Legislature(2011 - 2012)SENATE FINANCE 532
03/16/2012 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB307 | |
| SB192 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 307 | TELECONFERENCED | |
| += | SB 192 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax;
and providing for an effective date."
9:08:18 AM
KARA MORIARTY, EXECUTIVE DIRECTOR, ALASKA OIL AND GAS
ASSOCIATION (AOGA), presented a PowerPoint Presentation,
"Oil and Gas: Fueling Alaska's Economy" (copy on file).
Ms. Moriarty displayed slide 2, "AOGA Member Companies."
She stated that AOGA was a business trade association whose
mission was to foster the long-term viability of the oil
and gas industry for the benefit of all Alaskans. She
stated that the member companies represented the majority
and account for the majority of the oil and gas
exploration, production, transportation, refining, and
marketing activities in Alaska. The AOGA member companies
reflected the breadth and scope of the oil and gas industry
across the state. She emphasized that AOGA required a 100
percent consensus of all member companies in order to allow
AOGA to testify on matters of tax policy. She stated that
the Alaska Clear and Equitable Share Act (ACES) affected
continued production decline on the North Slope and had a
negative impact on the economic future of Alaska.
Ms. Moriarty discussed slide 3, "Decoupling - Sections 5
and 11 of CSSB 192 (RES)."
AOGA Opposes Proposed Language
-Proposed Language results in a tax increase.
-Recognize need to eventually resolve the concern that
combining the value of gas with that of oil when
significant gas sales occur will reduce the tax on the
oil, unless they are decoupled.
-AOGA open to trigger mechanism, but reserve right to
evaluate proposed language.
Ms. Moriarty looked at slide 4, "Petroleum Information
Management System, Sections 2 and 3 of CSSB 192 (RES)."
-New section would blur the current clear authorities
and accountability of DOR (Taxation Power) & AOGCC
(Police Power).
-Could lead to companies providing the same
information over and over or in different formats to
different agencies.
-Proprietary/confidential information may not be
adequately safeguarded.
-Creates unrealistic expectations about public access
to certain specific kinds of information.
-May create federal disclosure issues.
9:20:56 AM
Senator McGuire wondered what possible opportunities the
members of AOGA would be open to regarding more meaningful
financial disclosure arrangements. She remarked that there
were some concerns addressed in the Senate Resources
Committee, with respect to the Gleeson Agreement. She
pointed out that there was an issue regarding proprietary
agreements, and stated that it was only "proprietary" if
the company states it as such. Ms. Moriarty agreed to
provide that information.
Co-Chair Stedman noted that Commissioner Butcher would be
testifying to the committee at a later date regarding
disclosure issues. Ms. Moriarty looked forward to the
result of the disclosure issues conversations.
Ms. Moriarty discussed slide 5, "Progressivity and 'base'
tax rate, Sections 5, 7, and 8 of CSSB 192 (RES)."
-25 percent base rate is too high.
-CS does not provide brackets - brackets are
meaningful.
-CS lowers starting slope by merely one-eighth.
-The new cap will not be reached until approximately
$244/barrel.
Ms. Moriarty discussed Section 13 of CSSB 192 (RES). She
remarked that it was "essentially impossible" to know in
advance exactly how successful an investment would be. She
explained that ACES encouraged investments by rewarding tax
payers to make the decision to invest in Alaska, rather
than rewarding the successful production as a result of
investment. She stated that ACES tax credits were similar
to the tax credits given to movie producers. She explained
that CSSB 192 (RES) proposed to reward actual increases in
production from the prior year's level. This reward took
the form of a $10 a barrel reduction in the tax payer's
production tax value for a calendar year for each taxable
barrel produced over the production in the prior year. She
stated that some North Slope fields may have decline rates
substantially greater than the 6 percent historical average
for the North Slope, so under CSSB 192 (RES) there would be
no reward for the success in keeping production
significantly higher than it otherwise would have been.
Ms. Moriarty looked at page 19, sub-Section G of CSSB 192
(RES). She stated that the proposal would limit the effect
of the $10 a barrel reductions in the production tax value
by prevent the tax payer from being considered for purposes
of setting the progressivity tax rate. She remarked that
AOGA did not understand why the $10 allowance would not be
applied to progressivity. She stated that Senator Wagoner
had proposed a tax holiday conceptual amendment that would
provide a similar, but more effective reward for a
producer's success in slowing down its rate of decline. The
conceptual amendment would set a target level of production
for each year, by applying the decline rate during the
three most recent years to the producer's production in the
prior year. Therefore, if a production beats the target for
the year, the above-target production would receive a tax
holiday by excluding its gross value at the point of
production from the calculation of the production tax value
for the producer's taxable production during that year. She
stressed that the proposal would reduce the amount of
production tax values (PTV) subject to the tax, and if
progressivity were applicable, it would also reduce the
progressivity tax rate.
9:31:33 AM
Ms. Moriarty discussed slide 6, "New Minimum Tax - or
'Floor', Section 13 of CSSB 192 (RES)."
-Only applies to legacy fields (Prudhoe & Kuparuk).
-Creates a disincentive to invest in legacy fields,
especially at low prices.
-Requires allocation of costs among the two fields & a
producer's interest in their other fields.
Ms. Moriarty looked at slide 7, "Summary."
-AOGA Opposes CS SB 192 (RES).
-Overall government take for Alaska would still be too
high under this CS.
-AOGA supports meaningful changes - such as
progressivity brackets.
-Tax Policy does affect business decisions
-CS will not improve ability to attract more
investment.
-CS will not lead to more production.
Co-Chair Stedman noted that there was no limit to the
amount of credits in the current tax structure. He stated
that FY 12 expected credits reaching approximately $8
million to affect the treasury. He stressed that there
needed to be a solution, and was open to suggestions. He
stressed that it was a problem to have an exposure of an
over-abundance of tax credits. Ms. Moriarty stated that the
proposals would be evaluated, to determine the impact to
the State.
9:38:57 AM
CATHY P. FOERSTER, COMMISSIONER, ALASKA OIL AND GAS
CONSERVATION COMMISSION, read from a prepared testimony,
"Impact of Section 3, CSSB 192 on the Alaska Oil and Gas
Conservation Commission" (copy on file):
The AOGCC, an independent quasi-judicial State agency,
is the State's permitting and regulatory authority
over hydrocarbon and geothermal wells. The
Commission's duties include ensuring the maximum
recovery of hydrocarbon and geothermal resources,
preventing hydrocarbon and geothermal waste, ensuring
well safety, and protecting underground sources of
drinking water and correlative rights. Given the
nature of the Commission's duties and
responsibilities, apart from support personnel, it is
staffed by expert petroleum engineers and petroleum
geologists. Because its expertise is so carefully
tailored to its statutory duties and responsibilities,
the Commission functions well and Alaska has an
unrivaled record with regard to well safety and
production.
Section 3 of the committee substitute for SB 192 seeks
to effectuate a substantial change in the AOGCC by
requiring the Commission to establish, operate and
maintain an electronic petroleum information
management system comprised of available and non-
confidential information. The vast majority of the
information the Commission must include in the
petroleum information management system has nothing to
do with the Commission's mission or function - "unit
and joint operating agreements," exploration licenses
and leases, "work programs and budgets," "development
plans," operating and capital expenditures and
projections, "oil and gas sales, revenue and pricing,"
transportation agreements, abandonment plans and
budgets, resident and non-resident hiring information,
training opportunities, and other information "the
commission determines necessary and relevant to the
oil and gas production tax and to the exploration,
development, and production of oil and gas resources."
Much of this information is currently already gathered
and maintained by other state agencies or is not
available to any state agency.
After careful review and consideration of Section 3,
the AOGCC is of the view that Section 3 radically
changes the AOGCC's longstanding role as the State's
petroleum technology and geology experts and
jeopardizes the Commission's ability to discharge its
primary duties and responsibilities in those realms.
The Commission has neither the expertise nor the
infrastructure to construct, maintain and operate
information management systems, computer systems, and
the gathering of information on other subjects not
related to the safe, efficient production of
hydrocarbon resources from wells. Implementation of
Section 3 will create - at a substantial fiscal outlay
- an additional distinct state bureaucracy within the
AOGCC which duplicates functions currently performed
by other state agencies.
The AOGCC's non-confidential information is already
publically available on its website. Other agencies
are currently working to provide similar web
availability of their data. Once those agencies do
so, the information will be far more readily
accessible to the public on those websites and at a
substantially reduced cost.
Co-Chair Stedman stated that there would be discussions
with the Department of Revenue (DOR), and noted a concern
regarding the information disclosure to the legislature.
Commissioner Foerster replied that the AOGCC was doing
important work to solve the issue of financial disclosures.
9:44:48 AM
DOUG SMITH, PRESIDENT AND CEO, LITTLE RED SERVICES,
introduced himself. He encouraged the committee to ask
questions. He presented a PowerPoint Presentation, "The
Alliance and CSSB 192" (copy on file).
Mr. Smith looked at slide 3, "Our Story Hasn't Changed." He
stated that Alliance members, at their own expense, have
traveled to Juneau more than 10 times during the 27th
Alaska Legislature. He furthered that they had consistently
advocated for significant tax reform. He explained that
members and their employees had participated in every
public testimony opportunity in 2011 and 2012. He stated
that the McDowell Report confirmed the facts they had
presented: Alliance companies average between 70 percent
and 90 percent Alaska hire; Alliance companies employed
non-residents who were formerly long-term Alaska residents;
and record employment on the North Slope had not led to a
reduction in the production decline.
Mr. Smith discussed slide 4, "Alliance Member Composition."
-The Alliance is comprised of 460 member businesses.
-35,000 employees.
-Our membership is comprised of businesses in 43
different sectors from Automotive to Welding.
-Our mission statement is to "promote responsible
exploration, development and production of oil, gas
and mineral resources for the benefit of all
Alaskans."
9:50:52 AM
Mr. Smith looked at slide 5, "The Current Investment
Climate Impact on Alliance Members."
1. Continued decline in projects.
-Three largest fabrication shops in the state are
currently operating at a loss, with little to no work,
in order to keep core employees on staff.
2. Alaskan companies are looking for work, resulting
in many relocating or shifting resources and
investment to the lower 48 (CIRI, Solsten,
Fairweather, Builders Choice, Northern Industrial
Training, Carlile, Lynden, Peak Oilfield Services,
Cruz Construction, etc.).
Mr. Smith discussed slide 6, "Jobs."
1. As indicated in the McDowell study, record high
employment on the North Slope does not represent a
thriving oil industry.
A. 2000 - 108,000 barrels of annual production for
every job.
B. 2010 - 28,000 barrels of annual production for
every job.
2. Loss of highly trained professionals to outside
competition.
3. Reduction of jobs based in Anchorage and Fairbanks
like engineers, fabrication work, etc.
9:57:01 AM
Mr. Smith looked at slide 7, "My Company - Little Red
Services."
1. Letter in your committee packet (copy on file).
Dear Senator Stedman:
I am writing on behalf of myself and the 90+
Alaskans we employ at Little Red Services. We are
requesting your support of ACES tax reform that
will result in substantial new investment in our
primary oilfields that are declining in
production at a very concerning rate.
Our company engages in work activities that are
substantially subsurface, from the well head
down, and are usually associated with production
related activity. AN issue that many legislators
are struggling with is the employment statistics
that demonstrate that employment is up on the
North Slope after the implementation of ACES.
This I believe is an undeniable fact and should
be embraced as such. The concern is what are the
jobs and do they result in new or increased
production benefits. I cannot speak for all
sectors of business conducted on the North Slope
but I can provide a short view into a specific
instance within our company that indicates a
shift from production related effort to
maintenance.
After the enactment of ACES the production based
activity of ConocoPhillips slowed in Kuparuk and
we had to remove a truck from service resulting
in the layoff of 13 people in 2009. We eventually
found work for the truck in Prudhoe Bay.
Unfortunately for Alaska, this work was not our
usual production related support. Instead the
truck was put to us heating water from a lake on
the west side of Prudhoe to support the washing
of snow and ice from flow lines so they could be
inspected for corrosion. This adaptation may help
to maintain our revenue but it also clouds the
employment view of the North Slope and masks the
real issue of the significant number of jobs that
are related to non-production activities.
A recent jobs study conducted by the McDowell
Group demonstrated the negative trend in the
production and jobs relationship. The
relationship between production and jobs on the
North Slope had steadily decreased since peak oil
production in 1988. In 1987 the barrels of oil
produced per North Slope job was at 255,000
barrels per job (measured on an annual average
basis). In the year 2000 North Slope oil
production totaled approximately 108,000 barrels
for every oil and gas industry job. By 2010 North
Slope oil production had further declined to
approximately 28,000 barrels for every oil and
gas industry job on the North Slope.
While Alaska has maintained a reasonable level of
employment, our production decline and current
levels of investment is concerning and needs a
response from our legislature to stimulate
additional investment from the existing and
potential new producers on the North Slope. The
legislature and all Alaskans are aware of
thousand significant activity and investment
occurring in the other competing oil and gas
regions of Canada and the United States. It is
our long term future and fiscal stability that is
of concern. Now we look to our legislative
leadership to find the correct balance of fiscal
terms that can extend our oil production and
bridge our fiscal needs to the possible
development of gas, unconventional oil and OCS
resources that will offset our declining legacy
fields and Alaska's treasury.
There is no easy answer but dealing with
progressivity and providing reasonable tax
brackets and base rates are good steps in the
right direction. We do not believe industry needs
to be unfairly subsidized nor should treasury be
upside down on oil and gas activities in our
state. We do support measures that place us in a
competitive posture with other areas of
investment opportunity in North America like
those contained in HB 110. An effective fiscal
structure can only be measured in the form of
increased production that slows decline or
actually increases levels of production for the
next several years.
We applaud your commitment to the people of
Alaska and dedication to public service. Please
act wisely and swiftly during this session on our
behalf and help us preserve a healthy oil and gas
industry in Alaska for decades to come.
Sincerely,
Douglas Smith
-Relocating an asset from production-related activity
to maintenance activities that do not increase
production.
2. Financing.
-Banks outside of Alaska are concerned about our
current tax policy and its potential impact on future
financial forecast of our service company.
Mr. Smith Discussed slide 8 titled "The Future of Alliance
members in the oil Business."
Oil tax reform must address the following:
-Existing light oil production
-New light oil production
-Viscous
-Exploration
-New companies and investment in the Alaska market
Mr. Smith spoke to a slide on page 9 titled "Observations."
Existing production
-Low-cost light oil (existing production)
"Government take of 70-75 percent is reasonable. It is
maybe slightly on the high side." (PVM slide 28,
presentation to Alaska Support Industry Alliance)
10:02:00 AM
Mr. Smith explained the slides on pages 10 and 11 titled
"Observations."
New production
-The allowance for production increases in CSSB 192
does not reflect the recommendation of Dr. van Meurs:
"the 60-65 percent government take for more costly new
light oil resources as proposed in HB 110 and HB 17 is
a reasonable level from an international perspective."
(PVM slide 38).
-Dr. van Meurs includes in-field drilling of existing
fields as new high-cost light oil production (PVM
slide 16).
-Dr. van Meurs "The main reason for major companies to
be in a harvest mode is that projects outside Alaska
are more attractive. No large attractive projects
available in Alaska under current fiscal terms for
major oil companies" (PVM slide 15).
-Both Gabon and Trinidad applied an approximate 12
percent drop in order to attract new investment in an
effort to offset declining production (PVM slide 31).
a. Marginal government take in Gabon at $100/bbl is 52
percent.
b. Marginal government take in Alberta is 57 percent.
c. Marginal government take in Alaska under ACES is
over 80 percent (PFC Energy, slide 49).
Mr. Smith did not see Alaska "giving in" to a harvest
mentality and indicated that Alaska's resources oil
resources were vast.
10:05:51 AM
Mr. Smith discussed a slide on page 12 titled
"Observations."
1. Viscous (called heavy by Dr. van Meurs)
-Dr. van Meurs "To be competitive Alaska would have to
offer government takes for heavy oil at 55-60%." (PVM
Slide 42).
2. Exploration
-Tax credits have stimulated significant exploration
this season.
-Will this result in the required investment to bring
new discoveries to production under the current ACES
tax structure?
Mr. Smith looked at slide 13, "Observations."
New companies in the Alaska market
-CSSB 192 does not simplify our tax structure for
companies looking to invest in new markets and it does
not make us competitive for new projects.
-ACES does not compete well when developing higher
cost light oil (PVM slide 37).
-"ACES inhibits the development of new projects and
resources that might help stem or even reverse
decline." (PFC slide 28).
Mr. Smith discussed slide 14, "Observations."
There is probably a point where industry and the State
share the pain of low prices:
-Industry should not have to give up total profits to
taxes.
-The State treasury should not collect zero tax at low
prices.
A healthy partnership should exist on both ends of the
price spectrum.
Mr. Smith looked at slide 15, "Observations."
-Decoupling may be in the State's best interest if it
is revenue-neutral to industry.
-The Alliance feels this bill, in its current form,
does not go far enough to encourage a significant
shift in investment.
-Although we have touched on several points from Dr.
van Meurs on different types of production and
corresponding tax rates it would be difficult to
implement the approach.
-The method and levers to be adjusted is the challenge
before the senate but we support a magnitude of change
that would place us in the middle of a comparative
chart produced by PFC Energy.
10:11:50 AM
Co-Chair Stedman stated that PFC Energy had been asked to
examine Gabon and Trinidad, so there would be further
information forthcoming regarding the issues in slide 11.
He felt that Alaska had followed Gabon and Trinidad's
examples to stimulate investment. He commented that the
State did not have the ability to parse out individual
employment in the service companies, because they dealt
with labor issue on a macro level. He added that Exxon,
ConocoPhilips, and British Petroleum were often referred to
as the "big three" because the intricate details of each
company were unknown. He recognized that the employment
numbers were at maximum capacity, there was still the issue
of incremental production, which required a different type
of work force. Mr. Smith replied that his company was
fortunate, because the employment had been relatively flat
over the years. He felt that flat employment was "a win",
because there was declining production. He noted that the
more concerning issue was the low production, despite high
employment.
10:17:16 AM
RICK ROGERS, RESOURCE DEVELOPMENT COUNCIL, ANCHORAGE (via
teleconference), read from a prepared testimony.
Good morning Co-Chairs Stedman and Hoffman and members
of the committee. My name is Rick Rogers, Executive
Director of the Resource Development Council for
Alaska (ROC). ROC is a statewide membership-funded
non-profit trade association representing the common
interest of the Forestry, Fishing, Tourism, Mining and
Oil and Gas industries in Alaska. Our membership is
truly a broad cross section of Alaska businesses
including the aforementioned industries as well as
communities, all twelve Alaska Native Regional
Corporations, organized labor, utilities and support
business that recognize the important role resource
development plays in our economy.
ROC thanks the committee for this invited testimony. I
regret being unable to be with you today in Juneau,
and appreciate the LIO and staff facilitating
testimony from Anchorage. I have prepared no Slides
for today's presentation.
ROC is appreciative of this committee's recognition of
the need to improve the investment climate in Alaska's
oil and gas industry to stem TAPS throughput decline.
I hope to emphasize the sense of urgency and the broad
base of support from ROC membership towards meaningful
adjustment to the production tax to achieve a more
attractive investment climate in Alaska. Some of the
most vocal proponents of production tax reform among
our membership are not directly involved in the oil
and gas industry. The business community is fearful
what continued TAPS throughput decline will do to our
economy as a whole.
We are convinced that ACES in its current form is
retarding investment and contributing to an
accelerating production decline. Alaska is sitting on
the edge of a fiscal cliff. A sobering outlook can be
found in the Governor's budget, the ten-year budget
projection that shows several plausible scenarios with
significant budget deficits by 2014. While meaningful
tax reform will result in short-term revenue decline,
long term it is imperative that we sacrifice some
short-term tax revenues to reinvigorate production.
From the ROC perspective, this is about acting in the
long-term interest of Alaskans.
10:28:48 AM
Senator Ellis noted the state's base tax rate of 25
percent. He wondered what the ideal base tax rate would be,
from the perspective of the members of the Resource
Development Council. Mr. Rogers replied that it would be
difficult to determine the base tax rate without looking at
the progressivity formula and the entire structure and
regime.
SB 192 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2012 SB 192 Alliance Presentation.pdf |
SFIN 3/16/2012 9:00:00 AM |
SB 192 |
| 2012 SB 192 AOGCC.doc |
SFIN 3/16/2012 9:00:00 AM |
SB 192 |
| 2012 SB 192 AOGA Presentation.pdf |
SFIN 3/16/2012 9:00:00 AM |
SB 192 |
| 2012 SB 192 RDC Testimony.pdf |
SFIN 3/16/2012 9:00:00 AM |
SB 192 |