Legislature(2023 - 2024)SENATE FINANCE 532
05/05/2023 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB114 || SB122 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 122 | TELECONFERENCED | |
| += | SB 114 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
May 5, 2023
9:02 a.m.
9:02:46 AM
CALL TO ORDER
Co-Chair Olson called the Senate Finance Committee meeting
to order at 9:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Luke Saugier, Senior Vice President, Hilcorp; Todd
Griffith, President, ExxonMobile Alaska; Walt Bass, Vice
President of IT and Finance, ConocoPhillips Alaska; Barry
Romberg, Vice President of Strategy, Commercial and
Transportation, ConocoPhillips Alaska; Bill Cline,
Executive Director and Senior Advisor, GaffneyCline.
PRESENT VIA TELECONFERENCE
SUMMARY
SB 114 OIL & GAS PRODUCTION TAX; INCOME TAX
SB 114 was HEARD and HELD in committee for
further consideration.
SB 122 APPORTION TAXABLE INCOME;DIGITAL BUSINESS
SB 122 was HEARD and HELD in committee for
further consideration.
HOUSE BILL NO. 114
"An Act relating to the definition of 'village' in the
Village Safe Water Act."
SENATE BILL NO. 122
"An Act relating to the Multistate Tax Compact;
relating to apportionment of income to the state;
relating to highly digitized businesses subject to the
Alaska Net Income Tax Act; and providing for an
effective date."
9:03:28 AM
Co-Chair Olson relayed that there would be invited
testimony from oil and gas producers.
9:04:00 AM
LUKE SAUGIER, SENIOR VICE PRESIDENT, HILCORP, introduced
himself. He read from prepared remarks (copy on file):
Mr. Chairman, committee members, thank you for the
opportunity to be here today.
My name is Luke Saugier, and I am Senior Vice
President for Hilcorp Alaska. I am proud to be here
today representing the more than 1,500 Hilcorp Alaska
employees.
I have worked for Hilcorp since 2003 and my family and
I have had the privilege of calling Alaska home for
seven of the last ten years.
Hilcorp came to Alaska in 2012 as much larger oil and
gas producers were exiting Cook Inlet. At the time,
the Railbelt was facing a natural gas shortage and
preparing for the possibility of brownouts. As major
companies such as ConocoPhillips, Marathon, and Exxon
exited the Inlet, Hilcorp acquired their oil fields
and immediately invested to stabilize natural gas
supply for the Railbelt. Since 2012, Hilcorp has
invested over a billion dollars on new projects to
produce more than 690 billion cubic feet natural gas
in the Cook Inlet and to keep the lights on. We have
drilled roughly 90 new wells, completed over 400 well
repair projects and introduced innovative
technologies, such as new drilling rigs, new onshore
and offshore pulling units, and 3D seismic.
Hilcorp is proud of the role we have played in keeping
the heat and lights on for Alaskans and we look
forward to continuing to play an important role in
fueling Alaskan homes and businesses.
As Hilcorp has grown, so has our commitment to Alaska.
In 2014, we entered the North Slope with the
acquisition of Endicott, Northstar and a portion of
the Milne Point field. Like the Cook Inlet, Hilcorp
made substantial investments and introduced new
technologies to the North Slope, particularly polymer
flooding and horizontal drilling at Milne Point. And
just like in Cook Inlet, production increased as we
invested. Since taking over as operator in 2015,
Hilcorp has invested more than a billion dollars at
Milne Point, drilled more than 100 wells with another
20 wells planned for 2023. As a result, Milne Point
production has grown from roughly 18,400 barrels per
day in 2014 to more than 41,000 barrels today. And,
with continued investment, we expect to see production
near 60,000 barrels per day in the next four to five
years.
In 2020, Hilcorp made its largest Alaska investment to
date with the acquisition of BP's remaining Alaska
assets, most notably Prudhoe Bay. Since becoming
operator of Prudhoe, we have worked closely with our
partners, ConocoPhillips, ExxonMobil and Chevron, to
increase investments in this great old field. We are
drilling new wells, fixing old wells and repairing and
expanding the oil processing facilities. Like Cook
Inlet, we have stopped the production decline and
delivered two consecutive years of oil growth at
Prudhoe Bay. his is a major reversal of the prior two
decades of decline, and a big difference from the two
percent annual decline projected by DNR in 2019. I am
very proud of our team in Alaska and the hard work
they put in to make this happen.
9:07:56 AM
Mr. Saugier continued:
The work Hilcorp has done at various fields across
Alaska to grow production and reserves has resulted in
significantly more oil in the pipeline, more natural
gas for Alaskan homes and businesses, and billions of
dollars of additional revenues to the state of Alaska
in the form of royalties, production tax and property
tax.
Hilcorp has steadily grown our Alaska business to
where we're at today: in 2023, Hilcorp approved our
largest ever budget for Alaska. And I'm proud to say
that today Alaska makes up nearly 60 percent of the
company overall.
In the Cook Inlet, over the next five years, we
anticipate investing nearly a billion dollars or more
on capital projects, such as exploration drilling, new
wells at existing fields, and new offshore platforms.
In 2023 alone, Hilcorp plans to spend several hundred
million dollars in the Cook Inlet, operate four rigs,
and drill nearly 20 wells to produce additional
natural gas for Alaskans. Hilcorp was also the only
bidder in the recent State and Federal Cook Inlet
lease sales. And as we look to the future, Hilcorp is
working closely with the Railbelt Utilities to find
solutions to our natural gas supply challenges. These
solutions include significant new capital investments,
new commercial arrangements, new Cook Inlet platforms,
advancing North Slope natural gas options, and
exploring opportunities to repurpose existing
infrastructure for renewable energy. Hilcorp remains
confident we will find a solution.
On the North Slope, Hilcorp is making substantial
investments across our assets, particularly at Prudhoe
Bay and Milne Point. At Prudhoe Bay, our plans call
for billions of dollars in annual spend, focused on
drilling new wells, fixing existing wells, expanding
facilities to grow oil production, and increasing
optimization across the field.
At Milne Point, our plans call for significant capital
investments to grow production, primarily through
continuing to expand development of the Schrader
Bluff, and facility upgrades and optimizations. We
recently finished constructing the gravel pad at our
Raven Pad development a several hundred-million-
dollar investment that we expect to produce an
additional 10,000 to 15,000 barrels per day by 2025.
Just last week, Hilcorp finalized an agreement for
another drilling rig to be deployed on the North Slope
and we have plans for additional North Slope
drilling rigs in the next one to two years.
Ultimately, we're hoping to have at least six rigs
operating on the North Slope in the coming years.
These major capital investments will play a critical
role in keeping Alaskans employed, putting more oil in
the pipeline and generating revenue for North Slope
communities and the State of Alaska.
9:11:21 AM
Mr. Saugier referenced two slides that showed graphs of
Prudhoe Bay Production. He spoke to slide 1, which showed a
line graph, Prudhoe and Satellites Production Forecast -
Fall 2019. He identified that the data came from the DOR
Fall Forecast 2019. He pointed out that in 2019 production
in Prudhoe Bay and satellite fields had been declining and
it had been expected the production would continue to
decline. He pointed to the second slide, Prudhoe and
Satellites Production Forecast Fall 2019 & Fall 2022. The
slide reflected the two years of continuous growth under
Hilcorp. He pointed to the green wedge on the slide, which
was worth 730 million barrels of additional production to
the state.
9:13:41 AM
Co-Chair Olson thanked Mr. Saugier for the efforts made by
Hilcorp.
9:13:58 AM
Senator Wilson asked whether the wedge shown on the graph
could be translated into a dollar amount.
Mr. Saugier replied that he could not provide a dollar
amount as he would not know what oil price to use for the
assumption.
9:14:28 AM
Mr. Saugier continued with his prepared remarks:
But, as we think about our future in Alaska, Senate
Bill 114 and Senate Bill 122, give us great concern.
To be clear, if these bills, or the individual
components in them, were to pass, Hilcorp would be
forced to scale back in Alaska, especially in the Cook
Inlet where the investment and operating environment
is more challenged. And because Hilcorp is the
operator at Prudhoe Bay, even a narrowly targeted tax
on Hilcorp would impact Alaska's largest oil field.
First, let me provide some context on Hilcorp and our
business. We are structured as an LLC for a variety of
reasons, but most importantly, it is because we are a
privately-owned family business. Hilcorp does not have
hundreds or thousands of shareholders like a large
multi-national public Corporation; we are smaller,
nimbler and have fewer resources. Hilcorp is
structured the same way in every jurisdiction in which
we operate and has been structured this way since we
came to Alaska in 2012, including before, during and
after the BP acquisition in 2020.
As a smaller, privately owned company, Hilcorp has an
efficient management structure and is less susceptible
to pressure from those targeting Alaska. Ultimately,
we feel Hilcorp aligns very well with Alaskans' long-
term interests. For example, as many large multi-
national public corporations have made the decision
not to invest in Alaska due to pressure from Outside
groups, Hilcorp has significantly increased our Alaska
investments. While many sponsors decided to no longer
support the Iditarod, Hilcorp stepped up and became
one of the title sponsors to ensure the race survived.
At a time when Hilcorp is being asked to shoulder more
of the burden as it relates to Cook Inlet natural gas
production and investment, Senate Bill 114 and Senate
Bill 122 target Cook Inlet natural gas producers,
including Hilcorp. The proposed bills would negatively
impact Cook Inlet Producers at a time when new and
more investment is needed to bring natural gas to the
market.
Small and nimble LLCs and S-Corps are the future of
Cook Inlet investment and Senate Bill 114 and Senate
Bill 112 will drive this much-needed investment
elsewhere.
There has been discussion about how Senate Bill 114,
and now Senate Bill 122, would "level the playing
field." This bill would not "level" the playing field;
in fact, it would tilt the field against the small,
independent companies that the State has been trying
for decades to incentivize to come to Alaska. A
significant majority of Alaska businesses are S
Corporations and to single Hilcorp out, as Senate Bill
114 and Senate Bill 122 do, will treat us differently
than more than 55,000 other S Corporations in Alaska.
9:17:24 AM
Co-Chair Olson asked Mr. Saugier to restate his last point
about S Corporations. He asked whether there were other S
Corporations on the North Slope.
Mr. Saugier stated that a significant number of S
Corporations operated in Alaska and that the proposed
legislation would single out Hilcorp unfairly.
Co-Chair Olson asked how many S Corporations were operating
in the oil industry in Alaska.
Mr. Saugier replied that he did not know.
9:18:11 AM
Mr. Saugier continued with his prepared remarks:
The State of Alaska, under three different governors,
was fully aware of our structure when it approved each
one of our acquisitions. However, now, after Hilcorp
has invested billions of dollars, and dramatically
increased production on the Slope and in the Cook
Inlet, we are being unfairly targeted. Policymakers
should focus on ensuring a fair playing field and work
to attract more investment from a variety of companies
large and small.
In addition to the income tax targeted at Hilcorp,
Senate Bill 114's proposed changes to the sliding
scale credit would also have an immediate and
substantial impact to Hilcorp and our partners' North
Slope business. Our planned investment levels,
including the significant capital we plan to deploy in
the years ahead, will be at risk. There will be less
capital to invest in long-term, production-adding
projects to fill the pipeline and generate royalties
and production tax.
As I think about our future as a company, Alaska is a
critical pillar of the Hilcorp strategy and we're
committed to investing the necessary capital to
deliver increased production, new jobs, and a long
future in the state. But it's hard to commit long-term
dollars when there's continued uncertainty in the
fiscal regime or even worse, when the State
threatens to change the rules after we've
invested billions of dollars. As a company, all we can
do is respond, which, unfortunately, would mean
shifting capital investment outside of Alaska.
Hilcorp is excited about our future in Alaska. And we
are proud of the work we have done in Alaska over the
last eight years and look forward to being an
important part of the Alaska economy and community for
many years to come.
Thank you, again, for the opportunity to testify
before you today.
9:20:01 AM
Senator Bishop asked where Hilcorp would invest should they
decide not to invest capital expenditure in Alaska,
Mr. Saugier informed that Hilcorp worked in nine other
states in the country, and there were a number of other
investment opportunities they could pursue.
9:20:56 AM
Co-Chair Stedman thought Mr. Saugier was indicating that SB
122 changed the playing field and put Hilcorp at a
disadvantage. He wondered whether Hilcorp had thoroughly
reviewed the legislation. He asked whether Hilcorp could
provide any guidance as to how to make the bill palatable
to industry.
Mr. Saugier replied that Hilcorp had not reviewed the bill
but still maintained a general concern about the
legislation.
9:22:32 AM
Co-Chair Hoffman referenced Mr. Saugier's comment that if
the legislation passed, Hilcorp would have other areas to
invest in drilling. He asked what Hilcorp had done in
drilling since it had acquired the assets on the North
Slope. He thought the record showed that there had not been
exploration by Hilcorp, and he considered the threat by the
company to take their drilling dollars elsewhere was
without merit. He reminded Mr. Saugier that Hilcorp had an
obligation within its existing contract to explore and yet
no exploration had been done to date.
Mr. Saugier relayed that Hilcorp was very proud of the work
they had done in Alaska. He referenced the company's firm
commitment to continue to invest and grow production.
9:25:01 AM
Co-Chair Hoffman thoguht Mr. Saugier had not answered his
question completely. He referenced Mr. Saugier's comment
about wanting to fill the pipeline and wanted to know how
many barrels of oil should be expected if the legislation
failed to pass. He recalled that there was discussion by
industry of a million barrels of oil per day as a result of
the of SB 21. He expressed distrust for industry promises.
Mr. Saugier said that the goal was to grow the assets under
Hilcorps control. He thought the difference between
Hilcorp and its predecessor was approximately 70 billion of
oil per year.
9:27:47 AM
Co-Chair Hoffman observed that the repeal of SB 21 came
with promises from industry that if the repeal did not work
to increase production, legislation would be revisited for
reinstatement. He pondered reinstatement of a modified
version of SB 21 and asserted that SB 114 was "a baby step"
in that direction.
Mr. Saugier retorted that Hilcorp was proud of increasing
production and thought the data spoke for itself.
9:28:48 AM
Senator Wilson asked Mr. Saugier to discuss the work in
Cook Inlet. He asked Mr. Saugier to identify what the bills
might do to jeopardize natural gas production in the area.
Mr. Saugier asserted that Hilcorp was doing everything it
could to encourage and advance additional gas development
in the inlet. He asserted that all of its investment
dollars were being directed at exploring for new gas
resources and to maximize recovery from existing gas
resources. He added that they were working with partner
companies to bring gas resources to market.
Senator Wilson asked what, if any, impact would the two
bills have on Southcentral utility rate payers.
Mr. Saugier clarified that Hilcorp was not a public utility
and thereby did not have the ability to pass costs onto
consumers. He considered that additional taxes would
increase costs, which would lead to a higher price for its
product. He said that to his knowledge, Cook Inlet natural
gas was the most cost-effective product for utilities.
9:31:33 AM
Senator Bishop asked about unlocking the Ugnu deposits. He
asked Mr. Saugier to address the topic.
Mr. Saugier explained that the Ugnu deposit was a thick
viscous oil formation that supposedly contained billions of
barrels across the North Slope. He said that Hilcorp had
begun recovery efforts for the product, and had one
producing well, with the expectation of more wells in the
future. He was optimistic about the project.
9:33:16 AM
Senator Bishop thought even a 4 percent recovery rate of
the estimated 22 billion barrels of oil in the reserve
would benefit the state. He understood that Hilcorp was
working with a UAS engineering team.
Co-Chair Olson referenced Hilcorp's takeover of the assets
of another producer. He noted that as an S corporation
Hilcorp was not subject to the taxes of the previous
company. He noted that Alaska did not have a state income
tax. He wondered how he should respond to constituents who
believed that Hilcorp was not paying its fair share to the
state.
Mr. Saugier rebutted that Hilcorp had paid well over $1
billion per year in combined taxes.
9:35:01 AM
Senator Kiehl thought the notion that the current playing
field was level amongst producers on the North Slope was
questionable. He wondered what kind of tax structure would
level the playing field for all producers.
Mr. Saugier thought Senator Kiehl's question was
complicated. He shared that he was an engineer and did not
have a background in tax laws or tax structure. He
reiterated that Hilcorp was proud of the work and money
that the corporation contributed to the state.
Senator Kiehl replied that the presence of Hilcorp was a
benefit to the state. He asked if Hilcorp could get back to
the committee with an answer to the tax questions.
9:37:13 AM
Co-Chair Stedman wanted to revisit Co-Chair Hoffman's
question and put a finer point on the matter. He brought up
capital expenditures in Prudhoe Bay, and asked Mr. Saugier
to give a brief history and accounting of capital
expenditures for Hilcorp. He thought there had been
comments at the table that capital expenditures had dropped
substantially over the last few years. He suggested that
the department assemble information regarding capital
expenditures in the fields. He wondered about the industry
providing estimated 5-year targets to provide further
clarity.
Mr. Saugier could not speak to spending by the fields
predecessors. He identified that at the time that Hilcorp
took over the lease, there were no drilling rigs in Prudhoe
Bay; there were now two drilling rigs in Prudhoe Bay. He
said that most of Hilcorps capital expenditure went toward
the drilling of new wells. He said that new and revamped
processing facilities had also been established.
9:39:53 AM
Co-Chair Hoffman relayed that he was on the committee when
SB 21 was considered. He cited that he had not voted for
the bill because he believed it went too far. He stressed
that members had only to look to the Alaska State
Constitution to determine whether the state was receiving
its fair share for state resources. He identified that the
industry was at the peak of its earning power and thought
that the state needed to reevaluate whether it was
receiving an equitable share. He found it hard to believe
that the industry, in the spirit of fairness, could not
support the proposed legislation.
9:42:10 AM
AT EASE
9:42:24 AM
RECONVENED
TODD GRIFFITH, PRESIDENT, EXXONMOBILE ALASKA, introduced
himself and read from prepared remarks (copy on file):
Co-Chair Olson members of the committee for the
record my name is Todd Griffith and I am President
of ExxonMobil Alaska Production based n Anchorage.
Thank you for the opportunity to be here today to
offer Exxon Mobils views on Senate Bill 114.
And while I greatly appreciate the invitation to
testify, it is troubling that the oil and gas industry
is facing a legislative effort to increase industry
taxes especially when Alaska, and more specifically,
development in the Alaska Arctic, is facing such
strong headwinds.
Alaska has experienced first-hand the pressures that
are being brought to bear on financial markets
pressures to not invest in the Arctic. Additionally,
the federal government is making lease sales more
difficult, permits have become politicized, and
litigation is getting even more common by those that
oppose development.
Passage of SB 114 to increase oil taxes will not only
add to these economic headwinds, but it will also
fundamentally change the states tax policy. Under SB
21 we saw Alaska adopt a tax policy based on guiding
principles. I would like to share now these
principles, submitted by Governor Parnell and used
during the debate on SB 21:
Guiding Principles (Parnell Administration on SB 21
Governor Transmittal Letter) Tax policy must be fair
to Alaskans. Any changes to oil taxes should, when
taken together, be geared to foster new production.
Changes should result in a more simple tax system and
restore balance to our fiscal system. And, tax policy
must make Alaska competitive for the long-term. If
these guiding principles are met, I believe we will
more fully maximize the benefit of Alaskas oil
resources for Alaskans.
As a longtime investor in Alaska, we see SB 114 as a
fundamental change in policy, sending a clear message
that we in Alaska will increasingly tax our industry
to meet our spending goals.
This proposal has by-passed the Resource Committee and
the normal discussions on potential impacts to
resource development and seems to be focused solely on
meeting a short term revenue goal.
In contrast, the legislative process for SB 21 saw 50
hearings. SB 21 was sent to 3 committees in the Seante
alone to fully understand the impact on investment and
production.
Consultants ran models considering multiple scenarios
scenarios that asked the question: how will tax
changes impact production and investment?
The proposed changes in SB 114 to Alaskas tax policy
undermine investor confidence and weakens Alaskas
overall investment climate for attracting continued
and future industry investment.
To meet the states goals, the tax policy must be
competitive, stable, predictable, and therefore
provide confidence to taxpayers and investors alike
that the underlying rules of the game will not be
changed repeatedly. A tax policy change to one that
focuses solely on revenue will not inspire confidence.
9:46:08 AM
Mr. Griffith continued with his prepared remarks:
Recognize States Challenge:
ExxonMobil recognizes the challenges you face in
finding good solutions to the States 2-part problem
of:
• Providing for a robust PFD; and
• Meeting the States spending goals
Unfortunately, SB 114 is not a good solution.
This bill is bad for Alaskas oil and gas industry,
but more importantly its bad for Alaskas overall
economic performanceand there are 2 main reasons
why:
First, Senate Bill 114 will stop growing momentum in
the industry that has and continues to drive Alaskas
economy.
Secondly, Senate Bill 114 makes Alaska less
competitive to attract and retain investment which is
the lifeblood of the States broader economy and the
future of the oil industry.
Senate Bill 114 Stops Growing Momentum in Industry
Alaskas economy thrives on investment in its oil and
gas industry.
However, Seante Bill 114 drives a wedge in the system
by making the States fiscal policy unstable and less
competitive for attracting investment.
With the change in tax policy from one encouraging
investment to one focused on meeting the spending
needs of the state, industry will no longer be able to
invest based on economic predictions.
and make no mistake Senate Bill 114 is a significant
change in state policy and a significant tax increase.
Senate Bill 21 is working as intended it has led to
more industry investment and more importantly an
increase in oil production this increased investment
and production has led to the payment of taxes and
royalties to the state all of which have been good
for Alaskas economy.
Alaska needs to remain globally competitive for
critical capital investments changing Alaskas tax
structure again to simply raise taxes on the oil and
gas industry to meet state spending will not help
Alaskans improve our economic performance it will
just make matters worse.
Instead, we should be looking for ways to incentivize
investment, not discourage it.
Enacting Seante Bill 114 will:
• Not lead to more jobs
• Will not lead to more investment
• Will not lead to more production
• Nor will it help the Alaskan economy
• In fact, it only aids those who oppose investment
and development in Alaska, and we all know they
are active on multiple fronts.
Conclusion
Senate Bill 114 will force companies to reexamine
investment plans, which is not consistent with the
states long-term vision of promoting oil and gas
development.
Alaska remains an important part of ExxonMobils
world-wide investment portfolio and we look forward to
being here for many years to come.
And while ExxonMobil will continue to pursue
investment opportunities here in Alaska, if costs are
increased due to an increase in taxes under Senate
Bill 114 then such opportunities are diminished.
So Chairmen and members of the Committee let me
conclude by reiterating the need for Alaska to
maintain a competitive, stable, and predictable tax
regime that attracts and encourages ongoing and future
investments especially in light of the headwinds
facing investment in Arctic Alaska This is one of
the if not the most important issue facing the
state.
ExxonMobil believes the evidence is clear that Senate
Bill 21 is working as it was intended and has provided
a more predictable, competitive and stable tax regime
since its enactment.
As policy makers, your role is to decide whether
Senate Bill 114 is a wise long-term tax policy that
will lead to more jobs more investment more
production and long-term sustainable state revenues.
Will a bill that increases taxes on the industry, and
which will significantly alter Seante Bill 21 and the
State policy on oil taxation achieve those things?
Will it help Alaskas economy?
Is Senate Bill 114 a wise tax policy?
We believe the answer is NO
Thank you again Cho-Chairmen and members of this
Committee for the opportunity to testify here today.
9:49:44 AM
Co-Chair Stedman noted that there were two bills before the
committee: SB 114 and SB 122. He shared that SB 114
included the matter of the sliding per barrel price, while
SB 122 covered the issue of S corporation tax structure. He
wondered whether Mr. Griffiths had any comments on the
provisions in SB 122. He wondered if ExxonMobil had the
opportunity to scrutinize the legislation to a great
degree.
Mr. Griffith responded that that S corporation provision
singled out the oil and gas industry and, ExxonMobil was
not in favor of any policy that singled out the oil and gas
industry. He cited that he was not a tax policy expert, but
rather an engineer and businessman and that the legislation
had not been scrutinized by ExxonMobil.
9:51:44 AM
Co-Chair Hoffman expressed offense that Mr. Griffith
asserted that the reason behind SB 114 was the desire for
increased state spending. He emphasized that as a Senator
he had sworn to defend the Constitution of Alaska, which
grants that Alaskans receive a fair share for state
resources.
Co-Chair Hoffman addressed the issue of SB 21 and recalled
that for decades the state did not have a sliding credit.
He questioned why the tax structure had to include a
sliding credit at any price, when for decades industry had
an obligation to produce on their leases. He argued that
production had not increased to the level of promised made
by the industry during debate on SB 21 and considered that
it made sense that the state would revisit implementing a
tax structure that had worked for decades before SB 21.
9:55:34 AM
Mr. Griffiths offered that he had not intended to offend
Co-Chair Hoffman. He believed that previous testimony from
consultants had stated that Alaska was receiving more than
its fair share. He addressed the $8/bbl. sliding credit and
referenced a presentation by Kara Moriarty of the Alaska
Oil and Gas Association (AOGA) which he thought indicated
that the oil production in Alaska had been in rapid decline
under ACES and the passage of SB 21 arrested that decline.
He said that a policy that promoted investment was a policy
that promoted future revenue generation for the state,
which was why SB 21 worked so well for the state.
Co-Chair Olson asked for clarification that SB 21 worked to
the benefit of the state.
Mr. Griffiths corrected his previous statement, clarifying
that SB 21 worked well for industry.
9:57:16 AM
Co-Chair Hoffman believed that ACES had gone too far and
shared that he had not voted for that legislation. He added
that SB 21 had gone too far in the other direction. He
thought that Alaskas fair share would be found somewhere
between the two pieces of legislation. He reiterated that
he was at the table to make sure that Alaskans received
their fair share for state resources. He noted that
ExxonMobil was currently experiencing historically high
earnings.
9:58:54 AM
Senator Bishop referenced Mr. Griffith's comment regarding
ExxonMobils ideas to stimulate more investment and
increase capacity.
Mr. Griffth's said that not passing SB 114 would be a
start. He suggested that companies should be allowed to
receive credit for all capital investments. He emphasized
the importance of a stable, predictable, competitive fiscal
regime.
10:00:13 AM
Senator Kiehl referenced stability and thought it had been
clear in the meeting thus far the industry was comfortable
under SB 21. He wondered whether the total government take
currently was higher or lower than when SB 21 had been
enacted.
Mr. Griffiths replied that he did not know. He said that he
believed that Alaskas take was higher than other competing
states.
Co-Chair Olson suggested that Mr. Griffiths could get back
to the committee with the numbers.
Senator Kiehl recalled that when SB 21 passed, the
government take was in the 63 percent range, and was not
significantly lower. He wanted the numbers for post
enactment of SB 21 and the Federal 2017 Tax Bill.
Mr. Griffiths agreed to get back to the committee with the
information.
10:02:06 AM
Senator Bishop requested that Mr. Griffiths get back to the
committee with any suggestions to increase production.
10:02:22 AM
AT EASE
10:03:03 AM
RECONVENED
WALT BASS, VICE PRESIDENT OF IT AND FINANCE, CONOCOPHILLIPS
ALASKA, introduced himself.
BARRY ROMBERG, VICE PRESIDENT OF STRATEGY, COMMERCIAL AND
TRANSPORTATION, CONOCOPHILLIPS ALASKA, introduced himself.
He relayed that he had come to the state in the 1990s as a
United States Coast Guard officer and had transitioned to
the oil and gas industry when he worked for Alyeska
Pipeline 23 years previously. He had been with
ConocoPhillips since 2005.
10:04:23 AM
Mr. Romberg addressed a presentation entitled Senate
Finance - SB 114 (copy on file). The slide contained a
Cautionary Statement.
10:04:33 AM
Mr. Romberg looked at slide 3, which showed a map of
ConocoPhillips activity in Alaska in 2013. He recounted
that 10 years ago the industry was transitioning between
ACES and SB 21.
10:05:16 AM
Mr. Romberg spoke to slide 5, which showed the same map but
with a different view of the potential longevity and
economic health of the state as it included significantly
more development. He asserted that the increase in
development was due to the stability that resulted from the
passage of SB 21.
10:06:06 AM
Mr. Romberg spoke to slide 5, "SB 21 is Working," and drew
attention to a graph on the lower right of the slide. He
explained that the blue lines indicated the decline in
development before ACES red bars were indicative of the
time prior to ACES. He pointed to the green line, which
reflected the time after the passage of SB 21, and which he
categorized as remarkable. He remarked that the green line
was currently flat but put the industry on a 10-year growth
path. He pointed to the cycle illustration in the upper
right corner, which suggested that increased production led
to lower transportation costs, which led to increased
investment.
10:08:32 AM
Mr. Romberg addressed slide 6, "Willow is an SB 21 Success
Story," which offered figures pertaining to expected job
creation, planned capital expenditures of $1 billion to
$1.5 billion from 2024-2028, estimated resources, and
planned key construction milestones. He said investment in
Willow was based on the premise that SB 21 would last well
into the future.
10:10:26 AM
Co-Chair Hoffman relayed that he, along with members of the
Bush Caucus, had traveled to Washington DC to support the
Willow Project. He contended that he and his colleagues
were not anti-industry. He argued that the green line on
the graph on the lower right side of slide 5, which showed
production of 600,000/bbl. per day, while remarkable to
Mr. Romberg, was short of the goal promised by industry
during debate on SB 21. He viewed that actions fell far
short of the promises that had been made when SB 21 was
under consideration. He thought the experiment of SB 21 and
promises of more revenue for the state had not
materialized. He stressed that the state was not interested
in increased revenue only for the sake of spending and
reiterated that Alaskans had a right to their fare share
when it came to money made off state resources.
Mr. Romberg appreciated Co-Chair Hoffman's comments. He
thought everyone wished there was more oil flowing in the
pipeline. He commented on the volatility impacting industry
cashflow. He thought Willow was a good example and
commented that it had taken ten years of permitting to get
to this point and it would be several more years until the
project was fully functional.
10:13:22 AM
Co-Chair Stedman wanted to know whether ConocoPhillips had
time to analyze the bills in greater detail. He did not
think any of the presentations spoke to the intricacies of
SB 114 or SB 122.
Mr. Bass relayed that he had a future slide that discussed
SB 114 in deeper detail. He acknowledged that he had not
had time to read SB 122. He said he was prepared to speak
to SB 114.
10:14:26 AM
Mr. Bass showed Slide 7, Unconventional North American
Fields are Alaskas Competition:
• Enormous resource potential
• Tens of thousands of drilling opportunities
• Lower cost
• Closer to market
• Easier to permit
• Stable, competitive fiscal policies
Mr. Bass discussed Alaskas competition in North America.
He pointed to the map on the slide, which indicated
enormous resources. He noted the bar chart on the right,
which showed operating and transportation costs.
10:15:39 AM
Mr. Bass showed slide 8, SB 114 A Significant Increase
in the Cost of Doing Business:
• Alaska is already an expensive place to operate
• A $3 per barrel tax credit reduction, without
reducing
the 35% base rate, amounts to a significant tax
increase
• Ringfencing credits will discourage spending in new
fields compared to SB21
• As drafted, the State Income Tax would double tax
any flow through partnership
• Fiscal stability is a critical part of the decision
process when long-term investment decisions are made
• Alaska must remain competitive as the world moves
toward energy transition (cost, fiscals and cycle
time)
He stressed that increasing taxes made Alaska less
competitive.
10:17:56 AM
Co-Chair Stedman noted that Mr. Bass had referenced 18
percent in capital expenditures but had not mentioned
profitability of Alaska in ConocoPhillips's portfolio. He
asked whether ConocoPhillips was also a gas company that
focused heavily on only oil in Alaska.
Mr. Bass affirmed that the company operations in Alaska
were mostly oil, whereas operations in other states were
oil and gas combined.
Co-Chair Stedman interjected that more profit was made on
oil and gas production combined, rather than solely from
oil. He referenced the 35 percent base tax, which had
negative progressivity embedded to protect the state share
when oil prices dropped. He said that the federal corporate
tax rate used to be 35 percent and was now 21 percent and
he wondered whether that change on the federal level had
impacted industrys relationship with the state.
Mr. Bass opined that 35 percent was not a competitive rate.
He stressed that ConocoPhillips was working to keep
Alaskas tax rate competitive.
10:20:50 AM
Co-Chair Hoffman commented that the state was glad it had
companies interested in coming to the state to make a
profit from the state's oil. He pondered that he had voted
against SB 21 because he did not think the promises being
made by the industry at the time were possible. He thought
history would show that the promises had not been kept.
Co-Chair Hoffman thought that prior to SB 21 there was no
slider, and pondered what the state's take would be if the
slider did not exist in the legacy fields. He had
calculated that the figure was approximately $1 billion
annually, to the state prior to SB 21.
Co-Chair Hoffman agreed that SB 21 was good for industry.
He questioned whether the state was getting its fair share.
10:24:10 AM
Mr. Bass asserted that his argument on behalf of the state
would be to remain competitive to increase production.
Co-Chair Hoffman responded that ConocoPhillips had the
leases and had the obligation to produce oil and continue
to explore.
10:24:56 AM
AT EASE
10:26:06 AM
RECONVENED
BILL CLINE, EXECUTIVE DIRECTOR AND SENIOR ADVISOR,
GAFFNEYCLINE, discussed a presentation entitled State of
Alaska - SB 114" (copy on file).
Mr. Cline showed slide 2, Scope of Analysis:
Perspective
Context
Likely effects
First order
Second + order
Mr. Cline discussed his background. He related that due to
time constraints he would be limiting his testimony to the
allotted 20 minutes. He had not been directly involved in
matters in Alaska over the last 30 years but would draw
from his overall experience and from materials he had
reviewed within the last week. He shared that the overall
impact of SB 114 was not something that could be measured
or modeled but the first order of effects on SB 114 would
be decreased revenue to the state and decreased cashflows
for investors. He said that the second order effects were
more complex and included impact of incremental expansion
of existing and new developments.
10:29:28 AM
Mr. Cline showed slide 3, "Volatility and Disruption in the
Oil & Gas Industry,":
Up until the last 3 years the oil & gas industry had
been battered by deeply disruptive events leading to
volatility
Volatility impacts long term planning practices
Investors have demanded better capital discipline,
improved financial performance and action on climate
change
Leading to IOC emphasis on capital discipline
and core areas
Governments that rely upon petroleum related tax
revenues face challenges of maintaining tax base while
encouraging investment
He noted the graph on the page that charted the bullet
points on the slide.
10:30:26 AM
Mr. Cline turned to slide 4, Fiscal Comparison:
Chart illustrates general $/bbl cash breakdown and
tax burden for select jurisdictions over an oil & gas
development's life cycle
Assumes characteristics with new development in
Alaska, including constant cost environment
In reality each jurisdiction will have numerous
unique
characteristics (development timeframe, cost
environment, infrastructure/market proximity etc.)
Alaska has relatively high government take compared
to select jurisdictions
Worth noting that some fiscal elements are considered
more burdensome than others
Non Income based taxes, such as royalty, carry
elevated risk to investors because of timing and
it is not responsive to development/operating
costs
Many other competing jurisdictions, particularly
non western, implement asset level contracts
Popular for oil and gas dependent governments
Allows for fiscal terms specific to assets and
reflecting current economic conditions
Often contains various risk mitigations
including
fiscal stabilization
Mr. Cline mentioned the pointes listed on the overlayed red
bar:
The Competitive Environment not just other producing
areas!
The Energy Transition/Green Movement
War in Ukraine
Windfall profits
Cold War Reemergence
New Alliances
The Energy Trilemma Affordability, Reliability,
Sustainability
10:30:36 AM
Mr. Cline showed slide 5, Financial Performance by Sector
10 years, which showed that the energy sector had been
the worst performing sector in the stock market over the
previous ten years.
10:30:53 AM
Mr. Cline moved to slide 6, Financial Performance by
Sector More recently, which provided two-line graphs
showing that the energy sector been the best performer in
the stock market; the last two years being particularly
successful due to the war in Ukraine.
10:31:33 AM
Mr. Cline spoke to slide 7, "Alaska Development Scenarios,"
[Secretary Note: At this point the testimony and the slides
presented did not match up. Senator Olson took an at ease
to address the confusion]
10:32:53 AM
AT EASE
10:33:15 AM
RECONVENED
Co-Chair Olson asked Mr. Cline to announce the title of
each slide as he moved through the presentation.
Mr. Cline spoke again to slide 4, "Fiscal Comparison."
10:34:41 AM
Co-Chair Stedman asked to return to slide 4. He noted that
the oil price used was $70/bbl, which was comparable to
current prices. He wondered about the numbers at different
oil prices.
Mr. Cline replied that the current price had been used for
the purpose of illustration. He alluded to a lack of time
in crafting the presentation for the use of only the
current oil price.
10:35:35 AM
Mr. Cline advanced to slide 7, "Alaska Development
Scenarios,":
There is strong potential for major new developments,
as well as smaller incremental developments built
around existing or new infrastructure hubs
To understand the potential contribution of new
investments to Alaska state revenues and to gauge the
downside risk if new investments are curtailed, three
indicative profiles have been developed representative
of Alaska new investment opportunities:
A significant new development justifying a new
infrastructure hub, similar to the Pikka
development.
A large new development justifying a new
infrastructure hub, similar to Willow.
A smaller incremental development tying into an
existing infrastructure or infrastructure
associated with a new development.
The evaluation summarizes the estimated 'investor
return' and generated 'state revenue' under the
current and proposed tax changes as well as under a
variety of sensitivities.
10:36:54 AM
Mr. Cline addressed slide 8, "Pikka Scale Development,":
Table highlights indicative tax value and contractor
return for a major new development
Example uses Pikka Ph1 as representative major
new
development (340MMBbls development)
Evaluated on Standalone basis and no further
Phase 2 or tiebacks assumed
Mr. Cline discussed the table in the upper right. He noted
that the middle two columns showed the expected receipts to
the government of $6.3 billion, from a Pikka-like
development, using $70/bbl, and under current terms. He
noted that the far right two columns reflected post SB 114
numbers, which showed a state take of $7.8 billion, with
the trade-off that investor funding dropped. He pointed to
the bar chart below that table, which showed an eventual
decline in investment.
10:38:16 AM
Co-Chair Stedman noted that Mr. Cline was running the
scenario on the table at an oil price of $70/bbl. He
understood that the financial industry used $60/bbl and
wanted to see projected profitability at that price. He
asked for an idea of what the figures might look at with an
assumption of $60/bbl and $50/bbl, and whether there was an
issue surrounding timing of cashflows.
Mr. Cline affirmed that normally GaffneyCline would run the
scenario at a wide range of prices. He was not able to do
so in the time available to prepare for todays meeting.
Co-Chair Stedman asked about financing costs, and wondered
whether the industry was looking at a break-even figure of
$60/bbl.
Mr. Cline thought Co-Chair Stedman's question might be
better directed at companies. He believed that they would
evaluate the viability of projects by looking at lower
numbers.
10:40:50 AM
Mr. Cline continued to read from slide 8:
•New development generates material new State Revenue,
US$6 8 Billion for this evaluation in 20 years
State will also benefit from increased economic
activity through value chain
•Assuming $70/ bbl, the project is expected to still
be attractive under the proposed tax change
The tax change does impact the project economics
but not believed to be to an extent that it would
no longer be perceived as financially attractive
•However, there is still a risk that projects may be
compromised due to the reduced economic return or
perceptions of long term fiscal stability on top of
inherent oil and gas development risks
10:42:20 AM
Mr. Cline referenced slide 9, "Willow Scale Development":
• Based on COP Investor Statements
$8 Bn of total investment and nearly $6 Bn
before production
600MMbbls recovered over life
• Understood to be originally scoped as 80kbpd project
but current planning anticipated 160kbpd
Capacity increase likely in order to enable
additional near field future opportunities
• Over $7.5Bn State revenue generated under current
assumptions and tax law, over $10.2Bn with changes
State total assumed 50% of Royalty
• Largely due to investment prior to production, the
rate of return estimated is lower than other examples
Understood to not include potential near field
incremental developments
Does not consider potential impact on TAPS life
and tariff
10:44:00 AM
Co-Chair Stedman referenced slide 9, and asked Mr. Cline to
clarify the language, State total assumed 50% of Royalty.
Mr. Cline responded that 50 percent would go to the state
and 50 percent to the federal government because of the
location of the Willow development.
10:44:46 AM
Senator Kiehl asked Mr. Cline to repeat his comments
regarding the negative impact of limiting where capital
expenditures could be applied and owing to the slider.
Mr. Cline reiterated that 60 percent of value lost to
companies was the result of limitations imposed on tax
credits.
10:45:29 AM
Mr. Cline showed slide 10, "Incremental Development
Economics,":
Assumes 100MMBbls over 20 years
30kbpd plateau
Could be representative of numerous existing
discoveries GMT 2, Fiord West, Nuna, Narwhal,
Harpoon, Horseshoe, Quokka, Alkaid, Umiat,
Liberty
Incremental Developments benefit from shorter
development periods
Assumes reliance on existing infrastructure
The returns of the assumed incremental development
are attractive under current prices, however, many of
the discoveries will depend on the infrastructure for
larger developments that may not currently exist
Material further upside of consolidating tax
implications
Likely to be less affected by the tax change,
however potentially dependent upon timeframe of
other infrastructure developed
Each could add over $150 MM+ per year in peak years
and US$1.5 Bn of total State Revenue
If GMT or other NPR opportunity assumed, half
the royalty would be shared with Federal
Government
10:46:40 AM
Mr. Cline showed slide 11, "Second Order Effects,":
The impact on the perception of Alaska's Investment
Environment cannot be measured
New major upstream development requires a view
of 20-year time horizons.
Does increasing the tax burden in order to fund
State initiatives suggest to investors that
further increases may be likely when further
funding is needed?
How does this impact investment decisions
compared to other jurisdictions that have reduced
oil and gas burdens in order to encourage
investment?
To put it in perspective under current assumptions:
The Production Credit decrease could potentially
add $400MM/year to state income immediately
The incremental State revenue of a single major
new development is estimated to add in excess of
$500MM/year during peak production and > >$6
Billion over a 20-year life
Does not consider benefit of broader economic
activity or potential for further
incremental/satellite developments
Increasing tax burden may put new developments at
risk of delay and cancellation
Lower economic returns
Perceptions of elevated risk of further tax
increases during production phase
Potential to discourage exploration activity
10:47:48 AM
Mr. Cline said he would skip forward to slide 12.
10:48:12 AM
AT EASE
10:48:25 AM
RECONVENED
Mr. Cline advanced to slide 12, "Tax Stability?" The slide
showed a graph that charted UKCS wells drilled between 1970
and 2007. He noted that terms of agreement between parties
changed throughout the years. He shared that the red lines
indicated negative changes and the green lines indicated
positive changes. He spoke to Norway, which had a stable
tax regime, with a 78 percent marginal tax rate. He shared
that Norway had made changes to its regime in emergency
situations such as the Covid-19 pandemic.
10:50:09 AM
Senator Bishop asked why Norway had interest in capital
investment from major industry players if it had such a
large government take as shown on the slide.
Mr. Cline relayed that Norway had a regime that encouraged
exploration.
10:52:02 AM
Mr. Cline continued to address slide 12 and commented that
Alaskas biggest competition was the lower 48 states due to
investment agility and philosophy. He continued that in the
states there was a brief timeframe between investment and
project fruition. He said that Alaska was limited by the
cost of doing business in the state and the timeframe for
return on investment.
10:53:36 AM
Mr. Cline showed slide 13, "Fiscal Comparison,":
Chart illustrates general $/bbl cash breakdown and
tax burden for select jurisdictions over an oil & gas
development's life cycle
Assumes characteristics with new development in
Alaska, including constant cost environment
In reality each jurisdiction will have numerous
unique characteristics (development timeframe, cost
environment, infrastructure/market proximity etc.)
Alaska has relatively high government take compared
to select jurisdictions
Worth noting that some fiscal elements are considered
more burdensome than others
Non-Income based taxes, such as royalty, carry
elevated risk to investors because of timing and
it is not responsive to development/operating
costs
Many other competing jurisdictions, particularly
nonwestern, implement asset level contracts
Popular for oil and gas dependent governments
Allows for fiscal terms specific to assets and
reflecting current economic conditions
Often contains various risk mitigations
including fiscal stabilization
Mr. Cline detailed the bar graph on the right, Life Cycle
Indicative Value per Barrel Breakdown at $70/bbl.
10:55:34 AM
Co-Chair Stedman asked for clarification on the slide. He
observed that the graph showed that transportation costs
were the same for every jurisdiction.
Mr. Cline clarified that the data imported the fiscal
regimes of each jurisdiction to Alaska, rather than
exporting the Alaska fiscal regime to other jurisdictions.
Co-Chair Stedman announced that he would research the
concept for further clarity.
10:57:11 AM
Mr. Cline advanced to slide 17, "Concluding Remarks":
• Alaska oil & gas faces many challenges going
forward, but it remains an attractive and competitive
oil & gas province.
• Going forward tax revenues appear reliant upon new
oil & gas developments.
• Proposed tax changes will likely not lead to
material reduction of existing production.
The purely financial impact of the proposed tax
change is expected to have a limited impact on current
opportunities/investments.
• There is a downside risk if the tax change
discourages substantial new developments as the state
revenue lost may be materially greater than the
incremental tax generated from existing production.
10:59:49 AM
Co-Chair Stedman wanted to look at isolating the change of
the federal corporate tax rate and how it had affected the
regime in Alaska.
Mr. Cline agreed to provide the information.
11:00:19 AM
Senator Kiehl pondered that oil taxation was not binary.
He asserted that the bill tried to find the sensitivity
point. He looked forward to working with the consultant on
additional details.
Senator Olson discussed housekeeping.
ADJOURNMENT
11:01:11 AM
The meeting was adjourned at 11:01 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 114 Gaffney Cline Presentation 050523.pdf |
SFIN 5/5/2023 9:00:00 AM |
SB 114 |
| SB 114 RSB 19 vs RSB 22 production FINAL.pdf |
SFIN 5/5/2023 9:00:00 AM |
SB 114 SB 122 |
| SB 114 ConocoPhillips Testimony Presentation SFIN 05_05_23.pdf |
SFIN 5/5/2023 9:00:00 AM |
SB 114 |
| SB 122 DOR TAX 050523.pdf |
SFIN 5/5/2023 9:00:00 AM |
SB 122 |
| SB 114 Hilcorp slides RSB 19 vs RSB 22 production FINAL.pdf |
SFIN 5/5/2023 9:00:00 AM |
SB 114 SB 122 |
| SB 122 AOGA SB 122 Version H 05 08 23.pdf |
SFIN 5/5/2023 9:00:00 AM |
SB 122 |
| SB 114 Opposition Letters 4.pdf |
SFIN 5/5/2023 9:00:00 AM |
SB 114 |
| SB 114 Support Letters 5.pdf |
SFIN 5/5/2023 9:00:00 AM |
SB 114 |