ACES: Is it Working? Senator Bill Wielechowski Anchorage Tea Party January 12,

What did Alaska’s Founding Fathers have to say about the use and sale of Alaska’s natural resources? 2

Alaska’s Constitution “The legislature shall provide for the utilization, development and conservation of all natural resources belonging to the State, including land and waters, for the maximum benefit of its people.” Article VIII, Section 2 3

Recent History In 2006, the legislature overhauled the state’s outdated oil and gas tax system.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. 4

Oil Production Under ELF 5

Production Declines Before ACES ACES passed November SOURCES: “Production C-2a: Crude Oil Production –History,” Revenue Sources Book, Fall 2007, Fall 2008, Fall 2009, Tax Division, Department of Revenue percent a year from percent a year from

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. 7

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? 8

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. 9

Capital Expenditures From Put chart here from page 6 of the DOR report 10

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 FY2007FY2008FY2009FY2010FY2011 FY2012 (forecast) FY2013 (forecast) Operating Expenditures (million $) 2,0811,8812,0852,2702,6142,5792,375 Capital Expenditures (million $) 1,5781,9672,2122,3892,3172,7433,056 Total Capex/Opex (million $) 3,6593,8484,2974,6594,9315,3225,431

Are Increased Investments on the North Slope Due to Maintenance? 12

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,

More Development Wells Are Also Being Drilled 2006: 137 wells 2007: 153 wells 2008: 139 wells 2009: 132 wells 2010: 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 ACES 15

Competition For 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. 16

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.” 17

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The North Dakota Myth According 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.Bolivia 2.Venezuela 3.Russia 4.Libya 5.Iran 6.Florida 7.Kuwait 8.Kazakhstan 9.Algeria 10.Iraq 11.Ecuador 12.Argentina 22 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 23

Oil and Gas Employment 2000 – 8, – 9, – 8, – 8, – 8, – 8, – 10, – 11, – 12, – 12, – 12, – 13,200 (preliminary) 24 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 In April 2011, the Department of Labor found that 54% of all new oil and gas hires were non- residents. 25

The Legal Duties of the Parties Under our leases, the State grants the oil companies the exclusive right to explore and develop our oil and gas Oil 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. 26

A Legal Obligation 13. (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 27

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. 28

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%. 29

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 30

BP Alaska Net Income (in billions) 2007: $ : $ : $ : $2.3* *minus $1.5 billion in 2010 deducted for non-Alaska costs, such as the Gulf spill $8.5 billion in profit under ACES 31

Profits Remain Strong ConocoPhillips Alaska Net Income (In Billions) 2007: $ : $ : $ : $1.7 $7.8 billion in profits under ACES Source: ConocoPhillips Annual Report 32

Alaska Profits vs. World Profits From Petroleum News (8/16/2009) Alaska O&G production makes up about 12% of ConocoPhillips’ worldwide output. Yet, in the 1 st 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. 33

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.” Q 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. 34

Profitability of Alaska Oil Wells 35

Conclusion #1 Investment is up Exploration is at record levels New development wells Strong private sector profits More jobs than ever 36

What about the mandate to “maximize benefits” for Alaskans from the sale of Alaska’s natural resources? 37

ACES has generated about $15 billion more for Alaskans than ELF would have. 38

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. 39

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. 40

Is the Trans-Alaska Pipeline Going 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? 42

Conclusion We 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 43

A Better Way Forward 1.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 financing 5.Encourage gas-to-liquids plant on North Slope 6.“Bend the decline curve.” Set decline curves for No. Slope fields. If companies beat the curve, $x/ barrel tax break 7.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.