Legislature(2009 - 2010)SENATE FINANCE 532
03/09/2010 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 305 | TELECONFERENCED | |
| *+ | SB 306 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 305
"An Act relating to the tax on oil and gas production;
and providing for an effective date."
SB 305 was HEARD and HELD in Committee for further
consideration.
9:03:05 AM
Co-Chair Stedman explained that SB 305 concerns the
separation of oil and gas production tax. Preliminary
questions will be answered today by legislative consultants.
Public testimony is scheduled for Thursday, March 11. He
stated that SB 306 will not be addressed today.
CHARLES LOGSDON, LOGSDON AND ASSOCIATES, CONSULTANT
LEGISLATIVE BUDGET AND AUDIT, stated that he was the Chief
petroleum economist for the state from 1979 through 2004 and
he became familiar with the oil and gas production tax. He
negotiated a fiscal regime which involved changing from the
Economic Limit Factor (ELF) system to the net value
production system, which eventually became Alaska's Clear
and Equitable Share (ACES). He also works with Legislative
Budget and Audit (LB&A) which is a non partisan joint
committee. Co-Chair Stedman informed that LB&A is the body
who hires consultant for technical help in the oil and gas
arena.
ROGER MARKS, PETROLEUM ECONOMIST, ECONOMIC RESEARCH SECTION,
TAX DIVISION, DEPARTMENT OF REVENUE, explained that works
with Logsdon and associates under the arrangement with LB&A
to assist in analyzing gas taxation. He worked previously as
a petroleum economist with the tax division of the
Department of Revenue for 25 years. He explained that he
continually analyzed North Slope gas commerciality. He
retired approximately one year ago and started his own
private practice.
Co-Chair Stedman requested a brief high level overview
regarding the oil and gas tax regime.
Mr. Marks reviewed the PowerPoint presentation "SB 305: The
Separation of Oil from Gas for the Oil and Gas Production
Tax."
9:09:36 AM
Mr. Marks addressed Slide 2: "Premise of the Bill"
even though oil operations are unaffected
Mr. Marks addressed Slide 3: "Oil is Different than Gas"
OPEC)
Mr. Marks detailed Slide 4: "BTU 10:1"
West Coast ANS
o Shipping $2.07
o TAPS $4.18
North Slope Gas
o Tariff AK to AB $3.54
o AB Hub $.24
o Tariff AB to L48 $0.85
as much as gas
9:13:26 AM
Mr. Marks detailed Slide 5: "Some Things that have BTUs"
Mr. Marks explained that if a suggestion were made to
combine oil and shoe leather for taxation, you might wish to
decline the opportunity. He pointed out that gas and oil are
so different in value and net worth.
Mr. Marks described Slide 6: "Mechanics of Current Tax"
costs=Combined oil and gas net value
BOEs=p/BOE net value (see Slide #7)
25% base rate=tax rate
value
Co-Chair Stedman referred to the Senate Finance Committee
presentations during the last couple of weeks. He noted
those presentations from the Department of Revenue (DOR) and
various consultants.
Mr. Marks continued with Slide 7: "Barrel of Oil Equivalents
(BOEs): Putting Oil and Gas on an Apples/Apples Basis
BTUs
mmbtu's (4.5 X 1,100)
equivalence of 900,000 barrels of oil (BOEs)
(4,950,000/5.5)
total 500,000+900,000=1,400,000
Co-Chair Stedman asked if the 4.5 billion cubic feet per day
indicates in estimated capacity that TransCanada is
proceeding with their binding open season. He pointed out
that the capacity was important with the large diameter of
gasline moving down into Alberta.
Mr. Marks stated that the plan for TransCanada is to ship
4.5 billion cubic feet a day of natural gas from the North
Slope to Alberta. North Slope gas is enriched with natural
gas liquids such as ethane, butane, propane, and other
heavier hydrocarbons that enhance the British Thermal Unit
(BTU) content. Dry gas content without natural gas liquids
has approximately 1000 BTUs to the cubic foot. North Slope
gas is expected to have approximately 1100 BTUs to the cubic
foot.
Mr. Marks explained that the per Barrel of Oil Equivalent
(BOE) net value is the combined oil and gas net value
divided by the total amount of oil and gas BOEs. Based on
the per BOE net value, a progressivity factor is derived.
The progressivity factor kicks in when the net value is $30
a BOE or greater. Below 30 dollars there is no progressivity
factor. The progressivity factor is added to the 25 percent
base rate. The single tax rate for the oil and gas is
applied to the combined oil and gas net value to arrive at
the tax.
9:21:43 AM
Mr. Marks addressed Slide 8: "Progressivity Mechanics"
o Base tax rate=25%
o Progressivity=($50-$30)X.004=8%
o Total tax of 33% on net value
*Slope changes to 0.1% after $92.50 net per BOE
value.
Co-Chair Stedman explained that the operating cost is
subtracted along with capital expenditures and shipping
charges from Valdez to the market.
Mr. Marks stated that the starting point is the per barrel
of oil equivalent net value, which includes the shipping and
pipeline tariffs and the operating and capital lease
development costs.
9:24:06 AM
Mr. Marks remarked on Slide 9: "How Gas impacts oil taxes"
Oil
Alone Gas
(p/bbl) (p/mmbtu)
Market Price $80.00 $6.00
Transportation $5.00 $4.50
Gross Value
Costs $20.00 $0.50
Net (p/barrel or p/mmbtu) $55.00 $1.00
Base rate 25.00%
Progressivity 10.00%
Total tax rate 35.00%
Daily bbls (oil) or mmbtu (gas) 500,000 4,950,000
Daily BOEs 500,000 900,000
Annual BOEs(millions) 183 329
Combined Oil and Gas
Oil $55.00
p/bbl net value 183
mmbtu's (millions) $10,038
Gas
p/mmbtu net value $1.00
mmbtu's (millions) 1,807
Total gas net value ($mm) $1,807
Total oil and gas net value $11,844
Total BOEs 511
Net value/BOE $23.18
No Progressivity!
9:26:41 AM AT EASE
9:26:56 AM RECONVENED
Mr. Marks detailed Slide 10: "Department of Revenue Examples
from February 24, 2010 Presentation to Senate Finance." He
discussed the magnitude of the combination of oil and gas.
The more oil and gas values differ, the greater the net
value is diminished. The progressivity and tax also drop.
9:32:40 AM
Mr. Marks detailed Slide 11: "How the Bill Works"
o Plus progressivity based on the combined oil and
gas net value/BOE
oil net value/barrel
not reduce oil taxes.
Co-Chair Stedman stated that the committee does not have an
intention of bringing SB 306 to the committee.
9:34:58 AM AT EASE
9:35:33 AM RECONVENED
Dr. Logsdon noted that the bill's intention is to separate
oil and gas for the purpose of production tax. The
legislation is designed to correct the method that the
progressive element in the current tax is calculated in
respect to oil and gas. He referred to Section 1 and the
specific language that identifies the production of oil for
progressivity rate purposes, which includes Section (g) of
AS 43.55.011. He noted that (g) shows a number of changes
designed to take out the language per BTU equivalent. The
two words define the combination of gas with oil to
calculate the progressivity tax schedule outlined through
(g) one and two. He noted that when the price of oil is
greater than $30 per barrel then progressivity kicks in at
the rate of 4/10 of a percent for every dollar that the net
value per barrel is above $30 to a maximum trigger point of
$92.50. Gas has been removed from the calculation of the
progressivity element of the tax rate.
9:38:21 AM
Dr. Logsdon referred to Section 3, where elements of the
production tax addresses taxation outside of the North
Slope. He mentioned that taxes on the Cook Inlet are limited
to the lesser of the net tax. Section 3 addresses taxable
oil if sold at the average price as calculated under the
Economic Limit Factor (ELF) law. The current law includes a
cross reference to the base rate. Any reference to
progressivity in the statute does not affect gas.
Dr. Logsdon referred to Section 4, which is an exception for
the application of the net tax to property outside of the
Cook Inlet. He noted that the base rate is another way to
clarify that gas will not be subject to the progressive
rate. Section 5 repeats the sentiment.
9:43:15 AM
Dr. Logsdon continued that a key concept is that each
reference to the use of a progressivity factor is only
indicated for oil, never for gas. Section 6 covers AS
43.55.160(a)(2) to the tax base and the calculation of the
net production value. There are no references to a
progressive tax rate affected by the calculation. The annual
production tax value in Section 1 references (e), but
Section 6 references AS 43.55.011(g), which is the section
that describes the progressivity rates. All references to
gas are parsed out. The next change is in Section 7 where
the language controlling the taxable net value and any
reference to gas is eliminated. Section 8 states that the
bill takes effect after the governor's signature or the day
after the expiration period on gubernatorial action. This
bill separates oil from gas in calculating the progressivity
factor, which is a function of calculating the net value at
the point of production and focuses on the progressivity
calculated on the basis of the value of oil and how it
compares to $30 per barrel.
9:48:38 AM
Senator Olson asked about the advantages for eliminating
progressivity for the natural gas production tax.
Dr. Logsdon responded that the task was to separate oil and
gas because of the dilution affect on the tax rate. One tax
theory states that matching up the tax on substances matches
the ability to pay, which would suggest that a lower value
commodity should be taxed at a lower rate. Setting tax
policy is more complicated than speculating. He noted that
taxes can have positive effects on state revenue and
negative effects on the revenue source. He did not offer an
opinion on Senator Olson's question. Senator Olson imagined
that there were no advantages to encouraging exploration or
investment. Dr. Logsdon responded that SB 305 does not
change the basic incentive structure that is already in
statute.
9:51:17 AM
Senator Thomas asked if there was gas currently sold at
Prudhoe Bay. He asked about the effect of SB 305 on the gas
sales. Mr. Marks answered that the gas sold in-state is
subject to the ELF provisions and is not affected by
progressivity.
Co-Chair Stedman stated that public hearing is scheduled for
March 11, 2010 with input from the administration.
9:52:52 AM
SB 305 was HEARD and HELD in Committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 305 Marks Intro 030910.pdf |
SFIN 3/9/2010 9:00:00 AM |
SB 305 |
| SB 305 2010 03 09 Logsdon Sectional Analysis.pdf |
SFIN 3/9/2010 9:00:00 AM |
SB 305 |