Legislature(2011 - 2012)
03/26/2011 01:41 PM House FIN
| Audio | Topic |
|---|---|
| Start | |
| HB 110 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
March 26, 2011
1:41 p.m.
1:41:27 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 1:41 p.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 Tammie Wilson
MEMBERS ABSENT
Representative Mark Neuman
ALSO PRESENT
Representative Mike Hawker; Senator Cathy Giessel; Bryan
Butcher, Commissioner, Department of Revenue; Bruce
Tangeman, Deputy Commission, Department of Revenue; Dan
Stickel, Petroleum Economist, Tax Division, Department of
Revenue; Roger Marks, Consultant, Legislative Budget and
Audit Committee.
PRESENT VIA TELECONFERENCE
Lennie Dees, Audit Master, Tax Division, Department of
Revenue.
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."
1:42:58 PM
Co-Chair Stoltze announced to the committee that
Representative Hawker would be the designated alternate for
Representative Neuman, who was out of town because of a
family emergency.
Representative Doogan asked if Representative Hawker would
be able to debate and vote with the committee. Co-Chair
Stoltze replied that as an alternate Representative Hawker
would be both debating and voting.
Representative Doogan announced to the committee that he
had obtained a legal opinion that stated that
Representative Hawker was forbidden from voting.
Co-Chair Stoltze replied that he could produce a legal
opinion to the contrary. He noted Representative Doogan's
objection and forthcoming legal opinion. Representative
Doogan maintained that Representative Hawker should not
have a vote on the committee.
BRYAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE,
provided a PowerPoint presentation, "Proposed Changes to
the Oil and Gas Production Tax, March 26, 2011."(copy on
file). He cited Slide 3, "HB 110 Goals":
1. Improve investment climate
2. Increase production
3. Create jobs for Alaskans
Commissioner Butcher continued to Slide 4, "The Problem":
1. Oil production is declining in Alaska, faster
than the rest of the U.S.
2. Higher taxes have chilled investment in Alaska
3. Alaska's economy is fueled by a robust oil patch,
however the pipeline currently runs twothirds
EMPTY.
4. Low throughput levels increase maintenance costs
and threaten a shutdown.
1:45:57 PM
Commissioner Butcher discussed Slide 5, "The Solution":
We MUST:
1. Reform our oil taxes to be globally competitive.
2. Provide tax credits for drilling in technically
challenged fields.
3. Lower the tax rate for drilling new, untapped
fields.
4. Cap taxes to encourage more immediate investment
at higher oil prices.
Commissioner Butcher stated that Alaska had the highest oil
taxes in North America. High taxes coupled with the remote
location of the state had made it difficult for new
exploration and new development to occur in Alaska.
1:46:48 PM
Commissioner Butcher continued to Slide 6, "North Slope
Production," which was a graph depicting the annual North
Slope production and contribution of fields. He shared that
the department would be presenting a preliminary spring
forecast to the committee. He explained that the forecast
was preliminary because the department waited until after
March 31st, when the oil companies would balance their
numbers form 2010, to project their actual numbers.
Commissioner Butcher continued to Slide 7, "North Slope
Development Drilling," which was a bar graph depicting
development and service wells drilled on the North Slope.
He emphasized that current levels were not as high as those
previously seen.
Commissioner Butcher discussed Slide 8, "North Slope
Exploration Drilling," which was a bar graph that
illustrated that exploration drilling had peaked in 2001
and again in 2007, but had significantly declined since
2007.
Commissioner Butcher discussed Slide 9, "There's lots of
oil left in Alaska…":
· Cumulative production through 2010 has been over 16
billion barrels
· Remaining North Slope recoverable volumes exceed 5
billion barrels
· Geologybased estimates of total oil volumes are
much higher. For instance, we do not include any of
the approximately 20 billion barrels in the giant
Ugnu deposit, or offshore volumes from the Chukchi
or Beaufort Seas, in our forecast
1:49:53 PM
Commissioner Butcher read from the 2009 United States
Department of Energy Report on North Slope Potential:
From an exploration perspective, the North Slope and
adjacent areas are far from resembling a mature
petroleum province. The majority of the wells in both
the state onshore and near-shore Beaufort Sea are
clustered along the Barrow arch trend with only 47 of
the 323 exploration wells located south of 70º north
latitude Figure 2-2). The area south of 70 north
latitude constitutes nearly 75% of the state acreage.
This southern portion of the state land holdings has a
well density of one well per 367 square miles. Thus
only the area along the Colville-Canning portion of
the Barrow arch and the adjacent portion of the
Beaufort Sea has experienced moderate to high
exploration drilling activity. Here, the drilling
density is approximately one exploration well per 21
square miles.
[The full report can be found at www.doe.gov.]
Commissioner Butcher surmised that the state was not
looking at a mature basin, tens of billions of barrels were
yet to be discovered on the North Slope, and the state
should focus on the giant area south of where most of the
development had occurred; this was where the department
believed great exploration, development, and production
would occur as a result of the HB 110 incentives.
Commissioner Butcher continued to Slide 10, "Development
Timeline for North Slope Oil Fields," with a line graph
illustrating development timelines for fields on the North
Slope. The department believed that much of the in-field
development for legacy fields could occur more quickly. New
fields that were further from infrastructure had an
ultimate timeline of up to seven years. He stressed the
importance that the state acts right away.
Representative Gara understood that according to Slide 7,
decline in recent years was not due to Alaska's Clear and
Equitable Share (ACES), but began declining under the
Economic Limit Factor (ELF). He wondered how the drilling
of wells on the uptake under ACES and decline under ELF
related to HB 110. Commissioner Butcher replied that there
had been a one year uptake in 2010 - all other years had
been the lowest seen by the state in 15 years. He shared
that much of the capital had been put into the legacy
fields and that something had to be done to encourage new
exploration.
Representative Gara pointed out the second worst year in 15
years had been 2006, which had been under ELF. He did not
believe that the graph was convincing in relating the
decline to ACES.
1:53:30 PM
Commissioner Butcher maintained that the difference between
the exploration in the last five years and the more
successful years in the past was startling.
Representative Wilson asked what current available credits
could be used in producing wells, and how they compared to
exploratory credits.
LENNIE DEES, AUDIT MASTER, TAX DIVISION, DEPARTMENT OF
REVENUE (via teleconference), replied that a 20 percent
credit was currently available for development drilling
under AS 43.55.023 (tax credits for certain losses and
expenditures). Credits for exploration wells were dependent
on location, and ranged from 20 to 40 percent. In addition
to exploration, if the company was experiencing a net
operating loss, a 25 percent net operating loss credit was
available.
1:57:55 PM
Representative Wilson asked if numbers could be provided to
highlight where development was still occurring versus
where it had declined. She wondered if the decline had been
in existing fields or in new areas.
Mr. Dees assumed that the wells depicted on Slide 8 would
qualify for the 40 percent credit under AS 43.55.025
(alternative tax credit for oil and gas exploration). The
wells on Slide 7, to the extent that they were located in
existing fields, would qualify for the 20 percent credit.
Commissioner Butcher continued with the presentation. He
introduced Slide 12, "Main proposed changes":
Progressivity Rates & Cap: Progressivity levied as
discrete brackets, rather than as a continuous
function, and applied only to incremental revenue.
Base Tax Rate: Base tax rate of 15 percent, plus
progressivity for leases or properties neither
unitized nor producing as of 12/31/2008. Base rate of
25 percent plus progressivity for currently producing
fields.
Tax Credits: Extension of 40 percent well lease
expenditure tax credits to North Slope. Tax credits
can be claimed in a single year instead of two years.
Tax Calculation: Yearly tax calculation based on
average prices and costs, instead of monthly tax
calculation impacted by short term price and cost
peaks.
2:02:34 PM
Commissioner Butcher discussed Slide 13, "HB 110 compared
to ELF and ACES," which was a bar graph showing where the
department saw ACES if the bill did not pass, and where ELF
would be in terms of production tax revenue if ACES had
never been passed. He said that the production tax revenue
under ACES needed to be addressed. The legislation would
keep the revenue higher than under ELF but not as high as
under ACES. Under ACES, the department believed that too
much was being given to the state. Under ELF, the
department believed too much was going to industry.
Therefore, the department had worked to find a balance.
Vice-chair Fairclough asked whether the analysis showed any
increase production that the state could expect by offering
the incentives. Commissioner Butcher replied that it did
not. The analysis reflected where the department predicted
the future would be under the current scenario.
Representative Gara wondered if the bar graph included the
loss in revenue that would be incurred by shifting from
monthly to annually.
BRUCE TANGEMAN, DEPUTY COMMISSION, DEPARTMENT OF REVENUE,
responded no. He explained that oil prices were projected
annually and not monthly. He stated that the monthly-to-
annually calculation was different from month-to-month, and
that the department did not project from month-to-month.
Representative Gara opined that the loss was significant.
He reminded the committee that in 2008, the legislation
would have cost the state $400 million, had it been in
place. He believed that the loss should have been included
in the analysis. Commissioner Butcher interjected that
based on the previous two years the loss would have been
$10 million to $20 million, which was relatively
insignificant. He said that there could be situations where
the number was negative, but that it was impossible to
determine how to calculate the loss into the analysis.
Representative Gara offered that there were two companies
already proposing projects; Repsol and Great Bear on the
North Slope. He wondered if lowering the tax rate on
projects that had already been planned to move forward
would result in a loss of revenue.
2:06:11 PM
Commissioner Butcher replied that the department had heard
nothing about the exploration wells. Petroleum News had
alluded to Repsol spending $768 million on the North Slope
project. However, the total investment could be much more
if HB 110 were to pass. He thought that having a Repsol
representative on hand during the HB 110 debates would be
beneficial. He reminded the committee that the plan was
preliminary and could drastically change as a result of the
passing of HB 110.
Co-Chair Stoltze informed the committee that invitations to
the meetings had been distributed universally. Repsol Oil,
among others, had chosen not to be present.
Mr. Tangeman noted that the fields referenced by
Representative Gara had not been included in the budget
forecast for the department.
Representative Guttenberg referenced the development
timeline on Slide 10. He stated that the Kuparuk River
meltwater development timeline was uniquely short. He
wondered when the department expected new fields to be
online, and if different timelines were expected for
infield and outer-field development. Commissioner Butcher
expected potential infield development to occur before
outer-field development.
Representative Guttenberg asked if there was any of way of
projecting the timeline. Commissioner Butcher replied in
the negative.
Representative Doogan asked if the department could project
the possible losses or gains HB 110 would have generated
within the last five years. Commissioner Butcher said the
information would be provided to the committee.
Mr. Tangeman highlighted that proposed development in Umiat
was included in the department's forecast.
2:10:17 PM
Representative Gara wondered if the legislation was similar
to the Petroleum Production Tax (PPT). Commissioner Butcher
offered to provide comparison information.
Representative Wilson questioned the average barrel dollar
amount for each year from 2013 to 2015.
Commissioner Butcher listed the dollar amounts:
FY 13 - $95.79
FY 14 - $96.33
FY 15 - $100.76
FY 16 - $103.60
Representative Wilson requested the FY 11 per barrel dollar
amount. Commissioner Butcher replied that the estimate for
FY 11 was $91.13; FY 12 was estimated at $94.70.
2:12:04 PM
AT EASE
2:13:08 PM
RECONVENED
Commissioner Butcher added that the FY 10 oil price per
barrel was $74.90.
Representative Hawker questioned the success the state had
had in achieving past production forecasts. He noted that
the analysis on Slide 13 was based on the fall 2010 revenue
forecast. He queried whether the department anticipated the
numbers to be higher in the spring forecast when updated.
Commissioner Butcher replied that the price of oil was
expected to be higher.
Representative Hawker asked about the volume numbers. Mr.
Tangeman said that an initial drop was anticipated in 2013.
Volume numbers were expected to increase slightly in the
years following.
Representative Hawker wondered if the department had
researched the historic underachievement of the production
forecasts. Commissioner Butcher admitted that the forecasts
could be optimistic when compared to the actual numbers. He
offered that the actual numbers were often affected by
project delays.
2:15:41 PM
Representative Joule asked whether the forecasts would be
more accurate if the projects were on target. He wondered
if the department could study the pattern of projects that
had eventually been completed, but not in the projected
timeframe. Commissioner Butcher imagined that an
examination of projections over the last 20 years would
reveal that some projects had been delayed, and some had
never come to fruition. He believed that if a pattern
existed, it would take a tremendous amount of work examine
its effects.
Mr. Tangeman added that there were two variables to
consider when examining the projections: time and quantity.
Vice-chair Fairclough said that the Palin Administration
had proposed a bill for ACES that included the 25 percent
flat tax. She explained that amendments to the legislation
had changed progressivity to a "Draconian take," which
prompted her to vote no on the legislation. She relayed the
desire to view the Palin introduction bill. Commissioner
Butcher offered to get the information to the committee.
2:19:13 PM
Commissioner Butcher continued to Slide 14, "Outline for
Presentation: Outlook and Conclusion."
Commissioner Butcher cited Slide 15, "HB 110 Fiscal
Projections":
· General Fund Revenue, General Fund Appropriations, and
Savings Balances (CBR / SBR only).
· Based on 10year Fiscal Model developed by DOR Tax
Division, DOR Treasury, and OMB.
· Incorporates preliminary Spring 2011 revenue forecast,
production forecast, and investment forecasts.
· Spending projections using LFD presentation from March
1, 2011.
· Key provisions of HB 110 / SB 49 added - tax rate
change, tax calculation, well lease expenditure
credit.
· Alternative production scenarios & associated costs
developed to evaluate various possible outcomes
Commissioner Butcher discussed the five possible scenarios.
Based on the preliminary spring forecast, which was not
concrete, the department would be laying out potential
scenarios predicting future production. The department did
not know what would happen, but wanted to offer many
scenarios. The department would also show the effect of HB
110 with no new development and would compare the possible
revenue with the Legislative Finance Division (LFD) budget
predictions. All of the projections would vary from year to
year. He stated that the projections would include General
Fund revenue, General Fund appropriations, and the saving
balance. Projections would be based on a ten-year fiscal
model established by DORs Tax and Treasury Division and the
Office of Management and Budget (OMB). He added that when
looking at HB 110 the department had also factored in the
credit increase of 15 percent. Not only was the department
looking at what the potential increase in revenue would be,
but also removing the increased capital expenditures,
operating expenditures, and credits.
Representative Hawker understood that the spring 2011
forecast had been used in the development of the scenarios.
He asked if the department was factoring in any increased
production as a result of HB 110 passing. Commissioner
Butcher replied that the department would have scenarios
that would show increased production as a result of the
passing of HB 110. Representative Hawker clarified that a
full spectrum of potential new development would be
presented to the committee. Commissioner Butcher replied in
the affirmative.
2:22:44 PM
Commissioner Butcher continued to Slide 16, "Preliminary
Spring 2011 forecast compared to Fall 2010 forecast." He
noted that there were changes at the bottom level of
production, but the larger changes between fall and spring
occurred with the price of oil. He noted that unrest in the
Middle East would result in increased oil prices into the
future. He added that more detail on the matter would be
available in the spring forecast.
Commissioner Butcher discussed Slide 17, "Forecasted ANS
production FY 2010 - 2020," which illustrated historical
decline, as well as the breakdown of the spring forecast:
under evaluation, under development, and currently
producing. Currently producing included: base production,
fields that were currently producing, and where the
department saw continuing production over the next 10
years. The decline curve mirrored what the curve had been
over the last 10 years. It was projected that current oil
production was forecasted to decline an average of 9.3
percent per year. The under development projects included
projects that were currently funded, or were awaiting
project sanction. The projects were not guaranteed;
projections were an estimate based on when the department
believed they would come online. The under evaluation area
represented technically viable projects, with an emphasis
on engineering cost and reward. He stated that the under
evaluation area was the most vulnerable in the difference
between the current tax structure and the passing of HB
110.
Representative Guttenberg asked whether the forecast would
change from fall to spring. Commissioner Butcher replied
there would be changes. For example, when the fall forecast
was created the department had expected the Liberty project
would begin production in 2012 but the project had been
postponed.
2:26:12 PM
Representative Guttenberg thought that future legislators
would appreciate the documentation of the variables and
patterns that affected oil revenues. Commissioner Butcher
replied that it sounded like a great deal of work. He said
he could see the potential value of researching the effects
of year-to-year delays, smaller output numbers, and
permanently shelved projects on the forecast.
Representative Gara asked if a major factor of the decline
in production since 1990 was that the fields at Kuparuk and
Prudhoe Bay had naturally declined at a steep rate.
Commissioner Butcher replied the department believed that
the state was not in harvest mode but in a growth mode. He
said that a very small amount of the area on the North
Slope had been explored, and it was rumored that a very
large field would be found. He maintained that there were
potential tens of billions of barrels yet to be drilled
that would mitigate the decline.
Representative Gara repeated the question. Commissioner
Butcher agreed that the natural decline could be a factor.
He said that all fields declined over time but that the
decline would vary from field to field.
2:30:38 PM
Vice-chair Fairclough referred to Slide 6. She stated that
the state's largest fields had hit a place where production
could be maintained. She said that looking at 2007 forward,
producers had found a way to flatten decline on the larger
fields. She pointed out to the committee that doing more to
develop the fields already identified as having oil could
be as beneficial as an entirely new discovery.
Representative Hawker recalled a presentation given during
the original ACES legislation that had used the North Sea
as an example of natural decline. The example was that the
North Sea had reached its peak and was in precipitous
decline, much like the charts currently presented for
Alaska. He relayed that at that time there had been a
windfall profits tax in place, which was repealed in 1993.
The production recovery after the tax was repealed brought
the North Sea back up to peak levels. He suggested that the
department consider the fact that natural decline could
very well be impacted by tax decisions. Commissioner
Butcher agreed to look into the presentation.
Commissioner Butcher continued to Slide 18, "Scenario 1:
ACES Tax Structure, No 'Under Evaluation' and only 75
percent of 'Under Development' Production." The line graph
depicted numbers working under the assumption that the
under evaluation component of the DOR forecast did not
materialize, and only 75 percent the of under-development
component materialized.
2:35:00 PM
Commissioner Butcher continued to Slide 19, "Scenario 1:
ACES Tax Structure, No 'Under Evaluation' and only 75
percent of 'Under Development' Production," which was a bar
graph illustrating what Scenario 1 might look like going
forward using the current tax structure. Year-to-year
production was anticipated to drop to approximately 370
barrels in FY 20. The bottom of the page illustrated
through 2020: the forecasted oil price, General Fund
revenues, General Fund expenses, and Budget
Surplus/(Deficit); total reserves were predicted to drop to
$12,775 billion.
Commissioner Butcher continued to Slide 20 "Scenario 2:
Preliminary Spring 2011 Forecast." Scenario 2 examined what
was predicted to happen if HB 110 passed and if there was
no new production other than production already anticipated
by the department. He believed the scenario was
unrealistic, as did the governor. He said that the scenario
would occur only if the legislature and the governor did
nothing after lowering the tax. Slide 21, "Scenario 2:
Impact of HB 110 on Preliminary Spring 2011 Forecast,"
assumed the DOR spring production forecast. The bottom of
the page illustrated through 2020: the forecasted oil
price, General Fund revenues, General Fund expenses, and
Budget Surplus/(Deficit); total reserves were predicted to
drop to $10,378 billion.
Representative Gara queried the assumed percentage growth
of the General Fund. Commissioner Butcher believed that it
would be 6.8 percent per year, over a 10 year period.
Representative Gara surmised that the biggest reason why
the surplus did not disappear in both charts was because
the oil prices predicted were higher than almost every year
in the history of the world. Commissioner Butcher replied
that the numbers were assumptions. He added that there was
a belief that in the out years, the price of oil would rise
with the rebound of the global economy.
2:38:53 PM
Representative Gara wondered about the process the
department had used in the development of the projected oil
prices. Commissioner Butcher responded that the Delphi
method was applied in the fall; adjustments were then made
by a smaller group of production forecasters and an
economics team.
Representative Gara asked if the prices projected through
the Delphi were the same or less than the smaller group.
Commissioner Butcher replied that in the fall of 2010, the
Delphi had projected lower numbers, but that all forecasts
were currently different than they had been in in fall.
2:39:51 PM
Representative Hawker commented that the Federal Energy
Information Administration was working with $130 per barrel
in 2020. He stated that to him the scenario presented on
Slide 21 was unacceptable. He believed that the situation
was unsustainable for Alaska's public. He realized that the
7 percent used by LFD to predict the growth of Alaska's
budget was based on historic trends in recent years. He
thought that the slide defined the situation that the state
was currently in: an unsustainable situation that held
Alaska at risk. He said that the future success of the
state would take both the revenue work done by DOR and
spending cuts in the budget.
2:42:05 PM
Commissioner Butcher discussed Slide 22, "Scenario 3: 10
percent Additional Production From All Fields." He stated
that the slide included some new production. The scenario
assumed that production would be 10 percent higher than the
DOR forecast beginning in FY 13. The 10 percent was not a
magic number and had been chosen for illustrative purposes.
He reminded the committee that the scenario included
additional credits and capital expenditures that would be
expected. The line graph illustrated that production
through 2020 was expected to decline, but at a lesser slope
than currently projected.
Commissioner Butcher discussed Slide 23: "Scenario 3:
Impact of HB 110 on Preliminary Spring 2011 Forecast with
10 percent Additional Production From All Fields." The
bottom of the page illustrated through 2020: the forecasted
oil price, General Fund revenues, General Fund expenses,
and Budget Surplus/(Deficit); total reserves were predicted
at $14,524 billion.
Representative Doogan noticed that the chart depicted a
steady increase in revenue. Commissioner Butcher explained
that the revenue was charted to increase 10 percent in
2013, with that amount carrying forward for the next 10
years.
Representative Doogan understood that there was going to be
a constant 10 percent increase beginning in 2013. He asked
where the 10 percent was going to come from. Commissioner
Butcher replied that he did not have the specific
information on exactly what amount, or where, the revenue
would come from. The department could not predict the
future; these were simply potential scenarios.
2:46:54 PM
Co-Chair Thomas added that the administration could predict
only 1 percent growth. Commissioner Butcher stated that was
correct. He informed the committee that the department had
been requested to draft the scenarios in order to lay out
the possibilities.
Mr. Tangeman pointed out that Vice-Chair Fairclough
mentioned a 1 percent increase to currently producing
fields; scenario three would be the closest to her
thinking.
Representative Doogan assured committee that his only
critique was that projections were often wrong. However, he
respected the academic exercise.
2:48:26 PM
Vice-chair Fairclough maintained that the state could see
60 thousand barrels of oil per day if greater recovery were
allowed on the North Slope.
Representative Wilson asked if any of the credits expected
under HB 110 were already available under ACES. She assumed
the blue line on Slide 22 represented appropriations coming
in based on projected oil revenue numbers, and the black
line represented the difference made by HB 110. She
understood that the difference between the two lines was
the deficit that the state would experience until more oil
was brought online. Commissioner Butcher stated that the
two could be overlaid. He said that during the creation of
the presentation, the department had imagined that there
would be potential scenarios that would require further
clarification.
Representative Wilson reiterated her desire to know how
much revenue the state could possibly lose each year.
Mr. Tangeman stated that the fiscal impacts of HB 110 were
included in the scenarios. He understood she was requesting
further definition.
2:51:49 PM
Representative Wilson clarified that she wished to compare
the two tax regimes.
Vice-chair Fairclough pointed out that Scenario 1 reflected
the tax structure under ACES.
2:52:34 PM
Representative Edgmon wondered which of the five scenarios
in the presentation was favored by the department.
Commissioner Butcher replied that choosing a favorite
scenario would be difficult. He did not believe that DOR
should be the department to make the choice. He stated that
even with all of the knowledge gained by researching the
scenarios, predicting which scenario was going to be best
for the state was impossible.
Representative Edgmon expressed concern about crafting
policy to match the probability presented by the
department.
2:54:49 PM
Mr. Tangeman responded that Scenario 1 showed the ACES tax
structure and each scenario thereafter reflected the
structure under HB 110. Each scenario added more and more
production. The administration believed that it would be
foolish to show what additional production would look like
under ACES because they did not believe that ACES was going
to draw the investment that would lead to oil production.
He stressed that additional production would require
significant capital. He asserted that from the
administration's point of view, charting the effect of ACES
through 2020 was disingenuous. He trusted that HB 110 would
have a positive effect on future investment and production.
Representative Edgmon requested composite that detailed the
range of outcomes under HB 110.
2:56:56 PM
Representative Hawker highlighted Vice-chair Fairclough's
observation that Slide 19 illustrated the status quo with
ACES in current revenue and expanding projections.
Representative Joule understood that the current tax
structure did not offer incentive for activity. He recalled
a previous question to the commissioner of DNR concerning
whether the industry would allow the pipeline to shut down.
He asked if the pipeline would be shut down if no future
activity occurred under ACES. Commissioner Butcher
responded that the Trans-Alaska Pipeline had tremendous
value to the producers. He hoped that a shutdown would not
be a step taken by producers. However, producers could
drill for oil elsewhere. He reminded the committee of the
shock felt when the Liquefied Natural Gas plant in Nikiski
was closed down. He warned that the state had to be careful
what kind of a message was being sent to industry.
Co-Chair Thomas assumed that the department had models in
place that showed the difference in the projected price of
oil per barrel as it raised from $94.70 to $108.
Commissioner Butcher agreed to supply the information.
3:00:42 PM
Representative Gara noted that any loss to the state due to
switching from monthly to annually had not been factored
into the projection scenarios. Commissioner Butcher replied
that that was correct. He added that in most years the loss
was fairly minimal. He reiterated that it was virtually
impossible for the department to attempt to assume what
would occur in the future.
Representative Gara he reminded the commissioner that he
had previously noted for the committee a year when the
state would have lost $500 million under the switch from
monthly to annually. He expressed concern that no loss at
all was factored into the scenarios. He queried that DOR's
second scenario had shown 520 thousand barrels in 2020, but
Slide 19 listed 370,000 barrels in that year. Commissioner
Butcher said that Scenario 1 had been crafted in in
response to request by Representative Costello and
Representative Hawker to show a less optimistic forecast
based on historical numbers.
Representative Gara noted that LFD had created a budget
forecast using the projected prices determined by the
Delphi method. The division assumed a loss of approximately
$200 million per year from going from monthly to annually.
Also, in the LFD projections the surplus came close to
disappearing in FY 20. He thought it was strange that DOR
would assume no loss for switching from monthly to
annually, and use a higher price than the one determined by
the Delphi method when creating the scenarios. Commissioner
Butcher explained that that was the biggest difference
between the LFD and DOR forecasts. The division's forecast
was based on numbers from six months ago; all the numbers
looked very different now.
3:04:10 PM
Representative Guttenberg said that the department made the
assumptions for Scenario 1 under the idea that there would
be no uptick in oil production; there was no oil production
forecasted into the future. He perceived that the
department was working under the belief that there would be
no uptick under the current system, and therefore only
represented possible decline. Commissioner Butcher
countered that the department had started with the most
conservative numbers in Scenario 1 and built to Scenario 5,
which was the most optimistic. He felt that the scenarios
covered the full range from the most conservative to the
most optimistic.
Representative Guttenberg reiterated that the assumption
for Scenario 1 only reflected decline. Commissioner Butcher
rebutted that the scenario was generated by the department
specifically at the request of Representative Hawker and
Representative Costello: it had been intended to illustrate
a scenario using historic, not current, forecast numbers.
Representative Guttenberg pointed out that every other
scenario showed an increase in production, except the
current scenario. Commissioner Butcher replied that it had
been anticipated that there would be requests for
additional scenarios, which could be provided without
difficulty.
Co-Chair Stoltze advised that the line of questioning
should cease. He asked the commissioner to proceed with his
presentation.
3:07:49 PM
Commissioner Butcher continued to Slide 24, "Scenario 4:
10% Additional + New Alpine-Size Field + New Fields
Development." He explained that the department had figured
in the 10 percent production uptick from Scenario 3, and
then added a hypothetical Alpine-sized field online in 2018
and new field development expected by Brooks Range
Petroleum. The department used the 15 percent tax bracket
in the projection because it was an already established
percentage.
Commissioner Butcher cited Slide 25, which incorporated the
HB 110 tax regime, the preliminary spring 2011 price
projections, and the LFD budget projections. The bottom of
the page illustrated through 2020: the forecasted oil
price, General Fund revenues, General Fund expenses, and
Budget Surplus/(Deficit); total reserves were predicted at
$16,110 billion.
Representative Doogan probed the process of cost and credit
estimations. Mr. Tangeman responded that the numbers were
based on presentations given by the industry early in the
process. The department had made assumptions based on
graphs used by industry and had incorporated real-life
knowledge of actual fields. Educated guesses were applied
to the types of fields described by other presenters.
Representative Doogan asked if the credits used in the
assumptions were the credits as described in the current
bill. Mr. Tangeman replied in the affirmative.
3:10:59 PM
Representative Wilson asked why the numbers of barrels of
oil per day decreased between 2019 and 2012.
DAN STICKEL, PETROLEUM ECONOMIST, TAX DIVISION, DEPARTMENT
OF REVENUE, explained that the new field scenario presented
by Brooks Range Petroleum had shown that the number of
barrels per day were expected to decline in 2020. He noted
that production was predicted to start strong and that
multiple fields were being layered in over time. He
reiterated that the baseline production forecast showed a
decline in 2020.
Representative Wilson asked if the same natural decline
that the state was currently experiencing would be seen in
2020. Mr. Tangeman said yes. He relayed that an increase
would be seen in 2013 that would climb until 2019, at which
time the numbers were projected to decline.
Representative Wilson requested the approximate lifespan of
an oil field. Commissioner Butcher responded that the
lifespans of fields varied vastly because of the range in
field size. He said that an answer could be provided at a
later date.
Representative Gara understood that a lower tax rate was
necessary for new fields because producing the fields was
more expensive. He requested an estimate of the range of
possible per-barrel lifting costs at Umiat or the Great
Bear Petroleum site. Commissioner Butcher thought that the
question was better suited to DNR.
3:14:30 PM
Representative Gara maintained his disagreement that tax
rates should be lowered for new fields. He said that ACES
had a built in lower rate for new fields. He contended that
the rate for more challenged fields was already lower under
ACES. Commissioner Butcher replied in the affirmative. He
added that more exploration should be occurring given the
historically high oil prices, as well as the amount of oil
available as estimated by the state and federal government.
Vice-Chair Fairclough asked whether smaller explorers would
be deterred by a tax rate that would not be profitable once
production began. She said that producers had made
commitments to the state under ACES, and then ACES changed.
She wondered if producers, both large and small, would seek
a higher rate of return in other areas of the globe.
Commissioner Butcher relayed that smaller explorers that
had been excited by the tax credits and found oil had
experienced difficulty finding companies willing to invest
in production.
3:17:53 PM
Commissioner Butcher discussed Slide 26, "Scenario 5: 20%
Additional + New Alpine-Size Field + New Fields
Development." The slide included the 10 percent uptick,
with an additional ten percent uptick in 2017. The scenario
was the most optimistic of the five. He cited Slide 27,
which incorporated the HB 110 tax regime, the preliminary
spring 2011 price projections and the LFD budget
projections. The bottom of the page illustrated through
2020: the forecasted oil price, General Fund revenues,
General Fund expenses, and Budget Surplus/(Deficit); total
reserves were predicted at $18,259 billion.
Commissioner Butcher added that "Scenario 5b: 20%
Additional + New Alpine Field + New Fields Development
(with 5 % annual spending growth)" on Slide 28 emphasized
the increased production and department oil price
estimates. He said that one major variable was the
projected budget numbers. Each scenario presented had
reflected the LFD number of 6.8 percent estimated growth
over the next decade. Scenario 5(b) suggested a 5 percent
annual spending growth rate. The bottom of the page
illustrated through 2020: the forecasted oil price, General
Fund revenues, General Fund expenses, and Budget
Surplus/(Deficit); total reserves were predicted at $21,900
billion.
Representative Edgmon asked if a scenario had been
considered that illustrated the lack of enough resource to
accommodate all possible investors.
3:21:37 PM
Commissioner Butcher replied that he did not know. He
believed that Alaska was unique among states in terms of
potential production. He asserted that no other states in
the Lower 48 had the kind of production potential that
Alaska had. He mentioned the assertion made earlier in the
meeting that North Dakota could surpass Alaska in five
years in oil production, but North Dakota did not have the
estimated reserves that Alaska did in the North Slope.
Representative Edgmon thought that the competition for the
resources available on the North Slope could increase in
the future. Commissioner Butcher agreed.
Commissioner Butcher continued to Slide 29, "Fiscal
Projections Scenario Assumptions":
· DOR forecast - uses the full production forecast per
Spring 2011 revenue forecast (preliminary) plus
associated lease expenditures and credits. These are
preliminary numbers based on the forecast which will
be released in early April.
· Scenario 1 - removes "Under Evaluation" and 25% of
"Under
· Development" from the forecast along with associated
lease expenditures and credits.
· Scenario 2 - 10% production increment - adds an
additional 10% to forecast across the board, and an
associated increase in lease expenditures and credits.
· Scenarios 3, 4, 5 - Add hypothetical Alpinesize field
in 2018, and new fields development
o Alpine size field in 2018 - production profile
developed based on presentation by AOGCC to House
Finance on 3/16/11. This development receives the
25% base tax rate under HB 110.
o New fields development - production profile
developed based on presentation by Brooks Range
to House Finance on 3/23/11. This development
receives the 15% base tax rate under HB 110.
· LFD spending scenario - 10year spending projections as
presented in House Finance on 3/1/11 - averaging 6.4%
yearly budget growth FY 1320.
3:23:40 PM
Commissioner Butcher continued to Slide 30, "Other Oil that
is not in our scenarios":
· Shale oil
· Heavy and viscous oil
· Most of the oil in the NPR-A
· Nearly all of the federal Outer Continental Shelf
(OCS)
· Arctic National Wildlife Refuge (ANSR)
Commissioner Butcher finished the presentation with Slide
31, "In Conclusion":
1. Tax rates must be lowered to improve the investment
climate in Alaska.
2. Our economy is at risk if we decide to do nothing.
Our future is at stake!
3. The decisions made now will affect Alaska's economy
for decades to come.
4. Without major new investment, new drilling will
continue to suffer in Alaska.
5. Oil exploration and development will create
immediate return in jobs for Alaskans.
6. Just one exploratory well creates dozen of direct
jobs and hundreds of indirect jobs.
7. Industry investment and exploration should be
closely monitored to make sure HB 110 has the
desired effects.
Commissioner Butcher recapped that Alaska was not weighing
in competitively with other states in terms of investment
and exploration. He warned that the economy and future of
the state was at risk if nothing was done to alter the tax
regime.
Co-Chair Stoltze asked what percent of the budget had
consisted of oil revenue when Governor Sean Parnell was Co-
Chair of the House Finance Committee and the price of oil
was $9 per barrel. Commissioner Butcher shared that the
price per barrel at the time was approximately 50 percent.
Commissioner Butcher emphasized the importance of acting as
soon as possible. He reiterated that without major new
investment, new drilling would continue to suffer in the
state. He offered the caveat that the industry investment
and exploration should be closely monitored to be sure that
the legislation had the desired effect.
3:28:10 PM
Representative Joule pointed out to the committee that the
resources listed on Slide 30 were not listed in the five
scenarios presented. He requested the anticipated credits
that would be offered for heavy and viscous oils, and how
the credits changed in HB 110. Mr. Tangeman replied that an
immediate drop in revenue due to capital credits already in
place would be seen if the heavy and viscous oil were
incorporated into the scenarios. The heavy and viscous oils
required considerable capital in advance.
Representative Joule said that the tax credits would
hopefully lead to enough production to offset the capital
investment if a credit was offered that changed explorer
behavior. He stated that the heavy viscous oils were in
current wells and did not need exploration. He asked how
the credits that might be offered related to heavy and
viscous oil, and whether a way had been found to lift the
oil.
Commissioner Butcher responded that BP was optimistic and
making progress in the area. The heavy and viscous oils had
not been considered in the scenarios because they included
too many variables. He explained that the majority of the
Outer Continental Shelf (OCS) was on federal land and
Alaska would not get a production tax off that land.
However, the state's tariff in the pipeline would be
positively affected and more jobs would be created.
Ultimately, more through-put would improve the life of TAPS
and help with the heavy and viscous oil that would need an
estimated 50 percent mix of light oil to travel through the
pipe.
3:32:28 PM
Representative Guttenberg wondered what action the state
would take if the expected changes to industry behavior did
not manifest due to the passage of HB 110.
Commissioner Butcher replied that it was difficult to
imagine the legislature and the governor would sit back and
watch nothing happen after reducing taxes in order to
incentive the industry.
Representative Guttenberg asked how the state would
determine whether the tax changes in HB 110 were not
working.
Commissioner Butcher replied that it would be determined on
a year-to-year basis.
3:35:12 PM
Representative Gara understood that the credits were
"stackable"; companies could benefit from more than one
credit at a time. He believed all the stackable state and
federal credits and deductions for the production of heavy
and viscous oil would be over 50 percent of any capital
investment. He contested that the significance of the
credits already on the books had not been emphasized.
Representative Gara noted that the same presentation (tied
to a completely different bill) had been shown to the
committee the year prior. He wondered what was different
about HB 110 that would inspire confidence that it would
benefit Alaska.
Commissioner Butcher responded that he could not speak to
the previous year's bill. He said that in the few months
that he had been working for the governor, the governor had
applied a "full-court press." He furthered that discussions
concerning the future of the state had involved Roads to
Resources and expanding the involvement of the Department
of Transportation and Public Facilities (DOT/PF). Also
involved were the Department of Environmental Conservation
(DEC) and the Department of Law (DOL). From his personal
viewpoint the administration had done everything possible
to craft a comprehensive bill.
3:39:54 PM
Co-Chair Thomas expressed concern with the term
"retroactivity," which had been written into past
incarnations of the legislation.
Representative Wilson requested the simple analysis and
fiscal ramifications of each section of the bill.
Commissioner Butcher agreed to provide the information.
3:42:27 PM
RECESS
3:48:50 PM
RECONVENED
Representative Hawker stated that the Legislative Budget
and Audit Committee had received a competitive proposal to
procure economic consultants for the HB 110 debates. He
informed the committee that he had requested a presentation
from a consultant. The presentation used the same data as
the presentations made by DOR and proposed that with only a
five percent increase in production in five years the state
would have a break even revenue scenario if HB 110 were
passed.
ROGER MARKS, CONSULTANT, LEGISLATIVE BUDGET AND AUDIT
COMMITTEE, argued that it was plausible that due to the
relative international uncompetativeness of ACES,
investment capital had been diverted to other parts of the
globe, which had suppressed production in the state.
Conversely, it was plausible that with a more competitive
fiscal system the capital could be drawn back and increase
production. He contended that when comparing the revenue
stream with and without HB 110 it was inappropriate to use
the same number of barrels per day under the status quo.
Mr. Marks introduced the presentation "HB 110 & ACES
Revenue Sensitivities to Production (Logsdon & Associates,
House Finance, March 26, 2010. copy on file)."
Mr. Marks began with Slide 1: "Framework":
• Over the past 10 years, looking 5 years forward, the
DOR production forecast has averaged about 20% too
high.
• The DOR forecast does not take the availability of
capital into account in the production forecast. The
availability of capital is crucial for producing
barrels.
• It is plausible due to the relative international un-
competitiveness of ACES that capital has been diverted
elsewhere and production has been suppressed.
• For this exercise we assume the Fall 2010 production
forecast under ACES is 10% too high for 2016, and
looked at total oil revenues under ACES.
• It is plausible that with a more competitive fiscal
system Alaska would attract more capital and
production would be enhanced.
• For this exercise we looked at total oil revenues
under HB 110 at a spectrum of percentage production
increases over the Fall 2010 forecast for 2016.
• We looked at $80, $100, and $120/bbl prices.
• We looked at HB 110 both with and without the 40% well
expenditure credit.
• Total oil revenues include restricted royalties that
go to the Permanent Fund.
3:55:25 PM
Mr. Marks continued with Slide 2: "Total Oil Revenues HB
110 vs. ACES: 2016 @ $100/bbl($mm)," which charted the
comparison of total oil revenues under ACES and HB 110. The
chart included restricted royalties without the 40 percent
well credit for HB 110. The chart illustrated that under
ACES, with production 10 percent below the DOR forecast,
total oil revenue would be approximately $6.2 billion. Mr.
Marks noted that the chart reflected that the state would
make more money under HB 110.
3:56:18 PM
Mr. Marks continued with Slide 3: "Total Oil Revenues HB
110 vs. ACES: 2016@ $100/bbl ($mm). The chart included
restricted royalties with the 40 percent credit for HB 110.
Without the well credit, production was projected to
increase 4 percent. With the credit, production was
anticipated to increase 10 percent. He believed the higher
oil prices got under ACES made the state less competitive
with other areas in the world.
3:58:07 PM
Mr. Marks skipped to Slide 8: "Crossover Points":
Increased Percentage Production where HB 110 Revenues
Exceed ACES Revenues:
• Without 40 percent well expenditure credit
- $80/bbl 0 percent
- $100/bbl 4 percent
- $120/bbl 11 percent
• With 40% well expenditure credit
- $80/bbl 5 percent
- $100/bbl 10 percent
- $120/bbl 15 percent
3:58:24 PM
Representative Gara noticed that the presentation worked
under the negative assumption that no new production would
occur under ACES by Great Bear Petroleum, Repsol, or in
Umiat. Also assumed was that the state would lose the case
surrounding the National Petroleum Reserve - Alaska. Mr.
Marks replied that the presentational data assumed the DOR
production numbers for 2016 under ACES.
Representative Gara restated the question.
Mr. Marks DOR relayed that he had used the DOR production
forecast five years out coupled with the historical error
rate and had throttled the error rate down.
Representative Doogan took issue with the term
"plausibility." He wondered if there was any concrete
information that could be extracted from the presentation.
Mr. Marks emphasized that regardless of what would happen
with or without the bill every plausible scenario should be
taken into consideration.
4:02:28 PM
Representative Doogan disagreed. He argued that the
committee would have to consider a fiscal note if the bill
reported out. He believed that the assumptions made in the
presentation lacked credit to affect the fiscal note.
Mr. Marks replied that the basic argument laid out in the
presentation was backed up by rationality; investments went
where the most money could be made. He felt he had
presented a sound argument on why investors were making
more return by investing dollars elsewhere in the world.
Representative Edgmon asked Mr. Marks to choose from the
five DOR scenarios which would best represent a mid-case
scenario. Mr. Marks replied that he would need to study
each scenario more in-depth before giving a response. He
requested more time.
Representative Edgmon expressed frustration in
understanding which scenario best represented a middle
point. He hoped for further enlightening discussion on the
matter.
4:05:39 PM
ADJOURNMENT
The meeting was adjourned at 4:05 PM.
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