Legislature(2011 - 2012)BARNES 124
02/16/2011 01:00 PM House RESOURCES
| Audio | Topic |
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| Start | |
| Overview: Alaska Oil & Gas Producers | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
OVERVIEW: Alaska Oil & Gas Producers
[Contains discussion of HB 110]
1:03:55 PM
CO-CHAIR SEATON announced that the only order of business is
presentations from the oil and gas industry.
1:05:05 PM
MARILYN CROCKETT, Executive Director, Alaska Oil & Gas
Association (AOGA), noted that AOGA is the oil and gas trade
association in the state of Alaska. Its members include the in-
state explorers and producers, the three in-state refiners, and
Alyeska Pipeline Service Company. She said AOGA's goal is to
have a vital oil and gas industry that contributes to a vibrant
economy for the state (slide 3). The association provides a
forum for discussion and consensus on various policy positions,
including HB 110.
MS. CROCKETT related that production from currently producing
fields will continue to decline over the forthcoming years
(slide 4). The new oil projected to come on line in the future
includes production from current units of these fields. She
explained that the apparent flattening of the production decline
is based on projections from the Department of Revenue (DOR),
and while the department does a good job of forecasting, no
forecast is 100 percent accurate.
1:08:55 PM
MS. CROCKETT, in response to Representative Gardner, said that
the new oil depicted on slide 4 does not include production from
the federally owned outer continental shelf (OCS). In further
response, she said she will be showing slides later in her
presentation that depict what new production from the OCS would
do to the curve of the production decline. She clarified that
slide 4 is based entirely on DOR's projections.
MS. CROCKETT, returning to her presentation, pointed out that in
[2020] half of the state's production will come from existing
fields and half from new oil.
MS. CROCKETT compared the Department of Revenue's 2005
production forecast with today's production forecast (slide 5).
For the year 2010, the 2005 DOR production forecast was for
832,000 barrels of oil per day, while the 2010 DOR forecast was
for 644,000 barrels per day, a decline of 188,000 barrels a day.
For the year 2015, the 2005 DOR production forecast was for
762,000 barrels per day, while the 2010 DOR production forecast
was for 608,000 barrels per day. While DOR does the best it can
with the information it has at a particular point in time, she
said that project economics can shift. She therefore cautioned
to not get comfortable with what appears to be a flattening of
the production curve on slide 4 because history has shown the
reality is that the production continues to decline.
1:11:46 PM
MS. CROCKETT provided a further example of how production levels
may not be reflected in the estimate prepared by the Department
of Revenue (slide 6). She related a recent announcement that
production from the Liberty field has been delayed. The impact
of Liberty's delay is a reduction from the 2010 DOR production
forecast of 5,000 barrels a day in 2012, another 39,000 barrels
per day in 2013, and 31,000 barrels per day in 2014.
MS. CROCKETT noted that in 10 years, half of Alaska' production
will come from new oil (slide 7). Even with this new oil,
however, the state will still experience a decline of 124,000
barrels per day in 10 years. Almost 100 percent of the
production [in 2020] will come from oilfields that are located
within current unit boundaries. A great deal of the new oil
will come from investments within existing unit boundaries -
Prudhoe Bay, Kuparuk, and Alpine.
1:13:58 PM
MS. CROCKETT addressed North Slope oil production with
production from the OCS (slide 8). She noted that when this
slide was put together the production projection for 2007 was
greater than what actually happened. However, the slide is
still a good depiction of what would happen with OCS production,
which is that production would increase to nearly 2 million
barrels per day.
MS. CROCKETT pointed out that a challenge faced by industry in
Alaska is the long lead time associated with development (slide
9). Alaska is very remote, has a tough climate, and is away
from infrastructure. For example, Nikaitchuq took about 6 years
to come on line from the time the field was discovered, which is
an aggressive time line. Oooguruk took 5 years from discovery
to production. Liberty was discovered in 1997, but production
there has yet to start. It has been 10 years and counting since
the discovery at Alpine West (CD-5). New production takes time
to bring into the queue and no new projects are coming into the
queue.
1:16:48 PM
MS. CROCKETT noted that to get to field discovery and new
production, exploration wells must be drilled (slide 10). In
2010 three exploration wells were drilled, but only one of those
was a true exploration well for oil. The other two were wells
drilled at Point Thomson and were categorized as exploration by
the Alaska Oil and Gas Conservation Commission (AOGCC) because
that field is not in production right now. For 2011 only one
exploration well has been permitted.
MS. CROCKETT said another indicator of activity levels is the
status of lease holdings (slide 11). The total acres under
lease in Alaska include lands in the National Petroleum Reserve-
Alaska (NPR-A), state offshore, federal offshore, and the North
Slope. In 2008 the total number of acres under lease peaked at
just over 9 million acres, declining since then. [Between 2005
and 2010] the number of lease acres relinquished to the state
has increased dramatically.
1:18:51 PM
REPRESENTATIVE KAWASAKI asked how many acres have been released
in Alaska's arctic leases versus other leases across the world.
MS. CROCKETT replied she does not know, but will try to research
that information for members.
REPRESENTATIVE KAWASAKI said that to compare Alaska's tax regime
to those across the world he would like to know whether
exploration wells outside of the North Slope are being actively
drilled as opposed to within Alaska. In response to Ms.
Crockett, he confirmed that he is talking about the number of
wells drilled as well as the amount of acres under lease.
MS. CROCKETT said she will try to get the requested information,
but that information on lease holdings could be problematic
because some regimes do not have a leasing program.
1:20:16 PM
REPRESENTATIVE HERRON asked whether the leases that were
relinquished could have been an error in judgment at the time of
their selection. He requested that this information be provided
to the co-chairs.
CO-CHAIR SEATON surmised that Representative Herron is asking
whether these leases were explored, found nonproductive, and let
go or whether they were let go without exploration.
REPRESENTATIVE HERRON responded, "That helps as well."
CO-CHAIR SEATON further requested that Ms. Crockett provide the
acreage that was released by each company.
MS. CROCKETT replied that the acreage released by company is
public information and she would provide members with a map in
this regard.
1:21:44 PM
CO-CHAIR FEIGE, following up on Representative Kawasaki's
request, asked Ms. Crockett to also provide a comparison of
acres under lease that have been added to the totals. In
response to Ms. Crockett, he clarified that if companies are
relinquishing acres in Alaska it would be important to note
whether they are also relinquishing acres in other provinces or
acquiring acreage in other provinces because this would give an
indication of the relative competitiveness of Alaska.
MS. CROCKETT agreed to try to provide this information.
CO-CHAIR SEATON understood that this might be a challenge
because many places have a production sharing agreement in which
the agreement is cancelled if things do not happen within a
certain timeframe.
1:23:14 PM
REPRESENTATIVE GARDNER commented that slide 11 implies to her
that the leases were released because of Alaska's tax system.
She maintained, however, that there could be a host of reasons
for relinquishing the acreage and therefore she is interested in
who relinquished them and why.
MS. CROCKETT agreed that there are a number of reasons for why
the leases were relinquished and said she will provide that
characterization. However, she continued, there is no question
in AOGA's mind, or the minds of some of the companies that have
left the state, that a number of factors impacted their decision
to leave, including Alaska's fiscal regime.
1:24:31 PM
MS. CROCKETT, returning to her presentation, stated that AOGA
supports HB 110 and supports the governor's goals of making
Alaska more competitive, creating more jobs, and increasing
production (slide 12). She related that AOGA thinks the number
one threat facing Alaska right now is declining production
through the Trans-Alaska Pipeline System (TAPS).
MS. CROCKETT outlined AOGA's position on the elements of HB 110
(slide 13). She said AOGA supports the provision for
progressivity rates, bracketing, and tax cap. Under the current
system, each time the production tax value (PTV) increases
beyond $30 [per barrel] all dollars prior to that amount are
taxed at the higher tax rate instead of just the incremental tax
rate. The bracketing in HB 110 would not reach back like the
current system and would add stability and predictability to the
tax. As companies realize higher prices and greater production
tax value, the state would likewise continue to share in those
benefits. Additionally, HB 110 would cap the base rate and
progressivity at 50 percent of the combined rate rather than the
current 75 percent; this would motivate companies to undertake
the high risk projects on which the future economic health of
Alaska will depend. A business climate would be created where
the reward is commensurate with the risk and keeps the needs of
the producers and the state in a more appropriate balance.
1:26:41 PM
MS. CROCKETT offered AOGA's support for the provision in HB 110
that would change the calculation for the payment of tax from
monthly to annual. The current system of progressivity creates
a huge mismatch by using each month's actual gross value at the
point of production while deducting one-twelfth of the actual
expenses. This result is achieved at the annual true-up on
March 31 of the following year. In making estimated monthly
payments the mismatch is compounded because taxpayers have used
the actual gross value at the point of production for the entire
year to calculate the PTV with the estimated lease expenditures,
thus resulting in a progressivity rate for the month.
CO-CHAIR SEATON asked whether the annual true-up goes back and
calculates the actual expenses per month.
MS. CROCKETT replied it does, but it does not annualize the
production tax value; it annualizes the lease expenses that were
paid on a monthly basis based on production and the gross value
each month, and that component does not true up on March 31.
CO-CHAIR SEATON understood the true up goes back and does actual
expenses in the month they occurred.
MS. CROCKETT responded correct.
1:28:30 PM
MS. CROCKETT, turning back to her presentation, said AOGA
supports moving from a monthly calculation of progressivity to
an annual calculation to synchronize the revenues with the
expenses, avoid the mismatching, and more accurately reflect the
philosophy behind what a progressivity feature should look like.
MS. CROCKETT endorsed the provision in HB 110 that would expand
the 40 percent well lease expenditure tax credit to production
on the North Slope, a credit that is currently available only to
qualified expenditures in the Cook Inlet basin. This credit
targets qualified capital expenditures for infield drilling,
which would enhance production from currently existing fields
and this credit includes labor costs, which would impact jobs.
Additionally, the credit is a recognized, convenient, and
readily accessible accounting designation. Also, this proposal
has the advantage of an earlier effective date, thus potentially
jump starting production that is needed to stem the decline.
MS. CROCKETT noted that the proposed effective dates are of
concern to AOGA, but not enough to oppose the bill. The
effective dates differ for the various provisions of the bill
and the delay of these effective dates in a staggered fashion
does not reflect the urgency of the need for this legislation;
instead, the delayed effective dates will protract commercial
decisions over the next several years. Production decline in
Alaska is an immediate issue and the delayed effective dates for
provisions that would enhance production ignore this immediate
problem.
1:31:16 PM
REPRESENTATIVE P. WILSON inquired whether Ms. Crockett is
suggesting that all of the effective dates happen at the same
time or that they need to be sooner.
MS. CROCKETT replied that in 2012 the amendments for the tax
credit provisions become effective, in 2013 the progressivity
provisions become effective, and in 2014 the statute of
limitations shifts from six years to four years. She said she
has provided supporting testimony for those provisions of the
bill that AOGA thinks will make a difference in industry
investment, but some of those provisions would not go into
effect for two, three, or four years, which delays the certainty
associated with those particular provisions.
REPRESENTATIVE HERRON asked what the advantages are of an
immediate effective date.
MS. CROCKETT responded that the advantage is certainty. As
companies sit down to make investment decisions they will have
the certainty that they can move forward based on the law that
is on the books.
1:32:50 PM
CO-CHAIR SEATON pointed out that it will take time for DOR to
write the new regulations, and the question in the meantime is
how to have stability, continuity, and full knowledge of the
details that would be provided by these regulations when the
companies are preparing their taxes.
MS. CROCKETT allowed that that is a valid point for new
legislation establishing new ground rules. However, all of the
provisions in HB 110 already have a complementary section in
statute and regulation that would be amended. Therefore, the
effort required by the Department of Revenue to produce
amendments to the regulations and to get them adopted will be
significantly less than it would be for a brand new taxation
regime. The provisions in HB 110 would be relatively simple
changes to the current regulations.
1:35:08 PM
CO-CHAIR SEATON said he is less secure in this than is Ms.
Crockett, one reason in particular being the ring fencing that
would be introduced on the North Slope with any new developments
within existing units. Companies with both new and existing
fields will have two different [tax] rates and regulations will
be needed to direct how those expenses are taken and categorized
because right now all the expenses and credits are companywide.
Additionally, there is the bracketing provision which was seen
as a problem by industry in previous years when such jumps were
being considered. A tremendous amount of restructuring will
need to be done by DOR to incorporate those items.
MS. CROCKETT concurred that the new rate for new fields is a new
concept, but said AOGA does not see that as overwhelming in
terms of regulation drafting. Also, AOGA does not see
challenges with bracketing progressivity.
1:37:57 PM
REPRESENTATIVE KAWASAKI commented that [DOR] is still working on
some of the 2006 petroleum production profits tax (PPT) filings.
He then noted the tax regime has been changed twice in the four
years he has been in the legislature. He inquired whether AOGA
would rather have some certainty for a period of years versus
changing the tax regime every other year.
MS. CROCKETT answered that AOGA would prefer that the State of
Alaska and the legislature adopt a policy position that
recognizes that production is declining, investment is
declining, and something needs to be done about it. The two
aforementioned tax changes were significant tax increases on oil
and gas production; HB 110 represents a tax decrease on oil and
gas production and recognizes some of the challenges that
production faces in the state of Alaska. Thus, AOGA believes
that HB 110 is a step in the right direction to addressing some
of those challenges.
1:39:32 PM
REPRESENTATIVE KAWASAKI recalled previously DOR testimony that
during the first few years of Alaska's Clear and Equitable Share
(ACES) investment was up, as was the number of jobs and capital
expenditures, and the price of oil was very high at the time.
He cautioned that the proposed changes are being made without
any clear and concise information from the Department of
Revenue.
MS. CROCKETT said AOGA's concern is that time is going to pass
both the industry and the legislature by. The quest for perfect
information sounds good on the surface, but perhaps once every
piece of data and information is on legislators' desks,
production on the North Slope and in Alaska may have declined to
the point that there will be another problem to deal with in
terms of production.
1:41:45 PM
REPRESENTATIVE P. WILSON noted that the proposed base tax rate
reduction from 25 percent to 15 percent would be for forever.
She asked whether it might be wise to establish a timeline of 10
years.
MS. CROCKETT clarified that the aforementioned provision is the
proposed new rate for new fields. She said AOGA supports this
provision because it is important for developing new fields and
new players. While the incentive would still be there for a
certain provision with an expiration deadline, the degree of
certainty associated with the provision would not be there.
1:43:19 PM
REPRESENTATIVE GARDNER inquired whether the producers agree with
the state's forecast that half of Alaska's production will be
from new oil (slide 7). She also requested additional
explanation regarding the statement on slide 7 that 98 percent
of the production in 2020 will be from oilfields located in
current unit boundaries.
MS. CROCKETT replied that AOGA's observations were taken from
DOR's forecast book. She suggested that members look at the
chart in the book's appendix that has the numbers for production
anticipated year by year. Units and the satellite fields
associated with those units can be identified and the drilling
activity within those units characterized to see where some of
this new oil would be coming from as opposed to brand new
fields. She offered to provide that information to members.
REPRESENTATIVE GARDNER asked whether she is correct in
understanding that the concept of new oil from legacy fields is
that satellite fields reached from an existing unit would be
called new oil.
MS. CROCKETT responded that it is a combination of all of those.
1:45:23 PM
REPRESENTATIVE GARDNER surmised that some of the timeline
between discovery and production has to do with the U.S.
Environmental Protection Agency (EPA) and the U.S. Army Corps of
Engineers. She suggested that members think about what the
legislature can do in this regard, one such suggestion being to
get a permit coordinator at the federal level to try to keep
things moving forward. She requested that AOGA provide the
committee with suggestions in this regard.
REPRESENTATIVE GARDNER, regarding the number of exploration
wells drilled on the North Slope, stated that the implication is
that there is a lack of interest because of the fiscal regime or
other reason. However, regarding the two wells at Point
Thomson, she said she heard there were actually five wells
planned but the EPA exerted jurisdiction over three of them for
permitting. Thus, not drilling those three wells may have been
for reasons other than those being discussed today.
1:48:08 PM
The committee took an at-ease from 1:48 p.m. to 1:49 p.m.
1:49:24 PM
KEN SHEFFIELD, President, Pioneer Natural Resources Alaska
(Pioneer Alaska), Pioneer Natural Resources, first offered his
company's support for HB 110, saying the bill would bring better
balance to the state's severance tax structure, increase
drilling activity, put more oil in the pipeline, and produce
more jobs for Alaskans. He said he will be sharing some
forecasts about Pioneer's future activity; hence he has included
a disclaimer slide in his presentation (slide 2).
1:50:21 PM
MR. SHEFFIELD stated that while Pioneer Natural Resources is a
large independent oil/gas company listed on the New York Stock
Exchange, it is about one-tenth the size of the other operators
on the North Slope (slide 3). Pioneer is in the top 10 of the
most active drillers in the U.S.; last year Pioneer ranked
seventh in the U.S. in footage drilled. Like most independents,
most of Pioneer's assets are heavily focused on the Lower 48,
with 95 percent of Pioneer's reserves and about 90 percent of
its production derived from the Lower 48.
1:51:10 PM
MR. SHEFFIELD reported that Pioneer Alaska began its business in
Alaska from scratch in 2003 (slide 4). It has gone from no
employees to 60 full-time Alaska employees plus about 120 Alaska
contract workers on the North Slope. Pioneer Alaska made a huge
commitment to the state in 2006 when it sanctioned the world
class Oooguruk Project. In 2008, Pioneer Alaska became the
first independent operator on the North Slope. Operating in a
challenging environment, Pioneer Alaska is applying everything
that technology provides to make this successful. His company
would not be where it is today without the solid support from
the State of Alaska and the other producers on the North Slope.
1:52:24 PM
REPRESENTATIVE KAWASAKI inquired how Alaska's royalty relief
provisions played into Pioneer Alaska's decisions to construct
and operate Oooguruk.
MR. SHEFFIELD replied that Pioneer Alaska was granted royalty
relief prior to the sanction of this project. At that time,
about 2006, oil prices were approximately $30 per barrel and
Pioneer Alaska was looking at sanctioning a project in the
hundreds of millions in a very remote offshore arctic
environment. The company worked with the State of Alaska
through existing [law] to successfully secure royalty relief.
1:53:21 PM
REPRESENTATIVE KAWASAKI asked whether royalty relief was one of
the company's main reasons for coming to Alaska.
MR. SHEFFIELD responded that royalty relief was not what his
company was looking for. When drilling its exploration wells,
his company was hoping to hit large, high productivity oil
reservoirs that would not require having to apply for royalty
relief in order to sanction the project. However, a low quality
reservoir was what was found and the economics were tough, so
the company applied for royalty relief. He pointed out that the
royalty relief phases out when the project pays out.
1:54:25 PM
REPRESENTATIVE GARDNER inquired whether the application process
for royalty relief was onerous or unnecessarily challenging.
MR. SHEFFIELD answered that it was a fairly exhaustive and
challenging process to demonstrate the economic need for some
sort of relief. The complexities of making a big decision like
that, the risks, what future prices are going to be, what
production is going to be, and what costs are going to be make
it extremely difficult for a producer and a government to get on
the same page. But, the State of Alaska did work with Pioneer
and royalty relief was approved.
1:55:34 PM
MR. SHEFFIELD, returning to his presentation, said Pioneer's
focus when it came to Alaska in 2002 was on growing the company
through exploration around the world (slide 5). At that time,
Pioneer had an active exploration program in the deep water Gulf
of Mexico and on the continent of Africa, and had just started
exploration in Alaska. When considering entry into Alaska,
Pioneer put together a scorecard to compare Alaska against the
company's legacy assets in the Lower 48 (slide 6). What stood
out was the tremendous resource potential in Alaska and the
general lack of competition, although Pioneer recognized that
Alaska would be more challenging from a regulatory perspective.
When looking at profitability in Alaska, however, Pioneer could
see there would be challenges, one challenge being the long
project cycle times. For example, in Texas a well can be
drilled and put into production in just a few months, but in
Alaska it takes several years. Additionally, the execution risk
is challenging in Alaska as is the capital cost. But, Pioneer
thought the operating margins in Alaska could potentially be
better than the Lower 48 given the zero severance tax for lower
rate producing fields like Oooguruk under the Economic Limit
Factor (ELF) tax regime in place at that time. Plus, there were
exploration incentives in place at that time as well.
1:57:45 PM
REPRESENTATIVE HERRON asked whether it would have taken big
ticket items or small increments to have moved the checkmarks
from Alaska's column to the Lower 48 column, and vice versa.
MR. SHEFFIELD replied that it was more of a "back of a cocktail
napkin" type of analysis. Picking the best place to explore is
a lot like picking the best stocks. While there is technical
and economic information, the money is spent and the hope is
that the predictions are correct. Therefore, he allowed, such
an analysis is somewhat subjective.
REPRESENTATIVE HERRON remarked that the scorecard's two columns
represent black and white to him, yet there are hundreds of
shades of gray. So, to characterize something as either on or
off seems over-simplistic to the complex legislation that is
being looked at.
MR. SHEFFIELD said this scorecard was an internal assessment of
the pros and cons of making Pioneer's initial investments in the
Alaska and it really did not pertain to the fiscal policy,
although that was one of the components that was looked at.
2:00:20 PM
REPRESENTATIVE GARDNER requested further elaboration about the
scorecard regarding the terms oil bias, regulatory process ease,
and resource competition.
MR. SHEFFIELD explained that regarding the term oil bias, the
rocks in the North Slope are usually filled with oil rather than
gas, which is a good thing. The regulatory process is a
combination of state, federal, and local jurisdictions, and in
Alaska the process is significantly more complex and time
consuming than in the Lower 48. Regarding resource competition,
he said the State of Alaska was and continues to hold regular
land sales, which is a good thing. Pioneer found that few
companies showed up at Alaska's lease sales relative to lease
sales held in other petroleum provinces.
REPRESENTATIVE GARDNER commented that members would like to hear
any suggestions Pioneer has about how to improve the state's
regulatory process.
2:02:56 PM
MR. SHEFFIELD, continuing his presentation, noted that Pioneer
participated in 11 exploration wells from 2003-2007 (slide 7).
Some of the wells were operated by Pioneer and some were
operated by ConocoPhillips with Pioneer as a minority partner,
particularly in the NPR-A. Of those 11 wells, 1 had a
commercial discovery, which became the Oooguruk development.
Oil was found in nearly all of the wells, but the quality of the
reservoirs was generally insufficient to make an economic
development.
MR. SHEFFIELD said Pioneer spent a couple of years doing the
engineering and assessments for the Oooguruk project (slide 8).
Pioneer sanctioned the project in January 2006 and went on to
make it a reality. The total cost of the project will be in
excess of $1 billion. Over 600 people were on the site during
peak construction in 2007. The first production was established
in June 2008 and average production in 2010 was about 10,000
barrels a day. Pioneer sees the gross resource potential being
in the range of 120-150 million barrels, although how much of
that will be economic remains to be seen. Pioneer is quickly
wrapping up the original project that was envisioned and over
the next few years all of the wells originally planned will have
been drilled. The challenge for Pioneer is finding that next
opportunity in Alaska to grow its business.
2:05:28 PM
MR. SHEFFIELD reviewed changes that have occurred over Pioneer's
eight years in Alaska (slide 9). Technology continued to drive
opportunities in Pioneer's business. Oil and gas prices moved
much higher, along with the cost of doing business. Prices have
provided a financial incentive to develop some of the lower tier
resources in North America and around the world. Resource
development plays - shales, tight sand reservoirs, coal seams,
and such - have clearly taken center stage in the Lower 48 for
oil and gas investment. Lastly, Alaska's severance tax system
changed twice during the last eight years.
MR. SHEFFIELD related that the combination of two technologies,
horizontal wells and fracture stimulation, has created a boom of
activity across the Lower 48 (slide 10). Multiple stimulations
are now being done along the horizontal well bores in petroleum
reservoirs. In 2004 less than 10 percent of the wells drilled
in the U.S. were horizontal wells, but by the end of 2009 that
number was nearly 50 percent (slide 11).
2:07:41 PM
MR. SHEFFIELD noted that rising prices and technology have
fueled the growth in resource plays, and represent the primary
competition for his Alaska team when it is competing for funds
(slide 12). Over the past eight years oil prices have gone up
from around $30 a barrel to over $100 and now back down to about
$80. Over that same time period natural gas prices in the Lower
48 have gone up from about $3 to $8 and now back down into the
range of $4-$5. Gas prices have fallen because these successful
resource plays have increased the gas supply. Oil and gas
shales in the U.S. have taken center stage and are attracting
tens of billions of dollars of capital (slide 13). The
geography of those shales happens to be near infrastructure and
in states with very favorable fiscal policies.
2:09:11 PM
MR. SHEFFIELD reviewed the history of Alaska's severance tax
over the past eight years (slide 14). Prior to 2007 the
economic limit factor (ELF) was in effect and was the regime
under which Pioneer sanctioned the Oooguruk project. Under ELF
low rate fields paid low or next to no severance tax. In 2007,
during the construction phase of Oooguruk, the petroleum
production profits tax (PPT) became law. The PPT allowed for a
20 percent tax credit on the front end, a 22.5 percent tax on
the net profits on the back end, and a progressivity element.
In 2008, the first year of production at Oooguruk, Alaska's
Clear and Equitable Share (ACES) became law. Under ACES the 20
percent investment tax credit stayed the same, the base tax rate
increased to 25 percent, the progressivity became aggressive and
was not indexed, and the maximum tax rate became 75 percent.
2:10:56 PM
MR. SHEFFIELD addressed the issues that Pioneer Alaska is facing
in the future as it tries to grow its business in Alaska (slide
15). He said the reservoirs being developed at the Oooguruk
island drill site are the Kuparuk and the Nuiqsut. In the next
two to three years all wells will have been drilled and the
sanction development completed. Pioneer Alaska is therefore
trying to build its next big thing, which it hopes will be the
Torok Reservoir - a very low quality, but fairly large
reservoir. One well was drilled into the Torok in 2009 and two
more wells are now being drilled from the island to further
evaluate that reservoir and to install a waterflood pilot.
Based on the results of that waterflood pilot, Pioneer Alaska
hopes to develop the reservoir by building a gravel pad onshore
and directional drilling into the reservoir. Whether to take
this next step is a half-billion-dollar decision.
MR. SHEFFIELD, in response to Representative P. Wilson, said
horizontal drilling can reach out as far as 3 miles depending
upon how deep the reservoir is.
2:14:11 PM
MR. SHEFFIELD elaborated further on the Torok development (slide
16). Two onshore drill sites will be tied into Pioneer Alaska's
existing infrastructure, and as many as 25 development wells may
be drilled. Moving forward with development of this large, but
challenged, oil resource is contingent upon success of the
waterflood pilot and meeting the economic and competitive
hurdles.
2:14:56 PM
MR. SHEFFIELD said his team competes against other projects when
it goes before Pioneer's management and board (slide 17). The
primary competition comes from the Spraberry field in west Texas
in which Pioneer is the largest operator, producing about 46,000
barrels equivalent per day. Pioneer has over 20,000 development
locations in that field and these will keep Pioneer busy for 20
years or more. They are high margin, predictable wells in a
fiscal environment of low taxes and no progressivity. Pioneer
is currently running about 30 rigs in this area and will be
ramping up to 40 rigs by 2013, the expectation being a doubling
of production. Also competing with Pioneer Alaska is the Eagle
Ford shale development in south Texas, which has a gross
resource potential of about 150 trillion cubic feet (slide 18).
Over 100 rigs, of which 7 belong to Pioneer, are currently
running on this huge, profitable, liquids-rich play. Pioneer's
production is only a couple of thousand barrels a day, but the
hope is to be running 16 rigs in that play by 2013 and the
forecast is for 40,000 barrels a day net, which is almost eight
times as big as what Pioneer Alaska has been able to develop in
Alaska over the last eight years.
2:17:07 PM
MR. SHEFFIELD, in response to Representative Kawasaki, said the
Spraberry wells are oil wells that produce a lot of gas,
although he does not know the exact split since that is not his
area. Processing of that gas produces natural gas liquids and
he estimates that the barrel of oil equivalents from those wells
is a little more than 50:50. He offered to follow up further if
members desired.
MR. SHEFFIELD, returning to his presentation, reviewed Pioneer's
scorecard for Alaska today (slide 19), saying that the greater
resource potential is now in the Lower 48. Additionally, given
Alaska's permitting challenges, Pioneer now perceives the
execution risk going forward as being greater in Alaska than it
was eight years ago.
2:19:23 PM
REPRESENTATIVE KAWASAKI asked whether Pioneer Alaska is an oil
company that is developing gas or a gas company that is
developing oil. He said his reason for this question is that
this would affect the scoring of the resource potential.
MR. SHEFFIELD replied, "We are an oil and gas company." He said
that Pioneer, like most other independents in the Lower 48, is
shifting investment more toward the oil side because the price
differential for oil on a British Thermal Unit (BTU) equivalent
basis is probably more than three times the value of gas. Gas
is the most abundant thing in the Lower 48 and Pioneer is not
moving completing away from gas, but in the near term
investments are quickly moving toward liquids.
2:20:53 PM
MR. SHEFFIELD closed his presentation (slide 20), reiterating
that Pioneer Alaska is wrapping up its original plans at
Oooguruk and in about two years will be facing another major
investment decision. He said he is hopeful the pilot for the
Torok Formation will be successful, but that if it is it will
have to compete against formidable competition for funding.
Pioneer's vision of the Oooguruk expansion is that it would be
in excess of 10,000 barrels a day. The new project would create
about 500 construction jobs and about 100 development jobs. He
said HB 110 will have a positive, material impact on Pioneer's
decisions going forward. The combination of the increased well
credits and the indexing of progressivity "really moves the
needle" and gets the tax system into what Pioneer feels is a
better balance.
2:22:35 PM
CO-CHAIR FEIGE inquired whether Mr. Sheffield has been contacted
by the Department of Labor & Workforce Development regarding
which jobs on the North Slope are for maintenance and which are
for exploration.
MR. SHEFFIELD replied that he personally has not been contacted
and does not believe any of his staff has been contacted.
2:23:27 PM
REPRESENTATIVE GARDNER observed that the Oooguruk project has
spanned the ELF, PPT, and ACES tax regimes. She asked how much
the state has participated in that capital expenditure in terms
of credits and did Pioneer participate in the transitional look
back when the state went from the PPT to ACES.
MR. SHEFFIELD responded that Pioneer has been the beneficiary of
the credits from both PPT and ACES. He estimated that about
$180 million has been received since the beginning of Oooguruk.
He offered his belief that some credits for transitional
investment expenditures (TIE) were also received. In response
to Co-Chair Seaton, he agreed to confirm the exact amounts of
the aforementioned and get back to members.
2:25:10 PM
The committee took an at-ease from 2:25 p.m. to 2:29 p.m.
2:29:43 PM
WENDY KING, Vice President, External Affairs, ConocoPhillips
Alaska, Inc., said that by way of HB 110 the governor and his
team are choosing a brighter future for the oil and gas industry
than what the status quo would lead to (slide 2).
ConocoPhillips Alaska agrees with the administration that HB 110
would make Alaska more competitive, would create more jobs for
Alaskans, and would have the probability of increasing
production into the Trans-Alaska Pipeline System (TAPS). She
emphasized that ConocoPhillips Alaska sees that there is more
potential on Alaska's North Slope. The challenge faced by the
industry is that the costs are higher today to produce a barrel
of oil, the technology requirements are greater, the reservoirs
are more complex, and finding the remaining oil is harder. For
example, at Kuparuk, a field operated by ConocoPhillips Alaska,
the publically available figure is that about six billion
barrels of oil are in place. A 1 percent increase in recovery
at Kuparuk is 60 million barrels of oil, which would mean 10,000
more barrels per day for 15 years. This is the kind of prize
that ConocoPhillips thinks is out there and is why HB 110 is a
step in the right direction.
2:32:24 PM
MS. KING allowed there are elements of Alaska's Clear and
Equitable Share (ACES) tax structure that are working and should
remain. The biggest challenge with the ACES tax structure is
the progressivity piece. This is because when oil prices are
high companies are generating a significant cash flow by where
they can reinvest. But with the steep progressivity, that cash
flow is paid out in taxes rather than coming back to the parties
to be able to reinvest. A look at what happened in Alaska
during the high oil prices of 2008 shows that what happened in
the Lower 48 did not happen in Alaska.
MS. KING pointed out that there is a lot of capacity in Trans-
Alaska Pipeline System (TAPS) due to the substantial production
decline (slide 3). But probably more significant is the
challenge of keeping the pipeline operating once the flow
decreases to 500,000 or 300,000 barrels of oil a day. The
recent shutdown of TAPS showed that the challenge of moving a
low flow is real. She said HB 110 would set out a framework by
where those low flow challenges could get pushed to the future.
2:34:59 PM
REPRESENTATIVE HERRON inquired whether the difference should be
split between the historical decline rate and the Department of
Revenue's forecast, which some say is overly optimistic.
MS. KING replied that she will address the uncertainty of the
production forecast later in her presentation. However, she
said there is no doubt the production forecast over the next 10
years is an uncertainty. ConocoPhillips looks at ranges and can
only look at its own asset base for forecasting. For the North
Slope asset base, ConocoPhillips must use the publically
available information in the DOR production forecast.
2:36:23 PM
MS. KING addressed U.S. production changes between 2003 [and
2010] using data from the Energy Information Administration
(EIA) for those states that produce more than 50,000 barrels of
oil per day (slide 4). North Dakota, Mississippi, and Utah had
the greatest production increases over the last eight years, she
related. Texas is still producing about 1 million barrels of
oil a day, which is roughly what it was producing back in 2003.
Over that same timeframe Alaska's production declined more than
30 percent, a steeper decline than many of the other oil
producing states in the U.S.
2:37:38 PM
REPRESENTATIVE GARDNER observed that slide 4 does not depict
production, rather it depicts changes. The slide makes it
appear that North Dakota, Mississippi, and Utah have huge
productions when they do not compared to Alaska, rather they
just had a huge change in production.
MS. KING responded that this information is available on the
Energy Information Administration's website. She recalled that
production in Texas was about 1.1 million barrels a day in 2003,
declining to about 1 million [in 2010]. In 2003 Alaska produced
1 million barrels of oil a day, but declined to about 650,000
barrels over that same timeframe. She further recalled that
North Dakota is predicted to surpass Alaska's production in the
future.
2:38:42 PM
MS. KING reported that oil production in the Lower 48 declined
[between 2003] and 2005, stayed steady until 2008, then
significantly increased between 2008 and 2010 (slide 5). Oil
prices spiked in 2008, particularly in the third quarter, then
pulled back in 2009, and again picked up in 2010. The annual
average number of oil rigs working in the Lower 48 increased
from about 150 [in 2003] to over 500 [in 2010]. This increased
oil rig activity in the Lower 48 saw a corresponding increase in
production - oil prices went up, oil rig activity went up, oil
production went up. Right now in the Lower 48, a combination of
different types of liquid-rich plays is driving this increased
drilling activity with the high price environment.
2:40:28 PM
MS. KING compared Alaska's oil production for this same time
period and pointed out that Alaska's production declined from
about 1 million barrels of oil a day [in 2003] to about 600,000
barrels a day [in 2010]. Over this same timeframe, the annual
average rig count in Alaska stayed flat - rig activity in Alaska
did not increase with the increase in oil price like it did in
the Lower 48. Another disturbing trend is that even though the
number of oil rigs has stayed flat, the production decline has
not been offset. This as a function of the oil prospects being
more challenged. It does not mean that industry does not want
to pursue them, it just means that the zones being targeted may
have more water in them or cross multiple fault blocks or the
sand quality is not as good or the oil quality may not be as
good. That challenged oil impact is starting to show in how the
wells are being able to offset what is happening in Alaska's oil
production decline.
2:41:39 PM
MS. KING compared the forecast for oil production in Alaska with
the forecast for the Lower 48 using information from the Energy
Information Administration, Annual Energy Outlook (AEO) 2011
Reference Case (slide 6). She explained that onshore production
is the biggest portion of oil production in the Lower 48, and it
is expected to grow another 26 percent over the 12-year period
[of 2008 to 2020]. Lower 48 offshore production is expected to
grow by 44 percent over this same time period. She noted that
this forecast was put together after the Gulf of Mexico spill
occurred. The forecast for Alaska is a decline of 39 percent
over the next 10 years, which calculates to about 400,000
barrels of oil a day by the turn of the next decade. She
reminded members that Alyeska Pipeline Service Company has said
that low flow problems will start at 500,000 to 300,000 barrels
of oil a day. Thus, the EIA is saying that Alaska will be
facing that low-flow problem in the next decade.
2:43:13 PM
REPRESENTATIVE KAWASAKI asked whether the aforementioned
forecast includes new oil.
MS. KING answered that she cannot make an assumption because the
EIA does not outline in the forecast where it the information,
it just has a plot of Alaska production.
REPRESENTATIVE KAWASAKI commented that the Department of Revenue
forecast in the AOGA presentation shows a tapering off at
600,000 barrels and not changing from today, and that forecast
includes new oil.
MS. KING said she will be further discussing this projected
decline later in her presentation.
2:44:09 PM
MS. KING, returning to her presentation, directed attention to a
map depicting the most recent status of acreage on the North
Slope (slide 7). She noted that exploration activity is the
frontend of what the industry is; it is the feedstock for
finding new fields. The land is studied, acquired, explored,
and if successful it is appraised, and if economic or
commercially viable it will be developed. ConocoPhillips has
been the state's largest explorer, particularly over the last
decade. Since 1998 ConocoPhillips has drilled 56 exploration
wells on the North Slope, 20 of them in the National Petroleum
Reserve-Alaska (NPR-A). For many years ConocoPhillips was the
state's largest acreage holder.
2:45:50 PM
MS. KING addressed the amount of activity that took place under
the former ELF structure, saying that since development of
Alpine there have been a number of exploration wells and lots of
activity trying to find and develop new prospects. However, a
transition is now occurring. When a company acquires a lease it
must determine whether it can convert the lease into something
that is commercially viable in the term of that lease. At this
time, approximately 50 percent of that lease acreage has been
dropped. The conclusion that could be taken is that there is
not potential on the North Slope; however, she said she thinks
it is combination of factors that affect whether parties are
moving forward with those leases. What draws her attention are
the active leases that are still held, such as Prudhoe and
Kuparuk, which have potential and are some of the state's most
valuable barrels. The publically available figure for Prudhoe
Bay is 30 billion barrels in place and 6 billion for Kuparuk.
One percent additional recovery at Prudhoe Bay would be 300,000
million barrels. Thus, the potential is there and it is the
state leases where the state has royalties, not federal lands
like the NPR-A.
2:47:46 PM
CO-CHAIR SEATON asked how much of the dropped acreage belonged
to ConocoPhillips.
MS. KING replied that she will have to look that up and will
provide the committee with the exact figure immediately after
the hearing. She added that ConocoPhillips went from being one
of the largest acreage holders on the North Slope to not, so a
sizeable portion of the dropped acreage was from her company.
2:48:09 PM
CO-CHAIR SEATON presumed that plays were not there in the
dropped parcels. He related that the main thing being looked at
in a tax rate change is to get production into TAPS. If the tax
system is changed, the dropped parcels would not be developable
until they go through another round of acquisition, in which
case the state is looking at a very long lead time for those
dropped parcels to come into play.
MS. KING concurred that the highest probability for getting oil
in the short term is from existing units; significant potential
is left in Prudhoe, Kuparuk, and Alpine, but it is more
challenged. Given a number of issues there is uncertainty in
NPR-A leasing, but there are active leases around the Alpine
satellite areas (slide 7).
2:50:19 PM
REPRESENTATIVE KAWASAKI inquired how much the Alpine West fields
played into ConocoPhillips's decision to drop acreage in NPR-A.
MS. KING responded that since approval of the environmental
impact statement (EIS) for Alpine West CD-5 in October 2004, the
fiscal regime has changed three times. Most exploration
companies would consider [CD-5] the first commercial oil
development in NPR-A, and the delays clearly indicate a risk
that all parties would consider when deciding whether to explore
in NPR-A. She said she believes that the permitting challenges
of CD-5 affect what is happening here. Additionally, in its
updated forecast for NPR-A the U.S. Geological Survey downgraded
the oil, saying there is more likelihood of gas. There are
significant challenges on NPR-A with respect to upside balancing
because under the current fiscal regime the upside is gone if
oil is found.
2:52:06 PM
REPRESENTATIVE KAWASAKI asked how oil in NPR-A is treated in
regard to royalty.
MS. KING answered that it is a mixture of federal and private
royalties in NPR-A. Some of ConocoPhillips's satellites have
private royalties to Native corporations and the rest have U.S.
Bureau of Land Management (BLM) royalties. She understood that
a portion of the federal royalties on NPR-A come back to the
state through revenue sharing.
REPRESENTATIVE KAWASAKI surmised that uncertainty in royalties
and a number of other factors are related to the reduction in
lease holdings.
MS. KING replied that there is no uncertainty in the royalty
because when a lease is acquired the federal or private royalty
terms are known. The challenge with [NPR-A] is uncertainty and
downside; the upside is not necessarily seen. When deciding
whether to acquire a lease, one more step back creates a real
challenge in the balance of risk and reward. A lot of factors
are in play and a fiscal structure that takes away the upside
really mitigates how a company views an investment decision to
cover the downsides.
2:54:17 PM
MS. KING, turning back to her presentation, explained that
ConocoPhillips compiled its capital and operating expenditures
for Prudhoe, Kuparuk, and Alpine [from 2005 to 2009]. These
expenditures were divided into a maintenance/replacement/repair
category and a development category that would add new barrels
(slide 8). The increase in investment over these years is not
attributable to ACES; rather, it is substantially associated
with maintenance/replacement/repair activity. This maintenance
activity is very important for keeping oil in TAPS and for
keeping base oil production, otherwise a much larger production
decline would occur than what is being seen now. The drop off
in development investment from 2008 to 2009 is because of the
risk/reward balance.
MS. KING referenced a slide that the committee previously
received from the Department of Revenue outlining the total
capital expenditures going to new fields and those going to
already-producing fields. She said coupling that DOR slide with
slide 8 really outlines what is happening to investment and
where that investment is going in the three major North Slope
fields.
2:56:14 PM
MS. KING discussed the impact of progressivity on a discounted
cash flow basis for a $1 billion investment on a federal
offshore lease [in the outer continental shelf] compared with a
State of Alaska onshore lease (slide 9). She explained that the
only variable in the two comparison graphs is the oil price; all
other possible variables remain the same. Under the federal
offshore environment, both the investor's and the government's
returns increase as oil prices increase. Under the federal
fixed percentage system, neither party's increase is
disproportionately bigger than the other's. However, this is
not the case under the Alaska onshore environment. At a price
of $25, the investor loses money due to gross taxes and royalty.
At $50 the state receives revenue but the investor is still in a
negative position. At $75 and above the investor's increase in
revenue is disproportionately smaller than the government's
increase. When total government take is factored in at the one
peak spot, the marginal tax rate is $.92 on the dollar. This
dramatic shift in government and investor take is because
progressivity applies to every dollar that is earned.
2:59:17 PM
REPRESENTATIVE P. WILSON surmised the figures would be different
if the federal example was for onshore, such as the NPR-A,
rather than offshore.
MS. KING explained that the federal example for the outer
continental shelf means it is beyond the three-mile zone.
Anything within the three-mile zone is subject to the ACES
production tax. The difference for the state is significant if
that $1 billion investment is on NPR-A versus state lands
because the state would get royalty; for industry, however, both
onshore NPR-A leases and onshore state leases are subject to the
same production tax. In further response, Ms. King reiterated
that NPR-A leases are subject to the ACES production tax because
the reserve is within the state's taxing jurisdiction, therefore
the NPR-A is subject to the bottom graph depicted on slide 9.
3:00:44 PM
MS. KING, continuing her presentation, noted that the source for
the estimated number of barrels remaining on the North Slope, as
depicted on slide 10, is the 2009 DOR production forecast and
the graph represents the accumulated production from 2010-2050
for various fields. When the sum of expected production from
the core fields of Kuparuk, Prudhoe, and Alpine is compared to
the sum of the Point Thomson, Nikaitchuq, Liberty, and Oooguruk
fields, it can be seen that even though the core fields are
declining they will still have a lot of production. This is not
to say that developing the other fields is unimportant, it is to
show that the big prize is within the core fields. She
recollected a saying she heard as a young engineer: "Big fields
get bigger." Another way of saying this is, "You find oil where
you already found oil." That is why ConocoPhillips thinks there
is a prize to be had at Kuparuk, Prudhoe, and Alpine; it is just
that it will be more costly and challenging to do so.
3:02:35 PM
MS. KING noted that Alaska North Slope (ANS) gas and the OCS
Chukchi are significant prizes to be had (slide 11). However,
she continued, they have limited ability to influence Alaska's
production curve over the next 10 years. Alaska's production
changes will therefore come from the current fields and from the
more recent developments. The natural decline rate of the
Kuparuk, Prudhoe Bay, and Alpine fields is between 10 and 16
percent, meaning that in 10 years the daily production will be
down to 200,000 barrels. ConocoPhillips projects that the
decline rate can be reduced to 6 percent through significant
investment, which ConocoPhillips estimates to be in excess of $3
billion per year. A 6 percent decline rate would mean a daily
production of 400,000 barrels at the turn of the decade.
However, the Department of Revenue's latest forecast is for a 2
percent decline rate over that timeframe. These differences
illustrate that there is a level of uncertainty in the
production forecast for the next 10 years. All of this is
significant because [HB 110] is a critical bridge to these
growth projects. If the unit cost per barrel goes up or the
North Slope costs must be borne by these incremental projects,
the economic threshold for ANS gas and OCS will go up. The
governor's bill would provide steps to work with industry to
change the decline basis. The fiscal improvement outlined in HB
110 would lead to increased investment, which in turn would
increase production and extend the life of TAPS, increase jobs,
and lay a foundation for future growth through ANS gas and OCS
development.
3:06:12 PM
MS. KING related her company's reasons for supporting HB 110
(slide 12). She said that within ConocoPhillips's portfolio,
most everything on which a discovery has been made has been
unitized, including leases in NPR-A. Therefore, ConocoPhillips
sees the bracketing of progressivity as a critical component of
HB 110 because it is one of the most significant impacts on
investment decisions. Bracketing is a critical step in
supporting some of those longer-term growth projects within the
core fields and existing units that would help to mitigate the
production decline. The improved well credits in HB 110 would
help with the short-term push by stimulating workover activity
on the North Slope. She offered ConocoPhillips's suggestion
that the language for well credits be clarified to say that well
workover activities are included. The bill's changes to the
audit period, interest rate, and monthly versus annual
progressivity are administrative improvements. A concern,
however, is that an effective date for progressivity of 2013
will delay the effect of the whole bill as industry will delay
decisions accordingly, given that the effective date could be
changed in the next legislative session. Therefore,
ConocoPhillips suggests that the effective date be accelerated
by a year. She added that HB 110 is a step in the right
direction. Alaska is at the point of making a choice between
figuring out how fast production will decline versus an
investment policy that encourages moving new developments
forward. A balanced fiscal policy can achieve a different
future and create a bridge to bigger projects.
3:09:50 PM
CO-CHAIR SEATON inquired as to how much ConocoPhillips has
invested in the federal OCS off of Alaska.
MS. KING replied that right now her company's only portfolio is
in the Chukchi Sea where $506 million was invested in the lease
round in 2008. Since then ConocoPhillips has spent tens of
millions of dollars on gathering baseline science data and
engaging local stakeholders.
3:10:33 PM
CO-CHAIR FEIGE asked whether ConocoPhillips has been contacted
by the Department of Labor & Workforce Development about a
breakdown on which jobs are going to maintenance and which to
exploration and construction.
MS. KING responded that she has spoken to Commissioner Bishop
several times over the past few weeks and has provided him with
the maintenance/replacement/repair information shown on slide 8.
ConocoPhillips does not necessarily have a good handle on how
much of the jobs, but it will provide a breakdown of the
spending that is going between those buckets.
3:11:20 PM
REPRESENTATIVE HERRON inquired whether the chairman/CEO of
ConocoPhillips said anything about Alaska when he spoke at
yesterday's conference in New York. He further inquired whether
this dialog will be part of ConocoPhillips's annual analyst
meeting in mid-March.
MS. KING answered that she did not see yesterday's presentation.
She added that one of the company's senior vice president's gave
a presentation recently and she does not remember a specific
reference to Alaska in that presentation. Much of the company's
focus has been on growing its liquid-rich plays in the Lower 48.
From her meetings with senior management she can say that the
marginal tax rate definitely has an impact on how ConocoPhillips
views the investment climate, particularly when Alaska's project
risks are seen. While Alaska is a key part of ConocoPhillips's
portfolio, it is not necessarily where the company is focusing
in the short term as far as growth in production. However,
Alaska is something the company would like to see grow if a more
balanced fiscal structure can be had.
3:13:21 PM
MS. KING, in response to Representative Munoz, confirmed that
ConocoPhillips holds U.S. Bureau of Land Management (BLM) leases
within NPR-A; additionally some are private Native corporation
leases on NPR-A.
REPRESENTATIVE MUNOZ asked whether those lands will be subject
to the federal inventorying for possible wild land designation
[in NPR-A] that is currently happening through the BLM.
MS. KING replied that it appears a wild land designation could
affect the leases that ConocoPhillips already holds, although
she cannot yet draw conclusions. ConocoPhillips is looking at
this right now and discussions are planned with the U.S.
Department of Interior.
REPRESENTATIVE MUNOZ, referencing the U.S. production changes
depicted on slide 4, inquired whether ConocoPhillips is invested
in the states that are shown as having large production changes,
those states being North Dakota, Mississippi, Utah, Colorado,
Kansas, and Montana.
MS. KING responded she has been out of the Lower 48 for awhile,
but she can definitely say she has colleagues working in North
Dakota on the Bakken shale play and in offshore Gulf of Mexico.
Additionally, she is confident that ConocoPhillips has people
working in Oklahoma, Texas, Utah, and Louisiana.
3:15:34 PM
REPRESENTATIVE HERRON inquired whether the committee co-chairs
should ask the Department of Revenue to carefully reconsider its
predictions on the rate of oil production decline.
MS. KING answered it is difficult for her to speak about what
the Department of Revenue should do on its production forecast
because the department has access to more information than does
ConocoPhillips. In its production forecasts, ConocoPhillips
tends to at a range - the probability of different outcomes is
looked at and weighed. She said she does not know how the
department weighted and risked its production profiles.
3:16:36 PM
REPRESENTATIVE FOSTER understood ConocoPhillips Alaska competes
for investment dollars with other worldwide opportunities and
that altering ACES would make its position more competitive for
those dollars. He asked whether a summary of ConocoPhillips's
worldwide portfolio could be provided to members.
MS. KING replied that ConocoPhillips has put a number of reports
into the public domain, and the analyst's presentations are some
of the most helpful ways to get an indication of where the
company is investing in a particular year. Last week
ConocoPhillips announced a significantly strong budget for
investment for exploration and production, and next week the
company will disclose what portion of that is Alaska. Once the
2010 actuals and the 2011 figure are in the public domain, she
will prepare an update to the maintenance/replacement/repair
graph (slide 8). The company is increasing investment in
exploration and production activity in a diverse set of assets
around the world. When making an investment decision in Alaska,
the most important thing being looked at is whether that
investment decision stands on its own. Downside risks, such as
producing more water from a well than was anticipated or hitting
gas instead of oil, are balanced against knowing that if they
occur there is also an upside. That risk/reward balance is what
the industry is built on, but if the upside cannot be seen it is
difficult for those to be attractive investment opportunities.
She reiterated that ConocoPhillips is spending money on growing
its liquids portfolio around the world.
3:19:25 PM
REPRESENTATIVE FOSTER inquired where Alaska falls in the
spectrum of competitiveness for ConocoPhillips.
MS. KING responded that Alaska has one of the highest marginal
tax rates in ConocoPhillips's worldwide portfolio. If oil price
goes up a dollar, and 90 cents on that dollar goes to pay
governments, it affects how the company makes an investment
decision.
BOB HEINRICH, Vice President, Finance, ConocoPhillips Alaska,
Inc., offered to provide members with a recent graph depicting
that information.
3:20:16 PM
CO-CHAIR SEATON, referencing a Department of Revenue graph
presented at an earlier hearing, related that at a price of $120
[per barrel] the effective tax rates are about 34 percent. He
asked whether ConocoPhillips agrees that that is the effective
tax rate when the whole system is melded together.
MS. KING said she thinks the graph that is being referred to
plots only the effective rate of production tax. There are two
differences - the total government take and the marginal piece
of that. While she has seen a marginal tax rate quoted as only
87 percent, she calculates that at the peak it is closer to 92
or 93 percent because federal income tax was not incorporated
into that. She said she is unaware of ConocoPhillips looking at
the analysis from the state and seeing the numbers very
differently from the Department of Revenue.
MR. HEINRICH added that taking the credits into account reduces
the total line down, which impacts where the endpoint is, but it
does not change the shape of the curve.
3:21:42 PM
CO-CHAIR SEATON directed attention to the effective tax rates
reported on page 2 of the ConocoPhillips [Consolidated Income
Statement for 2009 and 2010]. He noted that the effective tax
rate depicted for exploration and production (E&P) for all of
2009 was 34.4 percent for the U.S. and 66.6 percent for
international; the effective tax rate depicted for E&P for all
of 2010 was 36.2 percent for the U.S. and 48.6 percent for
international. He asked why it is being said that Alaska needs
to change its tax regime to be more competitive with regimes
that are taxing ConocoPhillips at twice the rate of Alaska.
MS. KING answered that 2008 is the year that sticks out because
in that year ConocoPhillips did not see the benefit of higher
oil prices within the state of Alaska. The oil price in third
quarter 2008 was about $115 and in fourth quarter 2009 the price
was $69, yet both quarters generated exactly the same net
income. That is the challenge when ConocoPhillips looks at its
financials. In 2008 ConocoPhillips paid $3.4 billion in
production taxes alone to the State of Alaska.
3:24:52 PM
CO-CHAIR SEATON reiterated his previous question.
MR. HEINRICH said he believes the line items in this report are
the federal taxes and do not include the production taxes paid
in states.
MS. KING added that royalty is also not included in those line
items.
MR. HEINRICH interjected that it would have to be broken apart.
CO-CHAIR SEATON requested that an explanation of the line items
be provided to the committee.
3:26:25 PM
REPRESENTATIVE GARDNER recalled an earlier hearing at which
members heard that the information the Department of Revenue
receives on the returns from companies does not allow the
department to reach firm conclusions as to whether the credit
claims fall under maintenance/replacement/repair investment or
development projects. She asked whether ConocoPhillips Alaska
concurs with that.
MR. HEINRICH replied that ConocoPhillips does provide a lot of
information to the Department of Revenue. He said he does not
believe that in the forecast basis the capital is broken out in
categories that separate maintenance from development capital.
As well, he said he does not believe that information for the
actual filings is built up in a way that would allow the
department to do that for the actuals. In response to Co-Chair
Seaton he agreed to confirm this in writing.
3:28:18 PM
REPRESENTATIVE GARDNER expressed her concern about the provision
that reduces the audit period to four years. She understood
that under the petroleum production profits tax (PPT) the audit
period took longer than that because of accommodating that tax
change and a shortage of auditors. She asked how long the ELF
tax audits took on average.
MS. KING offered her belief that the audit period under ELF was
three years and she is confident that the audits would have been
completed within that time period.
CO-CHAIR SEATON interjected that under ELF it was just a tax on
per barrel, so there was no net and no costs.
REPRESENTATIVE GARDNER clarified that her question is whether it
actually took three years to do those audits.
MR. HEINRICH explained that the audits did not occur during the
full three-year period; they tended to begin sometime during
that period and end prior to the three years.
CO-CHAIR SEATON suggested that DOR be asked this question when
it is before the committee next week.
REPRESENTATIVE GARDNER said this does not give her a great deal
of confidence that a four-year audit period can be met. She
noted that because many of the auditors at the department are
new it has been hard to get definitive answers in this regard.
3:30:23 PM
REPRESENTATIVE GARDNER posited that what the state is trying to
do with its tax structure is encourage reinvestment in Alaska
when oil prices are high. For example, if the price of oil goes
up and puts ConocoPhillips into a higher marginal tax rate, the
company could reinvest that extra dollar of value into a capital
project in Alaska to lower its tax rate.
MR. HEINRICH responded that capital expenditures are part of the
calculation that determines a company's petroleum production
profits tax (PPT) value. So, in effect it is a reduction of PPT
value which sets where a company is on the progressivity curve.
He agreed that those dollars spent would have the effect of
reducing the current year or current month progressivity rate.
MS. KING added that just prior to this hearing she looked at a
plot showing the effect of and the increasing of capital
expenditure credits on that. However, the progressivity portion
of this curve is so steep at those higher ends that even though
the capital expenditure credit provides an element, it does not
change the shape of the curve and does not balance that risk and
reward. It a valuable component during lower prices, but at
high prices the progressivity really drives the shape of the
government take.
3:32:00 PM
REPRESENTATIVE GARDNER noted that because the North Slope is not
ring-fenced the cost of development for other fields can be
applied against the taxes that might come out of the North
Slope. She asked whether this means that a major investment in
a challenged field could effectively cut ConocoPhillips's tax
bill to the state. She further asked how much that factors into
investment decisions.
MS. KING agreed there is no ring-fencing across the North Slope
and that ConocoPhillips is a net taxpayer. There is a benefit
in that, she said. It is motivating in helping other
developments move forward whether or not they are in the fields
themselves, so challenged oil could be within Kuparuk; therefore
all of those are projects that would be valuable if they could
compete for the investment.
3:33:17 PM
CO-CHAIR SEATON asked whether ConocoPhillips would consider
challenged oil that is not currently developed in Kuparuk to be
new oil from a new reservoir and therefore subject to the
proposed new oil tax rate or would the company say that that oil
would be under the existing tax regime.
MS. KING answered that the statute as drafted in HB 110 is clear
that that is within an existing unit and would get the
provisions of an existing unit. From a practical point of view,
ConocoPhillips would not want to complicate the tax by trying to
do that if the oil is going through the same facilities.
3:35:11 PM
CLAIRE FITZPATRICK, Senior Vice President for Alaska Operations,
Chief Financial Officer, BP Exploration (Alaska), Inc. (BP
Alaska), stated that the passage of ACES increased BP Alaska's
overall tax burden and from her perspective it is an
unsustainable level if her company wants to access Alaska's
resources. The ACES production tax is BP Alaska's largest tax
and not its only tax as it also pays state royalties, state
income tax, state property tax, and various other state
assessments. Thus, when making investment decisions BP looks
through the lens of all of the taxes not just a single tax. BP
Alaska competes for investments and competes against other U.S.
and worldwide projects inside BP. Those other people are
equally passionate about getting funding for developing their
resources and progressing their projects. From where she is
sitting, Alaska is not winning that competition. The
risk/reward balance is not helping as there is insufficient
upside. There has not been a constructive dialogue around being
in partnership for the common goal of developing the resources
and getting barrels in the pipe. Additionally, ACES limits the
commercial viability when compared to other opportunities around
the world. She further pointed out that as an operator at
Prudhoe she only owns 26 percent, so when she is enthusiastic
about something she must ensure that the other working interest
owners are also equally enthusiastic about that the same item.
3:38:16 PM
MS. FITZPATRICK related that independent evidence shows Alaska
is uncompetitive (slide 1). The 2007 Wood Mackenzie Petroleum
Fiscal Index Report ranked Alaska at 97 out of 103 jurisdictions
around the world. The 2010 report ranked Alaska 117 out of 129.
She said her focus is not on Alaska's specific ranking, but on
whether she can get the amount of investment needed to progress
the opportunities in Alaska. If the answer to that is no, then
the key for her is how to make Alaska more competitive so she is
more successful in getting the funds to get those projects
moving. A lot of factors go into investment decisions: the
price cannot be controlled, the geology of the reservoirs cannot
be controlled, and costs cannot be controlled, although she
works hard to influence that.
3:40:54 PM
MS. FITZPATRICK said this is about how to make Alaska
competitive. There are variables within the legislature's gift
to decide whether to move Alaska to a more competitive position
(slide 3). She said her colleagues in BP around the U.S. can be
dismissive, saying Alaska will never produce all the things it
thinks it is going to. When taking forward activities to seek
investment, she is competing with other projects and is at
disadvantage because the Alaska projects are always going to
underperform relative to the other Lower 48 states. Given
Alaska's location and its high costs, she is not as successful
in getting investment dollars as she wants to be and she is
confident that she is not as successful as Alaska's legislators
want her to be.
MS. FITZPATRICK pointed out that production is rising in the
Lower 48, but declining inside [Alaska] (slide 4). Some of that
is being driven by price and that wells in the Lower 48 can be
brought on line faster than can most wells in Alaska. There is
a steady uptick in activity in the Lower 48, yet BP Alaska's
operated footage in Alaska is steadily declining (slide 5). She
related that during testimony on ACES in 2007, she stated that
BP Alaska would not stop its activity, but she clearly stated
that ACES would impact her ability to attract the level of
investment to actually make a difference in the decline curve.
3:42:05 PM
MS. FITZPATRICK pointed out that it is not just the value of an
isolated well; the revenue generated from a well or wells must
also fund the cost of actually running the North Slope. The
facilities on the slope are old and she must keep looking at
when and how to upgrade the facilities as the mix of oil
changes. The camps, roads, and large infrastructure must be
maintained. Putting all of those things together is when she
starts to look at Alaska's competitiveness relative to the other
opportunities within BP's portfolio.
3:43:06 PM
REPRESENTATIVE KAWASAKI, regarding the return BP receives on its
Alaska investments as compared to its returns from other states
(slide 3), surmised that BP does not make a decision based
specifically on Alaska versus the U.S. because BP is a global
company.
MS. FITZPATRICK replied that the decisions are made on a variety
of bases. As a global company BP wants a global portfolio and
will look to keep its activities in Alaska going. Decisions are
also made on a strategic basis regarding where to move some of
its investments, in which case it looks at both a global and a
U.S. portfolio and the mix across the two. So, when bringing a
project forward she may be competing against something in Angola
and also something in any of the other Lower 48 states.
Decisions are made on two levels: one is the totality of her
business and its health and the other is the individual project.
3:44:24 PM
CO-CHAIR SEATON requested Ms. Fitzpatrick to provide the
committee with a slide that depicts her company's Alaska return
compared to the returns on its international investments. He
said such a slide would help in understanding Alaska's
competitiveness on both a U.S. and international basis.
MS. FITZPATRICK responded that she can provide details of BP's
global portfolio. In regard to fiscal terms around the world,
she related that the Wood Mackenzie database gives the details
of the fiscal regimes in every location around the world. She
noted that some investments are individually negotiated
contracts with commercially sensitive terms that she is not in
the position to share.
CO-CHAIR SEATON clarified that it would be acceptable for the
slide to depict company share data in the same format as on
slide 3. He said he is aware that Indonesia has an 85:15 split
and Iraq has a 98:2 split.
3:46:16 PM
REPRESENTATIVE GARDNER understood that the terms of earlier
leases do not have deadlines but they do have a duty to develop.
She asked how this duty to develop is factored into decisions
when BP is weighing international opportunities.
MS. FITZPATRICK, answering specifically to Alaska, offered her
belief that the duty to develop is for things that are
commercially viable, and this is the development that BP is
continuing. Regarding obligations under the lease to do certain
activities, BP does factor those in, but does this in terms of
what the consequences would be if they were not done, what the
value is of that in terms of commercial viability. There will
be times when it is determined that something is not
commercially viable for BP and BP will choose to relinquish that
particular lease, and this could be in Alaska or elsewhere
internationally.
3:47:44 PM
REPRESENTATIVE KAWASAKI noted that ConocoPhillips provides
consolidated reports and breaks out its level of investments in
Alaska versus other provinces, but BP does not do that. He
inquired whether BP could show a limited number of people the
numbers to prove the case of the level of investment in Alaska.
MS. FITZPATRICK replied that BP does not provide the details
publically about Alaska because it is not required to do so
under U.S. Securities and Exchange Commission (SEC) regulations.
However, ConocoPhillips is required under SEC regulations to
release this information because of the size of its Alaska
business relative to its global portfolio. Regarding whether BP
would be willing to release some information, she said it would
depend on what information is specifically requested.
3:48:51 PM
CO-CHAIR FEIGE, in relation to the duty to develop economic
projects, asked whether a lowering of the tax rate would make
more of BP Alaska's existing reservoir economic to develop.
MS. FITZPATRICK responded that specific projects were pushed off
as being no longer viable once ACES passed. If HB 110 is
passed, she would go back to look at their viability and would
then see whether her own internal organization as well as the
other working interest owners are willing to get on board to
progress them.
3:49:32 PM
CO-CHAIR SEATON recalled that in 2005 Mr. [David] Van Tuyl was
asked how things could be changed to incentivize more
development and his response was that BP was fully investing in
every project that made sense at the time. Co-Chair Seaton
surmised that Ms. Fitzpatrick is saying that BP is now not
investing in those projects or that there are projects BP is not
investing in because of ACES. He inquired whether it is the
aspect of ACES that at high oil prices the marginal profit is
not high enough, because obviously projects are profitable and
economic to do. He requested an explanation of how it is that
BP is saying it is not going to invest in economic projects
unless there is a tax change to make them more economical.
MS. FITZPATRICK answered that she would not say that BP is
saying that it is not investing in things that are economic.
Rather, it is the definition of economic, the definition of
commercially viable. If 1 cent is made is that worth the
investment and the risk? For some of the projects deferred in
2007 and 2008, BP was not yet at the stage in 2005 of actually
saying it was ready to invest in them. Some of that is going to
be around technology evolved; also, when doing planning, there
is the long lead time in activities. Oil prices in the 10-15
years prior to 2005 probably averaged $20-$25. She estimated
that future prices will be in the ranges of $60 and $80 and said
things that were marginal at that time might now be economic.
She must look at the totality of an investment plus the
potential upside for doing that investment, and if that is not
competitive relative to other opportunities then she will be
unable to compete to get the money to progress the project. She
said there are projects that she would like to get the money to
progress if she can have the opportunity to demonstrate that
they are more competitive relative to other opportunities.
3:52:46 PM
CO-CHAIR SEATON said he still does not understand why a company
would not go forward with an economic project because it is not
as competitive with someplace else in the world, given that the
20 percent credit and 80 percent tax deduction in Alaska would
equal the full cost of the project.
MS. FITZPATRICK replied that there are two aspects. One is that
the marginal tax rate applies to revenue, not investment.
Therefore, the tax shield from an investment is actually
considerably lower than that. There is still a tax shield that
would be based off the base rate, the progressivity at the time
of making the investment, plus the tax credit - and it could be
45, 50, or 55 percent depending on the price. The other aspect
is the full life cycle. When making an investment, a
consideration is the revenue stream once the investment actually
turns into production. If that revenue is taxed at the marginal
tax rate the totality of the life cycle might not be
commercially viable relative to something else. Thus, on the
pure investment, she said she does not actually get the
aforementioned 80 percent scenario.
3:54:41 PM
CO-CHAIR SEATON surmised that Ms. Fitzpatrick's commercial
liability is based on relative value versus elsewhere in the
world, instead of whether she is actually making money in
Alaska.
MS. FITZPATRICK responded that it is both, depending on the size
of the project, the risk, the time scale, and a range of other
factors. She will be able to progress a project that has a
short life cycle and that looks good. However, a more
challenged project that requires investment in technology to
progress it must have the whole life cycle taken into account,
and that may not be commercially viable.
3:55:26 PM
REPRESENTATIVE GARDNER asked how much exploratory acreage BP
holds in Alaska. She requested a history of BP's exploratory
wells for the last two years of ELF and any exploratory wells
under PPT and ACES. She further asked whether BP's interest in
holding exploratory acreage or drilling wells would change if
the fiscal regime changed dramatically.
MS. FITZPATRICK agreed to get back to members with the specific
data items, but said the general answer is that BP does not do
traditional exploration wells. Within its existing units, BP
believes there are significant resources and prefers to focus
its attention on how to access them rather than focusing on what
BP believes would be smaller pockets of resource elsewhere. She
said she thinks that would be a better option for getting more
barrels into the pipe, particularly within a shorter timeframe.
3:56:38 PM
REPRESENTATIVE KAWASAKI requested that a slide similar to [slide
5] be provided that shows the number of wells drilled worldwide
and in Alaska. He said the point [in slide 5] appears to be
that there is less drilling in the fields operated by BP Alaska.
MS. FITZPATRICK answered that the trend is generally less,
although it was up a bit in 2010 depending on the amount of
multi-laterals that BP had to drill to try to access the
targeted volumes.
3:57:44 PM
REPRESENTATIVE KAWASAKI, [regarding slide 5], noted that for
[the footage drilled] in 2006, the tax season would have been
2005 in which the decisions were made and would probably have
been under ELF. In 2006 it would have been under PPT, and ACES
is 2009. He observed that there was an increase in the footage
drilled in 2010 and asked the reason for that increase.
MS. FITZPATRICK replied that the footage depicted includes all
of the footage associated with multi-laterals, and when several
sidetracks must be done to access the targeted hydrocarbons it
increases the footage drilled without necessarily increasing the
barrels in the pipe. She said she will make a valiant attempt
at getting the worldwide wells drilled, but she cannot commit to
actually achieving it.
3:58:49 PM
MS. FITZPATRICK, turning back to her presentation, pointed out
that BP Alaska's actual spend on revenue generating, i.e. that
which would directly put barrels into the pipe in the short
term, is flat to declining (slide 6, top graph). When adjusted
for price inflation based upon the producer price inflation
index, the spend on a real basis is actually going down even
though in real terms it is looking like it is flat (slide 6,
bottom graph). That reflects the basis that there are still
good wells to be drilled. However, investment decisions are
made ahead of time: in 2005 the average price was about $30 or
$32 and that was the amount of money she was spending. In 2010
the price was near $65 or $70. Logic would tell her, however,
that if there was a lot of good opportunities and they were
competitive, that would have been a substantially higher number.
4:00:06 PM
REPRESENTATIVE HERRON inquired whether the committee co-chairs
should ask the Department of Revenue to carefully reconsider its
projections.
MS. FITZPATRICK responded that she has not personally gone
through the study in detail. She said she does not know what
assumptions were used in the department's decline curve
regarding existing fields versus new activities, and that is
where the committee's questions would be better addressed. In
further response, she said she could not encourage or discourage
whether the co-chairs ask the department to reconsider its
projections.
4:01:59 PM
MS. FITZPATRICK, continuing her presentation, offered her belief
that there is a lot of opportunity in Alaska if something is
done to make the state more competitive (slide 7). She noted
that there is a lot of challenged oil as well as a lot of light
oil. The question is how projects in Alaska stand out relative
to other locations. Last year BP committed $20 billion of net
investment and not a single one was an Alaska project. She said
it is not from lack of trying that she is unable to get the
dollars needed for Alaska.
4:02:51 PM
REPRESENTATIVE FOSTER asked how long it might be before an
increase in exploration investments would be seen if changes
were made to ACES with an effective date in two years. He
further asked Ms. Fitzpatrick's opinion about a sunset of the
changes and going back to ACES if in four years there was no
activity.
MS. FITZPATRICK, regarding a timeline, answered that it depends
on the type of activity, so there would be things across the
entire timeframe. Drilling activities, subject to access to
risk, could be progressed faster, and there could be some of
those opportunities. Projects on which work was done but then
they were deferred might not be as long. Projects starting from
pure exploration could be 5-7 years. Regarding a sunset, she
explained that she must make investment decisions based on the
tax regime that is in place at the time. If there is a sunset,
then she would have to assume in her entire economics that it is
going to sunset. Therefore, a sunset provision would hamper
investment decisions in the short term.
4:05:14 PM
REPRESENTATIVE KAWASAKI inquired what the lead time was for the
sanctioned projects listed on slide 7 [Gulf of Mexico, Egypt,
North Sea, Azerbaijan, Canada, North Africa, Angola, TNK BP].
MS. FITZPATRICK replied that from discovery to sanction the time
will vary, but based on the industry average it would range from
three to six years depending on the size, scale, and complexity.
REPRESENTATIVE KAWASAKI understood that the Gulf of Mexico would
be a favorable place; however, Angola, North Africa, Azerbaijan,
Russia, and Egypt would not at all be favorable. He asked how
Ms. Fitzpatrick would justify $20 billion in sanctioned projects
in those unfavorable areas while at the same time saying that
Alaska is uncompetitive.
MS. FITZPATRICK responded that many, many factors go into making
an investment decision. "It is not a straight on-off switch,
nor is it a case of if the answer is 42 it is yes." It depends
on the size of the resource, the quality of the resource in
terms of any price differential, its location relative to
infrastructure, the cost of doing business in that location, and
the quality of the rocks. While nothing can be done about
Alaska's location from market or the complexity of the
hydrocarbon structures on the North Slope, which of the numerous
factors can be influenced if the objective is to make Alaska
more attractive for investment?
4:08:02 PM
REPRESENTATIVE KAWASAKI inquired where Alaska would stand in
overall competitiveness with BP if its tax regime was changed to
be one of the most competitive in the world.
MS. FITZPATRICK answered that it is only going to be relative,
how far up the curve Alaska wants to go. From her perspective,
HB 110 will make a positive step in the right direction and will
give opportunities to bring new and more activities into Alaska
and get more barrels in the pipe. She allowed that she would
like the bill to go further. It is whether the state wants to
take the step to see if it is actually going to get some of the
things it wants, and if that has not made Alaska competitive
enough, further changes can be made to make the state even more
competitive.
4:09:09 PM
MS. FITZPATRICK, concluding her presentation, noted that due to
the limited time left in the hearing she will address the
technicalities of the bill in a letter to members. However, she
said that, overall, HB 110 will make a difference and is a step
in the right direction. Some of the things that she thinks will
come back in as a result of the bill and will be helpful to both
BP Alaska and the state include drilling, increased well work,
and the gas partial processing plant, which is a $1.7 billion
project with 50 wells and new pad. The sooner the bill takes
effect the sooner she can get an answer from the head corporate
office in terms of getting more funds. Alaska is uncompetitive.
It has lots of resource, but the resource is high cost and
challenged. It is a choice of whether the state wants to work
together to get more barrels in the pipe, and if so, then HB 110
is a step that will help get there.
4:10:54 PM
CO-CHAIR SEATON asked whether BP Alaska has a position on moving
the tax floor. In response to Ms. Fitzpatrick, he confirmed he
is meaning the point at which the minimum tax takes effect.
MS. FITZPATRICK replied that BP Alaska recognizes that if there
is going to be a risk/reward switch, which BP Alaska is
supportive of at one end, she would like there to be no floor;
however, she appreciates from the state's perspective the desire
to have one.
4:11:34 PM
REPRESENTATIVE KAWASAKI expressed his desire to see Alaskans
hired. He cited a 2009 report on oil industry top employers
which states that 26 percent of BP Alaska's workers are
nonresidents. The report also states that the average quarterly
wages for nonresidents in oil and gas extraction is roughly 30
percent more than for residents. The report's appendix states
that 48 percent of new hires for oil and gas are nonresidents
and 42 percent for oil field services. He said he will be
providing further data that shows Alaskans are not being hired.
MS. FITZPATRICK agreed to provide a response in writing.
4:13:51 PM
CO-CHAIR FEIGE inquired whether BP Alaska has been contacted by
the Department of Labor & Workforce Development regarding the
number of jobs in the various categories of maintenance and
construction.
MS. FITZPATRICK responded that she will check and get back to
the committee in this regard.
4:14:23 PM
DALE PITTMAN, Alaska Production Manager, ExxonMobil, paraphrased
from the following written statement [original punctuation
provided]:
Let me start by saying that Alaska has been and
continues to be an important component of ExxonMobil's
world-wide investment portfolio. We have had a
presence in Alaska for over 50 years and have been a
key player in Alaska's oil industry development,
investing over $12 billion dollars to date. We are
the operator of Point Thomson, hold the largest
working interest at Prudhoe Bay (36.4%) and the
largest lease holder of discovered Alaska gas
resources. We expect to be involved in Alaska for
many years to come and will continue to evaluate
potential development opportunities.
At the outset, so our position is clear, let me say
that ExxonMobil supports the presentation you heard
today from the Alaska Oil and Gas Association. I do
not intend to repeat the thorough technical comments
from that testimony.
As for our specific comments, I would like to state,
consistent with our prior testimony during the
hearings on both the PPT and ACES, and on the proposed
tax reform legislation last session, that ExxonMobil
believes the changes made to Alaska's oil and gas
production tax since 2005 have had a negative impact
on business activity in Alaska and Alaska's overall
investment climate. Alaska's current production taxes
are simply too high to stimulate the additional
investment required to fully develop Alaska's oil and
gas resources.
It is for this reason ExxonMobil is pleased to see
that the Administration recognizes the need for
material change to Alaska's current oil and gas
production tax system. We are encouraged by Governor
Parnell's desire to see increased investments and
further oil and gas development. We support his
efforts to reform ACES and believe HB 110 is a good
first step towards what we hope is a thorough review
and revision of Alaska's production tax regime to
allow the state to fully develop its vast resources.
ExxonMobil supports HB 110, and if enacted in its
current form, we would expect investment activity in
Alaska to increase, resulting in a corresponding
benefit of more work for Alaskans. With passage of
the Governor's proposed changes to ACES in its current
form, we anticipate that industry will reexamine the
inventory of Alaska North Slope opportunities and move
forward with those projects that are made competitive
by the reduced production tax burden. For example,
the proposed enhanced in-field drilling tax credits
and reduction to the progressivity tax would allow us
to consider additional drilling and well work activity
at the Prudhoe Bay Unit. This kind of developmental
drilling in the core field on the North Slope is
critical to Alaska's future, particularly over the
next five to ten years. Production decline must be
stemmed until new developments can be discovered,
progressed and brought on production.
4:17:56 PM
While the enhanced in-field drilling tax credits and
reduction to the progressivity tax are much needed
revisions to ACES, we would urge earlier effective
dates to accelerate the resulting ramp up in
investment activity, Alaskan jobs and future state
revenues.
However, merely providing additional tax credits while
keeping the overall effective rate of the ACES tax too
high is not the long term solution to improving
Alaska's investment climate. While the system of tax
credits under ACES does provide significant incentives
for investing in capital assets to explore for,
develop, and produce more oil and gas, the deduction
of lease expenditures or the allowance of a tax credit
is simply part of the calculation about how much tax a
producer owes. The bottom line is that, between PPT
and ACES, the industry's production tax obligations
have more than tripled over the past five years.
ExxonMobil supports the Governor's proposal as an
important first step, but additional reform of ACES is
needed.
Additional reforms are needed to improve Alaska's
overall investment climate over the long term.
Evaluation of a further reduction in the production
tax rates should also be considered. Even with the
Governor's proposal, Alaska's production taxes are
high in comparison to other investment alternatives,
making Alaska one of the most expensive states in
which the oil and gas industry does business.
As you have heard in prior testimony or may have read
in recent newspaper articles, spending on the North
Slope has remained relatively flat since the enactment
of ACES. But what needs to be clarified is that the
majority of that investment has been for maintenance
or production enhancement efforts for existing
operations, not for new exploration and development
opportunities that would bring on new production. It
is also worth noting that costs for this investment
activity have gone up, so while some may argue there
has been additional investment, it doesn't necessarily
translate into more activity. For example costs to
drill a well have increased over the years, so higher
spend on drilling does not necessarily mean more wells
are being drilled.
4:20:06 PM
Alaska is currently producing approximately 600,000
barrels of oil per day from the North Slope. Industry
currently invests more than $1 billion per year just
to maintain current North Slope oil production decline
at six to seven percent. Without that continued
investment, the annual production decline would be in
the range of 12 to 15 percent annually.
The Alaska Department of Revenue is forecasting the
production from Alaska's currently producing fields to
decline by 60,000 barrels of oil per day this year.
It goes on to predict that current field production
will decline to half of its current 600,000 barrels of
oil per day in just seven years, a decline of over
300,000 barrels of oil per day. Allow me to put the
challenge of stemming that decline in perspective.
Alaska's newest development, the Nikaitchuq field, is
scheduled to produce first oil early this year. The
field has been more than six years in planning,
development and construction and carries a total cost
of over $2 billion dollars. The field is forecasted
to reach production of about 25,000 barrels per day
four years from now. So using this as an example, it
would take the startup of two to three Nikaitchuq
equivalent fields every year in perpetuity just to
hold North Slope production at 600,000 barrels of oil
per day. Pioneer's Oooguruk field is another example.
It would take three to four fields the size of
Oooguruk every year to match the forecasted North
Slope production decline. Clearly, the current
outlook for development falls far short, and new
fields are urgently needed to stem this decline.
Such development will only occur if there is an
improvement in the Alaska investment climate. Alaska
production tax policy is key to fostering a favorable
investment climate.
4:21:52 PM
Alaska's overall high production tax rates discourage
investment. Companies like ExxonMobil are willing to
accept the risks of long-term, capital intensive
investments when there is a stable and competitive tax
structure that encourages investment and ensures a
corresponding opportunity for upside potential. When
you take away the upside potential through a high
progressivity tax you reduce the overall
attractiveness of those capital intensive investments,
which in turn could lead to reduced investment and
resource recovery and, in the long-term, diminished
state revenues. Let me reemphasize this point, while
higher taxes may bring additional revenues in the
short-term, it's reasonable to anticipate that any
reduction in investment will decrease production and
significantly reduce those revenues in the longer
term.
As many of you heard me testify last year, time in the
oil and gas industry is not measured in business
cycles. It is measured in decades and in generations.
Today's production rates are the product of government
policies, technical work, and investment decisions
made years ago. Increasing production rates in the
decades to come will be a direct result from sound
policies, decisions, and commitments that are made
today. The Governor's proposed ACES changes are
clearly a significant step in the right direction
towards much needed reform of Alaska's high oil and
gas production tax system.
4:23:16 PM
Alaska needs a long-term resource development policy
that will encourage increasing investment to maximize
its resource potential while receiving a fair share of
the resource revenues; addressing its high level of
government take is a start. The reform of ACES needs
to result in a competitive, stable and predictable
fiscal environment that will encourage investment,
recognize that the remaining resources are
economically challenged, including both new fields and
resource development opportunities in existing fields.
The primary driver of Alaska's long-term resource
development policy should be to maximize the
development of its resource base, not just maximize
short-term state revenues.
Let me conclude my testimony by reiterating that while
we hope to continue to pursue investment opportunities
in Alaska in the future, the resource and cost
structure in Alaska is becoming increasingly
challenging. Governor Parnell's proposed changes to
ACES are a good start to needed fiscal reform - but
more is still needed.
ExxonMobil looks forward to working with the
Administration, the legislators, industry and the
people of Alaska in the future pursuit and development
of Alaska's oil and gas resources.
4:24:32 PM
CO-CHAIR SEATON referenced the upside potential mentioned in Mr.
Pittman's testimony and inquired whether ExxonMobil considers
the provision in HB 110 to reduce the floor for downside
potential to be a significant factor.
MR. PITTMAN replied that ExxonMobil has not considered it at
this point to be significant, but he will check and get back to
the committee with a specific answer.
4:25:25 PM
REPRESENTATIVE HERRON related that some people believe there is
time until 2018 to fill the pipe. However, he said he thinks it
is much earlier. He asked whether 2013 is more realistic for
the state to do something.
MR. PITTMAN responded that 2013 would be appropriate as far as
to act. He said he finds the suggestions that TAPS will
continue to produce through the mid-2020s with no additional
investment to be optimistic. There are some downside cases that
suggest that may be only 7-8 years away.
4:26:26 PM
REPRESENTATIVE HERRON recalled testimony by a consultant to the
governor, saying he thought the consultant was knowledgeable.
He related that a question asked of the consultant was whether
HB 110 as currently written would effectively translate into
guaranteed exploration and the consultant's answer was no. He
asked whether Mr. Pittman agrees with this answer of no.
MR. PITTMAN replied that he would not agree with no, but he
would agree that it may not directly correlate because of the
other factors that have been discussed today. Cost, commodity
prices, and supply and demand in other areas of the world make
it hard to say that HB 110 will guarantee increased exploration.
One of the various factors impacting those decisions that cannot
be controlled is the Mother Nature aspect, such as not finding
the quality of rock that was expected. However, between the
state and producers there are four prime factors that can be
controlled: technology, state and federal government take,
development cost, and operating cost. He said he thinks
industry and the state should be aligned to help minimize those
to improve the opportunity for Alaska resources.
4:28:14 PM
REPRESENTATIVE KAWASAKI commented that he has not yet heard any
convincing evidence from any speaker that the investment will
come back to Alaska, that there will be more Alaska jobs, and
that industry will explore more. He noted that a graph put out
by the Department of Revenue shows that the production decline
started in 1987, and between 1987 and 2005, when the very
favorable ELF gross production tax was in effect, there was
still not the production required to fill the pipe. Therefore,
in substantive terms, how will industry's investment change
should HB 110 pass and ACES is rewritten.
MR. PITTMAN responded that the decline curve is currently as
flat as it has ever been since peak production; Alaska has a
world class resource capable of immense volumes of production.
To answer the question about continuing to invest or increasing
the need to invest, he said he is convinced that [ExxonMobil] is
clearly aligned to keep the pipeline flowing; that is good for
the state and good for future resource recovery. The kind of
volume increases that are possible on the scales that ExxonMobil
is currently working are pretty challenging to affect the kind
of slopes that are seen when starting at 2 million barrels a
day. However, it is possible today to affect 100,000 barrels
over a year. Some of it is going to take things that we do not
yet know how to do, and more interest needs to be attracted in
making those investments.
4:31:08 PM
CO-CHAIR SEATON noted that the percent decline in production was
steeper when Alaska had lower tax rates. The slope of decline
was greater under the lower PPT rate than it has been since
instituting ACES. According to information the committee just
received from the Alaska Oil and Gas Conservation Commission
(AOGCC), the decline in production/developmental wells occurred
in 2004 and then leveled off, so that drop occurred before the
PPT. He allowed that there are other factors as well, but said
he is having a hard time making the link with ACES, as portrayed
by industry, when the number of developmental wells went down
prior to the enactment of PPT and ACES. He requested that the
companies submit a written explanation of this to the committee.
4:34:30 PM
CO-CHAIR FEIGE, regarding the changing numbers of developmental
wells and when they occurred, inquired whether the correlation
was with the price of oil.
MR. PITTMAN answered that there are so many variables it will be
difficult to draw a direct correlation to any individual
variable, but ExxonMobil will do its best not to have just
supposition and will look at the data. He agreed that the price
of oil is a factor.
CO-CHAIR SEATON pointed out that the AOGCC data does include in
the background the price of oil, so the price of oil can be
directly looked at.
4:35:35 PM
REPRESENTATIVE HERRON asked whether the committee co-chairs
should request the Department of Revenue to conduct a careful
reconsideration of its production rate decline graph.
MR. PITTMAN replied that he cannot tell the co-chairs what to
tell the commissioner, but when he looks at the data the
questions that come to his mind are what the assumptions were
that went into that data and what are the current assumptions
that would add to that data.
4:36:45 PM
REPRESENTATIVE KAWASAKI inquired whether ExxonMobil has an exit
strategy for the North Slope.
MR. PITTMAN responded no, ExxonMobil intends to be in Alaska and
intends to find ways to work with its colleagues, industry, and
Alyeska Pipeline Service Company, but that is tempered with his
knowledge and experience of how long it takes to effect those
changes.
4:37:32 PM
CO-CHAIR SEATON, regarding Mr. Pittman's testimony that the
remaining resources are economically challenged, noted that the
current tax regime is a companywide regime. No tax occurs below
all costs rolled out and then the base rate applies for the next
$30. For an economically challenged field that takes $60 to
produce, the base tax rate is 25 percent on the next $30 above
that, so there is no progressivity for Alaska North Slope $90.
Regarding economically challenged oil, he asked how
progressivity becomes the crucial factor in decision making when
it does not start until $30 after all expenses are rolled out.
MR. PITTMAN answered that when looking at investments,
ExxonMobil runs a full suite of possibilities and many of those
will be at the higher-end prices, which will only occur 15-20
percent of the time. Coupled with the downside prices that
occur 15-20 percent of the time, it does impede the viability of
future projects. Many of them could be on the edge and that
could be enough to push them over, and the aforementioned is one
of those types of projects.
4:39:38 PM
CO-CHAIR SEATON offered his appreciation to all of the witnesses
for their testimony.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 02 16 11 AOGA Presentation to House Resources (2).pdf |
HRES 2/16/2011 1:00:00 PM |
|
| (H)RES_Testimony_HB110 Final.pdf |
HRES 2/16/2011 1:00:00 PM |
|
| Drilling Activity North Slope.pdf |
HRES 2/16/2011 1:00:00 PM |
|
| Alaska Industry Acreage Reduction Slide CP.docx |
HRES 2/16/2011 1:00:00 PM |
|
| ADN and Petroleum News articles.pdf |
HRES 2/16/2011 1:00:00 PM |
|
| House Resources Testimony Final (2).pdf |
HRES 2/16/2011 1:00:00 PM |
|
| ConocoPhillips 4Q1020Supplemental Information.pdf |
HRES 2/16/2011 1:00:00 PM |
|
| Microsoft PowerPoint - BP Alaska testimony HRes Feb 2011.pdf |
HRES 2/16/2011 1:00:00 PM |
|
| S45C-211021609000 (2).pdf |
HRES 2/16/2011 1:00:00 PM |
|
| Testimony of Dale Pittman ExxonMobil HB 110.pdf |
HRES 2/16/2011 1:00:00 PM |
|
| HRES 2.16.11 AOGA Notes.pdf |
HRES 2/16/2011 1:00:00 PM |