Legislature(2017 - 2018)BARNES 124
02/01/2017 01:00 PM House RESOURCES
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| Audio | Topic |
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| Start | |
| Presentation(s): Update: Status of the Oil and Gas Tax Regime in Alaska | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 1, 2017
1:07 p.m.
MEMBERS PRESENT
Representative Andy Josephson, Co-Chair
Representative Geran Tarr, Co-Chair
Representative Dean Westlake, Vice Chair
Representative Harriet Drummond
Representative Justin Parish
Representative Chris Birch
Representative DeLena Johnson
Representative George Rauscher
Representative David Talerico
MEMBERS ABSENT
Representative Chris Tuck (alternate)
COMMITTEE CALENDAR
PRESENTATION(S): UPDATE: STATUS OF THE OIL AND GAS TAX REGIME
IN ALASKA
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
KARA MORIARTY, President/CEO
Alaska Oil and Gas Association
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation
entitled, "House Resources Committee," dated 2/1/17, and
answered questions.
SCOTT JEPSEN, Vice President
External Affairs
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation
entitled, "House Resources Committee," dated 2/1/17, and
answered questions.
DAMIAN BILBAO, Vice President
Commercial Ventures
BP Alaska
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation
entitled, "Prudhoe Bay & Alaska Policy Enabling the next 40
years," and answered questions.
DAN SECKERS, Tax Counsel
ExxonMobil Corporation
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing of the status
of the oil and gas tax regime in Alaska, and answered questions.
PAT FOLEY, Senior Vice President
Caelus Energy
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation
entitled, "Caelus Activity Update," dated 2/1/17, and answered
questions.
ACTION NARRATIVE
1:07:04 PM
CO-CHAIR GERAN TARR called the House Resources Standing
Committee meeting to order at 1:07 p.m. Representatives Tarr,
Birch, Parish, Rauscher, Johnson, Westlake, and Josephson were
present at the call to order. Representatives Talerico and
Drummond arrived as the meeting was in progress.
^PRESENTATION(S): UPDATE: STATUS OF THE OIL AND GAS TAX REGIME
IN ALASKA
PRESENTATION(S): UPDATE: STATUS OF THE OIL AND GAS TAX REGIME
IN ALASKA
1:07:44 PM
CO-CHAIR TARR announced that the only order of business would be
an update on the status of the oil and gas tax regime in Alaska.
1:08:44PM
KARA MORIARTY, President/CEO, Alaska Oil and Gas Association
(AOGA), provided a PowerPoint presentation entitled, "House
Resources Committee," dated 2/1/17. Ms. Moriarty informed the
committee AOGA is a private, professional trade association
representing the majority of the companies in the oil and gas
industry in Cook Inlet and on the North Slope [slide 2]. She
said a review of the changes in Alaska's tax system over the
past ten years revealed five guiding principles found in common:
production, investment, competitiveness, revenue, and "fair
share" [slide 3]. Production from fiscal year 2015 (FY 15) to
FY 16 increased 3 percent, and she pointed out that the present
production increase is the first since 2001-2002, after the
[Alpine oil development owned by ConocoPhillips Inc.] came
online [slides 4 and 5]. Slide 5 illustrated oil production
from 2002 through 2016, record high and record low oil prices,
and changes in the oil and gas tax system. Ms. Moriarty
provided a chart that illustrated that production increased in
excess of what was forecast; the 2013 fall forecast was for
487.6 thousand barrels per day and the actual production in 2016
was 514.9 thousand barrels per day, even as oil prices dropped
[slide 6]. In Cook Inlet, after passage of the Cook Inlet
Recovery Act [passed in the 26th Alaska State Legislature], oil
production went up 84 percent from its lowest point in 2009.
She noted that all of the oil produced in Cook Inlet is utilized
at the Tesoro Alaska Company Refinery in Nikiski [slide 7]. The
next guiding principle is investment, without which there is not
production. In 2003 as prices went up, U.S. and worldwide
spending followed, but investment by the industry in Alaska
"remained relatively flat" under the tax system of Alaska's
Clear and Equitable Share (ACES) [passed in the 25th Alaska
State Legislature]. She said the lack of investment was the
impetus for Senate Bill 21 [passed in the 28th Alaska State
Legislature] [slide 9]. Slide 10 was a chart previously
provided by the Department of Revenue (DOR) - with an added
column for average oil price - which illustrated that from 2007
to 2012, investment levels are about the same. She concluded
that investment in Alaska did not increase with rising oil
prices and investment in the Lower 48, because the ACES tax
structure included high progressivity. However, in 2013 as oil
prices begin to decline, the level of investment shown is higher
and more stable because current tax policy is predictable and
geared toward production.
1:15:57 PM
MS. MORIARTY stated that increased investment has led to higher
production and major new discoveries, even though low oil prices
have led to layoffs and job losses [slide 11]. She questioned
whether Alaska's tax policy will allow the new discoveries to
reach production and increase the flow of oil into the Trans-
Alaska Pipeline System (TAPS) [slide 12]. Ms. Moriarty provided
a DOR slide entitled, "North Slope Repurchased Credits," and
pointed out the slide should be updated to reflect the potential
ultimate recovery from repurchased tax credits [slide 13]. She
opined credits have been a very worthwhile investment for the
state. The next guiding principle is competitiveness, because
to attract investment the state needs to be competitive;
however, the question is how the industry can remain
competitive if the state is constantly changing tax policy. The
state has changed tax policy in the past ten years - and an
additional change was proposed - and all six changes except one
have been tax increases [slide 15]. She elaborated that Senate
Bill 21 was both a tax increase and a tax decrease under certain
conditions. Ms. Moriarty disagreed with DOR that the Petroleum
Production Tax (PPT) [passed in the 24th Alaska State
Legislature] was neutral and that PPT doubled production tax
[slide 16]. Slide 16 was corrected as follows: FY 2016 to FY
2006; FY 2017 to FY 2007. She opined that during debate in
2007, no one disputed that PPT brought the state more in tax
revenue than the Economic Limit Factor (ELF) [passed in the 12th
Alaska State Legislature and modified by executive order in
2005], and that a correct fiscal note attached to the PPT bill
would have indicated PPT was almost a 200 percent increase in
taxes over ELF.
1:21:36 PM
MS. MORIARTY turned to the challenge of remaining competitive in
Alaska's high cost environment due to factors - such as remote
locations and Arctic environments - which restrict drilling to a
short period of time. Further, costs don't decrease as quickly
as oil prices, and remain the same at lower production. For
calendar year 2016, the average oil price was approximately $43
per barrel, and the average deductible cost per barrel was
approximately $41. However, according to page 29, DOR Revenue
Sources Book (RSB) Fall 2016, total costs are over $48 per
barrel. This discrepancy explains why companies are cash-
negative in Alaska, and she emphasized that the $48 per barrel
cost is before taxes or royalty are paid, and only includes
transportation, operating, and capital expenditures [slide 17].
Alaska has a hybrid tax of a net tax at higher prices and a
gross tax at low prices, demonstrated by a chart that showed at
an oil price of $40 per barrel, production tax value (PTV) is a
negative number, thus taxing "phantom income" even when
companies are losing money [slide 18]. Finally, she presented a
graph that compared Alaska's 2013 development costs to that of
competitors in the Lower 48 [slide 19]. The next principle is
revenue and she advised that since statehood, oil has provided
85 percent of the state's unrestricted general funds (UGF) that
support government and a strong economy [slide 21]. Senate Bill
21 generates more revenue to the state at low prices than ACES,
as reaffirmed during testimony before the committee on 1/30/17
[slide 22]. She then clarified that the industry pays more in
government revenue than it receives in credits: total FY 16
revenue paid was over $2 billion; cashable credits or credits
used against tax liability were $598 million. Ms. Moriarty
stressed that the total tax credit liability after FY 20, for
cashable credits, is about $150 million per year after the
reforms of House Bill 247 [passed in the 29th Alaska State
Legislature] [slide 23].
1:27:46 PM
CO-CHAIR JOSEPHSON expressed his understanding that the total
number of cashable and tax liability credits for FY 16 is over
$900 million.
MS. MORIARTY responded that the credits shown on slide 23 are
those that were generated in FY 16 only; a higher number could
include some of the credits that were vetoed. Ms. Moriarty
recalled there are questions about whether earned credits need
to be paid, and she pointed out that the administration has
stated that the credits are obligations the state needs to pay.
She advised that if the governor had not vetoed certain credits,
the state's liability for FY 18 would be near $400 million,
instead of over $1 billion; in fact, the vetoes have inflated
the actual liability [slide 24]. Turning attention to net
operating loss credits, she explained that a net tax is a tax on
the difference between a taxpayer's gross revenue and the cost
of producing revenue, and to demonstrate the impacts of a net
tax versus a gross tax, she gave the example of the costs and
profits of a restaurant business [slide 25]. Ms. Moriarty
concluded that taxes on net allow net operating loss from the
loss year to carry forward to the following year, and observed
that her organization could not find a net-based oil tax system
without some type of mechanism, such as an NOL credit, to carry
forward losses.
1:33:21 PM
MS. MORIARTY addressed the last principle of fair share, which
is the most subjective of the five guiding principles discussed.
She provided a chart that illustrated what is received by the
industry and state and federal governments from a barrel of oil
at various prices. At under $40 per barrel, the industry
receives nothing, and government receives more revenue than
industry at any price [slide 27]. She summarized as follows:
· production: there is more production
· investment: there is more investment than under the ACES
regime
· competitiveness: industry is attracted to Alaska, leading
to major discoveries
· revenue: the current system is bringing in more revenue
· fair share: government receives the most at any price
scenario
MS. MORIARTY suggested that proposed changes to the tax system
should be weighed against the foregoing principles.
REPRESENTATIVE BIRCH returned attention to slide 10 and observed
that the capital credits for 2016 are 6 percent of the total
spend, which is a relatively small percentage.
MS. MORIARTY agreed that the credits have spurred investment
even though average oil prices are low.
REPRESENTATIVE BIRCH recalled that Shell spent $7 billion and
left Alaska; investments carry a significant risk.
CO-CHAIR TARR advised that the spending shown on slide 10 does
not reflect deductions for operating and capital expenditures.
REPRESENTATIVE PARISH surmised that spending also includes
support of ongoing operations. He asked what cashable tax
credit certificates sell for.
1:39:23 PM
MS. MORIARTY responded that the amount for which a company sells
its cash certificate is proprietary data. In further response
to Representative Parish, she said a company is at liberty to
disclose this information if it chooses to do so.
REPRESENTATIVE PARISH asked the industry to share this
information with the committee in order to better inform its
decisions.
MS. MORIARTY, addressing an earlier statement, clarified that
deductions are costs that have previously been paid by industry.
1:41:11 PM
SCOTT JEPSEN, Vice President, External Affairs, ConocoPhillips
Alaska, Inc., provided a PowerPoint presentation entitled,
"House Resources Committee," and dated 2/1/17. He informed the
committee he would address three basics aspects of Alaska's tax
framework: Senate Bill 21 has achieved the state's goals of
achieving a flatter tax rate over a broad range of oil prices
and certainty of revenue at lower oil prices; there has been
increased investment resulting in jobs, production and revenue;
there is competition from the unconventional plays in the Lower
48, and Alaska should ensure it does not create a disadvantage
for additional investment by changes in its cost structure
[slide 2]. He provided a graph that illustrated net cash flow
from negative -$4 billion to $12 billion, Alaska North Slope
(ANS) West Coast (WC) price of a barrel of oil from $30 to $100,
and bars representing investor, federal, and state shares of a
barrel of oil at various prices [slide 3].
1:44:16 PM
MR. JEPSEN, directing attention to slide 3, pointed out that at
any price, state share is the largest and is a positive share
when industry share is negative. The state share includes
royalty, production tax, state income tax, and property tax.
From the investor share is subtracted transportation, capital
expenditures (CAPEX), operating expenditures (OPEX), royalty,
production tax, property tax, state income tax, and federal
income tax. The federal share consists of federal income tax.
Mr. Jepsen recalled that debate surrounding Senate Bill 21
raised the issue of revenue divided into equal thirds for the
state, federal government, and producers. In fact, about two-
thirds does go to government, and the present system provides
the state the larger share of revenue, even when oil prices are
low. He acknowledged that the graph did not reflect cashable
credits, small producer credits, or exploration credits, because
ConocoPhillips Alaska, Inc. is a large producer and does not
consider the credit incentive system to be part of the basic tax
structure; the basic tax structure is the net tax the state
imposes on those who produce and make a profit. The per barrel
credit is included in slide 3 as it is an integral component of
the overall tax system, and he recalled that the per barrel
credit was implemented to create a leveled tax rate over a broad
range of prices. Mr. Jepsen said ConocoPhillips Alaska, Inc.
considers the tax framework in Alaska each time projects are
proposed, and increases do not create a good climate for
investment. Since the passage of Senate Bill 21, ConocoPhillips
Alaska, Inc., added several rigs to the Kuparuk River Unit rig
fleet; two new rigs were delivered in 2016. Through the last
quarter of 2016, five rigs were running between Kuparuk and
Alpine, and through 2017 three rigs will be running in Kuparuk;
higher oil prices may lead to more investment. An extended
reach drilling (ERD) rig was sanctioned that means 125 square
miles can be reached from an individual drill site. In
addition, work was restarted on the Northeast West Sak (NEWS) 1H
drill site at Kuparuk. Also sanctioned was drill site 2S in
Kuparuk, and Greater Mooses Tooth 1 in 2015, and the company
began the process of permitting Greater Mooses Tooth 2.
ConocoPhillips Alaska, Inc. recently announced its Willow
discovery which may hold 300 million barrels of recoverable
resource. At the December 2016 lease sale, ConocoPhillips
Alaska, Inc. bought leases over 400,000 acres of federal land
and over 200,000 acres of state land. He recalled that during
the ACES tax system from 2007 through 2012, the average
investment by ConocoPhillips Alaska, Inc. was $800 million per
year; beginning in 2013 there was a "step-up" in investment, and
the percentage of the corporation's spend increased - even while
keeping its expenditures level - to an average investment of $1
billion per year through 2016 [slide 4]. He opined that in
calendar year 2016, the first growth in production in 14 years
was a function of the positive investment climate as a result of
Senate Bill 21. Mr. Jepsen recalled his previous testimony
stating that if there is a positive investment climate, the
state should expect the industry to react rationally and
increase investment, and it has done so. He turned to the topic
of competition, and advised that there is opportunity in
unconventional plays in the Lower 48 which is due to "all the
massive investment," that is attracted by nearby infrastructure,
a shorter time from investment to production, less regulation,
and a nearer market. Also, wells are cheaper to drill and
operate; in Alaska, after the industry does its part to manage
OPEX costs, the role of the state in competition is that an
increase in taxes is an increase in cost, which will send
investment to other places than Alaska. Mr. Jepsen urged the
committee to consider how Alaska can remain competitive with the
Lower 48 and worldwide [slide 5].
1:54:28 PM
CO-CHAIR TARR questioned whether Mr. Jepsen would provide
updated information related to the timelines on slide 4. The
committee has heard that although most projects take years to
plan, "quick decisions" were made following the passage of
Senate Bill 21, and she requested the dates that the foregoing
projects listed on slide 4 were sanctioned.
MR. JEPSEN responded that all of the investment decisions
illustrated on slide 4 were sanctioned after Senate Bill 21 was
passed.
REPRESENTATIVE TALERICO asked whether the ERD rig is in
association with Doyon.
MR. JEPSEN said yes.
REPRESENTATIVE BIRCH questioned whether the use of ERD rigs will
reduce the cost of producing oil in Alaska.
MR. JEPSEN was unsure about the amount of savings, but ERD rigs
will enable his company to develop certain resources; for
example, ERD rigs will allow the company to access resources in
areas for which permits probably would not be secured, and also
to reach areas that do not economically justify drilling a new
rig, thus reducing the total number of drill sites.
REPRESENTATIVE PARISH inquired as to the 50 percent difference
in the growth of North Slope production that was projected by
AOGA and ConocoPhillips Alaska, Inc.
MR. JEPSEN explained the ConocoPhillips Alaska, Inc. projection
was based on a calendar year, and AOGA's was based on a fiscal
year.
REPRESENTATIVE PARISH asked how much revenue was foregone by the
state in providing the per barrel credit.
1:59:35 PM
MR. JEPSEN said none. Per barrel credits are part of the tax
rate put in place in order to have a reasonable tax on
producers; unlike other credits, a per barrel credit is not
reimbursable and cannot be carried forward, but is a mechanism
agreed to in Senate Bill 21 legislation. In further response to
Representative Parish, he said the state determines a fair tax
rate to achieve revenue, more jobs, a healthy economy,
investment, and oil in the Trans-Alaska Pipeline System; he
opined incentives for investment create a healthy economy and
encourage new investment.
2:02:52 PM
DAMIAN BILBAO, Vice President, Commercial Ventures, BP Alaska,
provided a PowerPoint presentation entitled, "Prudhoe Bay &
Alaska Policy Enabling the next 40 years." Mr. Bilbao said he
supported the testimony of the previous speakers, Ms. Moriarty
and Mr. Jepsen. He directed attention to graphs labeled
"Investment trends by region" and "Production trends by region"
that illustrated global, U.S., and Alaska trends, and explained
that both graphs were indexed to a common starting point to show
how each region moved relative to each other. He pointed out
that from 2008-2009, investment in the Lower 48 was much higher
- relative to global investment - due to new technology and
developments, and although globally there was an increase, in
Alaska investment was "flat" until about 2013 when the Alaska
profile began to increase; in fact, investment globally and in
the Lower 48 began to decline as prices fell in 2014, but
investment in Alaska continued to climb. Looking at the
production graph, increased investment in the Lower 48 resulted
in dramatic increases in production in the Lower 48, global
production increased, and in Alaska production continued to
decline by an average of 4 percent to 6 percent until 2013-2014,
when the production trend in Alaska flattened out. Mr. Bilbao
advised that in 2014, there was a material shift that brought
investment into Alaska, and with that an associated impact to
production [slide 2].
2:08:05 PM
MR. BILBAO presented an example of the distribution of one
barrel of oil in Alaska priced at $43 per barrel: in 2016, of
$43, royalty and state taxes were $7, and OPEX, CAPEX and
transportation were $48, which resulted in a loss to industry of
$12 per barrel; despite the industry's loss, the state was still
receiving revenue [slide 3]. From the perspective of BP, losses
were over $1 million per day, prompting improved efficiencies to
its operations. To illustrate how Senate Bill 21 attracted
investment and activity, Mr. Bilbao provided a graph that showed
that investment in Prudhoe Bay drilling from 2010 to 2012 was "a
broadly flat level." In response to Senate Bill 21, the
industry quickly increased drilling activity and spending in
Prudhoe Bay beginning in 2013 through 2015, even though oil
prices continued to decline [slide 4]. He acknowledged that
spending in 2016 has decreased as a result of low oil price,
concluding that policy has its limitations. Overall, however,
Senate Bill 21 has resulted in increased activity, production,
new discoveries, and more revenue to the state than under the
ACES system; further, he opined that Senate Bill 21 is not
complicated to administer and drives behavior in the best
interest of the state. Regarding policy, BP measures policy
against the following set of principles [slide 5]:
· encourages more North Slope oil down TAPS
· extends the life of the backbone fields which provide the
bulk of production
· encourages more independents to look for oil and gas
· does not pick winners and losers, but remains neutral
2:14:18 PM
CO-CHAIR TARR asked whether BP has used any of the credits that
are currently available.
MR. BILBAO said since 2006, no. He referred to an opinion
letter recently issued by the Department of Revenue which he
said, "certainly discourages the opportunity" [document not
provided].
MR. BILBAO, in response to Representative Parish, clarified that
BP has not acquired any credits to offset tax liability.
REPRESENTATIVE PARISH surmised BP has used tax credits, but has
not purchased them from smaller companies.
MR. BILBAO said BP uses per barrel offsets to reduce its tax
liability. Senate Bill 21 increased the tax rate from 25
percent to 35 percent; however, in order to encourage a focus on
more production, the legislation also created the per barrel
credits, and for every barrel produced, BP uses per barrel
credits to offset its tax liability.
REPRESENTATIVE PARISH asked what BP would pay to purchase
transferrable tax credits from a small independent producer.
MR. BILBAO said he would not speculate.
REPRESENTATIVE TALERICO asked how much BP reduced its workforce.
MR. BILBAO answered that BP has reduced its workforce
approximately 17 percent over the last several years to 1,700
employees.
REPRESENTATIVE BIRCH asked whether the existing infrastructure
is accessible to others in the industry that may have a new
discovery.
MR. BILBAO suggested the question should be asked of the
independents. He opined BP has made progress in creating
standard third-party facility terms that can be leveraged;
currently, at Prudhoe Bay water management is an issue, however,
commercial terms are managed more efficiently than in the past.
CO-CHAIR TARR passed the gavel to Co-Chair Josephson.
2:21:04 PM
MR. DAN SECKERS, Tax Counsel, ExxonMobil Corporation, informed
the committee ExxonMobil Corporation is committed to Alaska and
has been a key player in the development of Alaska's oil and gas
resources, spending over $20 billion dollars in the state over
many years. Alaska remains an important component in ExxonMobil
Corporation's worldwide portfolio; however, for Alaska to
maximize the benefits of its resource potential, the state must
remain globally competitive and needs a long-term and stable
fiscal environment that attracts industry and provides the state
and industry a fair share of revenue. He opined that Senate
Bill 21, [also known as the More Alaska Production Act (MAPA)]
has made Alaska more globally competitive and has led to
industry investment and increased oil production. He stated his
support of the previous testimony offered by Ms. Moriarty, Mr.
Jepsen, and Mr. Bilbao, and added that MAPA has simplified
Alaska's production tax regime, thereby providing more
confidence to industry and investors. The policy goals of MAPA
are being achieved such as providing a more predictable and
competitive tax regime and attracting additional investment,
more production, and corresponding benefits to Alaskans. Mr.
Seckers recalled that in 2013 at the time MAPA was proposed, he
stated that MAPA would make significant progress in making
Alaska more globally competitive, and has done so by providing a
more balanced tax production tax structure by offsetting aspects
of the ACES tax regime; for example, eliminating the punitive
progressivity feature of ACES. In addition to being an
excessive tax, the progressivity feature was calculated monthly,
so projects could not be evaluated, and the elimination of
progressivity simplified the production tax regime; on the other
hand, MAPA increased the tax rate to 35 percent, compared to
12.25 percent in Louisiana. Although high, the tax rate is
predictable, so industry can make easier investment decisions;
MAPA also removed a 20 percent tax credit on capital expenses
tied to investment - not necessarily to production - which was
replaced by the per barrel credit that helped incent production
at legacy and economically-challenged new fields. Importantly,
MAPA preserved the critical net-based tax structure of PPT and
ACES which allows the recovery of ordinary and allowable
expenses. Mr. Seckers stressed that in Alaska deductions and
credits are necessary to offset a 35 percent gross tax rate;
furthermore, MAPA preserved a net operating loss feature that
allows a balancing of revenue and expenses: a cornerstone
feature of all net-based tax systems. He concluded that MAPA
has resulted in the first overall production increase since
2002, a more competitive investment climate, and more
predictable production taxes; therefore, ExxonMobil Corporation
believes allowing the reforms brought by MAPA to continue will
lead to more increased investment and production, and more
benefits to Alaskans.
2:28:51 PM
[Although not stated on the audio recording, Co-Chair Josephson
returned the gavel to Co-Chair Tarr.]
REPRESENTATIVE PARISH asked what percent of gross value at the
point of production ExxonMobil Corporation paid to the state
last year.
MR. SECKERS answered he did not know and taxpayer information is
confidential. In further response to Representative Parish, he
said he did know they have paid their fair share.
REPRESENTATIVE BIRCH asked for an update on Point Thomson.
MR. SECKERS said Point Thomson is on schedule and is producing.
Point Thomson has unique economics and pressures, and he added
that under the ACES tax system ExxonMobil Corporation would have
paid less tax, however, the current regime is more stable and
favorable.
CO-CHAIR TARR inquired as to whether ExxonMobil Corporation has
used any credits that are currently available.
MR. SECKERS stated that ExxonMobil Corporation has used credits
to the extent they were available.
CO-CHAIR TARR clarified that net operating losses are a feature
of every net tax system - as related to corporate income tax -
but not as a feature of a severance tax. She pointed out that
net operating losses as a feature of a severance tax, in
addition to a corporate income tax, are unique to Alaska.
MR. SECKERS reminded the committee that the state's tax system
is a combination of a gross and a net system, which is
predominately a net system, and thus has an essential net
operating loss feature to allow balancing of revenues and
expenses, and to allow companies to recover costs of investments
in the future, "otherwise, some investments won't get made, and
you'll start causing a different dynamic approach to the
analysis of investments in the state."
CO-CHAIR JOSEPHSON surmised that ExxonMobil Corporation has
invested $3 billion in the Point Thomson Unit with the hope of
supplying a natural gas pipeline in the future.
MR. SECKERS agreed that Point Thomson is primarily a gas field
to anchor a gas pipeline, but it is also important for
delineating the reservoir and possibly other uses on the North
Slope.
CO-CHAIR JOSEPHSON noted Point Thomson has the advantage of
being closest to the Arctic National Wildlife Refuge (ANWR).
MR. SECKERS was unsure as to Point Thomson's application to ANWR
or other areas.
2:36:37 PM
PAT FOLEY, Senior Vice President, Caelus Energy Alaska (Caelus),
provided a PowerPoint presentation entitled, "Caelus Activity
Update," dated 2/1/17. Mr. Foley stated Caelus is a company
that is in Alaska because of the fiscal climate created by
Senate Bill 21; in fact, Caelus has earned several tax credits
and his presentation would show how the state also benefits from
tax credits as a co-investor. Caelus is a privately-held
company and he provided brief background information on its
president and on prior company activities. Three factors in
Alaska that attracted Caelus to purchase Pioneer Alaska assets
are: the petroleum system and opportunities for discovery; the
contractor community of services; the investment climate [slide
2]. He directed attention to the company's portfolio, noting
that Caelus operates Oooguruk River Unit as its 70-percent
owner, producing approximately 15,000 barrels per day. Onshore,
the Nuna project was sanctioned after the passage of Senate Bill
21; Nuna is a project of approximately 25,000 barrels at peak
production after a future investment of approximately $1
billion, and Caelus will drill 30 wells during phase 1. Caelus
has purchased eastern exploration leases totaling 350,000 acres
and anticipates drilling two projects "in the next winter or
two." The Caelus Smith Bay discovery is approximately 125 miles
outside of the Colville River Unit and 70 miles from
Barrow/Utqiagvik, located in a very sensitive waterfowl habitat
area [slide 3]. Mr. Foley provided Caelus' major milestones: in
2013, Senate Bill 21 passed; in 2014, Caelus purchased Pioneer
Alaska assets and acquired 320,000 acres in leases; in 2015,
sanctioned Nuna project; in 2016, idled drilling rig in
Oooguruk, reduced workforce, and announced discovery at Smith
Bay [slide 4]. An overview of the Nuna project revealed that
peak production would be about 25,000 barrels per day, and that
the project is now idled due to low oil prices and concern about
the fiscal policy in the state. The project is searching for
investment dollars and he expressed his hope that pipelines will
be installed this winter with first oil late in 2018. Within
the terms of House Bill 247, the project will acquire and earn
$150 million in cashable tax credit certificates from the state
in exchange for $2.2 billion in revenue from royalty, net profit
share lease payments, production tax, and ad valorem, which
equates to a 15.8 times over return on investment [slide 5].
2:45:30 PM
CO-CHAIR JOSEPHSON inquired as to how the outlay of $151 million
in state tax credits was calculated.
MR. FOLEY explained that Caelus' projections come from economic
models; the values are generated at $70 per barrel of oil and
estimate a net operating loss credit of 35 percent of a negative
cash flow stream before becoming cash flow positive. He
remarked:
All of these are estimates, all of these are wrong,
but directionally, it's going to give you the right
ballpark of what a project like this can, can
contribute to the state of Alaska.
MR. FOLEY stated two exploration wells were drilled at Smith Bay
last year that discovered a resource with a thickness of about
1,000 to 1,500 feet, and a gross sand thickness of about 200
feet. He characterized the discovery as a tight reservoir;
however, the oil sample extracted was 43 degree gravity oil,
which is a very low viscosity of twice the quality of most North
Slope oil production, and which indicates that Smith Bay is a
commercial project. The goal next winter is to drill another
appraisal well with additional testing, at a cost of $140
million [slide 5]. Thus, oil in place on Caelus leases is six
billion barrels and, if estimating recoverable oil at between 20
percent and 30 percent, the project could deliver 1.8 billion to
2.5 billion barrels of oil. He placed Smith Bay field on par
with Kuparuk River Unit, supplying 200,000 barrels of oil per
day and supported by 2,000 direct jobs at peak production. The
total cash contribution to the state would be $28 billion from
royalty, production tax, and ad valorem. He acknowledged first
oil is not expected until 2022 or later, and the project will
only progress under a tolerable oil price and a durable fiscal
system [slides 6 and 7]. Mr. Foley restated that in [2000] TAPS
had almost 1 million barrels flowing through, and currently
about one-half of that flows through: at around 300,000 barrels
per day TAPS becomes challenged [slide 8]. He provided a chart
that illustrated increased oil production projected from all new
projects except [ConocoPhillips Alaska, Inc. Willow discovery]
[slide 9]. Turning to recent and proposed tax changes, Mr.
Foley provided a project model that illustrated how fiscal
regime changes and proposed changes affect the value of the Nuna
project; due to changes made by House Bill 247, the Nuna project
is now worth $0.62 on the dollar to Caelus, and under changes
proposed in Senate Bill 5005 the project would never happen
[slide 10]. He offered key drivers that are important to the
state and industry [slide 11].
2:54:52 PM
CO-CHAIR JOSEPHSON directed attention to slide 10 and inquired
as to what royalty relief Caelus had already received for Nuna.
MR. FOLEY said Caelus received royalty relief; Nuna is a project
with a combination of leases: one-sixth royalty leases and one-
eighth royalty leases, plus a 30 percent net profit component.
He remarked:
So, the royalty modification that was granted took all
of those base royalties and rolled them down to a flat
5 percent until we received a multiple of our total
investment. ... One of the conditions of that royalty
modification said first oil had to commence by X date.
We will not make that date, so that royalty
modification will expire without having any activity
done.
CO-CHAIR JOSEPHSON surmised that Caelus will not receive any
benefit from the contracted royalty relief due to its
expiration.
MR. FOLEY advised that the Division of Oil and Gas, Department
of Natural Resources, will receive a renewed application to
extend the aforementioned royalty modification.
REPRESENTATIVE BIRCH asked how sanctioning is defined.
MR. FOLEY explained that after a company completes a rigorous
economic evaluation of a project, it seeks financing, thus
sanctioning is a culmination of the financing request and the
commitment to the project.
REPRESENTATIVE BIRCH inquired how Caelus plans to access
privately-owned existing infrastructure on the North Slope.
MR. FOLEY recalled that at the Oooguruk River Unit, Caelus
contracted with owners for third-party processing. He said the
details of the contract are confidential, however, Caelus
avoided capital expenditures and in exchange, rented capacity in
the existing system by paying fees.
REPRESENTATIVE RAUSCHER asked for Caelus' policy on Alaska-hire
and for the number of Caelus employees who are local.
MR. FOLEY answered that Caelus has 70 employees in Anchorage and
on the North Slope; he estimated that 80-85 percent are local.
3:02:19 PM
The House Resources Standing Committee meeting was recessed at
3:02 p.m. to be continued at 6:00 p.m. [The meeting never
reconvened.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| BP Juneau Slides 1.27.2017.pdf |
HRES 2/1/2017 1:00:00 PM |
|
| Caelus Energy Update 1FEB17.pdf |
HRES 2/1/2017 1:00:00 PM |
|
| ConocoPhillips House Resources Testimony Feb 1 2017 Final JNU.pdf |
HRES 2/1/2017 1:00:00 PM |
|
| FINAL AOGA HRES 02 01 17.pdf |
HRES 2/1/2017 1:00:00 PM |