ACES: Is it Working?

Senator Bill WielechowskiAnchorage Tea Party

January 12, 2012

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What did Alaska’sFounding Fathers have to say

about the use and saleof Alaska’s natural resources?

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Alaska’s Constitution

“The legislature shall provide for the utilization, development and conservation

of all natural resourcesbelonging to the State,

including land and waters, for the maximum benefit of its people.”

Article VIII, Section 23

Recent History• In 2006, the legislature overhauled the

state’s outdated oil and gas tax system.

• Under the old system, called “ELF,” in 2006, 15 of 19 oil fields on the North Slope paid no production tax at all. And legacy fields saw their tax rates fall as they became “marginal”.

• The philosophy under ELF was that very low – or zero – taxes would spur oil production.

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Oil Production Under ELF

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Production Declines Before ACESACES passed November 2007

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SOURCES: “Production C-2a: Crude Oil Production –History,” Revenue Sources Book, Fall 2007, Fall 2008, Fall 2009, Tax Division, Department of Revenue.

• 5.78 percent a year from 1998-2007• 8.00 percent a year from 2004-2007

Alaska’s Clear and Equitable Share

The legislature continued its review of oil taxes in 2007, passing

“Alaska’s Clear and Equitable Share” (ACES) to ensure that Alaskans are fairly compensated for the sale of

their petroleum resources.

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How has ACES affected our constitutional mandate to develop

the state’s natural resources?

Is it scaring business away, as some have alleged, or encouraging

greater investment in Alaska,as it was designed to do?

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A Look At the Evidence

In the years since ACES passed, capital expenditures have increased consistently to

all-time highs each year, according to the Parnell Administration.

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Capital Expenditures From 2001-2010

• Put chart here from page 6 of the DOR report

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Both Operating and Capital Spending Are Up Since ACES Went Into Effect

Source: Revenue Source Books, Alaska Department of Revenue - Fall 2007, Fall 2008, Fall 2009, Fall 2010 and Fall 2011

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FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 (forecast)

FY2013 (forecast)

Operating Expenditures(million $)

2,081 1,881 2,085 2,270 2,614 2,579 2,375Capital Expenditures(million $)

1,578 1,967 2,212 2,389 2,317 2,743 3,056Total Capex/Opex(million $)

3,659 3,848 4,297 4,659 4,931 5,322 5,431

Are Increased Investments on the North Slope Due to Maintenance?

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Exploration is Booming

• 7 explorers are currently working on the North Slope, many new to Alaska

• 34 wells are planned, “exceeding the record to date, which was 33 in 1969, when 33 exploration wells were drilled after the discovery of the giant Prudhoe Bay field.”

Petroleum News, Oct 2, 2011

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More Development WellsAre Also Being Drilled

2006: 137 wells2007: 153 wells2008: 139 wells2009: 132 wells2010: 164 wells – highest # in 5 years

Source: Alaska oil and Gas Conservation Commission 14

More Companies Doing Business• In 2006, the first year that tax filings

were made under the net profit tax, 19 companies filed annual returns.

• In 2007, ACES passed. 18 Companies filed.

• In 2008, it grew to 26. • In 2009, 47 companies filed• In 2010, 69 companies filed returns. A

283% increase under ACES15

CompetitionFor New Oil Leases

And this December, 19 oil companies competed for 616,000 acres of new petroleum-rich lands, paying the state nearly $21 million.

The bidding generated the sixth largest amount ever for tracts on the North Slope.

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Big Investors, Big Interest • There’s been lots of good news in the oil

patch. Great Bear acquired 500,000 acres

• The large Spanish oil giant Repsol will begin exploring in Alaska this winter.

• The company hopes to spend at least $768 million under a "broad-reaching exploration and development program.”

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19

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The North Dakota MythAccording to Leg. Research, drilling increase in No. Dakota is not likely to due tax rates, but rather advent of hydraulic fracturing technology

According to Pedro Van Meurs, North Dakota has one of the least attractive fiscal regimes in North America.

Gross tax, higher royalties and lease rates – mostly to private land owners. Nowhere near the credits or deductions we have in Alaska

If you really want to be like No. Dakota, be prepared to pay a state income tax, a statewide sales tax, and to forfeit your PFD. 21

Worst Fiscal Terms in the World*

1. Bolivia2. Venezuela3. Russia4. Libya5. Iran6. Florida7. Kuwait

8. Kazakhstan9. Algeria10. Iraq11. Ecuador12. Argentina

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Highlighted are places with extremely high taxes where Alaskan oil companies (BP, ConocoPhillips, Exxon or Repsol) have done business in recent years:

* According to the Frasier Institute Global Petroleum Survey

Jobs Are Also On The Rise

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Oil and Gas Employment

• 2000 – 8,800• 2001 – 9,500• 2002 – 8,900• 2003 – 8,100• 2004 – 8,200• 2005 – 8,700• 2006 – 10,100

• 2007 – 11,500• 2008 – 12,800• 2009 – 12,900• 2010 – 12,800• 2011 – 13,200 (preliminary)

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Figures provided by the Department of Labor, based on average annual employment. Numbers highlighted in yellow are since the passage of ACES.

But… Who’s Getting the New Jobs?

Unfortunately, unemployment claims for Alaskan oil and gas workers increased 160% from 2006 to 2010, while roughly 50% of all new oil and gas hires were non-residents in 2009. In April 2011, the Department of Labor found that 54% of all new oil and gas hires were non-residents.

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The Legal Duties of the PartiesUnder our leases, the State grants the oil companies the exclusive right to explore and develop our oil and gasOil companies have a legal duty to explore and produce oil in areas they have leased if they can generate a reasonable profit. If they don’t develop lands Alaskans have leased to them for that purpose, they must relinquish their leases.

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A Legal Obligation13. (b) “Upon discovery of oil or gas on the leased area in quantities that would appear to a reasonable and prudent operator to be sufficient to recover ordinary costs of drilling, completing, and producing an additional well in the same geologic structure at another location with a reasonable profit to the operator, the lessee must drill those wells as a reasonable and prudent operator would drill, having due regard for the interest of the state as well as the interest of the lessee.” -- From a standard state O&G lease

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Point Thomson:A Case in Point

The state is currently in litigation with the producers over the gas-rich Pt. Thomson area, where Exxon and its partners have failed to develop the area’s vast resources after more than 30 years of delay and 27 “plans of development .”

Alaskans have a legal/contractual right to expect that resources they lease for development will be developed.

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Are the Producers Living up to Their Obligations?

Last April, ConocoPhillips CEO Jim Mulva announced that Conoco and its partners would consider investing $5 billion more in Alaska if the legislature rolled back oil taxes, which would produce 90,000 new bbl/d. Analysis of this proposal showed Alaskans give up $13.5 billion through 2020 in exchange for $3.2 billion in new revenue. Of the $5B investment, Alaska picked up $3B. The oil cos would yield about $3 billion in additional profits at a rate of return greater than 90%.

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Royalty Relief is Available

• Oil companies can request to pay lower royalties to the state if they can demonstrate their projects would not be economic without this relief.

• Relief has been requested just 3 times and has been granted twice. Oooguruk (Pioneer)-approved 2/1/2006. Nikaitchuq (Kerr McGee) denied 10/30/06. Nikaitchuq (ENI)-approved 2/11/08

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BP Alaska Net Income(in billions)

2007: $2.52008: $2.0 2009: $1.9

2010: $2.3* *minus $1.5 billion in 2010 deducted for non-Alaska costs, such as the Gulf spill

$8.5 billion in profit under ACES31

Profits Remain Strong ConocoPhillips Alaska Net Income

(In Billions)

2007: $2.3 2008: $2.32009: $1.52010: $1.7

$7.8 billion in profits under ACESSource: ConocoPhillips Annual Report

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Alaska Profits vs. World ProfitsFrom Petroleum News (8/16/2009)

Alaska O&G production makes up about 12% of ConocoPhillips’ worldwide output. Yet, in the 1st quarter of this year, Alaska operations earned the company 29% of its worldwide exploration and production income.

In the 2nd quarter, 55% of ConocoPhillips’ E&P worldwide earnings came from Alaska.

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Healthy Rates of Return

• On 3/23/11, ConocoPhillips executives acknowledged that Alaska has “strong cash margins” and “very good rates of return”

• On 10/26/11, ConocoPhillips executives stated Alaska had, “higher-than-average margins.” Q3 2011 Earnings Conf. Call

• In 2007, consultants hired by the Legislature modeled the rate of return an oil company receives when investing in Prudhoe Bay. The following slide estimates returns at 123% when oil sells at $80 a barrel.

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Profitability of Alaska Oil Wells

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Conclusion #1• Investment is up• Exploration is at record levels• New development wells• Strong private sector profits• More jobs than ever

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What about the mandate to “maximize benefits”

for Alaskans from the sale of Alaska’s natural resources?

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ACES has generated about $15 billion more for Alaskans than ELF would have.

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$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2007 2008 2009 2010 2011 Projected

Estim

ated

Pro

ducti

on T

ax R

even

ue ($

M)

Fiscal Year

Comparison of Estimated Production Tax Revenue From ACES, PPT and ELF for FY 2007 - FY 2011 (Projected)

ACES

PPT

ELF

Benefits for all Alaskans• A state surplus, when most states have

deficits.• Substantial “rainy day” state savings

accounts.• Community revenue sharing to keep local

property taxes down.• Fiscal responsibility and self-reliance as

federal spending declines.

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Benefits for Individual Alaskans• No state income tax.• No statewide sales tax.• No local sales taxes in many Alaskan

communities, including Anchorage. • Protection for your PFD. If the

Governor’s bill passes, we will be broke within a decade and your PFD could be at risk.

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Is the Trans-Alaska PipelineGoing to Shut Down?

• In 2004, BP reported that Prudhoe and Kuparuk would be “cash flow positive at 2064.”

• On 8/16/10, a BP expert concluded TAPS could effectively operate at 70,000 to 100,000 barrels/day.

• BP relied on this study to book its reserves with the SEC. 41

If we lower oil taxes . . . • We know HB 110 will result in $8.2 billion in lost

revenue over 5 years. We know it will endanger our credit rating.

• Governor Parnell hopes industry will invest more in Alaska.

• However HB 110 requires no assurance of increased investment, job creation or production.

• Is this a reasonable gamble to take? Especially in light of the existing legal duty to produce when reasonably economic?

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ConclusionWe are fulfilling our constitutional responsibilities both to encourage

development and to maximize benefits for Alaskans over the long-term.

Under ELF, jobs, investment, production declined. Alaska lost billions.

Under ACES, jobs, investment, exploration, company profits and number of companies on

the No. Slope are at all-time highs

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A Better Way Forward1. Restructure how we do leases. State does seismic work,

make it public. Instead of highest bidder, select company with best plan to develop our oil

2. Run our oil fields like a business. AG, DOR and DNR Commissioners should undertake analysis of all outstanding leases to ensure fields are being produced

3. Open and transparent laws re oil & gas: NPV, IRR, etc. 4. Make state investment available to companies needing

financing5. Encourage gas-to-liquids plant on North Slope6. “Bend the decline curve.” Set decline curves for No. Slope

fields. If companies beat the curve, $x/ barrel tax break7. Taper progressivity at $160 / barrel 44

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• The financial welfare of the future state and the well being of its present and unborn citizens depend upon the wise administration and oversight of these developmental activities. Two very real dangers are present. The first, and most obvious, danger is that of exploitation under the thin disguise of development. The taking of Alaska’s mineral resources without leaving some reasonable return for the support of Alaska governmental services and the use of all the people of Alaska will mean a betrayal in the administration of the people’s wealth. The second danger is that outside interests, determined to stifle any development in Alaska which might compete with their activities elsewhere, will attempt to acquire great areas of Alaska’s public lands in order NOT to develop them until such time as, in their omnipotence and the pursuance of their own interests, they see fit.