Legislature(2013 - 2014)SENATE FINANCE 532
03/04/2013 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
| += | 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."
9:04:31 AM
ROGER MARKS, LEGISLATIVE CONSULTANT, LEGISLATIVE BUDGET AND
AUDIT COMMITTEE, gave a brief overview of his resume and
began the presentation, "Review of SB 21(RES) Presentation
to Senate Finance" (copy on file).
9:04:48 AM
Mr. Marks discussed Slide 2, "Roger Marks - Background":
•Since 2008: Private consulting practice in Anchorage
specializing in petroleum economics and taxation
-Clients include: State of Alaska Legislature,
federal government, local municipalities,
University of Alaska, independent oil and gas
explorer/producers, pipeline companies
•1983-2008: Senior petroleum economist with State of
Alaska Department of Revenue Tax Division
-Fiscal development
•Statutory and regulatory design
•Petroleum economic and commercial valuation
of exploration, development, production,
transportation, refining, marketing,
taxation
•Analysis of international competitiveness
•Oil and gas valuation
-North Slope gas commercialization
•Economic valuation
•International competitiveness
•Pipeline financing
•Taxation
•Tariff design
•1977-1983: Petroleum economist with United States
Geological Survey
-Resource evaluation of unleased acreage on
Alaska federal Outer Continental Shelf
-Design of bidding systems
•Publications on Alaska petroleum taxation: Journal of
Petroleum Technology, OPEC Review, Journal of Energy
Finance and Development, Oil & Gas Financial Journal,
Journal of Economic Issues, Journal of Legal Issues
and Cases in Business
9:06:09 AM
Mr. Marks stated that he would offer several observations
about the bill and introduce other possible approaches for
the committee to consider. He spoke to Slide 3, "Approach
for Evaluation":
•The interest in evaluating the production tax stems
from concern over the perception of slow investment
and declining production levels on the North Slope
•The international investment climate is characterized
by plenty of opportunities, fluid capital, but finite
capital
•Investors allocate productive resources to their most
highly valued uses
•Taxes are a significant part of the cost structure
and under Alaska's Clear and Equitable Share (ACES)
they are relatively high
•Tax rates under ACES have made Alaska uncompetitive
•The goal is to make Alaska competitive
9:07:59 AM
Co-Chair Meyer noted that the current version of the
legislation had come from the Senate Resources Committee
and that the chair of that committee, Senator Giessel, was
present.
9:08:37 AM
Mr. Marks explained that taxes were the price that an oil
producer paid for the opportunity to develop the oil in a
certain jurisdiction. He likened the structure to a market
with the sovereign jurisdictions in the role of the seller,
oil companies as buyers, and the tax as the price companies
paid for goods. He stressed that the state should remain
competitive, while still reaping a fair share of profits.
Mr. Marks discussed Slide 4, "Defining Fair Share:
Determining a Competitive Tax Structure":
•Determine who the competition is
•Determine where Alaska should be in within that
competition
•Design a system to achieve that target
Mr. Marks stated that it had been demonstrated that oil
companies were willing to pay more taxes when the rewards
were greater. He relayed that companies would pay more
taxes in places where there was either more reserves, less
risk, or lower cost. He offered that Alaska was not
competitive with Kazakhstan, which had more oil at lower
cost with lower risk. He believed that when looking at the
competition world-wide, Alaska needed to examine places
with a similar risk/reward balance.
9:11:33 AM
Mr. Marks addressed Slide 5, "Alaska Peer Group Government
Take at $110/bbl Market Price." The slide illustrated who
Alaska was competing with worldwide after looking at the
factors of geography, institutional environment, operating
environment and geologic potential. The slide reflected
total taxes as a percentage of net value; all taxes and
royalties. He stated that he had researched on North
America regimes (U.S. states and Canadian provinces with
greater than 200,000 bbl/day production), tax and royalty
regimes, arctic regimes and regimes with similar production
and reserves (between 400,000 - 800,000 bbl/day production
and between 2 - 6 billion bbl proved reserves). He pointed
out to the committee that the graph ordered the different
regimes from low government take to high government take;
at 74 percent Alaska fell just below Norway, which had the
highest percentage of government take. He detailed that of
the 74 percent, half was production tax and the other half
were royalties, property taxes and state and corporate
income tax. He believed that a competitive target for
$110/bbl would be 62 percent.
9:14:59 AM
Mr. Marks addressed Slide 6, "Alaska Peer Group Government
Take at $70/bbl Market Price." He relayed that at $70/bbl
the government take under the current tax regime was at 68
percent. He said that at $70/bbl, 65 percent would be more
competitive number.
Mr. Marks discussed Slide 7, "Alaska Peer Group Government
Take at $160/bbl Market Price." He pointed out that the
current government take was at 77 percent. He thought that
62 percent would be a more attractive number.
9:15:33 AM
Mr. Marks spoke to Slide 8, "Proposed Government Take to be
Competitive":
•65% take at $70/bbl
•Level down to 62% take at current prices ($110/bbl)
and beyond
•A fairly neutral system
Mr. Marks explained that a regressive system was when the
government take was high at lower prices and low at higher
prices; a progressive system was where the take was low at
low prices and high and at high prices and neutral systems
were generally flat across the price spectrum in regard to
government take. He thought that it would be necessary to
determine a target number that informed where the tax
system would fall.
9:17:29 AM
Mr. Marks spoke to Slide 9, "Each Percentage Point of Take
is Worth a Lot of Money At $110/bbl Each Percentage Point
in Government Take Means $142 Million Annually to
Government/Producers":
•Market Price $110/bbl
-Costs $29
•Net value $81/bbl
•Taxable percentage .875
•Million bbls/yr (@550,000/day) 201
•One-percent .01
•TOTAL $142 mm
Mr. Marks stressed the difference a few percentage points
could make in the overall numbers; each percentage point
was worth a substantial amount of money.
9:18:20 AM
Mr. Marks noted that the ten percentage points in-between
Oklahoma and Alaska were equal to $1.4 billion, which he
believed illustrated the main problem with ACES.
9:18:55 AM
Mr. Marks relayed that regressive elements in ACES made it
difficult to hit the financial target at low prices. He
discussed Slide 10, "Regressive Elements in Fiscal System":
•Make for challenging economics at low prices,
particularly for high cost fields
•Makes for challenge in designing production tax to
offset effects
•Royalty
•Property Tax
•Minimum Tax
He added that a 65 percent target at low prices; even if
there was zero tax, and particularly due to the royalty,
would result in high government take.
9:20:54 AM
AT EASE
9:21:42 AM
RECONVENED
9:21:45 AM
Mr. Marks opined that the challenge of designing a tax
system that included the regressive elements was that there
was not a single system that applied uniformly to all
costs. He clarified that the royalty, property and minimum
taxes would not be eliminated, but needed to be addressed.
9:22:29 AM
Mr. Marks spoke the need to examine how the tax system
worked with the cost spectrum on the North Slope. He
referred to Slide 11, "Cost Spectrum":
•Low cost fields (existing production)
-$7/bbl capital; $13/bbl operating ($20/bbl
total)
•Medium cost fields (new production from existing
fields)
-$20/bbl capital; $17/bbl operating ($37/bbl
total)
•High cost fields (new fields and some heavy and
viscous oil)
-$33/bbl capital; $21/bbl operating ($54/bbl
total)
9:23:35 AM
Mr. Marks discussed Slide 12, "Example of Royalty
Regressivity":
ANS Market Price ($/bbl) $70.00
Less: Transportation Costs ($/bbl) $9.00
Gross Value ($/bbl) $61.00
Less: Upstream Capital and Operating Costs
($/bbl) $50.00
Net Value ($/bbl) $11.00
Royalty (1/8 of Gross Value) ($/bbl) $7.63
Royalty chews up 70% of profit before property,
production and income taxes
9:24:57 AM
Mr. Marks addressed Slide 13, "Comparison of Gross, Net &
Royalty Low & High Cost Fields." He related that the blue
dotted line on the graph reflected the gross market value,
a spectrum from $60 to $190/bbl. He noted the green dotted
line that represented the net-low cost, a spectrum from $40
to $170/bbl. The red dotted line represented net-high cost
on a spectrum of $10 to $140/bbl. He noted that the blue
line at the bottom illustrated that the royalty for both
the low and high cost fields were the same.
9:26:21 AM
Mr. Marks discussed Slide 14, "CS SB 21(RES) Features":
•35% rate applied to net (production tax) value (ptv)
•30% gross revenue exclusion (GRE) used in computing
net
•$5/bbl credit
•If ptv is negative, the loss can be carried forward
to when ptv is positive as a credit at 35% of the loss
Mr. Marks stated that the last bullet point was a provision
that would allow tax payers to realize the benefit of
deductions if they fit the tax floor of zero. He shared
that the bill proposed that the credit be deferred, with
interest, until the time of positive income.
9:28:14 AM
Mr. Marks addressed Slide 15, "How Features Operate":
•1) GRE (CS increased from 20% to 30% for new fields)
-Brings down tax rate more for high cost fields
and more at lower prices
•2) Per barrel credit (Introduced in CS)
-Focuses on bringing tax rate down high cost
fields at low prices
•3) Rate (Increased from 25% to 35% in CS)
-Moves entire curve for all fields up or down
Mr. Marks reiterated that the features were meant to work
together.
9:29:44 AM
Mr. Marks spoke to Slide 16, "Overview of How Features
Interact":
•Tax is higher of net and 4% of gross calculation
•There is a floor of zero on each
•The GRE is used to calculate the net; it is not used
to calculate the gross minimum
•The loss carry-forward credit is applicable
regardless of whether net or the gross minimum is
invoked
•The $5/bbl credit is applicable for both the net and
gross minimum calculation. It can only take the tax
down to zero. Any unused amounts are lost.
9:31:26 AM
Mr. Marks discussed slide 17 titled "Government Take CS SB
21 (Res)." He stated that the graph reflected a more
competitive regime than ACES. He said that the bill would
flatten out the taxes on the low side for high cost fields.
He warned that the committee should not underappreciate the
role that low tax scenarios played in corporate planning.
He explained that companies performed stress tests to
ensure that money was not lost at low prices. He believed
that it would behoove the committee to understand how
government take related to a target and how the varying
takes related to each other.
9:33:06 AM
Senator Hoffman requested documentation of the current
government take in dollars and how it related to the state
treasury, as well as what the industry would be taking in
monetarily.
Mr. Marks replied that he would provide the information in
an expedient manner.
9:33:40 AM
Senator Dunleavy wondered if the frequency of changes in
the state's oil tax policy had affected the investment
climate.
Mr. Marks replied that fiscal stability was very important
to possible investors. He believed that Texas had not had a
material change to its fiscal structure in the last ten
years, which was attractive to industry. He related that
Norway's current structure had been in place since 1994. He
said that he could provide a general assessment within the
peer group at a later date.
9:35:52 AM
Co-Chair Meyer offered that PFC might have that information
readily available during the afternoon meeting.
9:36:19 AM
Mr. Marks continued to discuss Slide 17. He spoke to how
the different fiscal takes related to each other and the
difference between the low and high cost fields. He relayed
that the difference was approximately 7 percentage points
after $110/bbl.
9:37:25 AM
Mr. Marks spoke to Slide 18, "General Comments: Differences
in Take Depending on Costs and Fields":
•Given a target take at a given price, the system
should come as close as possible to hitting the target
over a spectrum of costs
•Treating Different Fields Differently (No GRE for
Existing Participating Areas)
-Both existing and new production benefit from
existing and new investment.
-Existing fields may contain costly isolated
targets in existing participating areas.
-The system is efficient when the highest valued
resources get produced. The tax system should not
distort this; it should not favor investing in
certain cost fields over others.
-Differential treatment could cause unwanted
shifts in investment.
Mr. Marks offered the economic limit factor (ELF) as an
example of a tax system that resulted in differential
treatment that caused unwanted shifts in investment. He
relayed that in 1989 ELF was altered so that large fields
had high tax rates and low fields had low tax rates, which
caused an immediate shift in investment from high tax to
low tax fields. He said that this caused production to
decline on the high tax fields and increase on low tax
fields, but the high tax field decline was significant. He
expressed concern that different tax rates for different
fields would cause an unwanted shift in investment.
9:40:43 AM
Senator Hoffman pointed out that in the later years of the
ELF regime the tax rates had shifted drastically downward
for Kuparuk.
Mr. Marks replied in the affirmative. He noted that the
Kuparuk field was an unusual case. He shared that in 1996
Kuparuk had a high ELF, and the tax rate was based both on
average well productivity and field size; if less than
300/bbl were produced then no tax was paid. He furthered
that Kuparuk's average well productivity was not much more
than 300/bbl. He said that in the last years of ELF, if a
company made investment to increase production it would
increase production on every single barrel in the field and
that that increase in tax contributed to the new barrels,
which in turn had a very high tax rate. As a result, the
production on Kuparuk declined to below 300/bbl resulting
in no tax.
9:42:41 AM
Senator Hoffman inquired how many years Kuparuk had no tax,
and whether having no tax had stimulated investment.
Mr. Marks replied that it did not stimulate investment
because the marginal tax on increased production under ELF
was too high. He said that the rate at Kuparuk had been
zero during the last two years of ELF.
9:43:24 AM
Senator Hoffman asked why no investments had occurred even
though Kuparuk was the second largest field on the North
Slope.
Mr. Marks replied that during the ELF era oil prices were
much lower than present. He contested that the reason no
investments occurred at Kuparuk during the latter years of
ELF was because of the way the tax structure worked; if new
barrels were produced the tax rate for every barrel in the
field increased. He reiterated that the increased tax,
attributable to the new barrels, made for a high tax rate
and poor economics.
9:44:54 AM
Mr. Marks noted that Slide 13 reflected the royalty
distortion, or how much the royalty eroded the net value at
low prices.
Mr. Marks spoke to Slide 19, "Specific Comments on
Features":
•Gross Revenue Exclusion and $5/bbl Credit
-Same for all cost structures - unconnected to
actual production costs
-Has different effects at low prices depending on
cost structure
-Unaffected by investment
-$5/bbl credit: Lose some of it at low prices if
at $0 tax floor
•20% Capital Credit (Revoked in Original Bill and CS)
-Explicitly related to actual costs
-Automatic adjustment to different cost
structures: low credit if low costs; high credit
if high costs
-Affected by investment
-Do not lose it at low prices
-Boost to net present value and rate of return
9:45:13 AM
Mr. Marks continued to discuss Slide 19. He suggested that
the committee consider retaining the 20 percent capital
credit. He understood that there could be concern
surrounding the cash-flow associated with the credit, and
the exploration credits as well, but that targeted capital
credits could be beneficial.
9:49:55 AM
Senator Hoffman pointed out to the committee that retaining
the 20 percent capital credit could cost the state nearly
$1 billion, which was why it had been excluded from the
legislation. He believed that by accepting Mr. Marks's
recommendation on capital credits could result in
complications with operating costs for the state of Alaska
over the next ten years.
9:50:50 AM
Co-Chair Meyer hoped that a plan could be developed that
increased investment and maximized the state's return. He
offered that the current capital credit did not target
production and that Mr. Marks was suggesting that the
capital credit would only apply to companies that were
drilling wells. He said that industry would not drill wells
if they had no intention to produce. He believed that the
numbers needed to be examined to determine the potential
impact to the state. He understood that the capital credit
under discussion was similar to an "uplift credit" used in
Norway.
9:52:49 AM
Senator Hoffman observed that the state would not get more
production without exploration. He thought that the state
could encourage exploration, but the success of exploratory
wells provided no guarantee that the state would find oil
that would lead to production. He stressed that although
the state wanted more production it was necessary to first
encourage more exploration.
9:53:42 AM
Co-Chair Meyer thought that the majority of the known oil
in the legacy fields was hard to get to. He opined that,
theoretically, targeting wells in the legacy fields should
lead to more production, but acknowledged that exploration
was needed as well.
9:54:09 AM
Vice-Chair Fairclough stated that if the state was looking
for immediately returns on its investment, a reflective
look needed to be taken at the recovery rate in Prudhoe
Bay. She believed that more exploration could lead to more
oil in the pipe for the long-term. She added that in the
short-term the legacy fields were Alaska best opportunity
in regard to immediate oil in the pipe.
9:55:54 AM
Senator Dunleavy inquired if there had been any study
regarding how the fiscal/spending policies at the state
level affected the investment psychology of corporations.
Mr. Marks responded that in the affirmative. He said that
that 90 percent of Alaska's general fund revenue came from
the oil industry. He believed that the state could benefit
from a diversified tax base. He furthered that there could
be any number of reasons why there would be no investment
response even if the state passed a "perfect" tax. He
stated that the bill had taken progressivity off the table.
He related that progressivity provided certainty and that
oil companies hated uncertainty; some of the corporations
would prefer, particularly in more volatile countries, to
negotiate a progressive system to protect against price
increases. He stressed that corporations viewed large tax
increases as a confiscation of assets.
10:01:57 AM
Co-Chair Meyer requested a response regarding the targeted
capital credits versus the GRE and how the state could
limit the impact to the state treasury.
Mr. Marks replied that the targeted tax credit was
preferable because they provided incentive to invest and
the credit was directly related to the cost of production.
He offered that, if the concern was that the credits were
being currently used for activities that were not related
directly to oil production, the targeted tax credit would
be an improvement over the GRE or no credit at all.
10:04:08 AM
Senator Olson inquired if Norway had a GRE element in its
tax structure.
Mr. Marks replied no. He furthered that Norway did not have
a royalty tax. He noted that the reason Norway had a higher
take than Alaska was because producers in Norway were more
protective on the low side of oil prices.
10:04:42 AM
Mr. Marks discussed Slide 20, "How Much of $5 Credit Used",
which reflected how of the non-transferable $5 credit was
used for different cost fields. He noted that low-cost
fields received the $5 credit at all prices because they
never hit the floor, but the medium cost fields received
less than the full $5 because they hit the floor at $90 ANS
market price.
10:05:47 AM
Mr. Marks spoke to Slide 21, "Cash Flow Comparison - Value
of 30 percent GRE & $5 Credit vs. 20 percent Capital Credit
Mid Cost Fields", which reflected what the $5 credit and
the GRE were worth together, as opposed to a 20 percent
capital credit, for a mid-cost field. He explained that the
20 percent capital credit was the same regardless of oil
price because it was based on spending, but the GRE and the
$5 credit was significantly higher.
10:06:52 AM
Senator Hoffman requested a figure of what the projections
on slides 20 and 21 would cost the state treasury.
Mr. Marks responded that he could provide the information.
10:07:54 AM
Mr. Marks spoke to Slide 22, "Government Take - 40 percent
Rate/ 30 percent GRE All Fields/ $5/bbl Credit." Mr. Marks
offered that the slide illustrated the state having the
goal of a 62 percent take with similar tax rates across the
entire spectrum of costs.
10:08:32 AM
Mr. Marks discussed Slide 23, "Government Take - 23 percent
Rate/ 20 percent Capital Credit." He stated that this
scenario brought down the low and mid-cost fields at lower
prices. He noted that the credit was reflective of actual
costs.
10:10:21 AM
Mr. Marks looked at Slide 24, "Government Take - 26 percent
Rate/ 20 percent Capital Credit/ 5 percent GRE All Fields/
$2/bbl Credit." He said that the scenario incorporated all
of the discussed features. He explained that the curve
reflected a slow, downward slant based on the higher oil
prices. He relayed that the royalty still had an effect at
high costs and that the GRE was able to level the curve at
higher prices.
10:11:47 AM
Mr. Marks discussed Slide 25, "Progressivity?":
•Can use a progressive structure to flatten out the
curve at both ends and make a neutral system, which
aligns interests
•Or can make a progressive system
-Pros (if not excessive)
•Protects producers interests at low costs
•Protects state's interests at high costs
•May be necessary for fiscal stability
-Cons
•Only works if balanced at low and high
prices
•With inherent regressive elements may be
difficult to achieve, or can only achieve
modestly
•Many jurisdictions in the peer group do not
have progressivity
10:13:14 AM
Senator Hoffman wondered if projections using the current
tax structure could be compared to the schedules in the
presentation.
10:13:47 AM
Mr. Marks replied in the affirmative.
10:14:28 AM
Senator Bishop clarified that Senator Hoffman wanted to see
ACES compared with the government take scenarios in the
presentation.
10:14:47 AM
Mr. Marks discussed Slide 26, "Example: Government Take
under Bracketed Progressivity - Base Rate of 20 percent up
to $60 Net/ Brackets up to 50 percent at $160 Net/ Includes
20 percent Capital Credit." He recommended against the
progressivity structure under ACES. He offered that the
example system reflected on the slide would be more
attractive to industry.
10:15:46 AM
Mr. Marks spoke to Slide 27, "Other Issue: Section 10":
•Defers loss carry-forward credits until positive
income
•Would eliminate loss carry-forward credit for
unsuccessful explorer with no other nexus in state
•May discourage new entrants
10:16:43 AM
Mr. Marks discussed Slide 28 titled "Other Issues: Section
25":
•Eliminates loss carry-forward credits for exploration
expenses
•Explorers with offsetting income can still realize
benefit of deduction; those without offsetting income
will not
•Disparate treatment
•Also, suppose a producer has $100 in gross value.
Suppose exploration expenses are $90. And suppose non-
exploration expenses are $80. If they deduct the
exploration expenses first, they will have $10. Then
they can deduct the $80 non-exploration expense from
the $10. This will give them $70 in losses they can
use for the loss carry-forward credit.
But, if they deduct the $80 non-exploration first,
they will have $20. Under the amendment they would
only be able to deduct $20 of the exploration expense.
So there needs to be something about the order in
which costs are deducted.
10:19:21 AM
Co-Chair Meyer appreciated that Mr. Marks was offering
alternatives. He noted that the capital cost credits had
been expensive and had not had the intended effect.
Senator Dunleavy requested a list of the countries that
Alaska's tax structure was competing with, and a breakdown
of the economic diversification of those countries. He also
wondered about the effects of an income tax in those
countries.
10:21:53 AM
Co-Chair Meyer highlighted that there were factors at play
that were not under the state's control, particularly
accessibility and weather. He stressed that the state was
interested in being attractive not competitive.
10:22:38 AM
Senator Olson asked whether the state would lose $1 billion
due to the 20 percent capital credit.
Mr. Marks relied that some of the credit were capital
credits and some were exploration credits. He referred the
question to DOR.
Senator Olson hypothesized that the figure was accurate. He
queried a recommendation, outside of the GRE, for the state
to rectify such a sizeable deficit to the treasury.
Mr. Marks replied that the GRE was an innovative device,
but that it also involved cash flow out. He shared that the
amount of activity that resulted from the capital credits
had been disappointing. He believed that all of the
features needed to be examined holistically.
10:25:20 AM
Senator Olson inquired if Mr. Marks had a suggestion to
rectify the projected deficit.
Mr. Marks related that the best way to deal with the
deficit was to have a good tax structure.
10:26:14 AM
Senator Bishop understood that Alaska had changed its tax
rate historically very seven years since 1977. He noted
that the easy oil was gone and that as the state moved
forward a stable tax structure was a necessity. He surmised
that the state should reconsider looking at progressivity
in order to quell the possibility of creating a new tax
structure if oil reached $200/bbl.
Mr. Marks replied in the affirmative.
10:27:58 AM
SB 21 was HEARD and HELD in committee for further
consideration.
10:28:48 AM
| Document Name | Date/Time | Subjects |
|---|---|---|
| Marks Sen Fin 030413 (2).pdf |
SFIN 3/4/2013 9:00:00 AM |
SB 21 |