Legislature(2011 - 2012)HOUSE FINANCE 519
04/21/2012 10:00 AM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB3001 | TELECONFERENCED | |
HB 3001-OIL AND GAS PRODUCTION TAX
10:13:42 AM
CO-CHAIR FEIGE announced that the only order of business would
be HOUSE BILL NO. 3001, "An Act relating to adjustments to oil
and gas production tax values based on a percentage of gross
value at the point of production for oil and gas produced from
leases or properties north of 68 degrees North latitude;
relating to monthly installment payments of the oil and gas
production tax; relating to the determinations of oil and gas
production tax values; relating to oil and gas production tax
credits including qualified capital credits for exploration,
development, or production; making conforming amendments; and
providing for an effective date."
CO-CHAIR FEIGE stated the committee would begin with
presentations by the Department of Revenue (DOR) and the
Division of Oil and Gas (O&G).
10:14:35 AM
BRYAN BUTCHER, Commissioner, Department of Revenue (DOR),
introduced himself. He began a PowerPoint presentation,
"Alaska's Production Tax: Discussing the issue" dated April 21,
2012, which illustrated the contrast between oil production
taxes in Alaska and other countries and provided a context for
the bill.
10:15:14 AM
COMMISSIONER BUTCHER stated that oil prices have been at an all-
time high for several years. He provided a brief history on oil
prices, noting historically prices would fluctuate from $10 to
$40 per barrel, but at some point oil prices began to increase
to $50 to $60 per barrel. However, oil prices have been at $100
or above $100 per barrel for several years, to the extent that
most experts consider the current price as the new reality and
they anticipate prices will remain in this range for the next
ten years. He noted, however, prices are subject to change.
The direct result of the higher prices is that projects not
economic at $30 per barrel would most likely be viable at $100
per barrel. High prices and technological booms have resulted
in big advances happening all over the world. He then focused
on North America, noting an oil boom has happened in Arizona,
North Dakota, and Texas, as well as Wyoming and Louisiana, but
not in Alaska.
10:16:36 AM
COMMISSIONER BUTCHER stated that according to the federal U.S.
Geological Survey, [oil pricing] is certainly not a resource
issue [slide 3]. The federal government does not consider the
North Slope basin a mature basin. Over 70 percent of state land
has been minimally explored. Mr. Tangeman touched on it
slightly yesterday, stating that when Prudhoe Bay was discovered
all exploration flooded there since Prudhoe Bay contained such a
massive volume of oil. He said there is no debating that Alaska
is a world-class basin. Cumulative production from the North
Slope through 2010 has been over 16 billion barrels of oil with
an estimated 40 billion barrels overall, including the Outer
Continental Shelf (OCS). In addition, an estimated to 236
trillion cubic feet (TCF) of conventional natural gas is also
present, in fact, 8 to 8.5 billion cubic feet (BCF) of gas is
recycled into the field making Prudhoe Bay the largest gas
circulating facility in the world. This has been the reason so
much focus on developing a big gas pipeline for export has
occurred, whether the destination is Alberta or for potential
export from tidewater to Asian markets. He highlighted that the
North Slope production recirculates about the same amount of gas
that Canada uses on a daily basis. Additionally, tens of
billions of heavy and viscous oil are found primarily under the
giant Prudhoe Bay field, again, estimated to hold 40 billion
barrels of conventional oil. However, he was unsure how much of
that oil will be economically recoverable. He pointed out three
huge shale oil and gas formations exist- similar to the Bakken
shale basin in North Dakota - but little is known about the
formations. Furthermore, he was unsure whether the shale oil
can be developed or if the technology must first be developed.
He concluded by stating there is reason to be excited about
Alaska and the natural resources on the North Slope.
10:19:54 AM
COMMISSIONER BUTCHER covered "More Important Points" [slide 4].
He said as a state Alaska is in a position that it has never
been in before. The state can review with a higher degree of
understanding what has been happening in the oil industry. When
Alaska switched from a gross tax - simply taxing the amount of
oil being produced at a given oil price - the state did not know
as much as it now does since the state has moved to a net tax,
in which the operating and capital expenses of companies factor
into the tax equation. He highlighted that since last summer
the state has been working to obtain more specific information
and policy makers will also have that information. He compared
what's been happening in Alaska today with what happened in
previous years with respect to the petroleum production profits
tax (PPT) and Alaska's Clear and Equitable Share (ACES).
Instituting those tax processes required a lot of modeling,
forecasting, and projects, he said. He reiterated that
currently the department has a much better idea of what has
happened over the past five years. The department has observed
that record high oil prices lead to oil and employment,
investment, and production booms throughout the world. He
reported that Russia and ExxonMobil Corporation (ExxonMobil)
have worked out an agreement to potentially invest up to $500
billion in exploration in Russia's offshore Arctic. This would
result in Russia having the ability to reduce its taxes and
eliminate its export tax to a level below Alaska's taxes. He
highlighted that this agreement has resulted in a potential
explosion of investment in Russia. Subsequently, the Russian
government and the Russian government's oil companies are
pairing with ExxonMobil in this development. Russian companies
will be taking two-thirds of the work with ExxonMobil taking
one-third, but in exchange the Russian companies will also have
pieces of ExxonMobil's work in the Gulf of Mexico, Alberta, and
in Texas, but not in Alaska.
10:23:03 AM
REPRESENTATIVE KAWASAKI referred to slide 2 and bullet 2, which
says other oil producing regions have been enjoying production
and employment booms. He asked how many oil producing regions,
such as Alberta, Texas, North Dakota are enjoying the employment
production booms due to technology versus Alaska's large,
mature, conventional oil field. He pointed out it takes more
people to build a small hydraulic fracture facility. He offered
his belief that their higher level of production is due to
technology rather than changes in taxes.
COMMISSIONER BUTCHER acknowledged that technological advances
play a role, especially given the small cost and turnaround in
the Lower 48. He related that North Dakota's and Alberta's
technological advancements allow them to be economical at $70 to
$80 per barrel, which would not be economical using Alaska's tax
structure. The same has been true in Alberta. He stated that
Texas has had an explosion of shale oil; however, when they
flattened out their decline it was exclusively due to
conventional oil. It is much cheaper to produce oil in Texas
and the turnaround from exploration to production is one to two
years as opposed to seven to ten years in Alaska.
10:25:39 AM
REPRESENTATIVE KAWASAKI clarified his question and asked how
much of the oil in the new producing regions in Texas, Eagle
Ford, and in North Dakota's Bakken shale are due to
technological advances versus mature conventional oil fields.
COMMISSIONER BUTCHER responded that his question is not a yes or
no answer. He pointed out that this has not only happened due
to prices or technology, but rather the outcome is a combination
of all of these things.
10:26:27 AM
CO-CHAIR SEATON related his understanding that the DOR seems to
be suggesting that Alaska is not enjoying investment in Alaska
due to low prices previously and a mature basin. He noted his
statement that the federal government did not consider Prudhoe
Bay a mature basin; however in 2004, the state's oil prices were
at $45 per barrel, which at the time was the highest price the
state had ever had. Still, the state did not see exploration or
development wells being drilled by the existing producers.
Therefore, the historic high prices did not bring development or
reinvestment in Alaska. In 2005, again, the oil prices were at
an historic high at $60 per barrel, with a tax rate between zero
percent and five percent; however, investment still didn't
happen. He emphasized his concern the DOR is trying to "paint
the picture" that everything is caused by ACES; however, when
prices were high and taxes were low, investment still didn't
happen.
10:28:11 AM
COMMISSIONER BUTCHER declared a later slide will show the curves
for the major oil producing regions in North America compared to
the price of oil that will better demonstrate his point.
Certainly, he stated, taxes represent a major piece; however
taxes are not the entire piece. Additionally, there is a big
difference between $100 per barrel oil for a sustained time and
$45 per barrel oil. Further, Alaska is one of if not the most
expensive places to do business, which results in a larger
economic hurdle rate than competitors in North America have
since they have a much shorter turnaround. He pointed out the
cost of an exploration well in other areas is also much smaller,
however he acknowledged that many other factors are considered
when a company makes decisions on whether to explore or develop.
Unfortunately, Alaska does not have most of the advantages as
compared to other areas.
10:29:20 AM
CO-CHAIR SEATON asked the department to submit details to the
committee on Alaska's higher internal hurdle rates. He related
his understanding that normally the hurdle rates are internal
rates of return, which include expenditures and the return on
capital. He restated his request for the DOR to provide any
data it has that shows the oil companies doing business in
Alaska have higher hurdle rates - internal rates of return - for
their Alaska operations versus the operations in the Lower 48.
COMMISSIONER BUTCHER responded that a company's considerations
for continuing development in a mature field such as Prudhoe Bay
and for new exploration or development would differ.
CO-CHAIR SEATON related his understanding Commissioner Butcher
has indicated that companies in Alaska have higher hurdle rates
- internal rates of return - than companies in the Lower 48. He
asked him to document this for the committee.
COMMISSIONER BUTCHER offered to provide what he can. He asked
to clarify his point, which is that the cost and expense of
doing business is certainly more in Alaska than it is anywhere
else in North America.
10:30:48 AM
REPRESENTATIVE GARDNER asked for examples of specific locations
of an oil boom in a mature, conventional basin as measured by
increased investment and a change in the decline curve. She
suggested this would get to the heart of the discussion.
10:31:27 AM
COMMISSIONER BUTCHER discussed "Historical Oil Production"
[slide 5]. He pointed out this graph demonstrates the declining
curve of the Alaska North Slope (ANS) production beginning in
1989 with a little over 2 million barrels per day to under
600,000 barrels per day today. He highlighted that North Dakota
may have just passed Alaska as an oil producing state.
10:32:21 AM
COMMISSIONER BUTCHER suggested that Alaska's historical oil
production is the main problem for the department [slide 6].
The goal would be to have production flatten out and ultimately
turnaround. He pointed out this slide compares the major oil
producing jurisdictions in North America, including Texas,
Alaska, North Dakota, and Alberta with the West Texas
Intermediate (WTI) price layered in. He explained the graph,
such that North Dakota is depicted along the bottom of the
graph. The WTI prices shot up in the mid-2000s due to the
technological advances of shale and when the price point for
shale oil development became economical. He reported that it
was not economical below $70-80 per barrel. He noted Alberta
bounces around, but will be steepening its incline as oil prices
rise. Alaska - depicted as the blue line - has peaked, while
Texas - depicted as the yellow line - intersected with Alaska in
1990. Alaska's decline curve was almost identical to Texas's
decline until mid-2000 when prices rose. Texas flattened out
and in 2010, oil production - which represents almost 100
percent conventional oil - began to turnaround Texas's decline
curve. In 2010, Texas was producing about 1,000 barrels per day
of shale oil, perhaps less.
COMMISSIONER BUTCHER indicated that once prices rose, it became
economical for Texas to develop fields and the decline stopped.
Meanwhile Alaska continues on the same decline curve as Texas
previously had. He found it interesting to examine the mature
basins and the decline curves - that some people said could not
be turned around - however; that hasn't been the case in Texas.
He predicted in 2011 and 2012, Texas's Eagle Ford basin will
make a huge impact since Texas anticipates adding 300-500
thousand barrels of oil production per day, per year, as the
field begins to produce. He surmised that Alaska will not be
anywhere near Texas anytime soon. He concluded that this slide
demonstrates what has occurred in the major oil producing basins
as a result of high oil prices. He acknowledged that
technology, time, and cost do play a role, but one can see the
effect it seems to have on every other oil producing region
except for Alaska.
10:35:35 AM
CO-CHAIR FEIGE asked for the nature of Texas's tax system and
whether it has changed much.
COMMISSIONER BUTCHER answered that Texas's taxes haven't changed
at all. He acknowledged that Texas's taxes are relatively high
compared to other oil producing states, but their taxes are
relatively low compared to Alaska. He emphasized that North
Dakota has been working to reduce its oil taxes. He recalled
when he visited North Dakota - which has the highest oil tax in
the Lower 48 - that he read a Bismarck newspaper article which
compared Alaska to North Dakota. The article claimed that North
Dakota would need to double its tax rate and add 25 percent in
order to equal Alaska's rate due to progressivity in Alaska.
Even so, North Dakota has been trying to reduce their tax rate
based on an increase in their oil production. In other words,
North Dakota will consider changes in their tax structure so
that the higher the production is the lower their tax rate will
be. North Dakota's rationale is that the state's operating
costs are the same and with higher oil production the operating
cost percentages decrease. Further, North Dakota expressed
concern that government growth could not be sustained by their
small population once oil declined. He said he was not
suggesting Alaska should move in an opposite direction from
progressivity; however, he described the conversation being held
in North Dakota as a much different one than is being discussed
in Alaska today. He likened North Dakota's circumstance as much
like the boom Alaska encountered in the 1970s. As a result,
North Dakota's housing has been tight and some fast food
companies have offered signing bonuses for employees who will
commit to managing fast food restaurants for at least a year.
10:38:19 AM
CO-CHAIR FEIGE referred to North Dakota's oil production in 1979
or 1980, noting that production did not increase when the WTI
price spiked, but it did spike in about 2002-2003. He asked for
an explanation for the increase.
COMMISSIONER BUTCHER answered that advancement of technology
played a big role. He offered it is the difference between oil
prices and economic models of companies. For example, if the
price of oil rose to $147 per barrel then plummeted to $40 per
barrel, that no company would base its decisions on $140 per
barrel oil even if the oil prices held for a number of months.
He explained it takes time to get to a point in which a company
would base decisions on higher oil prices - noting $100 per
barrel oil is here to stay - but six months of $100 per barrel
oil would change their initial models based on $30-$50 per
barrel oil. He suggested the oil producers could speak to how
long it takes to "turn the ship around;" however, he did not
think a company would move forward with a project - economically
- if oil prices dropped to $30 per barrel for several years
since the company would operate at a deficit once production
began.
10:39:56 AM
CO-CHAIR SEATON noted the oil production separation between
Texas and Alaska occurs somewhere between 2001-2007 when oil was
$20 per barrel; however oil prices do not correspond. He asked
for possible reasons for the changes in oil production, if it is
not based on oil prices.
COMMISSIONER BUTCHER answered that he did not know. He
acknowledged that the oil production between Alaska and Texas
fluctuates, but it was not until the last five to six years that
Texas increased and Alaska decreased, which has been the focus.
10:41:07 AM
CO-CHAIR SEATON pointed out the commissioner used his slide to
illustrate a point: that the separation occurred in 1999 or
2000. However, it would seem that the department could check
with Texas and find out whether the production changes were due
to technological advances or a change in investment climates,
since it apparently wasn't due to WTI pricing. He questioned
the commissioner attributing parts of the slide to demonstrate
factors that are obviously not related to the separation point.
COMMISSIONER BUTCHER responded that the oil production between
Alaska and Texas separates, but comes together again and by 2005
it's very close. He agreed the state dipped and plateaued in
early 2001-2002, but pointed out that ultimately the gap closes
up again.
10:42:27 AM
CO-CHAIR FEIGE asked members to hold questions.
REPRESENTATIVE GARDNER remarked that she felt it was appropriate
for her to ask questions on this slide since others were.
10:42:42 AM
COMMISSIONER BUTCHER discussed Two distinct elements of ACES:
Can't discuss one without the other" [slide 7]. He related
discussions the department held with companies that highlighted
differences in their viewpoints on ACES, depending on the
timeline for exploration to production. He said that ACES
includes very generous tax credits, which were made over the
past several years to help spur exploration. A new company who
would begin oil exploration will receive 45-60 percent
reimbursement on their estimated tax benefits on expenditures.
Once companies transition to production, the smaller companies
have experienced difficulties in finding larger companies to
assist with development. He noted that typically many "wildcat"
operators buy leases, find oil, and then sell their leases to
larger companies, but they have had difficulty moving forward
due to Alaska's much higher tax rate, which is higher than any
place in North America or any other Organization for Economic
Cooperation and Development (OECD) companies - with the
exception of Norway. He said the department has observed
disconnects between oil development and an increased production
in the state due to Alaska's production taxes.
10:44:32 AM
COMMISSIONER BUTCHER turned to "ELF, PPT & ACES: Did the
Pendulum Swing Too Far?" [slide 8]. He explained this slide
provides the history for the past seven or eight years in
Alaska. He referred to a comparison of the estimated production
tax revenue from ELF, PPT, ACES as Proposed, and ACES for FY
2012-FY 2016. He acknowledged that Alaska would not have
received its fair share under ELF, which needed to be overhauled
and raised, that was accomplished by PPT. He said the yellow
bar on the graph indicates the revenue under ACES as Proposed,
and the red bar indicates the current taxes. The difference
between ACES as Proposed, and ACES as passed occurred near the
end of the special legislative session on ACES. He commented
that progressivity was made much more aggressive in the final
version than in the original ACES bill. He characterized the
taxes as a sizable jump between the PPT and ACES as Proposed.
He said the department thinks the legislature may have gone up a
little higher on taxes than it should have. He concluded that
the ACES as Proposed taxation rates make more sense to the DOR.
He declared that he wished he had projections on the graph to
outline the effects of the proposed HB 3001, but he offered to
provide the graph to the committee. He predicted that the bar
would be somewhat comparable to PPT and ACES as Proposed.
10:46:43 AM
COMMISSIONER BUTCHER referred to the "Monthly ANS Crude Prices
Under Net Tax System [slide 9]." Even though ANS crude prices
have been over $100 per barrel for the past year - and he
anticipated prices will hold - the fact remains that oil prices
have been below $100 per barrel 70 percent of the time from FY
07 to today. He cautioned against expecting oil prices to
remain high given the history of oil prices. In 2008, oil
prices jumped to $140 per barrel, but quickly nosedived to under
$40 per barrel. He acknowledged there are a number of reasons
for the fluctuation, but primarily he attributed the price drop
to the worldwide contraction in the economy. At that point the
Organization of Petroleum Exporting Countries (OPEC) recognized
$140 per barrel was detrimental to the world's economy. He said
he mentions this as a reminder of the volatility of oil. As oil
prices rise and contribute positively to Alaska's treasury,
higher fuel costs also negatively impact rural Alaska and
Fairbanks. Additionally, high oil prices have had a detrimental
effect on the U.S. and the world's economy. Even though the
prices have been fairly constant over the past year, it doesn't
mean factors that affected oil prices won't happen again, he
said.
10:48:53 AM
REPRESENTATIVE KAWASAKI referred back to slide [6], "Historical
Oil Production: How Did Our Competition Fare When Prices
Spiked?" He asked how much new incremental oil is derived from
technological advances versus conventional oil well drills in
oil producing regions of Alberta, North Dakota, and Texas.
COMMISSIONER BUTCHER offered to provide a breakdown of what is
produced from conventional methods and the amount produced from
shale.
10:49:56 AM
REPRESENTATIVE GARDNER also referred to slide 6, noting the
commissioner stated that Texas's increase was derived from
almost entirely mature basins, yet the Institute for Energy
Research (IER) disagrees. The IER cites information from the
U.S. Energy Information Administration indicated in 2011 Texas
produced 1,427 thousand barrels of oil per day - 22 percent more
than in 2010 - which represents the highest production since
1997. Further, the IER indicates the increase was primarily due
to the Eagle Ford shale formation, which is not conventional
oil. She asked for specific examples of mature fields that have
seen a boom.
COMMISSIONER BUTCHER clarified that he mentioned that the
projections on slide 6 ended in 2010, at which time little shale
oil production had occurred. In 2011, Texas's oil production
increased by a few hundred thousand barrels, which continues
into 2012. He offered to provide a year-by-year breakdown of
shale oil production from Eagle Ford shale, which produces the
vast majority of shale oil produced in Texas.
REPRESENTATIVE GARDNER asked whether it would be inaccurate to
say that the increase is due almost entirely from mature basins.
COMMISSIONER BUTCHER answered that it is accurate to say that
the decline flattened out, turned around, and began to incline
almost entirely from conventional oil. He related a huge
increase in 2011 and 2012 was the result of shale oil, which he
previously pointed out.
10:51:55 AM
REPRESENTATIVE PRUITT referred to North Dakota's increase in
production. He understood the tax rate is considerably less in
North Dakota. He inquired as to North Dakota's full take,
including private royalties.
COMMISSIONER BUTCHER offered to provide the information. The
department prepared a report in January that outlines various
tax regimes and he offered to provide a breakdown between the
two. He suggested North Dakota's tax is 6.5 percent up to $50
per barrel, and the tax increases to 11 percent above $50 per
barrel. The royalty rates vary, but tend to range from 10-20
percent royalty on mature fields, including a large part of the
Bakken field, since it had been producing conventional oil at
very small percentages. Some of the newer fields have been
taxed at 25-30 percent - which does factor in - although it is
necessary to factor in other pieces, too. He illustrated the
ease in getting to oil sites in North Dakota, by stating his
brother is currently working in North Dakota and stays about 500
yards from where he works since it's possible to drive there.
Thus it gives the state a glimpse of the many variables that
must be considered when comparing states or provinces. He
concluded that the numerous variables led the DOR to produce a
report on oil tax regimes since the numerous factors make it
difficult to compare taxes.
10:54:54 AM
REPRESENTATIVE PETERSEN referred to slide 4, "More Important
Points." He recalled Commissioner Butcher mentioned this was
based on actual information; however, the commissioner also
mentioned audits are not finished. He suggested the audit
information would be useful to assess how well ACES has been
working. He asked the department to provide more information,
acknowledging he understood some information is proprietary
information.
COMMISSIONER BUTCHER offered to provide capital and operating
expenditures to the committee; however, he said that it is more
difficult to analyze how well tax rates have been working. He
explained that some companies claim tax credits but have no
production since they are still exploring for oil. Other
companies have been producing and receive tax credits. The
companies that currently receive tax credits are in the
exploration phase, but will not provide any information until
production occurs. He offered to review the past four to five
years. It is difficult to draw a line between what exploration
occurred due to the tax credits and what would not have occurred
without the credits. He suggested that the oil companies may be
able to provide these details.
10:57:27 AM
CO-CHAIR FEIGE noted that production tax credits have been in
effect since 2007 under ACES. He asked for the number of
companies that have moved forward with production.
COMMISSIONER BUTCHER deferred to Mr. Barron, Department of
Natural Resources (DNR). He commented that DOR is limited to
what information it can release since the DOR has access to
confidential taxpayer information. He stated that the DOR can
speak generally about tax credits as a whole, but cannot provide
information for a specific company.
CO-CHAIR FEIGE asked whether the DOR is restricted by statutes.
COMMISSIONER BUTCHER answered yes, the company can choose to
release information, but the department cannot release it.
10:58:37 AM
REPRESENTATIVE PETERSEN referred to slide 7, "Two Distinct
Elements of ACES: Can't discuss one without the other" and to
the previous comment about the difficulty a small "wildcat
operator" would have in switching from exploration to
production. He further recalled the commissioner thought the
tax might be impediment for these small operators. He said he
has read one big impediment is access to facilities, whether it
would be processing facilities or the pipeline itself. He asked
him to comment.
COMMISSIONER BUTCHER stated that access to facilities is more of
a DNR issue; however, he recalled the last two fields to come on
were done by smaller producers. He related that he has not
heard of any difficulty in the field in his limited
conversations about facilities.
10:59:51 AM
REPRESENTATIVE OLSON referred to "ELF, PPT & ACES: Did the
Pendulum Swing Too Far?" [slide 8]. He recalled the
commissioner previously offered to update the slide with
projections under HB 3001. He asked whether the slide could
also be updated with North Dakota's tax structure.
COMMISSIONER BUTCHER said he would see what he could do. He
characterized North Dakota as "a different beast" but offered to
try to show their structure and Alaska's production and cost
estimates.
11:00:37 AM
CO-CHAIR SEATON related his understanding that the conversation
has been discussing contractor take. He suggested only showing
government take and excluding private royalties to try to
compare competitiveness. He asked whether that could also be
included in slide 8.
COMMISSIONER BUTCHER agreed. He said he had been thinking of
that since if it is not included the outcome would be pretty
invalid. He pointed out that people in North Dakota have owned
farms for decades and some family members have sold subsurface
rights years ago, while others are now benefitting from shale
oil. He commented that the footprint for fracking is very
small. Some people rent an area without subsurface rights for
$30,000 per year, while others who own the subsurface rights are
earning $1 million plus the rent. He concluded this has
resulted in animosity among neighbors.
11:02:24 AM
REPRESENTATIVE FOSTER asked whether the report could contain
charts. He referred to slide 6, "Historical Oil Production:
How Did Our Competition Fare When Prices Spiked?" and asked
whether he could add in Texas, Alaska, North Dakota, and Russia.
COMMISSIONER BUTCHER answered that he previously mentioned
Russia since Pedro van Meurs emailed the department to indicate
their tax rates were lower, so the information will be based on
his analysis.
11:03:28 AM
REPRESENTATIVE P. WILSON asked him to update the slide to
indicate when PPT and ACES went into effect since the effective
date is not always the same date as passage.
COMMISSIONER BUTCHER agreed to do.
11:04:01 AM
REPRESENTATIVE SADDLER asked how precisely the department can
tease out the effects of any one factor on production.
COMMISSIONER BUTCHER offered his belief that differences exist
between companies. He said that Repsol has had leases taken
away in other countries. He suggested that when Repsol was
interested in Alaska, they may have considered other factors
than a company based in the Lower 48 would consider.
11:05:08 AM
REPRESENTATIVE HERRON referred to slide 7, titled "Two Distinct
Elements of ACES: Can't discuss one without the other" and
asked for clarification on whether the commissioner had
testified that tax credit should be reduced, as well.
COMMISSIONER BUTCHER responded that the department believes the
tax credit element of ACES is working since it brings new
companies and potential investment into the state. The DOR has
been working to separate out the effects, but it may take a few
years to sort out the positive and negative aspects.
11:06:15 AM
REPRESENTATIVE HERRON referred to slide 9, titled "Monthly ANS
Crude Prices Under Net Tax System." He recalled hearing
testimony that oil prices will stay relatively stable and may
bounce slightly. He asked for confirmation the DOR anticipates
oil prices will be holding at $100 per barrel
COMMISSIONER BUTCHER answered the DOR and most experts
anticipate oil prices at $100 to $110 per barrel.
11:06:51 AM
REPRESENTATIVE HERRON related his understanding the decline
curve is at six percent with private sector investment estimated
at $1 billion per year. He asked whether HB 3001 would reduce
the decline curve to three percent, and for the estimated
figures.
COMMISSIONER BUTCHER answered that question is a difficult one
to answer. He anticipated that DOR and DNR would try to
determine the ballpark figure of what would be needed. He was
unsure a chart would be possible given the variables. He
suggested that a new exploration company will spend more in
billions than an existing producing company who was working to
extract more oil from a field to a certain percentage. He
offered that the DOR would work on developing a ballpark figure.
11:07:53 AM
REPRESENTATIVE HERRON related his understanding that the
governor would like to increase production from .5 million
barrels per day to 1 million barrels per day. He suggested
incremental investments of $2-$4 billion would flatten the
decline curve out. He asked whether HB 3001 would increase
production to 1 million barrels per day.
COMMISSIONER BUTCHER characterized 1 million barrels per day as
a goal that would be great to attain. He predicted DNR would
agree that to one day to hit 1 million barrels per day would
require "shale [oil], potentially heavy [oil], and other
things." He suggested that he would be thrilled if the state,
over the next five years, could flatten the decline curve out
and begin to turn it around as Texas has done.
11:08:47 AM
CO-CHAIR FEIGE asked for the effect on the state to flatten out
the curve.
COMMISSIONER BUTCHER answered that to do so would help solidify
and make for rosier fiscal future for the state. He pointed out
that the high oil prices have muddied the fact that oil is
declining since the state is bringing in more revenues than the
state expends. He recalled policy discussions held a few years
ago about instituting a state income tax and eliminating
permanent fund dividend checks, besides making deep budget cuts.
However, as the state's oil continues to decline and if oil
prices dropped, the state's taxes would drop below the mid-1990s
level, which is about what it needs to balance the budget. He
concluded that if the oil prices in the state drops to $90 per
barrel Alaska will be in a deficit.
11:10:33 AM
CO-CHAIR SEATON referred to slide 7, titled "Two Distinct
Elements of ACES: Can't discuss one without the other." He
recalled testimony that small producers could not bring in
capital due to the tax rate. He asked whether the smaller
producers in Cook Inlet are having trouble obtaining capital for
their operations due to the zero tax rates in Cook Inlet.
COMMISSIONER BUTCHER agreed the Cook Inlet taxes are much lower
than those on the North Slope basin, but the estimates for
potential oil is much smaller. He characterized it as a
different situation, although he suggested that DNR may be able
to enlighten him on the potential for different finds between
the two regions.
CO-CHAIR SEATON wanted to establish that tax rates are driving
small producers to not have access to capital. He recalled,
historically, the committee has heard that the small producer's
tax credit is ineffective in obtaining capital and he presumed
bringing capital in is the function of the new oil portion of HB
3001. He further recalled testimony that the small producer's
tax credit expiring in 2016 does not allow them to bring capital
in since the tax credit will be gone before the small producers
are in production. He asked whether the administration supports
extending that credit until 2022 to allow small producers to get
capital invested, anticipating the tax credit once production
begins.
COMMISSIONER BUTCHER answered, "Yes, that's something we would
be happy to work with the committee on."
11:13:06 AM
CO-CHAIR SEATON referred to access to facilities. He asked
whether capital underground is one thing and above ground is
another. He related a scenario in which one small producer
found oil and tested the flow. The producer came to the state
asking for a loan for production to get past the bottleneck. He
asked whether the administration is supportive of incentives for
capital for production facilities to ease the access problem.
COMMISSIONER BUTCHER deferred to the DNR to answer that
question.
11:14:00 AM
CO-CHAIR SEATON explained that if the crux of the new oil
portion is to bring capital to Alaska, noting that facility
access has been identified in numerous publications by numerous
individual companies, he would like the DOR to review making
loans at 10 percent interest in terms of whether it would
facilitate getting oil in the pipeline by 2014. He noted this
would be two years sooner than Point Thomson's projected 10,000
barrels per day production.
COMMISSIONER BUTCHER answered absolutely; that the governor is
focused on getting more oil production in the pipeline. He said
he is open to discussion.
11:15:13 AM
REPRESENTATIVE PRUITT recalled testimony that several regimes
peaked at the perfect time, when prices were high and the DOR
often refers to their success. He asked how confident the DOR
is that if the legislature makes tax changes that Alaska will
not be "Johnny come lately." He further asked whether prices
could drop and Alaska would find itself short in the future. He
suggested Alaska would be trying to react to the success that
other areas and regimes have had.
COMMISSIONER BUTCHER responded that there would never be a
definitive answer to the question. He pointed to estimates on
oil pricing and on the world economy; however, the general sense
is the U.S. and world economy will expand and need for oil will
be greater than it is today. He suggested that it appears the
world will need oil.
REPRESENTATIVE PRUITT asked for the impact of new regimes. He
referred to the Falkland and to Iceland. He said he understood
the dynamics, but asked for the impact that new regimes bringing
new oil into the market will have on the marketplace and whether
the value of oil will benefit Alaskans.
COMMISSIONER BUTCHER answered the biggest advantage Alaska has
is it is politically stable. He said it is a goal of the
Congress and U.S. to become less energy dependent. He suggested
that becoming less reliant on other volatile parts of the world
will always make sense.
11:17:48 AM
REPRESENTATIVE KAWASAKI referred to slide 8, titled " ELF, PPT,
& ACES: Did the Pendulum Swing Too Far." He recalled earlier
testimony that under the ELF system Alaska was not receiving its
fair share.
COMMISSIONER BUTCHER agreed the state did not receive the levels
of revenue it should have received.
11:18:26 AM
REPRESENTATIVE KAWASAKI suggested that under ELF, the companies
and corporations, specifically in the two big legacy fields,
were taking the money. He then referred to the decline curve
[in slides 5-6] and stated that in the most precipitate decline
from 1983 to 2003, the state's production kept going down. He
suggested the whole assumption has been that if taxes are lower
the state will get more production, but the state has seen
historically - with high prices and low taxes - that the state
has not seen an increase in the two legacy fields. He asked how
the DOR intends to change that with HB 3001. He recapped that
under ELF the state received little in taxes.
COMMISSIONER BUTCHER answered that in reviewing oil prices
during those times the relatively high level of oil at $40 to
$45 per barrel was not nearly what it would be today. He said
he has had companies state that they don't base decisions on
$100-$120 per barrel. He also said the state makes its
estimates on the forecast, but the oil producers will be more
conservative. He characterized the view today as a different
world view than it was at that time.
11:20:42 AM
REPRESENTATIVE KAWASAKI said he didn't really answer the
question. He stated that when taxes were exceedingly low under
Prudhoe Bay and Kuparuk, the decline curves were even greater
than now. The entire assumption has been that if Alaska changes
its taxes to give oil companies more profit, the companies will
reinvest in declining legacy fields; however, the state has not
previously seen that so why would the state experience a
different outcome now.
COMMISSIONER BUTCHER answered that companies will be able to
give insight into this. He related a scenario in which a model
includes taxes and capital at $20 per barrel oil and another
model is run at $80 per barrel oil. He indicated that some
projects that were not economical at $20 per barrel are
economical at $80 per barrel. He said that nothing would be
economic on the North Slope if oil was at $9 or $10 per barrel.
11:22:02 AM
REPRESENTATIVE PRUITT asked what impact the fall of the Berlin
Wall, in 1989, had on the opening of significant amount of oil
basins not previously available. He pointed out the capital
could be spread to other areas. He asked him to describe the
impact on Alaska, which had been the subject of substantial
focus.
COMMISSIONER BUTCHER related that Pedro van Meurs laid out the
number of countries which would be stable and friendly to
American companies 20 years ago and compared it to today, which
is radically different. He acknowledged the number of companies
available to multi-national companies has changed the overall
investment landscape.
11:23:21 AM
REPRESENTATIVE GARDNER referred to slide 9, titled "Monthly ANS
Crude Prices Under Net Tax System" and to the decline curve in
investment. She asked what would be needed to bring the
governor's production goal to 1 million barrels per day. She
recalled he indicated that would likely include shale, heavy
oil, and legacy field production. She further asked for the
various proportions of oil production sources the administration
anticipates with passage of HB 3001. She recalled ExxonMobil
had previously testified that it would take $3-5 billion
annually to stem or reverse the oil decline in the legacy
fields. She was unsure if the testimony indicated stem or
reverse the decline, but either way, she wondered would passage
of HB 3001 result in that type of investment and what type of
data could the department provide to support it.
COMMISSIONER BUTCHER answered that he would discuss this with
DNR. He pointed out the difficulty in determining the economic
viability of heavy oil or shale oil production. He predicted
either one could come into production in five years or else not
happen at all. He said he did not know enough to figure it out,
but he offered to attempt to do so.
11:25:08 AM
REPRESENTATIVE GARDNER suggested with the magnitude of state
participation needed that the state must have estimates on the
types of fields, particularly since the tax structure could be
designed to support heavy oil, shale oil, or legacy fields. She
questioned how the legislature could effectively make decisions
if the legislature doesn't know the target.
COMMISSIONER BUTCHER answered that the DOR holds discussions on
these matters with oil companies. He declared that if a lever
can be moved the parties, including the legislature and the
governor, will have conversations. He offered his belief that
improving the investment climate and tax regime for companies
will improve the economic situation. He related his
understanding that it would be a company-by-company discussion.
He asserted that everything becomes more economic under the
bill.
11:26:24 AM
REPRESENTATIVE GARDNER agreed to the necessity of holding
company-by-company discussions; however this is the
administration's proposal and she expected the administration
would have held those discussions at the time the proposal was
developed. She also indicated that yesterday the Senate posed a
series of questions. She expressed interest in the answers and
asked for a timeline.
11:27:08 AM
COMMISSIONER BUTCHER answered that he hopes to get the
information to the Senate and the committee sometime next week.
He spoke of the constraints posed by being in committee hearings
the entire day.
11:27:31 AM
The committee took an at-ease from 11:27 a.m. to 11:31 a.m.
11:31:55 AM
WILLIAM BARRON, Director, Central Office, Division of Oil and
Gas, Department of Natural Resources (DNR) introduced himself.
11:32:33 AM
JOHN NORMAN, Commissioner, Alaska Oil and Gas Conservation
Commission (AOGCC), Department of Administration (DOA), offered
to characterize some of the potential sources of increased oil
and gas production in Alaska. He stated he would discuss legacy
fields, new discoveries, heavy oil, shale oil, natural gas
condensate from Point Thomson, outer continental shelf oil,
Arctic National Wildlife Refuge (ANWR), production from the
Beaufort Sea, and North Slope natural gas during his
presentation.
11:33:31 AM
MR. NORMAN characterized the legacy fields as Alaska's "bird in
the hand." He said Alaska counts on the legacy fields daily and
should not take them for granted. During the regular session,
Commissioner Foerster testified that the health of all of the
fields on the North Slope depends on the health of Prudhoe Bay.
He compared it to the anchor tenant at a shopping mall since a
good tenant helps everyone. The state's anchor tenant is the
Prudhoe Bay field. He recalled that years ago, the original
estimate for the Prudhoe Bay field was 9 billion barrels of oil;
however, thus far the state has recovered more than 11 billion
barrels of oil with an anticipated 2 billion barrels of oil
remaining to be recovered. Except for North Dakota's Bakken
basin, the remaining asset [in Prudhoe Bay] represents the
largest discovery in the U.S. in many years. In fact, it is
currently one of the largest conventional oil fields in the U.S.
Prudhoe Bay owners have been spending substantial amounts of
money to finesse the additional oil. Negative impacts on
profitability, such as a drop in the price of oil, increases in
taxation or increases in regulatory burden will put some of
these 2 billion barrels of oil at risk. Conversely, there is
increased potential for greater ultimate recovery from Prudhoe
Bay, depending on technological advances and other things in the
future that may positively impact profitability. "We don't have
control over technology or advances or oil price, but we can
certainly caution in increasing the burden on an operator either
through taxation or regulation," he stated. He then stated that
this characterization is also valid for Alaska's other legacy
fields. New discoveries positively impact the production
profile in Alaska and the state must continue to encourage new
operators to take risks for new exploration. He offered his
belief it is not likely that another Prudhoe Bay will be found
in currently allowed areas. He said that it is easy to find
fields in the upper Cook Inlet region and some in the central
North Slope have been found. However, he said nothing is wrong
with Alpine, North Star or other smaller fields. He referred to
these fields as ones that would be considered huge fields in
other places. He noted that the cost and remote location of
Alaska works against Alaska.
11:38:28 AM
MR. NORMAN stated that the fields are viable due to their
proximity to the infrastructure of the legacy fields. One
factor to keep in mind is that as exploration moves farther from
the legacy fields and Prudhoe Bay the challenges of
commercializing these fields increase. He then turned to heavy
and viscous oil, which is the subject of attention currently by
industry. Although the resource estimates for heavy and viscous
oil vary depending upon with whom one speaks, almost everyone
would agree there are potentially at least 20 billion barrels on
the North Slope. However, it is not an easy resource to
commercialize as the challenge to extract viscous oil would be
similar to filling a sandbox with molasses and using a drinking
straw to recover only the molasses. Mr. Norman stated that the
key to developing "this" will be advances in technology. The
AOGCC understands that research is actively ongoing in Alaska
and other jurisdictions, including internationally. However,
this development is not a given. He then moved on to shale oil
development, which has created a boom in the Lower 48 that now
extends from New York, Pennsylvania, and through North Dakota.
He noted shale is often the normal source for oil which then
migrates into the conventional reservoirs. He characterized the
geological risk as low since geologists can predict where the
source rock is located. The risk lies in whether enough oil
exists and if it can be extracted from the rock, but the only
real way to find out is to drill. He pointed out that the state
has exploration incentives in place that have piqued the
interest of at least one shale oil explorer - Great Bear
Petroleum, LLC - and this will be subject the Mr. Barron will
comment on later.
11:41:19 AM
MR. NORMAN turned to the estimates of condensate associated with
gas at the Point Thomson field. He suggested that it is safe to
estimate at least 200 to 400 million barrels of oil exist at
Point Thomson. He said that the settlement of Point Thomson
litigation was good news. He explained this was worrisome to
the commission since there is a significant conservation issue.
He explained anytime liquid is associated with gas it creates a
tradeoff, such that one might want to blow-down the field, but
each time that happens some liquids are lost so it is really
just a matter of calculating how much will be lost. He related
the goal is to optimize and develop the field first and ideally
try to produce every single drop of liquid and then blow-down
the field; however, that is often not possible. Point Thomson's
operator has been working on a cycling project to recover the
liquids, which will be transported by the Trans-Alaska Pipeline
System (TAPS). He pointed out that this is another example of a
known resource with an uncertain outcome. He stated that the
condensate is present, but it is uncertain whether cycling to
recover it will be commercially viable. The outcome of the
current pilot project will provide valuable answers, he said.
MR. NORMAN turned briefly to the outer continental shelf (OCS),
noting Alaska's jurisdiction runs seaward for three miles and by
law Alaska has some revenue sharing between 3-6 miles. The
legacy fields are Alaska's "bird in the hand" but the OCS is a
"bird in the bush." He indicated there is significant potential
for Alaska's OCS to offer opportunities for a large oil
discovery. He surmised that Shell Western E&P Inc. has been
patient in its attempts for exploration, which is an indicator
of a potentially large oil discovery. He declared that a
discovery, even in federal waters, will have enormous benefits
to Alaska - from jobs to extending TAPS. He identified the
greatest obstacle to developing the OCS off Alaska is the
federal government's policies. Alaskans should try to influence
these policies. He stated the commission is often asked about
the recent Gulf of Mexico events and if time permitted he would
offer contrasts; however, Alaska's situation is significantly
different. The AOGCC's jurisdiction runs statewide and it
exercises the police power of the state since it is not a
property management agency. He opined that the AOGCC believes
resource development can occur responsibly and carefully. He
said, "We all live here and we want to be sure that's the way it
does proceed."
11:44:50 AM
MR. NORMAN mentioned the Arctic National Wildlife Refuge (ANWR).
He stated that the AOGCC is not certain of ANWR's potential
until drilling occurs; however, his belief is that it can be
done responsibly and it is not an either-or situation. The area
necessary for drilling would be relatively small and the
obstacle is political - a giant obstacle - but conditions can
change and the nation could realize the necessity for the
resource development. Currently, the state is being denied the
opportunity to assess and quantify the resource, which is
somewhat irresponsible, he said.
MR. NORMAN turned to the Beaufort Sea. Currently, oil is being
produced offshore in the Beaufort Sea, including North Star and
Endicott production. He pointed out there are likely other
discoveries and at least one exploration effort is being planned
with [BP Exploration (Alaska) Inc.'s] Liberty project. He
pointed out the Liberty project lies in federal waters, but can
reap benefits for Alaska; however, it is not without risks since
it will consist of an ultra-extended reach well. He explained
it will begin and travel from Endicott Island underground for
several miles. The technology necessary for the Liberty project
will push the limits of current drilling technology. Therefore,
the operator has kept the commission closely advised and the
commission is also keeping informed by federal oversight
agencies. He said the AOGCC believes the operator is proceeding
diligently and cautiously to assure the technical risks and
challenges are assessed and addressed before work begins.
11:47:21 AM
MR. NORMAN turned to North Slope gas. He cautioned that from
the AOGCC's perspective the natural gas must be used properly.
Still, the AOGCC's opinion is that every bit of known North
Slope gas associated with an oil reservoir is or will be
beneficially used to obtain more oil from the ground. He said
there is a way to orchestrate this and time it such that when
the time and conditions are right for a major natural gas sale,
there are procedures for adjusting and setting a new offtake
rate so gas can be removed. However, currently the AOGCC is
satisfied that industry is proceeding properly and natural gas
is being cycled in a beneficial manner. He made an observation
that until 2005-2006, oil and gas were in tandem, but since that
time oil and gas have been decoupled and valued independently.
He pointed out that the nation is awash in gas, and thus the
relative values [of oil and gas] are no longer the same. He
suggested that legislators, property managers, and Alaskans must
ensure that the state underscores the importance of not selling
gas if it means sacrificing oil development to do so.
MR. NORMAN turned to gas to liquids (GTL) technology, and
related that currently GTL is a very inefficient way to develop
a product since about 40 percent of the resource is lost in the
process of going from gas to gas liquids. Additionally, GTL
plants are very expensive to build. He previously mentioned
Shell Western E&P Inc. has been constructing some of the largest
plants in the world. The AOGCC has been optimistic that in the
future there may be some promise for GTL, bur currently "the
jury is out."
11:51:02 AM
CO-CHAIR FEIGE recalled him mentioning the offtake rate on the
North Slope, which he believed was 2.7 BCF. He asked how the
number was arrived at and how has it changed over the years.
MR. NORMAN answered that the number was arrived at approximately
25-30 years ago when the commission hired consultants who
determined without harming the ability to produce oil, that at
the time it was possible to take off 2 BCF of natural gas per
day. He recalled that about .7 BCF would be necessary for fuel
and consumption as part of the process. He said that number
still remains in existence as part of the AOGCC's rule in
setting the ground rules for producing the Prudhoe Bay
reservoir. He explained that a few years back, during the time
of the Stranded Gas Act and the Alaska Gasline Inducement Act
(AGIA), the AOGCC became concerned since an application had not
yet been made. The process is such that a company comes to the
commission and applies to amend and change the Prudhoe Bay
offtake rate. The company would suggest an [offtake] number,
document it, and the AOGCC would undertake a public process,
including publishing it, and providing an opportunity for the
public and legislature to weigh in on the proposal. He
concluded that an administrative record would be made and this
is not something the AOGCC arbitrarily does. He emphasized that
the number is carefully examined.
11:53:09 AM
MR. NORMAN explained that the AOGCC went through the process
because the commission did not want to delay any major gas sale
or pipeline. Further, the AOGCC entered into some cooperative
agreements with the operators at Prudhoe Bay and Point Thomson
to gain information and not cause delays. However, as a result
of their inquiry, the AOGCC determined it did not have enough
information to adjust the offtake upward. No one had come in to
request 4, 4.5, or 5 BCF per day. He said the AOGCC concluded
that there was insufficient information in the record to do so.
He acknowledged that the commission recognizes that the AOGCC
will revisit this as part of a public process and adjust the
figure when a company or consortium is ready to move forward on
a project. He offered that with each passing day as oil flows
in TAPS, the conservation issue and the AOGCC's worry is reduced
since the oil in the field is reduced and at some point it will
be a matter of "blowing down the field." He cautioned that is
not necessarily the case at Point Thomson since 2-4 million
barrels of oil liquid exists, which is about the size of an
Alpine field. He identified this as what is at risk if someone
simply went straight into blowing down the Point Thomson field -
simply because of the characteristics of that field.
11:55:02 AM
CO-CHAIR FEIGE asked, with respect to ANWR, what knowledge the
state has that leads us to believe ANWR contains so much oil.
MR. NORMAN answered that the AOGCC is the repository of
confidential information entrusted to the state. The AOGCC has
certain information that has been the subject of litigation,
which has been afforded extended confidentiality. He related
that by law, when unleashed acreage exists and one operator has
made a significant, proprietary investment to drill, that the
operator should get the benefit before it is made public.
MR. NORMAN said the AOGCC has one or two people who could begin
to answer that question. The AOGCC's access to information is
on a "need to know basis." He said he does not want to know the
answer. He emphasized that this is proprietary information, but
estimates could be made since the USGS has made estimates. He
concluded it is reasonable to think the potential is there, but
he could not speak to any specifics.
11:57:08 AM
REPRESENTATIVE KAWASAKI said that the state has been blessed
with Prudhoe Bay as one of the largest fields with recoverable
oil equals to double the East Texas oil field. He asked whether
any other examples of fields the size of the Prudhoe Bay and
Kuparuk - legacy or conventional fields - ramping up and
dropping down. He related the discussion surrounds whether
there a way to change the production curve in a mature field.
MR. NORMAN answered that the AOGCC does not know how to
interrupt the field; however lots of innovation is occurring.
People have been experimenting with microbes to break up the
oil. When Prudhoe Bay began the estimates were for 9 billion
barrels and the operators have greatly exceeded that figure. He
recalled some years back an operator proposed injecting water in
the gas cap to improve the reservoir. He offered his belief
that he was skeptical, but it has been beneficial. He suggested
that something will happen but he does not see anything on the
horizon that will interrupt the decline at this point.
11:59:50 AM
REPRESENTATIVE KAWASAKI recalled learning about re-pressuring
fields during his time in the legislature. The legislature has
been considering monetizing natural gas and transporting it to
communities such as Fairbanks. He asked how the AOGCC would
suggest the state monetize gas for in state use.
MR. NORMAN responded that the AOGCC has written a letter which
indicates it would not see any problem with drawing down up to
2.7 BCF of natural gas per day, which would be more than
adequate for in state use. He did not want to suggest that
taking off any gas is problematic since it is not; however, to
launch into major gas sales ranging from 4-5 BCF or greater,
would require careful analysis to ensure that oil is not left
behind. He likened the natural gas projections as being similar
to asking a real estate appraiser to give an owner an appraisal
on a house now, but to also to predict the property's value in
2018. He offered his intuitive feeling that the state can get
there with Prudhoe Bay, that Point Thomson is problematic, but
certainly for gas for in state use the AOGCC does not see any
difficulty.
12:02:14 PM
REPRESENTATIVE GARDNER said she liked the analogy of Prudhoe Bay
being the anchor tenant in a shopping mall. She offered from
the legislature's perspective it is as though the tenant also
controls the elevators and doors. She recalled earlier
testimony on remaining oil and barrels that could at risk due to
low prices or from tax burden. She related the legislature's
consultants have discussed decision-making and the impact of
taxes. She related her understanding that prospectivity and
price are the two biggest determinants - far and away - and
beyond that are other considerations, including the tax burden,
which does not stand separate from the credits, incentives and
other terms. She related the AOGCC's commissioner
qualifications are set by statute. She inquired as to whether
anyone on the AOGCC is an expert in tax structure, petroleum
economics, or anything similar.
12:03:45 PM
MR. NORMAN answered no; that the AOGCC exists to provide factual
information to the DOR and others. The AOGCC's jurisdiction is
statewide so if oil is produced on federal lands their
jurisdiction would extend to the National Petroleum Reserve-
Alaska (NPR-A), and to the Native corporation's 44 million
acres. He suggested that it has been interesting to listen to
the testimony. He explained his background, such that he
started his career in Texas, and he understands the history of
Alaska's statehood - which was due to oil discovered at Swanson
River. Further, he understands the hopes and expectations of
Alaskans. He held up a publication that he said is the history
of how Prudhoe Bay was selected by the state. He referred to
numerous basins and early state development. He said, "With
respect to taxation, that production will not increase by taxing
it higher. It's just not going to occur." He offered that from
his perspective it is all part of a total climate. The industry
wants access, infrastructure, but "the herd mentality" still
exists, and industry has oil plays and hot areas and companies
don't want to be left out of hot areas - if the Falkland Islands
is hot, or off the coast of Brazil - so they will move in that
direction. He offered his belief that Alaska's time will come
around again, but right now Alaska does not have the cachet it
once had. He says this because he interacts with regulators and
officials and he understands their mindset. He related that
Texans has a greater understanding of the industry than Alaskans
do - noting he speaks as a 50-year Alaskan. He suggested that
Texans are less hostile to industry and Alaskans are sometimes
unnecessarily hostile to an industry that has provided and is
providing tremendous benefits; however, it should be carefully
regulated.
12:07:36 PM
MR. NORMAN turned to oil taxation. He said he hears a statement
in Alaska: "Let's get our fair share." The fair share is a
concept that comes from the oil and gas lease sale process. The
state obtains royalty, bonus money, promotes the sale, make best
deal and encourage development through unit agreements and
exploration licenses. He acknowledged that the state should
promote production, but he has always viewed tax differently.
He cautioned against government taking "another bite of the
apple" through its taxing powers. He related a scenario to
emphasis this. He stated if he operated a car wash and the
state discovered he was successful they would want the state's
fair share of his profits. He regarded the tax policy as
starting from the premise of funding government and taking care
of the needs of the citizens instead of getting right to the
point of pressing someone. He has held many discussions with
the prior governor of North Dakota. The governor's goal was to
get people trained for jobs in 2004. He initially thought he
was nuts since shale oil technology was lacking; however he
realized later that the governor had vision. He characterized
North Dakota's business climate as positive and one in which
industry is welcome, although they must obey the law, and hire
local people. Alaska does not have a broad base of private
property ownership like North Dakota has so there isn't a broad
base of Alaskans who understand the industry. Although Alaskans
receive a permanent fund dividend check, the connection to oil
is indirect. In other states the royalty checks are mailed to
people so they take an active interest in the industry. He
reiterated he recommends that the state be less hostile, watch
industry carefully and expect them to pay. He surmised that the
hostility stems from a lack of understanding of the oil
business.
12:11:23 PM
REPRESENTATIVE GARDNER responded that his point is well taken.
She stated that the AOGCC's responsibility is to regulate the
industry, but she suspected the AOGCC has the necessary
information to do so. However, the legislature does not have
enough information to know the full impact of the decisions,
while at the same time the legislature has been admonished by
the courts as being too trusting. She acknowledged she is
sometimes troubled that the severance tax is considered a tax
rather than a sales price. Alaska has a limited resource that
may or may not be developed, but the state's responsibility is
to assure that it obtains the value of the resource for future
generations. She said to allow the resource to flow away
without understanding the value of oil makes these discussions
difficult. She pointed out that the decisions surround
unimaginable amounts of money yet the legislature must still
vote on them and be diligent without possessing adequate
information. She agreed confidentiality is important, but she
said she is reluctant to sign confidentiality agreements since
she wants to be able to tell constituents the reasons for her
vote.
12:13:28 PM
CO-CHAIR FEIGE recalled hearing testimony that no one ever
increased production by increasing taxes.
MR. NORMAN answered that is a broad law of economics.
12:14:08 PM
REPRESENTATIVE SADDLER asked whether any false assumptions exist
with respect to the health of the North Slope resources.
MR. NORMAN answered that none come to mind. He clarified he
assumed that by health he meant ensuring the best possible
recovery from the oil fields. He stated that the AOGCC's job is
to keep an eye over the fields. He characterized the first line
of defense as the DNR's Division of Oil and Gas. He described
their working relationship as a good relationship. He pointed
out that the AOGCC also watches Native lands. He indicated that
the AOGCC will fine a company millions of dollars if a company
is out of compliance with Alaska's regulations. Additionally,
the AOGCC issues conservation orders, which are all located on
their website. He reiterated that he did not know of anything
that legislators should have in the front of their minds.
12:16:01 PM
REPRESENTATIVE HERRON recalled that 8 BCF of natural gas is
produced and reinjected; however, he wondered if Mr. Norman said
that to maintain the maximum recovery of the oil basin that the
state could siphon off 2.7 BCF of natural gas for a future gas
line.
MR. NORMAN answered yes, for a future line. He recalled the
conversation has generally been considered in 2017-2018 or 2019.
He agreed with those dates. He said that Commissioner Foerster
is always quick to say if someone wanted to immediately today
start pulling gas off the AOGCC would need to have an emergency
meeting to consider it.
12:17:19 PM
REPRESENTATIVE PETERSEN referred to shale oil technology. He
asked what type of oil is produced using this process.
MR. BARRON described the typical crude produced from the shale
oil process as a very nice crude oil, particularly in Eagle Ford
and the Bakken areas. He agreed that the state does not know
what type of crude will be extracted from the potential Shublik
production. He explained that Eagle Ford is unique. He stated
that the terminology is different. The Eagle Ford project
consists of three areas of development: gas component,
condensate component, and an oil component. The industry is
chasing each one of those relative to product price. If there
is a high gas demand and high gas price the rigs will shift to
gas development in the Eagle Ford shale gas zone and when they
want to chase oil they will move back to the oil zone.
12:19:24 PM
REPRESENTATIVE PETERSEN referred to a map of potential
production areas not on the North Slope. He asked what types of
tax regimes the legislature could develop to promote development
in other areas sooner. He highlighted that there are areas of
the state that would like to have local access to natural gas
not currently available.
MR. NORMAN said he did not know of anything. He suggested that
the best thing is to have someone drill and discover the
resources; however it is difficult to make something occur if
the industry is not interested in the area. He related that
anecdotally, the AOGCC has observed positive response to the
incentives in Cook Inlet. He reiterated the best thing to
encourage development is to allow access, provide stability,
predictability, and hope for discovery.
12:21:47 PM
REPRESENTATIVE PETERSEN asked whether the geological formations
on the map he referenced earlier have the potential to produce
oil, gas, or condensates.
MR. NORMAN answered that he identified geologic basins with
production potential, but by no means is it assured that
production will occur.
12:22:20 PM
REPRESENTATIVE MUNOZ said the legislature understood companies
are thinking of investing up to $14 billion with more favorable
fiscal terms in Alaska in legacy and new fields. She asked
whether he could estimate what $14 billion in investment might
correlate to in terms of recoverable barrels; that is benefit to
the state.
MR. BARRON said he was not able to do so. He pointed out that a
certain amount of the investment is required to maintain the
current infrastructure, which is aging across the North Slope.
He further pointed out that while some things will need to be
replaced, it may not improve the flow. In terms of how much of
is ordinary maintenance and how much would be an incremental
increase, Mr. Barron said he did not know.
12:23:42 PM
REPRESENTATIVE SADDLER asked for the relative ranking of the
effects on oil production on some of the elements, including
resource, commodity price, the technology, taxes, and access.
MR. BARRON answered that the industry is dealing with a
multivariable component, including the product price, lifting
cost, corporate overhead, facility cost, taxation, fiscal
regime, the environment, and the stability of the government.
These variables come into play and any one could shift the
balance. He suggested that a dramatic product price swing would
make a difference. A new tax or a tax reduction would make a
difference. He was unsure how to balance those and give a
weight to that is difficult. He offered his belief that most
companies run hundreds of economic simulations to value,
estimate, and solve that problem. He offered that the oil
companies' assessments are different. In some cases taxation
and political stability are equal. He referred to product price
and questioned if it would be stable for 5-10 years. Every
company has their own escalation factors and forecasting branch.
He concluded that most companies run economics in a static
position assuming a low product price to see what element drives
the cost. He characterized it as a very dynamic model to run
and he could not answer the question specifically.
12:26:26 PM
REPRESENTATIVE SADDLER said the legislature's mission and
challenge is to reverse engineer those variables and try to
figure out what impact Alaska's taxes will have on different
producers, price points, technology, and access.
MR. BARRON said he really does not want to step into the
legislature's seat. He echoed the commissioner's comments. The
state needs to understand and try to identify the things that
the state can control and influence. He related that
Representative Petersen asked a good question, in asking what is
impacting the ability to get to new basins. He pointed out that
Alaska has its own set of unique problems, some of which are
self-imposed. He acknowledged that some of the barriers are for
protection of the state's assets, but the state needs to
recognize they are barriers. He turned to his PowerPoint,
"Potential of increasing production" and pointed out that winter
exploration season is good for exploration in some areas, but in
others, such as in Cook Inlet it doesn't make sense to use ice
roads since the road cannot be maintained with any assurances
[slide 2]. He suggested that the legislature should think
through and be cognizant of such [barriers]. He said the cost
of development creates a barrier as a cost of production. He
recalled the commissioner of DNR commented on some of these,
trying to capture the threshold and hurdle rate; however, not
economic hurdles, but the hurdles necessary to jump to get into
business, such as cost of production, lack of physical
infrastructure, and roads.
12:28:59 PM
MR. BARRON brought up other barriers to new production [slide
2]. He recalled substantial discussion this legislative session
on the roads to resources, which is critical. He pointed out
that there is not any road to Badami oil field or on the west
side of Cook Inlet. The industry and state must build a road
each year. He offered his belief that some exploration areas
could be less challenging if a road had existed. He
characterized the Cook Inlet region as a challenging area for
exploration and development, but the potential exists for world-
class gas production. He pointed out that power distribution
systems are limited. Considerable dialogue has been held on
access to facilities. He described the process as a
complicated, economic development process that must be worked
out integrally between two companies. The company with the
assets has also been challenged to do more each day, so if they
try to negotiate an agreement for excess capacity, it might
limit their ability to do work on their current assets to
satisfy the commission, but also satisfy their obligations and
plan of development. He asked who is at risk or responsible for
the loss of reserves when the facility goes down due to
equipment failure or for routine maintenance. He characterized
these as complicated negotiations and every company's
negotiations will be a little different. Some companies do not
want to be part of a shared facility since they want to control
their own destiny and have access to the pipelines. He reported
that Brooks Range Petroleum is struggling to finance their
facilities. He said they have publically indicated their
facility will now be a stand-alone facility. He wished them
luck and noted that their oil could help fill the pipeline. He
turned to environmental, subsistence, and permitting issues,
some of which are unique to Alaska.
12:32:15 PM
MR. BARRON surmised the environmental impact in North Dakota is
not there since it is mostly North Dakota farming and ranch
land. Most of the North Dakota and Texas lands are private
lands - subsurface and surface. He said the fear of ongoing
litigation risks exists. He concluded by discussing the last
item on this slide: fiscal certainly. Companies want to know
what will be in place for a long time. He agreed this is a
legacy for kids, but the dialogue must include a fundamental
understanding on whether to capture everything today in a basin
that is still a world class basin. He questioned how to develop
a tax and royalty system that establishes a protocol and is
robust for all kinds of fields and what type of development
scenarios can be contemplated.
12:33:42 PM
REPRESENTATIVE DICK referred to GTL and to what he thought was
the Fischer-Tropsch process, which is over 60 years old. He
recalled hearing alternative and newer GTL methods. He
suggested that the legislature needs to keep its mind open to
all options and not narrow the options.
REPRESENTATIVE PRUITT recalled him mentioning the offshore area
from three to six miles. He asked whether concerns exist in
tapping an area that extends beyond six miles offshore. He also
asked whether the state can still extract oil if part of it is
on state land and some of it is on federal land.
MR. NORMAN answered that the problem doesn't exist since it is
carefully worked out as the reservoir is developed. He pointed
out that the state currently has differential ownership and in
this case there would be revenue sharing with the federal
government. He said the legal framework and technology
currently exist.
12:36:36 PM
REPRESENTATIVE PRUITT asked whether the state has opportunity to
"stick a straw over" into ANWR and have a "federal milkshake."
MR. NORMAN recalled a law article written on that subject, which
he offered to provide. He answered that the state cannot
invade; however the state can drill right to the line and rely
on drainage. Still, the federal government could drill an
offset well to prevent against drainage. He acknowledged that
Alaska boarders ANWR on one side. He recalled Governor
Murkowski had considered drilling an offshore well on Alaska's
tide and submerged lands. He further recalled the matter was
discussed in the U.S. Senate and U.S. Senator Lisa Murkowski was
working on a bill to say that if the federal government has
permanently put ANWR off limits to drilling that in effect
Alaska's subsurface has no value. He wondered if Alaska could
directionally drill, as Representative Pruitt suggested. He
recalled the Liberty well is looking at a lateral displacement
of at least eight miles, so arguably there would be no harm
since the state would be producing oil that is not going to be
produced. Additionally, it would benefit the nation by reducing
the balance of payments and reducing dependence on foreign oil
imports.
12:38:59 PM
MR. BARRON interjected this is what the commissioner has
referred to as the right of capture. He offered his belief that
this has been done, tried, and proven. It is possible to drill
on land and remove product from an adjacent property.
Technically, from an engineering and drilling standpoint it can
be done. He segued into Representative Petersen's question of
what to do to incentivize remote areas. The state has worked
with the federal government and put up adjacent lands for lease
in recent lease sales. The state lands had more reasonable
entry rates for leasing to encourage participation. He
summarized that the cooperative effort between the two groups
encourages the desired action.
12:40:38 PM
REPRESENTATIVE PRUITT encouraged them to drill the hole and if
the federal government also drilled that it would provide an
argument for the state's actions.
12:40:51 PM
CO-CHAIR SEATON related the House Resources Standing Committee
held an interim meeting on barriers to oil and gas development.
He said the committee was disappointed that at the time the
industry did not identify the barriers, such as ice roads. He
hoped the industry would come forth to collectively try to solve
the problem. He related his understanding that the owner
agreement allows any of the three companies to veto the project
so if the terms were not acceptable to one it could get vetoed.
He asked whether that specific concern is real and any way the
legislature can solve that problem.
MR. BARRON answered yes; he related his understanding that is
part of the agreement on the North Slope. He did not know if
the state can get around that, nor does he know what type of
impact this has had on the development of Prudhoe Bay, which has
been robustly developed. Additionally, the three companies work
on a broader portfolio of international projects. He said that
Representative Hawker said it best when he said that the state
must be competitive not just economic. He stated that the lease
sales, rental sales, rates, and severance taxes must be set
competitively so when the companies run the economics, Alaska
rise higher on their international list rather than lower. He
was unsure of the overall impact.
12:45:04 PM
REPRESENTATIVE GARDNER stated that besides Badami, the shale
lease areas Great Bear Petroleum, LLC, has taken up also need
roads and not ice roads. She asked whether any statutory change
or regulatory changes are necessary to allow roads, and not ice
roads, to be built.
MR. BARRON answered it falls under self-barriers. He explained
in the best-interest findings, that one of the historic findings
is that exploration should be done on ice roads and ice paths.
The state and companies don't necessarily want a permanent road
for dry hole and then need to pull the road up. That has begun
to be a problem due to shortened drilling season, and the
distance requires longer roads. The state has encouraged
industry to identify ways to avoid an ice road in their
exploration mitigation plans. He recalled that Great Bear
Petroleum, LLC has worked very closely with the Alaska
Department of Fish & Game and the Division of Oil and Gas to
identify sites along the haul road on previously disturbed paths
so the company can move its rig in early next month to explore
by using existing disturbed soil. He characterized this as
creative and preferable. The division would like to have ice
roads as a preferred option rather than a requirement, he said.
12:48:20 PM
REPRESENTATIVE GARDNER asked whether any statutory change is
necessary or if they currently have the authority.
MR. BARRON offered to get back to the committee since it may be
possible to craft something beneficial to the state and still
protect the other parties.
12:48:47 PM
REPRESENTATIVE GARDNER asked whether any other area has a
reserves tax as Texas does and if there is value to do so.
MR. BARRON answered that he would defer to the DOR.
12:49:21 PM
CO-CHAIR SEATON said it seemed like he would like the
legislature to mandate the department to do something it has the
authority to do, with respect to the best interest finding. He
asked for clarification.
MR. BARRON agreed it is within the purview of the division;
however, the way the standings are changed is from information
and requests from citizens and the industry. He said that when
the division receives a request or an option to look at another
alternative, then the division can go into the best interest
finding and make a determination that it is not necessary for
this specific project. He agreed it would be a clear decision;
and under the purview of division on whether to require or not
require an ice road.
12:51:01 PM
CO-CHAIR SEATON said it wouldn't be necessary for the
legislature to have a finding that it requests the producer
build an exploration road instead of an ice road and to consider
it in the best interest finding since the division has the full
ability to do so now.
MR. BARRON clarified that what he was referring to were the
roads to Badami, Umiat, and west Cook Inlet. The state could
help fund or work with the federal government on permitting for
wetlands to gain access, which is one of the biggest hurdles.
He pointed out other states are scattered with roads for
industry to use.
12:52:25 PM
REPRESENTATIVE GARDNER pointed out the federal government has
been working on creating a federal coordinator position to help
with permitting and to share information. She asked whether
that has happened and whether this will be helpful on these
types of projects.
12:52:47 PM
JOE BALASH, Deputy Commissioner, Department of Natural Resources
(DNR), answered that it is true the president issued an
executive order last year creating a lead person for permit
coordination. He characterized this action as two steps
forward, but one step back, since some things are being dumped
into groups or subgroups on individual topics that are spinning
out. He reported that the DNR has meetings in Washington D.C.
next week to try to get things back on track.
[HB 3001 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES Testimony of John Norman - AOGCC 4.21.12.pdf |
HRES 4/21/2012 10:00:00 AM |
|
| HRES 4.21.12 DOR Production Tax - Discussing the Issue.pdf |
HRES 4/21/2012 10:00:00 AM |
|
| HRES 4.21.12 Div. of Oil and Gas Presentation.pdf |
HRES 4/21/2012 10:00:00 AM |