Legislature(2009 - 2010)BUTROVICH 205
02/04/2010 03:30 PM Senate RESOURCES
| Audio | Topic |
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| Update by the Administration - Aces and Its Effect on Oil and Gas Investment | |
| 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 4, 2010
3:36 p.m.
MEMBERS PRESENT
Senator Lesil McGuire, Co-Chair
Senator Bill Wielechowski, Co-Chair
Senator Hollis French
Senator Bert Stedman
Senator Gary Stevens
Senator Thomas Wagoner
MEMBERS ABSENT
Senator Charlie Huggins, Vice Chair
COMMITTEE CALENDAR
Update by the Administration - ACES and its Effect on Oil and
Gas Investment
PREVIOUS COMMITTEE ACTION
No previous action to record.
WITNESS REGISTER
PATRICK S. GALVIN, Commissioner
Alaska State Department of Revenue (DOR)
POSITION STATEMENT: Presented an overview of ACES.
MARCIA DAVIS, Deputy Commissioner
Alaska State Department of Revenue (DOR)
POSITION STATEMENT: Discussed the ACES Status Report.
ACTION NARRATIVE
3:36:51 PM
CO-CHAIR LESIL MCGUIRE called the Senate Resources Standing
Committee meeting to order at 3:36 p.m. Present at the call to
order were Senators French, Stedman, Stevens, Wagoner and
McGuire.
^ Update by the Administration - ACES and its Effect on Oil and
Gas Investment
Update by the Administration - ACES and its Effect on Oil and
Gas Investment
3:37:27 PM
PATRICK S. GALVIN, Commissioner, Department of Revenue (DOR),
Anchorage, Alaska, introduced Deputy Commissioner Marcia Davis
and outlined his presentation. He said he would give a brief
review of Alaska's Clear and Equitable Share (ACES) for the
people at home and then turn it over to Deputy Commissioner
Davis to talk in more detail about the ACES status report and
some of the data that was generated to look at the question of
ACES impact on the investment climate.
3:38:18 PM
COMMISSIONER GALVIN began with a high-level overview to remind
everyone of what the structure of ACES is intended to accomplish
and how that may play into its impact on the investment climate.
He explained that the term production tax value (PTV) is at the
heart of the calculation of what will actually be due; it is the
sales price of Alaska's oil at market minus the cost of the
tankers and pipeline to get the oil to market; and then, because
this is a net-based tax, minus the cost to produce the oil. It
is the capital and operating expenditures associated with
producing the oil, which companies deduct from their revenue in
order to generate the production tax value. So, he said, two
moving parts are going to drive PTV - the price and the
expenditures. (Slide 3)
SENATOR FRENCH interjected that the equation on slide 3 should
include the word "minus" on the top line.
COMMISSIONER GALVIN agreed. He continued saying that the other
two terms they need to look at are the base tax rate on
production, 25 percent under ACES, and the progressive surcharge
rate, which is the additional tax rate that is added to the 25
percent based upon that extra production tax value. When the
profit on a barrel of oil goes above $30, then the tax rate
increases. Between $30 and $92.50 profit, the rate goes up 4
percent per dollar of additional production tax value. Once the
profit gets above $92.50, which is the break-point of a 50
percent total tax rate between the base tax and the progressive
surcharge, it increases at 1 percent per dollar up to $342.50 of
profit, which is at a 75-percent total tax rate.
SENATOR FRENCH asked Commissioner Galvin to remind him where the
PTV kicks in on the price per barrel of oil.
3:42:24 PM
COMMISSIONER GALVIN replied that it is different for each
taxpayer, because each will have a different cost (both
operating and capital) associated with producing their oil. A
company that has a new development project under way may be
expending a significant amount of money during those years and
gets to deduct that immediately from its production tax value.
On average, across the North Slope a ballpark figure of $25 to
$27 is used to represent the per-barrel aggregate of
transportation and lease expenditures. That means that the
market price (West Coast Alaska North Slope [ANS] price) needs
to be approximately $56 to $57 before progressivity kicks in.
3:43:28 PM
SENATOR FRENCH said he thought the first $25 to $27 per barrel
escaped production tax and between $25 and $50 the tax is 25
percent, and that progressivity kicks in after $50.
COMMISSIONER GALVIN added that a minimum tax acts as a floor.
3:44:20 PM
COMMISSIONER GALVIN commented that for those who want more
detail on this type of calculation, they go through a much more
rigorous analysis of the different components in Senate Finance.
He reviewed the big picture tax calculation, which was shown on
slide 4 as follows: multiply PTV times the base tax rate to get
the base tax, multiply PTV times the progressive surcharge rate
to get the progressive surcharge, combine the base tax and the
progressive surcharge to get the pre-credit tax bill. He said
credits are in multiple forms and come right off the tax bill,
dollar-for-dollar. If the amount after subtracting the credits
is negative and credits remain that can't be applied against the
tax bill, then those can be transferred to another tax bill or
submitted to the state for full payment.
3:45:40 PM
SENATOR HUGGINS and CO-CHAIR WIELECHOWSKI joined the meeting.
COMMISSIONER GALVIN explained that small producers, those with
production levels less than 50,000 barrels per year, get a $12-
million off-the-top credit and an across-the-board 20-percent
credit on all capital expenditures. The exploration incentive
credit is 30 to 40 percent for certain expenditures that are
outside the current operating areas, and if a producer has no
production and is incurring operating and capital costs that
result in a negative PTV, the 25 percent tax rate results in a
loss carry-forward that can be used as a credit in future years.
3:47:41 PM
COMMISSIONER GALVIN provided two examples to demonstrate the way
the state participates in these investment factors. The first
assumed a new entrant, a company that has no production in the
state at this time but is pursuing an exploration project that
requires a $200 million investment (slides 6 and 7). Depending
on the location of that exploration activity, they would receive
a capital credit of 20 to 40 percent on those expenditures; so
their investment is worth $40 to 80 million in terms of what
they would get back from the state. They would also likely incur
a tax loss which, at a base tax rate of 25 percent, would result
in an additional credit, bringing credits to $50 million.
Between the two, they would qualify for credits on that $200
million investment of between $90 and $130 million. They could
either submit the credit to the state for cash back or find a
taxpayer who is willing to buy the tax credit from them.
3:50:11 PM
SENATOR FRENCH said it looks as if a new entrant is going to get
back almost half of his money; it is like a 50-percent-off sale
through the state.
COMMISSIONER GALVIN confirmed that under the right circumstances
a new entrant would get 45 to 65 percent of their investment
costs. He added that although they probably will not get to it
today, in future discussions this session they will talk about
some of the provisions that may hinder that transaction.
3:51:06 PM
COMMISSIONER GALVIN continued that either way, whether they try
to get the cash back or transfer the credit to another taxpayer,
the state pays for that $200 million exploration activity.
Recognizing that exploration itself is risky, the state bears
the risk associated with failure as well as a large part of the
cost of the exploration project.
He moved on to the second example, which assumed an incumbent
with current production (slide 8). If this producer pursues a
$200-million development project within the existing field that
is not eligible for the exploration incentive program, the
capital credit associated with that investment will earn a 20
percent credit - so $40 million comes off the top. Reducing
their production tax value by the amount of their capital
expenditure reduces their taxes in the amount of their PTV
reduction - $200 million times 25 percent - a $50-million
reduction in their taxes.
The second part to note, Commissioner Galvin said, is that the
PTV establishes their progressivity surcharge - the higher their
PTV, the higher they slide up that scale. By making a $200
million investment and having it immediately reduce their PTV,
they slide back down the scale, so the tax rate that will apply
to all of their production is reduced as well. In addition, the
$200 million gets multiplied by the reduced progressivity
surcharge, so both of those components add value, and the state
will provide an immediate tax benefit of at least 45 percent of
the cost of that development investment.
3:54:48 PM
SENATOR FRENCH asked if that assumes oil prices are over $25 and
they are paying a production tax.
COMMISSIONER GALVIN answered that even if they were not paying a
production tax, they would get the credit and be able to reduce
their PTV. If that brought them down below $27, it would still
provide them with a similar economic benefit.
SENATOR FRENCH said he thought they had established that they
aren't paying any production tax with oil below $25 to $27 a
barrel and he didn't think the investment shouldn't get them any
benefit but the credit.
COMMISSIONER GALVIN said the $25 to $27 he mentioned before was
an average. If an individual taxpayer was otherwise at the
average and then added a $200-million expenditure, the
deductions would amount to more than $25 per barrel and become a
loss carry-forward for a subsequent credit.
SENATOR FRENCH ventured that for an existing producer with a new
development expenditure, the state would pay at least $90
million and probably more at today's oil prices.
3:56:41 PM
COMMISSIONER GALVIN confirmed that the state will pay a total of
at least $90 million for an existing producer with a new
development expenditure and bears the risk if that development
fails.
3:57:30 PM
COMMISSIONER GALVIN recapped the key points in the two previous
examples (slide 10). He said there is no difference in the cash
flow to the state, whether the investment is made by an existing
producer or a new entrant; either way, the state is going to be
out the money in the form of reduced initial revenue, or in the
payment of a credit certificate. But by taking on some of the
risk and reducing the initial investment hurdle for these
companies, the state is making the investment more attractive
than it would otherwise be. Recognizing that, the state is
generally providing more than 50 percent of the cost of all new
investment and becomes the largest investor in exploration and
development in the state under this system.
3:58:54 PM
COMMISSIONER GALVIN pointed to a graph of ACES nominal,
marginal, and effective tax rates (slide 11), which illustrated
some of the confusion that occurs in public discussions
associated with ACES, because the tax rate can be described in
many different ways. He explained that when he says at certain
price-points the marginal tax rate associated with the ACES
system goes up to almost 90 percent, it sounds like an
incredibly high number, but that doesn't convey the whole
picture. What most people think of with regard to the tax rate
is the number in statute, which starts at 25 percent, and climbs
through progressivity, and slides out potentially to 75 percent;
that is what is referred to as the nominal tax rate. The
percentage of revenue that a producer pays in taxes at a given
market rate is referred to as the effective tax rate, and is one
that most people are familiar with.
He explained that the term "marginal tax rate" is a much
different calculation and determines how much of the additional
revenue represented by a $1 increase in the price of oil is
going to be paid in taxes. Because of progressivity, that number
goes up fairly steeply. Oh the other hand, as that number goes
up, every dollar a company spends reduces its taxes by the same
percentage. When the PTV is in the $92.50 range at an average of
$120 per barrel market price, the rate hits that 90 percent
level and then drops off immediately. At that point in time,
every dollar spent by a company reduces their taxes by about
$.90. So the tax rate the company is paying is not really 90
percent. At that point, as the chart shows, they are paying less
than a 40-percent actual tax rate, so their incentive to invest
is greater. They can't control the price, but if they spend
money it has a significant impact on their tax bill. At these
rates, the state is participating at upwards of 90 percent.
4:04:21 PM
SENATOR FRENCH asked Commissioner Galvin to go back one slide to
confirm his understanding of the tax rate. He said it appears
that at a market price of $100 per barrel the effective tax rate
is 28 or 29 percent; that rate represents the company's total
revenue divided by the total tax paid.
COMMISSIONER GALVIN said that is correct.
4:05:02 PM
SENATOR STEDMAN asked what impact these different tax rates may
or may not have on a company's decision to continue an
investment. He said some people have expressed concern that the
marginal rate puts them at a disadvantage when competing against
other locations in the company for capital.
CO-CHAIR MCGUIRE said she has also heard those concerns
expressed - that for some producers the ability to profit at the
high end becomes the driving force behind decisions regarding
new investment.
4:06:22 PM
COMMISSIONER GALVIN responded that they have to recognize that a
lag time exists between the decision to invest and when the
expenditures are actually made. If a company knew the price
would be in the $110 range when they actually spend the money,
they could count on the fact that the state would be paying the
bulk of the expenditure. The worst-case scenario is that prices
will be low when they make the investment and high when the
production comes in.
4:07:44 PM
CO-CHAIR WIELECHOWSKI said he recalls that the administration
and the legislature made a conscious decision to structure ACES
this way to encourage reinvestment in Alaska. The state was
seeing oil companies making billions of dollars in profit and
not reinvesting any of that money in Alaska, even though the
state had fairly low tax rates. Under the Economic Limit Factor
(ELF), many fields had 0 percent severance tax rates and yet the
state did not see any investment.
4:08:47 PM
COMMISSIONER GALVIN said that is an accurate depiction of how
this system is intended to work. It is intended to tax the money
that is taken out of state at a higher rate than money that is
invested back in Alaska.
CO-CHAIR WIELECHOWSKI asked if that was a good policy call.
4:09:27 PM
COMMISSIONER GALVIN replied that he would like to let Ms. Davis
go through her presentation before addressing that issue, so
they have all of the information in front of them.
4:09:43 PM
MARCIA DAVIS, Deputy Commissioner, Department of Revenue (DOR),
said she would be covering the information that was developed by
the Department of Revenue's Economic Research Group, including
the revenue comparisons under the various production tax systems
the state has had: ELF, Petroleum Production Tax (PPT) and ACES.
She would also look at lease expenditures, standard deduction
experiences, the oil and gas employment figures, and drilling
activity levels.
She said the ACES Status Report was released on January 14, 2010
(slides 13-14). The department began preparing it in late summer
to determine whether ACES is working the way it should. While
they were working on it, they began receiving inquiries from
various legislators asking the same questions Commissioner
Galvin was asking, so they rolled the answers to as many of
those questions as they could into the report. They looked at
confidential taxpayer data consisting of monthly and annual tax
returns that had a level of detail that enabled them to look at
what types of expenditures were being made. The department was
given the right to request information from operators on what
they were seeing ahead in the one to four years, so they could
get an idea of where those companies thought they were going in
terms of expenditures. They requested employment statistics from
the Department of Labor and Workforce Development (DOLWD); they
inquired of the Alaska Oil and Gas Conservation Commission
(AOGCC), which is the agency that issues well permits and tracks
completion reports throughout the state; they also obtained
information from the Department of Natural Resources (DNR).
MS. DAVIS said the question they were asked most often was how
revenue to the state compares under ACES versus PPT versus ELF,
so slide 15 shows a bar graph comparing those figures for fiscal
years 2007 through 2010. She noted that the revenue projections
for 2010 are based on the oil price forecast issued in fall of
2009 at $66.93 per barrel. In each of the years shown on the
graph, ACES did generate a larger amount of state revenue under
the production tax structure. She pointed out that ACES
outperforms the prior system, ELF, at about $51 per barrel West
Coast price, but the corollary is also true, that ELF
outperforms ACES at under $51 per barrel West Coast price.
She explained that, because ACES is a net tax, one has to ask
what lease expenditures are being deducted. Lease expenditures
are made up of two categories of expenses: capital expenses,
which are hard costs that have a life and can be depreciated,
and operating expenditures, which tend to be upkeep, services,
labor and other things that have to be done over and over again.
4:15:11 PM
SENATOR FRENCH asked if she had any data prior to 2007.
MS. DAVIS replied that she had some data for CAPEX and some data
for OPEX on the next two slides. The capital expenditures trend
shown on slide 16 was increasing from 2007. She added that the
operating expenditures shown were real reported costs, not the
standard deduction for those earlier years.
4:16:11 PM
CO-CHAIR MCGUIRE asked Ms. Davis if the data differentiates
between capital expenditures for repairs to existing
infrastructure and for new infrastructure.
MS. DAVIS answered that they did try to separate the details of
those expenditures using the data they had by identifying in a
conservative manner those things that were clearly tied to
wells, drilling, workovers, coiled tube drilling, and costs that
were directly associated with anything related to production.
They considered everything else "other," which would be
maintenance and things companies would do anyway. They found
that both production-related and maintenance-related capital and
operating expenditures were going up.
4:17:50 PM
CO-CHAIR WIELECHOWSKI said that is helpful to know and asked if
she had that broken down somewhere.
MS. DAVIS answered that they had not represented the break-down,
in part because that is confidential taxpayer information. It
can be aggregated, but it varies by unit. Unit information for
at least three owners can be displayed, but not for fewer than
three owners. So that would provide an incomplete portrait.
4:18:42 PM
CO-CHAIR WIELECHOWSKI asked if the bar graph representing CAPEX
and OPEX included maintenance costs or not.
MS. DAVIS answered that it included maintenance and production.
4:18:58 PM
At ease due to technical difficulties.
4:20:53 PM
CO-CHAIR MCGUIRE called the meeting back to order.
4:21:13 PM
CO-CHAIR WIELECHOWSKI asked Ms. Davis to confirm that
maintenance is included in the figures represented on the bar
chart.
MS. DAVIS said it is.
CO-CHAIR WIELECHOWSKI asked if she could give them a rough
estimate of how much is maintenance.
MS. DAVIS replied that one of the department's challenges is
that is has data from the tax returns only. So, they have
partial data for 2007, all of 2008, and monthly returns for
2009; they wouldn't have final returns for 2009 until March of
2010. They did the calculation to see trends, she said, but
hadn't done a chart for that yet. She said she expected to have
better data as they get a few more years under their belts.
4:22:24 PM
SENATOR FRENCH opined that what many people are referring to
when they say "maintenance costs" is really the costs that BP
incurred as the result of their failure to maintain their flow
lines for so long.
MS. DAVIS responded that while that was certainly the start of
it, under ACES any costs that are related to gross negligence or
associated with a spill cannot be deducted. That kind of
experience, however, teaches operators what needs to be done; so
one would expect to see more maintenance costs after an incident
like that.
4:23:23 PM
SENATOR HUGGINS asked if Pt. Thomson is a significant part of
these numbers.
MS. DAVIS answered that part of the forecast of North Slope
expenditures from fiscal year 2009 into fiscal year 2011
includes some large expenditures for new development in Pt.
Thomson, Oooguruk, and Nikaitchuq.
SENATOR HUGGINS said he recalled Exxon talking about how
expensive the up-front costs of their investments were. He
wondered how large a chunk of the listed numbers it was.
MS. DAVIS responded that confidentiality provisions prevent her
from speaking with reference to Pt. Thomson individually.
However their revenue source book identified Pt. Thomson,
Nikaitchuq, and Oooguruk as a significant chunk of the capital
expenses they expect to see going forward.
4:24:51 PM
COMMISSIONER GALVIN said with reference to Senator
Wielechowski's request for historical information, although they
cannot reveal taxpayer information, perhaps the committee could
get a cost estimate from Exxon as an operator, then they could
compare it to the overall figures to get a sense for how it
stacks up on an annual basis.
SENATOR HUGGINS said he just wants to be sure they aren't
drawing conclusions from an incomplete picture.
MS. DAVIS agreed.
4:27:00 PM
SENATOR HUGGINS said he would be interested to hear if she saw
some picture emerging from this activity.
MS. DAVIS said that is precisely why they were trying to look at
which of the expenditures were associated with "production adds"
and which were actually increasing production.
SENATOR HUGGINS asked if that information was somewhere in the
slides.
MS. DAVIS answered that that was the back side of the question
regarding what was and was not maintenance. The growth in
expenditures was not all about maintenance; it was about
production adds, which are also increasing.
4:28:10 PM
CO-CHAIR MCGUIRE said she would be interested in seeing a better
breakdown in terms of where the investments are for Pt. Thomson,
Nikaitchuq, and Oooguruk are, because two of those fields have
royalty reductions in place. If capital investment were being
made in those fields, then it was certainly not indicative of
any kind of an ACES pattern, but rather of what the state had
done to incentivize development.
4:29:09 PM
COMMISSIONER GALVIN commented that the incentives offered
through royalty relief and the production tax are significantly
different in terms of scale. Because royalty is a smaller
percentage of the overall take, it would provide a much smaller
incentive than what the state provides through the production
tax.
4:30:42 PM
CO-CHAIR MCGUIRE conceded the distinction between severance tax
relief and royalty relief, but said they can push and pull a
number of different levers and buttons to encourage exploration,
and they are trying to figure out how best to do that while
maintaining a healthy balance between the state's take and
industry's take.
4:31:30 PM
COMMISSIONER GALVIN responded to Senator Huggins' question
regarding Pt. Thomson that it was less than a quarter of the
overall capital expenditure.
4:31:57 PM
MS. DAVIS stated that DOR can provide operating costs on a
historical basis only for Prudhoe Bay; the prior tax systems
were not net tax, so they didn't really gather data related to
OPEX or CAPEX, and the state was privy to some historical costs
associated with Prudhoe Bay only because of discussions that
took place relative to the Stranded Gas Development Act.
4:32:46 PM
She continued to say that the graph on slide 17 tracked those
operating expenses from 2003 through 2009 and showed they were
increasing. The next question would be whether that represents
an increase in costs per unit or if it actually represents an
increase in activity; the answer is a combination of both. She
stated that while unit costs have increased, activity had
increased as well.
CO-CHAIR MCGUIRE noted that the first meaningful drop on that
chart was between 2009 and 2010.
MS. DAVIS agreed. She said the reason for that drop was that
they are seeing the global indexes for operating expenditures
coming down; their data on per-unit costs was also showing a
downward trend. This was essentially because oil prices came
down from the peak at the end of 2008 and unit costs of goods
tend to trail oil price by about a year to a year and a half; so
the costs of goods and services were just catching up to the
decrease in oil price.
4:34:38 PM
CO-CHAIR WIELECHOWSKI asked if this chart indicated a good thing
or a bad thing - if all costs had gone down or if materials and
labor had gone down and, therefore, the operating costs.
MS. DAVIS said on the surface it was hard to tell whether it was
good or bad. They looked deeply enough to know this was not
simply an increase in the cost of goods and services, but rather
reflected an increase in activity - a good thing.
4:35:32 PM
COMMISSIONER GALVIN clarified for Ms. Davis that Senator
Wielechowski's question went to the 2010 trend.
CO-CHAIR WIELECHOWSKI confirmed that his question was whether
the projected reduction in costs was a positive thing. He said
if the costs totaled $11.80 per barrel in 2009 and now total $9
per barrel, that should be a good thing for the producers.
MS. DAVIS agreed that it was a good indicator that the industry
had been able to get the service industry to respond by lowering
their costs as revenues went down.
CO-CHAIR MCGUIRE pointed out that Ms. Davis indicated a
combination of factors in play here and that there is a direct
correlation between both the unit costs and activity. If prices
go down, the reduction in costs would mean a reduction in
activity.
4:36:42 PM
MS. DAVIS answered yes, they have gathered publicly available
data about what some of the major companies are doing, and they
all are cutting back on expenditures because of the global
recession. The only question is how much and where. DOR is
finding that some of that may be a reflection of some ratcheting
back of expenditures at a corporate center level, plus the lower
expenditure of unit costs.
4:37:22 PM
COMMISSIONER GALVIN said, in general, the escalation of per-unit
costs was not a good thing for the state or for the producers.
The question Ms. Davis answered initially was whether the
increase indicated that something had happened with regard the
incentive that ACES created back in 2007 with regard to
operating expenses in particular. And this didn't seem to be
driven by an investment-incentive, decision-making methodology.
As she indicated, he said, most of this was driven by a steep
escalation in across-the-board oil and gas sector costs,
followed by a drop-off across the oil and gas sector worldwide
after the peak in 2009. It wasn't reflective of ACES either way.
SENATOR HUGGINS recalled previous discussions of "lifting cost"
and asked if that was synonymous with operating expenditure.
COMMISSIONER GALVIN answered that they were pretty
interchangeable; lifting costs are a component of operating
costs.
SENATOR HUGGINS noted that these numbers were less than half of
what they were talking about in relation to lifting costs.
4:40:15 PM
COMMISSIONER GALVIN cautioned that lifting costs associated with
the whole North Slope were different from those isolated for
Prudhoe Bay, which is more efficient due to its size and scale.
Also, under ACES a provision now allows the department to show
the legislature some information on Prudhoe Bay that they could
not previously share.
4:41:20 PM
SENATOR HUGGINS commented that they need to know how Prudhoe Bay
numbers compare to the rest of the North Slope.
4:41:42 PM
MS. DAVIS responded that the department would provide a range of
what they considered to be the OPEX and the CAPEX charges on a
per-barrel basis. She said she worked in the industry for nine
years and had heard "lifting costs" used in various ways and she
would hesitate to opine how it was used historically with this
body.
4:42:11 PM
She moved on to slides 19 and 20 that showed the historical
trends associated with capital expenditures. She said they
acquired this information from the TIE credit data that was
presented to the department.
4:42:32 PM
COMMISSIONER GALVIN added that when the PPT was passed, TIE was
also referred to as a "claw back" and allowed companies to earn
credits for the capital expenditures they had made for five
years in the past. That gave the forward-producing companies a
reason to provide the department with numbers for their previous
five years of capital expenditures.
4:43:31 PM
MS. DAVIS said the figures reflected on the slides were not
restricted to Prudhoe Bay and that the chart showed a dip in
capital expenditures during the period when ELF was in place,
from about 2001 to 2005. They started to build coming out of
2005 and continued to increase through 2009. She highlighted
that this chart didn't indicate a decrease in capital
expenditures after the passage of PPT and ACES.
She said the forecast was for about $2.5 billion in capital
expenditures for fiscal year 2010, and about $2.9 billion for
2011. Unfortunately, the chart was in calendar years and the
forecast was in fiscal years, so it only roughly illustrated the
trend.
CO-CHAIR MCGUIRE asked if the projection in expenditures was
based on answers provided by the companies to questions on
Department of Revenue forms.
MS. DAVIS answered yes; they ask operators at all of the fields
in development or exploration what they are doing over the next
five years.
4:46:01 PM
CO-CHAIR MCGUIRE said the committee needed to explore why
companies like ConocoPhillips have for the first time in 44
years said they won't drill an exploration well.
MS. DAVIS reminded Senator McGuire that they reported a rolled-
up number for capital expenditures on the whole North Slope.
4:47:00 PM
CO-CHAIR MCGUIRE reiterated that she would like Ms. Davis to
come back to the committee with as much information as she was
able to provide on where those expenditures were being made. She
pointed out that the Resources Committee had a history of
looking at the individual resources in each part of the state to
determine how to incentivize each particular field.
4:48:23 PM
CO-CHAIR WIELECHOWSKI said he wanted to be sure he understood
the chart correctly. Under ELF, the state had quite a number of
fields that paid little or nothing in severance tax from 2001 to
2005 and it saw a pretty steady decline in capital expenditures
on the North Slope during that time. PPT became effective April
1, 2006 and there was a pretty significant increase; that upward
trend continued after ACES became law in 2007. He asked if that
was correct.
MS. DAVIS replied that it was. She expanded that part of the
department's forecasting involved looking at what was happening
worldwide and they had confirmation that capital costs were
coming down globally. That told them that if they were seeing an
increase in the overall capital costs incurred on the North
Slope, it was due to activity as opposed to increased costs per
unit.
4:49:53 PM
CO-CHAIR WIELECHOWSKI asked if she was using "capital costs" and
"capital expenditures" interchangeably.
MS. DAVIS answered yes.
CO-CHAIR WIELECHOWSKI said the chart indicates that the rest of
the world experienced a steady increase in investment from 2001
through 2005, but Alaska showed a steady decline. However, 2009
saw a pretty significant decline in capital expenditures
worldwide, but Alaska had an increase. He asked if he was
reading that correctly.
MS. DAVIS answered that was correct.
4:50:42 PM
SENATOR HUGGINS said the debate in the legislature when they
were going through the tax structure was gross versus net. He
asked if Ms. Davis would say they made a good decision on ACES,
based on the data that was now available.
COMMISSIONER GALVIN responded that net had proven to be very
valuable to this state.
4:51:20 PM
MS. DAVIS said one of things they wanted to address in the ACES
report is the unique feature of "ACES past," the standard
deduction provision. This provision said a field that had
produced a cumulative 1 billion barrels of oil up to the
effective date of ACES could deduct the operating expenses
associated with their 2006 level of operating expenditures.
Although it was grossed up slightly, it was indexed off the 2006
operating expense rates. The reason for this was that the state
had little experience with what the costs coming out of those
large fields would be. Since the large fields were the dog, not
the tail, there was concern about what the revenue hit would be
to the state because of the leap from a gross tax structure to a
net tax structure. This provision was to be in place for only
two and a half years and expired on December 31, 2009. She said
that slide 22 illustrated the amount of additional tax paid by
taxpayers who had interests in Prudhoe and Kuparuk during the
half year of 2007, all of 2008, and all of 2009 because of the
difference between the standard deduction allowed and their
actual reported operating expenses. Presuming the reported
operating expenses were correct, she said, this was the increase
in the state's production tax. Even though in FY 2008 the
operating expense was approximately $2.6 billion and in 2009 it
was $2.7 billion, there was a big difference in the revenue
impact because the overall tax rate was higher due to the much
higher oil prices in 2008.
4:53:57 PM
SENATOR HUGGINS recalled that the standard deduction was
introduced on the floor of the House with very little debate. He
asked if the administration supported the standard deduction.
COMMISSIONER GALVIN replied that the administration did not
propose a standard deduction, but the governor at that time was
not opposed.
4:54:38 PM
MS. DAVIS said another indication of activity level was oil and
gas industry employment and that the department had obtained
statistics from the Alaska Department of Labor and Workforce
Development (DOLWD), which were shown on the graph on slide 23.
She noted that this graph was different from the one in the
published ACES Status Report, because they had not received all
of the data for 2009 at the time it was developed. The
information on slide 23 was adjusted to reflect more complete
information. In 2008 the oil and gas employment numbers were
12,900. In 2009, when the report was published, the number was
13,500; that was revised to 13,000 on this slide, so there was
an increase of 100 between 2008 and 2009. The forecast from the
Department of Labor and Workforce Development for 2010 was
12,700, a decrease of about 300 jobs. According to the graph,
2007 through 2010 are the highest oil and gas industry
employment numbers since the beginning of field development.
4:56:26 PM
SENATOR FRENCH said he worked in the oil industry until 1992 and
did not remember anything that would account for a major drop in
employment, but the chart indicates that between 1991 and 1992
the industry lost about 2000 jobs. He asked if such large
fluctuations are common in the industry.
4:57:13 PM
MS. DAVIS said according to the Department of Labor and
Workforce Development, oil and gas employment is very project-
dependant and when workers are let go it takes some time for
them to be reabsorbed into other projects. They would probably
have to look at what major project might have been concluded in
1991 to explain the drop.
4:57:59 PM
CO-CHAIR MCGUIRE stated that both investment and employment are
focal points for the legislature. She said she was interested in
knowing whether jobs had shifted away from those related to
maintaining infrastructure and toward building new
infrastructure. She also wanted to know whether Ms. Davis had
looked at unemployment insurance filings for people in oil and
gas sector jobs.
MS. DAVIS responded that DOR has access to reporting related to
some state taxes and state programs under the jurisdiction of
the Department of Labor and Workforce Development, but none of
that reporting was specific to the oil and gas industry. They
based their unemployment statistics primarily on payroll records
that tend to be the most complete, because employers are
required to report their payroll for purposes of paying the
unemployment ESC tax. She was advised that the current rate of
unemployment filings is no higher than it was in 2003.
5:00:24 PM
CO-CHAIR MCGUIRE said she wanted to understand as a policy-maker
what impacts the legislature's efforts are having on oil and gas
employment regarding the data for 2008, 2009 and 2010.
5:01:40 PM
COMMISSIONER GALVIN said in response to Senator McGuire's first
question regarding a breakdown between maintenance and
production jobs that the Department of Revenue does not have
that information. He said he did ask the Department of Labor and
Workforce Development about it and was told by Commissioner
Bishop's statistical economist that the department does not get
the reports in a form that allows them to discern that.
5:03:21 PM
COMMISSIONER GALVIN said they can see that the trend in
employment seemed to track expenditures pretty closely.
5:03:59 PM
SENATOR HUGGINS remarked that slide 23 was interesting because
it showed that employment was actually lower in 2001 than it was
when prices were so low in the late 80s and early 90s.
5:05:08 PM
MS. DAVIS pointed out that the dip in employment from 2001 to
2003 mirrored the dip in capital expenditures on slide 19; so
labor seemed to track the CAPEX, which could be reflective of
projects that were going on in that time period.
SENATOR HUGGINS said the chart made it appear that things were
going pretty well in Alaska around 1991, but that sure wasn't
the case where he lived.
5:06:17 PM
CO-CHAIR WIELECHOWSKI said it would be helpful to him to see a
worldwide oil and gas industry employment comparison. He asked
if Ms. Davis had any sense of what employment had been doing
worldwide.
MS. DAVIS replied that they hadn't looked at employment numbers
globally, but said she would try to find them. She continued
that they also obtained information from the Alaska Oil and Gas
Conservation Commission (AOGCC) that tracks drilling rigs and
completions. Slide 24 showed a graph of active drilling rigs in
Alaska from 2005 through 2009 using the West Coast spot price of
oil. The Commission concluded that there was relatively flat rig
usage through this time period with a drop-off in the last three
quarters of 2009; they were not sure what that drop-off
represented, but it lagged PPT and ACES enactment.
CO-CHAIR MCGUIRE asked when that chart was completed.
MS. DAVIS answered that they got the final data from AOGCC at
the end of December 2009.
5:08:39 PM
CO-CHAIR WIELECHOWSKI asked why Alaska has historically had
fewer wells drilled than other oil-producing states like
Wyoming, Oklahoma, and Texas.
5:09:08 PM
COMMISSIONER GALVIN responded that it was due to a combination
of things; number one is probably cost. The per-well cost in
Alaska is significantly higher than in those other states. The
logistics of drilling a well, particularly an exploration well,
in Alaska are much more challenging; access to land is an issue
in that a significant part of Alaska's oil and gas land is
locked up in existing leases.
5:10:09 PM
CO-CHAIR WIELECHOWSKI suggested that Alaska think bigger. He
stressed that the state needs to find a way to encourage smaller
companies to get out there and drill not five or six more wells
per year, but hundreds.
5:11:01 PM
MS. DAVIS related that many new entrants comment that it is
costly to do work in Alaska, so a job has to be big enough to
justify the expense. Things those companies take for granted
when they are drilling in Wyoming, like the ability to move a
rig across 20 miles fairly easily, are a big deal on the North
Slope. From their perspective, the state could help them most by
improving the infrastructure to open up access.
5:12:02 PM
COMMISSIONER GALVIN asserted that a starting point in trying to
address these barriers was a system like the one Alaska now has
in ACES where the state participates significantly in the up-
front costs. The fact that the state will pay upwards of half
the cost is a significant incentive that was not there
previously. Dealing with access and permitting issues will also
be in the interests of the both the state and the producers.
5:14:47 PM
MS. DAVIS pointed out that the increase in rig activity shown on
slide 24 lags behind West Coast price fluctuations by about
three quarters. They looked deeper to see how high the
correlation is between oil prices and these types of
expenditures and found that development expenditures seem to
have a very high correlation (slide 25).
5:15:41 PM
Moving on to slide 26 and wells completed, Ms. Davis said the
AOGCC did not see much of a correlation between numbers of wells
completed and the enactment of PPT or ACES.
Finally, she said the Department of Revenue was asked what
companies were actually drilling in Alaska during the calendar
year 2009, so they provided a list of those companies on slide
27.
5:16:26 PM
SENATOR HUGGINS referred to the graph on slide 24 showing
drilling activity and asked if the trend shown there indicated
that the state should see an increase in drilling activity based
on the cost per barrel of oil.
MS. DAVIS said the Department of Revenue is forecasting a
relatively flat oil price for the coming year, so she would
expect activity to be fairly level as well.
SENATOR HUGGINS said he keeps hearing reports from oil service
companies that they aren't drilling, so he would expect to see a
downturn.
5:17:36 PM
MS. DAVIS said their information is not definitive; it will be
interesting to see how it turns out.
5:17:50 PM
SENATOR FRENCH said he thought Exxon was drilling in 2009, but
they were not listed on slide 27.
MS. DAVIS said she got the list from AOGCC and the data may not
be complete.
SENATOR FRENCH asked if the committee would hear from members of
the oil industry today.
CO-CHAIR MCGUIRE replied that they are not scheduled to speak at
this meeting.
5:18:42 PM
MS. DAVIS summarized that the information the Department of
Revenue was able to gather from various state agencies and the
tax system does not reveal a direct negative impact due to the
state's tax changes.
5:19:46 PM
SENATOR HUGGINS said one of Senator Stedman's concerns going
into the open season for the gas pipeline is whether the state
will suffer a serious loss of revenue due to the association
between oil and gas.
COMMISSIONER GALVIN said he agreed that all of the members need
to be aware of the relationship between oil and gas production.
They need to discuss the price parity issue and what its impact
could be, look at ways to address the problems it may create,
and decide whether they need to something about it before the
end of this session.
5:21:42 PM
CO-CHAIR MCGUIRE thanked everyone for their comments and
adjourned the meeting at 5:21 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| ACES Update Presentation SEN RES - FINAL Read-Only (2).pdf |
SRES 2/4/2010 3:30:00 PM |