Legislature(2013 - 2014)BUTROVICH 205
01/31/2013 01:00 PM Senate SENATE SPECIAL COMM ON TAPS THROUGHPUT
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
SB 21-OIL AND GAS PRODUCTION TAX
1:01:30 PM
CO-CHAIR MICCICHE stated that the purpose of today's meeting is
to hear a presentation from PFC Energy and to hear public
testimony on SB 21.
1:03:25 PM
SENATOR FAIRCLOUGH requested information about where the
presentation can be found on line.
CO-CHAIR MICCICHE related that the information is on BASIS under
the Senate Special TAPS Throughput Committee.
JANAK MAYER, Manager, Upstream & Gas, PFC Energy, introduced
himself. He described his work with PFC Energy to provide advice
and analysis to the legislature in the context of future Alaska
production.
CO-CHAIR MICCICHE said he requested an independent evaluation,
with a focus on increasing oil production through TAPS.
MR. MAYER introduced his partner, Mr. Reinsch. He listed the
day's agenda.
1:06:08 PM
TONY REINSCH, Senior Director, Upstream & Gas, PFC Energy,
explained that PFC Energy is an above ground risk group with a
focus on issues beyond the oil reservoir which impact the
success or failure of hydrocarbon exploration and development
from global economics and geopolitics to above ground risk
issues and fiscal systems. He described his focus within PFC is
portfolio analysis and strategy and planning for the largest oil
and gas companies globally. He said today's presentation will
focus on BP, ExxonMobil, and Conoco Phillips.
CO-CHAIR MICCICHE noted the arrival of Senator McGuire.
MR. REINSCH turned to the first topic on how oil and gas company
decision making is made in terms of capital allocation,
budgeting, and long-range planning. He said the second part of
the presentation would be a portfolio analysis of the three
major oil companies and how Alaska fits into their global
portfolios.
He began with a graph depicting a company's typical annual
planning cycle. Oil and gas companies follow a standardized
process aligning the annual budget cycle to the long range plan
and corporate strategy. In the first quarter of the cycle, a
company will look at its annual strategy review, operating
environment, and long range plan, and prepare for a board
meeting early in the second quarter of the year. In the third
quarter a company focuses on the annual budget and in the fourth
quarter the budget is approved.
1:09:47 PM
MR. REINSCH listed components of the first quarter analysis:
strategy, planning and positioning. He discussed how companies
analyze markets, new sources, and competition. Companies
identify gaps in their planning. They apply their own filters
that have to do with metrics and above ground risk, in order to
produce strategic options.
He described the budget activity in the third quarter. Most
companies are structured around business units. Corporate will
provide those business units with their operating assumptions.
Based on those assumptions, each unit will come up with a long
range plan and a budget for next year's capital allocation. The
budget is made during the first year of a five-year plan.
Corporate evaluates the budget and sends it back to the unit
with added constraints. Eventually, a budget request goes to the
board for approval.
1:14:17 PM
MR. REINSCH related how companies attract capital - the project
approval process. He listed stages of an oil and gas development
or investment project; exploration, appraisal, development, and
production. For each stage, companies have a project approval
request form accompanied by an approval of expenditure.
SENATOR GARDNER asked for examples of what "stranded within the
strategy of the company" looks like.
MR. REINSCH gave as an example ConocoPhillips' repositioning
their global portfolio to focus their upstream more on
Organisation for Economic Cooperative and Development (OECD)
basins in order to minimize above ground risk. In doing that,
they sold their equity share in LUKOIL. He noted another example
when BP sold out of entire portfolios in North America for lack
of relevancy. Or, a developer may not have the focus to take on
the enhanced recovery requirements of a particular asset, so
they will sell it to a company for whom it is relevant.
MR. REINSCH continued to explain approval requests and approval
for expenditures, both of which compete for limited capital. The
board makes decisions at each stage of project development to
amend, suspend, or divest.
MR. REINSCH turned to a graph depicting business control
architecture of six years of cyclical planning. There are
activities that extend well beyond a fiscal year. The capital
budget in a given year consists of activities that have
successfully competed for scarce resources and attracted capital
to those activities.
1:19:35 PM
He addressed the question to what basis does a company allocate
investment capital to opportunities, or how the projects compete
for capital. He pointed out that a project will compete for
capital within a basin, with like activities within a portfolio,
and with all activities within a portfolio. For example, an
enhanced recovery project in Alaska will compete for capital
against other capital expenditure opportunities in Alaska,
against enhanced recovery projects elsewhere, and against simple
capital investment within those portfolios. It is also competing
against alternative uses of capital, such as paying down debt or
paying shareholders. He noted that ExxonMobil creates capital
scarcity within their portfolio by allocating a significant
share of their available funds to shareholder returns.
1:21:16 PM
CO-CHAIR MICCICHE asked if companies divide capital investment
by business units and have areas of no investment because other
projects are more attractive.
MR. REINSCH explained, if a business unit has received approval
for an activity request, that capital is secure and is
allocated. Competition is at the next stage.
CO-CHAIR MICCICHE understood that there could be business units
that receive no capital.
MR. REINSCH said yes.
CO-CHAIR MICCICHE said even if a unit was a core interest of
that company, the company can choose not to fund it.
MR. REINSCH said if the business is core to the operation, there
is a level of production and on-going capital commitment and
requirement. However, even within core business units, some are
not competitive.
1:23:40 PM
MR. REINSCH listed the five elements of upstream financial
metrics: growth, profitability, efficiency, cash flow, and risk.
He described growth as managing the "top line." It involves
compound average growth rate (CAGR) in production and reserves
relative to the target, quality of growth, and plowback rates.
He explained profitability as the ability to manage the "bottom
line," the upstream cash flow, net income, and production costs.
SENATOR GARDNER asked what CAGR is.
MR. REINSCH said it is compounded average growth rate.
He explained efficiency as the ability to manage capital, either
from operations or from shareholders. The return on capital
employed (ROCE) is one measure, as is finding costs.
He defined cash flow as the ability to manage investments and
reinvestments in the portfolio. He said risk is the ability to
manage a diversified portfolio.
1:27:03 PM
MR. REINSCH explained project selection and decision metrics
such as the pay-out period and internal rate of return (IRR), a
discount rate that equates costs and revenues. He related that
net present value (NPV) is bringing the present values of the
cost stream and the revenue stream together to occur at a point
in time in order to measure net gain. If the NPV is greater than
zero, it means the project is expected to deliver a return to
the company that is greater than the cost of development. It
includes a return on the capital invested.
CO-CHAIR MICCICHE asked about maximum negative cash flow
exposure and capex/boe.
MR. REINSCH replied that maximum negative cash exposure is
investing capital long before break even position. Is a
companion to "pay-out period" and is particularly relevant to
very large and long-life capex projects, such as major deep-
water development, liquefied natural gas developments, or oil
sands projects. A company may be putting capital out for four or
five years before production.
CO-CHAIR MICCICHE suggested that might also be seen in shale or
heavy oil production.
MR. REINSCH pointed out that shale projects return their
investment very quickly. They are low cost wells and are
characterized by very high initial flow rates, very steep
declines, and very long plateau periods. They attract small
investors who can test their theories and technological advances
and get funds back quickly. He noted that Alaska has a mix of
small investor projects and very large capex projects.
He said capex/boe, or cost per barrel of production capacity, is
a measure of a project by accounting for the capital that was
spent or burdened with shared facilities that it is benefitting
from. It tends to favor developments that are less complex and
less capital intensive.
1:33:31 PM
MR. REINSCH spoke of the advantages of NPV. One advantage is
that time value can be incorporated. It can be calculated
exactly. It can accommodate risk through discounting of costs
and/or revenue flows. It can encompass opportunity cost of
investment capital. The sole disadvantage with NPV is that it is
difficult to rank projects. Significantly different capital and
expenditure profiles can deliver the same NPV due to the effect
of discounting.
MR. REINSCH defined internal rate of return (IRR). It is the
discount rate that equates all future cash inflows to outflows
at a point, usually the present. The value of an IRR is that it
can be compared to a required minimum or hurdle rate. It helps
companies allocate capital within a portfolio of competing
opportunities.
MR. REINSCH showed charts that depict capital allocation and the
IRR hurdle rate. The projects are ranked from highest IRR to
lowest IRR. Eligibility for consideration for capital means that
all projects are showing positive attributes. For example, they
will all have a positive NPV, a positive return to the
investment dollar, and acceptable payback terms. Corporate will
establish a hurdle rate for IRR. Projects with IRR's equal to or
greater than the hurdle rate will be undertaken.
1:37:33 PM
MR. REINSCH spoke of issues with IRR hurdle rate. If there is an
increase in cash flow from high oil prices, there is more
available capex to spend on projects. In that case, companies
may lower the hurdle rate and extend their risk horizon. The
problem is that if the hurdle rate is lowered, the company may
be taking on projects that are less lucrative and less
competitive. This is reflected sometimes in "cycles of value
destruction" and gaming the system. He explained problems with
projects that are exposed and generate low rates of return.
CO-CHAIR MICCICHE asked if larger integrated companies have a
higher IRR hurdle than smaller independents.
MR. REINSCH suggested it was the inverse; smaller companies tend
to be risk companies. At the other end is ExxonMobil that has
little interest in risk. Most companies fall somewhere in
between.
MR. REINSCH related what "gaming the system" means. In a
business that involves attracting capital, there is a real
incentive for project managers to overstate the size of the
prize or to understate the cost. There are standards in place
that help to eliminate that behavior.
1:41:20 PM
MR. REINSCH discussed return on capital employed (ROCE). He said
it is the net profit before interest and taxes, divided by gross
capital employed, times 100. He talked about upstream and
corporate, and compared independents.
He explained return on capital employed (ROCE) and issues with
ROCE. He said ROCE is a measure of how successful and efficient
a company is at investing the money that has been given to it.
ROCE tends to increase with production and prices and it favors
a mature portfolio. He featured charts that depict upstream and
corporate ROCE amongst global players and amongst independents.
The global players compete on efficiency so ROCE is extremely
important. The independents compete on growth. There is a great
difference between ROCE for larger global players, who in 2011
averaged 20 percent, and independents who averaged 11 percent.
MR. REINSCH spoke of issues with ROCE. Major capital projects,
which increase the denominator in the equation, will weaken the
ROCE performance. He said that ROCE favors mature assets.
SENATOR GARDNER asked why ROCE favors mature assets and at what
point would a company consider stripping off assets. She
wondered if Alaska is at that point.
MR. REINSCH said Alaska is an interesting mix of basin
opportunities due to the variety of fields and situations. Field
life is an economic concept. He related that Alaska has mature
fields, enhanced recovery opportunities, new fields, offshore
exploration, and stranded gas. There are also unique contractual
structures. The big three play a part. All those are facts
unique to Alaska.
1:48:00 PM
SENATOR GARDNER asked if Mr. Reinsch would talk more about the
unique contractual structures.
MR. RAINSCH said that Mr. Mayer would address that issue.
CO-CHAIR MICCICHE questioned the idea that depreciation creates
bias in favor of a mature portfolio. He asked if investment
interest in a field were to be regenerated, if the bias would be
eliminated.
MR. REINSCH said an enhanced recovery program of a mature field
stands alone and does not receive the benefit of the maturity of
the asset to which that capital is being deployed. The enhanced
recovery activity is a brand new project. The company may or may
not burden it with shared facility costs. It is an independent
decision.
He used BP's 40's field that was sold to Apache as an example.
That field today has produced out all of the reserves it was
believed to have at purchase, and it still has more reserves. It
was a tremendous success for Apache and BP would not have taken
it on.
CO-CHAIR MICCICHE commented that with the right incentives, a
field could still draw investment.
MR. REINSCH said the point is that the investment has to compete
on its own.
1:52:58 PM
CO-CHAIR DUNLEAVY asked if BP left the field unaware of the
reserves.
MR. REINSCH explained that BP recognized the field's
possibilities, but it no longer had an interest due to
opportunities or higher returns elsewhere. Apache, on the other
hand, was in a capital spending phase.
CO-CHAIR MICCICHE asked if there were factors that could have
been created to make the field competitive to BP.
MR. REINSCH replied that neither BP nor Apache foresaw the
dramatic increase in crude oil prices over the life of that
asset. High oil prices have saved a number of otherwise marginal
investment decisions. Gas prices in North America currently are
bringing into question what otherwise would have been good
investments in on shore development. He could not say that
Apache saw something BP did not. Apache had a different set of
global opportunities they had captured and were looking to
allocate capital towards.
CO-CHAIR DUNLEAVY asked if sometimes smaller companies are less
risk adverse.
MR. REINSCH agreed, but for this example it was more a matter
that the 40's field was an asset to Apache and the acquisition
became the focus of their company. It was less of a risk issue
and more of a capital focus issue.
SENATOR GARDNER asked if this is an example of natural
progression in field development.
MR. REINSCH said yes, especially in North America. The industry
has developed in this manner. He described a variety of ways
consolidation takes place.
SENATOR GARDNER asked if there is a period of time between when
assets mature and companies are ready to divest and move on.
MR. REINSCH called it "harvesting" when a field generates free
cash flow that is being invested elsewhere. He used the UK North
Sea as an example of a harvest portfolio within global players;
however, for other companies the UK is considered a focus area
for growth and development as they acquire UK North Sea assets.
1:59:32 PM
SENATOR GARDNER requested information about when the UK changed
its tax regime and investment increased. She wondered if the
investment increased for harvest producers or in the next
generation of producers.
MR. REINSCH explained that the UK government uses its fiscal
system for behavior modification to incentivize exploration and
development. He termed that method "a risky game" because fiscal
system changes have unforeseen consequences.
CO-CHAIR MICCICHE said a recent uptick in the UK was that it
incentivized current players in order to increase production,
similar to what Alaska is proposing to do. He said he thought
that was what Senator Gardner was referring to.
MR. REINSCH said that was true. All production profiles of the
major company portfolios in the North Sea have been trending
downwards for a decade regardless of incentives. All companies
have been generating cash flow to invest elsewhere. Offering
incentives for small companies looking to grow portfolios in the
UK has had a positive impact.
SENATOR GARDNER asked if SB 21 would cause that same effect - of
the majors investing elsewhere.
MR. REINSCH stressed that the capital allocation decision is a
relative decision. He said, "If you are augmenting the
investment activity in a particular field or basin, all else
being equal, you will improve the chances of that investment
activity attracting capital within a global portfolio." He added
that a good way to attract capital is by enhancing project
economics; improving IRR and NPV.
2:04:46 PM
CO-CHAIR DUNLEAVY referred to a model where levers are used,
such as in the UK and Alberta. He asked if Alaska is viewed
similarly.
MR. MAYER responded that the UK is characterized as being very
high in terms of sovereign risk due to constantly changing terms
and in terms of regimes where governments pull levers at a
micro-level, rather than simply setting broad and stable terms.
He said Alaska is also characterized that way; it is
characterized as a regime that is not competitive and not
attractive. He gave an example of the use of a "lever" when the
state proposed a tax credit for the best jack up rig in the Cook
Inlet.
CO-CHAIR DUNLEAVY asked if the view of Alaska is that it likes
to tinker.
MR. MAYER agreed.
CO-CHAIR DUNLEAVY asked if that enhances investment or not.
MR. MAYER explained when a company is making large capital
investments that repay over decades, what is most important is
stability in fiscal terms. He gave an example of Pioneer and
Oooguruk with good economics under ELF, and then less so under
PPT, followed by challenging economics under ACES.
CO-CHAIR DUNLEAVY stated that Alaska has plays such as those
that are found elsewhere in the world. He inquired if the
industry views Alaska as having a lot of potential.
MR. REINSCH said yes. For example, Alaska is core to
ConocoPhillips. He added that Alaska has a lot of opportunity,
but also has a challenging operating environment. Entry to
Alaska is difficult because there is not a lot of asset sharing
or opportunities for new players to position in mature assets.
High potential growth opportunities, such as deepwater
exploration, are very challenging, as is the Arctic paradigm.
He noted the technology of gas commercialization is giving new
life to Alaska. He said there are many opportunities in Alaska.
He agreed with Mr. Mayer that stability is key.
CO-CHAIR DUNLEAVY asked for an example of a place that does not
tinker.
MR. MAYER said there were many examples. He used Australia's
federalized system and U.S. federal offshore as examples of
straightforward systems with well-designed tax systems. They
shed risk from the government and put it on the private sector.
He described the economics of a system that rewards for that
risk with no micromanaging and has long-term stability.
2:16:35 PM
CO-CHAIR MICCICHE asked why Texas's conventional oil production
has increased, while Alaska's has declined. Both states enjoy
the increase in the price of oil. He questioned why the
economics in Texas are more attractive than Alaska's.
MR. MAYER explained that two things make the production of
conventional and unconventional oil more attractive in Texas:
lower cost of drilling and lower government take.
MR. REINSCH began part 2 of the presentation, which addresses
the global strategy and portfolio overview of major Alaska
producers: BP, ConocoPhillips, and ExxonMobil. He said he would
discuss portfolio composition and the growth/capex focus of the
major companies. He said he would answer the question about
where these companies are looking to grow and which plays and
basins are attracting investment capital. He noted that the
majors in Alaska are amongst the ten largest global
international oil and gas companies. ExxonMobil is the largest
of all companies and the largest privately traded entity in the
world. Each of the major companies in the last three to four
years, has hit a major strategic wall.
MR. REINSCH began with BP and its challenges. He said BP has
taken the disaster in the Gulf of Mexico and turned it into an
opportunity by repositioning its portfolio globally. They sold,
and bought back, roughly $30 billion in assets and changed their
growth strategy: deepwater basins, global gas, and giant oil
fields. On a performance basis, BP exposed a lot of capital to
grow. It agreed to sell its Russian production and reinvest in
Rosneft, focusing on the Arctic play.
He turned to a chart that shows BP's focus areas and a very
large exit portfolio.
2:23:36 PM
CO-CHAIR MICCICHE asked why UK is considered only a harvest area
in BP's portfolio.
MR. REINSCH showed a chart of regional trajectories, which shows
a European decline in production for BP. The reality of the
North Sea decline is because BP takes free cash flow from there
and reinvests it in other areas, such as Africa or in the Middle
East. He pointed out that BP's future growth will come from
elsewhere.
SENATOR GARDNER asked, if Alaska is pulled out from the North
American data, whether the profile would look the same as Europe
or different.
MR. REINSCH replied that it would look a lot like Europe with a
large decline.
SENATOR GARDNER pointed out that in Norway the government take
is higher or comparable to Alaska's. In spite of the UK's recent
reduction in government take, the profile shows a decline in
production out to 2020.
MR. REINSCH agreed. He said this data consists of PFC Energy's
modeling of each company's portfolio and does not include
forward exploration success.
CO-CHAIR MICCICHE asked what is different about Alaska - so
Alaska could expect greater fiscal certainty in a reduced
government take. He inquired about the probability of Alaska not
ending up looking like the UK.
MR. MAYER explained that the major differentiator is the
enormous potential in Alaska, even with challenging access to
the resources. He noted that there are many future unknowns,
such as future of the shale resource.
CO-CHAIR MICCICHE asked if the investment world accepts that UK
does not have the same potential.
MR. MAYER replied that the UK is not deemed to have similar
resources.
2:30:07 PM
MR. REINSCH added that the UK/North Sea has reached a stage
where the remaining resource basin and the field size
distribution is material for smaller companies. Alaska has a
very different reality.
2:31:22 PM
At ease
2:50:17 PM
MR. REINSCH turned to global areas of upstream operations by BP.
He reviewed the types of operations depicted: core, focus,
harvest, or new venture.
He explained a graph that shows BP's production and how it
compares to the competition. He pointed out that BP has been
through a tremendous change. He said the impact of its Russian
portfolio sale, TNK-BP, would yield a production floor of 2.3 to
2.4 million barrels a day (mmboe), a tremendous decrease. If
they are successful in positioning within Rosneft, BP would
receive that millions of barrels a day back by securing 20
percent equity stake in Rosneft.
He showed a chart called regional trajectories of BP's. It shows
growing trends; where the company has been focused. The
assumption is that BP would reposition in Rosneft. He related
growth in various areas and said that BP is looking for a lot of
capital investment, both in unconventional resources plays in
the Lower 48 and in the oil sands development potential in
Canada.
He highlighted BP's portfolio in Alaska.
He turned to BP Alaska activity and PFC Energy's assessment. He
explained that Alaska is considered a harvest area. He suggested
focusing on PFC Energy's assessment of BP, "Current production
volumes are modest and declining. Significant potential lies in
the long-term commercialization of Prudhoe and Point Thomson gas
resources. Cancellation of the Denali gas pipeline proposal
leaves BP as a potential supplier to an alternative pipeline/LNG
export option, should one be approved and developed."
2:55:47 PM
He focused on BP's six challenges, as identified by PFC: bring a
close to the portfolio rationalization process, reposition in
Russia, develop a deepwater partnership in Brazil with
Petrobras, develop the U.S. unconventional gas resource, and
accelerate the development of oil sands leases in Western
Canada.
MR. REINSCH moved on to discuss ConocoPhillips. He related that
in 2010 ConocoPhillips committed to execute on a full portfolio
repositioning plan that has resulted in a significant
divestiture of assets. It included a departure from equity
interest in LUKOIL, the entire proceeds which were put towards
debt reduction and shareholder returns. This approach is very
different from BP's approach.
He continued to say that in 2011 and executed in 2012,
ConocoPhillips separated the company into two separate corporate
entities. The net impact has been a significant decline in
production. The company is looking to grow from global gas/LNG,
oil sands, and unconventional resource development.
MR. REINSCH looked at ConocoPhillips' global portfolio, or areas
of upstream operations. He said the company sees that deepening
their position in relatively stable, above ground operating
environments, separates them from their competitors. Their asset
divestitures have been largely focused on moving out of areas
that did not fit that goal.
He looked at the total portfolio evolution for ConocoPhillips as
a pure play independent versus their competition. He described a
chart that shows rapid growth from 2001 until 2011 and a
forecast of staying at 2011 production levels in 2016.
He presented a chart with regional trajectories for
ConocoPhillips. He detailed seven focus areas: Asia-Pacific,
Europe, Latin America, Middle East & North Africa, Russia &
Central Asia, and Sub-Saharan Africa. He emphasized that
activity in Alaska is core to ConocoPhillip's portfolio. The
future of natural gas commercialization has a significant
bearing to the success of their company.
3:00:59 PM
CO-CHAIR MICCICHE asked why BP and ConocoPhillips are in exit
mode from Russia, whereas ExxonMobil is not.
MR. REINSCH replied that BP exited the TNK-BP joint venture in
Russia, which was a monetization play, as much as anything. The
TNK-BP portfolio was a very mature, onshore portfolio and made a
lot of money. He explained that BP is not leaving Russia, but
taking proceeds to buy a 20 percent equity interest in Rosneft.
He said that ConocoPhillips, however, is truly leaving. Its
equity investment with LUKOIL did not bring expected returns.
ExxonMobil is a single asset player in Russia. All of the majors
are looking at the Arctic.
3:03:31 PM
MR. REINSCH looked at challenges ConocoPhillips is dealing with:
competing as a "pure play" E & P company, effectively
positioning in high value areas, defining operational strengths,
effectively managing base production, and, their biggest
challenge, delivering production growth.
CO-CHAIR MICCICHE welcomed Senator French.
MR. REINSCH provided an overview of ExxonMobil. He described
difficult situations in global unconventional areas like Qatar,
Brazil, and Venezuela. He related that ExxonMobil made a very
aggressive move of a $40 billion acquisition of XTO Energy. He
concluded that ExxonMobil is a company that has had to redefine
itself.
3:07:28 PM
He looked at ExxonMobil's portfolio, listing core, harvest,
focus, and new ventures. The company is constantly churning its
portfolio to move non-core, non-material assets out.
He said ExxonMobil is by far the largest producer. He described
their total portfolio evolutions and compared them to the
competition. He noted less emphasis on "return on capital
employed - a little more emphasis on growth."
He looked at regional trajectories for ExxonMobil in seven
regions of the world. He pointed out that ExxonMobil's Europe
profile looks similar to BP and ConocoPhillips. Volume growth is
focused on North America. There is growth in Asia Pacific due to
LNG development ventures.
3:10:36 PM
He looked at ExxonMobil's Alaska activity and PFC Energy's
assessment of that activity. Alaska is designated as a harvest
designation. PFC's assessment reads, "As the largest holder of
discovered gas resources on the North Slope and a co-operator of
the Prudhoe Bay Western Region development, ExxonMobil holds a
leading position in Alaska. Maintaining and growing upstream
investment increasingly hinges on a gas commercialization/export
scheme."
He showed a chart that summarized the three majors' share of
U.S., Alaska, and global production.
3:11:50 PM
MR. MAYER began a presentation about Alaska's fiscal regime in a
global competitive context and how ACES and SB 21 fit into the
picture.
He showed a graph that depicts how fixed-royalty jurisdictions
in the Lower 48 area are a key competitor to Alaska for
investment dollars. It is now an exception not to be targeting
unconventionals in North America as a major growth platform. He
called them fixed royalty regimes and all have low government
take that decreases as prices rise.
He showed how Alaska's days of "easy oil" are gone. High costs
and high government take present challenges. Costs are
significantly higher in Alaska than in the Lower 48 - even
compared to unconventionals. Meanwhile, Alaska's government take
has risen significantly over recent years. He suggested a
further look be taken at global economics in order to meet those
challenges.
MR. MAYER defined divisible income as gross revenues less cost,
including capex and transportation. Government take includes all
payments the government mandates in its function as a sovereign
including royalties, land rental fees, property taxes,
production taxes, and income taxes. Relative government take is
government take divided by divisible income.
MR. MAYER showed a graph that depicts fixed royalty versus
profit based fiscal systems. He concluded that a high cost
project in a given oil environment, or one single project as the
oil price moves, is going to face a very different government
take in those different circumstances. He pointed out that the
chart on the left shows the incidence of a 30 percent fixed
royalty for a single project, under five price environments. The
chart on the right shows the incidence of a 50 percent profit-
based tax on five different price environments.
3:20:59 PM
He noted that the fixed royalty system is inherently regressive.
There are many benefits to the private investor on a low cost
project or a high price environment. In a high cost project or
low price environment the private investor does poorly. By
contrast, the basic nature of the profit-based system in Alaska
is one that tries to more evenly have a more stable government
take.
He showed a chart that compares Alaska's government take under
ACES with the take of global fiscal regimes at $60/bbl. Alaska
is shown in red. At $60/bbl under ACES, government take looks
moderate due to a fixed royalty at high costs. At $100/bbl, both
for a new producer and for an existing producer, Alaska has the
highest government take of any OECD country other than Norway.
SENATOR GARDNER asked if the data includes lease costs.
MR. MAYER said lease costs are included in the overall
economics, but are not done on an "unrisked basis."
SENATOR GARDNER said it was slightly distorted.
MR. MAYER agreed, as it applies to the Gulf of Mexico.
SENATOR GARDNER asked if it includes that Alaska is sharing in
the risk under ACES through the credit system.
MR. MAYER replied that those credits are included in the
analysis. He added that costs against existing production reduce
government take. That benefit does not apply to a new entrant to
Alaska. He noted that "these are stand-alone economics" for an
existing producer based on their base portfolio or of a new
producer. There is no incremental analysis for an existing
producer.
3:27:42 PM
CO-CHAIR MICCICHE commented that a new entrant is disadvantaged
under ACES until about $140/bbl regarding government take.
MR. MAYER responded it relates to the economics of having higher
costs.
He said at $120/bbl, for new development under ACES, the
government take is the highest of any area.
CO-CHAIR MICCICHE said at $120 it is highest for new development
and just below Norway for existing producers.
MR. MAYER agreed. He said at $160/bbl, Alaska's government take
is greater than Venezuela's.
MR. MAYER looked at the components of government take for
existing production under ACES. The tables show the impact of
credits. Credits are a way in which the state shares in the
downside risk of all price environments, but takes a very large
share of the benefit at high oil prices.
CO-CHAIR MICCICHE asked if at a low price environment - $60/bbl
to $70/bbl - the state take is about half of that in a high
price environment - $110/bbl to $120/bbl. He stated that the
production tax dramatically declines in a lower price
environment.
MR. MAYER drew attention to the wedge shape of the yellow bars
on the graph that shows how progressivity affects government
take. He compared how government take would look for a new
investor under ACES.
He showed a cash flow analysis for new development at $100 ANS
West Coast under ACES. He said he is working with the same data
Econ One used so that the models would align.
SENATOR GARDNER asked to see the chart as it would apply to
legacy fields.
3:36:58 PM
MR. MAYER said such a chart would be less interesting, but he
could provide that information. Existing production in Alaska is
not as profitable as large mature assets in other parts of the
world.
MR. MAYER discussed government take for existing production
under SB 21. He noted the graph is nearly completely flat, but
slightly regressive without progressivity. At $100/bbl the
government take is about $60. It looks similar with new
development. Under ACES there is limited ability to use profit
based tax. He described the method of determining that amount.
The best way to incentivize new development is to calculate
production tax.
He explained a cash flow analysis on new development under SB 21
using $100 bbl. He compared it to ACES with significant capital
development but negative government take. Under SB 21 the
project has better rates of return. In the early years there is
no benefit from capital credit.
3:45:53 PM
MR. MAYER addressed regime competitiveness and average
government take at $60/bbl, and up to $160/bbl. Under ACES at
$60/bbl for existing producers and for new development,
government take is actually lower than under SB 21 because
progressivity has yet to kick in. He said that SB 21 maintains
an even take of 60 percent at about $120, while the take gets
continually higher.
CO-CHAIR MICCICHE requested the average for OECD at those
prices.
MR. MAYER offered to provide that information.
CO-CHAIR MICCICHE said it would be useful for comparison.
MR. MAYER addressed making SB 21 more neutral at the 66 percent
level of government take, such as if progressivity was
introduced back into the regime. He showed a graph of government
take for existing production if progressivity was reintroduced
at the 0.1 percent level from $30 PTV/bbl to a maximum of 35
percent.
He showed a graph that made the same comparison for new
development and a graph depicting the cash flow analysis for new
development with reintroduced progressivity.
MR. MAYER explained credits and deductions. The current credit
system is necessary in ACES to offset high government take, but
it introduces numerous distortions and unintended consequences.
The best example of this relates to incentives for cost control,
when one combines the progressive nature of ACES with the
credits that exist. The best example is the 40 percent
exploration credit.
In low price environments, or in the case of significant success
attracting new producers to the North Slope, it poses
significant cash flow risk to the state.
CO-CHAIR MICCICHE asked if "under the current system" means ACES
and if it was part of an effort to control the downside risk to
the state for credit payouts.
MR. MAYER agreed. He said that risk under ACES would be
eliminated in SB 21.
He continued to say that eliminating the 20 percent capital
credit may pose greater issues for small, more capital-
constrained producers.
3:54:07 PM
CO-CHAIR MICCICHE questioned the statement, "If capital credit
were to be retained in some form, it may be desirable to end the
ability to claim directly from the state."
MR. MAYER explained there were a number of ways to do that. For
example, a small producer could sell credits to a larger
company. He said the next step would be to offer credits for
future production.
He spoke of the benefits of differentiating between the various
credits. He said credits could be targeting to specific
development activity, but he cautioned against it. He said SB 21
is appealing in that it strips out the complexity of the tax
regime. He maintained it is not always easy to distinguish
between maintenance and development spending.
He discussed if current deductions should be allowed - for
instance, in the case of the pipeline tariff, which is likely to
be problematic and add complexity for little gain. He weighed
the advantages and disadvantages of allowing a credit. He opined
that a simple regime has benefits.
4:00:07 PM
MR. MAYER concluded that Alaska's future petroleum revenues
depend on sensitivities to oil price, production decline, and
fiscal terms. He stated that the biggest sensitivity is crude
oil price. It is the major determinant of Alaska's future
petroleum revenues. He showed a graph with Alaska's crude oil
production forecast.
CO-CHAIR DUNLEAVY asked if 2032 should be 2022.
MR. MAYER said yes.
He stated that the other major determinant regarding Alaska's
future petroleum revenues is the rate of decline of North Slope
production. He said fiscal terms changes have a smaller impact
than oil prices and the decline rate. He emphasized that the
state should work to stimulate new production by improving
fiscal terms. If an improvement in fiscal terms can stimulate
sufficient new investment to stem declines, it has the long run
potential to increase revenue, despite the near-term cost of the
change.
He said to maintain revenues to the state at a steady level in
real terms, a reduction in government take such as that under SB
21 would need to spur sufficient investment to reduce the North
Slope base decline from 6 percent, as currently forecast to 1
percent. Re-introducing 0.1 percent progressivity into SB 21 to
a maximum of 35 percent production tax would require lower
additional production post 2017 to be revenue neutral. To
maintain revenues to the state at a steady level in real terms,
a reduction in government take such as that under SB 21 with 1
percent progressivity would need to spur sufficient investment
to reduce the North Slope base decline from 6 percent as
currently forecast to 2 percent.
He showed graphs that depicted both scenarios under SB 21 and
tables that show incremental production needed to be added every
year with and without progressivity.
4:06:50 PM
CO-CHAIR MICCICHE thanked the presenters and asked committee
members to submit further questions.
4:07:17 PM
At ease
4:39:59 PM
CO-CHAIR MICCICHE reconvened the meeting and opened public
testimony. He reminded that the committee was looking at SB 21
with regard to how it affects TAPS throughput.
4:42:28 PM
TONY TENGS, representing himself, testified in opposition to SB
21. He said he was speaking in support of ACES. He quoted
Governor Parnell who emphasized Alaska's healthy economy and is
one of the best run governments in the nation. Mr. Tengs
attributed that success to the benefits from ACES. He suggested
that Alaska begin thinking like a country, such as Norway, which
has a higher government take than Alaska's. He spoke in favor of
letting Alaska continue to receive the benefits from ACES.
4:46:02 PM
PAM BRODIE, representing herself, encouraged the legislature to
protect the public's interest for the long term. She said it
seems unlikely that SB 21 is in the long-term interest of
Alaskans.
4:48:49 PM
ROBERTA HIGHLAND, President, Kachemak Bay Conservation Society,
testified in strong opposition to SB 21. She spoke in support of
ACES and recommended that state use those funds wisely for
renewable energy.
4:50:46 PM
PATRICK SCHLICHTING, representing himself, testified in
opposition to SB 21. He said ACES gave Alaska a fair settlement
and allowed the state to maintain its infrastructure. Governor
Parnell introduced a bill several years ago and has been focused
on it since. He stated that nothing is broken with ACES and
nothing needs to be fixed.
4:54:34 PM
DAVID OTNESS, representing himself, testified in opposition to
SB 21. He said the current direction is detrimental to the
state. The Governor's bill will create a welfare state in
Alaska. The producers are making the same claims in North Dakota
as here. It is not in Alaska's best interest to pass SB 21.
4:57:28 PM
KELLY WALTERS, representing himself, testified in strong
opposition to SB 21. He stated for the record that he took issue
with Senator Micciche's statement that he did not have a
conflict of interest. He said that eliminating progressivity
will rob Alaskans. Removing the capital credit will result in a
harvest mode. Under ACES there has been record employment and
numerous successes on the North Slope for three years.
5:00:35 PM
RACHAEL PETRO, President and CEO, Alaska State Chamber of
Commerce, testified in support of revising the current oil tax
policy. Alaska has a responsibility to be competitive and get a
fair return for its citizens. This legislation is an investment
in Alaska's long-term sustainability.
5:03:27 PM
WILLIAM WARREN, representing himself, said he had been active on
instate gas for years. He said the Governor, the legislature,
and industry have let the citizens down. The big boys left Cook
Inlet and just the small ones are left. The chair is correct -
we're all in the oil and gas business. He spoke in favor of
getting the instate gas line in place and taking action this
year or everyone will be looking for new jobs. He said the eyes
of Alaska are upon you.
5:06:27 PM
RICHARD JACOB MAENPA, representing himself, said he was
testifying in support of anything that would make it possible to
work and stay in Alaska. He was worried about the declining
throughput. He said at some point TAPS will fail. He said he
supported taking action on SB 21 or any legislation that will
increase throughput.
5:08:30 PM
STEVE GIBSON, representing himself, testified in opposition to
SB 21. He said it appears that ACES is fairer than the proposal
under SB 21. The long term effects of SB 21 are hopeful, nothing
more.
5:10:23 PM
GEORGE PIERCE, representing himself, testified in opposition to
SB 21. He said not to give the oil companies incentives unless
they are given on a performance basis. If it weren't for the
Senate last year, the citizen's resources would have been given
away.
ERIC TREITER, representing himself, testified in opposition to
SB 21. He said the oil companies are good at producing profits.
Tax breaks are fine if they are tied to performance objectives.
He concluded that the oil is the people's resource and therefore
he believes in the principle of progressivity.
5:16:33 PM
DAVID TRANTHAM, representing himself, testified in opposition to
SB 21. He said he represents five generations of Alaskans and
they are in survival mode. They pay more than $7 a gallon for
fuel and he didn't see that SB 21 would help. He said he
supports ACES, although some minor tweaking may be necessary. He
stated that the people need the legislature's help to protect
all Alaskans.
5:19:53 PM
At ease
5:44:50 PM
CO-CHAIR MICCICHE reconvened the meeting.
5:45:11 PM
MONIKA KUNAT, representing herself, testified in opposition to
SB 21. She said it wasn't good enough for future Alaskans.
5:47:22 PM
JAVEN OSE, representing himself, testified in opposition to SB
21. He said he didn't want to give his tax dollars away to the
current scheme. He suggested if you give a tax break to make
sure you get something for it.
5:48:44 PM
AARON GRIFFIN, representing himself, testified in opposition to
SB 21. He urged the committee to tie tax breaks to production
benchmarks.
5:51:22 PM
At ease
6:12:57 PM
CO-CHAIR MICCICHE reconvened the meeting.
6:13:10 PM
ANDREW PETER, representing himself, expressed concern about the
direction things appear to be going in Alaska regarding
corporate favoritism.
6:15:53 PM
DELICE CALCOTE, representing himself, testified in opposition to
SB 21. She cited a 1970, 88 page article by the Stanford
Research Institute, regarding a plan for Alyeska. She said she
was concerned that money is being given away. She did not
support any tax break for the oil or mining companies that are
making billion dollar profits.
CO-CHAIR MICCICHE asked what article she referenced.
MS. CALCOTE said she would send a link and reiterated that she
wanted to see the document posted.
6:20:13 PM
SENATOR GARDNER requested her address.
CO-CHAIR MICCICHE asked her to send the link to the chair.
SENATOR FAIRCLOUGH inquired about future plans for the
committee.
CO-CHAIR MICCICHE said the next meeting would be Tuesday,
February 5, and the oil industry would testify on SB 21.
February 7 would be the last meeting on the subject. He reminded
the public that the committee was reviewing the bill solely from
the perspective of declining throughput in TAPS. If there is a
need for additional public testimony, arrangements will be made.
6:23:32 PM
At ease
7:15:43 PM
CO-CHAIR MICCICHE reconvened the meeting.
7:15:56 PM
KATHLEEN PEARSON, representing herself, said she didn't
understand why the state should give its resources away to the
oil companies.
7:17:22 PM
MICHAEL DZURSLIN, representing himself, said he thought the
current tax system was fair. He testified in opposition to SB
21.
7:19:36 PM
LYNETTE MORENO HINZ, representing herself, testified in
opposition to SB 21. She said the Governor should represent the
people and not the oil companies. She said it is a conflict of
interest.
7:21:49 PM
ED NELSON, representing himself, testified in opposition to SB
21. He said the Governor has been more a lobbyist for the oil
companies than for the people of Alaska.
7:23:27 PM
HARRY WALKER, representing himself, testified in opposition to
SB 21. He said the bill is not fair or good for Alaska.
7:25:10 PM
DAVE DARRON, representing himself, testified in opposition to SB
21. He said the fact that the Governor refused to debate Senator
Wielechowski swayed him to oppose the legislation.
7:28:00 PM
KATE VEH, representing herself, said she submitted written
testimony. She said ACES was working and she did not support SB
21.
7:29:15 PM
JIM BYRNES, representing himself, testified in opposition to SB
21. He said if the royalty rate is changed, it should be
increased. Alaska is the safest place that the oil companies
operate, but it should not be the most profitable.
7:31:02 PM
BEN CREASY, representing himself, testified in opposition to SB
21. He said he has a degree in economics and hasn't seen a good
cost benefit analysis that demonstrates that the legislation is
a good idea. He was a bit disappointed in the analysis that had
gone into the bill thus far. He thought oil companies would
continue to come to Alaska.
7:34:28 PM
CO-CHAIR MICCICHE closed public testimony. He said written
testimony would be taken. He told committee members to have
amendments to his office by 7:00 p.m. Wednesday. He reiterated
that the committee was looking at SB 21 with the mission of how
it might affect increasing throughput in TAPS.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Alaska Senate TAPS Throughput Committee January31.pdf |
STTP 1/31/2013 1:00:00 PM |
SB 21 |
| Alaska Senate TAPS Throughput Committee January 31- Supplementary Slide.pptx |
STTP 1/31/2013 1:00:00 PM |
SB 21 |
| SB 21 written testimony in support.PDF |
STTP 1/31/2013 1:00:00 PM |
SB 21 |
| SB 21 written testimony in opposition.PDF |
STTP 1/31/2013 1:00:00 PM |
SB 21 |
| SB 21 Deb Brollini Email 1-31-13.PDF |
STTP 1/31/2013 1:00:00 PM |
SB 21 |