Legislature(2011 - 2012)BARNES 124
01/26/2012 10:15 AM House ECON. DEV., TRADE & TOURISM
| Audio | Topic |
|---|---|
| Start | |
| HCR19 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HCR 19 | TELECONFERENCED | |
HCR 19-OIL & GAS POLICY/NORWAY TOUR
10:18:50 AM
CHAIR HERRON announced that the first order of business would be
HOUSE CONCURRENT RESOLUTION NO. 19, Acknowledging the lessons
learned from the 2011 Norway Policy Tour and encouraging
investment in the state's oil and gas industry. He explained
that the resolution would be held for further action at the
committee meeting of 2/2/12, and introduced representatives from
the Institute of the North.
10:21:50 AM
NILS ANDREASSEN, Managing Director, Institute of the North,
informed the committee representatives from the Institute of the
North ("Institute"), and a contingent of 45 Alaskans from the
public, private, academic, and nonprofit sectors participated in
a week-long policy tour to Norway in September, 2011. The
participants now seek to share what they learned about Norway's
oil and gas development, economy, tax structure, and development
climate - particularly pertaining to Alaska's competitiveness.
Impetus for the tour came from the Institute's commitment to
bring new ideas, best practices, and strengthened partnerships
to Alaska. A strengthened relationship with Norway is important
because of its role in Arctic governance, its government's
relationship with the private sector, and its leadership's
priority of strong communication and collaboration. These
relationships with the private sector are supported by Norway's
core values of competitiveness, capacity-building, and
competency. Although there are many differences between Alaska
and Norway, the trip presented an opportunity to examine a
system that effectively manages development, encourages
investment, and ensures that citizens get a fair share of
government-owned resources. In today's economy, the Institute
encourages the state to study other systems, adapt the lessons
learned from others, and share experiences while building
partnerships.
10:24:45 AM
IRA PERMAN, Chair, Board of Directors, Institute of the North,
provided a PowerPoint presentation entitled, "Institute of the
North Public Policy Report: How Norway Develops Its Oil and
Gas." Slide 1 was a map of the Arctic Circle surrounded by the
Arctic nations. Slide 2, entitled "Why We Went: Oil Production
in Decline," was a graph of Alaska's oil flow from 1977-2019.
He explained that because Alaska's economic future is uncertain,
the Institute decided to look at Norway's oil and gas
production. Slide 4 was a graph that forecast Alaska will have
surpluses for seven years due to the flow of oil and high oil
prices; after that revenue will decline and "we want to find
ourselves a way out of that ... with some speed and haste but
with careful deliberation." Slide 5 was a map of Norway with
three Alaska cities superimposed on top. Norway's latitude and
coastline are similar to that of Alaska. Mr. Perman continued
to "what we found," and described the construction - financed
largely by the private sector - that is underway in Oslo. Slide
8 indicated that Norway has more jobs in the oil and gas sector
than does Alaska; in fact, the oil and gas sector is
"extraordinarily active." Slide 9 indicated Norway's oil fund
is worth US$570 billion compared to the Alaska Permanent Fund,
which is worth about $40 billion. He pointed out that Norway's
first deposit in the oil fund was in 1996, and it has produced
12 billion barrels of oil since that date. Total savings for
Norway over the life of its oil and gas resource is expected to
be $3 trillion. Norway statistics: population - 4,888,000;
income per capita - $88,400, although living expenses are very
high and value-added taxes are 25 percent; gross domestic
product purchasing power parity - $59,100 versus $47,700 in the
U.S; unemployment rate - 3 percent; percentage of government
annual expenditure paid by oil and gas revenues - 10 to 26
percent versus 80 to 90 percent in Alaska; and a democratically
elected unicameral Parliament with a ceremonial monarch.
10:34:03 AM
REPRESENTATIVE KELLER asked whether the income comparison
included the income taxes paid by Norwegians.
10:34:24 AM
MR. PERMAN said yes.
10:34:29 AM
REPRESENTATIVE GARDNER understood in Norway preschool, a
university education, and technical training are free.
10:35:09 AM
MR. PERMAN heard that income taxes in Norway pay for pre-
kindergarten through doctorate education, even for a resident
living in a different country.
10:35:27 AM
CHAIR HERRON noted a student does not have to be a citizen to
receive a free education.
10:35:52 AM
REPRESENTATIVE PAUL SEATON, Alaska State Legislature, added that
the retirement system in Norway is not associated with one's
job, but through the government, and is available to everyone.
In fact, the retirement funds and universal medical care costs
are paid by the oil fund. He encouraged the committee to
recognize these differences.
10:37:01 AM
BRADFORD G. KEITHLEY, Attorney at Law, Partner and Co-Head, Oil
and Gas Practice, Perkins Coie LLP, provided a brief history of
his background. Mr. Keithley's purpose as a representative on
the 2011 Norway Policy Tour was to focus on the oil and gas
aspect of the Norwegian system to understand its differences
from the Alaska system, and to identify areas of benefit to
Alaska. Norway's oil and gas industry is the world's sixth
largest exporter of oil, and Europe's second largest exporter of
gas. Slide 12 was a map that indicated the three primary areas
of Norway's oil and gas production are the North Sea, which is
also the location of the world's second largest new discovery,
the Barents Sea, and the Norwegian Sea. Oil and gas fields in
the Norwegian Sea have had limited development because this is
an important fishing ground for Norway. Norwegians are not
worried about their economic future because Norway has flattened
its oil and gas production decline by attracting investment
capital and co-investing in its own oil and gas development.
Slide 14 entitled, "Norway's Oil and Gas Production:" compared
Norway and Alaska's production curves and illustrated that
Norway's oil decline curve does not approach the severity of
Alaska's. In addition, he pointed out that Norway has
maintained a high level of investment for oil and gas
development, and Alaska has undergone a decline. Mr. Keithley
advised there is a direct relationship between investment and
production when the investment is in productive assets. Slide
15 indicated that the primary lesson learned on the 2011 Norway
Policy Tour is that Norway has successfully attracted private
investment to help develop its oil and gas resources; in fact,
over 60 international oil and gas producers are investing in
Norway including ExxonMobil, BP, ConocoPhillips, Chevron,
Statoil, and many others.
10:43:18 AM
CHAIR HERRON requested an example of how Norway attracts private
investment.
10:43:33 AM
MR. KEITHLEY said Norway acts as an investor by co-investing
with the private sector. The government participates as a
producer in the development of the resource. In Alaska,
producers pay a bonus prior to production, and then pay a
royalty during production. In Norway, there is no bonus system,
but there is more focus on development; as a matter of fact,
upon the licensing of a new area the government will co-invest
alongside of industry. This system aligns the interest of the
government with that of the producer during the development of
the resource, and provides the producer with a level of comfort.
He opined this factor "has had the most significant impact on
... attracting and maintaining private investment in the
country." The system is termed State Direct Financial Interest
(SDFI), and the government participates directly in the
development of the resource, substitutes definitive work and
investment commitments for an upfront lease bonus, and
participates in development decisions. Mr. Keithley further
advised that the most significant lesson learned was that SDFI
creates an alignment of interests between the government and the
producers because the government gains an understanding of oil
and gas development decisions, participates as a working-
interest owner; contributes to the costs of development, and has
access to data. Moreover, as the Norwegian government increases
its understanding of oil and gas development, suspicions of the
producers are reduced and there is a higher level of confidence
and a more positive environment. He recalled that Norway once
used a bonus and royalty system, but during the '80s,
transitioned away from that system - on both new and existing
fields - because it impaired investment decisions. The
Norwegian hosts acknowledged that the lease, bonus, and royalty
system generates a lot of cash from the producers, but after
time does not produce development since producers can hold onto
property without developing the property. Through government
investment, and by taking a working-interest owner position,
development is better driven. Mr. Keithley displayed slide 22,
entitled, "Implementing SDFI in Alaska," and explained that SDFI
can be offered as an option in new leases at the time of the
lease sale; however, that would not produce the desired result,
and making SDFI an option for developing existing resources is a
challenge. One important lesson from Norway's experience is to
organize a professional, non-politicized board - similar to the
Alaska Permanent Fund Corporation board of trustees or the
Alaska Housing Finance Corporation board of directors - to
administer the state's interest. The next step, with the
cooperation of the oil companies, is to convert the existing
leases to SDFI with a focus on undeveloped and underdeveloped
fields. Mr. Keithley reiterated that this is a way to drive
increased investment and increased development over time. He
displayed slide 24 entitled, "The Goal: Change the Curve," that
showed three different alternatives for Alaska's future: zero
investment which results in approximately a 15 percent decline
rate; investment of $1 billion to $1.5 billion per year which
would result in approximately a 6 percent decline; and an
investment of $4 billion to $5 billion per year that would
result in approximately a 3 percent decline. He estimated that
the current rate of investment is approximately $1.6 billion to
$1.75 billion per year.
10:55:28 AM
REPRESENTATIVE SEATON asked Mr. Keithley to discuss the misstep
made by Norway surrounding the Statoil model, specifically to
differentiate between the Statoil model and "what was the right
amount of state direct financial investment that got the right
balance between state participation and not interfering with
projects."
10:56:13 AM
MR. KEITHLEY explained that Norway originally invested through
Statoil, which is now a partially privately-held company. In the
early '70s, Statoil was 100 percent government-owned and served
the purposes of holding Norway's interest in the development of
oil and gas resources, and to act as an operator. As an
operator, Statoil helped develop the service sector industry,
gained expertise in oil and gas operations, and began service
operations outside of Norway. The company grew very large and
powerful and lost its focus on Norwegian projects, so in the
'90s Norway reduced Statoil's share in oil and gas resources to
50 percent, and transferred the other 50 percent interest to
Petoro. Subsequently, Statoil increased its international focus
and shares were sold to the public, although 67 percent is still
owned by the Norwegian government. In contrast, Petoro is
focused solely on Norwegian resources and is a small, non-
operating, efficient, and professional investment company.
10:59:32 AM
REPRESENTATIVE SEATON recalled the Norwegian officials stressed
that Statoil's growing independence threatened Norway's policies
thus "that model didn't work." Conversely, Petoro is funded by
the government, does not collect profits independently, and acts
as a manager.
REPRESENTATIVE TUCK understood that Statoil invests on a field-
by-field situation, and negotiates terms with other companies
that want to invest.
11:01:15 AM
MR. KEITHLEY clarified that Statoil is its own entity. At the
time of licensing - which is the equivalent of leasing in Alaska
- Petoro determines what the government's share will be,
therefore, private companies know what the government's
financial share will be in terms of investment responsibility
and revenue. Norway participates in all fields at an average of
20 percent; moreover, Norway does not want to take a high or
total percentage of a field, but wants to remain a co-investor
alongside of industry.
11:02:24 AM
REPRESENTATIVE TUCK asked about any obstacles to overcome.
MR. KEITHLEY acknowledged that in the beginning there was a lack
of success due to a few dry holes, raising concerns about
investment decisions; however, spreading out the investment and
risk over all of the fields, and co-investing with industry, was
highly successful.
REPRESENTATIVE SEATON explained the difference between a lease
in Alaska and a license in Norway: In Norway, the government
provides industry with two-dimensional (2D) seismic work for
their bids and as a result plans of development are submitted
for the license. The government then selects the preferred plan
of development for the field, thereby reducing the time of the
development phase. He opined this process is a little more
complicated, but possible to do for fields in Alaska.
11:04:34 AM
MR. PERMAN further explained that Norway's SDFI is part of a
larger licensing system which includes benefits such as initial
seismic and consistent rules and regulations on environmental
protection and safety, yet without the "wild cards" investors
find in Alaska. The Institute sees a great potential benefit
for Alaska in pursuit of SDFI.
11:06:12 AM
REPRESENTATIVE BRYCE EDGMON, Alaska State Legislature, said he
was extremely fortunate to have participated in the 2011 Norway
Policy Tour experience. Norwegians are unified on their
strategy in "going forward" and their overall goal to take
profits from their nonrenewable resources and put those profits
into a renewable vehicle: the oil fund. There are many
similarities between Norway and Alaska such as the coastal
waters, a small population, and competing interests between
fisheries and oil and gas development. Norway is also a major
player in the opening of the Arctic and is a leader in the
generation of hydroelectric power. Representative Edgmon said he
was especially interested in Norway's success bridging
differences between commercial interests and promoting corporate
social responsibility. Norway also maintains friendly relations
with neighboring countries and cultures even after a history of
occupation and war. In fact, many agreements between the
fishing industry and the oil and gas offshore industry involve
other countries. Returning to corporate social responsibility,
he stated that Norway recognizes that developers need to make
profits, but they also have to show responsibility toward local
communities and cultures in order to alleviate controversy.
11:11:38 AM
REPRESENTATIVE SEATON said the trip emphasized some of the
differences between Norway and Alaska, such as the impact of the
North Atlantic Current on Norway's northern coast which remains
ice-free for 200 miles. He also found that another of Norway's
policies that could apply to Alaska is that all of the oil
companies who do business in Norway pay corporate income tax on
the profits made in Norway. He recalled that in 1978 Alaska
realized that apportioned worldwide corporate tax would - when
production in Alaska was more profitable than elsewhere - lower
the taxes received by the state, thereby subsidizing less
profitable operations around the world. At that time Alaska
passed a separate accounting tax rate; however, in 1981 - after
a court challenge by the oil companies - the tax rate was
returned to worldwide apportionment. Even after the separate
accounting rate was upheld on appeal, the state has never
returned to that system. Representative Seaton pointed out that
this means an all-Alaska oil company pays the corporate income
tax rate on its income in Alaska, but an international oil
company may pay much less. He opined a return to separate
accounting ensures all companies pay the same rate.
11:14:48 AM
CHAIR HERRON restated the intent of the resolution is to create
a bill which will ask the legislature to discuss oil and gas
policies in committee.
11:16:00 AM
REPRESENTATIVE SEATON, in response to Chair Herron, said if the
legislature is to look at the lessons learned from the 2011
Norway Policy Tour, SDFI is an important aspect, as is the fact
that in Norway everybody pays the same tax rate. He confirmed
that this is a subject he would like to see discussed along with
others.
11:17:17 AM
LONE SEMMINGSEN, Deputy Director General, Tax Policy Department,
Ministry of Finance, Government of Norway, informed the
committee she shares the responsibility of resource rent
taxation with a counterpart in the Tax Law Department of
Norway's Ministry of Finance. She said Norway taxes natural
resources differently from other sources of income for the
following reasons: when a natural resource is exploited there is
the potential for an extraordinary rent, known as the resource
rent; natural resources are generally immobile; and natural
resources belong to the public, thus the resource industry is a
legitimate tax base. While ensuring a reasonable public share
to the profits from the petroleum sector, Norway believes it is
important to attract investment by reliable investors.
Therefore, Norway provides a stable tax system and a policy
framework that are free from frequent changes. Today, Norway
takes 80-85 percent of the value of petroleum production. Also,
it is important to provide simple tax rules that apply to all
investors including Statoil - which is partially owned by the
government. In fact, equal tax treatment of all companies is
essential to reduce the administrative burden. A simple tax
system reduces the opportunity for the companies to avoid paying
taxes and ensures that taxes are correct and enforced. Ms.
Semmingsen said the ministry has a highly competent tax
administration and also ensures taxpayers' rights by allowing
extensive opportunities for complaints and court filings. The
ministry uses a variety of government-take instruments: direct
taxation of petroleum companies; indirect taxes; a tax incentive
to reduce carbon dioxide emissions; and an area fee. In Norway
the central government holds direct financial interest in
several oil and gas fields thus the government, as do all other
licensees, pays a share of all investments and operating costs,
and receives deductions thereof. The amount of the government's
direct share is decided for each field and varies between
fields. Norway owns 67 percent of Statoil and receives a
corresponding share of its dividend. There are no upfront
payments or fees on production, and royalty payments were
totally phased out in 2006. She acknowledged that royalty
payments were an important source of income to the Norwegian
government, but today, taxes and SDFI are the most important
government-take instruments.
11:24:01 AM
MS. SEMMINGSEN continued to describe the petroleum tax system,
saying that the petroleum sector is subject to a uniform net
profit tax at a rate of 28 percent levied on a broad tax base.
In addition, there is a special tax on production on the
Norwegian continental shelf. Production began there in 1971 and
the resource rent tax was in place by 1975. This is a
relatively stable system as the marginal tax rate has been the
same since 1992. The special tax is a net-surface taxation
levied on a company basis, and companies are allowed to
consolidate costs and income from all fields in their
portfolios. The additional tax rate is 50 percent levied on
extraordinary profits; however, an extra deduction - known as
the uplift - is given to shield an ordinary return from the
special tax. Since 2002, uplift and losses can be carried
forward with interest; further, if a company withdraws from the
Norwegian continental shelf, losses are transferable or the tax
value will be paid by the government. Ms. Semmingsen noted
Norway has a similar system for hydroelectric production which
is also a natural resource. Norway's profit-based taxation
system promotes investment and implies a sharing of risk and
return between the government and the investor. Turning to the
other large source of government income from petroleum
activities, she explained SDFI is an arrangement whereby the
government holds an interest in oil and gas fields, pipelines,
and onshore facilities. The SDFI program was instituted in 1985
and was managed by Statoil until 2001, when Statoil was
partially privatized and the administration of the portfolio was
transferred to Petoro. She emphasized that Petoro does not
receive income from SDFI and is not an oil company. Each
participant's interest in SDFI is decided when the license for a
field is awarded, including the size of the government's
interest, which can vary. The government, along with the other
licensees, pays its share of investments and costs, and receives
gross income from the license. Currently, SDFI is an important
instrument for increasing the government's take in licenses with
high expected profitability. Therefore, SDFI works similarly to
a "cash-flow" tax of 100 percent on the government's share of
the license, in addition to the ownership of the real capital of
the installations on the shelf. Ms. Semmingsen concluded that
this policy has secured for Norway government income from
petroleum activities, while allowing for the resources to be
exploited in an economically efficient way.
11:30:04 AM
CHAIR HERRON commended Ms. Semmingsen on her professionalism.
REPRESENTATIVE SEATON asked whether Ms. Semmingsen had any
experience with negotiating SDFI on old, existing fields that
may require the demobilization and remediation of facilities.
MS. SEMMINGSEN restated that SDFI is determined at the time the
license is awarded. Previously, there was a sliding scale that
allowed SDFI to increase its share on more profitable fields;
however, this system was not supported by the oil companies and
has been abolished.
REPRESENTATIVE SEATON understood that Norway makes no changes to
its share from the issuing of the license through the time of
production.
MS. SEMMINGSEN said correct.
11:33:57 AM
REPRESENTATIVE TUCK asked whether there is a lot of competition
at the time of licensing.
MS. SEMMINGSEN said there is open bidding - similar to an
auction - and companies describe their plans for development of
the field. The Ministry of Petroleum and Energy then decides on
the license-group.
CHAIR HERRON thanked the presenters.
CHAIR HERRON asked Mr. Barron how to begin a dialogue between
the Department of Natural Resources and the legislature on
Norway's oil and gas tax policies.
11:37:47 AM
WILLIAM BARRON, Director, Central Office, Division of Oil & Gas,
Department of Natural Resources, said the Norwegian model is
interesting but is not unique to the industry; in fact, many
countries have the opportunity to initially, or at a later date,
participate in a working-interest share in the development of
their natural resources. He said he was familiar with the oil
and gas fields of Norway, and others that are similar. Mr.
Barron supported opening a dialogue on the subject and
continuing investigation; however, the conversion from a tax and
royalty system to a system wherein the state has a working
interest in a property "is quite a conundrum. How do you go
from being the regulator to being regulating the regulator?" A
plan for exploration and a plan for development are distinctly
different programs. He pointed out that having the state pay
for upfront 2D seismic in the North Slope foothills would cost
$1.6 billion to $1.8 billion over five years, and it would take
an additional three to four years to complete primary analyses
of the data. Mr. Barron cautioned that a working-interest owner
has many responsibilities such as losing money, being outvoted
by other owners, abandonment liabilities, environmental
disasters, dismantlement, removal, and restoration liabilities,
and changes in fiscal regimes. He advised that most of the
questions that first arise are policy, directional, and
philosophical questions, and - after a dialogue takes place - if
the state is prepared for this action, there will be technical
and administrative questions. Furthermore, if the state cannot
get into existing fields, becoming a working-interest owner may
not be an advantage in terms of new exploration and subsequent
development. Mr. Barron opined there would be a "time-delay in
exploration effort ... in exchange for our current program." He
concluded that the Norwegian model is good for Norway; however,
"these are very complicated, negotiated, concession terms that
cover all sorts of socio-economic parameters."
11:44:08 AM
[Although not formally stated, HCR 19 was heard and held.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HCR 19 - Inst. of the North Notes on 2011 Norway Policy Tour.pdf |
HEDT 1/26/2012 10:15:00 AM |
HCR 19 |
| HCR 19 - Ministry of Petroleum & Industry - Norwegian Policy of Development in the High North.pdf |
HEDT 1/26/2012 10:15:00 AM |
HCR 19 |
| HCR 19 - Ministry of Petroleum & Industry - State Direct Financial Interest.pdf |
HEDT 1/26/2012 10:15:00 AM |
HCR 19 |
| HCR 19 - Ministry of Petroleum & Industry - Statoil ASA.pdf |
HEDT 1/26/2012 10:15:00 AM |
HCR 19 |
| HCR 19 - Norway Petro Facts 2011.pdf |
HEDT 1/26/2012 10:15:00 AM |
HCR 19 |
| HCR 19 - 2011 Norway Policy Tour - Sponsor Statement.pdf |
HEDT 1/26/2012 10:15:00 AM |
HCR 19 |
| HCR 19 - NOC_Statoil_Gordon-Stenvoll_(2009).pdf |
HEDT 1/26/2012 10:15:00 AM |
HCR 19 |
| HCR 19 - Norway-_Areas_of_Inquiry.pdf |
HEDT 1/26/2012 10:15:00 AM |
HCR 19 |
| HCR 19 - ION Norway Report - To House EDT v 1 25 12.pdf |
HEDT 1/26/2012 10:15:00 AM |
HCR 19 |
| HCR 19 - Norway Resolution Agenda - EDT 1.26.12.pdf |
HEDT 1/26/2012 10:15:00 AM |
HCR 19 |