissioner when that statute was
created. When he testified to House Finance, he talked about the
intent of the fund. But talking about economics, obviously not
being able to have that credit and then not being able to apply
it is like it goes away. For those companies it will have a
severe impact on whether they are able to invest in Alaska.
3:56:56 PM
SENATOR COGHILL said they have to figure out how to work with an
industry that already is losing money, because there wouldn't be
any great use for a net operating loss without losses. They have
gone into this negative valley both as a state and an industry
and he didn't think it was wrong for them both to look for ways
of dealing with it.
One of the ways he tries to balance the discussion is
illustrated by the state's partnership with industry in raising
taxes but also incentivizing things that were beneficial to the
state. Because he wanted to be able to make "value calls" on
what the state wants and what the industry needs, as well as the
cash call, he asked what the timeframe was for industry's $5
billion investment.
MS. MORIARTY answered since SB 21 passed on April, 2013, there
has been an additional $5 billion of investment announced from
the industry both in the Cook Inlet and on the North Slope.
SENATOR COGHILL said that significant investment is what brought
the oil curve from a stand-even to a low-positive 1 percent
raise in the decline rate, which is not a decline rate right
now. That was a win for both in a high price environment. But
neither the industry nor the state anticipated the current low
price environment. However, the state also made some significant
investments and stated that he would be watching where that cash
flow balance is. A lot of the $5 billion investment went into
infrastructure, operations and maintenance, and what are
considered "sunk costs." The NOL carry forward, because it's
really not a credit, just stacks up and becomes numbers that
will have to be paid back some day, and because of that their
value is minimal.
He doesn't mind stacking the credits up and going through the
valley as long as the infrastructure remains whole and healthy,
and is able to produce when they get to the other side of the
valley. He didn't want the infrastructure - the cash investment
and the "sunk costs" - to be of no value. The NOLs and increased
base tax eat into available cash right now, but the sunk costs
are still there he reasoned. He was faced with making the
judgement call of how to "kind of hunker down" with industry to
go through this valley of low oil prices without messing that
field up.
4:02:03 PM
CHAIR GIESSEL said she understands the importance of Ms.
Moriarty's policy questions (referring to slide 2), and stated
that legislators have three questions of their own that relate
to all taxes:
1. How does it affect Alaska families?
2. How will this affect Alaska businesses?
3. Will it affect Alaska jobs?
Last week Chair Giessel said she talked to a registrar of over
10 years in one of her district's schools who said in January
she had five families withdraw and she had never had that many
withdraw before. Four of them were families that had lost jobs
in the oil industry and they were moving out of state. So,
legislators see the impact of the low price environment and the
decisions industry has to make, but it affects their
constituents, as well. That is the balance they are looking for,
too.
4:03:19 PM
SENATOR COSTELLO asked if Ms. Moriarty's member companies had
related communications from the investment community in relation
to the price environment or just having this bill before them.
Specifically, she was interested in the companies that might be
eligible for the cashable credits.
MS. MORIARTY answered that the investor community is very
nervous. They first started getting extremely nervous after the
governor's veto of the $200 million in the credit fund, because
it was completely unexpected. That caused a ripple effect
through the investment community, whether it's private equity
firms, banks, and so on, and that has not gone away.
She said that one of her member companies was ready to go
forward with a gas project in Cook Inlet, but decided to wait
until they see what is happening in Juneau. That could be seen
in the letter from Caelus.
4:05:27 PM
SENATOR COSTELLO asked if the oil price rebounds slowly, which
is anticipated, would those companies put their plans on hold or
exit Alaska.
MS. MORIARTY answered that it depends on what the legislature
does with tax policy. Prices can go up, but if companies don't
feel Alaska is a stable environment, and if it is going to
continue to raise taxes, the oil price may not matter.
CHAIR GIESSEL thanked Ms. Moriarty for her testimony and invited
Mr. Seckers to testify.
4:06:15 PM
DAN SECKERS, Tax Counsel, ExxonMobil Corporation, Anchorage,
Alaska, said SB 130 is a "very concerning piece of legislation."
Addressing Senator Costello's question, he said ExxonMobil is
committed to Alaska. They had been here for many years and will
continue to pursue attractive investment opportunities; they
look forward to being here for many years to come. Alaska
remains a very important component of ExxonMobil's investment
portfolio.
He underscored that ExxonMobil recognizes the difficulty
legislators face as policymakers in tackling the state's current
budget problems while still trying to protect current revenue
streams and trying to keep Alaska as a very competitive place to
do business. Tax policy decisions fundamentally impact the
economic health of the state and those companies that are doing
business in the state. Those tax policy decisions will move
Alaska either towards or away from its vision of the future for
oil and gas development. The need for Alaska to maintain a
competitive and stable fiscal regime that attracts and
encourages long-time, critical investments and future
investments to develop its resources especially in today's low
price environment is one of the most important issues the state
faces, ExxonMobil believes.
MR. SECKERS said they appreciate the need to close the state's
fiscal gap, but ExxonMobil believes that any tax policy change
should be weighed against the potential negative impacts on the
state's long-term investment climate. The real question before
legislators seems to be whether or not raising taxes on the oil
and gas industry at a time when the DOR has testified that the
companies are losing money is consistent with their vision of
Alaska's future, and if they believe that such action will lead
to more jobs, lead to more investment, lead to more production,
and lead to more long-term sustainable state revenues, or will
it in fact, just make matters worse?
MR. SECKERS said ExxonMobil supports AOGA's testimony that SB
130 represents a significant tax increase on the oil and gas
industry. They also agree with the comments made by the
legislative consultants, enalytica, that SB 130 represents
further instability in Alaska's tax and fiscal policy, and
undermines the economics and investments that were made in the
past and those that are being contemplated for today and into
the future. SB 130 will not improve Alaska's overall investment
climate; it will not lead to more industry jobs; it will not
help maintain or increase production, and it will not lead to
sustainable, long-term revenues for the state. In fact,
ExxonMobil believes it will do the exact opposite.
4:10:25 PM
He said SB 130 will create a major disincentive for companies to
invest in the high cost, high risk, environment that is Alaska
and reduce Alaska's global competitiveness. For those reason
ExxonMobil opposes SB 130.
MR. SECKERS said the impacts of SB 130 can be summarized into
three categories: one is substantive law changes, another are
procedural changes, and the other is the overall state policy
concerns. SB 130 affects each and every one of those categories
in a profoundly negative way. While ExxonMobil believes SB 130
as a whole is a bad bill, its key impacts are first: it raises
the minimum tax from 4 to 5 percent, which represents a
substantial regressive tax increase. It represents a minimum of
25 percent increase. As the legislature's consultant testified
that under today's low prices, the state is already at or above
100 percent of total government take. Raising taxes on companies
in that scenario on the very activity of producing oil and gas
is not a wise nor a long term feasible solution and it is not
sound tax policy.
Secondly, Mr. Seckers said, hardening the minimum floor in
section 17 will prevent companies from realizing the true
economics of their investments by preventing critical tax
credits from being used to reduce or offset the minimum tax.
Disallowing companies from using any earned or available tax
credits to reduce their minimum tax would represent an immediate
and significant tax increase, and it would penalize those
companies who made prior year investments even while they were
losing money. It would also penalize companies that continue to
make current investments or are planning to make future
investments from realizing the true economics of their
investment despite the low price environment. He said that AOGA
summed it up correctly in saying that this provision will affect
large or small companies; those that have new oil tax credits,
exploration credits, loss credits, and who may be in a loss
position today because of low prices and who are depending on
those credits to help continue to make investments in the state.
Further, this provision would deny that economic recovery when
they need it the most. This provision, by announcing to the
world that Alaska is willing to adversely affect the economics
of prior and future investments simply for short term revenue
needs, would significantly and negatively impact Alaska's
investment climate and the perception of Alaska's investment
climate to any future investor.
4:13:09 PM
MR. SECKERS stated that section 17 of SB 130 doesn't stop there.
"This 'bad boy' has a double-edged sword." Preventing a company
from fully utilizing its tax credits from any month against its
total production liability for the year is nothing but a
"disguised tax increase."
He explained that the production tax is an annual tax, not a
monthly tax. It is paid in monthly installments from monthly
estimates. This proposal would, in effect, migrate the tax into
more of a monthly tax which is a significant change, and the
repeated suggestion that this bill only affects the per-barrel
credits or the legacy field credits is simply not true. This
section of the bill has the potential to impact every single tax
credit. This means that companies with small producer tax
credits, exploration credits, and loss credits could each be at
the risk of losing tax credits, or worse, having them deferred
or actually losing them, and "that is a tax increase."
MR. SECKERS explained that the production tax is an annual
estimated tax that a company files 12 monthly installments for,
and a lot of variables go into that. One is the fact that
companies can only claim one-twelfth of its estimated expenses,
not actual expenses, every month. They can only take one-twelfth
of fixed credits or carry overs from a prior year in any given
month. That is why the payments are called estimates. "True ups"
are filed at the end of the year and on March 31 of the next
year and those reflect the total economics of the entire year of
operations. This bill would require almost perfect estimates to
be filed for numbers they can't possibly know. If they don't hit
it exactly, any credit they could have claimed the next month or
at the end of the year will either be deferred or it will be
lost forever, and some of these credits do not carry forward.
4:16:28 PM
Another hidden tax increase is in section 31 that keeps gross
value at the point of production from going below zero. He
explained that the production tax is not filed on a field by
field basis like the Economic Limit Factor (ELF) used to be; it
is a segment by segment tax. When PPT was put in place, which is
the foundation of the current law, it created four segments:
Cook Inlet, Cook Inlet gas, Middle Earth and the North Slope.
Separate returns are not filed for Prudhoe Bay, Kuparuk or
Endicott; they file one for the entire segment, which is the
North Slope. Thus if a company is producing from a remote field,
the gross value of that unit goes negative (because of marine
transportation costs or pipeline costs, the value of those
investments (in a pipeline or in marine tankers) are not lost,
because it is all consolidated at the end of the year as one
economic segment of activity. This provision says no, the gross
value can't go below zero, and therefore the costs that drove it
there are now lost forever. "That is a tax increase. That they
never tell you; that is a disguised tax increase."
4:18:19 PM
MR. SECKERS said section 8 addresses confidentiality and this
provision would allow the DOR to make significant taxpayer
confidential and sensitive information available to the public.
This information is currently confidential and rightly so.
ExxonMobil, even they are partners with BP and ConocoPhillips in
various fields, remain competitors with them and are prevented
by federal law from discussing and disclosing certain
information. In addition, they are bound by their shareholders
from disclosing sensitive proprietary, and maybe commercially
advantageous, information. The section 8 provision would allow
the DOR to release almost anything regarding company activities,
and this is particularly important in looking at the net
operating loss (NOL), which is determined by looking at what a
company sold a product for all and all its costs way down
through the value chain. Would that make their contracts open
for disclosure, because that is how they get their revenue?
4:20:13 PM
MR. SECKERS said along with all the tax increases, SB 130 has
procedural changes that could also raise taxes. Section 2, the
hardening of the minimum tax floor and the inability to use
credits on a monthly basis, is made retroactive to January 1 of
the year. That means by the time this bill reaches its ultimate
conclusion, taxpayers would have already filed a number of
estimated installments based on current law. Retroactively
applying these changes onto companies that have already filed
installments could expose them to punitive action.
SB 130 would reduce Alaska's overall global competitiveness.
Raising taxes when many companies are reporting record losses on
the very activity that this bill is trying to tax is poor tax
policy, and Ms. Moriarty numbers are correct: it costs companies
more to produce a barrel of oil on the North Slope than the oil
is currently worth. All are losing money. Raising taxes on
companies like that at that time will force them to reexamine
short and long-term investment behavior and is inconsistent with
the state's long term vision of promoting oil and gas
development.
MR. SECKERS said ExxonMobil is committed to Alaska and wants to
be here for a long time. They look forward to investing in all
attractive investment opportunities, but if taxes are increased,
especially in this economic environment, they will have no
choice but to reevaluate all their investment decisions.
4:24:28 PM
SENATOR COSTELLO asked him what is happening in other areas of
the world. How are other governments responding to the low
commodity prices?
MR. SECKERS answered that he couldn't speak about all the
jurisdictions, but when he talked to the legislative consultant,
Mr. Mayer, he said most countries' regimes are looking to
incentivize or encourage continued investment in their states.
He is not aware of any jurisdiction that is trying to raise
taxes or government take when companies are losing money.
4:25:35 PM
SENATOR STEDMAN said when legislators look at tax code, no
matter which one Alaska is in - PPT, ACES or SB 21 - complexity
is enemy to both, and instability doesn't do anybody any good.
Currently, the system is way too complex. Even the legislature
has a hard time understanding under certain price environments
what its side of the table is going to look like.
The current tax code provides for a 35 percent tax with some
credits moving around. He personally had never seen a firm pay
the 35 percent tax rate since the state has had it and didn't
think he ever would, because of the deductions it allows. In
trying to find a way of stabilizing this environment, he was not
so sure they shouldn't go back and listen to some previous
testimony from another major back during PPT when the proposal
was 8, 10, or 15 percent or even zero.
SENATOR STEDMAN said he had a 13-page amendment that would just
have a time out on taxes below $55. It would get rid of all the
credits and complexity and allow the state to collect royalties
and income tax (which he doubts there is any at low prices),
property tax, which you can't get away from, and zero out
severance. Would that increase or decrease stability?
4:28:27 PM
MR. SECKERS commented that it's hard to provide a detailed
response without seeing the entire proposal, because of all the
variables. Would prior investment be grandfathered or would the
losses just disappear all of a sudden? He also cautioned that
when companies look to invest, they look at the total government
take, the bottom line. But he admitted that it was an
interesting concept.
He underscored the desirability of stability and said that
constantly reviewing tax law is troubling. He strongly suggested
running it by a consultant and getting an idea of how it would
rank Alaska globally in terms of fiscal competitiveness.
SENATOR STEDMAN said it wouldn't be retroactive and wouldn't
take place until the end of this calendar year. But he wanted to
know if Mr. Seckers thought it would be a tax increase or a tax
decrease in this price environment.
MR. SECKERS replied that it is hard to project that on every
company, because they are all different. It may be a tax
decrease for a company that is in a current taxpaying position.
For companies with a lot of credits it may be neutral, but they
might lose the benefit going forward.
4:32:34 PM
CHAIR GIESSEL said section 27 provides that a company gets a
transferable or cashable credit based on percent of Alaska
resident hire of and asked if it applies to ExxonMobil.
MR. SECKERS answered that provision relates to cashable,
refundable credits and under law, ExxonMobil doesn't qualify for
them and he also has a concern about the constitutionality of
such a provision. However, he said that ExxonMobil has a very
high level of Alaskan employment.
SENATOR STEDMAN said he has very few constituents who work in
the oil patch, but a couple of young guys worked at Point
Thomson and were very impressed with the operation there and
want to stay working in the industry.
CHAIR GIESSEL said one of her constituents announced at a
community meeting that she is a contract housekeeper at the
Point Thomson development and was very excited about it.
4:35:44 PM
JOE REESE, Sr. Managing Tax Counsel, BP Alaska, Anchorage,
Alaska, said BP is a member of AOGA and supports the testimony
Ms. Moriarty provided earlier today on SB 130. He said the
success of Alaska's oil and gas tax policy is critical to BP, to
the AKLNG Project, and to all Alaskans who depend on the
successful exploration, development, and production of Alaska's
oil and gas resources. A durable, predictable, administrable tax
policy must be in place to unlock those benefits.
From BP's perspective, he said a durable tax policy means that
BP can count on it being the same tomorrow as it is today. A
predictable tax policy means it can be modeled and from an
investment perspective BP can determine how the tax policy will
impact their investment decisions. Administrable means they can
file their tax return accurately and when it's due. These are
the three things BP thinks about when they consider tax policy.
MR. REESE said BP is committed to maintaining a safe and
compliant business in Alaska that is sustainable. Over the past
two years there has been a 70 percent drop in oil price. In
2015, BP paid approximately $263 million in taxes and royalties.
That resulted in a financial loss of $194 million. These are
publically available numbers that are in their 20F filing.
Under the current market conditions, he said BP's business in
Alaska is spending more than it is bringing in and that is not
sustainable. As a result, BP is taking the very difficult
decision to undertake a 17 percent reduction in force and is
working with their Prudhoe Bay working interest owners to
analyze the activity level at Prudhoe Bay and adjust it
according to the current price environment.
SENATOR MICCICHE joined the committee.
4:38:40 PM
MR. REESE said a 1-percent increase in the minimum tax equates
to approximately six months of rig time at Prudhoe Bay; it's a
significant increase in taxes and cost to their business. He
repeated that operating under a predictable, durable, and
administrable oil and gas tax policy is essential to maintaining
the activity level of Prudhoe Bay and the long term viability of
the AKLNG Project.
SENATOR COSTELLO said the administration is asking to go from 4
to 5 percent and some are considering that to actually be a 25
percent increase and asked what he means when he says a 1-
percent increase.
4:40:49 PM
MR. REESE clarified that the 1 percent raise from 4 to 5 percent
is a 25 percent increase in the minimum tax. He added that BP is
committed to complying with tax laws in a responsible manner and
to having open and constructive relationships with tax policy
makers. One of the major costs of BP's business in Alaska is the
oil production tax, and while BP is currently cash-flow
negative, they still pay oil production tax, because certain
cash costs are not deductible such as their investment in the
AKLNG Project and other specifically delineated restrictions.
At current prices, Prudhoe Bay doesn't currently receive oil
production tax credits, but BP doesn't support limiting the
production tax credits under SB 21. That is because it would
negatively impact the oil and gas industry as a whole including
the many companies that made investments, created jobs, and
added production in Alaska based off of that tax policy.
Just as the industry is struggling to make ends meet, the state
also faces severe budget shortfalls and BP recognizes that.
While reasonable people may disagree about how to make changes
to improve the current oil and gas tax policy, now is not the
right time to increase taxes on businesses that are struggling
to make ends meet, and it would further inhibit their ability to
maintain their activity level at Prudhoe Bay. Near term changes
in the state's oil and gas tax policy will have long term
consequences for all.
4:41:55 PM
MR. REESE said the presenters before him had hit the highlights
of the issues with SB 130 and he wanted to touch on six items.
He wouldn't belabor them because they had been stated before.
One is the administration has proposed an increase in the
minimum tax from 4 to 5 percent and it does represent a 25
percent tax increase that equates to approximately six months of
rig time at Prudhoe Bay. It would have a chilling effect on
additional investment in Alaska.
Second, the administration is proposing an artificial limitation
to the use of credits. Their concern that law provides for
production tax to be calculated on an annual basis using
forecasted prices and estimated costs as opposed to actual
numbers, and having an end-of-the-year "true-up." The new
provision in SB 130 would cap the amount of credits that could
be used based on what a company claims in a given month. BP
doesn't believe that would lead to a predictable or
administrable tax policy, because it would be impossible to file
tax returns correctly at the time they are due.
Third, the administration is proposing a material increase in
the interest rate for tax overpayments and underpayments. The
current rate is 3 percent over the federal fund rate and it is
calculated using simple interest methodology. The administration
has proposed a significant increase to that and for the interest
to be compounding. However, Mr. Reese pointed out, the
administration typically takes the full six years of the statute
of limits to provide companies with their assessments and as
that interest clicks along, 7 percent compounded could be up to
$.55 per dollar, a significant amount of interest before a
company ever knows there is an issue. That does not allow for
predictability when they model their activities.
Fourth, the administration proposed a limitation on use of the
Net Operating Loss (NOL) tax credit, which would penalize people
who made investment decisions based on the tax law and now that
they are in a position where the cash flow doesn't meet the
expenses, they wouldn't be allowed to utilize that NOL going
forward. BP believes that is not durable or predictable.
Fifth, Mr. Reese said, the administration has proposed an
erosion of taxpayer confidentiality. Mr. Reese emphasized that
the production tax is a self-reporting tax much like the income
tax, and the quid pro quo for that is that the taxpayer, because
they give the information to the DOR or the IRS, in return they
get confidentiality of that data. It's different than a property
tax, for instance, where the government looks at market
indicators of a property, sets the value, assesses the tax, and
you pay the tax. That's public. The difference really comes down
to anti-competitive behavior. How will that information be used?
Will their competitors be able to see BP's commercial dealings
and will that lead to anti-competitive behavior? And secondly,
there is a constitutional question around violating privileges
and immunities to be forced to provide confidential information
and have that be disclosed by someone.
For both reasons, BP believes that taxpayer confidentiality and
the erosion of taxpayer confidentiality is bad tax policy.
4:45:45 PM
Last, Mr. Reese said, retroactive and mid-year changes to law or
regulations make it extremely difficult if not impossible to
administer the tax. BP can't file its returns accurately if the
game changes mid-way. Again, he said BP is committed to
maintaining safe operations in Alaska that are sustainable and
they are committed to complying with tax laws and developing
relationships with tax policy makers. They support a
predictable, administrable oil and gas tax policy and that's why
they do not support SB 130.
4:46:32 PM
SENATOR MICCICHE said everyone agrees that transparency with the
public is good when possible, and asked him to explain the
problems with taxpayer confidentiality.
MR. REESE explained the best analogy to use is everyone's
individual income taxes. The federal income tax is a self-
reporting system. This means the taxpayer writes down on his
return his income, deductions, and credits and submits that
under penalties of perjury to the IRS, and then they review and
determine whether it has been reported accurately or not. That
is a very similar system to the production tax, which is a self-
reporting system.
The concern is that the appetite for disclosure is never
satisfied until everything is disclosed, and as an individual in
the community, he would not want his income taxes shown to his
neighbor; it's none of their business. In the business context,
there are anti-trust laws that require BP to act in a
competitive way, and if they are forced to disclose their
commercial relationships to their competitors, especially in a
place like Alaska where there aren't as many competitors as
there may be in the Lower 48, one can quickly get to a spot
where there is anti-competitive behavior going on that would
violate federal law.
Secondly, a company has a constitutional right to not
incriminate itself regarding whether they know about a violation
of the law or not and they can't be forced to give up their
constitutional right to keep confidential information that will
be used only to administer the tax.
SENATOR MICCICHE said that was a partial answer, and asked if he
were to disclose details of a commercial contract how that could
disadvantage BP in competition with other companies.
MR. REESE answered that he is not an anti-trust attorney, but he
could share a simple example of how that information could be
used to manipulate the marketplace. If a party was forced to
disclose their contract for a helicopter, and they had retained
that helicopter to perform services for them and they paid them
a certain amount. If their competitors were to have access to
that information, then they could go to the same helicopter
operator and say I want a better deal, $99 instead of the $100
that the first party was charged. So now it's no longer a free
market, competitive environment. Private information can be used
to manipulate the marketplace.
CHAIR GIESSEL said one of the arguments made by the
administration to increase the interest rate and compound it for
tax returns is their assertion that companies short-pay their
taxes. So, this would be a motivator for companies to not do
that. She asked if that is a realistic argument.
MR. REESE answered that is just false and a little bit
offensive. He elaborated:
They are basically accusing us of lying or maybe even
less than basically, and we have every incentive to
pay our tax when it is due. We want to pay the right
amount of tax. We want to pay the right amount of tax
when it's due. We sign a return under penalties of
perjury, and none of us would intentionally do
anything that would jeopardize ourselves in that
regard.
Secondly, he said, many laws are already in place to discourage
short-paying taxes. "BP does not short-pay their taxes," Mr.
Reese stated. A provision would have to be created to resolve
uncertain tax issues.
4:54:19 PM
SENATOR STEDMAN said this is the same question he asked the
ExxonMobil representative. Why not take the severance tax to
zero in trying to get some stability and fairness in the state's
tax structure. His amendment uses the trigger price of $55 and
it is not retroactive.
MR. REESE responded that a simple tax policy is easier to
administer, but he would have to model Senator Stedman's
proposal to see how it impacts business. He said there are four
areas of government take in Alaska, at a minimum: one is
royalty, one is production tax, one is property tax, and the
last is state corporate income tax. Those all represent costs to
the business and the more their costs go up the less activity
they are able to conduct in the state. If their costs go down,
then they can make judgments about increasing their activity.
SENATOR STEDMAN said severance tax, of the four components they
struggle with, is the hardest to resolve. That is where the
instability lies, and making it zero would simplify that matter.
He asked Mr. Reese to comment.
MR. REESE agreed that the production tax gets the most attention
and it has been the most volatile of the four taxes. For them
the equation is simple: an increase to the production tax
increases their costs and reduces their investment; a reduction
to production tax reduces their costs and allows them to
increase their investment.
4:58:20 PM
SCOTT JEPSON, Vice President, External Affairs, ConocoPhillips,
Anchorage, Alaska, introduced himself.
PAUL RUSCH, Vice President, Finance, ConocoPhillips, introduced
himself.
MR. JEPSEN related that ConocoPhillips is not a member of AOGA,
so they may have some slight differences of perspective, but by
and large they are basically aligned.
He walked them through the activities that ConocoPhillips has
embarked upon since SB 21 was passed in 2013 and then took a few
minutes to talk about how ConocoPhillips has reacted to the
current economic environment. Mr. Rusch would walk them through
SB 130 and talk about their key concerns. They would conclude
with a few observations.
Since SB 21, Mr. Jepsen said, ConocoPhillips has done a number
of things: added two rigs to the Kuparuk rig fleet, which helped
stem the decline out of the Kuparuk River field, and ordered two
new rigs to be built, one which has already been delivered. The
other one will be delivered later this year. Prior to SB 21,
ConocoPhillips had three rigs in its rig fleet between Alpine
and Kuparuk. Since then, they have averaged about 5 - 6 rigs for
the two fields, but they are down to four right now. One rig was
sent over to BP, but they will pick up another rig later this
year and be back up to 4 rigs later this year. More rigs leads
to more production.
ConocoPhillips has also invested $500 million in bringing on
stream the first new drill site at Kuparuk in 13 years, drill
site 2S. It will produce about 8,000 barrels/day. They have also
embarked upon expanding their viscous oil production at West Sac
in the Kuparuk field called 1H-News (North East West Sac). It is
similar to drill site 2S in terms of the kind of production they
expect to get, the amount of money it cost to develop, and the
people they used to construct it. However, they have deferred
drilling on 1H-News in response to low oil prices.
MR. JEPSEN said they had built the modules and transported them
to drill site 1H on the North Slope. They are powered up to stay
warm for drilling next year and 1H-News should see first oil in
2017.
MR. JEPSEN said that ConocoPhillips has also been pursuing their
new developments in the National Petroleum Reserve Alaska (NPRA)
having received the key permits for Greater Mooses Tooth (GMT) 1
and have made the decision to move forward on it. It is about 9
miles west of CD-5 (this development is moving west). It will
cost about $900 million to develop and a peak gross rate of
30,000 barrels a day is expected. Hundreds of construction jobs
will be generated and first oil is anticipated in 2018. Right
now they are in the process of ordering materials and finalizing
their engineering.
5:03:26 PM
ConocoPhillips has another development 9 miles west of GMT1
called GMT-2. It will be a bigger development than GMT-1, but
its engineering is not as far along as it is for GMT-1. It will
cost in excess of $1 billion and take about 700 people to
construct it. He didn't have an estimated production rate at
this time.
MR. JEPSEN said ConocoPhillips made the decision to pursue CD-5
in 2012 before SB 21 was passed having spent quite a few years
since 2002 trying to get it permitted. They were hopeful that
they had made a good decision.
5:04:07 PM
The last thing Mr. Jepsen said they had done since 2013 is drill
two exploration wells at NPR-A. They shot seismic over the GMT-1
area so they could better ascertain the size of the field and
plan its development. This year they are drilling three wells in
NPR-A; two of them are about 9 miles west of GMT-2 and the
other, called Hyperion, is off of CD-5.
MR. JEPSEN said he wanted to correct the record about a number
of things. One is that none of their production qualifies for
the GVR. Some of it could potentially, but they felt the
regulatory requirements would be difficult and expensive to
meet, and didn't even file for it. So, the comment that all
fields since 2002 are getting the GVR is not accurate.
To put things in context, ConocoPhillips has a total of three
rigs in the Lower 48: one in the Bakken and 2 in the Eagleford.
One of the reasons they are continuing to pursue their
development in Alaska is because of the positive investment
climate, especially after SB 21 was passed. Ramping down
activity in Alaska is not easy. It's not like in the Lower 48
where you have short-term rig contracts and can go pick up a
Jones rig next week. There is a lot of momentum when things are
rolling and it is difficult to shut them down.
Right now BP is their key partner at Kuparuk and Anadarko is
their key partner at NPR-A, and BP supports ConocoPhillips in
these decisions. They have momentum and want to try to keep that
momentum going and hopefully outlast this trough in oil price.
If the price doesn't go up, they will have to take measures to
try to get back to a neutral cash flow, at least.
5:07:00 PM
He said slide 4, labeled "Capital Spending Trends," had a line
plot that showed oil price versus time and a bar chart in the
upper left corner that showed ConocoPhillips's corporate capital
expenditures during the same time period. They peaked at about
$17 billion in 2014 and have been ramping down at a steady
decrease that mirrors the price of oil since then. Their capex
is down about 63 percent from 2014.
Slide 4 provided a graph of ConocoPhillips's investments in
Alaska since 2012 and a graph of the percentage of their Alaska
investments relative to ConocoPhillips's total corporate capital
expenditures was below it. During the key ACES years of 2007-
2012, and when oil prices were considerably higher than they are
today, ConocoPhillips averaged about $800 million per year.
After SB 21 passed, in partial response to the better investment
climate, ConocoPhillips started to ramp up its investments. This
year (late 2015) they had anticipated spending about $1.3
billion in Alaska, but that has been ramped back to about $1
billion, still a pretty healthy-sized investment.
MR. JEPSEN said the bottom plot showed the percentage of their
Alaska expenditures relative to their total corporate
expenditures, which has been coming up as a total percentage.
The take away message here is that ConocoPhillips is investing
differentially in Alaska and for all the reasons he mentioned
earlier.
5:09:20 PM
He said that slide 5 graphed the "crux of the issue." The "Y"
axis shows net cash flow; the "X" axis shows ANS West Coast
price and the different colored bars show how much the state is
making, how much the federal government takes in income tax, and
how much the investors get from the North Slope in the blue.
The state's share excludes tax credits other than the per barrel
production tax credits. The reason? It's pretty difficult to
figure out how and when they are going to be taken, or if the
state will allow them or not. It's one of the discretionary
items that the state has in its control. In the current price
environment the state has positive cash flow and the investors
are negative. It stays that way up until somewhere north of
$50/barrel. But even above that price, the state's share is
larger than the investor's share under the current tax regime.
MR. JEPSEN said that there have been comments that severance tax
isn't high enough or it should be higher, but ConocoPhillips and
others in the industry don't just look at severance tax when
they make their investments, they look at total government take.
It plays the biggest part in their assessment of the fiscal
framework in the areas in which they invest. Severance tax goes
up as the price goes up, and it's a majority of the free cash
flow. He turned the presentation over to Mr. Rusch to give his
perspective on these key items.
5:10:52 PM
MR. RUSCH said slide 6 identifies key concerns with SB 130, a
number of which have been detailed by previous presenters.
However, these represent some very important issues for the
industry. The previous slide demonstrating that the industry is
losing money is the strongest argument against increasing the
minimum tax from 4 to 5 percent and will continue in that
position until upwards of $50/barrel.
ConocoPhillips' net cash flow last year was a negative $100
million-plus, at $52/barrel. Oil price is now south of
$40/barrel. If prices don't improve they will be in an even
worse position that will result in reduced investment in Alaska.
The concern they have with hardening the floor is that they will
lose the ability to use those losses, and those are real losses
on expenditures made in Alaska at a time when the industry is
losing money. ConocoPhillips continues to be committed to Alaska
and wants to invest for the future, but with that restriction
those investments effectively got more expensive.
5:13:17 PM
MR. JEPSEN commented that just because they are in a negative
cash flow does not mean they incur net operating losses. A fair
amount of expenses and costs don't get included when calculating
NOLs. Last year, for example, ConocoPhillips was not in an NOL
situation. He wasn't sure about this year.
5:13:36 PM
MR. RUSCH said they just received their tax audit from 2009,
which was six years and three months after the end of that
calendar year. Interest was accruing for that entire period.
That interest clock doesn't start when the audit is done; it
starts in the first month of the year.
ConocoPhillips also just closed out their 2006 audit, but the
appeal process took nine years. That is not a trivial amount of
time and compound interest component can actually be greater
than the underlying audit issues.
He said the current system, partly because it is a net tax
system, has a fair level of uncertainty about the deductibility
of certain expenses. In one year an item may be deductible and
the following year it may get challenged. The bottom line is
that uncertainty makes it very difficult to predict what the
final tax assessment will be.
5:15:35 PM
MR. RUSCH said the DOR has expressed concern that oil companies
might migrate the per-barrel tax credits across months. The tax
law is very clear that it is an annual tax, and the suggestion
that it isn't goes against the clearer guidelines that are
already in statute.
He also pointed out that a significant amount of confidential
data is already being reported to the DOR and the DNR about and
companies are in no way saying they aren't going to comply with
that.
5:17:27 PM
MR. JEPSEN observed in summary that any significant change in
the tax law just reemphasizes their concern about the inability
of the State of Alaska to implement a stable oil and gas fiscal
policy. It's only been 19 months since SB 21 was ratified by the
voters. They understand the state's fiscal issues, but
ConocoPhillips is basically in the same position. Everyone has
to do something to manage their way through this, and asking
just industry to solve the problem is not fair.
He said ConocoPhillips makes multiple billions of dollars of
investments in Alaska and since 2007, it has paid over $26
billion to the State of Alaska. However a pattern of tax
instability raises the question whether or not Alaska actually
competes for capital relative to other places where their money
can be invested. The most damaging thing about continual changes
in tax policy is what it does to a corporations' long-term
philosophy for investing in Alaska.
MR. JEPSEN added that they thought the House Resources Committee
Substitute (CS) was a vast improvement and amendments are being
taken right now. So, they will see what comes out of that and
tell them what they think. He repeated if there are increases in
tax that increase their costs, they will take it out of what
they are spending today. They don't have excess cash flow to
spend on taxes.
5:19:33 PM
SENATOR STEDMAN asked to go back to slide 5 and said it is
helpful for industry to use the same dataset as the state does,
the Revenue Sources Book. It shows in FY17 there will be $570
million in credits but when they get applied is up in the air.
The Revenue Sources Brook used $39/barrel and the chart uses
$40/barrel. It would be helpful to have that bar chart parsed
when the NOLs are discussed.
SENATOR STEDMAN said the state continually tries to get a stable
tax environment, but they never seem to get there and it might
actually be making it worse, to the point where the state has
trouble understanding it. He asked Mr. Jepsen's thoughts on just
getting rid of the severance tax - "Take it to zero."
5:21:32 PM
MR. JEPSEN responded that he would have to look at that in terms
of their past investments, their current investments, and the
price framework they intend to be in, and see if it makes sense.
"Is it substantially better, and is it worth going down that
path?" It sounds intriguing, but one of the concerns would be
that it is just another substantial change in the tax framework,
and there is no guarantee that after next year someone wouldn't
think they gave away the farm with a zero severance tax and want
to revisit it.
5:22:59 PM
SENATOR STEDMAN said both sides of the table are trying to get
stability, because this isn't good for the state's business nor
the industry's business, and they are in business together. So,
jointly nobody wins in this game.
He asked if CD-5 is on private land and how that works with the
tax code. It's not a loaded question, but more of an
informational question, because most of the time they talk about
what is on state land.
MR. JEPSEN responded that CD-5 is a combination of Arctic Slope
Regional Corporation (ASRC) minerals and federal minerals. So
production there is predominantly coming off of state lands and
ASRC lands. ASRC obviously gets the royalties from their
production and 50 percent of the royalties from the federal
production come back to the State of Alaska. Those royalties is
directed to be spent on the villages in the National Petroleum
Reserve Alaska (NPRA) that surround that, basically for the
benefit of the North Slope Borough.
CD-5 is located on Kuukpik Corporation surface land, so it's the
first development that is on Native-owned surface land.
ConocoPhillips has worked very closely with the Village of
Nuiqsut and Kuukpik Corporation and the ASRC in its development.
So far, they are drilling wells and fully expect to see their
initial expectation of about 16,000 barrels a day of average
production.
SENATOR STEDMAN said he thought it was good to point it out,
because it is a significant issue that the committee and the
public should know about.
MR. JEPSEN emphasized that they do pay severance tax even if the
development is on private land or federal lands.
5:25:39 PM
CHAIR GIESSEL pointed out an important fact: that ConocoPhillips
does something that the other two majors don't. It reports its
quarterly profits and losses in a procedure that is called
"separate accounting." She asked him why ConocoPhillips does
that.
MR. JEPSEN corrected her that it's not "separate accounting;"
it's called "segment reporting."
CHAIR GIESSEL asked him to explain why they do that.
MR. RUSCH answered that they don't do it voluntarily, because it
puts a bit of a microscope on their results. It's purely driven
by Securities and Exchange Commission (SEC) reporting
requirements. What triggered it for ConocoPhillips was their
upstream/downstream business, which simply made their upstream
business smaller. As they created the segments to report, Alaska
became a material segment for SEC reporting.
SENATOR MICCICHE asked why ConocoPhillips is investing heavier
in Alaska than in the rest of the Lower 48. ConocoPhillips'
Alaska capex went from 6 percent in FY12 to 13 percent in FY15
and to 16 percent in FY16.
MR. JEPSEN answered that ConocoPhillips ramped up investments in
Alaska after passage of SB 21 and have a lot of momentum going
now and think they have some good opportunities here. Momentum
is important because it's difficult to get the permits and rigs
in place as well as alignment with the partners. Once a project
gets started, ramping down is equally difficult. If you think
there's an opportunity you want to maintain that optionality to
continue with the level of investment that you have. Right now
they have a lot of stuff in place and are "investing in the
future," although they aren't making money in Alaska.
5:29:16 PM
DAVID WILKENS, Sr. Vice President, Hilcorp Alaska, LLC,
Anchorage, Alaska, said Hilcorp is the largest privately held
oil and gas company in the U.S. It is headquartered in Houston,
Texas, and has operations in the Gulf Coast of Texas and
Louisiana, the northeast U.S. in Ohio and Pennsylvania, as well
as Alaska's Cook Inlet and the North Slope. It was founded in
1989 and has 1400 full time employees. Just over 500 of those
employees support their Alaska operations and 90 percent are
Alaskans including himself.
MR. WILKENS said Hilcorp operates approximately 53,000 gross
barrels of oil per day and 150 million cubic feet of gross gas
sales per day from approximately 500 producing wells for a net
production of approximately 57,000 barrels of oil equivalent per
day. Hilcorp's assets are primarily, although not exclusively,
older fields with extensive production histories of steady and
predictable performance that carry an incredible amount of
opportunity for getting more oil and gas out of the ground. It's
the company's business model. They do it safely and responsibly
while extending production lives through efficiency in thousands
of small-scale projects.
MR. WILKENS said the state needs to attract more companies like
Hilcorp as its infrastructure continues to age. Hilcorp's
production in Alaska is approximately 40 percent of what it
produces company-wide. So, their success in Alaska is critical
to their overall company's success. From Hilcorp's perspective,
the credits in question have resulted in more investments in
Alaska, and more production both on the North Slope and in Cook
Inlet.
He said it's no secret that Hilcorp has been a big part of
reviving energy security in Southcentral Alaska. Over the past
four years they have invested over $1 billion in projects and
have drilled over 50 wells in the Cook Inlet area. As a result
of this investment and the increased production, they are
sending more oil to be refined and used in Alaska.
5:33:11 PM
Due to Hilcorp's significant investments over the past four
years, Mr. Wilkens said, they are now making longer term gas
supply commitments at a lower price out into the year 2023. They
continue to stand by their commitment to serve Alaskan's energy
needs first and are working to ensure a reliable and affordable
energy source for Alaska's largest population hub.
MR. WILKENS reminded them that prior to Hilcorp's entry into
Alaska in 2012, brown outs were a widespread concern as well as
the need for utilities to import natural gas to meet demand.
Expecting outages, many people bought electric generators, but
he is proud that with Hilcorp's results none of those generators
were needed.
He said that Hilcorp's success certainly didn't come without
challenges. Developing oil and natural gas in the Cook Inlet
basin carries a very high cost of production coupled with annual
decline rates that vary from 15-50 percent. The simple fact is
that if they did not continue spending money on projects that
bring on new production the declines cannot be curbed. So,
Hilcorp believes it is in their best interest and the state's
best interest to continue spending dollars on trying to produce
more oil and gas in the Cook Inlet basin. Victory can't be
declared or Alaska will be back in the same boat it was in at
the end of 2011. It's also no secret that Alaska's tax credit
system and the Cook Inlet Recovery Act were key drivers in
bringing Hilcorp to Alaska and their investments to date.
Since 2012, Mr. Wilkens said, Hilcorp has spent $3.5-4 billion
total in capital and acquisition costs in Alaska. Those
investments were aimed at one primary goal: increasing oil and
gas production. And since 2012, they have increased production
by about 40 percent. How do they do it? The answer is simple.
They have and continue to make significant investments,
investments that were encouraged by the state's tax credit
program and investments that did just exactly what the credits
were intended to do: increase energy supply for Alaskans.
Their success has been meaningful to many, including the state.
Increase production levels of oil and natural gas in the Cook
Inlet basin has resulted in increased royalty rates, property
taxes, and jobs. One example of this is looking at their monopod
offshore platform. In January 2012 right after Hilcorp took over
operations, the realized oil price was approximately $95/barrel.
Production on the monopod was 600 barrels per day, a marginal
rate for an offshore platform that has a high operating cost.
5:37:07 PM
Because of the marginal rate and low profitability from the
monopod, it qualified for royalty relief under HB 185 that was
passed in 2003. The royalty rate was reduced to help maintain
profitability for the platform so it would not be shut in or
permanently abandoned. As the royalty owner, the state's take
from the monopod at that time was approximately $90,000 per
month. This was when oil was $95 a barrel.
Over the past four years, Mr. Wilkens said Hilcorp has done over
150 projects on the monopod, most of which were smaller in
scope, and has increased production to approximately 3,000
barrels of oil a day. Because of the increase in production, the
state's royalty share is back up to the standard 12.5 percent
and even with prices at $35/barrel, the state's royalty take
from the monopod has increased to about a half-million dollars
per month, five times more royalty going to the state despite
prices declining by 60 percent. Furthermore, and probably more
important, their success at the monopod has added 20-plus years
of production life and approximately 8 million barrels of future
oil production. The monopod is not an isolated anomaly. Since
Hilcorp's entry into the Cook Inlet area in 2012, oil production
has doubled, which has increased oil royalty to the state in
these four years by over $70 million. And even though oil prices
are lower this year, estimated oil royalties will be
approximately $10 million more this year than what they were
right before Hilcorp took over.
5:39:46 PM
Hilcorp's success in increasing oil production over the past
four years has also increased future estimated oil production by
20-30 million barrels in the Cook Inlet area. That is just the
oil. That's meaning future royalty to the state. He said, "We
need more results like this."
He also offered that the state needs a system in place that is
stable, predictable and incentivizes - not penalizes - continued
investments. Hilcorp's Cook Inlet success is a good example of
the state putting good policy in place aimed at achieving a
positive result and then getting one.
MR. WILKENS remarked that the credits Hilcorp earned were
"absolutely reinvested in the state." They have managed to work
their way above the 50,000/barrel/day mark through both projects
and acquisitions and a lot of hard work. Breaking the
50,000/barrel/day mark means they can no longer cash-in the
credits in question, but other budding companies can still use
those credits, and Hilcorp is a company that always welcomes
competition and encourages other companies, especially in
Alaska, to succeed. Hilcorp wants to help promote a healthy
industry throughout the state, because an active industry means
additional service companies will not only stay but maybe even
come to Alaska, which will in turn lower costs.
5:41:24 PM
MR. WILKENS said a lot of the discussion regarding the credits
has involved the Cook Inlet basin, primarily because they were
wildly successful. Their success in the Cook Inlet is what has
fueled Hilcorp's interest in expanding to the north in November,
2014, when they purchased three of BP's fields on the North
Slope: Milne Point, Endicott, and North Star. When Hilcorp took
over operations there, all three fields were producing
approximately 36,000 gross barrels/day. Today, they are
producing about 37,000 gross barrels/day and after a year of
working these assets, he is very excited about the opportunities
he sees. They have a comprehensive list that they can invest in
for years to come: wells needing to be drilled, projects that
will put more oil in the pipeline and support hundreds if not
thousands of jobs in Alaska.
Hilcorp has one drilling rig running on the North Slope today
and would like to pick up a second before the end of 2016. But
in today's price environment and in the face of an uncertain
state fiscal structure, it is yet to be determined what projects
move forward and when. They have to be very thoughtful with
every penny they spend.
MR. WILKENS said investment budgets are shrinking and they
compete with other oil and gas producing areas throughout the
world, and within Hilcorp, as well. He wants Hilcorp's
investment dollars to come to Alaska. They have to continue to
work hard to build efficiencies and cut costs while ensuring it
is done safely and without causing harm to the environment.
"Cutting costs, not corners, is the only way we will survive
this downturn," he said.
5:44:12 PM
He asked legislators to recognize that change creates
uncertainty and uncertainty affects investments and jobs, and
investments, whether for exploration or development, are the
only way to increase production. Increasing production is the
only way to get out of this spot. Alaska can't afford to have
less production.
MR. WILKENS said that he had worked over the past 30 years in
several other basins throughout the U.S. and internationally and
can say with confidence that Alaska has changed its tax policy
more in the past few years than he has seen in other areas in
decades. He wants to keep Alaskans working and to increase
production, but his company simply isn't going to continue to
invest hundreds of millions of dollars in Alaska nor is his
owner going to let him take a loan out to pay his tax bill. That
is just not what they are going to do, and the only other choice
is to cut something out.
He concluded by saying that the uncertainty they are in
threatens their ability to plan their investments, and the
decisions they make today will impact the economics and the
opportunities to increase tomorrow's production both in the Cook
Inlet and the North Slope.
5:45:23 PM
SENATOR COSTELLO related that the director of the Alaska Tax
Division, Ken Alper, came before the committee and basically
said they tried to incentivize activity and that happened. The
state got what it wanted with the credits, and now it's going to
pull them back. She asked him to respond to that way of
thinking.
MR. WILKINS answered that in his view the tax credit system
incentivizing the behavior the state wants worked beautifully
for the Cook Inlet. Without them, Cook Inlet would have had an
"out of business" sticker in 2011/12. The state propped it up
with wonderful success. If the implication is that they are
going to call victory and be done, Cook Inlet will be back in
the same boat very soon. He added that policy that incentivizes
the behavior the state wants can work on the North Slope, as
well. He explained that Hilcorp reacts to policies the state
sets and the tax credit system is one of the things that brought
them to Alaska in the first place.
5:47:50 PM
CHAIR GIESSEL said SB 130 addresses transferable credits in
section 27 and bases them on Alaska resident hire, and asked if
Hilcorp takes advantage of those and if so, how he feels about
the requirement that they will be based on the percent of Alaska
hire.
MR. WILKINS responded that he isn't the tax person and that
Hilcorp is proud of the fact that they have 90 percent Alaskans
working. He could see where tying the credits to that would
result in changing numbers and tying it to something arbitrary
like that might not be sound tax policy. There is also the
constitutional question.
SENATOR MICCICHE asked him to comment on the effect commodity
price of gas has on Hilcorp and others if the incentives had
been lower if they kept the attractive delta with Henry Hub that
they had last year.
MR. WILKINS answered that Hilcorp can no longer take the
cashable credits as they have worked themselves out of those.
But other companies are budding that can take advantage of them
and they are very important to them. On the gas side of
Hilcorp's business, their investment decisions to drill all the
wells were based on predictability and stability. Hilcorp is not
a "build and flip" type of company. When they make a decision
they enter in and their track record is that they are in for the
long haul. Their business model uses a 5 to 10 year period to
get their money back. Before they came into Alaska they studied
the fiscal landscape, and the gas side is more stable than on
the oil side and that is a good thing.
SENATOR MICCICHE said Hilcorp operates largely in his district,
its effects on his community with the resurgence in the Cook
Inlet has been undeniable and positive. They are very
appreciative not only of the energy supply but for the
employment, increased property taxes, and all kinds of other
things.
CHAIR GIESSEL noted that where Mr. Wilkens works used to be her
district and recognized how much his company contributes to the
community in not just jobs, but to non-profit organizations like
senior centers and other community endeavors.
MR. WILKINS accepted her recognition on behalf of the Hilcorp
employees.
5:52:25 PM
TOM WALSH, member of the Board of Directors and Executive
Committee, Alaska Support Industry Alliance (Alliance), said he
is also the founder and managing partner of Petrotechnical
Resources of Alaska (PRA), but he is testifying on behalf of the
Alliance in opposition to SB 130 based on the negative impacts
to client companies and his own company. He said that PRA had
experienced a decline in activity and revenue much like many
other Alliance members in every sector of the industry in Alaska
from major and small independent oil and gas producers and
explorers to Native corporations, state, local and federal
government agencies, and the Southcentral Alaska utility
companies.
In 2010-12 Mr. Walsh said he was in Juneau stating that Cook
Inlet was running out of gas and now they are seeing a major
turn-around because of the credits. The oil and gas business in
Alaska has a tremendous breadth of skills and experience across
the full spectrum of disciplines. Two of PRA's employees are
recognized experts in the current oil tax statutes, regulations
and processes. PRA was established in 1997 and has grown
steadily over the years to a peak staffing level of 102
employees in early 2012. Recently, due to the depressed oil
price and associated crisis in the industry, employment numbers
have declined to levels not seen in the past decade.
5:54:57 PM
MR. WALSH said PRA's payroll is down to 48 employees and they
haven't seen the bottom yet. Last year, PRA had 55 contract
employees supporting the Prudhoe Bay unit operator, BP
Exploration Alaska, Inc., and presently they have 15 contract
employees at BP. Activity levels have crashed in the last year
impacting everyone in the oil and gas industry including the
major producers and large and small independents, alike. The
service industry has been hit very hard. It has seen significant
layoffs at CH2M and Parker Drilling among others. The Alliance
has surveyed member companies and can account for over 2,000
layoffs in the industry in the last year. PRA has lost over one-
half of its business and employees.
He said that last week, BP faced one of the most difficult times
in memory with respect to employee layoffs in Alaska, and
globally. After significant cuts last year, approximately 17
percent of the remaining employees in Alaska were informed of
their pending layoffs. His phone had been ringing all week with
severed employees looking for work, which simply does not exist.
On another sad note, Mr. Walsh said, Caelus Energy announced
this week that they will delay development of its Nuna Field for
at least one year due to the low oil price and the uncertainty
of Alaska's tax structure. All of PRA's clients have been
impacted by this continual uncertainty in tax structure; even
the perception of instability has major impact on the industry.
The investment community, which has been backing exploration and
development projects, has all but vanished in Alaska making it
difficult to impossible to finance oil and gas projects.
He said SB 130, if adopted, could mortally wound an already
critically ill oil and gas industry in Alaska. Raising taxes and
removing credits is a bad idea under any circumstance and is
fatally flawed policy in the current price environment. Raising
taxes on the industry in this moment is analogous to selling oil
stocks at a low point in the market. Alaska is heavily invested
in oil and gas even to a fault, and selling out now by raising
taxes and further crippling the partners who have developed the
state's most valuable resource in good times and have for the
last six decades, and who are now in a cash negative status is
simply irrational, he said.
He countered that since PRA is down by 50 percent in contracts
and revenue, perhaps he should double his hourly consulting
rates to correct for that downturn in business and see how many
of his clients agree to pay it. He didn't think many would.
5:58:59 PM
SENATOR COSTELLO asked how Mr. Walsh would respond to community
leaders across Alaska whose message on an hourly basis is to do
it all: cut the budget, address the credits and taxes, raise
revenue, and change the Permanent Fund, and if you don't do it
all you are not representing what the people of Alaska want you
to do. This has been a constant and consistent message since the
beginning of session and before. He must be aware of it. People
are joining arms and marching in lock-step saying every industry
must pay and fairness must be the value they put forward when,
in fact, all they have heard in this committee meeting is that
taxing an industry that is losing money just doesn't get you a
good result.
MR. WALSH responded that the challenge is tremendous, but her
last point is the critical one. The industry is hemorrhaging;
all the companies he is aware of are in a cash negative
situation with these low oil prices, and that's not just in
Alaska, but globally. So there is a major ongoing crisis and
raising the taxes is absolutely the wrong thing to do at this
point. It will just accelerate the decline of the industry in
Alaska, and we can't afford to do that.
CHAIR GIESSEL thanked Mr. Walsh.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB130-ConocoPhillips Testimony to SRES-4-8-2016.pdf |
SRES 4/8/2016 3:30:00 PM |
SB 130 |
| SB130AOGA Presentation to SRES-4-8-2016.pdf |
SRES 4/8/2016 3:30:00 PM |
SB 130 |
| SB130-SRES-Testimony-BP-04-08-16.pdf |
SRES 4/8/2016 3:30:00 PM |
SB 130 |
| SB130-Testimony-Hilcorp- 4-08-16.pdf |
SRES 4/8/2016 3:30:00 PM |
SB 130 |
| SB130-Testimony-AOGA-4-8-2016.pdf |
SRES 4/8/2016 3:30:00 PM |
SB 130 |