Legislature(2011 - 2012)BUTROVICH 205
02/08/2012 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Overview: Gleason Decision of 12/30/2011 by Robin O. Brena | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 8, 2012
3:34 p.m.
MEMBERS PRESENT
Senator Joe Paskvan, Co-Chair
Senator Thomas Wagoner, Co-Chair
Senator Bill Wielechowski, Vice Chair
Senator Lesil McGuire
Senator Hollis French
Senator Gary Stevens
Senator Bert Stedman
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Cathy Giessel
COMMITTEE CALENDAR
OVERVIEW: GLEASON DECISION OF 12/30/2011 REGARDING THE ASSESSED
VALUATIONS OF THE TRANS ALASKA PIPELINE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
ROBIN BRENA, Attorney
Brena, Bell, and Clarkson, P.C.
Anchorage, Alaska,
POSITION STATEMENT: Testified during the presentation on the
Gleason Decision.
CRAIG RICHARDS, Attorney
Walker and LeBreck
Anchorage, Alaska,
POSITION STATEMENT: Testified during the presentation on the
Gleason Decision.
ACTION NARRATIVE
3:34:13 PM
CO-CHAIR JOE PASKVAN called the Senate Resources Standing
Committee meeting to order at 3:34 p.m. Present at the call to
order were Senators Wielechowski, French, Stevens, Co-Chair
Wagoner and Co-Chair Paskvan.
^Overview: Gleason Decision of 12/30/2011 by Robin O. Brena
OVERVIEW: GLEASON DECISION OF 12/30/2011 REGARDING THE ASSESSED
VALUATIONS OF THE TRANS ALASKA PIPELINE
CO-CHAIR PASKVAN said the committee would continue to take up
the only order of business today, a review of the decision
following the Trial de Novo of the 2007, 2008 and 2009 assessed
valuations of the Trans Alaska Pipeline System (TAPS), known as
the Gleason Decision of 12/30/2011.
3:36:06 PM
CO-CHAIR WAGONER asked what the current status of the Gleason
Decision was. He inquired if a judgment was handed down and if a
judgment was necessary prior to an appeal.
ROBIN BRENA, Attorney, Brena, Bell, and Clarkson, P.C., related
that no judgment had been made and one is required prior to an
appeal. He continued to say that the 2006 case is being briefed
to the Alaska Supreme Court, there has been a judgment, and it
has been appealed. The 2007 - 2009 cases have not yet received a
judgment.
CO-CHAIR WAGONER asked when the judgment might be made.
MR. BRENA said that it takes three-and-a-half years to move from
a Superior Court decision through an Alaska Supreme Court
decision.
CRAIG RICHARDS, Attorney, Walker and LeBreck, added that in the
2007-2009 case, Judge Gleason left the state bench and went to
the federal bench. The case is in the process of being handed
over to a new judge.
SENATOR STEVENS requested clarification of the logic of the
saying "as the price of a barrel of oil increased by $10, the
expected life of TAPS increases by 5.5 years."
MR. BRENA explained that it is the statistical correlation of BP
Exploration's description of the expected economic life of the
Prudhoe Bay field at different price points. He referenced a
graph that depicted price data points and Security Exchange
Commission (SEC) filings.
3:38:41 PM
SENATOR WIELECHOWSKI asked for clarification of "duty to
produce". He brought up the argument that Alaska is competing
with other places around the world for investment dollars. He
shared his understanding of "duty to produce" by relating that
the CEO of ConocoPhillips indicated if the legislature passes HB
110, it would invest $5 billion and produce roughly 90,000
barrels of oil. That would generate about a $3 billion net
present value profit to the companies at about a 92 percent rate
of return under the DL 1 leases. He questioned if it was a valid
argument that if a company can make money somewhere else, they
can ignore what their leases say.
SENATOR MCGUIRE joined the committee.
3:40:02 PM
MR. BRENA acknowledged the presence of Bill Walker, co-counsel
on the case.
MR. RICHARDS addressed Senator Wielechowski's question. He
explained that American oil and gas leases contain understood
terms and covenants, some implied and some expressed. One of the
fundamental tenants of oil and gas law is that if a landowner
leases their land to an oil company, the oil company has an
obligation to undertake all development projects if there is a
reasonable expectation of profit. That is called an obligation
to explore, produce, and market. If there is a net present value
positive project, the company is required to undertake that
project. That is often characterized in the "reasonably prudent
operator" standard, which says it would be unfair of the
operator to not undertake a profitable project in a lease and
take their money elsewhere. The operator is not allowed to "high
grade" investment projects with different leases.
MR. RICHARDS noted that these cases are litigated all the time
in Texas. As it applies to ACES, if an operator says they can
make more money undertaking a project in Trinidad than from an
Alaskan project, it is a violation of their lease obligation.
MR. BRENA related that he looks at it as to "whether you pay
somebody twice to do what they agree to do." They are paid once
to develop the North Slope resources and paid a second time
through a tax incentive. He discounted a need to pay them a
second time.
3:43:40 PM
SENATOR WIELECHOWSKI summarized the analysis under ACES as it
relates to Mr. Brena's philosophy. He said the state should be
looking to see if there is a positive net present value under
ACES for a future oil production project, and if there is, the
company would be legally required under their lease to go
forward.
MR. RICHARDS agreed. He said the law is clear on that point. He
suggested that the state would want to make sure that the taxing
regime is not driving out investment dollars.
3:45:06 PM
MR. BRENA summarized, "What they can and cannot make in another
lease in another part of the world is irrelevant to their duty
to produce the resource in Alaska."
MR. BRENA addressed Senator French's request for backup and
support to the suggestion that TAPS tariffs represent over-
collection of $13.5 billion. He referred to a packet of
information which provides that information: Judge Gleason's
order to that effect, order number 151 from the Regulatory
Commission of Alaska, and charts from Cicchetti Report 1525. He
listed several return deficiencies.
He pointed out that $13.5 billion of extra transportation rates
is a significant barrier to entry to independents that would
have to pay the full cost. The amount does not include the
demolition removal and restoration obligations or earnings.
3:48:46 PM
CO-CHAIR PASKVAN noted that the aforementioned documents are
available on BASIS and in the committee room.
MR. BRENA addressed Senator Wagoner's question about the impact
to producers from taking away existing tax credits. Mr. Brena
clarified that he was not suggesting that the legislature do
that.
CO-CHAIR WAGONER noted that his question was in regards to
taking tax credits away from explorers.
MR. BRENA said he was not suggesting taking away any existing
tax credits from anyone.
MR. BRENA summarized yesterday's hearing. He said it is
important to note three things: Judge Gleason used proven
reserves only in evaluating the life of TAPS, which would last
until about 2065 to 2068. Using proven reserves, Judge Gleason
set the limit at 100,000 barrels per day, even though the
evidence shows that TAPS could operate below that level. No
witness suggested a single example of a pipeline anywhere in the
world that could not figure out how to transport economic oil.
MR. BRENA referred to slide 84 as an example of minimum
throughput economics of continued operation of TAPS. He opined
that the oil companies would figure out how to transport the
stranded oil due to its tremendous value. He maintained that
TAPS will be operating when everybody in the room was dead.
3:54:55 PM
MR. BRENA turned to slide 86, the frustrations of obtaining
access to industry information. He expressed frustration that
the Department of Revenue makes little effort to find out
information that enables them to administer AS 43.56 properly.
He stressed that the department has the power to compel the
information, but doesn't. Instead, they rely on information
reported to the SEC, which is off by decades, and from experts
who don't have confidential information.
He said he believed both the department and the legislature
should use their power to get this information in order to
fulfill their duties to Alaskans. The department has chosen a
cooperative approach and they haven't gotten the information
they need.
MR. BRENA addressed another problem whereby the department
stamps everything "taxpayer confidential," whether it is or not.
It is difficult to determine what the tax policy should be
without necessary information from the companies.
3:59:38 PM
MR. BRENA said the statute allows the department to enter into
cooperative administrative agreements with municipalities so
that confidential taxpayer information could be shared with
municipalities. However, efforts to do so have been
unsuccessful.
He related that Steven Van Zant observed that the oil companies
provide experts that are not privy to necessary information. He
predicted that the legislature would run into problems with the
department because it lacked the data and information needed to
develop a tax policy.
4:01:55 PM
SENATOR STEDMAN joined the committee.
SENATOR WIELECHOWSKI thanked Mr. Brena for bringing up what he
called "one of the critical issues that we face." He noted that
this issue came up during the discussion of ACES. The
consultants hired at that time were shocked at the lack of
information the legislature had. Five years later the same holds
true. He maintained that DOR has stonewalled repeatedly despite
numerous requests for information. He inquired what the
department was saying to Mr. Brena.
MR. RICHARDS reported that he deposed the state assessor who was
very frank about the fact that the department has made a policy
decision to work cooperatively with industry because they
believe that doing so will result in more information. Mr.
Richards opined that history has shown that not to be true. The
state assessor made it clear that he has never used the
authority he has to compel the oil companies to provide
information. He would first have to receive permission from the
commissioner to do so.
CO-CHAIR PASKVAN asked if the effect of the policy is that the
State of Alaska is in the dark when making these policy
decisions.
MR. RICHARDS said that was a fair characterization of the
department's position on AS 45.56.
MR. BRENA discussed the kinds of information the legislature
ought to have from the oil companies. Legislators should demand
accurate information regarding the information oil companies use
for their own decision making, such as which projects they
intend to develop without the use of tax incentives.
4:07:53 PM
He related that the information used in the Ad Valorem Case was
inconsistent with what was actually used to make internal
company decisions.
He said that the information companies provide to the investment
community tends to exaggerate their worth, production schedule,
and oil value in order to increase the value of their company
and their ability to finance. He noted they share their
development plans with the BP Royalty Trust because they are
obligated to do so for the purpose of SEC filings. The
department should have all of that information, also.
He continued to say that when a company prepares for a sale,
such as of the assets on the North Slope, it provides
information to potential purchasers, including documents
detailing the value of those assets. The legislature has no
access to that kind of information.
SENATOR FRENCH said he shared Mr. Brena's concerns. He reported
that he has requested an example of, under the category of
information used for internal decisions, a project made
uneconomical by ACES. He said he sent a letter to BP and
ConocoPhillips requesting one example of a project on hold due
to ACES and has received no response, in spite of the industry
having said those projects exist.
4:13:38 PM
MR. BRENA related that the areas of information that he is
presenting to the Senate Resource Committee have been found to
be inconsistent and not credible based on Judge Gleason's public
ruling, in the context of ad valorem tax litigation. He opined
that the legislature has a duty "to run this to ground" and
obtain hard date in order to make good policy decisions
regarding the future of Alaska.
MR. RICHARDS said he views ACES as a complex tax and to
understand the impact it has on decision making at the corporate
level, a person needs the data that goes into the model. Without
that information, there is no way to know whether any reduction
in taxes is the right amount or that it's targeted in the right
manner.
MR. BRENA provided an example of testimony by Jeff Bray from
Exxon. He said one contradiction he took advantage of during the
ad valorem litigation was the "doomsday throughput scenarios."
He read a quote where he was trying to get Mr. Bray to provide
evidence that the throughput profile would change if the tax is
changed. Mr. Bray said he certainly hoped that it would be the
case, but it would be speculative to say it would. He continued
to say, "We wouldn't give that much weight with all the
uncertainties involved."
Mr. Brena concluded that what people tell SEC matters; if they
lie, they go to jail. What people do internally matters; they
get fired if it's not accurate. What people tell purchasers,
they don't want to litigate forever and it proves out to be
wrong in a multi-billion transaction. What people tell the
legislature, taxing authorities, and rate regulators seems to be
different than what they are telling everybody that matters.
CO-CHAIR PASKVAN asked if that witness was under oath.
MR. BRENA said yes.
4:20:09 PM
MR. RICHARDS made some points about DOR's treatment of
confidentiality. He turned to slide 97 to provide examples.
There are two statutory provisions that provide an exception to
the Alaska Public Records Act for taxpayer information. One is
an exception for taxpayer information, which includes
particulars of business affairs of the taxpayer or items
divulged on tax returns. The department takes that exception and
paints it as broadly as possible to include everything a
taxpayer provides. The department even treats production
forecasting information as taxpayer confidential material. It is
not even for tax purposes, but rather for budgeting purposes for
its Revenue Sources Book.
Judge Gleason observed that the department was treating budget
information as confidential material. He opined that it was a
policy call by DOR to allow the producers to feel comfortable
about providing information. It also reflects a lack of desire
by DOR to sift out what is confidential and what is not. He
believed that in a state where 80 percent of revenues come from
a couple taxpayers on the North Slope, and with a history of
"closed door deals," it should be the policy of DOR and the
legislature to encourage full disclosure of information.
MR. BRENA reported that the standard for making something public
within the context of litigation is whether there is competitive
harm and the public interest or right to know does not outweigh
the potential.
4:24:35 PM
MR. BRENA provided a summary of the presentation with six take
away points:
Don't use bad tax policy to correct a failed
competitive marketplace; instead insure an open,
competitive market. Sound tax policy should consider
the market structure and should not substitute tax
incentives for behavior which would normally and
organically occur in an open marketplace. Market
dominance by the "Big Three" is real and results in
the underdevelopment of Alaska's resources. One need
not look any further than the Big Three for the raw
power that they exercise over the development of
Alaska's natural gas resources as leverage to lower
their oil taxes. Alaska is "outgunned" by the Big
Three.
Don't pay the Big Three producers to do what they are
already contractually obligated to do. Sound tax
policy should not incent behavior and goals that
producers are otherwise already doing.
If you have to pay more to get the job done, pay the
producers most willing to do the job. Two out of the
Big Three have demonstrated that they are not
interested in expanding exploration and development in
Alaska. Independents are knocking at the door.
Increases to the price of oil are making exploration
and production more profitable, regardless of the
progressivity of the tax structure. At issue is how to
divide up profit at higher oil prices. Investment
decisions are justified based on long-term forecasts.
Projects will get done regardless of how the state
divides up the pie.
It is absolute fiction that TAPS is in imminent threat
of shutting down. Sound tax policy should not be
deliberated under the context of a fictional cloud or
crisis. There is evidence that production will
stabilize and increase over time, with or without tax
incentives.
4:31:04 PM
MR. BRENA mentioned one of Mr. Bradford Keithley's rebuttal
points, "It's about production, stupid," and agreed that it was
about production, but added that the state needed to "take off
the table" that TAPS will shut down any time soon. He noted that
Mr. Keithley didn't appear in the Gleason Decision case and
isn't familiar with the discovery and the confidential
materials.
MR. BRENA noted the last of six concluding points:
The legislature should have complete and accurate
information upon which to base its tax policy. The
legislature has a fiduciary responsibility to all
Alaskans and should look at the oil company's data
used for internal decision making, financial
communities, and potential purchasers.
MR. BRENA thanked the committee for the opportunity to speak.
4:34:30 PM
CO-CHAIR WAGONER returned to Mr. Brena's first point. He related
that he believed in "trust but verify." He said he planned to
offer an amendment providing a tax holiday if a company shows
proof that they will increase production over and above their
current level of production. He stated he did not have a concern
about TAPS shutting down any time soon. Instead of giving back
$2 billion, he suggested incentivizing increasing production.
4:36:05 PM
MR. BRENA said he shared many of the views Senator Wagoner
expressed. He opined that when there is a closed market and
barriers to entry, the first thing that should be done is to
open up the market to competition. In order to promote a tax
holiday, a base line would be needed to assure that companies
don't currently plan to increase production and haven't already
budgeted money to do so. He reiterated that production will
stabilize, followed by upward production, regardless of what is
done.
CO-CHAIR PASKVAN asked where the state is on the decline curve
and how policy makers should react to it.
MR. BRENA reported that "elephant fields follow hyperbolic
decline curves." Those fields can remain flat for a long period
of time. The state is currently on the "drop down to the point
of flattening out." When TAPS was built there were 9.6 billion
barrels of proven reserve; today there are 7 billion or 8
billion. He predicted that those barrels would be coming through
the line due to high prices of oil.
4:40:39 PM
CO-CHAIR PASKVAN asked Mr. Richards about the federal mineral
law comparing Alaska with other U.S. jurisdictions and
questioned how Alaska might be unique.
MR. RICHARDS responded by agreeing with what former-Governor
Wally Hickel pointed out in the Mineral Leasing Act of 1920. The
federal government made a policy decision that when they got rid
of federal lands, they were going to keep the mineral deeds.
That requirement became imbedded into the statehood compact for
Alaska. Alaska received 103 million acres and when it disposes
of its acres, it will keep the mineral deeds. Alaska will always
be the resource owner, unlike Texas or Oklahoma, and should act
like a landowner.
CO-CHAIR PASKVAN requested continuing substantive factual
information from Mr. Brena and Mr. Richards.
SENATOR WIELECHOWSKI thanked the presenters.
4:43:26 PM
There being no further business to come before the committee,
Co-Chair Paskvan adjourned the Senate Resources Standing
Committee at 4:43 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| BRENA_2012-02-06 FINAL.pdf |
SRES 2/8/2012 3:30:00 PM |
|
| BRENA_Barriers To Competitive Entry_Feb 8.pdf |
SRES 2/8/2012 3:30:00 PM |
|
| BRENA_ray test- legislature_Feb 8.pdf |
SRES 2/8/2012 3:30:00 PM |
|
| List of Company Documents for Legislature 2-8-12.pdf |
SRES 2/8/2012 3:30:00 PM |