Legislature(2017 - 2018)BARNES 124

02/01/2017 01:00 PM RESOURCES

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01:07:04 PM Start
01:07:44 PM Presentation(s): Update: Status of the Oil and Gas Tax Regime in Alaska
03:02:19 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 06:00 pm --
+ Update: Status of the Oil & Gas Tax Regime in TELECONFERENCED
AK: HB 280 (2010), SB 21 (2013), HB 247 (2016)
Presentation by Kara Moriarty, President/CEO,
AK/ Oil & Gas Assoc.
Presentation by Scott Jepson, VP External
Affairs & Transportation, ConocoPhillips, AK
Presentation by Damian Bilbao, VP for Commercial
Ventures, BP
Presentation by Dan Seckers, Tax Council,
Presentation by Pat Foley, Senior VP of
Operations, Caelus Energy, LLC
-- Testimony <Invitation Only> --
**Streamed live on AKL.tv**
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                        February 1, 2017                                                                                        
                           1:07 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Andy Josephson, Co-Chair                                                                                         
Representative Geran Tarr, Co-Chair                                                                                             
Representative Dean Westlake, Vice Chair                                                                                        
Representative Harriet Drummond                                                                                                 
Representative Justin Parish                                                                                                    
Representative Chris Birch                                                                                                      
Representative DeLena Johnson                                                                                                   
Representative George Rauscher                                                                                                  
Representative David Talerico                                                                                                   
MEMBERS ABSENT                                                                                                                
Representative Chris Tuck (alternate)                                                                                           
COMMITTEE CALENDAR                                                                                                            
PRESENTATION(S):  UPDATE:  STATUS OF THE OIL AND GAS TAX REGIME                                                                 
IN ALASKA                                                                                                                       
     - HEARD                                                                                                                    
PREVIOUS COMMITTEE ACTION                                                                                                     
No previous action to record                                                                                                    
WITNESS REGISTER                                                                                                              
KARA MORIARTY, President/CEO                                                                                                    
Alaska Oil and Gas Association                                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Provided a PowerPoint presentation                                                                       
entitled, "House Resources Committee," dated 2/1/17, and                                                                        
answered questions.                                                                                                             
SCOTT JEPSEN, Vice President                                                                                                    
External Affairs                                                                                                                
ConocoPhillips Alaska, Inc.                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION   STATEMENT:     Provided   a   PowerPoint   presentation                                                          
entitled,   "House  Resources   Committee,"   dated  2/1/17,   and                                                            
answered questions.                                                                                                             
DAMIAN BILBAO, Vice President                                                                                                   
Commercial Ventures                                                                                                             
BP Alaska                                                                                                                       
Anchorage, Alaska                                                                                                               
POSITION   STATEMENT:     Provided   a   PowerPoint   presentation                                                          
entitled,  "Prudhoe  Bay &  Alaska  Policy  Enabling the  next  40                                                              
years," and answered questions.                                                                                                 
DAN SECKERS, Tax Counsel                                                                                                        
ExxonMobil Corporation                                                                                                          
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:   Testified during  the hearing of  the status                                                            
of the oil and gas tax regime in Alaska, and answered questions.                                                                
PAT FOLEY, Senior Vice President                                                                                                
Caelus Energy                                                                                                                   
Anchorage, Alaska                                                                                                               
POSITION   STATEMENT:     Provided   a   PowerPoint   presentation                                                            
entitled,  "Caelus Activity  Update," dated  2/1/17, and  answered                                                              
ACTION NARRATIVE                                                                                                              
1:07:04 PM                                                                                                                    
CO-CHAIR   GERAN  TARR   called  the   House  Resources   Standing                                                            
Committee meeting  to order  at 1:07  p.m.  Representatives  Tarr,                                                              
Birch,  Parish, Rauscher,  Johnson, Westlake,  and Josephson  were                                                              
present  at  the call  to  order.   Representatives  Talerico  and                                                              
Drummond arrived as the meeting was in progress.                                                                                
^PRESENTATION(S):  UPDATE:   STATUS OF THE OIL AND  GAS TAX REGIME                                                              
IN ALASKA                                                                                                                       
PRESENTATION(S):  UPDATE:  STATUS OF THE OIL AND GAS TAX REGIME                                                             
                           IN ALASKA                                                                                        
1:07:44 PM                                                                                                                    
CO-CHAIR TARR announced  that the only order of  business would be                                                              
an update on the status of the oil and gas tax regime in Alaska.                                                                
KARA  MORIARTY,  President/CEO,  Alaska Oil  and  Gas  Association                                                              
(AOGA),  provided  a  PowerPoint   presentation  entitled,  "House                                                              
Resources  Committee," dated  2/1/17.  Ms.  Moriarty informed  the                                                              
committee  AOGA  is  a  private,  professional  trade  association                                                              
representing  the majority  of the  companies in  the oil  and gas                                                              
industry in  Cook Inlet  and on  the North Slope  [slide 2].   She                                                              
said  a review  of the  changes in  Alaska's tax  system over  the                                                              
past ten years  revealed five guiding principles  found in common:                                                              
production,  investment,   competitiveness,  revenue,   and  "fair                                                              
share" [slide  3].  Production  from fiscal  year 2015 (FY  15) to                                                              
FY 16 increased  3 percent, and  she pointed out that  the present                                                              
production  increase  is  the first  since  2001-2002,  after  the                                                              
[Alpine  oil  development  owned   by  ConocoPhillips  Inc.]  came                                                              
online  [slides 4  and 5].   Slide  5  illustrated oil  production                                                              
from 2002  through 2016,  record high and  record low  oil prices,                                                              
and  changes  in  the  oil  and gas  tax  system.    Ms.  Moriarty                                                              
provided  a chart that  illustrated that  production increased  in                                                              
excess  of what  was  forecast;  the 2013  fall  forecast was  for                                                              
487.6 thousand barrels  per day and the actual  production in 2016                                                              
was 514.9  thousand barrels  per day, even  as oil prices  dropped                                                              
[slide  6].   In  Cook  Inlet, after  passage  of  the Cook  Inlet                                                              
Recovery Act  [passed in the  26th Alaska State  Legislature], oil                                                              
production  went up  84 percent  from  its lowest  point in  2009.                                                              
She noted that all  of the oil produced in Cook  Inlet is utilized                                                              
at the Tesoro Alaska  Company Refinery in Nikiski [slide  7].  The                                                              
next guiding principle  is investment, without which  there is not                                                              
production.    In 2003  as  prices  went  up, U.S.  and  worldwide                                                              
spending  followed,  but  investment  by the  industry  in  Alaska                                                              
"remained  relatively  flat"  under  the tax  system  of  Alaska's                                                              
Clear  and  Equitable Share  (ACES)  [passed  in the  25th  Alaska                                                              
State  Legislature].   She said  the  lack of  investment was  the                                                              
impetus  for Senate  Bill  21 [passed  in  the  28th Alaska  State                                                              
Legislature]  [slide  9].     Slide  10  was  a  chart  previously                                                              
provided  by the  Department  of  Revenue (DOR)  -  with an  added                                                              
column for  average oil price -  which illustrated that  from 2007                                                              
to 2012,  investment  levels are  about the same.   She  concluded                                                              
that  investment  in  Alaska  did not  increase  with  rising  oil                                                              
prices  and investment  in  the  Lower 48,  because  the ACES  tax                                                              
structure included  high progressivity.   However, in 2013  as oil                                                              
prices begin to  decline, the level of investment  shown is higher                                                              
and  more stable  because current  tax policy  is predictable  and                                                              
geared toward production.                                                                                                       
1:15:57 PM                                                                                                                    
MS. MORIARTY  stated that increased  investment has led  to higher                                                              
production and major  new discoveries, even though  low oil prices                                                              
have led  to layoffs and  job losses [slide  11].   She questioned                                                              
whether  Alaska's tax  policy will  allow the  new discoveries  to                                                              
reach  production and  increase the  flow of  oil into the  Trans-                                                              
Alaska Pipeline System  (TAPS) [slide 12].  Ms.  Moriarty provided                                                              
a  DOR slide  entitled,  "North  Slope Repurchased  Credits,"  and                                                              
pointed out the  slide should be updated to reflect  the potential                                                              
ultimate recovery  from repurchased tax  credits [slide 13].   She                                                              
opined  credits have  been a  very worthwhile  investment for  the                                                              
state.   The next  guiding principle  is competitiveness,  because                                                              
to  attract  investment   the  state  needs  to   be  competitive;                                                              
however,   the   question  is   how   the  industry   can   remain                                                              
competitive if the  state is constantly changing tax  policy.  The                                                              
state  has changed  tax policy  in  the past  ten years  - and  an                                                              
additional change  was proposed -  and all six changes  except one                                                              
have been  tax increases [slide  15].  She elaborated  that Senate                                                              
Bill 21 was both  a tax increase and a tax  decrease under certain                                                              
conditions.   Ms. Moriarty disagreed  with DOR that  the Petroleum                                                              
Production   Tax  (PPT)   [passed   in  the   24th  Alaska   State                                                              
Legislature]  was  neutral and  that  PPT doubled  production  tax                                                              
[slide 16].   Slide 16  was corrected as  follows:  FY 2016  to FY                                                              
2006;  FY 2017  to FY  2007.   She  opined that  during debate  in                                                              
2007,  no one  disputed that  PPT brought  the state  more in  tax                                                              
revenue than the  Economic Limit Factor (ELF) [passed  in the 12th                                                              
Alaska  State  Legislature  and  modified by  executive  order  in                                                              
2005], and  that a correct  fiscal note  attached to the  PPT bill                                                              
would  have indicated  PPT was almost  a 200  percent increase  in                                                              
taxes over ELF.                                                                                                                 
1:21:36 PM                                                                                                                    
MS. MORIARTY turned  to the challenge of remaining  competitive in                                                              
Alaska's high  cost environment  due to factors  - such  as remote                                                              
locations and Arctic  environments - which restrict  drilling to a                                                              
short period  of time.  Further,  costs don't decrease  as quickly                                                              
as  oil prices,  and remain  the same  at lower  production.   For                                                              
calendar year  2016, the average  oil price was  approximately $43                                                              
per  barrel,  and  the average  deductible  cost  per  barrel  was                                                              
approximately  $41.  However,  according to  page 29,  DOR Revenue                                                              
Sources  Book  (RSB) Fall  2016,  total  costs  are over  $48  per                                                              
barrel.    This  discrepancy  explains  why  companies  are  cash-                                                              
negative in  Alaska, and  she emphasized that  the $48  per barrel                                                              
cost  is before  taxes  or royalty  are  paid,  and only  includes                                                              
transportation,  operating, and  capital expenditures  [slide 17].                                                              
Alaska  has a  hybrid tax  of a  net tax  at higher  prices and  a                                                              
gross tax  at low prices, demonstrated  by a chart that  showed at                                                              
an oil price  of $40 per barrel,  production tax value  (PTV) is a                                                              
negative   number,  thus   taxing  "phantom   income"  even   when                                                              
companies are losing  money [slide 18].  Finally,  she presented a                                                              
graph that  compared Alaska's  2013 development  costs to  that of                                                              
competitors in  the Lower 48  [slide 19].   The next  principle is                                                              
revenue and  she advised  that since  statehood, oil has  provided                                                              
85 percent  of the state's  unrestricted general funds  (UGF) that                                                              
support government  and a strong economy [slide 21].   Senate Bill                                                              
21 generates  more revenue to the  state at low prices  than ACES,                                                              
as reaffirmed  during testimony  before the  committee on  1/30/17                                                              
[slide 22].   She then  clarified that  the industry pays  more in                                                              
government  revenue  than it  receives  in  credits: total  FY  16                                                              
revenue  paid was  over $2  billion; cashable  credits or  credits                                                              
used  against  tax liability  were  $598  million.   Ms.  Moriarty                                                              
stressed  that the  total tax credit  liability  after FY  20, for                                                              
cashable  credits,  is  about  $150 million  per  year  after  the                                                              
reforms  of  House Bill  247  [passed  in  the 29th  Alaska  State                                                              
Legislature] [slide 23].                                                                                                        
1:27:46 PM                                                                                                                    
CO-CHAIR  JOSEPHSON expressed  his  understanding  that the  total                                                              
number of  cashable and tax  liability credits  for FY 16  is over                                                              
$900 million.                                                                                                                   
MS. MORIARTY  responded  that the  credits shown  on slide  23 are                                                              
those that  were generated  in FY 16 only;  a higher  number could                                                              
include  some of  the  credits that  were  vetoed.   Ms.  Moriarty                                                              
recalled  there are questions  about whether  earned credits  need                                                              
to  be paid,  and  she pointed  out  that the  administration  has                                                              
stated that  the credits are obligations  the state needs  to pay.                                                              
She advised that  if the governor had not vetoed  certain credits,                                                              
the  state's liability  for  FY  18 would  be  near $400  million,                                                              
instead  of over $1  billion; in  fact, the  vetoes have  inflated                                                              
the  actual  liability  [slide  24].   Turning  attention  to  net                                                              
operating loss credits,  she explained that a net tax  is a tax on                                                              
the difference  between a  taxpayer's gross  revenue and  the cost                                                              
of producing  revenue,  and to demonstrate  the  impacts of  a net                                                              
tax versus  a gross  tax, she gave  the example  of the  costs and                                                              
profits  of  a  restaurant  business [slide  25].    Ms.  Moriarty                                                              
concluded  that taxes  on net allow  net operating  loss from  the                                                              
loss year  to carry  forward to the  following year,  and observed                                                              
that her  organization could not  find a net-based oil  tax system                                                              
without some  type of mechanism, such  as an NOL credit,  to carry                                                              
forward losses.                                                                                                                 
1:33:21 PM                                                                                                                    
MS. MORIARTY  addressed the  last principle  of fair share,  which                                                              
is the most  subjective of the five guiding  principles discussed.                                                              
She provided  a chart  that illustrated  what  is received  by the                                                              
industry and  state and federal  governments from a barrel  of oil                                                              
at  various  prices.    At under  $40  per  barrel,  the  industry                                                              
receives  nothing,  and  government  receives  more  revenue  than                                                              
industry at any price [slide 27].  She summarized as follows:                                                                   
   · production:  there is more production                                                                                      
   · investment:  there is more investment than under the ACES                                                                  
   · competitiveness:  industry is attracted to Alaska, leading                                                                 
     to major discoveries                                                                                                       
   · revenue: the current system is bringing in more revenue                                                                    
   · fair share:  government receives the most at any price                                                                     
MS. MORIARTY  suggested that  proposed changes  to the  tax system                                                              
should be weighed against the foregoing principles.                                                                             
REPRESENTATIVE BIRCH  returned attention to slide  10 and observed                                                              
that  the capital  credits for  2016 are  6 percent  of the  total                                                              
spend, which is a relatively small percentage.                                                                                  
MS.  MORIARTY agreed  that  the  credits have  spurred  investment                                                              
even though average oil prices are low.                                                                                         
REPRESENTATIVE  BIRCH recalled  that  Shell spent  $7 billion  and                                                              
left Alaska; investments carry a significant risk.                                                                              
CO-CHAIR TARR  advised that  the spending shown  on slide  10 does                                                              
not reflect deductions for operating and capital expenditures.                                                                  
REPRESENTATIVE  PARISH   surmised  that  spending   also  includes                                                              
support  of  ongoing  operations.   He  asked  what  cashable  tax                                                              
credit certificates sell for.                                                                                                   
1:39:23 PM                                                                                                                    
MS. MORIARTY responded  that the amount for which  a company sells                                                              
its cash  certificate is  proprietary data.   In further  response                                                              
to Representative  Parish,  she said  a company  is at liberty  to                                                              
disclose this information if it chooses to do so.                                                                               
REPRESENTATIVE   PARISH   asked  the   industry   to  share   this                                                              
information  with the  committee  in order  to  better inform  its                                                              
MS.  MORIARTY, addressing  an  earlier statement,  clarified  that                                                              
deductions are costs that have previously been paid by industry.                                                                
1:41:11 PM                                                                                                                    
SCOTT  JEPSEN, Vice  President,  External Affairs,  ConocoPhillips                                                              
Alaska,  Inc.,   provided  a  PowerPoint  presentation   entitled,                                                              
"House Resources  Committee," and dated  2/1/17.  He  informed the                                                              
committee he  would address three  basics aspects of  Alaska's tax                                                              
framework:   Senate  Bill 21  has  achieved the  state's goals  of                                                              
achieving  a flatter tax  rate over  a broad  range of  oil prices                                                              
and  certainty of  revenue at  lower  oil prices;  there has  been                                                              
increased investment  resulting in  jobs, production  and revenue;                                                              
there is  competition from the  unconventional plays in  the Lower                                                              
48, and  Alaska should  ensure it does  not create a  disadvantage                                                              
for  additional  investment  by  changes  in  its  cost  structure                                                              
[slide 2].   He provided  a graph that  illustrated net  cash flow                                                              
from  negative -$4  billion  to $12  billion,  Alaska North  Slope                                                              
(ANS) West Coast  (WC) price of a barrel of oil  from $30 to $100,                                                              
and bars  representing investor,  federal, and  state shares  of a                                                              
barrel of oil at various prices [slide 3].                                                                                      
1:44:16 PM                                                                                                                    
MR. JEPSEN,  directing attention to  slide 3, pointed out  that at                                                              
any price,  state share  is the  largest and  is a positive  share                                                              
when  industry  share  is  negative.   The  state  share  includes                                                              
royalty,  production  tax, state  income  tax, and  property  tax.                                                              
From  the investor  share  is subtracted  transportation,  capital                                                              
expenditures  (CAPEX),  operating  expenditures  (OPEX),  royalty,                                                              
production  tax,  property  tax,  state income  tax,  and  federal                                                              
income tax.   The federal  share consists  of federal  income tax.                                                              
Mr.  Jepsen  recalled  that  debate  surrounding  Senate  Bill  21                                                              
raised  the issue of  revenue divided  into equal  thirds  for the                                                              
state, federal  government, and  producers.   In fact,  about two-                                                              
thirds  does go  to government,  and the  present system  provides                                                              
the state  the larger share of  revenue, even when oil  prices are                                                              
low.   He acknowledged  that the  graph did  not reflect  cashable                                                              
credits, small  producer credits, or exploration  credits, because                                                              
ConocoPhillips  Alaska, Inc.  is  a large  producer  and does  not                                                              
consider the credit  incentive system to be part of  the basic tax                                                              
structure;  the basic  tax  structure  is the  net  tax the  state                                                              
imposes on  those who produce and  make a profit.  The  per barrel                                                              
credit is included  in slide 3 as  it is an integral  component of                                                              
the  overall tax  system,  and he  recalled  that  the per  barrel                                                              
credit was implemented  to create a leveled tax rate  over a broad                                                              
range  of prices.   Mr.  Jepsen said  ConocoPhillips Alaska,  Inc.                                                              
considers  the tax  framework  in Alaska  each  time projects  are                                                              
proposed,  and  increases  do  not   create  a  good  climate  for                                                              
investment.  Since  the passage of Senate Bill  21, ConocoPhillips                                                              
Alaska, Inc.,  added several  rigs to the  Kuparuk River  Unit rig                                                              
fleet; two  new rigs  were delivered  in 2016.   Through  the last                                                              
quarter  of  2016, five  rigs  were  running between  Kuparuk  and                                                              
Alpine, and  through 2017 three  rigs will be running  in Kuparuk;                                                              
higher  oil prices  may  lead to  more  investment.   An  extended                                                              
reach  drilling (ERD)  rig was  sanctioned that  means 125  square                                                              
miles  can  be  reached  from  an   individual  drill  site.    In                                                              
addition, work was  restarted on the Northeast West  Sak (NEWS) 1H                                                              
drill  site at  Kuparuk.   Also sanctioned  was drill  site 2S  in                                                              
Kuparuk,  and Greater  Mooses Tooth  1  in 2015,  and the  company                                                              
began  the   process  of  permitting   Greater  Mooses   Tooth  2.                                                              
ConocoPhillips   Alaska,  Inc.   recently  announced   its  Willow                                                              
discovery  which  may  hold 300  million  barrels  of  recoverable                                                              
resource.    At  the  December  2016  lease  sale,  ConocoPhillips                                                              
Alaska,  Inc. bought  leases over  400,000 acres  of federal  land                                                              
and over  200,000 acres of  state land.   He recalled  that during                                                              
the  ACES  tax   system  from  2007  through  2012,   the  average                                                              
investment  by ConocoPhillips  Alaska, Inc.  was $800 million  per                                                              
year; beginning in  2013 there was a "step-up"  in investment, and                                                              
the percentage of  the corporation's spend increased  - even while                                                              
keeping its  expenditures level -  to an average investment  of $1                                                              
billion  per year  through 2016  [slide 4].    He  opined that  in                                                              
calendar year  2016, the  first growth in  production in  14 years                                                              
was a function of  the positive investment climate  as a result of                                                              
Senate  Bill  21.   Mr.  Jepsen  recalled his  previous  testimony                                                              
stating  that  if there  is  a positive  investment  climate,  the                                                              
state  should  expect   the  industry  to  react   rationally  and                                                              
increase investment, and  it has done so.  He turned  to the topic                                                              
of  competition,   and  advised  that  there  is   opportunity  in                                                              
unconventional  plays in the  Lower 48  which is  due to  "all the                                                              
massive investment,"  that is attracted by  nearby infrastructure,                                                              
a shorter  time from  investment to  production, less  regulation,                                                              
and  a nearer  market.    Also, wells  are  cheaper  to drill  and                                                              
operate; in  Alaska, after  the industry does  its part  to manage                                                              
OPEX  costs, the  role  of the  state in  competition  is that  an                                                              
increase  in  taxes  is  an increase  in  cost,  which  will  send                                                              
investment  to other  places than  Alaska.  Mr.  Jepsen urged  the                                                              
committee to consider  how Alaska can remain competitive  with the                                                              
Lower 48 and worldwide [slide 5].                                                                                               
1:54:28 PM                                                                                                                    
CO-CHAIR  TARR   questioned  whether  Mr.  Jepsen   would  provide                                                              
updated  information related  to the  timelines on  slide 4.   The                                                              
committee  has heard  that although  most projects  take years  to                                                              
plan,  "quick  decisions"  were  made  following  the  passage  of                                                              
Senate Bill  21, and  she requested the  dates that  the foregoing                                                              
projects listed on slide 4 were sanctioned.                                                                                     
MR.  JEPSEN  responded  that  all   of  the  investment  decisions                                                              
illustrated on  slide 4 were sanctioned  after Senate Bill  21 was                                                              
REPRESENTATIVE   TALERICO  asked  whether   the  ERD  rig   is  in                                                              
association with Doyon.                                                                                                         
MR. JEPSEN said yes.                                                                                                            
REPRESENTATIVE BIRCH  questioned whether the use of  ERD rigs will                                                              
reduce the cost of producing oil in Alaska.                                                                                     
MR. JEPSEN  was unsure about the  amount of savings, but  ERD rigs                                                              
will  enable  his  company  to   develop  certain  resources;  for                                                              
example, ERD  rigs will allow the  company to access  resources in                                                              
areas for  which permits probably  would not be secured,  and also                                                              
to reach  areas that  do not economically  justify drilling  a new                                                              
rig, thus reducing the total number of drill sites.                                                                             
REPRESENTATIVE  PARISH inquired  as to the  50 percent  difference                                                              
in the  growth of  North Slope  production that  was projected  by                                                              
AOGA and ConocoPhillips Alaska, Inc.                                                                                            
MR. JEPSEN  explained the  ConocoPhillips Alaska, Inc.  projection                                                              
was based  on a calendar  year, and AOGA's  was based on  a fiscal                                                              
REPRESENTATIVE PARISH  asked how much revenue was  foregone by the                                                              
state in providing the per barrel credit.                                                                                       
1:59:35 PM                                                                                                                    
MR. JEPSEN  said none.   Per barrel  credits are  part of  the tax                                                              
rate  put  in  place  in  order   to  have  a  reasonable  tax  on                                                              
producers;  unlike  other credits,  a  per  barrel credit  is  not                                                              
reimbursable  and cannot be  carried forward,  but is  a mechanism                                                              
agreed to in Senate  Bill 21 legislation.  In further  response to                                                              
Representative  Parish, he said  the state  determines a  fair tax                                                              
rate  to   achieve  revenue,   more  jobs,   a  healthy   economy,                                                              
investment,  and  oil  in the  Trans-Alaska  Pipeline  System;  he                                                              
opined  incentives for  investment  create a  healthy economy  and                                                              
encourage new investment.                                                                                                       
2:02:52 PM                                                                                                                    
DAMIAN  BILBAO, Vice  President, Commercial  Ventures, BP  Alaska,                                                              
provided  a  PowerPoint  presentation  entitled,  "Prudhoe  Bay  &                                                              
Alaska Policy  Enabling the  next 40 years."   Mr. Bilbao  said he                                                              
supported  the testimony  of the previous  speakers, Ms.  Moriarty                                                              
and  Mr.  Jepsen.    He  directed   attention  to  graphs  labeled                                                              
"Investment trends  by region" and  "Production trends  by region"                                                              
that illustrated  global, U.S.,  and Alaska trends,  and explained                                                              
that both graphs  were indexed to a common starting  point to show                                                              
how each  region moved  relative to  each other.   He  pointed out                                                              
that from  2008-2009, investment in  the Lower 48 was  much higher                                                              
-  relative to  global  investment  - due  to  new technology  and                                                              
developments,  and although  globally  there was  an increase,  in                                                              
Alaska  investment was  "flat" until  about 2013  when the  Alaska                                                              
profile began  to increase;  in fact,  investment globally  and in                                                              
the  Lower  48 began  to  decline  as  prices  fell in  2014,  but                                                              
investment  in  Alaska  continued   to  climb.    Looking  at  the                                                              
production graph,  increased investment  in the Lower  48 resulted                                                              
in  dramatic  increases in  production  in  the Lower  48,  global                                                              
production  increased,  and  in  Alaska  production  continued  to                                                              
decline by an average  of 4 percent to 6 percent  until 2013-2014,                                                              
when the  production trend  in Alaska flattened  out.   Mr. Bilbao                                                              
advised  that in 2014,  there was  a material  shift that  brought                                                              
investment  into Alaska,  and with  that an  associated impact  to                                                              
production [slide 2].                                                                                                           
2:08:05 PM                                                                                                                    
MR.  BILBAO  presented  an  example of  the  distribution  of  one                                                              
barrel of  oil in Alaska  priced at $43 per  barrel:  in  2016, of                                                              
$43,  royalty  and  state  taxes  were $7,  and  OPEX,  CAPEX  and                                                              
transportation were  $48, which resulted in a loss  to industry of                                                              
$12 per barrel;  despite the industry's loss, the  state was still                                                              
receiving revenue [slide  3].  From the perspective  of BP, losses                                                              
were over $1  million per day, prompting improved  efficiencies to                                                              
its  operations.   To  illustrate  how  Senate Bill  21  attracted                                                              
investment and activity,  Mr. Bilbao provided a  graph that showed                                                              
that investment in  Prudhoe Bay drilling from 2010  to 2012 was "a                                                              
broadly  flat  level."    In  response  to  Senate  Bill  21,  the                                                              
industry  quickly  increased  drilling activity  and  spending  in                                                              
Prudhoe  Bay  beginning in  2013  through  2015, even  though  oil                                                              
prices  continued to  decline  [slide 4].    He acknowledged  that                                                              
spending  in 2016  has decreased  as a  result of  low oil  price,                                                              
concluding  that policy has  its limitations.   Overall,  however,                                                              
Senate Bill  21 has  resulted in  increased activity,  production,                                                              
new discoveries,  and  more revenue  to the state  than under  the                                                              
ACES  system;  further, he  opined  that  Senate  Bill 21  is  not                                                              
complicated  to  administer  and   drives  behavior  in  the  best                                                              
interest  of the  state.   Regarding  policy,  BP measures  policy                                                              
against the following set of principles [slide 5]:                                                                              
   · encourages more North Slope oil down TAPS                                                                                  
   · extends the life of the backbone fields which provide the                                                                  
     bulk of production                                                                                                         
   · encourages more independents to look for oil and gas                                                                       
   · does not pick winners and losers, but remains neutral                                                                      
2:14:18 PM                                                                                                                    
CO-CHAIR TARR  asked whether BP has  used any of the  credits that                                                              
are currently available.                                                                                                        
MR.  BILBAO said  since  2006,  no.   He  referred  to an  opinion                                                              
letter  recently issued  by  the Department  of  Revenue which  he                                                              
said,  "certainly  discourages   the  opportunity"  [document  not                                                              
MR. BILBAO, in  response to Representative Parish,  clarified that                                                              
BP has not acquired any credits to offset tax liability.                                                                        
REPRESENTATIVE PARISH  surmised BP has  used tax credits,  but has                                                              
not purchased them from smaller companies.                                                                                      
MR.  BILBAO said  BP uses  per barrel  offsets to  reduce its  tax                                                              
liability.    Senate  Bill  21 increased  the  tax  rate  from  25                                                              
percent to 35 percent;  however, in order to encourage  a focus on                                                              
more  production,  the legislation  also  created  the per  barrel                                                              
credits,  and  for  every  barrel produced,  BP  uses  per  barrel                                                              
credits to offset its tax liability.                                                                                            
REPRESENTATIVE  PARISH  asked  what   BP  would  pay  to  purchase                                                              
transferrable tax credits from a small independent producer.                                                                    
MR. BILBAO said he would not speculate.                                                                                         
REPRESENTATIVE TALERICO asked how much BP reduced its workforce.                                                                
MR.   BILBAO  answered   that  BP   has   reduced  its   workforce                                                              
approximately  17 percent  over the  last several  years to  1,700                                                              
REPRESENTATIVE  BIRCH asked  whether  the existing  infrastructure                                                              
is  accessible to  others  in the  industry  that may  have a  new                                                              
MR.  BILBAO  suggested  the  question   should  be  asked  of  the                                                              
independents.    He  opined  BP  has  made  progress  in  creating                                                              
standard  third-party  facility   terms  that  can  be  leveraged;                                                              
currently, at Prudhoe  Bay water management is  an issue, however,                                                              
commercial terms are managed more efficiently than in the past.                                                                 
CO-CHAIR TARR passed the gavel to Co-Chair Josephson.                                                                           
2:21:04 PM                                                                                                                    
MR.  DAN SECKERS,  Tax Counsel,  ExxonMobil Corporation,  informed                                                              
the committee  ExxonMobil Corporation  is committed to  Alaska and                                                              
has been a key  player in the development of Alaska's  oil and gas                                                              
resources,  spending over $20  billion dollars  in the  state over                                                              
many years.   Alaska remains an important component  in ExxonMobil                                                              
Corporation's   worldwide  portfolio;   however,  for   Alaska  to                                                              
maximize the  benefits of its  resource potential, the  state must                                                              
remain  globally  competitive and  needs  a long-term  and  stable                                                              
fiscal environment  that attracts industry and provides  the state                                                              
and  industry a  fair share  of revenue.   He  opined that  Senate                                                              
Bill 21,  [also known  as the More  Alaska Production  Act (MAPA)]                                                              
has  made  Alaska  more  globally   competitive  and  has  led  to                                                              
industry investment  and increased oil production.   He stated his                                                              
support of  the previous  testimony offered  by Ms. Moriarty,  Mr.                                                              
Jepsen,  and  Mr.  Bilbao,  and added  that  MAPA  has  simplified                                                              
Alaska's   production   tax   regime,   thereby   providing   more                                                              
confidence to  industry and investors.   The policy goals  of MAPA                                                              
are  being  achieved such  as  providing  a more  predictable  and                                                              
competitive  tax  regime  and  attracting  additional  investment,                                                              
more  production, and  corresponding  benefits to  Alaskans.   Mr.                                                              
Seckers recalled  that in 2013 at  the time MAPA was  proposed, he                                                              
stated  that  MAPA  would  make  significant  progress  in  making                                                              
Alaska more globally  competitive, and has done so  by providing a                                                              
more balanced tax  production tax structure by  offsetting aspects                                                              
of  the ACES  tax regime;  for example,  eliminating the  punitive                                                              
progressivity  feature   of  ACES.    In  addition   to  being  an                                                              
excessive tax,  the progressivity feature was  calculated monthly,                                                              
so  projects  could  not  be evaluated,  and  the  elimination  of                                                              
progressivity simplified  the production tax regime;  on the other                                                              
hand,  MAPA increased  the tax  rate  to 35  percent, compared  to                                                              
12.25  percent in  Louisiana.    Although high,  the  tax rate  is                                                              
predictable,  so industry  can make  easier investment  decisions;                                                              
MAPA also  removed  a 20 percent  tax credit  on capital  expenses                                                              
tied to  investment -  not necessarily to  production -  which was                                                              
replaced by  the per barrel  credit that helped  incent production                                                              
at legacy  and economically-challenged  new fields.   Importantly,                                                              
MAPA preserved  the critical  net-based tax  structure of  PPT and                                                              
ACES  which  allows   the  recovery  of  ordinary   and  allowable                                                              
expenses.   Mr.  Seckers stressed  that in  Alaska deductions  and                                                              
credits  are necessary  to offset  a  35 percent  gross tax  rate;                                                              
furthermore,  MAPA preserved  a  net operating  loss feature  that                                                              
allows  a  balancing  of  revenue and  expenses:    a  cornerstone                                                              
feature  of all net-based  tax systems.   He  concluded that  MAPA                                                              
has  resulted  in  the first  overall  production  increase  since                                                              
2002,   a   more  competitive   investment   climate,   and   more                                                              
predictable  production taxes;  therefore, ExxonMobil  Corporation                                                              
believes allowing  the reforms  brought by  MAPA to continue  will                                                              
lead  to  more  increased  investment  and  production,  and  more                                                              
benefits to Alaskans.                                                                                                           
2:28:51 PM                                                                                                                    
[Although not  stated on the  audio recording, Co-Chair  Josephson                                                              
returned the gavel to Co-Chair Tarr.]                                                                                           
REPRESENTATIVE  PARISH asked what  percent of  gross value  at the                                                              
point  of production  ExxonMobil  Corporation  paid  to the  state                                                              
last year.                                                                                                                      
MR. SECKERS answered  he did not know and taxpayer  information is                                                              
confidential.   In further response  to Representative  Parish, he                                                              
said he did know they have paid their fair share.                                                                               
REPRESENTATIVE BIRCH asked for an update on Point Thomson.                                                                      
MR. SECKERS  said Point Thomson  is on schedule and  is producing.                                                              
Point Thomson  has unique  economics and  pressures, and  he added                                                              
that under the  ACES tax system ExxonMobil Corporation  would have                                                              
paid less  tax, however,  the current  regime  is more stable  and                                                              
CO-CHAIR TARR  inquired as to  whether ExxonMobil  Corporation has                                                              
used any credits that are currently available.                                                                                  
MR. SECKERS  stated that ExxonMobil  Corporation has  used credits                                                              
to the extent they were available.                                                                                              
CO-CHAIR TARR  clarified that net  operating losses are  a feature                                                              
of every  net tax system  - as related  to corporate income  tax -                                                              
but not  as a feature of  a severance tax.   She pointed  out that                                                              
net  operating  losses  as  a  feature  of  a  severance  tax,  in                                                              
addition to a corporate income tax, are unique to Alaska.                                                                       
MR. SECKERS  reminded the  committee that  the state's  tax system                                                              
is  a  combination  of  a  gross   and  a  net  system,  which  is                                                              
predominately  a  net  system,  and  thus  has  an  essential  net                                                              
operating  loss  feature  to  allow   balancing  of  revenues  and                                                              
expenses, and to  allow companies to recover costs  of investments                                                              
in the  future, "otherwise, some  investments won't get  made, and                                                              
you'll  start  causing   a  different  dynamic  approach   to  the                                                              
analysis of investments in the state."                                                                                          
CO-CHAIR  JOSEPHSON  surmised  that   ExxonMobil  Corporation  has                                                              
invested $3  billion in the  Point Thomson  Unit with the  hope of                                                              
supplying a natural gas pipeline in the future.                                                                                 
MR. SECKERS  agreed that  Point Thomson is  primarily a  gas field                                                              
to  anchor  a   gas  pipeline,  but  it  is   also  important  for                                                              
delineating  the reservoir and  possibly other  uses on  the North                                                              
CO-CHAIR  JOSEPHSON  noted  Point  Thomson has  the  advantage  of                                                              
being closest to the Arctic National Wildlife Refuge (ANWR).                                                                    
MR. SECKERS was  unsure as to Point Thomson's  application to ANWR                                                              
or other areas.                                                                                                                 
2:36:37 PM                                                                                                                    
PAT FOLEY, Senior  Vice President, Caelus Energy  Alaska (Caelus),                                                              
provided  a  PowerPoint presentation  entitled,  "Caelus  Activity                                                              
Update,"  dated 2/1/17.   Mr.  Foley  stated Caelus  is a  company                                                              
that  is  in Alaska  because  of  the fiscal  climate  created  by                                                              
Senate Bill  21; in  fact, Caelus has  earned several  tax credits                                                              
and his presentation  would show how the state  also benefits from                                                              
tax  credits  as  a  co-investor.    Caelus  is  a  privately-held                                                              
company  and  he  provided brief  background  information  on  its                                                              
president  and on  prior  company activities.    Three factors  in                                                              
Alaska that  attracted Caelus  to purchase  Pioneer Alaska  assets                                                              
are:   the petroleum system  and opportunities for  discovery; the                                                              
contractor community  of services;  the investment climate  [slide                                                              
2].   He directed  attention  to the  company's portfolio,  noting                                                              
that  Caelus  operates  Oooguruk  River  Unit  as  its  70-percent                                                              
owner, producing  approximately 15,000 barrels per  day.  Onshore,                                                              
the Nuna project  was sanctioned after the passage  of Senate Bill                                                              
21; Nuna  is a  project of  approximately 25,000  barrels  at peak                                                              
production  after   a  future   investment  of  approximately   $1                                                              
billion, and  Caelus will drill 30  wells during phase  1.  Caelus                                                              
has purchased  eastern exploration  leases totaling  350,000 acres                                                              
and  anticipates drilling  two  projects "in  the  next winter  or                                                              
two."  The Caelus  Smith Bay discovery is approximately  125 miles                                                              
outside   of  the   Colville  River   Unit  and   70  miles   from                                                              
Barrow/Utqiagvik,  located in a  very sensitive waterfowl  habitat                                                              
area [slide 3].   Mr. Foley provided Caelus'  major milestones: in                                                              
2013, Senate  Bill 21  passed; in  2014, Caelus purchased  Pioneer                                                              
Alaska  assets and  acquired  320,000 acres  in  leases; in  2015,                                                              
sanctioned  Nuna   project;  in   2016,  idled  drilling   rig  in                                                              
Oooguruk,  reduced workforce,  and  announced  discovery at  Smith                                                              
Bay [slide  4].   An overview  of the  Nuna project revealed  that                                                              
peak production  would be about  25,000 barrels per day,  and that                                                              
the project is now  idled due to low oil prices  and concern about                                                              
the fiscal  policy in  the state.   The  project is searching  for                                                              
investment dollars  and he expressed his hope  that pipelines will                                                              
be installed  this winter  with first  oil late  in 2018.   Within                                                              
the terms  of House Bill  247, the project  will acquire  and earn                                                              
$150 million  in cashable tax  credit certificates from  the state                                                              
in exchange for  $2.2 billion in revenue from  royalty, net profit                                                              
share  lease  payments,  production  tax, and  ad  valorem,  which                                                              
equates to a 15.8 times over return on investment [slide 5].                                                                    
2:45:30 PM                                                                                                                    
CO-CHAIR JOSEPHSON  inquired as to how the outlay  of $151 million                                                              
in state tax credits was calculated.                                                                                            
MR. FOLEY  explained that Caelus'  projections come  from economic                                                              
models; the  values are  generated at  $70 per  barrel of  oil and                                                              
estimate a net operating  loss credit of 35 percent  of a negative                                                              
cash  flow  stream  before  becoming   cash  flow  positive.    He                                                              
     All  of these  are estimates,  all of  these are  wrong,                                                                   
     but  directionally, it's  going  to give  you the  right                                                                   
     ballpark  of   what  a  project   like  this   can,  can                                                                   
     contribute to the state of Alaska.                                                                                         
MR. FOLEY stated  two exploration wells were drilled  at Smith Bay                                                              
last year  that discovered  a resource with  a thickness  of about                                                              
1,000  to 1,500  feet, and  a gross  sand thickness  of about  200                                                              
feet.   He  characterized  the  discovery  as a  tight  reservoir;                                                              
however,  the oil  sample  extracted was  43  degree gravity  oil,                                                              
which is a very  low viscosity of twice the quality  of most North                                                              
Slope  oil production,  and which  indicates that  Smith Bay  is a                                                              
commercial  project.   The goal  next winter  is to drill  another                                                              
appraisal  well  with  additional  testing,  at  a  cost  of  $140                                                              
million [slide  5].  Thus,  oil in place  on Caelus leases  is six                                                              
billion barrels and,  if estimating recoverable oil  at between 20                                                              
percent and 30  percent, the project could deliver  1.8 billion to                                                              
2.5 billion  barrels of  oil.  He  placed Smith  Bay field  on par                                                              
with  Kuparuk River  Unit, supplying  200,000 barrels  of oil  per                                                              
day and supported  by 2,000 direct  jobs at peak production.   The                                                              
total cash  contribution to  the state would  be $28  billion from                                                              
royalty, production  tax, and ad  valorem.  He acknowledged  first                                                              
oil is  not expected  until 2022  or later,  and the project  will                                                              
only progress  under a  tolerable oil price  and a durable  fiscal                                                              
system [slides 6  and 7].  Mr. Foley restated that  in [2000] TAPS                                                              
had  almost  1 million  barrels  flowing  through,  and  currently                                                              
about one-half of  that flows through:  at around  300,000 barrels                                                              
per day TAPS  becomes challenged [slide  8].  He provided  a chart                                                              
that illustrated  increased oil production projected  from all new                                                              
projects  except [ConocoPhillips  Alaska,  Inc. Willow  discovery]                                                              
[slide  9].   Turning  to recent  and  proposed  tax changes,  Mr.                                                              
Foley  provided  a  project  model  that  illustrated  how  fiscal                                                              
regime changes and  proposed changes affect the value  of the Nuna                                                              
project; due to  changes made by House Bill 247,  the Nuna project                                                              
is now  worth $0.62  on the  dollar to  Caelus, and under  changes                                                              
proposed  in  Senate Bill  5005  the  project would  never  happen                                                              
[slide 10].   He  offered key  drivers that  are important  to the                                                              
state and industry [slide 11].                                                                                                  
2:54:52 PM                                                                                                                    
CO-CHAIR  JOSEPHSON directed  attention to  slide 10 and  inquired                                                              
as to what royalty relief Caelus had already received for Nuna.                                                                 
MR. FOLEY said  Caelus received royalty relief; Nuna  is a project                                                              
with a combination  of leases:  one-sixth royalty  leases and one-                                                              
eighth royalty  leases, plus  a 30  percent net profit  component.                                                              
He remarked:                                                                                                                    
     So, the royalty  modification that was granted  took all                                                                   
     of those base  royalties and rolled them down  to a flat                                                                   
     5  percent until  we received  a multiple  of our  total                                                                   
     investment.  ... One of the  conditions of that  royalty                                                                   
     modification said  first oil had to commence  by X date.                                                                   
     We   will  not   make  that   date,   so  that   royalty                                                                   
      modification will expire without having any activity                                                                      
CO-CHAIR  JOSEPHSON  surmised that  Caelus  will  not receive  any                                                              
benefit   from  the   contracted   royalty  relief   due  to   its                                                              
MR. FOLEY  advised that  the Division of  Oil and Gas,  Department                                                              
of  Natural  Resources,  will receive  a  renewed  application  to                                                              
extend the aforementioned royalty modification.                                                                                 
REPRESENTATIVE BIRCH asked how sanctioning is defined.                                                                          
MR.  FOLEY explained  that after  a company  completes a  rigorous                                                              
economic  evaluation  of  a  project,  it  seeks  financing,  thus                                                              
sanctioning  is a  culmination of  the financing  request and  the                                                              
commitment to the project.                                                                                                      
REPRESENTATIVE   BIRCH  inquired  how   Caelus  plans   to  access                                                              
privately-owned existing infrastructure on the North Slope.                                                                     
MR.  FOLEY  recalled  that  at the  Oooguruk  River  Unit,  Caelus                                                              
contracted with  owners for third-party  processing.  He  said the                                                              
details  of   the  contract  are  confidential,   however,  Caelus                                                              
avoided capital  expenditures and in exchange, rented  capacity in                                                              
the existing system by paying fees.                                                                                             
REPRESENTATIVE  RAUSCHER asked for  Caelus' policy on  Alaska-hire                                                              
and for the number of Caelus employees who are local.                                                                           
MR. FOLEY answered  that Caelus has 70 employees  in Anchorage and                                                              
on the North Slope; he estimated that 80-85 percent are local.                                                                  
3:02:19 PM                                                                                                                    
The House  Resources Standing  Committee  meeting was recessed  at                                                              
3:02  p.m. to  be  continued  at 6:00  p.m.   [The  meeting  never                                                              

Document Name Date/Time Subjects
BP Juneau Slides 1.27.2017.pdf HRES 2/1/2017 1:00:00 PM
Caelus Energy Update 1FEB17.pdf HRES 2/1/2017 1:00:00 PM
ConocoPhillips House Resources Testimony Feb 1 2017 Final JNU.pdf HRES 2/1/2017 1:00:00 PM
FINAL AOGA HRES 02 01 17.pdf HRES 2/1/2017 1:00:00 PM