Legislature(2011 - 2012)SENATE FINANCE 532
03/13/2012 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB307 | |
| SB192 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 307 | TELECONFERENCED | |
| + | SB 192 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax;
and providing for an effective date."
9:09:47 AM
Co-Chair Stedman noted that the committee had received SB
192 from the Senate Resources Committee for first reading.
He observed that the committee was in the process of
scheduling representatives from the Parnell Administration,
independent contractor PFC Energy, and the 3 major oil
producers in the state for testimony throughout the week.
He indicated the desire to make the process transparent and
understandable for the public, and that the committee would
schedule time for public testimony on the legislation. He
warned that the scheduling specifics were subject to
change, but the general layout would remain as previously
mentioned. He explained that morning committee meetings
would be dedicated to oil legislation, leaving afternoon
meetings open for normal finance committee business.
SENATOR JOE PASKVAN, introduced SB 192 and began a
PowerPoint presentation titled "Committee Substitute for
Senate Bill 192 (RES) Oil and Gas Production Tax
Rates"(copy on file).
Senator Paskvan spoke to slide 2 titled "CSSB 192(RES)
Overview." He stated that the presentation would reveal the
following information:
· Intro: Alaska is and Owner State
· Summary of DOR Reports
· Lessons Learned
· Basic Petroleum Economics
· DOR's "Facts To Begin the Conversation"
· CSSB 192(RES): Rationale and Overview
· Optimism for Alaska's Future
9:18:25 AM
Senator Paskvan discussed slide 3 titled "Alaska is an
Owner State." He quoted the preface from the book, "The
Taxation of Petroleum and Minerals: Principles, Problems
and Practice:
"There are few areas of economic policymaking in which
the returns to good decisions are so high - and the
punishment of bad decisions so cruel - as in the
management of natural resource wealth."
Senator Paskvan highlighted the importance that the
determinations made for the state pertaining to the oil tax
issue were made substantively and not emotionally.
9:19:28 AM
Senator Paskvan continued to slide 4 titled "Alaska is an
Owner State." He quoted Chapter 4, Petroleum and Fiscal
Regimes: Evolution and Challenges (page 89) of the
previously mentioned book:
"The central objective in designing petroleum fiscal
regimes is easily stated. It is to acquire for the
state in whose legal territory the resources in
question lie, a fair share of the wealth accruing from
the extraction of that resource, whilst encouraging
investors to ensure optimal economic recovery of the
hydrocarbon resources. How to achieve this balance is
a subject of enduring controversy."
Senator Paskvan added that from an ownership standpoint the
state had to consider the receipt of oil revenues both as a
royalty share, and as a production taxing interest owner.
9:20:28 AM
Senator Paskvan discussed slides 5 and 6 titled "Alaska is
an Owner State." He noted the quote on slide 5 was from the
publication "Fiscal Systems for Hydrocarbons":
Chapter 5: Designing Efficient Fiscal Systems
Although the host government and the investor may
share one common objective - the desire for the
project to generate high levels of revenue - their
other objectives are not entirely aligned:
Host Governments aim to obtain the maximum value (not
volume) for their countries over time in terms of net
receipts for treasury. Their goal is to maximize the
wealth from their natural resources and, at the same
time, attract foreign investment. Host governments
also have development and socioeconomic objectives,
such as job creation, transfer of technology, and
development of local infrastructure.
9:22:02 AM
Senator Paskvan continued to slide 6, which quoted "Fiscal
Systems for Hydrocarbons":
Chapter 5: Designing Efficient Fiscal Systems
(continued)
Oil companies aim to ensure that the return on capital
is consistent with the risk associated with the
project and with the strategic objectives of the
corporation.
Senator Paskvan shared that the friction between industry
and government could be found in the areas in which the two
were not aligned; where host governments aimed to maximize
revenue and net receipts to the treasury, goal of industry
was to maximize the rate of return on investment.
9:22:25 AM
Senator Paskvan discussed slide 7 titled "Meeting the
Challenge." He observed that at the time of the formation
of Alaska's Constitution it had been understood that Alaska
was, and would remain, a resource rich state. Bob Bartlett
wrote during the Alaska Constitutional Convention:
"Where such vast resources potential exists one need
not be clairvoyant to foresee an influx of interests
wanting to develop these resources…
This moment will be a critical one in Alaska's future
history. Development must not be confused with
exploitation at this time. The financial welfare of
the future state and the well-being of its present and
unborn citizens depend upon the wise administration
and oversight of these developmental activities.
Two very real dangers are present. The first, and most
obvious, danger is that of exploitation under the thin
disguise of development. The taking of Alaska's
mineral resources without leaving some reasonable
return for the support of Alaska governmental services
and the use of all the people of Alaska will mean a
betrayal in the administration of the people's wealth.
The second danger is that outside interests,
determined to stifle any development in Alaska which
might compete with their activities elsewhere, will
attempt to acquire great areas of Alaska's public
lands in order NOT to develop them until such time as,
in their omnipotence and the pursuance of their own
interests, they see fit. If large areas of Alaska's
patrimony are turned over to such corporations the
people of Alaska may be even more the losers than if
the lands had been exploited." (November 8, 1955)
Senator Paskvan relayed that policymakers should be ever
vigilant as to the two aforementioned dangers when drafting
any fiscal tax system.
9:27:02 AM
Senator Paskvan continued to the Department of Revenue
(DOR) summary reports. He spoke to slide 9 titled "ACES
Status Report: Alaska Department of Revenue (January 14,
2010)":
Letter from DOR Commissioner Galvin to Gov Parnell:
· "The ACES Status Report evaluates whether ACES is
meeting its intended goals of providing a fair
share of revenue to the state while encouraging
investment in new oil and gas exploration and
development activities."
· "The status report shows that ACES successfully
allowed the state to share in the benefits of
high oil prices while accommodating fluctuations
in production costs and oil prices. ACES adjusted
when oil prices tumbled and kept the oil
operations in Alaska highly profitable relative
to other oil provinces."
· "Since ACES passed the legislature, overall
spending on oil and gas activities on the North
Slope has increased. However… it would be
premature to attribute the increased level of oil
company investment to the success of ACES."
9:29:02 AM
Senator Paskvan discussed slide 10, which provided further
information on the 2010 DOR status report:
Letter from DOR Commissioner Galvin to Gov. Parnell
(cont):
"Oil taxes are clearly an important factor in industry
investment decisions. However, it is misleading to
isolate their influence from other key factors, such
as world oil prices, geologic potential, access to
land, resources and markets, costs if infrastructure
and support services, and the legal regulatory
framework. As noted in the report, the true merit of
Alaska's current fiscal system can only be determined
when it is evaluated in conjunction with these other
variables."
9:29:59 AM
Senator Paskvan discussed slide 11 titled "ACES Status
Report: Alaska Department of Revenue (January 14, 2010)":
ACES Structure and Tax Rate (page 9-11):
"AS with any tax, ACES may be evaluated using a
variety of different metrics, including 'effective,'
'nominal,' and 'marginal' tax rate comparisons. While
each of these can be helpful under the appropriate
circumstances, each is also subject to certain
limitations. It is important when using these metrics
to understand their relative value and how they
reflect upon the objectives of the tax system..."
"The 'marginal tax rate' is the rate historically
applied to each dollar increase in oil price…With a
net based tax system, this metric shows a company the
impact of making additional investment, because each
dollar they invest is 'subsidized' by the government
based on the amount of marginal tax they have avoided
paying on that dollar…For example, a marginal tax rate
of up to 87 percent initially sounds excessive.
However, at the same price level, the effective tax
rate is less than 40 percent. The marginal rate of 87
percent actually represents that state's 'portion' of
any new investment made at such high prices."
Senator Paskvan reiterated the importance that the
differences between the tax rates be observed.
9:31:50 AM
Senator Paskvan presented slide 12, which provided the
conclusion of the report:
Conclusion (page 15):
"Overall, the information reviewed by the department
indicates that ACES is performing as expected when it
was passed by the Legislature in 2007. The economic
provisions are resulting in the revenue levels
anticipated, and the investment incentives appear to
distribute the increased tax burden in a fashion that
continues to encourage reinvestment, through the
experience with the credit program could be improved
for new explorers. Challenges remain in the
implementation by the department, but they are
manageable and the department is positioned to meet
those challenges."
9:33:00 AM
Senator Paskvan discussed slide 13 titled "Production Tax
Status Report to the Legislature by DOR (January 18,
2011)":
From the Executive Summary (pages 1 -2)
· Industry Investment - Investment in the form of
capital expenditures has increased in each of the
four fiscal years since implementation of the net
profits tax, however, it is unclear how much of
the capital expenditures were drilling or well-
related and how much were maintenance or
facilities-related.
· Impact on Exploration, Development, and
Production - Exploration has generally increased
from 2003, when the EIC credit was implemented,
but has dropped off in 2010. Development
continues in three relatively new North Slope
projects, yet production continues to decline.
· Industry Employment and New Entrants - Industry
employment rose steadily from 2006 through 2009,
but dipped slightly in 2010. The number of
companies filing annual tax returns doubled
between 2006 and 2009, indicating interest by
companies that are either new or returning to the
Alaska oil and gas industry.
9:35:09 AM
Senator Paskvan continued to slide 14 titled "Production
Tax Status Report to the Legislature by DOR (January 18,
2011)":
From the Executive Summary (cont.)
· Use and Expansion of Tax Credits - The amount of
credits used has increased annually since 2006
and we expect the trend to continue as new credit
programs were added in the 2010 legislative
session.
· Tax Administration and Compliance - The
department continues to write regulations for the
new tax system, and the first audits under the
net profits tax have been completed. The
department has, however, been hampered in its tax
reporting and compliance efforts by the lack of a
centralized database to house and manage the
large volumes of oil and gas data it receives.
· Conclusions and Recommendations - Based on the
multiple changes to the tax laws over the past
few years, drawing any conclusion about their
effect on Alaska's investment climate is
difficult. However, what is clear is that
production continues to decline. The state should
continue to monitor its competitiveness with
other oil and gas jurisdictions worldwide and be
prepared to change its tax structure as needed.
9:38:05 AM
Senator Paskvan discussed slide 15 titled "Production Tax
Status Report to the Legislature by DOR (January 18,
2011)":
Conclusion and Recommendations (page 14-15):
"A government's fiscal regime is just one element for
oil and gas companies to consider when weighing
options for where to invest. Many other elements, such
as resource risk, political risk, environmental
factors, and availability of labor and equipment, also
play a part in companies' decisions about where to
invest. It is very difficult to separate these factors
in order to determine the extent to which a
government's fiscal system influences investment
choices.
While it is untenable to blame a tax system for the
lack of industry investment, it is equally untenable
to claim that the tax system is the reason for
increased activity or investment occurs. The past
three years have seen dramatic swings in oil prices
from a high of $134 per barrel to a low of $38 per
barrel just 6 months later. An economic recession
stifled investment and business activity in the United
States and much of the developed world for over a
year. The economic activity of the past three years
may not have been the best benchmark by which to judge
the impact of a tax system…
…State officials should continue to monitor the
state's competitiveness in oil and gas opportunities,
and be prepared to modify it as the need arises."
Senator Paskvan stressed that in neither the report from
DOR directly to Governor Parnell, or directly to the
Legislature, did not explicitly state that ACES was broken.
9:40:27 AM
Senator Paskvan directed attention to slide 16, which
illustrated that the DOR report on the status of ACES was
released to the legislature on January, 18, 2011. He
pointed out that HB 110 was introduced on the House side
that same day. The Senate companion, SB 49, was introduced
on January 19, 2011. He felt that the timing for the
reports from DOR and the introduction of the production tax
legislation was significant.
9:41:10 AM
Senator Paskvan continued with the "Lessons Learned"
section of the presentation.
9:41:30 AM
Senator Paskvan spoke to slide 18 titled "Comprehensive
Plan and Feasibility Study by FAST Enterprises, LLC
(October, 2012)":
Excerpts from the Executive Summary
The Alaska Department of Revenue's Tax Division
(DOR/TAX) relies on a patchwork of 17 automated
systems and over 100 manual "side-systems" to
administer 22 tax programs.
· DOR/TAX manages over $3 billion in Oil and Gas
Tax revenue using an eclectic mix of home-grown
side-systems that include multiple databases and
unsecured, unstable spreadsheets stretched well
beyond their intended use. Storing sensitive
taxpayer information in these databases and
spreadsheets poses a high security risk.
· The 17 systems used to administer different taxes
and functions have been pieced together over the
past 15 years without integration or an overall
architecture. The systems do not scale to meet
current needs and are inflexible and difficult to
maintain. Since the initial development of the
systems, many tax laws have changed and the
systems have not changed accordingly.
Senator Paskvan felt it was important to highlight the
internal issues that state government and state
policymakers faced.
9:43:12 AM
Senator Paskvan continued to slide 19 titled "Comprehensive
Plan and Feasibility Study by FAST Enterprises, LLC
(October, 2012)":
Excerpts from the Executive Summary (continued)
· DOR/TAX employees spend a higher proportion of
their time compiling, organizing, and reconciling
data than actually auditing, examining,
analyzing, forecasting, or managing tax programs.
· The limitations and inflexibility of existing
systems impose a burden on taxpayers. Current
reporting processes are inefficient and
ineffective, and create unnecessary work and
cost. As one taxpayer stated, "the Tax Division's
inefficiency makes taxpayer interaction with the
division inefficient."
· DOR/TAX cannot easily produce reports by the
legislature and policymakers because the current
systems prevent timely, complete, and correct
extraction of data. Reports can be inaccurate and
misleading due to incorrect and incomplete data
and human error.
Senator Paskvan stressed that the October 2010 study
indicated that the current tax system should be approached
with a high level of skepticism.
9:45:46 AM
Senator Paskvan spoke to slide 20 titled "Department of
Revenue Additional Information":
Single Audit of the State of Alaska (Feb 28, 2011)
· Recommendation: "DOR's commissioner should ensure
staff within its Tax Division implement controls
to improve the auditing of oil and gas severance
tax revenues."
· Legislative Audit's Current Position:
"Significant control deficiencies continued over
the auditing of oil and gas severance tax
revenues in FY10. A loss of experienced audit
staff during FY10 compounded the struggles that
the audit section was already experiencing."
Decision Following Trial De Novo: 2007, 2008, and 2009
Assessed Valuations of the Trans-Alaska Pipeline
System (December 30, 2011)
· "The Department's Production Forecasts and
Reserves Estimates are Unreliable" (page 170)
Senator Paskvan believed that the conclusion handed down by
the court should cause policymakers to consider whether the
information received by the department was fundamentally
valid. He added that the court had also concluded that
DOR's system was broken and headed in the wrong direction.
9:46:45 AM
Senator Paskvan continued to slide 21 titled, "U.S. Energy
Tax Policy (2011) (Chapter 9) State Tax Policy and Oil
Production: The Role of the Severance Tax and Credits for
Drilling Expenses." He explained that chapter 9 of the
publication "U.S. Energy Tax Policy" addressed the role of
severance tax and credits for drilling expenses:
Introduction
"Although most energy-producing states have levied
taxes on the value of oil, natural gas, and coal
production for many years, changes in these taxes have
become headline news as state governments grapple with
budget shortfalls brought about by the current
recession. For instance, Alaska has increased the
severance tax on the value of its oil production and
attempted to simulate future production by allowing a
credit against this tax for expenditures on capital
items, including drilling rigs, infrastructure,
exploration, and facility expansion (Alaska Department
of Revenue 2008)."
9:50:50 AM
Senator Paskvan explained slide 22 titled "State Tax Policy
and Oil Production: The Role of the Severance Tax and
Credits for Drilling Expenses" which presented questions
about the effects of state energy taxes:
· Do state taxes tilt the time path of energy
production to the present or to the future?
· Do upstream subsidies for exploration and
development work together with downstream taxes
on production to influence the levels and time
paths of production and tax collections?
· What are the implications of these for the long-
term sustainable use of nonrenewable natural
resources?
Senator Paskvan noted that the tilt of taxes to the past or
future, could manipulate the production process in a way
that could be detrimental to the state.
9:51:55 AM
Senator Paskvan discussed slide 23 titled "State Tax Policy
and Oil Production: The Role of the Severance Tax and
Credits for Drilling Expenses":
Key Finding #1:
· "Oil production is closely linked to the size of
the reserve base and is relatively insensitive to
changes in oil prices. This outcome, which is
broadly consistent with experience in the U.S.
oil industry over the past 50 years, leads to the
conclusion that the severance tax has little
effect on production levels (p.306)."
9:52:58 AM
Senator Paskvan spoke to slide 24 titled "State Tax Policy
and Oil Production: The Role of the Severance Tax and
Credits for Drilling Expenses":
Key Finding #2:
· "The simulations suggest that a drilling expense
credit may cost more than the incremental
severance tax revenue obtained, although such
credits may be worthwhile concessions if a
state's objective is to generate greater support
for increasing the severance tax rate (p.307)."
9:54:04 AM
Senator Paskvan continued to slide 25 titled "Additional
Research":
"Effectiveness of Severance Tax Incentives in the U.S.
Oil Industry" (Mitch Kunce, International Tax and
Public Finance, 2003)
· "In general, results show that severance tax rate
cuts substantially reduce state tax revenue
collected, but yield moderate to little change in
oil drilling and production activity. This
outcome suggests that states should be wary of
arguments asserting that large swings in oil
field activity can be obtained from changes in
severance tax rates."
Senator Paskvan thought that the finding was an appropriate
guiding consideration when discussing changes in the oil
tax structure.
9:55:24 AM
Senator Paskvan spoke to slide 26 titled "Additional
Research":
"State Taxation, Exploration, and Production in the
U.S. Oil Industry" (Mitch Kunce et al, Nov 26, 2001)
· "Results of this study suggest that oil
production is highly inelastic with respect to
changes in production taxes."
9:55:47 AM
Senator Paskvan discussed slide 27 titled "Gas and Water
Handling Constraints." The slide offered a transition in
topic to the issue of gas and water handing constraints:
Gas and Water Handling Constraints
"While new oil is an issue in maintaining production
levels, there are also issues at existing fields,
where [Dudley] Platt said facilities expansion may be
needed. he said that the large facilities are 'maxed
out on how much gas they can handle and they're
getting close to being maxed out on how much water
they can handle…If they don't expand their facilities
to handle that, the oil production will continue to go
down.'" ("Alaska Oil Forecast Shaky" By Kristen
Nelson, Petroleum News - Week of November 18, 2007)
Senator Paskvan believed that the quote spoke to the
question of why wells couldn't be easily expanded or dug
deeper.
9:58:10 AM
Senator Paskvan explained slide 28 titled "Gas and Water
Handling Constraints":
North Slope of Alaska Facility Sharing Study
Prepared for Division of Oil and Gas, Alaska
Department of Natural Resources By Petrotechnical
Resources Alaska, May, 2004.
"The North Slope processing facilities have specific
design capacity limits, indicating the amount of oil,
water and gas which can be handled by the facility. If
the handling capacity of one of these streams is
reached for a given facility, it limits the overall
production output from that facility. While some
facilities may be producing below capacity for oil,
they are often limited due to capacity constraints on
total water production or gas production."
10:00:08 AM
Senator Paskvan discussed slide 29 titled "Gas and Water
Handling Constraints":
1989 Revenue Sources Book
Alaska Department of Revenue
"The vast majority of Alaska production will continue
to come from the now declining Prudhoe Bay field…The
decline in Prudhoe Bay production is now expected to
be much more rapid than assumed in our Spring
forecast. This reflects a more serious gas handling
constraint. As more and more gas is produced with each
barrel of oil, the amount of gas which must be re-
injected back into the Prudhoe Bay field had increased
substantially. Since it is anticipated that there will
need to be more production downtime due to field and
TAPS maintenance, the gas handling constraint will
limit the ability to keep average annual oil
production from falling. Installation of additional
gas handling equipment, GHAX1 (gas handling and
expansion 1), is scheduled to start late in 1990. A
second expansion is in the planning stages. Once in
place, the ability to re-inject up to 5.1bcf/day of
gas production will slow the rate of decline in oil
production."
10:02:21 AM
Senator Paskvan continued to slide 30 titled "Gas and Water
Handling Constraints":
A Production Optimization System for Western Prudhoe
Bay Field, Alaska
By D.A. Barnes, K. Humphrey, and L. Muellenberg of BPX
America
Paper prepared for presentation at the 65th Annual
Technical Conference and Exhibition of the Society of
Petroleum Engineers held in New Orleans, LA, Sept 23-
26, 1990.
"For almost a decade the Prudhoe Bay field on the
North Slope of Alaska has produced at a yearly average
offtake rate of 1.5 million stock tank barrels of oil
per day. As the reservoir depletes and field gas-oil
ratios (GORs) increase, gas handling constraints make
it difficult to achieve oil rate targets."
10:03:34 AM
Senator Paskvan discussed the slide on page 31 titled "Gas
and Water Handling Constraints":
Prudhoe Bay: Development History and Future Potential
By D.J. Szabo, BP Exploration (Alaska) Inc. and K.O.
Meyers, ARCO Oil and Gas
Paper prepared for presentation at the SPE 1993
Western Regional Meeting, Anchorage, AK, 26-28 May
1993.
"Prudhoe Bay is seen by many as a mature oil field on
an inevitable and irreversible decline…The field's oil
production capacity dropped below 1.5 MMSTB/D in 1988
*officially* signaling the start of decline. The onset
of decline was a direct result of limited gas handling
capacity as opposed to limited oil production
capacity."
10:04:52 AM
AT EASE
10:12:39 AM
RECONVENED
Senator Paskvan explained that the focus on the water
handling constraints was the result of information gathered
about throughput. He believed that understanding the
history of the declining throughput in the North Slope was
necessary for public understanding of the relationship
between engineering issues, treatment facilities and
throughput.
10:13:35 AM
Senator Paskvan discussed slide 32 titled "Gas and Water
Handling Constraints":
Prudhoe Bay Field: Facility Consolidations Pave the
Way for an Economic Future
By K.D. Eager, BP Exploration; M.D. Briscoe, ARCO
Alaska; R.A. Bolduc, Exxon
Paper prepared for presentation at the 1998 SPE Annual
Technical Conference and Exhibition held in New
Orleans, LA, 27-30 Sept 1998.
"The Prudhoe Bay Field on Alaska's North Slope has
produced for twenty-one years. Prudhoe's gas and water
production rates are at historic highs, but the oil
production rate has declined to less than one-half of
the peak rate achieved in the 1980s. As a result,
significant excess oil treating capacity exists, with
water and gas handling capacity constraining the
current oil production rate. The owners of the Prudhoe
Bay Unit developed a major facility consolidation plan
in 1997 designed to rationalize this excess oil
treating capacity while preserving existing gas and
water handling capacity. The reconfigured facilities
are expected to provide sufficient capacity at a lower
cost to accommodate projected oil, water and gas
production rates over the remaining life of the
Prudhoe Bay Field."
10:16:48 AM
Senator Paskvan continued to slide 33 titled "Gas and Water
Handling Constraints":
Prudhoe Bay Field: Facility Consolidations Pave the
Way for an Economic Future
By K.D. Eager, BP Exploration; M.D. Briscoe, ARCO
Alaska; R.A. Bolduc, Exxon
Paper prepared for presentation at the 1998 SPE Annual
Technical Conference and Exhibition held in New
Orleans, LA, 27-30 Sept 1998.
(Continued)
"Oil production rates are projected to continue to
decline in the future. In developing the field
development and management plans for 2000 and beyond,
the PBU Working Interest Owners recognize the need to
reduce lifting cost commensurate with the decline in
oil production to maintain an economic assert for as
long as possible. The Prudhoe Bay Facility
Optimization Project will play an important role in
achieving reduced lifting costs."
10:17:36 AM
Senator Paskvan discussed slide 34 titled "Gas and Water
Handling Constraints":
Optimization of Production from Mature Fields
By P. Wang & K. Aziz of Stanford University and M.L.
Litvak of BP, USA 17th World Petroleum Congress,
September 1-5, 2002, Rio de Janeiro, Brazil
"Oil production in the Prudhoe Bay and Kuparuk River
fields is constrained by the gas handling limits of
the surface facilities."
2003 Oil and Gas Report (for the period ending
December 31, 2002)
Alaska Department of Natural Resources (Tom Irwin,
Commissioner)
Division of Oil and Gas (Mark Myers, Director)
"From the beginning of Prudhoe Bay production,
dissolved gas and water were separated from the crude
oil and injected back into the reservoir. Over time
the reservoir's proportion of both gas-and-water to
oil increased. Eventually, oil production was
constrained by the rate at which the separating plants
could process gas and water."
10:18:52 AM
JEFF STEPP, STAFF, SENATOR JOE PASKVAN, interjected that
one of the key points to the "Optimization of Production
from Mature Fields" article was cost reduction. He pointed
out that the language was not about "increased" production,
but "optimized" production in a mature field. He offered to
provide the complete article to the committee upon request.
10:19:52 AM
Senator Paskvan spoke to slide 35 titled "Gas and Water
Handling Constraints." The slide detailed the following
question and answer session:
Q: Does DNR agree that oil throughput at Prudhoe Bay
is constrained by the ability of field operators to
process and re-inject associated natural gas?
A: Yes, gas processing is a significant constraint in
Prudhoe Bay. While new wells could be drilled with
lower GOR's, other high GOR wells have to be shut-in
because of the gas processing limitation.
Q: As of the early 1990's, does DNR agree that Prudhoe
Bay was past the point where well drilling could stave
off a falling oil rate?
A: Yes. The Prudhoe Bay Unit WIO had a very aggressive
drilling program in 1986-1992. In addition, a major
gas handling expansion (GHX-1) occurred in the late
1980s which helped stem decline. Significant delay in
the production plateau would have been difficult.
(Source: Memo from DNR to Senator Paskvan re:
"Responses to the 30 questions from September 22,
2011" (January 17, 2012)).
10:22:03 AM
Senator Paskvan discussed slides 36 - 39 titled "Overview
of the Gleason Decision":
· Market Structure
· The Life of TAPS
· Access To Information
Senator Paskvan relayed that the PowerPoint presented by
Robin Brena, as well as the Gleason Decision had been
included in committee packets (copy on file)[Secretary
note: Both the Brena presentation and the Gleason report
can be found on BASIS and in the SB 192 binders located in
the Senate Finance Committee Room].
Senator Paskvan shared that the big three oil companies
(Exxon, BP, and ConocoPhillips) had market dominance in the
Central North Slope to the extent that it was no longer a
free market. He said that due to the passage of PPT and
ACES the state had observed an increased interest of other
companies, but that there were still barriers, particularly
in the area of treatment facility access.
10:27:14 AM
Mr. Stepp added that in 2003 the Murkowski Administration
had established the goal of increasing production 3 percent
per year. The director of the Division of Oil and Gas at
the time, Mark Meyers, prepared a white paper titled,
"Meeting the Governor's Goal: Increasing Oil and Gas
Production by Three Percent Per Year." The paper identified
the problem with the market structure on the North Slope:
"Mergers and market concentration on the North Slope have
created a non-competitive environment in which three majors
have a near monopoly that gives them a large competitive
advantage in exploration, development, production, and
transportation. It is this uneven playing field that has
raised the barrier to new entrants, from smaller
independents through large integrated majors. As long as
these majors invested sufficient capital for exploration
and development activities, the State accepted the
consequences of the oligopoly. Since the existing majors no
longer are willing to invest sufficient resources on
exploration or development, the State must look elsewhere.
The State must look beyond the existing majors to the new
wave of independents and remaining majors. This situation
parallels the experience in other oil and gas basins
worldwide, several of which have successfully made this
transition."
10:29:06 AM
Senator Paskvan addressed slide 38 titled" Overview of the
Gleason Decision," which addressed the life of TAPS. He
stated that one of the unanimous pieces of information
received in the Senate Resource Committee was that fields
matured under the concept of a "hyperbolic curve." He
explained that all of the Alaska North Slope basins were
experiencing a hyperbolic curve decline and were entering
into a flattening period that would last many years. He
cited the Brena PowerPoint, page 39, which stressed the
importance of examining the value of the reserves; the
current value of the reserves was greater than any other
time in history. He said that at $100 per barrel, the 7
billion barrels of proven reserves would result in a $700
billion dollar profit. He asserted that it was a fiction
that TAPS was facing an imminent shutdown.
10:31:34 AM
Co-Chair Stedman clarified that a shut-down did not infer
to a mechanical shut down, but rather the amount of oil
remaining in the basin that would not come down the
pipeline.
10:31:39 AM
Senator Paskvan stated that the Gleason Decision determined
the estimated life of the proven reserves that were
technically, economically and legally deliverable into the
TAPS system. He stated that the decision was a conservative
one; based only on proven oil reserves as required by
statute. The decision did not include conventional oil (not
yet discovered), heavy oil, shale oil, ANWAR, National
Petroleum Reserve-Alaska (NPRA), Chukchi or Beaufort, and
Point Thomson. He reiterated that the Gleason determination
of 7 to 8 billion barrels of proven reserves was very
conservative. He expressed concern that inconsistent
information had come from DNR, AOGC, and internal oil
industry sources. While industry information was publicly
available, it was unreliable. He noted that the court had
been forced to sopeana industry to gain access to documents
concerning proven reserves and production forecasting. He
discussed the issue of low flow studies. He cited a 2005
JTG study that indicated that production would eventually
slow down to 135,000 barrels per day (page 65 of the BRENA
Report.) He shared that the determination made by Judge
Gleason was that the TAPS system would stay in operation
through 2065. He cited pages 56 and 57 of the BRENA Report
which contained a graph that addressed that as oil prices
increased, the concept of economically recoverable oil
increased; every 10 dollar increase in the price of a
barrel of crude resulted in a 5.5 year increase in the
economic life of the TAPS structure.
10:36:57 AM
Senator Paskvan discussed slide 39 titled "Overview of the
Gleason Decision: Access To Information." He reiterated the
challenge of gathering substantive information from
industry without a sopeana.
10:37:43 AM
Senator Paskvan explained slide 41 titled "Expanded Basic
Petroleum Economics: Course Level - Basic":
About the Course:
· Could you answer the following three questions for
your next project:
9What will it cost?
9What is it worth?
9Will it earn sufficient profit?
· Before undertaking any project, these questions
should be answered.
He believed that the legislature was consistent in
examining the first question, but that all three questions
should be examined in order to create a comprehensive
fiscal system.
10:39:28 AM
Senator Paskvan discussed slide 42 titled "Example":
· Estimates of drilling cost per well range from
$132,907 in Kansas, where wells tend to be
shallow, to $3,881,600 in Alaska, where the
drilling experience is very different as compared
to the lower 48 states.
· Marginal reserve additions from drilling range
from 11,051 barrels per well in Kansas to 177,067
barrels per well in Alaska.
· Thus, while drilling a well in Alaska is markedly
more expensive than Kansas, Alaska experiences a
greater payoff from these more costly exploration
and development efforts.
He said that while the drilling costs in Alaska were more
expensive, but yielded a higher return.
10:40:14 AM
Senator Paskvan spoke to slide 43 titled "Will it earn
sufficient profit?" He discussed what the split between the
state, the federal government, and investors:
"Oil Industry Profitability in Alaska 1969 through
1987"
The oil industry received an estimated $42.6 billion
in profit from production and transportation
activities in Alaska from 1969 through 1987…Alaska
North Slope (ANS) production contributed $29.1 billion
to profit, with $27.8 billion of this amount
attributable to Prudhoe Bay and $1.3 billion
attributable to Kaparuk. TAPS provided $12.4 billion.
Production in Alaska other than ANS production added
$1.1 billion in profit.
Shares. The $42.6 billion in after-tax profit that
accrued to the oil industry compares to $29.3 billion
in State of Alaska receipts from oil industry
activities during this period. During the same period,
Federal government receipts were $25.8 billion from
these activities (page I and II).
(Source: "Oil Industry Profitability in Alaska 1969
through 1987," Prepared for the Department of Revenue,
State of Alaska, by Edward Deakin, Distinguished
Enterprise Professor and Director, Institute of
Petroleum Accounting, University of North Texas, March
15, 1989.)
10:41:29 AM
Senator Paskvan discussed slide 44 titled "Will it earn
sufficient profit?" He stated that in 1989 a report
concluded that production profits do not stop at Alaska's
boundaries:
"Oil Industry Profitability in Alaska 1969 through
1987"
Additional Benefits of ANS Oil
ANS Producers receive profits from Alaska Oil outside
of Alaska which provides and additional bonus beyond
what it would cost if they had to purchase imported
oil. An additional profit of approximately $0.7
billion went to the producers through the operation of
the U.S. Department of Energy crude oil entitlement
program. Producers are believed to earn additional
profit through the refining of ANS crude because,
among other things, they have access to a secure
source of crude oil. If they did not have the ANS
crude, it would be necessary for them to acquire crude
from foreign sources.
Others estimate that profits on tanker operations and
the trans-Panama shipment activities added between
$.25 and $1.00 profit per barrel of ANS crude
produced. These additional profits would have been
received on the nearly 6 billion barrels of ANS
production. These added profits are not included on
the $42.6 billion of total oil industry profit on
Alaska covered in this report (page 13).
These downstream profit issues are beyond the scope of
this project. They do indicate, however, that the
producer's economic benefits of Alaska oil production
extended beyond the profit obtained within the
boundaries of the State of Alaska (p.T-70).
(Source: "Oil Industry Profitability in Alaska 1969
through 1987," Prepared for the Department of Revenue,
State of Alaska, by Edward Deakin, Distinguished
Enterprise Professor and Director, Institute of
Petroleum Accounting, University of North Texas, March
15, 1989.)
10:42:19 AM
Senator Paskvan continued to slide 45 titled "Will it earn
sufficient profit?" The slide discussed the hourly profit
rate:
"Oil Industry Profitability in Alaska 1969 through
1987"
Hourly Profit Rate
"Looking at these profits as an hourly earning number
may bring the amounts into better perspective. After-
tax profits have been earned by the producers at the
rate of $463,144 per hour, twenty-four hours per day
for each day of the first ten and one-half years of
ANS Production (page 19)."
(Source: "Oil Industry Profitability in Alaska 1969
through 1987," Prepared for the Department of Revenue,
State of Alaska, by Edward Deakin, Distinguished
Enterprise Professor and Director, Institute of
Petroleum Accounting, University of North Texas, March
15, 1989.)
10:42:43 AM
Senator Paskvan discussed slide 46 titled "Will it earn
sufficient profit", which contained a letter from the Chief
Executive of BP:
Lord John Browne, Chief Executive, BP
Address to shareholders (April 15, 2004)
"In periods of high oil prices such as the one we find
ourselves in today, the group generates significant
"Excess free cash flow' after capital expenditure and
dividends. Rather than using this cash to reduce
debt…we are committing to return…100 percent of this
excess free cash flow to our investors for as long as
oil prices remain above $20 a barrel, all other things
being appropriate (Sarah Takes on Big Oil, page 16)."
10:43:56 AM
Senator Paskvan continued to slide 47 titled "Will it earn
sufficient profit?" He noted that the slide harkened to an
earlier slide discussing the harvest mode analysis that had
risen out of the 1997 plan:
"Alaska's role in BP's portfolio is to provide a
stable production base and cash flow to fuel growth
elsewhere in the business while improving margins and
returns."
Senator Paskvan pointed out to the committee that the
information on the slide was consistent with the analysis
of Pedro Van Meurs. He believed that the statements should
be viewed pragmatically. He continued with the slide:
Sidenote:
"Over the past three years the TAPS Owners and Alyeska
have studied a number of potential business efficiency
opportunities…Preliminary engineering studies have
also confirmed electrifying and automating all 4 pump
stations will allow Alyeska to eliminate over 285 full
time positions, many of those in field locations where
wage and locations premiums are very high. Currently,
remote crews at these pump stations require expensive
catering, transportation and other costly support
service systems. Eliminating these positions
translates to an annualized expense savings
improvement of over $41mm gross (+16mm net BP) by 2007
over APSC 2003 Base O&M."
(Source: BP, Alaska Business Unit, Mid-Stream Alaska,
Trans-Alaska Pipeline Pump Station Electrification,
2004, Page 13)
10:46:02 AM
Mr. Stepp pointed out that both the Senate Resources
Committee and the Senate Finance Committee would be subject
to a series of bar graphs, but indicated that the
statistical graphs did not tell the whole story. For
example, when the committee saw graphs pertaining to
unemployment levels on the North Slope decisions designed
to increase business efficiency, such as the one found on
slide 47, were not represented and needed to be considered.
10:47:30 AM
Senator Paskvan continued with his presentation and spoke
to slide 48 titled "Will it earn sufficient profit?" The
slide was intended to provide perspective on profits under
ACES:
Gene Therriault,
Senior Policy Advisor on In-State Energy, Parnell
Administration
Email Correspondence, August 2, 2010
"Major producers like ConocoPhillips and BP have
reported strong profits from their Alaskan operations
under the ACES system. For example, in 2009,
ConocoPhillips' Alaska activity accounted for 12
percent of its worldwide production but 29 percent of
its corporate profits. In addition, the August 1, 2010
edition of Petroleum News recently detailed
ConocoPhillips current year earnings and concluded
that "ConocoPhillips' exploration and production
activities continue to be more profitable in Alaska
than across the Lover 48.'"
Senator Paskvan reiterated that at the time of the
correspondence there was nothing to indicate that ACES was
"broken."
10:48:31 AM
Senator Paskvan discussed slide 49 titled "Will it earn
sufficient profit?" The slide highlighted the correlation
between the BP Prudhoe Bay Royalty Trust and the profits
from the operation on the central North Slope:
BP Prudhoe Bay Royalty Trust (BPT)
"In the past 10 years, BPT has earned a total return
of 2,246 percent. A $5,000 investment just 10 years
ago would be worth $117,400 right now…To give you an
idea of how strong a return that is, integrated oil
giant Chevron returned 231 percent over that same
period. That would have turned $5,000 into $16,550.
Not bad, but nowhere near what BP Prudhoe Bay Royalty
Trust did."
"And those royalties are on top of capital gains.
BPT's share price gained 667 percent during the past
10 years thanks to rising oil prices, while Chevron's
stock price went up only 137 percent."
"The thing is, BPT not only beat Chevron…it beat out
just about every major oil company over the same
period. And that's only part of the equation. Go back
a few more years, and the major oil and gas companies
aren't even in BPT's league."
"BPT has generated total returns of 5,089 percent
since 1990 -- beating the "big" names in the oil and
gas industry. Chevron…Exxon…Shell…you name it."
(Source: Seeking Alpha website, "BP Prudhoe Bay
Royalty Trust: Why Worry about This High Yielder?,"
January 25, 2102)
10:49:32 AM
Senator McGuire highlighted that the perspective being
presented to the committee was that of Senator Paskvan. She
felt that there were other reliable documents available
that would provide fodder for a counter position. She noted
that that same website attributed to slide 49 also stated
that the BPT was a short term, overvalued opportunity. She
believed that a presentation could be put together showing
a different perspective, yet using the same website. She
noted that some industry experts believed that ACES was a
highly penalizing tax regime.
Co-Chair Stedman reminded the committee that there were
many available websites, providing many opinions on the
issue of traded securities. He believed that the fact
remained that the value of the BPT had increased over time.
10:51:49 AM
Senator McGuire agreed. She suggested that offering many
opinions for discussion could be helpful. She hoped that
more opinions, dialogue and facts could be brought into the
committee for future discussions. She stressed that it was
the work of the committee to determine the right tax regime
based on a variety of factor and opinions.
Co-Chair Stedman pointed out the presentation was the first
of many. He thought that some of the issues raised in
resources might not surface in finance. He said that if it
could be reasonable concluded that there were sufficient
resources in the Arctic to facilitate the operation of TAPS
beyond the next 20 years; the committee would work under
that assumption. He asserted that the committee would be
diligent in providing factual information for the purpose
of discussion at the table, and for the public. He strongly
railed against delivering misinformation to the public.
10:53:46 AM
Senator McGuire reiterated that the senator was laying out
one perspective that did not reflect the consensus of the
committee as a whole.
Co-Chair Stedman declared that the documents currently at
the table had been presented in resources and were part of
the public domain. He regarded that each member held strong
opinions on the matter. He believed that the documents
before the committee provided useful, factual information.
10:51:38 AM
Senator Paskvan explained slide 50 titled "Will it earn
sufficient profit?," which provided a chart illustrating
how BPT had trounced the major players in the oil industry.
Senator Paskvan continued to slide 52 titled "Department Of
Revenue's Facts to Begin the Conversation":
· Oil Prices Began to Climb to All-Time Highs Starting
Mid-2000s
· TAPS Throughput Continues Steady Decline
· Other Oil Producing Regions Enjoying Production and
Employment Booms
· Competition is High - Many Other Areas To Invest
Around the World
(Source: Senate Resources Committee (February 10,
2012))
10:55:38 AM
Senator Paskvan discussed slide 53 titled "Oil Prices Began
to Climb to All-Time Highs Starting Mid-2000s":
Chapter 7: Evaluating fiscal regimes for resource
projects: An example from oil development
"The unprecedented rise in the internationally traded
prices of crude oil and natural gas (petroleum)
between 2003 and 2008, and the sudden fall after July
of 2008, have concentrated attention once again on how
petroleum revenues are shared between owners of the
resource in the ground (usually governments) and the
companies that extract the petroleum (page 187)."
(Source: The Taxation of Petroleum and Minerals:
Principles, Problems and Practice)
10:56:38 AM
Senator Paskvan addressed slide 54, which spoke to fiscal
regimes in a volatile oil price era:
Fiscal Regimes in a Volatile Oil Price Era: What
Options Exist for Balancing the Interest of the
Resource Country and Investor Company?
By Humphrey Onyeukwu, SPE, Centre for Energy,
Petroleum, Mineral Law and Policy, University of
Dundee
Paper presented at the CPS/SPE International Oil and
Gas Conference, Beijing, China, June 2010
"The challenge of a fiscal policy in a volatile price
oil era is ensuring a high share of value is secured
for the Government. At the same time, the fiscal
policy strives to encourage the exploration of these
valuable resources without harming the commercial
interest of the oil companies. Price volatility
fundamentally alters the sharing formula; it is
therefore imperative for a correct balance to be
achieved between the competing state interests and the
oil companies. The question becomes how equilibrium
can be achieved in a petroleum fiscal system design,
which guarantees a suitable government take and avoids
the negative effect of instability and re-negotiation
of fiscal terms."
10:57:49 AM
Senator Paskvan spoke to slide 55 titled "TAPS Throughput
Continues Steady Decline":
Revenue Source Book (October, 1988)
Alaska Department of Revenue
"It is important to emphasize that the North Slope
producers, while not agreeing on the exact date, have
concluded that North Slope production will commence to
decline in either FY89 or FY90."
10:58:22 AM
Senator Paskvan discussed slide 56 titled "TAPS Throughput
Continues Steady Decline":
Revenue Source Book (Fall 1989)
Alaska Department of Revenue
"The fall in oil production means that the inevitable
decline in the huge Prudhoe Bay field had started
sooner than we predicted…This forecast assumes that
production from the Prudhoe Bay field will continue to
fall steadily, and will drop to less than half its
present level in less than 10 years."
"Some observers may believe that exploration will
discover another Prudhoe Bay. Prudhoe Bay is the
largest oil field in North America, and finding such a
'supergiant' is extremely rare."
"The State of Alaska is standing on a precipice. Only
a combination of budget cuts, more efficient programs,
and new revenues will keep that State from falling a
long way..."
"The decline in production for the Prudhoe Bay field
is a central issue for Alaska…The decline in Prudhoe
Bay production is now expected to be much more rapid
than assumed in our Spring forecast."
Senator Paskvan recommended that the committee should look
to the value of the state's resources and not only the
rates of decline.
10:59:57 AM
Senator Paskvan continued to slide 57:
Revenue Sources Book (Spring 1992)
Alaska Department of Revenue
"The long-term revenue outlook is dominated by the
depletion of petroleum reserves of the Prudhoe Bay oil
field…Despite the start of the irreversible decline at
the Prudhoe Bay field this year, continued success in
reservoir management in all fields will hold statewide
production decline throughout fiscal year 1995 to less
than 9 percent total (3 percent per year)."
11:00:28 AM
Senator Paskvan addressed slide 58:
Revenue Sources Book (Spring 1994)
Alaska Department of Revenue
"The Prudhoe Bay field, which accounts for two-thirds
of Alaska statewide production, is in irreversible
decline."
Senator Paskvan noted that DOR has been aware of the
production decline for well over a decade.
11:00:39 AM
Senator Paskvan spoke to slide 59:
With Prudhoe Bay in Decline, What's Next for Alaska?
By James M. Davis (Senior Vice President for
Exploration and Land) & Jerry R. Pollock (Manager,
Prudhoe Bay Engineering) of ARCO Alaska, Inc.
Oil and Gas Journal, August 3, 1992
"By any definition, Prudhoe Bay is declining and will
continue to decline…"
"To accountants, Prudhoe decline began during 1998
when the field was no longer able to make its maximum
allowable rate of 1.5 million b/d of oil. To
engineers, the decline began long before that…
"Unfortunately, adding more wells can't keep the oil
production rate up forever. We're already past the
point where drilling can stave off a falling oil rate.
Oil reserves are finite…."
"As the field matures, the production facilities reach
their maximum capacities to handle produced water and
gas. Wells with falling oil rates and increasing
produced water and gas volumes have to be shut-in.
Total field production drops."
Senator Paskvan stressed that the decline was an
engineering issue.
Co-Chair Stedman interjected that due to time constraints
the presentation would be continued during the afternoon
meeting.
SB 192 was HEARD and HELD in committee for further
consideration.