Legislature(2011 - 2012)SENATE FINANCE 532
03/21/2012 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB192 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 192 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax;
and providing for an effective date."
9:03:34 AM
Co-Chair Stedman stated that the meeting would consist of
testimony by representatives from ConocoPhilips, British
Petroleum (BP), and ExxonMobil related to Alaska's oil and
gas basin. He anticipated some questions that would be
answered later via email, but hoped that some responses
could be given during the meeting.
BOB HEINRICH, VICE-PRESIDENT FINANCE, CONOCOPHILIPS ALASKA,
introduced himself.
SCOTT JEPSEN, VICE-PRESIDENT EXTERNAL AFFAIRS,
CONOCOPHILIPS ALASKA, introduced himself.
Mr. Heinrich discussed the PowerPoint Presentation, "Senate
Finance, Discussion of CSSB 192" (copy on file).
Mr. Heinrich looked at slide 2, "Agenda." He stated that
the CSSB 192 provisions were progressivity change,
discretionary production incentive, increased gross minimum
tax, oil information system, and decoupling. He added that
he would also address the framework for modifications.
9:06:02 AM
Mr. Heinrich addressed slide 3, "Progressivity Change." He
stated that the graph represented the split of cash flow
between the State of Alaska and the producers across a
range of prices. The data was used from the most recent
Revenue Sources Book, and the modeling defects for FY 13.
The x-axis was the Alaska North Slope crude price, rather
than the production tax value (PTV). He stated that in
order to determine the PTV, $40 would be deducted. The
solid red and green lines represented the Alaska and
producer share at the industry level under ACES. The
diamond-marked lines represented the Alaska and producer
share under CSSB 192. He stated that "Alaska share"
included production taxes due under ACES, royalties, state
income tax, and property tax paid within the state. The
producer share was a net, after federal income tax, and
incorporated all of the fiscal taxes paid. He noted the
0.05 percent decrease in progressivity provided only
minimal impact over a narrow price range. He furthered that
the 60 percent tax cap had no impact below $230/bbl, and
did not anticipate existing in that price environment in
the near future.
Co-Chair Stedman noted some discussions regarding the
inaccuracies about the actual revenue that is different
than what was presented. Mr. Heinrich replied that
ConocoPhilips paid some of the highest taxes of any fortune
500 company. He stressed that each taxpayer's position
would be different.
9:11:39 AM
Co-Chair Stedman stated that after the last tax
restructuring, there was an expectation of higher State
revenue, but that did not happen. He stressed that changes
and expectations should materialize, so the presentations
should reflect actual numbers. Mr. Heinrich replied that
the model was merely a static model, and there were other
factors that influence the company take. He furthered that
variable such as prices, cost structures, and capital
investments affect the capital credit programs on the split
of cash flow.
Co-Chair Stedman stressed that there could be similar
charts, with different assumptions. He surmised that the
presentation was put together based on the Department of
Revenue (DOR) Source Book. Mr. Heinrich replied that the
presentation was based on the producer's perspective on the
legacy fields, or slow-point production based on the
Revenue Source Book.
Co-Chair Stedman noted that if a company has no income,
Alaska's share decreases. Mr. Heinrich agreed.
Co-Chair Stedman looked at the price range from $70/bbl to
$150/bbl, and wondered if the split should ever be split so
the lines run parallel.
Mr. Jepsen felt the lines should parallel, but there needed
to be an examination of all the components. He did not want
to state a specific number, without analyzing all the
attached components.
9:16:05 AM
Co-Chair Stedman noted testimony from consultants that
declared that the relationship of the sharing of profit oil
could be in a reasonable range around $100/bbl. He wondered
where specifically the tax issue landed: $80/bbl, $100/bbl,
$130/bbl, or $150/bbl. Mr. Jepsen stated that it was
approximately $100/bbl in other investment areas in the
North America.
Mr. Heinrich added that there needed to be an examination of
the effective tax rates, so the areas that are "most
attractive" are at the lower end of the price range.
Senator Thomas wondered why each industry partner did not
present their own individual story, because it was important
to understand each company's objective. He would like to see
the individual company's projections. Mr. Heinrich replied
that ConocoPhilips was not able to provide that information,
because projections were considered confidential.
Mr. Jepsen furthered that the State of Alaska should look at
the presentation as a "portfolio." He stressed that the
individual company's actions culminate into a higher level.
He felt that ConocoPhilips' "story" would be very similar to
what was presented.
Senator Thomas knew DOR's perspective, and stressed that he
would like to see ConocoPhilips' individual outlook based on
their own business's financial considerations. Mr. Jepsen
responded that the graph was very reflective of
ConocoPhilips' numbers. Senator Thomas surmised that it was
proprietary, and that was the reason for "lumping" the
numbers together.
9:21:41 AM
Co-Chair Stedman stressed that there were multiple
presentations regarding Alaska's share versus the producer's
share. He would like to have further discussions with
consultants, because he felt that ConocoPhilips presentation
overstated the State's share, and understated the producer's
share. He felt that there was most likely a $200 to $250
million spread at $109/bbl for income tax. He stated that
the government take number referred to property tax,
royalties, income tax, severance, and corporate income tax.
He noted that the consultants had suggested a range from 70
to 75 percent, with the analyses using 75 percent government
take at $100/bbl. He alleged that those numbers might not
actually materialize. He felt that there needed to be a more
accurate analysis of the projected impact on the State
treasury. Mr. Heinrich replied that the State of Alaska had
a different marginal tax rate, and there were several
assumptions across the board.
Co-Chair Stedman agreed, and furthered that there were many
comparative analyses that used the 35 percent corporate rate
in the jurisdiction. He stressed that the focus should be on
the State of Alaska's revenue.
Co-Chair Hoffman stated that the goal of tax revision was
based on getting more oil into the pipeline, and the
governor had a goal of an increase from 550,000 to 1 million
barrels a day. He wondered if ConocoPhilips felt that the
governor's goal was realistic. Mr. Jepsen replied that the
governor's goal was very challenging, and ConocoPhilips
liked that challenge. He stated that drilling in legacy
field was a great challenge, because of the lack of
motivation to explore an older field. He noted that there
was some heavy oil that could be developed, but that would
require great investment.
9:29:18 AM
Co-Chair Hoffman felt that the goal of off-shore drilling
was potentially realistic, but the proposed changes that SB
192 addressed did not affect off-shore drilling. He noted
that tariff costs could be reduced, but the basic question
was whether or not the changes would be beneficial to both
the State and the producer. Mr. Jepsen responded that a
later slide would address ConocoPhilips' proposed
alternative to the Alaska Clear and Equitable Share Act
(ACES). He was confident that if there was an environment
that promoted investment, then there would be healthy oil
production for many years. Mr. Heinrich furthered that there
were many comparisons between tax reductions equal to
capital investment, and felt that comparison was not
helpful. He stated that there needed to be comparison
between tax reduction and what is actually generated. He
noted that every project was different in terms of the types
of returns, nature of the cash flow, and timing of the cash
flow; but generally it was a two to one ratio in terms of
the investment dollar. Every investment dollar generated
approximately two dollars in royalties and production taxes.
9:33:08 AM
Co-Chair Stedman noted that Prudhoe Bay was producing
approximately 300,000 barrels a day, and Kuparuk was
producing approximately 133,000 barrels a day. He wondered
how ConocoPhilips could move from about 150,000 to between
200,000 through 250,000 a day. Mr. Jepsen responded that in
order to stop the decline, there needed to be additional
drilling. He stressed that Alaska was at a big disadvantage,
because of the intense ecological environment. He stated
that there was some examination of new technologies, and the
new technologies were fairly sophisticated and expensive. He
stressed that it was possible to level out the decline, if
there were additional resources. He pointed out that the
development of new resources within new fields required
cutting edge technology. He did not know if the governor's
goal of 1 million barrels a day could be reached, but
pointed out that skill and science would encourage new
development.
9:38:04 AM
Co-Chair Stedman remarked on some discussions regarding
above-ground and below-ground processing facilities. He
wondered if the processing facilities were a high priority
on the list of capital improvements for ConocoPhilips. Mr.
Jepsen replied that Kuparuk did not face many significant
capital constraints. He added on the hottest day of the
summer, there might be decrease of 3,000 or 4,000 barrels a
day for a short period of time; in the winter there might be
a decrease of 1,000 barrels a day. ConocoPhilips was
continually looking at ways to efficiently and cost-
effectively handle the production that was available at the
wells.
Co-Chair Stedman referred to some testimony from consultants
regarding profitable in-field drilling at $100/bbl in the
legacy fields. He wondered where ConocoPhilips' concerns
lie. Mr. Jepsen responded that decisions were not made based
on a single variable. He stressed that most of the revenue
flows to the State; it did not come back to the producer.
Co-Chair Hoffman wondered if there would be harvesting for
another 50 years, if there was no change to ACES. Mr. Jepsen
replied that ConocoPhilips was investing $90 million a year
in Alaska, and restated that it was difficult to fully
exploit the resources under ACES. He alleged that if ACES
was reformed, there would be greater desire to fully develop
the fields.
9:44:00 AM
Co-Chair Stedman stated that Pedro Van Meurs was surprised
at the small amount of capital expenditures, and the maximum
amount of harvest mode investment in the Arctic. He assumed
that ConocoPhilips did not agree with that perspective. Mr.
Jepsen affirmed that ConocoPhilips did not agree with that
point of view, but furthered that the tax environment in
Alaska did not allow for rapid new investment. He stressed
that ConocoPhilips was pursuing state of the art, cutting
edge drilling technology in Alpine and Kuparuk. He felt that
new oil fields were essentially being developed, because the
current technology did not exist when the fields were
initially developed. Pools of oil were currently being
accessed that were not accessible 20 years prior.
Co-Chair Stedman felt that prospectivity needed to be a
focus. Mr. Jepsen agreed, but stressed that ACES did not
promote investment.
Senator Thomas pointed out the production decline of 5
percent, and wondered how much investment it would take to
increase production. Mr. Jepsen remarked that half of the
production in Kuparuk was a result of in-field drilling,
well optimization, and production optimization. He noted
that the decline was substantial, but felt it was possible
to have significant results from increased drilling and
investment in the legacy fields.
Co-Chair Stedman stated that PFC Energy would help with that
analysis.
Senator Thomas stressed that there was still decline at
Kuparuk, so he requested a model from ConocoPhilips
regarding their plan to at least reduce the decline.
9:50:41 AM
Mr. Heinrich explained slide 4, "Discretionary Production
'Incentive'." He stated that discretionary production did
not incentivize the significant investment required just to
offset decline. Production aggregated by the producer had no
benefit derived by new satellite of production offset by
decline at other fields. He explained that for the short-
lived benefit period, the PTV reduction impact was
immaterial. He noted that there was no way to plan for
discretionary production. He stressed that a discretionary
production "incentive" could not improve the investment
climate.
Co-Chair Stedman explained that there were various
perspectives that were considered to boost production and
revenue. He noted there were some discussions regarding
changing the $10 allowance to $20 or $30, and lengthening it
over time to determine if the concept could mature and be
more effective. He stated that there was also a
consideration regarding a tax holiday, and the consultants
were going to present the benefits thereof, and other
recommendations to boost production. Mr. Jepsen felt that
the changes to ACES must apply to the legacy fields, and
must encourage investment. He declared that Alaska needed to
be attractive place for additional capital investment. He
felt that the impacts would be beneficial to the state
treasury over the long-term, but could have a negative
impact in the short-term. He felt that there needed to be a
focus equally on legacy fields and new fields.
9:56:49 AM
Co-Chair Stedman stated that there was testimony from
consultants that showed that $100 a barrel was very
profitable for the industry. He explained that if there was
a broad adjustment for all production, then too much cash
was moved unnecessarily.
Mr. Jepsen stated that if there was a significant reduction
in severance tax, the State would see an immediate change in
its revenue. However, over the long-term, the State's
revenue would balance out, and even be positive. He added
that ConocoPhilips would be willing to work with the
committee to determine the best approach.
Co-Chair Stedman observed that the consultants were
analyzing the language in the bill, and running various
numbers to determine whether or not the bill was aggressive
for incremental production. He encouraged the industry to
provide some input.
9:59:41 AM
Mr. Heinrich stated that healthy legacy business was
important to future development on the North Slope. The
assets that currently exist were the "backbone" to future
investment.
Senator Thomas understood the industry's concern and wanted
their thoughts on how they would structure something that
would clearly delineate new oil other than current year's
investment and revenue. Mr. Jepsen responded that
ConocoPhilips had invested billions of dollars in operating
expenditures (OPEX) and capital expenditures (CAPEX).
Senator Thomas furthered that there needed to be a fair
definition to determine what was considered "new oil."
Co-Chair Stedman stated that there would be a presentation
by PFC regarding the incremental issue. He indicated that he
expected the number to be billions every year. He encouraged
industry to help the State solve the problem. Mr. Jepsen
replied that they were trying to be as transparent as
possible and that under ACES Alaska was not as attractive of
a place to invest.
Co-Chair Stedman noted he would be surprised to hear any
agreement with the producers at any set tax rate.
Senator McGuire felt that there was an assumption that the
tax system at $100 a barrel was "good" and "competitive."
She remarked that there was a philosophical divide in the
Senate regarding tax reform. Some felt that the tax system
needed to be altered for future barrels as opposed to
improving the overall tax system. She stated that the focus
should be on every price per barrel, and on analyzing the
entire tax system.
10:04:59 AM
Mr. Heinrich discussed the slide on page 5, "Other
Provisions."
1. Increased gross minimum tax.
-A minimum tax is already in place under ACES
-Increased minimum tax triggers at higher price than
under ACES.
-Impact is increased taxes at low to moderate oil
prices.
2. Oil information system.
-Provides for a sweeping list of data to be warehoused.
a. Burdensome and potentially duplicative.
b. Includes data considered to be trade secrets.
c. Confidentiality concerns.
-Creates unrealistic expectations about public access
to specific data.
3. Decoupling.
-Administratively burdensome.
-Cost allocation mechanism unknown -left to discretion
of DOR.
-Implementation should be tied to major gas sales.
Mr. Heinrich stated that the provisions in the bill did not
improve the current investment climate.
Co-Chair Stedman indicated that committee would deal with
the issue of changing the tax process on the upper end later
in the process. He was worried about the production tax
value going in the negative, because of high volume of tax
credits.
10:07:09 AM
Mr. Heinrich stated that ConocoPhilips supplied a large
amount of data to DOR. Some of the information should not be
made publicly available. They were not against decoupling
oil and gas, but they wanted clear regulations before
implementation of decoupling. Co-Chair Stedman pointed out
that the document from DOR showed that not decoupling oil
and gas would result in a loss of $80 million dollars to the
State. He noted that decoupling would provide billions to
the state per year in the event of a major gas sale.
Mr. Jepsen discussed the slide on page 6, "Capital
Allocation." He explained that the graph demonstrated
ConocoPhilips' budget history in Alaska from 2010 to 2012,
and compared it to the capital budget history in the Lower
48. He stated that with the higher prices, one would expect
to see more investment in Alaska. He stressed that Alaska
had a low investment profile.
Co-Chair Stedman alleged that the graph represented the
gross rates. Mr. Jepsen replied that it was actually the net
income. Co-Chair Stedman wondered what would happen if the
comparative states allowed for capital expenditure write-
offs.
10:12:55 AM
Mr. Jepsen replied that the severance tax write-off was
meant to be a tax on the cash margin. It took into account
operating costs and capital costs to determine "free cash",
but it was still taxed at a very high rate. He did not feel
that it should be considered a write-off, rather a mechanism
at which to arrive at the cash margin to apply the severance
tax.
Mr. Heinrich furthered that many of the expenditures did
benefit from the 20 percent capital credit, which was put in
place to off-set the high progressivity on the calculation
of tax.
Co-Chair Stedman stated that one way of looking at it was as
an accounting entry, but that he was concerned that capital
credit could swing against the treasury. The State could be
in a position where they were covering all the capital
expenses. He observed that consultants had informed them
that the state would be left in an exposed position.
10:16:11 AM
Mr. Jepsen replied that ConocoPhilips allocated the actual
dollar for the project. He stressed that the graph
represented an accurate depiction of investment. Co-Chair
Stedman stressed that he was very curious about the net
income of the producers after tax credits had been applied.
Senator McGuire queried how ConocoPhillips felt about
credits and how the credits influenced their investments.
Mr. Heinrich replied that every producer would have a
different perspective. The biggest priority for
ConocoPhillips was the change in progressivity, because of
the impact it had on long-term cash flow, cash generation,
and net income per barrel. He stated that after the first
few years of tax credit benefit, there would be a burden
with an impaired asset from a profitability or cash
generation standpoint.
Mr. Jepsen furthered that there were many ways to determine
how Alaska could promote investment, but ConocoPhilips
looked at every possible mechanism to become a more
profitable company.
Co-Chair Stedman felt that a good discussion would be about
pre- and post-tax consequences. He stressed that the net
cash flow was a concern for both ConocoPhilips and the
State.
10:21:14 AM
Mr. Jepsen looked at slide 7, "Will Alaska Benefit from
Reduced Oil Taxes?" He pointed out the letter on the right
side of the slide from ConocoPhilips.
Last spring, ConocoPhillips made the following
commitments to Alaska if the business environment is
improved:
-We will pursue increased drilling activity on the
North Slope.
-We will aggressively pursue more satellite
developments at Alpine and Kuparuk.
-We will work with partners to develop major projects
at Prudhoe Bay.
-We will proactively pursue other projects that can
move the needle on oil production.
Co-Chair Stedman queried the date of the published letter.
Mr. Jepsen replied that the letter was dated the year prior.
Co-Chair Stedman stressed that the discussion had moved
further from what was addressed in the letter.
Co-Chair Stedman wondered if there was a potential for
disagreement between Exxon, ConocoPhilips, and BP. Mr.
Jepsen replied that BP and ConocoPhilips had to agree on
major capital expenditures in Kuparuk. He furthered that all
three parties had to agree on capital expenditures in
Prudhoe Bay, and encouraged the committee to query each
company's level of commitment.
Senator Thomas looked at slide 5, and queried what
specifically was duplicative and what would be considered
"trade secrets."
Co-Chair Stedman interrupted that there would be a
presentation from DOR, so there would be further information
later regarding the oil information system. He felt that a
response from industry should wait until after DOR's
presentation.
Senator Thomas looked at slide 6, and wondered if the Mr.
Heinrich agreed with Co-Chair Stedman regarding the impact
of credits. Mr. Jepsen stated he agreed with Co-Chair
Stedman's point of view regarding credits.
Senator Thomas wondered if the new projects referred to on
slide 7 needed long development periods. Mr. Jepsen replied
that some projects had been put aside, but there was a
pursuit of new projects if there was significant change to
ACES.
10:26:57 AM
Senator McGuire requested an example another democratic
jurisdictions that ConocoPhilips struggled with tax rates.
Mr. Jepsen stated that Alberta, Canada had seen significant
reduction in production and they adjusted their tax
structure and saw more development.
Mr. Jepsen explained slide 8, "Framework for Modifications."
1. CSSB192 as currently proposed does not improve the
investment climate.
2. Focus the legislation on elements that will make the
Alaska North Slope an attractive place for investment.
-Significantly reduce rate of progressivity or
incorporate bracketing.
-If decoupling is included, make implementation
contingent upon major gas sales.
-Meaningful change must include the legacy fields -this
is where the largest potential production gains reside.
3. Changes on same order of magnitude as HB110 will
lead to more investment and production.
Co-Chair Hoffman looked at slide 3, and noted that flattened
out the progressivity to between 130 and 150 per barrel. He
wondered if that would be significant impact.
10:32:02 AM
Mr. Heinrich felt that it was at too high of a price-point
and the problem with progressivity was at the lower end of
the price range.
Co-Chair Hoffman remarked that there had been continual
focus on the progressivity change at the high end of the
price range, and the focus should continue to be on the high
end. He remarked that the issue with ACES fell at the low
end.
Co-Chair Hoffman felt that there would be a reduction in the
State's coffers of $4 billion if the price of oil was at
$150/bbl. He wondered if the $4 billion would be
significant. Mr. Jepsen replied that the State's revenue
would continue to rise at $4 billion. He stressed that the
current structure did not make Alaska competitive even at
lower prices per barrel. He agreed that a cap to severance
was a helpful component, but there needed to be an
examination of the rate of progressivity. He noted that even
at $110/bbl there was an 80 percent marginal tax rate.
Co-Chair Stedman felt that the focus should be equal between
the effective and marginal tax rates. Mr. Heinrich agreed.
10:36:41 AM
Co-Chair Stedman wondered if $4 billion was significant
number. Mr. Jepsen replied that $4 billion was a large
number, but could not reply accurately, because he felt that
his calculations would not produce a similar number.
Co-Chair Stedman stated that the numbers could be determined
by PFC. He furthered that he had requested more analysis
from DOR, from concept purposes. Once the mechanics were
determined, there could be a policy discussion. Mr. Jepsen
replied that a cap was an important component, but there was
an issue when oil was below $130/bbl.
Senator Thomas referred to slide 8, and felt that the gas
tax should be in place from the point of view of the State.
Mr. Heinrich stated that decoupling would be contingent on
major gas sales and development.
Senator Olson commented that rural Alaskans were "hyper-
sensitive" to the high price of oil because of the limited
amount of deliveries they receive each year. When there were
high oil prices, the affordability and out-migration was a
major issue. He felt that the perspective of rural Alaskans
was an important issue in the discussion.
10:43:45 AM
AT EASE
10:48:57 AM
RECONVENED
DAMIAN BILBAO, HEAD OF FINANCES, DEVELOPMENTS AND RESOURCES,
BRITISH PETROLEUM, ALASKA, discussed the PowerPoint
Presentation, "BP Testimony to Senate Finance."
Mr. Bilbao looked at slide 2, "Alaska's Future." He stressed
that ACES was not working, more investment was needed to
increase production, and policy must focus on long-term
solutions.
Co-Chair Stedman stressed that ACES had worked as a
harvesting tax structure, but did not promote incremental
production. Mr. Bilbao clarified that ACES did not provide
incentive for increased production, and felt that the record
reinforced that perspective.
Mr. Bilbao looked at slide 3, "Declining Production is a
crisis for the State." He stated that Alaska general fund
revenue was projected to decline through 2017.
Co-Chair Hoffman wondered if the general fund expenditures
included operating and capital expenditures. Mr. Bilbao
agreed to provide information.
Mr. Bilbao stressed that there was a crisis for the State,
and added that the policy in place did not support Alaska's
infrastructure.
Co-Chair Stedman stressed that the legislature would not
accept a substantial deficit, and pointed out that there was
continual close examination of the numbers. He noted that
there was no blind acceptance. He stressed that there was
not going to be an acceptance of the operating side of
stemming the decline of production. Mr. Bilbao understood
that the committee was looking forward, explained that
increased investment and production would occur after
meaningful tax reform.
Mr. Bilbao looked at slide 4, "State's Experts - ACES is not
working." He felt that there were serious concerns with ACES
regarding incentivizing investment and production. He
stressed that there were multiple data points that require a
need for tax reform. Fundamentally, there was a serious
concern for the long term issue, and needed to be addressed
currently. He stressed that ACES was a "failed fiscal
policy."
SB 192 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB192 COP 03-21-12 Testimony.pdf |
SFIN 3/21/2012 9:00:00 AM |
SB 192 |