Legislature(2011 - 2012)BUTROVICH 205

03/11/2011 03:30 PM Senate RESOURCES

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03:34:28 PM Start
03:35:34 PM SB49
05:00:55 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Bills Previously Heard/Scheduled
Heard & Held
Presentation by Sponsor
              SB  49-PRODUCTION TAX ON OIL AND GAS                                                                          
3:35:34 PM                                                                                                                    
CO-CHAIR  PASKVAN  announced  the   committee  would  resume  the                                                               
hearing  on  SB  49 and  is  now  on  page  12 of  the  sectional                                                               
analysis.  He said  that DOR  Commissioner Butcher  would present                                                               
the  goals  and  rationale  for  SB 49,  an  explanation  of  the                                                               
production  tax  mechanism  and more  details  about  the  bill's                                                               
individual components.                                                                                                          
3:36:53 PM                                                                                                                    
BRIAN  BUTCHER,  Commissioner-designee,   Department  of  Revenue                                                               
(DOR),  introduced  himself  and  said  that  Ms.  Pollard  would                                                               
continue with the sectional analysis of SB 49.                                                                                  
3:37:38 PM                                                                                                                    
SUSAN  POLLARD, Assistant  Attorney  General,  Department of  Law                                                               
(DOL), said she had ended  with the interest rate provisions that                                                               
apply to  taxes of all  types in SB  49 and explained  that there                                                               
are a variety of conforming amendments.                                                                                         
SENATOR STEDMAN joined the committee.                                                                                           
MS.  POLLARD said  the last  interest rate  provision changes  in                                                               
sections 21 and 22,  and one change to AS 43.56  even out the oil                                                               
and  gas  properties  tax  interest   rate  between  refunds  and                                                               
payments for unpaid taxes.                                                                                                      
Section 19  on page  13 changes the  statute of  limitations that                                                               
applies to returns under the oil  and gas production tax from six                                                               
years  to  four.  However,  subsection   (b),  which  deals  with                                                               
adjustments that need  to be made after a possible  court or FERC                                                               
decision, is not changed.                                                                                                       
SENATOR FRENCH asked what the rationale for the reduction is.                                                                   
COMMISSIONER BUTCHER answered that ACES  had three years and that                                                               
was changed to six years to  give the department time to not just                                                               
move from  ELF to PPT  to ACES, but more,  to move from  gross to                                                               
net, which  is a huge  change for  the audit division.  They have                                                               
completed the  first year  of PPT and  are currently  three years                                                               
back but catching up quickly.  Their reasoning is that four years                                                               
would be longer than the initial  three, but shorter than the six                                                               
and  it  also wouldn't  begin  until  2014  -  to make  sure  the                                                               
division could get completely caught up.                                                                                        
SENATOR  FRENCH commented  that  there are  seven  owners on  the                                                               
North Slope and six of those  have been audited under PPT and one                                                               
has not.  So, the  state hadn't really  completed an  ACES return                                                               
COMMISSIONER  BUTCHER replied  that  was correct.  They are  just                                                               
starting on the  first year of 2007, which was  available to them                                                               
in 2008.                                                                                                                        
SENATOR FRENCH  said it  sounds like he  is saying  if everything                                                               
works right, they  will be caught up once this  goes into effect;                                                               
but his  concern is that it's  always hard to go  back and change                                                               
things  if something  doesn't work  out. Maybe  they should  wait                                                               
until they have  actually done a year or two  of ACES returns and                                                               
then change the statute. "Has that crossed your mind?"                                                                          
COMMISSIONER BUTCHER  answered no.  They just  used 2014  to give                                                               
them a little  added flexibility, but they don't  think the extra                                                               
time will be needed.                                                                                                            
SENATOR  WIELECHOWSKI asked  if they  complete the  audit of  one                                                               
company before moving on to the next.                                                                                           
3:42:21 PM                                                                                                                    
LENNY DEES,  Audit Master, Department of  Revenue (DOR), answered                                                               
that  they   complete  the  audits   by  taxpayer  and   do  them                                                               
simultaneously.  This depends  on the  amount of  staff that  are                                                               
available; they have almost a  full complement presently and have                                                               
started on 2007.                                                                                                                
SENATOR WIELECHOWSKI asked if he  expects the number of taxpayers                                                               
they have to audit to increase in the coming years.                                                                             
MR. DEES  answered if investment  improves, yes. He added  that a                                                               
special group  of auditors reviews  audits of companies  that are                                                               
applying for tax  credits in addition to the  companies that file                                                               
tax liabilities every year.                                                                                                     
SENATOR  WIELECHOWSKI  stated that  since  the  passage of  ACES,                                                               
Savant, Great  Bear and Repsol have  come on board, and  he asked                                                               
if there  would be  a need  for additional  audit work  for those                                                               
companies and others that have come to the North Slope.                                                                         
MR. DEES answered yes.                                                                                                          
SENATOR WIELECHOWSKI  remarked that  the PPT  passed in  2006 and                                                               
hadn't finished those audits.                                                                                                   
MR. DEES replied that they have just one taxpayer left.                                                                         
SENATOR WIELECHOWSKI asked if they  would be beyond the four year                                                               
statute of limitations  for that one company if this  law were in                                                               
place now.                                                                                                                      
MR. DEES answered yes.                                                                                                          
SENATOR WIELECHOWSKI  asked if additional  companies had  come on                                                               
since that time that would need to be audited.                                                                                  
MR. DEES  answered yes; every  time a  company applies for  a tax                                                               
credit their application gets reviewed.                                                                                         
3:46:26 PM                                                                                                                    
CO-CHAIR  PASKVAN  asked  the  number   of  companies  that  were                                                               
available for audit in the years 2005 and 2011.                                                                                 
MR. DEES replied that he started  with the department in 2008 and                                                               
didn't have  that number  at hand. The  number of  companies that                                                               
are available  to be audited  today, whether for  tax liabilities                                                               
or for tax credits, probably runs in the teens to low 20s.                                                                      
SENATOR  FRENCH asked  who  benefits from  a  shorter statute  of                                                               
MR. DEES replied  that is difficult to answer.  He couldn't think                                                               
of an  instance when the  state hadn't  had enough time  to audit                                                               
even  with   the  three-year  statute  of   limitations,  because                                                               
extensions allowed  them to take  place. The department  can also                                                               
issue a certain type of  assessment which would send the disputed                                                               
items to the  appeals process. For the most part,  when there has                                                               
been a  need to extend the  audit due either to  the department's                                                               
or  the taxpayer's  desire to  do so,  that had  occurred without                                                               
SENATOR  WIELECHOWSKI  asked  if  the state  had  gone  past  the                                                               
statute of limitations in auditing of royalty payments.                                                                         
MR. DEES  answered that  he couldn't  speak to  royalty payments,                                                               
because those are handled by  the Department of Natural Resources                                                               
CO-CHAIR PASKVAN  asked if  part of the  procedure to  extend the                                                               
statute of limitations is filing of documents without support.                                                                  
MR. DEES responded that extensions  aren't done in an adversarial                                                               
sense.  He there  are many  reasons for  an audit  needing to  be                                                               
SENATOR WIELECHOWSKI asked  when the Palin/Parnell administration                                                               
proposed  ACES, if  there was  a reason  they did  not include  a                                                               
provision that said the statute  of limitations will be six years                                                               
and then in 2014 it would go down to four years.                                                                                
COMMISSIONER  BUTCHER  replied  that  neither of  them  was  here                                                               
during that time.  He could say that  this is not a  key piece to                                                               
the Governor's bill, but rather a minor improvement.                                                                            
3:51:16 PM                                                                                                                    
MS. POLLARD continued  her summary saying the  last provisions of                                                               
the bill,  sections 25-30, simply  state the  different effective                                                               
dates for  the different  divisions. An  applicability provision,                                                               
which  is common  in tax  legislation,  particularly when  making                                                               
changes to  credits, clarifies how  the credit is issued  for the                                                               
expenditures  incurred  before  and  after  the  effective  date.                                                               
Everything in  the bill  takes effect  prospectively, and  all of                                                               
them at  slightly different dates.  The interest  rate provisions                                                               
would  take  effect   on  July  1,  2011,   because  interest  is                                                               
compounded quarterly.                                                                                                           
SENATOR WIELECHOWSKI said they had  asked at the last hearing for                                                               
data on interest rate under or overpayment.                                                                                     
COMMISSIONER BUTCHER  replied the department is  still working on                                                               
3:53:35 PM                                                                                                                    
At ease from 3:53 to 3:57.                                                                                                      
3:57:09 PM                                                                                                                    
CO-CHAIR PASKVAN  called the  meeting back to  order at  3:57 and                                                               
announced the next presentation.                                                                                                
COMMISSIONER BUTCHER said the goal  of this legislation is to get                                                               
more oil out of legacy fields  by changing the tax system so that                                                               
Alaska  will be  more competitive  both nationally  and globally,                                                               
produce  more  jobs  for  Alaskans   and  increase  Alaska's  oil                                                               
He said they have heard that  in the next five years North Dakota                                                               
is expected  to pass Alaska in  terms of production -  a real eye                                                               
opener when  one looks  at the  history and  potential of  oil in                                                               
Alaska compared to North Dakota.  The federal government has been                                                               
a significant deterrent  to a lot of the development  and that is                                                               
why  the governor  is trying  to  promote and  encourage as  much                                                               
development on state land as possible.                                                                                          
He said  that many of the  credits and incentives that  have been                                                               
passed over the last few  years have been helpful, but production                                                               
continues to decline. The challenge is  that most of the easy oil                                                               
has  been produced  and the  two main  goals of  the bill  are to                                                               
develop currently  unexplored fields  and to get  more production                                                               
out of  the legacy  fields that are  currently providing  over 80                                                               
percent of Alaska's oil.                                                                                                        
CO-CHAIR  PASKVAN asked  him  to elaborate  on  the North  Dakota                                                               
COMMISSIONER  BUTCHER replied  that it  has  been a  mix of  more                                                               
traditional oil as well as shale oil.                                                                                           
CO-CHAIR PASKVAN asked  what kind of future  development would be                                                               
needed for North Dakota to pass Alaska.                                                                                         
COMMISSIONER BUTCHER  replied those  two and, in  particular, the                                                               
Bakken  Shale. Great  Bear  has potential,  but  Alaska has  some                                                               
hurdles that  North Dakota  doesn't have  in terms  of workforce,                                                               
infrastructure  and distance  from  market. What  is economic  in                                                               
North Dakota isn't necessarily economic here.                                                                                   
SENATOR WIELECHOWSKI asked  if he knows what the tax  rate is for                                                               
oil in North Dakota.                                                                                                            
COMMISSIONER BUTCHER replied 10 percent of gross.                                                                               
4:01:15 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  if he is aware of efforts  by the oil                                                               
industry and the business community in North Dakota to lower it.                                                                
COMMISSIONER  BUTCHER replied  he  had read  things,  but had  no                                                               
SENATOR FRENCH  commented when they  wrote ACES in 2007  the bill                                                               
spent 40 hours  in the Judiciary Committee and a  similar time in                                                               
the Resources  Committee before that,  and probably more  time in                                                               
the  Finance Committee  after that.  He wished  him luck  saying,                                                               
"It's tough to  change oil taxes. It should  be tough....When you                                                               
start tinkering  with AS 43.55,  that is the financial  future of                                                               
the state....We all know how serious it is."                                                                                    
COMMISSIONER BUTCHER said he looked forward to the discourse.                                                                   
CO-CHAIR WAGONER added  that this committee had  the original PPT                                                               
bill for over  six weeks, and one thing that  was stressed at the                                                               
time is  that they  had to  have those credits  to make  sure oil                                                               
continued to flow  in TAPS without a decline. And  it bothers him                                                               
that they hadn't seen any change  in the decline since then. What                                                               
can  he tell  him that  will  make him  believe they  will see  a                                                               
leveling off and perhaps an increase of oil in the pipeline?                                                                    
4:05:31 PM                                                                                                                    
COMMISSIONER  BUTCHER responded  that  the  administration has  a                                                               
role, but  so does industry -  in coming forward to  answer their                                                               
questions and giving  them some level of comfort  that the future                                                               
is as they discuss  it as the bill goes forward.  The bill has no                                                               
SENATOR STEDMAN said  North Dakota's tax rate is  10 percent, but                                                               
subsurface  ownership   is  different  there.  In   North  Dakota                                                               
payments  are  also  being made  to  several  hundred  subsurface                                                               
owners instead of  one sovereign that has 30  years of experience                                                               
in hydrocarbon  basin comparisons  like the  State of  Alaska. He                                                               
asked if  the problems defined  by the administration in  slide 3                                                               
are in ranked order or arbitrarily put on the page.                                                                             
COMMISSIONER  BUTCHER  replied they  have  no  priority, but  "We                                                               
would hope  that number one would  lead to number two  and number                                                               
three." The three are:                                                                                                          
1. Improve investment climate                                                                                                   
2. Create jobs for Alaskans                                                                                                     
3. Increase production                                                                                                          
4:08:35 PM                                                                                                                    
SENATOR WIELECHOWSKI asked how many  jobs he estimated that SB 49                                                               
would create.                                                                                                                   
COMMISSIONER BUTCHER  replied that he  had no number,  but rather                                                               
they  would  lay  out  some  investment  scenarios  in  a  future                                                               
SENATOR  WIELECHOWSKI asked  how much  increased production  they                                                               
are expecting under SB 49.                                                                                                      
COMMISSIONER  BUTCHER  answered  that those  questions  would  be                                                               
covered while  looking at a  variety of investment  scenarios and                                                               
what they  believe each would mean.  But he thought much  of that                                                               
would come from industry testimony  and those that are looking at                                                               
this as  being a material change  to how they do  business in the                                                               
SENATOR STEVENS  stated it's of "enormous  importance" to realize                                                               
the   difference  in   ownership.  He   said  Senator   Murkowski                                                               
took the joint  session of the House and Senate  to task when she                                                               
compared Alaska  oil taxes  to Texas taxes  saying that  ours was                                                               
something  like five  times more.  But she  probably didn't  take                                                               
into  consideration the  fact that  in Texas  if you  are an  oil                                                               
company, you  pay money to  the property  owner - the  rancher or                                                               
the farmer  - who owns  the land. In  Alaska, when you  pay taxes                                                               
you  pay them  to Alaska.  The press  hadn't even  mentioned this                                                               
CO-CHAIR  PASKVAN said  he understands  that in  Texas if  it's a                                                               
quality field with a sophisticated  landowner that the royalty is                                                               
25 percent or more depending on those factors.                                                                                  
SENATOR WIELECHOWSKI said he read  through some old PPT testimony                                                               
and came  across several  people who  testified that  the natural                                                               
rate  of  decline on  the  North  Slope  was  expected to  be  15                                                               
percent, and the  numbers he saw by some industry  reps were that                                                               
if they spent $1-1.5 billion per  year, they could stem that to 6                                                               
percent, which  has been the  actual decline rate. He  asked what                                                               
the DOR projected would be the decline over the next decade.                                                                    
COMMISSIONER BUTCHER answered between 3 and 4 percent.                                                                          
SENATOR  WIELECHOWSKI  responded  that he  understood  the  total                                                               
decline would  be roughly about  18 percent over the  next decade                                                               
or 1.8 or 2 percent per year.                                                                                                   
4:12:19 PM                                                                                                                    
COMMISSIONER BUTCHER replied  that he would get  the details, but                                                               
he believed  it was a  3 to  4 percent decline.  The department's                                                               
petroleum  forecaster, Frank  Molly,  could  also participate  in                                                               
this discussion, since  the forecast was made before  he had this                                                               
position. Liberty is a pretty  good example of something that has                                                               
changed since the fall forecast in  terms of needing to be pushed                                                               
back from where they thought they would see production.                                                                         
He  said slide  4 showed  the North  Slope production  curve from                                                               
1977 and  peaking in 1988  with a  little over 2  million barrels                                                               
per day.  Fiscal year 2010 finished  at 644,000 barrels a  day, a                                                               
68 percent  decline since  the peak.  The DOR  forecast continues                                                               
the decline,  although it will  flatten out somewhat.  Seeing the                                                               
high  price  of  oil  and   development  in  other  states,  it's                                                               
surprising  that  Alaska  continues  to  decline.  There  doesn't                                                               
appear to be the rush to  exploration here that other states have                                                               
SENATOR  WIELECHOWSKI said  the  steep decline  in 1989-2009  was                                                               
during  the ELF  [economic limit  factor] when  the tax  rate was                                                               
roughly 15 percent for some fields and zero for many others.                                                                    
SENATOR STEDMAN asked  if this is a normal  production life cycle                                                               
of a basin or is it abnormal.                                                                                                   
COMMISSIONER BUTCHER answered that he  didn't have the details of                                                               
what a mature  basin decline looks like and Frank  Molly might be                                                               
able to answer that at a future meeting.                                                                                        
SENATOR STEDMAN  asked if they were  to model an investment  in a                                                               
new basin  would it be  similar to  the type of  production curve                                                               
they  would normally  use -  a rapid  increase at  first, peaking                                                               
after three or four years, and  a fairly rapid decline and then a                                                               
tapering off.                                                                                                                   
COMMISSIONER BUTCHER  said he couldn't  answer that and  asked if                                                               
he would like Joe Balash to come forward.                                                                                       
SENATOR STEDMAN answered, "Not really."                                                                                         
SENATOR STEDMAN asked  if he did an investment  analysis of this,                                                               
would he  have a  flat production for  several decades  like with                                                               
gas  or would  he build  this into  the financial  model to  make                                                               
those decisions.                                                                                                                
COMMISSIONER BUTCHER replied that is  more of a DNR question, but                                                               
when you look at many states,  like North Dakota, that is growing                                                               
tremendously  because they  had a  relatively low  amount of  oil                                                               
being produced and  now that's changed, and then look  at a state                                                               
like Texas with a little decline  over the last number of years -                                                               
and it has a much more mature  oil basin than the State of Alaska                                                               
does - there is a natural  decline, but some areas have been able                                                               
to stem that decline.                                                                                                           
SENATOR STEDMAN said as they  go through the process, they should                                                               
have  their   consultants  explain  how  these   investments  are                                                               
modeled.  He  thought they  would  find  that  one sees  a  rapid                                                               
increase over  the first  three years to  recoup capital,  then a                                                               
fairly  rapid decline,  then a  tapering off;  it's all  the time                                                               
value of money  - and they will probably find  this is a standard                                                               
life-cycle of a  basin. The question is how to  slow the decline,                                                               
not that  there is anything wrong  with the decline curve  on the                                                               
North Slope. His  concern is that the public isn't  left with the                                                               
impression  that a  policy error  led  to this  rapid decline  in                                                               
Prudhoe Bay.                                                                                                                    
COMMISSIONER BUTCHER agreed that passage  of this bill won't fill                                                               
the  pipeline,   but  decreasing  the  decline   and  potentially                                                               
increasing  the amount  that  is currently  being  produced is  a                                                               
reasonable goal.                                                                                                                
SENATOR  STEDMAN  said  as  the  sovereign,  the  state  is  more                                                               
attracted  to a  flat revenue  stream for  many years  versus the                                                               
need  to have  a  large  spike in  the  beginning  to recoup  the                                                               
capital  costs  that  are  required  to open  up  basins  and  do                                                               
development. The state  does not have alignment  with industry on                                                               
COMMISSIONER BUTCHER said he didn't disagree.                                                                                   
4:20:58 PM                                                                                                                    
CO-CHAIR  PASKVAN asked  what  they should  expect  to hear  from                                                               
COMMISSIONER BUTCHER  answered his assessment is  that they would                                                               
hear  a discussion  of this  being a  material change.  He didn't                                                               
think  they should  expect a  "quid pro  quo" from  multinational                                                               
corporations that  have to  go through  their board  of directors                                                               
for their investment decisions. It's  also an opportunity for the                                                               
legislature  to  get  information  from the  companies  that  the                                                               
department can't provide.                                                                                                       
SENATOR WIELECHOWSKI  asked if  he is  familiar with  the majors'                                                               
reserves regarding their Alaska productions.                                                                                    
COMMISSIONER  BUTCHER  replied  that  is something  that  is  not                                                               
shared with the state.                                                                                                          
SENATOR WIELECHOWSKI asked if he  knew whether ConocoPhillips had                                                               
added reserves on the North Slope in recent times.                                                                              
COMMISSIONER BUTCHER answered no.                                                                                               
SENATOR WIELECHOWSKI  asked what triggered Mark  Gillman, analyst                                                               
with Benchmark  Company, talking  about additions to  reserves in                                                               
Alaska,   and  Jeff   Sheets,  Sr.   Vice   President  and   CFO,                                                               
ConocoPhillips, saying they  came from their existing  areas - in                                                               
other words,  Prudhoe, Kuparuk  and the  western North  Slope. He                                                               
asked the commissioner  if he was aware  of ConocoPhillips adding                                                               
significant reserves in Prudhoe.                                                                                                
COMMISSIONER BUTCHER responded that he  would talk to the DNR and                                                               
find out what he could on that.                                                                                                 
SENATOR WIELECHOWSKI  asked if  he thought  it was  important for                                                               
the DOR to keep track of reserves being added to by the majors.                                                                 
COMMISSIONER  BUTCHER  answered  that   he  hadn't  been  in  his                                                               
position long  enough to get  into that  detail. But he  would be                                                               
happy to get back to him on it.                                                                                                 
4:25:17 PM                                                                                                                    
He went  on to  explain that slide  5 reflected  the department's                                                               
revenue  forecast, and  basically  looks at  three categories  of                                                               
future  production.  The  first is  currently  producing  fields;                                                               
these tend to  be the most in-sync in looking  into the future in                                                               
terms of  the slope  of a  field. The  second category  is "under                                                               
development"  and that  looks at  fields that  are currently  not                                                               
producing  but will  be producing  in the  future; Liberty  is an                                                               
example. The  most speculative is the  "under evaluation" fields,                                                               
the ones industry is looking at  but they haven't made a decision                                                               
to begin to develop.                                                                                                            
SENATOR FRENCH  said he understands that  under development means                                                               
it's either  currently funded or awaiting  project sanctioning in                                                               
the  very near  future. So,  they have  a fairly  high degree  of                                                               
confidence that  is going forward (under  ACES). Under Evaluation                                                               
is more  speculative - technically  viable projects  currently in                                                               
the pencil  sharpening stage where  engineering costs,  risks and                                                               
rewards are all  being actively evaluated. The  unfunded but have                                                               
a high  chance of being  brought to  fruition ones are  maybe the                                                               
ones they are trying to influence most here today.                                                                              
COMMISSIONER  BUTCHER agreed  and  added areas  that wouldn't  be                                                               
considered as  under evaluation  enough to put  on the  graph but                                                               
yet would hopefully show up with future development.                                                                            
SENATOR  FRENCH said  this does  not include  NPR-A and  OCS, for                                                               
example, and asked if ConocoPhillips CD-5 is included.                                                                          
COMMISSIONER BUTCHER indicated yes.                                                                                             
SENATOR FRENCH asked if the heavy sands area was included.                                                                      
COMMISSIONER BUTCHER  answered no; he  said Ugnu is  not included                                                               
in the production forecast at this point.                                                                                       
SENATOR FRENCH asked if the black  section is going to be an area                                                               
that will enjoy the lower tax rate in this bill.                                                                                
COMMISSIONER   BUTCHER  replied   the  majority   of  the   under                                                               
evaluation category is  unitized; Mr. Molly could  dig into those                                                               
details at a later point.                                                                                                       
SENATOR FRENCH  asked which areas  are non-unitized and  how ACES                                                               
works as far  as onshore oil and if it  applies throughout Alaska                                                               
whether or not it's state or federal land.                                                                                      
COMMISSIONER  BUTCHER answered  that the  production tax  applies                                                               
SENATOR FRENCH  said the state gets  ACES oil from NPR-A,  and if                                                               
ANWR  opened tomorrow  it  would get  state  production tax  from                                                               
COMMISSIONER  BUTCHER said  that was  correct. He  said that  the                                                               
governor has pointed out the  Armstrong area has real development                                                               
potential, but it is non-unitized.                                                                                              
SENATOR FRENCH asked if shale oil is the same as heavy oil.                                                                     
COMMISSIONER BUTCHER said he didn't know.                                                                                       
CO-CHAIR PASKVAN said that it's  conventional oil flowing through                                                               
SENATOR WIELECHOWSKI  asked the  commissioner if he  was familiar                                                               
with the producers' duty to produce under their leases.                                                                         
COMMISSIONER BUTCHER answered yes.                                                                                              
SENATOR  WIELECHOWSKI asked  if a  producer wants  to sit  on his                                                               
leases,  does the  DOR  have any  say whether  or  not the  state                                                               
should take  more aggressive  action to  ensure those  leases are                                                               
explored and drilled.                                                                                                           
COMMISSIONER BUTCHER  answered his understanding is  that isn't a                                                               
DOR issue.                                                                                                                      
SENATOR  WIELECHOWSKI said  that  is an  important discussion  to                                                               
have  at some  point. If  these areas  that are  under evaluation                                                               
have extremely high  internal rates of return  and extremely high                                                               
net present  values and the  company just decides not  to develop                                                               
them for  whatever reason, he  thought they were in  violation of                                                               
their lease terms. He didn't think  it was the best public policy                                                               
to give  them "a few billion  dollars in tax breaks"  in exchange                                                               
for their developing them.                                                                                                      
COMMISSIONER  BUTCHER said  it's not  an  issue the  DOR has  had                                                               
anything to do with.                                                                                                            
SENATOR  STEDMAN asked  him  to provide  the  committee with  its                                                               
five-year  incremental  production  forecasts  for  Prudhoe  from                                                               
COMMISSIONER  BUTCHER replied  he  could put  that together  very                                                               
easily. He said slide  6 is a view over the last  15 years of the                                                               
development and service wells drilled  on the North Slope as well                                                               
as  a comparison  with the  price of  oil during  that period  of                                                               
time.  He clarified  that a  development well  is a  well drilled                                                               
within the  proved area of an  oil or gas reservoir  to the depth                                                               
of  a stratigraphic  horizon known  to be  productive. A  service                                                               
well (for  natural gas) is  a well  drilled to support  that well                                                               
whether it's for injecting the  water, steam or air necessary for                                                               
the development  well but  it's not  a producing  well in  and of                                                               
4:35:24 PM                                                                                                                    
SENATOR WIELECHOWSKI, referring  to the slide, asked  with oil at                                                               
an all-time high ($60)  and a zero percent tax rate  on 15 out of                                                               
19 fields on  the North Slope in 2006, what  makes him think that                                                               
lowering  taxes  now  will  have  any impact  at  all  on  future                                                               
COMMISSIONER BUTCHER responded two things.  One is there tends to                                                               
be a  couple-year lag  time between when  decisions are  made and                                                               
when wells are drilled and  development occurs. The second aspect                                                               
has to do  with the development and service wells,  which tend to                                                               
be in the more mature areas of  the North Slope, and as the price                                                               
of oil went up in the past,  the level of wells being drilled was                                                               
maintained although they didn't increase in number.                                                                             
SENATOR WIELECHOWSKI said even with  a couple-year lag, there was                                                               
still a zero percent tax rate  in 2004/5 (with prices still going                                                               
up) and drilling was still flat in 2006.                                                                                        
COMMISSIONER BUTCHER  said producers could provide  more detailed                                                               
answers. This  slide leads into  the next that  shows exploration                                                               
wells  "basically  falling off  the  table"  and development  and                                                               
service wells declining slightly over the last five years.                                                                      
CO-CHAIR PASKVAN asked if the  administration thinks there should                                                               
be an  increase in development  wells in  the next five  years as                                                               
part of any negotiation.                                                                                                        
COMMISSIONER  BUTCHER  replied that  he  didn't  have a  specific                                                               
answer  for that  question;  he  would need  a  breakdown of  the                                                               
currently  producing  fields  and   those  that  would  be  newly                                                               
producing,  because they  are focusing  on not  just getting  new                                                               
fields under development; they are  also focusing on getting more                                                               
out of current fields.                                                                                                          
SENATOR  WIELECHOWSKI asked  the  difference between  development                                                               
and exploration wells.                                                                                                          
4:39:52 PM                                                                                                                    
JOE BALASH, Deputy Commissioner,  Department of Natural Resources                                                               
(DNR),  explained   that  the   primary  difference   between  an                                                               
exploration well  and a development  well is what is  known about                                                               
the subsurface. An exploration well  is truly looking to see what                                                               
is  beneath   the  surface.  The  planning   and  engineering  is                                                               
different  - for  safety purposes  more than  anything. Once  the                                                               
resource  is discovered,  a little  bit of  delineation is  done;                                                               
those  wells  are  kind  of  like  exploration  wells.  They  are                                                               
delineated and the well is  designed to maximize the bore-to-rock                                                               
exposure, taking  into consideration the pressures  in and around                                                               
the reservoir zone.                                                                                                             
SENATOR  WIELECHOWSKI  said  he   was  still  unclear  about  the                                                               
difference and  asked if once  you figure  out oil is  there then                                                               
does it become a development well.                                                                                              
MR.  BALASH  answered  that  the   way  a  well  is  designed  is                                                               
different, both  from a casing  and stream perspective,  but also                                                               
in the  direction that the  bit is turned  down in the  ground to                                                               
identify the target and reach.                                                                                                  
CO-CHAIR PASKVAN said he has seen  a report that says the central                                                               
North  Slope has  5.1  billion barrels  in  proven reserves,  and                                                               
according  to  the USGS  there  is  about  4 billion  barrels  in                                                               
undiscovered likely recoverable oil.  He asked if the development                                                               
well is the  5.1 billion barrels and the exploration  well is the                                                               
4 billion barrels.                                                                                                              
MR.   BALASH  answered   yes,  that   is  basically   correct.  A                                                               
development  well is  designed  to pay;  an  exploration well  is                                                               
designed to find out information.                                                                                               
SENATOR  WIELECHOWSKI  asked   if  ConocoPhillips  does  in-field                                                               
drilling, would that be considered exploration or development.                                                                  
MR. BALASH replied that would be development.                                                                                   
SENATOR  WIELECHOWSKI  asked if  he  is  aware of  ConocoPhillips                                                               
changing its policies  in terms of doing  fewer exploration wells                                                               
and focusing more on in-field drilling opportunities.                                                                           
MR. BALASH replied that he  is generally aware of ConocoPhillips'                                                               
plans in Alaska through a  number of the exploration targets they                                                               
have cited  since they took  over the  Arco legacy assets  on the                                                               
North  Slope, but  he  is not  privy  to a  general  policy or  a                                                               
particular strategic business approach.                                                                                         
SENATOR WIELECHOWSKI asked if he  was familiar with the following                                                               
that Kevin  Meyers, Sr., Vice President,  ConocoPhillips, said on                                                               
March 24, 2010 an analyst meeting:                                                                                              
     Let's take  a few minutes and  take a look at  where we                                                                    
     are  spending  the  rest of  our  exploitation  dollars                                                                    
     around  the  globe.  Whether  it   be  [in]  Alaska  or                                                                    
     Australia or the North Sea,  you see some common themes                                                                    
     that emerge.  We are spending our  exploitation dollars                                                                    
     on   infield  drilling   opportunities  on   peripheral                                                                    
     drilling opportunities  and on  technology applications                                                                    
     to improve recovery in these legacy assets.                                                                                
MR. BALASH replied that he  is aware of their investment approach                                                               
of  reducing their  debt  on their  balance  sheet and  divesting                                                               
certain  assets,  particularly  those in  the  refining  business                                                               
sector for  the last 18-24  months. But in terms  of exploitation                                                               
versus exploration, the strategy  is that exploration dollars are                                                               
high  risk  -  very  little guarantee  of  success  and  ultimate                                                               
payback.  So,  they  want  to choose  their  targets  wisely.  In                                                               
Alaska, he has  seen a change of focus from  the exploration side                                                               
on  the western  side of  the  North Slope  into greater  Moose's                                                               
Tooth and Bear Tooth.                                                                                                           
4:46:23 PM                                                                                                                    
SENATOR FRENCH  asked him to comment  on ConocoPhillips' purchase                                                               
of Burlington Resources in 2005,  a natural gas company for which                                                               
they paid about $15/mcf, one of  the highest prices ever paid for                                                               
a natural gas company.                                                                                                          
MR.  BALASH  responded  that  through  trade  press  coverage  he                                                               
understands ConocoPhillips'  exposure to gas and  gas reserves in                                                               
North  America  and   the  effect  it  has   on  their  corporate                                                               
performance. It is  one of the reasons why the  returns that they                                                               
are seeing on  oil in Alaska appear to be  so impressive relative                                                               
to  the  rest   of  North  America.  As  one   of  Alaska's  most                                                               
transparent players, ConocoPhillips shows  comparisons of all the                                                               
regions  that they  are producing  hydro  carbons from  including                                                               
their Eagle Ford and Bakken shale gas plays.                                                                                    
SENATOR  FRENCH asked  if it  is fair  to say  that investing  in                                                               
those plays  had a "negative  effect" on  ConocoPhillips' ability                                                               
to spend  money on things  like exploration and  development over                                                               
the subsequent years.                                                                                                           
MR. BALASH replied that's for shareholders to decide.                                                                           
SENATOR FRENCH asked  if it's true that they had  to sell assets,                                                               
like  a refinery,  to  cover  the debt  they  acquired when  they                                                               
bought that company.                                                                                                            
MR.  BALASH replied  that  he understands  their  strategy is  to                                                               
divest of  a number  of poorly  performing refining  projects and                                                               
facilities to  repay that  debt, but  at the  same time  they are                                                               
optimizing other business segments.                                                                                             
SENATOR  STEDMAN  said  he  wanted  to  know  if  there  are  any                                                               
recognizable trends between  what is going on in  Alaska and what                                                               
is going  on elsewhere recognizing,  for instance,  the financial                                                               
meltdown  in  2008/9.  He  asked  to  have  an  industry  profile                                                               
overlaid on  development and service wells  and exploration wells                                                               
on slides 6 and 7.                                                                                                              
COMMISSIONER  BUTCHER indicated  he would  put that  together for                                                               
SENATOR WIELECHOWSKI pointed out  that ConocoPhillips paid out $3                                                               
billion to  shareholders in 2009  and cut their  capital spending                                                               
from  $12 billion  to  $10.7 billion.  They  also repurchased  $4                                                               
billion worth of  shares. Significant amounts of  money were paid                                                               
back  to shareholders,  but were  not used  to develop  the North                                                               
Slope. He wasn't criticizing them for  it, but if they are trying                                                               
to figure out what is going  on out there, it's important to look                                                               
at what the company is doing with the money it has.                                                                             
COMMISSIONER  BUTCHER responded  that  many factors  play into  a                                                               
company's decisions.                                                                                                            
SENATOR  MCGUIRE asked  him to  look  at her  legislation on  the                                                               
competitiveness  review   study  and  asked   to  what   end  the                                                               
department has  considered the  effect investment  decisions made                                                               
by  oil   and  gas  companies  have   on  Alaska  competitiveness                                                               
COMMISSIONER BUTCHER indicated  that he had read her  bill and he                                                               
would be happy to go through it with her at a later date.                                                                       
4:54:31 PM                                                                                                                    
CO-CHAIR PASKVAN  asked if there  is an  industry norm as  far as                                                               
the number  of development wells  one should anticipate  "in this                                                               
age of the development of an elephant field."                                                                                   
COMMISSIONER BUTCHER replied  that he would get back  to him with                                                               
those details, but he knows  that getting technology to a certain                                                               
threshold or the  price or oil helping a project  make more sense                                                               
have an impact.                                                                                                                 
4:55:44 PM                                                                                                                    
At ease from 4:55 to 4:56.                                                                                                      
4:56:01 PM                                                                                                                    
He said that slide  7 overlaid the price of oil  on the number of                                                               
exploration wells  drilled on  the North  Slope and  covered 2007                                                               
when ACES passed  and investment decisions that  had already been                                                               
made prior  to its passage; it  also showed the a  drop of almost                                                               
50 percent in 2009 and a drop of  50 percent in 2010. He said DNR                                                               
estimates only one exploration well  will be drilled in 2011. So,                                                               
as the price  of oil has been  going up and as  other states have                                                               
seen  the  number of  exploration  wells  increase, Alaska's  has                                                               
dropped "to almost a trickle."                                                                                                  
SENATOR FRENCH remarked  that they would probably  spend a couple                                                               
of  hours  on  this  slide.  So, as  a  matter  of  housekeeping,                                                               
drilling seasons  are thought of  as winters spanning  two years,                                                               
and he  asked how the state  decides which year these  wells fall                                                               
MR.  BALASH  answered that  exploration  on  the North  Slope  is                                                               
restricted by access to tundra  travel and ice road construction.                                                               
More often  than not that  activity doesn't get  authorized until                                                               
later in the year. By the  time rigs are mobilized it's generally                                                               
after the first of the year.                                                                                                    
SENATOR FRENCH asked if these are spring time wells in general.                                                                 
MR. BALASH responded,  "If you would like to think  of January as                                                               
spring, yes."                                                                                                                   
SENATOR FRENCH asked what happened in 2003.                                                                                     
COMMISSIONER  BUTCHER  replied that  he  would  have to  research                                                               
SENATOR FRENCH asked what an exploration well costs.                                                                            
MR. BALASH  replied that the cost  of the well is  one thing, but                                                               
the larger  cost in most cases  has to do with  its distance from                                                               
infrastructure and  the mobilization  transport costs.  The wells                                                               
drilled  by FEX  in the  remotest  NPR-A cost  over $70  million;                                                               
closer  in to  infrastructure and  with  a limited  need for  ice                                                               
roads a well still costs $15-20 million.                                                                                        
5:00:55 PM                                                                                                                    
CO-CHAIR PASKVAN said this was  an appropriate point to stop this                                                               
presentation and adjourned the meeting at 5:00 p.m.                                                                             

Document Name Date/Time Subjects
SB 49_DOR Presentation_Proposed Changes to Oil and Gas Prod Tax_3-11-2011.pdf SRES 3/11/2011 3:30:00 PM
SB 49