Legislature(2013 - 2014)BUTROVICH 205
02/18/2013 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
SB 21-OIL AND GAS PRODUCTION TAX
3:31:53 PM
CHAIR GIESSEL announced SB 21 to be up for consideration.
3:32:25 PM
KARA MORIARTY, Executive Director, Alaska Oil and Gas
Association (AOGA), Anchorage, Alaska, said they are the
professional trade association of the oil and gas industry. She
said the changes in SB 21 were reviewed and unanimously approved
by the full membership. The Role of AOGA and individual
companies should not be to tell Alaska how to structure its tax
system, but to relate how it is affecting them, so they can make
informed decisions about how it.
3:34:49 PM
She said the greatest and most urgent challenge facing Alaska
today is the decline of oil production on the North Slope and
that saying any change in tax structure that reduces tax
revenues below the projection in the Revenue Sources Book is a
"giveaway" is a red herring about oil taxes. It's just not true.
Industry has had to spend at least $2 billion each year to slow
the production decline from what it would naturally be in order
to even approach the level of production published in the
Revenue Sources Book. Just like any other investment industry
makes here, these investments must beat the competition
elsewhere.
Another false concept assumes that production in the Revenue
Sources Book is all that will be produced; no additional revenue
or production resulting from a tax reduction is calculated in
it. If a tax reduction makes investments here more competitive,
companies will want to make more investments here for that
upside and they will do so even though they lack the gift of
prophecy and cannot know beforehand exactly what the upside will
turn out to be.
3:36:41 PM
She said it would be useful for them to identify principles they
want the tax system to embody, and AOGA believes Governor
Parnell's' four principles offer an excellent cornerstone. It
needs to be fair to Alaskans, to increase production, and to be
simple and be durable. They suggest adding a fifth principle,
because the challenge facing Alaska is not that there are too
many companies pursuing opportunities here, but too few. So
Alaska should avoid tax changes that artificially create winners
and losers.
3:37:39 PM
MS. MORIARTY said that AOGA wholly endorses eliminating
progressivity, because it destroys one of the few strategic
advantages that Alaska has, which lies in its economic
remoteness. It costs about $9.42 to ship a barrel of oil from
the North Slope to the West Coast (WC) according to the 2012
Fall Revenue Sources Book. This starts Alaska off with a $9.42
disadvantage compared to outside competition, so other parts of
an Alaska investment must be pretty strong in order to overcome
it. If oil prices turn out to be higher than projected, nearly
100 percent of each extra dollar in price flows into the gross
value at the point of production (GVPP) and then after royalties
and taxes flows straight to the investors' bottom line. This
improves the economic performance of an Alaskan investment
relative to an equally competitive one outside, because the
Alaska baseline was $9.42 a barrel lower and an additional $1 in
price is a larger percentage of that baseline than for the
percentage of the outside investment. This can be particularly
significant to potential investors who are bullish on prices.
Currently, progressivity in conjunction with a 25 percent base
rate will take half of each dollar from higher prices when the
WC price is $138, the one strategic advantage that Alaska's
economic remoteness provides. And the more bullish one is on
prices the more this advantage is undone because they will see
higher rates for progressivity at those high prices in their
investment analysis.
3:38:52 PM
SENATOR MICCICHE joined the committee.
Secondly, Ms. Moriarty said progressivity is extraordinarily
complicated for calculating the amount of progressivity for any
particular item that affects the taxpayers' production tax value
(PTV). This complexity exists because the tax rate for
progressivity depends on the taxpayers' PTV/bbl and then the
resulting rate is applied to very PTV that set the rate. This
circularity in the tax calculation leads to some bizarre
effects. For example, simply the fact that oil prices fluctuate
during a year instead of remaining perfectly flat increases that
tax even though the average of the fluctuating prices is the
same as the flat price. And the greater the fluctuation the
greater the tax from progressivity becomes. There is no
objective economic or financial reason for the tax to go up,
instead this occurs entirely because the progressivity
calculation is circular.
She said in general tax credits represent a direct reduction in
the amount that a potential investor puts at risk by spending
money on the equipment and facilities. It is important to re-
enforce that there is no tax credit liability for the state at
all until an investor invests here, so it costs nothing to offer
the credit until the investment is made. At that point the tax
credit has already succeeded in what it was supposed to do -
attract additional investment.
3:42:17 PM
SENATOR DYSON said it was different for explorers who have no
production.
3:42:30 PM
MS. MORIARY said she would get to that in a moment and that the
first component the bill addresses the qualified expenditure
credit (QCE). While eliminating progressivity would improve the
competitiveness of Alaskan investment, she said, eliminating the
QCE credit would claw back a big chunk of that money and undo a
significant part of that competitive improvement. This is
because the benefit of the QCE credit depends only on how much
is invested here while the benefit from ending progressivity
depends on the price of oil relative to the producer's lease
expenditures. So for every producer there is a price below which
the lost QCE credit would start to outweigh the benefit from the
end of progressivity and exactly where that crossover comes on
factors specific to each individual company is an unknown,
because for competitive reasons that isn't talked within AOGA.
It would depend on how much oil they produce, where it is sold,
the cost to deliver it and other expenditures. So they feel that
repeal of the QCE credits is likely to do the one thing that
they don't want to do, which is to create winners and losers
artificially among the producers. AOGA doesn't see any sound tax
policy justification for doing so.
3:43:59 PM
She said they endorse extending the small producer tax credit
under AS 43.55.024 from the present sunset date if 2016 to 2022
and encourage the same extension for the exploration tax
credits. She reasoned that the state had sound policy reasons
for creating those tax credits and those reasons are just as
valid today as they were then. The purpose of the small producer
tax credit was to attract new players to Alaska who might
otherwise have been deterred from coming here by its remoteness,
northern climate and resulting challenges of higher than average
costs and expenses. The success of the credit in doing this is a
fact that cannot be denied. Testimony has indicated that the
small producer tax credit has made a material difference both
for AOGA members and other companies who are here in their
decisions to do business and invest in Alaska.
MS. MORIARTY said the purpose and justification the exploration
credits under AS 43.55.025 are equally plain and clear. If
exploration is to occur in a timely fashion so any resulting
production can be transported through existing infrastructure,
the exploration tax credits are a direct way of bringing that
exploration about and these types of credits should be extended
as well.
3:45:37 PM
MS. MORIARTY said AOGA had some concern about limiting the
transferability of the current carry-forward annual-loss tax
credit. These credits arise every year for any active explorer
that finds something and finally has production that has a tax
to apply the credit against. At present, explorers can only
realize immediate benefit from them by selling them to other
taxpayers or cashing them in with the state. Such sales and
cash-ins would stop the North Slope explorers who instead would
be able to hold the credit for up to 10 years for possible use
against tax on their own future production, assuming they find
some. During this 10-year shelf life the unused credits would
compounded annually at the rate of 15 percent. This bill's only
exception to this ban would be for a transfer made in
conjunction with the sale or other transfer. To prevent hoarding
of credits to get the 15 percent annual increase the bill denies
the 15 percent increase for each year when they could use their
credits but don't. This would be an effective deterrent against
abuse that might otherwise occur. So, in general if sales and
transfers of these annual loss tax credits are to be limited at
all, then the proposed limitations would be a reasonable way to
do it. Their major concern is that the 10-year shelf life for
using the credit is unrealistically short. It is not the norm
for a producer to go from lease sale to production in 10 years;
15 years is more in line with actual experience. Without this 15
percent annual increase in the unused credits, AOGA would oppose
the ban on transferability, because it will destroy the
incentives the credit is supposed to provide.
3:47:56 PM
MS. MORIARTY said AOGA supported the gross revenue exclusion
(GRE), but was concerned it wouldn't apply to a majority of the
current production. Fields likely to lose out on getting any GRE
are Prudhoe Bay, Kuparuk, Lisburne, Milne Point, Endicott,
Niakuk, Point McIntyre, Alpine, the Prudhoe Bay satellite fields
and the Kuparuk satellite fields.
She referenced slide 6 from Econ One's presentation last week
that showed economically recoverable oil and gas resources at
$90/bbl (which totals 29 billion barrels of oil and barrel
equivalents of gas). Of this total the slide showed 10.4 billion
in ANWR and NPRA, another 9.9 billion in the Chukchi Sea, 5.8 in
the Beaufort Sea and 3 billion in the central North Slope. This
means that more than half of the resource lies in the federal
OCS outside Alaska's jurisdiction to tax. Current federal law
does not allow for any OCS revenue sharing even though the
congressional delegation is trying very hard to change that. So
the only direct revenues the state would see from the OCS are
property taxes or for the instate portion of a pipeline to
connect it to TAPS. Another 34 percent is in ANWR over which
Congress gives approval for development and the Department of
Interior could turn the NPRA into a bird sanctuary. So, of the
29 billion barrels on the slide, only 3 billion on the North
Slope have the potential to contribute significantly to Alaska's
wellbeing in the near and mid-term future. Of that, 2.5 billion
comes from fields she didn't think would achieve the gross
revenue exclusion.
3:50:21 PM
MS. MORIARTY said AOGA is continuing to search for ways to
include the GRE with the legacy fields in a manner that would be
acceptable to the state and the legislature. It may turn out
that a different approach may be necessary to encourage new
production from legacy fields. So for now all they can say is
not enough is being done in the bill to improve the economic
competitiveness of the legacy fields.
3:51:08 PM
MS. MORIARTY said there are some components not addressed in SB
21 that they believe would make a better tax policy. The first
would be to repeal the minimum tax in AS 43.55.011(f) that
targets North Slope production. That tax is based on the gross
value of the production instead of the regular tax that is based
on the net. The rationale for adopting it was to protect the
state against low petroleum revenues when prices are low. The
minimum tax only complicates potential new investors' analysis
of what their tax would be if they were to invest here instead
of someplace else. So consequently, it has probably driven
investments away.
3:52:05 PM
Next she noted that the statute of limitations and statutory
interest provisions are interrelating, but sometimes not in an
obvious way. The statute of limitations under .075 is six years
from the date when the tax return was filed for the tax being
audited while the limitation period for other taxes is only
three years. The statutory rate of interest under AS
43.05.225(1) for tax underpayments is 5 percentage points above
the annual rate charged member banks for advances by the 12th
Federal Reserve District as of the 1st day of that quarter or
the annual rate of 11 percent. Because the Federal Reserve rate
is very low, the 11 percent is the applicable rate. So,
taxpayers are required to make monthly estimated tax payments
for each calendar month's taxable production, but the final tax
amount for the entire year is reported on March 31 of the
following year and it requires that any additional tax to be
paid at that time. The statutory interest starts to accrue on
any underpayment from that March 31 true up date. So, in
practical terms there are two different formulas. The first one
at three years is $.38; the second one, the six-year statute of
limitations increases that to $.92. So, for each dollar of
uncertainty there is about $.38 of additional uncertainty due to
the difference between the two. So, she said it is the
combination of the six-year statute of limitations plus the
interest rate of 11 percent that is harmful for a taxpayer and
any would-be taxpayer.
3:54:25 PM
When speaking about uncertainty and audit assessments six years
after filing the tax returns, she said many people think that
oil companies could calculate their correct tax liability under
the ACES tax, and she thought so, too, before she started
working with AOGA's tax committee. But in reality, due to the
complexity of ACES it is impossible to know beforehand what the
department's calculation will turn out to be. They don't want a
statutory fix to the regulations, but if the department chooses
to defer making calculations and similar determinations that are
necessary in order to be able to calculate the correct amount of
tax, they would want to either shorten the period for making
those determinations from six years back to three or eliminate
the 11 percent minimum interest rate or both.
3:55:32 PM
MS. MORIARTY said joint interest billings is still a concern,
because the DOR regulations reflect an assumption that each non-
operating partner has information in addition to the operator's
billings to them that allows them to determine which
expenditures are deductible as allowed lease expenditures and
which are not instead of starting with the joint interest
billings that participants in a unit or other joint operations
receive from the operator. This assumption is unrealistic. And
even if there was some merit to it, the regulations ought to
audit each participant separately regarding that participant's
interpretation of which expenditures are deductible and which
are not. They are not asking to put the regulations on a
different track, but some in the department believe that the
repeal of two sections, .165(c) and (d), in ACES specifically
authorizes the department to rely on joint interest billings and
means that the department can't legally rely on them now. AOGA
disagrees with that position and it is at odds with what the
department testified to in 2007, but they do think it would be
appropriate to restore language that allows the department to
rely on joint interest billings if they choose to do so.
3:58:35 PM
SENATOR FRENCH said he was glad she ended with a production
slide, because he was wondering if AOGA had an estimate of the
number of additional barrels of production that would come on
line should they embrace the changes to ACES in her
presentation.
MS. MORIARY answered it's hard to predict what the additional
barrels would be. If investors can make more money in Alaska
they would want to invest more here, but she couldn't say what
that would translate into in terms of barrels.
SENATOR BISHOP asked if all AOGA's member companies are
represented on the tax committee.
MS. MORIARY answered yes.
4:00:16 PM
BILL ARMSTRONG, President and CEO, Armstrong Oil and Gas,
Denver, Colorado, said their subsidiaries 70 and 148 LLC are in
Alaska as well as in Cook Inlet. He supported SB 21 saying he
still sees big potential in Alaska. He put a lot of time into a
power point presentation and had some slides showing the
inevitable day when TAPS becomes obsolete and Alaska's tax
regime being sandwiched somewhere between Venezuela and Russia,
but he had positive ones as well showing the North Sea
resurgence in 1993 when the tax laws were reformed there
(something that could happen to Alaska if it was done).
He had a map of the Permian Basin (located in Texas and New
Mexico) in the 1950s (with about 5,500 wells) that would be very
similar to the North Slope today, which would show about 5,000
wells. Well, today the Permian Basin has 150,000 wells and he
sees big potential outside of the legacy fields on the North
Slope to do lots and lots of drillings particularly with the new
technology. He also had slides showing how the energy boom is
happening in Lower 48 has totally resurrected production
declines in North Dakota, New Mexico and Texas.
4:04:14 PM
But then he saw other industry presentations and decided he'd
rather just come up here and talk about Alaska from the heart
and what he sees: "I think what we really need is a lot more
common sense."
MR. ARMSTRONG said he didn't do these kinds of presentations
very often, so he wanted to open a dialogue with them to kick
around ideas. First he wanted to give them a little background
on his company. Armstrong is the most active and successful
independent oil company in Alaska. Three of the most recent
developments in Alaska - two on the North Slope and one in Cook
Inlet - originated in his office. The Oooguruk field operated by
Pioneer was generated and created by Armstrong before they went
to Dallas, Texas, became Pioneer Natural Resources and came back
up to Alaska. The same thing goes for the Nikiatchuq field that
is operated by Eni; Armstrong originated the idea, did all the
geophysical and engineering work, et cetera - and brought Eni up
here. Most recently they brought in a different set of partners
and are the recent developers of the North Fork Field, the sixth
largest field in Cook Inlet.
MR. ARMSTRONG said they are the most active explorers on the
North Slope today and are currently partnered with Repsol. They
drilled $200 million worth of wells last year and are drilling
another $200 million worth of wells this year. He thought
Armstrong was the largest lease holder in the state on the North
Slope outside of the legacy fields. He and his partners put
"their own dough" on the table. He has one of the best oil
finding companies in the country and they are "big-big
believers" in what the state could be. Armstrong has found oil
all over the world and had been successful all through the US;
they are in the Bakken, Louisiana, the Rockies, Michigan,
California and now in Alaska.
4:07:39 PM
He said their business model is pretty simple: they go to a play
where they see big time potential, do all the geophysical and
hard work - "really get our hands dirty with the data." Most of
the time these are dead-end runs, but if they find something to
worth pursuing they lease it try to make land trades and put it
together; then they go out and look for partners. He said Alaska
is "so wickedly expensive" that he has decided to defer his
business model and look for bigger more capitalized companies he
can talk into coming here and teaming up with him. So in a way
he said he is a "walking talking Chamber of Commerce" for
Alaska. He is a member of a group of oil and gas executives
called "All American Wildcatters" and they derisively now call
him the "new Mr. Alaska" after Robert Anderson of ARCO who had
passed away. This group always asks him how much oil he has
found and how much money he has made (because of the perceived
difficulties up here): how can you possibly get into facilities
because the guy who controls them doesn't want you to plan up
there, and even if you solve all the regulatory, permitting and
headaches - not to mention the cold weather and remoteness -
when you find something, the state takes a majority of the
profits.
He said the Lower 48 boom is unprecedented. All other oil
producing states were facing the same production decline curve
as Alaska, and they have all reversed them by actively pursuing
the new technologies that make heretofore non-commercial lousy
fields commercial again, and he said, "that boom has completely,
utterly totally skipped Alaska."
4:11:44 PM
MR. ARMSTRONG stated that a rig count is when a rig is actually
running and drilling in a given region and as of three weeks ago
Alaska had six. Rig counts have always been used as a "report
card" of an area's health; right now Texas has 819 rigs running,
North Dakota has 178, and Oklahoma has 190. "Alaska has
six...it's pathetic!" He said, "running six rigs is so anemic!
There is no way you are going to turn that curve around with six
rigs running." That shows you exactly what industry thinks of
Alaska and this body should ask why.
4:13:27 PM
CHAIR GIESSEL asked how he thought SB 21 will help that.
MR. ARMSTRONG said Alaska has to change the game, not just on
tax reform, although that is "a massively great first start."
But he explained when you get right down to it, oil and gas
companies are not about finding and producing oil and gas;
"they're about making money." And being sandwiched between
Venezuela and Russia is not where they want to be. So, they are
drilling in the Eagleford, the Bakken, in Oklahoma and the Great
Wash. "That deafening silence you hear is the number of people
that are up here."
MR. ARMSTRONG said there are certain things about Alaska that
you can't change. It's cold, the weather sucks especially on the
North Slope and it's remote. It will always be expensive,
although not as expensive as it is now, and it will always take
longer to do things because it is so remote. But the playing
field could be a lot more attractive from a tax and a regulatory
permitting standpoint.
4:15:08 PM
SENATOR MICCICHE asked if any states that were primary producers
hadn't turned around their production.
MR. ARMSTRONG replied California was doing "a pretty bad job of
it" and has the same environmental regulatory issues not to
mention their "massive tax rates." New York, which is a very
tiny producer, is still flat-lined because they don't allow this
technology to be applied in their state.
4:16:33 PM
SENATOR BISHOP said he was "a breath of fresh air" and asked him
to elaborate on the facilities access issue.
MR. ARMSTRONG said he supported SB 21 although it's not perfect.
He thought the guys in the legacy fields needed a break, too. He
wasn't saying that because they are buddies, in fact it's
probably the opposite. His relationship with ConocoPhillips is a
little bit like Ike and Tina Turner (he being Tina Turner). They
don't make it easy.
4:19:09 PM
SENATOR DYSON noted that the decline curve was very steep long
before the tax regime was changed. In fact it had the economic
limit factor (ELF) which made the second largest oil field in
North America - Kuparuk.
MR. ARMSTRONG responded that he came up because of ELF, but he
wouldn't have come up under ACES.
SENATOR DYSON said his point was that the decline curve looked
even steeper with ELF (that reduced taxes) than it does after
ACES. He asked if he thought the decline curve would head up
instead of down if the state did everything it could on
permitting and change the tax regime to something more favorable
to the explorers and the legacy fields.
4:21:03 PM
MR. ARMSTRONG responded that almost every state in the Lower 48
had a decline curve that looked like ours prior to 2009. A lot
of it was because of low oil prices and those years were without
the new technological advances in the last half dozen years. He
said the big guys want them to believe that all the oil on the
North Slope is in the legacy fields, but he disagreed. He
thought instead of having isolated fields at Prudhoe Bay,
Kuparuk and Alpine and a couple others, the North Slope could be
one gigantic green blob of production. He explained that it is
hard to find a well on the North Slope that was non-commercial
in 1985 when it was drilled that would not be commercial using
today's new technology. He didn't know if you could get
production up over 1 million barrels a day, but flattening it
out and extending the life of that pipeline is a real
possibility. There has been only one version of a modern
frac/horizontal well on the North Slope in the Oooguruk Field so
far, and it was a massive success. It's showing that the
technology is going to work up here.
4:23:19 PM
SENATOR FAIRCLOUGH said she had heard that the legacy fields are
the only ones that could create the quickest return on dollars
as far as putting more oil in the pipe in the short term and
asked how to get more holes in the ground.
MR. ARMSTRONG said he totally agreed with that and answered that
Commissioner Sullivan was doing a pretty good job of
streamlining the permitting and regulations, and that couldn't
be done overnight. Making the tax laws positive for the guys
outside of the big legacy fields was another piece. He said oil
companies come up here for money; when the tax laws, the
regulatory environment, and facilities access are better and you
see the success of a Pioneer or his partnership with Repsol -
people follow those successes. He didn't predict a thundering
herd coming to the North Slope right away, but he thought it
would be a lot better than six active rigs. There needs to be
65, 70 or 100 rigs up here to keep that decline curve flat. It's
not that much when you think of other places that have three
times that amount.
SENATOR FAIRCLOUGH asked if anything else specific was happening
in other regimes that incentivize production.
MR. ARMSTRONG said he was okay with the state getting out of the
way. A majority of these other states have a very low, simple
tax structure typically on the gross and below 10 percent. He
said Alaska has to be better than being competitive; there isn't
a magic number; there is no sweet spot in terms of government
take. You just need to find a way to get these people up here
with tax credits, reasonably small takes, and royalty relief
until you get your money back or corporate tax relief. He wasn't
going to make any specific proposals other than the fact that
the bill is at least a step in the right direction.
4:27:56 PM
SENATOR MICCICHE said he thought Mr. Armstrong was refreshing
and he like the fact that he was a privately owned company and
hadn't gone through the school of "corporate speak." Mr.
Armstrong had done some great things in this state and he wanted
Alaska to be invited to the party. He asked how nimble the All
American Wildcatters are and expressed the fear is that we make
a change and put a lot of cupcakes out there and no one comes to
the party. The people of Alaska worry about making that change
without seeing any results.
MR. ARMSTRONG said there is no guarantee, "but if you ain't got
nothing you got nothing to lose." They were talking about
production that is not there now and outside of the existing
units. If you lay out the cupcakes and no one comes - although
he liked to think they would - you are no worse off. For
instance, Prudhoe Bay was a Lisburne idea when they stumbled
into the Sadle-Rochit; Kuparuk River Unit was a Lisburne idea
when they stumbled into the Kuparuk sand; and Alpine Field was a
Kuparuk idea when they stumbled into the Jurassic Alpine sand.
"This is an absolute adage: if you're not pulling the trigger,
you're not going to shoot anything." You need to get people
looking up here to get lucky. He didn't think they would find
another Prudhoe Bay or Kuparuk, but some Alpines are out there
and that was pretty good; some low grade reservoirs are out
there that have been drilled through in the past. We need to get
those guys up here who know how to do these unconventional
plays, like Armstrong, and give it a crack, "Because, it might
really work fantastic." He related how he passed on Bakken fives
times and it worked; Alaska has way better resources.
CHAIR GIESSEL thanked him for his thoughts and invited Mr. Foley
from Pioneer Natural Resources to testify.
4:32:18 PM
PAT FOLEY, Manager, Land and External Affairs, Pioneer Natural
Resources, Alaska, said he felt he had been following Bill
Armstrong's footsteps since 2003. He said in May he would become
the president of Pioneer, but he would try to not get bogged
down in talking about Pioneer, because this was really about tax
policy. So, he wanted to give them a little bit of insight about
what goes through his [Pioneer's] mind when allocating capital
and what would make investing in Alaska more attractive for
them.
MR. FOLEY said Pioneer is a largish independent worth about $19
billion (stocks, market capitalization plus debt); it has about
3,500 employees and a 2013 capital budget of about $3 billion.
They will make a little bit of money from Alaska but their core
business is in Texas; they do business in Colorado and Kansas,
too. Pioneer is the first independent on the North Slope; they
have 70 employees and everyone is an Alaskan. They have from 150
to 300 contractors working with them depending on what they are
doing. In a normal year it's about 150, but last year they had a
large exploration program and this year they have another
appraisal program going on, so that number swells to almost 300.
Pioneer makes about 6,000 barrels of oil a day at Oooguruk and
they hope to see production rates increase there by 40 or 50
percent over the next year, because of some of the success Mr.
Armstrong mentioned.
He said Pioneer came up to Alaska in 2002 when Mr. Armstrong
encouraged them for a Kuparuk play. In getting to Kuparuk, they
drilled through the Nuiksut and realized that all the really
good Nuiksut was not on the leases they got from Bill but right
next door on ConocoPhillips' land. So they made a deal with them
and now their Oooguruk development is primarily based in
Nuiksut; they recently expanded into the Torok where they have a
little bit of a Kuparuk play. The point was that "Bill" got them
excited about a play; they came up looking for one thing and
found something else. "It's that serendipity. You drill wells;
you're exposed to upside and sometimes that upside works out for
you."
He said Pioneer owns 70 percent of the Oooguruk Unit; their
partner is Eni and together they have spent over $1 billion in
developing and producing 12 million-plus barrels; Pioneer has
enjoyed the benefit of receiving $270 million in credits from
the state. They look at the state as their investment partner.
Pioneer got about 7 percent of all the credits the state has
given out so far.
MR. FOLEY said they came here during the ELF regime (for them
that meant a zero tax rate) and honestly for the projects they
thought they would become involved with they never thought they
would pay a production tax. But the day after sanctioning their
project, they got a call from Governor Murkowski who said there
was going to be some tax changes, but they would be better off.
They wondered how they could be better off than zero, but his
proposal was for a 20 percent tax rate and for 20 percent
credits and when they looked at the value of those credits
upfront and paying some tax on the other end, he was right.
Pioneer was actually marginally better off. But then things
started to escalate; ACES came along and then progressivity.
Since they made their commitment to develop their project, the
fiscal environment has become poorer rather than more attractive
and SB 21 provides an opportunity to turn that around.
4:38:50 PM
MR. FOLEY explained that the Oooguruk project is an island off
shore drill site. He said their next project is called Nuna, an
Inupiat word that means "on the land." From this onshore site
they will laterally drill into the Torok Unit (offshore). They
drilled one exploration well in phase 1 of Nuna and it was very
successful; this winter they drilled a second appraisal well,
which is just finishing up as he speaks. If that is successful,
phase 2 will expand into the southern part of that unit. They
are pumping very large mechanical diversion fracs (2 million
pounds). While it's not big compared to some of the Lower 48
fracs, it's substantially bigger than what people have pumped up
here before. So far everything looks really good.
If Nuna is successful, it's about 50 million barrels of oil and
will cost another $1 billion. They have actually acquired all
the required permits from the North Slope Borough and have the
permit they need from the Corps of Engineers, but he is still
waiting for the state permit. He had been slugging away on it
for two years now and had been working very diligently with the
DNR. Oooguruk is about 14,000 barrels of oil a day, peak, and
first oil is in 2015.
MR. FOLEY said for him to get the funding he will have to
compete against a whole number of opportunities that Pioneer has
in the Lower 48. When they first came up here, Alaska had a much
greater attraction than the Lower 48, and it hasn't gotten any
worse, but the Lower 48 resource potential is enormous, because
of the explosion of shale plays.
4:42:20 PM
He said the key things that really help drive projects and help
the economics is quick payback, quick cycle times (make
investment today and start making oil soon), and operational
flexibility. He explained what he meant saying their projects in
the Lower 48 have "a gas pedal and a brake." They can react very
quickly to changes in the economy - the oil price, activity and
the success of their neighbors. It's a lot harder to do in
Alaska where he has one rig for an offshore drill site that
works 365 days a year that he can't shut down or send home. It
doesn't have a brake or an accelerator.
4:43:05 PM
SENATOR DYSON asked what the state could do to ease the
regulatory process.
MR. FOLEY replied that permitting just takes a long time in
Alaska and he thought one of the problems was staffing in the
department. The people are good, but there just aren't enough of
them. He said Pioneer has $3 billion to spend in 2013 and will
probably spend it all in Texas.
4:46:06 PM
SENATOR MICCICHE asked him to define "operating margins" and
tell them why the Lower 48 is superior.
MR. FOLEY replied that costs for the exact same services are
substantially more in Alaska than they are in Texas or anywhere
in the Lower 48. The exploration rigs don't get to work 365 days
a year; they work in the winter. Companies have to capitalize
the cost of that rig; it's just an expensive place to do
business. It's not a complaint; it's a great place to do
business, but it's hard and it's expensive.
4:46:59 PM
SENATOR MICCICHE asked if production taxes enter into the
equation.
MR. FOLEY answered the production tax is just one part of the
whole fiscal environment. The other side of government take is
the industry take; the more the government gets the less he
gets. In Alaska their industry take is less than many other
places they do business. It's just a reality. Pioneer is also
burdened by net profit share leases.
Pioneer will spend a total of $3 billion next year, he said; $2
billion of that will come from free operating cash flow and
about $600 million will from joint ventures (they have two large
ones in Texas - Sinchem, a Chinese company, and Reliant). Their
2013 budget is based on $85/bbl WTI price (which is equal to
$100/bbl for ANS) and $3.25 gas.
4:49:11 PM
MR. FOLEY said revising the tax structure is a wonderful idea
and that they support the governor's four key principles, but
the bill as currently written doesn't achieve all of those
principles. On the positive side, it eliminates progressivity
and extends the small producer credit that Pioneer was involved
in creating that helped little people come up here and establish
a toe hold.
4:50:45 PM
On the negative side, it disadvantages small new projects and
Pioneer will be worse off under the proposed tax change than
they are under ACES, and the real reason is because they will
lose all the QCE credits. They came to the state and invested $1
billion and over $100 million in the appraisal of Nuna, all with
an expectation that they would be able to enjoy capital credits.
Now they are concerned that may change.
4:51:42 PM
He presented slide 11 that ranked the players in Alaska by
enterprise value: ExxonMobil at $400 billon; Shell, Chevron and
BP in the $200 billion range; Eni, ConocoPhillips, Statoil,
Anadarko, Repsol, Apache are in the $50 billion range; Pioneer
comes in at $19 billion; then there is a bunch of other private
players that had no publicly available data.
MR. FOLEY said because the cycle time takes 10 years in Alaska
from first idea to the first barrel of oil, increased production
will come from one of the players that are already doing
business here and they need to incentivize every single one of
them.
4:53:36 PM
What is an independent? Mr. Foley said an independent is a non-
integrated oil company; it doesn't do marketing and refining.
They are responsible for drilling 94 percent of all the wells in
America.
4:54:16 PM
SENATOR MICCICHE asked if applying credits against production
only was a disincentive in SB 21.
MR. FOLEY said he would come to that in a minute. The reason the
independents aren't here is because of the cost structure, which
is where Alaska falls to the bottom of the list in terms of
CAPEX and OPEX. He explained that Pioneer looks at projects with
CAPEX in the $25-20/bbl range $10-20/bbl for OPEX. However, he
said they ran Econ One's slide of a typical project in Alaska
that coincidentally was very similar to Nuna ($1 billion project
and 50 million bbl/oil) at $100 WC discounting it 12 percent and
found that a new project would be $115 million better off under
the new tax proposal than under ACES. But that is not how
Pioneer sees the world at all. Econ One's work said you spend
all your capital in the first three years, oil peaks and then
you have relatively flat operating costs. But Pioneer sees very
substantial capital expenditures for the first eight years and
oil ramping up so it peaks at year 8, and then operating costs
climb for a time.
MR. FOLEY related that he provided all of this information back
to Econ One, but they looked at it and delivered a different
economic answer with that input. He ran that project through the
model for three different players: a brand new entrant, a
company like Pioneer and a bigger company, and without the
capital expenditure credits the costs are 20 percent higher and
the new entrant was disadvantaged by $92 million under SB 21.
4:59:09 PM
SENATOR FAIRCLOUGH asked why their models were different from
Econ One's (that used today's dollar not net present value
(NPV)).
MR. FOLEY answered that Econ One showed both and admitted that
although Pioneer discounts at 10 percent like most companies in
the industry, he used 12 percent and if you ran this project at
10 percent, that $92 million would be smaller. A small producer
like Pioneer would be $66 million worse off.
Why is this project better for Pioneer than for a new entrant?
It's pretty simple. The new entrant doesn't get credits anymore;
all he can do is offset tax through that loss carry forward. But
he's not making any production, so he doesn't get that benefit
until several years down the road. Pioneer, because it already
has production, gets the benefit of the loss sooner, and that is
why it is more attractive to them.
5:00:58 PM
They modeled a company with production of 10,000 bbl/day (twice
as much as Pioneer) and escalated operating costs by 10 percent
(not a legacy producer) to show a company that is already paying
taxes and getting to enjoy the benefit of the loss immediately;
they are only $13 million worse off than under SB 21. He 12
percent NPV, but if you ran it at 10 percent, it would almost be
a wash, which he thought was the administration's goal. They
wanted to reduce the credits upfront in exchange for lowering
the tax rate on the other end.
He summarized that everyone says a lot of money had been spent
on credits and where did it all go? About 42 percent of those
credits had been spent on drilling new wells and he could
guarantee that every one of them delivered new oil.
SENATOR FRENCH remarked that this was the strongest presentation
made today so far, particularly the close examination of Econ
One's numbers versus someone who has a little more experience in
the field in making projects come together. It's stunning to
find out if they had not done their homework they would have
passed a bill last year that would have impacted a small project
like the one being discussed here by $92 million for a new
entrant or by $66 million for a small producer.
5:03:49 PM
MR. FOLEY said people will ask what could be done to make the
bill more helpful and it's really simple: lower the tax rate and
keep the credits alive. The credits matter to a company like
his, because they reduce the upfront capital needed for a
project. He believed the administration tried to design a bill
that would compensate by taking the credits away and allow the
losses to escalate at 15 percent. But if you think in simple and
discount it 10 or 12 percent, why is that not a wash? The answer
is there are so many rules about how that escalation works: the
first two years don't count, the year you use it doesn't count
and if you didn't pay a tax because you're a small producer
those dollars don't get to escalate. His point was that for a
company like Pioneer and this project the value of that 15
percent escalation on the loss carry forward just doesn't
compensate for the loss of the credits.
SENATOR BISHOP complimented him on his Alaska hire record.
5:05:19 PM
BART ARMFIELD, CEO, Brooks Range Petroleum Corporation,
Anchorage, Alaska, supported SB 21. He said they would probably
echo a lot of the same positions as the previous speakers, but
he wanted to show it to them in a different manner.
The key elements in SB 21 for Brooks Petroleum were the capital
credits under .023(a) and the ability to cash in certificates in
a single year versus 50 percent one year and the other 50
percent in the second. The problem is that they only get to
experience that for a single year, because they are eliminated
December 31, 2013. To offset that, he suggested extending
.023(a) or applying the credit policy in .023(l), Cook Inlet
policy, to the North Slope. A .023(l) credit allows 40 percent
for all intangible well work in the Cook Inlet. A third option
would be to redefine the .025 exploration incentive credit.
MR. ARMFIELD said Brooks Range supported eliminating
progressivity and maintaining the 25 percent base tax.
He said not being able to apply for the loss carry forward
credits on a cash basis after December 31, 2013 was also a
problem for a small independent, but the 15 percent was a
benefit. He supported extending the small producer credit in
.024(c) from 2016 to 2022.
He said while they support the GRE concept, the actual language
says that it doesn't not contain lands that were in a unit on
January 1, 2003 and the problem with that is that two of their
near term development projects, Mustang and Tofkat, were
actually in a unit in 2003 and wouldn't qualify.
He said the reasons they came to Alaska from the Lower 48 were
the big reserves that are available. An acceptable cost of doing
business in early 2000 was $6 to $8 million per well; today they
cost $20 to $25 million per well. In 2000 the tax policy was not
an impact consideration (under ELF); it was a tax structure used
in other lower 48 properties, but it has changed twice and now
they are considering another one.
5:12:49 PM
MR. ARMFIELD said they also envisioned a cyclical change in
focus from the majors lessening their activity on the North
Slope - much as occurred in the mid-continent, Rocky Mountains,
Gulf of Mexico - and that they would move on and smaller
independents would come in and pick up the slack as they existed
the area.
When they came to Alaska the biggest draw was its world class
reserve base. But those are being challenged by the high cost of
oil, the new technology and unconventional plays taking place in
the Lower 48. The perception of high taxes and changing the tax
regime so frequently both make Alaska an unattractive place to
invest in; you can't adhere to a 5-10 year business plan.
5:15:55 PM
Key elements people look at in coming to Alaska are:
-they must have the desire to really be in Alaska
-they need to understand the business from a geological setting
to permitting, to lease administration, to Native relations to
politics
-the must have the financial capacity to fully execute a program
5:16:53 PM
Brooks Petroleum currently uses the QCE (.023(a) credit, but it
would like to get out of the loss carry forward credit, because
that means they are still losing money in Alaska. They like
small producer credit and would like it extended to 2022.
5:19:05 PM
MR. ARMFIELD said in the groups he speaks with everyone feels
Brooks Petroleum receives the .025 exploration credits, but they
never have. Even though they are an exploration company, none of
their leases come even close to being able to qualify, because
of having to be three-miles outside around any existing well and
25-miles from producing units in order to qualify for it.
5:19:49 PM
He said Brooks' was the only exploration company drilling in
Alaska in 2011 and of the $1 billion in credits the state had
paid out they had received$69 million, $7 million of which came
to them in 2011. He compared the impacts of ACES and SB 21 to
their Mustang development. Brooks Petroleum would have received
$205 million under ACES for the Mustang development and the full
field development associated with that would generate $1.2
billion in royalty, tax burden and progressivity to the state.
Conversely, under SB 21 using the same numbers and applying the
same strategy, but receiving no credit support in 2014/15/16,
that $205 million credit investment by the state was reduced to
$81.5 million. That would require this project to support an
additional $124 million worth of capital infusion that was not
planned for under the ACES program.
5:23:35 PM
The peak throughput of their five near term projects, Mustang
through the Badami Expansion, was 55,000 bbl/day. That $561
million in credit support would throw off $4.4 billion in
revenues to the state at an average $300 million per year. He
asked them to imagine replicating what Brooks Range is doing
with 10 other companies.
5:25:28 PM
SENATOR FRENCH asked if the loss of the credits threaten his
five listed projects.
MR. ARMFIELD answered yes, not so much in terms of never getting
done; someone would do them, but the pace would be much slower.
CHAIR GIESSEL asked how his loan with the Alaska Industrial
Development and Export Authority (AIDEA) was affecting him.
MR. ARMFIELD replied that the AIDEA loan is strictly a financial
arrangement consisting of principle, interest and a defined
term. That was in the Brooks Range portion and didn't get credit
support.
CHAIR GIESSEL asked if that was moving his project forward.
MR. ARMFIELD answered yes; ADIEA provided the best financial
option at the time for the Mustang development.
SENATOR MICCICHE asked the expected dates of first oil for those
five projects.
MR. ARMFIELD replied Mustang was planned to come on Q3 2014,
Appaloosa was planned for 2016/17, Tofkat was planned for mid-
2016, Beechey Point was planned for mid/late 2015, and Badami -
since it was close to underutilized facility infrastructure and
pipeline and they have the ability to drill from existing gravel
and infrastructure - was soonest at Q3/4, 2014.
5:31:44 PM
MR. ARMFIELD said all of their leases are burdened with a one-
sixth royalty position, which would generate $2.1 billion for
the state. Other leases are a one-eighth royalty position, which
generates $1.6 billion. That means they are already paying $542
million more than other companies and compounded with the
anticipated elimination of $561 million in capital credits that
means this project is impacted to the tune of $1.1 billion. He
urged a minor change in SB 21 that could have a dramatic effect
on their business: retain the capital and loss carry forward
credits that could generate a return of $3 billion a year to the
state.
5:33:27 PM
KEN THOMPSON, Co-Owner, Alaska Venture Capital Group (AVCG),
parent company for Brooks Range Petroleum, said he supported SB
21 with some changes. He was a former president of Arco Alaska
and had served on the Board of Directors of Pioneer Natural
Resources. He said AVCG invests only on the North Slope; they
don't have any oil production currently, but they do have
105,000 acres in three core areas and a joint venture (JV)
partnership with Ramshorn Exploration, an affiliate of
Neighbor's Industries. To date they have invested just under
$200 million.
In 2004, AVCG formed an operating subsidiary, Brooks Range
Petroleum Corporation, and since that time they have had six
discoveries and acquired three discoveries that were drilled by
other companies in the 70s and 80s that they think are now
commercial. They have four development oil projects on the North
Slope in permitting and conceptual engineering, the most
important being the 44 million/bbl Mustang Field, their anchor
development. A lot of their leases are in unitized blocks; they
have 570 sq. mi. of modern 3D seismic, one of the largest
holdings of modern 3D seismic on the North Slope.
He said that AVCG and Ramshorn had drilled more exploration
wells on the North Slope than any other company in the last six
years. Literally almost one-third of all the exploration
activity on the North Slope state lands has been done by their
company. In the last two years Repsol has exceed their number.
Their first production cash flow will be in Q3 2014. Their four
development units will be coming on from 2014 through 2016 and
have 770 barrels of recoverable oil.
SENATOR GIESSEL asked if he liked SB 21 or continuing ACES.
MR. THOMPSON said he'd choose SB 21. He added that the
production profile of over 50,000 barrels/day could stop the
decline on the North Slope if one or two more independents like
his could continue to explore.
5:38:18 PM
SENATOR GIESSEL thanked Mr. Armfield and Mr. Thompson for
providing their testimony and recognized Mr. Brad Keithley.
5:38:30 PM
BRAD KEITHLEY, Partner and Co-Head, Oil and Gas Practice,
Perkins Coie, LLP, said the five key things to look at in
redoing the oil tax structure to increase oil production over
the remaining life of Alaska's resources are competitive rates,
durability, neutrality, simplicity/predictability and alignment.
The goal is to grow the pie. The objective any oil reform needs
to have is to increase production over the remaining life of
Alaska's resources. Alaska needs an additional recovery of 7.5
billion barrels or 4 billion barrels beyond just staying on the
status quo. To put that in context, Prudhoe Bay has 25 billion
barrels of oil in place.
5:43:31 PM
MR. KEITHLY said the level of investment needed to maintain the
status quo in 2006 dollars was roughly $1 to $1.5 billion and
double that is needed to get to the 3 percent decline range, so
they should look at what would get that additional investment up
here.
The first key thing to look at is having competitive rates over
a full spectrum of prices and for a long period of time (10-20
years) so companies can test economics against prices they
anticipate occurring during that entire period.
Since PFC said in the medium to long term the floor price is
roughly $70 a barrel, SB 21 needs to be evaluated using that
price perspective. However, he pointed out that taxes ACES,
according to Econ One, are actually lower than SB 21 at that
price level and that it's important to make sure they don't
replicate the current problem going forward. The problem with
ACES right now is that it is uncompetitive at high prices and we
don't want to enact a statute that would make us uncompetitive
at low prices.
5:46:31 PM
The second key factor was durability. Investors are looking out
10-25 years and whether the tax structure will remain durable
over the entire term of the investment.
SENATOR DYSON asked what his statement "no durability mechanisms
included not established by contract or economic stabilization
clause" meant.
MR. KEITHLEY explained in many jurisdictions throughout the
world, when the fiscal regime is settled with the investor it is
settled by contract. In third world companies a lot of times
that is backed up by World Bank agreements that enable
arbitration and other protections if the fiscal contract
changes. That gives the investor fiscal certainty over the term.
Another way to do that is through an "economic stabilization
clause" which essentially says if the taxes are raised in one
area we'll lower government take in another area so that the
level of take across the years is held the same. That is done in
countries that have other industries and may raise the corporate
income tax or do other things.
5:48:23 PM
SENATOR DYSON said that would be very difficult to do in Alaska
given its constitution that says you can't bind a future
legislature. He asked if he had any ideas for a solution.
MR. KEITHLEY said yes, and they would take more time to explain
than the committee had now, but he did think that Alaska had the
capability of entering into some sort of economic stabilization
clause with producers or entering into contracts with producers
through the use of the royalty provisions. SB 21 doesn't do it,
but that's okay if they expect the tax structure to stay the
same through the life of the investment.
MR. KEITHLEY said according to a news article that the BC prime
minister was trying to solve the same problem basically -
raising taxes on LNG - by negotiating with the industry and
arriving at a common agreement about what the levels of take
would be.
He said another way of achieving durability is to just assume
the fiscal structure will remain durable throughout the life of
a project. To some degree that is what Alaska relied on and
people had been testifying that they had invested based on the
tax structure remaining in place. But since the early 2000s
Alaska has changed its tax structure periodically (for various
reasons) in a way that has fostered the perception that it will
not remain durable.
MR. KEITHLEY said the Institute for Social and Economic Research
(ISER) indicated that Alaska's fiscal policy had a gap in it,
right in the middle of the time when investors are going to
expect to be getting the revenues that they predicated their
investments on. And whether it's correct or not, they will have
the perception that when that fiscal gap shows up, the state
will change its tax policy again and the economics that they had
predicated their investments on are going to be undermined. So
Alaska has to set up a situation that has no durability and SB
21 doesn't have it either. In addition, there are no
negotiations going on with producers that would lead to
durability. The consequence of that is that investors will look
at the short term for investments and SB 21 may lead to those,
but it will not lead to the type of long term investments that
are needed in order to level the decline curve.
Durability is perhaps the most significant issue that SB 21
faces Mr. Keithley stated, and it's unlikely that a legislature
would feel comfortable including durability provisions in the
statute. He emphasized:
A necessary part of this process is not only to fix
the oil tax, but we have to fix our fiscal policy. If
we don't fix our fiscal policy we're leaving investors
with the impression that okay we've got it done for
the short term, so you can make your short term
investments now. Those will pay out. But we don't have
a long term solution in place and you need to be
concerned about what's going to happen about half-way
through your investment cycle.
5:54:22 PM
MR. KEITHLEY said the third criterion was neutrality, which
means the extent to which government is out of the way in trying
to direct investments. ACES provided incentives to certain types
of investments and "penalized" other types of investments by
charging them a higher rate in order to provide the subsidies to
the favored investments, which dis-incentivized investments in
the existing fields and maybe over-incentivized investments in
exploration areas. A good tax structure is neutral across all
investment opportunities and doesn't try to second guess the
market.
He said SB 21 does a good job of increasing neutrality, but it
doesn't go all the way there. Testimony about legacy fields
revealed that Alaska has had a history of finding ways to
increase ultimate recovery inside of existing fields. When
production first started at Prudhoe Bay the recovery rate of the
25 billion barrels was expected to reach 40 percent, and today
using new technologies that has increased to more than 60
percent. It's important to remember that each 1 percent
improvement in Prudhoe's recovery rate equals an additional 250
million barrels of ultimate recovery, the equivalent of
discovering another 250 million-barrel field.
For context he showed an Econ One slide showing the expected
field size on the North Slope was 32-54 million barrels. So,
improving the recovery rate in Prudhoe Bay by 1 percent you get
250 million barrels. It's important to recognize that improving
the recovery rate plays an important role in improving
production, but SB 21 doesn't deal with that. It gives GREs to
new fields outside existing units and to new PAs inside existing
units, but continues to in some sense penalize the production
for existing fields. So, it's important to find a way to provide
neutrality.
SENATOR MICCICHE said the state has 3 billion barrels of oil
economically recoverable on the North Slope at $90/bbl (under
ACES) and asked if the curve changes under SB 21 especially at
$110/barrel.
MR. KEITHLEY said that was a question for Econ One to answer,
and he was using their slide to demonstrate the size of the
fields people expect going forward and comparing those to the
improving recovery rates.
SENATOR MICCICHE added that the 1 percent should incrementally
improve as the cost to produce comes down or the profit
increases.
MR. KEITHLEY said the 1 percent in Prudhoe Bay will always be
250 million barrels, because the oil in place is 25 billion
barrels - the math is always the same - so the economics of
making the investment necessary to achieve the 1 percent will
improve or be penalized if the GRE isn't extended there. SB 21
does not provide a level playing field for those investments,
because they are inside existing fields.
5:59:42 PM
SB 21 does a good job in the area of another key criterion,
simplicity/predictability. It doesn't have a lot of room for
interpretation or have a lot of recalculations and or require a
lot of regulations.
His final category was aligning the state with producers in
growing the pie. A lot of conversations right now are
interpreted by investors as arguing about who gets what share of
the existing pie, not about growing it. SB 21 doesn't change
that. Before SB 21, Alaska relied on indirect policy tools,
trying the carrot approach of creating fiscal incentives and the
stick approach of creating regulatory action at Pt. Thomson, but
the state hasn't aligned with investors in trying to grow the
pie. It has essentially tried to drive the industry from the
backseat. He sincerely believed the state needed to adopt the
mindset of an investor in putting its money and effort into
things that produce the greatest returns. When you look around
the world, the most successful model is in Norway that has
created a co-investment vehicle that partners with industry in
identifying new opportunities.
6:02:25 PM
In summary he said that SB 21 is better than ACES but material
concerns remain. SB 21 is not competitive at a full range of
anticipated prices for long term investments and unlike
horseshoes being close isn't good enough. Durability is a huge
significant issue - he went so far as to say that to some degree
messing with the oil tax structure is sort of like playing with
deck chairs on the Titanic. Investors won't make the long-term
investment Alaska needs without a fiscal policy that
demonstrates to them that it's not likely to change in the
middle of their investment cycle. Neutrality is significantly
better with expanding the GREs to new participating areas in SB
21, but bias remains against important investment opportunities.
Increasing the ultimate recovery rate in existing fields has
always been a way that Alaska has benefited in terms of
increased production and recovery and this needs to remain on
the playing field if we are going to fix the decline problem. SB
21 doesn't gain any on the alignment issue - we're sort of stuck
in the same rut we have been in.
6:04:27 PM
MR. KEITHLEY had three recommendations: adopt SB 21 with
amendments, make the tax structure competitive across all
anticipated prices not just the high end and avoid a tax
increase at the lower end, provide GRE or similar incentives for
investments designed to increase ultimate recovery in existing
fields (don't' penalize them). And while it is beyond the
purview of this committee, the Finance committee must identify
and deal with the fiscal policy concerns the state faces - if
we're going to have long term investment.
There are long term fixes on the table: the ISER study does an
excellent job of talking about developing a sustainable budget
and the Finance Committee should take it up as part of this
issue. Finally, he recommended holding hearings on Norway's co-
investment model, because the state needs a game changer in
terms of aligning the state's interests with industry. DNR
Commissioner Sullivan said Alaska needs $4 billion more per year
in order to achieve an oil economy it wants to have. He reminded
them that Norway's permanent fund concept came from them looking
at Alaska, so we can learn things from other countries and
regimes, too. The second largest oil discovery in the world was
led by science in the North Sea last year when Petoro identified
opportunities that other companies had overlooked. There are
benefits from the state contributing to the effort to try to
develop its resources and it's important to hold hearings on
those and take advantage of those opportunities.
6:07:58 PM
SENATOR GIESSEL thanked Mr. Keithley.
6:08:46 PM
At ease from 6:08 to 6:10 p.m.
6:10:11 PM
SENATOR GIESSEL reconvened the hearing at 6:10 p.m. and invited
Mr. Corbus to testify.
BILL CORBUS, member, Make Alaska Competitive (MAC) Coalition,
Juneau, Alaska, said he was a former commissioner of Revenue
during 2003 to 2006 and supported SB 21. He participated in the
ELF aggregation formulation of the PPT and watched with dismay
as ACES was passed. He supported particularly the removal of the
extreme progressivity tax increase at high oil prices, the gross
revenue exclusion and modifying the tax credit system that will
result in credits being granted when production begins. He said
something is urgently needed to increase investment on the North
Slope and to turn around the declining oil production. If they
modify SB 21 he urged adopting a severance tax system that is
competitive at a range of oil prices with similar provinces such
as the Gulf of Mexico, Texas, North Dakota or Alberta.
SENATOR GIESSEL thanked him for his service to the state and his
testimony.
6:13:02 PM
DAVID TRANTHAM, representing himself, Bethel, Alaska, testified
in opposition to SB 21 in its current form. He said the governor
supports a tax that is fair, but this bill would not be fair to
small operators and independents on the North Slope,
particularly regarding eliminating a contribution to revenue
sharing on page 2, line 2. Small operators and independents will
help the state get back to 1 million barrels a day in the
pipeline much faster than the large operators.
SENATOR FAIRCLOUGH responded that the governor was not proposing
to eliminate the contribution to revenue sharing (which remains
whole), but proposing to fund it using corporate income tax,
because he is eliminating progressivity.
6:17:29 PM
NOEL WOODS, representing himself, Palmer, Alaska, said he
appreciated previous testimony on SB 21. He said there is so
much opposition to developing the state's resources and the
permitting process takes so long. When you're trying to do a
project, time really is money.
6:19:18 PM
LANCE ROBERTS, representing himself, Fairbanks, Alaska,
supported them doing some measure of oil tax reform and
supported the governor's third point of simplifying the tax
structure and eliminating progressivity or going to a smaller
number of brackets. He supported moving SB 21 forward.
KEN HALL, representing himself, Fairbanks, Alaska, said he
supported the "sentimental concepts of fair to Alaskans"
embodied in SB 21. And it must be fair not only to those who are
still coming into the workforce, but those in the future, too.
New production is needed here; other regions had either
increased production or stymied the decline. He said SB 21 needs
to have incentives for companies to develop the legacy fields,
because realistically that is where the oil is. The state needs
to be competitive and have a durable tax policy. Writing a C-
grade paper in this circumstance will not provide the necessary
incentives to increase production and just tweaking it won't do.
6:24:32 PM
MAYNARD TAPP, representing himself, Anchorage, Alaska, testified
in support of the concept of SB 21. He encouraged them to
simplify the tax, get competitive, stop the decline curve, and
make a plan that is longer than for two years.
6:26:27 PM
STEVE PRATT, Executive Director, Consumer Energy Alliance
Alaska, Anchorage, Alaska, said there are several reasons to
change the tax regime in Alaska. Consumers have a direct
interest in consuming competitively priced energy supply from
domestic sources and also have a direct interest in robust
overall economic activity to maintain livelihoods. According to
ISER, at least 30 percent of Alaskans are dependent on oil and
gas exploration and development for employment. Development of
Alaska's abundant resources is vital to the energy security of
the entire nation as well as the state. Alaska needs to be able
to compete for global investment dollars. The current
progressivity is a disincentive, because at the current high
prices other states' production is going up, but not in Alaska.
6:29:54 PM
RICK ROGERS, Executive Director, Resource Development Council
(RDC), Anchorage, Alaska, said they could support the governor's
four guiding principles but the real giveaway is the oil that's
locked in the ground, because we're looking at maximizing short
term tax revenue at the expense of encouraging investment and
production for the long term. If a less aggressive tax regime
could cut the decline rate by half, over $8 billion new dollars
would be circulating in Alaska's economy. He said the business
community is fearful of what continued TAPS throughput decline
will do to the state's economy as a whole. He quoted Lynden
Johnson who said, "The most dangerous thing you can do to any
businessman in America is keep him in doubt and keep him
guessing on what our tax policy is;" and Calvin Coolidge who
said, "The method of raising revenue ought not impede the
transaction of business; it ought to encourage it."
6:32:44 PM
LAURIE FAGNANI, MSI Communications, Anchorage, Alaska, testified
that SB 21 is a step in the right direction. More than 50
percent of their revenues come from oil and gas industry and the
decisions made today impact her company and the people who work
there. Every day she worries about being competitive in her
industry; if the answer is no, then she changes her strategy.
She maneuvers to a better position, because if they can get it
cheaper someplace else, they will. That's how the market place
works.
ALLISON GRIFFITH, representing herself, Anchorage, Alaska, said
she was advocating for oil tax reform in whatever form it takes.
She had lived here all her life and worked for an Alaska owned
company since 1978, virtually her whole career. She spoke for a
lot of people who had also invested their lives here.
6:36:37 PM
SCOTT HAWKINS, Advanced Chain Supply International, Anchorage,
Alaska, supported the governor's four principles and SB 21. His
was an oil and gas services company employing about 230 Alaskans
in direct support of the industry in Alaska. He said Alaska had
been missing out on a worldwide boom for all the reasons pointed
out by previous speakers. He concurred with Mr. Keithley's
comments about achieving alignment with the producers and having
a stable durable tax policy.
6:39:23 PM
MICHAEL JESPERSON, representing himself, Anchorage, Alaska, said
SB 21 is better than the alternatives, although it could be
improved in terms of durability. But it needs to get passed so
we can start getting some investments.
6:40:43 PM
ANDY ROGERS representing himself, Palmer, Alaska, testified in
support of oil tax reform and SB 21 in particular.
6:41:40 PM
JOHN STURGEON, Concord Forest Products, Anchorage, Alaska,
supported SB 21. He manages one of the few timber operations
left in Alaska. If he operated under the same progressivity as
the oil companies he would have been out of business many years
ago. If they want Alaska's economy to thrive, they must provide
the incentives to encourage people in Alaska to invest and the
current oil tax structure is a disincentive.
6:42:35 PM
GAIL PHILLIPS, representing herself, Anchorage, Alaska, said she
supported the work the committee had done to find a reasonable
and long term solution to the oil tax conflict. She was a former
member of the legislature and congratulated them on their great
stamina and said it's up to them to make Alaska competitive
again with a durable and simple tax policy.
6:45:31 PM
RENEE SCHOFIELD, representing herself, Ketchikan, Alaska,
testified in support of SB 21. She urged the committee to pass
tax reform that was fair and durable and to do it this session.
She said they really want family to be able to stay, live and
work in Alaska. Her business is not in the oil industry, but
everything is impacted by their decisions.
6:47:32 PM
TOM LAKOSH, representing himself, Anchorage, Alaska, asked the
committee to honor its oath of office to evaluate the long term
benefits to Alaskans from development of its resources. He said
the benefit of the different tax regimes to Alaskans hadn't been
sufficiently or competently analyzed. He said there may be some
merit in looking at the Norway model. The committee should also
commission further analysis that is consistent with their
mandate to get the maximum benefit of the resource here for the
long term.
6:51:05 PM
MERRICK PEIRCE, representing himself, North Pole, Alaska,
opposed SB 21 asking how often legislators questioned the
reckless policy of having only one source of revenue. He had
worked with Governor Palin and DOR Commissioner Bryan Butcher
doing transition work in 2006 with a significant emphasis on
getting a fair return for our oil. SB 21 is supposed to
accomplish more TAPS throughput, but that hypothesis has been
thoroughly refuted by Bill Wielechowski. Even if we had more
throughput there is no guarantee that the price of oil will not
be $40 next year and then Alaska will have massive deficits.
He said to ask themselves what they could do with the $1 to $2
billion per year that SB 21 would cost us if the money is used
to find new alternative revenue sources. SB 21 offers zero
guarantee of any return on investment and there is clear
evidence that ramping up production and over-supply of the ANS
market drives down profits. Smart producers will take that money
and invest it outside of Alaska. The Asian market is very
interested in Alaska LNG and we have trillions of dollars of gas
under the North Slope that is not being monetized, because we
refuse to invest billions of dollars to build the infrastructure
to get the gas to market. Alaska has keen competition from 19
LNG projects in North America alone.
6:54:40 PM
KIMBERLY METCALFE, representing herself, Juneau, Alaska,
testified in opposition to SB 21. She said ACES was a very
reasoned approach and she was against giving back to an industry
that makes millions in profits from Alaska's oil and we need it
so much. In 2007 the legislature made a conscious choice to save
for the future that produced budget surpluses and allowed the
state to save billions of dollars in the budget reserve. Through
strategic tax incentives it also attracted new oil explorers
here. Today we have more jobs in the oil industry, more capital
investment in the oil and more new exploratory wells than when
ACES passed. This is major progress. The decline in oil flowing
through the pipeline has continued due to maturation of the
Kuparuk and Prudhoe Bay fields.
She said the governor's tax giveaway would create ongoing budget
deficits and cripple the state's competitiveness; this year the
Anchorage and Juneau school districts announced hundreds of
layoffs and are looking at the loss of more. Alaska cannot cut
oil taxes and still have a viable education system.
KELLY WALTERS, representing himself, Anchorage, Alaska,
testified in opposition to SB 21. He said the evidence is pretty
clear that taxes are not related to throughput in the pipeline.
We have 30 years of low tax policies and yet the pipeline's
throughput has declined. There are a lot of other problems and
issues around throughput, but taxes isn't one of them. Prior to
2006, 15 of 19 fields on the North Slope had zero taxes, and the
state's own data shows that investment still declined.
7:01:44 PM
JERRY AHWINONA, representing himself, Anchorage, Alaska,
testified in opposition to SB 21. He had lived in Alaska all his
life. He thought the current law was working. Alaska has the
biggest bank account of any state in the nation and due to ACES
a lot of people are coming up who want our natural gas. Russia
just took a stake in our Pt. Thomson development. So, we have a
lot potential to keep a lot of our future intact.
7:03:18 PM
KATE VAY, representing herself, Soldotna, Alaska, testified in
opposition to SB 21. Keep ACES intact she said, because it works
great! Don't give the state's resources away. How will the money
be replaced? She pointed out that Alaska is a safe place to
extract oil; we don't have terrorism, wars or an unstable
political regime.
CHAIR GIESSEL thanked everyone for their testimony and held SB
21 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 21 SRES B.Keithley Five things (pub.11 23 2012) 2013 02 18.pdf |
SRES 2/18/2013 3:30:00 PM |
SB 21 |
| SB 21 Bradford Keithley Comments 2013 02 18.pdf |
SRES 2/18/2013 3:30:00 PM |
SB 21 |
| SB 21 Brooks Range Petroleum Armfield SRES 2013.02.18.pdf |
SRES 2/18/2013 3:30:00 PM |
SB 21 |
| SB 21 Alaska Venture Capital Group Thompson SRES 2013.02.18.pdf |
SRES 2/18/2013 3:30:00 PM |
SB 21 |
| SB 21 AOGA Moriarty SRES 2013.02.18.pdf |
SRES 2/18/2013 3:30:00 PM |
SB 21 |
| SB 21 Pioneer Testimony Foley 2013.02.18.pdf |
SRES 2/18/2013 3:30:00 PM |
SB 21 |