Legislature(2011 - 2012)SENATE FINANCE 532
04/05/2012 01:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB192 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 192 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax;
and providing for an effective date."
2:51:24 PM
Co-Chair Hoffman MOVED to ADOPT the proposed committee
substitute for SB 192, Work Draft 27-LS1305\O (Bullock,
4/5/12).
Co-Chair Stedman OBJECTED for the purpose of discussion.
2:51:44 PM
DARWIN PETERSON, STAFF, SENATOR BERT STEDMAN, explained the
changes in the Committee Substitute (CS). He shared that
Section 1 remained the same, while Section 2 included a
provision that allowed exemption from the minimum floor tax
for small producers. Section 3 reflected the new 3 tier
progressivity approach. He added that subsection 1 on page
4, line 19 addressed existing production on legacy fields.
The calculation began at $60 with a progressivity rate of
0.27 percent. At $120, 16.2 percent was reached, and at
that point, the progressivity was reduced to 0.03 percent
and capped at 20 percent for existing production in the
legacy fields.
2:54:47 PM
He explained that page 5, line 28 updated the definition of
new production with a 7-year window. The new production
outside of the legacy fields was calculated at $60/bbl and
a progressivity rate of 0.05 percent was applied. The
progressivity was capped at 5 percent. He addressed page 6,
line 1, which referred to the new production progressivity
calculation "from a lease or property." He explained that
the date was selected to include the Nakiachuk and Oooguruk
oil Fields, which would fall under the lowest
progressivity. Section 4 on page 6, line 11 adjusted the
$60/bbl base amount by the annual percent increase in the
United States Consumer Price Index. The indexation avoided
the stealth tax as advised by the consultant for PFC
energy. Page 6, Section 4, lines 23 through 29 represented
the production decline calculation. The target volume
equaled a volume of oil produced in 2011, multiplied by the
decline percentage, calculated using the cube root method.
The calculation created a fixed decline on a particular
time going forward to incentivize all of the incremental
production in Alaska's legacy fields. He explained that the
other sections of the bill remained the same except for
changes to the effective dates in Sections 13 and 14, which
detailed that the Petroleum Information Management System
would take effect immediately, while the remaining sections
of the bill take effect January 1, 2013.
2:57:59 PM
Co-Chair Stedman REMOVED his OBJECTION, There being NO
FURTHER OBJECTION, Work Draft 27-LS1305\O was ADOPTED.
2:58:52 PM
JANAK MAYER, MANAGER, UPSTREAM AND GAS, PFC ENERGY,
initiated the PowerPoint presentation "Discussion Slides:
Alaska Senate Finance Committee," dated April 5, 2012 (copy
on file).
2:59:17 PM
Co-Chair Stedman noted that the presentation included
updated slides detailing the oil decline curve. The
presentation was prepared in response to Senate Finance
Committee questions.
3:00:21 PM
Mr. Mayer discussed slide 2, titled "Production Above a
Decline-Fixed v Annual Calculation." He reiterated
questions regarding the use of decline methodology to
incentivize production above the decline curve. His
research included a review of previous amendments that
incentivized production above the previous year's figures.
He explained that his research involved a review of
amendments from the Senate Resources Committee that
calculated a decline curve. He proposed incentivizing above
the decline curve. Decline was calculated on a rolling
average, and the incentive was applied to production above
a target based on last year's production.
3:04:48 PM
Mr. Mayer explained slide 3, "Approximate Decline Rates to
2010 by Start Year" and stated that the CS compared 2008 to
2011 production, particularly the implied decline rate. He
noted that the graph was not a timeline but a sensitivity
of an average beginning in 1995. The graph depicted an
approximation using publically available production data,
applying equity stakes for each company in those assets. He
detailed the graph's depiction of differences between
producers. From 2007 to 2010, Exxon Mobile had a decline
curve of slightly over 6 percent; whereas decline curves
for BP and Conoco Phillips were significantly higher. He
stated that the higher curves came from the higher decline
at Kuparuk compared to other assets.
3:07:36 PM
Mr. Mayer spoke to slide 4 titled "Approximate Decline
Rates to 2010 by Start Year." The graph was modified to
include the average start of the decline in 2010 for
Prudhoe Bay and Kuparuk River. He commented on the higher
rates of decline for Kuparuk River than for Prudhoe Bay. He
revisited slide 3 stating that higher rates of decline were
observed for Kuparuk and Prudhoe Bay than for Exxon Mobil.
He explained that higher rates of decline created a steeper
decline forecast based on the methodology along with more
room for incentive. He encouraged the committee to ponder
the question about whether a flat rate or a companywide
approach was better.
3:08:46 PM
Mr. Mayer discussed slide 5 titled "Approximate Decline
Rates to 2010 by Start Year." He explained that he employed
a maximum decline curve of 20 percent, for the sake of
legibility. The graph depicted a high rate of variability
between different assets, with decline curves calculated on
the same basis as the previous slides.
3:09:55 PM
Mr. Mayer explained slide 6 titled "Regime Competiveness:
Relative Government Take." He explained that the slide
provided an updated version of relative government take as
a benchmarking exercise, using stylized cash flow profiles
discussed in previous committee meetings. The existing
producer had relatively low levels of costs, with a high
level of costs for a new development. The costs for the new
producer were approximately $17 per barrel. He explained
that a producer interested in new production occurring
without existing infrastructure would include higher costs
and higher government take. He noted that the indexing of
the break-point at which progressivity starts, was not
included in the depictions.
3:12:39 PM
Co-Chair Stedman requested further explanation for slide 6.
He asked why the bar depicting CSSB 192 (Existing Producer)
was located above the bar depicting ACES (Existing
Producer). Mr. Mayer responded that at $60/bbl of oil,
including the impact of indexing for inflation, the two
bars would be equal. He continued that Slide 6 depicted a
lack of indexing for inflation, which allowed the
progressivity at lower price levels throughout the 30-plus
year time horizon. He credited Co-Chair Stedman for the
excellent question and reiterated that incorporation of the
indexing into the model would illustrate no difference
between CSSB 192 and Alaska's Clear and Equitable Share
(ACES).
3:13:40 PM
Co-Chair Stedman required further explanation. Mr. Mayer
explained that no difference existed between ACES and CSSB
192 because of the impact of indexing. Without the impact
of indexing, inflation had a disproportionate impact on
CSSB 192 versus ACES because the tax was on the gross
rather than the net, which made the indexing particularly
important. He noted that viewing higher rates than the
depicted $60/bbl created the opposite situation where CSSB
192 fell significantly below ACES.
3:14:16 PM
Co-Chair Stedman joked that if Alaska wanted to out-do
North Dakota, they would keep their price at $60 per
barrel. Mr. Mayer explained that the states depicted in the
graph were sometimes duplicated, with the difference being
the costs associated with development. He added that when
costs rise in low price environments, "government take" was
relatively high. He agreed that at $60/bbl, North Dakota,
Texas and Louisiana remained relatively low for
conventional production.
3:15:30 PM
Mr. Mayer discussed slide 7: "Average Government Take of
Global Fiscal Regimes at $80/bbl" and related that ACES was
the second highest regime at $80 per barrel. He observed
slide 8: Average Government Take of Global Fiscal Regimes
at $100/bbl" where a rise to $100 per barrel led to a
significant drop of 60 percent in fixed royalty regimes.
3:17:04 PM
Mr. Mayer explained slide 9: "Average Government Take of
Global Fiscal Regimes at $120 /bbl." He clarified that the
graph depicted significant increases in progressivity under
ACES, while government take for CSSB 192 increased much
less significantly. He commented that other regimes also
increased significantly in government take.
3:17:48 PM
Mr. Mayer discussed slide 10 titled "Average Government
Take of Global Fiscal Regimes at $140/bbl." He noted that
at $140/bbl, the gap increased dramatically and ACES was
equal to Norway and became the greatest government-take
level. At that point, CSSB 192 hit the 73 percent split
seen in past analysis, and remained there with the higher
price levels.
3:18:41 PM
Mr. Mayer explained slide 11: "Average Government Take of
Global Fiscal Regimes at $160/bbl." He noted that CSSB 192
remained constant, while ACES moved further up the chart of
government-take. He noted that in Slide 12: "Average
Government Take of Global Fiscal Regimes at $180/bbl," the
problem was further exacerbated with the higher price
assumptions.
3:19:02 PM
Mr. Mayer discussed slide 13: "Average Government Take of
Global Fiscal Regimes at $200/bbl." He stated that the
disparity increased substantially with the increased price
assumptions.
3:19:24 PM
Mr. Mayer explained slide 14: "Average Government Take of
Global Fiscal Regimes at $60/bbl." He revisited the slides
with the focus on new development. He stated that only a
few percentage points existed in between the various
producers, but the indexing of inflation would again even
the field between ACES and CSSB 192 at $60 per barrel.
3:20:14 PM
Mr. Mayer explained slide 15: "Average Government Take of
Global Fiscal Regimes at $80/bbl." He noted that the ACES
levels were approximately equivalent to Norway.
3:20:25 PM
Mr. Mayer discussed slide 17: "Average Government Take of
Global Fiscal Regimes at $120/bbl." He stated that by $120
per barrel, the government take for ACES was approximately
80 percent for a new producer, while CSSB 192 settled
around 70 percent, where it remained.
3:20:49 PM
Co-Chair Stedman queried the impact on the illustrated
ranking of inflation for new development using CSSB 192.
Mr. Mayer replied that the difference comprised only a
couple of percentage points in government take. He
requested additional time to adapt the model to better
answer the question. Co-Chair Stedman asked if Mr. Mayer
would add the requested information to his model. Mr. Mayer
agreed to incorporate the information.
3:22:06 PM
Mr. Mayer explained that with progressively and higher
price levels, ACES moved higher and higher up the chart.
3:22:32 PM
Mr. Mayer detailed slide 18: "Average Government Take of
Global Fiscal Regimes at $140/bbl." He noted that while
ACES continued to rise up the chart, CSSB 192 remained
fixed at the 72 percent government take figure. He observed
that HB 110, for new development fell below CSSB 192. He
mentioned that the chart allowed for new development
including the impacts of the seven year reduction down to a
five percent cap in progressivity in the early years. He
stated HB 110 fell significantly for new development, due
to the impact of the reduced 15 percent base.
3:23:15 PM
Mr. Mayer discussed slides 19 through 21, which illustrated
government take for new development at $160/bbl-$200/bbl.
He noted that the difference illustrated that ACES arrived
at the mid-80 percent government take, which was among the
highest in the world. On the other hand, CSSB 192 remained
above most conceivable developments in the Lower 48.
3:23:47 PM
Senator Ellis asked for clarification on slide 8. He asked
if revenue was neutral at $110/bbl why the disparity in
government take was observed. He also queried the impact of
indexing at all levels. Mr. Mayer replied that CSSB 192 was
revenue-neutral at $100/bbl. He added that the cost
assumptions were critical to the question regarding the
neutrality. For new development, the figures used for the
analysis separate the capital investment that is part of
new investment from the capital investment that maintained
a steady decline. He added that the impact of indexing was
used to reduce government take on the life cycle basis. He
mentioned that the impact of indexing, when viewed over the
entire cycle of a project reduced government take slightly.
3:26:05 PM
Senator Ellis asked if indexing maintained the relationship
to allow for durable and sustainable architecture. He asked
why indexing was employed at the expense of the citizen
take. Mr. Mayer responded that the purpose of indexing was
indeed to allow for a durable and sustainable system. He
stated that indexing removed the stealth tax effect.
3:27:09 PM
Co-Chair Stedman queried if ACES and CSSB 192 would incur
similar government take if ACES had been indexed upon
creation. Mr. Mayer replied that indexing would probably
reduce the government take under ACES. He informed the
committee that he required further analysis to be
absolutely certain. He opined that the impact of indexing
should appear greater with CSSB 192 than ACES because of
leveling the tax on the net rather than the gross along
with sensitivity to cost.
3:27:56 PM
Co-Chair Stedman requested modification of the model to run
index figures for the committee. Mr. Mayer agreed to
provide the information. Co-Chair Stedman stated that the
inflation index would allow comparison by committee
members.
3:28:25 PM
Senator Ellis pointed out that industry expressed concerns
that the model did not adequately calculate company costs.
He expressed confidence in the consultant and the modeling.
He believed that Mr. Mayer deserved an opportunity to speak
to the concern of company costs. Mr. Mayer responded that
the vast majority of the analysis utilized 2013 figures. He
attributed the information provided to stylized field
development models, which compared existing producer levels
to new development levels of government take. He perceived
two different questions, one being the deductible cost
under the fiscal system, and the other being the question
of the picture of the business. The costs illustrated for
new development provided a reasonable representation of a
new "light oil" development that was similar to existing
production. Drilling further from existing production, for
material that is more viscous would incur higher costs. He
offered to provide analysis for those projects, if
requested. He clarified that the analysis provided was
meant to illustrate information for recent developments.
3:32:31 PM
Co-Chair Stedman noted that Mr. Mayer planned to travel
through the weekend and he asked that committee members
communicate their requests for further information if
necessary.
SB 192 was HEARD and HELD in Committee for further
consideration.
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