Legislature(2005 - 2006)HOUSE FINANCE 519
03/29/2006 02:00 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB488 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 488 | TELECONFERENCED | |
HOUSE BILL NO. 488
"An Act repealing the oil production tax and gas
production tax and providing for a production tax on
the net value of oil and gas; relating to the
relationship of the production tax to other taxes;
relating to the dates tax payments and surcharges are
due under AS 43.55; relating to interest on
overpayments under AS 43.55; relating to the treatment
of oil and gas production tax in a producer's
settlement with the royalty owner; relating to flared
gas, and to oil and gas used in the operation of a
lease or property, under AS 43.55; relating to the
prevailing value of oil or gas under AS 43.55;
providing for tax credits against the tax due under AS
43.55 for certain expenditures, losses, and surcharges;
relating to statements or other information required to
be filed with or furnished to the Department of
Revenue, and relating to the penalty for failure to
file certain reports, under AS 43.55; relating to the
powers of the Department of Revenue, and to the
disclosure of certain information required to be
furnished to the Department of Revenue, under AS 43.55;
relating to criminal penalties for violating conditions
governing access to and use of confidential information
relating to the oil and gas production tax; relating to
the deposit of money collected by the Department of
Revenue under AS 43.55; relating to the calculation of
the gross value at the point of production of oil or
gas; relating to the determination of the net value of
taxable oil and gas for purposes of a production tax on
the net value of oil and gas; relating to the
definitions of 'gas,' 'oil,' and certain other terms
for purposes of AS 43.55; making conforming amendments;
and providing for an effective date."
2:39:15 PM
STEVE MARSHALL, PRESIDENT, BRITISH PETROLEUM-ALASKA,
provided the committee with a written copy of his testimony
(copy on file.) He related that he has been watching the
oil tax proceedings over the last few weeks with a lot of
interest. He emphasized the significance of the bill in
front of the committee. He opined that it is important to
provide the best information so that the legislature can
make the most informed decision. He noted concern about the
changes made to the bill and the focus of the discussions.
He stated that the bill is moving in the wrong direction and
has the potential to hurt Alaska. He wondered if the lure
of the short-term revenues would jeopardize the long-term
benefits.
Mr. Marshall pointed out that the common ground between the
industry and the state is production. The common enemy is
the natural decline of oil and there are ways to offset that
decline with investment, technology, new ideas, and new
recovery techniques. He spoke about the danger of
polarization between the industry and the legislature.
Mr. Marshall related that a final concern is one of
consequence. He said he wished he shared the confidence of
consultants that increasing taxes will not reduce
investment. As a significant investor in Alaska the last
five years, he said that one of his roles has been to seek
capital to sustain business. It is a challenge faced every
year. What is being contemplated is going to make his job
more difficult every year with projects that will compete
less favorably than they will today.
Mr. Marshall emphasized that the right question to ask now
is what is the tax structure and rate that would encourage
additional investment, increase production, maximize
recovery, and provide the state with a fair share.
Mr. Marshall spoke of high prices and profits as part of the
reason British Petroleum (BP) is in Alaska. He maintained
that high prices masks production decline. The underlying
decline of fields is about 15 percent. Through investment,
that is restored to about 6 percent. He said the industry
has failed to meet projections in recent years for a variety
of reasons such as project delays, less productive wells,
operational difficulties, and the inherent challenges in
working with a mature basin like the North Slope.
Mr. Marshall pointed out that Alaska has a business plan
that goes out 50 years. He spoke of personal pride to be
involved with the creation of a business plan called the
"bridge to gas". It involves maximizing the light oil
production for the past 28 years as well as bringing on the
technologies that can access heavy oil. It is through
providing investments in the infrastructure that will lower
the unit costs.
Mr. Marshall spoke of the privilege to have led 5,000
employees and contractors who run the day-to-day operations.
The 50-year plan is a reflection of their dreams and hopes.
He shared the excitement of how BP employees have responded
to the challenges of the future. He spoke of being ready
for future challenges.
Mr. Marshall addressed lack of appreciation for BP's
contributions. He responded to the criticism that BP is not
exploring enough. He clarified that BP's business is about
maximizing recovery and adding barrels using technology. He
gave an example of technology that has the potential to add
400 million barrels of additional reserves recovery on the
North Slope, a big discovery. Another example would be an
extra 1 percent recovery at Prudhoe Bay, or 250 million
barrels. New technology has the potential to pay off
hugely.
Mr. Marshall concluded that he is hopeful that the House
Finance Committee will re-direct the dialogue to achieve a
balanced structure that results in an infusion of capital,
reduces decline, creates growth in state revenue, provides a
better balance at high oil prices, and secures a healthy oil
business that bridges to gas and beyond. BP is willing to
provide information and follow-up so that the most informed
decision can be made.
2:49:43 PM
Co-Chair Meyer inquired about the relationship of the 50-
year plan and the justification to London of capital
expenditures each year. He wondered about starting out with
a tax rate that may be too high, but could be adjusted later
on.
Mr. Marshall spoke of the challenge of producing a business
plan that addresses a vast array of investments and projects
that are profitable and not too risky. Every year the
company requests a specific amount of capital. This year it
was about $590 million for Alaska business. One of the key
measures is the economic merit. Tax rate - production tax,
royalty, federal tax, corporate taxes - is one of the
factors, as are the capital cost and operating cost. When
those costs are put into the economic equation it makes
those investments at a higher tax rate, less competitive
than they are today. It becomes harder to attract capital
to them.
2:53:23 PM
Co-Chair Meyer asked what would happen if the tax rate
changes and BP reports back to London and chooses not to
invest in Alaska because it is no longer competitive, and
after a couple years that tax rate is lowered. He wondered
if BP could recover the lost capital.
Mr. Marshall spoke of the difficulty of restoring production
after such a loss. He pointed out that BP is trying to
sustain a more stable level of activity, which is a better
way to run the business. It is not easy to bring back new
rigs, get them drilling again, and fill in the gap. He
suggested that the industry has had to struggle to keep up
with that 6 percent decline.
2:55:39 PM
Co-Chair Meyer agreed that the state shares the goal of
lessening decline and increasing production. He stated that
BP is re-investing about $600 million. He asked if the 20
percent credit is of more value than the 20 percent tax
rate.
Mr. Marshall replied that the most important thing is
production, in terms of providing revenues to the state or
to the industry. Production will out trump tax rate.
"Growing the pie will always be better than a bigger slice
of the pie." When comparing tax rate vs. incentives - tax
rate will always out trump incentives. 20/20 as proposed in
the governor's bill, for BP in 2006, at current prices and
with a $590 million capital investment, results in an
effective tax rate of about 13 percent. Under ELF, the
current tax rate is about 5.5 percent. BP sees that as
doubling the tax rate. Growing the barrels attracts higher
taxes, but also higher royalties. No amount of incentives
can offset a significant increase in tax rate.
2:58:14 PM
Co-Chair Chenault addressed the 15 percent decline in
production, which drops to 6 percent due to investment. He
asked Mr. Marshall to elaborate on "delays in large
projects".
Mr. Marshall responded that some of the large projects have
been late and costly. North Star was delayed due to legal
challenges and ended up costing $1.2 billion instead of $400
million. There have been delays in small projects, as well.
He gave an example of a well that was not ready before June
and had to be put into suspension until December when the
ocean froze again.
Co-Chair Chenault asked if the delays are caused by the
corporation, by lack of investment capital, or by legal or
permitting problems.
Mr. Marshall said it is not lack of capital. The industry
has experienced a shortage of people out of college needed
to sustain the industry. BP has hired 200 people, many of
them engineers, in order to fulfill the investments.
3:01:18 PM
Representative Weyhrauch asked if Mr. Marshall said no
amount of incentives or tax credits could overcome a
problematic tax rate. Mr. Marshall said yes. In the
analysis of 20/20, if the incentive is increased a nominal
amount there is some positive impact. He described the
example of 20/20 translated to 13 percent as the "best
comparison that can be made against today".
Representative Weyhrauch asked about tradeoffs and the
intent of the bill to induce incentives to develop oil,
which is on a decline. He summarized BP's point of view as
being willing to accept a tax rate that is smaller than the
one in the CS, with certainty for the long term, and with no
interest in tax credits or incentives. He noted that the
incentive part of the bill is not the committee's concern.
Mr. Marshall countered that the economic analysis of any
project going forward reflects both the incentives and the
tax rate. The incentives are a factor, but the net effect
of the tax rate has more of an impact on the economic
attractiveness of any individual project than the incentive
itself. Ultimately, it is the relative attractiveness of
the project today vs. the attractiveness of the project in
the future that is one of the key drivers for the
investment.
3:04:26 PM
Representative Weyhrauch pointed out that ELF was amended in
1989. He asked if the bill is adopted today, in 2006, if
that is the end of the useful life of a taxation scheme. He
inquired if there are other international models to look at
to determine the useful life of a tax program. Mr. Marshall
said he does not know if 17 years is the correct amount of
time. He noted that this project is unprecedented, very
large, and a significant investment. BP is looking for a
period of certainty for oil that allows a healthy oil
business to exist, which will underpin a healthy gas
business.
3:05:48 PM
TOM WILLIAMS, ALASKA TAX COUNSEL, BRITISH PETROLEUM-ALASKA,
discussed how the tax structure is viewed in terms of how
well suited it is for the industry's situation as well as
for the. He elaborated on the history of the ELF tax
structure in Alaska. Oil resources are being depleted and
it becoming more challenging to produce it. He mentioned
that the current structure might not be the most suitable
one for the future.
3:08:52 PM
ANGUS WALKER, COMMERCIAL VICE PRESIDENT, BRITISH PETROLEUM-
ALASKA, referred to a handout entitled "BP Presentation on
CSHB 488 (PPT)" (copy on file.) He addressed the decline
of production in the North Slope of Alaska as shown on Slide
5. The historical basin decline has been around 6 percent
per year since peak production in 1988. There was a period
of flattened production in 2000-01 with the addition of
Alpine and Northstar.
Mr. Walker highlighted the Department of Revenue production
forecasts. These forecasts have been continually revised
downward. The latest forecast projects a decline of 3
percent per year. He asked why the industry and the
Department of Revenue continually overestimate production
and fail to meet expectations when the resources are there.
He explained that the first reason is that the industry is
overly optimistic and some things have proven more difficult
and expensive, such as viscous oil. Some projects take
longer and some projects don't work. That is the nature of
the oil and gas business. The primary reason is the
unrealistic expectation of investment in Alaska. A 3
percent decline is forecast and investment must double to
support the industry. Production is "King" in terms of
revenue to the state - 100,000 barrels of production is $500
million less in revenues at today's prices. It is of great
concern that production is declining and the forecasts are
continually being revised downwards.
3:14:44 PM
Mr. Walker referred to Slide 6 - Investment Offsets Decline.
He explained three decline rate scenarios and what would
happen if investment were stopped in the North Slope.
Production would decline very rapidly and terminate around
2012. The green line, the 6 percent decline line, is the
extrapolation of historical decline. In order to achieve 6
percent, the industry is spending between $1 billion and
$1.5 billion a year. One should not underestimate the
effort that goes into achieving that 6 percent decline: a
workforce of 5,000 and between $600-$700 million in capital,
and about $1 billion in operating costs. To move to a 3
percent decline requires an investment of between $2 billion
to $3 billion a year. Unless investment is attracted to
Alaska the forecast will be revised downward in the future.
3:18:18 PM
Mr. Walker addressed Co-Chair Meyer's question about setting
too high of a tax rate. He emphasized that production would
fall quickly, after 2-3 years on the wrong decline line, and
would be impossible to recover from.
Representative Holm referred to Mr. Marshall's presentation
where he stated that BP is investing $500 million into
Alaska operations. He requested clarification about a
mention of investing $1 billion to $1.5 billion into Alaska
to keep the industry going.
Mr. Walker responded that the $1 billion to $1.5 billion is
the investment required by the whole industry on the North
Slope. The $2 billion to $3 billion is what would be
required to meet the 3 percent decline line. He related
that the current level of investment, which has been
attracted to Alaska and predicated on the ELF tax system, is
looking at a $1 billion increase in taxes at current prices
under the new system. A tax increase does not equate to an
increase in investment. The new 20/20 tax structure would
result in less investment than is currently being made.
Many examples around the world show that lowering taxes
increases investment.
3:22:16 PM
Representative Kerttula pointed to BP's profit, which allows
for continued investment on the North Slope. She referred
to the United Kingdom and Norway where taxes were raised in
juxtaposition with certain incentives. She requested a
response to those two concerns.
Mr. Walker put off the question of comparison to other
regimes to later on in the presentation. He spoke of recent
excellent profits as a function of high prices. He said
that when prices are very low, no profits are made.
Everyone benefits from high prices.
Representative Kerttula noted that the committee's purpose
is to try to determine a balance between the state and the
industry.
3:25:07 PM
Mr. Marshall spoke of disappointment with the Badami Fields
reservoir that was more compartmentalized than expected. He
noted that there have been a number of examples of fields
which have disappointed and are not reflected in profits.
He spoke of a dry hole experience loss in the Mukluk
project. He asked the committee to consider the risks that
the industry has taken.
Representative Kerttula asked how long ago Badami was. Mr.
Marshall said that it was restarted last year. Investments
were made in the late 1990s, and production was started in
1998-9 and did not achieve expected rates.
Mr. Walker reiterated that decline is the most important
issue facing the industry and the state.
3:28:19 PM
Mr. Walker referred to Slide 7 to discuss the industry's
strategy and how BP is addressing the decline. The strategy
is to create a 50-year business in Alaska by focusing on the
large known resources that exist on the North Slope such as
light oil, viscous oil, and gas. The future is very
different than the past and it has many challenges.
Technology is being pursued to develop the Liberty Field and
heavy oil. BP has been investing in infrastructure to get
ready for the future and has spent $1 billion on four ships
and $400 million to update the pipeline. Each of these
investments is designed to reduce costs and increase the
wellhead value of oil for the benefit of the industry and
the state. Mr. Walker noted that 200 people have been hired
this year for the additional projects and investments.
3:32:05 PM
Representative Kerttula asked if the costs spent on TAPS
would go through the normal process with the state paying
one-quarter of the cost.
Mr. Walker explained that the costs spent on TAPS are
incorporated into the tariff that is paid by all users of
the system. He explained how the investment in the ships
results in a reduction of shipping costs, which results in a
higher wellhead value, which results in higher royalties to
the state.
Representative Kerttula pointed out that the state ends up
paying a quarter on every dollar spent on TAPS.
Mr. Williams explained that it is not the TAPS settlement
methodology. It is the fact that if it goes into the
tariff, both the royalty and severance tax are based on the
net value. They work the same way.
Mr. Walker noted that BP would spend $14 billion over the
next ten years in Alaska to execute this strategy. Half
will be spent on gas - half on oil. The total is double
what has been spent in recent years on the upstream portion
of the business. In order to deliver the strategy, BP is
concerned that the wrong outcome from these deliberations
would be a tax that is too high for the industry.
3:34:35 PM
In response to a question by Representative Hawker, Mr.
Williams explained that once the new pipeline is built, the
new gas would be found to fill it.
Representative Hawker referred to the Administration's high
volume and low volume scenarios. He observed that there is
a presumption of a long-term scenario that every 3 to 6
years new reserves would be brought on line. BP's scenario
appears to be more linear. He questioned if BP anticipates
new discoveries.
Mr. Walker observed that the state's assumption is flat and
then declines on the new gas line scenario. Based on recent
history, it is known that the North Slope is declining.
BP's view is that the new gas line scenario is too
optimistic.
Representative Hawker pointed out that they were talking
about "new oil" not new gas. Mr. Walker agreed.
Representative Hawker asked if Mr. Walker believes that the
state's model is not as realistic as the industry believes.
Mr. Walker noted a problem in Alaska of the massive resource
base and said that any of the scenarios are possible in
total volume - in the sense that the oil is there. The
questioned is, can the development occur in light of
investments. The industry agrees that there would be more
oil development if the gas line were built. It would take
issue with the assumption that an alpine-type field is
discovered every three years. The industry's profile is
based on multiple, repetitive investments in existing
fields.
Mr. Walker added that the strategy is to concentrate on the
known resource base, since that is where the oil is. He
acknowledged the importance of exploration.
3:41:10 PM
Representative Joule referred to the model of the 50-year
vision and questioned if a model has been developed for
offshore oil. Mr. Walker explained that development of
Liberty is the only oil included in federal waters. The
view is specific to BP. An industry view would look
different.
3:42:25 PM
Mr. Walker reviewed Slide 8, the link between production and
revenue. There are three decline scenarios that show the
volume of oil until the North Slope is shut down. Operating
expenses and industry investments were included. If BP were
successful in moving to a 3 percent decline, production
would double. The cost to operate would also double. The
industry investment required above operating expense would
increase from $20 billion to $60 billion.
Mr. Walker reported that the affect on state revenue was
reviewed. There would be an impact on the whole of Alaska
in terms of jobs, industry, infrastructure, etc. The total
state revenue derived from property tax, royalty, state
corporate income tax, and severance tax was included. It is
clear that the most important aspect is to get "volume down
the pipeline", in terms of generating revenue for the state.
He maintained that PPT is relatively unimportant. He
suggested that a production tax could be set at zero if it
stimulated investment.
3:46:41 PM
Representative Holm noted that the assumption is that it is
in the best interest of the state of Alaska to insure the
fastest use of a non-renewable resource. Mr. Walker
responded that if the decline continues at the same rate,
industry would not be able to support the infrastructure.
Once the oil has declined, the industry will be gone. The
decision is how long can the industry last and how much oil
can be brought out of the ground. The industry will not
return after it leaves, that is why Alaska is being
encouraged to develop as much of its resource as it can
while it still has infrastructure to support it.
Mr. Marshall maintained if that is successful, it could last
30-40 years or longer. He explained that the industry
continues to find new ways to maximize recovery. There is a
finite limit of oil. The challenge is to get to the
technical limit, which has changed. Sustaining momentum is
the key.
3:51:38 PM
Representative Hawker referred to slides 3 and 8 and noted a
discrepancy. Mr. Walker explained that slide 3 refers to an
investment of two to three billion on an annual investment.
Slide 8 looks at spending more money over a longer period of
time.
Mr. Walker concluded that less investment means less
revenues and more investment means more revenues. The
question is what is necessary to increase investment.
3:54:17 PM
Mr. Walker reviewed Slide 9 and the impact of the tax rate.
He concluded that the tax rate does matter. The state of
Alaska already has one of the highest tax rates. He
maintained that progressivity would result in a tax rate of
75 percent. He compared Alberta's tax rate and noted that
they have been successful in attracting development by
reduction taxes. Their tax rate is 39 percent until a
project pays out, when it reverts to 54 percent. The Gulf
of Mexico has also been successful in attracting investment.
Representative Holm questioned what a marginal tax rate of
61 percent included. Mr. Walker responded that leaseholder
royalties were included. He explained that all taxes paid
were included: property tax, royalty, federal income tax,
severance tax, and corporate income tax.
3:58:12 PM
Representative Kerttula wondered if all other states'
severance taxes are comparable to Alaska's. Mr. Walker said
he does not have the numbers. Mr. Williams indicated that
every state could have a severance tax and most of them do.
In 1977, Louisiana had the highest severance tax of 12.5
percent. Alaska is at 12.25 percent. He discussed lower
rates of taxes based on category of well. He described West
Virginia's severance tax.
Representative Kerttula asked what the offset is. Mr.
Walker said the numbers are an amalgamation of all taxes
paid. Representative Kerttula asked about commonality
between states.
4:01:23 PM
Mr. Marshall added that as BP looks at comparisons between
countries and states, the missing ingredient is geology. A
100 million barrel field found in Alaska is different than
one found in Norway or in West Texas. The costs are
different and the efficiencies do not compare. An important
ingredient in the economic analysis is capital efficiency.
Mr. Williams restated Representative Kerttula's question
about commonality factors. The primary assumption is that
th
percent corporate federal income tax rate, which is another
major common element. Most of the states have a 5-8 percent
severance tax rate.
Representative Kerttula asked why Alaska is already the
highest cost region to operate and if that is based on PPT.
Mr. Walker pointed out that the yellow bar, AK ELF, is the
current situation. Mr. Walker commented that the UK is an
excellent role model for any country looking to increase
investment. He referred to two quotes by Daniel Johnston:
The "gross benefits" to the UK Government go way beyond
direct tax revenues and royalties received from the
upstream sector of the petroleum industry. The
economic impact of the industrial hyperactivity in the
UK sector of the North Sea, a direct result of the
"lenient" terms of the 1990's, is difficult to measure.
The UK offshore became the most active offshore
province in the world. Reducing the Government take in
the following years managed to sustain that boom.
Activity and employment in the British petroleum sector
is healthy and robust.
He spoke to the difficulty of comparing two systems.
4:06:52 PM
Representative Hawker asked if the UK recently increased
their tax structure by 10 percent. Mr. Walker said that is
correct. The UK increased their corporate income tax.
Representative Hawker noted the UK's tax reduction mode
previously vs. raising taxes now. Mr. Walker responded that
the country made decisions based on its needs to attract new
players and stimulate investment. Now they are reversing
those tends. Representative Hawker asked for a copy of that
report.
Mr. Walker concluded by stating that Alaska has lots of oil
and gas, but declining production. Significant investment
is needed to stem the decline. Maximizing production will
maximize state revenues and benefits to Alaska. With a 20
percent tax rate, Alaska will have the highest tax rate and
the highest cost structure in the U.S. The bill as drafted
will not maximize benefits to Alaskans. The UK and Alberta
have successfully attracted significant investment and
increased production by reducing taxes and are thus great
role models.
4:10:56 PM
Co-Chair Meyer noted that the common goal is to get as much
oil as possible down the pipeline. He pointed out that
20/20 is the highest tax rate in the U.S. He asked how
Alaska would compete domestically with such a high rate. He
asked if the industry is proposing a smaller number. Mr.
Walker responded that the right answer for Alaska is a rate
less than 20/20, but BP has agreed not to oppose the
governor's bill because it is a steppingstone to gas.
Representative Kelly asked if three different tax rates
would work better for the different types of fields. Mr.
Walker said that the vast resources in Alaska are in
existing fields and the focus should be on incentivizing
development across the board. He said there should be one
rate.
4:14:34 PM
Representative Hawker referred to Slide 12, critiques and
challenges of the proposed bill. He said he tends to agree
with the points made. He noted that complexity is not a
good objective in tax structures. He asked for a comment on
WTI not being a proxy for ANS crude. Mr. Williams explained
that WTI is a sweet crude and has low sulfur content. North
Slope oil is moderately sulfurous, which puts it in a
different category. During windfall times, those who have
trouble are the ones who are least flexible. "Spot prices"
is the marketplace and is based on real sales. The
composition of North Slope oil is going to move away from
that of WTI. There will be more viscous oil that is ANS and
will be more expensive to refine. It will move further away
from WTI. He explained that wherever the windfall threshold
is, eventually a point will be reached that matches it. All
of the value out of the ground is consumed by the cost of
getting it out of the ground.
4:20:30 PM
Representative Hawker noted that three major producers
dominate ANS, which allows for manipulation. Mr. Marshall
responded that ANS is a unique market because of the Jones
Act, which only allows transport between U.S. ports. West
Texas has access to many refineries, but ANS is restricted
to the West Coast. WTI is not a good benchmark because the
market is weak. Many refineries have tried to copy ANS. BP
tries to maximize the value of ANS to Alaska. The goal is
to get full benefit for every barrel of Alaskan crude.
Mr. Williams added that there were a handful of export
transactions allowed during the Clinton administration.
Representative Hawker related that back when there was a
surplus, there was more of an ability to affect the West
Coast market. Mr. Marshall did not want to leave an
impression that the market could be manipulated. One of the
challenges that ANS faces is that it is difficult to find a
buyer.
4:26:03 PM
Representative Kerttula asked about the profit side of the
industry in Alaska compared to other places. Mr. Walker
replied that if it costs less to get oil out of the ground,
and there is less tax, then there would be more profit.
Representative Kerttula requested more information.
Representative Holm suggested that the higher tax rate is
needed is because the value of oil has increased. He asked
about the rate of return at $60 per barrel. Mr. Walker said
BP is excited about current prices. BP does not make a
profit until oil is above $22.50 per barrel. BP can justify
the 20/20 tax due to adjusting the share between the
industry and the state at higher prices.
Representative Holm noted that the increase value between
$25 and $60 is $11 billion a year. Mr. Walker responded
that their analysis shows a significant reduction in
industry take under PPT and a balancing of state take. He
offered to share that information.
4:31:26 PM
Representative Kelly noted that when prices so high they are
a lot less sensitive to BP's investment. Concern is higher
at $30 than at $60. Mr. Walker replied that he would sleep
better at night if prices were high. He repeated what
happens at a $22.50 situation and noted that there are many
factors involving doing business in Alaska.
4:34:34 PM
Representative Foster requested a copy of the slide. Mr.
Walker said it is a compilation of page 12 of the written
testimony.
Mr. Williams addressed Representative Kelly's concerns. He
said $33 is not a high price today, but in 1980 it was the
price that Sohio put on North Slope oil delivered on the
West Coast. Minus inflation those prices have not since
been matched at today's prices. It would be equivalent to
$72 per barrel today.
4:36:57 PM
Representative Joule inquired about the 50-year vision in
Slide 4. He maintained that the legislature is at a
disadvantage because it lacks information about gas. He
wondered if the legislature is supposed to trust the
industry on oil because much would be made up for in gas.
Mr. Williams replied that in due course, the legislature
will get to see the details of the gas contract. The bill
should be considered as the right thing to do for oil. The
oil industry needs to be healthy and investment needs to be
attracted to Alaska.
4:38:36 PM
Representative Weyhrauch asked if the oil industry would be
amenable to resolve all disputes through binding
arbitration, without appeal. Mr. Williams said he could not
take a position on that.
AT EASE: 4:39:40 PM
RECONVENE: 4:51:09 PM
BRITISH PETROLEUM PRESENTATIOIN
JOHN ZAGER, GENERAL MANAGER, CHEVRON-ALASKA, referred to a
handout "Chevron - Alaska Area" (copy on file) throughout
his presentation. He discussed the current asset base
formed by the combination of heritage Chevron and Unocal
assets. Both companies have been active in Alaska for many
th
years. Chevron is the 4 largest producer in the state and
rd
the 3 largest operator. It has 382 employees or full time
contractors, 272 of which are based on the Kenai Peninsula,
with a payroll of more than $45 million. Chevron supports
other companies by supplying them energy: Tesoro, Enstar,
Chugach Electric, Agrium and Aurora Power. Chevron is the
only producer in the state with a relative balance of assets
in the Cook Inlet and on the North Slope.
Mr. Zager referred to Slide 3, which portrays the North
Slope fields, a net production of about 16,000 barrels of
oil equivalent per day (BOEPD). He reported that Chevron
owns a little bit of most of the major fields and 50 percent
of the fields in ANWAR that have been leased.
4:55:39 PM
Mr. Zager showed Slide 4, the Cook Inlet assets both
offshore and onshore. In recent years exploration has taken
place in the Kenai area. Slide 5 depicts pictures of assets
in Trading Bay, which has difficult operating conditions.
Chevron takes great pride in the environmental care used in
this area.
Mr. Zager noted that most of his testimony would focus on
Cook Inlet assets. Cook Inlet is different than the North
Slope assets and deserves special consideration regarding
the new tax regime. Slide 6 depicts Cook Inlet Offshore.
He described the percent of barrels that are water cut and
how costly it is to operate this area.
Slide 7 shows Trading Bay Unit, the single biggest asset in
Cook Inlet. It has decreased drastically in the number of
barrels per day and has a greater percentage of water cut.
Slide 8 depicts the Cook Inlet net oil production history,
which has declined from about 12,000 barrels per day to
6,400.
Slide 9 shows the Cook Inlet Offshore oil and the high
operating costs and risks. Cook Inlet Offshore cannot
afford an additional tax burden. He spoke of earnings,
which involves adding back depreciation. Further production
declines will raise breakeven prices even further.
5:02:47 PM
Slide 10, Chevron Cook Inlet Strategic Study, deals with
when Chevron acquired Unocal in 2005. A strategic study was
done and it was determined that there are incremental
investment opportunities in Cook Inlet. In February 2006,
Chevron announced a decision that it would retain all of the
Cook Inlet assets, with the intent to begin a multiyear
investment program. Chevron will retain the current office
locations. Alaska is now a major part of Chevron's
portfolio.
5:05:25 PM
Slide 10 deals with the fact that the Cook Inlet
reinvestment program was evaluated using the current
severance tax assumption (zero severance tax). He explained
that when modeled under the proposed 20/20 PPT, the
economics on some projects are degraded and some projects
are improved. Overall, it results in poorer economics for
the program. He addressed the fact that oil taxes will go
up dramatically. It will cause investment decisions to be
reconsidered. Higher taxes will cause less capital to be
spent. Enhanced PPT terms could significantly expand the
list of economic projects in the investment program and
significantly extend the life of offshore oil production.
Representative Hawker asked about the surtax that is being
charged on the gross price of oil. Mr. Zager agreed that
the surtax should be based on net rather than on gross. He
shared a concern on the cash flow of the net profits tax.
5:11:02 PM
Mr. Zager referred to Slide 12 - "Cook Inlet Production
Forecast with Four Year Capital Plan". He highlighted the
decline without further investment. In about 2009, Trading
Bay would be depleted. With investment the projection would
be held flat for four years.
Slide 13 - "Alaska Oil Production - January 2006 BOPD".
Cook Inlet is only about 2 percent of the state's production
of oil. He mentioned that the benefit of the impact of tax
on Cook Inlet oil for the state would be insignificant.
Slide 14 depicts the same information with gas added in. He
spoke of how important gas is to the Anchorage area. He
defined the strategic value of these assets as making sure
production is there for future years.
5:15:08 PM
Mr. Zager asked the committee to consider Cook Inlet as
different than the North Slope. Slide 15 shows reasons to
lower taxes and provide incentives for additional Cook Inlet
investment. He pointed out that gas is running out, and he
suggested alternatives such as coal, nuclear, hydroelectric
power, and L & G import, and addressed their difficulties.
He spoke of a current lack of significant exploration. He
said that production tax is a pass through on most utility
contracts. Oil redevelopment will maintain and add new jobs
and will extend field life. Cook Inlet competes for capital
with other areas in North America and does not compete for
global capital. Under PPT, Alaska will have the worst
fiscal terms in the U.S.
5:19:02 PM
Mr. Zager explained that Slide 16 lists Cook Inlet
provisions in the bill to date. The House Resources version
of the bill has no incentives for Cook Inlet. The Senate
Resources version provides a 5,000 BOPD exemption, but fails
to provide any real help to Cook Inlet. He suggested two
reasons given not to consider a Cook Inlet provision. The
first is that it complicates the bill. The second reason is
that the system must be uniform over the entire state. He
argued that there are statutes that distinguish geographic
areas.
Slide 17 refers to the Senate version of PPT. He related
the Senate formula for the 5,000-barrel exemption. Chevron
produces 40,000 a day and would get 187 barrels credit out
of the 5,000. He noted the amount for other producers. The
reduction would be trivial for Chevron.
5:24:22 PM
Mr. Zager reviewed Slide 18, which shows that any Cook Inlet
provision should be specific to Cook Inlet. When looking at
incremental investments in the state, total business must be
considered. Credit sits on the bottom and anything that
raises the "boat" engages the tax. Anything above 5,000
would be hit by the PPT tax. He summarized that any
provisions for Cook Inlet must be specific to Cook Inlet or
areas outside of the North Slope.
Mr. Zager stated that the biggest disappointment of the
House Resources CS is that it does not recognize the unique
value and challenged position of the Cook Inlet. He
concluded that the revisions, as proposed, would lower the
economics of capital investments in the Cook Inlet and put
the capital program in jeopardy. Without capital the
McArthur River Field will be gone in about four years, and
with it the critical mass for Cook Inlet oil industry.
5:26:59 PM
Representative Holm asked what price of oil the four-year
capital assumption was based on. Mr. Zager acknowledged
that it was based on a price lower than the current price.
Representative Holm suggested that $60 barrel oil was
"pretty good" for the four-year plan.
Mr. Zager pointed out that the breakeven point is well above
$25-$30 per barrel.
Representative Holm noted that Chevron had spoken against
severance taxes. Mr. Zager disagreed with Representative
Holm's statement. He concluded that the lower the tax the
better.
5:29:31 PM
Mr. Zager discussed ideas to help Cook Inlet producers, as
summarized on Slide 20. He observed that Cook Inlet could be
left under the current system. There could also be a
special exemption for Cook Inlet. He added that PPT could
apply to Cook Inlet, adjusted to lower tax rates.
Mr. Zager concluded that the balance of the original bill is
gone. He spoke in support of a 20 percent tax rate and a
tax credit of $12 million as replacement for a $73 million
standard deduction. He pointed out that the transition
capital credit was taken out of the CS. He noted that
progessivity is a big issue, especially for Cook Inlet. He
argued against windfall taxes. He noted that pricing cycles
are not measured in terms of days. Decisions are made based
on distribution, field size, well productivity, and prices.
Mr. Zager reiterated the difference between WTI and ANS. He
observed that gas and North Slope oil are tied to WTI. He
noted that many of the contracts in the Cook Inlet are not
tied to Henry Hub. He emphasized that Chevron does not
support progressivity, but maintained that if it is
included, the indexing price should be also included. He
did not think the commencement date of April was realistic.
He spoke to the interest rate and the penalty.
5:37:11 PM
Mr. Zager reviewed Slide 22. He discussed the issue of "get
it now" vs. "grow the pie". He was optimistic that the pie
could be grown. He observed that consultants would someday
leave and "we will be left to deal with our decisions". He
maintained that over the coming years, investors would vote
with their dollars. He emphasized that the original
industry support was astounding, however, investors are now
concerned with the House Resource version of HB 488. He
expressed concern that the CS would discourage investment in
Alaska.
Mr. Zager summarized that Chevron could not support the CS
in its current form. He urged the committee to return to
the original PPT terms, while inserting a Cook Inlet
provision. He recommended inclusion of an additional 5%
capital credit (20/25) for heavy oil or tertiary recovery
projects statewide. Chevron has been in Alaska for many
years and intends to continue an active exploration and
production operation in the state if a sound and stable
fiscal regime can be offered.
5:41:16 PM
KEVIN TABLER, MANAGER, LANDS & GOVERNMENT AFFAIRS, CHEVRON-
ALASKA, clarified that Chevron is not asking "not to be
taxed", but to maintain their current tax, without
additional tax.
Co-Chair Meyer clarified that the state receives an ELF
payment in addition to royalties, property tax, and income
tax. He agreed that the natural gas from Cook Inlet is
vital to Alaska. He also agreed that Cook Inlet is a small
amount in the whole oil production picture and suggested
that Chevron be exempted from PPT. Mr. Tabler observed that
there is a domino affect once a platform goes down. There
are number of reasons the base should be maintained.
5:44:11 PM
Co-Chair Meyer pointed out that Cook Inlet has been explored
since the 50's and estimated that if there were additional
resources that they would be found. Mr. Zager noted that
there are some potential reserves at deeper levels. There
are always possibilities.
Representative Kelly referred to SB 185 and asked how the
credits would affect Chevron. Mr. Zager responded that one
well would be affected. The intent was for a broad
interpretation. Chevron got a small part of what they
expected due to the narrow interpretation. There are
stringent limits on what qualifies.
Co-Chair Chenault noted that SB 185 was not intended for
Cook Inlet. It was modified to cover Cook Inlet.
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ADJOURNMENT
The meeting was adjourned at 5:48 PM.
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