Legislature(2005 - 2006)HOUSE FINANCE 519
04/06/2006 08:30 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB488 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HCR 30 | TELECONFERENCED | |
| + | HB 105 | TELECONFERENCED | |
| + | HB 412 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 307 | TELECONFERENCED | |
| += | HB 493 | TELECONFERENCED | |
| += | HB 488 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
April 6, 2006
8:39 a.m.
CALL TO ORDER
Co-Chair Chenault called the House Finance Committee
meeting to order at 8:39:05 AM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Richard Foster
Representative Mike Hawker
Representative Jim Holm
Representative Reggie Joule
Representative Mike Kelly
Representative Beth Kerttula
Representative Carl Moses
Representative Bruce Weyhrauch
MEMBERS ABSENT
None
ALSO PRESENT
Marianne Kah, Chief Economist, ConocoPhillips-Houston;
Barry Pulliam, Senior Economist, Econ One Research; Dan
Dickinson, Consultant, Tax Division, Department of Revenue;
Angus Walker, Commercial Vice President, British Petroleum
- Alaska; Dr. Tony Finizza, Special Consultant, Econ One
Research; David Bramley, Vice President, CRA International;
Representative Ethan Berkowitz
PRESENT VIA TELECONFERENCE
None
SUMMARY
Round Table Discussion
HB 488 "An Act repealing the oil production tax and gas
production tax and providing for a production tax
on the net value of oil and gas; relating to the
relationship of the production tax to other
taxes; relating to the dates tax payments and
surcharges are due under AS 43.55; relating to
interest on overpayments under AS 43.55; relating
to the treatment of oil and gas production tax in
a producer's settlement with the royalty owner;
relating to flared gas, and to oil and gas used
in the operation of a lease or property, under AS
43.55; relating to the prevailing value of oil or
gas under AS 43.55; providing for tax credits
against the tax due under AS 43.55 for certain
expenditures, losses, and surcharges; relating to
statements or other information required to be
filed with or furnished to the Department of
Revenue, and relating to the penalty for failure
to file certain reports, under AS 43.55; relating
to the powers of the Department of Revenue, and
to the disclosure of certain information required
to be furnished to the Department of Revenue,
under AS 43.55; relating to criminal penalties
for violating conditions governing access to and
use of confidential information relating to the
oil and gas production tax; relating to the
deposit of money collected by the Department of
Revenue under AS 43.55; relating to the
calculation of the gross value at the point of
production of oil or gas; relating to the
determination of the net value of taxable oil and
gas for purposes of a production tax on the net
value of oil and gas; relating to the definitions
of 'gas,' 'oil,' and certain other terms for
purposes of AS 43.55; making conforming
amendments; and providing for an effective date."
HB 488 was heard and HELD in Committee for
further consideration.
8:39:13 AM
HOUSE BILL NO. 488
"An Act repealing the oil production tax and gas
production tax and providing for a production tax on
the net value of oil and gas; relating to the
relationship of the production tax to other taxes;
relating to the dates tax payments and surcharges are
due under AS 43.55; relating to interest on
overpayments under AS 43.55; relating to the treatment
of oil and gas production tax in a producer's
settlement with the royalty owner; relating to flared
gas, and to oil and gas used in the operation of a
lease or property, under AS 43.55; relating to the
prevailing value of oil or gas under AS 43.55;
providing for tax credits against the tax due under AS
43.55 for certain expenditures, losses, and
surcharges; relating to statements or other
information required to be filed with or furnished to
the Department of Revenue, and relating to the penalty
for failure to file certain reports, under AS 43.55;
relating to the powers of the Department of Revenue,
and to the disclosure of certain information required
to be furnished to the Department of Revenue, under AS
43.55; relating to criminal penalties for violating
conditions governing access to and use of confidential
information relating to the oil and gas production
tax; relating to the deposit of money collected by the
Department of Revenue under AS 43.55; relating to the
calculation of the gross value at the point of
production of oil or gas; relating to the
determination of the net value of taxable oil and gas
for purposes of a production tax on the net value of
oil and gas; relating to the definitions of 'gas,'
'oil,' and certain other terms for purposes of AS
43.55; making conforming amendments; and providing for
an effective date."
Co-Chair Chenault introduced the speakers for the round
table discussion. He summarized the PPT process so far.
He noted that each oil corporation has had a little
different opinion on the proposed tax.
8:42:16 AM
Co-Chair Chenault read the first question for the PPT
panel:
1. Legislators took an oath to maximize the return on
resources for the benefit of Alaskans. What do you
believe is the best proposal to maximize this return
while at the same time encouraging investment and
exploration to extend the production life of our
oil/gas resources?
8:42:49 AM
DAN DICKINSON, CONSULTANT, TAX DIVISION, DEPARTMENT OF
REVENUE, began by challenging the basis of the question.
He opined that encouraging investment and exploration to
extend the production life of oil and gas resources is
maximizing the benefit of our resources for all Alaskans.
He suggested that the governor's bill does that and strikes
the best balance. It is important to account for the long
term as well as the short term.
ANGUS WALKER, COMMERCIAL VICE PRESIDENT, BRITISH PETROLEUM
- ALASKA, responded that barrels in the ground have no
value, so production and investment need to be maximized.
The lowest tax rate would be best for Alaska because it
would stimulate investment. He maintained that a 15/25
structure would be better than a 20/20 structure, which
would be better than a 20/25 structure.
8:44:24 AM
MARIANNE KAH, CHIEF ECONOMIST, CONOCOPHILLIPS - HOUSTON,
agreed with Mr. Walker, but added that a lower tax rate
combined with tax credits would do the best job of
maximizing production, investment, and revenues.
BARRY PULLIAM, SENIOR ECONOMIST, ECON ONE RESEARCH,
responded that maximizing investment for investment sake is
not the goal. The ultimate goal is to maximize the value
of the resource. If you only maximize production and
investment, there would not be a tax or a royalty. As Econ
One views the proposals, 20/20 does not discourage
investment.
8:47:20 AM
DR. TONY FINIZZA, SPECIAL CONSULTANT, ECON ONE RESEARCH,
echoed Mr. Pulliam's comments. He opined that there are
enough incentives for the new fields. He thought the ELF
tax was not onerous and movements from it would not stifle
investment.
Mr. Walker responded that PPT is not investment for
investment sake, but to stem the 6 percent per year decline
of Alaska North Slope oil production. In 10 years the
production and revenue will be half of what it is today.
This is a matter of great importance for Alaska because it
is about getting investment to Alaska to develop the
barrels on the North Slope that are difficult to develop.
Ms. Kah added to the comment about investment for
investment sake. Just providing tax credits and incentives
for new players to come in for new exploration, versus
supporting more production from existing fields, sounds
like investment for investment sake. To maximize the value
of investment, the industry should get more reserves from
existing fields, particularly heavy oil. She pointed out
that the 20/20 proposal is a 17-23 percent increase in the
government take and is bound to have an impact on
investment.
8:50:21 AM
Co-Chair Meyer requested Econ One's response to Ms. Kah.
Mr. Pulliam stated that the increase would be only a 4-
percentage point increase in government take. At lower
prices the take would be even lower. Ms. Kah agreed. He
addressed the intent of the bill, which is to reach a
balance and keep investment going. He suggested that even
at higher prices, the take is not out of line in comparison
to the industry in the rest of the world. He suggested
that Mr. Johnston could comment further.
8:51:57 AM
Dr. Finizza observed that when he first came to Alaska,
major producers agreed to a 20/20 tax, so he thought it was
not too onerous, but a reasonable starting point. He
advised not going higher than that.
8:52:47 AM
DAVID BRAMLEY, VICE PRESIDENT, CRA INTERNATIONAL, referred
to Slide 91 from Econ One's presentation yesterday. Price
projections at $52.7 per barrel show calculations for
government take figures go from 54.4 percent to 62.3
percent. He highlighted Alaska's competitive position.
The step proposed by Econ One is a step from a high
government take to an even higher one. He pointed out that
his company's view is pessimistic. He termed this trend
very onerous with a negative impact on investment.
8:54:39 AM
Mr. Pulliam said when you look at those take figures at
$52.7, at real prices, in time, with 2.5 percent inflation,
the prices are high.
Mr. Walker said it important to remember that what has been
proposed in the new CS and in the governor's bill will
create the highest tax rate in the United States for a
state that has the highest cost structure. He disputed the
idea that if the producers agreed to it, it must be good.
He emphasized that the agreement was part of a negotiation
as a steppingstone to gas. He reiterated that it would be
better for Alaska to have a lower tax rate.
8:56:31 AM
Co-Chair Meyer pointed out that the legislators take an
oath of office to maximize returns to citizens. He noted
that at Kuparuk the tax rates went down and investments
went up. Pioneer is trying to decide whether to invest in
Alaska or Texas. He suggested improving regulatory and
permitting processes. He asked if there would be any
difference, from the investor's point of view, between the
various tax rates.
Mr. Walker repeated the statement, "The lower the tax rate,
the more investment. The higher the tax rate, the less
investment."
Co-Chair Meyer asked if oil price would impact the decision
about tax rate. Ms. Kah noted that most of the remaining
reserves are in small fields and in heavy oil outside of
ANWR. She suggested that is why there is not more
investment today. The effect of lowering the tax rate
would make a marginal field more economic and result in
more investment.
8:59:40 AM
Mr. Dickinson agreed with Mr. Walker's "the lower the tax"
statement. He said people are faced with a competitive
situation and with a limited capital budget. He wondered
if dropping the tax would create a window. Dr. Van Meurs'
work suggests that investment is more likely with the 20
percent PPT, but there will not be a dramatic shift in
investment opportunities.
9:00:50 AM
Mr. Bramley pointed out a statistic that over the last five
years, for every $1 invested in exploration, more than $10
has been invested in known reserves. The reason has to do
with the underlying prospectivity. When looking at
investment attractiveness, there is a concern about the
extent of focus on exploration. He found it hard to see
that new exploration would be more prospective than old
exploration. Changing the balance of investment
attractiveness between investment and development, in favor
of investment, does not seem the sensible way to go. To
contemplate a tax system focused on incentives does not
make sense.
Co-Chair Meyer referred to a graph produced by Econ One
with scenarios of 18/10 and 19/15. He noted that the
government take does not differ so much from the 20/20
scenario, with the price of oil between $35 and $60. He
suggested 18/10 and wondered if that would be more
beneficial to existing producers and less attractive to the
independents and explorers. Mr. Pulliam addressed the
credit mechanism in the bill, which encourages
reinvestment. Producers would like a lower tax rate, but
also a higher credit. He suggested that the producers
would not view it as better.
9:04:48 AM
Mr. Walker responded that the credit mechanism in the PPT
bill is of the least concern because it is powerful and
appropriate. The tax rate is of most concern.
Mr. Dickinson said that at today's prices the tax rate
overwhelms the effect of the credit, but at lower prices,
the two strike a better balance. At medium prices the
credits become a significant portion of the overall
economics.
Mr. Pulliam maintained that the two work together.
Mr. Walker did not disagreed with that. He voiced concern
for the very high tax rates.
9:06:41 AM
Representative Holm stated appreciation for the discussion
about tax rates. He requested information about how the
price of the commodity affects investment in Alaska.
Ms. Kah replied that the price upside is of great
consideration. If that is taken away it is of concern.
She commented that if prices are high, it is going to be
because replacement costs are that high. The upstream
margin will not change that much and costs will have caught
up.
9:08:59 AM
Representative Kerttula said that at the current price the
tax rate is overwhelmed. She asked if we are banking on
the higher price. Mr. Dickinson clarified that the credits
will reward investment at the same amount no matter what
the price. He provided an example. Banking needs to
create an environment that is pro-investment.
Mr. Walker responded to Representative Kerttula and said
that everyone is banking on higher prices. Price is
masking the real issue that production is declining.
British Petroleum is very concerned about the decline of
prices.
9:11:50 AM
Co-Chair Chenault read question 2:
2. Econ One stated that 25/20 was better in a low rate
environment. What tax/credit rate best meets the
balance between government and industry and high and
low prices? Should we consider a two-tiered system
dependent on price?
Dr. Finizza said that is a comment that came out of the new
fields analysis for low prices. If you look only at new
fields and the EIA price distribution, the 20/20 is better
for producers and brings in more revenue for the state. He
suggested not having a high tax rate at average prices, but
rather at higher prices.
Ms. Kah commented about the economics of 25/20. She
speculated that the only reason it appears to be better is
because dry hole costs are being subsidized. She asked if
the state wants to be in the business of subsidizing dry
hole costs.
Dr. Finizza spoke to dry hole costs, a necessary part of
investment. Ms. Kah countered that was her point a high
success rate with known reserves.
9:15:40 AM
Representative Kerttula pointed out that in Norway a great
deal of credit was successfully given. Ms. Kah commented
about how successful how those credits were. Norway did
not see the increase in exploration and had rig
availability problems. The success of those credits is
debatable.
Representative Holm asked what the rig availability is in
Alaska. Mr. Walker said he does not know, but he observed
that oil is a big industry and it takes time to ramp up
investment. It is very important to have a fiscal policy
to rely on.
9:18:01 AM
Representative Foster spoke of his air service experience
with fares and taxes. He wondered if the consumer would
pay for any operating increases in costs. Ms. Kah agreed
that in a tight supply and demand environment, costs get
passed to the consumer. She gave an example of demand
destruction from last year. Prices are still high because
of supply disruptions in places like Nigeria.
Dr. Finizza generally agreed, but commented that one cannot
expect the same level of demand as prices rise. Mr.
Pulliam questioned Ms. Kah's statement that if taxes rose
in Alaska, it would cause crude oil prices generally to
rise. Ms. Kah clarified if the cost of global production
went up, that will happen. Mr. Pulliam agreed. He
maintained that what happens in Alaska will not have an
effect on consumers around the world.
9:21:04 AM
Co-Chair Chenault read question 3:
3. Substantial discussion has occurred over the
progressivity surcharges in the House and Senate
bills. Outstanding issues of concern include
inflation, the slope, and the cap. What do you
consider to be a reasonable way to address these
issues?
Mr. Kah maintained that the ideal solution would be not to
have a windfall profits tax. If there were to be one,
inflation adjustment is a must because otherwise it would
make the investment incentive go away over time. The cap
would have to be set high enough at a relevant range. The
tax would have to be set wider and more upside. It would
have to start the tipping point at a much higher level in
order to not affect investment. It would need to be
capped it at a lower level in order to maintain investment.
Dr. Finizza agreed somewhat. He suggested a minimum of
indexing. Mr. Pulliam suggested taking increase in costs
into account when looking at progressivity, otherwise the
margin between cost production and delivering the oil to
market, relative to the price at which the trigger for
progressivity, shrinks. He advocated for the threshold
price to be adjusted annually.
Ms. Kah asked about cost inflation increasing beyond 2.5
percent general inflation. Mr. Pulliam suggested
increasing it dollar for dollar with increasing costs. He
spoke to the threshold and where it should kick in. He
suggested that one couldn't divorce progressivity from the
underlying tax rate. If the tax rate is higher, the
threshold should be moved up. A lower tax rate allows for
a higher slope. He agreed with moving higher into the $50
range. He concurred with the index level.
9:25:22 AM
Mr. Walker thought that if progressivity were to be chosen,
it needs to be simple, balanced, and based on the realized
price of crude on the North Slope. That is what the
economics is based on.
Representative Weyhrauch thought that the bill had a
progressivity feature in it. Ms. Kah agreed.
Ms. Kah, in response to a question by Representative
Weyhrauch, replied that when a certain cap is reached the
rate increase should be leveled off. Mr. Pulliam responded
to a question by Representative Weyhrauch about moving up
the threshold for progressivity. Mr. Pulliam clarified
that he was talking about adjusting the threshold in
response to changes in cost. Representative Weyhrauch said
that agrees with Ms. Kah's point on inflation. Mr. Pulliam
agreed that there should be a cap. Representative
Weyhrauch suggested finding specific language.
Mr. Dickinson pointed out that there is a real difference
between merely acknowledging general inflation and
acknowledging specific costs. He spoke to the possible
ranges.
Dr. Finizza said it is possible to have a decrease in costs
from year to year, which could change the threshold in the
other direction. Mr. Dickinson agreed. Ms. Kah referred
to 20 years of cost decline. Mr. Pulliam asked whether the
state is collecting cost information as a part of this
program. Mr. Dickinson said yes. Ms. Kah added that the
$20-$80 dollar range is the working range ConocoPhillips
uses. She emphasized that starting at $50 would result in
a negative impact on investment.
9:30:39 AM
Representative Hawker asked about progressivity and the
windfall profits tax approach. He suggested finding a way
to inflation-adjust the index. He wondered if other
approaches to progressivity should be taken off the table.
He questioned if a gross receipts surtax should be kept in
place or a tax on the margins should be looked at.
Mr. Walker replied that it is a difficult question. What
is on the table would create an unworkable outcome for
Alaska and would not serve the industry well.
Progressivity is not appropriate for Alaska. If it is part
of the final solution, then an option based on margins,
which is inflation-proofed and balanced, should be found.
British Petroleum does recognize that there are different
ways to approach this.
9:34:25 AM
Dr. Finizza suggested that progressivity should be
addressed now. Ms. Kah repeated that investment will be
impacted if the top is shaved off. $50 is not high enough.
Representative Hawker said he heard two different opinions
from the two companies. Ms. Kah emphasized that
ConocoPhillips is strongly against the windfall profits
tax. Representative Hawker asked for Mr. Dickinson's
comments.
9:36:29 AM
Dan Dickinson responded, "The flatter the better. The
further to the right it starts, the better." He mentioned
when cost consideration is less relevant. In the
governor's proposal there is nothing addressing that.
Representative Hawker asked if it would be better to keep
progressivity on a gross receipts surcharge as a component
of the state income tax, rather than as a component of the
production tax.
Mr. Dickinson replied that he has not thought through that
point. Representative Hawker said he is thinking in terms
of simplicity. If PPT is worked out at a flat rate, then
it is easier to write a gross-receipts calculation and tack
it onto corporate income tax.
9:39:41 AM
Mr. Pulliam felt that mechanism, which allows for cost to
increase, strikes the right kind of balance. Mr. Bramley
observed that increasing taxes would bring a lowering of
investment. He added that complexity would not be
recommended. The consequences are hard to anticipate. Mr.
Pulliam noted that one of the goals is to move the system
into a more progressive structure. The old system is
regressive. The base PPT only moves toward progressivity.
The intent is to correct PPT to be more relevant.
9:43:39 AM
Representative Kelly noted that the regressive aspect can
be changed later, but is in place now. He thought that the
public might be confused about when the rate increase kicks
in. There are three separate elements. Although most
folks are going for the net and keeping it simple, there
are good arguments for the other position. He stressed
that it is not just a tax. The issue is what the state is
getting for its oil. The market will adjust if a mistake
is made on the high side.
9:48:21 AM
Mr. Walker felt that gross is an unworkable solution. He
reviewed the share between the industry and the state as it
moves to the new system. He explained what the move from
the existing status quo to the 20/20 proposal does to the
share. Under the status quo at $60 per barrel, the state
receives 32 percent, the federal government receives 25
percent, and the industry receives 43 percent. Under PPT,
the state share moves from 32 to 40 percent, the federal
government share goes from 25 to 22 percent, and the
industry share goes from 43 to 38 percent.
In response to a question by Representative Foster, Mr.
Walker observed that there would a substantial increase in
tax, which would result in less investment. He felt
confident that there could be an agreement and movement on
a gas pipeline.
9:51:39 AM
Co-Chair Chenault read question 4:
4. What issues are different when considering a
progressivity surcharge on gas?
Ms. Kah noted that the industry doesn't like progressivity
on anything, but it is worse on gas. The economics would
be more difficult. Mr. Walker noted that the gas fiscal
contract would govern the terms on the North Slope. The
issue is appropriate for the Cook Inlet and other
producers.
9:53:19 AM
Mr. Dickinson noted that in the Cook Inlet, Henry Hub
prices are used to index the gas, while few are actually
getting that price. There are many contracts that are
lower priced than that.
Representative Kelly asked if Cook Inlet was taken out of
the equation, if a "WTI/ANS-type comparison" applies. Ms.
Kah stressed that it is important to go back to a wellhead
value. The world's supply is getting more sour. She said
she expects the differential between light sweet crude and
sour crudes to widen over time. Over time, WTI is becoming
an increasingly poor indicator for all of the world's
crude. There are similar issues for natural gas.
HB 488 was heard and HELD in Committee for further
consideration.
ADJOURNMENT
The meeting was adjourned at 9:58 AM.
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