Legislature(2011 - 2012)HOUSE FINANCE 519
03/23/2011 08:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB110 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 110 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 23, 2011
8:07 a.m.
8:07:43 AM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 8:07 a.m.
MEMBERS PRESENT
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Co-Chair
Representative Anna Fairclough, Vice-Chair
Representative Mia Costello
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Reggie Joule
Representative Mark Neuman
Representative Tammie Wilson
MEMBERS ABSENT
None.
ALSO PRESENT
Representative Mike Hawker; Senator Cathy Giessel; Bart
Armfield, Vice President, Operations, Brooks Range
Petroleum Corporation; Marilyn Crockett, Executive
Director, Alaska Oil and Gas Association; Ralph Portell,
Tax Manager, BP Exploration Alaska.
PRESENT VIA TELECONFERENCE
Ken Thompson, Managing Director, Alaska Venture Capital
Group (AVCG); Claire Fitzpatrick, Chief Financial Officer,
BP Alaska.
SUMMARY
HB 110 PRODUCTION TAX ON OIL AND GAS
HB 110 was HEARD and HELD in committee for
further consideration.
HOUSE BILL NO. 110
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
relating to the oil and gas production tax rate;
relating to monthly installment payments of estimated
oil and gas production tax; relating to oil and gas
production tax credits for certain expenditures,
including qualified capital credits for exploration,
development, and production; relating to the
limitation on assessment of oil and gas production
taxes; relating to the determination of oil and gas
production tax values; making conforming amendments;
and providing for an effective date."
8:08:16 AM
BART ARMFIELD, VICE PRESIDENT, OPERATIONS, BROOKS RANGE
PETROLEUM CORPORATION (BRPC), offered a PowerPoint
presentation, "Brooks Range Petroleum Corporation, 10-Year
History and Project Milestones" (copy on file).
Mr. Armfield informed the committee that Brooks Range
Petroleum Corporation (BRPC) had been working from the
North Slope since 2001. The corporation had three core
areas spread across the North Slope, stretching from
Nuiqsut, to Beechey Point, to south of Point Thomson. The
BRPC gross North Slope acreage totaled 240,000 acres. The
corporation had accumulated the positions strategically
with specific operational ideas and expectations for each
unit. The Beechey Point unit, located in the central
portion of the slope, was considered the near-term,
development phase of the BRPC master plan. The corporation
had been active in the area long enough for results to
progress to the point of nearing actual development
sanctioning, pending an engineering report due in the near
future. The corporation had drilled, and was near the
bottom of a well at the southeast corner of the Miluveach
Unit, near Nuiqsut. He stated that this was the only
exploration well that had been drilled on the North Slope
in in the current year. The acreage position in the east,
south of Point Thomson, was considered more strategic in
for long term planning.
8:14:29 AM
Mr. Armfield directed attention to a timeline at the bottom
of Slide 1. He relayed that the Alaska Venture Capital
Group (AVCG) was formed in 2000. The AVCG is comprised of a
consortium of lower 48 mid-continent oil and gas companies
and is the parent company of BRPC. The group used the
period of 2001 through 2006 to acquire acreage, hire
technical staff and solidify the business program. In 2007
the first well was drilled at the Beechey Point Unit. Now,
in 2011, the corporation was drilling another exploration
well and was on the edge of sanctioning a development
program.
Representative Gara asked what the sanctioning and
development program meant in relation to the corporation's
commitment to produce in the area. Mr. Armfield replied
that a third-party engineering report concerning the
reserves that were discovered in past activities. If the
reserve numbers came back indicating that there were enough
barrels to progress a development program, the corporation
would take the report to the working interest owners and
request that the development be sanctioned and progressed
forward. He stated that the corporation had plans for
production in 2013.
Mr. Armfield continued with Slide 2 of the presentation.
o WIO's represented by BRPC are committed to Alaska
and currently have a $ 154 MM investment that
needs to perform
o Current business plan approved by our investors
has a timeline which reflects first oil and
revenues from production in mid 2013
o Each year we delay, has an adverse effect on the
investments ROI and IRR
o Current economic models used by BRPC, marginally
support an acceptable IRR on smaller targeted
accumulations with an assumption that reserve
base would expand to include other prospect
potential in the project area
o An increase in tax rate and a reduction in
capital credits would have a negative reaction
when applied to current models most certainly
moving the project to an un-economic portfolio
position and would shorten our active
participation on Alaska's North Slope
o Increased capital credits, lowering of the base
rate and progressivity when applied to our model
would assure an attractive IRR, and would foster
a more aggressive prospect portfolio and in turn,
provide encouragement to our WIO's for added
funding for our NS projects.
o Elevate the interest level of other players with
a watchful eye on Alaska
Mr. Armfield reiterated that BRPC was the only entity
drilling an exploration well in the current year. He
offered that BRPC had been forced into the solitary driller
position because it had $154 million invested, and the
working interests owners of the corporation needed to see a
return in the investment. The current business plan had
approved development and production by 2013. He stressed
that the internal pressure to make the investment perform
were as significant as the external pressure. Each year
that the project was delayed cut into the internal rate of
return and the return on investment. The corporation
maintained the goal of becoming a producing entity. The
models currently used were geared toward finding smaller,
viable projects to get established and then add to those
projects over time.
8:19:56 AM
Mr. Armfield testified that an increase in the base rate,
progressivity or the status quo would affect revenue
streams into the future.
Co-Chair Stoltze asked what kind of affect an increase
would have. Mr. Armfield replied that it would negatively
affect the return on investment. Naturally, an increase in
capital credits, and a decrease in base rates and
progressivity, would have a positive effect on investment.
Mr. Armfield acknowledged that because BRPC was a very
small entity, the corporation's performance would be
heavily scrutinized. He believed that if a small company
could come into Alaska and turn a profit, any sized company
could. He said that HB 110 would be helpful in getting new
entities interested in working in Alaska. Mr. Armfield
stated that the decline of oil production in the state was
cause for concern. He revealed that a common goal between
the state and the industry was to slow or level the decline
of oil production and throughput in Alaska. He believed HB
110 would set the stage to find a positive solution to the
problem of decline.
Mr. Armfield cited the top three elements that would
operate once BRPC made return on its investment, as listed
on Slide 3:
· Revise the progressivity surcharge to the "bracketed
tax structure" with calculations made annually
instead of monthly
· Cap the total tax at 50 percent when oil prices top
$92.50/bbl
· For development of new fields outside existing
production units, the base tax rate will be 15
percent instead of 25 percent and cap the total tax
at 40 percent
8:23:48 AM
Vice-chair Fairclough queried difference between an
"explorer" and a "producer." She asked why a company would
explore under the current tax regime. Mr. Armfield answered
that as explorers BRPC had a business plan that indicated a
revenue producing stream by 2013. The corporation needed to
get a return on the already invested $154 million as soon
as possible. He understood that it would behoove BRPC to
wait until the changes from HB110 took affect before
drilling. However, the corporation was not in yet
production and could not afford to wait another year.
Vice-chair Fairclough suggested that companies operating in
the state understood the tax regime when they began
exploration. She wondered if an argument could be made
around why companies would willingly enter into
exploration, knowing the tax regime was less than
advantageous.
Mr. Armfield reiterated that BRPC was an unusual
corporation. The corporation had working interest owners
that had been told a revenue stream would be established by
2013. He admitted that the current tax regime did have an
adverse effect on BRPC, but being in a position to become a
revenue producer was more important than waiting another
year.
8:28:01 AM
Representative Wilson asked if BRPC had examined the tax
regime upon deciding to come to Alaska in 2000. Mr.
Armfield replied that when AVCG made the decision to come
to Alaska, oil was $9 per barrel. He reiterated that AVCG
was a group of investors made up of small, independent,
second and third generation, family-owned oil and gas
companies. With oil at $9 per barrel, available projects
would have generated a very small cash flow. Group members
had agreed that there would not be enough profit to pursue
smaller accumulations. The thinking was that more money
could be made in Alaska because of the much larger
reserves. The price of oil remained $9 per barrel, but the
hope was that the cost of doing business in Alaska would be
lower. Currently, with oil at $105 per barrel, the small
accumulations from 2000 are producing some return. Some of
the members of AVCG had turned their activity elsewhere,
but retained small holdings in the state.
8:32:37 AM
Representative Wilson asked whether AVCG would have made
the decision to come to Alaska if Alaska Clear and
Equitable Share (ACES) had been in place in 2000. Mr.
Armfield thought that it would have been less likely that
the group would have made the same decision to come to
Alaska if ACES had been in place at the time.
Representative Costello wondered about the nature of the
conversations concerning Alaska that BRPC had when seeking
partnerships with other producers. Mr. Armfield replied
that the group had been in partnership with a company
called Bow Valley, which was acquired by Dana Petroleum.
When Dana Petroleum reviewed the 20 percent position it had
acquired in Alaska, it elected not to participate in the
state. Dana Petroleum requested that BRPC buy them out of
their share, which took AVCG to a position of 50 percent.
The group has continued to work to lower its position
percentage, but has had trouble acquiring new partners.
Representative Doogan asked if the group had acquired
pipeline space to deliver any oil it may produce.
8:36:55 AM
Mr. Armfield replied that the Trans-Alaska Pipeline System
(TAPS) was a common carrier. If the group could get their
product to TAPS there would be no problem. The objective
was to tie into common carriers and transport the oil to
TAPS. The group did not anticipate any problems to that
end.
Representative Gara understood that the project at Beechey
Point would move forward upon the completion of the
engineering report that showed the anticipated reserves,
even if ACES remained the same. Mr. Armfield responded that
the Beechey Point project had begun 10 years ago, and the
economics that the group had in place showed that a certain
level of reserves would ensure the project moved forward.
If the reserves came in less than anticipated, and
depending on the impact of HB 110, a recalculation may be
in order and a new presentation would be made to working
interest owners. He reminded the committee that AVCG had
other ventures that needed to produce revenue, instead
there was $154 million producing zero return. He felt that
some form of return was better than none.
Representative Gara understood that if the engineer's
reports showed the reserves that were expected, the group
planned to move ahead with the project. Mr. Armfield said
that the group would present the report to the working
interest owners. The decision would ultimately be made by
the partners.
8:40:11 AM
Representative Gara understood that it was difficult for
smaller producers to produce a modest sized field without
their own processing facility. He queried the plans for a
processing facility at Beechey Point. Mr. Armfield relayed
that the group planned to build its own processing
facilities. Small, portable, component modules would be
applied to the project. The facilities would expand or
contract depending on the throughput. As other project
areas progressed, facilities could be relocated to new
project areas.
Mr. Armfield concluded with Slide 4, "HB 110, Opportunity
to Change the Current Trend", a line graph, which depicted
the decline in forecasted oil production over the next 38
years. He argued that HB 110 had a strong chance of
positively impacting the throughput decline. He thought the
activity levels generated from the changes outlined in HB
110 would change the decline curve, create jobs and expand
the vendor base. The change in the high cost of exploration
and development timelines could create more business on the
North Slope.
Co-Chair Thomas asked if HB 110 were to pass, when the
state could expect to see exploratory wells begin to
produce oil. Mr. Armfield stated that according to the
current timeline results could be expected in three to five
years.
8:44:08 AM
KEN THOMPSON, MANAGING DIRECTOR, ALASKA VENTURE CAPITAL
GROUP (AVCG) testified that AVCG was the parent company of
BRPC. He presented the Power Point presentation, "House
Bill 110 House Finance Committee Testimony by AVCG, LLC."
He cited Slide 2, "Agenda":
Purpose: Present ideas to re-incentivize investment
and increase the competitiveness of Alaska relative to
other oil basins with one common State & Industry Goal
in mind: LEVEL ALASKA'S OIL PRODUCTION
Mr. Thompson relayed that if the state and the industry had
the goal of dividing "fixed-pie" revenues, conflict would
be ever present. He believed that changes in the tax
structure would lead to growth in the industry resulting in
increased revenue for the state. Another giant field on the
North Slope was not necessary; several small companies
producing modest amounts would level production. He hoped
that the state could move from the position of losing $2
million, to a position of having no decline. He shared that
the company approached working with the state from an
investor standpoint. The company hoped to raise more
capital for exploration and production. Mr. Thompson
informed the committee that he was calling in via
teleconference because he was currently in the Lower 48
soliciting additional partners to share the risk with AVCG.
He thought that HB 110 would help the company in attracting
new partners to the state. He stressed that some fields in
the North Slope were declining, and offered that the state
and industry together could focus on the next frontier of
development in an effort to level the decline. He stated
that oil source rocks, low-permeability sand and
exploration with smaller fields could level production in
the next several years.
8:48:24 AM
Mr. Thompson stated that AVCG was growth company. The
company currently had no production, but he stressed that
the only way forward for the company was upward. He
reiterated his hope that the company would play a major
role in leveling oil production in the state.
Mr. Thompson cited Slide 3, "AVCG & BRPC: Entity
Comparison." He told the committee that his job as lead
director was to attract new investors. He said that there
were 15,000 attendees at the North American Prospect Expo
in 2009. Twelve companies approached the AVCG booth at the
expo and all twelve queried Alaska's tax regime. The
company was down to one potential investor. He said the
investors lead negotiator requested information on what
Alaska planned to do to change the tax regime in order to
incentivize major new investment.
8:52:03 AM
Mr. Thompson cited Slide 4, "AVCG JV Leasehold Portfolio."
He reiterated that the company had approximately 240,000
acres in the North Slope and a well was currently being
drilled west of the Kuparuk River Unit. He added that AVCG
owned 50 percent of the overall acres. Houston, Texas based
Ramshorn Investments, Inc. owned 25 percent and TG World
Energy Corporation, out of Calgary owned 25 percent.
Mr. Thompson continued to Slide 5, "Attracting New
Investors In the Face of Global Competition for Capital."
He stated that 12 companies had initially expressed an
interest in investing in the Alaska project, 11 of which
had eventually revoked support. He repeated that companies
were not likely to invest in the state due to the tax
regime.
Mr. Thompson shared that AVCG had been optimistic when Bow
Valley was bought out by Dana Petroleum. However, Dana
Petroleum had elected not to participate on the North Slope
because of better tax treatment and higher returns in the
North Sea. He reiterated Mr. Armfield's statement that AVCG
was currently searching for a partner to shoulder the 50
percent interest.
Mr. Thompson explained that substantial tax incentives
enacted in 2009 encouraged the development in the UK North
Sea. In the North Sea new fields were exempt from the 20
percent surcharge until the first $13 billion in profits
was made. The tax changes the UK made in 2009 increased
first quarter drilling for 2010 by 29 percent; the second
133 percent. New production was anticipated. The company,
Noble Energy, declined to join in the Alaska investment,
opting instead to invest in Israel. The prospectivity and
tax structure in Israel were more appealing than Alaska.
The government take was less in Israel and producers were
recovering 200 percent of their investment.
Mr. Thompson continued. He stated 138 wells per month in
North Dakota and would soon surpass Alaska in daily oil
production. The suspension of severance tax for initial
development and expedited state permitting had attracted
investors.
8:56:24 AM
Mr. Thompson continued to Slide 6, "Frasier: Alaska is 68
of 133 in terms of overall attractiveness." The slide
indicated that Alaska was average in its overall
attractiveness; falling behind Alberta, but in front of
Iran.
Mr. Thompson Slide 8, "AVCG's Recommendations to Assist in
Achieving the Common Goal of No Decline":
· Revise the progressivity surcharge to the
"bracketed tax structure" with calculations made
annually instead of monthly
· Cap the total tax at 50 percent when oil prices
top $92.50/bbl
· For development of new fields outside existing
production units, the base tax rate will be 15
percent instead of 25 percent and cap the total
tax at 40 percent
A bracketed structure with reduced base rate and cap
and a reduced base tax rate for new fields with a
lower cap would attract more investor partners for
AVCG et al to increase small field development and
establishment of the North Slope's first "open
access" facility sharing processing facilities.
· Accelerate the payment for exploration and other
qualified capital investments to one year vs. two
years
The acceleration of credit recovery payments to a
one year cycle would allow for AVCG and its partners
to consider drilling 3 exploration wells per year
instead of an average of 2 per year…a chance for
more discoveries sooner
· Increase the tax credits for "qualified capital"
investments from the current 20 percent to 40
percent
An increase in qualified capital credits to 40
percent would provide immediate impact to BRPC's
project investment base and would extend our ability
to encourage additional and continued capital
investment from our current WIO's therefore
providing more opportunities for successful
discoveries and future development projects
· Extend indefinitely the "Small Producer Tax
Credit" of $12MM a year from expiring on May 1,
2016 (or certainly extend another 5 years to May
1, 2021 then re-assess at that time). This is an
item not currently in current bills but would be
helpful in attracting new long-range development
capital for BRPC and others like our company.
Currently, we have a sanctioning proposal in front
of our WIO's that projects first oil and revenues in
2013. With the Small Producers Credit expiring in
May 2016, the development would be limited to a 3
year use of this credit. We would propose an
extension through 2021 to allow our first project
the full credit to attract new investors.
Mr. Thompson addressed Slide 9, which was a line graph that
illustrated the outcomes of both maintaining the status
quo, and the positive adjustments due to the passage of HB
110. He asserted that the AVCG would continue an
exploration program in the state regardless of the passage
of HB 110. He relayed that there were 16 new prospects in
the Southern Miluveach Unit and that the tax changes
outlined in HB 110 would attract capital investors. He
strongly believed in the "Next Frontiers" Development plan
depicted on Slide 9, which listed:
· Smaller field exploration with regional
processing
· Lower-permeability sands with new tech
· Oil source rock shales
· Viscous oil, NS shore, NS gas
9:00:44 AM
Mr. Thompson insisted that the plan would increase revenue
for the state and end decline in production. He reiterated
his full support for HB 110.
Representative Gara asked if the AVCG would appreciate the
state considering delaying taxation until production was
online, as was done by some of the foreign regimes
mentioned in the presentation. Mr. Thompson replied that
getting all involved parties aligned behind an entirely
different tax system would be difficult and time consuming.
He thought that the most effective solution would be to
examine the current system and modify it to attract new
capital investors. He stated that he had worked with over
20 countries that had a system in place where the tax rate
was low until the company recouped its capital, and then
the tax rate would be increased. He said that the tax
credits that Alaska currently had in place had been helpful
to the industry. The money saved by the credits had been
used for further seismic and drilling activity. None of the
savings had been distributed to AVCG members.
9:04:34 AM
Representative Gara wondered if an increase in the tax
credits would be sufficient to increase exploration, and
had lack of access to existing processing facilities on the
North Slope made it difficult for smaller companies to
produce. He asked if a credit toward the building of
processing facilities be worth consideration Mr. Thompson
responded that faster payment of the exploration tax credit
would be helpful. Currently the credits were paid out over
two years, 50 percent per year. He said that AVCG would use
the money to further drilling in the state, and could
consider drilling a third well during a routine year. He
stressed that AVCG was currently Alaska's number one
exploration company. He said that the company wanted to
build its own processing facilities and possibly rent them
out to other developers. He concluded that tax credits for
shared processing facilities would be helpful.
Vice-chair Fairclough pointed to Slide 6 of the
presentation. She noted that Alaska fell in the middle of
the overall attractiveness scale and queried the reason
that AVCG was advocating for tax regime changes. Mr.
Thompson replied that Alaska could maintain the status quo,
and the state and the industry could remain in conflict
over who should benefit most from the funds made off of
mediocre production activity, or changes could be made
which would greatly increase capital spending and level
Alaska's production. He offered that it was a matter of
maintaining the status quo or making a positive adjustment.
9:09:47 AM
Vice-chair Fairclough understood that the Alaska's
investment attractiveness had more factors than just the
taxation issue. Mr. Thompson responded that the first
factor that investors examined was prospectivity. Second
was the tax regime. Many companies had stopped exploring on
the in the central North Slope area because the prospects
had fallen. He did not think that any amount of tax change
would increase exploration in that particular area, except
for small companies like AVCG. He believed that the
unassessed areas of the North Slope contained massive
amounts of oil in low permeability reservoirs and oil
source rock shales. He concluded that Alaska's
prospectivity was attractive, but maintained that the tax
regime was unattractive to capital investors.
9:13:43 AM
AT EASE
9:17:48 AM
RECONVENED
MARILYN CROCKETT, EXECUTIVE DIRECTOR, ALASKA OIL AND GAS
ASSOCIATION, (AOGA) remarked on the components of the CS
for HB 110 that were of concern to AOGA. She referred to
the handout, "Comments of the Alaska Oil and Gas
Association on CSHB 110(RES), March 23, 2011."
Ms. Crockett read from the section "Progressivity
Rates/Bracketing/Tax Cap":
AOGA supports the provisions in CSHB 110(RES) which
establish bracketing of the progressivity rates and
caps progressivity at 25 percent, for a maximum rate
of 50 percent for progressivity and the base rate
combined. Under the current form of ACES, at $30, the
taxpayer pays at the 25 percent base rate. But as the
taxable Production Tax Value (PTV) raises above $30,
the progressivity feature kicks in, and instead of
applying the higher tax rate to just the incremental
dollar, the current tax system reaches back and taxes
the entire original $30 at the higher rate. Each time
the PTV per barrel increases further beyond $30, all
prior dollars are taxed at the higher rate instead of
just that further increase. This approach is what
creates such high marginal tax rates, and creates an
imbalance in the risk-reward investment environment in
Alaska. Removing the upside to the degree the
progressivity feature does makes it much more
difficult to compete for investment dollars with other
areas that are not as fiscally challenged as
investments here in Alaska. CSHB 110(RES) adds much
needed stability and predictability to the tax. As
companies realize higher prices and greater PTV, the
State likewise continues to share in those benefits.
In addition, capping progressivity and the base tax at
the 50 percent combined rate under CSHB 110(RES),
rather than the current 75 percent, also provides the
impetus needed to motivate companies to undertake the
high risk projects on which the future economic health
of Alaska will depend.
This change creates a business climate where the
reward is commensurate with the risk and keeps the
needs of the State and the producers in a more
appropriate balance.
You will be hearing from our member companies
regarding this risk/reward and the need for an
adequate upside, and the challenges they face when
presenting projects to their respective Boards. The
competition for these dollars is real and anything to
move Alaska to a more competitive position will make
those arguments more palatable and possible.
9:21:17 AM
Ms. Crockett read from the section "Annual-v-Monthly":
The revenues that are used in the calculation of the
progressivity are actuals, reflecting current
production and current prices. They are subject to the
seasonal swings in production or market pressures of
price. In calculating the PTV, though, the deductible
lease expenditures are the actual expenses for the
whole year, with 1/12 of the annual total being
allocated to each month during the year.
We support moving from a monthly calculation of
progressivity to an annual calculation to synchronize
the revenues with the expenses, avoid the mismatching,
and more accurately reflect the philosophy behind what
a progressivity feature should look like.
Ms. Crockett read from the section "Tax Credit Incentives
Extended To North Slope":
CSHB 110(RES) expands the existing 40 percent well
lease expenditure tax credit currently available only
to qualifying expenditures in "Middle Earth" and the
Cook Inlet Sedimentary basin.
The well lease expenditure concept was introduced and
enacted into law in May 2010 in connection with
chapter 16, 2010 Session Laws of Alaska (the Cook
Inlet Recovery Act).
A well lease expenditure is the subset of qualified
capital expenditures (QCE) that currently define the
scope of capital spending that qualifies for the 20
percent QCE credit under sub-section .023(a). Thus,
within the QCE "bucket" are a set of costs that would
be eligible for a full 40 percent tax credit instead
of the usual 20 percent QCE credit. The definition of
WLE as intangible drilling and development cost (IDC)
has several advantages. First, IDC is a concept that
is well-defined in oil and gas tax law. Second, WLE is
consistent with language already existing in the PPT
ACES framework. Producers will not have to wait for
the DOR to write regulations that describe what is
included and not included in the WLE.
Lastly, since labor costs may be included in IDC, the
40 percent WLE credit indirectly supports hiring and
job creation. In sum, AOGA strongly endorses this
special category of QCE that is targeted for the
credit uplift because 1) this category of expenditure
is tied directly to in-field drilling; 2) includes
labor costs; and 3) is a convenient and readily
accessible accounting designation.
Ms. Crockett continued to the section "Lower Tax Rates For
New Field Development":
AOGA cautiously supports this proposal for new field
development, which represents a significant reduction
in the implied tax burden. However, it raises several
questions. First, as with other provisions in CSHB
110(RES), the implied lag in the effective date is
problematic.
The provisions in sections 6 and 8 of CSHB 110(RES)
are silent on the treatment of lease expenditures for
new field development. Since the proposed change in
base tax and progressivity is driven by the PTV
associated with new field development, some form of
ring-fencing production, revenue and costs is implied.
AOGA favors addressing the matter of cost allocation
in statute rather than through regulation.
Lastly, and most importantly, it is important to
incentivize ALL new oil. This means new oil associated
with new field development and from exploration, as
well as new oil from existing producing fields using
in-field drilling, secondary recovery, and tertiary
recovery techniques.
Ms. Crockett continued to the section "Reducing the
Interest Rate on Tax Under and Over Payments and the
Statute of Limitations":
AOGA supports the Administration's proposed reductions
to the statutory interest rate on tax under and over
payments and the statute of limitations for performing
tax audits.
Unfortunately, the provision reducing the timing of
the statute of limitations in the version of the bill
before you now was deleted in the previous committee.
We encourage you to reinstate it.
The time period for which the Department can audit a
taxpayer's tax return is three years from the date of
the filing of the tax return for all taxes except for
the production tax. With the enactment of ACES, the
statute of limitations for auditing production tax
returns was increased to six years. We never
understood why that change was needed when the three-
year audit period has worked successfully for all
other taxes and can be extended and re-extended any
number of times as appropriate and taxpayers were
generally willing to do so.
Under the current interest rate provisions, after
three years, interest represents at least 38¢ for each
dollar of additional tax claimed. But after six years
the accrued interest grows to at least 92¢ for each
dollar of additional tax claimed. The longer statute
of limitations, coupled with the high interest rates,
mean a greater likelihood that audit disputes will be
litigated instead of settled, because the interest,
which under state law cannot be compromised or abated,
represents such a substantial portion of the amounts
at issue even at the very beginnings of the disputes.
9:25:07 AM
Ms. Crockett testified that AOGA supported the legislation.
Representative Edgmon asked if assurances could be made
that productivity would increase with the passage of the
legislation. Ms. Crockett answered that time would tell;
recent history had shown that activity and investment
levels were down. She thought that the bill presented a
more positive and attractive fiscal regime than the system
currently in place.
RALPH PORTELL, TAX MANAGER, BRITISH PETROLEUM EXPLORATION
ALASKA, introduced his support staff.
CLAIRE FITZPATRICK, CHIEF FINANCIAL OFFICER, BRITISH
PETROLEUM (BP) ALASKA, testified in support of HB 110. She
believed the legislation would address three key issues:
1. Alaska is not competitive. So it is not getting the
level of investment that it could.
2. The pipeline is 2/3 empty as there isn't the level
of investment required to put more barrels in the
pipe.
3. There would be more jobs if there was more activity.
Ms. Fitzpatrick stated that with 85 percent of the states
unrestricted funds coming from the oil industry, Alaska
needed a healthy oil industry to ensure a long-term,
sustainable future. She shared that she was in London
attending a series of meetings to advocate for Alaska
activities. She opined that she remained at a significant
disadvantage relative to the other locations being
represented there. The other locations were able to
demonstrate that their opportunities were providing a
better risk reward balance than Alaska was able to
demonstrate with the projects and fiscal structure it has.
9:29:31 AM
Ms. Fitzpatrick referred to the Power Point presentation,
"House Finance Committee BP Alaska Testimony - Claire
Fitzpatrick, CFO March 23, 2011, and cited Slide 2,
"Balanced Fiscal Systems Investments." She said that in the
past the state had had a more balanced fiscal system and
that at that time BP had been in a position to make
substantial investments in a number of properties. Not only
did BP make production investments, they also invested in
support opportunities with upgrades to pipelines and the
tanker fleet. Since the change in production tax in 2007
investments in capital and expense had shifted to where
opportunities demonstrated the best risk reward return.
Because of the way the production tax worked all of the
upside earnings went to increased taxes, which leaves
little share for investors. British Petroleum was
responsible for meeting the fiduciary expectations of their
investors and as a result less was being invested in
Alaska.
Ms. Fitzpatrick continued to Slide 3, "U.S. Production is
growing; Alaska production isn't," which was a line graph
depicting that production in the Lower 48 had rose as oil
prices had risen, and Alaska had continued to decline. The
following graph on Slide 4 illustrated that the trend could
also be seen in terms of well activity and drilling
footage.
9:32:20 AM
Ms. Fitzpatrick reiterated the importance that Alaska
remained competitive in the industry.
Ms. Fitzpatrick continued to Slide 5, "Less money being
spent on new oil since ACES," which was a bar graph that
illustrated BP operated fields production adding
investments, after adjusting for inflation. She felt that
Alaska had a policy choice to make; did Alaska want less
oil production, or more oil production. More oil production
would require more investments, which would result in more
jobs. She opined that there was considerable oil left on
the North Slope, yet the pipeline was two-thirds empty. She
relayed that Alaska needed to attract billions of dollars
to drill and produce enough to stem decline. She stressed
that Alaska was far removed from the markets that used the
oil, and that the cost for goods were higher in the state
than elsewhere. She added that the real challenge to more
production was the state tax system.
Ms. Fitzpatrick testified that BP supported the
legislation. She explained Slide 6, "Governor's Bill (HB
110) - A step in the right direction":
• BP continues to support this bill
ƒImproves competitiveness and encourages
investment
• What we like
ƒBracket structure for progressivity
9Incentivizes investment
9Rebalances risk reward
ƒAdditional credits for drilling investments
9Incentivizes production adding investments
ƒReduction in statute of limitations and punitive
interest rate
9Increases certainty, removes unfair provision
ƒAnnual calculation of production tax rather than
monthly
9Matches costs with revenues and increases
predictability
Ms. Fitzpatrick explained that tax reform was the single
most important thing that the state government could do to
promote the increase in oil production. Tax reform would
draw oil industry investment, which would slow the decline,
put more oil into the pipeline and create many jobs over
many years. She noted that tax credits had a significant
place in the tax fiscal structure. The tax bracketing and
the lower progressivity rate were crucial parts of
successful reform. She thought that the state and the
investors had mutual interests and should be working toward
the common objective of putting more barrels in the
pipeline.
9:35:43 AM
Ms. Fitzpatrick discussed Slide 7, "Increased investment =
Alaskan jobs and production":
· BP will re-evaluate the entire inventory of
opportunities
ƒNote: BP owns 26 percent of Prudhoe Bay -
investments require other working interest owner
approvals
· Opportunities that could become competitive if bill is
passed:
ƒIncreased drilling, potentially adding another Rig
in service
ƒIncreased wellwork
ƒGas Partial Processing /I - PAD
ƒEvaluate 'at scale' development viscous
opportunities
ƒIncreased R&D spending to develop heavy oil
· The sooner the bill takes effect, the sooner increased
activity can happen
Ms. Fitzpatrick reminded the committee that BP had warned
the state that projects would be impacted by the 2007
passage of the higher production tax and the removal of the
price upside. She emphasized that Alaskans were working on
the projects that had to be shut down at that time, whether
they were employed by BP or Alaskan based contractor
companies. She anticipated more drilling after the passage
of HB 110, which would provide 100 jobs per drill rig. She
stated that BP had plans for a 50, new well, I-PAD program
and a new gas processing plant, which would assist in the
extraction of the thicker oil out of the more difficult
reservoirs in the western area of Prudhoe Bay. She
contended that under the current tax system it did not make
economic sense to invest the over $2 billion those projects
would cost. She compared Alaska with North Dakota, noting
that North Dakota was more attractive to investors. She
asserted that it was becoming increasingly difficult to
lure investors to Alaska. She concluded that HB 110 would
significantly improve the prospect of retaining investor
funding to move forward with projects currently on hold.
9:38:39 AM
Representative Gara referred to testimony given by Ms.
Fitzpatrick during a past House Resources Committee
meeting. Representative Gardener had asked if the state
could expect more exploratory wells if HB 110 were to be
passed. Ms. Fitzpatrick had responded:
"BP doesn't do what's referred to as traditional
exploratory wells. Within our existing units we
believe there are significant resources we'd rather
focus our attention on."
Representative Gara understood by the response that with HB
110, BP's focus would be on development wells within
existing fields and not on exploration wells. Ms.
Fitzpatrick responded that the definition of exploration
wells was very technical. Technically, the corporation
would be focusing on development wells, recompleting wells
and well work. She communicated that it was not BPs current
intention to drill what was technically classified as an
exploration well.
Representative Gara related that according to numbers
provided by the Alaska Oil and Gas Conservation Commission
(AOGCC), the number of development wells rose in 2010 to
157, the highest number since 2005. He admitted he had
hoped to hear that BP's plan was to continue with more
exploration. Ms. Fitzpatrick repeated that more exploration
was not in the corporation's current plan.
Representative Wilson referred to Slide 5. She asked
whether the numbers would rise back to those seen in 2007,
were the legislation to pass. Ms. Fitzpatrick replied that
the expectation was that BP would spend more money on
production adding activity if HB 110 passed. She could not
attest to the distribution between wellwork recompletions
versus new wells, but the overall aim would be to get more
production in the pipeline.
9:42:16 AM
Representative Wilson wondered how many jobs were
anticipated to be created by BP with the passage of HB 110.
Ms. Fitzpatrick said that if an additional rig were added
it would create approximately 100 jobs. If HB 110 passed
and was successful in bringing in significant projects,
more jobs would be created. Some of the job creation would
be within the corporation, but the bigger difference would
be seen by Alaskan contract companies who support the oil
industry.
Representative Doogan wondered what reaction BP would have
if the legislature reported out a bill with the same basic
provisions as HB 110, but that stipulated that all payments
to industry be made after the fact. Ms. Fitzpatrick said it
would depend on how "after the fact" was defined, which
would have an impact on what became economic. The value of
receiving cash flow now would differ from cash flow in 15
years.
Representative Doogan clarified that "after the fact"
referred to oil actually moving through the pipeline.
9:45:47 AM
Ms. Fitzpatrick said that if wells were going to be drilled
to get oil into the pipeline in 12 to 18 months, the tax
benefits associated would be minimal. However, investing in
a project with two to three years of research concerning
the application of technology, that would then be applied
to a seven-year construction period the value of the
project deteriorates because of the delay in receiving the
tax benefits.
Representative Doogan asked whether BP would support a bill
that did not pay out credits until oil was in the pipeline.
Ms. Fitzpatrick related that BP would be less supportive of
the hypothetical legislation because it would negatively
impact the economics. Theoretically, projects might not be
a competitive as they could be and could lose out to other
opportunities elsewhere. She said that BP would work with
whatever the legislature passed in order to get as much
investment as possible, provided it made competitive and
economic sense.
Representative Guttenberg noted that BP was a 26 percent
owner in Prudhoe Bay and the dominant owner in TAPS,
including the terminal, which produced substantial revenue.
He wondered if the low-flow and liability of a shutdown
should be a major responsibility for BP. He asked whether a
feeling of responsibility came into calculation during BP
business decisions. Ms. Fitzpatrick replied that she was
separated from some of the decisions and details concerning
TAPS and low-flow. Her upstream decisions were based on
tariff information provided by midstream companies. The
delivery system for the oil was not disclosed, only the
cost of getting the oil to market was revealed. She said
that when she made upstream decisions they were not made
form an economic perspective of TAPS, but by considering if
the upstream project was competitive and relative to other
opportunities. Clearly, on a business perspective BP had an
interest in TAPS therefore it was in the best interest for
BP that as many barrels as possible flowed through the
pipe. She stated that the entities had to remain separate
under Federal Energy Regulatory Commission (FERC) rules.
9:49:47 AM
Representative Guttenberg wondered if BP took the health of
TAPS into consideration when going forward with development
plans. Ms. Fitzpatrick replied that getting the oil to
market was a consideration. Whether the oil was going via
TAPS, rail cart, or truck was not an economic consideration
for the corporation. She assumed that the Alyeska Pipeline
Service Company would consider what investment was
necessary in order to maintain an appropriate flow rate for
TAPS. The cost would be built into the tariff, which would
be considered by BP. If the upstream activity were no
longer viable, then BP would conclude that the upstream
activity was not economic.
Representative Gara asked how many exploration wells had BP
developed in Alaska. Ms. Fitzpatrick said she would need to
research the question.
Representative Gara requested the history of BP exploration
wells spanning the last three fiscal regimes. Ms.
Fitzpatrick replied that she would provide the information
to the committee.
9:53:38 AM
Representative Gara asked whether BP had earned an excess
of $7 billion over the last four years. Ms. Fitzpatrick
said yes. She imagined that the number of taxes paid by BP
surpassed any earnings over the same period of time.
Representative Gara wondered whether paying out credits
over one year instead of two, or increasing the credits to
allow for the building and expansion of processing
facilities would make a positive difference even if the tax
rates remained the same. Ms. Fitzpatrick responded that
the changes that would make the most significant difference
in BP's areas of investment would be changes to the area
around bracketing and annual monthly charges.
Representative Hawker spoke to three issues raised during
debates in House and Senate Resources Committees, and in
the committee, concerning the legislation. One prevailing
opinion was that Alaska's competitiveness was a non-issue.
He said that there were specific claims in House Resource
Committee that competitiveness was not a factor in industry
decision making. Secondly, there was consistent and
continuous concern that industry was failing to make a
solid commitment to the state in exchange for state
concessions. Thirdly, was the premise that new, additional
exploration credits would result in increased oil
production. He asked if competitiveness was and issue, and
if so what were competitors offering that was giving them
the edge over Alaska. He requested assurances that the
state could expect industry to change behavior with the
passage of the legislation. He probed whether additional
exploration credits were the best way to get significantly
more production into TAPS as quickly as possible.
9:58:19 AM
Ms. Fitzpatrick answered that competitiveness was an issue.
The question came down to the amount of return that would
be seen by BP shareholders. She said it was a matter of
weighing the value of other opportunities against
opportunities in Alaska. Specifics that were considered
were: what were the rock types, how far from market was the
location, and overall project cost. A variety of scenarios
were considered while looking at the risk/reward balance of
a project.
Ms. Fitzpatrick she could not give a definitive reply
assuring increased production if HB 110 passed the
legislature. She stated that her hopes that the bill would
pass was informing the nature of the conversations she was
currently having with possible investors in London,
England. She stressed that time was of the essence.
Ms. Fitzpatrick thought additional exploration credits
would prove beneficial. She did not believe it was the best
way to get significantly more volume in the pipeline as
quickly as possible. She explained that the fastest way to
get significant volume in the pipeline quickly was to focus
on how to allow for more competitive investment in existing
fields.
10:03:28 AM
Representative Hawker reiterated that the legislature hoped
for a firm commitment from industry in the event that a
change was made to Alaska's tax regime. He wondered if the
HB 110 debates were being followed by industry.
Ms. Fitzpatrick replied HB 110 was currently being
discussed in London.
10:06:09 AM
ADJOURNMENT
The meeting was adjourned at 10:06 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 110 Brooks Range032311PDF.pdf |
HFIN 3/23/2011 8:00:00 AM |
HB 110 |
| HB110 BPFitzpatrick Bio 0323.doc |
HFIN 3/23/2011 8:00:00 AM |
HB 110 |
| HB110 BP Portell Bio 0323.doc |
HFIN 3/23/2011 8:00:00 AM |
HB 110 |
| HB 110AVCG HFC 032311.pdf |
HFIN 3/23/2011 8:00:00 AM |
HB 110 |
| HB110 BP HFIN032311.pdf |
HFIN 3/23/2011 8:00:00 AM |
HB 110 |
| HB110 AOGA HFIN032211.pdf |
HFIN 3/23/2011 8:00:00 AM |
HB 110 |