Legislature(2005 - 2006)HOUSE FINANCE 519
03/30/2006 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 | |
| + | 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.
2:08:08 PM
Co-Chair Chenault convened the meeting of the House Finance
Committee noting that producers for ExxonMobil and
ConocoPhillips would provide testimony.
2:08:42 PM
EXXON MOBIL:
RICHARD OWEN, ALASKA PRODUCTION MANAGER, EXXONMOBIL & VICE
PRESIDENT OF EXXONMOBIL ALASKA PRODUCTION, discussed
ExxonMobil's concerns with the committee substitute, CS HB
488 (RES). [Testimony on File].
ExxonMobil has had a presence in Alaska for over a half
century, investing more than $11 billion dollars in the
State's economy. Currently, ExxonMobil has working
interests in Prudhoe Bay, Kuparuk, Endicott and Granite
Point. ExxonMobil's current working interest oil production
is approximately 180 thousand BD and is the largest owner of
the discovered gas resource.
Mr. Owen noted they are proud of the role they have played
in Alaska through:
· Exploration
· Initial Field developments
· Construction of Trans-Alaska Pipeline System (TAPS)
· Development of new technology
· Promotion of efficient reservoir management practices
Today, ExxonMobil's production from Alaska represents
approximately 4% of the worldwide oil and gas produced,
primarily from Prudhoe Bay and nearby satellite fields.
Prudhoe Bay, along with Point Thomson, has significant
remaining potential.
Changes in the taxation regime for oil directly impacts how
ExxonMobil views stability of the Alaskan fiscal
environment, which in turn, impacts the evaluation of
ongoing investment decisions. Tax systems need to be
designed to ensure the desired objective of resource
development. Quality of resources means the size and nature
of the oil and gas reservoirs, the cost & technology
required to develop those reservoirs, the distance to
market, as well as the tax and royalty system that applies
including long-term stability of the system.
2:13:14 PM
Mr. Owen continued, HB 488 as proposed by the
Administration, represents a significant tax increase on the
industry. ExxonMobil is concerned that a higher tax rate
could prevent some of Alaska's remaining resources from
being developed. He reiterated, too high a tax rate
discourages investment. When the State limits or reduces
the benefit that companies can achieve from upside factors,
the State reduces the attractiveness of those investment
opportunities. ExxonMobil recommends the focus of the bill
be encouragement of investment and the growing production.
2:14:55 PM
Mr. Owen pointed out the committee substitute elimination of
transition provisions. The benefits from a typical oil and
gas investment need many years to be realized. Satellite
and territory recovery investment decisions by the company
during the last five years, were made under the Economic
Limit Factor (ELF) structure, anticipating a lower tax
relative to that proposed under the Petroleum Production Tax
(PPT) bill. The original proposal of HB 488 recognizes it
is not appropriate to increase taxes on investments without
providing some form of consideration to the Industry. The
provisions in HB 488 contain a 5-year transition period into
the proposed PPT system. That is reasonable.
2:16:16 PM
Mr. Owen said ExxonMobil was prepared to move forward under
the original proposed system, HB 488, as it seeks to provide
a balance of revenues to the State and producers across a
range of oil prices, providing sufficient incentive for
producers to undertake exploration and development risks; it
also includes reasonable transition provisions for past
investments.
He commented the quality of the resource, the risks
undertaken by a producer, and the impact on the State's
overall investment climate, should be factored into the
design of a tax system. While the industry needs
predictability and durability from which to gauge investment
decisions, the attractiveness of that predictability and
durability is lost if it comes at too high a cost.
Mr. Owen urged support of the bill as proposed by the
Administration.
2:17:46 PM
Representative Hawker asked if ExxonMobil would support CS
HB 488 (RES) if it were the version passed out of the House
Finance Committee. Mr. Owens replied that when the bill was
changed, there were implications, which need further
consideration & negotiation. He maintained that increasing
the tax structure undermines the health of the Industry.
2:19:34 PM
Representative Holm asked about the removing the transition
provision. He asked what price oil the provisions were
based upon. Mr. Owen replied that they were based on
investments made, in which the company anticipated a revenue
stream, which the tax structure was in place. The Petroleum
Production Tax (PPT) legislation proposes to change that
structure. He argued that revenue streams from those
investments will take many years from start to return, and
that some of the actual oil expected from the enhanced
recovery projects has not come to fruition.
2:21:35 PM
Representative Holm asked how ExxonMobil responds that the
people of Alaska have waited seventeen years for a Court
resolution for consequences of the spill. Mr. Owen said it
was not his intent to discuss that; he only intended to
discuss the PPT bill and the future of oil and gas
development throughout Alaska.
2:22:30 PM
Representative Joule inquired about the transition phase, as
it exists in other parts of the world. Mr. Owen
acknowledged some, noting five examples. He offered to make
the information available to the Committee.
2:23:26 PM
Representative Kelly inquired about the investment "crawl-
back" being considered by the Senate. Mr. Owen said it is
difficult to determine how that will work. On the Senate
side, it is a plan to tie the transition to future spending.
The revenue stream is not obvious at this time and the
proposed legislation creates a change from one system to a
new tax system. The original bill made the transition based
on calendar years, which was an effective mechanism.
2:25:15 PM
Vice Chair Stoltze referenced the dead-end response from the
query made by Representative Holm. He asked if there would
be further consideration regarding the spill litigation.
Mr. Owen replied that this meeting was not the appropriate
forum for that discussion.
2:26:06 PM
Co-Chair Chenault asked when the actual negotiations began
on the PPT with the Administration. Mr. Owen advised that
from the beginning, ExxonMobil made it clear both to the
public and the State that predictability & durability were
necessary for the gas pipeline to move forward. As soon as
negotiations started, ExxonMobil began to talk with the
Administration about the "stability" surrounding oil terms.
2:27:21 PM
Co-Chair Chenault asked when if Alaska to date has been a
stable environment for ExxonMobil to work. Mr. Owen
responded that he did not have a personal history with the
entire industry. During the period of the Economic Limit
Factor (ELF), there was stability in the year round oil
taxes; however, nearly every year, there is discussion to
change it.
2:28:34 PM
Co-Chair Chenault agreed, however, in the worldwide arena,
there must be similar conversations occurring. He thought
that during the past six years, there has been continued
stability. He emphasized that the State of Alaska has been
stable in how they have treated the oil industries. Mr.
Owen agreed, and asked that his comments were not reflective
of the current situation but what could happen over the next
ten years in relationship to predictability, durability and
stability. He indicated that ExxonMobil was looking at a
huge initial investment over the next ten years; for that to
be possible, it requires a guarantee of large returns over
the next fifty years.
2:31:40 PM
Representative Kerttula reiterated the emotion of statewide
disappointment from ExxonMobil, resulting from their
behavior with the oil spill and the lack of settlement over
the last seventeen years.
Mr. Owen replied to comments made by Representative Kerttula
that there are different tax structures that could be put in
place. The Administration has testified about the
structural issues associated with the existing system.
There are many different systems that could be put in place
and the one made by the Administration could work in Alaska
and it would be appropriate.
2:34:01 PM
Representative Kerttula pointed out the lack of definition
contained in the Governor's legislation. She believed both
groups could better define it.
2:34:19 PM
Co-Chair Meyer referenced the heavy oil existing on the
Alaska North Slope (ANS) and asked if the best way to access
it would be by keeping the tax rate down or raising the
credit portion. Mr. Owen said both are important, but
ultimately, the tax rate is the most important. The tax
credit is a way to reduce the barrier for investment.
ExxonMobil attempts to get a guaranteed revenue stream for
that investment. A tax rate could impact the revenue stream
for the entire life, while a credit rate only eases the
investment. Ultimately, they must be balanced. The
investment credit has the ability to impact the rate of
return, reducing up-front investment.
2:36:01 PM
Co-Chair Meyer pointed out that the House Resource Committee
(HRC) version of the bill uses the West Texas Intermediate
(WTI) gauge rather than the ANS. He asked how ExxonMobil
felt about that. Mr. Owen explained that WTI has a
different crude mix to the ANS. It is not representative of
the ANS crude. It is more appropriate to make the tax based
on the mark attempting to actually be taxed. The market is
based on sale contracts, based on price. ExxonMobil does
not discuss price or price outlooks with any of their
competitors. The West Coast market is more of a refinery
market; where crude is sold is a real market. He did not
believe that there had been manipulation of that market.
2:40:08 PM
Representative Kelly asked about the progressivity aspect
added by the HRC. Mr. Owen stated that he did not like
either option or the 25% tax rate. ExxonMobil only supports
the 20% rate with no progressivity. Representative Kelly
thought that a 25% rate would be better for "bad times" in
Alaska.
2:42:09 PM
Mr. Owen replied that the 25% rate was damaging for the
Industry. He urged a base tax rate, stating that
progressivity does not work for the Industry. As the cost
of oil rises, the State continues to receive a higher share.
2:42:54 PM
Representative Joule pointed out that ExxonMobil is the
"long range fiscal plan" for the State of Alaska and that it
does not leave the State many alternatives to finding a
healthy balance.
Mr. Owen recommended that the idea of the long-range fiscal
plan, including the Industry, would be a helpful discussion
for the State to have. Ultimately, the tax system the
Legislature is attempting to come to terms with needs to be
one that addresses resources that exist in Alaska and that
will provide a long-term health for the Industry. Also, the
prize for the State would be getting volumes, royalties and
taxes.
2:45:33 PM
Representative Hawker commented on progressivity. He
counseled Mr. Owen that nothing would pass out of this Body
that does not contain a progressive structure. He noted
that the Governor's proposal would not happen and that the
progressive mechanism proposed by the House Resource
Committee was a preferable alternative at this time. Mr.
Owen replied, ExxonMobil encourages the House Finance
Committee to explore something progressive, reasonable &
desirable. Representative Hawker said that since the PPT
was designed for profitability, the aspects of that
principle must be considered.
2:48:19 PM
Representative Hawker argued that the account receipts do
not factor in inflation. He requested comments for a net
base scenario.
2:48:59 PM
Mr. Owen responded that discussion was hypothetical and that
moving to progressivity brings a whole new range of issues
and does not take into consideration implications. He
warned that it should be addressed carefully.
ATEASE: 2:50:02 PM
RECONVENE: 2:56:53 PM
CONOCO-PHILLIPS:
JIM BOWLES, PRESIDENT, CONOCOPHILLIPS-ALASKA, commented that
ConocoPhillips supports the bill proposed by the Governor as
it brings a fair balance to the table, which effectively
doubles tax for the oil companies. Mr. Bowles noted concern
with the bill from the House Resource Committee (HRC),
pointing out that nearly every component had been changed.
He listed the negative changes:
· The base tax rate changed with the escalation of the
porgressivity;
· The WTI pricing presents a negative change;
· The transition is a negative change.
Many people think that there would be only a 2-3% change in
government take; however, the proposed changes result in
substantial dollars removed for each Industry involved.
3:00:11 PM
Mr. Bowles referenced the handout. (Copy on File). The
first slide indicates the government take represented in
billions of dollars. The bottom of the slide illustrates
the amounts for each of the following:
* The current ELF system,
* The original bill,
* The HRC version, and
* The Senate version.
He pointed out that the proposed bill indicates the doubling
of taxes - extra $20 billion dollars over a 20-year period
for the State of Alaska. HRC version proposes basically a
tripling of those taxes; the Senate Committee substitute
would impose 3.5 times taxation.
Mr. Bowles emphasized that the base effective tax rate is
the key component of the business.
3:02:07 PM
Mr. Bowles referenced Page 2, which demonstrates how the
link works for making decisions - Investment beats Tax. He
stressed that tripling taxes on Alaska's #1 economic engine
is not a winning move. He commented on the State taxing
Industry to a breaking point and then backing off just below
the breaking point, actions which "trouble" ConocoPhillips
and the overall Industry. Any tax change has an incremental
effect on how business is done.
3:04:11 PM
He agreed that there should be a competitive government take
with respect to business around the world; however, he
warned that the competitive peer group should be
investigated very closely.
Mr. Bowles acknowledged that Industry profits are high but
the State needs to consider the amount of investment costs
associated with getting the royalty, State taxes and
statewide charity and educational program contributions.
3:06:05 PM
Mr. Bowles acknowledged that ConocoPhillips-Alaska has a
vested interest in what comes out of the tax bill. They are
the largest oil and gas producer in the State. He pointed
out that they employ 500 statewide employees.
ConocoPhillips is:
· Alaska's #1 oil producer
· Alaska's #1 gas producer
· Alaska's #1 explorer
· Largest owner of State and federal leases
· Largest industry-community supporter
· Largest royalty and taxpayer
· Key employer in the State
3:07:57 PM
Representative Weyhrauch asked if ConocoPhillips could
quantify their total investment under the original HB 488.
Mr. Bowles could not. He noted they could provide a better
insight regarding how investment decisions were made. The
assurance is looking at their track record in Alaska.
3:09:42 PM
Representative Hawker inquired about the tripling of taxes,
as indicated on Slide 1. Mr. Bowles responded that at the
$40 dollar rate, taxes would be doubled and that would be a
substantial change.
3:10:48 PM
DAVID BRAMLEY, BUSINESS CONSULTANT & ASSOCIATE, VICE
PRESIDENT - CRA FOR INTERNATIONAL ISSUES, acknowledged his
history with ConocoPhillips and CRA International, a
business firm specializing in economic strategizing.
Understanding the application of the E&P fiscal systems and
their business implications is fundamental to his work.
At the request of ConocoPhillips, CRA International has
analyzed Alaska's proposals for fiscal change in comparison
with the fiscal environment in other Organization for
Economic Cooperation and Development (OECD) regions that are
also mature and are significant oil and gas producers. They
identified a comparable group of international oil and gas
producing areas and compared those fiscal systems in context
with underlying economic potential and current levels of
investment. Through the comparisons, they sought to
illustrate how well Alaska's fiscal system is aligned to the
economic realities of the region.
3:14:04 PM
Mr. Bramley explained that the proposed changes to Alaska's
fiscal system support new investment. He spoke to the
impact of the fiscal changes on investor decisions making.
All potential investors in the Alaskan oil and gas business
make their decisions on capital allocation in the context of
a larger portfolio of choices about where to invest,
covering a range of competing options.
3:16:35 PM
Mr. Bramley compared Alaska's fiscal proposals in
relationship to overall government take of net cash flows
from investing in new opportunity areas. The analyses
provide an effective high-level view of the impact on the
investment of current and proposed fiscal terms. Comparing
Alaska's fiscal proposal to other mature OECD producing
areas is the basis for a realistic appraisal of the impact
on investment.
3:19:21 PM
Mr. Bramley reviewed Slide 4, indicating Alaska's production
decline by 6% between the years 2000-2004. Petroleum is an
extractive industry and the overall economic potential of an
area is a function of the hydrocarbon reserves present and
the technical and operational costs required to bring oil
and gas to market. The relative level of maturity and
remaining prospetivity of Alaska versus the other OECD areas
is therefore an important factor in defining the context for
comparisons of the fiscal regimes. Overall production of
oil and gas from an area rise to a peak and then undergo a
long steady decline. There are exceptions to that pattern,
in which the United Kingdom (UK) is one.
3:21:24 PM
Dr. Bramley reviewed Slide 5, the remaining oil and gas
reserves and their size relative to past production from an
area is a fundamental measure of maturity. The figures
reflect gas in the tank, although any Industry insider would
acknowledge how elusive and verifiable reserve figures are.
The bar chart indicates historic oil and gas production &
estimates of remaining production of remaining reserves.
3:22:24 PM
Mr. Bramley highlighted Slide 6, the reserves and reflecting
how successful an area is in replacing its year-by-year
production with proved petroleum reserves. The chart shows
the comparison group. Only Alaska has failed to replace
production on a proved reserve basis over the past 10 years.
3:22:47 PM
Mr. Bramley referenced Slide 7, which indicates the pattern
of new field developments in an area giving another measure
of potential to add to the producing base and arrest long-
term production decline. The chart shows the number of new
fields brought on stream in each of the comparison areas and
the average size of those new fields. Alaska has the lowest
number of new producing fields with the smallest size
amongst the whole group.
3:23:25 PM
Mr. Bramley spoke to Slide 8, looking at exploration
activity. Alaska clearly lags behind the other conventional
oil and gas areas in the comparison group both in terms of
number of exploration wells drilled and success rate.
Canadian oil sands were excluded from the comparison since
exploration there does not make good business sense with the
major resources already discovered but undeveloped.
3:23:50 PM
Mr. Bramley commented on Slide 9. Based on recent
development history and the available set of forthcoming
opportunities, seeks to develop a profile of a "typical
field" in each area. It is a helpful way of characterizing
an area's economic potential and a good base for later
calculations of government take in economic terms. The
results are shown in the tables.
3:24:51 PM
Mr. Bramley continued, Slide 10, draws together all of the
observations of maturity and indicates the overall trends.
Alaska emerges in a predominately red category. Alaska has
little remaining economic and resource potential. It does
have areas under review, ranking low in that group.
Maturity analysis raises concerns about the impact of
Alaska's existing fiscal terms.
3:26:24 PM
Mr. Bramley highlighted Slide 11, which provides a direct
comparison of total government take throughout field life
for the representative fields of each area. To calculate
involved determining a relevant fiscal system dividing the
cash flow from a new field between the government and the
company investor. Overall government take is a good measure
of the share of the economic value of a field that is
captured by that fiscal system. The chart shows overall
government take for each region, plotted against the unit
technical cost of representative fields.
3:28:52 PM
Mr. Bramley continued, Slide 12, adds a color code to
reflect relative levels of maturity and suggests Alaska's
positioning is problematic - a mature region with a high
cost base and with relatively high government intake.
3:30:52 PM
Mr. Bramley continued, Slide 13, points out that Norway is
the only country in the comparison group with levels of
government take higher than the Alaska proposals; used as an
example, since Norway has been citied in previous testimony
as an area with strong similarities to Alaska. Norway is
significantly less mature than Alaska for conventional
resources. There are a number of structural and policy
factors that are relevant:
· Norway has chosen to give incentives for exploration
· Norway's upstream petroleum industry remains highly
concentrated and is led by largely government-owned
companies
· Norway has pursued a policy of 'measured
development'
3:34:03 PM
Mr. Bramley spoke to Slide 15, indicating the fiscal
response to changing oil price is an important
consideration. The base price considers oil at $35 dollars
per barrel. He urged that both a higher and lower scenario
be considered to reflect the way investors make decisions,
and in order to capture the full range of possibilities that
may affect future investment in Alaska. The chart
illustrates the regressive nature of both the current and
proposed fiscal systems. The regressive feature of the
Alaskan regime is not helpful in supporting positive
investment decisions.
3:35:35 PM
Mr. Bramley continued, Slide 16 observes the regressive
nature of the Alaskan regime and manifests itself in the
context of changing costs. The chart provides an
examination of the effect of higher and lower capital and
operating costs on total government take. As the costs
increase, so does the total government share.
3:36:09 PM
Dr. Bramley explained that is not a helpful combination in
supporting investment decision-making.
3:36:40 PM
In response to a question by Representative Hawker, Mr.
Bramley explained that the point of inflection rests at the
$35 dollar per barrel price; three points have been modeled
also including $40 & $50 dollars. There is always a
continuous curve.
3:37:57 PM
Representative Kerttula pointed out that Dr. Van Muers came
up with an opposite conclusion, indicating that Alaska was
highly enticing for new entrance; she asked the difference.
Mr. Bramley did not believe there was a difference in
interpretation of the roles or the cash flows. The
conclusions could be different because of the way they were
basing their judgment of fiscal competitiveness on the total
government take, which is important to investors. They were
more detailed on their expectation of economic potential in
Alaska in terms of field size and the unit cost in basic
analysis.
Additionally, ConocoPhillips has a different view on the
investment behavior. Other consultants have based their
models on threshold comparisons. ConocoPhillips bases
theirs on the market and the affect of fiscal take. If the
price goes up, the tendency to buy will go down, which might
result in a migration of capital.
3:42:21 PM
Representative Kerttula asked if factors for including small
companies had been added. Mr. Bramley affirmed and pointed
out the significance of price breaks for those smaller
companies. There are important questions regarding the
growth of those portfolios.
3:43:07 PM
Representative Kerttula questioned if ConocoPhillips had
factored in access to the facilities and the pipeline
corridor. Mr. Bramley affirmed that those elements had been
factored as part of costs doing business in Alaska.
3:43:49 PM
Dr. Bramley stated that Slide 18, considers the impact of
the new proposals on future investment; it is essential to
consider where Alaska future potential actually lies. The
table indicates that Alaska is in the unusual position of
having the majority of its resource potential in the form of
known but undeveloped hydrocarbons, currently, the
uneconomic heavy oil and gas resources. There is major
potential in incremental and improved recovery from
producing fields. Each element is larger than the resources
available through new exploration and undeveloped
conventional oil. Conclusions from the study of Alaska's
investment attractiveness within the OECD group, is that new
proposals will inevitably reduce future investment.
3:45:26 PM
Representative Hawker questioned how any increase in taxes
[including PPT] could provide an incentive toward
production. Mr. Bramley acknowledged that the increase in
tax goes directly to the overall government take. The
difference rests between the original and the proposed HRC
version.
Representative Hawker observed the PPT paradox. Mr. Bowles
commented there was no difference between ConocoPhillips and
the other companies. He spoke to the credit uplift, which
masks the underlining problem against the tax rate. Credit
cannot offset the underlining issues. ConocoPhillips can
only move the needle so far on the credit side and that the
underline, base investment will come from the larger fields.
The key driver is the base tax rate.
3:49:18 PM
Representative Kerttula asked which was the more important
factor:
· Entrance
· Tax rate
Mr. Bramley replied that they could not provide a definitive
answer one way or another. Each situation has issues of
access, and is not unique to Alaska. Mr. Bowles added that
there is full access capability to the pipeline and with
respect to facilities; Pioneer is the new entry player.
There is no facility access question.
3:50:56 PM
Representative Kerttula inquired how other places around the
world tackle these concerns. Mr. Bramley responded, there
is no indication that Alaska is not working.
Representative Kerttula pointed out the number of so few new
fields. Mr. Bramley responded that the infrastructure is
the complex networks created. It is difficult to draw
analogies from that; the Alaskan situation is not
fundamentally different from the others.
Mr. Bowles added, the lack of field size prospects is a key
driver. The availability of large structures, facilitate
new field developments. New field capability creates a
better environment for small developers to enter.
3:53:48 PM
Representative Kerttula observed the attractiveness of
Alaska; she asked if the profit rates had been considered
over proposed costs. Mr. Bramley replied that is inherent
in the manner in which the analysis is done.
3:55:08 PM
Representative Foster mentioned the boost to Alaskan economy
& the "golden egg" potential and how those things affect
marginal fields. Mr. Bowles agreed. ConocoPhillips hopes
for a clear and fair tax rate to help drive new players into
the State.
3:56:33 PM
Representative Kelly addressed credits versus progressivity.
Mr. Bowles replied that all companies have indicated that
the base tax rate is the most important consideration.
Progressivity moves the tax rate up, which has an impact on
investment decisions.
3:59:22 PM
Mr. Bramley pointed out Slide 19, suggests an appropriate
level of government take. Based on the analysis, the
Industry believes that the balance of the current proposals
is slanted towards short-term revenue collection over the
stimulation of new investment.
Slide 20, highlights that increasing Alaska's oil and gas
taxes comes with a price:
· The dilemma of balancing revenues and investment
· Alaska is mature, but has undeveloped potential
· Current fiscal proposals do not help competitiveness in
the OECD peer group
Mr. Bowles recognized the dilemma of balancing revenue and
investment and the work has focused on the question of
investment. Alaska is mature and has enormous remaining
potential, but the challenges to access that are huge.
Current fiscal proposals do not help competitiveness.
4:01:12 PM
Representative Kelly asked if there was a way to analyze the
shape of the curve. Mr. Bramley did not think so.
4:03:40 PM
MARIANNE KAH, CHIEF ECONOMIST, CORPORATE CONOCOPHILLIPS-
HOUSON, TEXAS, spoke to the investment criteria used and how
the tax bill would appeal or not appeal to ConocoPhillips.
Typical investment criteria components are:
· Prospectivity
· Costs
· Cycle time
· Taxes
· Legal regime
4:05:52 PM
Ms. Kah continued - Slide 2, the investment criteria in
relationship to Alaska's rating:
· Small expected field size & lower value heavy & high
sulfur crude
· High exploration, development and production cost and
high transportation cost
· Long lead times
· High tax rates given prospectivity & cost
· Recent concern about stability of fiscal regime
· Strong rule of law/political stability
· Concern about changing tax rate without grand fathering
recent investment
4:07:06 PM
Ms. Kah noted Slide 3 - the global average commercial
discovery size in comparison to other countries around the
world. The Alaska North Slope (ANS) has limited
prospectivity and the tax rates need to reflect that.
4:07:35 PM
Representative Holm pointed out the presented investment
criteria does not indicate a return of investment. Ms. Kah
explained that the value, which comes at the end of the
criteria, is the return on investment. All of those items
are the components.
4:08:14 PM
Representative Kerttula referenced stability & the tax
rates. She suggested it be considered that Alaska has
maintained the same tax rate for fifteen years. She assumed
that whatever is put in place at this time will likely be
working for many years. Ms. Kah stated that they do give
Alaska credit for the stable fiscal terms, acknowledging
there had been no major change for more than thirty years.
The corporate world wants to guarantee that if there is
transition, the Industry is treated fairly.
4:09:13 PM
Ms. Kah continued, Slide 3 provides a chart, indicating that
exploration is important. ConocoPhillips will continue to
explore in Alaska. She pointed out that the core fields
still produce over 80% of the total North Slope production
into 2015. Significant capital is needed to maintain the
infrastructure as well as for drilling and well work. It
could be many years before the full potential is reached.
Technology to develop resources requires huge capital and
resources. She warned that if members were interested in
Alaska's future, they should be interested in keeping the
major Industry investors in the State.
4:10:36 PM
Representative Weyhrauch referenced benefit "grand
fathering" of costs. Ms. Kah stated that "grand fathering"
implies that if you invested under the old regime, you keep
those terms; she realized that was not possible so the
alternative is transition credits.
4:11:24 PM
Representative Joule asked if that concept was true for the
effective date. Ms. Kah said that was a different matter,
regarding whether past rules apply. It would be consistent
that the principle of no retroactivity should be applied to
things moving forward. Representative Joule understood, but
did not agree.
4:12:49 PM
Representative Kerttula maintained that during the five
years, surely some costs could be amortized. Ms. Kah
advised that when ConocoPhillips makes investments, they
factor in price risk. She referenced Alaska attempting to
"punish" companies. Investments take many years to pay off.
It is not fair to use the new tax regime with expectation
and price risk included.
Mr. Bowles pointed out that last year when the tax structure
changed, ConocoPhillips was in the process of making
satellite investment decisions. They were unable to make
the decision on the premise that those fields could be
aggregated. They sought out State assurance that they would
not be aggregated and went forward with development
decisions based on the tax at that time. Those fields have
not yet produced.
4:16:05 PM
Representative Kerttula pointed out the incredible profits
that they have received in Alaska over time. She did not
understand why those considerations had been made. Ms. Kah
advised there have been years of good profits, which offset
the years when there were none. It is hoped that on
average, they earn above the capital return. The truth is
that the Industry over the past 20-years has not earned a
higher return than many others.
4:17:24 PM
Representative Hawker emphasized that profit is not a bad
word and acknowledged that there have been poor returns for
some years.
The Governor's version contains a five-year transition look-
back; the original HRC version had a three-year look-back
but what actually passed was a three-month recovery. He
asked what the Industry wanted. Ms. Kah replied that five-
years is relevant because that is the amount of time it
takes on the slope from the time of the initial capital
investment to the time the revenues actually start to come
in. Mr. Bowles indicated his respect for the HRC version,
however, the Senate version recognizes transition and
incentive investments in the future. Representative Hawker
was troubled with the 5-year option.
4:20:58 PM
Ms. Kah referenced Slide 4, which indicates increased
production costs and that Alaska is the highest cost region
in the portfolio. Costs in Alaska are rising at a greater
rate than other areas, because of the aging infrastructure
and the declining field size.
4:21:52 PM
Ms. Kah continued Slide 5, showing Alaska with high costs
and high taxes. Countries with no costs and no taxes are
the ones that are really trying to attract investment. The
quadrants are as follows:
· Low Cost - Low Tax
· Low Cost - High Tax
· High Cost - Low Tax
· High Cost - High Tax
She foresaw Alaska moving into the quadrant with high costs
and high taxes, which discourages development.
4:23:53 PM
Ms. Kah highlighted Slide 6, which shows Alaska with high
cost, high tax and low prospectivity and development
indicating that only the government takes.
4:24:20 PM
Representative Hawker referenced the MacKenzie projections.
Ms. Kah disagreed with the Daniel Johnson testimony. She
understood him to say that if the government participates at
all, it should be a government take. From the point of view
of ConocoPhillips, if the government is paying their way as
an investor, why should that then be a government take. She
agreed if the government was being carried through the
exploration; that is why some countries were removed.
MacKenzie is more representative of the industry and is more
mainstream.
4:26:36 PM
Representative Kerttula asked about "carried equity". Ms.
Kah explained that sometimes the government has the right to
"back-in" to a development prospect once discovered; in that
scenario it becomes a form of government take. The main
point is it does not change the answer, merely the details.
4:27:25 PM
Representative Kelly noted that Alberta is not shown on the
slide. Ms. Kah replied they have substantial royalty relief
and attractive fiscal terms.
4:28:03 PM
Representative Hawker asked what "development only" meant.
Ms. Kah explained it does not include exploration or lease
bonuses.
4:28:31 PM
Ms. Kah noted Slide 6, which adds bubbles; the size of the
bubble indicates the prospectivity.
4:29:24 PM
Ms. Kah disagreed that taxes can be raised without affecting
investment, as some consultants have suggested. She noted
three reasons that it will affect investment:
· Reduces after-tax cash flow available for investment
· Adversely changes risk/reward balance
· Capital goes elsewhere to:
· Other countries
· Other energy sources
· Other industries
4:32:46 PM
Ms. Kah reviewed the major upstream projects for investment
from 2005 through 2011+ being considered by ConocoPhillips.
Investment in Alaska must attempt to compete with the other
areas around the world. A tax rate needs to be comparable.
4:33:31 PM
Ms. Kah discussed Slide 9, clarifying what is wrong with
windfall profit taxes. Windfall profit tax introduces a lot
of distortion, decreases investment and doesn't achieve the
goal intended. She observed opposition to the tax by
elected officials and the 250 economists. She noted that a
non-partisan congressional research service concluded that
windfall profits tax on domestic crude oil removed $79
billion dollars in gross revenues from industry, reduced
domestic oil production by up to $1.6 million dollars and
generated 20 percent of expected gross revenues.
4:36:17 PM
Representative Hawker observed that Ms. Kah had made a
strong argument against windfall taxes. He noted that
progessivity is inevitable and questioned if ConocoPhillips
concerns could be alleviated by the net profit tax. Ms. Kah
responded that neither alternative is attractive as it would
not be inflating the base. To attract investment, that
would not work.
4:37:55 PM
Ms. Kah reviewed Slide 10, project economics in development.
(Impact of Progressivity on Risk/Reward Balance). She
observed that a "tornado chart" was created in order to see
the range. A series of simulations were run to see the
expected value of the project. If a windfall profit tax is
introduced, the upside is taken away and both the up and
downside are taken into account.
4:40:25 PM
Representative Hawker questioned if the profit tax remained
on the net, would the bar remain balanced. Ms. Kah observed
that inflation would be reduced, but the upside would still
be reduced.
Representative Hawker questioned if progressivity started at
$50 dollars on the net, and escalated to $120 dollars,
taxing at 80 percent. Ms. Kah responded that the upside
would be 80 or 90 percent. The company never sets one
price. She estimated that it would still be 90 percent.
Representative Hawker observed that the State of Alaska is
attempting to take a bigger chunk of the profits. He
questioned if a plateau were established if the results
would not be as eschewed. Ms. Kah responded that there
would then not be an investment. ConocoPhillips counts the
upside price risk and gives it a 25% weigh in;
ConocoPhillips is in the business of managing risk and the
upside is essential in the project value.
4:44:46 PM
Representative Hawker requested more information on the
definitions of "upside".
4:45:05 PM
Representative Holm observed that if the price analysis had
been done 14 months ago, what would the highs & lows be. He
guaranteed that ConocoPhillips would not have achieved the
current level and maintained that the models for the
investment had been made on a reduced level. The State
government does not own the oil; the citizens of Alaska own
that oil. A different climate exists today. The State is
not taxing the industry. He felt that as the value grows,
the profits should also grow.
4:47:24 PM
Ms. Kah observed that Slide 11 illustrated finding
development and production costs. Some of what is seen, as
a windfall tax is actually higher reserve replacement costs.
Development costs have doubled. She maintained that $25
dollars a barrel needs to be added up-front in terms of
investment. No compensation is included in the cost of
capital. Replacement cost is usually stated in terms of WTI
and that crude is not as valued as WTI, which increases
costs. Replacement costs today are over $50 dollars a
barrel. There are estimates of replacement costs of $50 -
$60 dollars. Spending levels and costs continue to rise, as
does inflation. ConocoPhillips is facing high replacement
costs. There have been increases in steel prices. The
industry is investing in prospects that are smaller, more
complex and more remote. Costs are not going down. She was
concerned that the windfall would only be used for the
higher replacement cost environment.
4:50:53 PM
Ms. Kah summarized Slide 12:
· Current tax rate is already uncompetitive given cost
and progressivity;
· Proposed tax increase will reduce investment and
production in Alaska; and
· U.S. federal windfall profits taxes lowered production
and failed to produce expected revenues.
Ms. Kah concluded that ConocoPhillips has been a long-term
investor in the State and wants to be part of Alaska's
future.
4:52:21 PM
Mr. Bowles recognized the difficult task of the Legislature,
but emphasize the key points:
· Higher taxes have a direct impact on investment,
· The 20 percent tax rate strikes a good balance, and
· Windfall profits tax do not encourage investment.
4:54:08 PM
Representative Hawker summarized previous testimony [from
the Administration] that stability is needed and PPT is the
key. He questioned if ConocoPhillips would be willing to
move forward on the gas line without a PPT bill. Mr. Bowles
said they reached agreement with the Governor, without the
PPT legislation. ConocoPhillips is now more nervous
regarding the climate of the State, given the current PPT
proposals.
4:57:03 PM
Representative Kelly did not understand why the proposal was
considered a tax given the contract of cost of goods sold
and how the value changes.
4:59:17 PM
Representative Holm observed a handout he distributed.
[Copy on File]. The handout indicates that ConocoPhillips
made $11 million dollars yesterday [3/29/06]. He commented
things are not as bleak as the information being presented.
He wanted a guarantee that the value for the people of
Alaska was realistic.
5:00:59 PM
Representative Hawker asked if the accountants for
ConocoPhillips had been consulted about the possibility of a
major tax date change without regulations promulgated by the
State. Mr. Bowles agreed with the complexities and
acknowledged the concerns. He urged a reasonable timeframe.
Representative Hawker recommended regulations are in place
first.
5:02:33 PM
Representative Joule spoke to a process, supported by the
Industry, excluding the Legislature. That bothered him. He
asked everyone to keep an open mind in the negotiation
process. Mr. Bowles recognized that and the role of the
entire State. The initial intent was to layout the
Industry's process in relationship to the formation of
taxation.
5:04:42 PM
Representative Foster commented on comparison with aviation
business and how the net profits work seasonally. He was
outraged with proposals submitted by the Committee.
Representative Weyhrauch agreed that profit is important.
He added that any law could be amended down the road.
HB 488 was HELD in Committee for further consideration.
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