Legislature(2011 - 2012)SENATE FINANCE 532

04/09/2012 01:00 PM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 163 G.O. BONDS FOR PORTS TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
= SB 192 OIL AND GAS PRODUCTION TAX RATES
Heard & Held
SENATE BILL NO. 192                                                                                                             
                                                                                                                                
     "An Act relating to the oil and gas production     tax;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
JANAK  MAYER,   MANAGER,  UPSTREAM   AND  GAS,  PFC   ENERGY,                                                                   
discussed  a   PowerPoint  presentation  titled   "Discussion                                                                   
Slides: Alaska  Senate Finance Committee, April 9, 2012 (copy                                                                   
on file).                                                                                                                       
                                                                                                                                
1:47:21 PM                                                                                                                    
                                                                                                                                
Mr.   Mayer   announced   that   the   information   in   the                                                                   
presentation   was  in   response  to   questions  from   the                                                                   
committee on  CSSB 192 and  previous testimony.  He explained                                                                   
Slide  2, titled  "Cost  Sensitivity-From  April 3  Testimony                                                                   
and Discussion -  Impact of Rising Revenue Costs."  The slide                                                                   
graphed   the   "Revenue   Difference    Between   ACES   and                                                                   
Progressive  Severance Tax Options  under Different  Opex/bbl                                                                   
Assumptions"  for  the producer,  proposed  in  CSSB 192.  He                                                                   
determined  that  the  impact   of  the  tax  systems  varied                                                                   
depending  on the level  of costs  the producer incurred.  He                                                                   
noted that the  chart, originally presented on  April 3, 2012                                                                   
was   slightly   outdated  since   the   committee   recently                                                                   
increased  progressivity   from  .25   to  .27.   The  impact                                                                   
increased  taxes   for  the  producer  at  the   $80/bbl.  to                                                                   
$100/bbl.  (price  per  barrel)  range  as a  result  of  the                                                                   
change.  He  pointed  out  that   the  cost  sensitivity  was                                                                   
calculated   on   opex   (Operating   Expenditure).   Capital                                                                   
expenses  (capex)  were  not   factored  in  because  of  the                                                                   
impacts  of the  capital  credit for  the  producer and  that                                                                   
typically,  high  cost  capital  expenditure  was  associated                                                                   
with  new production.  New  production  received reduced  tax                                                                   
rates  under  CSSB  192. Cost  sensitivity  was  relative  to                                                                   
opex.  He  reminded   the  committee  that  the   system  was                                                                   
calibrated  to be  revenue neutral  at  $100/bbl. at  average                                                                   
operating  costs of $12/bbl.  as forecast  by the  Department                                                                   
of  Revenue  (DOR) for  FY  2013.  He related  BP's  (British                                                                   
Petroleum)  previous testimony  that the  consequence of  the                                                                   
revenue  neutral  structure  meant the  producer  incurred  a                                                                   
higher tax  burden in  CSSB 192  than under  ACES if  the per                                                                   
barrel costs  were higher than  the average operating  costs.                                                                   
He concurred  with BP's  point of view.  He recapped  that if                                                                   
opex  rose as  production declined  and opex  costs were  not                                                                   
variable  on a cost  per barrel  basis the  result was  a tax                                                                   
increase.                                                                                                                       
                                                                                                                                
1:52:24 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  pointed out  that the effect  was a direct  result                                                                   
of  the committee's  desire  to  structure  a tax  with  more                                                                   
incentive  for  cost  control  and  less  state  support  for                                                                   
spending  at high  levels of  progressivity  "because of  the                                                                   
interaction   of  high   progressivity   with  full   capital                                                                   
deductibility"  under ACES. He  exemplified a scenario  under                                                                   
ACES  where  progressivity  was triggered  and  the  producer                                                                   
incurred a  production tax  rate of  40 percent, each  dollar                                                                   
of  operating  or capital  costs  can  be deducted  from  the                                                                   
production  tax  liability.  Since  the  production  tax  per                                                                   
barrel also  decreased the result  was to move  "further down                                                                   
the curve  of progressivity."  He emphasized that  under ACES                                                                   
the  costs  were   fully  deductible  from  the   25  percent                                                                   
production  tax  but  under CSSB  192  progressivity  was  no                                                                   
longer   taxed   on   the  net.   The   ability   to   reduce                                                                   
progressivity as  costs escalated was lost. He  believed that                                                                   
conclusion was  the fundamental  difference between  ACES and                                                                   
CSSB  192.   He  reiterated  that   CSSB192  created   a  tax                                                                   
structure that  reduced "excessive support" for  rising costs                                                                   
and incentivized  cost control.  He stressed that  the direct                                                                   
consequence  of increasing  incentives for  cost control  was                                                                   
higher taxes for producers with higher costs.                                                                                   
                                                                                                                                
Mr. Mayer  indicated that  CSSB 192  did offer a  substantial                                                                   
form  of   mitigation,   which  was  the   reduced  rate   of                                                                   
progressive  tax  on the  gross  for  new production  in  new                                                                   
areas  and  on  incremental  production   above  the  decline                                                                   
curve. Also,  companies  producing in a  completely new  area                                                                   
incurred  only  a  5  percent   tax  for  seven  years  which                                                                   
diminished  the impact  on costs.  He warned  that the  seven                                                                   
year  cycle  limited the  impact  of  lower taxes  on  higher                                                                   
operating costs  overall. He reminded the committee  that new                                                                   
production  incurred the  highest operating  costs. In  order                                                                   
to achieve cost  sensitivity it was imperative  that recently                                                                   
completed developments  like Oooguruk was included  under new                                                                   
production due  to high costs  well above the $12  fixed rate                                                                   
designated  in CSSB  192. The  effect reduced  taxes for  the                                                                   
first  seven  years.  He cautioned  that  the  reduction  was                                                                   
offset  by the  full tax  rate kicking  in after  the 7  year                                                                   
period.  He suggested that  extension or  elimination  of the                                                                   
seven  year  period could  mitigate  the  impact.  Similarly,                                                                   
mitigation   was   possible    by   reducing   or   excluding                                                                   
progressivity  and  simply  charge  the base  tax.  The  same                                                                   
scenario applied  to high  cost incremental (new  production)                                                                   
production from existing fields.                                                                                                
                                                                                                                                
1:58:23 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  addressed the conclusion  of the DOR  testimony on                                                                   
CSSB  192  that  sensitivity to  higher  costs  encouraged  a                                                                   
"further  retreat  to  harvest mode"  since  companies  would                                                                   
"face  lower  tax   rates  due  to  lower  costs   that  dis-                                                                   
incentivized  harvest  production."  He  disagreed  with  the                                                                   
conclusion. He  reasoned that  as production falls  operating                                                                   
costs were  likely to  stay flat and  costs per barrel  rose.                                                                   
"Harvest mode did not imply low costs per barrel."                                                                              
                                                                                                                                
Mr. Mayer  refuted DOR's assumption  that tax  incentives for                                                                   
existing  production  under CSSB  192  were not  as  strongly                                                                   
supported  as  under  ACES.  New  capex,  which  created  new                                                                   
production  and  was taxed  at  a  lower  rate, acted  as  an                                                                   
offset.  He  revealed  that  DOR's   testimony  ignored  that                                                                   
interaction.  Lastly,  he contended  that  production  volume                                                                   
and  the resulting  revenue  generated  was more  significant                                                                   
than  the   tax  rate.  It   would  take  an   "extraordinary                                                                   
reduction in tax"  to incentivize a producer  to deliberately                                                                   
produce   less  revenue,   especially  if   costs  were   not                                                                   
decreased.                                                                                                                      
                                                                                                                                
Mr. Mayer  addressed Slide 3,  "FY 2013 v Lifecycle  Analysis                                                                   
-  Impact  of   Costs  &  7  year  Time  Limit."   The  slide                                                                   
reproduced slides  from previous presentations  from April 4,                                                                   
2012 and  April 5, 2012 that  related to government  take for                                                                   
new  development  under  CSSB  192.  He  clarified  that  the                                                                   
slides  contained seemingly  conflicting  data on  government                                                                   
take. The  FY 2013  data showed government  take in  the mid-                                                                   
sixties  percent   and  the  lifecycle  slide   in  the  mid-                                                                   
seventies percent.  He explained that one analysis  was based                                                                   
on FY  2013 and  the later  benchmarking data  was done  as a                                                                   
life cycle analysis.  The April 4th analysis was  based on FY                                                                   
2013 outcomes  factoring in  revenue neutrality at  $100/bbl.                                                                   
The  April 5th  data  was based  on benchmarking,  which  was                                                                   
always  based  on  lifecycles.   A  lifecycle  analysis  used                                                                   
generic  new development  costs  as  opposed to  North  Slope                                                                   
average costs  for FY  2013 which  moved the government  take                                                                   
upward.  In  addition, the  FY  2013  data included  the  new                                                                   
production  cap of  5 percent,  which  drove government  take                                                                   
down.                                                                                                                           
                                                                                                                                
Mr. Mayer  stated that  the lifecycle  analysis included  the                                                                   
higher  tax  rate on  new  production  after  the 7  year,  5                                                                   
percent cap expired, which increased government take.                                                                           
                                                                                                                                
2:04:23 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman surmised  that one analysis  was run  using                                                                   
life cycle  new production data and  the other was run  on FY                                                                   
2013 blended numbers. Mr. Mayer agreed.                                                                                         
                                                                                                                                
Mr. Mayer discussed the slide 4:                                                                                                
                                                                                                                                
     Some Goals Are Mutually Exclusive                                                                                          
                                                                                                                                
     •Achieve decoupling                                                                                                        
     •Reduce high levels of support for spending, and poor                                                                      
     incentives for cost control                                                                                                
     •Minimize complexity, including need for separate cost                                                                     
      accounting                                                                                                                
     •Reduce government take on new/incremental production                                                                      
     •No increases on any taxpayers                                                                                             
     •Revenue neutral at $100+ /bbl.                                                                                            
     •More even split between state and companies above                                                                         
      $100/$120/bbl.                                                                                                            
                                                                                                                                
He stated that the fundamental issue was that all goals                                                                         
cannot be achieved in any single tax structure.                                                                                 
                                                                                                                                
Mr. Mayer turned to slide 5:                                                                                                    
                                                                                                                                
      Some Goals Are Mutually Exclusive                                                                                         
                                                                                                                                
      ACES with a 40% Cap                                                                                                       
                                                                                                                                
     •Achieve decoupling                                                                                                        
     •Reduce high levels of support for spending, and poor                                                                      
      incentives for cost control                                                                                               
     •Minimize complexity, including need for separate cost                                                                   
      accounting                                                                                                              
     •Reduce government take on new/incremental production                                                                      
     •No increases on any taxpayers                                                                                           
     •Revenue neutral at $100+ /bbl                                                                                           
     •More even split between state and companies above                                                                       
      $100/$120 / bbl                                                                                                         
     [Items in Bold were achievable goals.]                                                                                     
                                                                                                                                
Mr. Mayer moved to slide 6:                                                                                                     
                                                                                                                                
     Some Goals Are Mutually Exclusive                                                                                          
                                                                                                                                
     ACES with a 40% Cap & SB 305-Style Decoupling                                                                              
                                                                                                                                
     •Achieve decoupling                                                                                                      
     •Reduce high levels of support for spending, and poor                                                                      
      incentives for cost control                                                                                               
     •Minimize complexity, including need for separate cost                                                                     
      accounting                                                                                                                
     •Reduce government take on new/incremental production                                                                      
     •No increases on any taxpayers                                                                                             
     •Revenue neutral at $100+ /bbl                                                                                           
     •More even split between state and companies above                                                                       
      $100/$120/bbl.                                                                                                          
     [Items in Bold were achievable goals.]                                                                                     
                                                                                                                                
Mr. Mayer directed attention to slide 7:                                                                                        
                                                                                                                                
     Some Goals Are Mutually Exclusive                                                                                          
                                                                                                                                
     HB110                                                                                                                      
                                                                                                                                
      •Achieve decoupling                                                                                                       
     •Reduce high levels of support for spending, and poor                                                                    
      incentives for cost control                                                                                             
     •Minimize complexity, including need for separate cost                                                                     
      accounting                                                                                                                
     •Reduce government take on new/incremental production                                                                    
     •No increases on any taxpayers                                                                                           
     •Revenue neutral at $100+ /bbl                                                                                             
     •More even split between state and companies above                                                                       
      $100/$120 / bbl                                                                                                         
     [Items in Bold were achievable goals.]                                                                                     
                                                                                                                                
2:11:04 PM                                                                                                                    
                                                                                                                                
Mr. Mayer addressed slide 8:                                                                                                    
                                                                                                                                
      Some Goals Are Mutually Exclusive                                                                                         
                                                                                                                                
      CSSB192                                                                                                                   
                                                                                                                                
     •Achieve decoupling                                                                                                      
     •Reduce high levels of support for spending, and poor                                                                    
      incentives for cost control                                                                                             
     •Minimize complexity, including need for separate cost                                                                   
      accounting                                                                                                              
     •Reduce government take on new/incremental production                                                                    
     •No increases on any taxpayers                                                                                             
     •Revenue neutral at $100+ /bbl                                                                                           
     •More even split between state and companies above                                                                       
      $100/$120 / bbl                                                                                                         
     [Items in Bold were achievable goals.]                                                                                     
                                                                                                                                
Mr. Mayer pointed  out that CSSB 192 accomplished  all of the                                                                   
goals except  for one; no  increased taxes. He  believed that                                                                   
the  committee  must  consider   "fundamental  tradeoffs"  to                                                                   
achieve  all  of  the  goals.   He  summarized  the  ways  to                                                                   
mitigate  increased  taxes: eliminate  progressivity  on  new                                                                   
and   incremental   production,   raise   the   progressivity                                                                   
threshold, or  compromise on the  goal of revenue  neutrality                                                                   
at $100/bbl.                                                                                                                    
                                                                                                                                
Mr. Mayer  discussed Slide  9 titled, "Regime  Competiveness:                                                                   
Relative  Government Take."  He spoke  to previous  testimony                                                                   
that suggested that  ACES was a good system  at $100/bbl. but                                                                   
at higher  prices was problematic  or that 75  percent levels                                                                   
of government take  was a desirable goal. He  shared that PFC                                                                   
Energy  held  the  position  that  approximately  75  percent                                                                   
government  take  under ACES  at  $100/bbl. depicted  in  the                                                                   
ranking  on slide  9, was very  high by  world standards.  He                                                                   
noted the  ranking was  higher than any  oil producer  in the                                                                   
Lower 48  states. The  Lower 48 states  were faced  with much                                                                   
lower costs,  which increased its competiveness  with Alaska.                                                                   
He  observed that  Norway's government  take  was higher  but                                                                   
maintained  a National  Oil company.  Norway provided  active                                                                   
equity participation  through  Petoro, which ensured  ongoing                                                                   
investment in  its oil sector.  He explained that  instead of                                                                   
setting  a target  rate  for a  desired  outcome, PFC  Energy                                                                   
recommended  incentivizing production.  He detailed  that new                                                                   
investment  was  typically  accompanied  by  high  production                                                                   
costs. Flexibility  in government take  must be built  into a                                                                   
tax   regime  in   order   to  incentivize   production.   He                                                                   
reiterated  the ways  to accomplish  reduced government  take                                                                   
on new production.                                                                                                              
                                                                                                                                
2:17:18 PM                                                                                                                    
                                                                                                                                
Senator Thomas  asked for  clarification regarding  the chart                                                                   
on slide  2. Mr. Mayer responded  that the chart  illustrated                                                                   
the difference between  ACES and CSSB 192 at  different price                                                                   
levels and opex  assumptions. The horizontal axis  was set at                                                                   
zero. Any  point below  the zero  line represented  a revenue                                                                   
or  tax decrease.  Conversely,  every  point above  the  zero                                                                   
line represented a tax increase compared to ACES.                                                                               
                                                                                                                                
Senator Thomas asked  for a clarification on  the second goal                                                                   
on slide  8, "Reduce  high levels  of support for  spending…"                                                                   
Mr.  Mayer interpreted  the goal  as high  levels of  support                                                                   
from the state to industry.                                                                                                     
                                                                                                                                
Co-Chair   Stedman   exemplified   that  the   state   cannot                                                                   
subsidize capital  expenditures at  levels close to  or above                                                                   
100 percent. Mr. Mayer agreed.                                                                                                  
                                                                                                                                
2:21:47 PM                                                                                                                    
                                                                                                                                
SB  192  was   HEARD  and  HELD  in  committee   for  further                                                                   
consideration.                                                                                                                  
                                                                                                                                

Document Name Date/Time Subjects
SB 163 - CSSB 163(FIN) version D.pdf SFIN 4/9/2012 1:00:00 PM
SB 163
SB 192 April 9 PFC Energy Alaska Senate Finance.pdf SFIN 4/9/2012 1:00:00 PM
SB 192