Legislature(2013 - 2014)HOUSE FINANCE 519
04/07/2013 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| HB193 | |
| HB76 | |
| HB193 | |
| HB129 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
| += | HB 129 | TELECONFERENCED | |
| + | HB 76 | TELECONFERENCED | |
| + | HB 193 | TELECONFERENCED | |
| += | SB 18 | TELECONFERENCED | |
| + | TELECONFERENCED |
CS FOR SENATE BILL NO. 21(FIN) am(efd fld)
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
providing a tax credit against the corporation income
tax for qualified oil and gas service industry
expenditures; 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; establishing the Oil and Gas
Competitiveness Review Board; and making conforming
amendments."
1:34:26 PM
Co-Chair Stoltze discussed the meeting agenda.
MICHAEL PAWLOWSKI, ADVISOR, PETROLEUM FISCAL SYSTEMS,
DEPARTMENT OF REVENUE, presented the PowerPoint
presentation: "Fiscal Impact HCS CSSB 21(RES)." He noted
that the analysis focused on a long-term policy goal to
increase oil production in Alaska in the near-term and into
the future.
DAN STICKEL, ASSISTANT CHIEF ECONOMIST, DEPARTMENT OF
REVENUE, communicated that the department had identified 15
areas included in its fiscal analysis. The department would
provide information about each of the areas and would
conclude with a summary table showing the total fiscal
impact of the bill over the upcoming 6 years compared to
the fall 2012 forecast. He added that the fiscal note did
not consider potential additional production that could be
incentivized by the legislation. The presentation would
also look at revenue sensitivity under Alaska's Clear and
Equitable Share (ACES) and various versions of SB 21
specifically for FY 15.
Mr. Stickel pointed to slide 3: "1. Repeals Progressive
Surcharge." Under the current ACES system the surcharge
was the additional tax that applied when the production tax
value was in excess of $30 per barrel. The fiscal impact of
the repeal ranged up to $1.8 billion per year.
1:40:26 PM
Co-Chair Stoltze asked what the price of oil had been when
ACES was implemented. Mr. Stickel believed the price had
been in the $60 range.
Representative Gara asked Mr. Stickel to repeat his
comments about the impact of the elimination of
progressivity. Mr. Stickel replied that the repeal of
progressivity would have an impact of up to $1.8 billion
per year.
Mr. Stickel moved to slide 4: "Impact of Progressive
Surcharge." The slide showed revenues from the ACES 25
percent base tax and on the progressive tax portion from FY
08 to FY 19. He pointed out that going forward the
progressivity revenue was in the $1.8 billion to $1.5
billion range between FY 13 and FY 19. He noted that under
the current rates the department forecasted larger revenues
from the base tax than from the progressive tax.
Mr. Stickel turned slide 5: "Increases Base Production Tax
Rate." He explained that under the legislation the base
rate would increase from 25 percent to 33 percent (a
decrease from 35 percent was included in the prior bill
version CSSB 21). He elaborated that the change would bring
a revenue increase to the state of up to $875 million per
year. He noted that the difference between the 33 percent
and 35 percent base rates would be between $200 million to
$250 million annually.
1:42:21 PM
Vice-Chair Neuman wondered how the elimination of
progressivity would mean that oil and gas would be taxed
separately. He had been told that removing a BTU
equivalency section of the current law and eliminating
progressivity would have a decoupling effect. He stated
that progressivity was a multiplication function on the tax
and the BTU equivalency functioned to ensure that a tax
rate was followed for the producer's average monthly
production tax.
Mr. Stickel responded that under the ACES system the
progressivity surcharge factored in oil and gas and was
brought down by the lower gas value. He expounded that when
a producer had different commodity values there were
varying impacts on the surcharge. He explained that by
eliminating progressivity and taxing at a flat rate, gas
production would no longer change the tax rate. Under HCS
CSSB 21(RES) the base production tax would be 33 percent
for gas and 33 percent for oil.
1:44:56 PM
Vice-Chair Neuman stated that under ACES there was a
standard allowable deduction on capital and operating
expenses at the wellhead value. He clarified that the flat
rate under the legislation would include the same
components. Mr. Stickel agreed and stated that the
underlying calculation of the production tax value was not
changed in the legislation.
Co-Chair Austerman asked the department to review the
material as clearly and simply as possible for the benefit
of the committee and the public. He pointed to the
information on slide 3 stating that the fiscal impact would
be up to $1.8 billion. He asked what the fiscal impact
pertained to.
Co-Chair Stoltze requested simplicity and asked for other
department staff to augment with detail on slides as well.
1:47:29 PM
Mr. Pawlowski explained that the progressivity surcharge
was a tax that was added to the 25 percent base tax rate;
its elimination would have a revenue impact on the state.
The department endeavored to look at each revenue piece
separately given that some provisions had fiscal impact to
the state whereas others did not. He referenced slide 4 and
stated that while progressivity was a large piece of
revenue generated under ACES, the base tax rate also
generated significant revenue. For example, under the FY 14
forecast the base tax rate was estimated to generate $2.775
billion and progressivity was estimated at $1.55 billion.
He clarified that the slide showed the impact of revenue
raised prior to the application of credits.
Representative Wilson asked whether $1.8 billion would be
subtracted [potential loss related to the elimination of
progressivity] and $875 million would be added as a result
of the base tax rate increase from 25 percent up to 33
percent (slide 5).
Mr. Pawlowski answered in the affirmative.
Mr. Stickel expounded that the presentation included a
summary table showing the collective fiscal impact of the
provisions.
1:50:31 PM
Representative Gara looked at high revenues earned under
ACES in FY 08 and FY 12 (slide 4). He wondered if FY 12 was
the year that oil reached $140 per barrel and if
retroactive taxes had caused the high number in FY 08.
Mr. Stickel replied that oil prices had reached $140 per
barrel in FY 08. He detailed that the state had taken in
close to $1 billion in a specific month in FY 08.
Co-Chair Stoltze believed the retroactive provision had
expired after two or three years.
Representative Gara asked if the high revenue in FY 12 was
a result of high oil prices as well. Mr. Stickel replied in
the affirmative; prices had consistently been above $100
per barrel throughout FY 12.
Co-Chair Austerman pointed to slide 5 and asked for
verification that the state's revenue would increase up to
$875 million annually [due to an increase in the production
tax rate].
Mr. Stickel responded that the $875 million revenue growth
referred to an increase in the base production tax (based
on the fall 2012 forecast), which would vary by year. He
elaborated that the $875 million reflected a change in the
FY 16 forecast due to an increase in the base tax from 25
percent up to 33 percent.
1:52:55 PM
Mr. Pawlowski moved forward to slide 21: "Provisions in HCS
CSSB 21(RES) and Their Estimated Fiscal Impact as Compared
to Fall 2012 Forecast ($millions)." He noted that the slide
showed revenue impacts without a change in production.
Provisions in HCS CSSB 21(RES) were numbered on the left of
the slide. He believed it was pertinent to focus on FY 15
as it would be the first full fiscal year impacted by the
legislation.
Co-Chair Austerman noted that slide 21 showed a reduction
in $875 million; whereas slide 5 showed an increase in $875
million. He assumed the numbers were not the same.
Mr. Pawlowski replied that the number on slide 5 was
related to the upper maximum in the table on slide 21. He
elaborated that the elimination of progressivity would mean
a maximum loss in revenue per year of $1.8 billion (shown
in the FY 17 forecast); the revenue increase of $875
million was shown on line 2 in FY 16 (slide 21).
Co-Chair Austerman asked for clarification on the $1.8
billion impact shown on slide 3. He wondered if the impact
was a gain or loss in revenue to the state. He reiterated
his earlier comment about providing clarity for the public.
1:55:28 PM
Mr. Pawlowski answered that the overall fiscal impact would
be best described by the FY 15 analysis (tax was determined
in a calendar year). He pointed to slide 21, line 1 showing
that the elimination of progressivity would result in a
loss of $1.5 billion in FY 15 based on the fall 2012
forecast. Line 2 showed that an increase in the base tax
rate to 33 percent would increase income by $850 million in
FY 15. Line 3 included an increase of $700 million in
revenue as a result of the limitation on credits for
qualified capital expenditures for the North Slope (20
percent spending credit). He noted that line 3 only
pertained to taxpayers who directly took credits to offset
their production tax liability. Line 4 showed a minimal
revenue impact for the net operating loss (NOL) credit
increase from 25 percent to 33 percent. He detailed that
the NOL credit was available to small explorers who were
spending more than they were earning through production;
the change would impact the operating budget where credits
would go through the credit fund.
Mr. Pawlowski moved to line 5 that showed a $25 million
decrease in FY 15 revenue related to the gross revenue
exclusion for oil production in new units and new or
expanded participating areas. The provision eliminating the
requirement for credits to be taken over two years would
only have a fiscal impact in FY 14, which was projected at
an increased $250 million (reflecting credits that would
have normally been taken in FY 15). He explained that the
fiscal impact was limited to FY 14 because the obligations
created by companies spending in calendar year 2013 were an
obligation to the state. He furthered that when a company
made a qualified capital expenditure it earned a credit
based on 20 percent of the expenditure; under current law
the company had to divide the credit over a two-year
period. He expounded that the intent of the legislation was
to close out the fiscal obligation to the state.
Mr. Pawlowski continued on slide 21, line 7 showing no
fiscal impact of an amendment to the community revenue
sharing fund. He detailed that the item was linked to the
corporate income tax receipts under the legislation, but it
did not change the functioning of the program or the
legislature's authority to appropriate. Line 8 pertained to
a $5 per taxable barrel sliding scale credit, which was
based on the price of oil. The change would result in a
reduction in state revenue of up to $825 million in FY 15
based on the forecast production. He noted that if
production was higher the credit rate would increase. Line
9 showed the qualified oil and gas industry expenditure
credit, which was a corporate income tax credit for
manufacturing or modification of tangible personal property
(e.g. modules, truck and pipe improvements, and other). The
impact of the credit was indeterminate, but had an upper
range of $25 million per year in decreased revenue. He
detailed that the credit was limited to a company that paid
tax and could only be used to reduce the company's
individual tax liability.
Mr. Pawlowski addressed slide 21, line 10 pertaining to the
reduced interest rate for late payments and assessments on
most taxes; it showed an indeterminate fiscal impact with a
possible $25 million loss in revenue per year. Line 11
showed zero fiscal impact resulting from the removal of the
3-mile requirement for the Frontier Basin tax credit (the
change had been made in the House Resources Committee). He
communicated that the change showed no fiscal impact
because the Middle Earth [Interior Alaska] exploration
credit was included in the department's current production
forecast. Line 12 addressed the extension of the fixed $12
million small producer credit to 2022; the credit applied
to companies producing less than 100,000 barrels BTU
equivalent per day. He noted that there was no fiscal
impact in the near-term; in FY 17 through FY 19 there was a
loss in revenue projected as a result of new production
from new qualifying entities. Line 13 referred to the 2016
required report to the legislature from the department. He
remarked that the report requirement was in lieu of the
competitive review board. The report requirement cost would
be absorbed by the department and would generate zero
additional cost to the state.
Mr. Pawlowski moved to line 14 related to a requirement to
consider joint interest billings in the audit process. The
fiscal impact of the requirement was indeterminate; it was
challenging for the department to determine how the
requirement worked through the current audit process. Line
15 showed zero fiscal impact for Alaska Industrial
Development and Export Authority (AIDEA) bonding authority
to finance oil and gas processing facilities. He
communicated that the total revenue impact to the state
including all 15 items was projected at a loss of $800
million to $850 million per year.
2:04:06 PM
Representative Costello referred to prior testimony that a
tremendous amount of revenue was brought in through the
progressivity feature under ACES and that a significant
portion of the revenue was distributed in capital credits.
She had been told the number was approximately $850
million. She wondered where the amount was reflected on
slide 21 and noted the numbers seemed lower on the slide.
Mr. Pawlowski replied that there were two tiers in relation
to companies eligible for the qualified capital expenditure
credit. One tier included companies with a tax liability
that used the credit to reduce their liability. The other
tier included companies without a tax liability that were
issued a credit; the credit came through the state's
operating budget via the oil and gas credit fund. The
impact on the operating budget was $150 million in FY 15;
whereas the combination of the two tiers equaled the $850
million.
2:05:37 PM
Representative Gara stated that the base tax rate of 33
percent was misleading. He pointed to lines 2 and 8 and
surmised that a 33 percent tax rate would generate $450
million more than a 25 percent tax rate, but with the $5
sliding deduction $425 million out of the $450 million was
lost.
Mr. Pawlowski pointed out that the state would also gain
$300 million from the capital credit elimination. He noted
the numbers pertained to FY 14 (slide 21). He detailed that
when comparing the progressivity between the two, the
number would be a negative $525 million.
Representative Gara asked if the department could provide
different variations of the data on slide 21 assuming
various oil prices. Mr. Pawlowski directed attention to a
chart on slide 30: "Production Tax Revenue, Less North
Slope Refunded and Carried-Forward Credits." The data
pertained to FY 15 only, given that it would be the first
full year the legislation would impact. The impact was
shown across a range of prices ($50 to $150) and for
various versions of the legislation (from left to right:
ACES was shown in blue, SB 21 was shown in red, CSSB
21(FIN) was shown in yellow, and HCS CSSB 21(RES) was shown
in purple).
Representative Gara spoke to a ConocoPhillips projected
production decline of 3 percent for legacy fields beginning
in FY 17. He stated that the DOR forecast used a steeper
rate of decline and requested data using a 3 percent
decline from FY 17 going forward. Mr. Pawlowski was happy
to work with the committee on forecasted decline. He noted
that Conoco's 3 percent decline rate was limited to legacy
fields under its operation (the Colville River and Kuparuk
River units).
Representative Gara responded that an article using the 3
percent decline beginning in FY 17 included all of the
legacy fields operated by Conoco, BP, and Exxon. He noted
that Conoco estimated that its decline rate would be less
than 3 percent beginning in FY 17 given its other oil
fields.
Co-Chair Stoltze relayed that ConocoPhillips would have a
chance to present to the committee in the future.
2:10:35 PM
Co-Chair Austerman looked at slide 21, line 2, which showed
the 33 percent base tax. He pointed to FY 15 and asked if
the $850 million was representative of the 33 percent tax
and what the number would be under the current 25 percent
rate.
Mr. Pawlowski replied that the $850 million was the
difference between a 25 percent and 33 percent base tax
rates.
Representative Munoz followed up on a question by
Representative Costello related to how companies received
the capital expenditure credit. She wondered why the entire
amount was not reflected on slide 21.
Mr. Pawlowski replied that only looking at revenues brought
in by tax payers would have ignored the obligation created
by credits paid through the operating budget; therefore the
items had been broken out to clarify the expenditure by the
state. The total revenue impact (only factoring in revenue)
would be underestimating the bill's fiscal impact by $150
million. He remarked that it was difficult to represent the
two items in the fiscal note.
2:13:01 PM
Representative Munoz asked for verification that there was
an additional $400 million or $450 million not reflected in
bill's bottom line impact to the state. Mr. Pawlowski
replied that the total revenue impact was shown below line
15 on slide 21. The impact on the operating budget was
shown below and included in the bottom line total fiscal
impact on slide 21.
Representative Gara pointed to slide 21, line 8 and
observed that the tax rate would not reach 33 percent until
oil reached a price of $150 to $160 per barrel. Mr.
Pawlowski agreed that the impact on line 8 did reflect an
offset against the increase.
Vice-Chair Neuman asked what the cost of the gross revenue
exclusion (GRE) would be to the state. He wondered what the
cost to the state would be under the current standard
allowable deduction system.
Mr. Pawlowski replied that the GRE impact was represented
on slide 21, line 5. The estimated impact in FY 15 was
approximately $25 million. He noted that qualifying
production had been strictly limited to new oil that had
not been forecasted at present.
Representative Costello observed that the fiscal impact of
the GRE was projected at $50 million, but that it was also
listed as indeterminate. She wondered how the department
had approached the estimate and the unknown factors
involved. She assumed the worst case scenario had been used
in the assumption.
2:16:58 PM
Mr. Stickel replied that the GRE took the forecasted
production from the barrels and fields that would qualify
for the new unit and expanded participating areas. He
believed the number was 2 percent to 3 percent of the total
production for FY 15. The department also looked at the
forecasted production tax revenue with and without the GRE
applied to the barrels for the qualifying fields, which was
how the $25 million cost had been determined for FY 15. He
believed $25 million for the HCS CSSB 21(RES) version of
the bill was a good estimate; there was little uncertainty
about which barrels would qualify. He noted that the prior
version had included a more liberal definition about what
qualified as new oil. The uncertainty had been higher under
the prior version and the department had provided a range
of revenue estimate.
2:18:45 PM
Representative Edgmon pointed to slide 21, line 7 and
surmised that it was unlikely the community revenue sharing
fund would exceed $60 million given its tie to corporate
income tax unless a large uptick in activity occurred.
Mr. Stickel replied that the total corporate income tax
collections from oil, gas, and other corporations had been
over $500 million in each of the past eight years and
collections were continued to be forecasted at over $500
million per year for the length of the fiscal note. He
added that the $60 million threshold would easily be
reached.
Representative Edgmon questioned whether there would be a
decrease to the current $60 million. He believed an
additional $20 million to $25 million added to the revenue
sharing program in the last couple of years. He was
interested in the impact of tying revenue sharing to the
corporate income tax provision of the bill.
Mr. Pawlowski believed it was illustrative to look at the
progressivity piece (slide 4) because that was where
community revenue sharing dollars were softly dedicated to
the revenue sharing fund. He discussed language that was up
to 20 percent of the progressive portion or $60 million to
$180 million. He furthered that given the $500 million
annual corporate income tax revenue the department was
comfortable that plenty of revenue would be available for
the revenue sharing program. He stressed that the
legislation did not attempt to change how much would be
appropriated to the fund. The intent was to locate a
revenue stream that would meet the $60 million to $180
million to meet the obligation under the statute.
2:21:38 PM
Representative Edgmon relayed that an interactive
presentation demonstrating how changing numbers around
would impact the data. He wanted to be prepared for
unexpected events such as decreases or increases in various
areas. He referred to the importance of stress testing.
Co-Chair Austerman referred to his earlier question related
to $850 million. He clarified that the spring revenue
forecast was based on the ACES 25 percent production tax.
Mr. Stickel replied in the affirmative. He detailed that
the spring forecast was based entirely on the current ACES
production tax. He noted that slide 21 was based on the
fall forecast.
Co-Chair Stoltze made a remark about tying government
growth to production.
Mr. Pawlowski relayed that slide 21 was included on page 4
of a department fiscal note [FN10 (DOR), 4/8/13]. The
department felt the slide integrated the bill's provisions
without factoring in any changes to production or price. He
referred to a presentation by Econ One from the previous
day and to the importance of long-term decisions beyond the
timeline shown on the fiscal note.
Co-Chair Austerman asked whether the fiscal note reflected
the fall 2012 or spring 2013 revenue forecast. Mr.
Pawlowski replied that the note reflected fall data; the
department was currently working to update it for the
spring forecast.
2:24:35 PM
Representative Edgmon referred to a news article discussing
that the reduction of oil taxes should be thought of as an
investment to increase production. He wondered if a
projection of the potential increase in production
resulting from the legislation would be provided to the
committee. Mr. Pawlowski pointed to slide 22: "Production
Scenarios." He cautioned that any methodology looking at
increased production had flaws. The department had
attempted to provide a scenario method that examined
different production increase profiles.
Scenario A:
· New 50 Million barrel field developed by small
producer without tax liability
· Peak production = 10 thousand bbls/day
· Development costs = $500,000,000
· Qualified for GRE and NOL
Mr. Pawlowski relayed that ACES and the legislation used a
net tax. He expounded that it was important to also
consider the cost of reaching the production, which would
have a fiscal impact. Scenario A represented the addition
of one new 50 million barrel field.
2:27:25 PM
Mr. Pawlowski discussed Scenario B on slide 23: "Production
Scenarios." He communicated that the scenario provided the
most reasonable expectation for the near-term. He
emphasized that the scenarios were not meant to be
predictive.
Scenario B:
· Operators of existing units add 4 drill rigs to
current plans
· Each rig adds 4,000 bbls/day in new production
each year
o Which each then decline at 15% per year
· Does not qualify for GRE
Mr. Pawlowski elaborated that it was important to factor in
a decline rate when looking at oil production. He looked at
Scenario C on slide 24: "Production Scenarios."
Scenario C:
· Operator of existing legacy unit builds new drill
pad
· Development cost = $5 billion
· Adds 15,000 bbls/day in 2014 increasing to peak
rate of 90,000 bbls/day in 2018
· Does not qualify for GRE
Representative Holmes wondered about development costs
associated with Scenario B. Mr. Pawlowski pointed to page 5
of the fiscal note [FN10 (DOR), 4/8/13] and relayed that
the development cost for each well was estimated at $20
million. The figure was on the high side of current cost on
the North Slope, but he believed it was indicative of
future development costs.
Representative Gara expressed a concern related to Scenario
A (slide 22). He agreed that incentivizing new field
production was necessary. He asked for verification that
the GRE or the reduction in tax for a new field was 20
percent. Mr. Pawlowski replied in the affirmative.
Representative Gara asked whether the 20 percent GRE would
reduce the base tax rate by more than 20 percent. Mr.
Stickel replied that the 20 percent GRE was based on the
gross oil value and was subtracted from the net value. He
agreed that the impact of subtracting 20 percent of gross
would be a reduction of greater than 20 percent of net. He
explained that the exact percentage would depend on the
price of oil.
Representative Gara addressed tax rates of future new
fields. He stated that at $110 per barrel oil companies
would not pay a 33 percent tax due to the $5 sliding scale
[slide 21, provision 8]. He asked for a rough tax rate
estimate for FY 15 before the GRE.
Mr. Pawlowski asked for clarification on which presentation
Representative Gara was referencing.
2:32:55 PM
Representative Gara pointed to slide 21 of the DOR
presentation. He noted that line 2 assumed a 33 percent tax
rate, but the $5 per taxable barrel credit meant that
companies would pay less than 33 percent. He stated that
based on the chart the $5 credit would mean a reduction of
$825 million from the $850 million in gained revenue
resulting from the base tax rate increase to 33 percent. He
assumed that the actual tax rate on companies was closer to
26 percent or 27 percent with the inclusion of the $5 per
barrel credit. He wondered if the assumption was fair.
Mr. Stickel replied that at the forecast price the base tax
increase from 25 percent to 33 percent was roughly offset
by the per taxable barrel credit. He stated that the
effective tax rate factoring in only the two provisions
would be approximately 25 percent. He offered that the
department could provide more specific calculations that
encompassed all of the components.
Representative Gara pointed to the GRE, which subtracted
roughly 35 percent from the 25 percent tax rate. He
surmised that the tax rate would be approximately 17
percent when factoring in the GRE. Mr. Stickel answered
that the amount was roughly in the ball park.
Representative Gara understood that companies needed to
make up for sunk costs in the development of new fields,
but he wondered if the department had thought about a time
limit for the GRE. He did not know what the state would be
able to fund if it had to live off of a 17 percent tax
rate.
Mr. Pawlowski responded that a time limit on the GRE had
been discussed in multiple committees; the department was
concerned that it could create distorting effects on
behavior. Specifically, how investment behavior would
change if taxes were increased at the end or partway
through the useful life of a well. The department was more
comfortable with the more narrowly defined definition of
new oil in the current bill. He elaborated that DOR did not
see all of the new oil in the foreseeable future coming
from GRE eligible barrels because it did not apply to the
basic legacy production. He relayed that Mr. Stickel would
speak to the forecast related to non-GRE eligible
production.
Representative Gara understood that the GRE did not apply
to everything. He discussed areas that would qualify for
the GRE including new geological units in legacy fields,
Umiat, Nakiachuk, Oooguruk, CD5, and other oil. He stressed
that the provision would apply to a significant amount of
oil. He wondered if the state could fiscally sustain a 17
percent tax rate on the oil that would be included.
Mr. Pawlowski replied that the department had looked at
what the state could afford to offer in credits
particularly when it would not receive equal royalty into
the future. He believed CD5 was largely on non-state land;
the state paid through the credits and the deduction in
ACES. He furthered that the state invested, but did not
have the other components to provide the revenue to pay
back. The department was concerned about the state not
receiving the full royalty from the production and paying
for it upfront. The administration was more comfortable
with inspiring increased production in a way that did not
have the state as invested in the upfront development,
particularly when there was not the full balance of the
royalty to support the state.
2:38:40 PM
Representative Gara believed that the ACES tax system would
be eliminated in the near future. He asked about the pros
and cons of a significant amount of new oil being taxed at
a rate of approximately 17 percent and approximately 25
percent. He wondered why a 7-year to 10-year time limit on
the lower tax should not be imposed.
Mr. Pawlowski answered that when incentives changed
behavior also changed. He stated that the concern was
related to how tax increases would impact declining
production; costs would rise and increased taxes may cause
incentive to shut in the production. The fear was that the
change would discourage production in the future.
Representative Kawasaki asked if the production scenarios
provided were likely and how they were developed (slides 22
through 24).
Mr. Pawlowski replied that the scenarios had initially been
developed based on how something works without trying to be
predictive. He stated that predicting the magnitude of the
change was very difficult. He furthered that each scenario
was a realistic concept, but they were intended to be
illustrative. He pointed to Scenario B and relayed that
[operators of existing units] adding 4 new drill rigs was
not necessarily realistic. The department wanted to avoid
doing a direct correlation between increases in spending
and a direct percentage increase in production. He remarked
that it cost money to develop oil, production happened, and
then production declined; the items needed to be built into
a model given a net system in order to provide a realistic
picture for policy makers.
Representative Kawasaki believed there would be more value
to the scenarios if they were in a current development plan
under the Division of Oil and Gas.
2:42:53 PM
Mr. Pawlowski replied that the department had worked with
its economic research group to go through current DOR data
to get ideas on cost, development, and projects and had
built the data into the models. He relayed that the models
were not based on any individual opportunities.
Representative Kawasaki wanted to ensure that the public
understood that the scenarios were illustrative in nature.
Mr. Pawlowski stressed that DOR had attempted to move away
from anything that was not indicative of what actual
developments and projects would look like. The intent was
to produce something reasonable to show the public related
to the types of production.
Representative Holmes referred to the CD5 oil field. She
pointed to the department's concern that under ACES the
state may not collect royalties on developments off of
state land; therefore, production tax would make up the
entire revenue for the state on those areas. She furthered
that in the existing system there was interplay of the
state paying credits and the way the tax ran; she noted the
state could end up under water. She asked how the situation
would look under the proposed legislation and whether the
state would be on safer ground.
Mr. Pawlowski replied that the removal of the buy-down
effect had the largest impact. He elaborated that under the
net system the state support for company spending was at
the 25 percent rate plus the buy-down effect. He remarked
that PFC Energy and Econ One had talked about state support
for a project in the 80 percent range. The spending was
different under the current system because it was limited
to the basic tax rate (33 percent in the current bill); for
an existing company developing a field, the state supported
at 33 percent. The state would take a production tax
equivalent to the tax rate minus the GRE effect and the per
barrel future credit. He furthered that the scenario was
different than the buy-down effect and the capital credits
that came out up front in the current tax system. He stated
that there would be less potential for the state to go
negative in the situation than there was under ACES. He
referred to the decoupling effect and a previous PFC Energy
presentation. He detailed that the impact to the state
could be negative if a high value resource such as
conventional oil was combined with a low value resource
like viscous or high cost oil; the proposed system would
not create the same effect, but it was primarily linked to
the buy-down effect and not the credit structure. Under the
current system moving into the field, a company would have
the ability to write off expenditures against its taxes and
to receive 33 percent support. The company would receive a
per barrel production credit and the GRE for new fields.
The department saw the royalty being dramatically different
in comparison to the current system.
2:48:25 PM
Representative Wilson asked if the state could continue to
fund its budget with oil as the main resource. She observed
that oil is not a renewable resource and believed a change
needed to be made to stretch its production lifespan out in
Alaska.
Mr. Pawlowski focused on the power of production. He
referred to various presentations by departments showing
that Alaska was resource rich; approximately 3.5 billion
barrels of oil remained in the legacy fields and an
additional 3 billion barrels were waiting to be discovered.
He explained that roughly 10 percent of the resource needed
to be developed to continue to drive the revenues seen
under ACES with forecasted declines. He stated that in the
long-term the issue was about production being able to
sustain vital revenues to the state. He noted the
importance of discussing the relationship of state revenues
and the value being created. He pointed out that the state
received revenues in multiple ways in addition to the
production tax. The scenarios provided in the presentation
looked at production compared to the current system. He
suggested looking at the scenarios as underestimates. He
wanted to focus on what the production could do to drive
the long-term sustainability of Alaska as opposed to
looking at other revenue sources.
Representative Wilson understood that Alberta had recently
changed its tax structure. She wondered if the change had
made a difference. Mr. Pawlowski replied that DOR would
provide the committee with benchmarking data from prior
presentations that showed a dramatic increase in investment
and production in Alberta. He noted that Alberta was
currently experiencing some significant challenges due to
low oil prices caused by stranded production.
Representative Wilson remarked that Alaska could look to
other locations that had experienced similar issues to gain
information about outcomes.
2:51:54 PM
Representative Gara referred to the possibility that the
Alberta tax cut had raised the value to equalize the
offset. He relayed that the province was facing $2 billion
to $3 billion budget deficits. He stated that when too much
was spent on tax breaks it was possible to lose money.
Mr. Pawlowski referred to a Wall Street Journal article
from the past December that indicated there was oil at $50
per barrel if tankers were available to transport it. He
stated that there was a significant amount of oil produced
in Alberta with very little infrastructure to transport it.
He discussed various pipeline proposals. He understood that
the increased production was largely due to the decline in
price. He agreed that Alberta was facing a fiscal deficit.
Mr. Pawlowski continued to discuss Scenario C on slide 24:
"Production Scenarios." The scenario included a large drill
pad development with multiple wells, increased production,
and billions of dollars in spending. He furthered that the
scenario was an aggregate of the small field, the rigs, and
the addition of the large pad. He moved to slide 25:
"Production Profiles of Production Scenarios." The slide
illustrated production numbers associated with Scenarios A
through C. He pointed to FY 14 and noted that the blue bar
to the left represented forecasted production; Scenario A
did not add new oil, Scenario B increased production from
539 to 555 thousand BoPD, Scenario C increased production
to 570 thousand BoPD. The chart provided data for FY 14
through FY 19 including decline curves with production
layered on top.
Representative Gara asked whether actual projects had been
identified under Scenario C that would go online as a
result of the bill. Mr. Pawlowski answered that the
scenarios were hypothetical based on the department's
understanding of the type of spending that would occur. The
information was intended to be illustrative of realistic
elements that could occur.
2:55:46 PM
Mr. Pawlowski discussed slide 26: "Projected Revenues under
Production Scenarios at $90/Barrel ANS." The slide showed
rounded unrestricted general fund revenue at various prices
for the different production scenarios. The goal was to
present the sensitivity level of a new revenue system on
production. The chart provided a time limited (FY 14
through FY 19) illustrative scenario based on production
figures shown on slide 25.
Mr. Pawlowski turned to slide 27: "Projected Revenues under
Production Scenarios - at $100/Barrel ANS." The bar in
black on the far right showed ACES at the forecast
production (other scenarios were shown for comparison). He
pointed to Scenario B in FY 16, which showed that $5
billion would be raised under the proposal and $5.2 billion
would be raised under ACES.
Representative Gara recalled testimony that it would take
roughly seven years from the start to bring new production
online. He wondered why the chart showed new production
coming online within three and four years.
Mr. Pawlowski replied that adding a new rig to the legacy
fields could offer near-term opportunity and provide a
quick turnaround in production. He reiterated that the
slides were illustrative. He furthered that adding a new
rig could be done quickly; therefore, it was not GRE
eligible under the analysis.
Representative Gara asked for verification that there were
no commitments from any company that developments would
occur as a result of the bill. Mr. Pawlowski responded that
the oil industry was better equipped to answer the
question.
2:58:43 PM
Representative Costello observed that Scenario C preformed
the best. She asked the department to carry the analysis
beyond FY 19. She stated that the bill had a short-term
cost with the hope of a long-term gain. Mr. Pawlowski
replied that there were various requests that the
department could work with committee members on in order to
provide the desired information.
Mr. Pawlowski moved to slide 29: "Projected Revenues under
Production Scenarios - at Forecast ANS Price." The slide
showed how sensitive the scenarios were to moderations of
the decline curve to potentially create revenues that could
offset the revenue reduction under ACES.
Representative Edgmon discussed department comments that
U.S. oil production was at historic high levels. He noted
that production was increasing globally as well. He
wondered if a lack of infrastructure would provide a
limitation on the production scenarios.
Mr. Pawlowski replied with a reference to work done by Econ
One related to how much resource needed to be developed
over the long-term. Econ One had looked at what would
happen if Alaska trended along with its peer group
following 2006; it had examined what spending would be like
at present and how much resource there would be. Econ One
had also looked at the relationship between government take
and potential drilling and how many wells would need to be
developed over what period of time. He stated that when
considering the longer-term, it was necessary to look at
the opportunity to exceed the break even. He furthered that
the availability of capital as opposed to infrastructure
was the bigger question; whether companies had the capital
to reallocate quickly to develop resources in Alaska. He
encouraged members to ask the industry questions about its
ability to reallocate capital. He expounded that the change
would not happen immediately, but the attractiveness of the
tax system would make companies decide to reallocate
capital to Alaska to be competitive.
3:04:17 PM
Representative Holmes discussed slide 21 and the difference
between an impact on revenue and on the operating budget.
She pointed to slides 26 through 29 that showed projected
revenues under various scenarios. She asked whether the
slides also considered the impact of credits paid out under
the existing system on the state's operating budget.
Mr. Pawlowski believed the revenue projections factored in
the credits that would be paid out.
Representative Gara queried what 5.5 stood for in FY 19
(slide 29). Mr. Pawlowski answered that the figure was $5.5
billion in GFUR [General Fund Unrestricted Revenue]; the
bars represented revenue forecasts under the various
scenarios.
Representative Gara referred to testimony by the major oil
companies that technology was preventing the production of
massive amounts of heavy oil in Alaska. He recalled a BP
testifier who had said that the issue was technological and
not fiscal. He stated that Conoco had said it planned to
increase production, which would decrease its rate of
decline to approximately 3 percent. He was concerned that
the department was applying a 17 percent tax rate to new
oil, which was likely to be produced under the current ACES
system anyway. He was worried the state would unnecessarily
incentivize some items.
3:07:16 PM
Mr. Pawlowski replied that it was related to what the state
assumed would happen. He agreed that Conoco had made
comments about its specific production and decline rate. He
addressed the question about new oil and what would happen
and looked at projects that were on the horizon, but did
not happen (e.g. Liberty). He surmised that the root
question was about relying on the revenue forecast to
determine what would actually happen in the future and
using that to define new versus old oil. The department was
concerned that much of what was projected to occur under
ACES would not occur. He pointed to testimony from Ken
Thompson (of Brooks Range Petroleum) that the company had
been to over 200 potential investors to pitch its 40
million barrel project under the current system; it had
been unsuccessful and had asked the state to finance the
project.
BRUCE TANGEMAN, DEPUTY COMMISSIONER, TAX DIVISION,
DEPARTMENT OF REVENUE, relayed that the department had
incorporated information it learned from producers about
expected decline rates into its fall revenue forecast (2012
Fall Revenue Forecast, page 43).
Co-Chair Stoltze referred to a phrase "we're not fine with
decline."
Mr. Pawlowski agreed. He could provide committee members
with a transcript of the Conoco analyst presentation. He
added that the company had included that it saw an
opportunity to reverse the decline if tax reform occurred.
He pointed to the opportunity of production to provide a
long-term sustainable base for the state.
3:10:29 PM
Vice-Chair Neuman referred to slide 29 and the committee's
discussion the prior day on well amortization running at
about five years. He wondered whether the value resulting
from the potential addition of four wells per year was
included in FY 19.
Mr. Pawlowski replied in the affirmative. The rig drilling
under Scenario B would cost $20 million per year; the money
would be spent up front and the production would come on
and decline within the model. He added that 1,000 barrels
per day had been used based on the current average
productivity of a well in the Prudhoe Bay unit.
Mr. Pawlowski pointed to slide 30: "Production Tax Revenue,
Less North Slope Refunded and Carried-Forward Credits." The
slide showed the fiscal impact of ACES and various versions
of the legislation on production revenue for FY 15.
Mr. Stickel explained that slide 30 illustrated the total
impact of ACES and various versions of the legislation on
production revenue for FY 15 including credits paid out.
The amount of expected credit refund payments for the North
Slope under each of the tax systems had been subtracted
from the total production tax number. There were carry-
forward credits at $50 per barrel in excess of the tax
liability for major producers. He noted that the slide only
looked at major provisions of the bill; an assumption for
the corporate income tax and the reduced interest rate for
late payments or assessments had not been included, which
represented an impact ranging from $0.00 to $50 million.
3:13:46 PM
Representative Gara asked which fiscal year slide 30
pertained to. Mr. Stickel responded that the chart
pertained to FY 15.
Mr. Pawlowski moved to slide 31: "General Fund Unrestricted
Revenue, Less North Slope Refunded and Carried-Forward
Credits." The slide related to FY 15 and attempted to
incorporate other sources of state revenue outside of the
production tax including royalty, property tax, and
corporate income tax; it included the impact on revenue at
oil prices ranging from $50 to $150 per barrel.
3:15:16 PM
Representative Gara hoped to see the state to receive a
more substantial share of the revenue when oil prices were
high and oil companies were making record profits. He did
not believe the state would have sufficient revenues to
fund schools and other projects over the next 10 years. He
wondered about an option that would allow the state share
in the benefits when oil prices were high. He asked if DOR
had modeled a scenario that would provide the state with a
more substantial share as oil prices increased. He
suggested an increase in revenue to the state when
companies made $50-plus per barrel profit. He referred to a
proposal the prior year to include a stair-stepped
progressivity feature and wondered if the administration
had considered it as a possibility.
Mr. Pawlowski replied that under the legislation the
effective tax rate and government take increased as prices
rose. He stated that whether the bill increased the
government take to levels preferred by committee members
was a policy call the administration was willing to work on
with the legislature. He furthered that the state's share
increased with higher prices without the problems
associated with the progressivity mechanism.
Mr. Tangeman stated that if the current decline path
continued the state would be limited in its ability to fund
basic services 5 to 10 years in the future. He pointed to
page 43 of the 2012 Fall Revenue Source Book, which
projected production of 250,000 barrels per day in 2022. He
stressed that it was critical to show an upside and
potential in the state in order to layer on new oil to the
legacy fields. The department believed it was critical to
turn the decline rate around in order to fund basic
services in 10 years.
3:20:06 PM
Representative Gara communicated that every committee
member wished to reverse the decline rate; he noted that
there were varying views on how to meet the goal. He
understood the department wanted to move away from the
current progressivity mechanism. He stated that the bill
would reduce tax rates down between 17 percent and 25
percent and would cap out at 33 percent even if prices
reached $200 per barrel. He wondered if there were
proposals that would allow the state to share in the
profits in a way that would not damage oil production. He
believed a 17 percent tax on new oil was low.
Mr. Pawlowski believed the administration had been open to
all input from each committee throughout the process. He
agreed that government take was an important concept; at
what point production and economics would not be hurt was
taken into account. He stated that the administration was
willing to work with the committee and its members.
Representative Gara replied that he would schedule a
meeting with the department.
Representative Costello commented that she received emails
from constituents who did not want changes made to ACES.
She believed there was a compelling reason and need to
explain what would happen if nothing was done [to decrease
the current decline rate]. She appreciated the department's
offer to work with committee members on the bill.
Co-Chair Austerman pointed to slide 21. He discussed that a
prior version of the bill passed by the Senate had included
a 35 percent tax rate. He wondered if the department's
model could insert the 35 percent tax to show what it would
look like. He requested a breakout between the flat $5 per
barrel and the sliding scale based on the department's
projections related to volume and dollar value.
Mr. Pawlowski agreed. He noted that Mr. Stickel could
provide a verbal answer related to the difference between
the 33 percent and 35 percent tax rates.
Co-Chair Austerman requested the information in writing for
all committee members.
3:24:21 PM
Representative Gara pointed to a provision added in the
prior committee [House Resources Committee] that would mean
the state would rely on company and joint billing
statements in auditing companies. He recalled that in the
past most Democrats had wanted a gross tax because it was
relatively straight forward. He pointed to concern that
under the profits tax some companies could overstate their
costs, understate revenue, or qualify something for a tax
credit that should not qualify. He wanted DOR to have the
most power possible to ensure that the state was receiving
its intended return under the legislation. He wondered
whether the department was more comfortable with the
current auditing system than it was with the proposed
auditing provision.
Mr. Tangeman replied that the department had access to and
used the joint interest billings; many other "tools" were
also available to the department. He furthered that from an
audit perspective it was necessary to rely on all available
tools in order to get a job done.
Representative Gara asked whether Mr. Tangeman would prefer
the current auditing system or the one included under the
legislation that was limiting. Mr. Tangeman answered that
the provision had not been in the governor's original bill
and had been added by the previous committee.
3:27:49 PM
Vice-Chair Neuman looked at a provision related to lease
expenditures and a change on pages 26 through 28. He
discussed past concern related to "gold plating" and items
allowable under lease expenditures. He observed that there
were considerable changes in the legislation and asked for
an analysis from the department.
Mr. Tangeman replied that joint interest billings could be
very lengthy and were shared between two companies. He
expounded that the department did have access to the
billings, but they were not used by all companies. He asked
for clarification on the request.
Vice-Chair Neuman referred to a subsection (B)(3) in the
legislation, which stated that costs must be direct costs
for exploring, developing, and producing. He stated that
each producer was different; current statute included
direct cost per individual for standard allowable
deductions for production value. He stated that a new
section included an arms-length clause that made it
possible to be owner of the pipeline. He wondered about the
best way to get the actual cost to the state. He understood
the department had become fairly comfortable with the
current system; he wondered how all of the changes would
impact the department.
Mr. Tangeman answered that it was the state's
responsibility to have a relationship with every tax payer;
any insights provided through the documents helped the
department do its job. He relayed that relying exclusively
on a document between two companies limited the
department's insight into the information needed. He
stressed the importance of the one-to-one relationship
between the state and individual tax payers.
3:31:54 PM
Vice-Chair Neuman surmised that Mr. Tangeman preferred the
existing system. Mr. Tangeman answered that the department
had developed the existing system over years and was
comfortable where it was and where it was going under the
net tax system.
Co-Chair Stoltze remarked that the related thought process
and conversation would be ongoing.
Representative Edgmon looked at slide 21 and asked for a
ballpark sketch on how a base tax increase from 33 percent
to 35 percent would impact the data. Mr. Stickel replied
that once the tax was put in place the difference would be
in the $200 million to $250 million per year range.
Representative Edgmon noted he had misunderstood earlier
comments and had thought the difference in the base rate
from 25 percent to 33 percent was $200 million to $250
million.
Co-Chair Stoltze asked the department to clarify the
information. Mr. Stickel answered that line 2 of slide 21
showed the increase in revenue to the state from the base
tax. He detailed that moving from a base rate of 25 percent
up to 33 percent would increase revenue in FY 15 by $850
million. He furthered that moving from a rate of 33 percent
up to 35 percent would increase revenue by approximately
$200 million to $250 million on top of the $850 million.
The impact of moving from a base rate of 25 percent up to
33 percent would be slightly over $1 billion in increased
revenue.
Representative Munoz understood that a close relationship
existed between changes to the base rate tax and the $5 to
$8 per barrel credit. She asked for the per barrel credit
impact to be included in the department's modeling of the
change between a 33 percent and 35 percent base rate.
SB 21 was HEARD and HELD in committee for further
consideration.
3:35:41 PM
RECESSED
4:08:05 PM
RECONVENED