Legislature(2017 - 2018)HOUSE FINANCE 519
03/24/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 111 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 111
"An Act relating to the oil and gas production tax,
tax payments, and credits; relating to interest
applicable to delinquent oil and gas production tax;
and providing for an effective date."
1:38:46 PM
Representative Guttenberg pointed out he had provided a
handout to members with maps of "Middle Earth."
1:40:26 PM
AT EASE
1:41:08 PM
RECONVENED
1:41:23 PM
COLLEEN GLOVER, COMMERCIAL ANALYST, TAX DIVISION.
DEPARTMENT OF REVENUE, introduced herself.
RICH RUGGIERO, CONSULTANT, CASTLE GAP ADVISORS, LLC,
presented two slides from a PowerPoint titled "Model
Session" (copy on file). He relayed that he worked with the
Department of Revenue (DOR) to ensure that the models
provided by Castle Gap and DOR were compatible. He
explained that his model contained a one year "snapshot at
various price levels" that was totally interactive and
offered comparisons to the current structure. The two
models offered two different constructs: one was a
lifecycle and the other was a snapshot. He noted that his
snapshot was informative as to the relative amounts of
revenue based on the inputs. He delineated that neither
model provided "fiscal note type detail" and did not
contain the data to determine impacts for specific
geographic regions; e.g., Cook Inlet. The models provided
relative data and DOR could provide specific detail upon
request. He turned to slide 2:
Plan For Today's Meeting
Today's session will be a combination of two
presentations
-Department of Revenue
Presentation to cover comparison results of new (large
and small) field or project under Status Quo and
CSHB111
-Castle Gap Advisors
Real-time model of CSHB111 components to see snapshot
results of a variety of desired scenarios at given
price points
DOR and Castle Gap models are set up from two
different constructs
-Both assume the same logic in application of
legislation components
Mr. Ruggiero moved to slide 3:
Model Constructs
DOR
New project life-cycle model
Functionality: Can do what if scenarios on a project
lifecycle on request
Castle Gap Advisors
Delta price model
-i.e. shows the revenue and net effective tax rate
changes for various parameters at different prices
Functionality: Real-time what if scenarios on a one-
year snapshot basis
Limitations of Models
Neither model has the detail to run fiscal note level
results or data specific to a particular field
This further analysis can be requested through DOR
1:44:31 PM
Vice-Chair Gara mentioned industry testimony from Conoco-
Phillips' Annual Report. He referred to data indicating
that ConocoPhillips [March 22, 2017 "HB 111 ConocoPhillips
Supplemental Slide Testimony" (copy on file)] net profit in
Alaska was approximately "a quarter of a billion dollars"
at $41 per barrel of oil. He noted that the average
breakeven point for a North Slope field reported by DOR was
$40 in FY 2017 and $42 in FY 2018. He inquired whether Mr.
Ruggiero knew what ConocoPhillips breakeven point was. Mr.
Ruggiero responded in the negative. He remembered that the
company's testimony contained two slides [PowerPoint titled
"House Finance Committee CSHB 111" (copy on file) March 22,
2017] that addressed Alaska. He elaborated that the data on
one slide reported that the company reduced its "all-in or
all-inclusive 10 percent rate of return price level" from
$63 to $40, indicating that at the $40 price point the
company achieved an all cost included (all-in) 10 percent
rate of return for its Alaska operations.
1:47:06 PM
Ms. Glover presented the PowerPoint Presentation: "Alaska's
Oil and Gas Taxation - CSHB 111(RES)\N: Lifecycle Scenario
Analysis"
Ms. Glover turned to slide 2: "What Will Be Presented":
Summary of CSHB 111(RES)\N Impacts on Modeling
Modeling Assumptions
Scenario Analysis -economics of changes
· Status Quo (HB247) Lifecycle analysis of two
potential new North Slope fields (small and
large).
· Potential Impacts of HB111\N changes on new
North Slope fields.
Ms. Glover related that the modeling analyzed hypothetical
new fields; one small and one large. The model assumed the
fields were GVR (gross value reduction) eligible and any
other parameters were adjustable. The model calculated the
total revenue for the state and producer and the federal
and municipal revenue.
Ms. Glover advanced to slide 3: "What are the Major Tax
Changes in HB 111\N." She commented that the items
highlighted in green on the chart were provisions from the
CS (committee substitute) that impacted the modeling. She
listed the changes to the CS. She reported that the Net
Operating Loss Credit (NOL) was changed from 35 percent to
a NOL carry forward loss at "50 percent with an uplift."
Additionally, sliding scale per barrel credits that
impacted the economics of the field and the minimum tax
rate were changed. Finally, the CS eliminated cash
repurchases for North Slope fields and the minimum tax rate
for a GVR field was based on its reduced gross value. She
noted that the minimum tax rate change was referred to as
hardening the floor.
Ms. Glover highlighted slide 4: "Modeling Assumptions":
Modeling Assumptions
· All Fields begin development 1/1/2018
· Does not include Exploration Costs
· Includes price and cost inflation (based on
Callan 2.25% rate)
· For Status Quo modeling, after GVR ends the
producer opts to use their sliding scale per-
taxable barrel credits, which requires tax
payments not go below the minimum tax.
· For Status Quo modeling, producer opts to only
apply for $35 million of repurchasable credits
per year (and forgo the additional $35 million
with the 25% "haircut").
· Modeling assumes North Slope tax treatment.
1:50:34 PM
Ms. Glover scrolled to slide 6: "Lifecycle Modeling
Assumptions":
Lifecycle Modeling Assumptions
• 50 million barrels of oil (mmbo) field
• 750 mmbo field
• $40, $60, and $80 real (inflated)
• Fall 2016 Forecast prices in real prices extending
through life of field
• Status Quo
o All Provisions
o 1 and 4 Partner Scenarios (impacts total cash
repurchase per year)
• HB111\N
Ms. Glover highlighted slide 7: "Lifecycle Modeling
Outputs":
Lifecycle Modeling Outputs
· Each Scenario has a Dashboard with
Four Quadrants
1. Production Tax by year
2. State Revenue by year
3. Producer Revenue by year
4. Summary Economics
a. Total Cash Flows
b. NPV Analysis
c. Split of Profits
d. Split of Gross
Ms. Glover reviewed slide 8: "Dashboard -Net Production
Tax."
· Credits Repurchased by State
· Production Tax Paid
· Minimum Tax Calculation
Ms. Glover indicated that the dashboard slides were
depicting what type of information the model quadrant
contained and was not focused on data. The graph
represented a small field over 30 years and the red bars
represented cash outflows by the state; the green bars
represented cash inflows through production tax payments
made to the state and the orange line represented the
minimum tax level.
1:52:43 PM
Ms. Glover mentioned slide 9: "Dashboard -State Gains &
Losses."
State Revenue
· Production Tax (negative numbers are credits
repurchased)
· Royalties
· State Share of Property Tax
· State Corp Income Tax
Ms. Glover commented that the state received such a small
portion of property tax on the North Slope that the line
was not visible. She stated that the local government
received 7.5 percent of the property tax.
1:53:15 PM
Ms. Glover moved to slide 10: "Dashboard -Producer(s) Cash
Flows."
Producer(s) Cash Outflows
· Period when net cash is negative (typically
when haven't started production and have huge
cash outflows).
Producer(s) Cash Inflows
· Period when net cash is positive
Ms. Glover turned to slide 11: "Dashboard - Summary
Economics."
Total Credits
Total State and Producer Cash Flows
Lifecycle Totals
· Net Present Value (NPV) of discounted cash
flows for State and Producer(s).
Split of Profits
· By entity
Split of Gross (wellhead value)
· By entity
Ms. Glover reported that the bottom quadrant depicted the
compiled total economic picture. The small pie charts
represented the municipal and federal percent of profits
and gross value.
Ms. Glover moved to slide 13: "Lifecycle Modeling
Assumptions -Small Field":
Lifecycle Modeling Assumptions - Small Field
50 mmbo Field Assumptions
• Life of Field = 30 Years
• Peak Oil Production = ~15,000 bbls/day
• Transportation Cost = $10 / bbl
• Royalty Rate = 12.5% (all State)
• Capital Expenditures (Capex) $ = $18 / bbl
• Operating Expenditures (Opex) $ = $15 / bbl
• Property Tax Rate = $1.25 / bbl
• State Corp Income Tax Rate = 6.5% of remaining
Production Tax Value (PTV) after Production Tax is
paid
• Federal Corp Income Tax Rate = 35% of remaining PTV
after State Corp Income Tax is paid
Ms. Glover continued to the chart on slide 14: "Profile
Curves - Small Field." She noted that the chart contained
the production and cost profiles. The blue lines depicted
the capital expenditure investment. She noted that
production did not begin for four years at the point where
the green production line sharply rose.
1:55:48 PM
Ms. Glover presented the information on slide 15:
"Lifecycle Modeling -Small Field (GVR @ 20%): 50 mmbo,
Status Quo, Fall 2016 Forecast Prices, 1 Partner." She
highlighted that the slide contained the four quadrant
charts' data under current tax law. She turned to slide 16:
"Lifecycle Modeling -Small Field (GVR @ 20%): 50 mmbo, HB
111\N, Fall 2016 Forecast Prices, 1 Partner." She explained
that the tax was based on the producer or "partner" and not
on the field. The model assumed that only one producer was
involved in small fields, and that multiple producers were
involved in large fields. She pointed to the top left
quadrant on slide 15 that represented the status quo cash
credits for the producer that could recover up to $35
million per year in cashable credits. The state did not
receive income until year 7 from production tax credits.
She advanced to the same quadrant on slide 16 under CS HB
111 that depicted the elimination of cash credits. She
noted that the state did not receive revenue until the
field began production and received revenue at the minimum
tax level. She observed that when the green bars on the
graph rose above the orange minimum tax line the state
would receive more in production tax. She displayed the
summary table for a small field on slide 17: "Summary Table
-Small Field."
1:58:14 PM
Representative Grenn asked whether the forecasted prices
for the out years on the charts were steady. Ms. Glover
responded in the negative. She reiterated that slide 16
depicted that the producer did not pay any production tax
(upper left quadrant chart) until oil was produced in year
5, which was paid at the minimum tax level while the
producer was utilizing the NOL's, and once exhausted the
full production tax was paid. The chart in the upper right
quadrant showed that the state did not receive a payment of
any kind, including royalties until oil was produced. She
pointed to the lower left chart that portrayed the
producer's capital expenditure investment depicted as red
lines. Losses occurred until oil was produced. She moved to
the lower right-hand quadrant that contained the data for
the aggregate sums (net production tax total, net state
gain or loss, net producer cash flows) for all the colored
bars.
Ms. Glover continued to slide 18: "Summary Results -Small
Field." The table contained the modeling data from four
scenarios: oil price points at $40/bbl., $60/bbl.,
$80/bbl., the fall 2016 forecast under the status quo, and
CSHB 111 that was included in the dashboard data. She
indicated that the green lines represented the state cash
flow and the blue lines represented the producer's cash
flow.
2:02:21 PM
Ms. Glover scrolled to slide 20: "Lifecycle Modeling
Assumptions -Large Field":
750 mmbo Field Assumptions
Life of Field = 40 Years
Peak Oil Production = ~120,000 bbls/day
Transportation Cost = $10 / bbl
Royalty Rate = 12.5% (all State)
Capex $ = $13 / bbl
Opex $ = $12 / bbl
Property Tax Rate = $1.25 / bbl
State Corp Income Tax Rate = 6.5% of remaining
Production Tax Value (PTV) after Production Tax
is paid
Federal Corp Income Tax Rate = 35% of remaining
PTV after State Corp Income Tax is paid
Ms. Glover highlighted slide 21 "Profile Curves -Large
Field." She reported that the profile was similar to the
small field production profile, with the exception that it
took five years of investing before oil production began.
She reviewed the modeling on slide 22: "Lifecycle Modeling
-Large Field (GVR @ 20%): 750 mmbo, Status Quo, Fall 2016
Forecast Prices, 1 Partner." She pointed to the upper left
chart that depicted repurchased production tax credits and
tax payments. She reported that the producer received the
$35 million in cash credits through year 12 when oil
production began. The minimum tax was paid to the state
until all the producer's NOL credits were exhausted and
production tax was paid. The upper left chart indicated the
same as noted on the previous chart with the addition of
royalties paid. The lower left chart depicted the
producer's investment cost and income over the life of the
field. She reviewed slide 23: "Lifecycle Modeling -Large
Field (GVR @ 20%): 750 mmbo, Status Quo, Fall 2016 Forecast
Prices, 4 Partners." She remarked that the upper left chart
reflecting the field with four partners looked much
different. The partners could recoup $140 million per year
in total, which impacted the economics quite significantly
by the ability to recover their investment sooner.
2:05:16 PM
Ms. Glover discussed slide 24: "Lifecycle Modeling -Large
Field (GVR @ 20%): 750 mmbo, HB111\N, Fall 2016 Forecast
Prices, 1 or 4 Partners." She pointed to the upper left-
hand corner chart that showed the elimination of the cash
credits and oil production beginning in year five, when the
minimum tax was paid through year 12. The result of the
ability to carry forward losses. She turned to slide 25:
"Lifecycle Modeling -Large Field (GVR @ 30%):750 mmbo,
Status Quo, Fall 2016 Forecast Prices, 4 Partners." She
indicated that the scenario included a higher GVR of 30
percent that activated a higher royalty rate. The slide was
added at the request of Co-Chair Seaton. The state "might
be entitled to" a higher royalty rate of sixteen and two-
thirds percent at a GVR of 30 percent. The net state
revenue increased by $2 billion for the life of the project
compared to the figures on slide 22. She elucidated that
the state was gaining more in royalty then it lost with
lower production tax. She reviewed that at a GVR of 20
percent production taxes paid over the life of the field
was $10.95 billion [slide 22] and at the higher royalty
with the higher GVR (30 percent) the production tax paid
was $9.9 billion but more was paid in royalty than the loss
in production tax.
2:08:14 PM
Co-Chair Seaton asked what rate of royalty increase she had
used. Ms. Glover responded that she used the sixteen and
two-thirds royalty rate.
Ms. Glover moved to slide 26: "Lifecycle Modeling -Large
Field (GVR @ 30%): 750 mmbo, HB111\N, Fall 2016 Forecast
Prices, 1 or 4 Partners." She mentioned that the slide
depicted the impacts under the CS version. She continued to
slide 27: "Summary Table -Large Field." She noted that the
dashboard information was included on the table for ease of
comparison. She scrolled to slide 28: "Summary Results -
Large Field." She mentioned that the graph represented the
summary of the different scenarios for large fields when
comparing the state revenues to the producer's revenues.
Ms. Glover highlighted slide 29: "Further Analysis -Large
Field":
What's Driving the Changes from Status Quo by Tax
Component Change
Compared Two Scenarios
o 2016 Fall Forecast Prices
o 1 Partner Scenario vs HB111\N
Five Components to Tax Change
o Net Operating Losses (NOLs) changed from 35%
credit to 50% carry forward loss
o Sliding Scale Credits shifted from maximum
of $8/bbl @ <$80 Wellhead value to $6/bbl @
<$60 Wellhead value
o Hardened the Floor
o Minimum Tax increased from 4% to 5% @ $50
ANS $
o Cash Repurchases Eliminated for North Slope
Ms. Glover relayed that the following slides contained
further analysis for a large field development based on the
tax change components and their relative impact on revenue
and net present value for the state and the producers. She
reviewed the chart on slide 30: "Status Quo vs HB111 -State
Net Cash Flows." She indicated that the chart portrayed a
hypothetical project that brought $22.4 billion in revenue
under the status quo. The NOL tax change component gained
$1.8 billion in revenue for the state. The sliding scale
credit change added $1.3 billion and the hardening of the
floor, minimum tax, and elimination of cash credits
resulted in negligible changes. The yellow bar represented
the total cash flow for the state under the CS amounting to
$25.4 billion.
2:11:44 PM
Ms. Glover highlighted slide 31: "Status Quo vs HB 111 -
State Net Present Value." She elucidated that the chart
depicted the state's NPV from the scenario. She noted that
some of the tax change items had an impact due to the time
value of money. She discussed slide 32: "Status Quo vs HB
111 -Producer Net Cash Flows." She stated that the chart
portrayed the net cash flows for the producer. She pointed
to the gains and losses and noted the CS reduced a
producer's total cash flow compared to the status quo. She
turned to slide 33: Status Quo vs HB 111 -Producer Net
Present Value." She specified that the elimination of the
cash credits had a larger impact on the producer's NPV
calculations.
2:13:33 PM
Co-Chair Seaton asked about the higher royalty in relation
to the GVR and wondered how she modeled the scenario. He
deduced that she only modeled the higher royalty rate of
16.67 (two-thirds) percent rather than the usual 12 percent
royalty along with the 10 percent higher GVR [30 percent]
rate. He noted that some fields maintained the higher
royalty rate regardless of the GVR. He requested that the
model include the lifecycle of the field at the higher
royalty rate and the lifecycle of the field with the 16.67
percent royalty rate and the additional 10 percent GVR. Ms.
Glover affirmed his statement and stated she would model
both scenarios and provide the data to the committee. Co-
Chair Seaton wanted her to do so because some fields
received a higher royalty prior to the implementation of
the GVR.
2:15:34 PM
Vice-Chair Gara asked her to revert to slide 14. He asked
whether the green bar [depicting daily oil production] was
typical for a field that ramped up to production and then
declined. Ms. Glover affirmed that the curve was
characteristic of the "ramp up and ramp down of
production." Vice-Chair Gara raised concerns with the lower
tax GVR fields that were exempt from production tax for the
first seven years of production at oil prices under
$70/bbl. He ascertained that on slide 14 the first seven
oil producing years were years 4 to year 11, well after the
peak of production {year 7] and taxation began after the
peak production fell by half. He asked for clarification.
Ms. Glover explained that under the fall forecast a
producer only qualified for three years of the GVR and not
seven because they achieved the three-year maximum of over
$70/bbl. under the model. Vice-Chair Gara deemed that if
the price remained below $70/bbl. the taxes were exempted
for 7 years. Ms. Glover answered in the affirmative.
2:18:04 PM
Vice-Chair Gara referred to the summary table on slide 17.
He cited line 2 at $50/bbl. under the status quo. He
referred to the negative $41 million figure under the Net
Production Tax Paid column and the negative $89 million
listed under the Production Tax NPV 6.95 percent column. He
inquired whether the NPV amounted to production tax minus
deductions and credits. Ms. Glover answered affirmatively.
He pointed to the last column titled Producer IRR (%) and
noted the producers rate of return of 11 percent. He asked
whether the percentage represented a profit. Ms. Glover
replied that the internal rate of return (IRR) was
different for different companies, but typically the IRR
was calculated on a NPV of zero. Vice-Chair Gara asked
whether there was a translation for an IRR that represented
a net value or rate of return. Ms. Glover replied that
producers were profitable at 11 percent, which incorporated
the time value of money. She reported that the producer's
NPV was positive indicating a positive investment value.
Vice-Chair Gara referred to the GVR rate of 20 percent and
asked whether the rate translated to an equivalent 20
percent discount on the tax rate or represented a larger
tax discount. Ms. Glover responded that the 20 percent GVR
was a reduction off the gross value before taxes were
calculated and could have a larger impact on taxes.
2:21:26 PM
Representative Guttenberg had questions about the small and
large field assumptions. He observed that the Capital
Expenditure (Capex) and the Operating Expenditures (Opex)
were significantly lower for the larger field. He wondered
why the difference was so large when the scale of the costs
was so high on large fields. Ms. Glover responded that the
assumptions were based on previously developed assumptions
by past consultants for the Department of Revenue DOR) and
was unaware of the basis of the assumptions. Representative
Guttenberg asked whether other transportation costs outside
of TAPS (Trans Alaska Pipeline System) were included in the
model. Ms. Glover responded that the transportation costs
were all inclusive.
Representative Wilson referred to the chart of slide 17.
She asked whether the $60 price range was projected over
the life of the field. Ms. Glover responded in the
affirmative and added that 2.25 percent per year inflation
was factored in. Representative Wilson commented that she
observed much larger price swings over the lifecycle years.
Ms. Glover explained that the model was done around price
points, which was the way fiscal notes were written. The
model was designed to show "some representative price point
analysis." Representative Wilson asked what the $437
million [on line 2] under the Net State Gain column
represented. Ms. Glover answered that the figure
represented total state revenue that included production
tax, royalties, property tax and corporate income tax.
Representative Wilson asked about the revenue columns
totals for the state and producer. She wanted to understand
the total revenue for both under the scenario. Ms. Glover
explained that the $113 million under the state's NPV
column included the total revenue for the state over the
life of the field (30 years) and "converted it into like
dollars to represent today's time value of money. The
revenue columns were not additive. The $437 million net
state gain was the amount the state received over 30 years.
The value of $1 today was not the same in 30 years.
2:25:45 PM
Representative Wilson asked whether the states $437 million
net state gain was equivalent to the Producer's Cash Flow
column showing $550 million. Ms. Glover indicated that she
was correct. The state's gain and the producer cash flow
were the total revenue over the lifecycle of the project.
Representative Wilson wondered whether it was fair to say
that the state made almost as much as the producer without
the risk. Ms. Glover responded in the affirmative.
Representative Wilson asked that at the $80 price point the
state made more revenue at $1.108 billion than the company
made at $973 million. Ms. Glover replied in the affirmative
and added that the figures were under the status quo.
Representative Wilson wanted to make sure there was an
apples-to-apples comparison. She thought that the state was
benefitting without risk under the status quo modeling.
Co-Chair Foster asked about the discount factor used for
the state and the producer. He wondered why she chose to
use 6.95 percent for the state and 10 percent for the
producer and why they differed. Ms. Glover answered that
6.95 percent was the figure the Permanent Fund used as a
rate of return and was the state's expectation for
investment. She indicated that since the producer took
risks and depended on cost recovery, 10 percent was
allotted to the producer. Co-Chair Foster deduced that if a
lower discount factor was used for the producer than the
NPV would rise. Ms. Glover responded in the affirmative.
2:28:54 PM
Vice-Chair Gara did not understand the question about the
state not assuming risk. He remarked that the state still
offered tax credits under the status quo. Ms. Glover
agreed. Vice-Chair Gara disagreed that the state took no
risk because even under HB 111 the state would still
reimburse producers but as a deduction from taxes owed. Ms.
Glover answered that under HB 111 the losses were carried
forward and treated like any other costs.
2:30:06 PM
AT EASE
2:34:49 PM
RECONVENED
Co-Chair Foster stated that the forthcoming modeling was
interactive. [Secretary's Note: The interactive modeling
was a live model and static copies were not available at
the time of the meeting. The excel model titled "20170327
Castle Gap Advisors Dashboard" and the document titled
"Petroleum Fiscal Design Model Instructions" were provided
to the committee on March 28, 2017 (copy on file)]
Mr. Ruggiero provided a PowerPoint presentation titled
"Model Session" dated March 24, 2017 (copy on file). He
explained that he had been working on a full lifecycle
model to present to the committee along with DOR's.
However, issues arose with the data when modeling the NOL's
at half the amount. He expected that the cut would produce
a "significant hit" to the companies' "economics" but it
did not. He relayed that he checked the data and the result
had to do with utilizing the NOL's down to a zero-tax value
even with a minimum tax. He furthered that building the
model utilizing the NOL's down to the production tax value,
which yielded the same tax as the minimum was a huge
difference in how the NOL's were used. He related that when
he modeled a $10 billion project and the NOL's were cut 50
percent, the deductions were cut by $5 billion. In a 35
percent tax bracket for the deductions totaling $1.8
billion, a credit of $1.4 billion was owed to the state,
yet the numbers were one quarter of that amount. He thought
that the reason was nuanced, and he did not fully
understand it yet, therefore he did not present his model.
He concluded that lots of moving parts raised many
questions. He offered a "snap shot" one-year model.
Mr. Ruggiero continued that any of the parameters
highlighted in yellow in the model were changeable. The
model assumed 450 barrels per day of non-GVR production and
50 barrels per day of GVR. In addition, the cost structure,
tax rates, GVR rates, federal rates, royalty percentages,
and the gross minimum tax were all changeable. He pointed
to two plots [graphs] on the right-hand side that portrayed
the net effective tax on the left line [y axis -
percentages zero at bottom and 50 percent at the top. The x
axis represents price from $20 to $200] The orange line,
which was flat, portrayed the revenue to the state in the
current status quo. He noted that a change to the net tax
curve changed the revenue to the state. He changed the GVR
per barrel credit to $5. The graph showed the orange net
tax curve moved to a blue curve that represented changes in
the model. The right axis opposite the y axis was read from
the bottom to the top and began at minus $600 million to
$1.4 billion. A green curve representing the change in
state take rose up and over to $404 million at the price on
the x axis of $80/bbl. Alaska North Slope (ANS) West Coast.
The change to $5 from $8 increased the state's take from
the status quo to $404 million at $80 per barrel. He noted
that the figures were not exact, and the $404 million
figure was in the range of $375 million to $425 million but
offered "an order of magnitude" of results.
2:41:58 PM
Representative Wilson emphasized that the model determined
what the state would lose or gain after changing inputs but
did not predict production. Mr. Ruggiero answered in the
affirmative. He offered that only a company knew it's
"tipping point." There was a point at which companies could
slow or stop investments, but he was unaware of the changes
that would drive that result. He added that the decision
was specific to each company based on its economics. Small
changes could play a negligible or large role depending on
the company's future forecast. Representative Wilson
cautioned that members should be careful of "pulling too
many levers" at once unless the full impact was understood.
She suggested that dealing with the cash credits alone
brought consequences; whether positive or negative, would
be known next year. Mr. Ruggiero thought that
Representative Wilson's approach was easier but required
adjustments each year. He maintained that the model enabled
the legislature to look at collective changes or individual
changes and measure impacts and compare them to achieve a
desired result. Representative Wilson maintained that the
model did not predict production. Mr. Ruggiero responded
that the model employed average costs, which was imperfect.
He pointed out that different fields had cost structures
that were lower or higher. He exemplified that
ConocoPhillips reported a 10 percent rate of return at
$40/bbl. and the model used $40 as the cost; real numbers
were different. He stressed that the benefit of the model
was that all the inputs were changeable and the shifts on
the plot's curve were instructive. He pointed to the plot
on the right side of the slide and reiterated that the
model assumed that 90 percent of production was non-GVR and
the plot on the bottom right portrayed net tax plotted on
the left scale and state take plotted on the right scale
where the model assumed the 10 percent GVR production.
2:46:47 PM
Vice-Chair Gara wanted the GVR readjusted to $5. He asked
at what price the adjustment "kicked in."
CHRISTINA RUGGIERO, CONSULTANT, CASTLE GAP ADVISORS, LLC,
answered that the price was $75 at the crossover point of
zero.
Vice-Chair Gara wondered what dollar amount initiated an
impact. Ms. Ruggiero responded that the amount was $65.
Vice-Chair Gara referenced prior industry testimony on
royalty relief. He believed that royalty relief was not
factored into the model. He suggested that a change from $0
to $5 "could be far more offset by the amount of reduction
in the royalty from 12.5 percent or 16.5 percent to 7
percent to 11 percent in gross tax. He inquired whether
royalty relief was a greater benefit than a zero to five
change. Mr. Ruggiero suggested that he run the numbers from
the CS into the model. He input $56 and $62 for the gross
minimum that initiated a change to 6 to 8 percent, and
additionally inserted the $60 per barrel credit, cut off at
3 percent GVR per barrel and going to zero at $120. He
returned to looking at the state take (green line) that
depicted a $200 million benefit to the state at a price of
$70 to $80 per barrel. He changed the field production to
450 thousand barrels and applied the changes to determine
how much royalty relief a company needed to bring them back
to zero. He ascertained that deducting 2.5 points from the
royalty zeroed out the revenue. He recapped that most non-
GVR fields were at the 12.5 percent royalty rate and
royalty relief could reduce up to 9 percent. The changes
from the 2.5 percent reduction negated the changes made to
the gross minimum tax and the per barrel sliding scale
credits.
2:51:46 PM
Co-Chair Seaton referenced the DOR presentation. He
hypothesized that if the state allowed "100 percent carry
forward of the expenditures and they were written off over
the first life of the field" how that impacted the minimum
tax. Mr. Ruggiero explained that in the early years of a
field, once production began a company deducted investment
capital to bring the tax to zero, however, a minimum tax or
hard floor could still apply, the minimum was paid even
though the company had large amounts of carry forward
losses to deduct.
Vice-Chair Gara returned to his royalty relief question and
asked what the extra revenue to the state was at $60, $70,
and $80 per barrel employing a zero to 5 percent credit.
Ms. Ruggiero reported that at a $60 price point the state
generated $135 million, at a $70 price point the state
gained $240 million, and at an $80 price point the state
made $270 million.
2:54:17 PM
Vice-Chair Gara asked whether the $5, $6, and $7 credit and
the zero to $5 credit "kicked-in" at $65/bbl. were stacked
or alternative. Mr. Ruggiero responded that the results in
the graph were additive to all the changes made. He
indicated that the way to isolate a specific impact was to
only change one item.
Ms. Ruggiero interjected that the figures she provided
included a per barrel credit range from $8 to $3 and
offered to change the number from $5 to zero. She reported
that at a $60 price point the state generated $135 million,
at a $70 price point the state gained $240 million, and at
an $80 price point the state made $670 million.
Co-Chair Seaton asked for clarification regarding the
bottom right graph. Mr. Ruggiero answered that the bottom
right graph represented GVR. He exemplified employing a
hard floor. He reset the model back to normal and input a
hard floor that resulted in a minimum tax. The minimum tax
was initiated at roughly $90/bbl. ANS West Coast price, but
the amount of revenue was relatively small at approximately
$10 million. Mr. Ruggiero suggested changing the gross
minimum tax back to the previous change along with a hard
floor; a company would still only pay the minimum up to
$115/bbl.
2:58:18 PM
Mr. Ruggiero increased a new field's cost structure and
related that as the costs increased the top plot's curve
moved up and to the right since the 35 percent was fixed at
$150/bbl. The right-hand side of the curve remained fixed
and the left side of the curve moved towards the right with
a fixed price instead of the entire curve changing. The
non-GVR field was at $105/bbl. and below was subject to the
minimum tax with the same parameters. The overall revenue
to the state was negative because the higher cost structure
meant less profit to share.
Mr. Ruggiero referred to the bottom graph that showed the
GVR field with a hard floor and the previous points
increased for the minimum tax percentages, then a GVR field
would be subject to a minimum tax at $145/bbl. or below. He
clarified that the chart only reflected 1 year which was
the reason the GVR remained in place above the $70 cut-off;
the model hypothesized that the price jumped to $140/bbl.
within one year. The GVR would be eliminated if the high
price remained over several years and the top graph would
indicate the results of the changes.
3:00:49 PM
Mr. Ruggiero pointed out that the net effective tax (the
tax that was paid relative to profit), increased
considerably as the parameters changed.
Co-Chair Seaton requested that Mr. Ruggiero return the
model to the status quo and insert the per barrel credit
provision in the CS. Mr. Ruggiero noted that the change
went into effect at $60/bbl. at $8 per barrel and at every
$10 increment the amount was reduced by $1 until the credit
was at $3 and subsequently jumped to zero. The results were
shown in the upper right-hand plot.
Ms. Ruggiero reported that the change impacts began at
$80/bbl. where the state revenue increased by $270 million
and that remained relatively flat until the price reached
$120/bbl. and increased the state's revenue by $540
million.
Co-Chair Seaton wondered why the per barrel credit had such
an effect. Mr. Ruggiero replied that the change initiated
the point where the 35 percent tax was payable decreased
from $150/bbl. to $120/bbl. portrayed by the flat blue
line. He added that for prices at $80 or higher a $2/bbl.
increment was added. He stated that the flat plateau on the
chart depicted the standard $2/bbl. difference but after it
made the jump from $3 to zero a larger gap was created, and
the line began to rise. He indicated that "with each $10
increment it was coming back down until the two tax rates
were equal and the revenue to the state was equal."
3:03:40 PM
Representative Guttenberg asked Mr. Ruggiero to repeat the
scenario again.
Co-Chair Seaton asked Mr. Ruggiero to identify at what
points and price the per barrel credit changed from the
status quo. Mr. Ruggiero stated that relative to the status
quo one change was made, which was to the sliding scale per
barrel credit. He changed the starting price from $80/bbl.
where the decrement began to $60/bbl. He explained that
from $0/bbl. to $60/bbl. the highest credit of $8 applied
and every time there was a price step increase of $10, a
credit was decremented by $1 through $3 as the minimum
credit; after $3 the credit fell to zero. He pointed to the
table located on the lower left that set and calculated all
the parameters fed into the model. He detailed that there
was a difference between the credits available under the
status quo versus the CS at the point where the revenue
line initially jumped up. The difference became $2/bbl.
because he started at $60 and a $6 credit applied versus an
$8 credit at $80/bbl. The $2 difference remained in place
for roughly 150 million barrels per year totaling roughly
$300 million to $270 million. The $2/bbl. remained in place
through the price points of $90, $100, and $110 per barrel.
He furthered that once the price reached $120/bbl. the new
oil dropped off to zero and the rest was subject to a
$4/bbl. credit. He added that at every subsequent $10
increment, the credit dropped until the two tax rates
equated to the point the per barrel credit was zero on both
cases.
3:07:15 PM
Co-Chair Seaton asked Mr. Ruggiero to return to the model
of $5 per barrel credit flat across the board. Mr. Ruggiero
replied that the result made the $5 per barrel credit
remain flat up to $200/bbl. Co-Chair Seaton was not
understanding the steps in relationship to the $5 per
barrel credit. Mr. Ruggiero responded that the status quo
changed the per barrel credit every $10. He noted that the
$5 flat credit input reacted to the status quo. He
summarized that the stair step that Co-Chair Seaton
observed was the "delta impact of the current $8 down to
zero in $1 increments for every $10 in price." Co-Chair
Seaton asked whether the flat line indicated the status quo
and the model portrayed changes from the status quo. He
asked for clarification. Mr. Ruggiero responded that the
revenue that rose and stepped down represented the point
when the flat $5 credit was less, equated, or more than the
credit under the status quo. Co-Chair Seaton offered that
the status quo was portrayed as a straight line across from
zero and the graphs depicted the changes in relation to the
status quo shown as the flat line. Mr. Ruggiero responded
in the affirmative and added that the parameters set at the
status quo resulted in a flat green line from zero
representing state take. Mr. Ruggiero clarified that the
zero take was merely a starting baseline and did not
indicate that the state had zero take. He recommended that
the members utilized the model to gain the sense "of the
relative importance or magnitude" of changing one parameter
versus another. Co-Chair Seaton emphasized that the model
was set at the status quo and any changes affected the
current system. Mr. Ruggiero reminded the committee of what
changes could be made by the model.
Co-Chair Seaton requested that the GVR models were run at
20 percent versus 30 percent and wondered what price the
GVR intersected the state revenue line. Ms. Ruggiero
reported that the impact was negative and at the $80/bbl.
the state take was minus $16 million, which stepped down at
the $110/bbl. to minus $52 million. Ms. Ruggiero added that
at below $80/bb. no change was affected.
3:14:36 PM
Vice-Chair Gara struggled with the GVR. He emphasized that
he did not support the original provision. He asked for Mr.
Ruggiero's opinion regarding the GVR provision. Mr.
Ruggiero responded that statutes were implemented to
instigate desired results. He related that a long-term goal
of the legislature was to increase production. He
recommended that the state decide what the proper
incentives were to spur the development of new fields on
the North Slope and increase production. Vice-Chair Gara
stated that his goal was to increase production and state
revenue and not fill the pipeline while losing state
revenue. He referenced analysis that demonstrated a
negative net present value to the state for GVR oil. He
asked if Mr. Ruggiero was familiar with the analysis. He
declared that his "benchmark was that he did not want to
spend money on oil that was not making money for the
state." Mr. Ruggiero referred to his previous testimony and
deduced that the CS eliminated the practice of the state
paying "up front" but the state contributed through
foregoing tax via deductions. He personally did not endorse
cashable credits but felt that the same incentive was
accomplished through deductions and cost recovery tied to
actual production. He surmised that the flat $5/bbl. GVR
was an example of providing credit when production
occurred.
3:19:21 PM
Vice-Chair Gara expressed reservation about using the term
"uplift" for an interest rate that benefitted a company. He
would have a difficult time explaining to his constituency
why the state offered 8 percent interest on top of cash
credits and loss carry forwards. He wondered whether there
was an "uplift" percentage that was more reasonable. Mr.
Ruggiero responded that 8 percent was the average return on
a 50-year long-term curve. He explained that the use of the
term "uplift" was very common in the industry. He reminded
the committee that the reason large companies invested in
countries with higher tax rates because costs were not
deducted they were recovered with interest or uplift, which
was the "norm." He elaborated that in Alaska a company
deducted against its investment and then paid taxes
compared to another regime where the company received total
cost recovery and then began to pay taxes. The fact that
the company could attain cost recovery much earlier than
possible in Alaska added a "considerable upside" to a
company's economics. He remarked that when measuring how
the state compared to other regimes the comparison amounted
to "more than headline tax rates." The other "moving
pieces" in the tax system mattered. He maintained that "if
Alaska allowed full deductions with uplift," the state
would still not compare to other regimes that offered a
"much more lucrative recovery." In response to a question
by, Vice-Chair Gara, Mr. Ruggiero relayed that some regimes
with a lower effective tax rate than Alaska offered full
recovery of costs and uplift. He knew of many regimes with
higher government take that offered full cost recovery and
some form of uplift.
3:23:30 PM
Representative Wilson asked how many countries took
royalties in kind. Mr. Ruggiero responded that he was aware
of very few countries that took royalty in kind. He voiced
that explaining every regimes royalty system was a very
complex answer but indicated that very few countries took
royalty in kind. Representative Wilson referred to Mr.
Ruggiero's previous comments regarding cost recovery and
uplift in other regimes. She asked for clarification
regarding the producer's ability to recover costs earlier
then in Alaska. Mr. Ruggiero replied that the DOR model
employed a 5-year investment period. He elaborated that in
most other regimes the companies were investing during that
time as well but the ability for cost recovery depended on
whether production occurred. In addition, in most regimes
projects were ring fenced; companies had to wait until
production began before receiving cost recovery. He
restated that the regime did not pay anything upfront, the
producer had to produce oil to recover costs.
Representative Wilson queried whether uplift began once
production began. Mr. Ruggiero answered in the affirmative.
He added that regimes either allowed every barrel that was
not royalty oil or limited the number of barrels that were
counted for cost recovery to ensure some government
revenue. Representative Wilson stressed that the discussion
should include the "complete number" including all the
components of government take for Alaska or else it was
difficult to compare "apples-to-apples." Mr. Ruggiero
stated that a full project model was necessary to obtain
the goal of increased production. Representative Wilson
reiterated that she did not believe the current discussion
considered the negative consequences of decreased
production to the point of placing the pipeline in
jeopardy.
3:29:04 PM
Representative Guttenberg appreciated the model. He
wondered whether the majors were "sticking around" in case
more production came online or new areas in the state
opened for development. Mr. Ruggiero speculated that the
major oil companies believed that "there was huge upside
potential" in the state and that production would increase
in its own time when each company was ready. He observed
from personal experience that most major producers anywhere
in the world divested in big projects after 30-35 years.
3:32:16 PM
Representative Guttenberg wondered what would happen if the
major producers just walked away from the massive North
Slope infrastructure and TAPS and let throughput decrease
enough that the pipeline was forced to shut down. He asked
what the risks were for the producers. Mr. Ruggiero
believed that the companies were profit driven which would
drive its decisions and hoped that the companies kept
bringing new development online.
Co-Chair Seaton saw no further questions.
HB 111 was HEARD and HELD in committee for further
consideration.
Co-Chair Seaton reviewed the agenda for the following day.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB111 - DOR Lifecycle Scenario Analysis Presentation 3.24.17.pdf |
HFIN 3/24/2017 1:30:00 PM |
HB 111 |
| 20170324_Castle Gap Advisors_Models Session Intro.pdf |
HFIN 3/24/2017 1:30:00 PM |
HB 111 |
| 20170327_Castle Gap Advisors_Model Explanation.pdf |
HFIN 3/24/2017 1:30:00 PM |
HB 111 |
| 20170327_Castle Gap Advisors_Dashboard House Finance.xlsx |
HFIN 3/24/2017 1:30:00 PM |
HB 111 |
| HB 111 20170329_HFIN_Impact of CF NOLs_Castle Gap Advisors.pdf |
HFIN 3/24/2017 1:30:00 PM |
HB 111 |