Legislature(2013 - 2014)SENATE FINANCE 532

02/28/2013 09:00 AM FINANCE

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* first hearing in first committee of referral
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= bill was previously heard/scheduled
Heard & Held
Heard & Held
Bills Previously Heard/Scheduled
SENATE BILL NO. 21                                                                                                            
     "An  Act relating  to  appropriations  from taxes  paid                                                                    
     under the  Alaska Net Income  Tax Act; relating  to the                                                                    
     oil and gas  production tax rate; relating  to gas used                                                                    
     in the state; relating  to monthly installment payments                                                                    
     of the oil and gas  production tax; relating to oil and                                                                    
     gas  production  tax  credits for  certain  losses  and                                                                    
     expenditures; relating  to oil  and gas  production tax                                                                    
     credit  certificates; relating  to nontransferable  tax                                                                    
     credits based  on production; relating  to the  oil and                                                                    
     gas tax  credit fund; relating to  annual statements by                                                                    
     producers and explorers;  relating to the determination                                                                    
     of annual  oil and gas production  tax values including                                                                    
     adjustments  based on  a percentage  of gross  value at                                                                    
     the  point   of  production  from  certain   leases  or                                                                    
     properties;    making   conforming    amendments;   and                                                                    
     providing for an effective date."                                                                                          
1:36:28 PM                                                                                                                    
DANIEL   SULLIVAN,  COMMISSIONER,   DEPARTMENT  OF   NATURAL                                                                    
RESOURCES,  provided  a   Power  Point  presentation  titled                                                                    
"Arresting  TAPS  Throughput  Decline and  Oil  Tax  Reform"                                                                    
(copy  on  file). He  discussed  that  the department  would                                                                    
provide  an  overview of  the  bill  and would  discuss  the                                                                    
challenge related to TAPS throughput  decline, it would also                                                                    
underscore that the continued decline was not inevitable.                                                                       
Commissioner Sullivan looked at slide  2, "TAPS - A Critical                                                                    
State and National Energy Asset."                                                                                               
     -The Trans  Alaska Pipeline, 11 pump  stations, several                                                                    
     hundred  miles  of  feeder pipelines,  and  the  Valdez                                                                    
     Marine  Terminal constitute  the Trans-Alaska  Pipeline                                                                    
     System (TAPS).                                                                                                             
     -At 800  miles long, the  Trans Alaska Pipeline  is one                                                                    
     of the longest pipelines in  the world; it crosses more                                                                    
     than 500  rivers and streams and  three mountain ranges                                                                    
     as it carries Alaska's oil from Prudhoe Bay to Valdez.                                                                     
     -The  U.S. Congress  was instrumental  in the  approval                                                                    
     and  rapid  development   of  TAPS.  Congress  approved                                                                    
     construction  of the  pipeline  with  the Trans  Alaska                                                                    
     Pipeline Authorization Act of 1973.                                                                                        
     -The principle focus  of this Act is  as relevant today                                                                    
     as it was in 1973:  "the early development and delivery                                                                    
     of oil  and gas from  Alaska's North Slope  to domestic                                                                    
     markets is in the  national interest because of growing                                                                    
     domestic  shortages  and   increasing  dependence  upon                                                                    
     insecure foreign sources."                                                                                                 
1:40:20 PM                                                                                                                    
Commissioner  Sullivan  turned  to  slide 3  with  the  same                                                                    
     -TAPS has transported over 16.3  billion barrels of oil                                                                    
     and natural gas liquids  since June of 1977. Production                                                                    
     peaked  at 2.2  million  barrels per  day  in the  late                                                                    
     1980s,  representing   25  percent  of   U.S.  domestic                                                                    
     -Since  its  peak,  however,  throughput  has  steadily                                                                    
     declined; today, TAPS is 2/3  empty and declining at an                                                                    
     average of 6 percent per year                                                                                              
     -TAPS throughput decline  threatens economic disruption                                                                    
     and the very existence of our pipeline                                                                                     
     -We must  encourage industry  to invest  in exploration                                                                    
     and  development  of  conventional  and  unconventional                                                                    
     resources  on  state  and  federal  land,  onshore  and                                                                    
     -TAPS has plenty of capacity for increased throughput                                                                      
     -Most  near-term  critical  economic issue  facing  the                                                                    
     -Less oil  in the pipeline  year after year  takes away                                                                    
     revenue from future generations-the ultimate giveaway                                                                      
     -Reconfiguration, 1.2 million barrels/day                                                                                  
He  directed  attention to  slide  4,    "Oil Tax  Reform  -                                                                    
Production History."  He stated that the  opportunity on the                                                                    
North Slope  continued to  be "enormous."  He looked  at the                                                                    
urgency of  the issue on  slide 5, "TAPS  Throughput Decline                                                                    
is  an  Urgent Problem."  The  discussion  was not  a  scare                                                                    
tactic. He relayed that the issue  was real and needed to be                                                                    
addressed. He referred to a prior  shutdown of TAPS due to a                                                                    
pipeline  leak,  and opined  that  the  state had  dodged  a                                                                    
bullet in  the dicey situation.  He pointed out that  it had                                                                    
not been clear that the line would be restarted.                                                                                
Commissioner  Sullivan continued  to  discuss  slide 5.  The                                                                    
best way  to address  the technical  issues was  to increase                                                                    
throughput.  There  were  significant consequences  for  the                                                                    
state and country.                                                                                                              
Commissioner  Sullivan moved  to  slide  6, "Alaska's  North                                                                    
Slope Oil and Gas Potential."                                                                                                   
     USGS estimates  that Alaska's North Slope  has more oil                                                                    
     than any other Arctic nation                                                                                               
          -OIL: Est. 40 billion barrels of conventional oil                                                                     
          (USGS & BOEMRE)                                                                                                       
          -GAS: Est. over 200 trillion cubic feet of                                                                            
          conventional natural gas (USGS)                                                                                       
     Alaska   has   world-class  unconventional   resources,                                                                    
     including  tens of  billions of  barrels of  heavy oil,                                                                    
     shale oil,  and viscous oil, and  hundreds of trillions                                                                    
     of  cubic  feet  of  shale  gas,  tight  gas,  and  gas                                                                    
         -Positive methane hydrate test production                                                                              
1:46:20 PM                                                                                                                    
Commissioner  Sullivan  turned  to  slide  7,  "U.S.  Energy                                                                    
Renaissance." The opportunity was  enormous for the country.                                                                    
There had  been a huge  oil and  gas investment boom  in the                                                                    
past several years worldwide.  He provided amounts including                                                                    
$650  billion. The  state  of Alaska  received  less than  1                                                                    
percent of  the total  in the prior  year. He  stressed that                                                                    
the state  needed to  take back its  lead in  the production                                                                    
Commissioner Sullivan  moved to slide 8,  "Other Basins have                                                                    
Turned  Decline  Around."  Every  major  basin  was  turning                                                                    
around  their  throughput  decline  with  the  exception  of                                                                    
     "The  expansion  has  been spurred  by  record-breaking                                                                    
     levels  of  investment,  with about  £40bn  set  to  be                                                                    
     ploughed into  North Sea production  in the  next three                                                                    
     "The  surge in  investment comes  after the  government                                                                    
     relaxed the  tax regime  around North  Sea development,                                                                    
     prompting  a record-breaking  licensing round  when the                                                                    
     Department  of Energy  and Climate  Change awarded  167                                                                    
     new licenses on 330 blocks last October."                                                                                  
Commissioner Sullivan pointed to  pages from the Wall Street                                                                    
Journal on  slide 9.  He quickly moved  to slide  10 showing                                                                    
natural decline rates that had  been turned around. He moved                                                                    
to slide 11 titled "Other  Basins have Turned Decline Around                                                                    
- Historical  Oil Production." He  emphasized that  the line                                                                    
chart was  probably the most  important slide that  would be                                                                    
presented  to the  committee. He  discussed that  the yellow                                                                    
line represented  Texas, Alaska  was blue, North  Dakota was                                                                    
red, and Alberta  was brown. He discussed  that movement had                                                                    
been remarkably similar for many  years; however, all of the                                                                    
basins had  started turning their production  curve around."                                                                    
The only  place that oil  companies had not  increased their                                                                    
production was  in Alaska. The  department believed  that it                                                                    
was directly related to Alaska's unfriendly tax regime.                                                                         
1:53:44 PM                                                                                                                    
Commissioner  Sullivan  addressed  slide  12  titled  Secure                                                                    
Alaska's Future - Oil."                                                                                                         
     Secure    Alaska's    Future-Oil   is    the    State's                                                                    
     comprehensive strategy to increase TAPS throughput to                                                                      
     one million barrels a day.                                                                                                 
          I. Enhance Alaska's global competitiveness and                                                                        
          investment climate                                                                                                    
          II .Ensure the permitting process is structured                                                                       
          and efficient                                                                                                         
          III. Facilitate and incentivize the next phases                                                                       
          of North Slope development                                                                                            
          IV. Promote Alaska's resources and positive                                                                           
          investment climate to world markets                                                                                   
1:57:37 PM                                                                                                                    
Senator Hoffman did not believe  there was one individual in                                                                    
the  state that  did  not  want to  add  more  oil into  the                                                                    
pipeline. He  discussed the necessity  of volume.  He shared                                                                    
that the  number heard  from the industry  in order  to turn                                                                    
the investment  field around  was between  $2 billion  to $4                                                                    
billion.   Commissioner   Sullivan    responded   that   the                                                                    
department  had  worked  to encourage  production,  but  the                                                                    
growing sense  that action was  needed. He was  reluctant to                                                                    
speak  for  the  oil  and   gas  industry,  because  it  was                                                                    
important for  them to address  the committee  directly. One                                                                    
of the  items in the  proposal was focused on  balancing the                                                                    
system  and increasing  production. The  imbalance made  the                                                                    
state  treasury incredibly  vulnerable. He  shared that  DNR                                                                    
should be  making the state  more competitive with  peers in                                                                    
other basins when  the companies were most  eager to invest.                                                                    
He discussed  large tax credits  for companies that  did not                                                                    
commit to any production.                                                                                                       
2:02:42 PM                                                                                                                    
Senator  Hoffman   stated  that  the  issue   was  the  most                                                                    
important facing  the state for upcoming  decades. He wanted                                                                    
to  ensure that  the  state had  enough  revenue to  provide                                                                    
services until  the oil  came online, but  there would  be a                                                                    
big question mark  about when or if the oil  would ever come                                                                    
Senator Olson wondered how the  state would not just provide                                                                    
giveaways  to  the   oil  companies.  Commissioner  Sullivan                                                                    
replied that  the department  had taken a  hard look  at the                                                                    
issue. The  governor's initial proposal looked  at balancing                                                                    
the system with a  strong focus on incentivizing production.                                                                    
Many  people  did  not know  that  explorers  received  cash                                                                    
checks from the  state, so the incentives needed  to be more                                                                    
closely tied to production.                                                                                                     
2:06:11 PM                                                                                                                    
Senator Olson  believed much of the  bill addressed existing                                                                    
production.   Commissioner   Sullivan   replied   that   the                                                                    
governor's bill was not a  snapshot way to increase in state                                                                    
revenues,  but it  was  a balance.  At  higher prices,  ACES                                                                    
inhibited the  needed investment. One of  the challenges was                                                                    
related to  progressivity and the  bill was very  focused on                                                                    
new production and credits for oil.                                                                                             
Senator Bishop  pointed to  slide 5.  He discussed  that the                                                                    
department  had been  onsite working  around  the clock.  He                                                                    
relayed that there were workers  responsible for getting the                                                                    
pipeline  up and  running. He  stated that  money was  being                                                                    
well spent  on workforce development.  Commissioner Sullivan                                                                    
agreed. He added that there  had been some problems with the                                                                    
Environmental Protection Agency (EPA).                                                                                          
Co-Chair  Meyer pointed  to  slide 14  and  asked where  the                                                                    
governor's bill would put Alaska  in the range on the slide.                                                                    
Commissioner Sullivan would follow up with an answer.                                                                           
2:11:38 PM                                                                                                                    
BRYAN   BUTCHER,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                    
provided a Power Point presentation  titled "Oil Tax Reform:                                                                    
Creating   a  Durable   Production   Tax   System  that   is                                                                    
Competitive  for  the Long  Term  Benefit  of Alaskans."  He                                                                    
moved to slide 2, "Principles of Reform."                                                                                       
     Tax reform must:                                                                                                           
          1. Be fair to Alaskans.                                                                                               
          2. Encourage new production.                                                                                          
          3. Be simple so that it restores balance to the                                                                       
          4. Be durable for the long-term.                                                                                      
Commissioner Butcher  turned to  slide 3  titled "Challenges                                                                    
in  the Current  Tax System."  The department  would discuss                                                                    
declining production,  progressivity, and  tax credits  at a                                                                    
later time. He  looked at slide 4 titled  "Rising Prices and                                                                    
Declining  Production." He  directed  attention  to slide  5                                                                    
titled "Rising  Prices and Declining Production."  He talked                                                                    
about gross  value in production  versus gross value  of the                                                                    
ANS oil price.                                                                                                                  
2:19:29 PM                                                                                                                    
Commissioner Butcher pointed to  slide 6, "Rising Prices and                                                                    
Declining Production."                                                                                                          
     Less  production =  less potential  value for  both the                                                                    
     state and producers.                                                                                                       
     In   FY   2008  an   ANS   price   of  $96.51   yielded                                                                    
     approximately $20.4 billion in gross value.                                                                                
     By FY 14,  a price that is $13 higher  will yield a bit                                                                    
     more than $3 billion less in gross value.                                                                                  
Commissioner Butcher  looked at slide 7,  "Rising Prices and                                                                    
Declining Production Observations."                                                                                             
     1.High   prices   have   generally   offset   declining                                                                    
     production over the past several fiscal years.                                                                             
     2.As  production has  continued  to  fall however,  the                                                                    
     level of  production tax generated  by high  oil prices                                                                    
     has fallen.                                                                                                                
     3.But,  the  level  of  production  tax  revenues  have                                                                    
     fallen faster than production.                                                                                             
     4.The question is why?                                                                                                     
Commissioner Butcher moved to slide 9,  "The Progressivity                                                                      
     Found in AS 43.55.011 (g)                                                                                                  
     Based on the Production Tax Value (PTV)                                                                                    
     When the PTV exceeds $30 per barrel of oil equivalent                                                                      
     (BOE) the tax is levied at:                                                                                                
          -.4 percent per dollar until the PTV/bbl = $92.50                                                                     
          -.1 percent per dollar that the PTV/bbl is                                                                            
          greater than $92.50                                                                                                   
          -Maximum rate of 50 percent (in addition to 25                                                                        
          percent base tax)                                                                                                     
     Calculated monthly                                                                                                         
     A single statewide calculation on all oil and gas                                                                          
Co-Chair Meyer wondered if DOR promoted a bracket of                                                                            
progressivity. Commissioner Butcher replied that DOR would                                                                      
like not progressivity.                                                                                                         
2:26:20 PM                                                                                                                    
Commissioner Butcher looked at slide 10, "Progressivity:                                                                        
How it is Calculated."                                                                                                          
     Based on page 108 of the 2012 Fall Revenue Sources                                                                         
     Taxable Production: 170,262,000                                                                                            
     GVPP = Gross Value at the Point of Production.                                                                             
     PTV = Production Tax Value.                                                                                                
Commissioner Butcher presented slide 11, "Progressivity:                                                                        
How it is Calculated." He explained the following                                                                               
     Calculating the Progressivity with a PTV/bbl = $64.87                                                                      
          $64.87 - $30 = $34.87                                                                                                 
          Because the PTV/bbl < $92.50                                                                                          
          $34.87 x .004 § percent                                                                                         
     The 13.95  percent progressive tax  is then  applied to                                                                    
     the PTV/bbl of $64.87 not to the $34.87                                                                                    
     $64.87 x 13.95 percent = $9.05 per barrel                                                                                  
     Therefore:  the  $9.05  progressive tax  +  $16.22  (25                                                                    
     percent) base  tax = $25.27  production tax  per barrel                                                                    
     before credits.                                                                                                            
     Multiplied  by  the   taxable  production  (170,262,000                                                                    
     bbls) = $4,302 million                                                                                                     
Commissioner Butcher discussed slide 12, "Observations."                                                                        
     Progressivity  increases the  overall tax  rate as  the                                                                    
     overall profitability (before  state and federal income                                                                    
     taxes) rises.                                                                                                              
     Remember,  progressivity is  company specific  and each                                                                    
     company   will  have   a  different   exposure  because                                                                    
     progressivity is sensitive to:                                                                                             
          -The oil price.                                                                                                       
     Progressivity  is  only  one part  of  what  makes  the                                                                    
     overall system progressive;  it is not a  factor at low                                                                    
     oil prices.                                                                                                                
2:30:06 PM                                                                                                                    
Commissioner Butcher looked at slide 13, "Example 1: New                                                                        
Capital Spending in Fiscal Year 2014."                                                                                          
     Based  on page  108 of  the 2012  Fall Revenue  Sources                                                                    
     Taxable Production: 170,262,000.                                                                                           
     Increased  capital   spending  by  $500   million  from                                                                    
     $3,338.6 million to $3,836.6 million.                                                                                      
     CAPEX  per  barrel  goes  from  $19.61  to  $22.55  per                                                                    
Commissioner Butcher highlighted slide 14, "Example 1: New                                                                      
Capital Spending in Fiscal Year 2014."                                                                                          
     Calculating the Progressivity with a PTV/bbl = $61.93                                                                      
          -$61.93 - $30 = $31.93                                                                                                
          -Because the PTV/bbl < $92.50                                                                                         
          -$31.93 x .004 §                                                                                                   

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