Legislature(2007 - 2008)HOUSE FINANCE 519
11/01/2007 09:00 AM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB2001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
November 1, 2007
9:17 a.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Anna Fairclough
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative David Guttenberg
MEMBERS ABSENT
Representative Scott Kawasaki
OTHER LEGISLATORS PRESENT
Representative Les Gara
Representative John Harris
Representative Kyle Johansen
Representative Mike Kelly
Representative Kevin Meyer
Senator Thomas Wagoner
COMMITTEE CALENDAR
HOUSE BILL NO. 2001
"An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to the issuance of
advisory bulletins and the disclosure of certain information
relating to the production tax and the sharing between agencies
of certain information relating to the production tax and to oil
and gas or gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas auditors
and their immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund; providing
for retroactive application of certain statutory and regulatory
provisions relating to the production tax on oil and gas and
conservation surcharges on oil; making conforming amendments;
and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB2001
SHORT TITLE: OIL & GAS TAX AMENDMENTS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
10/18/07 (H) READ THE FIRST TIME - REFERRALS
10/18/07 (H) O&G, RES, FIN
10/19/07 (H) O&G AT 1:30 PM HOUSE FINANCE 519
10/19/07 (H) Heard & Held
10/19/07 (H) MINUTE(O&G)
10/20/07 (H) O&G AT 12:00 AM HOUSE FINANCE 519
10/20/07 (H) Heard & Held
10/20/07 (H) MINUTE(O&G)
10/21/07 (H) O&G AT 1:00 PM HOUSE FINANCE 519
10/21/07 (H) Heard & Held
10/21/07 (H) MINUTE(O&G)
10/22/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/22/07 (H) Heard & Held
10/22/07 (H) MINUTE(O&G)
10/23/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/23/07 (H) Heard & Held
10/23/07 (H) MINUTE(O&G)
10/24/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/24/07 (H) Heard & Held
10/24/07 (H) MINUTE(O&G)
10/25/07 (H) O&G AT 10:00 AM HOUSE FINANCE 519
10/25/07 (H) Heard & Held
10/25/07 (H) MINUTE(O&G)
10/26/07 (H) O&G AT 10:00 AM HOUSE FINANCE 519
10/26/07 (H) Heard & Held
10/26/07 (H) MINUTE(O&G)
10/27/07 (H) O&G AT 2:00 PM HOUSE FINANCE 519
10/27/07 (H) Heard & Held
10/27/07 (H) MINUTE(O&G)
10/28/07 (H) O&G AT 2:00 PM HOUSE FINANCE 519
10/28/07 (H) Moved CSHB2001(O&G) Out of Committee
10/28/07 (H) MINUTE(O&G)
10/29/07 (H) O&G RPT CS(O&G) NT 4DP 1NR 2AM
10/29/07 (H) DP: SAMUELS, NEUMAN, RAMRAS, OLSON
10/29/07 (H) NR: DOOGAN
10/29/07 (H) AM: KAWASAKI, DAHLSTROM
10/29/07 (H) RES AT 1:00 PM HOUSE FINANCE 519
10/29/07 (H) Heard & Held
10/29/07 (H) MINUTE(RES)
10/30/07 (H) RES AT 9:00 AM HOUSE FINANCE 519
10/30/07 (H) Heard & Held
10/30/07 (H) MINUTE(RES)
10/30/07 (H) RES AT 6:30 PM HOUSE FINANCE 519
10/30/07 (H) Heard & Held
10/30/07 (H) MINUTE(RES)
10/31/07 (H) RES AT 9:00 AM HOUSE FINANCE 519
10/31/07 (H) Heard & Held
10/31/07 (H) MINUTE(RES)
11/01/07 (H) RES AT 9:00 AM HOUSE FINANCE 519
WITNESS REGISTER
CRAIG HAYMES, Production Manager - Alaska
ExxonMobil Corporation
Anchorage, Alaska
POSITION STATEMENT: Expressed concerns with HB 2001.
MARILYN CROCKETT
Alaska Oil and Gas Association
Anchorage, Alaska
POSITION STATEMENT: Expressed concerns with HB 2001.
TOM WILLIAMS
Alaska Oil and Gas Association
Anchorage, Alaska
POSITION STATEMENT: During hearing of HB 2001, answered
questions and provided comments.
PAT FOLEY, Manager
of Lands and External Affairs
Pioneer Natural Resources Alaska
POSITION STATEMENT: During hearing of HB 2001, encouraged the
committee to stay the course with the existing tax.
DUDLEY PLATT, Consultant
Eagle River, Alaska
POSITION STATEMENT: During hearing of HB 2001, provided
comments.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 9:17:06 AM. Representatives
Gatto, Johnson, Wilson, Roses, Edgmon, Seaton, and Fairclough
were present at the call to order. Representative Guttenberg
arrived as the meeting was in progress. Other legislators
present were Representatives Gara, Harris, Johansen, Kelly,
Meyer, and Senator Wagoner.
HB 2001-OIL & GAS TAX AMENDMENTS
9:17:20 AM
CO-CHAIR GATTO announced that the only order of business would
be HOUSE BILL NO. 2001, "An Act relating to the production tax
on oil and gas and to conservation surcharges on oil; relating
to the issuance of advisory bulletins and the disclosure of
certain information relating to the production tax and the
sharing between agencies of certain information relating to the
production tax and to oil and gas or gas only leases; amending
the State Personnel Act to place in the exempt service certain
state oil and gas auditors and their immediate supervisors;
establishing an oil and gas tax credit fund and authorizing
payment from that fund; providing for retroactive application of
certain statutory and regulatory provisions relating to the
production tax on oil and gas and conservation surcharges on
oil; making conforming amendments; and providing for an
effective date." [Before the committee was CSHB 2001(O&G).]
CO-CHAIR GATTO then reviewed committee procedure and introduced
the first speaker.
9:18:38 AM
CRAIG HAYMES, Production Manager - Alaska, ExxonMobil
Corporation, Anchorage, Alaska, paraphrased from a prepared
statement, which read as follows [original punctuation
provided]:
... I want to thank the committee also today for the
opportunity to testify on this important issue in
front of us. I'd like to mention the packages we've
given you. We have an executive summary on the front
of our written testimony and the executive summary is
about six pages long and that's to help facilitate the
discussion today and hopefully will help you follow as
we go along. I would like to start and talk about
ExxonMobil and ExxonMobil in Alaska.
ExxonMobil has had a presence in Alaska for over 50
years and has been a key player in the development of
Alaska's oil industry. We have spent and invested
over $20 billion dollars in Alaska. We are currently
very active with our co-owners at Prudhoe Bay,
Kuparuk, Duck Island, Granite Point and Point Thomson.
Our current working interest share of production in
the State is approximately 150,000 barrels of oil per
day and we are also the largest owner of discovered
Alaska gas resources. We certainly look forward to
working with Alaska for many more years to come.
9:20:26 AM
I would like to state upfront that ExxonMobil believes
the current PPT tax rate and the proposed increase
will not result in the additional investments required
to maximize development of Alaska's resources. When
you consider Alaska's resource potential and the
current production decline, ExxonMobil does not
support the Administration's proposed tax increase.
Alaska has significant undiscovered resources - both
oil and gas; but oil production is declining.
Increasing investment in Alaska is required to
mitigate production decline. Government and industry
have a common goal: to maximize economic resource
development of oil and gas. The full development of
Alaska's resource potential will require extensive
collaboration and focus from all parties. We need to
work together - government, the industry, and the
people of Alaska to enhance the development of
Alaska's resources.
ExxonMobil believes that Alaska needs a long term
resource development policy, a policy that will
encourage increasing investment - increasing
investment needed to mitigate production decline, a
policy that will encourage the full development of
Alaska's oil and gas resources. With that I would
like to talk about Alaska and the significant oil and
gas resources it is blessed with.
9:22:11 AM
To date Alaska has produced close to 17 billion
barrels of oil - a world class result. According to
the US Geological Survey and the US Minerals
Management Service, Alaska still has undiscovered
technically recoverable resources of over 53 billion
barrels of oil as shown on the chart, the barrel -
that's represented by the orange colors. This is in
addition to the Department of Natural Resources'
estimate of known or proven reserves of 6 billion
barrels - that's shown in the dark green in the chart.
When you consider this resource potential, Alaska has
only produced one quarter of its resource. In other
words, Alaska still has the potential to produce 59
billion barrels of oil.
9:23:22 AM
CHAIR GATTO asked Mr. Haymes if his numbers include heavy oils.
MR. HAYMES said the numbers include conventional oil only.
CHAIR GATTO asked how much of the remaining three-quarters of
Alaska's oil resource is recoverable.
MR. HAYMES said if one assumes a crude price of about $60 per
barrel, recovery of about half of the 53 billion barrels would
be economically feasible, according to the federal agencies. He
clarified the numbers he quoted were based on the mean.
9:24:10 AM
MR. HAYMES continued:
If you expand the resource assessment to include gas,
on an oil equivalent basis, it doubles those 53
billion barrels. As you can see in the chart, there's
about 259 trillion cubic feet of gas according to the
U.S. Geological Survey and the U.S. Minerals
Management Service. Alaska has significant oil and
gas resources. While Alaska's resource potential is
high, the Oil and Gas Journal and Energy Information
Administration report that its world ranking of proved
reserves has dropped from 14th in 1977 to around 30th
today.
9:25:04 AM
CHAIR GATTO asked how many rankings exist.
MR. HAYMES noted every country in the world is ranked so the
number is probably around 100.
9:25:16 AM
MR. HAYMES continued:
How can we commercialize Alaska's resource potential?
I'd like to talk a little bit about Alaska's high cost
challenges. Alaska is a high cost environment that
challenges the pace of exploration and development of
both existing and new fields. Alaska also has mature
producing fields with significant challenges and
growing unit costs. Many factors contribute to
Alaska's higher costs. Some examples include severe
Arctic conditions placing seasonal limitations on
drilling and operations; a sensitive environment
requiring significant and due diligence measures to
protect it; remote location of its resource and
distance to market and current restrictions for
exploration activities. For any investor, higher
costs reduce the attractiveness of any opportunity.
We need to work together to reduce these high costs.
9:26:33 AM
The effective application of technology is critical.
We have been quite successful in the past at using
technology to unlock Alaska's resources. Some
examples include the installation of the ice resistant
platform at Granite Point, which is still producing
oil today. Another example is the completion designs
at Prudhoe Bay for permafrost conditions. Another
example is the installation of concrete oil and
drilling systems that we used to drill the first
exploration wells in the ice-covered waters of the
Beaufort Sea. And, also, still in use today a 3D
full-field simulation model for Prudhoe Bay, which
continues to underpin enhanced oil recovery
opportunities and development drilling opportunities.
The application of technology will continue to be
critical to the future pace of resource exploration
and development activity. It will require significant
long term research and investment.
9:27:59 AM
CHAIR GATTO asked about the different conditions that are
apparent in oil field developments and whether the Arctic
environment is tougher because of distance to market. He noted
the Arctic condition also offers some advantages; a 48-inch
pipeline has plenty of room in it and ice roads can be built.
He questioned whether the Arctic condition is harder for an oil
company to develop by 2, 4, or 10 times.
MR. HAYMES replied when the Arctic environment is compared to
other areas where most of the oil and gas is being produced
today, it presents unique challenges that increase costs. The
remote location requires significant infrastructure to get the
product to market. The North Slope is inside the Arctic Circle
so drilling and operation and maintenance activities can only be
done during certain times of the year. The increased costs are
due to what is known as "waste," meaning a drill might sit at a
location for weeks or months while awaiting a window of
opportunity. In addition the rigs typically cost $20 million to
mobilize and winterize because of severe conditions. Last, the
offshore water sites must deal with freezing and thawing ice.
9:30:34 AM
MR. HAYMES continued:
I'd like to talk about Alaska's oil production.
Alaska is currently producing approximately 750,000
barrels of oil per day from the North Slope - about
one third of its peak. The Department of Revenue
issued recently a forecast in the spring revenue
sources book. You can see that in the chart. It is
made of two components. Apparently current base
production is shown in the green and then future
"Under Development and Under Evaluation" is shown in
the blue.
9:32:27 AM
The department's forecast shows that the current base
production in the green is estimated to decline at 9
percent per year and within 10 years will be down to
around 360,000 barrels per day. The department's
forecast also shows that this production decline will
be partially mitigated or offset by the blue edge -
"Under Development and Under Evaluation" component.
That includes future investment opportunities, such as
satellite development drilling, enhanced oil recovery
from existing fields. Based on this forecast, 50
percent of the future production is not developed or
producing today. If you consider that most North
Slope projects take 5 to 7 years to bring to
production, new term investment decisions for these
activities will be critical to underpin future
production as forecast here.
If you turn to the next slide, as I mentioned earlier,
the Department of Revenue's forecast is based on a 9
percent decline, as shown in the green, but this
decline includes current production enhancement
investment activities. The department forecast does
not highlight that this activity requires investment
decisions that are no different than the "Under
Development and Under Evaluation" category. So, as
such, a more accurate representation of the future
investment levels required to achieve this forecast is
shown in the chart below.
9:32:55 AM
As this chart shows, Alaska's oil production could be
as low as 150,000 barrels per day in 10 years without
an ongoing increasing investment. Based on this
forecast, within 10 years 75 percent of production
will come from new investments. When you look at that
component - the green hatched section and the blue
section - conservatively we estimate at least $30 to
$40 billion of investment is required to achieve this
production forecast. We think 10 years. That does
not include the billions of dollars of operating
expenditures that would be required to support those
developments once they are producing. This is a
significant future investment spending level and
substantially more than is currently invested today.
9:34:03 AM
MR. HAYMES continued:
I'd like to focus in a little more on the production
and talk about Alaska's two largest oil fields -
Prudhoe Bay and Kuparuk. They have been producing
since 1977 and 1981, respectively. Today these two
fields account for over 70 percent of our production
on the North Slope. With continuing exploration and
investment activity, these fields could remain at this
level for the next decade. These fields require
continuous investment to keep the oil flowing and the
facilities operating at capacity. This is the same
for any oil field in the world. During production of
oil there are many changes - changes in reservoir
pressures, oil, water, gas production levels,
operating conditions, facilities utilization. In
order to keep the oil flowing, ongoing additional
investment is required. Such is the historical
investment that's been at Prudhoe Bay for gas and
water injection and gas compression facilities.
Apparently the owners spent over $2 billion per year
to optimize and enhance production from Prudhoe Bay
and Kuparuk. That spending is in addition to the
investments associated with development drilling,
project activities and other enhanced oil recovery
opportunities. These operating expenditures are
critical to mitigate oil production decline. Prudhoe
Bay and Kuparuk have the potential to continue to be
critical contributors to Alaska's oil production.
They also have the potential to remain hubs for other
activities on the North Slope, whether it's in the
pursuit of heavy oil, light oil, or gas.
9:36:07 AM
Now I'd like to talk about a couple of examples of
where this has worked. Many of today's exploration
and development activities are occurring around
Prudhoe Bay and Kuparuk. Since the year 2000 there
have been multiple Prudhoe Bay satellite developments.
Most of those today are contributing over 40,000
barrels of oil today. These satellite developments
would not have been possible without the
infrastructure of Prudhoe Bay and Kuparuk. They
simply would not have been economic. As
infrastructure on the North Slope continues to expand,
it improves and creates economic viability for future
satellite developments as the infrastructure continues
to grow.
Another example is development drilling in Prudhoe Bay
and Kuparuk. Over the past 7 years, over 900 new
wells have been drilled in those fields. The drilling
of those wells has slowed the production decline from
9 to 12 percent, so 12 to 15 percent to 6 to 9 percent
-and almost 40 percent of today's production at
Prudhoe Bay is from these new wells.
9:37:17 AM
CHAIR GATTO asked for clarification of the percentages.
MR. HAYMES apologized for the confusion and explained that if no
drilling activity occurred, Prudhoe Bay and Kuparuk would
typically decline at 12 to 15 percent. Drilling activity would
mitigate the decline to 6 to 9 percent.
9:37:42 AM
MR. HAYMES continued:
For the past two years, development drilling in
Prudhoe Bay alone has developed the equivalent amount
of resources as the important Oooguruk development.
Prudhoe Bay and Kuparuk have the potential to continue
to be critical contributors to the North Slope oil
production. They also have the potential to remain
key hubs - hubs that enable us in the pursuit of new
heavy oil, light oil and gas as I mentioned.
Encouraging increasing investment in these fields is
critical and important to the future. Without these
two hubs, Alaska would be severely challenged to
realize the full potential of its resources.
9:38:28 AM
Now I'd like to shift gears and talk about
ExxonMobil's position on the enacted PPT. ExxonMobil
did not support the PPT that was enacted last year.
As we testified last year, we supported the concept of
a net-based tax structure, the proposed 20 percent tax
rate as per the original PPT bill, and we said that it
would not encourage a 20 percent full development of
Alaska's resource potential. We agreed with the 20
percent tax rate in order to support the progression
of a gas pipeline project. The PPT that was
ultimately enacted increased the 20 percent base tax
rate to 22.5 percent with progressivity, more than
doubling industry's taxation. When combined with the
gross royalties and the high cost environment, it
produces the attractiveness of Alaska's resource
developments.
There has been a lot of discussion recently on PPT
revenues and forecasts, which has been used in part to
support the Administration's proposed tax increase.
PPT has only been in existence for slightly more than
one year. The Department of Revenue has not yet
completed its regulations around PPT, nor completed an
order. ExxonMobil, as well as a number of producers,
met with the Department of Revenue several months ago
to talk with them and help understand how we can help
them improve their ability to forecast revenues.
We're willing to continue to work with the Department
of Revenue in that pursuit. We're also willing to
work with auditors and our partners to improve the
understanding of joint interest billings.
9:40:39 AM
I would now like to talk about the Administration's
proposed tax increase. In analyzing the
Administration's tax proposal, we found that virtually
all of the provisions of tax increases or further
increases in complexity. In the summary you have in
front of you there's four examples I'd like to talk
about but, Mr. Chairman, and this is your call, the
first two I realize are not in the current bill in
front of you from the committee substitute, [Indisc.]
with 10 percent gross minimum tax, ring fencing of the
Legacy fields, and the additional reporting
requirements for exploration tax credits so, in the
interest of time I can move past those or, if you'd
like us to talk about our perspectives, I can
certainly do that.
9:41:24 AM
CHAIR GATTO asked Mr. Haymes to describe ExxonMobil's
perspectives.
9:41:54 AM
MR. HAYMES said the 10 percent gross minimum tax would be in
addition to the base royalty payments. With the minimum gross
tax, the state would be insulated from price and cost risks
while it would retain the upside potential from the
progressivity element. He explained the proposal would shift
the development risks to the producers. At low prices, the
producers would be penalized. He continued:
Progressing a tax policy that singles out and
penalizes these fields will discourage investment, not
only of these fields but would also impact investment
attractiveness to explore and develop other Alaska oil
and gas resources because of their dependency on that
infrastructure. Companies are certainly willing to
accept the risks of long-term capital investment but,
when there's a corresponding opportunity for upside
and potential, the economic risk increases
significantly at a low price environment with the 10
percent tax proposal.
9:43:00 AM
CHAIR GATTO commented that at the prices where the 10% floor
would have existed, all parties would have been in severe
financial stress. However, most people recognize that with oil
prices at $96 per barrel today, they will probably never drop
that far again. He said he recognizes ExxonMobil's concern that
it doesn't want to be penalized with a gross tax when no one is
making any money. He said the legislature recognizes that
problem and did not include it in the bill.
9:44:30 AM
MR. HAYMES continued:
The Administration also proposed that all revenues and
expenses for the Legacy Fields, which I think they've
defined as Prudhoe Bay and Kuparuk, would have to be
accounted for separately, with separate taxes paid for
each unit and their satellites. This would include
Alaska's heavy oil resource, which already has
significant economic and technical hurdles. It's
interesting that no other fields, units, or regions
within the state would be subjected to these higher
tax and administrative burdens.
9:46:26 AM
I will talk a little bit about the additional
reporting requirements for exploration tax credits.
The Administration is proposing that in order to
qualify for the exploration tax credits, the explorer
has to agree in writing to release proprietary
information, such as seismic survey and core samples.
Providing this type of proprietary information is not
the norm throughout North America. Releasing key
competitive and highly valued information would be of
concern to any explorer. As you know, it often takes
decades to progress from exploration to development,
and the release of proprietary and competitive
information before an asset is producing may not
always be appropriate so early in the phase and, so,
this could decrease the value of the exploration
credit and may discourage an explorer from applying
for the credit. In addition, providing this type of
information would increase the costs for an explorer.
Core samples are costly and in the bill it mentioned
providing one-third of the core to the state. Cores
can always be made available upon request. A core
[sample] can be easily damaged. It's physically
damaging to gather it and important to retain it's
integrity. So, when you look at it, we feel these
requirements go against the basic principle that if a
party is willing to take risks to collect information,
they should be entitled to maintain confidential and
competitive information.
9:47:07 AM
CHAIR GATTO asked if it would be fair to say that because the
state participates in the investment by giving credits, it
should be entitled to the data.
MR. HAYMES replied no one would disagree that the state should
see the data. He clarified that minimizing the burden on the
explorer by keeping costs down and providing certainty that a
credit can be applied for and granted is what needs to be
considered. The bill, as written, contained specific
requirements that a company must meet to be eligible for the
credit, which created uncertainty about the availability of the
credit.
9:48:18 AM
MR. HAYMES continued:
I'd like to talk about - in the bill, and I believe
it's in the committee substitute, the elimination of
the requirement for joint interest billings and, as a
starting point in particular, for audits. As a non-
operator for Prudhoe Bay, Kuparuk, Duck Island, and
Granite Point, we are on the receiving end of a lot of
those joint interest billings. We fail to see how not
using those is to the State's advantage. I believe
"it is to their advantage to use them" is probably a
better way to say that. All of the producers'
deductible lease expenditures are in accordance with
the monthly cost data charged by the field operator to
its co-owners. In addition, in a field's operating
agreement, the working interest owners have specified
what cost an operator can bill to the co-owners. Each
year the operator is subjected to very detailed audits
by the co-owners and we do that to ensure compliance
in accordance with those joint operating agreements.
The use of these joint interest billings is the
foundation to determine what are allowable business
expenses, which provides greater predictability and
eliminates the need for the state to reorder new
information for the same materials. Using joint
interest billings will reduce disputes over
appropriate deductions, as well as the state's and the
producers' administrative and audit costs. We believe
they should be used as a starting point. It doesn't
mean that's the ending point. ExxonMobil spends a lot
of time auditing those joint interest billings.
9:49:56 AM
I'd like to talk a little bit about joint information
requests. The Administration is proposing that they
require additional information to improve their
ability to forecast future revenues under PPT. As I
mentioned earlier, we met with the Department of
Revenue months ago and are willing to continue those
efforts to help them with that focus. We believe that
additional information beyond that currently submitted
with our tax filings needs to be carefully considered.
There must be some limitation and reasonableness on
what data is requested. As an example, in addition to
monthly cost and production information, the
Department would now require a producer or explorer to
file each month "other records and information the
department considers necessary." We recognize the
Department's need for additional data but we believe
the current legislation is too open-ended. It should
be amended to specify the required information and
existing data that is already submitted needs to be
strongly considered. There is a lot of information
that is shared currently with the Department of
Revenue.
9:51:33 AM
I would like to shift gears and step back. I'd like
to address another important element of the business
environment for any investor - fiscal predictability.
ExxonMobil, and I believe the industry, values a
predictable fiscal environment in which to make long-
term investment decisions. Our investments are
capital intensive and typically evaluated over
timeframes of decades. A change in the fiscal regime
has a direct impact on how we view predictability of
the Alaska fiscal environment. This directly impacts
how we evaluate on a risk basis future investment
decisions. The Administration's proposed tax increase
would represent the third significant change to
Alaska's fiscal terms in the past three years.
Changing the fiscal environment for capital intensive
projects could take many years to generate a return
and can only reduce the attractiveness of those
investments.
9:52:51 AM
CHAIR GATTO asked Mr. Haymes if he felt the first change made a
couple of years ago to boundaries was significant and on par
with PPT.
MR. HAYMES said he recognizes the aggregated ELF was a
regulatory change, not a statutory change. As a taxpayer, any
change, be it statutory, regulatory, or municipal, is a change
to the fiscal regime. The aggregated ELF was a tax increase,
but not as substantial as the PPT or ACES.
CHAIR GATTO said he asked because Mr. Haymes grouped it with
three significant changes, rather than calling it one minor, one
significant and one proposed change.
MR. HAYMES said on an industry level, the change from ELF to the
aggregated ELF to PPT to ACES would represent an over 350
percent increase in taxes. He noted each time taxes increase,
the attractiveness of any prospective well or project
diminishes. For every well or project that does not progress,
additional production of state revenues are foregone.
9:54:26 AM
MR. HAYMES continued:
ExxonMobil expects to be involved in Alaska for many
years to come. Policies established today and in the
future will impact the attractiveness of potential
projects and the future of Alaska.
Mr. Chairman, I'd like to wrap up on the next couple
of summaries. Alaska needs a long-term resource
development policy.
9:54:41 AM
As I mentioned earlier, Alaska has significant
resource potential but it is a high-cost environment.
Oil production is at one-third of its peak, but we've
only produced one-quarter of the total oil resource
potential. The gas resource potential is equivalent
to the oil. It will take significant resources,
technology, investment, and teamwork to realize the
full potential. In ten years, 75 percent of the
future oil production needs over $30 to $40 billion,
conservatively, of new investment. Prudhoe Bay and
Kuparuk represent currently 70 percent of the North
Slope production and they can continue to provide
significant levels of production if the right level of
investment continues. They can be the backbone for
future exploration-development activities, whether
it's heavy oil, light oil, or gas. Alaska and the
industry collaboratively need to create a resource
development policy. We propose a collaborative
approach to develop a sustainable long-term resource
policy that will encourage the increasing investments
that are needed to build the future of Alaska for many
generations to come. I've listed here some of the key
components we believe are important.
· Characterization of statewide resource potential.
· Identification of key issues challenging exploration
and development.
· Key factors that impact resource value, such as
research, technology, and exploration development
costs, regulatory and environmental considerations,
land access.
· Establishment of a fiscal policy that will encourage
development of remaining resources.
· Regular meetings with industry and agency
representatives.
ExxonMobil looks forward to working with the
Administration, legislators, the industry and people
of Alaska in the future pursuit and development of its
oil and gas resources. Thank you again, Mr. Chairman
and committee members, for the opportunity to testify
today.
9:57:33 AM
CHAIR GATTO opened the meeting to questions from committee
members.
REPRESENTATIVE ROSES asked Mr. Haymes to address the differences
in the bill before the committee and ACES, on the progressivity
on the gross as opposed to the net. He noted Mr. Haymes
mentioned the $30 to $40 billion that will be necessary to
invest for future development production. He asked if
ExxonMobil produces in any other country or state that offer as
many credits and incentives as Alaska.
9:58:38 AM
MR. HAYMES said the gross progressivity is no different from a
gross tax. Gross does not take into account the different
challenges that face future investment opportunities in Alaska.
A low gross tax has worked in other countries; the 10 percent or
progressivity factor would dampen attractiveness. ExxonMobil
would have to assume the gross would apply when it looked at
future investments. He said ExxonMobil considers various
factors when making investment decisions, such as the reserves
risk, the costs to explore, develop, and produce, including the
technology required, the fiscal regime, the operating costs over
the life, and the costs of returning the site to an agreed
condition.
He explained the $30 to $40 billion required averages $3 to $4
billion per year for the next 10 years - that is in addition to
operating costs on the Slope. The industry currently spends
about $2 to $2.5 billion. That substantial increase will be
necessary to achieve the Department of Revenue forecast.
10:01:21 AM
REPRESENTATIVE ROSES said he was not asking how or why the
investment would be made but whether ExxonMobil is offered the
same incentives that Alaska offers anywhere else in the world.
MR. HAYMES said many different fiscal policies exist around the
world: net, gross, credits. "They can all work," he said. He
said it is important that Alaska look at what others are doing
but each place is unique. ExxonMobil must look at Alaska in the
context of its goal here, whether that be to develop the entire
resource and at what pace. If the 53 billion barrels was
produced at 1 million barrels per day, it would take 124 years
to produce. Producing the gas at 4.5 billion cubic feet per day
would take 150 years. He noted the resource potential is
massive but ExxonMobil's production is down to 750,000 barrels
per day. He stated there is no right or wrong or magic answer.
10:03:27 AM
REPRESENTATIVE WILSON commented that, considering the price of
oil today, Alaska is not alone in considering restructuring its
oil tax to get higher returns. She asked how many countries and
states are considering raising their taxes.
MR. HAYMES said when the crude price inflates; the 'pie share'
is scrutinized. A lot of countries are doing that. He said one
must step back and consider whether the price will remain that
high. Historically it has not. He said ExxonMobil believes the
net-based structure can work and that the tax rate to encourage
the full investment of the resource potential is too high today.
The goal must be the focus, whether that is to develop the
resource potential or the revenue stream. He said those two
goals need to be balanced. The biggest challenge facing the
industry is that it looks at timelines of decades. Typically
governments are in power for less than decades, as are
legislators, so it is important to look at a policy that can
bridge the investment timeline under consideration. Long term
perspectives must be kept in mind by the oil companies.
10:07:39 AM
REPRESENTATIVE WILSON noted Mr. Haymes did not answer her
question.
10:08:09 AM
MR. HAYMES said he is not aware of a total number; he knows
Alberta is considering a change to its oil tax structure. He
offered to follow up on her question.
10:08:36 AM
CHAIR GATTO thanked Mr. Haymes for his presentation.
10:09:19 AM
The committee took an at-ease from 10:09 a.m. to 10:21 a.m.
10:22:21 AM
MARK HANLEY, Public Affairs Manager, Anadarko Petroleum
Corporation, told members his goal is to educate the committee
on what drives companies' decision making processes so that it
can better develop its policy. He said he believes it is
important to review parts of the original bill because people
are considering whether to include them.
[MR. HANLEY used a slide presentation to accompany his
discussion.]
MR. HANLEY explained that Anadarko is an independent company
that explores for and produces gas around the world. It does
not own pipelines, refineries, or gas stations. Its focus is
the upstream. He said Anadarko has been in Alaska a number of
years. It owns 22 percent of the Alpine field, which Conoco
Phillips operates. He noted it owns no interest in the gray
areas on the map. The brown and pink areas are areas in which
Anadarko has an interest but is not the operator. In general,
Conoco Phillips operated acreage runs from Alpine to National
Petroleum Reserve-Alaska (NPR-A). Anadarko is a partner in a
majority of the wells in NPR-A. The lighter brown areas are
acreage that Anadarko has an interest in. Its partners in the
Foothills are PetroCanada and BG. Its partners on the North
Slope are BG and ASRC (Arctic Slope Regional Corporation).
10:26:26 AM
REPRESENTATIVE GUTTENBERG asked that the 68th parallel be
identified on the map.
MR. HANLEY said it is not indicated on this map; however the
Foothills area is shown. He said the point of the maps is to
show Anadarko's significant acreage position and prospects in
multiple places.
10:27:34 AM
MR. HANLEY stated that, as a partnership corporation, Anadarko
is associated with ConocoPhillips, PetroCanada, BG, ASRC, and
Pioneer and has partnered with BP and Exxon in the past.
Partnerships are typical because areas far from infrastructure
are high risk with potentially high reward plays, and thus
there's the desire to reduce the risk. He pointed out that
Anadarko and Conoco Phillips relinquished about 300,000 acres in
NPR-A recently so its acreage equals about 4.9 million gross
acres and 1.4 million net acres.
10:28:18 AM
MR. HANLEY pointed out that Anadarko spent over $100 million on
lease bonuses and drilling costs on the acreage that was
relinquished. He said it is important to keep in mind the rate
of return must cover a company's losses and be commensurate with
the rate of risk. Models that only show profit margins on
discoveries do not take into consideration that risk. He noted
if one always takes it from a success case forward, one will
assume the company is making too much money. He said it is
important to ask consultants where the risk is included in their
models.
10:31:47 AM
REPRESENTATIVE FAIRCLOUGH asked if the industry average for
producing wells is one in ten.
MR. HANLEY said he has seen numbers all over the board and those
numbers can depend on whether it is true exploration outside or
in-field drilling. He said with new technology, gas and oil
will be found more often but whether or not a well is commercial
is the question.
10:32:32 AM
REPRESENTATIVE FAIRCLOUGH said Mr. Hanley is asking Alaskans to
consider what their fair share is as they look at billion dollar
profits for some companies. She said she would like to include
tangible statistics to provide a rationale in her newsletter if
she is to support Mr. Hanley's statement.
10:33:16 AM
MR. HANLEY said he believed the Department might have industry
numbers; at this point he could only provide a number for
Anadarko. He said Anadarko has participated in over 40
exploration wells and has had some discoveries but, to date,
none have been commercial. Each individual field has its own
economics but averages provide general ball park numbers.
10:34:51 AM
REPRESENTATIVE FAIRCLOUGH said she would be satisfied with a
number for Anadarko's experience in the North Slope that she can
include in a special session newsletter.
MR. HANLEY said he would provide those numbers and talk to the
Department about an average number.
10:35:27 AM
MR. HANLEY continued with his slide presentation. Alaska
provides a world class petroleum basin with significant
resources. The best place to find oil is where it's already
been discovered. Anadarko believes Alaska's resource potential
is significant such that there is "legacy-type" prospectivity
and a number of fields that can support their own
infrastructure, which is Anadarko's focus. Anadarko is looking
for the Alpine-size field.
10:37:07 AM
REPRESENTATIVE GATTO referred to the previous question on
success in drilling and said if one is drilling in Prudhoe Bay,
every hole in the ground will produce. He said previous
speakers have said that one in eight wells produces but, if that
is true, the oil companies would be spending a lot more money in
Prudhoe Bay and Kuparuk. He asked if the one in eight estimates
pertains to new exploration only.
10:38:08 AM
MR. HANLEY thought the in-fill drilling at Prudhoe Bay is not
included in those rates; they pertain to exploration drilling.
10:38:25 AM
REPRESENTATIVE FAIRCLOUGH stated, for the purpose of clarity,
that the speaker was offering a one-sided, corporate-biased
argument of numbers in the tax debate that is valid but again
asked for more accurate numbers.
MR. HANLEY agreed to provide accurate numbers to the committee.
10:39:41 AM
MR. HANLEY said Anadarko is bullish on Alaska's resource
potential. New players have entered the field in the last four
or five years and six new exploration rigs have been brought to
the North Slope this winter. The arrival of new companies in
the picture is a healthy situation as they provide new ideas.
He elaborated on how discoveries by various entities prove
helpful to all, and spread the risk and support the successes.
10:42:21 AM
MR. HANLEY moved to page 4 and explained the challenges of
operating in Alaska. Alaska's basin is maturing, which means it
is a smaller prospect. He said it is valuable to evaluate
Alaska's system to other places but:
...if you have a gutter that has 800 trillion cubic
feet [TCF] of discovered gas sitting close to
tidewater with costs that you don't need at 800 or a
2500 hundred mile pipeline to get it to market and
their costs are somewhat less, they can get a higher
rate. If they had 800 TCF sitting on the North Slope
right now I think you could be getting a higher
government take so it's important not just to look at
the average government take everywhere but look at the
prospectivity.
10:43:41 AM
MR. HANLEY continued:
...as you can see here, this is an Econ One
presentation during PPT from one of the legislative
consultants that was out there. ...One of the things
I wanted to point out because I think it's valuable
when we talk about this - what is the prospectivity of
Alaska - here is - these numbers come from USGS but if
you look at the top it says undiscovered technically
recoverable oil reserves. It is not gas, it's
technically recoverable. In other words, you may have
a field, oil in place of a billion barrels but you
can't get 100 percent of it out so this is the -
technically - they may have a 50 percent - I don't
know what their numbers use but it's what they think
is technically recoverable. It doesn't mean it's
economically recoverable. That's why it says the
footnote at the bottom. This is their slide but
what's interesting is we're just looking at the
central North Slope - that's not [Arctic National
Wildlife Refuge] ANWR, that's not offshore and you can
see that they think there's 4 billion barrels of
technically recoverable remaining reserves so I think
that's a significant amount that's sitting out there.
That's not in-field, that's not the heavy oil. It's
already kind of sitting there. This is kind of the
exploration oil that's out there.
But look at the amount in fields that's over one
billion barrels - zero. Look at the amount of fields
over 500 million barrels - 2 percent. That's the
anchor fields that I guess you'd say we were looking
at - the 4 to 500 million barrel fields. Look at the
amount in fields smaller than 64 million barrels - 51
percent. So, I think this helps put a little bit into
perspective why we think there's significant remaining
resource. They tend to be in smaller fields. They
tend to be in what we would consider the 64 million
barrel satellite opportunities. The 64 million barrel
field will not justify its own stand alone facilities
typically. So, if you're not within about - give or
take - 8 or 10 miles of an existing infrastructure,
you could have a 60 million barrel field that's just
not economic. That's why I say it's important to put
numbers into perspective. While we do like the
prospectivity, we do think there's some of these
amounts over 200 million barrels - it isn't the
billion barrel fields that are sitting out there.
This is just a size distribution of the fields.
But here's one of the other things that I like to use
this slide to point out, is the economic impact of
either price or, if you want to look at it in a
different way you can say taxes. We think taxes - I
think you've heard a lot of time that prospectivity,
risk, but price factors, volume factors and tax
factors all have an impact on economic decisions for
companies and how they make their investment
decisions. If you look here you can see that in rough
numbers this is the same North Slope - central North
Slope reserves that were 4 billion total potential,
you can see a different oil price is what they say is
economically recoverable. This is a model. This is
why it's hard for a lot of us to come up here and tell
you exactly what's going to impact specific issues.
We have to look at our own fields. But this gives you
an idea that there is some relationship between price
and the number of economically recoverable reserves.
I just want to leave people with the fact that if you
get another billion dollars of taxes, it's not a lot
different from our perspective as if we got a billion
dollars less on those barrels of revenue. And you can
see that if you took $3 a barrel, which is roughly
$800 million dollars of new taxes on the existing
production level we have, that you might have a couple
million barrels in the central North Slope that is not
economic now. Do they point out exactly where it is?
No, this is more theoretical or estimated models but I
do think it's important to point out that there is, to
the extent that you have a dollar impact from your
taxes, it does impact the amount of economically
recoverable reserves. I can provide a copy of the
whole report. I have in the past. This is a
legislative consultant report so you can see the whole
thing.
So again, when we got to the point of - we do see a
lot of resource potential but it tends to be in
smaller fields. We're looking for those smaller
numbers of anchor-type facilities but the challenges
that Alaska faces are the high costs, the extremely
long lead time exploration, which is partly driven by
the seasonal drilling. Part of it is the cards you're
dealt. We're out there not drilling in the summer
time and when there's sensitive activities out there.
For us, being able to drill for four months of the
year compared to other places, it does take longer to
explore for and develop oil and gas in Alaska than
almost anywhere else in the world where we operate.
10:48:40 AM
MR. HANLEY continued with page 4 of the committee hand out
entitled: "Seasonal drilling and regulatory timing
requirements". He told committee members:
You can imagine, if we have the same prospectivity,
the net present value, which you've heard, if we have
our money tied up for an extra four years here versus
somewhere else and they're the same kinds of
investment decisions, it's a challenge. That's why,
to be honest with you, the PPT system - and I'll go
into this a little more, but the net profits approach
system is so valuable in our opinion. One of the big
challenges of Alaska is the timeframe to get things
into market. The amount of time your capital is tied
up is longer here. What it's amounted to is through
those incentives, through those credits, effectively
it's reduced our costs. Now we pay more in the back
end. The tax rate is higher than it would be under a
gross system, for example, but effectively we have
less money up front, which means that really does help
our net present value analysis so that's why the
system - and I think you've heard the Administration
talk about if you had a gross that raises the same
amount of money - how does it affect investment
decisions. Those charts were very valuable and we
agree with those because you can raise the same amount
of money but you actually improve through a system
like PPT your chances of companies actually investing
up here because it improves our net present value
while you get the same amount of money. That, to us,
is one of the real benefits of the system that has
been developed and we would encourage that it stay
with the net profits approach, and I'll go a little
bit more into that.
10:50:52 AM
MR. HANLEY called attention to page 5, entitled, "Our View of
PPT Recap of 2006 Testimony," and said it was a significant tax
increase on existing fields. Anadarko was paying on net but it
wasn't able to utilize the credits and deductions that were
generated from building that facility. Anadarko felt its
exploration economics improved slightly under the new program
but that applied to a new field it has not started drilling in
yet because it will get the credits and deductions.
10:52:12 AM
MR. HANLEY stated that Anadarko supports a net profits approach.
Anadarko staff met with the Administration in May and June and
provided its ideas on net versus gross. It had no specific
proposals but had valuable discussions about why keeping the net
profits approach is beneficial for the industry and state.
Anadarko appreciates the fact that the state retained the net
profits approach. He explained that Page 6 contains four bullet
points, 3 on why this is a good approach. With a gross tax, one
could still pay taxes if costs exceed income.
10:53:16 AM
MR. HANLEY presented a gross versus net tax example on page 7
and explained how it works per barrel price. If, at Field A,
the cost per barrel is $10 and net income is $50 per barrel, and
at Field B the cost to produce is $20 and net income is $40 per
barrel, a 15 percent gross tax will be $9 on each field.
However, the tax rate on the net income will be 18 percent on
Field A and 22.5 percent on Field B. If a 20 percent net tax
was in place, Field A would pay $10 in taxes while Field B would
pay $8. This illustrates that the net system takes into account
costs. A gross system does not maximize state revenues because
some fields will be under taxed while others will be overtaxed.
There is a tipping point; taxing a very economic field, on a
gross basis, will cause other less economic fields to be
overtaxed.
10:56:07 AM
REPRESENTATIVE GUTTENBERG said this scenario has been presented
by all of the companies, but the state must come up with a model
to fit all of the companies' business plans. He said,
regardless of what the state does, it will not be completely
fair. He asked Mr. Hanley how he proposes the state strike a
balance between the large and small companies.
10:57:02 AM
MR. HANLEY said providing a net system should provide the best
opportunity to create a balance and provide maximum revenue. He
agreed that no system is perfect. He elaborated that the state
system, with the PPT, will also have a gross system when the
royalties and property taxes are accounted for. The net system
does the best job of balancing the higher costs of new fields
with the lower costs of older fields and incorporates the
variable costs involved in exploration and development.
10:58:41 AM
REPRESENTATIVE GUTTENBERG said if the state takes operating
costs off of the table that will compensate everyone across the
board.
MR. HANLEY admitted that does sound plausible. Costs are a
factor and the net system accounts for that, which is a
positive.
10:59:30 AM
REPRESENTATIVE GUTTENBERG asked how Anadarko's costs compare
with other members of the industry.
MR. HANLEY said industry groups publish standard models of costs
around the world so rough comparisons could be made.
11:00:42 AM
MR. HANLEY continued with page 8, which pertained to the ACES
model. The original ACES proposal would impose a significant
tax rate increase; the tax rate increase from 22.5 to 25 percent
would have the biggest impact. The progressivity change, which
Anadarko feels in an increase and elimination of the transition
investment credits, would also significantly impact Anadarko
because of the investments it has made. Anadarko and Conoco
Phillips invested hundreds of millions of dollars for a
satellite operation a year before the PPT took effect. Anadarko
made its decision based on the aggregation decision made by the
governor earlier. Because of the tax change, Anadarko could not
get any tax credits for that project, which was a big hit.
11:03:39 AM
MR. HANLEY continued with page 8, and said the second bullet
point about stability comes into play because of the
negotiations that will be forthcoming on the gas issue. He said
in his view, everyone will be back within two years to discuss
gas taxes. Assuming one passes, an open season will have to
occur within the next three years. Everyone has acknowledged
that the state has to know what the tax rate is on gas before
the open season occurs. He said many consultants have testified
that gas is less valuable than oil so should have a different
tax structure. He said he can argue to management that
stability will be provided, however if a gas tax is opened up
two years from now, it is intertwined with oil so that
discussion could be reopened. He pointed out Anadarko will have
to take that issue into account when making investment decisions
in the next two years.
11:05:53 AM
REPRESENTATIVE FAIRCLOUGH agreed that oil and gas taxes will be
intertwined in the future but separating that issue out in the
next two weeks of this special session so that an oil tax
structure will not have to be exposed to changes may not prove
possible. She said the credits seem to be causing the most
discussion. She has talked to the Administration and committee
members about creating oil production stability but repeated
that two weeks is probably not enough time in which to separate
the two but the concern has been recognized.
11:07:28 AM
REPRESENTATIVE WILSON asked if oil and gas taxes are treated the
same anywhere in the world.
MR. HANLEY said he suspects so and offered to investigate the
answer.
11:08:20 AM
MR. HANLEY emphasized that stability will be considered but it
is not the primary driver. He pointed out it is unfair to
require new legislators in two years to live by what was done by
this legislature, especially since a lot of new information will
be available.
11:09:04 AM
MR. HANLEY described the chart on page 9, "Administration Field
Economics Estimates." He explained that on the four fields
modeled by the Administration, the economics significantly
decrease. The Administration could argue that the value is
still high enough to make the fields economic, but a $700
million increase in revenue, based on a $2.50 increase in the
price per barrel on today's production, is not insignificant. A
decrease of the net present cash flow of a field by 54 percent
is significant. He told members it is important that the models
incorporate geologic and commercial risks, particularly when
looking at exploration economics.
11:10:53 AM
MR. HANLEY finished with page 10, and summarized three comments
on the Oil and Gas Committee version of CSHB 2001. Anadarko
would prefer to have a progressive tax applied to net income -
it supports the trigger as it was in the ACES plan. He
explained:
We can debate the dollar - the rate, but as a policy
we think applying a tax actually, whatever it is, to
the net makes more sense because it does take into
account costs. So, as I showed you on that one slide,
obviously if your goal is to get a certain amount of
revenue, then under this proposal I guess I would
argue you should apply it to the net, whatever the tax
rate is, and, of course, if you're trying to get the
same amount I will acknowledge that that .225
escalator will have to be higher because it's on the
net. As I showed in that one slide, you're going to
have a higher rate and apply it to the net - at least
it will take into account the costs. The higher cost
fields will have those considered. So, that's one of
the things I suggest you would at least take a look at
- is if you want to have that $50 trigger on the
wellhead price, at least figure out the progressivity
and apply it to the net income.
11:12:30 AM
REPRESENTATIVE SEATON said Mr. Hanley's analysis is in direct
opposition to previous testimony, which preferred a trigger
point driven by the net. In previous testimony, the speakers
said they wanted to make sure the trigger point was triggered by
the net so that it included the profitability margin. He asked:
I'm hearing you say that you don't care - well, you
probably care but you care more about applying it to
this increase - this progressivity tax considered a
separate tax - applying it to the costs of the state,
picks up additional portions of the cost that those
high prices, instead of making sure that you've got a
profitable margin on the field before progressivity,
kicks in. Is that where you're meaning to come in the
testimony here?
MR. HANLEY said the answer is yes, however either approach is
workable. He said something must be changed so that at least
one of the factors goes back to the net. Anadarko Petroleum
Corporation would prefer to go with the original ACES plan, he
related. If that is not possible, then either apply the tax to
the net, which would help account for costs or use the net as
the progressivity feature. Either one would help more than the
existing bill.
11:14:30 AM
REPRESENTATIVE SEATON followed up by stating that the risk to
the state has not been established. If the state applies the
progressivity times the net, it will be sharing in the
additional costs even at high prices. His concern is that when
the upper regions of progressivity are reached, it will be at 25
percent in all of the bills. He explained:
In all of the bills there's a 25 percent maximum cap
so that we would actually be participating in the
costs with additional 25 percent of the costs we would
be absorbing at those high prices, so that would be 25
percent gain through the progressivity net in addition
to the 22.5 or 25 percent portion of the cost the
state is going to pick up. And then you add on the
credits and those things in addition and it seems that
my concern is that the state starts taking a large net
present value risk for an expensive project - several
billion dollars. All of a sudden we'd be not only
putting in 40 to 45 percent of the costs but all of a
sudden we're putting in 75 percent of the costs. It
seems that might change behavior, as well as adding
risk to the state. Do you understand that the same
way?
MR. HANLEY said he is not sure he understands Representative
Seaton's concern. He pointed out this is not a base rate
change, so that does not affect Anadarko's increase in the net
income but the tax rate increase has always more than offset any
value it gets out of the credit or deductibility. Anadarko has
not seen a scenario in any of the proposals that provides an
incentive to invest a dollar because it receives more than that
in credits elsewhere.
11:16:59 AM
REPRESENTATIVE FAIRCLOUGH asked if Anadarko Petroleum
Corporation is advocating ACES versus the former PPT on the 20
percent progressivity rate instead of 25 percent with the lower
start price of $30 per barrel in ACES.
MR. HANLEY said Anadarko's number one preference is to maintain
the PPT. He furthered:
The approach versus the dollars - we still support the
PPT and the ACES approach, which is calculated on the
net and applied to the net. So that approach, in both
PPT and ACES, is our preference. If you ask us
specifically, when we get into the policy call on the
dollars, our preference is to stay with the existing
PPT. It starts higher. It escalates faster. What
you find is just the numbers actually cross at about
$80 a barrel net. At that point, we haven't gotten
into the annualized versus monthly, but just with the
progressivity itself, ACES versus PPT - they basically
cross at 80 so the state is actually taking more at
the lower end and less at the higher end. Our
preference would be to stick with the PPT and ACES
approach, figure it on the net, apply it to the net,
and our preference would be to stick with the PPT
policy, which started at 40, progressive .225.
11:19:10 AM
REPRESENTATIVE FAIRCLOUGH noted the approaches have different
curves and thanked him for the clarification.
11:19:24 AM
REPRESENTATIVE ROSES said two consultants told House Oil and Gas
Committee members the same thing - the state needs to try to
capture more when profits and prices are much higher and capture
less when they are lower to encourage investment. He
understands that is the reason why the committee dropped the 10
percent floor. It was also the reason the committee moved the
trigger point from $30 and $40 to $50 and for going to a gross
progressivity as opposed to a net progressivity to capture the
dollars on the higher end. He then said he now hears the
different producers say they want net here and there but, when
it comes to credits, they want gross. He said he is struggling
with the consultants' testimony with how the companies keep
picking this and that. He asked Mr. Hanley to talk about the
committee's flawed thinking in dropping the floor to 10 percent
to encourage investment.
MR. HANLEY said he did not see inputs into the model but the 50
is now a wellhead price, not a net price. If one compares that,
it didn't actually increase from the $40 in the existing PPT.
If costs are over $10 per barrel, it would actually start lower.
He furthered:
When you talk about the consultants, if that was their
view that you should leave some on the table, to the
extent that the costs considered in that calculation
were $15 or $20 per barrel, I've heard those numbers.
I don't know what they were then. The 50 equated to a
net is more like - if it were 15 that would be a 35 so
it's actually - you know, you are taking more in your
view starting at a lower price, which is what - at
least your comments were the consultant said not to
do. How that compares, you can get the guys to tell
you what the numbers are. And then I would just argue
that applying it to the gross is differentially
affecting companies with higher costs to lower costs.
You are leaving something on the table. If the
escalator is the correct number, then some fields are
paying less than they should be paying and other
companies are paying more because they have higher
cost fields. So those are the two criticisms I have
of the Oil and Gas [Committee] version.
REPRESENTATIVE ROSES said committee members have heard each
producer say that does include a scenario in which they could
pay taxes when they don't have a profit. He asked if the
progressivity trigger, which was changed from $30 in the ACES
bill to $50 in the House Oil and Gas Committee bill, will have
to increase costs by $20 per barrel above the existing costs
before that scenario would happen.
11:23:36 AM
MR. HANLEY said he would have to do the calculations on paper to
determine whether costs would have to increase $20 per barrel.
REPRESENTATIVE ROSES surmised that Anadarko's concern is that as
prices continue to rise, it will be taxed through progressivity
when there is no profit. Therefore, the higher the taxes, the
higher the deductions at the base level. For instance, at the
22.5 base rate, and allowing companies to deduct operating and
capital expenses and credits, the taxes will be reduced because
of the higher costs. He said he does not see it as a flat line.
It will be a long way before the point to where gross
progressivity will tax when there is no profit. He added he
would like to see someone run the numbers because he thinks the
curve is a lot more significant than people think.
MR. HANLEY offered to do the number crunching to answer the
Representative's question but thought unique circumstances would
have to occur for that to happen. He said if an oil company
gets a lease today, it will need to do seismic and development
work, which can easily take ten years, while not knowing the
price of oil in ten years.
11:27:15 AM
REPRESENTATIVE ROSES offered that if oil were $30 per barrel,
the committee would not be meeting today, despite the other,
various reasons that have been offered for this special session.
He noted: The fact is we're here because the prices
are high and I can guarantee if the prices fall back
to $30 a barrel, we'll be back discussing it because
we don't want the oil companies to leave. So, what
triggers us to be here for the high price would also
trigger us to be back if the prices tank. So, I'm not
as concerned about predicting what the prices are
going to be in 10 years because we'll probably discuss
this two or three more times between now and then.
MR. HANLEY said the progressivity feature does create some
stability in the system because it takes into account things
that cannot be predicted. He thought that because it is
increasing and the state is getting more revenue at higher oil
prices, everyone is less likely to be back because people will
feel like they are getting their fair share.
11:29:37 AM
CHAIR GATTO felt progressivity could be the single most
important aspect of the bill. He said no one involved in oil
production and profits is saying they need a break. Some
individuals have suggested that at $120, the state should get it
all. He said everyone must find a compromise so that all are
content with the product.
11:30:38 AM
REPRESENTATIVE SEATON asked if Anadarko feels the 22.5 or 25
percent deductibility plus the 20 percent investment credit
provides enough of an incentive to make a field go or whether it
feels the state should take a greater share of those costs.
MR. HANLEY referred to 2006 testimony about the PPT that looked
at internal rates of return for satellite versus an anchor field
project. He compared the 20:20 to the 20:25 and ELF system.
Anadarko's view was that the 20:20 was the most encouraging and
that the 25:20 was worse for exploration and the existing ELF
system. He said ELF was a regressive system so that it took a
significant amount of money when prices were low. He added:
What happened was we gave up some of the upside. The
PPT as it exists with the tax rate, as well as with
the progressivity, particularly crossed that line for
the ELF - compared to ELF. The companies got the high
end on the ELF and gave up something on the low end -
we would argue overtaxed when prices were real low.
All the PPT did was shift that line so the state got
more of the upside but did take some of the downside
risk and I think that's what people said. If you take
away the downside and take away the upside it's not a
good system. We argued that we had some downside risk
protection under the new system. We gave up some of
the upside but the prices were higher. That kind of
helped offset that so that overall it was a balance.
So, when you ask me, as we started getting up into
those 25 percent tax rates, overall our view was not
as favorable to exploration as even the old ELF
system.
11:34:02 AM
REPRESENTATIVE SEATON said all comparisons to ELF need to be off
the table at this time because the reason for that discussion
was that Kuparuk, the second largest field in the United States,
was going to be paying no tax. That system had been broken and
outdated for some time. He said he is wondering what amount of
state incentive is reasonable for development activities Slope-
wide. He also asked whether the extra 10 or 30 percent EIC
provides adequate incentive when Anadarko is making decisions.
MR. HANLEY said the current system works for Anadarko Petroleum
Corporation, which is focused on exploration. He cannot speak
to heavy oil or infield drilling. He emphasized it is not
adequate for gas.
REPRESENTATIVE SEATON asked if Anadarko is supportive of the EIC
as it came in the original ACES bill.
MR. HANLEY said he could spend a couple of hours on that
question. He stated there are many small things in the bill
that don't rise to the level of the big policy calls for either
side, but they do have an impact. He said overall the benefit
in the bill was extending the time frame under which one could
drill and get the EIC credits. Now a company can probably drill
a second season and get those credits, which is a positive
thing. However, all of the other things in ACES that relate to
that are negatives. As an example, he pointed out that
suspended wells were excluded from EIC credits. He was not sure
what the rationale was behind that exclusion. He explained some
of the difficulties of getting EIC credits for an existing well
because of the wide discretion the state would have in
determining "existing." He said Anadarko does not mind
providing more information, but the qualifier for receiving that
credit is unclear. He offered other examples of points in ACES
that are confusing or do not indicate good rationale. He said
the flat out prohibition on requesting extended confidentiality
is problematic because sometimes unexplored acreage exists near
leased acreage. Anadarko might want to lease the unleased area
but would want to keep drilling information confidential,
otherwise the state could say it wants to lease the acreage for
more. He said the system works as is so he is not sure what
problem will be solved.
11:45:56 AM
REPRESENTATIVE SEATON said the legislature is trying to fully
consider all of those issues so he hopes whatever passes is in
place for quite awhile. He said when PPT was being established,
he recalled, the legislature was looking for an expedited way
for explorers to turn transferable credits in through the Alaska
Retirement Board with 92 percent on the table. Anadarko
Petroleum Corporation supported that concept at the time. He
asked whether Anadarko still supports an expedited way to get
the credits back by including that provision.
11:47:53 AM
MR. HANLEY said the short answer is yes but it is not a
particular issue for Anadarko because it has production at
Alpine against which it can take most of its existing credits.
He said it is more of a level playing field issue for some of
Anadarko's partners. He pointed out the House Oil and Gas
Committee version of the bill did not address the net operating
loss and he believes the two should be matched.
11:49:57 AM
CHAIR GATTO said the ACES bill is one of broad public policy
that is being addressed in a 30 day session, which will be
followed by a 90 day session. He said no doubt some details
will need to be discussed later because of unintended
consequences. The legislature is interested in fairness between
the producers and the state and among the producers. The
legislature views this endeavor as a partnership and expects the
producers to come back during the 90 day session if it
encounters an unforeseen problem.
11:51:32 AM
REPRESENTATIVE HANLEY said he believes most producers will be
reluctant to come back to ask for small changes because they
fear the risk of reopening the issue.
CHAIR GATTO said he was making no promises but the legislature
might be willing to address certain problems.
MR. HANLEY thanked Chair Gatto for discussing that possibility.
11:54:15 AM
REPRESENTATIVE ROSES summarized various comments that he has
heard in the hallways about why the House Oil and Gas Committee
version will not work and he would appreciate having people come
forward to discuss that because the committee cannot continue to
debate the theoretical.
11:56:01 AM
REPRESENTATIVE SEATON referred to the [AS 43.55].165(e) portions
of the nondeductible lease expenditures. He asked the other
companies if, in the modification of Section 6 in the L version
of the Oil and Gas committee substitute, they would support
adding "violation of law" and clarifying that would include
criminal negligence, and removing Section 19, which pertains to
unscheduled maintenance. He asked if Anadarko would support
those changes.
MR. HANLEY deferred to other company officials to respond to his
question and said a response will be provided to the committee.
REPRESENTATIVE SEATON offered to get Mr. Hanley a copy of an
amendment he had drafted to that effect.
11:58:20 AM
CHAIR GATTO referred to the 30 cent per barrel deduction, and
asked if that is an appropriate device to take care of
unscheduled maintenance.
MR. HANLEY said it is essentially a gross tax that affects all
companies, whether they are doing adequate maintenance or not.
12:00:17 PM
REPRESENTATIVE SEATON clarified that various factors came into
play when the 30 cents per barrel rate was determined. That
rate was designed to cover more than poor maintenance.
12:01:24 PM
CHAIR GATTO offered that the 30 cents could be spent on
maintenance or paid to the state in order to provide the
motivation for proper maintenance.
12:01:58 PM
CHAIR GATTO announced that the committee would recess until 1:00
p.m.
1:08:00 PM
CHAIR GATTO reconvened the hearing and introduced Marilyn
Crockett and Tom Williams, Alaska Oil and Gas Association.
1:08:46 PM
MARILYN CROCKETT, Executive Director, Alaska Oil and Gas
Association (AOGA), informed members that AOGA had distributed a
handout to accompany her presentation. She informed members
that AOGA is a private, non-profit trade association. The
members of AOGA represent the producers, explorers who hope to
be producing soon; companies that are just starting to test the
waters in Alaska - Agrium, Alyeska Pipeline, and the three in-
state refiners.
1:09:17 PM
MS. CROCKETT pointed out that when AOGA takes a position on an
issue, it requires a 5/6 vote of committee members so that
legislators and regulators know that AOGA's positions represent
a broad majority of its membership. The association has gone
one step further on tax issues. Its tax committee requires a
100 percent vote or no dissent on issues. She specified that
her testimony today represents the views of AOGA's tax
committee. She told members Mr. Williams has an extensive
background in oil and gas tax issues, and tax issues in general
in the State of Alaska. He is an attorney for BP and was the
director of the tax division of the Department of Revenue from
1975-1979 and then became commissioner of that department. She
continued:
In these roles, he was the architect or co-architect,
if you will, of many aspects of Alaska's oil and gas
revenues that are still in place today, from the
methodologies of determining gross versus net - gross
value, excuse me, at the point of production to the
methodology of determining shareable net profits under
the state net profit leases system. Tom wrote the
regulations that successfully implemented the former
separate accounting tax, as well as the statutory
language in the state's present income tax enacted on
the oil companies in 1981 to replace separate
accounting.
He supervised the first property tax devaluation of
[Trans-Alaska Pipeline System] TAPS when it came into
production and he also administered the state's
temporary two years' reserves tax in 1976 and 1977,
some 30 years ago. He was also on the original board
of trustees for the Permanent Fund and, most
notoriously, Tom became the father of ELF in December
of 1976. He served as vice president and general
counsel for Cook Inlet Region, or CIRI, for almost
four years before joining BP in 1987. He is, if you
will, my tax expert. If I get questions that I am
unable to answer, and I'm certain there will be a
couple of them, I will defer to Mr. Williams to answer
those questions.
1:12:17 PM
MS. CROCKETT told members the focus of her testimony will be on
the practical impact of the declining production levels on the
industry and state and on some of AOGA's concerns with the
legislation before the committee. She continued:
Last year, when the legislature passed the PPT - we're
here now a year later with the Administration telling
you that it's broken. They say it's too complicated
to forecast, that it isn't bringing in the revenue
that was forecasted last year and they don't have
enough capable auditors to enforce it.
In discussing the merits of the proposal before you
today versus PPT and the Administration's concerns, we
must always keep our mind on the real world situation
that Alaska faces and that's the situation of
declining production. Production decline is a
cornerstone of the state's economy and - production is
the cornerstone - excuse me - and the decline is
eroding that cornerstone. Even with the massive
investments that have been made on the North Slope,
production continues to decline at an average rate of
6 percent - in Cook Inlet at an average rate of 8
percent. Without those investments on the North
Slope, that decline rate would be on the order of 15
percent so it is a significant contribution.
With respect to the future of the North Slope, there
is going to be a major challenge for North Slope
production for Alyeska pipeline and TAPS when it gets
down to about 300,000 barrels a day. That's the
minimum technical capacity that the new electronic
pumps that are being installed is capable of handling.
1:13:45 PM
CHAIR GATTO asked what action will happen when production gets
down to 300,000 barrels a day.
1:13:59 PM
MS. CROCKETT explained that oil production is approaching
300,000 at a slow rate; Alyeska will continue to develop
technologies and prepare for that declining flow rate. It's a
very, very challenging problem; a number of options can be
pursued but the difference could be getting oil down the line to
Valdez in days - at peak production to weeks.
1:14:55 PM
CHAIR GATTO asked if the issue is cavitation of the pump under
low flows. He questioned why a pump that can move 750,000
barrels would have trouble moving 300,000 barrels.
1:15:11 PM
MS. CROCKETT said she could not answer that question but added
the terrain is not flat and that makes a difference.
1:15:49 PM
TOM WILLIAMS, Alaska Oil and Gas Association, said "throwing a
switch and turning the pipeline off" at 300,000 barrels is an
extremely unlikely possibility. That amount is the threshold on
which the new pumps will operate. He does not know that the
engineers have come up with solutions for an amount lower than
that. He said AOGA is looking at, with TAPS, cost structure to
move oil to market. That may change when a point at which
something different must be done. That could mean transporting
oil in batches or heating oil but it will probably be more
costly.
1:17:37 PM
CHAIR GATTO said the legislature has projections that show no
change at 300,000 barrels.
1:18:03 PM
MS. CROCKETT said the 300,000 barrel threshold is focused on the
mechanical ability available today. She continued:
Again, recognizing that additional work will continue,
especially if the decline continues at the rate that
we're seeing to ensure that the pipeline is
operational - but it's a data point that's out there
as a point of reference for us.
1:18:30 PM
REPRESENTATIVE FAIRCLOUGH said members were told in other
testimony that 400-450,000 barrels are necessary to make it
economical, so that economics, as well as mechanics, are
involved in that decision.
1:19:09 PM
MS. CROCKETT referred to a chart on page 3 of her testimony and
said it describes the impact of different decline rates on
production with production [levels] starting today. She said at
the historical rate of 6 percent, it will take 15 years to get
to the 300,000 barrel a day mark. If the decline rate drops to
3 percent, the time frame will be pushed out to 30 years, so the
rate of decline makes a dramatic difference. She stressed her
chart is not a prediction; it demonstrates the impact of getting
to the 300,000 barrel a day level from the level today.
1:20:17 PM
MR. WILLIAMS pointed to a footnote about the mathematical
calculations in the graph.
1:21:02 PM
MS. CROCKETT said the chart demonstrates the importance of
investment necessary to extend the decline. She continued:
And, of course, as you've heard over the last few
days, there's three categories of investment that will
make a difference in keeping that pipeline full - one
is on exploration activities, of course, one is on
investment and development in heavy oil and bringing
new fields on-line and, of course, the third is
investments in the existing fields and the
infrastructure to keep those production rates from
declining further.
Now you've heard a great deal of testimony in your
committee and in other committees focusing on the
level of government take for exploring in Alaska and
the competitiveness of these terms relative to the
regimes elsewhere in the world. This kind of who
takes more analysis is faulty for a couple of
fundamental reasons. First, it assumes that the
geologic prospects for a commercial discovery in
Alaska are comparable to other regimes and,
unfortunately, that simply isn't true. The North
Slope has three major areas of significant oil and gas
potential. The first is the existing area where
activities are occurring now, between the Colville and
Canning Rivers. We also have [National Petroleum
Reserve-Alaska] NPR-A, of course, where companies are
exploring with, unfortunately, some limited success.
I'm sure that all of you have seen that there's been
about 300,000 acres of leases turned back recently due
to poor exploration results in NPR-A but companies are
still exploring there so that's the other option. And
then, of course, we have ANWR but, as all of you are
painfully aware, the coastal plain of ANWR still is
not open to oil and gas exploration.
1:22:40 PM
On the exploration front, that's certainly one of the
tools in the toolbox and it's an important one, it is
the activity that will bring the state production in
the future. Even when a commercial discovery is made,
it takes years to bring us production on line and the
challenge for us today is immediate, not 8 and 10
years out. It's an important tool in the toolbox, if
you will, but it's not an immediate fix for us.
Investment in heavy and viscous oil development is
also a solution. It's a mid to long-term solution.
Spending is underway, as you know, on evaluating some
drilling that's been done on the North Slope in the
Ugnu formation to continue to develop the technology
to get that heavy oil produced but, until then, we
have the production from West Sak to carry us for the
immediate short term.
1:23:37 PM
So this gets us to investment in existing fields. As
you've heard, the drilling that took place in 2006
resulted in an additional 70,000 barrels a day of
production from the Prudhoe field. If that was a
stand alone field, it would be the fourth largest
field on the North Slope. 70,000 barrels a day of new
production from infield drilling is a very significant
contribution to the production levels that we have
today and largely result in the smaller decline rate
from 15 to 6 percent that I mentioned a moment ago.
1:24:15 PM
There are also major investments being made and yet to
be made in the renewal of surface facilities for the
existing fields. For example, the gathering centers
and flow stations for the Prudhoe Bay area have been
in service now for over 30 years. Prudhoe Bay and
other producing fields are to continue to produce for
the decades to come. Their original facilities will
need to be overhauled or replaced. Also, as an
increasing amount of heavy and viscous oil come into
production, these facilities will need to be modified,
retrofitted, and replaced in order to minimize the
operating problems in handling this viscous oil.
Regardless of the stimulus or purpose for making them,
renewal investments and production infrastructure
present a very similar cash flow pattern, as there is
for investments in the original infrastructure.
Consequently, an incentive that is effective for the
initial development is equally effective for renewal
as well.
So, again, the harsh reality all of us face, and I
know that you are very much aware of this, is the
decline of production. It's a big challenge for us.
We are now in the process of grappling with it and
it's going to require massive new investments.
1:25:25 PM
MS. CROCKETT continued:
Turning now to the relative merits of the bill that's
before you today versus PPT, AOGA submits that there
are several self-evident principles of taxation that
should be used to test those merits. First, a tax
must be fit for purpose - that is it must do the
things that it was intended to do and it should do
them well. Second, the Administration, in enforcement
of a tax, must be as efficient as possible, consistent
with ensuring compliance by taxpayers. Third, a
taxpayer who wants to calculate and pay the correct
amount of tax when it comes due - it has to be
possible for them to do that.
Regarding the first test, achieving what the tax is
supposed to achieve, most new taxes have as their
primary or only purpose new revenues. In the case of
PPT however, things were not so simple. But as Pedro
van Meurs explained repeatedly in his testimony last
year and again at the beginning of the special
session, PPT was also designed to provide incentives
for investing in production and, in that way,
answering the threat of declining production.
With respect to the revenue side, no one disputes that
PPT has brought more state revenues than the ELF
system would have.
1:26:29 PM
CHAIR GATTO said he has heard differently, that there are
certain dollar levels at which ELF brought in more revenue than
the PPT.
MS. CROCKETT said she had not heard that but clarified the total
she is speaking to is in the aggregate. If one compares the
production tax income to the State of Alaska pre-ELF and post-
ELF, PPT has brought in increased revenue to the state.
MR. WILLIAMS added:
That statement is based in the context of the prices
that we've actually had and those are above the range
where you're talking about. It is possible, because
it's a net tax, for the net amount to get to zero
before the gross amount would get to zero and PPT is
net, the ELF was gross. So, there are certain numbers
where we make nothing under the net and the gross
never goes away.
1:27:21 PM
CHAIR GATTO asked if there is a cross-point.
MR. WILLIAMS said there is and noted it is also possible, when
oil prices are extremely low, to get to zero with a gross tax.
He explained that is where the West Coast market value is down
to the cost of transporting it there from the North Slope. He
noted on December 23, 1998, the transportation cost was half of
the market value on the West Coast.
1:28:05 PM
CHAIR GATTO said it must be handy to own a refinery, trucks, and
other parts, rather than just the raw resource.
1:28:16 PM
MR. WILLIAMS said it is handy and is the reason the state income
tax doesn't look just at the upstream income of a company, but
also considers the vertically integrated components downstream.
1:28:33 PM
MS. CROCKETT continued:
According to the Department of Revenue, the increase
was more than $800 million in the first nine months of
2006 and, at that rate, it would have been over a
billion dollars in additional tax revenue for the full
year. DOR also said at the time that the March 31
payments were about $137 million less than the $950
million it had estimated. I'll come back to the
questions of forecasting in just a moment.
For now, my point is that PPT has certainly
outperformed the ELF tax, which is exactly what it was
intended to do. As a consequence of the fact that
field costs are higher than DOR predicted last year,
the Administration criticizes PPT for failing to
generate all of the tax revenues that the fiscal note
for HB 3001 predicted. It's even been suggested that
Alaskans were somehow promised that PPT would generate
$800 million more this year than was projected and it
is necessary, therefore, to raise the rate in order to
make good on that promise.
1:29:31 PM
This whole line of reasoning is flawed. First, DOR is
complaining that they can't forecast PPT accurately
because it has so many variables that effect the
results. But if they can't forecast it accurately,
then why should reliance be placed on its current
forecast that shows the prior forecast was off by $800
million. If the first forecast was poor, what has
changed to make this one so good.
1:30:20 PM
As I explained a moment ago, the purpose of the PPT
was more than just to attract the tax revenues that it
would generate. It was to create incentives for
attracting massive new investments that will be needed
in order to meet the threat of declining production.
The system of tax credits that PPT provides
significant incentives for investing in capital assets
to explore for, develop and produce oil and gas in
Alaska - for example:
· there's a 20 percent tax credit on current capital
expenditures
· the transitional investment credit for expenditures
undertaken prior to implementation of PPT, which have
to be matched on a 2:1 basis for those prior capital
expenditures
· the tax credit for the carry-forward annual loss
particularly benefits explorers who don't yet have
production
· the $12 million credit for small producers also is an
incentive for those producers to continue to explore
· and then finally the annual credit as an incentive for
exploration and development
So, had these incentives under PPT worked - the
preliminary results so far show that they have - DOR's
August 3rd report on PPT states that capital
investments for FY 08 were 80 percent greater than
previously estimated, despite the fact that operating
costs were 101 percent over the prior projections.
1:31:22 PM
REPRESENTATIVE ROSES said when almost every producer was asked
whether the PPT drove their investments during the last year,
they all said no because their planning started up to ten years
ago. He said the producers were then asked how legislators
would know in the future whether the current incentives have
worked. The producers answered they hoped the state would be
able to tell because they would be producing more oil and
drilling more wells but they are planning ten years out at this
time. They said the incentives may cause them to speed things
up and bring on technologies that were not cost effective in the
past.
1:32:29 PM
MS. CROCKETT agreed Representative Roses is correct about
investment decisions being made out into the future, but noted
decisions to stop investing can be made very quickly, which is
the other side of the equation. Clearly no decisions were made
to stop spending under the increase in PPT last year.
1:32:51 PM
REPRESENTATIVE ROSES said the largest investor in many of the
exploration wells is the state. The producers can take credits
against production they have in other locations, which takes
away potential revenue from the state. When the state does get
a return on its investment, it comes at a much lower rate and
slower pace.
1:33:48 PM
MR. WILLIAMS said he does not disagree but added the result will
be production in the future for the next generation of Alaskans
to benefit from. By providing the incentives, the decline is
slowed, as is the problem of the 300,000 barrel threshold. The
mathematics between a 6 percent or 3 percent decline provide
almost enough time for a newborn Alaskan to grow up. He said
AOGA's point is that the focus has often solely been on the
dollars and cents this year and next rather than on the long-
term reasons for that policy.
1:35:48 PM
REPRESENTATIVE ROSES said if our objective should be to
encourage more investment, and some of those investments are
riskier and therefore more costly, it seems the credits should
be adjusted according to the risk. He stated:
In other words, those things that are going to be much
riskier, which is outside of the current existing
wells because we've heard the producers talk about
taking the current well that exists and then running
the horizontal wells out, we've heard them talk about
the technology and how exact that science was and they
could come literally within inches of hitting where
they thought they needed to be because of all the
seismic studies. It sounds to me like that is a lot
less risky than going 40 miles off somewhere and
drilling in an area where there are no existing wells.
So, why would we not add a higher percentage of
incentives for those types of wildcatting situations
and reduce the percentage of incentives for those that
are less risky potentials if we're talking about
incentives as the key.
1:36:57 PM
MR. WILLIAMS responded there are fundamental types of areas of
investment to get more oil from the existing fields: infield
drilling, replacing surface facilities that are close to 30
years old and were designed for 1.5 million barrels of oil per
day, and should perhaps be redesigned to deal with the water and
gas development and heavy oil and exploration. Infield drilling
offers a short term ability to add production but the others are
necessary as well. The known deposits of heavy oil and viscous
oil are under the Legacy fields. The renewal of the surface
facilities is of concern and is a backdrop to this session. To
replace facilities so that they are adequate for 30 or 40 years
requires a different type of investment than infield drilling.
It's important to look at all of the puzzle pieces to find a
good solution, however AOGA will make due with what the
legislature decides.
1:39:04 PM
REPRESENTATIVE GUTTENBERG said for the 20-some years that ELF
was in place, the state's return intake was diminishing,
theoretically because the investment was there but production
has declined. Why is industry coming back now and asking for
more incentives to stop the decline since the industry was not
making those investments to stem the decline when most of the
returns were going to the industry, he asked.
1:39:56 PM
MR. WILLIAMS said that is partially incorrect because
substantial investments were made in gas handling expansion and
a seawater injection facility was built that provides 2 million
barrels per day to keep the pressure up. He added that when he
was commissioner, the counterpart of AOGCC was then called the
Division of Oil and Gas. The division had a huge computer model
that said the Prudhoe Bay field should produce 9.6 billion
barrels, yet production is 2.5 billion barrels more than that
and that is the result of investments. He conceded the ELF
formula was flawed but he wouldn't say people didn't invest in
Alaska to develop the Slope.
1:41:27 PM
REPRESENTATIVE GUTTENBERG replied:
And I didn't say that either. That was most of my
work for 25 years. As far as investment for stemming
the decline, and I don't know where that was or where
that calculation was, but I know at the end of the day
the pipeline has lasted a lot longer than they thought
already and it has a longer life yet. Of course
maintenance goes up ... I just look back and wonder -
we thought they were making those investments then and
the decline has been down. Now we're asking to
increase our investment through the credits and all
those other things. It's a question we're asking
ourselves - how do we get to that? What is the right
level of doing that when, from my perspective, it
actually - when they had the advantage - more
motivation to do that, that didn't happen. I
recognize that you have a different opinion.
1:42:31 PM
MR. WILLIAMS said one thing the ELF didn't have was tax credits
- they are present here. After 1989, field size was the
dominant element in the equation unless a field was close to
averaging 300 barrels a day per well. Kuparuk's wells were
going down to 300 barrels a day and, at that rate, the ELF
formula became zero.
1:43:04 PM
CHAIR GATTO asked if that applied to all wells in the field.
MR. WILLIAMS said that is correct.
CHAIR GATTO said there was concern that a company could add a
few more unproductive wells to get the tax rate to zero.
1:43:34 PM
MR. WILLIAMS questioned why a company would spend $1 to save 15
cents on taxes.
CHAIR GATTO noted that depends on how many years one could save
15 cents.
MR. WILLIAMS said he could provide a fairly straightforward
demonstration, if members are interested.
1:44:03 PM
MR. WILLIAMS again acknowledged the ELF was flawed and said:
The point is: that is not where we are now. And,
meanwhile, there was a lot of money spent developing
fields, developing satellites, exploring for finding
successes like Endicott and finding things that are
less successful like Badami. And, still there are
investments being made to develop new fields like
NorthStar or Liberty.
1:44:52 PM
REPRESENTATIVE GUTTENBERG said his point was that legislators
are being asked to structure the oil and gas tax policy to
create a behavior when no historical reason for doing so exists.
1:45:14 PM
CHAIR GATTO asked what the output is of the Badami field.
MR. WILLIAMS did not know.
CHAIR GATTO said he has heard Badami was a "disappointment."
MR. WILLIAMS said it was shut down for awhile and may still be.
He offered to get that information for the committee.
CHAIR GATTO said he is curious about the purpose of shutting it
down and restarting it.
1:46:00 PM
REPRESENTATIVE SEATON stated:
...We are in a position where tax policy does drive
behavior, and previous tax policy drives behavior, and
there were a number of wells - our information was -
that were in Kuparuk that really weren't economic to
keep running but that were kept running because it
reduced the per-well production and so ELF went down.
That doesn't mean that's bad. Whatever system we set
up, you know, we have to look at those things and so a
gross tax system can be gamed just like a net tax
system can. There are different games in what we're
hopefully trying to do and work with you folks in
making sure we eliminate as many of those gaming
possibilities as available under whatever tax system
we come forward with. So, I don't think that we are
totally in opposition saying oh, well a gross tax
system ELF worked perfectly and didn't change behavior
or didn't have unintended consequences and the same
thing with the net tax system. And, so, there will be
a number of amendments, I'm sure, offered to try to
restrict those possibilities so that the desired
outcome is there and I think that Representative
Guttenberg's question about tax credits and all - I
think we are trying to influence behavior and that's
what the tax policy is for. Thank you Mr. Chairman.
1:47:40 PM
MS. CROCKETT said she would agree that tax policy does drive
behavior. She said legislators are attempting to strike the
balance between influencing behavior so that the money does not
get spent elsewhere as opposed to investing here. She submitted
that tax policy influences behavior in a positive way.
1:48:23 PM
MS. CROCKETT continued with her presentation.
So, now moving on to the House bill, the committee
substitute for HB 2001, how well does it stand up
under the standard of fit for purpose? Certainly it
would generate more tax revenue than the PPT will,
even in the short term, but it is premised on the
totally mistaken notion that increasing the government
take from the economic pie will encourage greater
investment, or at least not discourage it from what it
would be anyway. No one has ever taxed economic
growth into existence and this bill will not do so
either.
The second standard for evaluating the legislation
versus PPT is the administration and enforcement of
the tax must be as efficient as possible, consistent
with ensuring compliance by taxpayers. Here the two
chief objections to PPT have been, first that it is
not possible to forecast the revenues from it with the
accuracy needed for state budget purposes and, second,
that the audit challenges of PPT leave the state's
auditors hopelessly outgunned. So the questions that
need to be answered then are how much merit do these
criticisms have and would the legislation before you
now address these concerns.
Regarding the forecast for PPT, the Department of
Revenue cites two major concerns with the forecast.
One is that while costs would be expected to increase,
the dramatic difference between what was predicted and
what has actually been experienced brings into
question whether the legislature made its decisions
based on appropriate information. That's a quote.
The other is that the department needs cost
information about current and planned spending from
the operators, producers, and explorers and this
allegedly has not been forthcoming from them.
Addressing the matter of the difference between the
projected expenditures behind the fiscal note last
year and what those expenditures have actually been,
when the prior Administration saw information about
expenditures last year, they chose not to rely on the
representations about the 2006 costs that individual
companies gave the legislature in public testimony at
that time. Instead, they looked at what they believed
to be more reliable information contained in the most
recent partnership tax returns that had been filed for
the IRS. The federal partnership returns are not due
with the IRS until October of the following year so,
even as late as August of 2006, when the legislature
passed HB 3001; the most recent returns available were
for 2004.
1:51:00 PM
On page 8 of the testimony, there's a chart showing
the producer price index for oil and gas field
machinery and equipment during the last decade. You
can see, on the highlighted bar here and the graph
that marks 2004, when you look at that bar and compare
it out to what 2006 - the costs of doing business in
2006 were, you can see that there's a dramatic
difference between 2004 and 2006. Now there was
nothing sinister about what the Administration did,
and I don't mean to imply that there was. The company
said that the 2006 costs were high but the last tax
returns at that time indicated the costs were
significantly less with a fairly lengthy track record
of gradual increases.
1:51:28 PM
CHAIR GATTO noted oil prices increased by a 50 percent increase
between 2006 and 2007, which had to make a dramatic change in
the net profitability of every company that had produced any
oil, as well as the state's revenue. He stated that has not
abated yet so he suspects that rapid rise in costs had to do
with decisions to take advantage of this high oil price
environment and "pull out all of the stops." He asked whether
it takes three months to increase or reduce production.
1:52:30 PM
MS. CROCKETT said when prices are high companies drill more
wells because the return on the investment is higher. However,
more activity increases the cost of doing business because of a
labor shortage, less steel available, etc.
1:53:01 PM
MR. WILLIAMS explained that the graph shows what would have
happened to the wholesale/retail prices of equipment over that
period. He said the scope of work has gone up, which also
increases costs. More people are working on the Slope now than
for many years.
1:53:47 PM
CHAIR GATTO said labor has increased in price. He assumed
drilling rig crews must be imported from other places in the
world.
1:54:10 PM
MR. WILLIAMS said that 12 to 14 rigs have multi-year contracts
on the Slope; the cost of the rig is set on the contract, but as
those contracts roll over, the new contracts reflect any changes
in labor costs.
1:54:36 PM
MS. CROCKETT continued with her presentation.
So back to the Department of Revenue's use of
information that it had before it at this time.
Again, they relied on the information that was
reported in the tax returns and I suspect that, given
the same situation if Revenue found itself in today,
that they would do the same thing. It's a reliable
source of information versus characterizations from
the industry.
The other criticism that DOR makes of PPT is that
producers and other taxpayers are not providing
information that it needs to forecast with sufficient
accuracy. Obviously, AOGA is not privy to what
taxpayers are reporting to DOR as they make their
monthly installment payments and their annual true-up
payments, but that information is available.
DOR's second chief objection to the administerability
and enforceability of PPT is the audit challenges,
where it believes that it leaves its auditors
hopelessly outgunned. AOGA does not have a position
on the shifting of those classified positions to the
exempt service. That's a decision for the legislature
to make but there are some issues associated with
audits and with PPT that we would like to address,
however. This has to do with the starting point for
determining how much a producer's deductible lease
expenditures are. The PPT statutes currently allow
DOR a choice between starting with the joint interest
billings and invoices that operators bill to other
participants or starting from a comprehensive set of
accounting rules and principles that DOR writes up.
What choice DOR chooses will determine nothing less
than the very success or failure of PPT as a tax and
for this legislation as well, if it is enacted. It's
like having a tax based on your federal income tax and
choosing between the federal return as audited by the
IRS as a starting point or starting with the Internal
Revenue Code, and leaving it up to you and DOR's
auditors alike to find out what the right answer might
be.
1:56:30 PM
From the taxpayer's perspective, this means a near
certainty of continual assessments year after year
with additional tax, interest, and perhaps penalties,
and may mean a long series of lawsuits and appeals as
well. From the state's perspective, these same
troubles for the taxpayer will mean that the
incentives for investment will be seriously eroded.
The greater the uncertainty about how much tax a
company owes, the greater the likelihood that the
incentives will turn out to be less than their face
value. A taxpayer's only recourse in this situation
will be to discount the face value of those
investments in running the economic analysis about
making an investment or not. So the effectiveness of
those incentives will be less than what they should be
and Alaska will fail to realize the full amount of new
production it needs.
The other choice that DOR could make would be to start
with the operator billings to the other participants
on oil and gas operations - and please note that I
said start with those billings and not end. Anything
in those billings that are non-deductible under the
statute would have to be backed out. The central
concept of lease expenditures is that they must be
direct and ordinary and necessary costs of exploration
development and production. It would be most
surprising if there was anything in those billings
that goes outside the standard.
How can Alaska be sure of this? Because the
participants in an oil and gas operation do not give
the operator a license to waste their money. I've
heard a great deal of concern expressed during these
hearings about how companies might somehow game the
system in order to reduce the tax that they will pay
to the state. While so many are so worried about
efforts by their companies not to overpay the state,
why would most of these same people think that the
companies want to overpay either one? If anything,
since the operator usually is a direct competitor,
they probably don't want to overpay that operator any
more than they want to overpay the state. It's
reasonable to rely on the operators - on the non-
operators self interest to police and limit what the
operator can spend money on and they do that policing
by auditing the operators' invoices to them.
In the context of PPT, the Department of Revenue
should audit the audits to verify that operators do,
indeed, audit an operator's invoices on a regular
basis and that these audits are rigorous and at arm's
length. But, once these things have been confirmed by
the Department in its verification of the non-
operator's audits, there is little point to DOR to
spend the time and the effort to "replow" that the
field that the company's audits have already plowed.
Daniel Johnston, a consultant hired last year during
the legislative debate on PPT, gave an informal
presentation to members of the legislature, as you
know, on October 19. During that meeting he praised
the expertise of joint interest auditors and the
ability for the state to utilize unit accounting. He
went on to say that it would be extremely insightful
for the state to get unit accounting and made the
observation that state auditors are vicious, but that
joint interest auditors are even more vicious.
Of course for operations where there's only one
participant, the applicability of joint interest
billings doesn't really come into play but those joint
interest billings, however, can be used as a basis for
verifying expenditures that are ordinary and direct
and lease expenditures tied to a particular operation,
so, while you don't have the benefit of the joint
interest billing itself for a single operator
situation, the returns from that single operator can
be measured against the joint interest billings from
others.
Unfortunately, in the legislation that we have before
us today in Section 37, the ability of DOR to utilize
the joint interest billings is being repealed. That
ability does not require the Department to use them,
but rather authorizes the Department to utilize those
as one of the tools for auditing purposes. We believe
that this repeal will mean that the Department cannot
use those, even when DOR wants to allow their use.
DOR has testified in other hearings that somehow they
will still be able to require or authorize the use of
operators' billings, even if the present statutory
provisions are repealed. However, if you enact a law
specifically saying that DOR can do something and then
later on you repeal it, we believe that it means you
cannot do that any longer. But even if you're
persuaded by DOR that we're wrong on this point, why
would you repeal those statutes and take the chance
that the courts won't agree?
I've spent so much time on this particular topic
because of the situation a non-operator faces. All of
the information it has about what's being spent on the
operation is what it gets from billings by the
operator plus whatever it may learn by auditing those
invoices. But, if such a non-operator cannot start
from those invoices, how can it figure out what to
report as the lease expenditures for that operation?
All of the books and records of the expenditure are
with the operator and if a non-operator hasn't yet
audited the operator, they'll have no idea what those
books and records show. It's not feasible for a non-
operator to be auditing the operator month-by-month,
yet the non-operator must somehow have to be reporting
and paying installments month-by-month throughout the
year. Even by the March 31 true-up of the following
year, it is unlikely that any audit of the operator's
books and records will have begun by that date, much
less completed.
This is important because the penalty for
misestimating the installments is principally in the
difference between the rate of interest on overpaid
installments and underpaid ones - by the March 31
true-up, is a very serious business. Interest at an
APR of not less than 11 percent compounded quarterly
begins to accrue and penalties of up to 30 percent for
negligence and failure to pay can be assessed on the
amount of any underpayment continuing after the true-
up date. If a non-operator cannot rely on its
billings from the operator as the starting point for
these purposes, what is it supposed to use?
2:01:10 PM
Now this issue has been addressed by us and the
Administration during hearings as I mentioned a moment
ago, and they've stated that it is their intent to
allow the use of the joint interest billings as one of
the tools. I would encourage the committee to verify
that with the Administration during your
deliberations. In any event, if it is the intent to
allow these to be used, there's no reason to repeal
the specific authorization to do so.
2:02:39 PM
And Mr. Chairman, I've attached to the testimony a
white paper that provides some additional details
about why we believe this is important.
2:03:14 PM
REPRESENTATIVE SEATON referred to the joint venture billings and
asked if the joint partners pay for items that are not
deductible, such as lease expenditures under PPT. He questioned
whether those things are segregated out as to what is deductible
and non-deductible for our tax purposes or whether it is all
combined and must be torn apart. He noted there are up to 20
non-deductible lease expenditures that are chargeable to the
other partner.
2:04:26 PM
MR. WILLIAMS told members a number of things are specifically
excluded in the statute that don't go into joint venture
billings - costs of disputes, arbitration between partners, etc.
Some costs, such as the cost of response clean-up and
remediation are not allowed. The billings have a long series of
accounts so that each recipient can see each separate cost
involved in the remediation of a spill. The recipients will be
able to figure out what costs need to be removed from the
deduction and the billing so the state would not be paying for
those. From an audit standpoint, that will ensure that what is
spent for a disallowed category has been removed.
2:06:37 PM
REPRESENTATIVE SEATON responded:
So, we've got this huge stack of accounts and of
course there's no reason for the joint partners to be
separating those items out that are non-deductible
against PPT, so they're all going to be mixed in with
all of the things that are allowed to be deducted by
the joint partners - I mean allowed to be billed at
the joint partners. Is that correct or is it
segregated out so that it's fairly easily tracked
without going into each account category?
2:07:14 PM
MR. WILLIAMS explained the operator can't advise people that
certain accounts are disallowed costs. Each taxpayer has its
own tax department and responsibility for going through that.
At least it will know what costs have been spent. He said if a
cost can be argued either way that taxpayer will have to make a
call and the auditor will check. However, in terms of the
amount in each account, the question is whether those are direct
costs of running the field - are they ordinary and necessary
costs. With respect to those standards, a company won't give an
operator a license to waste its money to run another field so
that won't include a jet at headquarters. That discipline will
exist among the partners; however, it will not exist for a
company with no partners. He pointed out one company might have
a 99 percent interest in a field and that is an area where DOR
will have work. He added:
But, for a number of the fields in terms of the audit
workload, some of this can be made simpler than for
these ones where you don't have the audits going at
all between partners... Even now, I would be stunned
if there was anything in the joint venture billings
for PPT currently or under the proposed ACES
legislation that is not a direct cost and not an
ordinary and necessary cost of running that field,
just because of each participant's desire to keep its
money for itself and not to waste it, and not to let
the operator waste it for them.
2:10:16 PM
REPRESENTATIVE SEATON replied:
I understand your point and the point of the
Administration. The Administration is saying that
they're going to use the joint billings as part. Each
one of your companies on previous to the joint billing
statements has to submit all of the tax, you know,
accounting at the true-up time to the state. So, I
guess I'm trying to weigh this. Let's say Company X
has to file their PPT tax form on April 1st... and
then they may modify it when things go down the line
and they get some more billing or whatever - joint
billing statement from the operator in October.
They're still going to have to submit a revised PPT
billing if there's something different. So, I guess
the question is, does this make any difference as far
as the tax liability or the tax timing or is it just
simply that AOGA and the companies are wanting to have
the auditors first check the submitted tax - PPT tax
statement from each company against the joint billing
statement but it doesn't prevent them from going any
farther than that. Am I correct? I think many of us
are quite confused at what this big problem is to tell
you the truth.
2:12:07 PM
MR. WILLIAMS explained the problem is that the existing
authority that says the department may authorize or require the
use of the amounts billed or billable by the operator (Section
165(c) & (d)), which will be repealed in the bill. If that
statement is repealed, does that mean DOR cannot use them? He
said as long as it is clear that the legislative intent is to
allow them to continue to use it, that language can be removed.
However, if that language is left by itself, it could create an
unintended consequence that neither the Administration nor AOGA
want. If a non-operator in a field cannot use the joint
interest billings, it has no starting point from which to report
and make its estimated payments. If it turns out that during
the audit the auditor decides differently, the operator will be
on the hook for not being accurate.
2:13:39 PM
REPRESENTATIVE SEATON questioned whether this is the real
criteria the non-operator needs to be able to rely on for the
PPT tax filing and to determine whether DOR has the legal
authority to require that is the crux of the matter.
2:14:08 PM
MR. WILLIAMS said that is correct. The non-operator pays the
billings; that is the cash out of his pocket.
2:14:27 PM
MS. CROCKETT continued with her testimony.
Progressivity, as you know, is a feature of the PPT.
It's an addition to the PPT tax. Like the existing
PPT, the present progressivity tax is based on the
"net value" of production. But, unlike the basic tax,
it is computed monthly instead of on an annual basis.
The rate for progressivity in the current system is
zero when the "net value" per barrel is $40 or less,
and it rises linearly at a 0.25 percent point per
dollar that the net value of the equivalent barrel
rises above $40, then up to a maximum rate of 25
percent. The 0.25 figure, which sets the rate at
which the tax rate rises, is known as the "slope." I
should repeat that what I've just described here is
the current system and not the system that's embodied
in the committee substitute for you at this time.
2:15:26 PM
The rationale for progressivity boils down to little
more than, at these prices, that the oil industry can
afford to pay more. If affording to pay is the
rationale for setting taxes, then who was arguing not
even 9 years ago to give the industry a break when the
spot price for a barrel of ANS on the West Coast after
spending the $4.26 for transportation to get it there
crashed to $8.16 in December of 98. Nobody. It is
this asymmetry that makes progressivity so
objectionable to the industry. We have put all of the
capital and taken all the risks in making that
investment. Periods of high oil prices are not only
an opportunity for industry to catch up for periods of
low prices, but they are also an opportunity to make
up for expensive investments that prove to be
unsuccessful. The one example that I've included in
my testimony today is the Mukluk prospect. Industry
paid over $1 billion in bonus bids for that prospect
in 1982, then it spent another $135 million installing
a gravel island and drilling an exploratory well,
which turned out to be, unfortunately, a dry hole.
2:16:34 PM
REPRESENTATIVE ROSES agreed with Ms. Crockett's statement about
spending $135.6 million in 1982, but said today, a considerable
amount of credits under PPT and ACES would reduce the liability
for that company to an amount considerably below $135 million.
He stated the state has made a considerable amount of investment
to help provide oil companies the incentive to do exactly that.
He suspected that Ms. Crockett's statement, "We have put up all
of the capital and taken all of the risk in making the
investment ..." is inaccurate. He recounted that several
producers have said one of eight or ten wells drilled are
productive and said if the state is allowing exploratory credits
at 20 percent and 22.5 percent off of capital investments on all
ten wells, the state probably has taken an equal amount of risk
in terms of the amount of money put up and probably has fairly
significant investments. While he agreed with the concept, he
felt it inaccurate to say the industry is putting up all of the
capital and taking all of the risk.
2:18:32 PM
REPRESENTATIVE FAIRCLOUGH said she is on the same page as
Representative Roses as she construed Ms. Crockett's comments as
a request to take the credits back off the table and that the
industry would repay all of the costs the state has allowed as
credits. She said there is some balance in the progressivity
language to incorporate AOGA's truth and the state's truth.
2:19:13 PM
REPRESENTATIVE ROSES clarified that he appreciates Ms.
Crockett's and Mr. Williams' work but clarified his point is
that a lot of people do not realize the amount the state invests
to ensure the oil continues to flow. The legislature's most
difficult task is to find the balance between the state's return
on investment and the industry's return on investment. He noted
the fact is the state and industry are partners with investment
and risk. The state must determine a point where it encourages
investment and captures the maximum return for the state for its
investment and risk.
2:21:07 PM
CO-CHAIR GATTO offered his opinion regarding public perception
on the oil taxation issue:
The public hears we want to take even more money from
the oil companies. And I think it is important to
recognize that the money comes from the oil. It's our
oil and we share in the resource and the oil companies
get a share and we get a share. And the debate may be
over what's the fair way to put it. If we put in 50
percent of the money, do we only get 40 percent of ...
the revenue, and if you put in less money you get more
of the revenue, et cetera. And that's the debate.
But the statement that we take from the oil companies
is very far from truthful because we both take from
the resource and it's only the way the allocation is
made that determines who gets what percent. ...
There are things that the public hears - sometimes in
simple things like letters to the editor or talk show
callers or newspaper articles or certainly trade
publications, which are very strong depending on what
side they're on. They're usually on the side of the
oil companies and they have the most sway - how much
more do you want to take from the oil companies?
Well, we haven't taken any yet, so we're not taking
any more. And, to me, that's an important distinction
and Representative Roses and Representative Fairclough
and the rest of us recognize that that distinction is
very clear to us because we deal with it all the time.
It should be clear to you because you deal with it all
the time.
And I think, in all fairness, when we do speak to the
public at-large or write articles in the paper, that
we ought to be at least somewhat more careful in
describing what we take from the oil companies and the
fact that you take all the risk and, yet, of the small
amount of money being made that we take even more from
you. That puts us in a horrible light. And I'd be
willing to be in that horrible light if it was true
and say I need to defend myself now, because what
we're doing is unfair, is greedy - and, by the way, we
get called greedy all the time, too. And I'm thinking
- who gets most of the money here compared to the
investment they make? Are we greedy for demanding for
our shareholders what they deserve? And can we assign
the term to some other partner of ours and saying,
"You know, you're taking away from those single moms
with three kids who are sick at home today and don't
know what they are going to do for the next dollar."
And they deserve something better than to be called
greedy.
So, I know we're kind of dumping on you about this,
but you are ... with AOGA, not just with them, I mean
you're important. And you get that message to any
thousands of people. And I'm not sick of all the ads
that have shown up, but I kind of smile at them
sometimes because I recognize that this group here -
and the building at large is responsible for making
the most significant decision of the decade ... and
maybe because many of us were here for the previous
one, that we're involved in the most significant
issues of the decade for us - declining production et
cetera, high oil prices et cetera.
And ... we're going to make that decision based on
solid information that we get. But then there's all
that stuff that goes out over the air waves that's - I
don't want to say it's hurtful - but, it's inaccurate
and we don't respond with a million dollar ad campaign
saying, "You know, BP did not give us these parks."
The oil in the ground gave us the money so that BP
could get a share of that money and then give a little
bit back to the community. I'll give you that. But
sometimes the information is out there that, "You
know, we're enjoying these parks because of an oil
company." And I'm not sure that's fair, because we're
enjoying the parks because of the oil resource that we
own. And what we're doing is asking the companies to
come out and say want to make some money? You want to
make some good money? Come on out here, bring some
drilling rigs. We'll get somebody to build a
pipeline, we'll ship the oil, and we'll sell it to
somebody else. And we'll all make money. And not
that we are greedy for asking a share of the money
since we started with the oil and other people brought
in money and made a considerable amount of money.
And, I'm going to apologize for all of this, but at
some point, certainly as the week drags on, I really
would like you to understand our position on this. I
feel sometimes we're taken to be a little bit slow in
that you make some accusations, we don't respond, you
make some more accusations, we don't respond.
Because, even though we don't believe them, and we
hope lots of people don't believe them, sometimes
responding just creates ill will and then we start a
war in the media about who said what. And I want to
thank my colleagues that we don't do that.
2:26:46 PM
MS. CROCKETT said she agrees with a lot of the points Chair
Gatto raised but said AOGA's advertising that has occurred over
the past month has had one goal, that being to give the public a
heads-up that the number one issue facing Alaska today is
declining production. Therefore, it is important to strike the
balance Representative Rose just spoke to.
2:28:08 PM
REPRESENTATIVE GUTTENBERG admitted he finds AOGA's
advertisements to be offensive. He noted last year at the close
of the session, Mr. Hosie, a successful oil and gas attorney and
successful litigant against the [oil] industry, talked to
legislators about the obligations under the contracts. The
state owns the oil and gas. It is not a producer, developer, or
construction outfit. When the state enters into a contract with
a successful bidder, they get 87.5 percent of the royalties;
they are then obligated to look out for the state's best
interest, no their own. That only happens when folks come in
and convince legislators that it is more important to change the
tax structure and give tax breaks.
He surmised if the industry was looking out for the state's best
interest in the long term, the state would not be looking at
such a steep decline in production because maintaining
production is in the state's best interest. He said the state
has been encouraging more exploration, development, and new
technologies for the last 20 years. Had the industry lived up
to its end of the bargain, nobody would be having this
discussion today. Alaska could have been the leader in oil
technologies, but it is not. He agreed with Chair Gatto's
comments about the partnership but said he has found the
relationship to be disappointing in many ways because it has not
always been above board.
2:32:15 PM
REPRESENTATIVE JOHNSON pointed out the two basic ways to
distribute the oil wealth are through taxation and jobs. He
said the state needs its fair share but it also needs to keep
people employed. He said he does not believe the importance of
the employment issue has been discussed and should be considered
in the balance.
2:33:44 PM
REPRESENTATIVE WILSON said as she listens to all of the oil
companies now, she recalls how the same industry representatives
said the PPT would cause all kinds of problems when it was first
adopted. Now they are saying it is wonderful. She said it is
all relative. Now they are asking legislators to keep the PPT
and not adopt ACES. She understands their positions but finds
the situation to be ironic.
2:35:08 PM
MR. WILLIAMS said he doesn't want to respond to the statements
that were made as such because, as Chair Gatto said, a response
can sometimes be counterproductive. He noted in a fundamental
sense, the industry is repeating what it said last year - that
somewhere between a tax system where the state takes nothing and
where it takes 100 percent is a sweet spot. AOGA said last year
it thought PPT overshot the mark; it is now saying the same
thing. AOGA's point is that a sweet spot exists and AOGA is
telling legislators where it sees that spot. That spot must
consider the trade-off between jobs today and jobs tomorrow and
revenue today and revenue tomorrow. At the end of the day, that
point is the legislature's decision and everyone respects that.
No one means to demean that or the difficulty of the task. He
said industry representatives are urging legislators to get to
that spot, despite the rhetoric.
2:37:36 PM
CHAIR GATTO asked what the advertisements are saying.
MR. WILLIAMS said he did not know.
2:37:39 PM
REPRESENTATIVE EDGMON agreed with Mr. Williams' characterization
of the situation. He said the discussion confuses him because
it appears the progressivity theory gets both the state and
producers to the sweet spot. He asked if AOGA does not support
progressivity but agrees in concept that the state should get
more on the upper end when the producers are getting more
profit, and conversely both share at the lower end when oil
prices dip. He asked what AOGA would support if it does not
support progressivity.
2:38:30 PM
MS. CROCKETT said AOGA's position is that PPT should not be
changed. It contains a progressivity piece, something AOGA did
not support last year, but it is current state law. AOGA
believes the system in place today provides the sweet spot
mentioned.
2:39:00 PM
REPRESENTATIVE EDGMON asked why Ms. Crockett's written statement
says the asymmetry makes the progressivity so objectionable to
the industry.
2:39:16 PM
MS. CROCKETT said AOGA supports the PPT in force today, which
has a progressivity feature in it. She said AOGA doesn't really
like progressivity as a general concept, but that is immaterial.
The fact is the state law contains a progressivity feature and
AOGA is willing to live with that law. It does not want that
increased.
2:39:45 PM
CHAIR GATTO noted Ms. Crockett's opening page says AOGA requires
a 6/6 vote to adopt a tax policy - that being no dissent. He
asked if the entire AOGA tax policy committee accepts the
progressivity clause in the current PPT law, but objects to it
in ACES, he would assume the entire committee objects to
progressivity.
2:40:28 PM
MS. CROCKETT explained the progressivity clause is an increased
tax in the ACES legislation.
CHAIR GATTO asked if the entire tax policy committee objects to
progressivity in the ACES legislation.
MS. CROCKETT said that would depend on what the progressivity
contained in it. She said AOGA is living with a tax that
contains a progressivity feature; its members have agreed that
tax should not be changed. However, when you get into changing
bits and pieces of it, AOGA has to step back and make a judgment
call on whether it likes or dislikes the proposed changes. She
repeated AOGA's position is that PPT should not be changed.
2:41:35 PM
CHAIR GATTO said no one considers Ms. Crockett to be
disagreeable but when the committee reads something in print
that requires AOGA members to support it, members must ask the
tough questions and AOGA must "slug it out" and support its
statements. Those exchanges provide a golden opportunity to
take the legislature's message back to the association that some
statements need to be clarified. He questioned whether AOGA
does not support any amount of progressivity in the ACES
legislation.
2:45:37 PM
REPRESENTATIVE FAIRCLOUGH said she appreciates the difficulty of
representing so many industries within AOGA. She noted Ms.
Crockett was the benefactor of an earlier discussion on
progressivity and gross and net tax and how important it is for
each legislator to represent their districts and all Alaskans
and that the commonality is that everyone wants to do the right
thing for Alaskans and the state.
2:47:15 PM
MS. CROCKETT told members AOGA is concerned that the House bill
before the committee does not meet the fit for purpose standard.
AOGA is also concerned about the decline of production. AOGA
hopes the legislature continues to strive for the balance
discussed during the meeting. She thanked members for the
opportunity to testify.
2:48:17 PM
REPRESENTATIVE ROSES said his point was that he finds the
producers' comments about their partnership with the state to be
a bit disingenuous when they say they have made all of the
investments and taken all of the risk. He repeated the word
"all" bothers him because the state shares in that risk.
2:49:18 PM
CHAIR GATTO congratulated Ms. Crockett on her appointment to
AOGA's executive director position and apologized if his
comments were aggressive. He repeated the frontal conversations
must occur.
MS. CROCKETT informed members a staff member from AOGA's
production department is available to answer questions.
The committee took an at-ease from 2:51:13 PM to 3:08:38 PM.
3:08:51 PM
CHAIR GATTO reconvened the meeting and announced that the
committee received a written response from Marcia Davis of DOR
to a committee member's question.
3:09:49 PM
PAT FOLEY, Manager of Lands and External Affairs, Pioneer
Natural Resources Alaska, told members he would like to re-
familiarize them with Pioneer as a corporate entity and give a
status update of its projects in Alaska. He then said he would
address the existing PPT legislation. [Mr. Foley's testimony
accompanied a PowerPoint presentation.]
3:10:20 PM
MR. FOLEY said Pioneer would like the committee to resist the
temptation to makes changes to the existing tax legislation. He
noted, in regard to previous questions about how quickly the
industry can react, he would liken the industry to a steamship.
It cannot start, stop, or turn on a dime, he noted. He said PPT
is a tax system that will motivate investment but it is too
early to see any behavioral changes from that tax policy. He
submitted it may take several years to see any changes.
3:11:24 PM
MR. FOLEY informed members that Pioneer is a large U.S.
independent with operations in Alaska and the "Lower 48," which
is its breadbasket. Pioneer does a lot of work in Texas, both
oil and gas onshore, and has large coal bed methane assets in
the Raton Basin [in Colorado] and it does business in South
Africa and Indonesia.
3:11:51 PM
CHAIR GATTO asked Mr. Foley to clarify whether his company
replaced the Evergreen Resources operation in the Mat-Su Valley
and, if so, to summarize the transition.
3:12:18 PM
MR. FOLEY told members his company did acquire Evergreen
Resources, primarily for its coal bed methane assets in
Colorado. Evergreen's Alaska business did not fit Pioneer's
business model so, when it took over, it surrendered Evergreen's
leases within a year.
3:12:54 PM
CHAIR GATTO asked if Pioneer obtained some leases on the other
side of the Castle Mountain fault.
3:12:57 PM
MR. FOLEY said it did not. He explained another company named
Pioneer Oil came in and placed bids on some of those leases as
soon as Pioneer Natural Resources Alaska surrendered them.
3:13:36 PM
MR. FOLEY jested his company is the little company spending all
the money on the North Slope right now.
3:13:52 PM
MR. FOLEY told members Pioneer Natural Resources Alaska has
about 1600 employees worldwide, most are located in its
headquarters outside of Dallas. In 2006 its revenue was about
$1.6 billion. Its market cap is about $6 billion. In
comparison, ExxonMobil's market cap is about $500 billion.
3:14:46 PM
MR. FOLEY said Pioneer entered the state in 2003 and acquired
some leases. Pioneer drilled three exploration wells that have
led to its Oooguruk development - Pioneer's flagship project on
the North Slope. It has a 70 percent interest in that operation
and is partnered with ENI, the Italian national oil company.
Pioneer is also working on another project in Cook Inlet called
Cosmopolitan in Anchor Point. That resource was discovered
decades ago. Pioneer has acquired 100 percent of the leases; it
has an appraisal rig working at that location today. It should
finish drilling very soon and then spend several months testing
the well. Hopefully that will lead to another development. He
noted that Cosmopolitan is roughly similar in scope and scale to
its project on the North Slope.
3:16:07 PM
CHAIR GATTO asked if that project is similar to an on-land oil
platform.
3:16:09 PM
MR. FOLEY said that is a very good analogy; it is on land
although the resource lays offshore, as far as 3+ miles, so
Pioneer's entire development plan would be onshore drilling with
extended reach wells. He said Pioneer is also an exploration
company. It owns about 1.5 million net acres on the North
Slope, the vast majority of it is in NPR-A. It has an
exploration joint venture with Conoco Phillips and Anadarko.
Since Pioneer entered the state, it has participated in the
drilling of 11 exploration wells. He told members, "To be
frank, we haven't hit the ball out of the ballpark yet."
Oooguruk was originally a well that targeted a Kuparuk
formation. That well failed in that target but a Jurassic
resource was discovered, which is the focus of the Oooguruk
development. The resource did not lie upon the leases Pioneer
drilled; the vast majority was on adjacent lands owned by Conoco
Phillips. Through a series of transactions, Pioneer now owns
them. Pioneer employs 35 people in Alaska.
3:17:50 PM
MR. FOLEY discussed a statistical summary of what Oooguruk is
all about, and characterized it is an oil play. Pioneer is the
operator with a 70 percent interest; its partner ENI has a 30
percent interest. The resource is in the 70-90 million barrel
range. Pioneer has been working on the project for several
years and if all goes well, production will begin in 2008. It
will produce about 15,000 barrels per day at its peak and has a
25 year field life.
3:18:34 PM
CHAIR GATTO noted Alaska will have oil for a long time. He
asked if Pioneer's Cook Inlet area is a good one because it has
a high likelihood of success.
3:18:37 PM
MR. FOLEY said the Chair's question is actually focused on
exploration. Cosmopolitan is a discovered resource. The
original well was drilled several decades ago but was
uneconomical to develop at that time. Pioneer has not yet made
a development commitment but it is on the "radar screen."
3:18:42 PM
REPRESENTATIVE EDGMON asked what will become of the Kuparuk
island when the project is complete.
3:19:45 PM
MR. FOLEY told members the island consists of 500,000 cubic
yards of gravel that sits in 5 feet of water. The edge of the
island is made from 4 cubic yard gravel bags that provide slope
protection and prevent erosion. At the end of project life, the
bags will be removed and it will be abandoned in accordance with
the state's resource agencies at that time. It is possible that
the best abandonment plan will be to leave it intact and let it
erode naturally.
3:20:38 PM
CHAIR GATTO asked about an abandonment plan known as the Cook
Inlet hotel. He asked if any other use exists for a piece of
land so beautifully isolated other than to abandon it.
3:21:05 PM
MR. FOLEY pointed out that Oooguruk is in the Beaufort Sea, not
in Cook Inlet.
CHAIR GATTO recalled he was thinking of the on-land Cook Inlet
project.
MR. FOLEY said Pioneer sanctioned Oooguruk in 2006. It has
constructed a gravel island, set modules on the platform, and
installed a buried subsea flow line. Pioneer is weeks away from
beginning a 3-year development program and very proud of its
accomplishments there. It bought the leases in 2002 and drilled
exploration wells. Hopefully oil will be flowing in 2008 so
that in a 5-year timeframe, it will have gone from first well to
production.
3:22:34 PM
MR. FOLEY said during the past winter, Pioneer had over 600
contractors working on its project on the North Slope [Slide 6].
The total capital investment in that project will be $550
million plus. He noted the benefits of a project like Oooguruk
are tax dollars, jobs, and state income taxes. It also has
intangible benefits. Pioneer will be the first independent oil
producer on the North Slope. It will enter into a facility
access agreement with the Kuparuk River Unit making it the first
third party owners to rely upon existing infrastructure to
process its crude. A number of companies are watching closely
to see if this endeavor is successful. Pioneer's leases are
unique in that they have a net profit component, meaning 30
percent of net profits are paid to the state.
3:23:40 PM
MR. FOLEY discussed slide 7, which refers to government take -
the piece of the profit that the government enjoys. The
reciprocal is the company take, the share kept by the investor.
He said the punch line is that government take is dependent upon
costs and burdens.
3:24:58 PM
MR. FOLEY referred to a book authored by Daniel Johnston, an
esteemed academic who testified before the legislature. One of
Mr. Johnston's books details different elements of petroleum
fiscal systems. In that book he highlights the simple point
that high cost fields have a differentially high government take
if a royalty component is included.
3:25:31 PM
MR. FOLEY focused on the first two columns of the chart and told
members he normalized everything at 100. A royalty that behaves
as a gross tax comes right off the top. Most leases in the
state are 1/8th royalty. All of the newer leases have a higher
royalty rate, most are 1/6, and a few scattered leases have a
net profit component.
MR. FOLEY said to calculate one would subtract the royalty from
100 to get the net revenue. The next task is to remove costs.
To differentiate the high from the low, he assumed costs were 20
percent of the gross revenue. The high end costs were assumed
to be 50 percent. He said Mr. Johnston highlighted the Gulf of
Mexico in his book, which provides a much simpler example
because those operations are not subject to state income tax,
property tax, a PPT, etc.
3:26:48 PM
MR. FOLEY explained that once costs are deducted, the result is
a taxable net income. Then the state would take its taxes - a
state income tax, a PPT tax, and a federal income tax deduction.
The AFIT is what remains after everything is paid. The company
take would amount to the piece of the pie left over divided by
the sum of gross revenue minus costs. The low cost would be
28.3 divided by 80 (100-20). The divisor in the high cost would
be 50 percent, in the form of costs.
3:28:00 PM
REPRESENTATIVE FAIRCLOUGH questioned why the chart shows a $1
difference between the high and low property tax.
3:28:12 PM
MR. FOLEY said there is a difference between the high and low.
Property tax is a function of depreciated capital, similar to a
percentage of the assessed value of a house.
REPRESENTATIVE FAIRCLOUGH questioned whether the higher cost
would be due to a higher cost of infrastructure.
MR. FOLEY said that is correct.
3:28:47 PM
REPRESENTATIVE ROSES asked what the numbers look like when you
start adding credits back for exploration. He asked if the
whole dynamic would change as the percentages would start to
shift toward the contractor.
3:29:13 PM
MR. FOLEY said it would and that he made an attempt to
incorporate credits in this analysis. The number under PPT is
28 percent, which equals 22.5 percent plus the progressivity.
For the purpose of this calculation, he assumed 30 percent of
the total cost. Then, he credited back 30 percent of the total
cost of capital investment so the PPT is credited with 20
percent of the assumed capital. He stressed the numbers are
hypothetical but this model has attempted to incorporate the
credits so the PPT payment shown is net of credits.
3:30:37 PM
CHAIR GATTO asked if 30 percent of the cost represents capital
investment.
3:30:46 PM
MR. FOLEY said that is just an example; it may be that the
typical project will have a percent of total costs to be 50
percent operating and 50 percent capital, eligible for PPT
credits.
3:31:17 PM
REPRESENTATIVE ROSES asked about the PPT tax rate.
3:31:30 PM
MR. FOLEY said it is 22.5, but under existing PPT there is a
progressive element that has both a trigger point and a slope.
He thought that to be 2/10ths of a percent per dollar.
3:32:02 PM
REPRESENTATIVE ROSES clarified it is 2/10 percent on the net so
that operating and capital expenses are removed before the
progressivity kicks in. He pointed out that Mr. Foley's chart
goes from 22.5 to 28 percent, which means that the 5.5 percent
increase should have decreased if credits were taken into
account.
3:32:35 PM
MR. FOLEY replied:
... Again, the 28 percent is not - if you were to
open this up as a workbook, you'd see that this number
- 17 - is not 28 percent of taxable income. It's 28
percent of taxable income but there is also a credit.
I think the number actually calculated at 19 or a
number like that - I don't recall exactly - but it
takes into account the credits that you'd enjoy by
making a capital investment. We just selected - your
capital investment will be roughly 30 percent costs.
3:33:20 PM
REPRESENTATIVE ROSES asked to see that breakdown later.
3:33:35 PM
MR. FOLEY clarified that his point is that high cost and low
cost fields have different company takes.
3:33:53 PM
MR. FOLEY said the column on the right illustrates a project
with a 30 percent net profit component. He tried to keep the
other variables the same. He explained that under the net
profit system an additional 10 percent is paid to the state,
which affects the government take and increases it up to 80
percent in this example. If the debate is about what is a fair
and equitable share, not every field has the same fiscal regime
if you want to implement a constant fair and equitable take
across all investments.
3:35:01 PM
REPRESENTATIVE WILSON asked if the net income was derived by
dividing the 28.30 by 80. She asked if others needed further
explanation.
3:35:28 PM
CHAIR GATTO said the committee would work through and reach a
conclusion and that Representative Fairclough would explain
later.
REPRESENTATIVE FAIRCLOUGH replied:
Mr. Chairman, absolutely not. I think there is a
variable of assumptions up there that are already
being challenged and so we need to take it just as
illustrative to understand that all of those variables
- which we could go back and challenge. There's a
different assumption - well, it may be the same
assumption but there's an assumption on the cost of
the assets or value of the assets and there's an
assumption on some credits that our resident
mathematician has pointed out that we might not all
agree so I think that we need to take it as it is and
continue.
3:36:18 PM
REPRESENTATIVE SEATON said he also has some questions on the
mathematics of the high cost of low gas but thought Mr. Foley
was trying to illustrate that the bid taken with a 30 percent
profit sharing program would have a different government take
than the standard operation across the slope. He questioned
whether the difference between the right-hand column and the
other two is that the government take for the Oooguruk project
with a contract with a 30 percent net profit share is different
than for normal fields across Alaska.
3:37:18 PM
MR. FOLEY said that is correct. He said the simple point is the
government take is affected by cost and affected dramatically if
a net profit component is involved. The government take is the
highest when there is a high cost development with a net profit
component. He added that although Oooguruk is not represented
exactly, it is very similar to the right column.
3:38:14 PM
REPRESENTATIVE ROSES asked whether that entity with which
Pioneer negotiated agreement with the state for the well
mentioned will be affected by changes to the taxation policy.
3:38:34 PM
MR. FOLEY said that is incorrect. Pioneer has a contract and an
oil and gas lease with a royalty component and a net profit
component and it is subject to PPT and state income tax laws.
REPRESENTATIVE ROSES asked if that additional.
MR. FOLEY affirmed that is correct.
3:39:07 PM
MR. FOLEY continued with slide 8, which describes where the net
profit leases are located. Some are located in the Colville
River Unit; 4 of the leases in Oooguruk are net profit leases;
Nikaichuq; some are close to Duck Island. This graphic
representation shows the net rates.
3:40:08 PM
MR. FOLEY showed slide 9, which differentiates the leases by
operator on the same map.
3:40:51 PM
REPRESENTATIVE WILSON asked if Pioneer does not want a net
profit situation.
3:41:09 PM
MR. FOLEY said the legislature is considering a tax change and
the basis of that change is for the state to get a fair and
equitable share. He submitted on North Slope projects that have
a net profit component, the government take today is 80 percent
so those projects simply cannot afford to pay an increased tax.
3:41:50 PM
REPRESENTATIVE JOHNSON asked what the benefit is and why anyone
would enter into a lease that pays more.
3:42:13 PM
MR. FOLEY answered the State of Alaska had numerous lease sales
in the 1960s. All of the original sales had a 1/8th royalty.
In the early 1980s, oil prices were high so the state started
offering leases that had a net profit with the royalty. Most of
those leases never got developed because the difficulty of
administering that type of lease is fairly high. Stacked next
to a lease with a 30 percent net profit, it is the lease without
the net profit that would attract the investment dollars. The
state had 3 or 4 sales with net profits and then returned to a
flat 1/8th royalty or a 1/6th royalty.
3:43:20 PM
REPRESENTATIVE JOHNSON asked about the amount of oil being
produced out of the net profit leases and where they exist in
the history of an oil project.
3:43:37 PM
MR. FOLEY pointed to a red block on the far left of the map on
slide 9 that contains leases in the Colville River Unit. He did
not know if production is allocated to those leases. He told
members the Department of Revenue publishes a report of income
from net profit leases that would contain the information
Representative Johnson is looking for. He pointed out the
Oooguruk leases are colored pink; they are net profit leases.
He did not know whether production is allocated to leases on the
northern end of the Kuparuk River unit. He said Milne Point and
Duck Island have some net profit leases. All of the leases that
are still in existence today with a net profit component either
have a certified well that holds them or they are within a
producing unit, otherwise they would have expired years ago.
3:44:55 PM
REPRESENTATIVE JOHNSON asked what the effect of excluding net
profit leases from this legislation would be.
3:45:13 PM
MR. FOLEY said Pioneer would be thrilled as it would
dramatically improve the economics of its projects.
3:45:25 PM
REPRESENTATIVE JOHNSON asked if that would equalize projects
across the slope but not give Pioneer a benefit.
3:45:35 PM
MR. FOLEY said it would put Pioneer on a level playing field.
He stated:
For absolute disclosure here, Pioneer also has sought
and we have received royalty reduction for our
project, so for a period of time, our royalty falls
down to 5 percent and then escalates. The reason it
does is our project is marginal. It would not have
been funded in a low price world and because of this
additional burden of net profit, it was uneconomic.
3:46:16 PM
REPRESENTATIVE JOHNSON asked if Pioneer would be better off with
a 5 percent reduction in royalty or with a net profits lease and
the 5 percent reduction.
3:46:29 PM
MR. FOLEY replied that Pioneer would trade its royalty reduction
for the elimination of net profit in a heartbeat.
3:46:45 PM
REPRESENTATIVE FAIRCLOUGH added:
In response to Representative Johnson's line of
thought, the advantage is that this acts like a
license and the licensee knew that there was a fine
[line] there that was uneconomical to develop and went
in and developed that knowingly, and we had a previous
owner that received benefit or a lack of benefit when
they had to go sell the property under those same
terms. And so, there could be said that whoever owned
the lease prior to the current ownership took a net
loss with those conditions over the course of the
years that were applied on to it. And so, while I do
recognize the value of your questioning and what it
would do for the State of Alaska to encourage
development and exploration and production of those
wells, we should be careful in our thought process
before we move forward on that without speaking to
legal counsel as to the litigation that might come
forward afterwards. It certainly is within our power
to change the taxing policy but there are contracts
out there with other explorers that would be
implicated with that type of a decision - but being
treated in a different manner also. It depends if
they're the original holder of the lease.
3:48:07 PM
REPRESENTATIVE JOHNSON said he would like to find a way to level
the playing field for small producers.
3:48:29 PM
MR. FOLEY said his point is a project with a heavy net profit
can't afford additional tax burden. He said Pioneer is not
specifically asking the legislature to reconsider its net profit
interest; however he'd be pleased if it did.
3:48:49 PM
MR. FOLEY moved to slide 10, which pertains to the existing PPT
legislation. When Pioneer entered the state, it spent roughly
$100 million between its first investment and the time PPT was
enacted. Pioneer sanctioned its Oooguruk project prior to PPT.
Pioneer views PPT as durable, equitable, and balanced. He
explained that PPT is a tax increase over ELF but the benefit of
the credits for smaller, more marginal projects is huge.
Pioneer is taking PPT credits into effect when making investment
decisions. He thought the new explorers trying to drill
exploration wells are doing so too. He believes the credits are
an indication of a true partnership.
3:50:22 PM
MR. FOLEY told members the state is an investor in this project
under PPT and the credit program.
3:50:36 PM
MR. FOLEY said when Pioneer entered Alaska, it was attracted by
the prolific petroleum system. When it started its exploration
program here, it found all of its resources, although large, are
challenged, either by viscosity, location, oil quality, or size.
The odds are Pioneer's finds will be less attractive than it
hoped. The PPT and credits enable marginal projects to go
forward.
3:52:04 PM
REPRESENTATIVE JOHNSON asked if manmade obstacles, such as
access to the pipeline, will make putting oil in the pipe
problematic.
3:52:53 PM
MR. FOLEY told members a basin goes through a natural maturity
process. It is typical for large companies to make early
investments. Similar to the Gulf of Mexico, he believes the
North Slope oil basin will undergo a change in which the
activities of larger companies will decrease and the activities
of smaller companies will grow. Pioneer has been negotiating
for facility access with the Kuparuk River unit for facility
access into its fields.
3:53:47 PM
MR. FOLEY informed members Pioneer has avoided making capital
investments to build its own production facilities. Instead, it
is going to lease capacity from the Kuparuk River unit. The
agreement is not yet signed but he is 100 percent confident it
will be and allow Pioneer to stay on schedule and have first oil
in 2008.
He explained that TAPS is the Kuparuk River pipeline - they are
common carrier open access lines, which simply means the
pipeline has to take any barrel. It has a regulated tariff.
3:54:50 PM
REPRESENTATIVE ROSES said he appreciates that what Pioneer
expected to find was not what it found. He asked if Pioneer is
planning to drill more wells.
3:55:09 PM
MR. FOLEY said yes, Pioneer still has 1.5 million acres gross on
the North Slope and has hopes for a continued exploration
program.
3:55:23 PM
REPRESENTATIVE ROSES asked if Pioneer would make the same
decision to purchase its original leases, knowing what it knows
today.
3:56:04 PM
MR. FOLEY said he cannot answer that question without more
thought. He said the cost environment on the North Slope is a
bit higher than it expected and, because of inflation and
pressure on the industry, costs are even higher. He added the
price of oil is also a lot higher. Regarding tax policy, when
Pioneer entered this state, it made a commitment to develop
Oooguruk under the old ELF regime. Under ELF, Oooguruk would
have paid zero taxes. Within days of sanctioning the project, a
dramatic tax change under PPT was announced. He pointed out
there are cost and price scenarios where Pioneer is better off
under PPT than it was under ELF.
3:57:21 PM
REPRESENTATIVE ROSES asked, given the situation under the House
Oil and Gas bill - not ACES, would Pioneer make that same
investment today. He asked at what point the state will provide
enough incentives to get a company like Pioneer to drill a
marginal field. He said Mr. Foley's inability to answer gives
the public a sense of how difficult it is for the committee
because it is dealing with hypothetical numbers. Although it
has been getting more accurate information, that data has
margins of error.
3:59:20 PM
MR. FOLEY said he still is not going to answer the question. He
appreciates the difficulty of the legislature's task. Pioneer
is a for-profit company; Pioneer's task is simple - the
legislature has to look after the state's resources and make
decisions that are in the best interest of Alaska's citizens.
He noted as taxes increase, the investments will wane so the
question is how many investments the state is willing to forego.
4:00:31 PM
REPRESENTATIVE SEATON said the committee is actually looking at
a very unique situation in which someone sanctioned a project
that is 30 percent net profit above PPT and went forward. The
discussion about the change in ACES involves 2.5 percent. He
said he understands Mr. Foley's concern about adding another 2.5
percent but ACES would be 55 percent. He said the project with
the 30 percent net profit is not a normal one, but he feels the
committee should consider a 2.5 percent increase under ACES on
fields that already have the 30 percent net profit share.
4:02:32 PM
REPRESENTATIVE JOHNSON pointed out this project was sanctioned
under zero taxes with a 30 percent profit.
4:03:00 PM
REPRESENTATIVE SEATON questioned whether Representative Johnson
is saying Pioneer would be willing to trade PPT for a 30 percent
net profits tax.
REPRESENTATIVE JOHNSON said he misspoke; his point is it was
sanctioned under a zero tax.
4:03:20 PM
REPRESENTATIVE FAIRCLOUGH said she recognizes the zero percent
but it was followed up by a PPT and the investment credits,
which made it even more beneficial. She noted the old leases
present an interesting dilemma when considering whether the
legislature's actions today will make them more or less
economical for development.
4:03:51 PM
CHAIR GATTO noted the state does not grant grandfather rights.
4:04:02 PM
REPRESENTATIVE FAIRCLOUGH said:
It is an additional risk, but it is also another
battle that we, as a resource committee, are
challenged to make the best decisions in the balance
that's [been] spoken of. And I feel obligated to say,
well when people use the word partnership around here,
we need to be very careful. So, for the record, we
don't own anything on the North Slope because I don't
want to have to take it down nor be liable for it so
this partnership is incentive. If we have a
partnership interest, some might think that we own
some capital and we don't. We own resource that's in
the ground that we are monetizing with incentives.
Just for clarification on our partnership, I certainly
am not indebting the state to have to pick up those
pieces and remove them in that type of a partnership
for future liability. It is a partnership in
investing in Alaska's future, providing jobs and
employment opportunities, providing incentive for
development. I just want to be clear for all of us
that are using that term that I wouldn't want to hold
the state responsible for dismantlement, restoration
and such in that type of meaning for the word
partnership.
So, for the legal record, any future litigations, we
don't own a piece of that pipeline, a piece of the
property that's up there. We are offering incentive
credits for development. Thank you Mr. Chair.
4:05:32 PM
CHAIR GATTO noted the legislature set aside 5 cents per barrel
for dismantlement, removal, and restoration (DR&R).
4:06:14 PM
MR. FOLEY said the next slide [11] is juxtaposed to Chair
Gatto's comment about grandfather rights. During the transition
period addressed under PPT, Pioneer made $100 million of
expenditures. That amounts to $20 million in credits Pioneer
will hopefully be able to enjoy when it starts paying PPT taxes.
One element of the House version of ACES eliminates about 1/3 of
those investment dollars. It would have an effective date of
April, 2003, so that any capital spent after that would be
eligible for the credit. Between December of 2002 and April of
2003, Pioneer spent about $30 million. It drilled 3 exploration
wells that led to the development of Oooguruk. Those
investments would be eliminated under the current House CS for
ACES.
4:07:56 PM
MR. FOLEY said ACES makes a change to progressivity. One
fundamental change under consideration by the legislature is to
have that based on a gross tax rather than a net tax. As a
reminder, he told members a net tax rewards investments and
places a higher burden on fields that make a high profit. The
opposite applies to a gross tax; it treats an aggressive
investor in the same way a harvester is treated. He questioned
whether that is the policy the legislature wants to motivate. A
gross tax would disproportionately place a burden on a marginal
project. He pointed out that viscous oil and West Sak are
challenged projects that cannot withstand additional tax burden.
He encouraged members to keep the progressivity tax based on a
net system.
4:09:27 PM
REPRESENTATIVE SEATON asked if a marginal project has not
recovered the percentage of net profits to trigger the
progressivity tax so that even though the company has not built
up a profit margin, whether that be ACES/30 or PPT/40, the
progressivity tax is triggered when low profits have been made
on a marginal field.
4:10:03 PM
MR. FOLEY said the point he is trying to make is that right now,
if the tax is based on net, so the trigger point is also based
on net that takes into account that all barrels are not created
equal. Some barrels on the Slope enjoy a high profit margin
while others don't. The progressivity number for a high profit
field today is higher than the number calculated for a low
profit field. It does help level the playing field.
4:11:03 PM
MR. FOLEY progressed to slide 13, which contained his final
conclusions. He said Pioneer has been an aggressive investor in
Alaska and hopes to continue to be one. To continue to attract
capital, Pioneer will need to demonstrate that Alaska has a
stable fiscal regime. Pioneer believes that PPT is a very
balanced, durable, fair, and equitable program that produces
revenues to the state while providing a modest incentive for new
exploration. Furthermore, the [PPT] helps marginal fields get
over the threshold. The House CS version would eliminate one-
third of Pioneer's transitional capital that was invested on
Oooguruk. He asked members to avoid any kind of a tax that is
attached to the gross.
4:12:32 PM
REPRESENTATIVE GUTTENBERG said Mr. Foley highlighted many of
committee members' concerns. They want to reach out to the
independents and make sure they are not harmed by Alaska's
policies. Legislators are trying to get to a point where people
look to Alaska and say it's settled down and will be stable for
awhile.
4:14:42 PM
REPRESENTATIVE EDGMON said Mr. Hanley of Anadarko Petroleum
Corporation told members that 64 percent of North Slope reserves
were tied to fields of 1 million barrels or less. That was
based on USGS prospectivity. He asked whether Mr. Foley thought
other independents were watching Pioneer and to talk more about
his statement that the North Slope basin will increasingly
attract small producers.
4:15:48 PM
MR. FOLEY said Dr. van Meurs gave a presentation to the Senate
in which he used the term "basin master." Although it has a bit
of a negative connotation, he disagrees. He said typically,
only the large companies have the courage to go out in the world
and find and develop new basins. When they establish that
position, they want to maintain and benefit from it. That is
what happened on the North Slope and that is not a negative
thing. Three companies developed the North Slope; small
companies would not have the opportunity to explore the North
Slope if it weren't for the existence of the pipeline and big
field. He stated there is a natural evolution of a basin; it is
dominated in the early years by the investors that took the
risk. As time goes on, fewer big opportunities exist. Smaller
companies work on smaller projects. He felt some of Alaska's
policy needs to be directed at motivating new companies to come
spend their investment dollars here.
CHAIR GATTO said Mr. Foley used the term, "took all the risk."
He asked if any places exist where a company goes in and is
completely free to do what it wants without government
involvement.
4:18:30 PM
MR. FOLEY replied not to his knowledge but that may have been
the case 40 years ago.
4:18:45 PM
REPRESENTATIVE SEATON questioned whether Mr. Foley had any
suggestions to help the legislature find a more streamlined way
for small producers to take net operating transferable loss
credits and refund those through the Retirement Board at a 92
percent rate. He questioned whether that would have value to
Pioneer or whether the current system of credit refunds works
well enough.
4:19:45 PM
MR. FOLEY said speaking just for Pioneer, the current system
works just fine. Pioneer has generated nearly $80 million in
capital credits on its Oooguruk project so far. It has sold $25
million to the state at full face value. The rest has been
placed at a discounted number that Pioneer is fine with. Having
said that, he said it is a relatively thin market for the
purchase of credits. Pioneer is able to sell its credits but in
large dollar amounts. He can imagine that companies with a
smaller number of credits would absolutely welcome an
opportunity to sell credits. The type of legislation
Representative Seaton suggested would create a floor for that
type of market.
4:20:55 PM
CHAIR GATTO said it is good to hear that Pioneer got 100 percent
value on selling its credits. He furthered:
...I think Representative Seaton is saying here's a
good deal - you've got credits, sell them for 92 cents
on a dollar, and get that today instead of borrowing
money at 85 cents on the dollar to continue
exploration. The goal is one more forgiveness of some
kind for you so that you can proceed in the same
direction you are currently proceeding in and do
better than you would ordinarily, or not do it and say
92 cents is okay but we can turn these into something
better than that in 6 months and that's our decision.
It's one more way to assist. As I said, we're all for
independent producers to come in. I think we
recognize it's our future as well as anyone recognizes
it. When you get down to a certain number of barrels,
the biggest guys who have billions of dollars in
capital values go somewhere else and the smaller guys
say what an opportunity. It's there - we know how
much is there and we're more efficient so we can still
operate the resource and then we'd like to be here to
help in any way we can, including the capital credits.
4:22:38 PM
REPRESENTATIVE JOHNSON recalled this issue was discussed in the
House Oil and Gas committee. He questioned whether any
companies do not buy credits as a function of policy.
4:23:05 PM
MR. FOLEY replied he has personal knowledge of two companies
that have made attempts to purchase credits.
REPRESENTATIVE JOHNSON thought BP had a corporate policy to not
buy credits, which thins that market.
4:24:07 PM
CHAIR GATTO said this situation is providing a great opportunity
in one day to go from the big guy to the little guy and the
organization in between.
4:25:28 PM
CHAIR GATTO introduced the next speaker.
4:25:46 PM
MR. DUDLEY PLATT, a petroleum engineer, told members he has
lived in Eagle River for 27 years. He has worked for Arco
Alaska, the US Minerals Management Service, the State of Alaska
and as an independent consultant. He told members, for the
record, that he has numerous clients, one of them being the
Department of Revenue.
4:26:48 PM
MR. PLATT told members petroleum engineers can get involved in
many facets of the oil industry - upstream, transportation,
exploration, refining, or shipping. His career began doing
reservoir modeling for Arco Alaska in the Kuparuk field. He
then went on to field engineering.
REPRESENTATIVE SEATON said the committee heard about the ability
of TAPS to transport oil and at what level of production it
would become problematic for the pumping system. He asked for
further information about the new electric pumps and their
capacity.
4:26:59 PM
MR. PLATT said many numbers have been thrown around over the
last 20 years as to the minimum throughput for the TransAlaska
Pipeline System. He thinks of that as a mechanical minimum
throughput. He recalled hearing referenced testimony today
about the fact that an economic limit may be higher than the
mechanical limit. However, the fact is that no one knows what
that number is. They passed through that minimum on the way up
and never had a chance to pass through it on the way down.
Various government reports have used a number of 300,000 barrels
a day. He has seen other government reports that say 200,000 to
400,000. The range of the new electric pumps is 200,000 barrels
a day to 1.1 million barrels a day. They act like a dimmer
switch - faster or slower. Any time crude oil is shipped
through a very cold place issues arise, pump cavitation being
one mentioned earlier. One of the biggest problems is the
pumpability. To deal with that, heat is added to the cold
viscous material. Chemicals can also be added but that is
expensive. With a capital investment and increased operating
costs, Alyeska should be able to put lined heaters in to promote
the flow. The oil could also be "batched" down the pipeline.
His thought on minimum flow is if 300,000 barrels per day is
taken as the premise for the minimum throughput, the question is
how much would the shippers be willing to spend to
instantaneously acquire the leases to explore for crude oil, be
a successful bidder, put together an exploratory plan, find oil,
successfully delineate that field, do the 4 to 5 year design,
construction and engineering to build facilities to produce an
oil field at 300,000 barrels a day.
4:27:06 PM
MR. PLATT said his arithmetical exercise is to multiply 300,000
barrels per day times 365. At $50 per barrel, the gross revenue
is $5.5 billion. For every dollar increase in barrel price, the
revenue is increased by $110 million. He said his guess is heat
will be added to send the oil down the pipeline. He is sure
something will be done; otherwise $5.5 billion in revenue will
be lost. The higher the minimum input number, the easier it is
to justify some remedy for the perceived problem.
4:27:55 PM
REPRESENTATIVE SEATON asked at what point the lower volume
becomes problematic for the pumping system.
MR. PLATT said when trying to depreciate TAPS for property tax
purposes, 200,000 barrels a day was used last year because that
was the low end of the range of the pump.
4:33:09 PM
REPRESENTATIVE SEATON said the bid specification on the pumps,
200,000 to 1.1 million, is probably an accurate number so that
the limitation would be something other than the pumps being
able to pump as little as 200,000 barrels a day.
MR. PLATT said that is his opinion.
4:33:35 PM
REPRESENTATIVE GUTTENBERG said his last job at Alyeska was
taking Pump 6 off line. He related that he has talked to other
people about the number of pumps taken offline and the risk,
regardless of the pumps. He asked whether there is a plan for
Alyeska and for the producers to recognize there will be a lower
number of barrels going through the pipeline and whether the
pump shutdowns are an indication of something else.
MR. PLATT said he thought Alyeska is trying to be as efficient
as possible by using the most current technology. He doesn't
believe Alyeska would do anything to prohibit it from continuing
to make the profits it makes by shipping oil.
4:35:06 PM
REPRESENTATIVE GUTTENBERG said he heard Mr. Hanley say earlier
that when Anadarko considers developing in a remote field,
facilities access is an issue. It wouldn't be building its own
facilities until it had a find of 400 to 500 million barrels.
He said Pioneer is thinking about 100 million barrels. He
questioned the possibility of a scenario where oil is found far
away that would warrant another facility being built, like
Prudhoe Bay.
MR. PLATT asked if Representative Guttenberg was speaking to a
stand-alone field.
REPRESENTATIVE GUTTENBERG said it wouldn't be one field, it
would be a cluster of fields, and it would be a cooperative
venture to build a facility.
4:37:18 PM
MR. PLATT cited some historical numbers: BP developed Badami at
a time it thought it could get about 30,000 barrels per day from
it. He thought BP believed Badami held about 100 million
barrels at that time. The Alpine Field was scheduled to come on
line at 60,000 or 70,000 barrels per day with a total
recoverable amount of 265 million barrels. That project cost
between $1 to 1.3 billion. Forced Oil spent a couple hundred
million dollars on the west side of Cook Inlet chasing about
25,000 barrels a day at Redoubt Shoal, which never materialized.
He noted that the numbers have to be adjusted up to today's
dollars to make sense. Farther west in the NPR-A, FEX hit a
discovery but it's too far west. [FEX] believes it is 300 or
400 million barrels, which they claim is not commercial due to
the lack of infrastructure.
4:39:10 PM
CHAIR GATTO asked if that is the case at $96 per barrel.
MR. PLATT said they have been silent over the last couple of
weeks. He reiterated that at the higher level, the farther away
from existing infrastructure, the greater the hurdle.
4:39:37 PM
REPRESENTATIVE SEATON said he heard that high chromium pipe is
being used in the "workovers" in Prudhoe and Kuparuk. He asked
Mr. Platt if he has any insight on high chromium pipe and what
expense it would entail compared to other pipe.
MR. PLATT asked if he is referring to drill pipe or the actual
casing.
REPRESENTATIVE SEATON said the actual production pipe.
MR. PLATT said chrome pipe is much more expensive than carbon
steel, at least 50 percent more, sometimes double, but it does
not rust.
4:40:48 PM
REPRESENTATIVE SEATON asked what chromium pipe would enable a
company to do in those fields versus steel pipe.
MR. PLATT said it would provide comfort and longevity.
4:41:18 PM
CHAIR GATTO asked if using chromium is a phenomenal deal if the
plan is to use the pipe for the next 40 years.
MR. PLATT said that for the long haul, one can either buy cheap
or buy quality. He thought that, regardless of the industry,
companies would tailor the types of materials and engineering to
the planned duration of the project.
4:42:12 PM
CHAIR GATTO said these people are making a 100 percent increase
in their investment dollar for pipe. He questioned the
justification and asked Mr. Platt where he has seen this happen.
MR. PLATT said there is a big distinction between a petroleum
geologist and a petroleum engineer. He repeated if the planning
horizon is a long time, one would plan accordingly.
4:43:08 PM
REPRESENTATIVE SEATON asked if one was planning on producing gas
and increasing the percentage of CO2 into the well that would
normally be done so that the carbonic acid would not affect the
wells.
4:43:39 PM
MR. PLATT said CO2 is reinjected back into the well for several
reasons. First, it is inert so it cannot be burned. Second, it
has corrosive properties. Third, it is a wonderful solvent for
use in enhanced oil recovery.
CHAIR GATTO said someone might buy the privilege of putting CO2
in the ground if carbon caps or taxes are implemented 10 years
from now.
4:44:32 PM
REPRESENTATIVE GUTTENBERG said there is a lot of heavy oil at
Prudhoe. Canadians have made advances in technology to extract
oil from the tar sands. He asked if Mr. Platt sees any
indication that new technologies are on the horizon.
MR. PLATT pointed out that one has to distinguish between heavy
oil and viscous oil. Water has an API gravity of 10 and flows
easily. Viscous oil is very different - similar to Vaseline.
Alaska has incredible resources. BP is trying very hard to
commercialize the Ugnu resource. Various technologies can be
used - one is called cold heavy oil production with sand and is
currently being used in a pilot project. When he has asked
about incorporating new technologies into his work, he has been
told to wait two or three years.
4:46:49 PM
MR. PLATT said attempts to put heat in the ground generate other
problems. He is optimistic about the vast resources. With 25
billion barrels at Ugnu, 1 percent would equal another Endicott.
He believes if any resource needs help on the North Slope, it is
the viscous oils.
4:48:00 PM
CHAIR GATTO thanked Mr. Platt and announced a meeting at Friday
at 9:00 a.m., during which the committee would be hearing from
the Administration and would address amendments. He planned to
group amendments with a similar purpose together. The committee
would work off of the House Oil and Gas Committee version.
REPRESENTATIVE ROSES voiced concern that after a committee
substitute is distributed, some members may not understand what
the committee did, as happened in a prior committee. He
suggested having a work session on Sunday, open to the public,
whereby the committee substitute is presented and members have
the opportunity to ask questions or make further changes and to
make sure everyone on the committee supports it.
4:50:30 PM
CHAIR GATTO said the committee will have finished the roundtable
by then and hoped that would enable members to understand the
committee's resolution on oil and gas taxes.
4:50:43 PM
REPRESENTATIVE ROSES likened the situation to what happened in
the House State Affairs Standing Committee when a huge pile of
amendments was before the committee. He suggested putting a
small group of members together who could give a presentation to
the committee to ensure members understand the changes. That
would also be instrumental in showing the public what and why
the committee did and it will help the next committee of
referral as well and save time.
4:52:33 PM
CHAIR GATTO said he was agreeable to doing that.
[HB 2001 was held over.]
4:54:17 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Committee meeting was adjourned at 4:54 p.m.
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