Legislature(2011 - 2012)SENATE FINANCE 532
03/13/2012 01:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB192 | |
| SB160 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB 192 | ||
| += | SB 160 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax;
and providing for an effective date."
1:03:23 PM
SENATOR JOE PASKVAN, began on slide 60 of a PowerPoint
presentation [also heard during the March 13, 2012 morning
meeting] titled "Committee Substitute for Senate Bill 192
(RES) Oil and Gas Production Tax Rates" (copy on file). He
referred to a hearing before the Committee on Energy and
Natural Resources, United States Senate, New Developments
in Upstream Oil and Gas Technologies: Testimony by Kevin
Banks, Director, Division of Oil and Gas, Alaska Department
of Natural Resources (May 10, 2011). He explained that Mr.
Banks had spoken about potential for production and
throughput through the Trans-Alaska Pipeline System (TAPS)
including heavy and shale oil. He quoted from Mr. Banks'
testimony:
There are no known conventional resources on State or
Native lands that are likely sufficient to replace the
decline in the existing production rates.
Senator Paskvan believed that although the state should
remain optimistic about heavy and shale oil and Outer
Continental Shelf resources, the information from Mr. Banks
was poignant. He moved to slide 61 titled "TAPS Throughput
Continues Steady Decline" that included testimony from a
March 1, 2012 Senate Resources Committee meeting. He had
asked Scott Jepsen, Vice President, External Affairs,
ConocoPhillips Alaska whether Alaskans should expect to see
1 million barrels a day from state lands in conventional
oil with the $5 billion investment over the next ten years.
Mr. Jepsen had remarked previously that the expenditure of
the $5 billion would commence in the upcoming three years,
but would be spent over the next six to ten years. Mr.
Jepsen had indicated that 1 million barrels a day was a
good aspirational goal, but he didn't think it was possible
to get there with conventional oil. Mr. Jepsen hoped that
other types of technologies may increase throughput from
shale or heavy oil.
1:06:52 PM
Senator Paskvan addressed slide 62 "Other Oil Producing
Regions Enjoying Production and Employment Booms" and the
resurging North American oil production issues. He
referenced how technology had created an upheaval in the
North American natural gas markets. The slide highlighted
the transfer of technology that had transformed the natural
gas field and its promise to improve oil production in the
United States. The technology had caused the surge in
natural gas production, which was transforming the outlook
for oil production in America. He quoted material from the
slide (source: Citi Investment Research & Analysis,
February 15, 2012):
Advances in the use of horizontal drilling and
hydraulic fracturing have unlocked vast reserves of
hydrocarbons originally trapped in highly dense shale
rocks. The two shale oil plays that have benefited
most from this transformation so far are the Bakken
and Eagle Ford.
Senator Paskvan noted that Bakken was located in North
Dakota and that Eagle Ford was in Texas. He hoped that the
shale and heavy oils would arrive in and benefit Alaska in
the near future. He asked his staff to walk through the
subsequent slides related to rig counts.
JEFF, STEPP, STAFF, SENATOR JOE PASKVAN, referenced a
comment by Senator Paskvan that Alaskans expected policy
makers to act like "sophisticated owners of a world-class
resource." He stated that part of being a sophisticated
owner was performing a sophisticated analysis of the
relevant issues. He pointed to comparisons made between
Alaska, North Dakota, and Texas. He quoted from slide 62:
The unrelenting increase in oil rig count has been
driven by two major forces: the sustained, high price
of the commodity and the promise of improved oil
production using the technology that has transformed
the gas sector.
Mr. Stepp elaborated that the technology referred to in the
quote was horizontal drilling and hydraulic fracturing. He
looked at a map of the Baker Hughes oil rig count in
Bakken, North Dakota on slide 63. According to the Baker
Hughes website and app the current active rig count was
196; all of the rigs were for shale "oil play," a strategy
not currently used in Alaska. He stressed that there was a
substantial amount of infrastructure in North Dakota
compared to Alaska's North Slope. The map indicated the
presence of many state highways and county roads that
provided access to infrastructure hydraulic fracturing
technology.
1:11:40 PM
Senator Paskvan turned to slides 69 and 70: "Other Oil
Producing Regions Enjoying Production and Employment
Booms." He referred to an article: Alaska Economic Trends:
Alaska's Oil Industry September, 2008 (copy on file). He
believed that it was a fact that there had been dramatic
improvements in technology in the past decade. The article
addressed examples including, horizontal drilling, ultra
extended-reach drilling, 3-D and 4-D seismic surveys, drill
bit sensors, and other advancements that reduced the number
of wells that needed to be drilled; the number was
significantly lower than it was ten years earlier. Slide 70
addressed that the national oil and gas industry had been a
leader in productivity gains throughout the 1990s and that
the industry had been able to perform more work with fewer
workers (page 6 of the Alaska Economic Trends: Alaska's Oil
Industry September, 2008). He furthered that the industry
goal of fewer workers did not match up with the state's
goal of increased employment for Alaskans in the industry.
He stressed that policy makers should expect to see
continued advances in technology given the industry's
motivation to continue the development of new technologies
to perform more work using fewer workers.
Senator Paskvan directed attention to slide 71 that
compared Alaska to other oil producing states. Based on the
size of Alaska's oil industry work force a person would not
guess how important oil was to the state's economy
according to the Alaska Economic Trends: Alaska's Oil
Industry September, 2008. He cited from the report that
"Alaska produced 15 percent of the nation's domestic oil
supply in 2007 but employed only 3 percent of the U.S. oil
and gas work force...(page 10)."
1:14:10 PM
Senator Paskvan pointed to slide 72 that continued to focus
on how Alaska compared to other oil producing states:
One big reason is simply that Alaska's oil fields
enjoy large economies of scale. Prudhoe Bay is the
largest oil field in the nation and doesn't need a
huge work force to produce its oil...
In Texas, Oklahoma, Wyoming and other oil-producing
states, some oil is produced from very small fields.
There are 400,000 marginal fields or stripper wells
operating in the U.S. and a stripper well produces 10
barrels of oil or less per day. In many of the states,
there are literally thousands of families and small
companies engaged in producing oil - something nearly
totally absent in Alaska.
Senator Paskvan recalled that when legislators had been in
Texas in 2011 they had been told that the average Texan
well produced less than 5 barrels a day; something unknown
to Alaska where the production per well greatly exceeded
the amount. He read from slide 73 "Other Oil Producing
Regions Enjoying Production and Employment Booms":
Technology advances lead to more drilling and more
jobs in the new, unconventional (i.e., shale) oil
plays in North Dakota and Texas.
At the same time, technology advances lead to fewer
wells and fewer jobs in the mature, conventional oil
plays on Alaska's North Slope.
Senator Paskvan relayed that the state awaited the
application of technology in conventional resources in
heavy and shale oils and hoped for breakthroughs in the
area in order to compare to Texas and North Dakota.
1:16:23 PM
Senator Paskvan discussed slide 74 "Competition is High -
Many Other Areas to Invest Around the World." He observed
that the Alaska North Slope remained a world class basin;
the Prudhoe Bay field was one of the ten largest fields in
the world. He pointed to the vertical integration of the
"big three" on the central North Slope [BP, ConocoPhillips,
and ExxonMobile] and discussed that dollars were made by
distribution from the upstream to midstream and at the
wellhead. The industry was in a transition from "majors
only to mid-majors and independents." He related that
national oil companies had limited the areas in which
investments could be made. The final bullet point addressed
the concept of immobile capital including sunk costs; the
incentive was to keep areas functioning as long as
possible; a significant Central North Slope infrastructure
the that remained attractive to the industry.
1:17:57 PM
Senator Paskvan reviewed components included in SB 192
beginning on slide 76: "CSSB 192(RES) Rationale and
Overview." He highlighted that the legislation:
· Preserves Industry-Friendly Components of ACES
· Reduces the Rate and Cap of Progressivity
· Rewards Increased Production
· Establishes a Gross Minimum Tax
· Separates oil and natural gas for purposes of
calculating the progressivity portion of the
production tax
· Creates an Oil Information System
Senator Paskvan elaborated that the goal of the oil
information system was to make the access to information
more readily available to policy makers.
1:19:29 PM
Senator Paskvan highlighted industry-friendly components of
Alaska's Clear and Equitable Share (ACES) that SB 192 would
preserve. Expenditures and transportation costs were
preserved so the calculation of production tax was applied
after the removal of the deductions. The bill maintained
the current tax credits. He explained that for the same
dollar a company could deduct a 20 percent credit (a
company could deduct 100 percent of the dollar spent in the
year it was spent), which was a powerful investment
incentive. The royalty rate that ranged from 12.5 percent
to 16 percent was preserved and was attractive to the
industry; royalty rates ranged from 25 percent to 30
percent in other states including North Dakota and Texas.
The concept of royalty modification was sustained; if an
operator was able to prove a need for assistance the
Departments of Revenue and Natural Resources could reduce
the royalty down to as low as 3 percent to allow the fields
to continue production.
1:21:34 PM
Senator Paskvan addressed the progressivity rate and cap
reduction that would occur under SB 192 (slide 78). The
bill retained the original trigger of $30 in production tax
value (PTV). He explained that the PTV was assessed after
deductions for transportation costs and for qualified and
operating expenditures. The PTV was a $30 gap that was
maintained at the base 25 percent, at which point the
progressivity rate was reduced from a 0.4 per dollar
increase in PTV to a 0.35 per dollar increase that was
capped at 50 percent. At 50 percent there was a second
trigger on the progressive tax rate calculation to further
reduce the rate of progressivity from 0.35 per dollar to
0.1 per dollar up to 60 percent. The 60 percent
progressivity cap was a reduction from the current 75
percent cap. He stressed that the reductions were
significant and material.
Senator Paskvan pointed out that the bill would reward
increased production (slide 79). He relayed that a joint
Senate Finance and Resources Committee meeting had heard
from petroleum consultant Pedro van Muers who had addressed
the concept of an allowance for an increase in new oil or
incremental oil; it had been deemed important that the bill
provide incentives based on the concept. An allowance was
included that would reduce a company's PTV by $10 for new
and/or incremental barrels produced.
1:23:54 PM
Senator Paskvan communicated that the bill would establish
a gross minimum tax of 10 percent on the legacy fields of
Kuparuk and Prudhoe Bay to ensure that the revenue streams
would always maintain a minimum floor. In addition to the
adjustment for the oil industry at high oil prices the bill
factored in the potential for oil price volatility and the
need to balance the risk to the state at low oil prices. He
relayed that consultants had expressed the need for ACES to
be durable in a wide range of price environments; the
provision helped achieve that goal and protected the state
at the downside.
1:25:17 PM
Senator Paskvan reviewed the decoupling of the oil and
natural gas taxation systems on slide 81. He explained that
the tax rate applied in Alaska was based on the combined
BTU [British Thermal Unit] value of oil and gas; oil and
the BTUs created by oil were valued substantially higher
than BTUs of natural gas. There was a dilution effect that
dramatically reduced revenue streams to the state if the
taxes were not decoupled. The legislation removed the
dilution effect by having progressivity calculated
distinctly for oil and gas.
Senator Paskvan detailed that SB 192 would create an oil
and gas information system (slide 82); it was believed that
as much historical and current oil and gas information as
possible should be available to policy makers to help them
make decisions based on substantive data. The Alaska Oil
and Gas Conservation Commission (AOGCC) would be required
to develop the electronic Petroleum Information Management
System in order to make information more readily available
to policy makers.
1:27:20 PM
Senator Paskvan believed that there was more reason for
optimism related to Alaska's future than ever before (slide
84). There were 7 billion to 8 billion barrels of
conventional oil on the Central North Slope; additionally
there were other resources including, heavy and shale oils,
undiscovered conventional oil, Outer Continental Shelf in
the Beaufort and Chukchi Seas, National Petroleum Reserve-
Alaska, and the Alaska National Wildlife Refuge. The North
Slope was worth more currently than it had been over 30
years earlier because the value of oil had increased. He
noted that spending forecasts were up; there had been
significant work performed below ground in well workovers
and there had been a rebuilding of infrastructure below and
above ground. He believed the work would set the stage for
a "viable and vibrant" oil industry for decades to come. He
recalled that Cathy Foerster with AOGCC had reported that
the North Slope was healthy. He agreed with the Department
of Natural Resources (DNR) advertisement that read:
"Alaska: We're Open for Business"; he believed that the
state was competitive and had a world class resource to
offer. He pointed to a recent Petroleum News headline
"North Slope Booms"; legislators had been told in the past
year that exploration on the North Slope was at a level
that had not been seen in 40 years; as such, there were
currently not enough rigs to perform all of the work that
North Slope operators wanted. He referred to a practice
called "hot sheeting" where workers alternated sleeping in
beds due to the numerous employees working on the North
Slope.
Senator Paskvan concluded that Alaskans wanted to see the
legislature act like a sophisticated owner of a world class
resource and expected that Alaska would obtain the maximum
value for its resources for its citizens.
1:30:47 PM
Senator Thomas wondered whether members' packets included
the following detailed information: a memo from Mark Meyers
regarding mergers and market concentrations, Prudhoe Bay
development history and future potential (slides 31 through
33), and the optimization of production from mature fields
(slide 34).
Senator Paskvan replied that his office would provide the
articles and any additional information that the committee
wanted.
Senator Thomas referred to slide 60 and wondered whether
Senator Paskvan had heard from the Department of
Administration or DNR that remarks made by Kevin Banks to
the U.S. Senate the prior year were false or misleading.
Senator Paskvan replied in the negative. He believed the
remarks were true at the time they were made and continued
to be true.
1:32:13 PM
Co-Chair Hoffman referred to an unlabeled handout from
DNR's Division of Oil and Gas; it stated that the past two
years of lease sales of the North Slope successfully leased
a total of 1,276,000 acres to small companies. He asked how
many wells had been drilled on the leases in the past two
years.
Senator Paskvan responded that he did not have the
information.
Senator Stedman would ask DNR to respond to the question at
a later time.
1:32:57 PM
Senator Ellis asked about any Senate Resources Committee
discussions related to lease terms and the duty to produce.
Additionally, he was interested in any discussion on state
direct financial investment (SDFI) to better align industry
and state interests. He asked about facilities access; he
had heard from individuals in the industry that there was
no problem with facilities access and that it was a
commercial transaction that could occur in the future.
Senator Paskvan affirmed that all of the topics had been
discussed in the Senate Resources Committee. The ideas from
members were valid, but the issue was whether tax
legislation should be confined to the tax components. He
believed that there should be some "footage on the cutting
room floor" to keep the bill as precise as possible. He
referred to a slide in the presentation that included
remarks made by Bob Bartlett at the Alaska Constitutional
Convention; Mr. Bartlett had discussed the acquisition of
large tracks of land with the intent not to purchase. The
Senate Resources Committee had discussed that there were
exclusive rights provided under the lease structure that
could be for 10 years where no activity occurred; the
question was would the lease be tendered back to the state.
The topics of duty to explore, produce, and sell had been a
source of significant discussion in the committee. He hoped
that issues would be better developed throughout the
legislative session, particularly relating to the duty to
produce.
1:36:22 PM
Senator Olson referred to the Gleason Decision (slide 36).
He asked whether there were any points in the decision that
were in the repeal or reconsideration process that may
change the date from 2065 or 2075.
Senator Paskvan answered in the affirmative. There had been
a state request for reconsideration of the decision. He
elaborated that he prior week Judge Guidi had denied the
state's application with respect to one component of the
decision (the case had been transferred to Judge Guidi
given that Judge Gleason was made a federal district court
judge); Judge Guidi supported Judge Gleason's decision. He
expected that the decision would be appealed, but as of yet
the appeal for tax years 2007 through 2009 had not
occurred.
1:38:27 PM
AT EASE
1:43:30 PM
RECONVENED
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 160 AGDC FY 2013 Budget Request.pdf |
SFIN 3/13/2012 1:00:00 PM |
SB 160 |
| SB 160 AGDC Funding Profile JMD.pdf |
SFIN 3/13/2012 1:00:00 PM |
SB 160 |
| SB 160 DPS King Air Proposal 031212.pdf |
SFIN 3/13/2012 1:00:00 PM |
SB 160 |
| SB 160 Interior Helo -final- 11_28_11.pdf |
SFIN 3/13/2012 1:00:00 PM |
SB 160 |