Legislature(2005 - 2006)HOUSE FINANCE 519
04/28/2006 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
| + | TELECONFERENCED |
CS FOR SENATE BILL NO. 305(FIN) am
"An Act repealing the oil production tax and the gas
production tax and providing for a production tax on
oil and gas; relating to the calculation of the gross
value at the point of production of oil and gas and to
the determination of the value of oil and gas for
purposes of the production tax on oil and gas;
providing for tax credits against the production tax on
oil and gas; relating to the relationship of the
production tax on oil and gas to other taxes, to the
dates those tax payments and surcharges are due, to
interest on overpayments of the tax, and to the
treatment of the tax in a producer's settlement with
the royalty owners; relating to flared gas, and to oil
and gas used in the operation of a lease or property
under the production tax; relating to the prevailing
value of oil and gas under the production tax; relating
to surcharges on oil; relating to statements or other
information required to be filed with or furnished to
the Department of Revenue, to the penalty for failure
to file certain reports for the tax, to the powers of
the Department of Revenue, and to the disclosure of
certain information required to be furnished to the
Department of Revenue as applicable to the
administration of the tax; relating to criminal
penalties for violating conditions governing access to
and use of confidential information relating to the
tax, and to the deposit of tax money collected by the
Department of Revenue; amending the definitions of
'gas,' 'oil,' and certain other terms for purposes of
the production tax, and as the definition of the term
'gas' applies in the Alaska Stranded Gas Development
Act, and adding further definitions; making conforming
amendments; and providing for an effective date."
JOHN ZAGER, GENERAL MANAGER, CHEVRON-ALASKA, began by
stating that his company stands by previous testimony on
PPT. He referred to a handout throughout his presentation
entitled "Chevron-Alaska Area" (copy on file.) For the
overall tax credit rate, the 20/20 is in the best interest
of the state. For Cook Inlet the 5 percent tax is more
appropriate because it encourages additional vital
investment. Regarding the standard deduction, Chevron-
Alaska supports either the $12 million credit or the current
5,000 BOEPD exemption. He opined that the $12 million
credit makes the most sense and is the most simplistic
approach.
Mr. Zager addressed transition capital - Chevron accepts
that it must be earned again on a 2 for 1 ratio. He urged
extending the time period to 10 years. He noted an error in
the effective date of April 1, which should read July 1. He
addressed challenged oil, where an additional credit is
warranted due to the large resource waiting to be developed.
1:56:09 PM
Mr. Zager addressed the abandonment expense. Chevron-Alaska
believes that it should be prorated and that it should be a
qualifying expense.
Co-Chair Chenault asked if that issue should be addressed as
a special piece of legislation. Mr. Zager saw the benefits
of rolling it into this bill.
Mr. Zager talked about gas storage costs, which should be
explicitly recognized as qualifying costs. It is not
explicitly covered in the bill. The alternative is to drill
many more wells at a great cost.
1:59:08 PM
Representative Kelly pointed out that for pump storage, the
product brings a higher price at retail.
Mr. Zager responded that in the Cook Inlet, where gas is
priced on long-term contracts, there is no differentiation
for gas in storage vs. gas produced out of wells, in terms
of price. Gas storage is a process of the treatment charge
- it's what is required to get the gas ready to meet the
market. Henry Hub prices are a component. It's the most
capital efficient way of meeting that obligation.
Representative Kelly asked if it is a two-part process. Mr.
Zager explained "peaking", which is only in effect if
another producer fails to meet its obligation.
Representative Kelly spoke of extreme situations.
2:01:54 PM
Mr. Zager spoke about the progressivity provision on Slide
3. He said that Chevron-Alaska does not support
progressivity, but if it has to be, then it must be logical
and sensible. He referred to the reason the state wants
progressivity: to get a fair share when there is a price run
up accompanied by large profits. It is not to raise taxes
if the price increase is gradual over time and is
accompanied by increases in costs and thus not accompanied
by increased profits.
Mr. Zager described the problems with progressivity as
currently proposed. The trigger price tied to ANS is not
inflated, and over time costs will rise. High cost oil will
be produced in increasing quantities. Over the long term, a
fixed trigger price will not work as intended and is grossly
unfair.
2:04:30 PM
Mr. Zager noted that in the current Senate bill, at $250,
the tax is 100 percent. He cautioned to be careful about
tying into one number that is not connected to
profitability.
Co-Chair Chenault inquired if Chevron-Alaska is in favor of
a long-term oil contract. Mr. Zager replied that the 20-
year number has nothing to do with his company.
Representative Kelly asked where the line should flatten
out. Mr. Zager replied that he would cover that shortly.
Mr. Zager continued with Slide 4, concern about costs. The
Cambridge Energy Research Associates report entitled "Rising
Capital Costs Bear Down on E & P Profitability" was issued
on 4/24/2006. He read several quotes from the report:
Higher oil and gas prices have encouraged a wave of new
investments for discovering and developing resources.
However, soaring costs of exploration and production
(E&P) programs and the volatility of energy prices have
left many producers uneasy about future profit margins.
E & P capital costs are accelerating and have increased
approximately 42 percent from 2000 to 2005 (third
quarter) compared with a 15 percent rise in the
Consumer Price Index.
Increasing costs and energy price volatility are having
an impact on investments. Oil and gas projects that
were profitable at $22 per barrel in 2002, now require
$35 per barrel to achieve similar returns.
Mr. Zager pointed out that the oil industry in Alaska is
made up of more than just the producers - service companies,
drilling companies, and engineering firms - and they, too,
would like a fair share. Costs are going to go up along
with oil prices. He emphasized looking at the net effect,
not just pegging the index with the WTI.
2:09:19 PM
Mr. Zager referred to Slide 5, "Proposal: Progressivity
Based on Net Profits". Each company already will calculate
a net profits every month and divide them by production to
get a "net profits/boe". The trigger point should be set
and the escalation factor should be based on the net
profits/boe. He suggested that the trigger point be set at
$50 per barrel with 1.0 percent for each $5 increase in
profits. The original Senate CS adopted this methodology.
It would provide a minimum rate of 20 percent tax on net
profit, and a maximum general rate of 30 percent. The cap
is reasonable and would give comfort to producers.
He spoke to the advantages of progressivity based on net
profits. It would be self-correcting for inflation, costs,
different commodities, and high cost production, as well as
avoiding the discussion regarding WTI vs. ANS.
Progressivity would capture a windfall upside without
creating unintended consequences. The system would be fair
to everybody, since taxes and progressivity will only be
attached to actual company profits.
2:13:35 PM
Mr. Zager noted that Slide 6 shows examples of a net profits
trigger. In the first windfall case, the price was up and
the costs were fixed. The second case shows that there are
increased profits when prices go up and costs go up. In the
final case, which is an extreme end point, the profits are
constant and if the price is up, the costs keep pace. Under
this proposal if producers could cut costs, the state would
see an increase in revenue without an increase in oil price.
2:16:00 PM
Mr. Zager concluded with Slide 7. Chevron-Alaska believes
that Net Profits is the fair and logical method to implement
progressivity. The Cook Inlet 5 percent tax is in the best
interest of the state. He urged a cautious approach to
increasing taxes. He voiced appreciation for the hard work
and diligence of the legislature on this historic bill. He
pointed out that Chevron has been in Alaska for many years
and intends to continue an active exploration and production
operation in the state if a sound and stable fiscal regime
can be offered.
2:17:31 PM
Representative Kerttula asked what would jump the cost up to
$57. Mr. Zager replied that was intended to be an
illustrated example. He related a 20-year extrapolation.
He maintained that there are a lot of inflationary factors.
Representative Kerttula asked if Mr. Zager sees a difference
between the large and small producers. Mr. Zager replied
that it would be hard to generalize. To some degree it
matters on a worldwide scale. In Cook Inlet, the worldwide
scale is not a factor. He mentioned cost inflation, which
continues. Representative Kerttula asked if Chevron's costs
have increased. Mr. Zager said yes, and they are
representative of the industry as a whole.
Representative Kelly summarized that Chevron prefers the net
to the gross on progressivity. He asked if they use WTI of
$60 before progressivity hits and if it lays over at about
$110. Mr. Zager said that is correct for both WTI and ANS.
Profitability is not a one-to-one relationship between oil
price and "what you get at the end of the day" due to many
factors.
2:23:31 PM
KEN SHEFFIELD, PRESIDENT, PIONEER NATURAL RESOURCES-ALASKA,
expressed thanks to the members. He referred to a handout
from Pioneer throughout his testimony (copy on file.) He
shared several of Pioneer's projects. He related that in
Pioneer's portfolio, as seen through the governor's bill,
there is a modest incentive for investment. The governor's
bill aims to strike a delicate balance between incentives
and taxes.
Mr. Sheffield addressed tax rate. For oil, the
recommendation is a 20 percent rate, for gas, the 7.5
percent rate, and for Cook Inlet, 5 percent. The outcome of
the bill could affect Pioneer's decision on a Cosmopolitan
project in Cook Inlet.
Mr. Sheffield talked about base allowance. SB 305 contains
a 5,000 BOPD equivalent credit capped at $14 million. He
spoke of value deterioration and the calculation methodology
as a disincentive.
Representative Kerttula asked for clarification on that
point. Mr. Sheffield explained how the formula works -
multiply 22.5 percent by 5,000 barrels per day, divided by
the amount produced, and multiplied by the net income. This
equals a tax credit much smaller than the cap. He offered
to go over it later on using numbers.
2:29:12 PM
Mr. Sheffield addressed the 10-year sunset provision, which
is problematic for explorers.
Mr. Sheffield recommended the House Resources CS
methodology. It is simpler and contains flat tax credit
currently at $12 million. He requested several changes:
increase $12 million to $14 million, eliminate the annual
investment requirement, and eliminate the sunset provision.
Co-Chair Chenault asked if Pioneer would propose a trigger
on the day of production. Mr. Sheffield replied that
Pioneer is looking at a 10-year window if the sunset
provision is required.
2:31:44 PM
Mr. Sheffield spoke to refundable credits. The House
Resources CS contains $10 million in annual credits. He
called it a significant incentive to explorers with no
current production. There's a thin market for credits and
few buyers. It would allow explorers to receive full value
for some credits at no extra cost to Alaska.
Pioneer requests an increase of the credit to $30 million
annually and to allowing credits to apply to lease bonus and
rentals.
Mr. Sheffield addressed transition capital and the sunset
provision. Pioneer has invested over $100 million in the
state and will easily spend the 2 for 1 to earn back
credits, but would be unable to utilize capital credits
earned with 2:1 in 7 years. It would be a disincentive to
invest beyond 2:1, so Pioneer requests no sunset after
credits are earned. If a sunset is required, they recommend
allowing 7 years following the first utilization of the
credits.
2:33:15 PM
Pioneer does not support the concept of a progressivity
surcharge. If required, it should be based upon net profits
consistent with PPT structure. He recommended a $45/barrel
net profit trigger in the SB 305 draft version.
Dr. Sheffield spoke to the point of production for gas. Gas
treatment facilities should qualify for credits because the
facility is required for marketable gas. There should be
equal treatment for gas vs. oil.
2:35:08 PM
JOHN BARNES, PRODUCTION MANAGER, MARATHON OIL, ALASKA,
pointed out that Marathon Oil's activities are focused on
Cook Inlet Natural Gas. He observed that the industry has
come together on many important aspects of the production
tax. He referred to page two of a handout provided to the
Committee (copy on file), which compares Alaska to the North
American oil and gas business. He noted that WTI has risen.
He referred to North American Rig Count and maintained that
there is a strong correlation to oil price. The rig count
in North America has risen from 700 to 2,000 working
drilling rigs since April of 2001. The rig count in Alaska
has not risen similarly nor been driven by product price.
Mr. Barnes referred to page three - "PPT - A World Class Tax
Structure". He pointed out that Cook Inlet is small
compared to the North Slope and its issues are different,
thus the need for incentivization. He maintained that Cook
Inlet needs to be addressed differently, and observed that
SB 305 has done so.
2:40:02 PM
Mr. Barnes reviewed page four regarding Cook Inlet gas
concerns. He observed the difference between Cook Inlet gas
and oil. Gas is sold at a discount and there are strong
drivers to keep the cost low. He discussed why capital is
not being drawn into Cook Inlet. He spoke in support of a
reduction in the tax.
Mr. Barnes did not support progressivity for gas. If it has
to be used, then it should be based on net and not on gross
and based on actual transaction value, not Henry Hub.
Representative Kerttula referred to the Alaska rig count.
She observed that there was not investment under the ELF and
questioned if further reductions would result in more
activity. Mr. Barnes stressed that many factors apply: some
fields pay taxes under ELF, some don't; some companies can
factor in tax structures into investment decisions;
permitting is a factor.
2:44:16 PM
Co-Chair Chenault questioned if there is a difference in the
cost of Alaskan and Texan rigs. Mr. Barnes acknowledged
that there are significant differences and that Alaska is a
much more costly environment.
Co-Chair Chenault asked about a certain category of rig.
Mr. Barnes responded that they were not considered.
Representative Weyhrauch summarized that the state of Alaska
must take it on faith that lower taxes will result in more
exploration, since there are no contract agreements. Mr.
Barnes stressed that he represents a gas company in the Cook
Inlet.
2:47:21 PM
MARK HANLEY, MANAGER, PUBLIC AFFAIRS, ANADARKO-ALASKA
stressed that Anadarko's goal is to have a fair tax system
that encourages more exploration and development and
increases production. He noted that there would be a big
tax increase on existing production, but Anadarko supports
the governor's proposal because it is balanced by
exploration incentives. The changes have been measured
against the existing system. He observed that exploration
has not occurred while the price remained around $20 a
barrel. Now that the price has gone up, the prospective for
exploration has increased. He suggested that progressivity
start at higher prices, $60 or higher. He spoke in support
of a 20 percent tax rate. Anadarko supports the Senate
approach for gas, since it is less economic than oil.
2:51:15 PM
Representative Kerttula asked why the tax should be reduced
to 7.5 percent and the credits left the same. Mr. Hanley
emphasized that credits help the economics and it is a
balancing act.
Representative Kerttula questioned if keeping the tax up and
the credit rate up would be the most affective.
Mr. Hanley emphasized that a lower tax rate is the most
important. The point of choice is a policy call.
Representative Kerttula felt that the balance was not found
in the Senate version of the bill.
2:53:21 PM
Mr. Hanley felt that the trigger point needs to be higher on
equivalent basis than it is at $50 per barrel. He spoke in
support of a July 1, 2006, effective date. He spoke to the
$73 million allowance - the House approach of a $12 to $14
million credit is preferred. He did not want a sunset on
the credit. He suggested allowing the 10-year sunset
provision to begin on the start date of production. He
spoke in support of the Senate transition allowance, the
2:1, which has a sunset of 7 years. He would like to see
that sunset extended. There are two issues. A company
could run out of time to use the allowance. The allowance
cannot be used if under $40 per barrel of oil. He suggested
once the allowance is earned, it should be taken on a
schedule. If the $40 is off, it should be rolled forward.
2:56:36 PM
Representative Kerttula felt that lack of a sunset would put
the legislature in a precarious position.
Mr. Hanley clarified that there were two different sunsets.
He emphasized how essential timing is with the credits and
the allowance. He explained that Anadarko timed their
investments wrong, since they have two projects for which
they would not be allowed to capture the credit. A
transitional allowance would rectify this, but there is
still a problem with when they can be taken. He noted that
there is a difference between when they can be earned and
when they can be used.
Representative Kerttula reiterated concerns with credits
rolling forward indefinitely.
2:59:24 PM
Mr. Hanley spoke to the point of production. The gas
treatment facility should qualify because it is a cost.
Anadarko has agreed to support Senate language that would
allow part of the treatment facility as credit, but not as a
tariff. He voiced support for exploration incentive credits
and more opportunities to buy back credits for companies
that don't have production.
Representative Kerttula asked if there was any reason not to
have a flow-through credit. Mr. Hanley felt that Anadarko
would support the concept.
3:03:02 PM
Representative Kelly observed that the price of oil has been
low before and that it may be low again. He questioned how
to include and implement a floor.
Mr. Hanley observed that if there is a floor and the low and
high sides are taken away, then investment would be
affected. He suggested that protections should be
implemented at low price environment. He suggested paying
down debt and buying back stock to keep investment, and
saving money during the high times. He stressed that the
windfalls should be set aside during the high times.
3:07:20 PM
JIM WEEKS, ULTRASTAR EXPLORATION LLC, testified via
teleconference. He observed that Ultrastar is a very small,
independent explorer, formed in 2002 for the purpose of
exploring and developing leases on the North Slope.
UltraStar is 100% owned by Alaskans.
Mr. Weeks observed that he had testified and listened to a
lot of testimony on the Governor's original proposal, in
several committees. He observed that the bill has gotten
more complicated, but that Ultrastar could support it with a
few modest changes.
The Administration's original proposal was for a $73
million base allowance for net profits below which
there would be no PPT, with no sunset provision. The
Senate, rightfully so in my view, changed that to 5000
barrels of oil per day, but established a sunset date
of 2016, after which the allowance will expire. I
question the need for a 10-year time limit after which
the tax exemption will expire. UltraStar is a small,
start-up company that is poking around the fringes of
existing units and known reservoirs. Our leases are
too small to stand alone, so access to existing
facilities, owned mostly by the major producers, is the
only way we can develop anything we might find. It
took our sister company, Winstar, 6 years to negotiate
access with the KRU to enable the drilling of the well
that was completed in 2003. UltraStar has been in
negotiations with the PBU for over 3 1/2 years now to
get seismic data and facility access to enable the
drilling of our Dewline Prospect. It takes a long time
for these things to get done, and I question why our
investments should be put at risk with this relative
short sunset provision, whereas current producers can
use the allowance immediately after the effective date
of the bill, and receive the full ten years benefit.
During this debate, I've heard more than once about the
need for a "level playing field". No sunset provision
does indeed level the playing field.
Mr. Weeks observed that a 10-year time field for everyone
would level the playing field.
3:10:28 PM
Next is the issue of the effective date for the PPT.
We agree that July 1, 2006 is an appropriate date, but
also suggest that taxpayers should be given a 6-month
"grace period" to come into complete compliance. I'm
not suggesting that any taxes not be paid, or be paid
late, but rather that companies be allowed to get their
act together within 6 months before the stiff penalties
and interest provisions apply. During this period, any
adjustments can be made for under and/or over payments.
This bill requires a complex calculation of the
appropriate amount of tax, and conforming to it will
take some time, even for the current producers with tax
accountants and attorneys on staff. UltraStar hopes to
have production in the future, and we will be glad to
pay our fair share of taxes, but we will need to
contract for tax accounting and legal services on the
street at market rates, and frankly, I don't know
whether or not we can even find them. Anyone we hire
will need to get familiar with the law and regulations,
and develop the algorithms needed to comply with them.
This will take some time, and I think that 6-month
grace period is the minimum amount of time necessary to
assure compliance before the penalties and interest
starts. Obviously, to accommodate production not yet
on stream, the 6-month grace period should begin when
taxes under the PPT are due, and not necessarily July
1, 2006.
3:12:07 PM
Mr. Weeks commented on the 20/20 provisions and the
progressivity feature of the bill, and their relationship to
the gas pipeline.
I graduated from the University of Wyoming with a
Petroleum Engineering degree in 1969. In the fall of
1968, nearly 40 years ago, as a class project, we
designed a gas pipeline from Prudhoe Bay to Chicago.
After graduation, I joined ARCO, and in the early 70's,
spent several years working in project engineering and
construction, based in Dallas, headquarters of ARCO's
North American operations. I spent hours talking to
the real life engineers who spent nights and weekends
at the office, sleeping on cots, designing a gas
pipeline from Prudhoe Bay to Chicago. For seven years
in the late 80's and early 90's, I was in charge of all
of ARCO's Prudhoe Bay interests, including the
commercialization of natural gas. Except perhaps for
Governor Hickel, I've probably worried longer than
anyone in the State about getting North Slope Gas to
market.
Mr. Weeks felt that the proposal has never been closer to
coming to being realized.
3:13:09 PM
The legislature is to be commended for the fair and
full hearing the PPT has been given. Many thankless
hours of hearings, reviewing complicated drafts, and
debates have been spent by you and your colleagues in
both houses, and in my mind you all deserve a medal.
During the process, I've heard more than once that
there is no linkage between PPT and the gas line
project. But as the Governor said this week, there is
indeed linkage between the two. I think we all know
that.
Also of concern to me as an Alaskan who hopes to build
a business here that my kids and their kids can carry
on, is the "so what" attitude I've heard from several
legislators. They say "so what" if the big guys walk
from the gas line deal over disgust with the PPT.
Causing them to walk from the gas line as a result of
the PPT would be a huge disservice to the State of
Alaska. To forego the long term benefits of the gas
line in favor of short-term higher taxes in the PPT
would be a very mistaken, shortsighted approach.
Therefore, I encourage you to adopt the Governor's
20/20 proposal, with no progressivity. Twenty percent
of the net profits on seventy-dollar oil is progressive
enough. Oil companies compete worldwide. The
governments of China, Russia and the Middle East don't
put their domestic oil companies at a competitive
disadvantage with windfall revenue or profits taxes.
Why should the State of Alaska? However, if you feel
compelled to take a bigger share at higher prices, then
that bigger share should be on net profits, not gross
revenue. Be careful, though, lest they walk.
Mr. Weeks observed that they are as close to a gas pipeline
project than they have ever been and cautioned not to throw
out the baby with the bath water.
3:16:20 PM
FRANK WEISS, PRESIDENT AND BRANCH MANAGER, ALASKA ANVIL,
testified via teleconference. He gave a brief history of
his company and his involvement with it. He maintained that
an industry must have consistent taxation. SB 305 is a
message in conflict with Alaska's staying open for business.
At today's prices, the governor's bill will increase taxes
paid into the state by producers. He questioned how high a
tax rate is high enough. He spoke strongly in favor of the
governor's bill and against SB 305.
SB 305 was heard and HELD in Committee for further
consideration.
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