Legislature(2011 - 2012)SENATE FINANCE 532

04/05/2012 01:00 PM FINANCE


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02:50:41 PM Start
02:51:24 PM SB192
03:33:13 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 192 OIL AND GAS PRODUCTION TAX RATES TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
SENATE BILL NO. 192                                                                                                             
                                                                                                                                
     "An Act relating to the oil and gas production tax;                                                                        
     and providing for an effective date."                                                                                      
                                                                                                                                
2:51:24 PM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman  MOVED  to ADOPT  the  proposed  committee                                                                    
substitute  for SB  192,  Work  Draft 27-LS1305\O  (Bullock,                                                                    
4/5/12).                                                                                                                        
                                                                                                                                
Co-Chair Stedman OBJECTED for the purpose of discussion.                                                                        
                                                                                                                                
2:51:44 PM                                                                                                                    
                                                                                                                                
DARWIN PETERSON, STAFF, SENATOR  BERT STEDMAN, explained the                                                                    
changes  in the  Committee Substitute  (CS). He  shared that                                                                    
Section  1 remained  the same,  while Section  2 included  a                                                                    
provision that allowed exemption  from the minimum floor tax                                                                    
for  small producers.  Section 3  reflected the  new 3  tier                                                                    
progressivity approach.  He added that subsection  1 on page                                                                    
4, line  19 addressed existing production  on legacy fields.                                                                    
The calculation  began at $60  with a progressivity  rate of                                                                    
0.27  percent. At  $120, 16.2  percent was  reached, and  at                                                                    
that point,  the progressivity was  reduced to  0.03 percent                                                                    
and  capped at  20 percent  for existing  production in  the                                                                    
legacy fields.                                                                                                                  
                                                                                                                                
2:54:47 PM                                                                                                                    
                                                                                                                                
He explained that page 5,  line 28 updated the definition of                                                                    
new  production with  a 7-year  window.  The new  production                                                                    
outside of the  legacy fields was calculated  at $60/bbl and                                                                    
a  progressivity  rate  of 0.05  percent  was  applied.  The                                                                    
progressivity was capped at 5  percent. He addressed page 6,                                                                    
line 1,  which referred to the  new production progressivity                                                                    
calculation "from  a lease or  property." He  explained that                                                                    
the date was selected to  include the Nakiachuk and Oooguruk                                                                    
oil   Fields,   which   would    fall   under   the   lowest                                                                    
progressivity. Section  4 on  page 6,  line 11  adjusted the                                                                    
$60/bbl base  amount by the  annual percent increase  in the                                                                    
United States  Consumer Price Index. The  indexation avoided                                                                    
the  stealth  tax  as  advised by  the  consultant  for  PFC                                                                    
energy. Page 6,  Section 4, lines 23  through 29 represented                                                                    
the  production  decline   calculation.  The  target  volume                                                                    
equaled a volume of oil  produced in 2011, multiplied by the                                                                    
decline percentage,  calculated using the cube  root method.                                                                    
The  calculation created  a fixed  decline  on a  particular                                                                    
time  going forward  to incentivize  all of  the incremental                                                                    
production in Alaska's legacy fields.  He explained that the                                                                    
other  sections of  the bill  remained the  same except  for                                                                    
changes to the effective dates  in Sections 13 and 14, which                                                                    
detailed  that the  Petroleum Information  Management System                                                                    
would take effect immediately,  while the remaining sections                                                                    
of the bill take effect January 1, 2013.                                                                                        
                                                                                                                                
2:57:59 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  REMOVED  his OBJECTION,  There  being  NO                                                                    
FURTHER OBJECTION, Work Draft 27-LS1305\O was ADOPTED.                                                                          
                                                                                                                                
2:58:52 PM                                                                                                                    
                                                                                                                                
JANAK  MAYER,   MANAGER,  UPSTREAM  AND  GAS,   PFC  ENERGY,                                                                    
initiated  the PowerPoint  presentation "Discussion  Slides:                                                                    
Alaska Senate Finance Committee,"  dated April 5, 2012 (copy                                                                    
on file).                                                                                                                       
                                                                                                                                
2:59:17 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  noted   that  the  presentation  included                                                                    
updated  slides   detailing  the  oil  decline   curve.  The                                                                    
presentation  was prepared  in  response  to Senate  Finance                                                                    
Committee questions.                                                                                                            
                                                                                                                                
3:00:21 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer discussed  slide 2,  titled  "Production Above  a                                                                    
Decline-Fixed   v   Annual   Calculation."   He   reiterated                                                                    
questions  regarding  the  use  of  decline  methodology  to                                                                    
incentivize   production  above   the  decline   curve.  His                                                                    
research  included  a  review of  previous  amendments  that                                                                    
incentivized production  above the previous  year's figures.                                                                    
He  explained  that  his  research   involved  a  review  of                                                                    
amendments   from  the   Senate  Resources   Committee  that                                                                    
calculated a decline curve.  He proposed incentivizing above                                                                    
the  decline  curve. Decline  was  calculated  on a  rolling                                                                    
average, and  the incentive was applied  to production above                                                                    
a target based on last year's production.                                                                                       
                                                                                                                                
3:04:48 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  explained slide 3, "Approximate  Decline Rates to                                                                    
2010 by Start Year" and stated  that the CS compared 2008 to                                                                    
2011 production,  particularly the implied decline  rate. He                                                                    
noted that  the graph was  not a timeline but  a sensitivity                                                                    
of  an average  beginning  in 1995.  The  graph depicted  an                                                                    
approximation  using publically  available production  data,                                                                    
applying equity stakes for each  company in those assets. He                                                                    
detailed  the  graph's   depiction  of  differences  between                                                                    
producers. From  2007 to  2010, Exxon  Mobile had  a decline                                                                    
curve  of slightly  over 6  percent; whereas  decline curves                                                                    
for  BP and  Conoco Phillips  were significantly  higher. He                                                                    
stated that the  higher curves came from  the higher decline                                                                    
at Kuparuk compared to other assets.                                                                                            
                                                                                                                                
3:07:36 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer  spoke to  slide  4  titled "Approximate  Decline                                                                    
Rates  to 2010  by Start  Year." The  graph was  modified to                                                                    
include  the  average  start  of the  decline  in  2010  for                                                                    
Prudhoe Bay  and Kuparuk River.  He commented on  the higher                                                                    
rates of decline for Kuparuk  River than for Prudhoe Bay. He                                                                    
revisited slide 3 stating that  higher rates of decline were                                                                    
observed for Kuparuk  and Prudhoe Bay than  for Exxon Mobil.                                                                    
He explained that higher rates  of decline created a steeper                                                                    
decline forecast  based on the  methodology along  with more                                                                    
room for  incentive. He encouraged  the committee  to ponder                                                                    
the  question about  whether a  flat rate  or a  companywide                                                                    
approach was better.                                                                                                            
                                                                                                                                
3:08:46 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer discussed  slide  5  titled "Approximate  Decline                                                                    
Rates to 2010 by Start  Year." He explained that he employed                                                                    
a  maximum decline  curve of  20  percent, for  the sake  of                                                                    
legibility. The  graph depicted a  high rate  of variability                                                                    
between different assets, with  decline curves calculated on                                                                    
the same basis as the previous slides.                                                                                          
                                                                                                                                
3:09:55 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  explained slide  6 titled  "Regime Competiveness:                                                                    
Relative  Government  Take."  He explained  that  the  slide                                                                    
provided an  updated version of relative  government take as                                                                    
a benchmarking  exercise, using stylized cash  flow profiles                                                                    
discussed  in  previous  committee  meetings.  The  existing                                                                    
producer had  relatively low  levels of  costs, with  a high                                                                    
level of costs for a new  development. The costs for the new                                                                    
producer  were approximately  $17 per  barrel. He  explained                                                                    
that  a  producer  interested in  new  production  occurring                                                                    
without existing  infrastructure would include  higher costs                                                                    
and higher government  take.  He noted that  the indexing of                                                                    
the  break-point  at  which progressivity  starts,  was  not                                                                    
included in the depictions.                                                                                                     
                                                                                                                                
3:12:39 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman requested further  explanation for slide 6.                                                                    
He asked why the bar  depicting CSSB 192 (Existing Producer)                                                                    
was  located   above  the   bar  depicting   ACES  (Existing                                                                    
Producer).  Mr.  Mayer responded  that  at  $60/bbl of  oil,                                                                    
including  the impact  of indexing  for  inflation, the  two                                                                    
bars would  be equal. He  continued that Slide 6  depicted a                                                                    
lack   of  indexing   for  inflation,   which  allowed   the                                                                    
progressivity at  lower price levels throughout  the 30-plus                                                                    
year  time horizon.  He credited  Co-Chair  Stedman for  the                                                                    
excellent question and reiterated  that incorporation of the                                                                    
indexing  into  the  model would  illustrate  no  difference                                                                    
between  CSSB 192  and Alaska's  Clear  and Equitable  Share                                                                    
(ACES).                                                                                                                         
                                                                                                                                
3:13:40 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman required  further  explanation. Mr.  Mayer                                                                    
explained that  no difference existed between  ACES and CSSB                                                                    
192 because  of the impact  of indexing. Without  the impact                                                                    
of  indexing, inflation  had  a  disproportionate impact  on                                                                    
CSSB  192 versus  ACES  because  the tax  was  on the  gross                                                                    
rather than  the net, which  made the  indexing particularly                                                                    
important.  He  noted that  viewing  higher  rates than  the                                                                    
depicted $60/bbl  created the opposite situation  where CSSB                                                                    
192 fell significantly below ACES.                                                                                              
                                                                                                                                
3:14:16 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  joked that  if  Alaska  wanted to  out-do                                                                    
North  Dakota,  they  would  keep their  price  at  $60  per                                                                    
barrel. Mr. Mayer explained that  the states depicted in the                                                                    
graph were  sometimes duplicated, with the  difference being                                                                    
the costs  associated with development.  He added  that when                                                                    
costs rise in low  price environments, "government take" was                                                                    
relatively high.  He agreed that  at $60/bbl,  North Dakota,                                                                    
Texas   and   Louisiana    remained   relatively   low   for                                                                    
conventional production.                                                                                                        
                                                                                                                                
3:15:30 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer discussed  slide 7:  "Average Government  Take of                                                                    
Global Fiscal Regimes at $80/bbl"  and related that ACES was                                                                    
the second  highest regime  at $80  per barrel.  He observed                                                                    
slide 8:  Average Government Take  of Global  Fiscal Regimes                                                                    
at  $100/bbl" where  a  rise to  $100 per  barrel  led to  a                                                                    
significant drop of 60 percent in fixed royalty regimes.                                                                        
                                                                                                                                
3:17:04 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer explained  slide 9:  "Average Government  Take of                                                                    
Global Fiscal Regimes  at $120 /bbl." He  clarified that the                                                                    
graph depicted significant  increases in progressivity under                                                                    
ACES,  while government  take for  CSSB  192 increased  much                                                                    
less  significantly. He  commented that  other regimes  also                                                                    
increased significantly in government take.                                                                                     
                                                                                                                                
3:17:48 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer discussed  slide  10  titled "Average  Government                                                                    
Take of  Global Fiscal Regimes  at $140/bbl." He  noted that                                                                    
at  $140/bbl, the  gap increased  dramatically and  ACES was                                                                    
equal  to Norway  and  became  the greatest  government-take                                                                    
level.  At that  point, CSSB  192 hit  the 73  percent split                                                                    
seen in  past analysis, and  remained there with  the higher                                                                    
price levels.                                                                                                                   
                                                                                                                                
3:18:41 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  explained slide 11:  "Average Government  Take of                                                                    
Global Fiscal Regimes  at $160/bbl." He noted  that CSSB 192                                                                    
remained constant, while ACES moved  further up the chart of                                                                    
government-take.  He  noted  that   in  Slide  12:  "Average                                                                    
Government Take  of Global Fiscal Regimes  at $180/bbl," the                                                                    
problem  was  further  exacerbated  with  the  higher  price                                                                    
assumptions.                                                                                                                    
                                                                                                                                
3:19:02 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  discussed slide 13:  "Average Government  Take of                                                                    
Global  Fiscal  Regimes at  $200/bbl."  He  stated that  the                                                                    
disparity increased  substantially with the  increased price                                                                    
assumptions.                                                                                                                    
                                                                                                                                
3:19:24 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  explained slide 14:  "Average Government  Take of                                                                    
Global Fiscal Regimes at $60/bbl."   He revisited the slides                                                                    
with the  focus on  new development. He  stated that  only a                                                                    
few  percentage  points  existed   in  between  the  various                                                                    
producers, but  the indexing of  inflation would  again even                                                                    
the field between ACES and CSSB 192 at $60 per barrel.                                                                          
                                                                                                                                
3:20:14 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  explained slide 15:  "Average Government  Take of                                                                    
Global Fiscal  Regimes at $80/bbl."  He noted that  the ACES                                                                    
levels were approximately equivalent to Norway.                                                                                 
                                                                                                                                
3:20:25 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  discussed slide 17:  "Average Government  Take of                                                                    
Global Fiscal Regimes  at $120/bbl." He stated  that by $120                                                                    
per barrel,  the government take for  ACES was approximately                                                                    
80  percent  for a  new  producer,  while CSSB  192  settled                                                                    
around 70 percent, where it remained.                                                                                           
                                                                                                                                
3:20:49 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  queried  the impact  on  the  illustrated                                                                    
ranking  of inflation  for new  development using  CSSB 192.                                                                    
Mr.  Mayer  replied that  the  difference  comprised only  a                                                                    
couple  of   percentage  points   in  government   take.  He                                                                    
requested  additional  time to  adapt  the  model to  better                                                                    
answer  the question.  Co-Chair Stedman  asked if  Mr. Mayer                                                                    
would add the requested information  to his model. Mr. Mayer                                                                    
agreed to incorporate the information.                                                                                          
                                                                                                                                
3:22:06 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer  explained  that with  progressively  and  higher                                                                    
price levels, ACES moved higher and higher up the chart.                                                                        
                                                                                                                                
3:22:32 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer detailed  slide 18:  "Average Government  Take of                                                                    
Global  Fiscal Regimes  at $140/bbl."  He  noted that  while                                                                    
ACES  continued to  rise  up the  chart,  CSSB 192  remained                                                                    
fixed at the 72 percent  government take figure. He observed                                                                    
that HB  110, for  new development fell  below CSSB  192. He                                                                    
mentioned  that  the  chart   allowed  for  new  development                                                                    
including the impacts of the  seven year reduction down to a                                                                    
five percent  cap in  progressivity in  the early  years. He                                                                    
stated HB  110 fell  significantly for new  development, due                                                                    
to the impact of the reduced 15 percent base.                                                                                   
                                                                                                                                
3:23:15 PM                                                                                                                    
                                                                                                                                
Mr. Mayer discussed slides 19  through 21, which illustrated                                                                    
government  take for  new development  at $160/bbl-$200/bbl.                                                                    
He noted  that the difference illustrated  that ACES arrived                                                                    
at the mid-80  percent government take, which  was among the                                                                    
highest in the  world. On the other hand,  CSSB 192 remained                                                                    
above most conceivable developments in the Lower 48.                                                                            
                                                                                                                                
3:23:47 PM                                                                                                                    
                                                                                                                                
Senator Ellis asked  for clarification on slide  8. He asked                                                                    
if  revenue was  neutral at  $110/bbl why  the disparity  in                                                                    
government take was observed. He  also queried the impact of                                                                    
indexing at all levels. Mr.  Mayer replied that CSSB 192 was                                                                    
revenue-neutral  at   $100/bbl.  He  added  that   the  cost                                                                    
assumptions  were critical  to  the  question regarding  the                                                                    
neutrality. For  new development,  the figures used  for the                                                                    
analysis  separate the  capital investment  that is  part of                                                                    
new investment  from the capital investment  that maintained                                                                    
a steady decline.  He added that the impact  of indexing was                                                                    
used to reduce  government take on the life  cycle basis. He                                                                    
mentioned that the impact of  indexing, when viewed over the                                                                    
entire cycle of a project reduced government take slightly.                                                                     
                                                                                                                                
3:26:05 PM                                                                                                                    
                                                                                                                                
Senator Ellis asked if  indexing maintained the relationship                                                                    
to allow for durable  and sustainable architecture. He asked                                                                    
why  indexing was  employed at  the expense  of the  citizen                                                                    
take. Mr. Mayer  responded that the purpose  of indexing was                                                                    
indeed to  allow for  a durable  and sustainable  system. He                                                                    
stated that indexing removed the stealth tax effect.                                                                            
                                                                                                                                
3:27:09 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  queried if ACES  and CSSB 192  would incur                                                                    
similar  government  take  if ACES  had  been  indexed  upon                                                                    
creation.  Mr. Mayer  replied that  indexing would  probably                                                                    
reduce  the  government take  under  ACES.  He informed  the                                                                    
committee   that  he   required  further   analysis  to   be                                                                    
absolutely certain.  He opined  that the impact  of indexing                                                                    
should appear  greater with  CSSB 192  than ACES  because of                                                                    
leveling  the tax  on the  net rather  than the  gross along                                                                    
with sensitivity to cost.                                                                                                       
                                                                                                                                
3:27:56 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman requested modification  of the model to run                                                                    
index  figures  for  the  committee.  Mr.  Mayer  agreed  to                                                                    
provide the  information. Co-Chair  Stedman stated  that the                                                                    
inflation   index  would   allow  comparison   by  committee                                                                    
members.                                                                                                                        
                                                                                                                                
3:28:25 PM                                                                                                                    
                                                                                                                                
Senator Ellis  pointed out that industry  expressed concerns                                                                    
that the  model did not adequately  calculate company costs.                                                                    
He expressed confidence in the  consultant and the modeling.                                                                    
He believed that Mr. Mayer  deserved an opportunity to speak                                                                    
to the  concern of company  costs. Mr. Mayer  responded that                                                                    
the vast majority of the  analysis utilized 2013 figures. He                                                                    
attributed  the  information   provided  to  stylized  field                                                                    
development models, which  compared existing producer levels                                                                    
to new  development levels of government  take. He perceived                                                                    
two  different  questions,  one being  the  deductible  cost                                                                    
under the  fiscal system, and  the other being  the question                                                                    
of the  picture of the  business. The costs  illustrated for                                                                    
new development  provided a  reasonable representation  of a                                                                    
new  "light oil"  development that  was similar  to existing                                                                    
production. Drilling  further from existing  production, for                                                                    
material that is  more viscous would incur  higher costs. He                                                                    
offered  to   provide  analysis   for  those   projects,  if                                                                    
requested.  He  clarified  that the  analysis  provided  was                                                                    
meant to illustrate information for recent developments.                                                                        
                                                                                                                                
3:32:31 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman noted  that Mr.  Mayer  planned to  travel                                                                    
through  the weekend  and he  asked  that committee  members                                                                    
communicate  their  requests   for  further  information  if                                                                    
necessary.                                                                                                                      
                                                                                                                                
SB  192  was  HEARD  and   HELD  in  Committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                

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