Legislature(2013 - 2014)SENATE FINANCE 532
03/01/2013 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | SB 21 | TELECONFERENCED | |
SENATE BILL NO. 21
"An Act relating to appropriations from taxes paid
under the Alaska Net Income Tax Act; relating to the
oil and gas production tax rate; relating to gas used
in the state; relating to monthly installment payments
of the oil and gas production tax; relating to oil and
gas production tax credits for certain losses and
expenditures; relating to oil and gas production tax
credit certificates; relating to nontransferable tax
credits based on production; relating to the oil and
gas tax credit fund; relating to annual statements by
producers and explorers; relating to the determination
of annual oil and gas production tax values including
adjustments based on a percentage of gross value at
the point of production from certain leases or
properties; making conforming amendments; and
providing for an effective date."
SECTIONAL PRESENTATION
9:07:07 AM
MICHEAL PAWLOWSKI, ADVISOR, PETROLEUM FISCAL SYSTEMS,
DEPARTMENT OF REVENUE (DOR), introduced himself.
SUSAN POLLARD, SENIOR ASSISTANT ATTORNEY GENERAL, OIL, GAS
AND MINING, DEPARTMENT OF LAW (DOL), introduced herself.
MARY HUNTER GRAMLING, ASSISTANT ATTORNEY GENERAL,
DEPARTMENT OF LAW, introduced herself.
Ms. Pollard discussed the PowerPoint, "Departments of
Revenue and Law: Sectional Review, CSSB 21(RES) 28-
GS1647\C" (copy on file).
Mr. Pawlowski shared that there was a detailed Sectional
Analysis included in the members' packets.
Ms. Pollard looked at slide 2, "Main Provisions."
-Corporate Tax Credit for Qualified Oil and Gas
Service Industry Expenditures
-Production Tax Rate: 35 percent flat rate, no
progressivity
-Tax Credits
Eliminates current 20 percent capital expenditure
tax credit for North Slope activities but
establishes a North Slope tax credit applicable
to production tax liabilities.
Extends the small producer tax credit and
provides a $5 per barrel of oil tax credit.
Expands the exploration well tax credit.
-Gross Value Reduction
Establishes 30 percent reduction from the gross
value at the point of production for oil and gas
produced from new units, new participating areas,
and expanded portions of participating areas.
-Oil and Gas Competitive Review Board
-Hold Cook Inlet and Middle Earth harmless
Ms. Pollard highlighted slide 3, "Sec. 2 - Qualified Oil
and Gas Industry Service Expenditure Tax Credit."
-Amends AS 43.20, the Alaska Net Income Tax Act, by
adding a new section.
-Provides a 10 percent tax credit for qualified oil
and gas industry service expenditures incurred in the
state.
-A taxpayer may not apply more than $10,000,000 in tax
credits under this section for a tax year regardless
of whether the taxpayer earned the tax credit or
received the tax credit by transfer.
-Expires if not used against a tax liability within
seven calendar years.
-Qualified oil and gas service industry expenditure
must be directly attributable to in-state manufacture
or modification of tangible personal property that has
a useful life of three years or more used in the
exploration, development, or production of oil or gas.
Mr. Pawlowski emphasized that the direction of the tax
credit was to the modifications of the actual expenditures.
He remarked that the tax credit was not on the actual value
of the asset, but rather the value of the work performed in
state.
Vice-Chair Fairclough wondered if businesses that were
currently performing in Alaska would qualify for the
credit, if they were manufacturing for the industry. Ms.
Pollard replied that those businesses would qualify for the
credit.
Ms. Pollard discussed slide 4, "Sec. 3 - Tax Rate"
-AS 43.55.011(e) is amended to levy an annual flat tax
rate of 35 percent.
-AS 43.55.011(g), the monthly progressivity tax, is
repealed.
-This change applies to oil and gas produced after
December 31, 2013.
-Effective date of January 1, 2014.
9:12:49 AM
Mr. Pawlowski explained that the Senate Resources Committee
expressed concerns over the regressivity of the proposal.
In order to develop a progressive proposal, where the state
took slightly more at the higher end of the price range,
one had to start with an increase in the base rate in order
to develop the proper progressive line. He stressed that
the slide represented the first step in developing that
proposal.
Co-Chair Meyer surmised that the base rate was raised to 35
percent, and was offset by the $5 per barrel production tax
credit proposal. Mr. Pawlowski agreed, and added that the
presentation would later highlight the location of the $5
per barrel credit as written in the bill.
Ms. Pollard displayed slide 5, "Sec. 1- Community Revenue
Sharing Fund."
-Amends AS 29.60.850(b) to change the source of
revenue that funds the community revenue sharing fund
to AS 43.20.030(c), the Alaska Net Income Tax Act,
from progressivity under AS 43.55.011(g) (repealed in
this bill).
-Effective date of January 1, 2014
Mr. Pawlowski that the slide represented a provision that
was included in the governor's bill, which was maintained
by the Senate Resources Committee. He remarked that there
was a substantive change from current line on page 2, line
4, where the brackets point out that the language that was
being removed was an amount equal to 20 percent of the
money received. That limitation was put on the original
state, which limited the amount available for appropriation
to a maximum of 20 percent of the progressivity revenues.
9:16:13 AM
Ms. Pollard highlighted slide 6, "Sec. 8 - Qualified
Capital Expenditure Tax Credit."
-AS 43.55.023(a)(3) is a new provision limiting the 20
percent qualified capital expenditure tax credit for
expenditures incurred to explore for, develop, or
produce oil and gas deposits on the North Slope to
expenditures incurred before January 1, 2014.
-Tax credits for expenditures incurred to explore for,
develop, or produce oil and gas deposits south of the
North Slope are not impacted.
-The full amount of a tax credit certificate may be
issued in a single year.
Mr. Pawlowski furthered that the effect of this change
would be to limit the qualifications of capital
expenditures, at 68 degrees north latitude, which was the
dividing line for the North Slope. He remarked that the
provision only applied to expenditures that occurred on the
North Slope.
Co-Chair Meyer remarked that companies could be stressed if
they were counting on that 20 percent capital credit. Mr.
Pawlowski replied that there would be a situation regarding
how much obligation the additional investment creates in
liability and exposure to the state. He stressed that the
longer the credits are carried forward, the longer the
state was susceptible to that impact.
9:21:18 AM
Vice-Chair Fairclough requested a model from Econ One and
PFC Energy that put this particular provision against the
gross revenue exclusion at different companies' price
points and production points benefit. She remarked that the
$5 per barrel would impact the calculation regarding
industry profit and the expansion of the gross revenue
exclusion. Mr. Pawlowski agreed to provide that information
Senator Hoffman wondered what the new section would cost
the state compared to the anticipated $1 billion in the
current year. Mr. Pawlowski responded that the repeal of
the credit was a revenue generator, because the state was
no longer paying the credits. He shared that the
administration found that there was a difference in timing
of obligation to the state. He stated that expenditures
occurred in the development of the field, and production
occurred later. As the production on the North Slope
declined, the ability of the state to manage the increasing
obligations as more money was spent was a central balance
of the bill. He explained that the impact was found in the
fiscal note.
Ms. Gramling highlighted slide 7, "Sec. 9 - Carried-Forward
Tax Credit AS 43.55.023(b)." She explained that the title
of the slide actually referred to Section 10, not Section
9.
-Amends AS 43.55.023(b) to retain a tax credit of 25
percent for a carried-forward annual loss for adjusted
lease expenditures incurred outside of the North
Slope.
-Provides a tax credit of 35 percent for a carried-
forward annual loss for adjusted lease expenditures
incurred after December 31, 2013 on the North Slope,
subject to the requirements in new subsections (p)-
(u).
9:26:28 AM
Mr. Pawlowski explained that the amendment was added in the
Senate Resources Committee, which had two parts. The base
rate on the North Slope had increased from 25 percent to 35
percent, so the net-loss carry-forward credit was increased
for North Slope expenditures to match the base rate of 35
percent.
Co-Chair Meyer remarked that there may be further
discussion regarding the carry-forward credit at a later
date.
Ms. Pollard explained that the loss carry-forward did not
need to equal the tax rate, but there was no legal reason
to match the loss of the carry-forward.
Senator Hoffman wondered why the North Slope was the focus,
and did not include the Kuparuk and Prudhoe Bay basins. Ms.
Pollard responded that the bill included any areas 68
degrees north latitude and higher, so she assumed that
those areas would be included.
Senator Hoffman remarked that there was a difference
between the legacy fields and other fields on the North
Slope. Mr. Pawlowski clarified that the 35 percent credit
was meant for a loss carry-forward, so in order to qualify
for the credit there would have to be a loss.
Ms. Gramling highlighted slide 8, "Sec. 16 - North Slope
Carried-Forward Tax Credit AS 43.55.023(p) - (u)."
Key characteristics:
-10 year time limit on use.
Must be applied on a first-earned, first used
basis.
-Reporting requirements to the Department of
Revenue.
-May only be used to reduce production tax
liability under AS 43.55.011(e), limited
transferability, not redeemable for cash.
-May apply a 15 percent annual increase to the 35
percent tax credit base.
AS 43.55.023(p) requires producers to file an annual
statement with the Department of Revenue under new
subsection AS 43.55.030(g) to use the tax credit two
years after incurring expenditures. The tax credit may
not be used more than 10 calendar years later than the
date the expenditures were incurred.
9:31:45 AM
Mr. Pawlowski stated that the purpose of the new provision
was to adjust the current law. Under current law, the loss
carry-forward credit may be turned into the state and
converted to a cash payment from the state. The bill states
that the credit was required to be carried forward to when
there was a tax liability and the credit is used against
the liability.
Vice-Chair Fairclough requested a model of the annual 15
percent increase. She also asked if the outline was for a
new explorer. Mr. Pawlowski responded that the outline was
not necessarily for a new explorer. He stated that it was
for anyone that had a "loss", or someone whose expenditures
offset their production.
Vice-Chair Fairclough requested a model that outlined what
a loss might look like as an impact to the state in
comparison to paying it in cash. Mr. Pawlowski agreed to
provide that information.
Senator Hoffman suggested that the model also include
various interest rates. Mr. Pawlowski agreed to include
that in the model.
Ms. Gramling discussed slide 9, "Sec. 16 - North Slope
Carried-Forward Tax Credit : AS 43.55.023(q)."
-"First earned, first used" rule.
-Applies to expenditures after December 31, 2014.
-Assures credits earned in earlier calendar years are
used up before later earned credits.
Ms. Pollard displayed slide 10, "Sec. 16 - North Slope
Carried Forward Tax Credit: AS 43.55.023(r)."
-Increases at 15 percent annually if compliance with
new AS 43.55.030(g).
-Increase begins January 1st of the second calendar
year after credit earned.
-Increase stops December 31st of calendar year before
credit used.
-Increase has no value except as applied to 43.55
taxes
-2015 less
used against 2016 or 2017 taxes).
9:37:06 AM
Mr. Pawlowski displayed slide 12, "Sec. 16 - North Slope
Carried-Forward Tax Credit: AS 43.55.023(t)."
Ms. Pollard discussed slide 12.
AS 43.55.023(t) provides exceptions to allow for the
limited transfer of the tax credit:
-Transfer is limited to a person that acquires an
interest in the lease or property upon which the
credit is based.
-Transferee's use of credit subject to rules in
subsection (u).
-The Department of Revenue must be notified of
the transfer.
-Transferee subject to audit by the Department of
Revenue.
Mr. Pawlowski stated that if one company purchased property
from another company, they could buy the loss carry-forward
credits that were created. He explained that the bill
limited the purchaser's use of the credits to a function of
the value of the production that came from the lease or
property. In order for the purchased credits to activate,
the purchaser must take the property into production to
generate production that generates revenue. The limitation
is put on the purchaser's use of the credit, as opposed to
the seller of the credit.
Co-Chair Meyer wondered how 20 percent was determined. Mr.
Pawlowski replied that the 20 percent was determined after
analyzing the overall government take numbers. He stated
that they looked for a number that was low enough to not
exceed the actual potential tax revenue from the state. He
remarked that it was an arbitrary number to some degree,
but one must be sure there was not an overly generous
ability to apply the purchased credits.
Vice-Chair Fairclough asked if the property could transfer
ownership more than once in a ten-year period before it
expired. Ms. Pollard responded that there was no limit.
Mr. Pollard looked at slide 14, "Sec. 17 - Small Producer
Tax Credit."
-Amends AS 43.55.024(d) to extend the tax credit for
small producers (under 50,000 a day average BTU
equivalent barrels) by six years, the later of either
2022 or the ninth calendar year after production for
production before May 1, 2022.
-The tax credit is not transferable and any unused
portion may not be carried forward for use in a later
calendar year.
Mr. Pawlowski stated that the provision was on page 18,
line 21. The provision existed in current law, but was set
to sunset in 2016. He explained that the bill included an
extension of a producer's ability to qualify for the
credit.
9:42:56 AM
Ms. Pollard stressed that the credit was not based on
expenditures, but was based on the amount of production.
Ms. Pollard discussed slide 15, "Sec. 19 - $5 Per Oil
Barrel Tax Credit."
-Amends AS 43.55.024 by adding a new a tax credit of
$5 for each barrel of oil subject to tax under AS
43.55.011(e) applicable to the producer's tax
liability for the year the oil was produced.
-The tax credit is not transferable, any unused
portion may not be carried forward for use in a later
calendar year and it may not be applied to reduce the
producer's tax liability to below zero.
Mr. Pawlowski explained that the provision was the balance
that was struck in the Senate Resources Committee
Substitute to offset the increase in the base rate to 35
percent, which the committee heard in a previous meeting.
He stressed that the provision was based on production, was
non-transferrable, and could not be used to reduce a tax
payer's liability below zero.
Co-Chair Meyer wondered if the value eroded over time, and
whether it should be inflation proof. Mr. Pawlowski replied
that the inflation adjusting conversation was valid, but
stressed that there was a cautiousness regarding the
relationship between oil prices and inflation versus the
actual cost and inflation. He felt that there should be a
focus on what actually happens to the value of $5 during
that time period. He remarked that DOR was willing to work
with consultants to develop an inflation proof system.
Co-Chair Meyer felt that the law should be in place for 10
to 20 years, to the impact should be inflation proof.
Senator Hoffman wondered why 5 percent was not considered,
because it would provide $5 per barrel at $100 per barrel.
Mr. Pawlowski replied that the fixed dollar amount provided
less benefit to the producer at high oil prices, therefore
more benefit to the state.
Senator Hoffman surmised that the reason for the $5 was to
provide less benefit to the oil companies. Mr. Pawlowski
agreed with that summation.
Ms. Pollard highlighted slide 16, "Sec. 20 - Alternative
Tax Credit for Oil and Gas Exploration."
-The sunset provision in AS 43.55.025(b) is extended
from July 1, 2016 to July 1, 2022.
-AS 43.55.025(c), relating to exploration wells, is
amended by deleting the 3 mile distance requirement
for exploration wells outside Cook Inlet in AS
43.55.025(c)(2)(B).
-New subsection (q) provides expenditures claimed for
a tax credit under AS 43.55.025 may not also be
claimed for a tax credit under AS 43.55.023 or another
provision of AS 43.55.025.
9:47:26 AM
Mr. Pawlowski stated that the provision was a change made
in the Senate Resources Committee based on testimony they
had received from some of the explorers. The testimony
stated that the credit in the high risk exploration phase
of development were important for the risky activity of
drilling the exploration wells. While the governor had
maintained this credit, industry had expressed that the
three mile limit made the credit very difficult to use
within the central North Slope.
Ms. Pollard stated that the provision was outlined in
Section 22 of the bill. She stressed that the limitation
applied to the loss carry-forward credit.
Mr. Pawlowski explained that the exploration credit was not
based solely on expenditures, but there were further
limitations. A company must come to DNR, and prequalify for
the credit. The company must demonstrate that it was a
reasonable new target, and was an exploration expenditure
and well. Then DNR receives data on the findings of the
exploration. He stressed that there were benefits to the
state, and a gate for the credit.
Co-Chair Meyer surmised that a company would not receive
the tax credit, if they did not share the tax credit. Mr.
Pawlowski responded that the credit could be turned into
the state for reimbursement.
9:52:45 AM
Ms. Gramling looked at slide 17, " Sec. 30 - Gross Revenue
Exclusion for North Slope Oil and Gas."
-Provides that for the determination of the annual
production tax value of oil and gas produced north of
68 degrees North latitude, that the gross value at the
point of production is reduced by 30 percent for the
oil or gas:
1) Produced from a lease or property that does
not contain a lease that was within a unit as of
January 1, 2003;
2) Produced from a participating area established
after December 31, 2011 that was within a unit
formed under AS 38.05.180(p) before January 1,
2003, if the participating area does not contain
a reservoir previously established in a
participating area;
3) Produced from the expanded acreage of an
existing participating area that was expanded by
the Department of Natural Resources after
December 31, 2011 provided the producer
demonstrates to the Department of Revenue the
volumes of oil and gas produced from the expanded
acreage.
Mr. Pawlowski stressed that the final point was added in
the Senate Resources Committee, and he remarked that DNR
would be available later to discuss the participating
areas. He stressed that the intent of the original bill was
to be careful about the application of the gross revenue
exclusion (GRE). He remarked that the GRE should only apply
to new oil that was not currently under development.
Senator Bishop agreed that DNR should explain the benchmark
that they use to identify "new oil."
Vice-Chair Fairclough wondered how long "new oil" would be
considered "new oil." She felt that eventually all oil
would be considered new, and all oil would qualify for the
GRE. She encouraged the committee to consider that
implication.
Senator Olson looked at Section 1, and queried the net
effect of municipal revenue sharing. Mr. Pawlowski
responded that the net effect would potentially enable more
money to be added to the revenue sharing fund, to meet the
$60 million or $180 million.
9:57:08 AM
Senator Olson wondered how to ensure revenue sharing was
protected. He felt that the bill stated that one could do
less than 20 percent, if it were removed, so there would be
less money for the communities. Mr. Pawlowski replied that
the appropriation was the choice of the legislature. The 20
percent referred to a situation that pertained to low
progressivity.
Ms. Gramling stated that Section 1 would only amend AS
29.60.850B.
Mr. Pawlowski discussed slide 18, "Oil and Gas
Competitiveness Review Board AS 43.98.040-070."
-AS 43.98.040 establishes a 9 member board
-Governor designates chair every two years. Governor
may replace and remove members.
-Members serve 6 year terms, may be reappointed.
-The Board meets four times a year to review
investment, fiscal systems and to identify factors
that affect oil and gas investment.
-The Board reports annually to the Legislature with
recommendations.
-The Board sunsets December 31, 2022.
9:59:45 AM
RECESSED
1:36:32 PM
RECONVENED
Senator Dunleavy asked for a fiscal analysis of the CS at
35 percent to 25 percent of the tax. Mr. Pawlowski
indicated that he would provide that information.
Senator Dunleavy asked for page 8 and a fiscal analysis for
the above incremental increases instead of the entire
production. Mr. Pawlowski indicated that he would provide
that information.
Senator Dunleavy queried how the CS incentivized investment
into active production of the non-conventional oils. Mr.
Pawlowski responded that the incentives subject to the
gross revenue solution.
ECON ONE PRESENTATION
1:40:54 PM
BARRY PULLIAM, MANAGING DIRECTOR, ECON ONE RESEARCH, INC.,
presented "Analysis of Alaska's Tax System, North Slope
Investment and The Administration's Proposal SB 21/SRES CS
SB 21" (copy on file). He looked at slide 1, "Econ One: Who
We Are."
Economic Research and Consulting Firm
-We Provide Economic Analysis In Energy and Other
Industries
We Have Advised the State of Alaska on Petroleum
Related Matters For Over Two Decades
We Have Worked With the Cowper, Hickel, Knowles,
Murkowski, Palin, and Parnell Administrations
We Assisted the Legislature Between 2005 and 2008 on
Tax and Gas Development Issues
Our Energy-Related Work Outside Alaska
-State Governments: Texas, Louisiana, New Mexico,
Oklahoma, California
-Federal Government Agencies: Department of
Interior, Federal Trade Commission
-Energy Companies: Producers, Refiners, Mid-
Stream Services, Pipelines, Chemicals
Mr. Pulliam looked at slide 4, "Alaska North Slope
Discovered Resources by Discovery Year (1969 - 2010)."
-The North Slope Has Produced 16.2 Billion Barrels to
Date
-Approximately 5.6 Billion Barrels of Economically
Recoverable Resources Remain in Known Fields
-Significant Additional Resources Still Remain to be
Discovered
Mr. Pulliam slide 5, "Alaska North Slope Production and
Resources."
-Many North Slope Fields are Now at Mature Stages.
However, Less Than Half of its Potential Economic Oil
Resources Have Been Produced to Date
-In Total, the North Slope Contains Approximately 40
Billion Barrels of Additional Estimated Economic
Recoverable Resources at Today's Prices
Mr. Pulliam discussed slide 6, "Estimated Undiscovered
Conventional Oil Resources on Alaska North Slope." He
stressed that state property held resources that were much
different than what had been discovered to date. He
explained that Alaska production was dominated by several
very large fields. He explained that the remaining
locations held much smaller accumulations. He stated that
the USGS estimated that the typical field size that had yet
to be discovered on the central North Slope was in the $30
to $60 million barrel range.
1:45:46 PM
Mr. Pulliam discussed slide 7, "Estimated Undeveloped
Unconventional Oil Resources on Alaska North Slope." stated
that much was not yet discovered in Alaska. He spoke about
where the one billion barrels located, and thought that the
number could be very different going forward. He spoke
about viscous and heavy oil and estimated that 15 percent
was recoverable.
Co-Chair Meyer asked for insight about the possibility of
shale oil production in Alaska. Mr. Pulliam replied that he
did not have much insight regarding shale production, and
suggested that DNR provide that information.
Mr. Pulliam discussed slide 8, "Crude Oil Production,
Alaska North Slope vs. United States and OECD Countries
2003-2012." He stated that Alaskan production declined at
an average of 7 percent a year.
1:51:47 PM
Mr. Pulliam discussed slide 9, "Estimated Capital Spending
for Exploration and Development Alaska North Slope vs.
United States and Worldwide Spending 2003-2012." He stated
that spending rose consistently until 2007, while spending
in the rest of the world trended higher. He added that
spending continued to rise in the rest of the world, where
Alaska remained flat. The slide distilled some basic
concerns about production and investment.
Vice-Chair Fairclough referred to slides 8 and 9. She
stated that Alaska compared themselves to other regimes,
and wondered what regimes were the best to compare Alaska
against. Mr. Pulliam replied that the UK was the best
regime to compare against Alaska.
1:56:37 PM
Vice-Chair Fairclough wondered about provinces producing 1
million barrels. She thought that the bar charts and
wondered if volume affected the tax regime. Mr. Pulliam
agreed that the comparison, and furthered that Alaska's
production was approximately 0.5 million barrels per day.
He explained that Alaska's regime was roughly the size of
Australia's regime.
Vice-Chair Fairclough felt that there should be a
comparison between the United States and other regimes,
which included the threshold of 1 million barrels per day.
She felt that Alaska should be included in that group.
Mr. Pulliam continued with slide 11, "How ACES Works."
Tax is Calculated on "Net Value" of Taxable Production
-Taxable Production is Total Production Less
Royalties
-Net Value is Gross Wellhead Value Less Cost of
Production
-Costs of Production are Capital Expenses,
Operating Expenses and Property Tax Payments
Base Tax Rate of 25 percent
Progressive Tax Rate of 0.4 percent Per $1/Barrel (4
percent Per $10/Barrel) Increase Over $30/Barrel Net
Value and 0.1 percent Per $1/Barrel (1 percent Per
$10/Barrel) Over $92.50, Capped at 50 percent Total
Example:
Taxable Value = $100/Barrel "Production Tax
Value" Base Rate = 25 percent
Progressive Rate = ($92.50 - $30) x 0.4 percent +
($100 - $92.50) x 0.1 percent = 25.75 percent
Total Rate = 25 percent + 25.75 percent = 50.75
percent
Credit of 20 percent for Capital Expenditures (Taken
Over 2 Years)
Small Producer Credit of $12 Million Per Year (Phased
Out for Production over 50 MBD)
State Purchases Credits and Net Operating Losses
(NOLs) From Companies Without Tax Obligation
-Equals 45 percent of Capital Expenditures and 25
percent of Operating Expenditures
2:01:43 PM
Mr. Pulliam discussed slide 12, "Calculation of ACES Taxes:
Varying Prices." He explained the spreadsheet and created
comparisons regarding progressive tax.
Mr. Pulliam discussed slide 13, " Calculation of ACES Tax:
Varying Costs $100 West Coast ANS Price."
Mr. Pulliam discussed slide 14, "Calculation of ACES Tax:
Varying Costs $80 West Coast ANS Price."
Mr. Pulliam discussed slide 15, "Calculation of ACES Tax:
Additional Capital Spending." The graph depicted a producer
producing 50 million barrels per year, with ac capital
expenditure of $250 million. He pointed out the middle
column where the tax rate was 37 percent prior to the
expenditure and after it would be 25 percent.
2:08:13 PM
Mr. Pulliam discussed slide 16, "Effective Tax Rates For
New Development Under ACES Additional Tax as percentage of
Production Tax Value: Incumbent Producer."
Lower Cost: $16 Per Barrel Development Capex; $14 Per
Barrel Opex; 16.67 percent Royalty Rate; 50 MMBO New
Development by Existing Owner With Initial Ongoing
Production of Approximately 100 MBD and Costs
Consistent with Prudhoe Bay/Kuparuk River Units
Higher Cost: $25 Per Barrel Development Capex; $14 Per
Barrel Opex; 16.67 percent Royalty Rate; 50 MMBO New
Development by Existing Owner With Initial Ongoing
Production of Approximately 100 MBD and Costs
Consistent with Prudhoe Bay/Kuparuk River Units
Very High Cost: $34 Per Barrel Development Capex; $21
Per Barrel Opex; 16.67 percent Royalty Rate; 50 MMBO
New Development by Existing Owner With Initial Ongoing
Production of Approximately 100 MBD and Costs
Consistent with Prudhoe Bay/Kuparuk River Units
Mr. Pulliam discussed slide 17, "The Economics of Higher
Cost Oil Development." He explained the graphs.
2:14:02 PM
Mr. Pulliam discussed slide 18, "The Economics of Very High
Cost Oil Development." He stated that the slide represented
what may occur if there were a very cost for development.
Co-Chair Meyer suggested that an example of very high cost
oil development would be heavy oil. He felt that the heavy
oil areas would be locations that the industry would
pursue, because the state was picking up so much of the
cost. Mr. Pulliam agreed and noted that the development was
difficult with today's technology. He compared the lower
forty eight.
Co-Chair Meyer stated that ACES incentivized heavy oil. Mr.
Pulliam.
Mr. Pulliam discussed slide 19, "DOR Forecast Levels of
Production FY 2015-FY2022." He stated that the average
annual decline was 6 percent.
2:19:36 PM
Mr. Pulliam discussed slide 20, "Production With
Development of 150 MMB of Reserves Annually FY 2015-FY
2022." He explained that different fields were all
declining, but would balance out in the forecast, so there
would be an annual decline of zero percent from FY 15 to FY
22.
Co-Chair Meyer asked how much industry would spend to stop
the decline. Mr. Pulliam responded that the assumption $3
billion dollar investment. He noted that the pace of
spending worldwide would show the expense of $3 billion per
year.
2:21:56 PM
Mr. Pulliam discussed slide 21, "Forecast Levels of Capital
Credits and NOLs FY 2015 - FY 2019."
Mr. Pulliam discussed slide 22: "Capital Credits and NOLs
Assuming Development of Additional 150 MMB of Oil Per Year
Over Forecast By New Participant."
Co-Chair Meyer encouraged a discussion regarding the
difference between GRE versus capital credits and which one
was better for the state.
Vice-Chair Fairclough wished to see the issue modeled. She
wondered if one had a greater advantage. Mr. Pulliam agreed
to model the comparison. He stated that both credits
provided forms of incentives. He stressed that the current
system was tied to spending and the GRE was tied to
production.
Vice-Chair Fairclough remarked that each community was
unique. The Senate Resource Committee had hoped to generate
more viscous oil, which presented no benefit to the legacy
fields. Mr. Pulliam sensed that the intent was to offer the
GRE to the more challenged areas. Producers could find out
how barrels could work, and thought that the language may
accomplish the intent.
2:27:59 PM
Mr. Pulliam discussed slide 23, "Capital Credits and NOLs
Assuming Development of Additional 150 MMB of Oil Per Year
Over Forecast 50 Percent and 50 percent by Incumbent."
Co-Chair Kelly commented that the graphs were making him
angry. He did not like public debate that went without the
vetting required. He stated that the lack of professional
curiosity was lacking, and ACES was a more than the $2
million giveaway.
Mr. Pulliam discussed slide 25, "Summary of Production
Profiles Examined For Alaska and Benchmark Developments."
He discussed developments in the Lower 48 and compared them
to Alaska with a variety of different cost ranges. He noted
that the $16 range along with the technology, and chart
described a production profile.
Mr. Pulliam discussed slide 26, "Summary of Investment
Measures (New Participant)." All Alaska scenarios were
under ACES. He stated that the first section showed the MPV
per barrel at $80 west coast price. He noted that columns
two and three were noted and the economics were worse for
the new participants. Some were $34 per barrel mark or
technology not quite ready.
2:40:58 PM
Mr. Pulliam continued with slide 26. He stated that the
government takes were higher in Alaska than elsewhere.
Co-Chair Meyer asked what could be applied from the
information on the slide. Mr. Pulliam responded that the UK
GRE and $5 per barrel production allowance could be
considered. Producers came and applied for the existing
credit. He explained that producers could also apply for
the allowance to prove that the project was new reserves
and additional production. The process would occur to
qualify for a GRE. .
Mr. Pulliam discussed slide 27, "Summary of Investment
Measures (Incumbent Participant)." He discussed the spread
sheet and the MPV, which remained consistent. He mentioned
that Eagle Ford was better than Alaska, with the assumed
best case scenario.
2:46:36 PM
Mr. Pulliam discussed slide 29, "Key Aspects of
Administration's Proposal (SB 21)."
Establishes 25 percent Flat Net Tax Rate; No
Progressivity
Eliminates Capital Credit and State Purchase of Losses
Establishes 20 percent Gross Revenue Exclusion (GRE)
to Incent Production of New Oil
Losses May be Carried Forward and Applied Against Tax
Obligation When Production Occurs
Extends New Entrant Credits Through 2022
No Change Outside of North Slope
Mr. Pulliam discussed slide 30, "Key Aspects of
Administration's Proposal (cont'd)."
Provides Balance Between State and Producers
-Reduction of Tax Rates at High Prices, Balanced
with Elimination of Credits
-State Continues to Receive Largest Percentage of
Oil Production Revenues at Any Price
Simplifies Tax System and Provides Clarity for
Planning
-Eliminates Question of Marginal Tax Rate / Take
for Investment Planning
-Eliminates Incentives for "Gold Plating" Caused
by High Marginal Rates
Maintains Alignment Between State and Producer
Incentives
-Net Tax Allows for Deduction of Costs Against
Tax
Provides Incentive for Development of New Resources
Without Taxing State Treasury
-GRE Provides Lower Effective Tax Rate for New
Development
-New Developers can Recover Costs of Development
Once Production Begins
-Does Not Require State to Fund Development Costs
Through Potentially Expensive Credit Purchases
Extremely Positive Message to Potential Investors
-Will Encourage Broader Participation in
Development of Alaska's North Slope
-Economics of New Participants Closer to
Incumbents'
Senator Bishop compared the GRE to ACES. He appreciated the
analogy. He asked if the state will quit spending $12
million to make $10 billion. Mr. Pulliam concurred. He
commented that the credit was made with actual production,
rather than anticipated production.
Mr. Pulliam discussed slide 31, "Key Changes to SB 21 from
Senate Resources CS."
Base Tax Rate Increased from 25 percent to 35 percent
$5/Bbl Production Allowance (Credit)
GRE Raised to 30 percent
Allows Producers to Apply for GRE in Legacy Units for
Targeted Development of New Oil
Relaxes Current Restriction on Exploration Credits
Mr. Pulliam detailed slide 32, "Key Attributes of Senate
Resource CS SB21."
Results in Slightly Progressive Government Take
Overall Without Problems Associated with
"Progressivity"
Reduces Effective Tax Rate and Government Take at Low
Prices, While Increasing Tax Rates and Government Take
at Higher Prices
Effect of Fixed $/Bbl Allowance is to Provide Support
at Low Prices Where Needed, Diminishing as Prices Rise
Provides System in Competitive Range for
Taxpayers/Investors
Provides Simple, Straightforward and Understandable
Tax Framework
Allows DOR/DNR to Address Individual Circumstances as
Needed
Allows for Significant Investment on North Slope
Without Taxing State Treasury
2:53:42 PM
Mr. Pulliam discussed slide 33, "Illustration of Tax
Calculation Under Senate Resources CS for SB 21." He stated
that the total tax obligation had reduced to 33 percent as
a result of the tax allowance. The slide was simple and
straight forward, but noted that the relief was tapered.
Mr. Pulliam discussed slide 34, "State Outlays Prior to
Production Associated With Development of 50 MMBO by Non-
Taxpayer Under ACES and SRES CS SB21." He stressed that the
difference included $379 million, but the right side of
graph showed a higher tax field.
Mr. Pulliam discussed slide 35, "Expected Annual State
Outlays Necessary to Replace Current Production by Non-
Taxpayer Under ACES and SRES CS SB21." He pointed out the
lower tax rate on back end and exposure on the front end.
2:58:48 PM
Mr. Pulliam highlighted slide 36, "Average Government Take
at $100 per Barrel
Mr. Pulliam discussed slide 37: " Average Government Take
ACES v. SB21/HB72 and SRES CS SB21 for All Existing
Producers (FY2015-FY2019) and Other Jurisdictions."
Vice-Chair Fairclough discussed slide 37 and asked for
analysis for the federal government take. She specifically
asked if production tax was higher, would the structure be
affected. She wondered if the calculation was misinformed.
Mr. Pulliam responded that the analysis included the
federal tax rate, but the federal effective tax rate was
probably less, because nominal tax rate was 35 percent.
3:04:25 PM
Vice-Chair Fairclough replied that if companies under
federal tax returns might show something different. She
wondered if Conoco Phillips would show regarding various
tax levels. Mr. Pulliam responded that tax paid in Alaska
was a deduction for federal taxes.
Co-Chair Meyer asked about the red line. or average all
jurisdictions per PFC. He noted that everything between the
green lines was a small percentage. He noted that the
numbers in the range provided an average.
3:11:57 PM
Mr. Pulliam discussed slide 38, "Average Government Take
and Tax Rate ACES vs. SB21/HB72 and SRES CS SB21 for All
Existing Producers (FY 2015)."
Mr. Pulliam discussed slide 39, "Summary of Investment
Measures for New Participant Lower Cost Alaska Oil
Development ACES and SRES CS SB21 vs. Benchmark Areas." The
project became attractive with the marginal government take
of over 60 percent, which was competitive.
Mr. Pulliam discussed slide 40, "Summary of Investment
Measures for Incumbent Lower Cost Alaska Oil Development
ACES and SRES CS SB21 vs. Benchmark Areas."
Mr. Pulliam discussed slide 41, "Summary of Investment
Measures for New Participants Higher Cost Alaska Oil."
3:14:23 PM
Senator Bishop looked at slide 40, and wondered if the GRE
would make Alaska more competitive than North Dakota. Mr.
Pulliam responded that Alaska would look better than North
Dakota, on an MPV basis.
Senator Bishop asked if he would not have to hear any more
about North Dakota. Mr. Pulliam replied that North Dakota
would continue to be a part of the conversation, because it
was a large opportunity for investors in the industry.
Co-Chair Meyer asked if the majority of oil to be produced
in Alaska was higher or lower cost oil. Mr. Pulliam replied
that it was of the higher cost variety.
Co-Chair Meyer suggested recoverable oil was heavy oil. Mr.
Pulliam agreed. He stated that Canadian oil was too
expensive initially, but he had seen advances in drilling
efficiency.
3:19:34 PM
Mr. Pulliam continued onto slide 43, "Summary of Investment
Measures for New Participant Very High Cost Alaska Oil
Development ACES and SRES CS SB21 vs. Benchmark Areas."
Mr. Pulliam continued with slide 46, "Country/Area Profile
Alaska North Slope."
Vice-Chair Fairclough referred to slide 46 regarding
capital spending. She was interested in a 2013 or 2014
projection. Capital spending was increasing and she wanted
to know why. Mr. Pulliam stated that DOR's forecast would
provide the information.
Vice-Chair Fairclough wondered about viewing the past
year's forecast. She stated that the chart was based on the
DOR's revenue forecast book.
Vice-Chair Fairclough showed that the forecast was
published for the general public and she wished to acquire
the forecast.
3:36:50 PM
FISCAL NOTES PRESENTATION
DAN STICKEL, ASSISTANT CHIEF ECONOMIST, TAX DIVISION,
DEPARTMENT OF REVENUE, presented a PowerPoint presentation,
"Fiscal Note Slide - CSSB21 (RES)."
Mr. Stickel discussed slide 2, "Introduction."
1. 12 key provisions analyzed
2. Total fiscal impact under Fall 2012 forecast
3. Hypothetical additional production scenarios
Mr. Stickel discussed slide 3, "1: Repeals Progressive
Surcharge."
-Progressive surcharge at AS 43.55.023(g) repealed
-Progressive surcharge is an additional tax that is
added to base tax
-Progressive surcharge increases tax rate at
production tax values of greater than $30 / barrel
-Progressive surcharge may add up to 50 percent to the
total tax rate at very high prices for a maximum total
tax rate of 75 percent
-Fiscal Impact = varies by fiscal year, up to $1.8
billion per year under our Fall 2012 forecast
Mr. Stickel discussed slide 4, "Impact of Progressive
Surcharge." The provision eliminated the green part of the
graph.
Mr. Stickel discussed slide 5, "2. Increases base
production tax rate."
-Base tax rate increased to 35 percent from 25 percent
under ACES
-Base tax rate of 35 percent applied to production tax
value
-The higher base tax rate increases revenue from the
base tax
-The higher base tax rate provides greater protection
to the state at low oil prices
-Fiscal Impact = varies by fiscal year, up to $1.1
billion per year under our Fall 2012 forecast
Mr. Stickel discussed slide 6, "3. Limitations on Capital
Credits."
-Production tax credits under AS 43.55.023(a) for
qualified capital expenditures are limited to
expenditures incurred before January 1, 2014 for the
North Slope
-20 percent capital credit eliminated for North Slope
after 1/1/2014 (replaced with new mechanisms that
incentivize production, not spending).
-ACES provisions are unchanged for Cook Inlet and
Middle Earth and they retain 20 percent capital credit
-Since capital credits are taken against liability or
refunded, fiscal impact is on both revenue and budget
-Likely fiscal impact is summarized on next slide
Mr. Stickel discussed slide 7, "4. Changes to Net Operating
Loss credit."
-Companies that incur net losses from leases or
properties on the North Slope will earn a credit of 35
percent of those losses.
-May be carried forward for a 10-year maximum period.
-Net loss carry-forwards will increase at an annual
rate of 15 percent beginning on January 1 of the
second calendar year following the year of the loss.
-Taxpayer must have production and tax liability to
use credit - not refundable
-The revenue impact of this provision is confidential
under our forecast, however,
-Impact is expected to be minimal.
-In an increased development or low price scenario,
protects state because NOLs can't be refunded.
Mr. Stickel discussed slide 8, "Estimated Fiscal Impact for
limitations on credits as compared to Fall 2012 Forecast
($millions)."
3:41:34 PM
Mr. Pawlowski explained that the slide was based on the
forecast expenditures. If more development happens with
additional spending, the fiscal impact of the provision
would be greater, because the spending would create more
credit obligation for the state.
Mr. Stickel detailed slide 9, "5. Establishes Gross Revenue
Exclusions."
-Excludes a 30 percent of gross revenue, from taxable
value for qualifying production
-Cannot reduce tax liability below zero
-Qualifying production is any of the following:
Land was not in a unit on 1/1/2003
New PA, in units formed before 1/1/2003
Area added to an existing PA after 12/31/2011
-CSSB21 (RES) increased GRE from 20 percent to 30
percent, and added the expansion of an existing PA to
qualifying production
-Fiscal Impact = Indeterminate, under $50 million /
year under Fall 2012 forecast
-GRE benefit would apply almost entirely to "New
Production" not currently in our forecast
Mr. Stickel discussed slide 10, "6. Extends small producer
credit."
-The small producer credit at AS 43.55.024 is extended
to the later of:
2022, or,
the ninth calendar year after the calendar year
that the producer first has commercial
production.
-This provision extends the small producer credit six
years from the original sunset date of 2016 to 2022.
-The revenue impact based on the current revenue
forecast is minimal.
Mr. Stickel discussed slide 11, "7. Eliminates requirement
that credits be taken over two years."
-Capital credits and Net Operating Loss credits earned
had to be split across two years under ACES
-This provision allows credits to be used in the year
they were earned
-This provision aligns credit treatment on the North
-Slope with credit treatment in all other parts of the
state
-Fiscal impact is neutral - simply shifts a future
obligation to FY14.
-$400 million total obligation shifted to FY14: $250
million revenue impact; $150 million operating budget
impact
Mr. Stickel discussed slide 12, "8. Changes funding for
community revenue sharing."
-The community revenue sharing fund is amended to
allow the legislature to make appropriations from the
tax revenue collected under AS 43.20, as opposed to
revenue collected under the provision that is proposed
to be repealed - AS 43.55.011(g).
-Corporate income tax revenue under AS 43.20 is
adequate to provide the maximum annual appropriation
of $60 million or the amount to bring the fund up to
$180 million.
Corporate income tax has exceeded $500 million
every year for the last 8 years.
-Provision substitutes eliminated revenue source for
appropriations, with another adequate source.
Mr. Stickel detailed slide 13, "9. Establishes per oil
barrel tax credit."
$5 credit against tax liability for each taxable oil
barrel produced
-Ties credit to production
-Cannot be saved, does not accrue interest, is
not transferable
-Removes regressive nature of tax system
-Specifies barrel of "oil"
Likely fiscal impact is summarized on next slide
Mr. Stickel discussed slide 15, "10. Creates service
industry expenditures credit."
New Corporate Income Tax Credit for oil and gas
service companies
Credit is 10 percent of qualifying in-state
expenditures:
-Manufacturing of oil and gas equipment
-Modification of oil and gas equipment
-For in-state spending only
Maximum $10 million per taxpayer per year,
transferrable
This provision was added in CSSB21 (RES)
Fiscal Impact = Indeterminate
Difficult to estimate due to lack of data
If $500 million to $1 billion of qualifies …
Impact could be $50 to $100 million / year
3:47:55 PM
Mr. Stickel discussed slide 18, "Expanded exploration
credit allows additional wells to qualify." The twenty five
mile range around the existing units qualified for the
credit.
3:54:42 PM
Mr. Pawlowski moved on to slide 21, "Production Scenarios."
Operators of existing units add 4 drill rigs to
current plans
Each rig adds 4,000 bbls/day in new production each
year
-Which each then decline at 15 percent per year
Does not qualify for GRE
Mr. Stickel detailed slide 23, "Projected revenues under
production scenario - at $90 / barrel ANS." He further
explained the graph. He noted that the information was more
repressive, and noted the lower revenue generated from
ACES.
4:00:45 PM
Mr. Stickel discussed slide 24, "Projected revenues under
production scenarios - at $100 / barrel ANS." He stated
that 2019 displayed slightly less revenue under ACES.
Mr. Pawlowski stressed that the ACES did not have the
assumption of new production.
Mr. Stickel discussed slide 25, "Projected revenues under
production scenario - at $120 / barrel ANS."
Mr. Pawlowski hoped to discuss the figures which were bases
on near term options with. He clarified that the analysis
was from legacy fields, and department wished to remain
realistic.
Mr. Stickel discussed slide 26, "Projected revenues under
production scenarios - at forecast ANS price."
Senator Olson wondered if DOR anticipated that the
corporate income tax would continue to remain the same. Mr.
Stickel replied that it was projected that there would be
over $600 million per year in only the petroleum income
tax. He furthered that there would be an additional
approximately $100 million for the non-petroleum income
tax.
SB 21 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 21 Corrected DOR Fiscal Note Senate Finance Mar 1 2013.pptx |
SFIN 3/1/2013 9:00:00 AM |
SB 21 |
| CSSB 21 RES Sectional 02 28 2013 .pdf |
SFIN 3/1/2013 9:00:00 AM |
SB 21 |
| CSSB RES Sectional 02 28 2013 Final.pdf |
SFIN 3/1/2013 9:00:00 AM |
SB 21 |
| Econ One Presentation For Senate Finance 3_1_13.pdf |
SFIN 3/1/2013 9:00:00 AM |
SB 21 |