Legislature(2021 - 2022)SENATE FINANCE 532
03/03/2022 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Competitiveness of Alaska's Oil & Gas Regime | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
March 3, 2022
9:01 a.m.
9:01:21 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Donny Olson (via teleconference)
Senator Natasha von Imhof
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
Senator Lyman Hoffman
ALSO PRESENT
Mike Cline, Director, Corporate Strategy, Gaffney Cline;
Nick Fulford, Director, Gas and Energy Transition, Gaffney
Cline.
SUMMARY
^PRESENTATION: COMPETITIVENESS OF ALASKA'S OIL & GAS REGIME
9:01:44 AM
Co-Chair Stedman explained that the committee would hear a
presentation on the competitive nature of the states oil
and gas tax regime from one of the states consultants. He
thought Gaffney Cline had worked with the state since three
administrations previously. He commented that the company
had helped the state navigate through many issues dealing
with oil and gas. He commented on the number of changes in
the industry, including some changes in the ability to
finance, the competitive position, decarbonization, and a
current war.
Co-Chair Stedman mentioned that the consultants worked
through the Legislative Budget and Audit Committee, which
was currently chaired by Senator von Imhof. The joint
committee was non-partisan and engaged a variety of
consultants. He explained that Gaffney Cline would present
to the committee as well as to the House and to the Senate
Resources Committee. Co-Chair Stedman asked the testifiers
to discuss their background and the background of their
organization, including past work, to give the public an
idea of the firm and its work.
9:05:27 AM
MIKE CLINE, DIRECTOR, CORPORATE STRATEGY, GAFFNEY CLINE,
introduced himself and relayed that he was with the London
office. He informed that Gaffney Cline and Associates was
an international energy consultant with offices in Houston,
London, and Singapore primarily. The firm had been
providing services to the international oil and gas and
energy sector since 1962. The firms focus was not just
technical, but was on strategic and commercial matters
including oil and gas and energy transition. The firm had
done quite a bit of work in Alaska over the years. The work
had been both commercial and strategic.
9:06:27 AM
NICK FULFORD, DIRECTOR, GAS AND ENERGY TRANSITION,
GAFFNEYCLINE, introduced himself. He had worked in the
state during 2014 and 2015, working extensively on the
Alaskas Liquid Natural Gas (AKLNG) Project. He commented
on the states niche in the liquid natural gas (LNG)
industry, having been the first Pacific exporter to Japan.
He commented that he had been in the industry for 45 years.
Mr. Cline discussed the presentation "State of Alaska -
Alaska's Competitive Position - February 2022" (copy on
file). He looked at slide 2, "Overview":
Global
-Oil Supply and Demand
-Gas Supply and Demand
-Energy Transition Implications
What does this mean for Alaska?
-Oil Industry and Outlook
-Natural Gas Opportunity
What is Alaska's competitive position going forward?
9:09:26 AM
Mr. Cline spoke to slide 3, "Volatility, Disruption &
Supply in the Oil & Gas Industry":
?The oil & gas industry has been battered by deeply
disruptive events in recent years leading to
volatility.
Oil price collapse of 2014-2016 and Covid-19.
Deep cost cutting, project delays and
cancellations will have long term supply
implications.
The impact of energy transition on the energy
mix and related shift in the long-term prospects
of the industry.
Most recently dramatic price increases as the
global economy emerges from Covid-19 against a
backdrop of geopolitical concerns in Eastern
Europe and the Middle East.
?Oil and gas companies have generally performed poorly
and investors have demanded better capital discipline,
improved financial performance and action on climate
change.
Mr. Cline mentioned the striking changes in oil and gas
over the previous ten to twelve years. He referenced inter-
rivalries in Oil Producing and Exporting Countries (OPEC).
He offered the perspective that it was important to
understand which occurrences were important to the long-
term impact on the industry, which he thought was always
subject to volatility. He referenced the oversupply from
1985 to 2000 and the impact on prices and the industry. He
referenced the financial crisis in 2008, which had caused a
short lived but dramatic downturn in prices.
Mr. Cline continued his remarks and referenced a recent
price recovery. He offered his opinion that although there
had been a change, the underlying conditions had not
changed that much and a general condition of oversupply
would still exist. He pondered what had changed and
suggested that oil and gas companies were looking at
different ways of doing business. He mentioned greater
rigor in evaluating projects and being more selective. He
mentioned energy transition.
9:13:56 AM
Mr. Cline referenced slide 4, "Energy Demand Outlook":
?World energy demand is expected to grow but many
different scenarios are being discussed with key
differentiators being:
Costs of energy supply particularly fossil fuels
vs renewables/low carbon.
The nature of governmental and private
initiatives to decarbonise.
The pace of change.
?Under all scenarios significant investment is needed
to meet demand and offset existing oil & gas decline
Mr. Cline asserted that long-term prospects for energy
demand had not changed. The change was in how the energy
demand was met, and there was increasing change in the
energy mix. He commented that oil and gas and coal had been
under some pressure from renewables such as low-carbon
fuels. He pondered the nature of the change and how quickly
it would occur. He thought there was consensus that the
energy transition was moving forward, and there were a lot
of governmental and private initiatives supporting the
change. He predicted that there would be a lot of
investment into renewables and low-carbon energy, and over
time a transition (to some extent) away from oil and gas
and coal.
9:15:45 AM
Co-Chair Bishop asked if Mr. Cline's demand outlook
included the fact that China, India, and Russia were not
participating in the same way.
Mr. Cline answered affirmatively. He qualified that there
were multiple scenarios to consider. He suggested that
while many countries and companies had made pledges and
promises, in reality they were not doing everything they
had promised. He thought it was clear that energy demand
would be met somehow, and if not met by renewables, the
demand would probably be met by oil and gas and coal. He
referenced several scenarios that were more or less
optimistic about the use of renewables versus oil and gas.
Senator von Imhof thought the first bullet on the slide
addressed the major issues. She thought all could agree
that globally there would be an effort away from oil and
gas. She pondered the time frame of the transition, which
she thought no one knew. She thought de-investing in
hydrocarbons could risk a gap in supply and demand if the
alternative energy industry was not ready to fill the gap.
She asked if Mr. Cline was privy to some of the
conversations that indicated how the technology was going.
Mr. Cline thought that it was important to keep investing
in oil and gas projects, and asserted that there was a
great deal of uncertainty about how the energy mix would
change over time and how quickly. He commented on the
complexity of the issue. He thought it was important to, at
a minimum, have oil and gas as a bridge to any future. He
thought Mr. Fulford might have useful information regarding
the pace of technology adoption.
9:19:10 AM
Mr. Fulford thought there were three factors to consider:
the growth of renewables, the supply place to be taken by
hydrocarbons, and the question of whether the hydrocarbon
industry could relaunch itself in a different manner. He
mentioned carbon capture and sequestration being used in
conjunction with hydrogen. He posited that the matter was
hinged upon economics. He mentioned projects being
developed in Texas. He thought there were visionary
hydrocarbon projects being looked at that could extend the
time over which oil and gas could be economically produced,
potentially quite significantly, into the future.
Mr. Cline considered slide 6, "Energy Transition":
? The global energy mix is decarbonizing and the pace
of change is accelerating.
COP26 UN Climate Change Conference more than
140 nations committed to eliminate 90% of GHG
emissions.
2050 Net Zero GHG Targets: US net zero no later
than 2050 with a 50-52% reduction from
2005 levels by 2030.
2030 Methane Reduction Target: Over 100
countries commit to reduce methane emissions by
30% by 2030.
? Investment dollars will flow disproportionately into
clean energy.
The Bipartisan Infrastructure Deal includes
US$6.5 Bn for national network of EV chargers and
US$65 Bn in clean energy transmission and
electric grid in support of a 100% pollution free
power sector by 2035.
International finance: 25 countries, including
the US, and 5 financial institutions pledged to
end new international finance for unabated fossil
fuel energy by the end of 2022.
? Hydrocarbon producers with the highest cost and the
highest carbon emission intensity products will be the
first to be impacted.
Mr. Cline commented that it was not difficult to gain
funding for clean energy projects. He pondered the impact
of an energy transition on the state and thought the impact
would be significant. He thought Alaska fell into the
category of those that would be the first to be impacted.
9:22:54 AM
Senator von Imhof cautioned that clearly it was more ideal
to go into renewable energy and mentioned that it was
better for the environment, wondered if the state could
survive on alternative energy and mentioned frozen pipes
and lack of energy during extreme weather. She referenced
Texas. She thought a diesel or gas backup was essential.
Mr. Cline thought Senator von Imhof brought up an important
issue. He mentioned the structural issues of alternative
energies such as wind and solar power. He thought part of
the effort was to look at the overall infrastructure. He
thought the issue in Texas had been that the overall
infrastructure had not been up to the task and thought
there were different points of view on the reason. He
thought one of the attendant items with energy transition
was the major task and massive investment to make things
possible. He mentioned upgrading power grids. He thought
the role of oil and gas in the future would be to deliver
energy when needed.
9:25:46 AM
Mr. Fulford commented that looking at energy projections on
slide 4, all the items hinged on the massive
electrification of the global economy. He reiterated Mr.
Cline's commentary on the significant investments required
and the complexity of the task of an energy transition. He
posited that coping with the intermittence of renewable
energies in a highly electrified global economy required
things like battery storage or other means to deal with
issues like the problem in Texas. He thought the role of
gas (in terms of providing grid stability) was perhaps
undervalued, but at the moment was the only effective tool
to compensate for the intermittency seen in renewables.
Mr. Cline turned to slide 6, "Competition for Investment
Dollars and Capital Markets":
?Over last decade international oil companies have
moved from emphasizing growth to focusing on capital
discipline and shareholder value.
Super-Majors have initiated extensive divestment
initiatives and focused more heavily on "core"
regions or projects.
Capital has become reallocated to Share-Buyback
programs and carbon related opportunities.
?When large companies divest there is an opportunity
for smaller companies but funding is a challenge:
Banks and investors are reconsidering exposure
to oil & gas.
Project disruption as smaller companies struggle
to finance their interests.
Source: Financial Times Article sourcing Woodmac
Mr. Cline commented that Alaska was competing for
investment as a resource owner and referenced pressure on
the oil and gas companies competing for investment dollars
for finance. He relayed that there was a strong push from
investors for oil and gas companies to perform better
financially, because over time the asset class had not
performed that well. He mentioned the additional pressure
of becoming greener. He mentioned the trend of large
companies divesting assets. He mentioned the trend of
public and smaller companies trying to pick up the divested
assets. He summarized that the environment had changed for
many of the larger oil companies.
9:29:41 AM
Senator Wielechowski asked if Mr. Cline was familiar with
the legal obligation of an oil company to produce when it
took out a lease.
Mr. Cline agreed that specifically leases, agreements, and
contracts had a requirement of some kind to explore,
appraise, and develop per the terms.
Senator Wielechowski understood that there was a legal duty
to produce if it could make a reasonable profit.
Mr. Cline stated it was true that some contracts had a more
or less rigorous work program and minimum commitments
embedded. Some contracts were not so specific. He agreed
that companies did not have to progress a development if it
was not thought to be profitable enough.
Senator Wielechowski had heard from the Department of
Revenue that the reasonable internal rate of return for a
company to produce was around 20 percent, depending upon
the risk.
Mr. Cline thought Senator Wielechowski's comment was
reasonable and noted that it was not the same for every
company nor every asset class.
Senator Wielechowski asked if Gaffney Cline had done
previous analysis on the internal rate of return for
Prudhoe Bay under Alaska's Clear and Equitable Share (ACES)
plan.
Mr. Cline relayed that he had not been involved in such an
analysis, but it sounded like the kind of thing Gaffney
Cline did.
Senator Wielechowski referenced research and testimony from
Gaffney Cline and mentioned a document.
Co-Chair Stedman asked Senator Wielechowski to share the
date of the document.
Senator Wielechowski referenced a document from October 30,
2007, that showed the analysis Gaffney Cline did at Prudhoe
Bay indicated that the oil companys internal rate of
return after taxes was in excess of 60 percent under ACES.
He commented that the industry had testified that ACES had
been onerous, and now the state had a lesser tax rate. He
recalled that Gaffney Cline had testified that it had
stress tested and found that Prudhoe Bay had remained
profitable after a number of increases and a high
progressivity. He shared that the document concluded that
the Prudhoe Bay drilling program was so profitable that
even under the most extreme net tax structure, oil
companies would want to continue their reinvestment
program. He asked if there had been any more recent
analysis that had changed the opinion offered in 2007.
Mr. Cline affirmed that if Gaffney Cline had done an
analysis, the opinion would probably have changed because
between 2007 and the current day, there had been a lot of
change. He could not comment specifically on the numbers
cited by Senator Wielechowski. He thought it was important
to recognize that 2007 and 2022 were very different
environments. He could not comment further without
reviewing the material.
Co-Chair Stedman relayed that the committee would address
some of the subject matter later in the presentation.
9:34:19 AM
Senator Wielechowski asked for an update to the analysis.
Co-Chair Stedman noted that he was present during the 2007
presentation. He asked for the title of the presentation.
Senator Wielechowski stated that the presentation was from
Gaffney Cline.
Co-Chair Stedman relayed that Gaffney Cline had worked for
both the legislature and the administration. He shared that
he would go back into the records to identify the
information.
Mr. Cline displayed slide 7, "Response to Changes in Market
Conditions":
?In response to changes in market conditions, it is
common for proactive governments to reassess existing
fiscal terms and to consider incentives to ensure
continued exploration and development in the domestic
energy sector.
?How have the compared jurisdictions responded?
Most have allowed for tax reductions or other
fiscal concessions since 2015.
In June 2020, the Norwegian parliament enacted
temporary changes to the Petroleum Tax Act "in an
effort to mitigate underinvestment in the Norwegian
shelf stemming from market conditions and uncertainty"
"In order to protect jobs and investment in the North
Sea..." The UK implemented multiple tax reductions and
simplifications in 2015 and 2016
Alberta reviewed royalties in 2016 in an effort to
simplify an encourage investment. Other changes were
effected as well in less hydrocarbon developed
jurisdictions such as Newfoundland & Labrador.
Royalty Rates for shallow water Gulf of Mexico leases
were reduced in order to encourage new developments.
?Numerous other contract based adjustments have been
implemented and considered globally for asset specific
contracts through renegotiations, new marginal field
allowances and improved terms for newly issued
contracts
Mr. Cline mentioned that there had been a number of
different techniques employed since 2014, that were mainly
tax oriented, designed to encourage companies to continue
to and explore and invest. He mentioned the rebate of
exploration losses. He highlighted that there were things a
resource owner could do in a volatile environment to try
and keep companies investing. He cautioned against big
breaks in investment and lack of project progress for a
period of time.
Co-Chair Stedman asked if Mr. Cline wanted to address the
slide material.
Mr. Cline relayed that Norway had been very active in
applying techniques and incentives to keep oil companies
investing and exploring. In 2020, when there was a big
downturn the industry, Norway had tried to make it easier
by allowing companies to try and recover the tax value
exploration costs. He described the activity as de-
risking. He mentioned that the United Kingdom (U.K.) had
similarly offered reductions in tax. He thought Alberta,
Canada had done the same.
Mr. Cline showed slide 8, " Alaska Oil."
9:38:12 AM
Mr. Cline looked at slide 9, "Alaska Oil Outlook":
Strengths
1. Significant discovered resources
2. High-potential exploration
3. Good operators, investors and service companies
Weaknesses
1. Challenging and high cost operating environment
relative to other opportunities
2. Regulatory and fiscal stability challenges
3. Difficulty of converting commercial discoveries
into successful developments
Opportunities
1. Price recovery could enable material new
developments of discovered resources
2. Carbon capture and usage could provide advantages
in carbon conscious world
Threats
1. Continued volatility undercutting the case for
large, long-term investments
2. Decelerating demand due to changes in the energy
mix and energy efficiency
3. Competition with lower carbon and lower cost
producers
Mr. Cline mentioned the Willow project with reference to
issues around regulation and permitting. He read the
"weaknesses" listed on the slide, which he characterized as
structural problems. He cited that many of the states
projects were high-cost and took many years to achieve
economic potential. He commented that if the oil price
recovery was sustained, it might open up opportunities for
development in the state.
9:42:00 AM
Co-Chair Stedman addressed the decelerating demand listed
as a "threat" on the slide. He thought the state had the
ability to export its oil. He mentioned the market in the
Pacific and asked if Mr. Cline felt there might not be a
market for Alaskas oil.
Mr. Cline did not think there was a risk of not having a
market, but pointed out that the state would have to
compete with Middle East oil. He knew Alaska had been
successful exporting to China. He mentioned vigorous
ongoing competition from low-cost producers. He did not
know whether the competition would contract the premiums
the state was used to getting for crude oil, but knew the
competition would be an ongoing feature.
Mr. Cline addressed slide 10, "Alaska and the Lower 48
Developments":
?Alaska's biggest competitor is Lower 48 conventional
and unconventional oil.
Targeting the same US focused companies.
Often active in both Alaska and Lower 48.
Similar legal/fiscal environment.
?Unconventional can be high cost but the investment
proposition is different.
Understanding of unconventional wells and
proximity to market reduce development risks.
Limited pre-production development cost.
Deep pool of participating companies (large to
small) and financing options.
Developed and capable service industry and
optimized infrastructure/hydrocarbon trading.
Ultimately, differentiator is risk difference
inherent in drilling more US$10 MM wells that
could be selling crude in a matter of months vs.
US$8 Bn of investment with 20 year horizon like
Willow.
Mr. Cline mentioned a factory drilling approach, which
allowed companies to more easily pull back and restart
developments, in contrast with conventional developments
such as Willow.
9:44:55 AM
Senator von Imhof thought slide 10 was telling, and
commented on the bar graph that showed Alaska represented
in blue. She pointed out the decline from 2000 to 2020, and
noted that other locations were ramping up, particularly
Texas. She emphasized that there was less production, less
investment, and less volume in Alaska compared to other
states. She referenced Senator Wielechowski's comments and
pondered that if Alaska was that lucrative, the bottom bar
would be growing or holding steady. She thought it seemed
that Texas and North Dakota were having more success.
Mr. Cline thought Senator von Imhof had made an interesting
observation. He commented on developments in Texas that had
been able to ramp up production. He reminded that Alaska
was not only competing with other conventional high-cost
developments but also with unconventional developments. He
commented on the different risks and challenges associated
with getting lucrative projects in Alaska to the point of
production.
Senator Wielechowski reminded that in 2013 the legislature
had passed SB 21, which had cut oil taxes. He recounted
that at the time the state had been promised more
production, more investment, more revenue, and more jobs,
but the opposite had occurred. He queried what more the
state needed to do to bring more development to the state.
He wondered if cutting taxes more would bring more
production to the state.
Mr. Cline commented that Alaska was facing a situation with
large and mature declining fields, which was an ongoing
process. He thought if the state wanted more production,
new projects needed to be more attractive fiscally and in
the sense of the overall market. He mentioned the Willow
project and the Pikka project, which could slow the
downward trend. He emphasized that new assets needed to be
developed.
9:49:02 AM
Co-Chair Stedman looked at the chart on slide 10 and
reflected on Texas and North Dakota and shale oil. He noted
that the basins were much more open than in Alaska. He
commented on Alaskas expensive and remote basin. He
commented on the private ownership of other basins. He
thought that Alaska had a cumbersome regulatory
environment. He asked how to draw comparisons with other
states when so many factors were unequal.
Mr. Cline agreed that the market conditions in the Lower 48
were very different, including private ownership and
willingness to progress projects quickly. He mentioned
additional factors such as proximity to markets and
closeness to infrastructure. He acknowledged that Alaska
had some challenges including access and the cost of
transportation to market the oil.
Co-Chair Stedman asked if the state should be looking at
comparative conventional oil basins in the Arctic.
Mr. Cline thought it would be reasonable to do as Co-Chair
Stedman suggested. He cited that Gaffney Cline compared
Alaska to other high-cost developments. He reiterated that
transportation was an issue, and could also be an
interesting point of comparison with similarly situated
developments in the Arctic.
9:52:37 AM
Senator Wielechowski thought Co-Chair Stedman had made a
good point. He commented that Norway was also a high-cost
environment, and it had a tax rate of 70 percent and high
oil production. He asked what Norway was doing that Alaska
should be doing. He thought it was obvious that the tax
rate was not driving the industry away in Norway or other
countries that had tax rates of 70 percent or more. He
asked what Alaska could be doing to attract more
investment.
Mr. Cline thought Senator Wielechowski had made a good
observation. He agreed that the marginal tax rate in Norway
was 78 percent. He thought there were fundamental
differences between Norway and Alaska. He agreed that the
government take was high in Norway and suggested that some
government take was more attractive to companies than in
others. He noted that Alaska was an income-based system,
where companies were taxed on profit without royalty. He
explained that the tax burden was pushed to the post-payout
period, which governments liked.
Mr. Cline continued. He thought another important feature
was that in addition to the nature of the fiscal approach,
Norway had good resources and potential, good access to the
market, were well-regulated, and had a very stable fiscal
environment. He commented on the stability of the tax rate
over time. He mentioned recovering on exploration losses
and other tax policy-oriented techniques of taking risk
away from oil companies. He thought there were many factors
that made Norway an attractive environment.
Co-Chair Stedman commented that Norway had a national oil
company and were able to pick partners according to
profitability. He thought there were structural
differences. He thought the U.K. had changed its oil and
gas tax structure more than Alaska.
Mr. Cline thought Co-Chair Stedman had made a good point.
He explained that one of the problems had been change in
taxes in the U.K. He mentioned that the U.K. had proposed a
windfall profits tax because of the recent runup in prices.
He thought Norway seemed much more stable.
Co-Chair Stedman wanted to comment on slide 9 and slide 10.
He mentioned litigation and wondered how many projects in
Norway faced litigation for 5 or 10 years.
Mr. Cline answered some. He thought that Norway was less
litigious.
9:58:22 AM
Mr. Cline advanced to slide 11, "Oil Development,
Production and Mr. State Revenues":
?Prolific but rapidly maturing basin.
Dramatically impacting state revenues.
?Despite exploration success, new developments are not
replacing production declines.
Relatively high cost environment.
Permitting and regulatory challenges have
delayed major activities and heightened
perceptions of associated risk.
Tax stability may be considered a risk.
Fierce competition for O&G investment dollars.
Mr. Cline commented that slide 11 was a wrap-up slide for
the topic of Alaska oil.
Co-Chair Stedman discussed the decline in production. He
commented on presentations to the committee in 2008 and
2009 that had shown a parabolic curve predicting a decline
of 2 percent to 4 percent, depending on how active the
industry was in curtailing the decline. He thought there
had been a normal response from the industry and the
sovereign, and the production trajectory had been predicted
a decade previously.
Mr. Cline affirmed that Co-Chair Stedman was correct in
that for a conventional development, there was usually a
ramp up, plateau, and gradual decline. He continued that
the developments that occurred had also been seen in the
North Sea, where the big companies such as BP gave way to
smaller companies that were focused on extending the
economic life of projects. He thought because the state had
a few very large assets, the challenge was how to fill the
production gap.
Co-Chair Stedman commented on previous testimony on the
magnitude of Prudhoe Bay as the elephant field, and the
importance of continuing Prudhoe Bay into the future.
Mr. Cline agreed.
10:02:44 AM
Co-Chair Stedman thought it was not universally recognized
by the legislature that there was a fairly normal decline
curve. He pondered that the state needed to deal with the
geology of the basin regardless of policy.
Mr. Cline did not think the trend was reversible, but he
did think it was possible to slow it down and optimize it,
which would be incredibly valuable for the state.
Co-Chair Stedman qualified that he was not diminishing the
industrys push to stabilize and lengthen the life of the
field, which had taken much work and resources. He
emphasized that the trend was predictable.
Senator von Imhof hoped there was consensus to extend the
production tail end of the curve. She considered the
factors that could be controlled, as well as all the
circumstances outside the states control. She pondered the
effects of past decisions and a holistic way of looking at
events. She thought making isolated statements regarding
single elements was too constricting and did not account
for numerous factors. She wanted to be cautious about
laying blame on the effects of one action the state had
taken.
Co-Chair Stedman did not think anyone was trying to lay
blame and asserted that there were competitive forces from
both directions.
10:06:47 AM
Mr. Fulford showed slide 12, "Alaska Gas."
Mr. Fulford looked at slide 13, "Natural Gas Price
Volatility 2020-2022," which showed a graph entitled
'Global Gas Price History Since 2020.' He informed that the
next section of the presentation would address development
of the gas resource, which he thought most people would
perceive as a longer-term goal for the state. He commented
that after several weeks of price volatility in Europe and
Asia, there was a significant geopolitical event in Europe
and an extraordinary runup in the price of gas based on
concerns over Russian supplies. He cited that the price of
gas in Europe was about $60. He commented that the majority
of United States (U.S.) LNG exports were being sent to
Europe. He considered pricing basis for the two vessels per
day that went to Europe and compared it to feedstock. He
referenced about positive cash flow of about $200 million.
Mr. Fulford compared $5 gas in the U.S. to $60 gas in
Europe. He thought the arbitrage could only be captured
through LNG. He thought one of the broader considerations
of the events of the previous few days was that all major
gas suppliers would be looking at alternative supplies of
LNG, and would rate things like political stability and
ease of technical production very highly. He thought it was
quite likely that a number of major gas buyers would be
considering Alaska and wondering if they should pursue
projects.
Mr. Fulford continued to address slide 13 and considered
that not all LNG was priced at wholesale indices. He
discussed the price of LNG. He commented on the current
price volatility that the industry had experienced since
2018 due to structural oversupply of LNG in the market, and
other factors. He mentioned the impact of the Covid-19
pandemic on the market. He mentioned vessels being
delivered at a cash loss of $8 million to $10 million per
vessel, which led to supplies being turned down and
cancelations. He had been in the LNG industry for over 40
years and never seen a period of time like the previous two
years and its extraordinary pricing environment.
10:11:42 AM
Mr. Fulford continued his remarks. He qualified that
unfortunately from an LNG perspective, the price volatility
was an unwelcome feature. He mentioned new projects coming
on and used the example of China and its quick recovery. He
suggested that there would be a new opening for new LNG
projects to start up over the following few years. He
mentioned an expansion in Qatar. He summarized that it had
been a difficult time for the LNG industry, but there was
an underlying trend of increasing demand, notwithstanding
the energy transition features. He emphasized that events
in Ukraine had put the focus on secure, politically stable
suppliers such as Alaska.
10:13:09 AM
Co-Chair Stedman thought one of the states advantages was
a stable government. He asked Mr. Fulford to address
pricing. He mentioned the term Japanese cocktail, in
reference to pricing. He asked about a correlation between
Asia and Europe. He asked Mr. Fulford to address trends and
contracts. He thought the market had been dynamic over the
previous several years.
Mr. Fulford addressed pricing and explained that the global
gas industry had been seeking a way to establish price
transparency for several years. He noted that the
conventional pricing method had continued for many years.
He mentioned the emergence of the U.S. as a major energy
exporter, and that natural gas was a commodity that was
independent of oil and responded to its own supply and
demand features. He commented that buyers and sellers were
trying to establish a reliable mechanism to reflect the
underlying true value of natural gas in global markets. He
described the use of a mix of indices in the pricing
formulas, which was currently being used quite extensively.
Mr. Fulford continued to address Co-Chair Stedman's
questions. He noted that any LNG contract written in the
previous ten years typically had a kind of price re-opener
or price redetermination. He furthered that the industry
was in a very dynamic situation, and with LNG becoming so
fungible, and the major factor representing change was
freight. He emphasized that freight was a very active
feature of the market, and for any new LNG project freight
was a major factor in deciding on a marketing and pricing
approach.
10:17:09 AM
Co-Chair Stedman asked Mr. Fulford to elaborate on the
length of contracts, which he thought had been
substantially shorter and more dynamic.
Mr. Fulford thought Co-Chair Stedman had brought a very
interesting current topic. He explained that that in the
context of the commoditization that was happening in LNG,
more cargos were being bought and sold on spot basis. The
longer-term contracts that were being signed were now
typically shorter in length. He observed that there had
been an awareness amongst buyers that it was no longer
reliable on the commoditized spot market to buy LNG. He
estimated that he had seen three Chinese contracts signed
with U.S. exporters in the Gulf in the previous two months,
in the region of 10.2 to 10.5 percent Brent, for 15 to 20
years. He thought the period of time from 2018 to 2021,
when one could send a text and trade an LNG cargo to arrive
in the next few days, had passed. The practice had been
replaced by a very balanced procurement strategy that
included long-term reliable supply, some medium to trading,
and a short-term almost-daily trading pattern.
10:19:23 AM
Mr. Fulford referenced slide 14, "Global Market Context
LNG Developer Perspective":
?A new window of opportunity is potentially present
for Alaska but significant challenges must be faced.
Given the energy transition, this could be the
last chance to monetise the substantial gas
resources in a traditional manner.
AK LNG will require very large capital
investments and the State will need to weigh the
risks carefully.
?Industry and sources of finance have been materially
impacted by the volatility of the last 2 years:
European concerns over Russia supply
exacerbating volatility
Mr. Fulford commented that not surprisingly, the price
volatility and challenges seen over the previous few years
had significantly impacted the flow of LNG projects
reaching the market. He mentioned security issues in
Mozambique and cost issues for many projects. He described
the lack of long-term buyers for U.S. projects, which had
prevented the typical finance sources from funding
projects. He referenced a rapid supply tightening, and as a
result LNG projects were seeking more favorable backing
from financers.
Mr. Fulford continued his remarks. He mentioned the
emerging feature of carbon intensity. He described that
most of the U.S. Gulf Coast projects had been pursuing an
emissions strategy of net-zero projects. He referenced net-
zero cargos delivered in the past few years, which had used
nature-based offsets that worked out to about $2.5 million
per cargo. He described that the origins of the practice
had been the French governments refusal to approve a
contract between a French buyer and U.S. seller on the
basis of the carbon intensity of the gas. He thought the
event had sent the message through all the projects that
carbon intensity was something customers would be looking
at. He thought the feature had to be examined carefully in
the context of AKLNG.
10:22:23 AM
Senator von Imhof looked at the second item under the first
bullet on slide 14, which posited that AK LNG would require
very large capital investments and the state would need to
weigh the risks carefully. She asked if it was correct to
say that oil had a higher return on investment than gas.
Mr. Fulford thought Senator von Imhof's statement was a
good generalization. He explained that partly for LNG, a
lot of the investment was infrastructure, and the elements
typically had a much lower risk compared to the exploration
risk or reserve risk in the oil industry.
Senator von Imhof asked if the state did the same amount of
investment in other areas such as mining or fishing or
tourism, there would not be the same revenue return as gas
or especially oil.
Mr. Cline explained that oil and gas were currently very
profitable but went up and down. He generalized that
companies were able to be quite profitable in the crude oil
business, and historically more so than with gas. He
thought that extractive industries like oil and gas
involved a lot of investment but could be profitable,
probably more so than other industries.
Co-Chair Stedman thought it could be simply stated that
other industries could not replicate the value of oil. He
was concerned with the first paragraph on slide 14 that
iterated that given the energy transition, it could be the
last chance to monetize the substantial gas resources in a
traditional manner in Alaska. He thought there had been
similar comments on the subject over the previous twenty
years. He thought there were other impediments that were
blocking the state from monetizing the gas. He mentioned
the impediment of the gas being stranded in the Arctic. He
asked the testifiers to comment on whether it was the last
chance to monetize the gas.
10:26:07 AM
Mr. Fulford thought that a degree of explanation was
needed. He referenced energy transition and thought it was
clear that within a generation, the shape of the global
energy sector would change significantly. He referenced a
previous comment that hydrocarbons could play a very
significant role even in a net zero world, but the
technologies to exploit them were likely to be different.
He considered Alaska's natural gas resource and thought it
may be that exploiting it through an LNG project was less
likely as the world moved to a net zero position. He
thought there could potentially be additional
opportunities, and listed carbon sequestration, hydrogen,
and ammonia. He thought reexamining the resource and how
best to exploit it could change over the next few years as
the energy transition built momentum.
Mr. Fulford turned to slide 15, "High level guideline
project economics compared to other global sources of LNG
breakeven analysis to China (central case)":
?Alaska is competitive from a feed gas and freight
cost perspective.
?However, main challenges to the project arise from
high processing, pipeline and liquefaction costs.
Driving down costs in these 3 elements of the
value chain will drastically improve
competitiveness.
Unless they are addressed, Alaska will continue
to rank as a high cost producer unlikely to be
profitable at expected long run pricing levels.
Mr. Fulford discussed the AK LNG Project, noting that the
management of the project had changed, and the Alaska
Gasline Development Corporation (AGDC) in particular had
done work to build on what was done by Exxon and others. He
thought it had been recognized from the outset that cost
represented a major hurdle for any Alaskan LNG project to
overcome. He mentioned cost advantages from feedstock and
freight. He considered the gas treatment plant, the
pipeline, and the liquefaction plant, which represented
exceptionally high levels of investment. He commented that
the track record of the LNG industry had not addressed some
of the cost constraints very successfully.
Mr. Fulford discussed financing and noted that a lot of the
success of the LNG project rested around infrastructure,
and with the infrastructure came a high financing cost. He
mentioned looking at project structure and de-risking the
project as ways to bring down the financing cost. He knew
that AGDC had worked to reduce the cost of financing.
10:30:41 AM
Co-Chair Bishop referenced slide 14 and asked about the
slides reference to the states last chance to monetize
its gas. He asked if the viewpoint had factored in a
pipeline-only option for exporting the gas, and that
someday the gas could leave Point Thomson with no pipeline.
Mr. Fulford commented that considering different concepts
would be a positive route for the Alaska project. He
remarked on the substantial cost of the pipeline (compared
to the Gulf Coast competition), as well as that of the gas
treatment plant. He explained that the characterization on
the slide was based on a conventional LNG development plan
involving the gas treatment plant, the pipeline, and the
liquefaction.
Senator von Imhof referenced the cost of financing, and
statutory mill rates. She asked if the communities had
agreed to the arrangement, and if AGDC had addressed
property taxes.
Mr. Fulford shared that he had worked on the topic back in
2014 and 2015 along with the Department of Revenue. At the
time, the standard approach to property tax (20 mills based
on assessed value) had represented a significant cost
burden for the project in the early years to the order of
$2.5 billion per annum. He recounted that the extensive
discussion with borrowers at the time were aimed at a
levelized payment in lieu of tax, which would have resulted
in a lower burden on the project in the early years but
would have held it on a constant level. He thought there
had been draft legislation prepared at the time, but it had
never progressed. He thought the level of property tax
burden at the start of the project would be considered
difficult to accommodate and would need to be looked at in
the context of other government take.
10:34:22 AM
Co-Chair Stedman thought it was clear that the chart on
slide 15 showed that the pipeline cost was significantly
higher than Alaskas competitors. He observed that the
liquefaction terminal cost was also significant in
comparison. He asked Mr. Fulford to expand on the issue.
Mr. Fulford explained that he had not yet mentioned the
significance of the price of steel and cited that the price
had increased by about 250 percent over the previous two to
three years. The increase was a significant element of any
gas or oil processing facility. He thought the price of raw
material costs for a project were significantly higher than
a year or two previously. He mentioned the distance of
Alaskas projects as a factor, as well as the potential
need for an $8 million to $10 million gas treatment plan on
the North Slope.
Co-Chair Bishop commented that some members had suggested
purchasing pipe ten years previously and thought the state
could have achieved a great return on investment even if
the pipe was not used on a project.
Co-Chair Stedman asked Mr. Fulford to address cost overruns
and asked how sensitive the potential AK LNG project was.
Mr. Fulford considered that whenever his company looked at
an LNG project, the largest concern was capital cost. He
commented on the price of gas being a concern. He mentioned
the trend of negotiating a fixed price contract. He thought
LNG developers were adopting a more aggressive stance with
contractors to put some of the overrun risk onto those
building the project. He thought the practice had proved
partly successful. He referenced the Gulf Coast and
stabilization of costs.
Co-Chair Stedman thought the matter would be addressed in
greater detail if and when the state moved forward with the
project.
10:39:01 AM
Mr. Fulford considered slide 16, " Alaska LNG":
Strengths
1. Substantial low cost resources
2. Low upstream technical risk
3. Proximity to Asian demand markets
4. Climate assists with lower liquefaction cost
Weaknesses
1. Substantial infrastructure build required in
challenging environment
2. IOCs have withdrawn support, funding and expertise
from the projects
3. Competitiveness relative to other sources
Opportunities
1. Capex control and reductions improve economics
2. Carbon intensity reductions
3. Alternative structuring and funding options
Threats
1. Directly competing adjacent project (Can)
2. Competition from USGC, Qatar, Russia etc.
3. Emergence of new shale based exporters
4. Energy transition
Mr. Fulford quickly summarized the factors on slide 16,
which he thought had been previously addressed in part. He
thought the state was well-placed for Pacific LNG buyers.
He thought the cost framework of the AK LNG project was a
significant challenge and mentioned the lack of one of the
significant LNG players. He thought the Gulf Coast was the
states main competitor, and considered that achieving an
equivalent supply would be a main goal for the state.
Mr. Cline displayed slide 17, "Alaska's Competitive
Factors."
Mr. Cline highlighted slide 18, "OPEX/CAPEX Comparison":
? Alaska is a relatively high cost environment:
Most development statements and data suggests US$8-
15/Bbl of development costs, which is comparable to
other high cost developments (ongoing unconventional
developments & deepwater).
Operating costs are dependent on existing
facilities, remoteness, weather and accessibility but
broadly observed to be between US$7-12/Bbl.
Significant transport costs of US$8-$10/Bbl, which
is higher than most other upstream opportunities.
Unit costs further challenged due to gas and NGL
monetization limitations.
Mr. Cline summarized that Alaskas competitive position was
a combination of issues including resource potential,
market conditions, fiscal approach, and applicable costs.
He drew attention to the graph on the right entitled
'Indicative New Development Costs,' and highlighted that
the states transportation costs were higher than other
competitors and was a key issue that had a big impact on
competitiveness.
10:43:12 AM
Co-Chair Stedman referenced Senator Wielechowski's question
from the previous day regarding ownership of the
transportation corridor.
Senator Wielechowski referenced transportation costs, and
asked if the fact that the pipeline companies owned the
transportation infrastructure (and received a tax
deductible regulated rate of return of at least 9 percent)
impacted the figure shown on the chart.
Mr. Cline referenced the tariffs and the regulated rate of
return, which were important and did contribute towards the
cost. He mused that the cost could be lower but reminded
that regulated rates of return were designed to allow the
pipeline owner to get the investment back on a rate of
return.
Senator Wielechowski asked if Mr. Cline factored in the
regulated rate of return when calculating the cost of
transportation.
Mr. Cline stated that the firm had focused on the actual
data and costs and did not look further to determine if the
regulated tariffs were reasonable or not.
Co-Chair Stedman commented on earlier production increases
and noted that regardless of where the oil came from, it
all had to come down the pipeline. He referenced earlier
concerns on the rising tariff but noted that an increase in
marginal production was a benefit to all parties.
Mr. Cline thought Co-Chair Stedman had made a good
observation. He mentioned the issue that with declining
production, at some point the tax became less viable. He
believed the current operator had done a good job in
bringing down the threshold.
10:46:44 AM
Mr. Cline looked at slide 19, "Fiscal Comparison":
? Government take analysis assumes costs for new
development in Alaska.
Assumes US$70/Bbl crude oil sales value and net
of US$30/Bbl of Costs (Capex, Opex & Transport).
Each jurisdiction will have unique
characteristics (development timeframe, cost
environment, infrastructure/market proximity
etc.)
? Alaska has relatively high government take compared
to select jurisdictions, including GOM, Lower 48 and
Canada (Alberta).
Mr. Cline addressed the graph on the slide entitled 'Life
Cycle Indicative Value per Barrel Breakdown at $70/bbl.' He
noted that the slide had considered a number of different
jurisdictions, including Norway, the Lower 48, the Gulf of
Mexico, and the U.K.
Senator Wielechowski thought it looked as though corporate
income taxes were counting for 10 percent of the government
breakdown. He asked about the assumed rate charged by the
state.
Mr. Cline stated that the rate was different for each
state.
Senator Wielechowski asked about the rate for Alaska.
Co-Chair Stedman explained that historically there had been
three major producers on the North Slope, and the state had
set up the tax structure so the three corporations were C
corporations, not anticipating that one of the members
would leave the state. Another company had come into the
state with a different structure (Sub-Chapter S) that
changed the government share relationship. He summarized
that the three recipients were the federal government, the
state, and the industry. He asked how Gaffney Cline had
incorporated the state income tax into the analysis.
Mr. Cline relayed that the firm had not incorporated the
Sub-Chapter S tax basis into its calculations. He
acknowledged that the tax status made a difference for the
state.
Co-Chair Stedman reminded that Chapter S signified a tax at
the individual rate on an annual basis, and a C corporation
was taxed for corporations. He continued that there was a
shift within the structure that was unanticipated, and the
committee had been struggling with it.
10:50:20 AM
Senator Wielechowski remarked that one of the largest
producers on the North Slope paid no corporate income
taxes. He emphasized that the number shown on the graph for
government take in Alaska was extraordinarily flawed. He
cited that in FY 22, the corporate income tax had been $145
million on $11 billion of oil going down the pipeline,
while in 2023 it was projected to be $240 million on nearly
$13 billion in oil. He considered the production value, and
$5.8 billion in profit, and estimated that amount was
nowhere near a 9.4 percent. He thought the slide showed a
20 percent royalty was shown for the state of Alaska.
Mr. Cline stated that the graph was based on the actual
royalty rates in Alaska. He commented that the assessment
was a fiscal comparison from the companies wanting to come
in and was a competitive assessment. He postulated that a
company wishing to come into the state would look at the
actual tax rates for a company like itself (which was
likely a C corporation) and make its assessment on that
basis. He continued that it was true that an S corporation
might have a different situation. He reiterated that
Gaffney Cline had tried to do a competitive assessment with
the perspective of what a company would see of the Alaska
fiscal system when deciding whether to make an investment.
Co-Chair Stedman wanted to clarify that the chart addressed
the life cycle of a selected investment. He thought Senator
Wielechowski was using numbers in a 12-month window at
$70/bbl under current production cost and taxes. He thought
there were two different topics being discussed. He asked
if the slide considered the life cycle analysis of a
particular investment, a one-year slice in time over a
fiscal year.
Mr. Cline affirmed that the graph showed a life cycle
assessment.
Co-Chair Stedman thought the life cycle assessment moved
the numbers somewhat, since there were both new and old
entrants, aging valuable profitable fields, and fields that
made nothing. He wanted more clarity about what was being
discussed.
10:54:35 AM
Senator Wielechowski suggested that the graph appeared to
show that the royalties took up the 20 percent government
take. He noted that royalties were 12.5 percent, so the
graph appeared wrong. He commented that production tax, at
$70/bbl oil, was $4.63, while the slide showed a much
higher number. He thought the slide showed lower production
taxes for the Lower 48 compared to Alaska. He cited a
roughly 10 percent gross tax in Texas and North Dakota. He
thought the corporate income tax numbers were incorrect. He
thought the royalty numbers in other states were much
higher than Alaska. He asked about the State Special Oil
Income Tax.
Mr. Cline explained that the category was a supplementary
tax designed to capture the excess rent, usually in oil and
gas extractive industries. The tax was an income tax that
was applied on top.
Co-Chair Stedman thought the committee could ask Gaffney
Cline to return and look at the life cycle costs, and also
address the actual numbers from the previous two years and
the following year. He was concerned about mixing life
cycle costs with annual production and actual cash flow,
which he thought was messy. He suggested that Gaffney Cline
could put a finer point on the information. He thought the
information was confusing and cautioned that care was
needed when considering Texas and North Dakota, which could
distort the data. He wanted an apples to apples
comparison.
Mr. Cline stated that he was happy to share the information
on how the numbers on the slide were created.
Co-Chair Stedman asked about further information regarding
royalty trends. He thought there had been changes to the
royalty structure in North Dakota and Texas due to
macroeconomic issues.
10:58:53 AM
Senator Wielechowski thought the information on the slide
was damaging to the state. He referenced statements from
producers commenting that Alaska was too expensive. He was
concerned that companies would look at the information and
think the states government take was high, and asserted
that the numbers were wrong. He wanted to examine the
government take at different price levels. He compared
Alaska with the Lower 48, which had a gross royalty of 25
percent on average, and a gross production tax of 10
percent. He thought the price was paid at different prices
of oil. He thought the companies could not write off costs
in North Dakota and Texas, while in Alaska companies could
write off 100 percent of costs. He mentioned deductible tax
credits. He thought Alaska would be much more competitive
at lower prices where it was not taking nearly as much as
gross tax regimes.
Co-Chair Stedman thought Senator Wielechowski had made a
reasonable request. He thought Alaska clearly had a tax
structure set up to handle the different prices. He
suggested that Gaffney Cline run the model at $10
increments down to $30/bbl.
Senator von Imhof agreed with Senator Wielechowski that it
was important to get slide 19 correct. She appreciated
Gaffney Cline going back to check the numbers, and thought
it was important to differentiate between life cycle costs
and annual costs. She observed that Norway allowed a
delayed payment to the state. She thought it was material
that Alaska had a minimum tax and received the money early
on. She did not want to lose sight of the bigger picture
that the state was in the twilight years of oil production.
She asserted that when companies invested, there was money
to the state treasury and local governments, as well as
high paying jobs and economic stimulation statewide. She
cautioned against getting too mired down regarding amounts
of taxes and government take. She did not think anything
went to the state for the Natural Petroleum Reserve-Alaska
(NPRA) or the Alaska National Wildlife Refuge (ANWR).
11:03:34 AM
AT EASE
11:06:21 AM
RECONVENED
Co-Chair Stedman relayed he would adjourn the meeting and
continue the presentation at the afternoon meeting after
the planned agenda.
ADJOURNMENT
11:07:07 AM
The meeting was adjourned at 11:07 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 030322 DOR Response to March 2022 Order of Operations SFIN 2022.03.02 signed.pdf |
SFIN 3/3/2022 9:00:00 AM |
|
| 030322 AMENDED Alaska Gaffney Cline Oil Gas Competitiveness 3.3.22 SenFi.pdf |
SFIN 3/3/2022 9:00:00 AM |