Legislature(2013 - 2014)SENATE FINANCE 532
03/13/2013 01:30 PM 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 | |
| + | 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."
1:43:43 PM
ROGER MARKS, LEGISLATIVE CONSULTANT, LEGISLATIVE BUDGET AND
AUDIT COMMITTEE, presented the PowerPoint presentation, "SB
21: Long-Run Revenue Scenarios" (copy on file). He examined
the fiscal implications of adjusting oil and gas taxes in
order to create a more competitive investment climate for
Alaskan oil. He voiced that in 2007 the state instituted a
production tax increase. He shared that during the same
time period, Alberta, Canada increased oil tax royalties.
The oil drillers moved their operations to nearby provinces
in Canada and oil production in Alberta declined.
Subsequently, Alberta reduced its royalties and production
increased. He furthered that the infrastructure on the
North Slope was worth $60 billion and could not be
relocated. He characterized the present situation as
"captive investment." The producers kept producing oil and
paid increased taxes to the state.
Mr. Marks discussed Slide 2, "Alaska North Slope (ANS)
Production under Status Quo Current Decline Rate Extended
Out 20 Years." The slide graphed the decline curve by
barrels per day from 2006 through 2023. He stated that the
"predictable" consequence of the increased tax structure
caused a shift in investment from Alaska to worldwide
upstream capital investment, which increased 50 percent.
Conversely, investment in Alaska's oil industry remained at
2007 levels. Alaskan North Slope oil production dropped
300,000 barrels per day (bbl./d) to 550,000 bbl./d
currently. Within the next twenty years ANS production was
predicted to decrease to 200,000 bbl./d. He cautioned that
the Department of Revenue's (DOR) production forecasts were
historically high.
Mr. Marks pointed to two important elements when
instituting changes in the tax structure in order to create
a more competitive environment: (1) Revenue comparisons
could not use the same production number of barrels when
examining the difference between a non-competitive tax
system and a competitive one. A competitive tax system
needed more investment in production. (2) In the short
term, changes in the production tax needed "lead time" for
the investment in production response to work itself out.
Reductions in revenue were expected.
Mr. Marks turned to Slide 3, "ACES Total Petroleum Revenues
over 20 Years, ACES at Trended Current Production Forecast
vs. CSSB 21 (FIN) with Various Potential Production
Increases $110/bbl. ANS Market Price ($billions)." He
predicted that a competitive tax system would increase
investment and production. He commented that ANS
recoverable oil was estimated at 10 billion barrels. The
amount of increased investment and production was
impossible to predict but estimation was possible. He
explained that under ACES (Alaska's Clear and Equitable
Share) and the current production decline rate the state
was estimated to receive $87 billion in total petroleum
revenues (production tax, royalties, property tax, and
state corporate income tax). He hypothesized a scenario
that incorporated the predicted base production and added
increments of 10,000 bbl./d taxed under the provisions of
CS SB 21 (FIN) and calculated that over a 20 year period
the state would generate increase revenue above ACES at
70,000 additional bbl./d. He noted that 70,000 bbl./d was
not that large of an increase when compared to the fact
that oil production declined 300,000 barrels per day within
the last six years. North Slope proven oil reserves stood
at 4 billion barrels. He reiterated that recoverable oil
reserves were estimated at 10 billion barrels.
Mr. Marks displayed Slide 4, "Total Petroleum Revenues over
20 Years, ACES at Trended Current Production Forecast vs.
CSSB 21 (FIN) with Various Potential Reserve Growth
$110/bbl. ANS Market Price ($billions)." He explained that
70,000 bbl./d was only a small fraction of the potential
reserve base; one half billion barrels per day out of a 10
billion barrel potential reserve was only 5 percent of the
potential reserve base. He concluded that the tradeoff of
modifying the tax system was lost ACES revenue in the short
term with the potential for more or less new tax revenue in
the future.
1:52:27 PM
Senator Hoffman referred to his support of tax credits in
previous years. Mr. Marks replied that "there were pro and
cons to credits." He discerned that the expenditure credits
were not increasing production. He related that credits
incentivize production and when utilized in the investment
period of the project they positively affect the net
present value.
Senator Hoffman wondered whether the credits under ACES
were expected to produce new oil over the next 10 years.
Mr. Marks responded that any increased production was
included in the long term production forecast.
Co-Chair Meyer cited a slide from a previous presentation
and asked for clarification on extending the time period of
the GRE (Gross Revenue Exclusion).
BARRY PULLIAM, MANAGING DIRECTOR, ECON ONE RESEARCH, INC.,
reviewed Slide 6, "Relationship Between Length of GRE and
Percent of NPV of Drilling Cost Initial 1,500 BPD, 12%
Decline Rate" of "Comments on Senate Finance CSSB 21"
(March 12, 2013) (copy on file) from the previous
presentation. He explained that the analysis translated the
value of the GRE into an equivalent capital credit value.
The longer the GRE applied and the higher percentage of the
GRE the greater monetary value it produced. He delineated
that at a 20 percent GRE the tax rate was reduced each
year. Within five years half of the oil from the well would
be produced and was the equivalent of a 30 percent capital
credit up front. He added that the GRE at 15 percent would
yield the same results when applied over a longer time
period. He recommended the lower GRE, citing benefits for
the producers and the state. Consequently, each year the
revenue loss to the state would be reduced with the same
level of benefit to the producer extended over a longer
period of time. The scenario avoided increasing the tax
during the production period of the well, therefore
extending the life of the well.
1:59:37 PM
Vice-Chair Fairclough asked about "price distortions" at
various prices per barrel. Mr. Pulliam explained that
percent fluctuations would happen concurrently with price
fluctuations. He examined the GRE after 5 years at $80 per
barrel as opposed to $100 per barrel. The NPV (net present
value) of GRE as a percent of drilling costs would drop to
20 percent instead of 30 percent. If the prices were $120
per barrel the percentage would rise to 40 percent of
drilling costs. The fluctuations could be avoided by
eliminating the GRE and instituting an additional $4 per
barrel allowance. The benefit would be "invariant" to
price.
Co-Chair Meyer asked for clarification on the later point.
Vice-Chair Fairclough asked whether he was referring to the
proposed 30 to 5 ratio [30 percent tax rate and $5
production allowance per barrel and raising the $5 to $9.
Mr. Pulliam answered, "Yes." He explained that eliminating
the GRE for new production and adding an additional $4 per
barrel for a total of $9 per barrel production allowance
coupled with the 30 percent tax rate for new production
eliminated the need for a GRE. The additional $4 per barrel
took the place of the GRE.
Vice-Chair Fairclough asked whether the change eliminated
the need for additional accounting and acted as a bonus for
new oil production. Mr. Pulliam responded in the
affirmative. He offered that the method was an additional
way to reduce the tax rate without a GRE.
Mr. Pulliam turned to Slide 7, "Example of Tax Calculation
With and Without GRE." He explained that the GRE was based
on the wellhead value. He pointed out that at $100 per
barrel the GRE translated to a $15 reduction in taxable
value. He furthered that if the wellhead value was $120 per
barrel the value of GRE would be greater than $15; worth
more at a higher price. Conversely, the GRE was worth less
at a lower price; a well head value of $80 per barrel was
worth $12. He concluded that the GRE fluctuated with oil
price fluctuations. The fixed per barrel allowance did not
change as prices changes. He summarized that the GRE
equivalent of a fixed price allowance meant that with lower
prices the allowance as a percentage was higher and at
higher prices the percentage was lower.
Mr. Pulliam discussed Slide 3, "Summary of Investment
Measures Incumbent Investment in 50 MMBO Field $20/Bbl.
Development Capex, 12.5% Royalty Rate." The slide
demonstrated that a $5 allowance was the equivalent of a 20
percent GRE percentage at $80 per barrel and at $150 per
barrel the allowance was equivalent to a GRE of 10 percent
and at $60 per barrel the percentage equated to a 30
percent GRE. With a fixed barrel allowance the value was
greater at lower prices and lower at higher prices where
the incentive wasn't as necessary. He recommended a higher
fixed per barrel allowance for new oil instead of a GRE.
Vice-Chair Fairclough wondered what the administration
thought of eliminating the GRE and adopting a fixed price
allowance.
2:07:29 PM
MICHAEL PAWLOWSKI, ADVISOR, PETROLEUM FISCAL SYSTEMS,
DEPARTMENT OF REVENUE, shared that the administration
considered striking a balance with utilization of the GRE.
The fixed price allowance created a higher value at lower
prices and the GRE offered higher benefit at higher oil
prices. The administration wanted to balance protection for
the state at lower oil prices and how much was offset at
increased per barrel allowance. Both methods produced a
curve. The administration decided that "smaller per barrel
allowances and more comparable GRE's was a healthy
balance."
Senator Dunleavy asked how confident Mr. Pulliam was that
increased production would occur if the production tax rate
was reduced. He asked what his direct experience with the
situation was. He thought that the tax reduction could be
viewed as either an investment or a giveaway. Mr. Pulliam
shared that he had 25 years' experience in the petroleum
industry as an economist. He exemplified a situation where
only two gas stations existed in a small town and the gas
station with lower prices did more business. The higher
priced gas station will lower its price of gas. He believed
that in markets with "rational economic actors" price and
volume were "inversely related." He expected that the state
would attract more investment but was uncertain whether
production would compensate the state sufficiently for the
revenue lost due to the reduction in taxes. The results
were difficult to predict with a "high degree of accuracy."
Mr. Pulliam shared that an academic research study examined
a change in Wyoming's tax rate by 5 percent (to 10 percent)
and concluded that the change resulted in a 20 percent
impact on drilling and a 6 percent impact on production. He
noted that 5 percentage points equaled 3 percent in
government take. The Alaskan proposal supported a change of
government take by 10 percent, which "would suggest a
pretty large response in drilling and production."
Predictions from the various methods of analysis determined
that the state should expect a "pretty good response." He
judged that the state had a reputation for instability in
tax systems. He pointed to the ELF (Economic Limit Factor)
system at one "extreme" and ACES at the other. He thought a
stable tax system, if not perfect, was more beneficial than
continued adjustments to the tax structure.
2:15:33 PM
Senator Dunleavy wondered what other model worldwide comes
the closest to mirroring Alaska's situation of high taxes,
declining production, and other related variables. Mr.
Pulliam remembered that a similar situation occurred in the
United Kingdom. The government increased government take as
oil fields matured. The government subsequently embarked on
a program of field allowances in 2012. The production
response was too early to determine but the amount of
applications for development was substantial. The
government held a high expectation for increased
production.
Senator Dunleavy reiterated his question about how
confident Mr. Pulliam was that the tax reduction would
increase production in Alaska. Mr. Pulliam stated that the
current tax structure was in need of "meaningful change."
The state had the ability to analyze and change the tax
system if the proposed changes did not work. The state was
currently engaged in the same process with ACES. As
production in the state declined, the state needed to
create a competitive environment to attract new investment.
He determined that the first successful sign would be in
increased investment. He stated that "production will
follow investment." He discerned that the various versions
of SB 21 all contained significant enough changes to spur
significant responses.
Co-Chair Kelly announced that the state wanted to choose
the accurate tax structure now and avoid changing it again
in the future. He furthered that the state had a history of
incentivizing exploration and spending and it worked. The
state currently wanted to incentivize production. He
believed that production would increase with the passage of
the legislation. Mr. Pulliam agreed that "getting it right"
was important and furthered that "stability" was the main
element. He commented that if the system wasn't working it
would be appropriate to re-examine it for further changes.
Co-Chair Kelly stated that from personal experience in
retail that if reducing prices didn't work the first time
more reduction was necessary.
2:23:42 PM
Senator Bishop referred to Mr. Pulliman's experience and
queried what a reasonable amount of time that Alaska should
expect increased activity was. Mr. Pulliam replied that
increased investment should begin within a "couple years."
Senator Bishop stated that from personal experience with
collective bargaining that once something was given up it
was difficult to get it back. He believed it was important
to get the right tax system for future natural gas
investment opportunities on the North Slope. He was
encouraged by industries pledge to create more jobs for
Alaskans and grow the state's economy.
Vice-Chair Fairclough referred to prior testimony related
to incomplete audits. She asked whether incomplete audits
under ACES should be finished before changing the tax
system and if the information from the completed audits
could effectuate "more informed" decisions regarding SB 21.
Mr. Pawlowski answered in the negative.
BRUCE TANGEMAN, DEPUTY COMMISSIONER, TAX DIVISION,
DEPARTMENT OF REVENUE, replied that the department received
monthly information from tax payers. He detailed that an
audit was a compilation of information from the past twelve
months. The department was currently auditing taxes from
2007 on ACES and PPT (Petroleum Production Tax). The
department did possess accurate tax information from
subsequent years from the monthly tax filings paid by the
taxpayers. He recapped that an audit was a reconciliation
of large quantities of information already received. He
added that DOR was operating within the statutory timeframe
for completing audits.
Vice-Chair Fairclough surmised that DOR had not received
information from audits that would affect the information
the department was utilizing as the basis for changing the
tax regime. Mr. Tangeman concurred.
Vice-Chair Fairclough shared that she heard previous
testimony in a DOR subcommittee that audit completions were
slowed down due to various changes in federal regulation.
She confirmed that DOR was within the regulatory timeframe
for completing the audits. Mr. Tangeman added that each
time an audit was re-opened the six year period for
completion began again.
Vice-Chair Fairclough asked whether a legislator could sign
a confidentiality agreement and examine tax records. Mr.
Tangeman answered, "Yes."
Vice-Chair Fairclough shared that in the interest of
transparency, individual legislators had access to the
unaudited oil tax records.
SB 21 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 21 031313 marks - long-run revenue.pdf |
SFIN 3/13/2013 1:30:00 PM |
SB 21 |