Legislature(2011 - 2012)HOUSE FINANCE 519
03/24/2011 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 24, 2011
8:08 a.m.
8:08:07 AM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 8:08 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
Dan Sullivan, Commissioner, Department of Natural
Resources; Representative Mike Hawker; Kevin Banks,
Director, Division of Oil and Gas, Department of Natural
Resources; Bob Swenson, Director, Department of Natural
Resources; Paul Decker, Manager, Division of Oil and Gas,
Department of Natural Resources:; Representative Beth
Kerttula, Minority Leader; Rick Harper, Energy of Business
Consulting Associates; Bryan Butcher, Commissioner,
Department of Revenue; Susan Pollard, Oil, Gas, and Mining
Section, Department of Law; Representative Alan Austerman;
Representative Mike Chenault; Representative Berta Gardner;
Representative Mike Hawker; Representative Beth Kerttula.
Senator Hollis French; Senator Cathy Giessel; Senator
Thomas Wagoner; Senator Bill Wielechowski.
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."
8:10:24 AM
DAN SULLIVAN, COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, presented a PowerPoint presentation: "North
Slope Alaska and Arctic OCS Oil and Gas Potential." He
encouraged the committee to ask about the background of
each presenter.
Commissioner Sullivan discussed slide 3: "Good News, Alaska
Oil and Gas Resource Potential: 'World Class.'" He stated
that 33 percent (40 billion barrels) of Alaska's
undiscovered, technically recoverable oil resources was in
the Arctic. He furthered that 13 percent (230 tcf) of
Alaska's undiscovered, technically recoverable gas
resources was in the Arctic. He furthered that the numbers
did not include unconventional resources. He stressed that
the resource potential of the Arctic was in "the backyard"
of the largest petroleum consuming market in the world.
Commissioner Sullivan remarked that the focus of the
Department of Resources was to work towards a comprehensive
strategy. He stressed that the taps throughput decline
issue was the main source of concern for the state. He
expressed concern with some oil companies' commitment to
exploration in the state, should the taxes be lowered.
8:14:37 AM
Commissioner Sullivan stressed that the tax throughput
decline was the most important current issue. He felt that
the issue needed to be dealt with greater urgency. He
remarked that the Department of Revenue (DOR) forecasts for
the taps throughput were too optimistic. He felt the DOR
incorporated assumptions and billions of dollars in
investments that had not yet been anticipated in other
departments.
Commissioner Sullivan stated that Alaska needed to get
involved on the national level when it comes to oil and gas
contribution and participation. He pointed out many large
oil and gas companies had invested billions of dollars in
the oil and gas production and exploration outside of
Alaska. He stressed that Alaska is rarely mentioned in the
plans of the oil and gas company investments. He stated
that Shell Oil announced a $100 billion four year capital
spending program; British Petroleum (BP) publicly announced
a $10 billion deal in Russia, and $10 billion deal in
India; Conoco Philips was doubling spending to $3 billion
in the lower 48, while not increasing spending in Alaska;
and Exxon Mobil has discussed doubling US production by
2020. He reiterated that Alaska was rarely mentioned in the
spending plans of the oil companies.
8:19:34 AM
Co-Chair Stoltze wanted to be sure that when Commissioner
Sullivan highlighted "his perspective", it was the
perspective of the administration. Commissioner Sullivan
said that it was the perspective of the administration.
Commissioner Sullivan stressed that Alaska had the greatest
conventional and unconventional hydrocarbon resources in
the world. He explained that Alaska was often seen as the
world's greatest hydrocarbon basins. He stated that many
see Alaska as economically challenged because of its harsh
Arctic environment; high cost of exploration; remoteness;
lack of infrastructure; transportation costs; strict
environmental regulations; consistent environmental group
lawsuits; permitting inefficiencies; federal government
anti-development policies; litigation; and the perspective
that Alaska is one of the highest tax regimes in regard to
upside prices. He stressed that tax reform should be a
cornerstone to help address the cost to create an
economically attractive environment.
8:22:37 AM
Commissioner Sullivan stated that some viewed Alaska's tax
regime relatively uncompetitive. He felt that the high
taxes turned a high-class hydrocarbon basin into a mediocre
hydrocarbon basin. He pointed out that there was a
comparative lack of activity in Alaska. He stressed that
there needed to be a balance of the tax regime soon, to
ensure long term prosperity. He felt that there was a
sequencing of opportunity for the state: increased
production in Legacy Fields; focus on smaller pools; and
opening federal lands.
Commissioner Sullivan stressed that the governor did not
put forward a tax reform bill to benefit the oil companies,
but to benefit Alaskans in the long run. He explained that
the purpose of the discussion was to present the expert
view from DNR of the resource base.
Representative Guttenberg stated that some of the industry
had remarked that Alaska was profitable, but not profitable
enough. He wondered if because the industry took the
leases, that the companies have an obligation to the state.
Commissioner Sullivan stressed that there should be a
partnership with industry, and looking for common ground.
He stressed that the leases with the state had provisions
within the contracts. He stressed that Alaska, as a lessor
had a responsibility to be sure the lessee follows the
terms of the contract. He was not sure that the lease terms
required productions. He remarked that Alaska was looking
for the additional billion dollar investment with many
different providers. He stressed that the companies' global
capital is spent throughout the world, and not much is used
in Alaska. He remarked that there is a provision that could
be added to a lease term that requires the companies to
spend more money in Alaska.
Representative Doogan wondered if the major producers would
let the pipeline go dry if the Alaska did not finance the
producers. Commissioner Sullivan responded that he did not
know what the industry would do. He remarked that the
companies might stop supplying if the state tax structure
did not change. He stressed that the state of Alaska
competes for global capital. He stressed that there was a
global spending boom, with much economic growth.
Representative Doogan requested a clearer answer.
Commissioner Sullivan declared that he did not know.
8:34:39 AM
Representative Costello wondered why assurance to develop
was not given in writing when reducing taxes. She
specifically referred to the cruise ship industry, and the
recent re-writing of their taxes. She wondered why the
state was unable to receive assurance, after the effort was
made to change the tax environment. Commissioner Sullivan
understood that concern. He remarked that there could have
been anti-trust issues, and there were legal constraints on
the independent providers. He stressed that the settlement
contained a statement from the cruise ship industry to
ensure that Alaska is recognized as a competitive entity in
the tourism industry. He remarked that he believed the
settlement was currently upheld.
Representative Costello wondered if there was a fundamental
difference between the oil, tourism, and film industries.
Co-Chair Stoltze further queried if each of those
industries responded similarly to a better tax climate.
Representative Costello further wondered what summation
could be made at what was driving these industries.
Commissioner Sullivan replied that the state had to be an
attractive place to do business, which includes
competition, production. He felt it would be nice to have
assurances, but did not know if that would be easy.
8:42:47 AM
Representative Gara stressed that some companies had
expressed that their lack of exploration did not have to do
with ACES. He stated that Exxon had said that even with
lower taxes, they would not drill an exploration well. He
stated that Conoco Phillips' investment was flat. He felt
that issues that Commissioner Sullivan had addressed had
nothing to do with ACES. He said that some small companies
requested credits be given after one year, rather than two.
Commissioner Sullivan replied that he was trying to give a
sense of how Alaska lined up with other investments in
other parts of the world related to the oil industry. He
stressed that there was an overall issue of the cost of
doing business in Alaska. He felt that the federal
government put up many restrictions towards people and
companies attempting to do business in Alaska. He stressed
that Alaska had a world class hydrocarbon base, but the
federal government could not allow drilling in Alaska.
8:47:38 AM
Representative Gara remarked that the restrictions
mentioned by Commissioner Sullivan only dealt with the
federal government, but the bill was about the
restructuring of ACES. He also stated that investment had
gone up four times the rate of inflation over the previous
three years: from 4.7 billion to 5.1 billion to 5.5
billion. He requested that Commissioner Sullivan converse
with each oil company representative, and tell them that if
they believe the tax rate is too high-reduce their royalty.
He stressed that the companies should prove that the tax
structure was too high. Commissioner Sullivan replied that
he was using that proposal, and it sometimes worked. He
stressed that there were some statutory restrictions
pertaining to obtaining royalty relief, but it was
important to continue to talk to the oil companies. He
reiterated that every mechanism needed to be used in order
to ensure a prosperous future.
Vice-chair Fairclough wondered if there was proof that the
producers had moved the capital expenditure off of state
property because of ACES. Commissioner Sullivan did not
know.
Vice-chair Fairclough requested an answer.
8:53:39 AM
Representative Neuman requested a list of five policy
issues that should be changed in DNR to ensure that Alaska
is more economically attractive. Commissioner Sullivan
stated that there was an issue of permitting backlog, so
there was a request for further funding to relieve that
issue. He hoped that regulatory and statutory ideas would
be presented in the next legislative session. He stressed
that there were about 75 different steps that one needs to
take when getting a permit to drill.
Representative Neuman requested information regarding the
impact of lack of Trans-Alaska Pipeline (TAPS) throughput.
Commissioner Sullivan replied that the pipeline
coordinators would be more knowledgeable. He stated that
when he was in Anchorage just after the most recent
pipeline shutdown, he was struck that every minute with no
oil in the pipeline was incredibly important.
9:00:32 AM
Representative Wilson asked questions, and did not mind if
the answers would provided later. She wondered what leases
had been provided, she wondered how many of the leases were
oil companies, how many may have left because of backlog,
and she wondered what the audits were in the Department of
Natural Resources.
9:01:55 AM
Representative Edgmon appreciated the Commissioner's view
that the issue was about the welfare of Alaskans, not the
benefit of oil companies. He wondered what the
Commissioner's perspective was on how ACES had impacted the
global marketplace investment climate in Alaska.
Commissioner Sullivan replied that there were many factors
of why there was a boom in energy production in 2010. He
stressed that there was an issue of a combination of high
prices, turmoil in oil producing regions, and strong global
economic growth. He stressed that high prices hurt Alaskans
but high prices, from the state's perspective, were an
opportunity to collect more taxes. He emphasized that there
were many factors that contributed to cost component and
investment decisions that the global and small energy
companies made. He stated that taxes were one of those
factors, but not the only factor. He felt that the state
should be focusing on being competitive on the global
level. Alaska was competing for global capital, and Alaska
should be part of that competition.
Representative Guttenberg pointed out that the committee
had only heard from the industry up until this day. He
asked about Point Thompson. He was interested in the main
argument about capital related to the project. After 22
years of development plans the lease had been pulled and
litigation had ensued. Commissioner Sullivan responded that
Exxon had been doing quite a bit up at Point Thompson and
had been spending a lot as well. The state was cautiously
optimistic that the issue would be settled soon. Working on
common interests was important. He was reluctant to
characterize exactly what had happened in the litigation as
he had not been directly involved, it was the largest gas
field in the world and hopefully they could work together
to bring the gas to market.
Representative Guttenberg queried marketability and capital
in Point Thompson. Commissioner Sullivan agreed to provide
that information.
9:10:35 AM
REPRESENTATIVE MIKE HAWKER noted a universal agreement of
the challenge of production decline. He stated that there
were many things that could not be fixed, and perhaps there
were issues with things that were out of control. He
wondered what the main solution would be to the oil
production decline problem. Commissioner Sullivan replied
that the point of his testimony was intended to provide
discussion. He stated that there were many direct and
indirect solutions. He stated that there is not necessarily
an obvious solution, but it was important for Alaska to be
a more economically competitive state.
Co-Chair Stoltze stated that he would like to see
Commissioner Sullivan again in the week.
9:17:09 AM
KEVIN BANKS, DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT
OF NATURAL RESOURCES presented the PowerPoint presentation:
"Northern Alaska and Arctic OCS Resource Estimates" (copy
on file). He discussed his experience.
Mr. Banks discussed slide 2, and the lines of data: land
capital, regulations, exploration, and production. These
lines were what the industry looked at when determining the
profitability of a specific area.
Mr. Banks displayed slide 3, and pointed out the active
units, and potential for exploration on the North Slope. He
stated that most of the units were on state lands.
Representative Guttenberg wondered if the northern-most
line represented the barrier between state lands and the
Outer Continental Shelf (OCS). Mr. Banks affirmed that the
line indicated OCS, which contained the three mile state
limit for resource development.
Representative Guttenberg wondered how far the OCS shelf
extended. Mr. Banks replied that the shelf extended for
approximately 100 miles.
9:24:34 AM
Mr. Banks discussed slide 4: "North Slope 'Reserves'
Estimates, Developed or Delineated." He stressed that the
total North Slope Oil estimate was 5166 Million Barrels of
Oil (MMBO) and the gas reserves was estimated at 34,827
Billion Cubic Feet (BCF). He stated that all of the fields
on the list had been producing oil, or would soon begin to
produce oil. He pointed out that Prudhoe Bay held 2,450
MMBO, and stressed that the resources in any area would
follow a regular pattern. He pointed out that there were
very few large prospects, but many very small prospects. He
reiterated that Prudhoe Bay held the largest oil and gas
reserve in North America.
Mr. Banks presented slide 5: "North Slope and Arctic OCS,
Discovered and Undeveloped Resource Estimates." He stated
that there were some other recently discovered prospects.
The numbers and locations on the chart illustrated ranges.
He looked at Umiat, and stated that it could have between
70 and 300 MMBO. He stated that Gubik could have 600 BCF of
gas. He pointed out that the challenge was determining what
percentage of the resource could be recovered.
Co-Chair Thomas wondered who had found the prospects. Mr.
Banks replied that they were discovered by different groups
and people. He believed that Umiat had been discovered by
the Navy; Gubik was developed by Anadarko Petroleum
Corporation; Sivilliq was developed by Atlantic Richfield
Company (ARCO), and Shell is looking to take over; North
Tarn was developed by Brooks Range; Kulim was developed by
ARCO; Sandpiper may have been developed by Standard Oil of
Ohio (SOHIO); and FEX NPRA was a series of wells that were
drilled by FEX Talisman Energy.
9:27:43 AM
Representative Doogan wondered if there was no Exxon
exploration and development pertaining to those areas. Mr.
Banks replied that Exxon was given credit for prospects
around Nikaitchuq and Oooguruk.
Mr. Banks displayed slide 6: "Other North Slope and Arctic
OCS, Undeveloped Resource Estimates." He stated that the
two most important prospects were Ugnu and Burger. He
stated that Ugnu had up to 20 billion barrels of heavy oil,
and British Petroleum (BP) estimated that roughly 10
percent could be recoverable: 2 billion barrels. He
explained that Burger had 31 million to 1.7 billion barrels
of condensate, and 8 to 27 TCF of natural gas.
Co-Chair Thomas queried the definition of "heavy oil." Mr.
Banks replied that heavy oil was measured by its gravity
related to water. He stressed that it was a difficult oil
to produce. It is very cold and viscous, had to be held in
shallow reservoirs, and did not hold easily in the
reservoir. The products that one could derive from heavy
oil are limited.
Co-Chair Thomas requested more information about what would
be considered a shallow reservoir. He replied that shallow
would be between 3000 to 5000 feet.
Representative Neuman wondered what it would take to spur
development. Mr. Banks replied that the real challenge was
technology. Technology translates to high costs. He
stressed the there should be encouragement from the
government to undertake production.
9:32:51 AM
Representative Neuman wondered what the chance to acquire
the undeveloped resources. Mr. Banks replied that there was
some development of heavy oil prospects. He stated that BP
was beginning to work on developing heavy oil, but stressed
that technology needed to move forward for continued
development success. He reiterated that most of the
technology was experimental, so it was difficult to predict
how quickly development would progress.
Representative Neuman remarked that there was a potential
to change tax structures and policies, so he wanted to know
if it would get done because of changes.
BOB SWENSON, DIRECTOR, DEPARTMENT OF NATURAL RESOURCES,
presented the "Arctic Alaska Conventional Oil and Gas
Exploration Potential" (copy on file). He remarked that
there was a broad range of possibilities for exploration
and development. He stated that the red dots on the map
represented exploration wells on the North Slope. He
pointed out that most of the exploration was in the Prudhoe
Bay region. He discussed "maturity of expiration." He
stressed the distance and vastness of the space between
Burger and Prudhoe Bay covered the same distance across as
the entire state of Wyoming. He stated that the area of
exploration covered approximately 150,000 square miles, and
there were about 500 exploration wells in that space.
9:36:49 AM
Mr. Swenson looked at slide 2: "Global Conventional Oil
Resources." He explained that the slide displayed work from
the United Stated Geological Survey (USGS), and it
displayed estimates of undiscovered technical recoverable
reserves. The map did not display economic filters. He
stressed that the larger green dots represented areas that
had potential greater than 20 billion barrels of oil. He
stressed that the map displayed estimates from the year
2000. He said that new numbers should be released in the
next couple of years. He pointed out that Alaska did fit
into a world class province, and did not include the recent
assessment by the USGS on the circum-Arctic.
Mr. Swenson discussed slide 3: "Arctic Alaska Province -
30BB." He explained that the map displayed was a view of
the North Pole, and a study by the USGS and DNR on resource
assessments of all the circum-Arctic basins of oil. He
noted that the darker green portions represented greater
than 10 billion barrels of oil (BB), and were only in the
Alaskan province. He stressed that there was a significant
amount of data in Arctic Alaska to help constrain the
resource assessments.
Mr. Swenson displayed slide 4: "CARA Gas Provinces." He
pointed out that the gas prospects were very similar to oil
prospects. He reiterated that Arctic Alaska held greater
than 100 trillion cubic feet of technically recoverable
resource.
Mr. Swenson presented slide 5: "North Slope Regional
Geology." He stressed the importance of understanding the
contributing factors in determining the technically
recoverable resource estimates. He explained that the slide
showed a regional map of the North Slope, which showed the
Brooks Range in light blue, and the lighter green color
displayed the Colville Basin. He stated that the main focus
of resource development was in the Colville Basin. He
explained that the map was surface geological, but the
resources lie in the sub-surface. Although, without the
understanding of the distribution and history of the rocks
across the slope, recoverable resource estimates are
impossible.
9:40:10 AM
Mr. Swenson discussed slide 6: "Simplified and Generalized
Regional Cross-section." He explained that the chart showed
the sub-surface of the earth, from the Brooks Range to the
Beaufort Sea area. He stressed that the thrusted material
near the Brooks Range had very high temperatures. The
Colville Basin was represented in green, and it was made up
of cretaceous and tertiary rocks. The arch in the middle of
the diagram represented Prudhoe Bay. It was known as a
barrel rock, and the migration of the hotter oil to move
upward was located in Prudhoe Bay.
Mr. Swenson displayed slide 7: "Brooks Range Geologic
Mapping." He stated that one of the key aspects of resource
development assessments was the geological mapping. He
stressed the importance of understanding the distribution
and history of the rocks in relation to the petroleum
systems. He explained that the highlighted sections were
areas that had relatively detailed geologic mapping.
Mr. Swenson presented slide 8: "Geologic Mapping." This was
an example of one of the published maps that was produced.
He showed a cross-section that represented the history of
rocks were through the last million years, and detailed
descriptions of the rock packages-including the important
source-rocks.
9:43:17 AM
Mr. Swenson discussed slide 9: "Topical Petroleum-related
Studies." He stated that reservoir studies were also
important, when determining the possible extraction of a
conventional resource. He stressed that a key aspect of the
Colville Basin was the quality of the reservoir. He pointed
out that depositional sequence of the rocks was imperative,
when determining extrapolating data.
Mr. Swenson displayed slide 10: "Revising and Codifying
Stratigraphic Nomenclature." He stated that the earlier
stratigraphic column displayed the age and type of rock
across the North Slope.
Mr. Swenson presented slide 11: "Merging Surface and
Subsurface Data." He stated that it was important to take
all of the information and fit it into the context basin.
He showed a cross-section from Umiat to Prudhoe Bay. He
explained that the findings were put into the well-control
in the exploration wells, and determine an understanding of
the phases. He stated that the diagram displayed the
location of the expected reservoirs.
9:45:24 AM
Mr. Swenson discussed slide 12: "Foothills Structural Plays
Seismic Interpretation." He stated that the chart displayed
a seismic line from the Brooks Range to just south of
Prudhoe Bay. He stated that there was also a consideration
for how the petroleum system operates in the earth.
Mr. Swenson presented slide 13: "USGS Assessment
Methodology--Geologic Basis." He explained that after all
the data is gathered, the USGS looks at each region, and
conducts an analysis of what would be expected petroleum
and reservoir system accumulations.
Mr. Swenson displayed slide 14: "Undiscovered Mean field
Size Distributions-USGS." He stated that after the
analysis, field-size distribution is determined. He
reiterated that there were many small fields. After the
field-size is determined, the USGS needs to determine the
extrapolating capability of the field.
Mr. Swenson presented slide 15: "USGS Potential for
Undiscovered Petroleum in Arctic Alaska." This slide was
the USGS publication of the technically recoverable
resources for the North Slope region: Chukchi Shelf,
Beaufort Shelf, NPRA, ANWR, and Central North Slope. He
noted that the numbers were determined by a logarithmic
distribution, based on the mean of the commonly occurring
field sizes. He explained that the numbers in the
parenthesis represented the broad distribution. He stressed
that the if the range was very narrow in the distribution,
the amount of information was very good.
9:50:01 AM
Mr. Swenson discussed slide 16: "'Unconventional' Gas
Resources (continuous resources)." He stated that there was
a fair amount of activity of gas hydrates on the North
Slope. He furthered that the USGS estimated that there was
about 83 trillion cubic feet of potentially technically
recoverable resources in the Prudhoe Bay and Tarn regions.
He pointed out that gas hydrates occur across the entire
North Slope. He stated that there were no estimates for
shale gas, or "over-pressured, basin-centered gas", but
felt the number would be very large. He pointed out that
the shale gas in the deeper parts of the Coalbed region
would be predominant. He explained that the coal in the
Coalbed region was one of the largest accumulations in
North America, and produced methane gas.
Representative Wilson wondered if there was a comparison
between estimates and actual production. Mr. Swenson
replied that the analysis considers the original oil and
place numbers were, and remarked that the estimates were
continually evolving.
Representative Wilson wondered if a returned lease was ever
questioned. Mr. Swenson replied that there were discussions
with companies over a returned lease. He added that lease
returns hardly ever occurred.
9:53:08 AM
Representative Gara remarked that oil jumped from
$20/barrel in 2004 to $40/barrel in 2006, which was
considered a high price at the time. He remarked that even
with the high price of oil, the fields were not being
developed at that time. Mr. Swenson replied that there was
a significant change in the technology that perhaps
contributed to the change and development of exploration.
Representative Gara noted that some of the formations were
modest in size, and wondered if that contributed to the
restrictions. He wondered if building processing facilities
might enhance development. He suggested a credit to build
processing facilities for modest-sized fields. Mr. Swenson
affirmed that access to processing facilities was a
concern. He noted that the Prudhoe Bay field was almost an
anomaly in nature, because it is so enormous.
PAUL DECKER, MANAGER, DIVISION OF OIL AND GAS, DEPARTMENT
OF NATURAL RESOURCES presented a PowerPoint Presentation:
"Source-Reservoired Oil Resources Alaskan North Slope." He
spoke to the possibility of producing oil directly from the
source rocks on the North Slope.
9:57:44 AM
Mr. Decker discussed slide 2: "Unconventional Resources."
He distinguished unconventional and conventional resources.
He stated that conventional resources were produced for
several decades on the North Slope: discrete accumulations
of oil or gas that had migrated into a trap by buoyancies.
Unconventional resources represented much more continuous
accumulations, and held a lower geologic risk, but a higher
engineering risk because there was no certainly that the
rocks would be commercially viable. He stressed that there
needed to be good success with massive engineering
stimulations of the reservoirs.
Mr. Decker presented slide 3: "Unconventional Terminology."
He stated that when the various phrases were used, they may
pinpoint a technology component that needed to happen with
the rock stimulations. He stressed that the three
components: source, reservoir, were the key to producing
any conventional or unconventional resource.
Mr. Decker displayed slide 4: "North Slope Region." He
stated that the state lands and waters were in the central
portion of the map, and they were flanked by federal lands
and waters. He explained that state lands had seen much
exploration and development. During the most recent lease
sale, Great Bear Petroleum announced that they would try to
produce oil from the source rocks.
10:01:27 AM
Mr. Decker discussed slide 5: "North Slope Petroleum
Systems." He stated that the stratigraphic column
simplified the geology to the layer cakes. He pointed to
the red-outlined boxes, which represented three main
source-rock intervals.
Mr. Decker presented slide 6: "Central North Slope Seismic
Transect." He stated that the east-west seismic line
highlighted the Shublick and Kingak seismic line, and the
GRZ and Hu Shale line. He explained that the rocks that
prospective oil producing rocks were approximately 8,000 to
13,000 feet deep. He stressed that the permafrost could
reach depths of up to 2000 feet, and just under the
permafrost were fresh water aquifers that needed to be
protected from injection or fracking operations.
Mr. Decker displayed slide 7: "Key Geologic Factors--Shale
Resource Plays." He explained that there were many factors
that governed the prospectivity and productivity of shale
resource place. Some included organic geochemistry; thermal
and tectonic history, petrophysics; and geomechanics.
10:05:24 AM
Mr. Decker discussed slide 8: "Close Well Spacing, Many
Pads." He stated that close well spacing was infrastructure
intensive. The slide was from the North Dakota Industrial
Commission, and it displayed the Williston Basin. He
pointed out the seven mile dirt road with fourteen 5-acre
drill sites. The intent was to drill one well from each
surface locations. The drill went straight down two miles,
and horizontal for two miles. He stated that the site
conducted multiple stages of fracturing to open as much of
the formation as possible. The intent was for most
efficient drainage pattern possible.
Representative Neuman pointed out that the state was
considering assisting in road construction to help develop
oil and gas. He felt that there would be many shared
services that would be used, and the connecting road would
help in reducing costs. Mr. Decker replied that there was
no road to resources development would being considered in
shale oil development.
Representative Neuman stressed that if the state helped
cover the cost of the roads, it would help the state in the
long run because it keeps development at low costs over the
long haul. Mr. Decker replied that additional roads to
resources would spur exploration. He reiterated that none
of the proposed roads to resources concerned unconventional
resources.
Representative Neuman stressed that he was looking at the
cost of permitting. He pointed out that the shared services
would reduce costs to the state and increase opportunities
to the development because of credits on exploration wells.
10:09:55 AM
Mr. Decker presented slide 9: "Close Well Spacing, Many
Pads-Infrastructure-Intensive Development." The map showed
the sub-surface horizontal wells that would be developed
two adjacent parts of the Bakken Shale. He stated that
there were two different lease holdings represented, and
showed a different approach but systematic plan. After a
general well-plan was set up, a well was drilled one after
the other at the proper distance and length from one
another. He stated that the determination of how many acres
per well could be drained varied from source rock play to
another.
Mr. Decker displayed slide 10: "Frac FAQs." He explained
how fracking worked: "Fluid is pumped into an isolated part
of the borehole under increasing pressure. When the fluid
pressure exceeds the rock strength, the formation fractures
and the sand-rich fluid shoots out into the growing cracks.
The sand props the fractures open after the frac fluid
flows back into the wellbore. Frac jobs for horizontal
producers in L48 shale plays consume 1 to 5.5 million
gallons of water per well, depending on rock properties,
number of stages pumped, etc. Contamination of fresh water
aquifers with hydrocarbons and/or frac fluids can occur
where the hydrocarbon target and aquifer are not
sufficiently separated. This should be avoidable.
10:13:07 AM
Mr. Decker discussed slide 11: "Frac Jobs." He explained
that there was a technique called micro seismic monitoring
that monitoring fracking, and microscopic earthquakes. He
stated that the map displayed a well drilled for shale gas
play. He stated that each diamond represented a different
stage in a fracking job.
Mr. Decker displayed slide 12: "Single well flow rate over
time." He explained that flow rates drop quickly early on,
and then decline at a steady pace for years. He suggested
that wells could remain in production for as long as one
can afford to operate them.
Mr. Decker presented slide 14: "Texas Analogue." The slide
was of the Eagle Ford shale play in southeast Texas. He
stated that a critical component of the shale play was that
the rocks were brittle, with 70 percent calcite.
Mr. Decker discussed slide 15: "North Dakota Analogue." He
stated that the light blue represented the Bakken Formation
presence, and the dark blue represented the thermally
mature Bakken source rock. The large darker green dots
reflect the higher producing wells. He also stated that
there were other producing wells, because North Dakota was
a much lower cost operating environment.
Mr. Decker displayed slide 16: "Bakken Well Economics and
Production." He stated that wells in North Dakota were
three to four times less to operate and develop.
Mr. Decker presented slide 17: "Shublik Formation." He
explained that there were some variable lithologies
Mr. Decker discussed slide 18: "Shublik Formation." The
Shublik Formation was the main formation that Great Bear
Petroleum was interested in. He stated that sub-zones of
the formations could be mapped out and carried with a high
degree of predictability.
10:18:37 AM
Mr. Decker discussed slide 19: "Lower Kingak Formation."
The slide displayed a screening technique that was seen
between the well logs from 175 feet to 550 feet thick.
Mr. Decker displayed slide 20: "Hue Shale/GRZ." The diagram
showed a correlation for the Hue and GRZ zones.
Mr. Decker presented slide 21: "Shublik and Lower Kingak
Formations" and slide 22: "Hue Shale/GRZ." The maps
displayed the distribution of the thermal maturity zones.
The rocks needed to be thermally mature to generate and
produce oil and gas.
Mr. Decker presented slide 23: "Comparison." He pointed out
that Eagle Ford in Texas was a good analog for the Shublik
Formation.
Mr. Decker displayed slide 24: "Summary." He reiterated
that there were many variables that impact productivity of
source-reservoired oil and gas: organic geochemistry;
thermal and tectonic history; petrophysics; geomechanics;
and drilling and completion practices. He explained that
the development of North Slope shale oil would likely
depend on successful exploration drilling, and data
gathering to establish geological favorability; successful
production pilot projects; lowering drilling and operating
costs; all-season roads for year-round surface access to
new areas; more hydraulic frac crews; sufficient water
supplies for frac make-up fluid; and factual understanding
and operator transparency regarding frac practices.
Representative Guttenberg referred to thermal maturity. He
wondered if there was an expectation of acreage going out
west, if Great Bear was successful. Mr. Decker replied that
the state lands would be the first places to explore.
Co-Chair Thomas wondered if Great Bear was planning to move
forward with the current tax structure. Mr. Decker
understood that they would move forward with the current
tax structure.
10:22:54 AM
Representative Neuman stated that fracking had occurred on
the slope for many years, and he wondered the difference
between types of fracking. Mr. Decker explained the some of
the conventional plays used staged fracs, where there was
isolation of various parts of the wellbore. In the current
fracking intent, there was an effort to be more aggressive
with the tight rocks. He stressed that without the
fractures, the conduits through which the hydrocarbon
molecules could flow were only slightly bigger than the
molecules themselves. The basic difference is the size of
the frac, as well as the aggression.
Vice-chair Fairclough clarified that Great Bear was happy
to accept the exploration credits, but were in support of a
modification of ACES. She queried the time frame to permit
the leasing for Great Bear. Mr. Banks replied that average
awarding of leases took about six months.
Vice-chair Fairclough wondered when the streamlining took
place. Mr. Banks responded that the change took place 11
years prior.
Vice-chair Fairclough wondered when the drilling would
begin for Great Bear. Mr. Banks replied that the drilling
season would not begin until the next winter at the
earliest.
10:30:40 AM
Vice-chair Fairclough expressed appreciation for Great Bear
exploring Alaska.
Co-Chair Thomas remarked that Great Bear had years of
planning with the current royalty rate change.
Representative Wilson remarked that the Division of Mining
was still a part of DNR. Mr. Banks affirmed.
Representative Wilson wondered if the reason Great Bear
could not begin drilling was because of year-long state
regulations. Mr. Banks stated that she was not correct. The
lease award process was clear to most who were bidding. He
believed that Great Bear understood that they could not
begin drilling until late fall 2011.
Representative Wilson was trying to figure out why there
was such pressure because of permitting. She stated that
the administration was putting pressure on the legislature
to pass HB 110, but the permitting and other processes did
not allow that.
10:34:31 AM
Mr. Banks presented the PowerPoint Presentation: "Royalty
Modification" (copy on file). He stated that in 1995, the
legislature modified AS 38.05.180 (j) and created a new
opportunity for DNR.
Mr. Banks displayed slide 2: "Royalty Modification, AS
38.05.180(j)." He explained that the statute allowed for
the commissioner to modify royalty to allow for production
from a field or pool that was not in production, producing,
or shut-in.
Mr. Banks presented slide 4: "Royalty Modification, AS
38.05.180(j)." He stated that the commissioner may not
approve unless he determines that lessee makes a clear and
convincing showing that relief is in the best interest of
the state except for royalty modification, because
development would not proceed. Royalty modification was
applied only to the point where the investor was inclined
to develop, nothing more. He explained that DNR may hire an
independent contractor at the applicant's expense, for up
to $150,000 per application. He stated that the relief
mechanism must adjust percentage based on price and may
also adjust based on production rate and ultimate recovery.
He announced that between issuing the preliminary and the
final findings, DNR must offer to appear before LB&A to
explain the preliminary finding.
10:40:36 AM
Mr. Banks discussed slide 5: "Royalty Modification
Applications." He explained the February 1995 BP
application for Milne Point. It was an application
explicitly made only to comply with BP's contract with OXY.
He stated that BP called the application formality, and did
not intend to push it. He explained that in 1997, Unocal
applied for 10 platforms in Cook Inlet, but did not
continue to pursue the application. He stated that in 1999,
ConocoPhillips applied for Tyonek Deep in Cook Inlet, but
withdrew the application.
Mr. Banks displayed slide 6: "Royalty Modification
Applications." He explained that in 2005, the Pioneer
Natural Resources application for leases was in and near
the Oooguruk Unit, with the approval effective February 2,
2006. He stated that the KerrMcGee application for leases
in the Nikaitchuq and Tuvaaq units was denied on October
31, 2006. He explained that the ENI application for leases
in the Nikaitchuq Unit was approved with conditions
effective January 30, 2008. He furthered that there was a
2007 Chevron application for leases in the Ivan River and
Stump Lake units, but Chevron withdrew the application.
10:45:47 AM
Mr. Banks continued with the Appendix, and slide 8:
"Oooguruk Unit." He explained that the Pioneer Natural
Resources application for the existing Oooguruk Unit and
adjacent leases was applied May 20, 2005; and the amended
application was filed November 1, 2005, with approval
effective February 2, 2006. He explained that the royalty
modification mechanism was based on payout on one net-
profit share lease was centrally located over two
reservoirs.
Representative Edgmon wondered if the Department of Revenue
had any role in the decision making process and royalty
modifications. Mr. Banks replied that there was an indirect
role of DOR. He stressed that there were some auditing
records that were required in the application process. He
stated that often DOR would produce a price forecast that
was generally part of the application.
Representative Edgmon surmised that the tax regimes
provided a better mechanism to receive information on the
tax structure. Mr. Banks replied that the mechanism was
there. It provided DOR a way to audit the costs and
activity associated with Oooguruk. The question related to
the kind of data that was available to the department.
Representative Hawker wondered why Alaska would want to
pursue royalty relief when every time royalties were
reduced, money was taken directly out of the Alaska
Permanent Fund. He thought it was odd to take money away
from Alaskans. Mr. Banks responded that the state needed to
exercise all of the levers it had. Royalty relief offered
more incentive for development, and it provided an
opportunity to be very surgical about the incentive. The
tax system had to apply to everyone.
10:52:21 AM
Representative Hawker stated that royalties were
contractual and the department had the ability to adjust
them as needed. He stated that there were many steps to
achieve royalty relief, and was not desired by the
legislature. He stressed that the peoples' entitlement to
the resource wealth was not sacrificed "glibly." He pointed
out slide 9: "Nikaitchuq (Kerr-McGee)" and slide 10:
"Nikaitchuq (Eni)." He wondered if the date was ACES
special session and wondered if the economics had changed
because of the application approval. Mr. Banks replied and
stressed that the significant impact was the cost.
Representative Hawker clarified that the tax regime was not
taken into consideration in granting royalty relief. Mr.
Banks replied that ACES was considered in the analysis of
the application.
Representative Hawker looked at a take-away of the
consequences of what he saw as ACES having no causal affect
granting in the royalty relief. Mr. Banks stressed that the
prospect was modeled with ACES as the tax regime.
10:58:33 AM
Representative Hawker stressed that the ACES tax
legislation increased taxes.
Representative Gara stated that royalty relief could not be
granted if the field were economic. He felt that royalty
relief was granted under circumstances that produced no
royalty. Mr. Banks affirmed, but clarified that royalty
relief was limited to three instances when royalty relief
could be applied.
Representative Gara noted four applications denied and two
granted, and wondered if the taxes were not a deterrent if
there were no royalty relief applications. Mr. Banks
replied that many new projects had not moved forward in a
short period of time. He stated it was a difficult question
to answer. He stressed that the discretion was placed on
the commissioner.
11:03:04 AM
Representative Hawker looked at the issue of royalty
relief. He questioned whether the fields would have been
developed, if they were not granted royalty relief. He felt
that royalty relief was an unnecessary sacrifice of the
Permanent Fund.
Representative Wilson wondered if there was relief interior
Alaska for heating oil and gasoline question. Mr. Banks
replied that it was unconstitutional to offer royalty in-
kind for a value that was less than what the state receives
as royalty when paid by the lessees. He stated that there
was some discussion in changing the price of oil paid for
by Flint Hills, and it was determined that Flint Hills
should go through the same analysis a lessee's royalty
relief. Flint Hills turned over information about their
refinery, and there was an analysis of the validity of the
request. He concluded that there could not be an offer of
relief for less than what was collected as royalty and
value; and if there was a discussion about changing that
conclusion, it would require a thorough analysis.
Representative Wilson stressed that there was a region
holding financial stress of making money for the state, and
burdening the residents. Mr. Banks appreciated the
conversation.
Vice-chair Fairclough felt that Fairbanks could make a case
that they were paying the same price for the transportation
on a barrel of oil that reaches Valdez.
11:07:08 AM
Representative Costello wondered if the royalty relief was
contractual through the life of the lease. Mr. Banks
affirmed, and clarified that it was a matter of changing
the terms of the lease. He stated that it was a contractual
agreement.
Representative Costello remarked that royalty relief was
not the resolution for the state. She wondered if pursuing
royalty relief made a difference in progressivity. Mr.
Banks replied that the analysis incorporated the tax
system, and stated that the price might be different now
than what it was years ago when the analysis was developed.
He stated progressivity was an issue.
Representative Costello remarked that she was surprised
that rates could be negotiated. She wondered if the point
of royalty relief was to bring it down a couple of
percentage points. Mr. Banks stated that anywhere between
12 and 5 percent was the minimum and based on a sliding
scale. He stressed that awarding royalties required care
when determining royalty relief.
Representative Costello wondered if there was a value of
Alaskans in the Permanent Fund versus the value assigned if
not put in the Permanent Fund. Mr. Banks replied that there
was a concern about whether the royalty modification would
be affected. He stressed maintaining as much of the reserve
and Permanent Fund as possible. He stated that royalty
relief was not awarded when there was no difference in
investment.
11:13:51 AM
Vice-chair Fairclough queried the definition of economic
feasibility.
Representative Neuman liked the royalty relief option,
because it was the only flexibility that DNR had to work
with a producer to bring a field online. He wondered if
there was an ability to change the royally share. Mr. Banks
replied that royalty relief was the only financial
mechanism available to DNR after the lease was issued.
There were financial opportunities that could be exercised
when the leases were offered, that could create incentives
for rapid development.
Representative Neuman stated that royalty was the mechanism
that was given to DNR and the legislature to help bring a
field online. Mr. Banks agreed with Representative Neuman.
11:18:35 AM
Representative Doogan stressed that there was an indirect
way to measure the royalty relief of ten million in the
permanent fund. He wanted to know what the term
"granularity of the information" meant. Mr. Banks stated
that tax returns were filed with regulations that required
company wide information. He stated that there was not much
information about costs related to road-building
facilities, building costs, drilling costs, etc. He stated
that the DOR would get to those numbers when auditing tax
returns. He stated that DNR had access to tax filing
information, but it was difficult to determine royalty
relief.
11:20:43 AM
RECESSED
1:36:10 PM
RECONVENED
REPRESENTATIVE BETH KERTTULA, MINORITY LEADER, introduced
Mr. Rick Harper. She discussed that he was a person who
could break down complex ideas into information that was
easy for people to understand. He was present to provide
his independent review of HB 110.
RICK HARPER, ENERGY OF BUSINESS CONSULTING ASSOCIATES,
provided a PowerPoint presentation titled "An Independent
View of HB 110" dated March 24, 2011 (copy on file). He
discussed his background, which included PPT and ACES. He
had worked at ARCO Gas for a long period of time. He hoped
to help with the committee's understanding of the bill. He
had been in the oil and gas industry for over 38 years. He
had involvement in international exposure and was involved
with ARCO for over 15 years. After leaving ARCO he remained
as an independent consultant for 10 years.
1:46:21 PM
Mr. Harper had advised New Mexico, Oregon, Texas, and
Alaska. He looked at the view from the perspective of how
the industry would act or behave with the passage of HB
110. He referred to page 3 of the presentation. He did not
believe that the industry had made their case at that time
that a tax rollback of the scale in the governor's bill
would be offset by production gains. He had seen the debate
steered by industry in the direction of competitiveness for
the state on an on-going basis. He did not believe that was
the appropriate way to go about things. He believed that
the bill disproportionately benefited existing production.
He believed that the industry's response to the bill
suggested that the state's goals would not be met and that
there were alternatives to HB 110.
1:51:10 PM
Mr. Harper continued to discuss page 7: "What is the
alignment with industry?" He recommended that the committee
consider the premise of a study given that if the
fundamental premise of a study was flawed that it was not
valuable. He believed that what the committee had not heard
was more important than what they had heard. He discussed
page 10 "Authorizations for Expenditure." He remarked that
there would not be a fiscal comparison placed before
decision makers. He discussed the net present value
calculation. The "expected case" included decisions to
invest in capital the focus was always on the down-side.
There would be a downside on resources, taxation, etc. In
the end the approval was based on the expected case.
1:55:58 PM
Representative Hawker referred to page 10 and Mr. Harper's
opinion that most proposals use an expected oil price in
the 60 to 70 range, and wondered if there was evidence to
demonstrate that opinion. Mr. Harper did not know what the
companies were using because of confidentiality. He stated
that his professional opinion was that it was in the 60 to
70 range. He suggested that Representative Hawker ask the
industry directly.
Representative Hawker remarked that he did not believe that
anyone had asked the industry the particular question. He
felt that the industry was not denying those requests. Mr.
Harper replied that he appreciated the comment and that he
would want to see the hard document before moving forward
with a decision. He believed it would be a critical element
that he would want to see. He would not want to get away
from the upside of high oil prices. He would want to know
what the industry was basing their decisions on.
Representative Hawker referred to page 10 related to fiscal
and non-fiscal issues. He stressed that there was a suite
of considerations that the industry takes when making
determinations. He thought that the slide represented an
over-simplification of the issue. Mr. Harper responded that
he was correct. When it came time to make a decision in a
company the decision makers were not shown all of the
details capital requests were streamlined.
2:00:42 PM
Mr. Harper discussed page 11 "What Issues are considered?"
He referred to testimony from Ken Thompson and the term
"prospectivity." He believed that prospectivity was by far
the main driver in any economic decision to evaluate
whether to go forward. The oil industry was very concerned
about protecting the downside, better protection on the
downside was important. He moved on to page 12 that
continued to discuss what issues were considered. He
explained that timing, permits, and technical issues were
important and the effective tax rate was the rate that
ruled the day. The bottom line was that the effective tax
rate based on the effective case was the most important and
primary driver.
2:04:46 PM
Mr. Harper discussed page 13. He was concerned about the
debate related to Alaska's competitiveness. Each capital
investment stood individually, and he stressed that Alaska
was not competing against the rest of the world. Capital
was not limited at all; however, it may be limited in an
individual company. The energy sector was by far the best
performing sector, along with commodity producers. He felt
that if a project was expected to generate a substantial
rate of return, it would attract the capital that was
needed.
Representative Hawker did not believe that the statement
was true about competition against the rest of the world.
He wondered how it was that everyone else was saying
something different and why did Mr. Harper believe that
Alaska was not competitive with the rest of the world. Mr.
Harper responded that he had not had the same experience.
He discussed his experience in working with oil companies
in the past. Companies were entitled to do what they wanted
to do; however, they had a legal obligation to develop the
lease that they took from a lessor. In a broad sense, he
did not believe that capital constraints were an issue for
development in Alaska.
2:10:35 PM
Representative Hawker did not understand the concept that
capital was unlimited. Mr. Harper did not agree. A company
would have the obligation to move forward on a lease as
long as there was an expectation of profit. The company had
an obligation to make the investment on the leased land, as
long as there was a reasonable expectation of a prudent
officer standard.
Representative Hawker discussed Mr. Harper's statements
about capital. He believed competition was absolutely
inherent in where a company would spend capital. Mr. Harper
responded that capital was not unlimited; however, a solid
rate of return would attract capital. When he had worked
for an oil company their mantra was that if they could make
a project happen they would.
Representative Gara relayed that the committee had heard
from the Department of Revenue about the Frasier survey.
The survey discussed that there was a page that ranked tax
systems around the world. He explained that it was
determined that Alaska was viewed either favorably or not
as a deterrent to investment by 75 percent of the companies
that were surveyed. He wondered whether Mr. Harper was
familiar with the report. Mr. Harper was familiar with the
report. He felt that each project and each field bore
stand-alone economics.
2:16:28 PM
Representative Gara discussed companies that were investing
in Libya and Venezuela. Alaska had never nationalized a
company and he wondered whether that played into how
attractive investment in the state was. Mr. Harper replied
that oil executive committees always discuss that issue. He
pointed out that Alaska would rank at the top in that
discussion.
Representative Costello wondered if capital was infinite.
Mr. Harper responded that capital was not truly infinite;
however, capital was present. He was involved in venture
capital and remarked that money was moving towards
industry.
Representative Costello surmised that if a project was
profitable, it would be developed. Mr. Harper agreed.
Representative Costello wondered how he would explain a
project that became unprofitable in the middle of
development. Mr. Harper responded that many projects became
unprofitable during progress.
Representative Costello ascertained that Mr. Harper was
saying there was risk for the company when industry went
out looking for oil. Mr. Harper answered in the
affirmative. The bill seemed to provide a great deal of
benefit to existing production and did not seem to advance
the state in the exploration and development area.
2:23:48 PM
Representative Costello she discussed that the fiscal note
that was included in the bill did not read $2 billion per
year and that the $2 billion was included in a multiple
year projection. She discussed that the industry was taking
a high risk and that the state was providing incentive to
invest in Alaska. She discussed that there was a production
problem; she referred to previous testimony that reported
to the committee that the pipeline was in danger of
shutting down.
Representative Hawker discussed Repsol, and that they would
take advantage of the extremely competitive front-end
system. Repsol had announced that they would invest a
significant amount in exploration and the company was not
capital constrained; however, they needed some relief on
the upside. He felt they were case point that was contrary
to Mr. Harper's presentation. Mr. Harper replied that the
comment on page 13 regarding a "zero sum" game was in a
different context. He pointed out that it was not about
drilling in either North Dakota or Alaska, because they
were both going to be drilled. He stressed that within
those states, which prospects had a reasonable expectation
of profitability. He recommended that the companies present
the hard analysis, when convincing the legislature.
Representative Wilson understood that if a company had 20
projects, they would take risk factors into account before
they begin a project, then the company would rank a project
with profitability being one of the most important factors.
2:31:28 PM
Representative Wilson suggested that ACES could bring that
from 20 to 3, and wondered if that might have an impact on
whether a project was completed. Mr. Harper stressed that
all 20 projects would be profitable. He stated that the
companies have an obligation to the lessor to complete work
on the lease. Some companies were cash-rich, others
capital-constrained. The company has a firm obligation
within a reasonable period of time to every project.
Representative Wilson did not know what "reasonable" would
mean. She asked whether the tax regime would rank the
projects aside from the other factors. Mr. Harper responded
that he was trying to advocate as an advisor to accept the
premise that the companies have an obligation. If not
accepting the premise, there could be ranking change. He
advised that at the time the lease was made available-terms
were negotiated, not a term saying to agree to develop the
property only if in the upper 50 percentile. He stressed
that a lessee was obligated within the lease terms to
develop the property within a reasonable period of time.
2:35:20 PM
Representative Wilson stated that she stated that ACES does
have an impact on where Alaska would rank on a list of
projects. Mr. Harper responded that the lessee had an
obligation to the state to fulfill every profitable project
with a reasonable period of time.
Representative Wilson stated that she did not accept the
term "reasonable period of time"; she preferred the
projects to be completed immediately.
Representative Guttenberg wondered why the oil projects
were not being completed, and were considered less
profitable. Mr. Harper responded with Slide 26 "Total
capital spending, as well as spending per barrel, is
increasing rapidly." He stated that the trend has been
clear, with robust growth. The kinds of declines seemed
reasonable; there had been discussions about what could be
done. BP had stated that they would go forward with their
projects.
2:39:39 PM
Mr. Harper "Oil Industry boosting Alaska spending" (Slide
27):
Alaska's oil industry is boosting its spending in the
state more than expected, which may be good for future
oil production and jobs, but is limiting the state's
profit from rising oil prices.
Mr. Harper stated that the state's official oil production
tax estimate was down slightly from the year prior. He
stressed that the committee needed to focus on the reserve
projections and production plans directly from each
company.
Representative Gara was concerned with the profitability of
the governor's proposal, and pointed out that the tax would
be reduced without any obligation to invest in Alaska. He
believed would be smarter to enhance processing facility
credit and exploration well credits. Credits directed at
the activity would encourage development. Mr. Harper agreed
that would make sense. Credits encourage investments. He
stated that there were also reasonable alternatives.
2:43:01 PM
Mr. Harper Slide 15, "Obligations of a Lessee":
1) The reason Alaska is desirable is prospectivity. 2)
Companies bid leases based on belief in these rocks.
3) Signing the lease is a go / no go document. 4) The
decision to sign the lease is a commitment to develop
given 'reasonable expectation of profit'. 5) After
that point Alaska is not expected to compete with the
rest of the world.
Representative Hawker queried the definition of "reasonable
assumption of profit", and noted that huge bodies of law
that dispute in establishing the terminology. He asked why
production was declining, and wondered a course of
litigation should be pursued. Mr. Harper pointed out that
Prudhoe Bay was in decline, because it was a mature oil
field. He stressed that the state should and does enforce
the lease terms. He stressed that the capital will be
attracted, and if adjustments need to occur to the tax
structure-the changes be made based on hard certified
numbers from the industry.
Representative Hawker stressed that testimony in the room
was not under oath. He wondered if there were any other
situations in the state that demonstrated that lease
holders were not living up to the prudent operator
standard. Mr. Harper did not know.
Representative Hawker did not want people to think that Mr.
Harper was claiming that leaseholders were not living up to
2:47:26 PM
Mr. Harper stated he had not seen evidence that Alaska
would be undesirable. He understood the desire to see more
exploration quicker, might be evidence that something
needed to be done- like changing the tax structure. He was
concerned that the industry had not proven its case that
the abatements and concessions in the bill if granted would
result in specific and firm obligations.
Representative Hawker mentioned the annual report of the
Division of Oil and Gas, and stated that field projections
and AFEs were being presented to DOR. He pointed out that
field development plans were discussed extensively with
DNR, and stated that the field development plans were the
entire foundations to the projections of the annual report.
He wondered if Mr. Harper was certain that information was
not provided. Mr. Harper said he was certain he had not
seen that evidence presented to the legislature.
Representative Hawker restated Mr. Harper's statement. Mr.
Harper had seen no evidence that it had been presented in
any form in the House Finance Meeting considerations of the
ACES tax restructuring.
Representative Hawker stated that AFEs had not been
requested in the proceeding. Mr. Harper had been hired to
advise likely outcome as result of HB 110 and comment on
evidence presented "here." He had not seen it presented by
industry as to whether or not there would be a payback to
the state.
2:52:27 PM
Representative Guttenberg stated that as a policy maker, he
had not seen industry represent facts. He stressed that the
industry represented corporate interest. The committee had
not seen the items mentioned. The industry had represented
a unified message but the legislature had not had access to
the development plans and projects. Mr. Harper advised
steering the debate to what would happen in concrete terms
if the bill was passed and not allow the debate to merge to
a way to manage the statistics. He recommended a different
approach to the argument.
2:55:53 PM
AT EASE
3:00:26 PM
RECONVENED
Mr. Harper discussed Slide 20 "How Can We Reverse the
Trend." He stated that the commissioner of Department of
Revenue had acknowledged that there were a number of
factors that influenced investment decisions.
Mr. Harper displayed Slide 21:
· In the absence of concrete and verifiable analysis of
specific prospects, a presumption should be made that
no change in taxation is warranted.
· Alaska offers Royalty Relief if a producer can prove
the economics of a field require it.
· It's only been requested four times since 2000, and
granted twice.
Mr. Harper Slide 30 "Firm commitments from industry are
lacking" He stressed that all companies carefully word what
they say, but there was no identifiable commitment to add
new oil or to reduce the rate of decline.
3:04:26 PM
Mr. Harper stressed that industry's tone was important. He
emphasized that what was not seen was most important.
Mr. Harper Slide 32 "Is Industry About to Walk Away from
TAPS?"
· Major producers own a piece of the line. The economics
of TAPS and oil production are integrated.
· 6% decline highly unlikely given current ongoing
investment and updated projections.
Mr. Harper Slide 34 chart AOGA "North Slope Oil Production
with OCS" He highlighted the potential that the OCS brought
in terms of the life of TAPS.
Representative Guttenberg requested further explanation of
the chart on slide 34. He stated that it was a chart that
was presented in February 2011 by DNR. He just wanted to
show the potential that the OCS could bring to TAPS.
Co-Chair Stoltze asked whether the word "exacerbated" could
be substituted for "completely eliminated." Mr. Harper yes.
3:08:13 PM
Representative Hawker stated concerns about the chart. The
implication would create false precisions by putting things
on charts.
Mr. Harper Slide 36 "Changes to Progressivity"
This is where most of the revenue will be lost: $800
million to over $2 million /year depending on the
price of oil.
Representative Hawker felt that the slide presented false
precision, because the committee had not had the
opportunity do view or discuss fiscal note. He stated
severe concerns on the premise of the fiscal note. He
referred to empirical evidence regarding the future
projections that the state used was over-stated. Mr. Harper
corrected the suggestion the HB 110 would result in
production. He offered the concern that the incremental
production be enough to offset within a reasonable
timeframe.
3:12:14 PM
Mr. Harper slide 37 "Nominal Tax Rates," and stated that
the graph was made by DOR comparing ACES and HB 110.
Mr. Harper discussed Slide 38:
Under current law (ACES), our taxes can be envisioned
as the area inside this rectangle. The profits per
barrel, on the horizontal axis, line up with the tax
rate, on the vertical axis.
Mr. Harper concluded the presentation, and opened up to
questions.
Representative Wilson requested a dollar for dollar
comparison between current structure and the proposal. Mr.
Harper had not conducted analysis. He urged pursuing the
issue.
Representative Wilson wondered if he was not able to do
that. Mr. Harper had not been asked to make a comparison.
Representative Wilson he could do it in three days. Mr.
Harper replied no.
3:15:06 PM
Representative Guttenberg looked at slide 42 "Changes to
Progressivity", and queried the marginal tax rate. Mr.
Harper stated that a debate had been pushed in the
direction of marginal tax rates. He believed the effective
rate based upon the expected case assumptions was most
important. The marginal rate was not unimportant, but what
is most important is the effective rate.
Vice-chair Fairclough slide 22 related to lost jobs, and
wondered why the correlation did not imply causation. Mr.
Harper stated that the first axiom of economics stated that
correlation does not necessarily imply causation. He stated
that there were many factors that contributed to lost jobs,
and directed the committee to slide 23, which showed how
employment had gone through the different tax regimes.
Vice-chair Fairclough appreciated Mr. Harper's point of
view. He noted Monday hearings in Anchorage with explicit
numbers on how service-industry businesses had been
negatively affected from the decline in production on the
North Slope.
Vice-chair Fairclough pointed out that North Dakota's oil
industry was booming, and she asked what economics were
contributing to Louisiana, Oregon, and New Mexico for oil
production. She queried employment and production levels.
3:19:26 PM
Mr. Harper answered that he had highlighted his involvement
with the listed states, and was currently class action
lawsuit in Texas' oil company's failure to pay taxes. He
stated that Oregon's unemployment was "horrific", but it
was not an oil-dependent state.
Representative Hawker recalled that Exxon had prevailed in
most of the cases regarding Point Thompson. Mr. Harper
replied that was not his understanding. He stressed that
post implementation of litigation was radically different
than what was happening before litigation.
Representative Hawker concurred, and recommended on the
record they do it about a year and a half before. He
believed examining the court record would reveal that the
litigation may have been a bargaining chip.
Representative Hawker wondered if Mr. Harper felt the most
important metric was the effective tax rate. Mr. Harper
stated that the effective tax rate was the most important
factor when determining whether or not to invest capital in
a specific project. Exxon testified that they agreed with
that premise.
Representative Hawker agreed as well. He stated that
bracketing would reduce the rate to a nominal effective
rate. He believed the purpose of HB 17, a bracketing bill,
was to create an effective and reasonable rate.
3:24:12 PM
Representative Hawker wondered if brackets would reduce a
higher nominal rate to a lower effective rate. Mr. Harper
showed slide 46, which was developed by DOR. He would not
be making a determination, but suggested that the
concessions were extremely substantial. Representative
Hawker respected Mr. Harper's opinion.
Representative Gara directed attention to Slide 55
"Required Production to Replace Loss Revenue" and asked if
this was attempt to estimate how much new oil would be
needed to offset the tax losses under HB 110. Mr. Harper
did not develop the model. He focused on the first column
under ACES, and the last column under HB 110. He suggested
that if one presumed the assumptions that were present, it
would indicate how much production would equal the amount
of revenue currently being collected in taxes.
Representative Gara noted that DOR had promised an answer
on the question.
3:27:43 PM
AT EASE
3:38:00 PM
RECONVENED
BRYAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE,
explained that the testifiers would discuss the bill by
section.
SUSAN POLLARD, OIL, GAS, AND MINING SECTION, DEPARTMENT OF
LAW, discussed a PowerPoint presentation "CSHB 110
Presentation Bill Sectional" (copy on file). She outlined
her strategy for discussing the bill. Section 3: AS
43.05.225 would be amended to reduce interest rates on
overdue taxes and refunds to federal rate plus 3 percent or
11 percent (page 4). She discussed the changes to Section
6: Levy of Tax. The tax levied on oil and gas produced from
leases or properties containing land that was within a unit
or in commercial production as of December 31, 2008, was 25
percent base plus progressivity.
Ms. Pollard discussed changes to Section 7 (page 6). The
threshold was lowered for calculation of minimum tax on oil
and gas production from the North Slope.
3:43:53 PM
AT EASE
3:44:15 PM
RECONVENED
Ms. Pollard moved on to Section 8 on page 7. The
incremental bracketed progressivity rates applied if annual
production tax value was over $30, to the fraction of the
production tax value that fell within the incremental rate.
The incremental rates were up to 50 percent for production
subject to the 25 percent base rate and up to 40 percent
for production subject to the 15 percent base rate.
Ms. Pollard addressed Section 9 on page 8. The statute that
required monthly payments was revised to account for the
annual progressivity calculation and new tax rate for
certain fields. She discussed changes to Section 27 on page
8. The way annual production tax was calculated remained
the same and there was no intent to change the basic
calculations. She moved to page 9 and discussed that
capital credits would be taken in the year they were
earned. Section 11 removed the requirement that tax credits
for qualified capital expenditures be taken over two years.
Vice-chair Fairclough wondered where the date change was
located. Ms. Pollard replied that it was at the end of the
bill.
3:50:04 PM
Ms. Pollard discussed changes to Sections 15 and 16 on page
10. The only change was to remove the exclusion of the
North Slope.
Representative Guttenberg knew that there was a reason that
the line had been drawn. He wondered what the reason and
rationale was. Commissioner Butcher clarified that the
location was 68 degrees south and he could not speak to the
reason for the change. The department would provide the
information.
Representative Doogan wondered what the department meant by
"fairly minor" in terms of the change. Ms. Pollard had been
referring to the revenue change that was relatively minor.
Ms. Pollard continued with page 12. Section 17 was a
completely new section that was added to allow a credit
against production taxes for a producer that incurred more
than 80 percent of its wages and compensation for Alaska
residents. The credit was for the percentage by which wages
paid to Alaska residents exceeds 80 percent of wages and
compensation paid by the producer in the state.
3:55:36 PM
Representative Joule believed that when local hire was
mandated that issues developed. He was interested in
hearing more as the discussions progressed.
Representative Hawker wondered whether the agency had done
an analysis on the cost per job that was available.
Commissioner Butcher replied that there was not currently
an estimate.
Representative Hawker was concerned that a small percentage
using employee numbers calculated to a huge percentage.
Vice-chair Fairclough wondered whether the committee could
get a legal opinion on Section 17 for next week. She
wondered whether there was severability clause inside the
bill in the event that it passed. Ms. Pollard responded
that it was possible to have a repeal.
Representative Guttenberg referred to HB 308 from the prior
legislative session, and stressed that there was much work
on that issue.
3:59:44 PM
Representative Edgmon wondered whether there was a producer
that was currently near the 80 percent mark. Commissioner
Butcher responded that they would provide an answer later.
Ms. Pollard pointed to page 13 "Small Producer Credits,"
that related to changes in Sections 18-20. The sunset date
for AS 43.55.024 (a) and (c), non-transferable credits was
extended from 2016 to 2021. The small producer tax credit
for a calendar year was raised from $12 million to $15
million. It applied if average production was less than
100,000 BTU equivalent barrels a day.
Representative Wilson wondered whether the companies took
advantage of hiring locally. Commissioner Butcher replied
in the affirmative. There had been some concerns about
constitutionality with the local hire issue; however, the
other changes were fine with the department.
Representative Wilson wondered about the figures $12
million to $15 million. Ms. Pollard continued with the
presentation on page 14 "North Slope Exploration Credit,"
that listed changes to Sections 21 and 24 and Sections 22-
23.
Representative Guttenberg discussed expansions on an
existing field. Commissioner Butcher would be happy to
provide details at a later time. He added that he would
also speak with DNR.
Ms. Pollard continued on page 14. She discussed exploration
expenses, which were extended.
Representative Edgmon asked for the technical definition of
"unitization." Commissioner Butcher replied that DNR could
provide a definition or they could read the definition from
the Department of Law.
Representative Doogan discussed the credits under AS
43.55.025 and wondered what credits were included in the
statute. Ms. Pollard replied that the jack up rig was added
to the provision.
4:07:31 PM
Ms. Pollard addressed page 15 "Disclosure of Credit
Information," and changes to Section 28. The section
amended AS 43.55.890 to clarify that DOR may publish
detailed information related to tax credits, including the
statutory type and amount of each credit taken under each
statute, and whether the expenditure was for exploration,
development or production.
Representative Edgmon wondered whether it would be before
or after the audit. Commissioner Butcher responded that it
would be before the audit.
Representative Wilson wondered whether the statute would
include tax information that companies may not want to be
public for their competitors. Commissioner Butcher remarked
that there would not be changes to the confidentiality laws
that were already in place.
Representative Wilson wondered why the information should
be disclosed. Commissioner Butcher replied that the data
would be for information that was not currently gathered.
The department was not provided with a breakdown from
producers, when the information was disclosed, the
department would be able to share the information.
Representative Gara referred to page 14 and changes to
credits. He wondered if there was an increase to credits
in-field for 40 percent, and an increase to a 30 percent
credit for exploration. Ms. Pollard responded that the
change related to the 43.55.025 credit. The credit had been
added in House Resources Committee. She stated that there
was an additional provision was added regarding to
exploration on the North Slope. Representative Doogan asked
whether the date moved back one year.
Co-Chair Stoltze discussed the schedule for the remainder
of the day and for Friday.
4:21:45 PM
AT EASE
4:21:58 PM
RECONVENED
Co-Chair Stoltze clarified that the meeting on Friday would
commence at 1:30pm.
HB 110 was HEARD and HELD in committee for further
consideration.
4:22:22 PM
ADJOURNMENT
The meeting was adjourned at 4:22 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB110North Slope Conventional Expl_Swenson.pdf |
HFIN 3/24/2011 8:00:00 AM |
HB 110 |
| HB110HFIN DOG Presentation 3-24-11.pdf |
HFIN 3/24/2011 8:00:00 AM |
HB 110 |
| HB110 Royalty Modification_110324HFIN.pdf |
HFIN 3/24/2011 8:00:00 AM |
HB 110 |
| HB 110 NAK Shale Resource Plays_HFIN_2011-03-23.pdf |
HFIN 3/24/2011 8:00:00 AM |
HB 110 |
| HB 110 DNR HFINSRES 3-24-11.pdf |
HFIN 3/24/2011 8:00:00 AM |
HB 110 |
| HB110 Rep. Doogan Letter.pdf |
HFIN 3/24/2011 8:00:00 AM |
HB 110 |
| Rick Harper HB110 presentation 032411.pdf |
HFIN 3/24/2011 8:00:00 AM |
HB 110 |
| HFIN DOR CSHB 110 sectional numerical order 0324 [Read-Only] [Compatibility Mode].pdf |
HFIN 3/24/2011 8:00:00 AM |
HB 110 |
| HB 110 Rick Harper BIO 032411.doc |
HFIN 3/24/2011 8:00:00 AM |
HB 110 |