Legislature(2011 - 2012)SENATE FINANCE 532
02/14/2012 01:00 PM Senate FINANCE
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| Presentation by Pedro Van Meurs on Arctic and Alaska Oil Economics: Session Four | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
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ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
SENATE FINANCE COMMITTEE
February 14, 2012
1:03 p.m.
1:03:02 PM
CALL TO ORDER
Senator Bert Stedman, Co-Chair 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 Joe Thomas
SENATE FINANCE COMMITTEE MEMBERS ABSENT
Senator Lesil McGuire, Vice-Chair
Senator Donny Olson
SENATE RESOURCE COMMITTEE MEMBERS PRESENT
Senator Bill Wagner, Co-Chair
Senator Wielechowski, Vice-Chair
Senator Bert Stedman
Senator Hollis French
Senator Gary Stevens
SENATE RESOURCE COMMITTEE MEMBERS ABSENT
Senator Joe Paskvan, Co-Chair
Senator Lesil McGuire
ALSO PRESENT
Dr. Pedro Van Meurs, President, Van Meurs Corporation,
Consultant, Legislative Consultant; Senator Cathy Giessel;
SUMMARY
^PRESENTATION BY PEDRO VAN MEURS ON ARCTIC AND ALASKA OIL
ECONOMICS: SESSION FOUR
1:04:08 PM
DR. PEDRO VAN MEURS, PRESIDENT, VAN MEURS CORPORATION,
CONSULTANT, LEGISLATIVE CONSULTANT, provided members with
two PowerPoint presentations: Policy Options for Alaska Oil
and Gas; and Addendum to "Policy Options for Alaska Oil and
Gas" (copy on file). He explained the presentation would
consider how the architecture for existing oil and new oil
discussed in previous sessions could be applied to heavy
oil, shale oil and natural gas.
Mr. Van Meurs observed that the major heavy oil development
may face significant challenges, due to difficulties
assuring the total gravity in the TAPS line was adequate
for transportation. Major heavy oil development might have
to be stimulated in conjunction with expansion of light oil
projects, with possible condensate and liquid stripping
projects from gas fields (such as Point Thomson) and/or
construction of GTL plant(s) (with subsequent cracking of
waxy components). Heavy oil production needed to part of a
broader plan.
1:06:28 PM
Mr. Van Meurs stressed the need for special terms for heavy
oil with a lower government take. He observed that 40,000
barrels of oil per day (bopd) heavy oil was being produced
on the North Slope. He stressed the difficulty in
determining a fair decline curve and pointed out the small
volume of heavy oil. He proposed that heavy oil not be
separated by class.
1:08:49 PM
Mr. Van Meurs recommended terms for heavy oil production
based on the Petroleum Profits Tax (PPT) as follows:
· PPT based on a flat rate of 25 percent;
· 20 percent tax credit; and
· A 15 percent allowance based on the gross value of the
heavy oil as special deduction for the determination
of the PPT.
Mr. Van Meurs advised the severance feature start at a
higher price of $160 per barrel to protect government take
at higher levels.
Mr. Van Meurs explained that government take could be
brought down without creating problems through a 15 percent
allowance based on the gross value of heavy oil. At $100
per barrel of oil, $15 would be deducted before PPT was
calculated; PPT would be based on $85 per barrel of oil.
There would be one more line on the tax return for the
number of barrels multiplied by 15 percent of value.
Mr. Van Meurs addressed the issue of a negative PPT. A
floor price would be initiated for the purpose of
calculating PPT at a price that would never be lower than
$55 per barrel escalated with inflation. He observed that
the calculations might need fine tuning due to their
sophistication. Problems with negative PPT would occur if
the tax credit were greater than 20 percent.
Mr. Van Meurs summarized that the system would only need
two adjustments for new oil production for heavy oil: a 15
percent allowance and a floor price.
1:12:38 PM
Senator French asked where heavy oil would be measured; oil
was measured downstream of production facilities. Heavy oil
would join the production stream somewhere above the
production facility. Mr. Van Meurs explained that the
measurement would be field by field. The Department of
Natural Resources would designate fields as "heavy oil"
There might be difficulty measuring some fields precisely.
A methodology would be needed to calculate holdings since
ownership would be different for different fields. The
worldwide practice was to establish a simple test separator
for field tests to extrapolate, which would require
additional investment. He believed that Alaska had
sufficient technological advancement.
1:15:09 PM
Senator French observed that heavy oil deposits on the
North Slope might overlay different viscosities. He asked
how often fields overlay and comingle. Mr. Van Meurs did
not suggest that gravity content be tracked as oil was
produced. Any reservoir could have layers of heavy and
light oil. He recommended that entire fields be labeled
based on described criteria and classification. He did not
see any problem establishing criteria.
1:17:48 PM
Senator Wielechowski referred to previous statements by Mr.
Van Meurs, which he felt were in conflict.
Proposal for a Profit Based, Production Tax for
Alaska, February 14, 2006, by Dr. Pedro van Meurs,
page 138:
"The fiscal proposal of a 25 percent tax rate and a 20
percent credit rate will provide a strong stimulus for
heavy oil developments through the considerable
downside price risk protection this system provides
and the significant improvement in IRR and NPV@10
percent under current long term price projections.
There is no need for further incentives. Such
incentives would unreasonably lower the revenues of
Alaska for no significant added benefit in economic
stimulus."
North American Report, Recommended Fiscal Changes for
North American jurisdictions:
"For large unconventional or high cost resource
projects it can be recommended to introduce profit
sharing royalties or taxes, similar to the Alberta
royalties for oil sands, the net profits interest for
shale gas in Northeast British Columbia, the royalties
in Newfoundland and Nova Scotia offshore, or the
petroleum profits tax in Alaska."
Mr. Van Meurs explained that the PPT structure was entirely
suitable for development of heavy oil and ideal over a
fixed royalty structure. He originally recommended the PPT
structure in 2006 because it was the proper architecture
for development of heavy oil. He emphasized that he had not
changed his recommendation regarding the architecture, but
emphasized there was a different competitive environment in
2012. Competition with Alberta required a greater
competitive environment than 2006 when costs were lower.
The allowance was introduced in light of greater
competition and higher costs. He concluded the structure
was still viable if it were kept simple.
1:22:05 PM
Co-Chair Stedman spoke to of capital expenditures and asked
if they were included in the 25 percent credit. Mr. Van
Meurs did not recommend any changes to the capital
structure imbedded in PPT.
Mr. Van Meurs reviewed recommendations for ultra-heavy oil,
which would be more aggressive: PPT based on a flat rate of
25 percent. He thought government take would still be
somewhat higher than Alberta but advised that government
take and even royalties might need to be reduced if there
were no takers. He stressed that the market should be
tested before any reductions.
1:24:31 PM
Mr. Van Meurs discussed slide 92 and indicated that ultra-
heavy oil could present problems in the pipeline. Alberta
used an up-grader to create a mixture of light product
called synthetic crude oil and coke. The synthetic crude
oil was equal in quality to West Texas Intermediate (WTI)
and could be put directly into the pipeline. The coke would
be used to fuel the plant. He recommended that Alaska
upgrade ultra-heavy oil, which would solve the pipeline
issue with additional quality oil.
Mr. Van Meurs observed that Alberta permitted a "feed
price" into the up-grader. The value of ultra-heavy oil or
Alberta oil sands would be equal to 65 percent of the value
of the synthetic oil that would be produced. The feed
price would be the basis for royalties and PPT and would
only pay corporate income tax on the upgrader, since this
was in fact a mid-stream type operation. The same concept
was applied in Alberta for oil sands and recommended for
refineries in Alaska.
1:28:00 PM
Senator Wielechowski referred to Alaska's corporate tax
provisions and questioned if the lack of separate
accounting allowed the write-off of bad investments made
outside of Alaska. Mr. Van Meurs felt that Alaska's system
of taxation was a little cumbersome and complicated the
formula used above.
Senator Wielechowski asked if Mr. Van Meurs would recommend
separate accounting in Alaska to allow companies to write-
off investments and level the playing field. Mr. Van Meurs
affirmed that he has always been a strong supporter for
calculating state corporate tax based only on costs and
revenues attributed to development or production in Alaska.
He felt that Alaska's ability to provide incentives was
impaired by the tax system.
1:30:35 PM
Mr. Van Meurs reviewed slide 93, which was an overview of
all the terms for oil. He stressed that a wide range of
government take could be created with simple allowances,
within PPT and without changing the royalty or corporate
income tax. He concluded that Alaska had flexibility to
attract investment to "just about every resource that
Alaska has." Royalties could be lowered if the market
demanded over time. Alaska would compare favorably with
other major producers such as Columbia. He recommended
testing the market first.
1:32:38 PM
Mr. Van Meurs observed that shale oil was risky and could
be given the same terms as the terms for ultra-heavy oil.
However, there was a small probability that the shale oil
operations might turn out to be rather profitable if
fracking operations were very successful and primarily
light oil was produced. He suggested that introduction of
an R-factor in the case of shale oil would be wise to allow
adjustment if it was unusually profitable. The R-factor
would automatically correct.
1:35:18 PM
Mr. Van Meurs spoke to slide 95 and recommended that
natural gas be separated into two groups: new fields that
needed to be explored (Point Thomson) and associated fields
(Prudhoe Bay) where the drilling and field development
costs had been spent. He acknowledged that Governor Parnell
preferred to wait for discussions with major oil companies,
but recommended terms were established for both types of
gas. He advised a more aggressive approach and pointed out
that Alaska did not want to be dependent on major oil
companies for development. Announcing terms would enhance
the state's bargaining position. New gas needed to be very
attractive. The only way to export gas was as LNG. He
observed there were two concepts for development: develop
LNG directly from the North Slope, competing with Russia
through tankers, which would be economically feasible, but
not necessarily political acceptable; or through a
pipeline, which would be acceptable politically but not
necessarily economical. Taking new gas on-stream would be a
major undertaking that needed to be aggressive to be
competitive. He suggested a 25 percent allowance [of the
gross value of the gas revenues]. The severance feature was
tougher, starting at a net-back of $8/MMBtu. A floor net
back gas price would be necessary.
1:39:38 PM
Mr. Van Meurs suggested a 15 percent allowance would be
sufficient for Prudhoe Bay gas. He reiterated that the
state would be in a difficult and competitive position in
terms of gas development. He recommended that PPT be
modified as a first step; and that legislators test the
market.
Senator Wielechowski asked for a breakdown of government
take. Mr. Van Meurs promised to provide the breakdown for
each recommendation.
1:41:50 PM
Mr. Van Meurs noted that the proposed fiscal terms could be
provided for a simple to administer overall system and
would set terms for all possible oil and gas investments.
All resources would have 25 percent PPT and 20 percent tax
credit, which would allow consolidation of all resources
into one tax return. The base price, increment, change
price, next increment and maximum value would change, but
the concept would remain the same for each resource. An
allowance and floor price would be introduced for heavy
oil. Shale oil would also receive an R-factor as the only
resource capable of a huge variation in profitability. The
system would be simple, easy to implement and deal with all
systems.
Senator Wielechowski asked if industry had indicated that
the proposed system would result in increased investment.
Mr. Van Meurs had no indication from industry but believed
in the market. He stressed that if the terms were clear to
investment groups around the world that the state would
know relatively quickly (days to a year), if the terms were
well set. He was confident that investors would come with
competitive terms, even if they were not the major
companies. He pointed out that major oil companies were in
an extreme harvesting mode.
1:47:16 PM
Senator Wielechowski observed that the number of companies
doing business in Alaska had tripled, with all-time highs
in investments. Different consultants had recommended
different concepts. The concept adopted by the state of
Alaska was depicted in a number of presentations by Gaffney
and Cline and Associates. The philosophy of "portfolio
blending" was used to encourage production in heavier
fields since investors would lower their overall tax rate.
He did not think it was completely accurate to call ACES a
net profits tax; ACES encouraged reinvestment through cash
flow. He suggested that Mr. Van Meurs' recommendations
moved away from a portfolio blending philosophy.
Mr. Van Meurs agreed and acknowledged that investment was
occurring in Alaska, but at a modest level compared to
other nations. He agreed that PPT was developed with barrel
of oil equivalent (BOE) concept in mind and with combined
price and tax value concept to encourage heavy oil
production. He was not in favor of the BOE concept, but he
was in favor of the tax value. His analysis showed a need
for wider differences in government take than could be
achieved with ACES. He added that new investors attracted
to the resources would not benefit from the portfolio
blending. He concluded that the terms for heavy oil itself
would need to change in order to attract new producers; not
because it was cross subsidized from light oil.
1:52:36 PM
Senator French asked if the lower rate should persist in
the future or be timed to the recapture of investment. Mr.
Van Meurs responded that both could occur as long as the
system that allowed consolidation. He did not recommend
different tax rates were included in HB 110. The allowance
could be stronger for the first five years then be reduced
as a variation of the same concept. He explained he had
recommended a flat rate because it was simpler. He did not
think it was a major issue and noted that he had not had
time to optimize the system, but variations could be put in
place to optimize the economics.
Senator French asked if recommendations were made for other
areas. Mr. Van Meurs responded that different cultures
required different structures. A similar structure was
working successfully in Trinidad and Tobago. The same
system did not work in all areas of the world. Details of
fiscal terms were different from country to country.
Severance structure was also used in Kazakhstan.
1:57:05 PM
Senator Wagner questioned what the Repsol Company would say
to a similar tax structure. Mr. Van Meurs felt that Repsol
would find the terms advantageous since the government take
on development would be significantly less. He suggested
further adjustments could result in a simple system that
would work for every resource in Alaska, which would result
in further production.
Senator Wielechowski asked if any of the proposals could
hurt Alaska, such as cuts to credits, or a move away from
resource blending. "Was there any downside?" Mr. Van Meurs
stressed that companies and investors would be invited to
comment and identify any problems during the development of
a new system. He acknowledged that removal of the 40
percent [portfolio blending] would take away the "massive
help for exploration" but felt that there would be more
exploration in the end. He maintained that exploration was
reduced because companies could not see their way through a
totally profitable operation, including development. He saw
an enormous incentive for companies that had the cash and
incentive to explore through to development. He emphasized
the need to restore balance between attractive development
and somewhat less attractive exploration, which he
maintained would attract more business from major oil
companies.
2:02:52 PM
Senator Egan asked if the proposed new fiscal terms would
be enough to get the state out of harvest mode. Mr. Van
Meurs stated that it would be very difficult to get the
producers out of harvest mode because devolvement was so
competitive elsewhere. He furthered that the state needed
to provide a sense of fiscal stability. He acknowledged
that it would be very difficult to change perceptions but
stressed that his proposed changes were a good start. He
maintained that Alaska remained valuable in the long-term
and new investors would react favorably.
2:05:29 PM
Mr. Van Meurs observed that if Alaska did not achieve its
goals and production kept declining the market would have
indicated that something needed to be done; a valuable
benchmark would be established as to how fiscal terms may
have to be further changed in order to eventually attract
investment. He maintained that with the appropriate fiscal
and contractual framework Alaska could achieve 1 million
barrel per day throughput through the TAPS line, and
significant LNG exports. However major political and fiscal
change was required, which would be difficult. The sooner
the process started to encourage changes the better the
future of Alaska would be secured.
2:07:08 PM
Mr. Van Meurs reviewed the Addendum. He acknowledged that
his recommendations represented massive change and might be
a "bridge too far" in the short term. He provided proposals
in the case that Alaska only wanted to make minor
modifications to ACES through the following changes:
· Decrease .4 to .35
· Decrease $92.5 to $90
· Start at 0.1 percent increases to a maximum additional
rate of 25 percent at $ 130 per barrel, which prevent
a government take of more than 75 percent,
· Establish a 20 percent of gross revenues allowance for
new oil production, and
· Limit tax credits to 20 percent on exploration and
development.
2:09:28 PM
Mr. Van Meurs reviewed slide 3, which showed government
take under the proposed terms. He noted that the green line
on slide 3 should be 2 percent higher.
Mr. Van Meurs observed that it was possible to test the
market with a modest change from ACES. He reiterated that
his proposals would not create a "give away" from existing
production; would provide stimulus for new production;
would not require ring fencing [a protection-based transfer
of assets from one destination to another]; and solve four
of five deficiencies in ACES.
2:12:03 PM
Mr. Van Meurs acknowledged that the proposal would not
solve all the deficiencies. He asserted that it would be a
modest step, but a good step that would solve problems with
BOE cross subsidization. The proposal would not create an
"architecture" to which new Alaska resources could be
added, such as heavy oil, shale oil and natural gas, or
provide the stimulus of investment in these resources. He
concluded that his proposals was a superior concept to HB
110 and would better protect Alaska with a start in
encouraging new oil production.
2:13:33 PM
Co-Chair Hoffman asked for a breakdown of impact in dollars
for slide 3. Mr. Van Meurs agreed to provide the data.
ADJOURNMENT
2:15:15 PM
The meeting was adjourned at 2:15 PM.
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