Legislature(2009 - 2010)BARNES 124
04/09/2010 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| SB243 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
| + | SB 243 | TELECONFERENCED | |
| + | SB 144 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 305-SEPARATE OIL & GAS PROD. TAX/ DEDUCTIONS
[Contains brief mention of HB 337.]
1:43:14 PM
CO-CHAIR NEUMAN announced that the first order of business was
CS FOR SENATE BILL NO. 305(FIN)(title am), "An Act providing
that the tax rate applicable to the production of oil as the
average production tax value of oil, gas produced in the Cook
Inlet sedimentary basin, and gas produced outside of the Cook
Inlet sedimentary basin and used in the state increases above
$30 shall be 0.4 percent multiplied by the number that
represents the difference between that average monthly
production tax value and $30, or the sum of 25 percent and the
product of 0.1 percent multiplied by the number that represents
the difference between that average monthly production tax value
and $92.50, except that the total rate determined in the
calculation may not exceed 50 percent; providing for an increase
in the rate of tax on the production of gas as the average
production tax value on a Btu equivalent barrel basis of gas
produced outside of the Cook Inlet sedimentary basin and not
used in the state increases above $30; relating to payments of
the oil and gas production tax; relating to availability of a
portion of the money received from the tax on oil and gas
production for appropriation to the community revenue sharing
fund; relating to the allocation of lease expenditures and
adjustments to lease expenditures; and providing for an
effective date."
1:43:42 PM
SENATOR BERT STEDMAN, Alaska State Legislature, as sponsor of SB
305, mentioned a letter from Dr. David Wood (ph), which he said
shows what would have happened in 2008 and 2009 with the cross-
subsidy that is currently in place. In response to Co-Chair
Neuman, he suggested either Roger Marks or Dr. Wood could offer
explanation of the letter. He said Mr. Marks is a consultant to
the Legislative Budget and Audit Committee, and he recommended
the committee invite him to answer questions.
1:46:02 PM
SENATOR STEDMAN, in response to Representative Guttenberg, said
he had not yet had time to have a discussion with Commissioner
Galvin regarding his presentation at the last hearing on SB 305.
1:47:17 PM
MARILYN CROCKETT, Executive Director, Alaska Oil and Gas
Association (AOGA), testifying in opposition to SB 305, said she
would highlight key points of her written testimony [included in
the committee packet.] She said AOGA continues to believe that
legislation that proposes a major tax, such as production tax,
needs to be evaluated to ensure that it will not impact the
investment climate in Alaska. Ms. Crockett listed three
concerns AOGA has regarding SB 305: it is premature to
establish decoupling at this time; the justification for
decoupling is flawed; and determining an appropriate mechanism
for cost allocations is complex and further analysis should be
done to ensure a proper methodology is established.
1:49:23 PM
MS. CROCKETT, regarding premature decoupling, stated that the
impetus to pass SB 305 appears to be driven by the Alaska
Gasline Inducement Act (AGIA) provision that purports to provide
gas tax fiscal certainty through a lock-in provision on May 1.
She said AOGA is concerned that the apparent rush to address the
issue will yield a fix that is not needed now and will result in
further complexity to Alaska's already complex tax regime.
MS. CROCKETT, regarding flawed justification for decoupling,
emphasized AOGA's concern about the idea of decoupling and the
justification that is being offered. She stated that in
determining the rate of return to the state, there are three
factors that come into play: the netback value, the amount of
lease expenditures or deductable cost, and the number of Btu-
equivalent barrels that are being produced. She said the
analysis of the $2 billion figure was based on generic
deductable cost data released by the Department of Revenue for
the North Slope for 2008, and it also relied on oil production
forecasts published by the State of Alaska. She stated, "The
way these data were used in the analysis yield figures that we
believe are not likely to reflect actual circumstances in 2020
when a major gas [pipeline] is likely to begin operation. In
particular, oil production in 2020 is likely to be significantly
lower than the state estimate, which reflects an annual decline
of only 2.7 percent during the current decade from 2010 to
2019."
1:51:00 PM
MS. CROCKETT pointed out that historically, annual oil
production decline rates have been 5.1 percent during the last
20 years and 6.6 percent during the last five. She explained
that the difference in decline rate means that whatever the $2
billion analysis used as the figure for lease expenditures per
barrel, the cost per barrel using these historic decline rates
would be one-third to almost two-thirds higher, which means the
analysis significantly overstated the taxable margin per barrel
and overstated the tax rate to the extent it shows progressivity
as applying. Ms. Crockett said these distortions are inherent
simply from the design of the analysis that produced the $2
billion figure and did not depend on the particular numbers that
analysis used as the netback prices of gas or oil, or the
deductible cost per barrel. She said BP, in a letter to the
Senate Finance Committee, dated March 12, 2010, stated that it
is possible in some situations that the state would actually
receive more production tax without decoupling than with it.
Ms. Crockett stated, "If, however, this committee believes that
SB 305 needs to be passed this session, then the key effective
date of its provisions, oil and gas decoupling, and cost
allocations, should be deferred until commercial production of
Alaska North Slope gas commences."
1:52:08 PM
MS. CROCKETT, regarding AOGA's concern that the state should
establish a proper cost methodology, emphasized that AOGA is
troubled over the potential cost allocations that SB 305 would
require before major gas development. She indicated that under
the proposed legislation, tax payers would be required
immediately to begin allocating costs between oil and gas,
whereas AOGA recommends that tax payers begin allocating costs
between oil and gas when commercial Alaska North Slope (ANS) gas
production begins. She said developing a cost methodology
allocation is a very complex issue.
MS. CROCKETT pointed out that the enactment of Alaska's Clear &
Equitable Share (ACES) was designed, in part, to incentivize
investment and exploration of Alaska's resources; however,
requiring cost allocations prior to major gas development could
undermine that objective. She continued:
For example, if cost allocations are required prior to
major gas development, how would costs associated with
any lease or property, which ... contains both oil and
gas or ... currently produces only oil and possibly
trace amounts of gas, be handled when the production
of the oil provides information about the reservoir
and its potential gas development? Would any of the
costs be required to be allocated to gas, thereby
raising the tax on current oil operations?
MS. CROCKETT said on the North Slope there are producers with
current oil production from one field that are also incurring
gas related expenses for another field without gas production.
She questioned how those gas-related expenditures would be
handled. She asked if the those expenditures would be allowed,
for that producer, against its oil-related production income or
against future gas revenues from future gas production -
revenues that the producer may not have until many years into
the future, if at all.
MS. CROCKETT said cost allocation prior to major gas development
could also result in unintended consequences for explorers. She
said currently an explorer who takes the risk and incurs the
cost to explore in Alaska, does so with the knowledge its
expenses are deductible regardless of whether oil or gas is
discovered. She said SB 305 is not clear, and AGOA is concerned
that decoupling might be interpreted to mean that exploration
expenditures will be deducted only for oil if oil is discovered
and only for gas if gas is discovered. She stated that for an
explorer with no production, or for one that only has oil
production, discovering gas would mean there is nothing from
which its exploration costs can be deducted for that discovery.
She said the present tax without decoupling does not penalize
explorers in this way, which is another reason why decoupling
should be deferred until commercial gas productions begins. She
reminded the committee that AOGA has advocated for reexamination
of the entire production tax structure to ensure that structure
really is achieving the goals originally set in 2007.
1:55:06 PM
MS. CROCKETT summarized her testimony.
1:55:44 PM
CO-CHAIR NEUMAN said he agrees with much of Ms. Crockett's
testimony; however, where his opinion differs is in regard to
the statement that AOGA feels it is premature to do decoupling
at this time. He said an incentive of AGIA is that those who
participate in the first open season would potentially have a
lock-in on tax rates for ten years. The current tax rates were
basically established for oil under ACES. Because of that, he
said, the aforementioned lock-in would be at those tax rates,
which could have a substantial negative effect on the state's
general fund revenue.
CO-CHAIR NEUMAN offered his understanding that the intent of
some of the language in SB 305 is to allow the state to "come
back again and look at how taxes should be regulated," because
gas is a product different from oil and should be treated thus.
1:58:52 PM
CO-CHAIR JOHNSON requested Ms. Crockett specify particular
points in the proposed legislation that are of concern.
1:59:35 PM
MS. CROCKETT said she cannot point to specific provisions in the
bill right now, but she will get that to members. She said
essentially, it all depends on the operation that is being
conducted. She continued:
If you are producing oil with trace amounts of gas in
an existing field, you have a single facility that's
doing that. But as you spend time and gain experience
in developing that field, you learn more and more
about the reservoir, and eventually you learn enough
about that reservoir - you determine where the gas
component of it is, if you will. So, in some respects
you are spending dollars, your primary goal is to
produce oil, but at the same time you're also having
the benefit of learning more about that reservoir,
which, in worst case, somebody could point to and say,
"Well, no, ... we believe that this portion of the
expenses that you've incurred really are aimed at
determining what the reservoir qualities are and will
benefit gas." That's one example.
2:00:34 PM
CO-CHAIR JOHNSON said producers at Point Thomson are going to
sink a well that brings up gas, then turn that into liquid and
put the gas back. He asked if, under SB 305, that would be a
gas expenditure because the producer is learning about what the
fuel is going to be, or if it would be considered an oil
expenditure.
2:01:07 PM
MS. CROCKETT said she is not sure she is qualified to answer
that question, but can find out the answer for the committee.
2:01:23 PM
CO-CHAIR JOHNSON expressed his concern that Point Thomson could
be declared through regulation to be a gas field, which would
mean its expenditures would not be allowed as a deduction until
it sells the gas, which could be ten years down the road, if at
all. The result, he said, would be the shutting down of Point
Thomson. Companies may decide that it is not worth the risk.
He said he wants the committee to focus on this issue.
2:03:00 PM
REPRESENTATIVE GUTTENBERG, in regard to Co-Chair Johnson's
question, said he believes it is even more complex than that
because generally there are multiple partners in any operation.
He questioned how costs and profits would be allocated to one
partner versus another. He asked, "Somebody has an investment
for one purpose or another, and they ... want to see what's
allocated for gas or oil ... even though they're doing the same
thing. ... [Does] that happen now?"
2:04:21 PM
MS. CROCKETT replied she does not believe so. One reason it is
so complicated is the example that Representative Guttenberg
just used. A further complication, she related, is the whole
issue of the joint interest billings. When partners do not have
"all that data," the best they can do to pay taxes is based on
the joint interest billing received from the operator. She
said, "They have no way of knowing - assuming that we're now
separating out costs for gas and for oil - how that allocation
was ... made."
2:05:07 PM
REPRESENTATIVE TUCK directed attention to language in Ms.
Crockett's written testimony, on page 2, second to last
paragraph, which relates that oil production in 2020 is likely
to be lower than the state estimate, and which shows some
historic decline rates. He asked Ms. Crockett if she has a
forecast, and he questioned, "What's wrong with the 2.7 percent
current decline rate?"
2:06:02 PM
MS. CROCKETT said she is quite certain that the Department of
Revenue wishes it had a crystal ball to figure out what decline
rates would be, and she said she wishes the same. She said she
is confident that the department did the best job it could based
on the information it has to come up with those estimates. She
pointed out that these are estimates were made currently to
predict the production levels in the future; however,
historically, the decline rate has been much greater than that.
The whole point of the discussion is that nobody's figures will
be accurate because there is no way of knowing what production
will be.
2:07:13 PM
REPRESENTATIVE TUCK asked if the 2.7 percent was forecasted
before the committee passed out some tax credit bills as an
incentive to bring in more production.
2:07:34 PM
MS. CROCKETT said she suspects that is true, but said she cannot
speak for Commissioner Galvin.
2:07:48 PM
CO-CHAIR NEUMAN said Governor Sean Parnell is trying to address
the decline rate with HB 337. He indicated that the legislature
is reactive when considering industry ups and downs in decline
rates, and continues to create jobs in the state.
2:08:21 PM
REPRESENTATIVE TUCK, in regard to the Point Thomson scenario
presented by Co-Chair Johnson, asked if Point Thomson is able to
take advantage of capital credits right now with "the coupled
situation."
MS. CROCKETT replied that she does not know the answer, but
could find out.
2:08:57 PM
CO-CHAIR NEUMAN asked Ms. Crockett to produce information for
the committee regarding how a field is developed - the
geological work, the development, the credits, and the ratio of
gas and oil.
2:09:46 PM
CO-CHAIR JOHNSON offered his understanding that Commissioner
Galvin had [nodded] his head in confirmation that Point Thomson
is able to take advantage of the tax credits under current law.
2:10:20 PM
REPRESENTATIVE GUTTENBERG drew attention to the final sentence
in the first paragraph under "Decoupling is Premature," in the
written testimony of Ms. Crockett, which read: "And that
failure to address the dilution issue prior to that May 1
deadline might prohibit a future correction." He suggested that
it might not. He asked, "Isn't it possible to correct things
that are mutually beneficial to both parties after the May 1
deadline?"
2:10:58 PM
MS. CROCKETT answered that she believes that is correct.
2:11:04 PM
REPRESENTATIVE GUTTENBERG asked if it is Ms. Crockett's
contention that "we haven't gone anywhere far enough in
exploring the dilution issue."
2:11:17 PM
MS. CROCKETT responded that AOGA's primary concern is that this
is a very complicated and comprehensive situation, and everyone
believes they are trying to do the right thing; however, in a
complicated tax provision such as this, everyone runs the risk
of "not getting it right."
2:12:14 PM
REPRESENTATIVE SEATON, in regard to decoupling being premature,
directed attention to AS 43.90.320(a), which read:
Sec. 43.90.320. Gas production tax exemption.
(a) If a person qualified for a resource
inducement under AS 43.90.300 agrees under (c) of this
section, the person is entitled to an annual exemption
from the state's gas production tax in an amount equal
to the difference between the amount of the person's
gas production tax obligation calculated under the gas
production tax in effect during that tax year and the
amount of the person's gas production tax obligation
calculated under the gas production tax in effect at
the start of the first binding open season held under
this chapter. If the difference is less than zero, the
gas production tax exemption is zero.
REPRESENTATIVE SEATON noted that exemption is only for 10 years
of production. He asked if it is AOGA's view that the gas
production tax in effect at the start of the first binding open
season includes a coupling with oil or "will be the ACES amount
of gas tax and progressivity and those elements alone." He
said, "I guess what I'm trying do is find out whether AOGA's
position is that the gas tax is irrelevant whether it's coupled
or decoupled, as far as the law goes for this inducement."
2:14:09 PM
MS. CROCKETT responded that AOGA's primary concern is the impact
on producers and explorers today, and it is the cost allocation
issue that is the most troubling.
2:14:28 PM
REPRESENTATIVE SEATON said the committee has an important
decision to make, and the basis of that decision is to find out
whether gas production tax is the whole system of oil and gas
taxes or whether it's the tax rate and progressivity applied to
gas at the start of the open season. He asked if AOGA has a
position on whether it makes any difference to the tax rate on
gas whether it is coupled or not.
2:15:12 PM
MS. CROCKETT replied that she is not sure AOGA has answered that
question.
2:15:30 PM
REPRESENTATIVE P. WILSON offered her understanding that Ms.
Crockett had testified that AOGA would be against any measure
that would make producers have to pay more.
2:15:54 PM
MS. CROCKETT said if she had stated thus, it was not her intent.
She clarified AOGA's concern is in regard to the impact on
explorers and producers today and how costs are allocated
between the expenses that they incur that they can then apply
against the tax that they need to pay to get to the tax rate.
She said, "We don't know what any of that means yet." For
example, she questioned whether a company exploring for oil but
instead finding gas would only be allowed to apply those
expenses against gas. She stated that producers will be
required to allocate their costs between what they spend for oil
and what they spend for gas, separately. So, the incentive for
a company that does not currently have gas production today to
explore for gas is reduced.
2:17:34 PM
The committee took an at-ease from 2:17 p.m. to 2:23 p.m.
2:23:37 PM
ROGER MARKS, Logsdon & Associates, Inc., offered a reminder for
the record that Logsdon & Associates, Inc. is under contract
with the Legislative Budget and Audit Committee to assist on gas
taxation issues. He offered a PowerPoint presentation
interpreting the presentation from the Department of Revenue on
April 7 [entitled, "Comments on CSSB 305(FIN)"]. He said his
remarks would relate how the department's results were derived
and what they mean. He directed attention to [slide 2 of his
presentation, which shows] page 8 of the DOR presentation, to
the graph in the upper left-hand quadrant. The graph shows that
under $120 oil and $8 gas, there would be $8.5 billion in total
oil and gas taxes if taxes were calculated separately, and $5.5
billion if calculated combined. He continued:
Again, we're going to focus on what was called the tax
that's apportionable to gas, under these two
scenarios: the separate gas calculated - if oil and
gas are calculated separately - at $2.3 billion,
versus the attributed gas if ... under the status quo
with oil and gas taxes are calculated combined.
2:25:57 PM
MR. MARKS, [referring to the information on slide 4], said gross
value is derived by subtracting transportation costs from the
market price. That amount is then multiplied by the amount of
oil or barrels of oil equivalent (BOE), and then upstream costs
are subtracted, and the result is a tax base and progressivity
rate based on the production tax value per BOE equivalent. Mr.
Marks offered a scenario to illustrate this calculation as
follows:
We start out with $120 and the $8, and as we march
down, we subtract the transportation costs to get the
gross value. These are volumes: we used 500,000
barrels a day of oil and 4.5 Bcf a day of gas, which
on a BOE ... is 750,000 barrels of oil. And we
multiply the gross value times the BOE ... to get the
total gross value. We add them up, we take out the
non-royalty portion - one eighth - since tax is only
paid on the non-royalty portion, and we had $4.4
billion in costs, so track that for a net value of
$18,754 billion, and divide that by the total amount
of BOEs for the year - 456 million - we get a net
value of $46.98. And based on that, progressivity is
calculated on the portion above $30, so based on that
we get a 25 percent tax rate and 6.7 percent
progressivity for a tax rate of 31.79 percent. And we
multiply that by the production tax value, and we
subtract the credits, and we get a tax of $5.5
billion, and that matches what the administration got.
2:28:00 PM
MR. MARKS said AGIA has stabilized the gas portion of that tax.
In response to Representative Seaton, he explained that under
AGIA, any shipper that subscribes to the open season receives a
tax exemption equal the difference between current tax and the
tax in place at the time of the open season.
2:29:48 PM
MR. MARKS said with $5.5 billion in total taxes, then the
question is: How much of that is attributable to gas? He said
this is a question that the Department of Revenue had to answer
to implement the AGIA provision, and the department recently
adopted regulations to do that: 15 AAC 55 220. Because the
AGIA tax inducement applied only to gas and the current tax is
combined with oil, it was necessary for the department to
ascribe that portion which is gas; the proportion of the total
gross value that was gas is the amount of the total tax that is
attributable to gas. He explained that the department was not
allocating costs; it was allocating tax. Using the gross value,
the biggest determinant of the difference between oil taxes and
gas taxes is the difference in gross value; therefore,
allocating the tax by means of the gross value, seemed
reasonable to [Logsdon & Associates].
2:31:41 PM
MR. MARKS turned to the information on slide 4 of his
presentation, which shows that the gross value for oil is $20
billion and the gross value for [gas] is $5.7 billion, which
proportionally is 78 percent oil and 22 percent gas. He said 22
percent multiplied by "the 5.5 billion" results in what DOR
called the "attributed gas tax" of $1.2 billion. Mr. Marks
turned to slide 6, which shows what taxes would be if oil and
gas were decoupled. In the example, the total gross values for
oil and gas are the same, and the cost of $4.4 billion was
allocated based on the relative amount of BOEs, which resulted
in $1.76 billion in costs allocated to oil and $2.64 billion in
costs allocated to gas. If those amounts are subtracted and
then divided by the number of BOEs, the result is the net value
of gas per BOE of $9.98. Since it is less than $30 there is no
progressivity. There is a 25 percent tax rate, and with the
credits, there is a tax of $0.3 billion, which Mr. Marks
reiterated is what the department figured. He said, "So, what
we're looking at is the attributed tax under the status quo of
$1.2 billion for gas versus if the gas was calculated alone:
$0.3 [billion]."
2:34:03 PM
MR. MARKS directed attention to slide 7, and said if the $9.98
net value per BOE from slide 6 is put on a per million Btu
equivalent and divided by 6, the value of the gas would be
$1.66/MMBtu. Under the combined methodology the tax rate for
gas was based on the combined net value of $46.98 per BOE. When
that amount is divided by 6, the result is $7.83 per Btu. Using
the status quo and the methodology to ascribe tax to gas under
the department's regulations, gas with a value of $1.66 would be
taxed as if it had a value of $7.83, he said. He added, "And
this is what would be locked in under AGIA using the status quo
tax system."
2:35:53 PM
REPRESENTATIVE SEATON asked Mr. Marks to clarify that under
existing regulations, the gas system in place at the start of
open season would be "basically the 1.199."
2:36:12 PM
MR. MARKS responded, "Given these assumptions of this much
volume gas, this much volume oil, [and] these prices - under ...
the status quo tax and the department's regulations - yes, that
would be ... what would be stabilized for ... someone who
subscribes to the AGIA open season."
2:36:38 PM
MR. MARKS, directing attention to slide 8, reviewed that
combining oil and gas dilutes the oil tax down, but related that
it also "dilutes the gas value up." The net result is that oil
tax goes down more than the gas tax goes up, which is not only
bad for the state's finances, but is also bad for the producers.
He concluded that locking in a rate that may be too high would
negate the value of the AGIA inducement and may not be healthy
for the project. He said, "This underscores the problem of
combining substances of vastly different values for taxation."
2:38:47 PM
PATRICK GALVIN, Commissioner, Department of Revenue, in response
to Chair Neuman, said in general Mr. Marks' observations have
been accurate. However, he said, "It's just a matter of how you
decide to look at a combined tax system." In the aforementioned
assumption, wherein oil is $120 and gas is $8, the taxable value
of the oil is being moved faster than the value of the gas is
being increased, because the oil is on progressivity while the
gas is not. He continued as follows:
If you were in a different situation where the values
were at different places on the progressivity, you
could end up in the opposite direction where ..., by
combining them, the gas is coming down and the oil's
going up. It's just that when you accept a combined
system, you're saying that we're going to tax the oil
and the gas as one mix going forward.
COMMISSIONER GALVIN said Mr. Marks' observation regarding the
implication for the open season is valid. He said that from the
perspective of the state's policy makers, the question is what
to have on the table going into the open season. Having the
status quo will result in a higher gas tax, which means that the
state would be providing "less of an attractive inducement going
in." On the other hand, he said, the state could always "offer
it lower after the open season and bring that down."
2:42:02 PM
COMMISSIONER GALVIN, regarding the overall economic picture,
said a system that combines oil and gas makes the gas component
part of the conversation going forward. He said that issue
should be included as part of the consideration for decoupling.
He said what he tried to show during the department's
presentation last Wednesday, and what Mr. Marks is trying to
show, is that the state can decouple now, but it can also
decouple later without any financial impact "because you're not
locking in anything lower."
2:42:58 PM
CO-CHAIR NEUMAN said he thinks that the May 1 lock-in was
Representative Seaton's question and AOGA's concern. He asked
Commissioner Galvin if that lock-in could result in a lawsuit.
2:43:41 PM
COMMISSIONER GALVIN answered that the Department of Law has
looked at this issue very closely, and the issue with regard to
what is being locked in is the gas production tax obligation
that is in effect on April 30. There are questions pertaining
to exactly how much is locked in, what is being locked in under
the status quo, and what would be locked in if SB 305 is passed.
He stated, "The fact that the status quo is higher means that
you can implement SB 305 after the open season, it will reduce
the gas production tax obligation, and therefore it doesn't
implicate what's been locked in; it's lower than it, so it won't
create an exemption - it won't impact the ability to actually
put in place SB 305 as it's currently structured after the open
season."
2:45:35 PM
CO-CHAIR NEUMAN said the committee has given much consideration
to the equanimity of the inducements and the issue of changing
rules after the license is done. He asked Commissioner Galvin
to think about that.
2:46:02 PM
REPRESENTATIVE TUCK asked if there are North Slope producers
that do only oil or only gas.
2:46:35 PM
COMMISSIONER GALVIN said he thinks the question is actually
whether the fields are producing one or the other, and he said
that depends on the field. For example, he said Prudhoe Bay is
producing tremendous amounts of oil and gas simultaneously, and
currently the gas is being re-injected. In other fields on the
North Slope where there is production, it is almost entirely
oil, with very little gas that has to be handled. In the
Foothills the inverse may occur, where there is almost entirely
gas and very little, if any, oil. He said currently there is no
one who is producing only gas, because "there's nobody to sell
it to."
2:47:36 PM
REPRESENTATIVE TUCK recalled that Mr. Marks had said that
combining oil and gas dilutes the gas tax up. However,
regarding slide 3, he said, "We still see with it being combined
... in status quo that overall everything is down, even though
they dilute the gas tax up." He asked, "Wouldn't that still be
good for the producers?"
2:48:26 PM
MR. MARKS confirmed that with combining, oil is diluted down,
which many people think undermines the state's financial
interest, and that is the purpose of the hearing today. He
said, "That which is valued more gets diluted down; that which
is valued less gets diluted up." He said he is not guaranteeing
the future, but if gas was worth more than it is today, it would
be possible that "the combining of them" would raise taxes. He
indicated that the rationale behind SB 305 is that the
volatility could be removed by separating the substances.
2:49:35 PM
REPRESENTATIVE TUCK asked Mr. Marks to explain how combining oil
and gas would be bad for producers.
2:49:56 PM
MR. MARKS explained that the result of combining is that tax on
gas then goes from $0.3 billion to $1.2 billion, which is bad
for the producers. What undermines the state's financial
interest is that the oil changes from $8.2 billion to $4.3
billion, and "the oil effect overwhelms the gas," so overall the
tax revenues change from $8.5 billion to $5.5 billion. He
added, "Whereas when you go from the status quo to the bill,
state's ... revenues go up [and] the gas taxes go down."
2:51:36 PM
REPRESENTATIVE TUCK said he hears what is being said, but it is
the first time he has heard anyone say that in one particular
scenario, what is bad for the state is bad for producers.
2:52:23 PM
REPRESENTATIVE OLSON expressed concern that the committee has
until April 18, 2010, to address this issue. He said the ratio
of the aforementioned $120/$8 example is 15:1, but currently oil
and gas prices are approximately 20:1. He asked, "Wouldn't that
strengthen the argument of the sponsor of this bill on the
concerns for doing something in the next 10 days? Because the
numbers that are on the screen are off significantly based on
recent prices."
2:53:07 PM
MR. MARKS responded that Logsdon & Associates, Inc., has never
made any representation on what future prices will be; however,
the bigger the gap between oil and gas, the more the status quo
undermines the state's financial interest by having gas dilute
oil taxes.
2:53:29 PM
REPRESENTATIVE OLSON recollected that a couple years ago, the
legislature was emphatically told that the ratio would never be
20:1 or 15:1.
2:53:42 PM
COMMISSIONER GALVIN indicated that historically the ratio has
been between 8:1 and 12:1. He said no matter the ratio, the
relationship holds that when decoupling is done, the gas tax
goes down and the overall tax generally goes up. He said, "If
you're concerned about the fact that oil tax is significantly
lower going into the open season, that can be changed after the
open season - that's not at stake."
2:55:28 PM
REPRESENTATIVE GUTTENBERG opined that the key issue in
considering the right course of action is figuring out if the
best position for the state on May 1 would be to have a higher
or a lower gas tax. He asked if it is an accurate assessment
that the state would be better off with a higher gas tax without
decoupling than with decoupling when the producers come back to
negotiate fiscal terms.
2:56:40 PM
COMMISSIONER GALVIN responded that although that is one
consideration, he would not say that is the soul consideration.
He indicated that the state is balancing the desire to have the
inducement be attractive with the ability to retain flexibility.
He said the AGIA inducement was to ensure that the state retain
sovereignty over oil tax - that gas taxes would be on the table
at the open season. The legislature can only surmise what tax
system will work today and in the future. Furthermore, the
legislature will decide whether certain aspects of a system
should be fixed now or later.
2:58:47 PM
CO-CHAIR JOHNSON expressed concern that the state does not put
itself in "a weaker negotiating point," because there will be a
"contract parade on the pipeline," and "they're going to agree
to something."
2:59:56 PM
COMMISSIONER GALVIN responded that in establishing a starting
point for negotiations, neither SB 305 nor the status quo offers
a "clean choice." He explained that at certain price
differentials, the state will have much less revenue under the
status quo than if it separates. Going in with a higher number
would limit the state's ability to change the gas portion, but
would still allow the state to maintain complete control over
the oil. He said there is no clear path. He said from the
governor's perspective, the interests align more on the side of
leaving the status quo, because it leaves more flexibility and
does not create "a big shift of things just going into the open
season."
CO-CHAIR NEUMAN commended Commissioner Galvin for his
cooperation on this issue.
3:03:05 PM
REPRESENTATIVE SEATON reminded everyone that the charts being
looked at [on slide 2] do not reflect current numbers; they
reflect a situation in which there is 4.5 Bcf/d of gas flowing
at various rates. He asked for confirmation that if the state
chose this scenario, it would be guaranteeing that the
inducement would be whatever is negotiated and could not be
"higher than this 0.3 as shown under the left-hand column."
COMMISSIONER GALVIN answered, "Not entirely." He explained that
the primary issue is that the cost allocation method is not set
in statute. He directed attention to slide 2, which assumes not
only the 4.5 Bcf/d of gas mentioned by Representative Seaton,
but also 500 Mbbl/d in oil production. He said at the $120/$8
scenario, the $300 million changes to $800 or $900 million if
the point of production cost allocation method is used. If the
system is changed so that 90 percent of the costs are put on
oil, then "it goes up to $1.1 [million]." He said, "It's lower
than the status quo, but it's uncertain until the regulations
that would allocate costs are in play."
3:06:44 PM
CO-CHAIR NEUMAN said he thinks the 500 Mbbl/d of oil and the 4.5
Bcf/d of gas reflect fairly accurate numbers on which to base
the differential.
3:07:34 PM
MR. MARKS advised:
The higher rate that's being locked in - would be
locked in under the status quo - is ... a 30-32
percent tax rate on something worth $1.66. So, just
keep that in mind as you think about the
attractiveness of locking that in, which predicates
that higher number.
3:08:34 PM
MR. MARKS returned to his presentation and directed attention to
slide 9, which addresses the power of the status quo. He opined
that it would be a mistake to assume that future discussions
will focus solely on gas, because the same producers who produce
gas also produce oil. He said the argument will come up that if
the state becomes unhappy with gas taxes, then it can extract
value from producers through oil tax increases. Because of
that, Mr. Marks said he thinks there is a considerable
likelihood that the issue will move beyond gas, and oil taxation
will be predictably part of the discussion. Therefore, whatever
the status quo is at the time inevitably will become the frame
of reference for evaluation, and the state may be inadvertently
or inevitably locking in oil taxes on May 1, as well as gas
taxes.
3:10:13 PM
MR. MARKS concluded by talking about the Point Thomson issue,
which brought up what happens in developing a gas field under
both the current tax and under SB 305. He stated that the way
current law works and the way SB 305 would work is not
different. He continued as follows:
Let's say Point Thomson had no condensate - it was a
pure gas field. If you're a North Slope oil producer
incurring expenses to develop Point Thomson, the way
... the statute works now ..., whatever costs you
incur, you allocate them between oil or gas based on
the amount of oil or gas you produce. And if you're
producing no gas, all of those costs will be allocated
in oil, and you'd be able to deduct every single penny
of expenditure you would incur to develop gas here.
… So, we've looked at this issue and we believe the
current statute and SB 305 are both clear that the way
the statute works [is] ... if a producer had no gas,
[then] any expenditure they would incur would be
deductable against oil at the time they incur it.
3:11:47 PM
CO-CHAIR NEUMAN said Mr. Marks' comments throw into question how
a field is developed, whether producers pull oil, gas, or
liquids, depending on what is available on market prices.
3:12:18 PM
MR. MARKS responded that any costs incurred are allocated
against what is produced during the calendar year in which the
costs are incurred. If a producer stated its intention of
looking on for gas, but found only oil, all the expenses put
forth would be allocated against the oil and could be deducted;
the producer could get the credit as those expenses were
incurred. He said Logsdon & Associates does not see any risk
that those deductions would have to be deferred until the
producer found gas.
3:13:10 PM
CO-CHAIR JOHNSON asked whether Commissioner Galvin agrees.
3:14:01 PM
COMMISSIONER GALVIN said at this point he would not make such a
blanket statement. He said the way current statute is written
"leaves the department having to evaluate whether or not to
consider the timing issue associated with how you would apply
some things, such as a Btu-type basis if it's on current
production or if it's based upon what the purpose of the cost
is." For example, if a particular tax payer that currently has
only oil production is drilling in an area that is known to be
almost exclusively gas, then the question would be whether it is
appropriate to allow that producer to consider all those costs
to be oil costs when nobody expects those costs to be incurred
for the production of oil. Commission Galvin said given the way
statute is currently written, that is something the department
would have to consider as part of the regulation process and put
out as part of the public review process.
3:15:08 PM
CO-CHAIR JOHNSON said that underlines his concern. He clarified
that he does not want to leave this issue up to regulations, but
rather wants clearly delineated whether or not expenditures will
be allowable against oil production until such time there is a
market for the gas. He said this is not an issue of trust, but
a desire for clarity, which will make the department's job
easier.
3:16:23 PM
CO-CHAIR NEUMAN offered his understanding that both current
statute and SB 305 allow flexibility in a case in which there is
a decline in investments, so that the industry can thrive.
3:17:34 PM
COMMISSIONER GALVIN concurred that the state always has the
ability to adjust its tax policy if it finds its actions have
caused a detrimental effect.
3:17:55 PM
CO-CHAIR NEUMAN added, "Unless they're locked in on May 1."
COMMISSIONER GALVIN said that is the only caveat, but the tax
payer is not going to be limiting the state's ability to "make
something more fair."
3:18:55 PM
REPRESENTATIVE SEATON asked Mr. Marks to confirm that other than
the gas production obligation calculated under the gas
production tax in effect at the start of the binding open
season, the state may enter into discussions and is "in no way
obligated on oil taxes other than what we have in statute."
3:19:55 PM
MR. MARKS answered that is correct. He said he is just
suggesting that as discussions ensue, they will revolve around
the status quo, whether it is $8.5 billion or $5.5 billion.
3:20:10 PM
REPRESENTATIVE SEATON offered his understanding that Mr. Marks
is saying that gas production tax calculated and in effect at
the start of the open season is accurately reflected in status
quo calculations, and that the figure of [$1,199,688,523] shown
on slide 4 of Mr. Marks' presentation is an example of "the
current way the calculation for gas tax would be," and is "what
we would be obligated to honor as a ... maximum guarantee that
we are giving them that they could have that if it's less than a
... few (indisc. -- coughing)."
3:20:58 PM
MR. MARKS responded, "If future taxes were above that amount,
they would get a tax exemption equal to ... the difference
between that amount and the $1.199."
CO-CHAIR NEUMAN indicated that reference was being made to [AS]
43.90.320(a)-(c).
3:21:40 PM
REPRESENTATIVE TUCK referred to the term, "reverse dilution
effect," and asked if research has been done yet to determine
"how recent that we could have been potentially in that
situation."
3:22:11 PM
MR. MARKS related that a few days ago he had sent to the chair
an analysis regarding crossover points - when there is a
positive and a negative delusion effect. He offered his
understanding that an analysis has been done to determine
whether total oil and gas taxes would have been higher under the
combined taxation, and the answer was rarely.
3:23:10 PM
REPRESENTATIVE SEATON requested that the chair distribute the
aforementioned analysis to the other committee members.
3:23:47 PM
SENATOR BERT STEDMAN, Alaska State Legislature, testified on
behalf of the sponsor of SB 305, the Senate Finance Standing
Committee, on which he serves as co-chair. He reviewed that the
state changed from economic limit factor (ELF) to production
profits tax (PPT), there were discussions regarding changing
from a tax and royalty to a production-based system, and there
were 20 percent credits, at which point the legislature stepped
in with progressivity to protect the state from high oil prices
and a declining percent of government take. He said now the
dream is to have a gasline.
3:25:01 PM
SENATOR STEDMAN expressed concern about the $120/$8 forecast
presented from the federal government on slide 6, when first gas
will be present "'20 to 2030," and there is an impending
lockdown on gas in just a few weeks, "only leaving us the oil
lever to move." He stated, "When I look on slide 6, and I see
$8.9 billion, I feel that's what belongs in the state treasury
under this scenario, all other things being equal." He directed
attention to slide 4, which he said shows that the revenue to
the treasury is $5.5 billion. He continued:
The spread is $3.4 billion. ... There's only $300
million in gas revenue on the screen right there. And
the argument ... [that] this is an incentive or an
inducement to bring the industry to the table to build
the line - under this scenario, we'd be losing $3.4
billion a year on a $30 billion dollar project.
That's ... 10 percent of the project. [In] 10 years
you'd pay for the project. It's absurd; it's a
mathematical shell game being played on the State of
Alaska. And the best way we can boil it down is count
the cash.
SENATOR STEDMAN talked about the challenging issue of cost
allocation, and said work is being done to refine it. He said
when building financial models, "it all comes down to the net
cash flow." He reiterated that the numbers shown are alarming.
3:28:04 PM
SENATOR STEDMAN said the highest probability price scenario that
the state will face "is right in front of us." He said when
incentivizing a gasline, it is imprudent to give away the $333
million in revenue. He added, "And you certainly don't add
another $3 billion on the table." He indicated that those in
the legislature in the future when the gasline is up and running
will be embarrassed by the deal that was made. He said some
people have made efforts to make the public aware of this issue,
but it is difficult, because it is not possible to set the gas
tax until the infrastructure cost is known. He said the state
is in a perilous position with the impending May 1 deadline. He
said there is a lot less risk to the state to decouple the issue
and work on the cost allocation. He said he sees that nobody
wants to raise taxes on the industry. He said the legislature
can solve those problems.
3:30:07 PM
SENATOR STEDMAN continued as follows:
But once we're in a position like this, if we were to
try to raise that oil tax $3 billion - up on the
screen it's $8.6 [billion] - that's a third increase.
Politically, I don't see how you could do it in the
building - get the support, and mathematically, if you
did that, I think you'd have a high probability of
messing up your oil basin. The whole just spirals out
of control, and the state's in a position where we
can't ... fix it. So, it becomes a very ...
destabilizing problem.
3:30:48 PM
SENATOR STEDMAN recollected that during PPT talks, the
legislature was arguing over miniscule amounts, but today there
are billions of dollars on the table that could affect the state
for 2-10 years. He said Dr. Wood's work is available. He
warned that "if this was to happen two or three times in a
decade, it would severely hurt the treasury." He expressed
gratitude for the committee's efforts to revue this issue. He
posited that the scope of the problem is so large, it has taken
many legislators a long time to grasp the magnitude. He said he
wants to see good business practices from the state, a fair deal
for the industry, and the basin opened up.
3:33:02 PM
CO-CHAIR NEUMAN said Senator Stedman made a telling argument
when he said the only leverage that will be left will be the oil
leverage. He said the tax rates on oil are already some of the
highest in the world - up to 80-90 percent globally.
3:33:31 PM
SENATOR JOE PASKVAN, Alaska State Legislature, stated that the
6:1 ratio is law, and said the question is whether the dilution
effect previously discussed should cause the oil tax structures
to be separated from the gas tax structures. He said it is
known that market pricing has dramatically deviated from the Btu
benchmark; it is at approximately 20:1. Every one of the slides
shown illustrate that combining the tax will have consequences.
The risk is real, not theoretical, he emphasized. He reminded
the committee that the U.S. Department of Energy forecast shows
that the risk will continue for Alaska and that the magnitude of
that market deviation will impose substantial risk upon Alaska.
3:35:11 PM
SENATOR PASKVAN recommended that the committee rely on the
forecasts done by the U.S. Department of Energy, because he said
the department is not influenced by any argument being advanced
by the legislature or the administration and is, therefore,
unbiased. He said the department can be relied upon to indicate
the market deviation that shows the risk to Alaska. He
submitted to the committee that "the combination of all of that
provides a basis for decoupling as the proper result to occur at
this time to protect the State of Alaska." He said at a 12:1
ratio, production tax is lost; at a 15:1, royalty is also lost;
and at a 20:1 ratio, production tax and royalty are lost, and
oil savings are compromised.
SENATOR PASKVAN, regarding an issue raised by Representative
Guttenberg, said when Alaska goes to the table for discussion,
it needs a stand-alone tax structure for oil and another for
gas; the state should start those discussions with its
production tax on gas, royalty from gas, and savings from oil on
its side of the table. He concurred with the comment of Senator
Stedman that the committee, when looking at the charts provided,
should be consider how much is on the state's side of the
equation.
[SB 305 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| Corrected Sectional Analysis Sb 243 version P.pdf |
HRES 4/9/2010 1:00:00 PM |
SB 243 |
| CSSB0243 P Fin.pdf |
HRES 4/9/2010 1:00:00 PM |
SB 243 |
| Geothermal Royalty Rates.pdf |
HRES 4/9/2010 1:00:00 PM |
|
| Ormat SB243 for Senate Resouce Hearing 3.10.10 ver0 (2).pdf |
HRES 4/9/2010 1:00:00 PM |
SB 243 |
| Royalty Sheet SB 243 SFIN.pdf |
HRES 4/9/2010 1:00:00 PM |
SB 243 |
| SB0243-3-1-040210-DNR-N.pdf |
HRES 4/9/2010 1:00:00 PM |
SB 243 |
| USGS Geothermal Packet.pdf |
HRES 4/9/2010 1:00:00 PM |
|
| SB0243-4-1-040210-ADM-N.pdf |
HRES 4/9/2010 1:00:00 PM |
SB 243 |
| CSSB305 Conceptual Amendment by Rep Guttenberg.pdf |
HRES 4/9/2010 1:00:00 PM |
SB 305 |
| CSSB305 Amendment WA.2.pdf |
HRES 4/9/2010 1:00:00 PM |
SB 305 |
| CSSB305 Conceptual amend to Amendment WA.2.pdf |
HRES 4/9/2010 1:00:00 PM |
SB 305 |
| SB 305 David Wood Memo 3.02.10.pdf |
HRES 4/9/2010 1:00:00 PM |
SB 305 |
| SB 305 Logsdon 4.09.10.pdf |
HRES 4/9/2010 1:00:00 PM |
SB 305 |