Legislature(2013 - 2014)BARNES 124

02/15/2013 01:00 PM RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 3:40 pm for HB 4 --
Heard & Held
-- Testimony <Invitation Only> --
- Presentation by PFC Energy
+ Bills Previously Heard/Scheduled TELECONFERENCED
Heard & Held
-- Public Testimony --
** Meeting will Recess at 3:00 pm and will
Reconvene at 3:30 pm for HB 4 Public Testimony **
                HB 72-OIL AND GAS PRODUCTION TAX                                                                            
1:03:24 PM                                                                                                                    
CO-CHAIR  FEIGE announced  that the  first order  of business  is                                                               
HOUSE BILL NO. 72, "An  Act relating to appropriations from taxes                                                               
paid under  the Alaska Net  Income Tax  Act; relating to  the oil                                                               
and gas production  tax rate; relating to gas used  in the state;                                                               
relating  to monthly  installment  payments of  the  oil and  gas                                                               
production tax;  relating to oil  and gas production  tax credits                                                               
for  certain losses  and expenditures;  relating to  oil and  gas                                                               
production tax  credit certificates; relating  to nontransferable                                                               
tax credits based on production; relating  to the oil and gas tax                                                               
credit  fund;  relating to  annual  statements  by producers  and                                                               
explorers; relating  to the determination  of annual oil  and gas                                                               
production   tax  values   including  adjustments   based  on   a                                                               
percentage  of  gross  value  at the  point  of  production  from                                                               
certain leases  or properties; making conforming  amendments; and                                                               
providing for an effective date."                                                                                               
1:03:46 PM                                                                                                                    
JANAK MAYER,  Manager, Upstream and  Gas, PFC Energy,  noted that                                                               
PFC Energy was  now in its second year consulting  for the Alaska                                                               
State  Legislature on  oil  and gas  taxation  issues and  fiscal                                                               
reform.  He explained that PFC  Energy specialized in oil and gas                                                               
consultancy,  specifically  with  issues regarding  above  ground                                                               
risk.  He noted that PFC  Energy did not audit reserves or design                                                               
off-shore infrastructure,  but, instead  focused on  questions of                                                               
market risk,  geo-political risk, commercial strategy,  and other                                                               
economic issues and  fiscal terms analysis.  He  pointed out that                                                               
his area  of expertise was  explaining how fiscal  terms affected                                                               
both government revenue and project economics.                                                                                  
1:05:21 PM                                                                                                                    
MR. MAYER declared  that the discussion would first  focus on the                                                               
fundamental sensitivities  of Alaska's future  petroleum revenues                                                               
to oil  price, production  decline, and fiscal  terms, as  it was                                                               
important to differentiate short and long term revenue.                                                                         
1:06:24 PM                                                                                                                    
MR.  MAYER, directing  attention to  slide 3,  "Oil Price  is the                                                               
Major   Determinant  of   Alaska's  Future   Petroleum  Revenue,"                                                               
declared that, although  the price of oil was  the most important                                                               
issue, it  was completely  out of Alaska's  control.   He pointed                                                               
out  the difference  in  revenue  to the  state  for various  oil                                                               
prices, declaring  that the production  of oil did vary  with the                                                               
1:07:49 PM                                                                                                                    
MR. MAYER moved  on to slide 4, "Decline Rate  is the Other Major                                                               
Determinant,"  declaring   that  the  decline  rate   of  current                                                               
production was  also a substantial  determinant.  He  stated that                                                               
the  Department  of  Revenue  (DOR)  base  forecast  for  average                                                               
decline  was 6  percent  from  2017 -  2022,  which included  new                                                               
producing areas.   He theorized that  a 3 percent decline  or a 9                                                               
percent  decline  reflected  a  high magnitude  of  variation  in                                                               
1:08:50 PM                                                                                                                    
MR.  MAYER   presented  slide  5,   "Fiscal  Terms   Changes  and                                                               
Investment  Impacts," and  stated, although  fiscal terms  were a                                                               
significant determinant,  they were a smaller  impact unless they                                                               
resulted  in substantial  new investment.   He  reported that  an                                                               
additional  production  of  20 million  barrels  each  day  would                                                               
flatten revenues in real terms.                                                                                                 
1:10:23 PM                                                                                                                    
REPRESENTATIVE TUCK asked for the  amount of investment to reduce                                                               
the rate of decline from 6 percent to 1 percent.                                                                                
MR. MAYER  replied that he would  report back, but he  likened it                                                               
to  annually  bringing  on-line  a project  similar  in  size  to                                                               
1:11:04 PM                                                                                                                    
REPRESENTATIVE  SEATON  requested  the price  estimates  for  the                                                               
annual increased investment be also forwarded to the committee.                                                                 
MR. MAYER agreed to do so.                                                                                                      
1:11:35 PM                                                                                                                    
MR. MAYER spoke about slide  6, "Context:  Investment Competition                                                               
& Global  Oil Price Environment."   He declared that  the biggest                                                               
sensitivity  to  Alaska's  future  revenues was  the  future  oil                                                               
price,  and  the   questions  for  the  price   forecast  by  the                                                               
Department of Revenue (DOR).                                                                                                    
1:12:53 PM                                                                                                                    
MR. MAYER declared that another key  driver for oil price was the                                                               
competition  for  investment  dollars,  slide  7,  "Fixed-Royalty                                                               
Jurisdictions in US  Lower 48 Are A Key Competitor  to Alaska for                                                               
Investment Dollars."  He noted  that "an extraordinary revolution                                                               
in North American  production" had reflected a shift  in the last                                                               
seven years ago  from a source of cash flow  for oil companies to                                                               
finance projects elsewhere.   He declared that  North America was                                                               
now  a  major  region  for   re-investment  of  cash  from  other                                                               
projects.   He declared that this  was relevant to the  future of                                                               
oil and gas production in Alaska,  as the cash surplus was coming                                                               
from fixed  royalty jurisdictions with relatively  low government                                                               
take.   The  broader  context of  increased  investment in  North                                                               
America was important to consider  when discussing future drivers                                                               
of oil prices and the structure of the fiscal system.                                                                           
1:14:49 PM                                                                                                                    
REPRESENTATIVE  SEATON, directing  attention  to  slide 7,  asked                                                               
whether PFC Energy believed that  the major oil companies had not                                                               
targeted unconventional oil production in North America.                                                                        
MR. MAYER replied that it was  quite the opposite and it was rare                                                               
for a major  oil company not to be investing  in shale production                                                               
and other unconventional oil production in the Lower 48.                                                                        
1:15:42 PM                                                                                                                    
REPRESENTATIVE  SEATON asked  if  these  missed opportunities  in                                                               
Alaska were a factor.                                                                                                           
MR. MAYER  replied that there  was still  a lot to  be determined                                                               
for the  future of unconventional  oil production in  Alaska, and                                                               
many other jurisdictions throughout the  world.  He declared that                                                               
oil shale  did have promise,  but there were other  questions for                                                               
its development.   He pointed out  that tens of thousands  of oil                                                               
shale wells had  been drilled in the Lower 48,  however, no other                                                               
country had  drilled more  than ten  wells.   He stated  that the                                                               
Lower  48 did  have specific  circumstances which  combined small                                                               
private land holdings  which small oil companies  could afford to                                                               
buy  so that  an experimental  solution could  be attempted  with                                                               
small capital expense.                                                                                                          
1:18:31 PM                                                                                                                    
REPRESENTATIVE  TARR referred  to slide  7, and  asked about  the                                                               
capital  expenditures from  2008 -  2010 in  North America.   She                                                               
asked if the largest percentage  was represented by investment in                                                               
the Lower 48.                                                                                                                   
MR.  MAYER  expressed  agreement,  and   stated  that  it  was  a                                                               
combination  of  investment  in   shale,  oil  sands,  and  other                                                               
unconventional oil production.                                                                                                  
1:19:22 PM                                                                                                                    
REPRESENTATIVE TUCK asked how Alaska would look in relation.                                                                    
MR. MAYER  replied that, although  Alaska was now a  cash surplus                                                               
region, in  1980 it  had been  a cash deficit  region.   He noted                                                               
that the cycle of cash deficit  to cash surplus was a fundamental                                                               
part of the dynamics of the oil and gas industry.                                                                               
1:20:08 PM                                                                                                                    
MR.  MAYER  returned  to the  presentation,  slide  8,  "American                                                               
Energy  Reset."   He  declared  that it  was  the great  American                                                               
energy reset,  as the growth  and forecast were a  complete about                                                               
face from the decades before 2005,  and resembled the boom in oil                                                               
production during post-World War II.   He reported that there had                                                               
not  been  such a  steep  increase  in  oil production  in  North                                                               
America since,  and, by  2020, the oil  production would  reach a                                                               
peak similar to the mid 1960s.                                                                                                  
1:21:21 PM                                                                                                                    
MR. MAYER  moved on to slide  9, "Anatomy of the  Physical Market                                                               
for Crude  Oil."   He declared  that the  framework of  the world                                                               
market for  crude oil  was dictated by  demand for  final product                                                               
consumption,  which created  the refinery  demand for  crude oil.                                                               
He reported that meeting the  demand came from either non-OPEC or                                                               
OPEC (Organization  of the  Petroleum Exporting  Countries) crude                                                               
oil.    He  explained  that the  non-OPEC  producers  would  only                                                               
produce at  capacity given  the market  economics;   whereas, the                                                               
OPEC producers  functioned as  a cartel,  and played  a balancing                                                               
role  for  adjusting  the  crude  oil  output  by  increasing  or                                                               
decreasing the supply, thereby influencing  the price of oil.  He                                                               
pointed out  that the demand  from OPEC would influence  the non-                                                               
OPEC supply, and the future price of crude oil.                                                                                 
1:23:24 PM                                                                                                                    
MR.  MAYER  pointed to  slide  10,  "Non-OPEC Liquids  Will  Show                                                               
Substantial  Growth," and  stated  that  non-OPEC production  was                                                               
increasing substantially  from a wide range  of supply, including                                                               
Canadian  oil  sands, oil  shale,  and  natural gas  liquids  and                                                               
condensate projects.   These projects  would have a  large impact                                                               
on the OPEC producers.                                                                                                          
1:24:33 PM                                                                                                                    
MR.  MAYER  discussed  slide  11,  "Shale  Oil  Major  Factor  in                                                               
Reducing  OPEC's Share."    He declared  that  shale oil,  mainly                                                               
North  American  shale oil,  was  predicted  to reach  4  million                                                               
barrels per  day by the  end of the  decade, which was  twice the                                                               
production of Alaska  oil at its peak.  He  pointed out that this                                                               
was also  almost double the  Saudi Arabian oil  production swing,                                                               
as  its marginal  production  cost  was so  low,  allowing for  a                                                               
profit at almost  any oil price.  He declared  that shale oil was                                                               
relevant because  its supply  was variable,  as the  sources were                                                               
not large and were short lived.   This variability made shale oil                                                               
production very dependent on the price  of oil.  He reported that                                                               
shale oil  would join the  ranks of substantial world  oil supply                                                               
balancers,  thereby  affecting  the   traditional  role  of  OPEC                                                               
producers, and the increased production of oil in Iraq.                                                                         
1:27:11 PM                                                                                                                    
MR. MAYER  explained slide 12,  "Initial Output  Implications for                                                               
Major  OPEC Producers."    He pointed  to  three OPEC  producers,                                                               
Saudi  Arabia, Iran,  and Iraq.   He  stated that,  although Iran                                                               
production  had  dropped  off  as  a  result  of  sanctions,  the                                                               
increase  of  Iraqi  production with  the  increase  of  non-OPEC                                                               
producers, would force  Saudi Arabia to drop  its production from                                                               
9 million to 5 million barrels  each day, in order to balance the                                                               
global  oil  supply.    He  questioned,  as  this  would  not  be                                                               
tolerable to  Saudi Arabia, how  OPEC would manage the  market to                                                               
keep the oil prices up.                                                                                                         
1:28:49 PM                                                                                                                    
MR.  MAYER   discussed  slide  13,  "Character   of  U.S.  Growth                                                               
Changing."   He stated that  the future volatility of  oil prices                                                               
would be  influenced by the  increased role of oil  shale, noting                                                               
that the  production would  compound just  to maintain  the prior                                                               
year's supply.                                                                                                                  
1:30:11 PM                                                                                                                    
MR.  MAYER,  addressing an  earlier  question  for the  breakeven                                                               
prices  for  Lower  48  shale  oil, stated  that  it  would  vary                                                               
enormously by  quintile, the initial  productivity of  the wells.                                                               
He pointed  to slide 14,  "Bakken Quintile Breakeven PV  10," and                                                               
explained  that  a  first  quintile   well  was  "massively  more                                                               
productive  in terms  of initial  productivity you  get out  of a                                                               
well," than  was a fifth  quintile well.   The result was  a much                                                               
greater profit  from the first  quintile well.  He  declared that                                                               
almost 33 percent of the production  from the Bakken oil field in                                                               
North Dakota  came from first  quintile wells, and  that drilling                                                               
would continue as long as there  was the reliability to produce a                                                               
first quintile well.  He  acknowledged that other areas of Bakken                                                               
were not currently economically viable  for drilling.  He pointed                                                               
out  that   operating  cost  was   the  break-even   price  which                                                               
determined production.                                                                                                          
1:32:28 PM                                                                                                                    
MR.  MAYER,  responding  to  Representative  P.  Wilson,  defined                                                               
"quintile" as the inclusion of all  of the wells drilled within a                                                               
specific  time  period,  and  dividing   them  evenly  into  five                                                               
"buckets."  The top "bucket"  was the most productive wells, with                                                               
the  bottom  being the  least  productive  by initial  production                                                               
rate.  He pointed out that  the top quintile, the top 20 percent,                                                               
produced more than 33 percent of the oil in Bakken.                                                                             
1:33:26 PM                                                                                                                    
MR.  MAYER assessed  slide 15,  "Eagleford Quintile  Breakeven PV                                                               
10," stating that the producers  in the Eagleford shale oil field                                                               
in Texas had an even greater  variation in its well economics, as                                                               
its  first quintile  wells  were very  profitable  but its  fifth                                                               
quintile  wells  would  most  likely not  be  profitable  in  the                                                               
foreseeable future.                                                                                                             
1:33:52 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked how  the  acreage  costs by  class,                                                               
listed on the slide, related.                                                                                                   
MR. MAYER explained that both the  acreage costs by class and the                                                               
royalty  rates   related  to  the  quintile,   specifically  when                                                               
negotiating the economics.                                                                                                      
1:35:16 PM                                                                                                                    
MR. MAYER moved on to  slide 16, "Granite Wash Quintile Breakeven                                                               
PV  10," which  was  a significantly  less  economic producer  in                                                               
Texas.   He pointed  out that  the most  productive wells  in the                                                               
Granite Wash  oil fields  in Oklahoma,  the first  quintile, were                                                               
"only just  worth drilling at  current prices."  He  reminded the                                                               
committee  that  a   change  in  oil  price   potentially  had  a                                                               
significant effect on drilling activity and future production.                                                                  
1:35:49 PM                                                                                                                    
REPRESENTATIVE  TARR  asked  how  the information  on  shale  oil                                                               
development  was used  to  compare with  the  oil development  in                                                               
Alaska, as the Alaska oil was so different.                                                                                     
MR.  MAYER  responded that  there  were  a  number of  points  of                                                               
comparison.  He  agreed that a decision to drill  in oil shale in                                                               
Texas was  very different than drilling  on the North Slope.   He                                                               
said that  price signals  and fiscal  terms could  quickly affect                                                               
behavior.   He opined  that the North  Slope producers,  as there                                                               
was  a  concentrated  industry  structure  with  joint  operating                                                               
agreements,  were  economic  and  rational,  and  responded  more                                                               
slowly to market signals.                                                                                                       
1:38:30 PM                                                                                                                    
CO-CHAIR  FEIGE offered  his understanding  that,  as oil  prices                                                               
drop, the oil shale investment would diminish.                                                                                  
MR. MAYER  replied that this was  correct up to a  certain point,                                                               
noting  that the  least productive  oil wells  and acreage  would                                                               
drop off, but that the most productive would continue.                                                                          
1:39:14 PM                                                                                                                    
MR.  MAYER reviewed  slide  17, "Risks  to  Price Forecast,"  and                                                               
stated  that  the  upside  price  risk  was  that  strong  global                                                               
economic  growth  and  instability   would  increase  demand  and                                                               
tighten the oil  supply.  He pointed to the  downside price risk,                                                               
which included the US production  boom which left little room for                                                               
additional  growth from  other countries,  an economic  slowdown,                                                               
the challenge to OPEC to  manage supply given the non-OPEC supply                                                               
coming on-line, and  the premium price given to  West Coast crude                                                               
over WTI, as the boom had  created a greater supply than pipeline                                                               
capacity in the Lower  48.  He opined that as  long as the United                                                               
States was a crude oil importer,  then the impact of price on the                                                               
West Coast crude would be limited.                                                                                              
1:42:04 PM                                                                                                                    
MR. MAYER  projected slide 18,  "What Is the Potential  Floor for                                                               
ANS West Coast Crude?"  He  explained that the answer depended on                                                               
the time  frame.  He said  that prolonged low prices  would use a                                                               
lot of supply, and would eventually  bring the price back up.  He                                                               
offered his  belief that  the global price  floor for  West Coast                                                               
crude could  be sustained as  low as $70-$75 per  marginal barrel                                                               
if certain supply circumstances existed.                                                                                        
1:44:12 PM                                                                                                                    
MR. MAYER,  in response to  Representative Seaton, said  that the                                                               
US  constrained price  of $55-$60  per marginal  barrel could  be                                                               
possible  if  the US  met  its  own  supply  needs, and  was  not                                                               
exporting any crude.   He opined that $70-$75 was  more likely if                                                               
the marginal barrel was imported.                                                                                               
1:45:25 PM                                                                                                                    
REPRESENTATIVE  SEATON asked  to  clarify that  if North  America                                                               
becomes energy independent then the  floor price would be $55-$60                                                               
per marginal barrel.                                                                                                            
MR.  MAYER indicated  this  was  not a  likely  scenario and  was                                                               
merely used as an example of  the disconnect for the global crude                                                               
oil markets.                                                                                                                    
1:46:10 PM                                                                                                                    
REPRESENTATIVE TARR  asked if  that scenario was  a result  of no                                                               
exports of  crude because of  increased production  elsewhere, or                                                               
the need to import to meet demand.                                                                                              
MR.  MAYER  replied  that  the   scenario  would  result  from  a                                                               
combination  of the  North American  supply  being sufficient  to                                                               
meet demand and ongoing restrictions on exports.                                                                                
1:47:01 PM                                                                                                                    
MR.  MAYER brought  attention  back  to slide  20,  "ACES: 5  key                                                               
problems."   He  declared that  Alaska's fiscal  system, Alaska's                                                               
Clear and Equitable Share (ACES),  had five fundamental problems,                                                               
which he listed:   the high levels of government  take reduce the                                                               
competitiveness  for  capital   investment,  especially  at  high                                                               
prices; high  marginal tax rates  reduce incentives  for spending                                                               
control;  a  complex system  makes  it  difficult for  meaningful                                                               
economic analysis  and comparison; significant state  exposure in                                                               
low price  environments and for  high cost developments;  and the                                                               
substantial impact of large scale gas sales on tax rates.                                                                       
1:48:30 PM                                                                                                                    
MR. MAYER  explained slide 21, "Regime  Competitiveness:  Average                                                               
Government  Take  At $80  Per  Barrel."    He declared  that  the                                                               
benchmark  of Alaska's  fiscal system  in comparison  with global                                                               
fiscal systems for overall government take  for oil at a range of                                                               
prices  was substantially  higher, even  with production  sharing                                                               
contracts  (PSC) a  bit  over 70  percent.   At  $80 per  barrel,                                                               
Alaska was  substantially higher  than the  global averages.   He                                                               
pointed out that  capital spent by an existing  producer could be                                                               
written off  against the tax  bill, whereas capital spent  on new                                                               
development attracted capital credit,  but not the same reduction                                                               
in rate.   He stated that  ACES was the second  least competitive                                                               
OECD regime for new development, after Norway.                                                                                  
1:51:37 PM                                                                                                                    
MR. MAYER  addressed slide 22, "Regime  Competitiveness:  Average                                                               
Government Take  At $100 Per  Barrel," which identified  that new                                                               
development was now  the highest government take  regime in OECD.                                                               
He acknowledged that it was lower for an existing producer.                                                                     
1:52:36 PM                                                                                                                    
MR. MAYER  moved to slide  23, "Regime Competitiveness:   Average                                                               
Government  Take At  $120 Per  Barrel," but,  upon review,  noted                                                               
that there may be an error on this slide.                                                                                       
1:52:55 PM                                                                                                                    
REPRESENTATIVE  TUCK  asked  to   clarify  that  government  take                                                               
reflected  total  payout,  as the  private  royalties  were  also                                                               
MR. MAYER  expressed agreement, and  reported that the  system of                                                               
private royalties was only in the United States.                                                                                
1:53:38 PM                                                                                                                    
REPRESENTATIVE  SEATON asked  to clarify  that a  new development                                                               
was a non-legacy producer.                                                                                                      
MR. MAYER  said this was  correct when analyzed on  a stand-alone                                                               
basis, rather than a part of the portfolio of a base producer.                                                                  
REPRESENTATIVE SEATON  stated that  this was  not the  Alaska tax                                                               
regime,  as  everything  on  the  North Slope  was  part  of  the                                                               
MR. MAYER  acknowledged this, although  a new development  had to                                                               
be  looked   at  for  information   on  capital   allocation  and                                                               
investment decisions.                                                                                                           
1:55:16 PM                                                                                                                    
MR.   MAYER,  returning   to  his   presentation  of   slide  24,                                                               
"Difference  Between New  Investment  Versus  Base Production  is                                                               
Critical," noted  a frequent  question for how  there could  be a                                                               
reasonable profit.   He directed attention to the  net income per                                                               
barrel, which was  substantially higher in Alaska  than the Lower                                                               
48 for ConocoPhillips in 2011.                                                                                                  
CO-CHAIR FEIGE asked to clarify that this was per barrel of oil.                                                                
MR. MAYER replied that it was per barrel of oil equivalent.                                                                     
CO-CHAIR FEIGE asked to clarify that this would include gas.                                                                    
MR. MAYER agreed.                                                                                                               
CO-CHAIR FEIGE  asked to  clarify that  the distinction  would be                                                               
necessary if  a company produced more  gas than oil in  one area,                                                               
as the figures would be distorted.                                                                                              
MR. MAYER agreed.                                                                                                               
1:57:06 PM                                                                                                                    
MR.  MAYER, returning  to slide  24,  noted that  the Alaska  net                                                               
income per barrel  was "not particularly any higher  than in many                                                               
other parts  of ConocoPhillips portfolio."   He pointed  out that                                                               
ConocoPhillips had  extensive gas holdings  in the Lower 48.   He                                                               
pointed to  the production taxes,  which reflected the  impact of                                                               
ACES on the barrel of oil in  Alaska, as the State of Alaska made                                                               
more revenue per barrel than  ConocoPhillips made from net income                                                               
per barrel.                                                                                                                     
MR. MAYER, in  response to Representative Tuck,  said the columns                                                               
reflected the breakdown  of revenue, and added up  to the revenue                                                               
of a barrel of oil equivalent.                                                                                                  
REPRESENTATIVE TUCK asked to clarify  the Canadian income tax per                                                               
MR.  MAYER  explained  that  this was  solely  because,  in  that                                                               
particular year in Canada, ConocoPhillips had a tax loss.                                                                       
2:00:17 PM                                                                                                                    
REPRESENTATIVE  TUCK  asked  to   clarify  that  African  nations                                                               
received their revenue  from income tax, and that  the purple bar                                                               
reflected the operating cost of doing business.                                                                                 
MR. MAYER replied "broadly speaking that's correct."                                                                            
2:00:56 PM                                                                                                                    
MR.  MAYER stated  that the  figures really  did not  clarify the                                                               
competitiveness  of the  fiscal  regime, because  these were  the                                                               
result from  existing base  production, not  the economics  for a                                                               
new investment.   He explained that,  although ConocoPhillips had                                                               
a lot of gas production in the  Lower 48 with a small revenue per                                                               
barrel,  it continued  to invest  more in  the Lower  48 than  in                                                               
Alaska.   He explained that  there could  not be a  comparison of                                                               
investment  as  the base  portfolio  was  not indicative  of  the                                                               
investments in the Lower 48.   Those investments were in liquids,                                                               
which  had very  different  economics.   He  noted  that the  net                                                               
income  per barrel  in Alaska  reflected capital  investment from                                                               
many years ago,  with fully depreciated assets,  and now produced                                                               
cash.   He  pointed out  that  any current  investment in  Alaska                                                               
would not result in the same net income.                                                                                        
2:03:03 PM                                                                                                                    
MR.  MAYER, in  response to  Representative Tuck,  explained that                                                               
DD&A was  depletion, depreciation,  and amortization.   He agreed                                                               
that,  as this  was a  small amount,  there could  be postulation                                                               
that old assets  in Alaska were mostly depreciated  as opposed to                                                               
newer investment,  and higher  DD&A, in other  places.   He noted                                                               
that only judging  the net income per barrel did  not reflect the                                                               
economics of new investment.                                                                                                    
2:03:52 PM                                                                                                                    
MR. MAYER addressed slide 25,  "ACES: 5 key problems," and shared                                                               
that the  high marginal  tax rates  which reduced  incentives for                                                               
spending control  was the second  of the  five key problems.   He                                                               
suggested  taking  the  ACES production  tax  component  and  the                                                               
impact  of progressivity  to  marginal rates.    Under ACES,  the                                                               
initially  steep  component  of progressivity,  which  eventually                                                               
flattened  out, created  a jagged  spike in  marginal rates.   He                                                               
moved on  to slide  26, "ACES:   Average and  Marginal Production                                                               
Tax  Rates," and  explained that  progressivity and  marginal tax                                                               
rates  tapered  off  after  a   peak  at  $92.50  per  barrel  of                                                               
production tax value.   He shared that the marginal  tax rate was                                                               
not  necessarily  a measure  of  competitiveness  of the  system,                                                               
although it influenced the different  price environments in after                                                               
tax  cash flow.   He  pointed  out that  oil at  $120 per  barrel                                                               
reflected reduced taxes for 95 percent of expenditure.                                                                          
2:06:20 PM                                                                                                                    
REPRESENTATIVE SEATON asked to clarify  that ACES was designed in                                                               
this  way  to create  incentive  for  reinvestment on  the  North                                                               
Slope, although  it appeared  counter intuitive.   He  asked what                                                               
incentive could be offered for reinvestment in Alaska.                                                                          
MR. MAYER stated  that this was an excellent  question that leads                                                               
to his next  point regarding the complexity of  the system, slide                                                               
29,  "ACES: Standalone  versus Incremental."    He declared  that                                                               
there were many perspectives for  understanding this problem.  He                                                               
explained  that an  economic analysis  from an  incremental basis                                                               
took the cash flow from the  base portfolio, and layered in a new                                                               
development on top.  At the  end, the difference of the two would                                                               
be determined, and  the economics would be reviewed  on the basis                                                               
of the difference of the two  cash flows.  He declared that these                                                               
incremental economics  were crucial  from the  state perspective,                                                               
as  it  determined how  much  the  state  would receive,  or  not                                                               
receive.   However, incremental economics  were not  as important                                                               
to a  producer for a  large project, as its  investment decisions                                                               
were  determined by  cash  flow,  not tax  equity  or future  tax                                                               
liability.  He  expressed agreement that reduction  of future tax                                                               
liability  was  desirable, but  not  fundamental  to an  economic                                                               
decision.   He  reported  that economic  decision  making at  the                                                               
business unit level, or reinvestments  of cash flow in short term                                                               
decisions for  tax reasons, was  very different  from investments                                                               
for the long term which  needed to have the fundamental economics                                                               
for a sensible stand-alone basis.   He noted that a review of the                                                               
incremental basis  could determine  that a project  move "further                                                               
in  front of  the  queue,"  although the  decision  was not  made                                                               
solely on the  incremental economics.  He declared  that ACES was                                                               
a system under  which the state would  forego significant revenue                                                               
for investment, although that did  not necessarily make a project                                                               
more  competitive for  attracting capital.   He  opined that  "in                                                               
some ways  you could argue  it's the  worst of all  worlds, where                                                               
the state  foregoes significant revenue  but it  doesn't actually                                                               
get much more for the revenue that it foregoes."                                                                                
2:12:58 PM                                                                                                                    
MR. MAYER presented  slide 30, "Portfolio Efficiency:   Return on                                                               
Capital Employed (ROCE),"  and said that this could  be argued to                                                               
be the most  important metric for a large oil  and gas company at                                                               
the  corporate  level.    He  noted  that  this  metric  was  not                                                               
influenced by  incremental analysis, or any  return on investment                                                               
through taxes.  He explained that  the economics was not based on                                                               
the after tax cash flow, but  simply on the return on the capital                                                               
invested in the operation.  He  declared that this was an example                                                               
whereby ACES would forego revenue  for the state compared to what                                                               
it might otherwise receive in  return for investment, although it                                                               
was  unclear whether  this  would improve  the  economics for  an                                                               
2:14:18 PM                                                                                                                    
REPRESENTATIVE  TARR  asked if  the  credits  were less  reliable                                                               
because of possible political change.                                                                                           
MR. MAYER replied that there were  a number of components, and he                                                               
referred to slide  29, which reflected the  dramatic variation of                                                               
the  incremental economics  dependent on  price.   He noted  that                                                               
this variation  was sometimes counter intuitive,  explaining that                                                               
it  was a  better return  at  $125 per  barrel than  at $130  per                                                               
barrel. He  referred back to  slide 26, which depicted  the spike                                                               
in the marginal rate.  He  speculated that, as an investment in a                                                               
20 year  project did not know  the future oil price,  an investor                                                               
would  want  to  know  performance   in  a  range  of  scenarios,                                                               
especially the  long term cash  flow generated and the  upside of                                                               
capital.  He said that,  looking solely at incremental basis, the                                                               
internal rate of return (IRR)  could be excellent at a particular                                                               
price  range, slide  29.   Although this  would take  away future                                                               
cash flow, it would eliminate  the spending necessary to generate                                                               
it.    He   stated  that  IRR  was  only  a   useful  metric  for                                                               
standardizing  things,  and did  not  guarantee  the creation  of                                                               
economic value.   Creating economic value for  a company required                                                               
the use of large amounts of  capital to generate large amounts of                                                               
cash flow.   He explained that this system, on  an after tax cash                                                               
flow  basis, was  to reduce  the amount  of necessary  capital to                                                               
justify  a smaller  future cash  flow.   He stated  that a  large                                                               
investment  needed large,  long lived  assets with  a substantial                                                               
future  cash flow.   He  allowed that  any tax  benefit would  be                                                               
appreciated,  although  the  tax  bill was  not  the  fundamental                                                               
driver   of  the   investment  decision.     He   explained  that                                                               
fundamental  economics of  the project  would  affect the  global                                                               
allocation of capital,  and not the after tax  cash flow, because                                                               
the  investment was  not to  buy tax  equity.   He compared  this                                                               
investment to those investments  of property investors, who would                                                               
not buy negative  cash flow properties to reduce  their tax bill.                                                               
He said  that large  oil and  gas companies  were not  looking to                                                               
reduce their tax bills with investments in large projects.                                                                      
2:19:47 PM                                                                                                                    
MR.  MAYER  returned   attention  to  slide  31,   "ACES:  5  key                                                               
problems," and  reported that  the fourth  key problem  with ACES                                                               
was  for significant  state exposure  in low  price environments,                                                               
and for  high-cost developments.   He said that, for  Alaska, the                                                               
incremental analysis  was the most  important because it  was all                                                               
revenue to the state treasury, even  as it presented risks in low                                                               
price environments and high cost projects.                                                                                      
2:20:54 PM                                                                                                                    
MR. MAYER moved on to slide 32, "High state exposure for high-                                                                  
cost   developments,"  which   compared  the   economics  of   an                                                               
incremental basis  with the economics  of no production tax.   He                                                               
said  that the  producer would  get  a reduction  in the  overall                                                               
production  tax liability,  which,  although it  mattered to  the                                                               
state, did not improve the project economics for the investor.                                                                  
2:23:01 PM                                                                                                                    
MR. MAYER explaining slide 33,  "ACES: 5 key problems," and slide                                                               
34, noted the  impact of large-scale gas sales on  tax rates.  He                                                               
declared that  this was not the  ideal design for a  hydro carbon                                                               
fiscal system.                                                                                                                  
2:24:05 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked  to  clarify  that  the  offsetting                                                               
expense  against  oil  tax  would  not  be  a  consideration  for                                                               
investment,  even  if  it  allowed  more money  to  stay  in  the                                                               
company.   He asked if  the project would  be viewed on  a stand-                                                               
alone basis for cash invested and the return on capital.                                                                        
MR. MAYER replied that a large  scale investment over a long time                                                               
horizon  would  require  that  the project  "made  sense  on  its                                                               
fundamental  economics  in the  broadest  possible  range of  oil                                                               
prices, of gas prices, of  possible changes by the legislature to                                                               
the fiscal terms,  of a very wide range of  things."  He declared                                                               
that this  required an assessment  for the merits of  the project                                                               
on its  fundamental economics,  not on the  tax treatment  in any                                                               
given year.                                                                                                                     
2:25:36 PM                                                                                                                    
REPRESENTATIVE SEATON asked  to clarify that it  was necessary to                                                               
fix  the oil  economics  over  a long  period  in  order to  move                                                               
forward on the  gas project.  He  asked why there was  a push for                                                               
oil tax certainty, as well.                                                                                                     
MR.  MAYER  apologized  for any  misunderstanding,  stating  that                                                               
stability  was  absolutely  essential because  the  fiscal  terms                                                               
determined the  project economics.   He declared  that reductions                                                               
in taxes  did matter, but it  was not the fundamental  driver for                                                               
investment in the project.                                                                                                      
2:27:23 PM                                                                                                                    
REPRESENTATIVE SEATON  asked if the  economics for the  return on                                                               
capital invested  for a gas line  project would be analyzed  on a                                                               
stand-alone basis,  and whether  the idea  of a  fix for  the oil                                                               
system was separate and should not be part of the consideration.                                                                
MR.  MAYER expressed  his  agreement for  the  return on  capital                                                               
employed, as  it was a huge  investment, and was not  affected by                                                               
incremental  economics.    He  detailed  that  the  investor  was                                                               
measured  by  the  return  of  its  capital  employed,  and  that                                                               
incremental economics did not help the project.                                                                                 
2:29:23 PM                                                                                                                    
MR. MAYER introduced slide 35,  "ACES: 5 key problems - available                                                               
solutions," which  detailed solutions to the  aforementioned five                                                               
problems.   He  pointed to  the high  levels of  government take,                                                               
suggesting   that   either   progressivity  could   be   reduced,                                                               
bracketed,  or  eliminated,  or  that  the  base  rate  could  be                                                               
reduced.  For high marginal tax  rates and the impact on spending                                                               
control,  he  suggested,  again,   that  progressivity  could  be                                                               
reduced,  bracketed,  or eliminated,  or  that  credits could  be                                                               
reduced,  restricted, or  eliminated.   He pointed  out that  the                                                               
complexity  made  meaningful  economic  analysis  and  comparison                                                               
difficult, as it was often  misinterpreted.  He declared that the                                                               
complexity  was for  which basis  to assess  the investment,  and                                                               
would  look  different to  the  state  than  to  a company.    He                                                               
suggested simplifying  the overall system design,  especially the                                                               
interaction  of progressivity  with  credits,  and improving  the                                                               
economics for new development, as proposed in HB 72.                                                                            
2:33:21 PM                                                                                                                    
MR. MAYER addressed  the significant state exposure  in low price                                                               
environments,  and suggested  that  some or  all  of the  credits                                                               
could  be reduced  or eliminated;  the ability  to claim  credits                                                               
from  the state  treasury  could be  eliminated;  or the  credits                                                               
could be carried forward to production.                                                                                         
MR. MAYER spoke about the impact  of large-scale gas sales on tax                                                               
rates,   and   suggested   to   eliminate   progressivity;   levy                                                               
progressivity  on a  gross,  rather  than net,  basis;  or use  a                                                               
progressive Gross Revenue exclusion.                                                                                            
2:34:57 PM                                                                                                                    
MR. MAYER directed  attention to slide 36, "ACES:  5 key problems                                                               
- SB21/HB72 Solutions,"  and addressed the solutions  for each of                                                               
the aforementioned  problems.  He suggested  that the elimination                                                               
of progressivity and some credits,  while restricting that use of                                                               
lost credit could only be  claimed from the future, would resolve                                                               
the problems.   He moved on  to slide 40, "Government  Take under                                                               
SB21/HB72  and  ACES   -  Capex  Sensitivity."     He  said  that                                                               
elimination of  the capital  credit in  the following  year would                                                               
have a  substantial impact on  tax rates at current  prices under                                                               
ACES.  He  reported that extending the analysis out  for 20 years                                                               
would reduce the  impact because progressivity was  not linked to                                                               
inflation under  ACES.   He announced that  proposed HB  72 would                                                               
have a  range of points  in a single  year of production  to move                                                               
between a  tax increase  and tax  decrease, with  the fundamental                                                               
point  being the  level of  capital spending.   He  declared that                                                               
this was  the impact of  the capital credit.   He noted  that the                                                               
more spent,  the higher the point  of transition from tax  cut to                                                               
tax  increase,  and   the  higher  the  actual   oil  price  when                                                               
progressivity starts.                                                                                                           
2:39:27 PM                                                                                                                    
MR.  MAYER  declared that  the  question  was for  incentives  to                                                               
development  given the  current wide  range of  capital spending.                                                               
Those  companies  in the  asset  development  stage, rather  than                                                               
harvesting the  cash flow,  had the  highest levels  of spending.                                                               
He  stated that  companies with  high  spending would  see a  tax                                                               
increase relatively higher  on the price scale,  and he suggested                                                               
giving this more consideration.                                                                                                 
CO-CHAIR  FEIGE declared  that this  area had  received the  most                                                               
informal push back from the oil and gas industry.                                                                               
2:40:43 PM                                                                                                                    
REPRESENTATIVE TUCK  asked to clarify  that this was  a crossover                                                               
between  ACES and  the proposed  bill,  and that  as the  capital                                                               
expenses increased, the crossover moved  to a higher oil price in                                                               
order to  equalize.   He asked  if this  was due  to the  loss of                                                               
capital credits, which were eliminated in the proposed bill.                                                                    
MR. MAYER expressed agreement.                                                                                                  
2:41:36 PM                                                                                                                    
CO-CHAIR  FEIGE asked  what affect  the addition  of credits  for                                                               
certain capital expenditures would have on the crossover points.                                                                
MR.  MAYER replied  that the  addition  of some  form of  capital                                                               
credit would reduce those crossover points.                                                                                     
CO-CHAIR  FEIGE noted  that the  crossover points  at all  levels                                                               
would move to a lower price.                                                                                                    
MR.  MAYER  offered  his  belief that  they  would  shift  closer                                                               
together, with less sensitivity to capital spending.                                                                            
2:42:51 PM                                                                                                                    
REPRESENTATIVE TARR  asked what Mr.  Mayer suggested for  the low                                                               
price point to reduce significant state exposure.                                                                               
MR. MAYER  replied that it would  vary, dependent on the  cost of                                                               
the resources being developed.                                                                                                  
2:44:11 PM                                                                                                                    
REPRESENTATIVE SEATON  asked to clarify  that the idea  of adding                                                               
capital credits back in was being  proposed as a reduction of the                                                               
state's  liability  at  low  prices,  which  would  increase  the                                                               
state's liability  at higher  prices as there  was no  longer any                                                               
progressivity to offset  it during price swings.   He pointed out                                                               
that there  was discussion  for the  addition of  capital credits                                                               
and  the elimination  of progressivity,  which  would reduce  the                                                               
cash  flow  at high  prices  and  maintain  the exposure  at  low                                                               
prices.  He questioned the balance to the state.                                                                                
MR.  MAYER answered  the original  proposal was  put together  by                                                               
Pedro van  Meurs, and called for  a flat 25 percent  profit based                                                               
tax with a 20 percent capital  credit.  He declared that this was                                                               
different than  the current tax  regime, and recalled  that these                                                               
tax  credits were  not allowed  to be  claimed directly  from the                                                               
state   treasury  when   there   was  not   any  tax   liability.                                                               
Progressivity actually creates some  of the downside, without the                                                               
question of  the capital  credit.  He  stated that  the necessity                                                               
for capital credit  to only be claimed  against future production                                                               
would  mitigate the  problem.    He opined  that  for an  overall                                                               
analysis  of government  takes with  a baseline  that was  not an                                                               
abstract  design  of a  reasonable  and  competitive system  when                                                               
compared  with   the  current  system,  both   progressivity  and                                                               
maintenance  of  the  credit  would  create  a  bigger  delta  in                                                               
government  revenue.     He  questioned   whether  this   was  an                                                               
acceptable delta in  revenues, and that a  balance requiring some                                                               
form of progressivity  would be a fundamental  question of policy                                                               
2:47:56 PM                                                                                                                    
MR. MAYER  continued his presentation with  slide 42, "Assessment                                                               
of DOR Price  Forecast Methodology."  He noted that  he could not                                                               
elaborate  on  the  production forecasting  methodology,  as  the                                                               
revised  risk  approach  appeared  sound.    He  discussed  price                                                               
forecast methodology, noting that  with any forecasting exercise,                                                               
it was  necessary to  distinguish between  the overall  trend and                                                               
the  degree of  volatility.   He  stated that  it was  important,                                                               
especially with a  flat forecast, to not be  lulled into thinking                                                               
that  also implied  little  volatility.   He  declared that  wild                                                               
price  swings  were  still  possible,   and  he  opined  that  it                                                               
overwhelmingly appeared to  be the case that  volatility would be                                                               
the norm in the foreseeable future.                                                                                             
2:49:48 PM                                                                                                                    
CO-CHAIR FEIGE remarked, "we're one  silkworm missile away from a                                                               
lot of money."                                                                                                                  
2:49:57 PM                                                                                                                    
REPRESENTATIVE  TUCK,  referencing  an earlier  comment  for  the                                                               
ability of North  America to self-sustain, asked  to clarify that                                                               
the norm for the price of oil would be $70 - $75 per barrel.                                                                    
MR. MAYER  clarified that this had  been a specific answer  for a                                                               
specific question regarding a realistic  floor price for oil, and                                                               
it was not a likely forecast.                                                                                                   
2:50:33 PM                                                                                                                    
MR. MAYER, resuming  his presentation of slide  42, declared that                                                               
with any forecast it was  necessary to account for the volatility                                                               
of any trend.                                                                                                                   
2:50:50 PM                                                                                                                    
REPRESENTATIVE TARR, asking if Mr.  Mayer had determined that the                                                               
new Department of  Revenue (DOR) methodology for  the most recent                                                               
forecast  was  sound,  questioned  whether  the  methodology  for                                                               
previous DOR forecasts  had been reviewed and  compared to actual                                                               
results.   She offered  her belief that,  although there  had not                                                               
been  significant   deviation,  DOR  had  desired   even  greater                                                               
CO-CHAIR  FEIGE  asked  to  clarify   whether  the  question  was                                                               
regarding price prediction or oil production prediction.                                                                        
REPRESENTATIVE TARR replied that it was for oil production.                                                                     
CO-CHAIR  FEIGE   stated  that  the  discussion   was  for  price                                                               
MR.  MAYER  clarified  that  he had  begun  his  discussion  with                                                               
production  prediction,   prior  to   moving  on  to   the  price                                                               
prediction.  In response to  Representative Tarr, he acknowledged                                                               
that, although he  did not have expertise  for these predictions,                                                               
he had  judged these predictions to  be sound from his  review of                                                               
the materials.                                                                                                                  
2:52:06 PM                                                                                                                    
REPRESENTATIVE  SEATON  expressed  his  curiosity  regarding  the                                                               
importance of  volatility, as  the proposed  tax payment  was for                                                               
the annual mean, without progressivity or a windfall tax.                                                                       
MR. MAYER replied that it  was the biggest determinant regardless                                                               
of progressivity for future revenues.                                                                                           
REPRESENTATIVE  SEATON  asked  to   clarify  that  this  was  for                                                               
volatility over many years, and not just for a single year.                                                                     
MR. MAYER replied  that he had considered the  volatility for all                                                               
time frames.                                                                                                                    
REPRESENTATIVE SEATON  asked to  clarify, if  this was  an annual                                                               
tax  with no  monthly progressivity,  what was  the component  of                                                               
volatility between  months, and  how did  that affect  the annual                                                               
MR. MAYER  explained that it  was not a  question of rate,  but a                                                               
question of the  base revenue and its application  on the income.                                                               
He pointed  out that in  a low  oil price environment,  there was                                                               
very  little  revenue  to  the  state,  but  in  a  higher  price                                                               
environment, there was  an enormous amount of  revenue, even with                                                               
a flat tax structure.                                                                                                           
REPRESENTATIVE  SEATON  asked  to  clarify  that  the  volatility                                                               
within the year would generate a different return.                                                                              
MR. MAYER replied that it would not.                                                                                            
2:54:25 PM                                                                                                                    
MR. MAYER  continued his presentation with  slide 43, "Assessment                                                               
of  DOR Price  Forecast Methodology,"  explaining that  a blended                                                               
forecast  was a  good  approach which  provided  a more  accurate                                                               
forecast.   He expressed  his agreement with  DOR that  WTI (West                                                               
Texas Intermediate) was no longer  a good global indicator of the                                                               
oil market,  and that consideration  of supply,  geopolitics, and                                                               
the financial  market was  best for the  projected forecast.   He                                                               
noted that  the possible risks  for the DOR  methodology included                                                               
the  use of  futures prices  and the  EIA (US  Energy Information                                                               
Administration)  as  forecast  tools.     He  stated  that  group                                                               
forecasting  for  a  consensus  view could  result  in  a  "herd"                                                               
behavior, and  that a flat  price forecast should  understand the                                                               
fundamental question  of volatility,  and the  difference between                                                               
trend and movement around this trend.                                                                                           
2:57:28 PM                                                                                                                    
MR.  MAYER turned  to  slide  44, "Global  LNG  Demand Driven  by                                                               
Asia,"  and  explained  that the  potential  future  demands  for                                                               
Liquid Natural Gas (LNG) would  be into Asia, the world's largest                                                               
gas market.   He declared  that Asia  was a desirable  market for                                                               
LNG as  it had  historically been priced  with reference  to oil,                                                               
frequently to parity, which was  dramatically higher than the gas                                                               
price in  North America.   He  pointed out  that this  high price                                                               
made the  prospect potentially economic  for getting  North Slope                                                               
gas to Asia.                                                                                                                    
2:59:09 PM                                                                                                                    
MR.  MAYER  declared  that  the project  list  for  proposed  LNG                                                               
capacity was  largest in North  America, slide 45,  "Proposed LNG                                                               
Capacity by Country."  He  noted that some of the re-gasification                                                               
plants were now converting to  LNG export facilities.  He pointed                                                               
out that Australia  had the next largest  capacity for production                                                               
of LNG, estimated at 100 million tons each year.                                                                                
3:00:47 PM                                                                                                                    
MR.  MAYER addressed  slide  46, "PFC  Energy  Risked LNG  Supply                                                               
Outlook by Country,"  which reviewed the risk  and projection for                                                               
the main suppliers and the capacity  to come on line before 2025.                                                               
He compared this  risk analysis for capacity  with the contracted                                                               
capacity on slide 51, "Share  of Contracted Capacity by Country."                                                               
He reported that  LNG was sold on  20 year long term  take or pay                                                               
contracts,  which   allowed  the  capital  for   financing  these                                                               
enormous  projects to  be  raised.   He  questioned the  existing                                                               
capacity in 2025, and how much would be contracted.                                                                             
3:02:57 PM                                                                                                                    
MR. MAYER  reviewed slide  52, "Share  of Contracted  Capacity by                                                               
Country,"  which   depicted  the  expected   available  capacity,                                                               
especially in Australia,  Canada, and the United  States, for new                                                               
un-contracted volumes.                                                                                                          
3:03:36 PM                                                                                                                    
MR.  MAYER explained  slide 53,  "Competitive  Landscape for  LNG                                                               
Sales  to  Asia,"   and  stated  that  PFC   Energy  projected  a                                                               
sufficient rising demand for LNG in  Asia.  He noted that the new                                                               
liquefaction  projects in  North America,  Australia, Qatar,  and                                                               
East  Africa  would  be  logical competitors.    He  stated  that                                                               
Alaska,  factoring  in  all  the required  capital,  would  be  a                                                               
relatively  high  priced  gas  exporter.     He  noted  that  the                                                               
economics for competitive pricing would  be affected by a link to                                                               
oil pricing, rather than the Henry Hub pricing.                                                                                 
[HB 72 was held over.]                                                                                                          

Document Name Date/Time Subjects
HB04 Fact Sheet.pdf HRES 2/15/2013 1:00:00 PM
HB 4
HRES HB 72 PFC Energy 2.15.13.pdf HRES 2/15/2013 1:00:00 PM
HB 72