Legislature(2011 - 2012)BARNES 124
02/11/2011 01:00 PM House RESOURCES
| Audio | Topic |
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| Start | |
| Presentation(s): Oil & Gas Production Tax Status Report | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
PRESENTATION(S): Oil & Gas Production Tax Status Report
[Contains discussion of HB 110]
1:03:34 PM
CO-CHAIR FEIGE announced that the only order of business is an
oil and gas production tax status report by the Department of
Revenue (DOR). He noted that the presentation is part of the
committee's education process for HB 110.
1:04:15 PM
BRYAN BUTCHER, Acting Commissioner, Department of Revenue (DOR),
related that the Oil and Gas Production Tax Status Report to the
Legislature [dated January 18, 2011,] has seven sections (slide
3). The first section has to do with revenue generation and the
tax rate. State revenues under the 2006 petroleum production
profits tax (PPT) and the 2007 Alaska's Clear and Equitable
Share (ACES) have exceeded the amounts they would have been had
the state remained under the economic limit factor (ELF). A
provision of the PPT required that DOR provide a status report
to the legislature in five years. Eighteen months after PPT,
ACES was passed and the decision was made to leave the report in
statute. The passage of ACES probably affected some of the
information that DOR might have had had there not been a tax
change one-third of the way into the five-year period.
1:06:28 PM
ACTING COMMISSIONER BUTCHER noted that even though the tax rate
under ACES can be as high as 75 percent, it has not been nearly
that high over the last four years. Since Fiscal Year 2008 the
average tax rate has been just over 40 percent. The second
section of the report is a look at industry investment. Capital
expenditures began increasing upon passage of PPT and have
continued to increase after passage of ACES. However,
[regarding the third section of the report], the department does
not have a breakdown of how the capital expenditures are
separated between what is being done in existing facilities and
what is being done for new exploration. Although DOR has
considerably more information than it did five years ago under a
gross-based tax, it still does not have the kind of detail that
allows for separation that would provide a better idea of
exactly where that spending is going. [Regarding the fourth
section of the report], industry employment continued to creep
slightly up in 2007, 2008, and 2009, but dipped in 2010.
[Regarding the fifth section of the report], the amount of
credits used continued in an upward trend. However, it is
difficult to draw a hard conclusion on the credit results
because they were only recently put into law. Regarding the
sixth section of the report, tax administration and compliance,
the department continues to write regulations for the new tax
system. The first audits under the first year of the net
profits tax, PPT, have just been completed and the auditors are
now getting into the first year of the ACES tax. The seventh
section of the report, conclusions and recommendations, will be
presented at the end of the presentation.
1:08:57 PM
REPRESENTATIVE P. WILSON recalled that DOR has been hampered in
its tax reporting and compliance efforts due to lack of a
centralized database to house and manage the large volumes of
oil and gas data. She asked about the status of that problem.
ACTING COMMISSIONER BUTCHER confirmed that the DOR tax division
has had a difficult time in putting together all of the tax
information and data that comes in. While data is contained in
various systems of Excel software, DOR does not have a good
overall database that allows input of the information and
breakdowns of the information. Given that the cost range for
such a system is $25-$35 million, the department received
$300,000 in the current fiscal year to look into determining
what would be the best system. Additionally, with the
Department of Administration, DOR is looking at a statewide view
of all of the information technology (IT) projects, so DOR is
optimistic that by the fiscal year's end it will have a good
number and good recommendation on what is needed going forward.
1:10:32 PM
REPRESENTATIVE GARDNER inquired whether the new database will be
able to provide information on how much of the claimed credits
is for drilling or wells and how much is for maintenance or
facilities.
ACTING COMMISSIONER BUTCHER responded no, the statute is written
such that DOR only receives what the capital expenditures are
from the companies and the department can then determine what
they are to make sure they are legitimate. The law does not
require a breakdown that specifies exactly whether it is capital
work on an existing facility or exploratory work. The
department is very much limited by the amount of information
that it gets. The companies themselves might be able to provide
more insight in this regard.
REPRESENTATIVE GARDNER asked whether that is something that
could be done by regulation even though it is not required by
law. She said this is important because other bills are being
considered that would provide incentives for new wells, but if
it is unknown what is a new well and what is maintenance or
facility related, then a meaningful fiscal note cannot be done.
ACTING COMMISSIONER BUTCHER answered that he suspects it would
have to be statutory, but he does not know that for a fact and
will have to get back to the committee on that.
1:12:28 PM
ACTING COMMISSIONER BUTCHER, returning to his presentation,
compared the estimated production tax revenue for fiscal years
2007-2010 under the current ACES tax system with what it would
have been under the previous two systems of PPT and ELF (slide
4). Under ACES in Fiscal Year 2008 the state received nearly $7
billion in production tax revenue, but had ELF still been in
effect the revenue would have been less than $2 billion. Under
ACES in Fiscal Year 2010 the state received just under $3
billion, compared to under $1 billion had ELF still been in
effect. Thus, it can definitely be said that the new tax system
has been very good for state revenue over the short term.
ACTING COMMISSIONER BUTCHER reported that another known is that
companies are spending more, although the state does not have a
breakdown on where that is going (slide 5). Spending began to
increase in the 2004 calendar year, moved up when PPT was passed
in 2006, and has continued moving up since the 2007 passage of
ACES. He noted that during those years the Alaska North Slope
(ANS) West Coast price spiked up and down but the increase in
spending remained steady, which is not the usual case because
generally spending really moves up when the price of oil comes
up and dips when the price of oil drops.
1:14:35 PM
REPRESENTATIVE HERRON inquired whether the governor wants to, or
the legislature needs to, put something in statute to require a
breakout of the information that DOR receives from companies.
ACTING COMMISSIONER BUTCHER replied that the department has not
discussed this with the governor, but will if the committee
would like it to.
1:15:11 PM
REPRESENTATIVE SEATON surmised that the increase in spending
regardless of any decreases in oil price is because credits are
dependent on expenditures and are independent of price, and thus
the graph [on slide 5] indicates that the credits are working.
ACTING COMMISSIONER BUTCHER responded that DOR believes the
credits are having a positive effect, particularly with some of
the smaller producers. However, the number of exploratory wells
has continued to drop and production continues to decline, and
at this point this gives a picture that the credits have not
been working in terms of getting more exploratory wells.
1:16:21 PM
CO-CHAIR FEIGE asked whether the acting commissioner agrees then
that there is not necessarily a connection between capital
credits and production going into the pipe.
ACTING COMMISSIONER BUTCHER answered that he does not think that
DOR has the data to say one way or the other at this point in
time because it is too early in the process.
1:16:47 PM
ACTING COMMISSIONER BUTCHER, continuing his presentation, noted
that production continues to decline (slide 6). Additionally,
over the last five years the number of exploration wells on the
North Slope has continued to drop (slide 7).
CO-CHAIR FEIGE inquired whether the exploration wells [depicted
on slide 7] include wells that are drilled both within and
outside of the unitized areas.
ACTING COMMISSIONER BUTCHER replied that the graph represents
the entire North Slope area.
1:17:48 PM
ACTING COMMISSIONER BUTCHER, turning back to his presentation,
said that DOR cannot conclusively identify the ACES impact other
than state revenue has increased in the short term, oil
production continues to decline, and it does not appear that
much exploration is taking place (slide 8). Part of why it is
so difficult is because of the timeline for investment decisions
that producers generally use from the beginning of evaluating a
field to actually begin producing. For example, the investment
decisions for fields that are currently coming online, such as
Nikaitchuq and Oooguruk, were made prior to the passage of PPT
five years ago and ACES three and a half years ago. He
suggested having the producers address this timeline when they
come before the committee next week.
1:19:19 PM
CO-CHAIR FEIGE asked whether the acting commissioner is aware of
any decisions that have been made by companies to proceed with
new development since PPT and ACES were implemented.
ACTING COMMISSIONER BUTCHER responded he is not, but that Mr.
Frank Molli might be able to address that. Liberty Field was
initially expected to begin production in calendar year 2012,
but that is now potentially 2013 or 2014.
CO-CHAIR SEATON inquired whether the acting commissioner is
saying that Liberty Field is related to the tax regime.
ACTING COMMISSIONER BUTCHER answered that he is not.
CO-CHAIR SEATON added that since Liberty Field is under federal
control, not ACES, if oil companies are not proceeding with
developments then it may be that decisions are being influenced
by factors other than the tax regime.
ACTING COMMISSIONER BUTCHER agreed and said he pointed out
Liberty Field only as something that is seen in the future.
1:20:48 PM
REPRESENTATIVE P. WILSON said there is a rumor that one of the
reasons the oil companies are not investing in more exploration
and more drilling is that the companies are concerned about the
age and condition of the Trans-Alaska Pipeline System (TAPS).
She asked whether this has been in anyone else's mind.
ACTING COMMISSIONER BUTCHER deferred to the Department of
Natural Resources (DNR) to provide any specifics in this regard.
He said DOR believes that as long as there is oil to be produced
and profits to be made, the producers and owners of Alyeska
Pipeline Service Company have the motivation to keep the
pipeline active and in good working condition for decades.
1:22:39 PM
FRANK MOLLI, Petroleum Engineer and President, Molli Computer
Services, Inc., Consultant to the Department of Revenue (DOR),
first provided a history about himself, noting that he worked
for "Phillips" for 12 years in various places such as the North
Sea and Texas. He then started his own company and developed
software to do oil and gas reserve analysis, which he uses to
generate the forecasts for Alaska's North Slope. He pointed out
that North Slope production peaked in 1988 at 2 million barrels
[per day] but by 2010 that production had declined by 68 percent
to 644,000 [barrels per day] (slide 10), which is an average
production decline rate of about 5 percent per year. Over the
last 10 years, the decline mediated somewhat to an average rate
of about 4.2 percent per year. Looking into the future [through
2030] this decline rate is expected to flatten out a little bit
further at about 3.2 percent [per year on average].
1:24:01 PM
MR. MOLLI explained that the left side of the graph on slide 11
depicts the history of annual ANS production and the right side
depicts the forecast. The 68 percent decline can be seen from
the [1988] peak to the current date [2010]. The drop is not
quite as large over the last 10 years, and in the forecast it is
less steep. The major producer by far is Prudhoe Bay, second
largest is Kuparuk, and third largest is Alpine which came on in
the year 2000 or so. Not included in the forecast is the outer
continental shelf (OCS), the Ugnu heavy oil that is sizeable but
for which there is not yet a way to develop efficiently, and the
Arctic National Wildlife Refuge (ANWR).
MR. MOLLI, in response to Representative P. Wilson, confirmed
that the offshore production sources depicted in the graph
include North Star and Liberty.
MR. MOLLI, in response to Co-Chair Feige, said that Oooguruk is
in state waters and is not considered OCS.
1:26:07 PM
CO-CHAIR SEATON, regarding the production history, understood
that the rate of decline is determined by the steepness of the
slope.
MR. MOLLI replied that he used data from the Alaska Oil and Gas
Conservation Commission (AOGCC), which maintains production
history data for every well in the state of Alaska. He imported
that data into the software, looked at each well individually to
find a best-fit line through the trend of that well, and then
aggregated that data to come up with a field production. Thus,
the trend from each individual well was used to forecast. This
is called decline curve analysis and is fairly common in the
industry for projecting oil and gas.
1:27:00 PM
CO-CHAIR SEATON observed that the slope on slide 11 is pretty
steep between the years 1994 and 2000, which was during the time
of ELF when there was a zero percent tax rate on fields like
Kuparuk. From 2004 through 2007, during which there was a
lesser tax rate, the decline is steeper. After ACES in 2007,
the decline slope is much flatter and showing less decline. He
said it is being heard that if the tax rate was less there would
be less decline, yet the history does not show this. He asked
whether he is analyzing this curve correctly.
MR. MOLLI responded that he does not know the answer to that,
but he does know that the mitigation in decline was the result
of several new fields coming on line around the year 2000. He
does not know, however, whether that relates to the tax regime
at the time.
CO-CHAIR SEATON said that was a specific point and he exempted
that by looking at 2004 through 2007 which has a steeper curve
than after 2007 when ACES came into play. He said he will get
back with DOR in this regard.
1:29:44 PM
CO-CHAIR FEIGE inquired how much of an effect the price of oil
has had on that decline. He further inquired whether it would
be possible to come up with a graph that shows the amount of
investment in fields versus the price of oil.
MR. MOLLI answered that he will have to think about that; he is
sure the price of oil entered into the decisions here.
CO-CHAIR FEIGE commented that the price of oil obviously has a
fairly significant effect on whether a company decides to invest
in any field, whether that field is in Alaska or elsewhere. It
would therefore be interesting to see statistics that also
reflect the price of oil as a factor.
1:30:46 PM
MR. MOLLI, returning to his presentation, explained that the
graph on slide 12 [depicting forecasted ANS production] uses the
same information depicted on slide 11. However, the production
forecast in this graph [for fiscal years 2010-2020] is divided
into three categories - currently producing, under development,
and under evaluation. Currently producing includes all existing
equipment, existing wells, and existing surface equipment.
Currently producing requires a high level of maintenance, so the
currently producing category is the forecast at the same high
level of maintenance without any new development and it can be
seen that the production drops quite a bit. The under
development category includes any new projects or new wells that
the operators are planning to drill. To generate this forecast
he looked at the plans of development submitted to the
Department of Natural Resources by the operators and talked with
the operators' engineers, and then developed an average well for
each field. By using the drilling plans and applying an average
well he came up with the development and, given that this
development is usually already funded, there is a good probably
that this production will occur.
1:32:17 PM
REPRESENTATIVE GARDNER asked which companies are in which of
these three categories.
MR. MOLLI replied that they all are. In further response, he
said all companies are in each category.
REPRESENTATIVE GARDNER understood there are companies that have
produced wells in Alaska in the last few years that are not
necessarily under development.
MR. MOLLI responded that he is thinking of the majors and all of
them have some developments in the existing fields.
REPRESENTATIVE GARDNER said she is trying to get at the
companies that are not the majors.
MR. MOLLI answered that Great Bear Petroleum is planning some
exploration soon and is not in any of the forecasts. He said he
will research this information and get back to the committee.
REPRESENTATIVE GARDNER said she would like to know the under
development and the under evaluation and others who are known to
be working but not necessarily planning development right now.
MR. MOLLI agreed to provide that information.
1:33:33 PM
MR. MOLLI, continuing with his presentation, explained that the
under evaluation category is probably the most speculative. It
involves projects that are under study right now by the various
companies, such as Umiat and Point Thomson. He said the three
categories are added together to come up with the total
forecast.
CO-CHAIR FEIGE inquired whether any percentage or probability
was assigned on that curve.
MR. MOLLI replied that he does not do that; the decline curve
analysis is a deterministic process, so there is not a range of
probabilities.
CO-CHAIR SEATON surmised that this forecast gets more
speculative the further out in time it goes; for example, the
2013 date would be more confident.
MR. MOLLI responded correct, the further out in time the more
variance or error that could be introduced into the forecast, so
the near term forecast, meaning the next one to three years,
should be fairly confident.
1:35:29 PM
CO-CHAIR FEIGE observed that just after 2012 or 2013, Alaska
will cross the line down to 500,000 barrels per day if no new
production is put into the system.
MR. MOLLI concurred.
ACTING COMMISSIONER BUTCHER added that there has been discussion
over the years about forecasts being more optimistic than the
historical numbers show. He pointed out that Mr. Molli began
doing this for DOR in 2009 and that Mr. Molli factors in the
scheduled shutdowns of TAPS. However, unscheduled shutdowns
such as what happened last month with Pump Station 1, will be a
reduction in production that is unforeseen. Another thing that
can happen is that forecasted production comes on later than
expected, such as the Liberty field which was expected to come
on in 2012 but is now delayed to 2013 or 2014. Delays in coming
on are much more frequent than coming on earlier than expected.
Therefore, the forecasts are what is being looked at or lower.
1:37:23 PM
CO-CHAIR FEIGE noted that every year there is a new forecast for
the next 10-20 years. He asked whether DOR would be able to
take forecasts from 1990 and onward and plot each forecast at
the time against what the production actually was. It would
give a better sense as to how much importance can be placed on
this particular forecast and which way it can be expected to go.
ACTING COMMISSIONER BUTCHER answered that he thinks DOR can do
this and can go back as far as it has the information. He
pointed out that once this information is given to members, Mr.
Molli will be unable to answer any questions previous to 2009
because he did not work on it before then. He added that this
would apply to himself as well.
1:38:40 PM
REPRESENTATIVE HERRON inquired whether there is an error factor
that could be incorporated into the forecast model to allow for
variations.
MR. MOLLI replied that if an error factor was incorporated, he
thinks the forecast would grow bigger and bigger as time went on
and the variance between the optimistic side and the pessimistic
side would be greater and greater and would be almost unusable
once 10-20 years ahead was reached. It would be doable but not
meaningful.
1:40:57 PM
RICH RUGGIERO, Vice President, Field Development & I/O Support,
Gaffney, Cline, & Associates Division, Baker Hughes, Consultant
to the Department of Revenue (DOR), noted that his firm has been
working with and for the Department of Revenue since just before
the ACES special session and since then has been providing
testimony in both the special and general sessions on areas of
fiscal policy and in helping with a comparison around the world.
In response to Representative P. Wilson, he said the year this
started was 2007. He added that he has over 20 years experience
working for one of the major oil companies and that about half
of his time in this job was spent developing large projects and
negotiating with bodies like the State of Alaska on trying to
put together the right commercial package in order to do those
deals. He has now been in the consulting business with Gaffney,
Cline, & Associates for nearly 10 years and the majority of his
clients during this time period have been sovereign. He has
worked for a number of governments around the world putting
together different aspects of their fiscal policy on energy and
development of their petroleum resources.
1:42:36 PM
MR. RUGGIERO said that after having been through several
sessions, there are many people who are experts and have been
before this and several other bodies, so he would like to give
some background on what members are really running into. Many
of the questions today and in the past have been about what does
a particular number show. Fiscal design - what is the right
royalty, or right tax, or right rate - is two parts art for
every one part science (slide 2). A lot of science and analysis
can be done; however, there is also a lot of subjectivity that
goes into the design of fiscal systems as well as how the energy
patch responds to that. A wide range of response will be
received because every company is driven by something a little
bit differently. It will be found that everybody can always
quote an excellent fiscal system and look at the amount of
investment that occurred there, but even if a system worked for
that state or country for awhile, over time it starts to
deteriorate and changes have to be made for a number of
different reasons going forward.
1:44:21 PM
MR. RUGGIERO explained that when making comparisons a number of
things can impact the situation of a jurisdiction. This
includes the gross domestic product (GDP) of a country or the
GDP per capita and what percentage of the GDP that energy
represents. In those countries where energy is not a high
percentage the jurisdiction can choose to do some things
differently. However, in Alaska and countries where energy is a
very large portion of gross income the jurisdiction has to take
a little different look at how it is going to manage that and
steward that resource. Other factors include, but are not
limited to, infrastructure availability and, if there is
infrastructure, whether capacity is available. Building whole
new facilities to bring on another 100,000 barrels a day is one
set of economics, but it is a totally different economic picture
if there is 100,000 barrels of excess capacity. The fiscal
system will impact those two decisions very differently.
Another factor is the availability of labor force and another is
institutional capacity. For example, a country may not have the
skill to do anything that is complex or sophisticated because
that takes an army of auditors, so that country will come up
with something that is very simple. Another factor influencing
how sovereigns put together their fiscal system is where they
want to stand within that competitive environment. Somebody
will be the most competitive and somebody will be the least
competitive and somewhere someone will put together an analysis
or comparison and declare where the middle or the average is for
going forward.
1:46:45 PM
MR. RUGGIERO pointed out that there is always the pressure to
change, so Alaska is not alone (slide 3). Even a well-working
fiscal system must eventually be looked at because there may be
a need to do something differently. This change can be broken
down into two different drivers: A) governments want their
perceived fair share or B) governments think they are not
getting enough investment so they do something to attract the
industry and the investment. The newspapers are full of Item A
- the Venezuela's, the Bolivia's, the Peru's, the Iraq's, and
the Russia's; and there are the others that have gone the other
way to seek a share of those limited investment dollars. The
requests for change can always be justified - torture the
numbers and they will tell the story that is wanted. Any change
being asked for will be justified by "objective" calculations,
but understand that behind every "objective" calculation into
the future is probably 20 or 30 assumptions that were made.
Changes will also be justified by "subjective" calculations; an
example being whether there is a correlation between how many
wells will be drilled if the state does X, such as the state
providing credits.
1:49:52 PM
MR. RUGGIERO shared that one thing he has learned as a producer,
as well as working for governments and sitting across the table
from producers, is that producers have never met a tax they
liked (slide 4). Oil companies are no different than any other
for-profit organization; they are in it to make as much as they
can for their shareholders and tax just takes away from the
profit they are setting out to make.
CO-CHAIR FEIGE commented that this is the same thing the state
is attempting to do for its shareholders.
1:50:37 PM
MR. RUGGIERO said the messages that legislators will hear are
that less tax means more investment dollars and more tax means
less investment dollars. However, Illinois has one of the best
fiscal systems for oil and gas development, yet big oil is
investing nearly nothing in exploration and production in
Illinois. In Iraq, government take starts and ends in the mid
to high 90 percent, yet oil companies around the world have
committed in excess of $100 billion to begin developments there.
MR. RUGGIERO noted that throughout his time in Alaska he has
heard that if Alaska does not do something the producers will
take their money to the Gulf of Mexico or the Lower 48.
Recently the [Obama] Administration talked about raising federal
taxes on exploration and production and the response was that
more federal taxes would push investment abroad. If the Lower
48 and the Gulf of Mexico is collectively the best place to do
business as an exploration and production company - and that
could be evidenced by the number of foreign companies that have
purchased assets in that area - it is interesting that money
would go elsewhere if taxes were raised given that elsewhere has
a higher tax base than the Lower 48 and the Gulf of Mexico.
Alaska is going to hear that high tax is driving investment
elsewhere. There are grains of truth to that, but there are
also grains of that being something that a company has to say.
1:52:55 PM
MR. RUGGIERO addressed how fiscal systems are ranked (slide 5),
while reiterating that tortured numbers can tell any story. He
provided a ranking comparison between place "A" with a
production sharing contract (PSC) environment, place "B" that
also has a PSC environment, and place "C" that has a concession
agreement environment. The average government take for each of
the three places is 30 percent, 50 percent, and 60 percent,
respectively, making place "A" appear to be the best place in
this regard. The highest marginal government take is 45
percent, 65 percent, and 90 percent, respectively, again making
place "A" appear to be the best place for materiality and net
present value rate of return. However, a number of type fields
can be run through the various ranking categories and because of
some of the other provisions it might be found that place "A" is
not necessarily the best because some of the small things can
have a huge impact on the economics and it depends on what is
driving certain companies. For some companies, especially those
with a lot of private investment funding, the rate of return or
the immediate return of capital is most important. In this
case, place "C", which has a minimum capital expenditure (capex)
recovery period of 1 year [compared to 7 years for place "A" and
5 years for place "B"], becomes very important to an independent
investor; however, for someone long in the business that may not
be as important as the materiality, which is where the money may
not come back as fast, but more money comes back.
1:55:19 PM
MR. RUGGIERO, continuing his example of ranking fiscal systems,
pointed out that many locales do not have credits [places "A"
and "B" do not have credits; "C" has a 20 percent credit]. He
next explained that cost oil is how much of a given year's
revenue is available to recover costs already expended. Some
locales put a limit [cost oil cap] on how fast the capital and
operating costs can be returned. For example, place "A" has a
cost oil cap of 60 percent, while places B and C have no limit.
If the return has to be pushed forward because all the available
revenue for that year has been used, the time value of money is
lost on that unrecovered capital going forward. Another
category is unrecovered cost uplift. In some locales it can
take as long as 11 years on average from the point of
exploration to the first barrel flowing of dollar. That means
that $100 million spent today to discover a field would not be
recovered for 11 years and [in locales with no uplift] it would
only be the $100 million that is recovered. In locales that
have cost uplift the cost is uplifted each year by a certain
percentage, and in some of these regimes as much as $300 million
can be recovered as recoverable cost because credit is given for
having invested and carried that money on behalf of that
development. [In the example, places "A" and "C" have no uplift
and "B" has an annum uplift of 5 percent.]
1:57:14 PM
MR. RUGGIERO said ring fencing is another category used in the
ranking of fiscal systems. Ring fencing denotes the taxing unit
and in many locales the taxing unit is around particular leases
or particular fields. [In the example, places A and B have ring
fencing by field, "C" does not.] In locales where ring fencing
is by field, any money spent on exploration in a particular
field cannot be recovered until there is revenue from that
particular field, or ring fence, to recover it. Alaska has a
statewide ring fence, although there are some nuances between
Cook Inlet and "north of 68," so any money on exploration can be
deducted right away against current revenues. There is huge
cost and huge economic impact to oil companies as they go
forward and what is seen in a lot of these surveys is the
"emotive factors." These are the factors that get the most
optics and that become the 15 second sound bites in chamber of
commerce speeches before committees, one example being Alaska's
marginal tax rate of 87 percent that is said to be terrible.
However, this ignores all the other aspects of the Alaska system
that actually provide benefit in going forward. The emotion may
be enough to cause a negative decision in a board room
somewhere, but that is only one piece. When people present
surveys and focus just on these emotive points, the whole story
is not being seen because under most type oil fields, place "C"
comes out ahead on much more on the net present value (NPV) and
rate of return than "A" and "B," although "A" will come out
ahead on materiality.
1:58:57 PM
MR. RUGGIERO related that his company was asked for its view on
where Alaska is today and what is it that Alaska is facing. He
said it is undisputed that Alaska's production is declining and
continuing to decline [despite unprecedented prices (slide 6)].
There is the looming mortality issue of the Trans-Alaska
Pipeline System (TAPS), which could be either a physical limit
or an economic limit. Given that physical limits can be fixed
by money, everything is really an economic limit, so flow down
the pipeline will be cut off at the point where it is deemed
uneconomic. A number of Alaska's new resources are viewed as
stranded, so the TAPS uncertainty will give new players a big
cause for concern. The uncertainty of TAPS includes the
material integrity of the pipeline, the economic viability, the
longevity, and the cost for a company to get into it because
there is a bit of a stranglehold on the pipeline by its owners.
Thus, even if the economics are there with the fiscal system,
some risk premiums will start to be introduced, and assessing
the risks is an art rather than a science. Many companies will
run a straight economics model and subtract a risk premium from
that model. So, when a company compares Project A in Texas
against Project B in Alaska, Alaska may have a risk premium that
takes it from being better to being worse. Lastly, Alaska is a
location that has long lead times.
MR. RUGGIERO said the aforementioned leads to a crossroads for
the state: What path does Alaska see itself on from this point
forward? This goes back to the two drivers for why the state
would want to look at or think about changing its fiscal system.
If the state is entering a harvest path, then it needs to think
about how to get its fair share. If, however, the state wants
to be on a growth path, then it must assess what it really needs
to do, as opposed to what others want it do, to encourage
investment and development of resources.
2:02:49 PM
MR. RUGGIERO advised that two entities can have different
perceptions about the same item. For example, governments and
producers have different perceptions on the various levels of
producer profit (slide 7). If the profit level is a loss or
break even, the government perception is that it needs a minimum
amount of cash to allow development of its resources. A small
profit will be seen by government as about right, a moderate
profit will be seen as more than fair, and a large profit will
be seen as greedy and outrageous. The perspective of producers,
however, is that government is focused on a narrow range of
circumstance that does not look at the big picture. Producers
try to do things that avoid a loss, breaking even is nice but it
is not why a producer is in business, projects that will make a
small profit generally only work when there is more capital and
people than there are projects, a moderate profit is the target,
and there is no such thing as an outrageous profit because that
is the quid pro quo for all the losses that governments tend to
ignore when millions are spent on dry exploration wells.
2:05:20 PM
MR. RUGGIERO stated that it is not the numbers that drive the
decisions. While the numbers are there and part of the decision
making, there are perceptions, which is where the different risk
premiums come in, such as geologic, political, stability, and
infrastructure risk premiums. Or, they can become matters of
principles, such as certain companies will not do certain things
and will not agree to certain terms and will pull up stakes and
go elsewhere. Additionally, there is the fear of precedent and
that doing something in one place will result in the company
having to do same everywhere else that it does business.
MR. RUGGIERO, regarding future scenarios for Alaska, said any
number of consultants, his company included, can make several
thousand runs on all sorts of variations off certain base
assumptions (slide 8). However, the more runs that are put up
the more noise that is created. Instead of pinpointing to a
narrow range what will happen, he suggests talking about what
the goal posts are. He allowed that it is his subjective look
at the goal posts as far as the upside and downside cases of
doing something with HB 110.
MR. RUGGIERO pointed out that relative to many other prolific
hydrocarbon-producing regimes around the world Alaska has a lack
of data transparency from the producing community, which was
heard today in the answers to the committee's questions. The
amount of data that the State of Alaska gets is limited relative
to what other fiscal regimes around the world require through
either legislation or regulation.
2:07:48 PM
MR. RUGGIERO said he will try to give some perspective as to
what is really before the legislature when talking about whether
to change from ACES to something else. Since it is HB 110 that
is before members right now, he has put together two goal posts
- an upside and a downside - on that bill. One possible upside
growth scenario is that the reduction in taxes soon leads to
significant new investment that keeps oil and new oil coming in
sufficient quantities to pay out upgrades and repairs to keep
TAPS available and flowing through 2050. He interjected that
others might come up with other upside cases, but this is his.
A possible downside scenario is that taxes are reduced but, for
whatever reason, no new fields are developed and TAPS reaches
its economic or physical limit in the 2020s.
2:09:18 PM
REPRESENTATIVE P. WILSON, regarding his statement about lack of
data transparency, surmised that Mr. Ruggiero is saying that
other countries ask the same questions and get better answers
than does Alaska.
MR. RUGGIERO replied that other countries actually publish data,
so it can be found on the web and the question does not even
have to be asked. He recalled that Gaffney, Cline & Associates
presented a paper in testimony to either this body or the other
that went over these other regimes and what is normal reporting
and what is available, whether through the local regulatory
agency or the web, in each of those locations. It ranges from
how many wells were drilled, to how much of the capex was spent
on wells versus infrastructure, to what the forward plans are
for each of the individual fields, and more. In some cases
infrastructure is online and every day it can be seen what the
capacity is and what the amount of unused capacity is. There is
a wide range of things across the globe. He said he would
provide copies of the aforementioned paper to members.
2:10:55 PM
REPRESENTATIVE P. WILSON related that in cases where two or
three companies are involved in the same unit, members are told
by the producers that they do not want the other producers to
know what is going on. She asked whether this happens in other
countries.
MR. RUGGIERO responded that just as a producer has never met a
tax it liked, whenever it comes to data disclosure it is always
that this is competitive and if it gets out the producer is at a
competitive disadvantage. However, he noted, in countries where
producers are required to do this, they still compete, and they
compete quite well.
REPRESENTATIVE P. WILSON inquired whether the state could say it
wants this information and the producers must provide it, or are
there laws that say the producers do not have to provide it.
MR. RUGGIERO answered he is unaware of any law in either Alaska
or the U.S. at this time that would prevent companies from
producing information. There would have to be a closer look by
someone more familiar with such things as antitrust, but in
other locations and other regimes the companies are required to
present more data and make more data public than is done in
Alaska today.
2:12:33 PM
CO-CHAIR FEIGE requested that Mr. Ruggiero provide the committee
with a reasonable sampling of the types of information that
other countries make available that would increase transparency
in Alaska and why that information is available in those
countries and reasons why that information, based on existing
U.S. laws, is not available in the U.S.
MR. RUGGIERO replied he can look at what is available in other
countries and that would be the report his firm has already done
for the state. Legal issues, however, are outside his firm's
range of expertise.
2:14:06 PM
MR. RUGGIERO, returning to his presentation, reviewed his
downside and upside goal posts, but noted that reality probably
exists somewhere in between (slide 9). The downside case would
include only the existing fields, a fixed 6 percent decline, no
new major investments, and a TAPS minimum of 200,000 or 250,000
barrels a day. He clarified that he just picked two numbers for
the TAPS minimum and there was no science in picking them.
Running these numbers from 2011 through the mid-2020s, the total
cash flow to the state through the production tax and the
corporate income tax [under ACES] is somewhere between $95
billion and $110 billion undiscounted. He then reviewed a case
using the terms of HB 110, but first clarified that this is for
purposes of illustration only and is in no way a recommendation.
For this case he assumed that the needed capital investment is
actually developed, existing fields continue to produce at maybe
a slower decline rate because of additional investment, new
fields are discovered, and regular investment is made to keep
facilities in order, and thus a vibrant industry runs through
2050. In this forecast, the state's total undiscounted cash
flow or take would be around $210 billion. So, somewhere
between his downside case and his upside case, there is a
difference to the State of Alaska of $100-$115 billion.
MR. RUGGIERO then reviewed a scenario in which the state's
fiscal system is changed to HB 110 (slide 10). In this scenario
he used the same aforementioned [downside] assumptions in which
there is no investment, and also assumed that over the next 15
years the state did not make any changes to this investment-
friendly regime (slide 10). In such a scenario the state's
[undiscounted cash flow] would be reduced by about $20 billion.
He advised that if nothing actually happened under the fiscal
changes made by HB 110, it would be because the bill did not
pull the right levers to actually get the investment coming to
the state.
2:17:23 PM
REPRESENTATIVE GARDNER, regarding the figure of $20 billion,
observed that the fiscal notes for HB 110 show [a reduction of]
$7.7 billion over five years.
MR. RUGGIERO replied that his scenarios go out to the mid- to
late-2020s, so they take what is in the fiscal note and extend
it further out in time. The difference in production between
investment that happens and investment that does not happen gets
wider the further out in time, so that number will grow more
rapidly in the later years than it does in the first and early
years.
2:18:05 PM
MR. RUGGIERO, turning back to his presentation, discussed a
decision making process for the state that would be similar to
how producers look at the probability of success versus the
probability of failure (slide 11). Using the numbers he had
before, and using his own view of a conservative approach, the
chance of the downside occurring would be 75 percent. The
aforementioned $20 billion loss would be multiplied by 75
percent, arriving at a probabilistic outcome of minus $15
billion. The 25 percent chance of the upside occurring would be
multiplied by the difference of roughly $120 billion, arriving
at $30 billion. Thus, in his conservative case the decision he
is making right now has a probable outcome of a positive $15
billion to the state. Under an optimistic approach, which means
that the right levers were pulled by making the change, he would
use a 25 percent chance of the downside occurring, and under
this optimistic approach the probable outcome to the state grows
to a positive $85 billion. He pointed out that when getting
into decision making theory, what is really being said is that
if the belief is that the right outcome is somewhere in between
the two, then it is a risk worth taking because the upside is so
much greater than the downside of having taken that risk. He
further reminded members that in the downside case, the
assumption was that the state did nothing with its fiscal system
even after it was seen that there was no investment.
2:20:13 PM
REPRESENTATIVE GARDNER surmised that using probabilities of 75
percent and 25 percent instead of probabilities of 10 percent
and 90 percent is the art that Mr. Ruggiero talked about.
MR. RUGGIERO concurred. He then calculated that a 90 percent
downside would be minus $18 billion and a 10 percent upside
would $12 billion, which would be a negative outcome for the
state. If it was thought that there was only a 10 percent
chance of success, the mathematics would suggest that the state
not make the decision because it is a negative decision.
"However," he continued, "you get to a point where, we call it
the crossover point, where somewhere between the 10 and 20
percent chance of success you cross over where any chance of
success above that yields a positive outcome for the state in
that decision making process. So, it is just a different way of
looking at and approaching the numbers."
REPRESENTATIVE GARDNER asked whether the discounted cash flow,
today's dollars versus dollars 20 years from now, is calculated
in Mr. Ruggiero's example.
MR. RUGGIERO responded that if discounting is used the answer
and the crossover point would be different. That is one of the
pieces of noise that he did not want to get into so he took the
simple approach here [of undiscounted].
2:21:53 PM
MR. RUGGIERO, returning to his presentation, provided an
outsiders' view of where Alaska sits. He said the left column
of slide 12 describes several aspects of Alaska's fiscal regime.
In the center column labeled rank, the word "top" means the
aspect is good and the word "bottom" means it is bad. The
[right] column is the economic impact of that aspect. Regarding
the aspect of allowing immediate deduction of capex, only Alaska
and two or three countries allow immediate deduction of capex as
though it is operating expenditure (opex; all other regimes
require a period of time to recover that capex [giving Alaska a
rank of top 1-3 and economic impact of high for this aspect].
Alaska's investment credits give it a ranking of top one-quarter
[economic impact of moderate-high], and Alaska's investment
credits of up to 40 percent put it in the top 10 [economic
impact of high]. Alaska's unique aspect of credits to cash
ranks in the top 1 or 2, [economic impact of moderate, big,
huge]. Alaska's aspect of no ring fence, which is immediate
deductibility, puts the state in the top 10, and this aspect has
a huge economic impact. When looking at full-cycle economics,
the economics in a regime as a whole, Mr. Ruggiero said Alaska's
87 percent marginal rate puts it in the bottom 5-10. However,
he pointed out, to get to that 87 percent, a company would have
to be operating almost like on the head of a pin because the
parameters would have to be such that the company's cost
structure, amount of production, capex/opex split, credits, and
so forth, put it right at the $92.50 profit per barrel. Once a
company moves away from that, that 87 percent changes
drastically and is a very steep curve down on both the higher
and lower sides of $92.50. [The economic impact of the 87
percent marginal rate depicted on slide 12 is moderate, but with
the qualification that optically it is huge.] Regarding the
cost per barrel to find or develop, Alaska is in the bottom one-
quarter [high economic impact] due to the high expense of doing
business in the state. However, Alaska's fiscal system allows
full deduction of all costs before the state taxes, although
royalty does come off the top. Mr. Ruggiero reminded members
that in some other regimes, a company may not be able to recover
all its costs in a given year before it is credited with income
that it must pay tax on. Regarding environmental costs, Alaska
is in the bottom ten [high economic impact]. So, in some cases
Alaska has some things that are very, very favorable and in
other cases Alaska has some things that are not so favorable.
However, he advised, when looking for places to invest, always
look at the package.
2:26:03 PM
CO-CHAIR SEATON noted that one provision of HB 110 is ring
fencing - all new development would be taxed at a different rate
and presumably these fields would be reported separately. He
inquired how instituting ring fencing in the North Slope would
work in the balance of the aforementioned.
MR. RUGGIERO answered that for a brand new player, what the
state is really doing is ring fencing all production that
develops after a certain date; it is still a statewide ring
fence. A company would be starting from scratch and moving
forward. Initial exploration will take some time before the
company can recover the costs associated with it, but once there
is production and it is all new, it all is within the ring
fence. For existing players, he said he does not know if they
have the election, but something that can be looked at is that
they can elect to either pull it in and have the immediate
deductibility but the higher rate moving forward, or the option
to choose if it is something that hits a certain set of criteria
to be different and separately ring fenced. The ring fence will
be looked at as either a positive or negative thing depending on
individual company positions.
2:27:43 PM
CO-CHAIR SEATON asked what the effect is of the 87 percent
marginal rate on investment and described a possible development
scenario as an example.
MR. RUGGIERO replied that he thinks the issue that comes with
the 87 percent marginal rate is that the affected rate at that
point in time is in the greater-than-70-percent range. For
example, in a project in Alaska that requires an investment of
$100 million, the state is an investor up to $70 million through
the deductions and credits, and the company invests $30 million.
When the revenue comes in - say it is $200 million - the company
only gets 30 percent, $60 million, so the company's net in that
project is only $30 million. However, in a 50 percent regime in
the Lower 48, that exact same project with the exact same capex
and opex numbers makes the company a profit of $100 million
above its cost. So, in materiality it is the same project with
the same risks with the same revenues and cash flowing around,
but materially that would look a lot larger in another regime
than it looks in Alaska and, to him, that is where the optics of
this really comes in. This is why he put up the slide about the
two different perceptions: from a government standpoint the
company still made a profit of $30 million; however, while this
is a substantial profit, the company can do the same thing
elsewhere and make two to three times the money.
2:30:44 PM
CO-CHAIR SEATON said he is trying to get back to the separation
that capital credits and the investment are totally independent
of the price and a project is not going to have a price or
revenue component until after it starts producing. If a company
was at that point of $92.50 and an 87 percent marginal tax rate,
the company could instead invest $87 million in the project
rather than paying it to the state in taxes. Now it is an
investment and the company will get the full 20 percent capex on
top for the entire project. That is $107 million of money that
would have been in the state's pocket that is now giving a
company an entire project plus $7 million in excess. This was
the gold plating that was talked about before regarding whether
people would make investments that did not make economic sense
because they actually make money on the investment. The return
on that is totally separate because that is price control
depending on what the oil price is when the production starts,
not when the investment is. The investment tax credit and the
moving from paying tax to putting it into the project occurs at
that time, not when production starts. He asked whether he is
missing something or whether he is correct.
2:32:50 PM
MR. RUGGIERO agreed that Co-Chair Seaton's description is
correct, although he thinks that finding such a project is
getting a bit outside the realm of reality. The payback to the
state is when the revenue and the barrels would flow from that
project, which could be at a higher average tax rate or a lower
rate or a different marginal tax rate, so whether or not the
state was ahead or behind or whether the producer was ahead or
behind, is a number of what-ifs. However, the issue in Alaska
is that developments are multiple-year, multiple-period
developments and given that there is no price prediction
accuracy anywhere in the industry, he thinks it would be real
tough for the oil companies to actually manipulate the process
and be just ready to spend that money when that predicted right
number hits; that would be too hard, if not impossible, for any
project in Alaska. Maybe with a quick, land-based rig that
could drill 20 wells in a month, a company could hit the bonanza
because it optimized within what this tax law allowed, but that
could not be done in Alaska.
2:34:45 PM
MR. RUGGIERO allowed that members have a tough decision ahead of
them. A lot is being said publically and privately about what
is needed to go forward in a positive future for the state,
which is the growth case instead of the harvest case. He said
he has seen it time and time again as he comes to the state that
the body is handicapped in trying to make informed decisions
when it is not informed about what is going on (slide 13). His
firm cannot help in this regard and neither can the Department
of Revenue. The producers are the only people who can help with
the questions of: Where has the money been spent and on what
has it been spent? What is the upside potential that actually
exists out there? What are the fields that could be brought on?
There is noise about possibilities and projects that have been
deferred because ACES was passed, but what is the real reason
that is going on? Additionally, if HB 110 is passed, will the
producers invest? He said that while he is sure members will
not receive any guarantees, the question is what will members
get and in what form will it be received if a sacrifice is made
by the state to do the right thing?
2:36:18 PM
REPRESENTATIVE GARDNER inquired who the biggest investor is on
the North Slope right now.
MR. RUGGIERO said "investor" would be something that is down to
working interest and total spend per field and breaking it down
by field and what was spent where, so he cannot say which of the
"big three" is the largest. But, he added, they are all nearly
in the same boat. In response to another question from
Representative Gardner, he clarified that "H S & E" on slide 2
stands for health, safety, and environment.
2:37:15 PM
REPRESENTATIVE GARDNER, regarding Mr. Ruggiero's earlier
statement that investment money is limited based on the number
of companies, inquired whether more companies and more
investment dollars could be expected when prices are high.
MR. RUGGIERO answered that over time many things come down to
how many countries are open for business and trying to attract
capital. Over the last 30 or 40 years in the energy patch there
have been times when there were hundreds of companies with lots
of money and very few countries that were open, and therefore
the governments could charge a lot. And then there are the
periods of time when almost every country in the world is open;
for example, there have been years where 72 different countries
have held license rounds. When there are more countries than
there are companies and capital chasing it, it becomes a buyer's
game and the companies can dictate the terms and that is when
governments usually have to lower their expectations to attract.
What he meant by his statement is that at any point in time what
must be looked at is the balance between opportunity and capital
availability.
2:38:32 PM
REPRESENTATIVE GARDNER, regarding the producers' viewpoint that
a large profit is quid pro quo for taking downside risk, asked
how the state's participation in the capital cost of exploration
and development is balanced into the fiscal ranking system given
that the State of Alaska is buying down the risk and therefore
might expect to have more of the upside.
MR. RUGGIERO replied that in his firm's investigation of the
many companies that publish these rankings, the aspect of how
much a company can get back for a failed exploration well is not
something that is taken into account in those studies. Usually,
the studies take the positive fiscal system and a typical type
field and run that same type field through every one of the
regimes as though money was spent, the discovery was commercial,
and it was developed. Thus, the question is one of those
nuances that do not get captured in these relative comparisons
of regimes.
REPRESENTATIVE GARDNER inquired how the duty to develop or other
elements of a lease are included in fiscal system rankings.
MR. RUGGIERO said he cannot comment on how that is done today,
but back when he was in that situation if the company thought
there was any chance of a commercial nature being there, that
expiring lease would take priority for investment going forward.
2:40:54 PM
CO-CHAIR FEIGE asked how feasible would it be to tie the
production tax to production and productivity.
MR. RUGGIERO responded that he has seen a number of systems
where being able to get a certain set of commercial terms was
tied to requirements for certain levels of investment or work
programs. This is quite common and it could be something like
the number of wells, miles of seismic, or certain training to be
done. There are also a number of fiscal systems that tie the
government take, be it in royalty, production share, and/or tax,
to different levels of production and that production is used as
a surrogate for profitability; for example, government take
might be 50 percent up to 25,000 barrels a day, 60 percent up to
50,000 barrels a day, and 75 percent of everything over 70,000
barrels a day.
2:42:26 PM
REPRESENTATIVE HERRON, regarding fiscal system design, surmised
that oil companies want to make a profit but accommodate their
failures.
MR. RUGGIERO answered that a company looks at the totality of
its business. This is not an exact science business and if
added up there are more failures than successes when talking
about wells that find commercial hydrocarbons. So, to stay in
business, a company must make more off its successes than its
failures cost in getting to those successes.
REPRESENTATIVE HERRON understood Mr. Ruggiero to have said
earlier in his presentation that the oil companies do not have
to invest even if HB 110 is passed.
MR. RUGGIERO qualified that he has not read HB 110 in great
detail, but his understanding is that there is no requirement in
the bill that companies must invest after the bill passes.
2:43:53 PM
CO-CHAIR SEATON, regarding the state's investment in failures
and that this nuance is lost in analyses done by oil companies,
asked whether such benefits are lost because the focus is on the
negatives of the state's fiscal system.
MR. RUGGIERO answered that Co-Chair Seaton has "hit the nail on
the head" in that the 15-second sound bite seems to have more
validity and gets a wider audience than does a proper and
detailed analysis of what is actually there and what the good
versus bad points are. So, yes, what is seen in publications,
speeches, and conferences is that sound bite of 87 percent. He
said he is not sure that any producer has yet paid a marginal
87-percent dollar, but it is out there.
2:45:53 PM
CO-CHAIR SEATON noted that the main push for HB 110 is about
Alaska's competitiveness. In this regard, he inquired whether
the effective tax rate is the right thing for members to look at
when comparing Alaska's structure to the structures of other
countries or states.
MR. RUGGIERO replied he does not think there is any one right
thing to be looking at. Going back to his statement of "torture
numbers and they will tell you any story you want to tell," he
said that those who want to tell the negative story have latched
on to the 87 percent and have not let go. Those who want to
tell a positive story will latch on to something else. The key
is convincing the decision makers within the oil companies,
particularly the large oil companies. He pointed out that a
circle drawn around the worst quartile in those surveys will
include the names of countries where a vast majority of the
investment dollars of the large oil companies are going. So, if
it is location on those curves, Alaska is in a good spot and has
a lot of company in where investment dollars are going.
2:47:57 PM
REPRESENTATIVE GARDNER, regarding Mr. Ruggiero's earlier
statement that a system which is complex and sophisticated
requires an army of auditors, asked whether the ACES system is
complex and/or sophisticated.
MR. RUGGIERO responded that he thinks it is sophisticated but
not complex. What becomes complex is how the data is presented
that then needs to be audited. What form does the data come in?
Is it in a form that is cooperative? Or is it in a form of
"here is what you asked for, here is what my system just spit
out in a million lines of SAP code, you figure it out"?
2:48:53 PM
REPRESENTATIVE GARDNER related that one of the arguments heard
for bracketing taxes at different prices is that it makes the
return simpler. However, she said it seems to her that a
spreadsheet that works for 30 days could work 30 times for a
day, so it is not that much more complex to calculate one way or
the other.
MR. RUGGIERO answered that he thinks stepped taxation versus the
continuous progressivity taxation of ACES is not to change the
complexity level of the return or the mathematics to calculate.
It is to change the absolute high end of the tax being paid; it
reduces the amount of tax for a given set of price and cost
scenarios.
2:49:42 PM
CO-CHAIR SEATON recalled that when a step or steps were being
considered under ACES, there was great consternation in the
industry that each time there was a step there was a fairly
large jump in tax at $1 difference in price. He asked whether
that same consideration would still be there [under HB 110].
MR. RUGGIERO replied that to the extent that one step causes
consternation, three steps will cause more consternation.
However, he would suspect that if a system has steps, operations
would be such that they do not operate near the step change to
where that last dollar causes a much different rate of tax than
the previous dollar. Either through cost management, production
management, or something else, the companies will make sure that
they pay just the fair share of what they believe they should be
paying in taxes. Any fiscal system has its pluses and minuses
for both government and producer; there needs to be an
understanding of those nuances so an operation can be managed to
that from both perspectives of government and producer.
2:52:08 PM
CO-CHAIR FEIGE related that on 2/9/11 Mr. Roger Marks stated
that one of the best things that could be done to encourage more
investment and more production on the North Slope would be to
lower the aggressiveness of the progressivity factor. Another
idea floated at the time was to have a reverse progressivity in
HB 110 where the progressivity factor is a stair step going up
and then at a cap of a certain price the stair step would start
going down. He asked what the effect would be on an average oil
company's decision making if a reverse progressivity was put on
production above a certain point.
MR. RUGGIERO answered that he has a couple of emotional
responses to this hypothesis. In testimony before this
legislature he has heard about things that happen when the
profit per barrel is $150-$200. However, if that happens it
will not exist very long. For example, during the time that
prices quickly rose from the range of $40-$50 to the range of
$100, which was when ACES was being discussed, costs escalated.
A look back over time will show a fairly clear correlation
between cost in the oil patch and price of oil. So, the point
at which a decreasing progressivity would come into play at a
profit per barrel of $150 or more would soon disappear and the
state would be right back into the steps where it was to begin
with. He said that while Dr. Wood presented a separation of the
state versus the producer at $300 a barrel profit, he does not
think that is going to happen.
2:55:21 PM
REPRESENTATIVE GARDNER inquired of Acting Commissioner Butcher
whether any taxpayer has reached the 87 percent marginal rate.
Regarding audits, she noted that the 2006 audits for the PPT
were just completed and that no audits have yet been done under
the ACES tax structure. Therefore, without any audits under
ACES, it is unknown whether the proposed changes would be
pulling the right levers. However, what is known thus far is
that for rebates the state cannot break out the capital
expenditures which have been approved or are in the process of
being approved; the state cannot tell which are drilling or well
related or maintenance or facilities related. Page 6 of DOR's
January 18, 2011, report to the legislature basically says there
is no breakdown as to the spending that is occurring in the
state and where that is going. The state has no data by field
on capital spending. The credit program for Cook Inlet has been
expanded, but it is unknown whether that program has changed
anything. On page 9 of the January report is the statement, "It
is much more difficult to measure a tax system's impact on oil
development and production from existing fields." She said she
finds it cumulatively alarming that when billions of dollars are
being talked about, the state does not have baseline information
and is potentially embarking on taking billions of dollars out
of the treasury on a "flim" basis.
ACTING COMMISSIONER BUTCHER replied that the 87 percent marginal
rate is a scenario that could happen, but he does not know if it
has happened at $92.50 after production tax value. While he
knows it has been up over that, he thinks it was pre-ACES and
will get back to the committee in this regard. In terms of the
audits, he confirmed that DOR has finished with PPT and is just
starting with ACES. However, the information in these audits
will not provide any kind of enlightenment on these numbers
because they are not broken out in a way that would show where
the breakout is between what is being spent on exploratory
activities and what is being spent on current infrastructure.
2:59:44 PM
REPRESENTATIVE GARDNER asked whether DOR needs statutory
authority to get that information or whether the regulations can
be changed in a way that would allow the state to get the
information necessary to help figure out what impacts its
actions are having on investments.
ACTING COMMISSIONER BUTCHER responded that he believes it is
statutory and the department will get back to the committee with
a definite answer.
ACTING COMMISSIONER BUTCHER, regarding Representative Gardner's
question about Cook Inlet, said that the Cook Inlet bill just
passed last session and a couple of companies are looking at
developing. More should be known in the next six months, but he
thinks it is likely to happen. Regarding the state's limited
information, he related that the governor has looked at the lack
of exploration under the high oil prices and has had
conversations with numerous current producers as well as
companies that are interested in Alaska, and feels that this is
something that must be dealt with sooner rather than later.
When the state was looking at changing from ELF to PPT, it had
far less information than is had today, but it was a feeling
that something needed to be done and action was taken.
3:01:12 PM
REPRESENTATIVE HERRON, noting that the DOR commissioner needs
skilled auditors, inquired whether the state is at a complete
disadvantage because the other side is willing to pay anything
to keep the best from working for the department.
ACTING COMMISSIONER BUTCHER allowed that that is a very valid
point. The state cannot pay to the level of private industry,
but while the department has a much smaller budget its employees
do a really good job and are very experienced. It is difficult
to find people that look at public service as something they
want to take over a large paycheck, he said, but the committee
would be impressed with the folks that the department has.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Dept. Rev 2011 O&G Production Tax Report 1-18-2011.pdf |
HRES 2/11/2011 1:00:00 PM |
|
| 2.11.2011 HRes. O&G Tax Status Report & DOR Production Forecast.pdf |
HRES 2/11/2011 1:00:00 PM |
|
| 2.11.2011 HRes. Petroleum Fiscal System Design - Gaffney, Cline & Associates.pdf |
HRES 2/11/2011 1:00:00 PM |