Legislature(2017 - 2018)BARNES 124
02/22/2017 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Ocean Acidification in Alaska: Ecosystems and Economics | |
| SB30 | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | SB 30 | TELECONFERENCED | |
| += | HB 111 | TELECONFERENCED | |
HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
2:03:13 PM
CO-CHAIR TARR announced that the final order of business would
be 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."
2:03:48 PM
COLLEEN GLOVER, Commercial Analyst, Tax Division, Department of
Revenue (DOR), provided a PowerPoint presentation entitled,
"Alaska's Oil and Gas Taxation - HB111\O Lifecycle Scenario
Analysis," dated 2/17/17. Ms. Glover gave the committee brief
personal background information. She noted the sectional
analysis for HB 111 was previously presented, and her
presentation would focus on lifecycle modeling that is based on
two hypothetical North Slope fields and which will reveal the
impacts of any tax policy on a large or small new field,
including the present tax policy, identified as status quo, and
the potential impacts of HB 111 [slide 2]. On slide 3, impacts
by HB 111 such as the net operating loss (NOL) credit change
from 35 percent to 15 percent, changes to sliding scale credits,
the elimination of cash repurchases on the North Slope, the
change in the minimum tax from 4 percent to 5 percent, and
provisions to harden the floor, were highlighted in green.
REPRESENTATIVE BIRCH directed attention to page 4 of fiscal note
Identifier: HB111-DOR-TAX-02-10-17 that indicated HB 111
"raises $300 million." He asked whether the presenter would
characterize the net effect of HB 111 as a major tax increase.
MS. GLOVER clarified the model is a hypothetical field and the
fiscal note is based on the Fall [2016 Revenue Sources Book
(RSB)] forecast of projected revenues to the state. She
acknowledged it is an increase and the modeling would present
the impact of HB 111 on each of five scenarios.
2:07:48 PM
REPRESENTATIVE BIRCH asked whether the Fall forecast recognizes
the recent increased quantity of oil flowing through the Trans-
Alaska Pipeline System (TAPS).
MS. GLOVER deferred to the director of the Tax Division, DOR.
CO-CHAIR TARR stated the $300 million referred to in the fiscal
note are fiscal year 2025 (FY 25) and FY 26 estimates.
MS. GLOVER explained the model assumptions are as follows [slide
4]:
• development begins 1/1/18
• designed for the period of development through production
not including exploration costs or abandonment costs
• uses inflation of 2.25 percent per year
• for status quo, producers move to non-gross value reduction
(non-GVR) status and cannot go below minimum tax
• for status quo, producers apply for $35 million repurchase
sliding scale credits
• assumes North Slope only
MS. GLOVER, in response to Representative Johnson, restated the
model does not include exploration costs or abandonment costs.
She explained the field lifecycle modeling assumptions are as
follows [slide 6]:
• one 50 million barrel oil field over the life of production
• one 750 million barrel oil field over the life of
production
• price points of $40, $60, $80, and Fall 2016 forecast price
• status quo tax provisions with one or four partners
• HB 111
• each scenario has a dashboard with four quadrants [slide
7]: 1. production tax; 2. state revenue; 3. producer
revenue; 4. summary economics: a. total cash flows, b. net
present value (NPV) analysis; c. split of profits; d. split
of gross
2:13:41 PM
REPRESENTATIVE BIRCH asked whether [quadrants] 1-4 include state
royalty share.
2:14:09 PM
MS. GLOVER said royalty is a component of state revenue,
[quadrant] 2. Slide 8 illustrated a hypothetical small field
over 30 project years. There was no activity in the first years
and under the current tax system cash credits were generated.
Cash repurchases paid to the producer by the state were shown in
red. In later years, production tax paid by the producer was
shown in green, and the gold line was the minimum tax.
REPRESENTATIVE BIRCH questioned whether the model assumes the
state honored its commitment to the explorer in the amount of
$150 million.
MS. GLOVER said the model assumes $35 million per year would be
paid by the state. She turned attention to the four components
of state revenue: production tax shown in green, property tax
shown in red, royalties shown in blue, and state corporate
income tax shown in purple. On the North Slope, the state gets
a 7.5 percent share of property tax [slide 9].
REPRESENTATIVE BIRCH recalled the state collects 20 mills in
property tax statewide, and reimburses communities along the
pipeline for their share. He opined property tax for the state
is a significant amount.
2:17:27 PM
MS. GLOVER explained the property tax shown is for the
hypothetical field. However, 92.5 percent goes to
municipalities. She returned attention to slide 9 that
illustrated income tax is paid after producers begin to make a
profit. Slide 10 illustrated cash flows for producers over the
duration of the field, beginning with huge net operating losses
and followed by production. Slide 11 summarized economics
during the life of the project: lifecycle totals with rates of
return; split of profits based on entity such as the state or
municipalities; split of gross by entity. She pointed out state
net present value (NPV} is 6.95 percent and producer cash NPV is
10 percent. Ms. Glover presented the small field modeling
assumptions, noting that any changes can be easily accommodated
[slide 13].
CO-CHAIR TARR questioned why the state corporate income tax rate
is lower than in statute.
MS. GLOVER said the rate is 6.5 percent of the net. Slide 14
illustrated the production profile curve for a small field,
showing almost $200 million in capital investment before
production begins at year four. However, operating expenditures
correspond with the production curve.
2:24:18 PM
REPRESENTATIVE JOHNSON asked what taxes are being paid at the
beginning of development.
MS. GLOVER said none.
REPRESENTATIVE BIRCH noted total capital expenditures shown on
slide 14 are $500 million before production.
MS. GLOVER agreed. Slide 15 illustrated the four modeling
components for a small field under the current tax regime that
were previously discussed on slides 8-11. In the small field
model it was assumed there would be no production until year
four, and thus no production tax or royalty revenue is due the
state until year four. Total net gain to the state for the life
of the hypothetical field was $870 million and net cash flow to
the producer was $815 million.
REPRESENTATIVE BIRCH returned attention to slide 15, and asked
for clarification on the total amount of credits and capital
spend.
2:29:37 PM
MS. GLOVER responded slide 14 was a representative profile and
slide 15 illustrated the actual scenario. In further response
to Representative Birch, she said in the aforementioned scenario
the lifecycle total credits that were purchased are $161
million. Ms. Glover presented slide 16 which illustrated the
small field model under the proposed HB 111 tax regime. As
shown in the upper left graph, there are no cash repurchases and
the producer pays the minimum tax; as shown in the upper right
graph, there is no revenue to the state until production begins;
as shown in the lower left graph, there is little change; as
shown in the lifecycle totals, production tax remains the same
as adjusted for net present value.
REPRESENTATIVE RAUSCHER asked whether royalty was increased in
slide 16.
MS. GLOVER answered royalty is not impacted by HB 111. Slide 17
illustrated cash flows for the small field, one partner
scenario, at $40, $60, $80, and Fall 2016 forecast prices, under
the status quo and HB 111.
2:35:01 PM
CO-CHAIR TARR surmised at $40 companies have higher losses under
HB 111 due to the price of oil [from the point of development].
2:35:19 PM
MS. GLOVER provided additional data on the eight small field
scenarios under the status quo and HB 111 [slide 18]. Ms.
Glover presented the large field modeling assumptions [slide
20]. She explained the production profile differs as production
for a large field is assumed to begin at year five, however,
similarly to the development of a small field, there is a large
capital investment in the first years, followed by peak
production and declining production [slide 21]. Modeling for
the large field included three scenarios: current tax policy
[status quo], one partner with annual $35 million maximum
repurchase; status quo, four partners; HB 111 with one to four
partners. As shown on the slide 22 upper left graph, cash
repurchases are received for the first seven years, minimum tax
is paid to about year twelve or thirteen, and higher production
tax is paid in the following years; because of early losses, the
producer carried forward tax credits to use against tax
liability, and when the NOL credits are exhausted, production
tax greatly increases. As shown in the upper right graph, state
revenue also peaks around year twelve. As shown in the lower
left graph, positive cash flow begins around year eight.
CO-CHAIR TARR observed in the foregoing scenario, the producer
chose to use its $35 million in credits, and carried the
remaining credits forward.
MS. GLOVER said DOR assumed the producers would opt to carry
forward credits for their full value rather than taking 75
percent cash value.
REPRESENTATIVE RAUSCHER asked whether the model is based on an
average historical lifecycle of a production field.
MS. GLOVER said the model is based on a production profile curve
developed by DOR and the Department of Natural Resources (DNR),
looking at natural field production profiles and working with
tax consultants. She further explained the large field assumes
750 million barrels over the life of the field, so the profile
curve estimates percent of production by year. She returned to
the presentation, noting slide 23 illustrated the large field
with four partners, which qualifies the project for the $140
million per year cash repurchase maximum and impacts GVR
credits. As shown on the slide 23 upper left graph, state
repurchased credits are bigger, and production tax is paid
earlier, however, the total tax paid to the state is unaffected.
2:42:14 PM
CO-CHAIR TARR directed attention to the amount of $1.6 billion
in repurchased tax credits, based on the large field scenario
with four partners.
MS. GLOVER presented slide 24 that illustrated a large field
scenario with one or four partners under HB 111. As shown on
the upper left graph, there are no tax repurchases, tax payments
begin at year five at production, the producer pays minimum tax
until exhausting NOL credits, and pays the full production tax
for the remainder of the life of the field. As shown on the
upper right graph, the state does not receive revenue until
production begins.
CO-CHAIR JOSEPHSON returned attention to slide 23 - which
illustrated a partner or joint venture with a large field - and
noted the lifecycle of tax credits repurchased under current law
is $1.6 billion and the state nets $22 billion.
MS. GLOVER said correct.
CO-CHAIR JOSEPHSON acknowledged this is a high rate of return
albeit over a long period of time. Considering the all of the
variables such as price, the state should know the quality of
its investment. He questioned how residents of the state can be
assured of a worthy investment.
MS. GLOVER said that is not her expertise.
REPRESENTATIVE RAUSCHER asked what part of the model incents the
production of an oil field.
MS. GLOVER advised the model is designed to show the impact made
by HB 111 on a hypothetical field, and does not predict activity
or decisions by producers.
CO-CHAIR TARR said the upper left graphs on [slides 15, 16, 22,
23, and 24] show the changes in "incentives" because of the
changes to the repurchase cash credits, which are one of the
current incentives in tax policy.
MS. GLOVER advised there are analyses in this regard later in
the presentation. Slide 26 provided additional data on the
eight large field scenarios under the status quo one partner,
status quo four partners, and HB 111, and slide 27 was an
outline of all of the scenarios that were modeled on the large
field.
2:48:57 PM
REPRESENTATIVE JOHNSON pointed out the economics of a large
field are better than those of a small field, and opined
increased exploration on smaller fields was the purpose of
Senate Bill 21 [passed in the 28th Alaska State Legislature].
CO-CHAIR TARR compared the summary on slide 18 for small fields
to the summary on slide 26 for large fields, and pointed out
producer cash flow at $40 is negative for small fields - but is
not for larger fields - due to economies of scale.
MS. GLOVER noted from the results of the model DOR sought to
determine how the five components of the tax drive changes to
the state and to the producers. For example, DOR completed an
analysis on the five components using Fall 2016 forecast price
on a large field with one partner, compared to HB 111 [slide
27]. Slide 28 illustrated the tax changes made by HB 111 in
state net cash flows. The biggest difference was made by
changing the NOL credit from 35 percent to 15 percent, which was
a gain of $2 billion. Additional impacts are a gain of about $1
billion from changes to the sliding scale credit, and a gain of
about $25 million from hardening the floor. Other changes are
insignificant to cash flows.
CO-CHAIR TARR restated the analysis is over the lifecycle of the
modeled field, thus the total potential earnings are
approximately $22 billion, and the total potential change for
the life of the field would be the aforementioned $2 billion and
$1 billion.
MS. GLOVER added on slide 28 the blue bar on the left represents
approximately $22 billion in net cash flow for the status quo,
and the purple bar on the right represents net cash flow earned
under HB 111. Slide 29 illustrated the difference by HB 111 in
state net present value (NPV), incorporating the time value of
money over the lifecycle of the field. The biggest impact of HB
111 was again changing the NOL credits from 35 percent to 15
percent; the sliding scale credits, hardening of the floor and
other changes have smaller impacts. Eliminating cash repurchase
has no impact. Slide 30 illustrated the difference made by HB
111 in producer net cash flows: status quo for the producer
was about $18 billion in cash flow, changing NOL credits from 35
percent to 15 percent was a reduction of about $2 billion, and
the change in sliding scale credit was a reduction. Slide 31
illustrated the difference by HB 111 in producer NPV. Under
status quo the producer is at a negative NPV and changing NOL
credits has the biggest impact; sliding scale credit, hardening
the floor, changing the minimum tax, and eliminating cash
repurchase have further impacts.
2:55:40 PM
CO-CHAIR JOSEPHSON inquired as to the price forecast that was
used on the model for slide 31.
MS. GLOVER said the Fall 2016 RSB forecast was used. In further
response to Co-Chair Josephson, she explained there are no cash
credits reflected in slide 31.
MS. GLOVER, in response to Co-Chair Tarr, further explained the
status quo of the producers is negative in slide 31 because of
the time value of money. Slide 22 indicated the same negative
NPV due to the outlay of money in the beginning of a project,
which is shown in 2018 dollars.
REPRESENTATIVE PARISH surmised there was a 10 percent rate of
return on other funds.
MS. GLOVER said correct.
[HB 111 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB030 Transmittal Letter 2.21.17.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| SB030 ver A 2.21.17.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| SB030 Supporting Document-DNR Slide Presentation 2.21.17.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| SB030 Supporting Document-Royalty Board Resolution 2.21.17.PDF |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| SB 30 Supporting Document-Report from Royalty Board 2.21.17.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| SB30 Supporting Document-Support Letter 2-15-2017.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| SB 30 Supporting Document-Best Interest Finding 2.21.17.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| HB111 ver O 2.8.17.PDF |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM |
HB 111 |
| HB111 Fiscal Note DOR-TAX 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM HRES 3/13/2017 1:00:00 PM |
HB 111 |
| HB111 Sectional Analysis 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM |
HB 111 |
| HB111 Sponsor Statement 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM HRES 3/13/2017 1:00:00 PM |
HB 111 |
| HB111 - DOR Lifecycle Scenario Analysis Presentation - 2.17.17.pdf |
HRES 2/17/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM |
HB 111 |
| SB30 Fiscal Note-DNR-DOG 2.22.17.pdf |
HRES 2/22/2017 1:00:00 PM |
SB 30 |
| Ocean Acidification in Alaska Ecosystems and Economics By Jessica Cross 2.22.17.pdf |
HRES 2/22/2017 1:00:00 PM |