Legislature(2013 - 2014)BARNES 124
02/15/2013 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB72 | |
| HB4 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 72 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 4 | TELECONFERENCED | |
HB 72-OIL AND GAS PRODUCTION TAX
1:03:24 PM
CO-CHAIR FEIGE announced that the first order of business is
HOUSE BILL NO. 72, "An Act relating to appropriations from taxes
paid under the Alaska Net Income Tax Act; relating to the oil
and gas production tax rate; relating to gas used in the state;
relating to monthly installment payments of the oil and gas
production tax; relating to oil and gas production tax credits
for certain losses and expenditures; relating to oil and gas
production tax credit certificates; relating to nontransferable
tax credits based on production; relating to the oil and gas tax
credit fund; relating to annual statements by producers and
explorers; relating to the determination of annual oil and gas
production tax values including adjustments based on a
percentage of gross value at the point of production from
certain leases or properties; making conforming amendments; and
providing for an effective date."
1:03:46 PM
JANAK MAYER, Manager, Upstream and Gas, PFC Energy, noted that
PFC Energy was now in its second year consulting for the Alaska
State Legislature on oil and gas taxation issues and fiscal
reform. He explained that PFC Energy specialized in oil and gas
consultancy, specifically with issues regarding above ground
risk. He noted that PFC Energy did not audit reserves or design
off-shore infrastructure, but, instead focused on questions of
market risk, geo-political risk, commercial strategy, and other
economic issues and fiscal terms analysis. He pointed out that
his area of expertise was explaining how fiscal terms affected
both government revenue and project economics.
1:05:21 PM
MR. MAYER declared that the discussion would first focus on the
fundamental sensitivities of Alaska's future petroleum revenues
to oil price, production decline, and fiscal terms, as it was
important to differentiate short and long term revenue.
1:06:24 PM
MR. MAYER, directing attention to slide 3, "Oil Price is the
Major Determinant of Alaska's Future Petroleum Revenue,"
declared that, although the price of oil was the most important
issue, it was completely out of Alaska's control. He pointed
out the difference in revenue to the state for various oil
prices, declaring that the production of oil did vary with the
price.
1:07:49 PM
MR. MAYER moved on to slide 4, "Decline Rate is the Other Major
Determinant," declaring that the decline rate of current
production was also a substantial determinant. He stated that
the Department of Revenue (DOR) base forecast for average
decline was 6 percent from 2017 - 2022, which included new
producing areas. He theorized that a 3 percent decline or a 9
percent decline reflected a high magnitude of variation in
revenue.
1:08:50 PM
MR. MAYER presented slide 5, "Fiscal Terms Changes and
Investment Impacts," and stated, although fiscal terms were a
significant determinant, they were a smaller impact unless they
resulted in substantial new investment. He reported that an
additional production of 20 million barrels each day would
flatten revenues in real terms.
1:10:23 PM
REPRESENTATIVE TUCK asked for the amount of investment to reduce
the rate of decline from 6 percent to 1 percent.
MR. MAYER replied that he would report back, but he likened it
to annually bringing on-line a project similar in size to
Niakuk.
1:11:04 PM
REPRESENTATIVE SEATON requested the price estimates for the
annual increased investment be also forwarded to the committee.
MR. MAYER agreed to do so.
1:11:35 PM
MR. MAYER spoke about slide 6, "Context: Investment Competition
& Global Oil Price Environment." He declared that the biggest
sensitivity to Alaska's future revenues was the future oil
price, and the questions for the price forecast by the
Department of Revenue (DOR).
1:12:53 PM
MR. MAYER declared that another key driver for oil price was the
competition for investment dollars, slide 7, "Fixed-Royalty
Jurisdictions in US Lower 48 Are A Key Competitor to Alaska for
Investment Dollars." He noted that "an extraordinary revolution
in North American production" had reflected a shift in the last
seven years ago from a source of cash flow for oil companies to
finance projects elsewhere. He declared that North America was
now a major region for re-investment of cash from other
projects. He declared that this was relevant to the future of
oil and gas production in Alaska, as the cash surplus was coming
from fixed royalty jurisdictions with relatively low government
take. The broader context of increased investment in North
America was important to consider when discussing future drivers
of oil prices and the structure of the fiscal system.
1:14:49 PM
REPRESENTATIVE SEATON, directing attention to slide 7, asked
whether PFC Energy believed that the major oil companies had not
targeted unconventional oil production in North America.
MR. MAYER replied that it was quite the opposite and it was rare
for a major oil company not to be investing in shale production
and other unconventional oil production in the Lower 48.
1:15:42 PM
REPRESENTATIVE SEATON asked if these missed opportunities in
Alaska were a factor.
MR. MAYER replied that there was still a lot to be determined
for the future of unconventional oil production in Alaska, and
many other jurisdictions throughout the world. He declared that
oil shale did have promise, but there were other questions for
its development. He pointed out that tens of thousands of oil
shale wells had been drilled in the Lower 48, however, no other
country had drilled more than ten wells. He stated that the
Lower 48 did have specific circumstances which combined small
private land holdings which small oil companies could afford to
buy so that an experimental solution could be attempted with
small capital expense.
1:18:31 PM
REPRESENTATIVE TARR referred to slide 7, and asked about the
capital expenditures from 2008 - 2010 in North America. She
asked if the largest percentage was represented by investment in
the Lower 48.
MR. MAYER expressed agreement, and stated that it was a
combination of investment in shale, oil sands, and other
unconventional oil production.
1:19:22 PM
REPRESENTATIVE TUCK asked how Alaska would look in relation.
MR. MAYER replied that, although Alaska was now a cash surplus
region, in 1980 it had been a cash deficit region. He noted
that the cycle of cash deficit to cash surplus was a fundamental
part of the dynamics of the oil and gas industry.
1:20:08 PM
MR. MAYER returned to the presentation, slide 8, "American
Energy Reset." He declared that it was the great American
energy reset, as the growth and forecast were a complete about
face from the decades before 2005, and resembled the boom in oil
production during post-World War II. He reported that there had
not been such a steep increase in oil production in North
America since, and, by 2020, the oil production would reach a
peak similar to the mid 1960s.
1:21:21 PM
MR. MAYER moved on to slide 9, "Anatomy of the Physical Market
for Crude Oil." He declared that the framework of the world
market for crude oil was dictated by demand for final product
consumption, which created the refinery demand for crude oil.
He reported that meeting the demand came from either non-OPEC or
OPEC (Organization of the Petroleum Exporting Countries) crude
oil. He explained that the non-OPEC producers would only
produce at capacity given the market economics; whereas, the
OPEC producers functioned as a cartel, and played a balancing
role for adjusting the crude oil output by increasing or
decreasing the supply, thereby influencing the price of oil. He
pointed out that the demand from OPEC would influence the non-
OPEC supply, and the future price of crude oil.
1:23:24 PM
MR. MAYER pointed to slide 10, "Non-OPEC Liquids Will Show
Substantial Growth," and stated that non-OPEC production was
increasing substantially from a wide range of supply, including
Canadian oil sands, oil shale, and natural gas liquids and
condensate projects. These projects would have a large impact
on the OPEC producers.
1:24:33 PM
MR. MAYER discussed slide 11, "Shale Oil Major Factor in
Reducing OPEC's Share." He declared that shale oil, mainly
North American shale oil, was predicted to reach 4 million
barrels per day by the end of the decade, which was twice the
production of Alaska oil at its peak. He pointed out that this
was also almost double the Saudi Arabian oil production swing,
as its marginal production cost was so low, allowing for a
profit at almost any oil price. He declared that shale oil was
relevant because its supply was variable, as the sources were
not large and were short lived. This variability made shale oil
production very dependent on the price of oil. He reported that
shale oil would join the ranks of substantial world oil supply
balancers, thereby affecting the traditional role of OPEC
producers, and the increased production of oil in Iraq.
1:27:11 PM
MR. MAYER explained slide 12, "Initial Output Implications for
Major OPEC Producers." He pointed to three OPEC producers,
Saudi Arabia, Iran, and Iraq. He stated that, although Iran
production had dropped off as a result of sanctions, the
increase of Iraqi production with the increase of non-OPEC
producers, would force Saudi Arabia to drop its production from
9 million to 5 million barrels each day, in order to balance the
global oil supply. He questioned, as this would not be
tolerable to Saudi Arabia, how OPEC would manage the market to
keep the oil prices up.
1:28:49 PM
MR. MAYER discussed slide 13, "Character of U.S. Growth
Changing." He stated that the future volatility of oil prices
would be influenced by the increased role of oil shale, noting
that the production would compound just to maintain the prior
year's supply.
1:30:11 PM
MR. MAYER, addressing an earlier question for the breakeven
prices for Lower 48 shale oil, stated that it would vary
enormously by quintile, the initial productivity of the wells.
He pointed to slide 14, "Bakken Quintile Breakeven PV 10," and
explained that a first quintile well was "massively more
productive in terms of initial productivity you get out of a
well," than was a fifth quintile well. The result was a much
greater profit from the first quintile well. He declared that
almost 33 percent of the production from the Bakken oil field in
North Dakota came from first quintile wells, and that drilling
would continue as long as there was the reliability to produce a
first quintile well. He acknowledged that other areas of Bakken
were not currently economically viable for drilling. He pointed
out that operating cost was the break-even price which
determined production.
1:32:28 PM
MR. MAYER, responding to Representative P. Wilson, defined
"quintile" as the inclusion of all of the wells drilled within a
specific time period, and dividing them evenly into five
"buckets." The top "bucket" was the most productive wells, with
the bottom being the least productive by initial production
rate. He pointed out that the top quintile, the top 20 percent,
produced more than 33 percent of the oil in Bakken.
1:33:26 PM
MR. MAYER assessed slide 15, "Eagleford Quintile Breakeven PV
10," stating that the producers in the Eagleford shale oil field
in Texas had an even greater variation in its well economics, as
its first quintile wells were very profitable but its fifth
quintile wells would most likely not be profitable in the
foreseeable future.
1:33:52 PM
REPRESENTATIVE SEATON asked how the acreage costs by class,
listed on the slide, related.
MR. MAYER explained that both the acreage costs by class and the
royalty rates related to the quintile, specifically when
negotiating the economics.
1:35:16 PM
MR. MAYER moved on to slide 16, "Granite Wash Quintile Breakeven
PV 10," which was a significantly less economic producer in
Texas. He pointed out that the most productive wells in the
Granite Wash oil fields in Oklahoma, the first quintile, were
"only just worth drilling at current prices." He reminded the
committee that a change in oil price potentially had a
significant effect on drilling activity and future production.
1:35:49 PM
REPRESENTATIVE TARR asked how the information on shale oil
development was used to compare with the oil development in
Alaska, as the Alaska oil was so different.
MR. MAYER responded that there were a number of points of
comparison. He agreed that a decision to drill in oil shale in
Texas was very different than drilling on the North Slope. He
said that price signals and fiscal terms could quickly affect
behavior. He opined that the North Slope producers, as there
was a concentrated industry structure with joint operating
agreements, were economic and rational, and responded more
slowly to market signals.
1:38:30 PM
CO-CHAIR FEIGE offered his understanding that, as oil prices
drop, the oil shale investment would diminish.
MR. MAYER replied that this was correct up to a certain point,
noting that the least productive oil wells and acreage would
drop off, but that the most productive would continue.
1:39:14 PM
MR. MAYER reviewed slide 17, "Risks to Price Forecast," and
stated that the upside price risk was that strong global
economic growth and instability would increase demand and
tighten the oil supply. He pointed to the downside price risk,
which included the US production boom which left little room for
additional growth from other countries, an economic slowdown,
the challenge to OPEC to manage supply given the non-OPEC supply
coming on-line, and the premium price given to West Coast crude
over WTI, as the boom had created a greater supply than pipeline
capacity in the Lower 48. He opined that as long as the United
States was a crude oil importer, then the impact of price on the
West Coast crude would be limited.
1:42:04 PM
MR. MAYER projected slide 18, "What Is the Potential Floor for
ANS West Coast Crude?" He explained that the answer depended on
the time frame. He said that prolonged low prices would use a
lot of supply, and would eventually bring the price back up. He
offered his belief that the global price floor for West Coast
crude could be sustained as low as $70-$75 per marginal barrel
if certain supply circumstances existed.
1:44:12 PM
MR. MAYER, in response to Representative Seaton, said that the
US constrained price of $55-$60 per marginal barrel could be
possible if the US met its own supply needs, and was not
exporting any crude. He opined that $70-$75 was more likely if
the marginal barrel was imported.
1:45:25 PM
REPRESENTATIVE SEATON asked to clarify that if North America
becomes energy independent then the floor price would be $55-$60
per marginal barrel.
MR. MAYER indicated this was not a likely scenario and was
merely used as an example of the disconnect for the global crude
oil markets.
1:46:10 PM
REPRESENTATIVE TARR asked if that scenario was a result of no
exports of crude because of increased production elsewhere, or
the need to import to meet demand.
MR. MAYER replied that the scenario would result from a
combination of the North American supply being sufficient to
meet demand and ongoing restrictions on exports.
1:47:01 PM
MR. MAYER brought attention back to slide 20, "ACES: 5 key
problems." He declared that Alaska's fiscal system, Alaska's
Clear and Equitable Share (ACES), had five fundamental problems,
which he listed: the high levels of government take reduce the
competitiveness for capital investment, especially at high
prices; high marginal tax rates reduce incentives for spending
control; a complex system makes it difficult for meaningful
economic analysis and comparison; significant state exposure in
low price environments and for high cost developments; and the
substantial impact of large scale gas sales on tax rates.
1:48:30 PM
MR. MAYER explained slide 21, "Regime Competitiveness: Average
Government Take At $80 Per Barrel." He declared that the
benchmark of Alaska's fiscal system in comparison with global
fiscal systems for overall government take for oil at a range of
prices was substantially higher, even with production sharing
contracts (PSC) a bit over 70 percent. At $80 per barrel,
Alaska was substantially higher than the global averages. He
pointed out that capital spent by an existing producer could be
written off against the tax bill, whereas capital spent on new
development attracted capital credit, but not the same reduction
in rate. He stated that ACES was the second least competitive
OECD regime for new development, after Norway.
1:51:37 PM
MR. MAYER addressed slide 22, "Regime Competitiveness: Average
Government Take At $100 Per Barrel," which identified that new
development was now the highest government take regime in OECD.
He acknowledged that it was lower for an existing producer.
1:52:36 PM
MR. MAYER moved to slide 23, "Regime Competitiveness: Average
Government Take At $120 Per Barrel," but, upon review, noted
that there may be an error on this slide.
1:52:55 PM
REPRESENTATIVE TUCK asked to clarify that government take
reflected total payout, as the private royalties were also
included.
MR. MAYER expressed agreement, and reported that the system of
private royalties was only in the United States.
1:53:38 PM
REPRESENTATIVE SEATON asked to clarify that a new development
was a non-legacy producer.
MR. MAYER said this was correct when analyzed on a stand-alone
basis, rather than a part of the portfolio of a base producer.
REPRESENTATIVE SEATON stated that this was not the Alaska tax
regime, as everything on the North Slope was part of the
company.
MR. MAYER acknowledged this, although a new development had to
be looked at for information on capital allocation and
investment decisions.
1:55:16 PM
MR. MAYER, returning to his presentation of slide 24,
"Difference Between New Investment Versus Base Production is
Critical," noted a frequent question for how there could be a
reasonable profit. He directed attention to the net income per
barrel, which was substantially higher in Alaska than the Lower
48 for ConocoPhillips in 2011.
CO-CHAIR FEIGE asked to clarify that this was per barrel of oil.
MR. MAYER replied that it was per barrel of oil equivalent.
CO-CHAIR FEIGE asked to clarify that this would include gas.
MR. MAYER agreed.
CO-CHAIR FEIGE asked to clarify that the distinction would be
necessary if a company produced more gas than oil in one area,
as the figures would be distorted.
MR. MAYER agreed.
1:57:06 PM
MR. MAYER, returning to slide 24, noted that the Alaska net
income per barrel was "not particularly any higher than in many
other parts of ConocoPhillips portfolio." He pointed out that
ConocoPhillips had extensive gas holdings in the Lower 48. He
pointed to the production taxes, which reflected the impact of
ACES on the barrel of oil in Alaska, as the State of Alaska made
more revenue per barrel than ConocoPhillips made from net income
per barrel.
MR. MAYER, in response to Representative Tuck, said the columns
reflected the breakdown of revenue, and added up to the revenue
of a barrel of oil equivalent.
REPRESENTATIVE TUCK asked to clarify the Canadian income tax per
barrel.
MR. MAYER explained that this was solely because, in that
particular year in Canada, ConocoPhillips had a tax loss.
2:00:17 PM
REPRESENTATIVE TUCK asked to clarify that African nations
received their revenue from income tax, and that the purple bar
reflected the operating cost of doing business.
MR. MAYER replied "broadly speaking that's correct."
2:00:56 PM
MR. MAYER stated that the figures really did not clarify the
competitiveness of the fiscal regime, because these were the
result from existing base production, not the economics for a
new investment. He explained that, although ConocoPhillips had
a lot of gas production in the Lower 48 with a small revenue per
barrel, it continued to invest more in the Lower 48 than in
Alaska. He explained that there could not be a comparison of
investment as the base portfolio was not indicative of the
investments in the Lower 48. Those investments were in liquids,
which had very different economics. He noted that the net
income per barrel in Alaska reflected capital investment from
many years ago, with fully depreciated assets, and now produced
cash. He pointed out that any current investment in Alaska
would not result in the same net income.
2:03:03 PM
MR. MAYER, in response to Representative Tuck, explained that
DD&A was depletion, depreciation, and amortization. He agreed
that, as this was a small amount, there could be postulation
that old assets in Alaska were mostly depreciated as opposed to
newer investment, and higher DD&A, in other places. He noted
that only judging the net income per barrel did not reflect the
economics of new investment.
2:03:52 PM
MR. MAYER addressed slide 25, "ACES: 5 key problems," and shared
that the high marginal tax rates which reduced incentives for
spending control was the second of the five key problems. He
suggested taking the ACES production tax component and the
impact of progressivity to marginal rates. Under ACES, the
initially steep component of progressivity, which eventually
flattened out, created a jagged spike in marginal rates. He
moved on to slide 26, "ACES: Average and Marginal Production
Tax Rates," and explained that progressivity and marginal tax
rates tapered off after a peak at $92.50 per barrel of
production tax value. He shared that the marginal tax rate was
not necessarily a measure of competitiveness of the system,
although it influenced the different price environments in after
tax cash flow. He pointed out that oil at $120 per barrel
reflected reduced taxes for 95 percent of expenditure.
2:06:20 PM
REPRESENTATIVE SEATON asked to clarify that ACES was designed in
this way to create incentive for reinvestment on the North
Slope, although it appeared counter intuitive. He asked what
incentive could be offered for reinvestment in Alaska.
MR. MAYER stated that this was an excellent question that leads
to his next point regarding the complexity of the system, slide
29, "ACES: Standalone versus Incremental." He declared that
there were many perspectives for understanding this problem. He
explained that an economic analysis from an incremental basis
took the cash flow from the base portfolio, and layered in a new
development on top. At the end, the difference of the two would
be determined, and the economics would be reviewed on the basis
of the difference of the two cash flows. He declared that these
incremental economics were crucial from the state perspective,
as it determined how much the state would receive, or not
receive. However, incremental economics were not as important
to a producer for a large project, as its investment decisions
were determined by cash flow, not tax equity or future tax
liability. He expressed agreement that reduction of future tax
liability was desirable, but not fundamental to an economic
decision. He reported that economic decision making at the
business unit level, or reinvestments of cash flow in short term
decisions for tax reasons, was very different from investments
for the long term which needed to have the fundamental economics
for a sensible stand-alone basis. He noted that a review of the
incremental basis could determine that a project move "further
in front of the queue," although the decision was not made
solely on the incremental economics. He declared that ACES was
a system under which the state would forego significant revenue
for investment, although that did not necessarily make a project
more competitive for attracting capital. He opined that "in
some ways you could argue it's the worst of all worlds, where
the state foregoes significant revenue but it doesn't actually
get much more for the revenue that it foregoes."
2:12:58 PM
MR. MAYER presented slide 30, "Portfolio Efficiency: Return on
Capital Employed (ROCE)," and said that this could be argued to
be the most important metric for a large oil and gas company at
the corporate level. He noted that this metric was not
influenced by incremental analysis, or any return on investment
through taxes. He explained that the economics was not based on
the after tax cash flow, but simply on the return on the capital
invested in the operation. He declared that this was an example
whereby ACES would forego revenue for the state compared to what
it might otherwise receive in return for investment, although it
was unclear whether this would improve the economics for an
investment.
2:14:18 PM
REPRESENTATIVE TARR asked if the credits were less reliable
because of possible political change.
MR. MAYER replied that there were a number of components, and he
referred to slide 29, which reflected the dramatic variation of
the incremental economics dependent on price. He noted that
this variation was sometimes counter intuitive, explaining that
it was a better return at $125 per barrel than at $130 per
barrel. He referred back to slide 26, which depicted the spike
in the marginal rate. He speculated that, as an investment in a
20 year project did not know the future oil price, an investor
would want to know performance in a range of scenarios,
especially the long term cash flow generated and the upside of
capital. He said that, looking solely at incremental basis, the
internal rate of return (IRR) could be excellent at a particular
price range, slide 29. Although this would take away future
cash flow, it would eliminate the spending necessary to generate
it. He stated that IRR was only a useful metric for
standardizing things, and did not guarantee the creation of
economic value. Creating economic value for a company required
the use of large amounts of capital to generate large amounts of
cash flow. He explained that this system, on an after tax cash
flow basis, was to reduce the amount of necessary capital to
justify a smaller future cash flow. He stated that a large
investment needed large, long lived assets with a substantial
future cash flow. He allowed that any tax benefit would be
appreciated, although the tax bill was not the fundamental
driver of the investment decision. He explained that
fundamental economics of the project would affect the global
allocation of capital, and not the after tax cash flow, because
the investment was not to buy tax equity. He compared this
investment to those investments of property investors, who would
not buy negative cash flow properties to reduce their tax bill.
He said that large oil and gas companies were not looking to
reduce their tax bills with investments in large projects.
2:19:47 PM
MR. MAYER returned attention to slide 31, "ACES: 5 key
problems," and reported that the fourth key problem with ACES
was for significant state exposure in low price environments,
and for high-cost developments. He said that, for Alaska, the
incremental analysis was the most important because it was all
revenue to the state treasury, even as it presented risks in low
price environments and high cost projects.
2:20:54 PM
MR. MAYER moved on to slide 32, "High state exposure for high-
cost developments," which compared the economics of an
incremental basis with the economics of no production tax. He
said that the producer would get a reduction in the overall
production tax liability, which, although it mattered to the
state, did not improve the project economics for the investor.
2:23:01 PM
MR. MAYER explaining slide 33, "ACES: 5 key problems," and slide
34, noted the impact of large-scale gas sales on tax rates. He
declared that this was not the ideal design for a hydro carbon
fiscal system.
2:24:05 PM
REPRESENTATIVE SEATON asked to clarify that the offsetting
expense against oil tax would not be a consideration for
investment, even if it allowed more money to stay in the
company. He asked if the project would be viewed on a stand-
alone basis for cash invested and the return on capital.
MR. MAYER replied that a large scale investment over a long time
horizon would require that the project "made sense on its
fundamental economics in the broadest possible range of oil
prices, of gas prices, of possible changes by the legislature to
the fiscal terms, of a very wide range of things." He declared
that this required an assessment for the merits of the project
on its fundamental economics, not on the tax treatment in any
given year.
2:25:36 PM
REPRESENTATIVE SEATON asked to clarify that it was necessary to
fix the oil economics over a long period in order to move
forward on the gas project. He asked why there was a push for
oil tax certainty, as well.
MR. MAYER apologized for any misunderstanding, stating that
stability was absolutely essential because the fiscal terms
determined the project economics. He declared that reductions
in taxes did matter, but it was not the fundamental driver for
investment in the project.
2:27:23 PM
REPRESENTATIVE SEATON asked if the economics for the return on
capital invested for a gas line project would be analyzed on a
stand-alone basis, and whether the idea of a fix for the oil
system was separate and should not be part of the consideration.
MR. MAYER expressed his agreement for the return on capital
employed, as it was a huge investment, and was not affected by
incremental economics. He detailed that the investor was
measured by the return of its capital employed, and that
incremental economics did not help the project.
2:29:23 PM
MR. MAYER introduced slide 35, "ACES: 5 key problems - available
solutions," which detailed solutions to the aforementioned five
problems. He pointed to the high levels of government take,
suggesting that either progressivity could be reduced,
bracketed, or eliminated, or that the base rate could be
reduced. For high marginal tax rates and the impact on spending
control, he suggested, again, that progressivity could be
reduced, bracketed, or eliminated, or that credits could be
reduced, restricted, or eliminated. He pointed out that the
complexity made meaningful economic analysis and comparison
difficult, as it was often misinterpreted. He declared that the
complexity was for which basis to assess the investment, and
would look different to the state than to a company. He
suggested simplifying the overall system design, especially the
interaction of progressivity with credits, and improving the
economics for new development, as proposed in HB 72.
2:33:21 PM
MR. MAYER addressed the significant state exposure in low price
environments, and suggested that some or all of the credits
could be reduced or eliminated; the ability to claim credits
from the state treasury could be eliminated; or the credits
could be carried forward to production.
MR. MAYER spoke about the impact of large-scale gas sales on tax
rates, and suggested to eliminate progressivity; levy
progressivity on a gross, rather than net, basis; or use a
progressive Gross Revenue exclusion.
2:34:57 PM
MR. MAYER directed attention to slide 36, "ACES: 5 key problems
- SB21/HB72 Solutions," and addressed the solutions for each of
the aforementioned problems. He suggested that the elimination
of progressivity and some credits, while restricting that use of
lost credit could only be claimed from the future, would resolve
the problems. He moved on to slide 40, "Government Take under
SB21/HB72 and ACES - Capex Sensitivity." He said that
elimination of the capital credit in the following year would
have a substantial impact on tax rates at current prices under
ACES. He reported that extending the analysis out for 20 years
would reduce the impact because progressivity was not linked to
inflation under ACES. He announced that proposed HB 72 would
have a range of points in a single year of production to move
between a tax increase and tax decrease, with the fundamental
point being the level of capital spending. He declared that
this was the impact of the capital credit. He noted that the
more spent, the higher the point of transition from tax cut to
tax increase, and the higher the actual oil price when
progressivity starts.
2:39:27 PM
MR. MAYER declared that the question was for incentives to
development given the current wide range of capital spending.
Those companies in the asset development stage, rather than
harvesting the cash flow, had the highest levels of spending.
He stated that companies with high spending would see a tax
increase relatively higher on the price scale, and he suggested
giving this more consideration.
CO-CHAIR FEIGE declared that this area had received the most
informal push back from the oil and gas industry.
2:40:43 PM
REPRESENTATIVE TUCK asked to clarify that this was a crossover
between ACES and the proposed bill, and that as the capital
expenses increased, the crossover moved to a higher oil price in
order to equalize. He asked if this was due to the loss of
capital credits, which were eliminated in the proposed bill.
MR. MAYER expressed agreement.
2:41:36 PM
CO-CHAIR FEIGE asked what affect the addition of credits for
certain capital expenditures would have on the crossover points.
MR. MAYER replied that the addition of some form of capital
credit would reduce those crossover points.
CO-CHAIR FEIGE noted that the crossover points at all levels
would move to a lower price.
MR. MAYER offered his belief that they would shift closer
together, with less sensitivity to capital spending.
2:42:51 PM
REPRESENTATIVE TARR asked what Mr. Mayer suggested for the low
price point to reduce significant state exposure.
MR. MAYER replied that it would vary, dependent on the cost of
the resources being developed.
2:44:11 PM
REPRESENTATIVE SEATON asked to clarify that the idea of adding
capital credits back in was being proposed as a reduction of the
state's liability at low prices, which would increase the
state's liability at higher prices as there was no longer any
progressivity to offset it during price swings. He pointed out
that there was discussion for the addition of capital credits
and the elimination of progressivity, which would reduce the
cash flow at high prices and maintain the exposure at low
prices. He questioned the balance to the state.
MR. MAYER answered the original proposal was put together by
Pedro van Meurs, and called for a flat 25 percent profit based
tax with a 20 percent capital credit. He declared that this was
different than the current tax regime, and recalled that these
tax credits were not allowed to be claimed directly from the
state treasury when there was not any tax liability.
Progressivity actually creates some of the downside, without the
question of the capital credit. He stated that the necessity
for capital credit to only be claimed against future production
would mitigate the problem. He opined that for an overall
analysis of government takes with a baseline that was not an
abstract design of a reasonable and competitive system when
compared with the current system, both progressivity and
maintenance of the credit would create a bigger delta in
government revenue. He questioned whether this was an
acceptable delta in revenues, and that a balance requiring some
form of progressivity would be a fundamental question of policy
direction.
2:47:56 PM
MR. MAYER continued his presentation with slide 42, "Assessment
of DOR Price Forecast Methodology." He noted that he could not
elaborate on the production forecasting methodology, as the
revised risk approach appeared sound. He discussed price
forecast methodology, noting that with any forecasting exercise,
it was necessary to distinguish between the overall trend and
the degree of volatility. He stated that it was important,
especially with a flat forecast, to not be lulled into thinking
that also implied little volatility. He declared that wild
price swings were still possible, and he opined that it
overwhelmingly appeared to be the case that volatility would be
the norm in the foreseeable future.
2:49:48 PM
CO-CHAIR FEIGE remarked, "we're one silkworm missile away from a
lot of money."
2:49:57 PM
REPRESENTATIVE TUCK, referencing an earlier comment for the
ability of North America to self-sustain, asked to clarify that
the norm for the price of oil would be $70 - $75 per barrel.
MR. MAYER clarified that this had been a specific answer for a
specific question regarding a realistic floor price for oil, and
it was not a likely forecast.
2:50:33 PM
MR. MAYER, resuming his presentation of slide 42, declared that
with any forecast it was necessary to account for the volatility
of any trend.
2:50:50 PM
REPRESENTATIVE TARR, asking if Mr. Mayer had determined that the
new Department of Revenue (DOR) methodology for the most recent
forecast was sound, questioned whether the methodology for
previous DOR forecasts had been reviewed and compared to actual
results. She offered her belief that, although there had not
been significant deviation, DOR had desired even greater
accuracy.
CO-CHAIR FEIGE asked to clarify whether the question was
regarding price prediction or oil production prediction.
REPRESENTATIVE TARR replied that it was for oil production.
CO-CHAIR FEIGE stated that the discussion was for price
prediction.
MR. MAYER clarified that he had begun his discussion with
production prediction, prior to moving on to the price
prediction. In response to Representative Tarr, he acknowledged
that, although he did not have expertise for these predictions,
he had judged these predictions to be sound from his review of
the materials.
2:52:06 PM
REPRESENTATIVE SEATON expressed his curiosity regarding the
importance of volatility, as the proposed tax payment was for
the annual mean, without progressivity or a windfall tax.
MR. MAYER replied that it was the biggest determinant regardless
of progressivity for future revenues.
REPRESENTATIVE SEATON asked to clarify that this was for
volatility over many years, and not just for a single year.
MR. MAYER replied that he had considered the volatility for all
time frames.
REPRESENTATIVE SEATON asked to clarify, if this was an annual
tax with no monthly progressivity, what was the component of
volatility between months, and how did that affect the annual
revenue.
MR. MAYER explained that it was not a question of rate, but a
question of the base revenue and its application on the income.
He pointed out that in a low oil price environment, there was
very little revenue to the state, but in a higher price
environment, there was an enormous amount of revenue, even with
a flat tax structure.
REPRESENTATIVE SEATON asked to clarify that the volatility
within the year would generate a different return.
MR. MAYER replied that it would not.
2:54:25 PM
MR. MAYER continued his presentation with slide 43, "Assessment
of DOR Price Forecast Methodology," explaining that a blended
forecast was a good approach which provided a more accurate
forecast. He expressed his agreement with DOR that WTI (West
Texas Intermediate) was no longer a good global indicator of the
oil market, and that consideration of supply, geopolitics, and
the financial market was best for the projected forecast. He
noted that the possible risks for the DOR methodology included
the use of futures prices and the EIA (US Energy Information
Administration) as forecast tools. He stated that group
forecasting for a consensus view could result in a "herd"
behavior, and that a flat price forecast should understand the
fundamental question of volatility, and the difference between
trend and movement around this trend.
2:57:28 PM
MR. MAYER turned to slide 44, "Global LNG Demand Driven by
Asia," and explained that the potential future demands for
Liquid Natural Gas (LNG) would be into Asia, the world's largest
gas market. He declared that Asia was a desirable market for
LNG as it had historically been priced with reference to oil,
frequently to parity, which was dramatically higher than the gas
price in North America. He pointed out that this high price
made the prospect potentially economic for getting North Slope
gas to Asia.
2:59:09 PM
MR. MAYER declared that the project list for proposed LNG
capacity was largest in North America, slide 45, "Proposed LNG
Capacity by Country." He noted that some of the re-gasification
plants were now converting to LNG export facilities. He pointed
out that Australia had the next largest capacity for production
of LNG, estimated at 100 million tons each year.
3:00:47 PM
MR. MAYER addressed slide 46, "PFC Energy Risked LNG Supply
Outlook by Country," which reviewed the risk and projection for
the main suppliers and the capacity to come on line before 2025.
He compared this risk analysis for capacity with the contracted
capacity on slide 51, "Share of Contracted Capacity by Country."
He reported that LNG was sold on 20 year long term take or pay
contracts, which allowed the capital for financing these
enormous projects to be raised. He questioned the existing
capacity in 2025, and how much would be contracted.
3:02:57 PM
MR. MAYER reviewed slide 52, "Share of Contracted Capacity by
Country," which depicted the expected available capacity,
especially in Australia, Canada, and the United States, for new
un-contracted volumes.
3:03:36 PM
MR. MAYER explained slide 53, "Competitive Landscape for LNG
Sales to Asia," and stated that PFC Energy projected a
sufficient rising demand for LNG in Asia. He noted that the new
liquefaction projects in North America, Australia, Qatar, and
East Africa would be logical competitors. He stated that
Alaska, factoring in all the required capital, would be a
relatively high priced gas exporter. He noted that the
economics for competitive pricing would be affected by a link to
oil pricing, rather than the Henry Hub pricing.
[HB 72 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB04 Fact Sheet.pdf |
HRES 2/15/2013 1:00:00 PM |
HB 4 |
| HRES HB 72 PFC Energy 2.15.13.pdf |
HRES 2/15/2013 1:00:00 PM |
HB 72 |