02/22/2017 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Ocean Acidification in Alaska: Ecosystems and Economics | |
| SB30 | |
| HB111 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | SB 30 | TELECONFERENCED | |
| += | HB 111 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 22, 2017
1:06 p.m.
MEMBERS PRESENT
Representative Andy Josephson, Co-Chair
Representative Geran Tarr, Co-Chair
Representative Harriet Drummond
Representative Justin Parish
Representative Chris Birch
Representative DeLena Johnson
Representative George Rauscher
Representative David Talerico
MEMBERS ABSENT
Representative Dean Westlake, Vice Chair
Representative Mike Chenault (alternate)
Representative Chris Tuck (alternate)
COMMITTEE CALENDAR
PRESENTATION(S): OCEAN ACIDIFICATION IN ALASKA: ECOSYSTEMS AND
ECONOMICS
- HEARD
SENATE BILL NO. 30
"An Act approving and ratifying the sale of royalty oil by the
State of Alaska to Petro Star Inc.; and providing for an
effective date."
- MOVED SB 30 OUT OF COMMITTEE
HOUSE BILL NO. 111
"An Act relating to the oil and gas production tax, tax
payments, and credits; relating to interest applicable to
delinquent oil and gas production tax; and providing for an
effective date."
- HEARD & HELD
Oil & Gas Industry Testimony
- REMOVED FROM AGENDA
PREVIOUS COMMITTEE ACTION
BILL: SB 30
SHORT TITLE: APPROVAL: ROYALTY OIL SALE TO PETRO STAR
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/20/17 (S) READ THE FIRST TIME - REFERRALS
01/20/17 (S) RES, FIN
01/30/17 (S) RES AT 3:30 PM BUTROVICH 205
01/30/17 (S) Moved SB 30 Out of Committee
01/30/17 (S) MINUTE(RES)
02/01/17 (S) RES RPT 7DP
02/01/17 (S) DP: GIESSEL, WIELECHOWSKI, HUGHES,
COGHILL, VON IMHOF, STEDMAN, MEYER
02/06/17 (S) FIN AT 9:00 AM SENATE FINANCE 532
02/06/17 (S) Scheduled but Not Heard
02/08/17 (S) FIN RPT 4DP 2NR
02/08/17 (S) DP: HOFFMAN, MACKINNON, BISHOP, VON
IMHOF
02/08/17 (S) NR: DUNLEAVY, OLSON
02/08/17 (S) FIN AT 9:00 AM SENATE FINANCE 532
02/08/17 (S) Moved SB 30 Out of Committee
02/08/17 (S) MINUTE(FIN)
02/10/17 (S) TRANSMITTED TO (H)
02/10/17 (S) VERSION: SB 30
02/13/17 (H) READ THE FIRST TIME - REFERRALS
02/13/17 (H) RES, FIN
02/22/17 (H) RES AT 1:00 PM BARNES 124
BILL: HB 111
SHORT TITLE: OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
SPONSOR(s): RESOURCES
02/08/17 (H) READ THE FIRST TIME - REFERRALS
02/08/17 (H) RES, FIN
02/08/17 (H) TALERICO OBJECTED TO INTRODUCTION
02/08/17 (H) INTRODUCTION RULED IN ORDER
02/08/17 (H) SUSTAINED RULING OF CHAIR Y23 N15 E2
02/08/17 (H) RES AT 1:00 PM BARNES 124
02/08/17 (H) Heard & Held
02/08/17 (H) MINUTE(RES)
02/13/17 (H) RES AT 1:00 PM BARNES 124
02/13/17 (H) Heard & Held
02/13/17 (H) MINUTE(RES)
02/17/17 (H) RES AT 1:00 PM BARNES 124
02/17/17 (H) Heard & Held
02/17/17 (H) MINUTE(RES)
02/20/17 (H) RES AT 1:00 PM BARNES 124
02/20/17 (H) Heard & Held
02/20/17 (H) MINUTE(RES)
02/22/17 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
JESSICA CROSS PhD, Research Associate
Pacific Marine Environmental Laboratory
National Oceanic and Atmospheric Administration
U.S. Department of Commerce
Seattle, Washington
POSITION STATEMENT: Provided a PowerPoint presentation
entitled, "Ocean Acidification in Alaska: Ecosystems and
Economies," dated February 2017, and answered questions.
JIM SHINE, Commercial Manager
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: During the hearing of SB 30, provided a
PowerPoint presentation entitled, "Proposed Sale of the State's
Royalty Oil to Petro Star: Senate Bill 30" dated 2/22/17, and
answered questions.
DOUG CHAPADOS, President/CEO
Petro Star Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified in support of SB 30.
BRYCE WARD, Mayor
North Pole, Alaska
POSITION STATEMENT: Testified during the hearing of SB 30.
COLLEEN GLOVER, Commercial Analyst
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation
entitled, "Alaska's Oil and Gas Taxation - HB111\O Lifecycle
Scenario Analysis," dated 2/17/17, and answered questions.
ACTION NARRATIVE
1:06:21 PM
CO-CHAIR ANDY JOSEPHSON called the House Resources Standing
Committee meeting to order at 1:06 p.m. Representatives
Josephson, Parish, Talerico, Rauscher, Johnson, and Tarr were
present at the call to order. Representatives Birch and
Drummond arrived as the meeting was in progress.
^PRESENTATION(S): OCEAN ACIDIFICATION IN ALASKA: ECOSYSTEMS
AND ECONOMICS
PRESENTATION(S): OCEAN ACIDIFICATION IN ALASKA: ECOSYSTEMS AND
ECONOMICS
1:07:37 PM
CO-CHAIR JOSEPHSON announced that the first order of business
would be a presentation on ocean acidification in Alaska, by
Jessica Cross, PhD., of the National Oceanic and Atmospheric
Administration, U.S. Department of Commerce.
1:07:49 PM
JESSICA CROSS, PhD, Research Associate, Pacific Marine
Environmental Laboratory, National Oceanic and Atmospheric
Administration (NOAA), U.S. Department of Commerce, provided a
PowerPoint presentation entitled, "Ocean Acidification in
Alaska: Ecosystems and Economies." She recalled several years
ago the state invested almost $3 million in the Ocean
Acidification Research Center (OARC) at the University of Alaska
Fairbanks (UAF) for the purpose of research, and also to attract
matching federal research funds, which it did. Dr. Cross
informed the committee the phenomenon of ocean acidification
results from levels of global carbon dioxide (CO2) continuing to
rise; in 2013, atmospheric CO2 concentrations rose above 400
parts per million (ppm) as reported by the Mauna Loa Observatory
in Hawai'i. Last year CO2 peaked at 408 ppm, leading the global
community to seek limiting the amount of CO2 entering the
atmosphere because of global warming, sea level rise, coastal
erosion, and other problems due to excessive greenhouse gases
[slides 1 and 2]. The evil twin of the CO2 problem is ocean
acidification, because as the CO2 is emitted into the
atmosphere, approximately one-third is absorbed by the ocean.
Alaska waters are naturally very high in CO2, and the extra CO2
causes the potential hydrogen (pH) [measure of acidity] in the
oceans to drop [slide 3].
1:10:43 PM
REPRESENTATIVE BIRCH asked for the time period applicable to the
data illustrated on slide 3.
DR. CROSS said in a time scale of one thousand years the
aforementioned atmospheric CO2 levels have been seen before;
however, the change is happening much faster than before in the
geological record, and thus is unprecedented from that
perspective. She continued, noting since the oceans have
absorbed approximately one-third of the human-caused CO2 in the
atmosphere, ocean acidification has caused the pH to drop so low
that carbonate minerals in the Bering Sea are dissolving. As
many species use carbonate minerals to build shells and
biogenetic structures, since 2009 this is now a problem for red
king crab and blue king crab populations [slides 4 and 5].
Ocean acidification could threaten Alaska fishing and food
security because 60 percent of the commercial fish and shellfish
for the U.S. comes from Alaska [slide 6]. Federal laboratory
studies reveal impacts to shellfish species are: slower
embryonic development; fewer larvae hatch; high juvenile
mortality; stressed adults [slide 7]. Ocean acidification
impacts to fish includes higher sensory effects, which interfere
with the ability to see and smell prey as observed in pollock
[slide 8]. In addition, ocean acidification impacts the food
web and food sources for shellfish and fish by disrupting
pteropods which are a food source for Alaska pink salmon [slide
9]. Dr. Cross said laboratory studies have been coordinated
with state and federal field missions - conducted around the
state - that measure the surface and subsurface for ocean
acidification. Field missions are conducted by ships,
autonomous vehicles, and in-situ [slides 10-13]. All of the
studies are combined to generate disaster risk assessments for
Alaska fisheries by census areas; areas most highly at risk are
those that rely on threatened fisheries as their primary source
of protein or jobs [slide 14]. Slide 15 illustrated predicted
increases in ocean acidification from 2012 through 2100, and she
pointed out in 2012, on an annual average, most of the waters
around the state are not highly corrosive. However, by 2050, on
average, waters will be corrosive in the Chukchi Sea and
Beaufort Sea. She stressed ocean acidification does not happen
in a vacuum and provided slides of temperatures and sea ice in
the Arctic in 2017 [slides 16 and 17]. Ocean acidification
occurs along with warming temperatures, ice loss and low oxygen,
stressing organisms [slide 18]. If organisms cannot adapt, the
populations of important commercial fisheries will be impacted,
and research indicates, without intervention between 2035 and
2045, the red king crab fishery could collapse [slide 19].
1:18:40 PM
REPRESENTATIVE JOHNSON asked if there is evidence of a large
scale die-off, and whether species are moving north or changing
their behavior in response.
DR. CROSS said it will not be possible to separate the effects
of ocean acidification from the normal seasonal impacts of
colder and warmer years until around 2020. Further, a shift in
population has not been confirmed at this time and is an area of
ongoing research. Dr. Cross returned attention to the
presentation and explained in response to projections, NOAA
seeks to build adaptive capacity and community resilience by
bringing communities together to profile disaster risk
mitigation strategies such as to diversify economic regions,
encourage job training and education, increase access to
alternative protein sources, and reduce other environmental
stressors [slides 20 and 21]. The Alaska Ocean Acidification
Network connects scientists, stakeholders, fishing
organizations, and other interested parties with industry to
support ongoing research around the state [slides 22 and 23].
Dr. Cross stated awareness of ocean acidification across Alaska
is three times higher than in the Lower 48 [slide 24]. The
interest of Alaska's citizens and industry has been recognized
by the U.S. Department of Commerce [slide 25]. At the federal
level, NOAA research covers ocean chemistry research, species
response research, and economic modeling, and she urged the
committee to contact researchers with questions [slide 26]. Dr.
Cross stated further monitoring throughout the state will expand
using new technology, such as the Saildrone vehicle, which can
cover Alaska's extensive coastline [slide 27]. She summarized
the following: ocean acidification is already impacting areas
in Alaska; coastal communities in Southeast and Southwest are
the most vulnerable; ocean acidification is likely to worsen;
there are opportunities to mitigate risk and adapt to changes
through economic diversification, access to alternative sources
of protein, and the reduction of environmental stressors; the
best defense against ocean acidification is the long-term
reduction of CO2 emissions [slide 28].
1:24:52 PM
CO-CHAIR JOSEPHSON asked for the name of the secretary of
commerce.
DR. CROSS said Wilbur Ross. In further response to Co-Chair
Josephson, she stated the mission guidance she has received from
the agency has not yet changed [since the beginning of the Trump
Administration].
REPRESENTATIVE BIRCH questioned what the House Resources
Standing Committee should do.
DR. CROSS advised her role as a researcher is to monitor
economic and environmental impacts and provide information to
regulatory bodies. She suggested the committee communicate with
regulatory agencies.
REPRESENTATIVE PARISH inquired as to whether subsistence and
commercial fishing as presently known are projected to end
within his lifetime.
DR. CROSS said that commercial and subsistence fishing is not
likely to end in that time period, but will be impacted by ocean
acidification; however, if the risks are reduced, economically
viable commercial fishing and subsistence fishing will continue
in Alaska.
REPRESENTATIVE PARISH returned attention to slide 19, and asked
whether the red king crab decline in Bristol Bay would be
mirrored in other shellfish populations.
DR. CROSS said, "That's possible, it's research that's ongoing."
She added NOAA monitors CO2 levels in commercial hatcheries; in
fact, a shellfish hatchery it is easier to monitor than the crab
fishery. Further, the projections on slide 14 are based on the
present rate of ocean acidification and fishing.
CO-CHAIR TARR referred to OARC at UAF and asked about its work
with NOAA.
DR. CROSS advised the funding from the state for OARC was almost
$3 million in a one-time investment that went directly to UAF.
At this time, NOAA maintains the infrastructure built with those
funds, including the time-series moorings. There were four
mooring sites, but due to the limitations of federal funding,
only two of the four sites are operational.
1:31:05 PM
CO-CHAIR TARR asked to be informed if federal funding for
maintenance on the functioning two sites is threatened.
DR. CROSS added the two sites that are maintained are regular
time-series sites used by other research organizations; the two
sites that were eliminated were in Southeast and near Kodiak.
REPRESENTATIVE DRUMMOND questioned why Alaska's coastal waters
are naturally high in CO2.
DR. CROSS explained this is because cold water holds more CO2
and the global circulation process moves CO2 toward the North
Pacific via the global conveyor belt: phytoplankton bloom on
the surface of the world's oceans, sink to the bottom, are
respired by bacteria, releasing CO2, which moves from the North
Atlantic south and north, and is upwelled in the North Pacific
and Alaska waters. In further response to Representative
Drummond, she said recruitment failure in shellfish is the
inability to replenish the shellfish population to its previous
level.
REPRESENTATIVE RAUSCHER returned attention to slide 19, and
asked why the Bristol Bay red king crab fishery fell and rose
sharply from 2005 to 2015.
DR. CROSS said the chart on slide 19 emphasizes physical impacts
on certain populations. Eventually, ocean acidification impacts
overwhelm the normal climatic cycles expected for a particular
population. In further response to Representative Rauscher, she
explained without a change in the status quo, "the battle
continues."
REPRESENTATIVE RAUSCHER questioned whether types of CO2 other
than human-caused are a factor.
1:36:09 PM
DR. CROSS restated the natural concentrations of CO2 in Alaska
are about 65 micro mil per kilogram of anthropogenic CO2 in the
water; the remainder is natural as a result of cooler
temperatures, and global circulation processes. The ecosystem
has adapted to the natural level of CO2, but additional human-
caused CO2 may suddenly push the organisms in the system past
"the tipping point." In further response to Representative
Rauscher, Dr. Cross will provide the percentage of human-caused
CO2 as compared to the percentage of naturally-occurring CO2.
REPRESENTATIVE PARISH returned attention to slide 14, which
indicated Southeast is at high to medium disaster risk, and
asked what timescale and severity of disaster is forecast.
DR. CROSS said the timescale illustrated is about 50 years, and
the disaster is the loss of income and the loss of protein.
SB 30-APPROVAL: ROYALTY OIL SALE TO PETRO STAR
1:39:02 PM
CO-CHAIR JOSEPHSON announced that the next order of business
would be SENATE BILL NO. 30, "An Act approving and ratifying the
sale of royalty oil by the State of Alaska to Petro Star Inc.;
and providing for an effective date."
1:39:45 PM
JIM SHINE, Commercial Manager, Division of Oil and Gas,
Department of Natural Resources, provided a PowerPoint
presentation entitled, "Proposed Sale of the State's Royalty Oil
to Petro Star: Senate Bill 30," and informed the committee SB
30 is similar to last year's legislation enabling a contract
with Tesoro for a royalty-in-kind (RIK) sale. He said royalty-
in-value (RIV) occurs when a producer ships, transports, and
sells the state's royalty share, along with its own, and remits
the royalty value to the state; RIK occurs when the state
assumes ownership of its royalty barrels of oil and disposes of
them through statutory sales procedures. The bill is the
culmination of a long process including commercial negotiations,
a best interest finding, a public review, and other procedures.
Mr. Shine said the state has participated in RIK sales
procedures since 1979, and directed attention to a chart
provided in the committee packet that illustrated the history of
RIK sales [chart not provided]. The contract with Petro Star
Inc. (Petro Star) in SB 30 will yield the state from $22 million
to $28 million more over RIV revenue. Currently, the state has
a one-year contract with Petro Star that would be followed by
the four-year contract within SB 30, commencing 1/1/18.
Together, the two contracts will yield the state from $29
million to $37 million more over RIV revenue [slide 2]. The
best interest finding has determined SB 30 is in the state's
best interest, and the Alaska Royalty Oil and Gas Development
Advisory Board, Department of Natural Resources, recommends the
legislature approve the sale by its Resolution 2016-2, a copy of
which was provided in the committee packet [slide 3]. In
addition, the commissioner of DNR considered the following
decision criteria [slide 4]:
• cash value offered
• projected effects of the sale on the economy of the state
• the ability to provide refined products for distribution
and sale within the state
1:44:04 PM
MR. SHINE restated the approval process for the RIK sale began
with the preliminary best interest finding issued in 2016,
followed by public review, review and recommendation by the
royalty advisory board, the contract, and SB 30 [slide 5]. He
provided slide 6 which listed the statutory criteria that must
be considered by the royalty advisory board. Mr. Shine provided
details of the contract enabled by SB 30 such as projections of
royalty volume over a five-year period of 50,000 to 55,000
barrels per day of royalty oil in 2017, and 36,000 to 50,000
barrels available from 2018 through 2021. He recalled last year
a Tesoro RIK contract was approved that is providing 20,000 to
25,000 barrels of royalty oil over a five-year period and was
used as a guide in the state's projections [slide 7].
REPRESENTATIVE PARISH questioned whether the state will have the
ability to pick up additional capacity in the event of an
increase in throughput [in the Trans-Alaska Pipeline System
(TAPS)].
MR. SHINE said the contract has built-in quantity flexibility
that allows the state to offer additional oil on equal terms.
He returned to contract terms and pointed out in the event of
default the state is exposed in two scenarios: a complete
default - in which the state does not receive payment for
barrels produced and sold, and a denomination risk - in which
the buyer defaults after a certain volume of oil has been
nominated. In order to protect the state against either of the
aforementioned events, the contract has a security provision
clause for a $46 million surety bond. In addition, the contract
urges Petro Star to use commercially reasonable efforts to
manufacture refined products in the state and employ local
residents [slide 7]. In regard to RIK contract price, he
explained the contract begins with the monthly/daily average
U.S. West Coast price for Alaska North Slope (ANS) oil. The RIK
differential of $1.95 is a reduction of the price to determine
the value of an in-state barrel of oil, thus in an RIV context
the state is subject to marine transportation costs of between
$3.30 and $3.50 per barrel; however, in an RIK contract, the
state uses a $1.95 RIK location differential that represents the
value of a barrel of oil sold within the state. The location
differential is determined by the Department of Revenue and DNR
to ensure the oil remains competitive, and to maximize the value
of the resource to the state.
CO-CHAIR JOSEPHSON asked how the differential compares to that
of last year's royalty oil sale.
MR. SHINE said the differential is the same. In 2014, a
previous contract with Flint Hills carried a differential of
$2.15 per barrel. He advised the other deductions are the same
as found in an RIV formula as follows [slide 8]:
• TAPS tariff allowance and tariffs for oil transported
upstream of Pump Station 1
• quality bank adjustments required by regulation by the
Federal Energy Regulatory Commission
• line loss calculated at an industry standard amount for
metering in and metering out
MR. SHINE summarized as follows [slide 9]:
• the contract is in the state's best interest
• the contract will yield $29 million to $37 million in
additional revenue over what the state would receive if the
volume of royalty oil is taken RIV
• location differential is a static number and marine
transportation costs are expected to exceed the
differential
• Petro Star employs 44 Alaskans in refining operations and
others statewide
MR. SHINE presented slide 10 which was a short comparison of the
contract within SB 30 and last year's contract with Tesoro.
REPRESENTATIVE BIRCH expressed his support.
REPRESENTATIVE DRUMMOND questioned why DNR needs the
legislature's permission to sell royalty oil.
MR. SHINE explained for royalty oil sold in excess of a one-year
contract, there is a statutory requirement for DNR to obtain
legislative approval.
1:54:56 PM
DOUG CHAPADOS, President/CEO, Petro Star Inc., acknowledged the
efforts of the commissioners of DNR to support the contract. He
said after long negotiations, the contract is a fair agreement.
1:56:06 PM
BRYCE WARD, Mayor, City of North Pole, opined the ability to
sell RIK is beneficial to the state and Petro Star provides
benefits to the City of North Pole. He expressed his concern
related to the differential in the RIK contract and pointed out
the product is state oil provided to state residents by a state
producer, but at a differential price that is higher than the
spot market price. He acknowledged the contract is bringing in
an additional $30 million to the state, however, he questioned
whether this is a benefit for all residents of the state since
Interior residents will be paying the differential cost. Mayor
Ward encouraged the committee to look at the intent of the
differential as the oil is not being exported, but is provided
solely to state residents.
1:58:12 PM
CO-CHAIR JOSEPHSON opened the hearing for public testimony, and
after ascertaining no one wished to testify, closed public
testimony.
1:59:18 PM
CO-CHAIR TARR moved to report SB 30 out of committee with
individual recommendations and the accompanying fiscal note.
There being no objection, SB 30 was reported out of the House
Resources Standing Committee.
2:00:12 PM
[Co-Chair Josephson passed the gavel to Co-Chair Tarr.]
The committee took an at ease from 2:00 p.m. to 2:03 p.m.
HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
2:03:13 PM
CO-CHAIR TARR announced that the final order of business would
be HOUSE BILL NO. 111, "An Act relating to the oil and gas
production tax, tax payments, and credits; relating to interest
applicable to delinquent oil and gas production tax; and
providing for an effective date."
2:03:48 PM
COLLEEN GLOVER, Commercial Analyst, Tax Division, Department of
Revenue (DOR), provided a PowerPoint presentation entitled,
"Alaska's Oil and Gas Taxation - HB111\O Lifecycle Scenario
Analysis," dated 2/17/17. Ms. Glover gave the committee brief
personal background information. She noted the sectional
analysis for HB 111 was previously presented, and her
presentation would focus on lifecycle modeling that is based on
two hypothetical North Slope fields and which will reveal the
impacts of any tax policy on a large or small new field,
including the present tax policy, identified as status quo, and
the potential impacts of HB 111 [slide 2]. On slide 3, impacts
by HB 111 such as the net operating loss (NOL) credit change
from 35 percent to 15 percent, changes to sliding scale credits,
the elimination of cash repurchases on the North Slope, the
change in the minimum tax from 4 percent to 5 percent, and
provisions to harden the floor, were highlighted in green.
REPRESENTATIVE BIRCH directed attention to page 4 of fiscal note
Identifier: HB111-DOR-TAX-02-10-17 that indicated HB 111
"raises $300 million." He asked whether the presenter would
characterize the net effect of HB 111 as a major tax increase.
MS. GLOVER clarified the model is a hypothetical field and the
fiscal note is based on the Fall [2016 Revenue Sources Book
(RSB)] forecast of projected revenues to the state. She
acknowledged it is an increase and the modeling would present
the impact of HB 111 on each of five scenarios.
2:07:48 PM
REPRESENTATIVE BIRCH asked whether the Fall forecast recognizes
the recent increased quantity of oil flowing through the Trans-
Alaska Pipeline System (TAPS).
MS. GLOVER deferred to the director of the Tax Division, DOR.
CO-CHAIR TARR stated the $300 million referred to in the fiscal
note are fiscal year 2025 (FY 25) and FY 26 estimates.
MS. GLOVER explained the model assumptions are as follows [slide
4]:
• development begins 1/1/18
• designed for the period of development through production
not including exploration costs or abandonment costs
• uses inflation of 2.25 percent per year
• for status quo, producers move to non-gross value reduction
(non-GVR) status and cannot go below minimum tax
• for status quo, producers apply for $35 million repurchase
sliding scale credits
• assumes North Slope only
MS. GLOVER, in response to Representative Johnson, restated the
model does not include exploration costs or abandonment costs.
She explained the field lifecycle modeling assumptions are as
follows [slide 6]:
• one 50 million barrel oil field over the life of production
• one 750 million barrel oil field over the life of
production
• price points of $40, $60, $80, and Fall 2016 forecast price
• status quo tax provisions with one or four partners
• HB 111
• each scenario has a dashboard with four quadrants [slide
7]: 1. production tax; 2. state revenue; 3. producer
revenue; 4. summary economics: a. total cash flows, b. net
present value (NPV) analysis; c. split of profits; d. split
of gross
2:13:41 PM
REPRESENTATIVE BIRCH asked whether [quadrants] 1-4 include state
royalty share.
2:14:09 PM
MS. GLOVER said royalty is a component of state revenue,
[quadrant] 2. Slide 8 illustrated a hypothetical small field
over 30 project years. There was no activity in the first years
and under the current tax system cash credits were generated.
Cash repurchases paid to the producer by the state were shown in
red. In later years, production tax paid by the producer was
shown in green, and the gold line was the minimum tax.
REPRESENTATIVE BIRCH questioned whether the model assumes the
state honored its commitment to the explorer in the amount of
$150 million.
MS. GLOVER said the model assumes $35 million per year would be
paid by the state. She turned attention to the four components
of state revenue: production tax shown in green, property tax
shown in red, royalties shown in blue, and state corporate
income tax shown in purple. On the North Slope, the state gets
a 7.5 percent share of property tax [slide 9].
REPRESENTATIVE BIRCH recalled the state collects 20 mills in
property tax statewide, and reimburses communities along the
pipeline for their share. He opined property tax for the state
is a significant amount.
2:17:27 PM
MS. GLOVER explained the property tax shown is for the
hypothetical field. However, 92.5 percent goes to
municipalities. She returned attention to slide 9 that
illustrated income tax is paid after producers begin to make a
profit. Slide 10 illustrated cash flows for producers over the
duration of the field, beginning with huge net operating losses
and followed by production. Slide 11 summarized economics
during the life of the project: lifecycle totals with rates of
return; split of profits based on entity such as the state or
municipalities; split of gross by entity. She pointed out state
net present value (NPV} is 6.95 percent and producer cash NPV is
10 percent. Ms. Glover presented the small field modeling
assumptions, noting that any changes can be easily accommodated
[slide 13].
CO-CHAIR TARR questioned why the state corporate income tax rate
is lower than in statute.
MS. GLOVER said the rate is 6.5 percent of the net. Slide 14
illustrated the production profile curve for a small field,
showing almost $200 million in capital investment before
production begins at year four. However, operating expenditures
correspond with the production curve.
2:24:18 PM
REPRESENTATIVE JOHNSON asked what taxes are being paid at the
beginning of development.
MS. GLOVER said none.
REPRESENTATIVE BIRCH noted total capital expenditures shown on
slide 14 are $500 million before production.
MS. GLOVER agreed. Slide 15 illustrated the four modeling
components for a small field under the current tax regime that
were previously discussed on slides 8-11. In the small field
model it was assumed there would be no production until year
four, and thus no production tax or royalty revenue is due the
state until year four. Total net gain to the state for the life
of the hypothetical field was $870 million and net cash flow to
the producer was $815 million.
REPRESENTATIVE BIRCH returned attention to slide 15, and asked
for clarification on the total amount of credits and capital
spend.
2:29:37 PM
MS. GLOVER responded slide 14 was a representative profile and
slide 15 illustrated the actual scenario. In further response
to Representative Birch, she said in the aforementioned scenario
the lifecycle total credits that were purchased are $161
million. Ms. Glover presented slide 16 which illustrated the
small field model under the proposed HB 111 tax regime. As
shown in the upper left graph, there are no cash repurchases and
the producer pays the minimum tax; as shown in the upper right
graph, there is no revenue to the state until production begins;
as shown in the lower left graph, there is little change; as
shown in the lifecycle totals, production tax remains the same
as adjusted for net present value.
REPRESENTATIVE RAUSCHER asked whether royalty was increased in
slide 16.
MS. GLOVER answered royalty is not impacted by HB 111. Slide 17
illustrated cash flows for the small field, one partner
scenario, at $40, $60, $80, and Fall 2016 forecast prices, under
the status quo and HB 111.
2:35:01 PM
CO-CHAIR TARR surmised at $40 companies have higher losses under
HB 111 due to the price of oil [from the point of development].
2:35:19 PM
MS. GLOVER provided additional data on the eight small field
scenarios under the status quo and HB 111 [slide 18]. Ms.
Glover presented the large field modeling assumptions [slide
20]. She explained the production profile differs as production
for a large field is assumed to begin at year five, however,
similarly to the development of a small field, there is a large
capital investment in the first years, followed by peak
production and declining production [slide 21]. Modeling for
the large field included three scenarios: current tax policy
[status quo], one partner with annual $35 million maximum
repurchase; status quo, four partners; HB 111 with one to four
partners. As shown on the slide 22 upper left graph, cash
repurchases are received for the first seven years, minimum tax
is paid to about year twelve or thirteen, and higher production
tax is paid in the following years; because of early losses, the
producer carried forward tax credits to use against tax
liability, and when the NOL credits are exhausted, production
tax greatly increases. As shown in the upper right graph, state
revenue also peaks around year twelve. As shown in the lower
left graph, positive cash flow begins around year eight.
CO-CHAIR TARR observed in the foregoing scenario, the producer
chose to use its $35 million in credits, and carried the
remaining credits forward.
MS. GLOVER said DOR assumed the producers would opt to carry
forward credits for their full value rather than taking 75
percent cash value.
REPRESENTATIVE RAUSCHER asked whether the model is based on an
average historical lifecycle of a production field.
MS. GLOVER said the model is based on a production profile curve
developed by DOR and the Department of Natural Resources (DNR),
looking at natural field production profiles and working with
tax consultants. She further explained the large field assumes
750 million barrels over the life of the field, so the profile
curve estimates percent of production by year. She returned to
the presentation, noting slide 23 illustrated the large field
with four partners, which qualifies the project for the $140
million per year cash repurchase maximum and impacts GVR
credits. As shown on the slide 23 upper left graph, state
repurchased credits are bigger, and production tax is paid
earlier, however, the total tax paid to the state is unaffected.
2:42:14 PM
CO-CHAIR TARR directed attention to the amount of $1.6 billion
in repurchased tax credits, based on the large field scenario
with four partners.
MS. GLOVER presented slide 24 that illustrated a large field
scenario with one or four partners under HB 111. As shown on
the upper left graph, there are no tax repurchases, tax payments
begin at year five at production, the producer pays minimum tax
until exhausting NOL credits, and pays the full production tax
for the remainder of the life of the field. As shown on the
upper right graph, the state does not receive revenue until
production begins.
CO-CHAIR JOSEPHSON returned attention to slide 23 - which
illustrated a partner or joint venture with a large field - and
noted the lifecycle of tax credits repurchased under current law
is $1.6 billion and the state nets $22 billion.
MS. GLOVER said correct.
CO-CHAIR JOSEPHSON acknowledged this is a high rate of return
albeit over a long period of time. Considering the all of the
variables such as price, the state should know the quality of
its investment. He questioned how residents of the state can be
assured of a worthy investment.
MS. GLOVER said that is not her expertise.
REPRESENTATIVE RAUSCHER asked what part of the model incents the
production of an oil field.
MS. GLOVER advised the model is designed to show the impact made
by HB 111 on a hypothetical field, and does not predict activity
or decisions by producers.
CO-CHAIR TARR said the upper left graphs on [slides 15, 16, 22,
23, and 24] show the changes in "incentives" because of the
changes to the repurchase cash credits, which are one of the
current incentives in tax policy.
MS. GLOVER advised there are analyses in this regard later in
the presentation. Slide 26 provided additional data on the
eight large field scenarios under the status quo one partner,
status quo four partners, and HB 111, and slide 27 was an
outline of all of the scenarios that were modeled on the large
field.
2:48:57 PM
REPRESENTATIVE JOHNSON pointed out the economics of a large
field are better than those of a small field, and opined
increased exploration on smaller fields was the purpose of
Senate Bill 21 [passed in the 28th Alaska State Legislature].
CO-CHAIR TARR compared the summary on slide 18 for small fields
to the summary on slide 26 for large fields, and pointed out
producer cash flow at $40 is negative for small fields - but is
not for larger fields - due to economies of scale.
MS. GLOVER noted from the results of the model DOR sought to
determine how the five components of the tax drive changes to
the state and to the producers. For example, DOR completed an
analysis on the five components using Fall 2016 forecast price
on a large field with one partner, compared to HB 111 [slide
27]. Slide 28 illustrated the tax changes made by HB 111 in
state net cash flows. The biggest difference was made by
changing the NOL credit from 35 percent to 15 percent, which was
a gain of $2 billion. Additional impacts are a gain of about $1
billion from changes to the sliding scale credit, and a gain of
about $25 million from hardening the floor. Other changes are
insignificant to cash flows.
CO-CHAIR TARR restated the analysis is over the lifecycle of the
modeled field, thus the total potential earnings are
approximately $22 billion, and the total potential change for
the life of the field would be the aforementioned $2 billion and
$1 billion.
MS. GLOVER added on slide 28 the blue bar on the left represents
approximately $22 billion in net cash flow for the status quo,
and the purple bar on the right represents net cash flow earned
under HB 111. Slide 29 illustrated the difference by HB 111 in
state net present value (NPV), incorporating the time value of
money over the lifecycle of the field. The biggest impact of HB
111 was again changing the NOL credits from 35 percent to 15
percent; the sliding scale credits, hardening of the floor and
other changes have smaller impacts. Eliminating cash repurchase
has no impact. Slide 30 illustrated the difference made by HB
111 in producer net cash flows: status quo for the producer
was about $18 billion in cash flow, changing NOL credits from 35
percent to 15 percent was a reduction of about $2 billion, and
the change in sliding scale credit was a reduction. Slide 31
illustrated the difference by HB 111 in producer NPV. Under
status quo the producer is at a negative NPV and changing NOL
credits has the biggest impact; sliding scale credit, hardening
the floor, changing the minimum tax, and eliminating cash
repurchase have further impacts.
2:55:40 PM
CO-CHAIR JOSEPHSON inquired as to the price forecast that was
used on the model for slide 31.
MS. GLOVER said the Fall 2016 RSB forecast was used. In further
response to Co-Chair Josephson, she explained there are no cash
credits reflected in slide 31.
MS. GLOVER, in response to Co-Chair Tarr, further explained the
status quo of the producers is negative in slide 31 because of
the time value of money. Slide 22 indicated the same negative
NPV due to the outlay of money in the beginning of a project,
which is shown in 2018 dollars.
REPRESENTATIVE PARISH surmised there was a 10 percent rate of
return on other funds.
MS. GLOVER said correct.
[HB 111 was held over.]
2:59:58 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:59 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB030 Transmittal Letter 2.21.17.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| SB030 ver A 2.21.17.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| SB030 Supporting Document-DNR Slide Presentation 2.21.17.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| SB030 Supporting Document-Royalty Board Resolution 2.21.17.PDF |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| SB 30 Supporting Document-Report from Royalty Board 2.21.17.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| SB30 Supporting Document-Support Letter 2-15-2017.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| SB 30 Supporting Document-Best Interest Finding 2.21.17.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| HB111 ver O 2.8.17.PDF |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM |
HB 111 |
| HB111 Fiscal Note DOR-TAX 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM HRES 3/13/2017 1:00:00 PM |
HB 111 |
| HB111 Sectional Analysis 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM |
HB 111 |
| HB111 Sponsor Statement 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM HRES 3/13/2017 1:00:00 PM |
HB 111 |
| HB111 - DOR Lifecycle Scenario Analysis Presentation - 2.17.17.pdf |
HRES 2/17/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM |
HB 111 |
| SB30 Fiscal Note-DNR-DOG 2.22.17.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| Ocean Acidification in Alaska Ecosystems and Economics By Jessica Cross 2.22.17.pdf |
HRES 2/22/2017 1:00:00 PM |