Legislature(2011 - 2012)BUTROVICH 205
01/27/2012 03:30 PM Senate RESOURCES
| Audio | Topic |
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| Start | |
| Presentation by Bryan Butcher, Commissioner, Department of Revenue | |
| 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
January 27, 2012
3:35 p.m.
MEMBERS PRESENT
Senator Joe Paskvan, Co-Chair
Senator Bill Wielechowski, Vice Chair - via teleconference
Senator Bert Stedman
Senator Hollis French
Senator Gary Stevens
MEMBERS ABSENT
Senator Thomas Wagoner, Co-Chair
Senator Lesil McGuire
OTHER LEGISLATORS PRESENT
Senator Cathy Giessel
COMMITTEE CALENDAR
Presentation by Bryan Butcher, Commissioner, Department Of
Revenue
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
BRYAN BUTCHER, Commissioner
Department of Revenue (DOR)
Juneau, AK
POSITION STATEMENT: Presented overview of the new tax revenue
management system (TRMS) information.
CODY RICE, Petroleum Economic Policy Analyst
Department of Revenue (DOR)
Anchorage, AK
POSITION STATEMENT: Answered economic policy questions relating
to petroleum production.
BRUCE TANGEMAN, Deputy Commissioner
Department of Revenue (DOR)
Anchorage, AK
POSITION STATEMENT: Helped present overview of the new tax
revenue management system (TRMS).
LENNY DEES, Audit Master
Department of Revenue (DOR)
Anchorage, AK
POSITION STATEMENT: Answered statistical questions about the
TRMS.
ACTION NARRATIVE
3:35:11 PM
CO-CHAIR JOE PASKVAN called the Senate Resources Standing
Committee meeting to order at 3:35 p.m. Present at the call to
order were Senators Stedman, French and Co-Chair Paskvan.
Senator Wielechowski was present via teleconference.
^Presentation by Bryan Butcher, Commissioner, Department of
Revenue
Presentation by Bryan Butcher, Commissioner, Department of
Revenue
CO-CHAIR PASKVAN announced the presentation by Bryan Butcher on
the fall DOR forecast, the new tax revenue management system
(TRMS) approved in the capital budget last year, and ACES taxes.
3:36:43 PM
BRYAN BUTCHER, Commissioner, Department of Revenue (DOR),
introduced other members of the department in attendance and on
line. He said his presentation would be on the fall 2011
forecast, tax credits, tax revenue management system, production
tax audits, staffing levels for audits, a data assessment
project and regulations.
Factors that affect production forecasting fall primarily in the
production and price side of things. Their petroleum economist
and petroleum engineer and operators look at the geology of the
area, a development plan, where they are with it and when it is
expected to be completed. The commercial piece of production
forecasting include: project economics for a particular field
and well; oil price and market conditions, government policy,
access regulation, taxation and a production profile with
history.
CO-CHAIR PASKVAN said he was most intrigued by what process was
used to determine the project economics, like internal rates of
return (IRR) or return on investment (ROI).
COMMISSIONER BUTCHER responded that they looked at the big
picture of what affects production going up or down.
CO-CHAIR PASKVAN said the reason for the meeting is to establish
facts that future deliberation will be based on.
3:41:11 PM
COMMISSIONER BUTCHER said slide 5 showed the history of
production from 2001 to 2011 and out to 2021. The forecast in
the Revenue Sources Book (RSB) includes all three elements on
the right hand side between currently producing (currently
producing and the estimates into the future), under development
(currently under development but not producing but expected to
be producing in the near future) and under evaluation (such as
Pt. Thomson, which doesn't have a date for production, but still
needs to be in the forecast because there is enough industry
focus on it) - the most speculative of the three.
CO-CHAIR PASKVAN asked if it would be possible to identify which
projects he is referencing in the under development categories
so they can better understand what the department replied upon
for the forecasts.
CODY RICE, Petroleum Economic Policy Analyst, Department of
Revenue (DOR), said they could see what could be done in that
respect outside of the confidential limitations in AS 43.55.890
that requires aggregation of three or more producers before
specific taxpayer confidential information can be released; it
is almost entirely the basis of these production forecasts.
Where they were able to name a project they already have in the
RSB.
3:43:30 PM
SENATOR STEVENS joined the committee.
CO-CHAIR PASKVAN asked if fewer than three producers are not
disclosed and more than three are.
MR. RICE answered that is correct.
CO-CHAIR PASKVAN asked where the list is in the RSB categories
of under development or under evaluation.
MR. RICE answered that they don't have an actual list of three
or more owners because that changes periodically. He said page
38 of the RSB has production forecast assumptions; the far right
column lists a couple of projects including heavy viscous oil
development at Orion, continued satellite development at Alpine,
Nanuq and Alpine West fields, and continued development at
Oooguruk and Nikaitchuq.
3:45:44 PM
CO-CHAIR PASKVAN asked if names of three or more producers can
be disclosed or just their production totals.
3:46:04 PM
MR. RICE replied that the details of production and taxpayer
particular information can only be disclosed under AS 43.55.890.
Page 41 of the RSB describes fields currently under development
and currently under evaluation. Under current development
Nanook, Alpine West Satellites, Alpine Borealis, and Orion
Satellites at Prudhoe Bay are listed. Under development drilling
Liberty, Oooguruk and Nikaitchuq are listed. Ongoing development
drilling at Prudhoe Bay and Kuparuk are listed. The distinction
is important for the under development layers particularly in
currently producing fields. There may be multiple layers within
a certain field. Prudhoe Bay has both currently producing and
under development fields.
3:47:44 PM
SENATOR FRENCH asked where the 1 million barrel a day
aspirational goal set by the governor appears on the graph.
COMMISSIONER BUTCHER indicated that it wasn't there. What they
are seeing is a snapshot of how the department sees the
production forecast moving forward in the current investment
environment, not what a future investment environment would look
like with passage of HB 110. The governor's 1 million barrels a
day is a big picture goal, and the department believes that
under the current investment that wouldn't be achievable in the
next decade.
SENATOR FRENCH asked where Great Bear's efforts appear.
COMMISSIONER BUTCHER replied that is not included because the
first exploration well hasn't been drilled yet. It's far too
premature and there are many unanswered questions.
3:49:39 PM
BRUCE TANGEMAN, Deputy Commissioner, Department of Revenue
(DOR), added that Great Bear is a serious player in that both
their OPEX and CAPEX were taken into account in the potential
for plans going forward, but they weren't at the stage of
projecting production from those potential finds.
SENATOR FRENCH asked if they have a graph of how you get to 1
million barrels a day under HB 110 and where it would come from.
COMMISSIONER BUTCHER replied no.
MR. TANGEMAN said they had some scenarios based on publically
available information in House Finance last year. They weren't
just throwing a dart at the wall, but it was based on certain
types of fields.
CO-CHAIR PASKVAN said slide 5 shows a decline starting in 2001
for the past decade, but everyone agrees that the decline
started in 1989. He asked what the reason is for the onset of
the decline at Prudhoe Bay beginning in 1989.
MR. TANGEMAN answered that most fields realize a natural
decline, and this decline happens to track identically with
Texas' decline. He explained that it's critical to include the
price of oil in looking at the decline. When oil prices started
to spike in the early and mid-2000, Alaska's decline continued
but Texas' flattened out and turned around; so did North Dakota
and Alberta.
CO-CHAIR PASKVAN asked if the gas handling capacity as compared
to the oil production capacity was a constraint on the North
Slope fields since 1989 to present.
COMMISSIONER BUTCHER replied hasn't discussed that as being a
hindrance to development, but DNR could better answer that.
MR. TANGEMAN added that he also looked for to hearing those
answers from industry.
SENATOR STEDMAN said in the late 70s TAPS was looking at running
out of oil somewhere after the turn of the century, a decade
ago. Historically, it looks like the field has a normal decline
curve and legislators hadn't seen advancing prices tied into
alterations of the production curve in the books they have
reviewed. Accountings of most projects' full cycles also
indicate a rapid increase in production followed by a long
tapering decline.
COMMISSIONER BUTCHER said that is true, but as they began
researching other oil producing jurisdictions including Texas,
it was amazing to see them flatten out and turn up when the
price of oil went up to $80-90 barrel - with the exception of
the State of Alaska. Technology has some part in that, but the
economics of a project at $80 barrel is going to make many
developments pencil that wouldn't pencil at $10.
3:55:55 PM
SENATOR FRENCH asked what percentage of the new production in
Texas is conventional and unconventional.
COMMISSIONER BUTCHER answered almost all of that is
conventional, and the up-curve will increase as shale oil is
developed.
CO-CHAIR PASKVAN said he heard at an energy conference in Austin
in December that the average Texas well produces 5 barrels of
oil a day, but they are stripper wells that can be turned on and
off rapidly. It would make sense to him if there are 10,000
stripper wells, they could be turned on because the price is
$100 a barrel. Therefore, you have conventional oil extraction.
COMMISSIONER BUTCHER replied that could be a possibility, but
most of the discussion in Texas was that different areas were
having an explosion of exploration, development and production
that hadn't been occurring in the west and south. Many of the
stripper wells have had most of the capital investment already
put in to them and would still be profitable to produce at $30
barrel.
CO-CHAIR PASKVAN asked for the data he is referencing as far as
the increases or decreases.
MR. TANGEMAN said absolutely.
SENATOR STEDMAN said they need to make sure the public
understands some of these nuances when they are dealing with
Texas and Oklahoma where private individuals own the subsurface
rights; in Alaska the state owns all the subsurface, and it's
the only state in the union like that. So, a direct correlation
between Alaska and Texas and Oklahoma or even North Dakota has
some logistical challenges to it, because we don't have several
thousand individual people up there all owning a few acres and
the subsurface under their land that they can just go put a well
on.
COMMISSIONER BUTCHER said that's absolutely true. There are many
situations that make Alaska different; being able to drive
straight onto a drill pad and the resulting availability of
labor are also big differences. That is one of the big hurdles
the State of Alaska deals with; it has more estimated reserves
than just about any other oil producing jurisdiction in North
America, but it costs so much more to produce.
CO-CHAIR PASKVAN asked his estimates of the recovery rates in
Prudhoe, Kuparuk and some of the major Alaska fields and if they
had been compared to Texas, North Dakota and Oklahoma.
COMMISSIONER BUTCHER said he would get that information for him.
4:01:32 PM
SENATOR STEDMAN added that our decline looks like Norway's
decline from 2.4 billion barrels to 2.1 billion barrels in 2008
to 2010 and the UK's decline from 1.5 billion to 1.3 billion
barrels, and the UK North Sea has similar trends. In talking
about response to the high oil prices they need to broaden their
horizon out beyond the Lower 48.
MR. TANGEMAN agreed that was a good point. Perhaps they should
compare the Unites States to Norway seeing as how they are both
countries even though Alaska's reserves are so huge.
SENATOR STEDMAN said consultants would compare Alaska to other
export basins.
CO-CHAIR PASKVAN said it's also important to compare fiscal
systems of other countries.
COMMISSIONER BUTCHER agreed, but said it's difficult to compare
Alaska's to anywhere.
4:05:57 PM
MR. TANGEMAN went to an RSB chart on slide 6 and said he felt it
was important to point out the overly optimistic forecasts that
have been done in the past.
CO-CHAIR PASKVAN asked if the department does a range of
forecasts like the USGS does.
MR. RICE replied that the department doesn't do probabilistic
forecasting in its production forecast. The reason is because
they don't think it would provide lawmakers with a lot of value,
because the range would be very wide in the out-years; it could
be instructive maybe one year out.
CO-CHAIR PASKVAN asked if forecasting is done in ranges of
numbers.
MR. TANGEMAN replied yes; it is the important first step in this
layout. They have great confidence in the currently producing
number especially within the five-year window. The variable
would be the capital and operating expense that would have to go
into getting the oil produced.
4:11:34 PM
COMMISSIONER BUTCHER said the further out they go in analyzing
each operator and well, the less accurate they become. But
regardless of whom the forecaster was the department's
production forecasts always end up being on the optimistic side.
Year after year they end up producing less than they expect to
produce.
CO-CHAIR PASKVAN asked if it takes 7 to 10 years for a well to
come on line.
COMMISSIONER BUTCHER answered yes.
CO-CHAIR PASKVAN asked how many 2012 wells are anticipated to be
flowing this year based on decisions made back in 2005 to 2002.
COMMISSIONER BUTCHER replied the currently producing wells are
infield drilling in Kuparuk and Prudhoe. Nikaitchuq and Oooguruk
have come on line in the last couple of years in that
approximate timeframe.
SENATOR FRENCH said it is important to emphasize that at Kuparuk
and Prudhoe you can punch a hole in the ground from an existing
pad probably recompleting a well that has already been done once
before and the oil can be put on line very quickly. He asked
what would happen if you suddenly drilled more wells among the
approximately 150 wells that are on the North Slope now. Would
you get more oil or is there just not more to get there because
it's a 30 year old reservoir?
COMMISSIONER BUTCHER replied it depends on the kinds of wells
getting drilled and their pressures. He knows now that 8 to 8.5
bcf/day of gas is getting re-injected to keep the pressure up.
He said slide 7 was a snapshot of what 300 barrels a day would
mean in terms deficits and taxes in today's numbers. It makes
the governor's point about how important it is to try and
flatten out our decline curve and eventually turn it around.
CO-CHAIR PASKVAN asked if he is using the current tax law.
COMMISSIONER BUTCHER answered yes.
CO-CHAIR PASKVAN asked him to do a snapshot of the same
information applying HB 110.
COMMISSIONER BUTCHER said he would do that.
4:18:41 PM
SENATOR STEDMAN asked how far into the future the 300,000
barrels was targeted.
COMMISSIONER BUTCHER replied this discussion first started as a
result of Alyeska's study this summer and realizing some
difficulties in oil flowing down the pipeline, which at the time
was roughly 300,000 to 350,000 barrels. This snapshot intended
to show how important oil and gas production is to the state.
SENATOR STEDMAN said he wanted to be careful to not push alarm
bells that aren't needed to be pushed. When the legislature did
the original PPT they put in a 20 percent capital credit to help
offset the cost of heavy oil and to try to get a response out of
the legacy fields to increase production. So, this situation has
been getting addressed there as well as under ACES a couple of
years later.
He said he couldn't imagine a scenario where the State of Alaska
would just sit back and watch a decline happen without doing
anything. There was a similar situation in Cook Inlet and they
spent almost every winter here having meetings on Cook Inlet
changing its fiscal structure with ring fencing and credits,
trying to get more gas and oil production. And it appears to be
working.
SENATOR STEDMAN said he wanted the folks at home to realize that
when they walk through these assumptions, the legislature's job
is see that some of these things never materialize. He
emphasized, "No is going to sit around and watch billions and
billions of barrels being stranded in the Arctic. It's just not
going to happen."
4:22:01 PM
MR. TANGEMAN said that is true, but it is critical to look at
projections and consider the trends.
4:23:14 PM
COMMISSIONER BUTCHER said the department always seems to
forecast more production than really occurs and they are trying
to come up with more accurate numbers. In that regard, the
department has created standardized reporting forms and is
digging into specific well and field data more and focusing
closely on the decline curves for all of the operating wells.
CO-CHAIR PASKVAN asked how the big three oil companies perform
their internal production forecasting. He understood that they
use a field by field analysis as compared to well by well.
MR. RICE answered that their forecasting depends on the company
and the field. Different companies do things differently in the
same field, and do everything from rough estimates based on
publicly available information for fields they don't have well
data on to sophisticated 3D reservoir models that cost multi-
millions of dollars, using super computers and teams of
engineers. But even at the most sophisticated level the 3D
models have information on individual wells that can be
aggregated for a field.
4:27:25 PM
COMMISSIONER BUTCHER said slide 10 was the price forecast, and
the chief economist used to do it, but there were many questions
as to where it came from and how it got there. So, Cambridge
Energy Research was hired to give a different view of what the
potential price was. Then three or four years ago the department
began to approach it differently by getting more experts'
reviews. This year there was a tremendous number of
conversations about the difference between West Texas
Intermediate (WTI) and Alaska North Slope crude (ANS), because
ANS that had traditionally been a couple dollars a barrel under
WTI flipped 18 months ago.
SENATOR FRENCH remarked that it would be worth getting the
commissioner on record about the persistent price differential
Alaska enjoys over WTI and how long he expects it to persist.
COMMISSIONER BUTCHER replied that it occurred about 18 months
ago and peaked at about $28 in mid-September; experts had
different reasons as to why. In general they thought there was a
regional glut of oil and not enough pipelines to get it to the
Gulf to affect the price. So WTI would move up to a far greater
degree than ANS would move down. What occurred is that it came
much closer much faster than they thought it was going to and
got as close as $4, but now it has begun to widen to as much as
$12. They still don't know why.
MR. TANGEMAN added in the fall, discussions were happening down
south about how to build more pipelines and the reversal of
pipelines that had an immediate effect as well.
4:33:19 PM
COMMISSIONER BUTCHER went to slide 11 that showed a breakdown of
FY12 and FY13 estimates of unrestricted revenue forecast; it
indicated that the production tax is half of what the state
brings in in FY13 and two-thirds in FY12, royalty is a little
less than one quarter, a much smaller amount for corporate
income tax, then non-oil revenue and a very small amount for
property tax.
4:34:03 PM
SENATOR STEDMAN noted that it's confusing when some
presentations are in total revenue and some are in unrestricted
general funds. He clarified that unrestricted general funds are
just of interest to the Finance Committee and its budgeting.
COMMISSIONER BUTCHER added that a good example of what would not
be included here would be tuition for the University of Alaska,
which is income coming in for the state, but it's not
unrestricted; it's used specifically for the University of
Alaska. There are many other areas like that in looking at the
total state budget.
MR. TANGEMAN added that in general there are several different
ways to look at the revenue pie in the RSB and shifted the
presentation to production tax credits and introduced Mr. Dees.
4:37:30 PM
LENNY DEES, Audit Master, Department of Revenue (DOR), said
slide 13 showed production tax liabilities from 2008 to 2012. He
said the 2011 tax credits are pending true-up that happens in
March and the 2012 number is an estimate of what they anticipate
will be applied through the end of June. Since PPT and ACES,
almost $2.5 billion has been applied against production tax
liabilities and applications for transferable tax credit claims
of $1.7 billion hae received through the end of December 2011
[slide 15].
SENATOR STEDMAN referred to slide 13 that showed a total of
about $400 million in credits in 2012 and recalled that was the
number in their budget documents, but slide 14 shows $118.4 with
a footnote through December 2011 and asked why the discrepancy.
MR. DEES replied slide 13 only talks about tax credits that have
been applied by company against their tax liabilities - not
necessarily inclusive of the transferable tax credit
certificate. The information on slide 14 is primarily the
explorers, the companies that are not yet producing who don't
have a tax liability. They are the ones who are applying for tax
credit certificates and will be converting them to cash, for the
most part. Slide 15 shows the actual credits that have been
issued by year. The first line shows that Alaska has issued $1.5
billion worth of credits of the $1.7 billion requested on the
previous slide. Of the $1.5 billion, the state has actually paid
out about $1.3 billion in refunds. The other $400,000 is what
the state would pay out in cash during FY2012.
SENATOR STEDMAN asked if their expectations for 2012 are on
track with their expectations from a year ago when $63 million
of the $863 million in credits was targeted at Cook Inlet.
MR. DEES replied yes. The Cook Inlet jack up rig credit was
included even though it will not come to fruition because of the
delays.
CO-CHAIR PASKVAN referred to slide 13 and asked if the credit
structures for these years comes to about $4.5 billion.
MR. DEES answered no. The $3.5 billion is what has been applied
against tax liabilities and that would be added to the top line
on slide 15 which is the certificates that have been issued, for
a total of $3.9 billion. Slide 15 shows $132 million in credits
have already been issued through the end of FY2012, and they
anticipate getting a lot more applications between now and the
end of the fiscal year.
4:46:55 PM
MR. TANGEMAN said the number in the budget is $400 million;
these figures are "actual" through December 2011.
MR. DEES said slide 17 shows the total amount of credits to have
either been issued, are available to be redeemed, or have been
applied against production tax liability is about $3.9 billion.
SENATOR STEDMAN asked him to estimate 2012 through the end of
the fiscal year.
4:51:45 PM
MR. DEES replied the $400 million is the FY2012 final estimate
and that is what is shown in the RSB on page 31. The credits
that will be issued between now and the end of the year will
include the $133 million plus what they anticipate will come in.
It's difficult to estimate, but they use two or three of the
past years' activity to estimate that it could be somewhere in
the neighborhood of $300 to $400 million (credits claimed on
application and issued as a tax credit certificate redeemable
for cash).
CO-CHAIR PASKVAN said ultimately the point is that the north of
$4 billion figure is Alaska's investment in the North Slope
development and FY13 anticipates Alaska's investment will be in
the range of $875 million using the current credit structure.
SENATOR STEDMAN asked if it had made any difference that the
state had put in $4.1 billion for this fiscal year.
COMMISSIONER BUTCHER replied the companies should be able to
give him a good idea of what has been spent and potentially what
the difference is between the decline they had seen and the
decline they could have potentially seen. That is why the DOR
developed a data assessment project to figure out more
specifically where the money was going. Almost all of the
companies gave them a five-year look-back that got down a little
more into what the spending was on.
SENATOR STEDMAN said they have the credits, but they also have
the ability to write off 100 percent of CAPEX and he asked the
department to provide an estimate of what that is.
MR. TANGEMAN said that is a good point and is one of the
benefits of working under the net tax system.
SENATOR STEDMAN said the question isn't really what the capital
expenditure is, but what the monetary value is of being able to
immediately write off CAPEX in one or two years and how it
benefits the whole package of the state's fiscal structure.
COMMISSIONER BUTCHER responded that he would put that together
for him.
4:57:30 PM
CO-CHAIR PASKVAN thanked the presenters and adjourned the
meeting at 4:57 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 12 01 27 SenRes Overview Presentation.pdf |
SRES 1/27/2012 3:30:00 PM |