Legislature(2011 - 2012)SENATE FINANCE 532

02/13/2012 01:00 PM Senate FINANCE


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01:03:15 PM Start
01:05:00 PM Presentation by Pedro Van Meurs on Arctic and Alaska Oil Economics: Session Two
02:29:25 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Joint w/ Senate Resources TELECONFERENCED
Presentation by Pedro van Meurs on Arctic and
Alaska Oil Economics
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 ALASKA STATE LEGISLATURE                                                                                       
                       JOINT MEETING                                                                                            
            SENATE RESOURCES STANDING COMMITTEE                                                                                 
                 SENATE FINANCE COMMITTEE                                                                                       
                     February 13, 2012                                                                                          
                         1:03 p.m.                                                                                              
                                                                                                                                
1:03:15 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stedman called the Senate Finance Committee                                                                            
meeting to order at 1:03 p.m.                                                                                                   
                                                                                                                                
SENATE FINANCE COMMITTEE MEMBERS PRESENT                                                                                      
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Johnny Ellis                                                                                                            
Senator Dennis Egan                                                                                                             
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
                                                                                                                                
SENATE FINANCE COMMITTEE MEMBERS ABSENT                                                                                       
                                                                                                                                
Senator Lesil McGuire, Vice-Chair                                                                                               
                                                                                                                                
SENATE RESOURCE COMMITTEE MEMBERS PRESENT                                                                                     
                                                                                                                                
Senator Joe Paskvan, Co-Chair                                                                                                   
Senator Bill Wagner, Co-Chair                                                                                                   
Senator Wielechowski, Vice-Chair                                                                                                
Senator Bert Stedman                                                                                                            
Senator Hollis French                                                                                                           
Senator Gary Stevens                                                                                                            
                                                                                                                                
SENATE RESOURCE COMMITTEE MEMBERS ABSENT                                                                                      
                                                                                                                                
Senator Lesil McGuire                                                                                                           
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Dr. Pedro Van Meurs, President, Van Meurs Corporation,                                                                          
Legislative Consultant; Senator Cathy Giessel                                                                                   
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^PRESENTATION BY  PEDRO VAN MEURS  ON ARCTIC AND  ALASKA OIL                                                                    
ECONOMICS: SESSION TWO                                                                                                          
                                                                                                                                
1:05:00 PM                                                                                                                    
                                                                                                                                
DR.  PEDRO  VAN  MEURS, PRESIDENT,  VAN  MEURS  CORPORATION,                                                                    
LEGISLATIVE CONSULTANT,  provided members with  a PowerPoint                                                                    
presentation: Policy  Options for  Alaska Oil and  Gas (copy                                                                    
on file).  He observed that he  would focus on Session  2 of                                                                    
his  presentation: International  Competitive Framework.  He                                                                    
emphasized  the  importance  of  knowing  the  structure  of                                                                    
competition.  He stated  he would  evaluate competition  for                                                                    
five  groups of  resources: existing  light oil  production,                                                                    
new  light oil  production,  heavy oil  and  shale oil,  and                                                                    
natural gas.                                                                                                                    
                                                                                                                                
1:05:58 PM                                                                                                                    
                                                                                                                                
Mr. Van Meurs  looked at slide 26,  existing oil production.                                                                    
Shallow  water oil  production had  the largest  peer group,                                                                    
with  125 world  nations  that were  compared  to Alaska  in                                                                    
terms of  the exporting jurisdictions and  28 oil exporters.                                                                    
The  Arctic   Report  compared  Alaska  with   other  Arctic                                                                    
jurisdictions.                                                                                                                  
                                                                                                                                
Mr.   Van   Meurs   reviewed   profitability   for   various                                                                    
jurisdictions, on slide 27. He  looked at the rate of return                                                                    
for world  competitors using  a base  case field  of shallow                                                                    
water oil production. A typical  field with a $20 per barrel                                                                    
cost was compared  for rate of return  and profitability for                                                                    
each  of  the world  competitors.  Alaska,  Cook Inlet  oil,                                                                    
which was  slightly better  than North  Slope oil,  came out                                                                    
favorably when  compared to other exporters.  Exporters with                                                                    
high costs, typically  had costs over $15  per barrel. Lower                                                                    
cost  jurisdictions had  costs in  the $10  to $15  dollar a                                                                    
barrel  range.  Jurisdictions  with  very  low  costs  could                                                                    
typically charge  higher government take  than jurisdictions                                                                    
with high costs.  Alaska was not badly  positioned at number                                                                    
nine of 28 in profitability.                                                                                                    
                                                                                                                                
1:09:00 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman observed  that Cook  Inlet oil  production                                                                    
was negative  in terms of  revenue. Mr. Van  Meurs clarified                                                                    
that  the analysis  pertained to  terms not  received funds.                                                                    
The  review was  based on  a comparison  of fiscal  systems.                                                                    
Cook Inlet with mature fields was in a later phase.                                                                             
                                                                                                                                
Co-Chair Stedman  observed that  the comparisons  were based                                                                    
on $80  per barrel and  questioned if the  comparisons would                                                                    
change  if the  per barrel  price increased.  Mr. Van  Meurs                                                                    
affirmed that per barrel price changed the comparisons.                                                                         
                                                                                                                                
1:10:13 PM                                                                                                                    
                                                                                                                                
Mr.  Van  Meurs,  in  response  to  a  question  by  Senator                                                                    
Wielechowski, explained that Cook  Inlet was used because it                                                                    
was  a  shallow water  comparison.  North  Slope terms  were                                                                    
compared  to   other  Arctic  jurisdictions   in  subsequent                                                                    
slides.                                                                                                                         
                                                                                                                                
Mr.  Van  Meurs,  in  response  to  a  question  by  Senator                                                                    
Wielechowski, explained why investment  would occur in Qatar                                                                    
or Russian,  which had  negative rates  of return.  The base                                                                    
cost rate in the comparison  was $20 per barrel. The typical                                                                    
cost in  Qatar was $5 to  $8 per barrel. Qatar  was analyzed                                                                    
at a higher cost than would be experience.                                                                                      
                                                                                                                                
Mr.  Van Meurs  reviewed the  color codes  used in  the cost                                                                    
comparisons  on  slide  27:  exporters  identified  in  blue                                                                    
compared  in  cost  with  Alaska;  exporters  identified  in                                                                    
yellow were  lower than Alaska; and  exporters identified in                                                                    
green were  much lower  than Alaska.  He concluded  that the                                                                    
government take in  low cost areas were higher  than in high                                                                    
cost areas.                                                                                                                     
                                                                                                                                
1:11:50 PM                                                                                                                    
                                                                                                                                
Mr.  Van  Meurs  looked  at   government  take  for  various                                                                    
jurisdictions. Alaska  rated 10  out of 28  jurisdictions in                                                                    
terms   of   attractiveness.   Alaska  was   not   unusually                                                                    
positioned  internationally  from  a  competitive  point  of                                                                    
view. Government  take was based  on $80 per  barrel. Alaska                                                                    
was at 70  percent government take at $80  per barrel, which                                                                    
was not  an unusual level  of government take  compared with                                                                    
other  exporters.  Nova  Scotia   and  Canada,  with  costly                                                                    
conditions, were on the lower side of government take.                                                                          
                                                                                                                                
1:13:59 PM                                                                                                                    
                                                                                                                                
Senator  Wielechowski observed  that Cook  Inlet had  a zero                                                                    
percent  tax  rate for  oil  and  a  12.5 percent  rate  for                                                                    
royalty  with large  credits. Mr.  Van Meurs  explained that                                                                    
the government take was lower  because the zero tax rate was                                                                    
limited  and  would  expire.  The time  frame  used  in  his                                                                    
comparisons  assumed a  decade before  production and  would                                                                    
fall  in the  new regime,  2022. There  would only  be three                                                                    
years at the low tax rate.                                                                                                      
                                                                                                                                
1:15:01 PM                                                                                                                    
                                                                                                                                
Mr. Van  Meurs concluded that  an increase to $120  a barrel                                                                    
would  not change  Alaska's relative  position, despite  the                                                                    
fact  that it  had  a price  progressive  system since  many                                                                    
other nations  also had price progressive  systems. For very                                                                    
high prices  the scale goes  "off the rails" but  Alaska was                                                                    
well  positioned   in  the  $80   to  $120  range   from  an                                                                    
international competitive view.                                                                                                 
                                                                                                                                
Co-Chair  Stedman asked  for a  definition of  "progressive"                                                                    
and   "regressive".  Mr.   Van   Meurs   clarified  that   a                                                                    
progressive  system   in  taxation  meant  that   the  total                                                                    
government take  increased proportionally with the  price; a                                                                    
regressive  system  would  result  in a  lowering  of  total                                                                    
government  take  proportionally  if  the  price  increased.                                                                    
Alaska's  system  under  the Alaska's  Clear  and  Equitable                                                                    
Share (ACES)  system was structured  so that  the government                                                                    
share  went up  disproportionally with  increased price  and                                                                    
the government would receive a  higher benefit of the total.                                                                    
Many nations  have progressive systems similar  to Alaska's;                                                                    
therefore,  Alaska's  relative  position  would  not  change                                                                    
significantly with higher prices.                                                                                               
                                                                                                                                
1:17:42 PM                                                                                                                    
                                                                                                                                
Mr. Van Meurs compared Alaska's  Arctic oil price under ACES                                                                    
to other jurisdictions. Cost in  the Arctic was dependent on                                                                    
the existence  of transportation  systems. He  observed that                                                                    
slide  30  showed jurisdictions  in  red  that were  without                                                                    
transportation; blue lines  indicated transportation systems                                                                    
in place. He  concluded that prices under ACES  were not out                                                                    
of  line   with  other  jurisdictions.  Arctic   costs  were                                                                    
relatively similar.                                                                                                             
                                                                                                                                
Mr.  Van  Meurs,  in  response to  a  question  by  Co-Chair                                                                    
Stedman,  explained  that  assumptions   were  based  on  an                                                                    
international   oil   price   of  $80   per   barrel,   with                                                                    
transportation  costs  netted  back.  Trans-Alaska  Pipeline                                                                    
System  (TAPS) transportation  costs were  $5 per  barrel of                                                                    
oil.  Russia  pipeline  transportation  costs  were  $7  per                                                                    
barrel  of  oil. Assumptions  were  made  for areas  without                                                                    
transportation.                                                                                                                 
                                                                                                                                
1:20:27 PM                                                                                                                    
                                                                                                                                
Mr.  Van Meurs  discussed  net present  value  on slide  31.                                                                    
Alaska compared  well with Norway and  Russia. Russian terms                                                                    
were  regressive; at  lower costs  Russian terms  would come                                                                    
out better than ACES. There were  still quite a few low cost                                                                    
Russian  fields in  development.  The  negative feature  for                                                                    
Russia was due to high costs.  Alaska was not onerous at $80                                                                    
a barrel.                                                                                                                       
                                                                                                                                
Mr.  Van  Meurs  observed  that  the  relationships  between                                                                    
Arctic nations  would remain  stable at  $120 per  barrel of                                                                    
oil, except  that Russia would improve  significantly due to                                                                    
its regressive system.                                                                                                          
                                                                                                                                
Co-Chair  Stedman asked  how  prospectivity  would be  dealt                                                                    
with  in the  basin's; and  questioned if  Greenland's basin                                                                    
was as rich as Alaska's.                                                                                                        
                                                                                                                                
1:22:34 PM                                                                                                                    
                                                                                                                                
Mr.  Van Meurs  discussed attractiveness  from a  geological                                                                    
point of view. He referred to  slide 32. Greenland had a low                                                                    
government take  and was offering favorable  terms since oil                                                                    
had  not been  discovered. Canadian  federal lands  had good                                                                    
prospectivity  but   had  not  constructed  a   large  scale                                                                    
transportation    system;    consequently,   the    Canadian                                                                    
government  had to  offer relatively  attractive terms.  The                                                                    
Alaskan  Chukcki Sea  had good  prospectivity (geology)  and                                                                    
good   government   take   levels.   He   spoke   to   other                                                                    
jurisdictions  and  observed  that  Iceland  had  near  zero                                                                    
prospectivity.   Russia's   Krasnoyarsk    area   had   been                                                                    
discovered  during  communist  times   and  was  already  in                                                                    
production. He  observed that opportunities were  present in                                                                    
the Bering  Sea since  Norway had concluded  agreements with                                                                    
Russia.  Russia offered  2010 export  duty  region terms  on                                                                    
many smaller fields, which lowered government take.                                                                             
                                                                                                                                
1:27:07 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  asked Mr. Van  Meurs to address  the issue                                                                    
of  over   100  percent  government  take.   Mr.  Van  Meurs                                                                    
explained that if a system  was not economic at a particular                                                                    
price and cost,  then the government take showed  up as over                                                                    
100  percent.  Government take  in  Russia  would be  at  80                                                                    
percent  with a  $120 per  barrel price  and $15  per barrel                                                                    
cost.  Russian government  take was  very sensitive  to cost                                                                    
and price assumptions.                                                                                                          
                                                                                                                                
Senator Egan asked if the  anticipated million barrels a day                                                                    
oil  production level  would include  Chukcki  oil. Mr.  Van                                                                    
Meurs explained that  his reference to one  million barrel a                                                                    
day production  relied on  available Alaskan  resources. The                                                                    
Chukchi Sea  alone could produce  half a million  barrels of                                                                    
oil a day, but it was not  clear if the oil would go through                                                                    
TAPS.  Discoveries  in the  Beaufort  Sea  could go  through                                                                    
TAPS.  The  objective  of  the   governor  was  to  increase                                                                    
production, not to get more oil through the line.                                                                               
                                                                                                                                
1:29:30 PM                                                                                                                    
                                                                                                                                
Senator  Wielechowski  questioned  how government  take  was                                                                    
calculated. He observed  that the Shell Oil  Company paid $3                                                                    
billion  in  signature  bonus costs  when  the  leases  were                                                                    
bought in the Chukcki and  Beaufort Seas. The Great Bear oil                                                                    
company  paid $8  or  $9 million  when  it acquired  500,000                                                                    
acres.  Studies that  factor in  signature bonus  costs show                                                                    
the  Chukcki  and  Beaufort Outer  Continental  Shelf  (OCS)                                                                    
government take  would spike  to 77  percent. Mr.  Van Meurs                                                                    
did not necessarily agree. He  emphasized that the bonus was                                                                    
dependent  on  size of  the  anticipated  discovery. The  $3                                                                    
million  bonus would  be  immaterial  in overall  government                                                                    
take in compared to the size of oil field.                                                                                      
                                                                                                                                
1:31:45 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  asked for  clarification on  upfront bonus                                                                    
costs  versus the  net present  value  calculation. Mr.  Van                                                                    
Meurs   explained  that   assumptions  about   bonuses  were                                                                    
included  in  government take  since  it  was a  payment  to                                                                    
government. Government  take came  out at  the first  day of                                                                    
cash  flow,  so   a  10  percent  net   value  discount  was                                                                    
important, as  front ended bonuses weighed  heavily. Bonuses                                                                    
were  not  as  significant in  the  undiscounted  government                                                                    
take.                                                                                                                           
                                                                                                                                
1:32:46 PM                                                                                                                    
                                                                                                                                
Mr. Van Meurs concluded that  ACES was tougher than a number                                                                    
of  other jurisdictions.  Alaska  was  positioned well  even                                                                    
among Arctic jurisdictions.                                                                                                     
                                                                                                                                
Mr. Van  Meurs reviewed  slide 33  and observed  that Alaska                                                                    
compared well  to other jurisdictions in  front-end loading.                                                                    
Investors considered  when a  government takes  its payment.                                                                    
Governments  that  can wait  have  a  positive impact  (back                                                                    
ended system); taking government  share upfront has negative                                                                    
impact  on   profitability  (front-ended).   Discounted  and                                                                    
undiscounted   government   take  comparisons   showed   the                                                                    
relative degree  that governments take their  revenues early                                                                    
in  terms of  value.  Low numbers  signify that  governments                                                                    
were  beneficial in  terms of  their take.  Governments with                                                                    
high numbers  on slide 33  were not beneficial  to investors                                                                    
in terms of  government take. Alaska was  the most favorable                                                                    
of the Arctic jurisdictions due  to tax credits that provide                                                                    
early  benefits.  Russia  required export  duties  from  the                                                                    
start; much  like paying a  royalty. Alaska had  a favorable                                                                    
distribution on a worldwide basis.                                                                                              
                                                                                                                                
1:36:39 PM                                                                                                                    
                                                                                                                                
Mr. Van  Meurs discussed slide  34 and noted  the importance                                                                    
of incentives  given by government in  terms of exploration;                                                                    
how much governments  shared in exploration in  terms of tax                                                                    
deductions. A government  that losses, in the case  of a dry                                                                    
hole,  shares in  the  geologic risk.  Alaska  was the  best                                                                    
jurisdiction in the  world along with South  Africa in terms                                                                    
of sharing geological risk.                                                                                                     
                                                                                                                                
1:38:30 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  asked  how basins  would  be  ranked  for                                                                    
geographical risk  outside of  the tax  code. Mr.  Van Meurs                                                                    
clarified that it was difficult  to give a single geological                                                                    
risk  number for  the entire  North Slope;  some areas  were                                                                    
relatively high,  others were not.  He assumed that  one out                                                                    
of  five exploration  wells would  be discovered,  which was                                                                    
generous   for   some   jurisdictions.  Only   Iceland   was                                                                    
considered   a  high   risk.   The   government  of   Alaska                                                                    
participated in geological risk to an unusual rate.                                                                             
                                                                                                                                
1:40:47 PM                                                                                                                    
                                                                                                                                
Senator  Thomas asked  how Alaska  stacked up  against North                                                                    
Dakota and Texas.  He also questioned if the  state would be                                                                    
a high risk sharing  government without exploration credits.                                                                    
Mr. Van  Meurs clarified  that the risk  factor was  tied to                                                                    
the high tax credit. North  Dakota did not have tax credits.                                                                    
Alaska was the  most favorable in the United  States and one                                                                    
of top two in the world.                                                                                                        
                                                                                                                                
Senator Paskvan  observed that  Alaska had  a net  system as                                                                    
opposed to  a gross  system and  questioned if  deduction of                                                                    
operating  and capital  expenses  indicated government  risk                                                                    
sharing. Mr.  Van Meurs clarified  that he was  referring to                                                                    
geological  risk  sharing  not economic  risk  sharing.  The                                                                    
concept of ACES was to  share in economic risk. He concluded                                                                    
that economic  risk sharing was  embedded in ACES,  but that                                                                    
there was extremely high geologic risk sharing.                                                                                 
                                                                                                                                
1:43:03 PM                                                                                                                    
                                                                                                                                
Senator  Thomas asked  for comparisons  of overall  economic                                                                    
risk. Mr. Van Meurs did  not have economic or political risk                                                                    
charts in  his study. He  observed that in a  profit sharing                                                                    
system, in  general, the government observes  more risk than                                                                    
in a plain royalty system.                                                                                                      
                                                                                                                                
1:44:41 PM                                                                                                                    
                                                                                                                                
Mr. Van  Meurs concluded that  the government take  of about                                                                    
70 to 75  percent for Alaska was reasonable  compared to the                                                                    
other  exporters for  existing operations.  He felt  that 65                                                                    
percent for  existing production gave  away too much;  70 to                                                                    
75 percent  was well in the  international competitive scale                                                                    
for existing  production. He observed  that SB  192 retained                                                                    
significant revenues on existing production  in the 74 to 76                                                                    
percent  government take  range, but  did not  think it  was                                                                    
necessarily a serious bill in  terms of economic concessions                                                                    
since there was  no cap. He concluded Alaska  also offered a                                                                    
favorable time distribution of the  government take and very                                                                    
favorable  sharing  of  geological  risk at  the  70  to  75                                                                    
percent range.                                                                                                                  
                                                                                                                                
1:45:50 PM                                                                                                                    
                                                                                                                                
Mr.  Van Meurs  reviewed new  production as  demonstrated on                                                                    
slide 37. He  observed that Alaska light  oil production was                                                                    
rapidly  declining (5  percent  per year).  Internationally,                                                                    
there were  not many  jurisdictions in  declining production                                                                    
mode;  examples were  Alberta, Gabon,  Trinidad and  Tobago.                                                                    
Both Gabon  and Trinidad  applied a 12  percent drop  to new                                                                    
blocks in  order to attract  new investment in an  effort to                                                                    
offset  declining production.  Terms and  conditions on  old                                                                    
blocks remain unchanged.                                                                                                        
                                                                                                                                
1:47:03 PM                                                                                                                    
                                                                                                                                
Mr.  Van Meurs  concluded  that Gabon,  Trinidad and  Tobago                                                                    
were  three jurisdictions  with  declining conventional  oil                                                                    
production.  There were  not many  in the  "peer group"  for                                                                    
Alaska  that   would  be  exporting  jurisdictions   with  a                                                                    
declining conventional oil production.                                                                                          
                                                                                                                                
Senator Paskvan  observed that the  administration indicated                                                                    
that the  anticipated decline [in  production] from  2010 to                                                                    
2020 would be 2.1 percent.  Mr. Van Meurs clarified that his                                                                    
calculations  of  five  percent   decline  were  taken  from                                                                    
published  charts used  as background  information from  the                                                                    
governor for HB 110, which seemed reasonable.                                                                                   
                                                                                                                                
1:50:00 PM                                                                                                                    
                                                                                                                                
Mr.  Van Meurs  observed that  Canada had  moved in  another                                                                    
direction from  the United  States and  competed differently                                                                    
than  Gabon, Trinidad  and Tobago  in  their fiscal  system.                                                                    
Canada designed  royalties on formulas  with a system  for a                                                                    
wide  range of  economic conditions.  Royalties were  higher                                                                    
when economics  were more  profitable; royalties  were lower                                                                    
in less  profitable situations. Canada competes  through the                                                                    
structure of government take, not the level.                                                                                    
                                                                                                                                
1:51:20 PM                                                                                                                    
                                                                                                                                
Mr. Van  Meurs noted  that slide 41  demonstrated government                                                                    
take on  small high cost wells  ($50 per barrel of  oil cost                                                                    
and  10,000 barrels  cumulative)  to a  rich  well ($20  per                                                                    
barrel of  oil cost  and 1,000,000 barrels  cumulative). The                                                                    
Texas  well had  government take  over 100  percent. Alberta                                                                    
stayed  almost flat  and went  up with  the more  profitable                                                                    
field.  He  concluded that  when  there  was new  oil  under                                                                    
higher costs (Alberta) the  system automatically adjusted to                                                                    
the new  situation, which is  why there is so  much drilling                                                                    
in  Alberta,  as   both  high  and  lower   cost  wells  are                                                                    
profitable.                                                                                                                     
                                                                                                                                
1:52:42 PM                                                                                                                    
                                                                                                                                
Mr. Van Meurs reviewed  slide 42, which demonstrated typical                                                                    
government take  on oil wells  in North America.  Canada was                                                                    
more  attractive  than the  United  States  due to  improved                                                                    
Canadian  terms  over  the past  15  years.  Canadian  terms                                                                    
reflect that it had declining oil production.                                                                                   
                                                                                                                                
Senator Wielechowski  asked if  private land owner  take was                                                                    
included  in the  government take  for Texas  and Louisiana.                                                                    
Mr.  Van  Meurs  affirmed  and  observed  that  it  was  not                                                                    
uncommon  to pay  25 to  30 percent  for government  take in                                                                    
those jurisdictions.                                                                                                            
                                                                                                                                
Senator  French  queried  how many  private  contracts  were                                                                    
reviewed  for  an  average. Mr.  Van  Meurs  explained  that                                                                    
contacts in Texas and Louisiana provided an average.                                                                            
                                                                                                                                
1:54:55 PM                                                                                                                    
                                                                                                                                
Senator  French wondered  if slide  42 could  be applied  to                                                                    
slide  32. Mr.  Van Meurs  pointed out  that North  American                                                                    
wells had  a different  price structure than  Arctic fields.                                                                    
He stated that the chart was  based on a specific cash flow.                                                                    
He stressed that wells and fields were taxed differently.                                                                       
                                                                                                                                
1:56:00 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman concluded  that the  North Dakota,  Bakken                                                                    
Horizon oil well  at 50 percent (government take)  was not a                                                                    
direct  correlation  on  Alaska's  light oil  at  70  to  75                                                                    
percent. Mr.  Van Meurs responded  that Alaska  was compared                                                                    
with  world exporters.  He added  that a  special shale  oil                                                                    
comparison would be made later in the presentation.                                                                             
                                                                                                                                
1:56:40 PM                                                                                                                    
                                                                                                                                
Mr. Van Meurs noted that  Canada had become more attractive.                                                                    
In  1997, the  typical tax  rate in  Canada was  45 percent;                                                                    
since  then  both  federal and  provincial  governments  had                                                                    
substantially lowered  the tax rate to  25 percent. Canadian                                                                    
provinces  promoted  progressivity  in royalty  formulas  to                                                                    
encourage companies to move into  higher cost resources. The                                                                    
federal and  Alaskan government takes  in the  United States                                                                    
stayed  the same.  Canada  had pulled  ahead  of the  United                                                                    
States in terms of investors.                                                                                                   
                                                                                                                                
1:58:11 PM                                                                                                                    
                                                                                                                                
Mr.  Van  Meurs   concluded  that  a  10   percent  drop  in                                                                    
government  take  for  new production  was  reasonable  when                                                                    
compared to jurisdictions facing  a declining production. He                                                                    
concluded  that the  60 to  65 percent  government take  for                                                                    
more costly "new" light oil  resources as proposed in HB 110                                                                    
and  HB 17  was  a reasonable  level  from an  international                                                                    
perspective.                                                                                                                    
                                                                                                                                
1:59:11 PM                                                                                                                    
                                                                                                                                
Mr. Van  Meurs spoke to  heavy oil. He observed  that Alaska                                                                    
was well endowed with heavy oil resources in two groups:                                                                        
                                                                                                                                
   · Heavy Oil: 15 - 22 degrees API; and                                                                                        
   · Ultra-heavy Oil or Bitumen: 8 - 15 degrees API.                                                                            
                                                                                                                                
The  ultra-heavy oil  (8 to  15  degrees API)  could not  be                                                                    
transported by  pipeline or marine  tanker and needed  to be                                                                    
produced with  special production methods. Heavy  oil (15 to                                                                    
22   degrees  API)   could   typically   be  produced   with                                                                    
conventional  production methods,  since  oil  flows to  the                                                                    
wells. The  oil could  also be  transported by  pipeline and                                                                    
marine tankers.                                                                                                                 
                                                                                                                                
2:00:43 PM                                                                                                                    
                                                                                                                                
Mr.  Van Meurs  observed that  Alaska has  significant heavy                                                                    
oil in  the 15 - 22  degrees API: West Sak,  Schrader Bluff,                                                                    
Orion, Polaris, Nikaitchuq. Ultra Heavy  Oil in the 10 to 15                                                                    
degrees API was  also in Alaska in large volume  in the Ugnu                                                                    
deposits. Separate  fiscal terms  were required for  the two                                                                    
groups.                                                                                                                         
                                                                                                                                
2:01:09 PM                                                                                                                    
                                                                                                                                
Mr.  Van  Meurs  noted  that heavy  oil  compared  in  North                                                                    
America  to  Alberta   oil  sands,  at  43   to  55  percent                                                                    
government  take depending  on the  oil price.  In order  to                                                                    
compete, the  government take for ultra-heavy  oil in Alaska                                                                    
had  to  be  similar  to Alberta.  Alberta  also  had  price                                                                    
progressivity. At  $120 per dollar a  barrel government take                                                                    
would  be closer  to 55  percent; and  at $60  per dollar  a                                                                    
barrel  government  take  would  be closer  to  43  percent.                                                                    
Alberta was an immense  economic investment opportunity with                                                                    
500 billion of recoverable oil.                                                                                                 
                                                                                                                                
Co-Chair Stedman  addressed the $500 billion  barrels of oil                                                                    
in Alberta.  Mr. Van  Meurs stressed  that there  were 1,400                                                                    
billion  in-place barrels  of reserves  in  the Alberta  oil                                                                    
sands.  Current  special   steam  injection  technology  was                                                                    
expected to recover 30 to 40 percent of in-place oil.                                                                           
                                                                                                                                
2:03:28 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  queried the number of  recoverable barrels                                                                    
in Alaska. Mr.  Van Meurs replied that there  were 5 billion                                                                    
barrels of  recoverable oil  in Alaska.  He pointed  out the                                                                    
level of  competition with Canada with  500 billion barrels,                                                                    
which were comparable  to the heavier oil  in Alaska. Alaska                                                                    
was  fortunate  that  $4  billion  of  the  $5  billion  was                                                                    
lighter, better quality oil.                                                                                                    
                                                                                                                                
2:04:46 PM                                                                                                                    
                                                                                                                                
Senator Wielechowski queried  the cost per barrel  of oil in                                                                    
Canada and Alaska. Mr. Van  Meurs replied that the operating                                                                    
and  capital  cost  per barrel  was  approximately  $30  per                                                                    
barrel of  oil. He observed  that $60  to $70 per  barrel of                                                                    
oil was  needed to be  economic. He estimated that  the cost                                                                    
per barrel in  Alaska would be comparable  but slightly more                                                                    
expensive with  Arctic conditions.   He stressed  that there                                                                    
were unique problems related to  the process and development                                                                    
in Alaska.                                                                                                                      
                                                                                                                                
Senator  Wielechowski asked  the net  present value  rate of                                                                    
return for Canadian  heavy oil versus Alaskan  heavy oil. He                                                                    
questioned  if  government  take,   net  present  value,  or                                                                    
internal rate  of return should be  considered in comparison                                                                    
to Canada.  Mr. Van Meurs  noted that his on  shore studies,                                                                    
which were  not yet published,  would address the  issue. He                                                                    
noted that  investors look at  all the criteria;  all needed                                                                    
to be attractive.                                                                                                               
                                                                                                                                
2:07:57 PM                                                                                                                    
                                                                                                                                
Mr. Van Meurs concluded that  heavy oil in Alaska was better                                                                    
quality and could  handle a higher government take  55 to 60                                                                    
percent. Ultra  heavy Oil  had to  compete with  Alberta and                                                                    
should have lower government take.                                                                                              
                                                                                                                                
2:08:32 PM                                                                                                                    
                                                                                                                                
Mr.  Van Meurs  cautioned, that  at  that time,  it was  not                                                                    
known  whether shale  oil production  would  be possible  in                                                                    
Alaska.  There  were  large oil  shale  deposits  at  around                                                                    
10,000 feet deep. Companies would  have to create reservoirs                                                                    
to produce  the oil by  "fracking" to  make the oil  flow to                                                                    
the  well. The  problem with  shale oil  was that  different                                                                    
reservoirs  had  different fracking  characteristics.  Pilot                                                                    
projects  would be  required to  identify whether  reservoir                                                                    
characteristics were of a nature  that would permit fracking                                                                    
and would result  in a sufficient flow of oil  to make shale                                                                    
oil  economic.  He stressed  the  importance  for Alaska  to                                                                    
identify,  through pilot  projects,  whether  shale oil  was                                                                    
economic. Shale oil would likely be light oil.                                                                                  
                                                                                                                                
2:11:26 PM                                                                                                                    
                                                                                                                                
Senator   French  referred   to   development  of   fracking                                                                    
technology.  Mr.   Van  Meurs  acknowledged   that  fracking                                                                    
technology had  improved but stressed  that some  rocks were                                                                    
not frackable.  Clay would  not fracture.  He noted  that it                                                                    
was difficult  to predict whether  shale would  be frackable                                                                    
without pilot projects. Fortunately,  much of Alaska's shale                                                                    
oil shale was located along the  highway to Prudhoe Bay.  He                                                                    
stressed that sufficient fiscal  encouragement would need to                                                                    
be given due to the additional cost of pilot tests.                                                                             
                                                                                                                                
2:13:12 PM                                                                                                                    
                                                                                                                                
Mr. Van  Meurs reviewed slide  51, North American  Wells. He                                                                    
observed that  government take for  shale oil in  the United                                                                    
States  was  approximately  60  percent  across  all  lands.                                                                    
Canada  was  the most  attractive  (40  percent). Shale  oil                                                                    
would be  more expensive in  Alaska than in North  Dakota or                                                                    
Wyoming   due  to   difficult   conditions   and  depth   of                                                                    
reservoirs.  He concluded  that Alaska  would need  to offer                                                                    
governments take of under 60 percent.                                                                                           
                                                                                                                                
Mr.  Van  Meurs, in  response  to  a question  by,  Co-Chair                                                                    
Stedman, reiterated  that the analysis  used $80  per barrel                                                                    
of oil. The government take  would drop slightly at $120 per                                                                    
barrel of oil due to regressive fiscal systems.                                                                                 
                                                                                                                                
Senator Wagner asked how the  calculations were derived. Mr.                                                                    
Van  Meurs   explained  that  they  utilized   contact  with                                                                    
federal,  state  and  private  land  managers  to  ascertain                                                                    
details   of  the   terms.  The   fiscal   terms  for   each                                                                    
jurisdiction were available in North American study.                                                                            
                                                                                                                                
2:16:13 PM                                                                                                                    
                                                                                                                                
Senator Wielechowski questioned  why undiscounted government                                                                    
take was  used and asked  if it  was realistic. He  asked if                                                                    
Alaska's  discounted rate  would  be higher  or lower  [than                                                                    
other  jurisdictions].  Mr.  Van Meurs  explained  that  his                                                                    
study used 10 percent discounted  government take as well as                                                                    
undiscounted government  take. Governments liked  to compare                                                                    
on undiscounted  government take  because of long  term cash                                                                    
flow. He stated that he  would use a five percent government                                                                    
take rate for Alaska.  Undiscounted government take was used                                                                    
for ease of comparison.                                                                                                         
                                                                                                                                
Senator  Wielechowski asked  if a  discounted rate  would be                                                                    
more appropriate  with the credits offered  by Alaska. There                                                                    
were large  upfront costs to  the state for  exploration and                                                                    
development. Mr. Van Meurs affirmed  and looked at slide 33,                                                                    
which  showed  that  Alaska  was  the  most  favorable  when                                                                    
compared for  distribution of government take.  He concluded                                                                    
that Alaska  was looking at  a government  take of 45  to 55                                                                    
percent in order  to attract long term  investment to Alaska                                                                    
(assuming  the pilot  tests demonstrate  that shale  oil was                                                                    
economical).  He emphasized  Alaska  might have  significant                                                                    
shale oil  potential and emphasized  the need to  define and                                                                    
encourage  large  scale  project  testing  and  the  immense                                                                    
importance to the state of Alaska to set terms.                                                                                 
                                                                                                                                
2:19:54 PM                                                                                                                    
                                                                                                                                
Mr. Van Meurs  spoke to natural gas. The  Pacific market was                                                                    
very  competitive. Current  major new  LNG suppliers  in the                                                                    
Pacific  LNG market  were Australia  and  Papua New  Guinea.                                                                    
Government  take  was typically  in  the  45 to  52  percent                                                                    
range. He  stressed that  offshore and  onshore conventional                                                                    
gas  production in  China was  also  significant. China  had                                                                    
1300 trillion cubic  feet (Tcf) of coal bed  methane gas and                                                                    
1100 Tcf  of shale gas  and one-third of  the unconventional                                                                    
gas resources  in the world.  China was  actively developing                                                                    
resources with  international companies. He  emphasized that                                                                    
China  might  be  an  exporter   not  importer  of  gas.  He                                                                    
cautioned  not to  rely  on China  as  an importer.  China's                                                                    
government  take was  unusually low  at 42  percent for  dry                                                                    
gas.  China was  purchasing companies  experienced in  shale                                                                    
oil  development and  training on  an enormous  scale. China                                                                    
also had  the financial  resources to develop  the resource.                                                                    
He  concluded that  China  was  aggressively developing  its                                                                    
large  resources.  There  were some  problems  with  Chinese                                                                    
production sharing contracts  and bottlenecks with training.                                                                    
He reiterated  that Alaska should  not count on China  as an                                                                    
import nation in ten years.                                                                                                     
                                                                                                                                
2:22:36 PM                                                                                                                    
                                                                                                                                
Mr.  Van  Meurs reviewed  slide  54,  Arctic Gas.  The  most                                                                    
interesting country on  the chart was Russia  with the Yamal                                                                    
Peninsula  LNG  project.  The Yamal  Peninsula  project  was                                                                    
similar  to Prudhoe  Bay with  40 Tcf  of gas.  Most of  the                                                                    
shores were  surrounded by  six feet of  packed ice  and had                                                                    
shallow dredging.   Russian government  take for gas  was 24                                                                    
percent,  the  lowest  in the  world.  The  Russian  company                                                                    
Novatek, with the help of  the French company Total, planned                                                                    
to build  ice breakers and  LNG tankers to ship  year around                                                                    
into  Asian markets.  In eight  years, Russian  tankers were                                                                    
anticipated to  be through the Bering  Straight to establish                                                                    
year around transportation across Arctic paid with by LNG.                                                                      
                                                                                                                                
2:25:19 PM                                                                                                                    
                                                                                                                                
Mr.  Van   Meurs  concluded  Alaska  would   have  to  offer                                                                    
governments take in  the range of 45 to 55  percent in order                                                                    
to be  competitive for  the production  of gas;  Prudhoe Bay                                                                    
might be slightly higher.                                                                                                       
                                                                                                                                
Mr. Van  Meurs summarized that  in order to  be competitive;                                                                    
Alaska needed  to develop a  fiscal system that  offered the                                                                    
following government takes for the various resources:                                                                           
                                                                                                                                
   · Existing light oil production: 70 - 75 percent                                                                             
   · New light oil production: 60 - 65 percent                                                                                  
   · Heavy Oil: 55 - 60 percent                                                                                                 
   · Ultra Heavy Oil: 45 - 55 percent                                                                                           
   · Shale Oil: 45 - 55 percent                                                                                                 
   · Natural Gas - new gas fields: 45 - 55 percent                                                                              
   · Natural Gas - Prudhoe Bay: 55 - 60 percent                                                                                 
                                                                                                                                
2:26:37 PM                                                                                                                    
                                                                                                                                
Senator Paskvan referred  to slide 37. He  observed that the                                                                    
Department  of  Natural   Resources  forecasted  an  average                                                                    
decline rate at 2.1  percent from FY 10 - FY  20 in a letter                                                                    
dated 3/22/2012. Mr. Van Meurs had no opinion.                                                                                  
                                                                                                                                
Senator Wagner  returned to  slide 39  and asked  why Gabon,                                                                    
Trinidad  and Tobago  had recently  reduced  their terms  on                                                                    
government  take  by 12  percentage  points.  Mr. Van  Meurs                                                                    
explained  that   there  was  an  attempt   to  attract  new                                                                    
investors.  There were  no investors  prior to  the drop  in                                                                    
terms.                                                                                                                          
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
2:29:25 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 2:29 PM.                                                                                           

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