Legislature(2015 - 2016)BARNES 124
02/29/2016 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB247 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 247 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G
1:03:08 PM
CO-CHAIR NAGEAK announced that the only order of business would
be HOUSE BILL NO. 247, "An Act relating to confidential
information status and public record status of information in
the possession of the Department of Revenue; relating to
interest applicable to delinquent tax; relating to disclosure of
oil and gas production tax credit information; relating to
refunds for the gas storage facility tax credit, the liquefied
natural gas storage facility tax credit, and the qualified in-
state oil refinery infrastructure expenditures tax credit;
relating to the minimum tax for certain oil and gas production;
relating to the minimum tax calculation for monthly installment
payments of estimated tax; relating to interest on monthly
installment payments of estimated tax; relating to limitations
for the application of tax credits; relating to oil and gas
production tax credits for certain losses and expenditures;
relating to limitations for nontransferable oil and gas
production tax credits based on oil production and the
alternative tax credit for oil and gas exploration; relating to
purchase of tax credit certificates from the oil and gas tax
credit fund; relating to a minimum for gross value at the point
of production; relating to lease expenditures and tax credits
for municipal entities; adding a definition for "qualified
capital expenditure"; adding a definition for "outstanding
liability to the state"; repealing oil and gas exploration
incentive credits; repealing the limitation on the application
of credits against tax liability for lease expenditures incurred
before January 1, 2011; repealing provisions related to the
monthly installment payments for estimated tax for oil and gas
produced before January 1, 2014; repealing the oil and gas
production tax credit for qualified capital expenditures and
certain well expenditures; repealing the calculation for certain
lease expenditures applicable before January 1, 2011; making
conforming amendments; and providing for an effective date."
1:03:49 PM
KARA MORIARTY, President/CEO, Alaska Oil and Gas Association
(AOGA), provided a PowerPoint presentation with coinciding
written testimony [included in the committee packet]. After her
initial introduction, Ms. Moriarty paraphrased from her written
testimony, starting at the second paragraph, which read as
follows [original punctuation provided]:
AOGA is a professional trade association whose
mission is to foster the long-term viability of the
oil and gas industry in Alaska for the benefit of all
Alaskans. Thank you for the opportunity to testify
today on House Bill 247, Governor Walker's oil and gas
tax policy proposal.
Slide 2
AOGA represents the majority of oil and gas
producers, explorers, refiners, transporters and
marketers in Alaska. Our current members include:
Alyeska Pipeline Service Company, BlueCrest Energy,
BP, Caelus Energy, Chevron, ExxonMobil, Hilcorp,
PetroStar, Shell, and Tesoro. Although I am here on
behalf of a varied and diverse group of companies, my
testimony today represents the thoughts and sentiments
of each and every member. On matters related to tax,
AOGA requires unanimous consent on testimony.
Before I address the bill before you, I believe
it is prudent to discuss the current state of the oil
and gas industry in Alaska. In order for each of you
to make an informed decision, it is important to
understand and appreciate the industry from a context
broader than mere tax revenue.
1:06:02 PM
REPRESENTATIVE HAWKER noted that the administration had advised
the legislature to get its analysis of HB 247 from the industry.
He emphasized the importance of that advice in serving as the
basis for understanding how HB 247 would impact the [oil and
gas] industry.
1:07:03 PM
MS. MORIARTY expressed her thanks to Representative Hawker and
related the degree to which she takes the testimony seriously as
the reason she would exceed her 20-minute suggested time for
testimony. She said she will discuss the impact in broad terms
while many company representatives will discuss specifically how
the proposed legislation would impact their company. She then
directed attention to slide 3 and continued paraphrasing from
her written testimony, which read as follows [original
punctuation provided]:
Slide 3
The state revenue depicted on this table
represents the total state revenue generated in fiscal
year 2015, restricted and unrestricted state revenue.
The unrestricted portion of the $2.3 billion was $1.7
billion, representing 75% of the state's total
unrestricted revenues.
In addition, the industry paid $447 million in
property taxes to local governments. Again, for
greater context, the mining industry generates $83.7
million in state revenue and pays $18 million in taxes
to local governments.
It would be imprudent to discuss the oil and gas
industry's contributions to Alaska without mentioning
jobs. Based on data from the most recent McDowell
Group report on jobs and wages in the industry and
data in the 2015 Department of Revenue Sources Book
(RSB), the oil and gas industry is, without question,
a main driver in fueling Alaska's total economy.
When you combine jobs from direct industry
employers like AOGA members, plus the jobs provided
from indirect industry employers such as the multitude
of Alaska based contractors, plus the induced jobs
created by those employees spending money in their
communities, there are 51,000 private sector Alaskan
jobs created by the oil and gas industry according to
the McDowell Group's estimates. The McDowell Group
also modeled the number of state employees and other
jobs created in Alaska's economy through state
spending, acknowledging that the overwhelming majority
of that spending is attributable to the oil and gas
industry. McDowell Group found that an additional
60,000 public sector jobs would not exist without the
industry's fiscal contributions. All told, the
McDowell Group concluded that 111,000 jobs generating
$6.45 billion in wages result from the oil and gas
industry's presence in Alaska. By comparison, the
mining industry generates about 8,700 jobs in Alaska.
Slide 4
To put it in more simple terms, more than 1/3 of
Alaska's jobs are tied to the oil and gas industry.
For every direct job the industry provides, 20
additional jobs are created throughout Alaska's
economy. The McDowell Group found that no other
industry comes close to that magnitude of multiplier.
Finally, you have undoubtedly read headlines
regarding the industry being forced to lay-off direct
employees in this current, low price environment. It
is not just oil industry families that are dealing
with the adverse effects of downsizing, contractions
in the industry are felt across Alaska, as every
dollar earned by an oil and gas employee generates $8
additional dollars in wages throughout the state.
Slide 5
It is easy for the cynical to tell anecdotal
stories about getting on an airplane next to a worker
who lives out of state coming or going from the North
Slope. Although the industry for a variety of reasons
cannot dictate where an individual must live,
companies consistently strive to hire as many eligible
Alaskans as possible. According to the most recent
Department of Labor (DOL) report the statewide average
for all resident hire, across all industries is about
80% Alaskan hire. Many AOGA member companies actually
have a higher rate of resident hire than the statewide
average. For example, Caelus Energy has more than 85%
Alaska hire and over 400 contractors working on the
Slope this year. Alyeska has a 94% Alaska hire rate,
with 20% of their employees being of Alaska Native
heritage. 100% of BlueCrest operations staff are
Alaska residents, while 70% of the construction
workers at their Cosmopolitan project are state
residents. Petro Star boasts 97% Alaska hire.
1:13:00 PM
In 2014, BP spent $2.2 billion in Alaska, with
72% of that spend with Alaska companies; they
currently have a 79% Alaska hire rate.
MS. MORIARTY added that ExxonMobil Corporation has engaged
and worked with more than 100 Alaska companies in its
construction of Point Thomson, 80 percent of which are
Alaskans. She continued paraphrasing from her written
testimony, which read as follows [original punctuation
provided]:
89% of Hilcorp's workforce are Alaskans. In
addition, industry supports scholarships and training
programs to increase the resident hire. For example,
Alyeska alone spends $2 million each year to hire,
train and develop Alaska Native employees.
Would the industry like to hire more Alaskans? Of
course they would. It makes good business sense to
hire Alaskans, as it is both more efficient and
economical to do so.
What does not make good business sense is the
provision in Section 27 of the bill to limit the
repurchase of refundable credits to just a percentage
of the certificate equal to that company's percentage
of Alaska resident hire in the previous calendar year,
including Alaska hire by the company's contractor work
force.
Basing the repurchase of tax credits on a
company's local hire percentage would make it
difficult, if not impossible, for operators to plan
and evaluate investments because their contractors'
and subcontractors' Alaska hire percentages are
outside the operator's control. This uncertainty will,
in turn, discourage potential new investment here.
In addition, a resident-hire limitation on the
amount of an otherwise well-earned tax credit
certificate that can be cashed out also raises
significant issues under the U.S. Constitution, and an
earlier Alaska-hire preference attached to the
construction of the Trans-Alaska Pipeline System was
struck down by the U.S. Supreme Court. The inevitable
legal battle would drag out in court, and the
unanswered question would cloud Alaska's tax system
with uncertainty until there was a ruling. We note
that the U.S. Supreme Court recently heard oral
arguments involving an Alaskan issue, the Sturgeon
case, it has taken nine years for that case to wind
its way through the legal system to reach the highest
court. Does Alaska want to create further uncertainty
over local hire?
Finally, if it is good policy to put local hire
conditions on how the oil and gas industry is taxed,
one might expect similar proposals for other
industries operating in Alaska. But the Administration
isn't proposing anything like that, even though some
industries employ much higher rates of non-Alaskans
than ours.
Slide6
As I already indicated, Alaska's oil and gas
industry is a major contributor to state government,
both in terms of revenue generated for state spending
as well as the jobs created by the industry. You can
see from this table that, since statehood, oil and gas
has been the source for 85% of the state's
unrestricted revenue, totaling $141 billion dollars.
This figure has not been adjusted for inflation, so in
the total in today's dollars would be far greater.
Slide 7
As you discuss a change in Alaska's oil and gas
tax policy, this slide is a reminder that in the last
decade there have already been 5 major changes in tax
policy. As the President of Hilcorp stated last week,
"I started in the oil business right straight out of
school, during the real boom in the 7O's/early 80's in
Midland, Texas. I'm not aware of the fiscal system
ever changing in the State of Texas since I've been
working in the oil and gas industry. I've been in
Alaska four years, and we've debated it 3 or 4 times."
He went onto to say, "More than anything, changing
rules and taxes every few years is a sure way to scare
investment away."
Slide 8
Of course, the last major change in tax policy
occurred three years ago with the passage of SB 21,
followed by the referendum to repeal the new law in
August 2014. Voters decided the state's current fiscal
policy was good for Alaska, and we would agree that
Alaska has proved to be competitive, has attracted new
jobs and investment, and will ultimately result in
more production to the state.
Since April 2013, when the bill passed the
legislature, industry has announced more than $5
billion in additional spending across the state. That
increased spending could not have happened at a better
time, as the investments made in the last 18-24 months
are helping the industry sustain itself in this low
price environment.
1:19:00 PM
Slide 9
But what has the increased investment meant in
terms of production? As you can see from this chart,
using data from the Department of Revenue, production
on the North Slope has stabilized and was basically
flat from 2014 to 2015, which is particularly
significant when considering an historical trend of 5-
6% annual decrease.
The states own forecast shows the power of a
competitive fiscal system. The blue line is historical
production in Alaska for the last decade, the black
line is the forecast from December 2013, and the red
line is the forecast from just this past December.
If you look at the chart to the right, and look
out a few years to the year 2020, and compare this
year's forecast to the forecast released in the Fall
of 2013, after SB 21 had passed but had not yet been
enacted. After approximately two years under this tax
system, you will see the Department of Revenue is
forecasting 50,000 barrels per day more than what they
were forecasting in 2013. To provide further context,
the price forecast in the Fall 2015 forecast is
$50/barrel less for 2020 than it was in the 2013
forecast. Even with the much lower price forecast, the
production forecast is still 50,000 barrels per day
more.
Slide 10
There has been a lot of conversation about "new
oil" or oil that qualifies for the gross value
reduction or "GVR". The purpose of the GVR was to
lower the effective tax rate on new production as a
way to incentivize new production. Some have recently
asserted that all new oil after 2002 will pay zero
taxes if prices are under $70 per barrel. I will
discuss government take on all oil, including GVR,
later in the presentation, but I would like to point
out, that the DOR is forecasting that GVR will average
about 8% of our overall production for the next 15
years. So while bringing on new fields and new oil is
important to Alaska's future, our legacy fields will
continue to provide the lion's share of production for
years to come.
Slide 11
Looking to Cook Inlet, you will see a tremendous
oil production success story. The Division of Oil and
Gas Director Corri Feige mentioned these statistics
during her presentation last week. You can see there
has been an increase of over 100% since 2009. The
investments made to increase Cook Inlet production
have made a significant impression on the local
economy. Additionally, our member company Tesoro
refines every barrel of oil possible that travels the
short distance to their refinery. A December 2015 Econ
One study for the Senate Finance Committee reported
that Alaska refineries supply the majority of the
State's demand in the Southcentral and Interior
regions. When oil production was lower in Cook Inlet
the Tesoro refinery was importing oil to refine from
as far away as Africa, just to meet these in state
needs. Econ One also went on to say "We estimate that
the total value added to Alaska's economy by the two
refiners currently in operation (Tesoro and PetroStar)
is approximately $153 million per year.
1:23:32 PM
MS. MORIARTY added, "In comparison, the governor recently
announced the impact of the [Alaska] Marine Highway System is
just under that, at $100 million per year. So the ferry system
has an economic impact of $100 million and our two in-state
refineries ... [have] the benefit of $153 million." She
continued paraphrasing from her written testimony, which read as
follows [original punctuation provided]:
The [refining] industry provided $23.2 million in
revenue annually to the State in the form of revenue
in kind (RIK) purchases over and above the revenue in
value (RIV) alternative and $9.3 million in property
and income taxes." Having a local source of supply for
the refinery is good for value added manufacturing in
Alaska.
Slide 12
It is impossible to have this conversation
without acknowledging the ominous and unprecedented
drop in oil prices. Prices today are not only the
lowest we've seen in a decade, but when adjusted for
inflation, they are the lowest since the mid-1980's.
In less than two years, the industry has experienced a
70% drop in oil prices. You are well aware of the
impact this has had on the State of Alaska's revenues.
You have historically received 85-90% of your revenue
from oil. As significant as that is, it's important to
recognize that the industry receives 100% of its
revenue based on the market prices for what it
produces. As my friends in other industries will tell
you, we are price takers, we are not price makers.
Slide 13
Every industry operating in Alaska fully
understands that Alaska is an expensive and
logistically challenging place to do business. I
imagine that concept was expressed by the mining
industry last week, and it is particularly true for
the oil and gas industry.
The following chart demonstrates that while oil
and gas development costs grew 90% since 2000,
inflation grew only 40% during the same period. In
other words, over the past fifteen years, costs have
surged more than two times the rate of inflation. This
is yet another compelling factor and financial
stressor on industry in Alaska, which compounds the
difficult decisions these companies are making to cut
costs and increase efficiencies while safely and
reliably producing oil and gas.
Slide 14
Invariably, companies are forced to operate
despite the current oil price environment; this can
result in projects being delayed and deferred. Perhaps
most painfully, it also results in Alaskan jobs being
lost. This chart shows the relationship between the
low price on slide 11 and the high costs on slide 12.
It looks eerily similar to the charts you as policy
makers are reviewing in terms of the state's revenue
and expenses.
The oil and gas industry is cash flow negative,
as least as much as the state sees itself as being.
Slide 15
As I alluded to before, the high cost environment
in Alaska is even more difficult to navigate during
this unprecedented low price environment. According to
the Department of Revenue's Fall Sources Book, the
estimated average cost of producing a barrel of oil on
the North Slope -before a company pays even one penny
of tax -is $52/barrel. To reiterate, companies spend
$52 to produce each barrel before they pay any
corporate income tax, property tax, or production tax
in Alaska. One need not be an economist or Rhodes
scholar to understand that, in a $30 a barrel world
with $52 costs, oil companies are in an untenable
position in Alaska.
Yet despite this, here we are, testifying about
legislation to add additional costs to the industry by
raising the production tax. It is not surprising that
Department of Oil and Gas Director Feige testified
last week that companies are gravely concerned about
any substantive changes to tax policy. "Changes in
taxes generally are lumped into the bucket... of cost.
At a time when prices are low, that sets off some
alarm bells."
1:29:00 PM
Intuitively, it seems like poor long-term policy
to choose to increase the costs to the industry at a
time when companies spending is already out of balance
with their revenues by over $20/barrel before they pay
the existing taxes. If additional taxes are levied on
the industry, forcing them to be even more out of
balance, you can be sure that the industry would have
to make more severe cuts in expenditures that are
needed to maintain and grown the state's production.
The Department of Revenue Tax Director suggested
to me a few weeks ago that if industry were to simply
eliminate all capital expenditures, the industry would
be able to "break even" at these prices. This
astonishing suggestion discounts the significant role
that capital investment plays for maintenance and the
integrity of industry operations. Absent continued
capital spending, the State can say good-bye to the
currently forecasted additional 50,000 barrels per day
in 2020. As misguided as that line of thought might
be, it does highlight the fundamental question at the
core of this discussion. How badly are you willing to
mortgage Alaska's future for nominal and short-term
gains today?
It will be very challenging for the industry to
reduce operating expenses, without further reductions
in the workforce.
Any increase in this environment will have a
negative impact on the industry and on the state's
future.
Slide 16
As you weigh yet another change in tax policy,
there are policy questions that need to be answered:
-What effect will the policy have on overall oil and
gas production in the state?
-Will the policy make Alaska more competitive or less
on a global scale?
-Will the policy provide stability to the industry and
the state of Alaska?
-Will the policy provide predictability to companies
looking to make huge investment decisions?
The Department of Revenue has frequently said
that industry will be testifying to the impact of
their proposed changes, and I have no doubt each
company will do that, but I encourage you to ask each
individual company over the next several days their
view of these questions.
Slide 17
The Administration's proposal represents the
sixth major tax change in the last 11 years. Prior
changes came from unprecedented high oil prices, or
endeavored to incentivize development in the state and
make Alaska more competitive.
However, the motivation behind this current
proposal is not to improve the fiscal system for the
industry or create incentives for further development
and increased production. Rather, it is purely driven
by the state's desire for more money, now. As Director
Alper said on February 12th, "It is a tax increase. I
don't think we are attempting to disguise that."
Slide 18
Raising taxes when prices go up, and then raising
them again when prices go down, undercuts stability
and predictability. The Administration acknowledges
the industry is suffering tough economic times; in
fact, according to their testimony last week, if
prices average around $40/barrel for 2016, the
industry will suffer more than $1 billion "loss" in
the state of Alaska. If the state keeps the current
structure and does nothing, spending a $1 billion more
than industry is taking in will have a negative impact
on Alaska's economy, considering the industry is the
largest private economic driver in the state.
Yet it is clearly the intention of the state to
raise taxes on an industry with negative cash flow-and
not by small margins. To add another half-billion
impact to the industry with the passage of HB 247 will
only accelerate cutbacks by the industry, which will
affect the number of Alaskans working, the amount of
cash that circulates through the economy, and
ultimately, the future health and growth of the
industry.
1:34:25 PM
Slide 19
Under Governor Hammond, Alaska first established
an equitable policy of one-third government take for
the state, one-third for the federal government, and
the last third for industry. During the ACES regime,
government take climbed to a higher level, which, in
turn, led directly to SB 21 in an effort to normalize
total government take over a broad range of prices.
As Janak Mayer from enalytica explained last
week, with the slide that Rep. Josephson will hang on
his door, government take is about 62% in a price
range from $60-150, including government take on new
oil, or gross revenue reduction oil.
Contrary to Director Alper's testimony two weeks
ago, HB 247 increases government take. In fact, Mr.
Mayer demonstrated and explained "that the cumulative
impact of the proposed changes would be to shift up
government take in lower oil prices. In times like
today, the effective government take exceeds 100%.
Rep. Josephson summarized it well by saying,
"Industry suffering so much -that we (the State) are
getting all the money."
Slide 20
Two weeks ago, AOGA submitted specific comments
for each section of the bill that causes the industry
concern two weeks ago, and in the interest of time, I
will not belabor each and every point. However, I do
want to comment on a few of the substantial concerns
we have with the bill.
The governor's proposal would increase the
minimum gross tax from 4% to 5%. Although a one
percentage point increase might not sound significant
to some, [in] reality, it represents at least a 25%
increase for those companies who already pay the 4%
minimum tax.
Additionally, the Governor's proposal would
forbid companies from using any earned or available
tax credits to reduce the minimum tax below the new 5%
floor. It is likely that there will be companies,
large and small, that have earned "new oil" tax
credits or exploration, drilling or tax loss credits
from prior year investments, while also operating in a
loss position due to low oil prices. For those
companies, using those tax credits is the only way
they can also continue to invest in the state. The
proposal would delay, or possibly deny, vital economic
recovery at the very time companies need it the most.
In other words, raising the minimum tax affects
everyone, and the proposed increase is large enough to
cause substantial negative impacts on all producers at
today's oil prices. It is poor tax policy to engage in
nothing more than a flagrant money grab at a time when
the State should be encouraging industry to continue
making vital investments.
For smaller companies or newcomers to the state
who have yet to make a profit in Alaska, they don't
pay the 4% minimum tax, so under the governor's
proposal, they would go from paying zero in production
tax because they don't make a profit, to immediately
being hit with a 5% gross tax, a punitive tax increase
described by Director Alper as an "infinite increase."
Additionally, the proposal would change the way
the minimum tax is determined and would prevent a
producer from taking the actual tax credits available
for a month to the extent they are greater than the
initially estimated amount. Both of these incremental
changes amount to a fundamental change in how the tax
is calculated and will result in a tax increase.
Another major concern relates to the change in
the net operating loss (NOL) tax credits. The
Administration has testified that they are preserving
the NOL credit, but we contend that under the current
proposal the NOL credits become virtually useless.
NOL tax credits are utilized both on the North
Slope and Cook Inlet and were established to help
level the playing field for new companies trying to
get a foothold in Alaska and allow all companies
making critical investment to truly understand the
economics under which those investments were made.
Under SB 21, NOLs provide an even level of government
support for capital investments on the North Slope.
1:39:48 PM
HB 247 would prevent the use of NOL tax credits
to reduce the minimum tax. This change is analogous to
the federal government not allowing a company's losses
to be applied against its corporate income tax.
Additionally, the proposal imposes a ten year limit
for a company to apply unused NOL credits.
MS. MORIARTY added that even though the NOL credits can be
deferred, it essentially changes their value and the
deferral itself is a tax increase because the company was
not expecting to have to pay that same level of tax if
prices dropped and if the company defers the NOL credit to
be applied in a future year it has to pay the tax, though,
in the current year. She continued paraphrasing from her
written testimony, which read as follows [original
punctuation provided]:
Again, the proposed changes in HB 247,
essentially eliminate the value of the NOL tax credit.
Without question, changing the value of the NOL will
have a tremendous impact on companies and effectively
discourage future investment.
There are several other major changes proposed to
credits, both for the North Slope and Cook Inlet.
Setting arbitrary limits of $25 million per company,
when even the "smallest" of projects range in the $500
million -$1 billion range, is unreasonable and will be
a strong disincentive for future investment.
Eliminating or discouraging cash rebates for companies
that may not yet have production or profits, strongly
disadvantages new companies, especially considering
that they invested in good faith based on the tax
policy in place when the investments were committed.
For the State to basically say, after the fact, that
it is not going to fund its share of the new
developments, as originally promised, is just wrong
and potentially puts some of these new companies out
of business.
Eliminating two important credits for Cook Inlet
and "middle earth" is also dangerous as the Cook Inlet
drilling tax credits were unequivocally the driver for
several key investments in the region that have
already led to increased production and jobs. The
state has benefitted from several new, smaller
companies into the state, making new discoveries that
would positively increase the State's future revenues
from royalties and taxes on that new production. These
credits are not a "cost". They are an investment by
the state with a good return. Companies have already
entered into contracts and made large financial
commitments for spending over at least the next year.
Abruptly terminating those credits after they have
made substantial good faith investments and
commitments over the next year is bad faith on the
state's part and will chill these types of investments
in the future.
And, we fundamentally disagree that Cook Inlet
has gas in search of a market as has been asserted by
the Administration. DOR, DNR and enalytica have all
testified that additional investments are necessary to
meet the increasing demand of Alaska's residents.
Without continued investment, gas production will
rapidly decline. Any decline will inevitably result in
higher utility rates for consumers and increase the
likelihood of gas shortages.
The proposed revisions in Section 39 of HB 247
define "outstanding liability to the state" broadly as
"an amount of tax, interest, penalty, fee, rental,
royalty, or other charge for which the state has
issued a demand for payment that has not been paid
when due and, if contested, has not been finally
resolved against the state." Thus, the State could
deny or delay tax credit payments for virtually any
outstanding and alleged liability, regardless of
whether it is pending adjudication. If a taxpayer had
an existing dispute with a state agency unrelated to
taxes, it could be deemed an outstanding liability to
the state and the tax credit used to satisfy that
liability; or if an audit was pending, the tax credit
could be delayed until the conclusion of the audit.
1:44:46 PM
This revision, absent further clarification or
modification, would provide the State with the power
to arbitrarily deny or delay any tax credit, or to
apply them against unresolved and unrelated disputes,
including those utilized by in-state refiners. This
could have a major impact on both refineries.
According to a recent report by Econ One for the
Department of Natural Resources: "Alaska's refineries
are relatively small in size and technologically
simple. [This] puts Alaska's refiners at a
disadvantage relative to larger, more efficient
refineries ... [which] becomes greater when refinery
utilization outside the state drops, meaning that
refiners have spare production capacity. Refiners of
Alaska's size and complexity are generally the first
to close or idle units in this environment."
It is extraordinary then that in this price
environment and the challenges it presents to our
instate refineries, Petro Star and their parent
company Arctic Slope Regional Corporation are
investing over $20 million on an asphalt expansion in
North Pole, scheduled to come online this summer.
Creating increased uncertainty with this
provision causes understandable concern to my members.
Although there are plenty more aspects of this
proposal that warrants further discussion, I will
conclude by addressing the proposed increase in the
interest rate. AOGA supports the current rate and
believes it is reasonable, particularly considering
the lengthy statute of limitations that provides the
Department of Revenue with six years to audit a
company's production tax return. As Director Alper
stated on February 12 in front of this committee,
"When there is a change in an oil and gas tax return,
it is almost always in the State's favor. We're
looking for more money."
1:47:00 PM
Slide 21
Stated succinctly and candidly, HB 247 fails to
encourage increased production, fails to make Alaska
more competitive for future investment, and fails to
provide stability and predictability. This will,
without question, result in lower long term production
and revenues to the state. On one hand the
Administration has said that it "is not predicting new
or lesser activity through the enactment of this
bill." On the other hand, the Administration has also
stated that "It's reasonable to say that corporate
decisions might be made differently if a limitation
was put on that (tax credits)."
Enalytica agrees, stating that "limiting
refundable credits would increase capital needs." In
this price environment, it will be incredibly
challenging to find funding for those increased
capital needs. Enalytica went on to say, "for projects
currently under development, a July effective date
would have major adverse impacts."
HB 247 makes a series of incremental changes that
could be characterized by investors as "quite scary."
And as Mr. Mayer explained last week, "incrementally
taking more slivers without fundamental changes to the
system which can be more concerning than fundamental
changes -because fundamental changes can be accepted
if stable, but this creates 'oh dear', when
environment is tough, folks are going to come back
year after year to get another slice."
Slide 22
Raising taxes on companies that are reporting
losses or are in negative cash flow positions is
neither a prudent nor feasible long-term solution, and
is certainly not sound tax policy. While we appreciate
the need to close the state's fiscal gap, AOGA would
advise against taking even more from the oil and gas
industry when it is more important for the state to
encourage these companies to continue to make critical
investments in our collective future. To cripple the
oil industry is a misguided attempt to address short-
term concerns that will actually result in greater
long-term harm to the state's economy.
Compounding the negative impact of the highly
burdensome changes in Governor Walker's latest oil and
gas tax policy proposal is the provision that all but
one of these changes would become effective on July 1,
2016, while one is retroactive to January 1, 2016. It
is now [almost March], and companies' operational
plans for the full calendar year have already begun to
be implemented. Contracts for the entire year have
already been entered into, work has commenced, and
financial commitments have been made by the companies
-all based on the existing tax structure. Any sudden
reduction in the tax credits and/or increase in the
taxes on such short notice would therefore be, in
effect, a retroactive tax change. This would result in
a long-term serious impact to Alaska's oil and
industry, and have an intensely negative impact on the
state's reputation throughout the global banking and
financial community.
1:50:41 PM
Whether or not the Governor's proposal is
enacted, the oil and gas industry will still be the
largest annual contributor to state government by far.
The oil and gas industry will contribute 7.5
times more than the Governor's proposed income tax, 50
times more than the proposed revenue from mining, and
37 times more than from commercial fishing.
When will it be time for the State to realize
that, despite the rhetoric and misconceptions, the
industry is not immune from financial hardship?
Increasing taxes on the industry that is the largest
contributor to state government during a time when
that industry is suffering major financial loss will
result in long-term negative repercussions to the
state's overall economy. Forcing the industry to
reduce investments through excessive tax increases in
today's economic downturn will lead to a reduction of
industry jobs, a reduction of oil and gas production,
and a certain reduction in future revenues to the
State, all of which will only serve to exacerbate the
revenue crisis the state currently faces. This is not
a sound tax policy. This is not in the State's best
interest.
In the spirit of "Let's pull together", and in
order to make it through the current economic
downturn, we cannot emphasize enough that imposing
significant tax increases and eliminating access to
critical incentives does nothing to increase
production. It creates more harm to Alaska's largest
industry and the state's economy as a whole.
The industry is not before you today asking for a
tax decrease or for relief while we struggle though
extraordinarily low prices. We do ask, however, that
you consider that the industry has supported 85% of
Alaska's revenue since statehood, and at this trying
time, you do no harm to the long-term viability of the
oil and gas industry in Alaska, for the benefit of all
Alaskans.
1:53:01 PM
REPRESENTATIVE JOSEPHSON remarked that when Ms. Moriarty had
quoted him there should have been a question mark at the end of
the quote, because he did indicate some incredulity and surprise
at Mr. Mayer's testimony that because the state has a royalty
it's in an arguably better position. He said he was not making
a statement of fact, but rather his responding to Mr. Mayer's
testimony. He noted that fundamentally his main question was,
after hearing from the mining and alcohol and tobacco
industries, each industry could make the same arguments Ms.
Moriarty made. Therefore, at the end of the day, even if the
legislature used the earnings reserve in some beneficial way to
help the people of Alaska, the legislature is left with nearly a
multi-billion dollar deficit. He offered that the only option,
in taking the collective wisdom of all of the industries, is to
impose taxes on Alaskans. He noted that Ms. Moriarty had
discussed "pulling together," and he asked her to respond.
MS. MORIARTY recognized the challenging position that the
legislature is facing. She stated she was in agreement with the
mining testimony last week because the points were the same for
the oil and gas industry: In a low commodity price environment
and when industry is already struggling, additional taxes will
only make a bad situation worse. She said taxing the largest
economic drivers for the state "will not increase the feeling
that maybe Alaska's going into a recession." She noted there
has been some speculation as to whether or not Alaska is in a
recession, but people are nervous and feeling that things are
maybe not going in the right direction. She stressed the oil
and gas industry is saying that increasing taxes on them will
compound the problem in a different way, in that it may help the
state short-term for its revenue, but there will be
repercussions. She reminded the committee that every direct job
impacts 20 more jobs throughout the economy; therefore, the
industry currently creates 11 public sector jobs for every job
that it creates. She described it as a delicate balance and
stated that her testimony advised the committee of the impact
[HB 247] would have on the oil and gas industry.
1:56:28 PM
REPRESENTATIVE TARR referred to the slide depicting North Slope
production as stable, to which Ms. Moriarty had commented that
the difference is 50,000 barrels, and asked about the source of
that number. She reminded the committee that the fall 2013
forecast was after the previous administration decided to change
the way it performs forecasting with a more conservative
approach. It is not entirely genuine to use those numbers, she
stated, in the way Ms. Moriarty suggested.
MS. MORIARTY advised that AOGA relies on the state's forecast
and said she cannot speak to the methodology. After Senate Bill
21 was passed, while the public considered the referendum, the
forecast for 2020 was almost 400,000 barrels per day and
currently the forecast is for 460,000. She opined it was clear
that production has stabilized, in that production for 2015 was
approximately 519,000 barrels per day and that is the exact
forecast for this fiscal year.
REPRESENTATIVE TARR stated that that is an issue to be revisited
with Mr. Alper because that conversation, under the previous
administration and the way it was reported in the news, was a
methodology [DOR] suggested was done in partnership with the
industry, and the industry did actually have some influence over
that change.
MS. MORIARTY responded that the industry always has input on the
forecast and she was not suggesting it does not. She emphasized
that every administration has taken the information industry
shares with it in order for [DOR] to determine a forecast. She
continued:
I'm just saying if you used our production forecast
numbers, which we don't release because we don't talk
about it collectively because that would break anti-
trust ... rules. We can't talk about production and
price forecast. That's why we rely on the Department
of Revenue. So, they always take what the industry
tells them and makes a forecast.
REPRESENTATIVE TARR recalled that that was a pretty
controversial change and there were questions about how that
might be manipulated and how the legislature would review those
numbers going forward. She reiterated that she would like to
hear from the department on that as well.
1:59:45 PM
REPRESENTATIVE SEATON noted the diversity in features of HB 247.
He expressed particular concern with tax credits, specifically
state expenditures on the reimbursable tax credits. He
explained the tax credits are a direct expenditure from Alaska's
reimbursable cash to companies and that the industry cuts its
expenditures when they are having financial problems. He
reiterated Representative Hawker's comment about the committee
relying on Ms. Moriarty to explain the specific impacts the
elimination of these credits would have on individual projects.
He said the Cook Inlet credits are the largest portion of the
money being discussed and pointed out that the state would never
even recover its capital expenditures if the credits were on
expenditures over the entire life of the project.
REPRESENTATIVE SEATON mentioned slide 16 from the consultant
enalytica's presentation [to the House Resources Standing
Committee, on 2/27/16], explaining that in the current
constrained gas market the net present value (NPV) to the state
of those credits ranges between negative $125 million to $50-60
million in net losses. Another insight from enalytica, he
related, was that worldwide, a natural gas price of $5-$6 per
thousand cubic feet (Mcf) would be sufficient to make even the
most challenged gas deposit profitable and economic. He further
explained the state is trying to figure out how to proceed with
seemingly unneeded credits in a high price environment, such as
Cook Inlet where the price is about $7. He asked Ms. Moriarty
if she could explain what the impacts would be on individual
projects if those tax credits were eliminated while there was
still a high priced gas market.
MS. MORIARTY requested clarification of the question.
2:03:29 PM
REPRESENTATIVE SEATON said there were two portions of support
for economic development of [Cook Inlet] projects: tax credits
and high priced gas. Both the administration and the
legislature's consultants have advised that the higher price of
gas would be economically sufficient to do the projects and he
therefore wanted to know whether the higher price for gas is
enough to make projects economic and what the effect of
eliminating the tax credits would be.
MS. MORIARTY advised that tomorrow there will be testimony from
people operating in Cook Inlet specifically and they will answer
that question. She stated that categorically from the industry
as a whole, the elimination of the tax credits would have a
negative impact on investments, especially with an effective
date of July 1. She opined that tomorrow BlueCrest Energy will
discuss a gas project that is specifically on hold because of
the uncertainty surrounding whether the tax credits will be
available. Regardless of the price environment for gas, she
said, the industry as a whole is still in a negative cash flow
position; therefore, making those investments in the timeframe
is still very challenging. She stated that the tax credits were
absolutely necessary to bring those companies to Alaska. She
added, "You wouldn't have had the hundreds of millions of
dollars of investment over the last six years that have
increased the Kenai Peninsula Borough's tax revenues, and
increased the workforce and property values in that community
without the tax credits."
2:06:08 PM
REPRESENTATIVE JOSEPHSON noted he supported "the Agrium bill"
and that even though it meant a reduction to the state, he saw
that the case was made. He said he also sees Ms. Moriarty's
point of view. Notwithstanding that, he recollected that Mr.
Mayer, during his testimony at a prior meeting, had offered his
understanding that the industry in Cook Inlet believed that the
tax credits that exist in the inlet are not sustainable, because
they are too generous. He asked for Ms. Moriarty's response to
Mr. Mayer's comment.
MS. MORIARTY responded that she has not had any direct
conversation with Mr. Mayer since two sessions ago, and she
offered her understanding that he did have conversations with
individual companies; therefore, she encouraged Representative
Josephson to ask the Cook Inlet companies that question to
determine where [Mr. Mayer] may have obtained his information.
2:07:38 PM
REPRESENTATIVE HERRON referenced slide 20 regarding specific
concerns with the bill and slide 16 regarding the four policy
questions. He advised that when the governor's bill makes its
way out of committee it won't be the governor's bill as there
will be changes. "Obviously there must not be any good points
that you've put on that sheet," he said. He asked Ms. Moriarty
to describe the [most critical concerns] on which the committee
should focus by highlighting which were bad and which were ugly.
MS. MORIARTY replied it is impossible to advise which ones are
"evil, bad, and sort of ugly," because for various companies the
proposals will have different impacts based on the company.
Therefore, AOGA is saying, holistically, that all of these
changes will have a negative impact on every single company.
For example, when increasing the minimum tax by at least 25
percent. A company that is already paying the minimum tax is
faced with a 25 percent hit. A company that isn't paying a tax
right now and has production, but hasn't made a profit or was
given a small producer exclusion, goes from "zero to five." A
company that doesn't pay tax now has an "infinite increase."
The point is, she related, that all of these changes have a
different impact based upon the company, which is why each of
the companies will testify.
2:10:02 PM
REPRESENTATIVE JOSEPHSON referred to the first couple slides and
speculated that in some respects the industry might like the
fact that the state is trying to wean itself from dependence.
At the same time, he said, he occasionally feels as though each
time the legislature tries to be the 18-year-old moving out of
the house, the industry wants to remind the legislature, "No,
you can't leave, you must stay with us." He requested Ms.
Moriarty to respond.
MS. MORIARTY agreed the industry would "love for the state to
have a diversified economy, make no mistake about it." She
pointed out that the industry has been the largest contributor
to state government, not by choice, but by the policy put in
place by the state. She stated the industry takes its role
responsibly. Its employees are good corporate citizens who
provide large amounts of community service. She reiterated that
the industry would love to have a diversified economy, but she
opined that increasing taxes as a way to try to solve a fiscal
crisis does not provide any stability or predictability. She
continued, "Because all we see as the industry is: you raise
taxes when prices go up; you raise taxes when prices go down;
what's going to happen next year if you pass everything and
you're still a billion dollars short for whatever reason?" She
asked, "So, does that mean you're going to come back to us again
and again and again?" She reiterated that HB 247 would not
provide stability to the industry.
2:12:23 PM
REPRESENTATIVE JOHNSON opined that he looks at this as pay me
now or pay me later. He said [the state] can extract the wealth
from the oil industry now and lose it later because of lack of
production in those areas of things, such as exploration, that
the state would be missing out on. He said he would like to see
effort spent regarding the loss of production versus taking the
money now, some of the balance is missing. He indicated his
dilemma is in answering the question: "Do we take it now when
we, quite frankly, have more savings than we will maybe in ten
years when the lack of production really catches up and we
really drop down and TAPS [Trans-Alaska Pipeline System] becomes
an issue?" He requested an analysis on what the state would
forego in revenue by doing this now based upon exploration and
investment. He said he would like to see an apples to apples
comparison, including cost.
MS. MORIARTY noted that Representative Hawker had remarked that
the administration [had advised the legislature to obtain an
impact analysis from the industry], and she indicated that [the
industry would provide that information]. However, she said
that what Representative Johnson was discussing was something
that the industry cannot really do. She questioned where the
credibility would be if the industry told the state that under
HB 247 it would experience a $50,000 loss. She explained the
industry can take the state's projection and make assumptions
but it would be much better if it came from a third-party, such
as Econ One or Wood Mackenzie, thus AOGA would encourage a
third-party analysis.
2:14:57 PM
REPRESENTATIVE JOHNSON noted that if taxes are raised,
production will drop; if taxes are not raised, investment and
production will go up. He described it as a timing issue and
asked whether his assessment was accurate.
MS. MORIARTY stated that Representative Johnson's assessment is
not off base in that Janet Weese, from BP and the AOGA board
chair, in January discussed that tipping point and where it may
lie. Ms. Moriarty agreed that the legislature could increase
taxes on the industry, but questioned how that would impact
investment decisions, which in turn would impact production 4-15
years from now. She warned that the industry is already at a
tipping point in a cash negative position; therefore, the
state's actions could have long-term consequences.
2:15:59 PM
REPRESENTATIVE HAWKER referred to Ms. Moriarty's previous
testimony that the industry participants themselves are actively
and regularly engaged with the Department of Natural Resources
(DNR) and to some degree the Department of Revenue (DOR) in the
preparation of the Revenue Sources Book by providing access to a
certain amount of confidential production information. He asked
whether the members of AOGA will continue to work with the state
toward the spring update of the Revenue Sources Book and provide
information as to the potential decreases in production the
legislature can expect to see if this legislation is enacted.
MS. MORIARTY agreed that those are confidential conversations
the companies have with DOR and therefore she cannot speak to
those questions. She said the companies have ongoing
relationships with all regulatory agencies and stated that that
is a good question for the companies.
2:17:07 PM
REPRESENTATIVE JOSEPHSON referred to concerns raised by DOR, and
possibly others, regarding the statute and that the current
operating budget only funds 10 percent of the credits that are
likely to be requested for repayment. He asked whether the
current statutory authority allowing the governor to pay only 10
percent creates anxiety that there should be greater balance so
that the likelihood of payment is there for the industry.
MS. MORIARTY replied that HB 247 does not provide any further
stability to that. The bill could pass with all of the
problematic provisions, such as the $25 million limit, in-state
hire, companies with gross revenues of more than $10 billion
can't pay, and that it can't be against the net operating loss.
All those provisions could go into place and next year the
governor could only put in $40 million for the tax credit fund
if that was the 10 percent number [of operating budget funds].
From AOGA's standpoint, HB 247 provides no stability, no
predictability, and no certainty.
2:18:56 PM
REPRESENTATIVE SEATON noted that a production increase of 8,000
barrels per day in Cook Inlet would equal 2,920,000 barrels of
increased production for $400 million in tax credits. If the
credits and that production rate continued, the [cost to the
state] would be $136 per barrel. He asked whether, even with a
factor of 10 percent, the industry would expect the state to
continue that kind of price support by extending credits based
on the amount of production received.
MS. MORIARTY responded that it all goes back to what was
happening to production before those credits were in place and
whether that is the type of production the state wants for Cook
Inlet and the state. She pointed out that AOGA is saying that
those credits have been essential in increasing production,
essential in providing more royalties and property and corporate
income tax both to the state and the local governments, and they
are providing jobs. The industry will respond to the policies
set by the legislature, she said.
REPRESENTATIVE SEATON asked whether the industry would expect
the state to give credit price support of $136 per barrel, which
would be the increased production for that kind of credit
support seen in Cook Inlet.
MS. MORIARTY reiterated that that policy would be the purview of
the legislature and the industry will respond to whatever policy
is in place.
REPRESENTATIVE SEATON stated:
I guess you're in here testifying that we should keep
the credits in place, and that policy is what we
should keep in place for credit support for additional
production in Cook Inlet. And I guess if that's your
testimony, that's ... fine. And if you're just saying
we should figure out what's good for us and ... just
take that ... policy decision, that's fine too.
MS. MORIARTY interjected that the policy in place has increased
production, and should the committee believe that is a good
policy that should be continued, then the committee should
probably keep the Cook Inlet tax credits in place. In the event
modifications should be made to the credits, the industry will
modify its response, which will likely have an impact on
investment and production.
2:22:12 PM
REPRESENTATIVE HAWKER stated that Ms. Moriarty's response to
Representative Seaton confused him. He said he understands the
question as Cook Inlet currently producing an additional 8,000
barrels per day and the state having invested approximately $400
million in frontend credits. He asked whether many of those
credits are exploration as well as frontend-loaded credits on
establishing a level of production. Investing that much money
now will result in a long-term stream of production that will
continue for years and will not require an equal level of
support. He offered his understanding of Ms. Moriarty's
response as follows: "No, we have to put that same amount in
every year to get that same amount of production every day."
MS. MORIARTY offered her understanding that Representative
Seaton had asked her whether she thinks the amount of credits
currently being given are sustainable, to which she had
responded that [those credits] have "worked to increase
investments that will have an increased production over the life
of those fields and investments." She said she could not
predict "whether it's $440 million for another ... six years,"
because the price environment will self-correct. In this price
environment people are going to reduce their investments, which
would result in a reduction on the amount of credits paid
whether or not the system is changed. She continued:
I mean unfortunately we'd like to keep the same level
of spend but when price is only $30 it's probably not
going to be the same level of spend. ... Maybe I
misunderstood the question, but my point was is we
think the credits have been very important for Cook
Inlet production and investment.
2:24:29 PM
REPRESENTATIVE HAWKER described the discussions as "apples and
oranges," and said he would like witnesses to address the
frontloaded nature of credits and the long-term nature of
production arising from those credits. He noted that he will
not be able to attend some committee meetings and he would like
someone to bring up that issue.
2:24:58 PM
REPRESENTATIVE TARR advised that Hilcorp made front page news
for giving a bonus of $100,000 to each of its employees, to the
tune of over $100 million. She asked how AOGA expects the
Alaskan public to react to that information and then the
response that Hilcorp is hurting.
MS. MORIARTY responded that the company made a five-year
commitment to its employees and, even in this tough economic
time, decided to honor that commitment, which she described as
the company putting forth that it cares about its workforce.
With respect to the state being in a deficit and AOGA asking for
no additional increases on the industry, she noted that Hilcorp
had purchased fields on the North Slope and is part of the $52 a
barrel. Currently Hilcorp has a negative cash flow of about $22
per barrel, and the legislature is asking Hilcorp to add costs
to that at a time that it will cause an impact to either its
capital spend or operational spend. Making a policy decision to
raise taxes on an industry that has negative cash flow is the
legislature's prerogative, but the industry is saying that that
policy will impact its investment and production.
REPRESENTATIVE TARR commented that her constituents do not view
the company as having tough times when they read about over $100
million in employee bonuses. She said, "That doesn't ring the
alarm bells that ... bad things are happening to them."
MS. MORIARTY said the industry is hurting and stated that
several hundreds of jobs have been lost from ConocoPhillips, BP,
and others in the state. She advised that with the continuation
of these prices combined with an increase in taxes there will be
more job losses seen in Alaska.
2:27:47 PM
REPRESENTATIVE NAGEAK opined that both the private and public
sectors honor their commitment to their employees. He declared
that the state gives raises every year even when money is low.
REPRESENTATIVE TARR commented the action of the legislature,
until the final negotiations last year, was to not honor those.
She opined that was probably not the best example.
2:28:48 PM
The committee took an at-ease from 2:28 to 2:34.
2:34:08 PM
BILL ARMSTRONG, President, Armstrong Oil & Gas, explained he did
not have a prepared statement or a PowerPoint today but was
going to speak "from the heart." He explained he wanted his
time before the committee to be a question and answer session.
He noted things he wanted to discuss with the body today
include: where the price of oil is and where it is headed; the
recent announcement of his company's new discovery; state oil
tax policy, specifically HB 247; and the Trans-Alaska Pipeline
System (TAPS). Mr. Armstrong articulated he wanted everyone to
know how much he loves Alaska. His company has been in Alaska
for 15 years. He opined the state and his [current and former]
companies have worked well together and that their ventures have
been mutually beneficial. He mentioned he was the first one to
independently own and operate a field on the North Slope, and he
pointed out it is the sixth largest field on the North Slope.
He further pointed out the second field to ever be put into
production, which he noted is now the fourth biggest field, also
originated from his office. He announced that recently his
company and its Spanish partner, Repsol, found a field that may
possibly be the second biggest field on the North Slope. He
said Armstrong Oil & Gas is a private company and he believes in
the state, both its potential and future.
2:38:24 PM
REPRESENTATIVE HAWKER clarified that Mr. Armstrong is alluding
to the high prospectivity of the Colville Delta project. He
reported that some of the DNR numbers he has heard are 100,000
barrels a day and noted this is an environmentally sensitive and
difficult area to develop. He requested Mr. Armstrong to give
the committee some sort of confidence in the company's ability
to overcome the environmentalists' objections.
MR. ARMSTRONG replied the discovery is named Pikka, a name he
hopes to change, and is located between the Alpine Field and the
Kuparuk River Unit. He said the Pikka discovery is not in a
massively sensitive area such as the Chukchi Sea or areas that
have a very high profile. ConocoPhillips and Atlantic Richfield
Company (ARCO) already have five pads in the delta and have
shown the resources in the area can be developed. The first
three pads at the Pikka discovery planned for development are
east of the river, not in the delta. The company went with an
environmental impact assessment (EIA) as opposed to an
environmental audit (EA). He added he did not feel the EIA was
necessary but it was done at the request of DNR, Nuiqsut
Village, and the Native corporations. He said simple gravel
roads will be used, and oil on vertical support members, small
pads, and long-reach wells and therefore he didn't expect much
in the way of environmental impact nor in objections.
REPRESENTATIVE HAWKER congratulated Mr. Armstrong.
MR. ARMSTRONG described when he came to Alaska in 2001, all the
big companies had essentially written off Alaska for any
prospects; BP and Exxon decided they were not going to drill any
more wildcat wells, and the general thesis was that all the big
fields had been found. He explained the pipeline was declining
and had peaked out at 2 million barrels a day and was on its way
down to something noncommercial, but he did not believe that to
be true. He described the new field as being shallow and "very
old fashioned." He further described it has multiple "pays," a
23 percent porosity, 150 feet of pay, and huge oil columns. He
explained it has not been fully appraised yet, but the company
has already found over 1 billion barrels. He added that "the
wells are going to be good, fast production" and said this
discovery could "really add a big jolt to TAPS."
Mr. Armstrong declared that it is getting difficult to produce
and there are discussions about "heating it up" and adding more
pigs and compressors, but the best way to keep TAPS going is
more oil. In reference to the decline curve from Ms. Moriarty's
presentation he proclaimed [his company and Repsol] are not
going to flatten it, but increase it. The oil field is really
good and will last a long time, he said, and Armstrong Oil & Gas
and Repsol have put a lot of effort into it. He reported they
have seven penetrations in one zone and four in another that
have already been appraised, and multiple others. He advised,
"As a group, as a state, you have to get wells drilled," because
if wells aren't drilled oil won't be found. There is room to
find more fields like his and Repsol's on the North Slope.
Easier access to the land and a better permitting process are
needed; it is not a diminishing asset, it can increase.
2:45:53 PM
REPRESENTATIVE HAWKER inquired how Mr. Armstrong would respond
to someone who said he didn't need the state's financial
incentives because he was doing so well.
MR. ARMSTRONG replied that without the state's incentives he
would not have come to Alaska in the first place. The
competition the state has is not with other oil companies, he
opined, it's with other regions. He declared this price dip
won't last. Pretty much across the globe, regions are making
terms better by giving tax incentives or re-trading their
policies, he said, with the exceptions being Congo, Madagascar,
Tanzania, and Alaska. He posited, "To make things worse when
things are bad, you are kind of in rare company."
2:48:42 PM
REPRESENTATIVE HAWKER requested Mr. Armstrong to identify,
specifically to the North Slope, which state incentives brought
him here and which keep him here. He also asked Mr. Armstrong
to talk about his Cook Inlet experience and offer advice on how
to keep it developing.
MR. ARMSTRONG answered that Armstrong Oil & Gas was active in
Cook Inlet for four or five years because of the credits. He
said, "The production in the Cook [Inlet] was dropping like a
rock and you know exactly what was needed in Southcentral to
keep the schools heated and the hospitals open, and there was a
day of reckoning that was going to come within a ... half dozen
years or so and you all put together a series of very generous
tax credits." He described it as the "greatest tax regime on
the planet," and it worked. He explained he was able to put
together a project with a field of about 100 billion cubic feet
(Bcf) and a 25 mile pipeline and sold into the Southcentral gas
market. He said he didn't have an opinion about the credits
because he hasn't worked there in so long, but that they did
work. As for the North Slope, he said he has had the "dis-
privilege" of having five different tax regimes since 2001,
something that is extremely unusual. The economic limit factor
(ELF) was the tax regime that helped him come here, because it
was set up for developments that didn't have a huge field.
Following ELF, Governor Frank Murkowski created the petroleum
production tax (PPT), which was the beginning of the
"progressive quasi windfall profits tax." But, he said, things
went completely off the rails with Alaska's Clear and Equitable
Share (ACES) and he left the state at that point. He deemed
ACES as ridiculous and said no one could make any money with
ACES in play. He said he met with Governor Sean Parnell and
knew he would reform it because it was not sustainable.
Governor Parnell did reform it, with Senate Bill 21, and it was
good and was working. While Senate Bill 21 was extremely
complicated it made Alaska competitive with the continental U.S.
At that time he came back to Alaska, as did Jim Musselman with
Caelus and Jeff Hildebrand with Hilcorp, and it marked the
beginning of people coming to Alaska. He said the lifespan of
Senate Bill 21 was during this collapse. He said no opinion can
be said in this current financial environment. Everybody is
dropping rigs like crazy and in every exploratory region.
2:55:18 PM
REPRESENTATIVE HAWKER stated that he has always appreciated Mr.
Armstrong's unabashed honesty.
REPRESENTATIVE TARR stated the legislature was trying to figure
out the specific impact to current projects if changes were made
right now. She opined that in comparing different tax regimes,
referencing Mr. Armstrong's statement that ACES was bad, there
was concern about companies like his because of capital credits
being structured so generous. She offered her assumption
capital credits were essentially the same as operating loss.
She stated the legislature is also trying to figure out if the
credits being used incentivize wanted behaviors. She asked Mr.
Armstrong, with the exception of his previous statement about
wanting people to drill wells, to explain in the context of his
work which credits does he believe to be favorable.
MR. ARMSTRONG replied the big one is the 35 percent net
operating loss credit, because it enables the industry to
weather the time it takes to drill wells and get production
online. He mentioned he didn't want to upset any of the oil
guys in the room, but exploratory credit "is peanuts in the
scheme of things." He shared with the committee there is an
internal name for HB 247: "Hell bent 24/7 to run every oil
company off the North Slope."
2:58:29 PM
REPRESENTATIVE OLSON expressed his desire to address the Cook
Inlet stampede. He explained it was primarily "Tom Wagner's
baby." He reported he thought Mr. Wagner was crazy when he
first discussed it, but then he started to make more and more
sense and turned it into a real asset. He explained to Mr.
Armstrong it didn't really attract a lot of attention from
[companies outside of Alaska], with the exception of his.
Representative Olson agreed with Mr. Armstrong's assessment of
HB 247. He said he had heard that the only place HB 247's
tactics were being used was in third world countries and thanked
Mr. Armstrong for confirming that information.
2:59:32 PM
REPRESENTATIVE JOSEPHSON inquired as to the historic timing of
Mr. Armstrong coming to Alaska and which incentives he found
attractive in 2001.
MR. ARMSTRONG responded that Alaska is blessed with one of the
best petroleum systems in the world. All of the problems are
above ground - permitting, environmental extremism, tax laws,
and facilities access - but below ground it is fantastic. The
North Slope is really not very "picked over," unlike most other
places in the Lower 48, but is geologically terrific. He asked
if the committee remembered the charter agreement that he
thought to be expired. He elaborated that it was the product of
the legislature's realization that production peaked in 1990 and
was on its way down. Mr. Armstrong described that at the time
there was an oligopoly on the North Slope because BP and ARCO
were pushing people away by not working with them and limiting
seismic access, well information, and land trades. These were
the series of events that led to the creation of the charter
agreement, which was ostensibly an "open for business sign." In
answer to Representative Josephson's question about what brought
him to Alaska, he indicated it had been the charter agreement
and all the business opportunities for oil and gas exploration.
3:03:05 PM
REPRESENTATIVE HAWKER admitted he was not aware of any such
agreement and asked whether Mr. Armstrong was referring to the
BP/ARCO merger agreement.
MR. ARMSTRONG answered no, and offered that it was only about
four pages in length and was quite "loose."
| Document Name | Date/Time | Subjects |
|---|---|---|
| HSE RES 2.29.16 @ 1 pm - AOGA Presentation.pdf |
HRES 2/29/2016 1:00:00 PM |
HB 247 |
| HSE RES 2.29.16 @ 1 pm Caelus Energy Alaska.pdf |
HRES 2/29/2016 1:00:00 PM |
HB 247 |
| HSE RES 2.29.16 @ 1 pm Conoco-Phillips.pdf |
HRES 2/29/2016 1:00:00 PM |
HB 247 |