Legislature(2011 - 2012)BUTROVICH 205
03/01/2012 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB192 | |
| Presentation: Major North Slope Producers | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 192 | TELECONFERENCED | |
SB 192-OIL AND GAS PRODUCTION TAX RATES
3:35:46 PM
CO-CHAIR PASKVAN announced consideration of CSSB 192(RES),
labeled 27-LS1305\B. He said BP and ConocoPhillips would offer
comments on it. He said the committee had received letters from
ExxonMobil, Pioneer Natural Resources and the Arctic Slope
Regional Corporation in the last couple of days on their
positions and all the information is posted on BASIS. He said
approximately 140 Alaskans had testified on Tuesday and
Wednesday and the committee very much appreciated their input
and thoughts. Additionally, each committee member had received
dozens of emails from around the state and many had been
communicating with Alaskans about the oil tax issue almost daily
for the last year.
3:37:38 PM
He reviewed that CSSB 192(RES), version B, preserves the
deductions for the capital expenditures (CAPEX), the operating
expenditures (OPEX) and the transportation costs. It preserves
the tax credits, the State of Alaska's royalty rate and royalty
modification, and most importantly it reduces progressivity from
the current tax structure in two ways; it reduces the slope and
lowers the cap.
3:38:59 PM
The tax credits it preserves include:
-The 20 percent capital expenditure credits
-Oil and gas exploration credits
-Net operating loss (NOL) carry-forward credits
-Transitional investment expenditure credits
-Well lease expenditure credits
-Cook Inlet jack up rig credit
3:39:39 PM
He said as owner of a world class resource, Alaska collects
about 12.5 to 16.5 percent as a royalty and that doesn't change.
For comparison, Texas averages 25 percent royalty and North
Dakota averages 20 percent, but their production is on private
land.
CO-CHAIR PASKVAN said the commissioner still preserves the right
to modify royalty to no lower than 5 percent if a field or pool
is not otherwise economically feasible and is sufficiently
delineated. If a royalty modification is submitted to prolong
the economic life of a field (for example, because costs
increased or the price decreased) it can't be reduced below 3
percent.
3:41:24 PM
CO-CHAIR PASKVAN said Alaska has a system by which taxable
barrels are analyzed after royalty is taken off the top;
transportation costs, CAPEX and OPEX are deducted from that.
Production Tax Value (PTV) is the value that is established
after arriving at taxable barrels. The original trigger of $30
PTV is maintained but the slope changes in the CS at this point
from .4 to .35 and at 50 percent is reduced to .1 progressivity
for a 60 percent maximum (down from 75 percent).
^Presentation: Major North Slope Producers
3:42:58 PM
DAMIAN BILBAO, Head of Finance, Developments and Resources, BP
Exploration Alaska, recognized the committee's willingness to
discuss and debate Alaska's oil tax policy. He said this
dialogue must continue to stem declining production on the North
Slope. They have a common goal with the state of getting more
oil in the pipe.
3:45:01 PM
SENATOR STEVENS joined the committee.
MR. BILBAO said his testimony would be specific to the CS before
them [version B].
3:45:45 PM
SENATOR MCGUIRE joined the committee.
CO-CHAIR PASKVAN noted Senator Giessel in the audience.
MR. BILBAO said he found it notable that PFC Energy's
presentation yesterday indicated that only the amendments
providing for bracketing around progressivity showed meaningful
tax change that would lead to increased investment in Alaska.
MR. BILBAO said CSSB 192(RES), version B, does not provide any
meaningful tax change. The movement in the progressivity feature
from .4 percent to .35 percent will not affect BP's decision
making process in Alaska or shift the conversation around the
opportunity set. Only a "meaningful tax change starting with
bracketing around progressivity" will draw the additional
investment Alaska needs to put more oil in the pipe. He offered
to take questions.
SENATOR STEDMAN asked what BP thought of the two-tier approach:
one dealing with current production in the legacy fields and the
other for incremental production, versus a co-mingled tax.
MR. BILBAO replied that it's helpful to industry when the system
is simple. Right now it's not simple and takes a lot of effort
to implement and administer. It doesn't help the decision making
process. Secondly, the fields they operate are expensive and to
try to distinguish one from the other would be difficult.
Everyone has said the goal is to increase production in TAPS and
to do that the change will have to be meaningful; it will also
have to be simple so they can implement it. And bracketing
around progressivity is the meaningful change that will focus
the conversation around investment decisions.
SENATOR STEDMAN asked if he heard Mr. Bilbao say BP is more
interested in a co-mingled tax structure versus targeting the
incremental production with a lower tax rate (that would help
alleviate the higher costs of production).
MR. BILBAO replied that they hadn't modeled one versus the
other, but basically the fiscal policy has to incentivize
investment broadly. He didn't think creating two tiers would
affect the decision-making process. He explained that BP looks
at a project's economics and how it sits on top of the base
business. Both have to be healthy and distinguishing between the
two may not help the conversation.
3:52:15 PM
SENATOR WIELECHOWSKI said he has heard many times that HB 110 is
the only bill for which industry has offered a commitment to
invest and he wanted to know what the commitments were.
MR. BILBAO responded that over the last few months the BP Alaska
president has stated publicly with a meaningful shift in tax
policy they "would support progressing $5 billion of gross
incremental spend on the North Slope" on top of the large level
of investment activity that is already ongoing. He said it takes
a "significant amount of effort" to get at the 6 percent decline
that the state is experiencing today.
SENATOR WIELECHOWSKI asked if this is just a BP commitment.
MR. BILBAO answered this is a gross investment commitment that
both BP and ConocoPhillips have spoken to publicly. BP is a
minority owner at Prudhoe Bay so they need to make sure they are
aligned with their other working interest owners. BP has talked
about the I-pad project, Sag redevelopment, and incremental
drilling at both greater Prudhoe Bay and Kuparuk and
ConocoPhillips would share with them later what they have stated
publicly. ConocoPhillips is operator for the eastern/northeast
West Sak project which BP would support in the right fiscal
environment. That would take up the total $5 billion they have
been talking about.
SENATOR WIELECHOWSKI asked how much of the $5 billion would go
for the I-pad project.
MR. BILBAO replied the total of the four projects equals over $5
billion with each project being in a range of numbers, and he
would provide those ranges as a follow up to this testimony.
SENATOR WIELECHOWSKI said he is trying to understand what the
state will get for its tax break and asked what period of time
the $5 billion is invested over.
MR. BILBAO replied incremental drilling in the next year or two,
but it would take "at least six years plus" before getting into
the bulk of that spend. It depends on how the specific projects
mature with the resources available.
SENATOR WIELECHOWSKI asked if they have spoken with ExxonMobil,
the other partner, about doing this.
MR. BILBAO clarified that spending the $5 billion would be over
at least 6 years and it could take as long as 10. "These are big
complex projects" with technological and efficiency challenges
as well as the state's challenge.
CO-CHAIR PASKVAN asked if Alaskans should anticipate further
investments after these identified projects. Will there be
another $5 billion or $10 billion more?
MR. BILBAO replied yes; this would be a first phase. He added
that Alaska struggles to compete for incremental investment
opportunities when BP discusses its global opportunity sets.
4:00:05 PM
CO-CHAIR PASKVAN asked if he believed another 400,000
incremental barrels of oil from state land will be derived from
this $5 billion investment in the next 10 years.
MR. BILBAO replied he didn't want to set a specific production
target of 10 years for those projects and it would probably take
more than just the $5 billion to reach that level. However, with
meaningful changes to ACES - bracketing around progressivity -
other projects would materially stem the decline.
CO-CHAIR PASKVAN asked when he uses the term "material offset"
is that just within the hyperbolic rate of decline.
MR. BILBAO replied that the investment made today could move
production from what could be a 15 percent decline to the 6
percent decline. He said it takes a tremendous amount of
investment to get to the 6 percent and that it would take "big
material projects" to get beyond that. "Five billion is a first
phase of what those could be, but that will only happen if the
tax policy that is in place enables them to happen and makes
Alaska competitive with other opportunities around the world."
CO-CHAIR WAGONER said if the legislature would vote to give back
the state's take on progressivity and goes with the tax breaks
in HB 110 or Amendments B.4 and B.5, that amounts to $1.5
billion less per year to the state and Mr. Bilbao is talking
about a $5 billion spend in six years. In six years a total of
$9 billion would be credited back to the oil companies by this
give on progressivity and in 10 years they would get $15 billion
credited back. He asked in light of this information, "Whose $5
billion are we talking about investing to bring these projects
on line?" He said the state hasn't gained a lot if BP is
figuring on using the $5 billion the state gives up in
progressivity to invest as its $5 billion.
MR. BILBAO answered that the $5 billion of project investments
is a first phase and there will be more opportunities after
that. This is a transition point to another new business like
Prudhoe Bay was and a lot of cash is needed. BP has already
renewed its infrastructure over the last several years to
facilitate 30 more years of production.
4:04:38 PM
SENATOR FRENCH remarked that Senator Wagoner had pointed out
some of the math problems that have beset the committee and to
be fair the state would have to actually push $9 billion across
the table to get $6 billion in tax breaks to the companies,
because of the federal income tax effect. His question went back
to Senator Wielechowski's question about the role of ExxonMobil
in this investment scheme and asked if he had discussed these
projects with ExxonMobil and if they are contributing to the $5
billion.
MR. BILBAO replied that they have discussed these projects and
others and that they regularly discuss a "hopper of
opportunities" with their working interest owners. Those
conversations involve economics and the technical and efficiency
challenges, and they help the companies stay aligned. But
Senator French would have to ask that question of ExxonMobil
directly.
SENATOR FRENCH said to be clear as far as Mr. Bilbao is
concerned, the $5 billion is what BP and ConocoPhillips are
putting forward; it doesn't include anything from ExxonMobil.
MR. BILBAO replied that he couldn't speak for ConocoPhillips,
but he could say that conversations they have had with
ConocoPhillips are around the same set of projects.
SENATOR FRENCH rephrased his question and asked if that $5
billion is a combined spend between the two companies.
MR. BILBAO answered yes.
SENATOR FRENCH asked what percent of ownership ExxonMobil has at
Prudhoe Bay.
4:07:44 PM
MR. BILBAO said he wanted to correct his previous statement to
be very clear: the $5 billion is the total gross spend and would
include ExxonMobil. The $5 billion is the total estimate for
those four investment opportunities. They are not
differentiating who would pay for what amount. They are talking
about what level of investment ultimately would benefit the
state of Alaska with meaningful tax change.
SENATOR FRENCH said that Mr. Bilbao is also telling him to check
with Exxon as to their position on this.
MR. BILBAO replied that he was saying that only Exxon could tell
them specifically whether and when they are prepared to move
forward with those projects. He couldn't speak on their behalf.
SENATOR FRENCH asked how much of Prudhoe Bay ExxonMobil owns.
MR. BILBAO replied approximately 35 percent, roughly the same
amount as ConocoPhillips. BP owns approximately 26 percent.
SENATOR FRENCH remarked that no single company is a majority
owner.
MR. BILBAO replied he could answer that question, but
fundamentally the way the operating agreement for Prudhoe Bay
works is it requires the three parties to agree to move
something forward.
SENATOR FRENCH said that is the point he was getting at. He had
lunch with Jeff Lowenfels who is absolutely focused on the
Prudhoe Bay operating agreement as being the single document
that people have to understand to "get what is going on on the
North Slope." Jeff inspired him to get a copy; it's a very
complex document eight binders long. His understanding of it is
that Mr. Bilbao's position is correct; it requires the agreement
of all three owners to proceed with an investment in Prudhoe
Bay. That leaves him with a deep fear that BP can pledge $5
billion, and in all good faith believe it and have the check
ready to writeand ExxonMobil can say, "No, we don't like it and
we're not going to do it."
4:10:04 PM
SENATOR STEDMAN said he had a similar concern with the operating
agreement and its connection to the two-tiered approach and was
struggling with how to get a solution where all three companies
are comfortable. Because it seems like they would always be
chasing the lowest common denominator for whatever decision
point (and there are multiple ones) they are trying to work
through. If they took care of BP targets, whatever they are,
those might not be meaningful to ConocoPhillips and ExxonMobil.
He asked Mr. Bilbao to help the committee in understanding how
they could find a solution that would work for all three
companies.
MR. BILBAO said he could only speak on behalf of BP, but the
bracketing of progressivity in HB 110 was "chinning the bar on
meaningful tax change," and BP looked upon it as a minimum
threshold. They should also understand the way the companies
evaluate their projects; they do not look at them in isolation.
It's important that the underlying financials are healthy, not
just the project he sits on top of it. The fiscal policy needs
to affect both and to try to differentiate one versus the other
misses the mark on how that analysis takes place. It comes down
to the policy as a whole needs to provide a stable and healthy
business on top of which healthy projects can be executed.
SENATOR STEDMAN said he understood what Mr. Bilbao was saying,
but the committee struggles with knowing the details. Even if
they get the rough idea of a 33 or 34 percent effective tax rate
at $109 in FY13 for the overall basin by looking at the Revenue
Source Book, BP might be at a 5 percent higher rate internally.
Some small producers might have no revenue but have $400 or so
million in credits embedded in the system and so on. Legislators
use roughly a-third, a-third and a-third, because it's easy.
This is why they are asking for some guidance or help in solving
the incremental production question to get them above the 6
percent. BP is saying the bracketing is significant, but what he
hears is fix the high marginal rate, fix the government share
and give me a fair share of real high oil prices.
4:18:03 PM
MR. BILBAO responded that he provides a great amount of
information to the Department of Revenue each month and every
quarter and spends a lot of time trying to answer their
questions and help them analyze information. From BP's
perspective HB 110 was a start. It was chinning the bar on
"meaningful," but they would also like to see a reduction in the
base rate. They look at the upside opportunity at a higher price
versus whatever planning price they are using and if they don't
see that upside that affects the way that project competes
globally.
4:19:51 PM
SENATOR STEDMAN asked if one of their concerns is splitting the
extra increment at $120 to $130. He said it's not 50/50, but
probably 80/20. Do they want that split corrected and stabilized
so when they look forward to a price spike of $150, for
instance, they would have a good idea of what impact it would
have on their projects?
MR. BILBAO replied that the legislature's own consultants have
said that the current tax system is not competitive
internationally. In fact yesterday, PFC Energy said that ACES is
a system that encourages a harvest mode not a growth mode. That
is representative of what BP sees when they look at the
projects. At $100 versus $120 they do not see an upside for
moving a project forward and that affects the way that project
competes with opportunities elsewhere.
SENATOR STEDMAN said one of their consultants, Pedro van Meurs,
said that the government share of the tax structure within the
legacy fields should be capped at around 75 percent (including
federal tax).
MR. BILBAO responded that Mr. Van Meurs also said that the
Alaska system is not competitive internationally and his cost
assumptions were very low compared to BP's actual costs. So, he
would expect that some of his recommendations wouldn't "move the
needle on the way we look at our projects."
4:22:32 PM
CO-CHAIR PASKVAN recapped that the question still is who is
doing the investment if the state lowers its tax rate.
SENATOR WIELECHOWSKI said he was still trying to understand the
promise that the people of Alaska are getting in exchange for
the tax break. He asked Mr. Bilbao if he was saying with
absolute certainty if they pass HB 110 they will get $5 billion
in investment over 6 to 10 years.
MR. BILBAO replied no, but he could say if they pass meaningful
change, like the bracketing around progressivity in HB 110, that
they would move forward aggressively in conversations with their
other working interest owners. They would ramp up staffing
around these projects to make sure they could move forward
aggressively. But he couldn't speak on behalf of the other
owners other than hold with the comments they have already made
in support of some of these projects under a different tax
environment.
SENATOR WIELECHOWSKI said, "So essentially we really don't have
any promise or commitment to develop or invest $5 billion if we
pass HB 110?"
MR. BILBAO replied that they have an absolute commitment three
years from now if they pass a meaningful tax change in Alaska.
He said, "You can bring us up before this committee and hold us
to account if you haven't seen the progress you expect."
SENATOR WIELECHOWSKI said it's his understanding that the state
actually picks up 60 percent of the $5 billon he is saying they
may spend over 6 or 10 years through tax credits and deductions.
MR. BILBAO responded that their share of the $5 billion is money
they are not spending somewhere else in the world.
SENATOR WIELECHOWSKI asked, "Are you saying $5 billion of your
own money exclusive of state tax credits and deductions?"
MR. BILBAO said they talk in cash flow terms not in net income
terms. So, $5 billion is $5 billion of cash gross and BP's share
of that being spent in support of those projects.
SENATOR STEDMAN said they can run those calculations. But of the
$5 billion, 20 percent would probably be available for capital
credits and 100 percent write off. It digs a deeper hole when
getting to Senator Wagoner's question of net.
SENATOR WIELECHOWSKI asked how many barrels of oil they will get
from the $5 billion investment that may be made.
4:27:28 PM
MR. BILBAO replied that he could only speak to the Sag and I-pad
piece and it would be range of numbers over 200 million barrels,
and he would get that information for them.
CO-CHAIR PASKVAN asked if they would describe the field size
rather than the daily throughput.
MR. BILBAO replied yes.
CO-CHAIR WAGONER asked if that would be a total of recoverable
resource.
MR. BILBAO replied yes.
4:28:29 PM
At ease from 4:28 to 4:29 p.m.
4:29:58 PM
SCOTT JEPSEN, Vice President, External Affairs, ConocoPhillips
Alaska, thanked the committee for inviting them to testify on
CSSB 192(RES). He said ConocoPhillips believes that the key to
making the North Slope more attractive for capital investment is
reducing or eliminating the progressivity element of ACES. They
are pleased to see the committee has attempted to address
progressivity, but they have concluded that the changes as
described in the CSCS 192 (RES) are not significant and will not
improve the investment climate on the North Slope. They have
looked at the other amendments that have been proposed that
address progressivity and have concluded that only the
bracketing amendments have the potential of having any material
impact and those were the only amendments they would address at
this hearing. However, he assured the committee that
ConocoPhillips would want to come back and discuss any changes
to the bill. And they are not in a position today to say
whether a single provision would make the North Slope more
attractive for capital investment partly because they need to
see what the final bill would look like.
CO-CHAIR PASKVAN said he could probably understand the focus of
the committee's questioning from Mr. Bilbao's presentation and
asked if he could address those concepts.
4:32:26 PM
MR. JEPSEN said the first slide is a barrel slide that
demonstrates the fact that CSSB 192(RES) doesn't provide any
material change to ACES. They used the fall 2011 Revenue Source
Book for FY2013 with key assumptions for federal tax and state
income taxes et cetera. The bottom represented the capital and
operating costs; the next slice was industry share; then federal
income tax; and Alaska's share (royalty, severance tax, income
tax and property tax). There was some uplift for industry as
prices increased, but it paled in comparison with the state's
share of growth with the same increase (about five times that of
industry).
He said when ConocoPhillips looks at investments in Alaska they
look at the total risk/reward equation in terms of the
reservoirs, the capital risk and the technology risk; and they
also take a look at a number of economic metrics before making
that investment decision. Part of that is what their long term
cash flow potential is going to look like as margins increase.
Right now in the State of Alaska because of the progressivity
element and the impact it has on the marginal tax rate, they
can't see it as a terribly interesting place to invest
incremental capital. This is not to say they aren't investing;
they do invest about $900 million a year. But the key to making
Alaska more attractive for additional investment is going to be
to change the progressivity element of ACES.
4:34:32 PM
BOB HEINRICH, Vice President, Finance, ConocoPhillips Alaska,
went to the solid line chart on slide 3 that demonstrated the
split in cash flow between Alaska and the industry across a
range of prices (using the most recent Revenue Source Book
modeled for FY2013). It showed industry net (after federal
income tax and state royalty, production taxes, income and
property taxes) under the current ACES structure and under the
CSSB 192 (RES) structure.
CO-CHAIR PASKVAN said yesterday they were shown a $375 million
per year reduction in production tax at $120 barrel and a $500
million reduction at $130 barrel and asked if that gap was in
this chart.
MR. JEPSEN replied that the previous chart showed about a $2
barrel decrease in state sharing going from ACES to CSSB
192(RES) at about $125 barrel.
4:37:06 PM
MR. HEINRICH said the numbers won't match exactly because their
models are done using different bases; ConocoPhillips uses 2013
price data for a static year and PFC's model uses a longer term
economic basis.
CO-CHAIR PASKVAN said PFC based its model on FY2013 DOR
estimates. That is why he wanted to make sure he is saying that
gap represents $375 million a year at $120 barrel and about $500
million a year at $130.
SENATOR STEDMAN said PFC had a slight oversight in its
calculation of property tax (about a $300 million error); and
they will rectify that. They also used the data off the back of
the book which is a summary table. They may not exactly line up,
but the visual representation should lead to similar
conclusions.
MR. HEINRICH said at the $120 price range their calculation was
more in the $250 million impact range.
MR. JEPSEN said it's really hard to read the chart, but a rough
calculation shows a $2/barrel difference in the state's share
between CSSB 192(RES) and ACES which amounts to about $350
million at $125 barrel in that particular year.
4:39:05 PM
MR. HEINRICH said industry's share remains flat over a range of
prices while Alaska's share increases more dramatically under
ACES; CSSB 192(RES) doesn't make a material difference in
creating a robust investment climate. The next chart (slide 4)
represented the split under ACES excluding the progressivity
feature, the one aspect of ACES that makes Alaska a less
desirable area for investment in their eyes. He observed that
what it showed was across the range of prices Alaska receives a
higher portion of cash flow than industry does even without
progressivity.
4:40:26 PM
SENATOR STEDMAN said he didn't blame them for asking to
eliminate progressivity, but it would put the state in the same
position ConocoPhillips is in today and said, "We wouldn't be
very happy." He did a quick calculation before coming to the
meeting taking out progressivity, and the average aggregate
overall effect to the treasury would be an effective rate of
about 17.5 percent. Under ELF back in 80s the rate would have
been somewhere in the high teens and low 20s and he said, "I
think we were squealing back then." He understood the desire to
head in that direction, but it wasn't likely that they would end
up there - but maybe somewhere in the middle.
MR. JEPSEN said they understand, too, but wanted to make the
point that even without progressivity the state's share
increases with the oil price and it's actually greater than
industry's share.
SENATOR STEDMAN said the state has the impact of credits on top
of an effective tax rate of 25 percent, and if you take out
progressivity it would be a very attractive fiscal system for
the big three.
4:42:55 PM
MR. HEINRICH said that is part of the challenge in analyzing one
moving part of many; the credits are another lever in that
equation. He moved on to slide 5 that adds Amendments B.8 and
B.18, which reduce the cap of the existing progressivity element
from 50 percent to 35 percent and (B.18) inserts and adjusts the
trigger points. He said there are caps past the $200 barrel mark
that come into play, but they are well outside of this analysis.
And the $100 to $150 price range is where they think they will
be working for some time.
4:44:17 PM
SENATOR STEDMAN asked him to explain what Amendments B.18 and
B.8 mean.
MR. HEINRICH replied that the current ACES has a base rate of 25
percent and a progressivity add-on of 50 percent; Amendment B.8
would cap that [50 percent] at 35 percent for a total rate of 60
percent. B.18 reduces the second trigger point of progressivity
where the rate goes from .4 percent to .1 percent from $92.50
PTV to $67.50 (changing the slope of the increase).
4:45:26 PM
MR. HEINRICH said amendments B.4 and B.5 (slide 6) relate to the
bracketed structure, the approach that provides for higher tax
rates on an incremental income basis so as the price rises the
higher tax rate applies to only the incremental income and not
the entire income stream - how the federal income tax system
works for a personal return. It indicated a more equitable split
as prices rise and a material enough change to result in a
measurable change in investment activity.
CO-CHAIR PASKVAN said PFC indicated a $3 billion/year reduction
in production tax at the $150 barrel range and asked if that was
accurate.
MR. JEPSEN said that range was about right. He said it was a
good point, because small changes end up being large numbers. He
pointed out that if this change makes Alaska a better place for
capital investment, the $5 billion is just the leading edge of
investment by not just the big three but more outside companies
coming in. It has happened in Canada and other places around the
world. This is a snapshot in time and doesn't take into account
the fact there might be increased production if the severance
tax is lowered or that new reserves would mean more property
taxes and more jobs. This is just a potential outcome that is
sensitive to one point in time.
CO-CHAIR PASKVAN said he understood that, but people are trying
to comprehend if it's $2 billion or $3 billion a year and how
that compares to the $5 billion investment over a 10-year
period. Even assuming the $5 billion is actually invested over
the next 10 years, he asked if there will be any throughput
above 600,000 barrels or would that investment just continue the
decline curve at a lesser slope.
MR. JEPSEN replied that was difficult to answer, because people
don't know the entire suite of projects that would materialize
if ACES is changed significantly. ConocoPhillips has a lot of
geologists, engineers and geophysicists and it's their job to
come up with new projects; projects are sitting in line right
now that are challenged by ACES. ConocoPhillips is doing
projects now that they never envisioned doing 20 years ago and
industry as a whole is spending $2 billion a year now just as it
is. At this point in time a lot of these decisions are made at
the board level and he fully believed other projects are out
there that will be identified.
SENATOR WIELECHOWSKI asked if none of those projects will go
forward over the next 10 years unless a bill similar to HB 110
is passed.
MR. JEPSEN replied that some portion of these projects may
actually get done, but the real challenge is the pace. Eastern
northeast West Sak is a project that is challenged by ACES as
well as from a technical recovery point of view.
CO-CHAIR PASKVAN asked his thoughts on viscous heavy oil and new
production versus the legacy fields.
MR. JEPSEN replied that today's production is based on the tens
of billions of past investment when the tax environment was
quite a bit lower. Trying to isolate old versus new production
is fraught with all kinds of technical problems and he could
envision all kinds of discussions about where to draw the line
and how expenses get allocated. ConocoPhillips is developing a
new oil field as he speaks inside Kuparuk in the Kuparuk
reservoir using 3D seismic to identify specific fault blocks
which they cannot reach using conventional drilling. They are
drilling horizontal wells to hit those fault blocks, and this
for all practical purposes is new oil.
4:54:20 PM
CO-CHAIR PASKVAN said maybe they could change the definition
slightly from "new" to "incremental."
MR. HEINRICH said he looked at a couple of amendments that were
attempting to target incremental oil, but they didn't move the
needle.
4:55:15 PM
MR. JEPSEN said he wanted to finish his presentation comparing
B.5 bracketing with ACES (slide 7). It showed the state's share
goes up 2 times between $100/barrel and $150/barrel and
industry's share goes up about 1.4 times. This would be
sufficient to attract additional capital investment into the
state, but it would have to be looked at with the entirety of
everything else that comes out.
4:56:12 PM
MR. JEPSEN summarized that bracketing is not the only way; a
bigger change could be made in progressivity. The cap could be
decreased or progressivity reduced. They hadn't talked about
inflation indexing progressivity at trigger points and that has
the potential to provide more durability because inflation
wouldn't creep up on you and change what was intended by the
brackets or trigger points.
He reiterated that CSSB 192(RES) as currently proposed won't
change the investment climate, but they are encouraged that the
committee is looking at progressivity and look forward to having
the dialogue.
4:57:40 PM
CO-CHAIR PASKVAN said one interesting presentation was the
analysis under both a low cost and a high cost development, and
because it's hard to use the homogenized look he asked if he
could talk about any specific project.
MR. JEPSEN replied that as soon as a project is executed it
becomes a part of the portfolio; it's not independent and that's
how they look at it.
CO-CHAIR PASKVAN said he was trying to focus on incremental
production which would be ConocoPhillips's high cost
development. Better numbers would give them an idea of what it
would take on incremental production to move the needle.
SENATOR STEDMAN said several years ago Kuparuk had a zero
severance tax and asked why there wasn't a big build out then.
MR. JEPSEN replied in 1998 to the mid-2000s ConocoPhillips
brought on the first viscous oil projects at 1C and 1B; the
Tabasco oil field, the Tarn field, Melt Water, West Sak 1B, 1E
and 1J; in the Prudhoe Bay area: the Midnight Sun, Polaris,
Aurora, Borealis, and Orion were brought on stream; and Alpine
was brought on stream as were the Fjord and Nanuq satellites.
ConocoPhillips was "on fire" and they are still investing. They
have done a tremendous amount to offset the base field decline
plus bringing other fields on stream. The main fields aren't
declining at the same rate and there is a good chance they could
turn the corner now with a good investment climate.
SENATOR STEDMAN asked where Prudhoe Bay and Kuparuk are on the
parabolic global curve of legacy fields. What amount should they
be looking at in the flattening tail in barrels and in time?
5:02:33 PM
MR. JEPSEN asked him to clarify.
SENATOR STEDMAN said they notice a lot of money is being spent
to slow the decline curve and asked about keeping just the
status quo.
MR. JEPSEN replied he couldn't tell him at what point the
existing investment would flatten out the decline. Probably some
place south of where they are now.
CO-CHAIR PASKVAN observed that decisions were made in the early
2000s so throughput would be where it is today, because Alaskans
have heard it takes 7 to 10 years to bring a development on
line. That is when the state had essentially a zero percent
production tax rate and asked his thoughts on that.
5:04:44 PM
MR. JEPSEN asked if he remembered the "no decline after 99"
mantra. They didn't succeed but it was their intention to make
the investments to flatten out the decline and this is still
their intention. "As an oil company it is not our intention to
ride production into the ground if we think we have
opportunities." Alaska just has a handicap right now on
attracting investment capital to ramp up their activities.
MR. HEINRICH said they did work last year around CAPEX in the
earlier 2000 timeframe versus today and by trying to normalize
those costs to today's dollars (comparing apples to apples) they
actually spent significantly more on an average basis during
that timeframe than in the last three or four years.
CO-CHAIR PASKVAN asked if Alaskans should expect to see 1
million barrels a day from state lands in conventional oil with
the $5 billion investment over the next 10 years.
MR. JEPSEN asked from the projects that have been identified.
CO-CHAIR PASKVAN said yes.
MR. JEPSEN said the 1 million barrels a day is a good
aspirational goal, but he didn't think they could get there. It
would probably take some other types of technologies than what
is in the state right now. He hoped shale oil pans out and that
Great Bear plus some offshore help. State lands have potential,
but he didn't know where they would see the upside in terms of
getting to that 1 million barrels a day.
5:07:09 PM
SENATOR WIELECHOWSKI said they heard the $5 billion potential
investment over 6 to 10 years may get us 200 million barrels of
recoverable oil and asked how many barrels per day that equates
to. About 20,000 barrels?
MR. JEPSEN replied that it is difficult to project the future on
a lot of these projects and he would like to come back with a
better estimate, but probably considerably more than that.
SENATOR WIELECHOWSKI asked what a typical 200-million barrel
field generates per day.
MR. JEPSEN replied there is no typical production rate. It
depends upon reservoir quality, the quality of the oil, what
kinds of completions are used and the pressure of the reservoir.
CO-CHAIR PASKVAN expressed appreciation for the presentation and
comments, and held SB 192 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| ASRC testimony on SB192 (2).pdf |
SRES 3/1/2012 3:30:00 PM |
SB 192 |
| Pioneer Natural Resources testimony on SB192b revised 22912 (3).pdf |
SRES 3/1/2012 3:30:00 PM |
SB 192 |
| BP_CSSB 192_ SRES_03-01-2012.pdf |
SRES 3/1/2012 3:30:00 PM |
SB 192 |
| ExxonMobile Letter to Senate Resources re CSSB 192_03-01-12.pdf |
SRES 3/1/2012 3:30:00 PM |
SB 192 |
| ConocoPhillips CS SB192 Senate Resources 03-01-12 Testimony.pdf |
SRES 3/1/2012 3:30:00 PM |
SB 192 |