Legislature(2013 - 2014)SENATE FINANCE 532

03/04/2013 01:30 PM FINANCE


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01:36:35 PM Start
01:36:53 PM SB21
03:32:49 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 21 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
PFC Energy
Roger Marks
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."                                                                                          
                                                                                                                                
1:36:53 PM                                                                                                                    
                                                                                                                                
JANAK  MAYER,  UPSTREAM   MANAGER,  PFC  ENERGY,  introduced                                                                    
himself.  He explained  that  the focus  of  PFC Energy  was                                                                    
related to  above ground risk,  and the issues that  the oil                                                                    
and  gas  companies   face  that  did  not   come  from  the                                                                    
subsurface. He  furthered that PFC Energy  dealt with issues                                                                    
of  supply  and  demand  in  welled  oil  markets;  regional                                                                    
markets for natural gas;  competition analysis and strategy;                                                                    
political  risk  in various  parts  of  the world;  and  the                                                                    
question of fiscal terms and project economic analysis.                                                                         
                                                                                                                                
Mr. Mayer  acknowledged Senator Olson and  Senator Hoffman's                                                                    
presence in the committee.                                                                                                      
                                                                                                                                
Mr.   Mayer  discussed   the  PowerPoint,   "Senate  Finance                                                                    
Committee, Alaska Fiscal System  Discussion Slides" (copy on                                                                    
file).                                                                                                                          
                                                                                                                                
1:39:42 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer looked  at page  3,  "Regressive and  Progressive                                                                    
Regimes."                                                                                                                       
                                                                                                                                
     2 potential reasons to desire  a progressive element in                                                                    
     Alaska's fiscal regime:                                                                                                    
     -To  counteract regressive  elements in  the regime  to                                                                    
     achieve something close to neutrality                                                                                      
     -To go beyond  neutrality, to ensure a  higher level of                                                                    
     take for the state in high price environments                                                                              
                                                                                                                                
     Regressive   and   Progressive   regimes   imply   very                                                                    
     different outlooks  on risk and reward,  for government                                                                    
     and the private sector:                                                                                                    
     -Regressive regimes  limit risk  to the  state, placing                                                                    
     large downside  risk on the private  sector, protecting                                                                    
     the state in low price or high cost environments                                                                           
     -In return,  regressive regimes offer  outsized returns                                                                    
     in high price environments.                                                                                                
     -Progressive  regimes involve  the  state bearing  more                                                                    
     price and  cost risk, in  return for a higher  share of                                                                    
     returns in good times.                                                                                                     
                                                                                                                                
     Perhaps  the  single   biggest  problem  with  Alaska's                                                                    
     current  fiscal regime  is  that  it involves  elements                                                                    
     that   are  both   strongly  regressive   and  strongly                                                                    
     progressive.                                                                                                               
     -It  seeks  to  place  downside  risk  on  the  private                                                                    
     sector, while taking most of  the returns in high price                                                                    
     environments.                                                                                                              
     -It  is this  combination  that  makes it  particularly                                                                    
     unattractive from an investment perspective.                                                                               
                                                                                                                                
Mr.   Mayer  highlighted   page   4,   "Royalty  Only   Base                                                                    
Production."  Even   with  just  a  12.5   royalty  on  base                                                                    
production, a fixed royalty is  regressive at low prices; at                                                                    
$40/bbl the  royalty and property tax  consume all divisible                                                                    
income.                                                                                                                         
                                                                                                                                
1:48:24 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer  looked at  page  5,  "Royalty Only  $18/bbl  New                                                                    
Development,  Standalone."  He  stated that  with  the  16.7                                                                    
percent royalty  that generally applies to  newer leases, an                                                                    
$18/bbl  new   development  faces   more  than   70  percent                                                                    
government take at $65/bbl. He  pointed out that the company                                                                    
would not break even until  it hit $18/bbl. He remarked that                                                                    
the royalty  only option  would be  very profitable  for the                                                                    
state,  assuming  production  occurred  at  oil  prices.  He                                                                    
furthered  that the  bottom left  chart  displayed the  cash                                                                    
flow development,  beginning at  $100 per barrel.  He stated                                                                    
that  the   yellow  bars   represented  the   initial  Capex                                                                    
facilities  costs;  the  light  blue  bars  represented  the                                                                    
drilling capital  costs; the  green represented  the revenue                                                                    
that is  collected once production  commences; the  red bars                                                                    
represented  the  operating  costs;   and  the  purple  bars                                                                    
represented  the  government  take. He  furthered  that  the                                                                    
dashed line on  the graph represented the  off-tax cash flow                                                                    
of  the investments.  He remarked  that  there was  negative                                                                    
cash flow  in the  early years,  which turned  into positive                                                                    
cash  flow  as production  occurred.  He  remarked that  the                                                                    
black line  was essentially  the difference between  the top                                                                    
bars and the bottom bars on the graph.                                                                                          
                                                                                                                                
Mr.  Mayer  discussed page  6,  "Royalty  Only, $25/bbl  New                                                                    
Development,  Standalone."   He  stated  that   a  high-cost                                                                    
$25/bbl   development  may   face  more   than  70   percent                                                                    
government  take at  $85/bbl. He  explained that  the break-                                                                    
even cost for the company would be approximately $100/bbl.                                                                      
                                                                                                                                
1:52:29 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer explained  page 7,  "Base Production."  He stated                                                                    
that the Alaska Clear and  Equitable Share Act (ACES) layers                                                                    
onto  the  regressive  fixed royalty  a  highly  progressive                                                                    
profit-based  production tax.  The  gross-based minimum  tax                                                                    
also increases  the regressive  nature at  the low  end. The                                                                    
result is very  high levels of government take  at both very                                                                    
low and high prices.                                                                                                            
                                                                                                                                
Mr. Mayer  looked at page 8,  "ACES-$18/bbl New Development,                                                                    
Standalone."  He  stated  that standalone  new  developments                                                                    
face  particularly high  government take-  although this  is                                                                    
partly  offset by  the significant  downside risk  the state                                                                    
takes through  reimbursable credits.  He looked at  the cash                                                                    
flow line  on the chart, at  $100/bbl, was no longer  as far                                                                    
negative as the  capital and drilling cost.  He also pointed                                                                    
out  that there  would be  negative government  take in  the                                                                    
early years, as the capital  credits contributed to the cost                                                                    
of the  project. He  stated that the  new development,  on a                                                                    
stand-alone basis,  was an even higher  government take than                                                                    
the base  production. This was  because of a  combination of                                                                    
the higher royalty  and the inability to write  the cost off                                                                    
against the royalty.                                                                                                            
                                                                                                                                
1:57:41 PM                                                                                                                    
                                                                                                                                
Mr.   Mayer   highlighted    page   9,   "ACES-$25/bbl   New                                                                    
Development,  Standalone."  He   stated  that  the  downside                                                                    
exposure  to the  state from  reimbursable credits  to small                                                                    
producers is potentially  significant for high-cost projects                                                                    
in low  price environments. He  remarked that the  cash flow                                                                    
analysis chart differed from the  previous charts. He stated                                                                    
that the slide was based on  what might occur at $50/bbl. He                                                                    
remarked that  the negative purple  bars in the  early stage                                                                    
of  capital spending  were  greater  than the  corresponding                                                                    
relatively small amount of government  take that occurred at                                                                    
the tail-end of $50/bbl.                                                                                                        
                                                                                                                                
Mr. Mayer  discussed page 10, "Alaska  Base Production Under                                                                    
UK North Sea Regime." He  explained that by comparison, pure                                                                    
profit-tax  based  regimes like  the  UK  North Sea  can  be                                                                    
completely neutral over an indefinite  range of prices, with                                                                    
or without some progressivity at  low prices. He stated that                                                                    
the UK North  Sea regime was completely  neutral, because it                                                                    
did  not have  the  fixed royalty,  property  tax, or  other                                                                    
regressive  components. He  stressed that  the UK  North Sea                                                                    
regime  was  a strictly  profit  based  taxation system.  He                                                                    
explained that a pure profit  based taxation system could be                                                                    
designed to target  any level of government  take. He stated                                                                    
that their  system created a  small amount  of progressivity                                                                    
at  low price  levels,  but  at a  certain  price level,  it                                                                    
reached   its  target   level  of   government  take.   That                                                                    
government take was  maintained at all price  levels, at all                                                                    
cost structures for base production.                                                                                            
                                                                                                                                
Co-Chair  Kelly  wondered  if  the  $18/bbl  was  a  capital                                                                    
expenditure. Mr.  Mayer responded that the  $18/bbl was both                                                                    
drilling and facilities capital expenditures.                                                                                   
                                                                                                                                
Mr.  Mayer  answered  some of  Senator  Dunleavy's  previous                                                                    
questions  related to  changes  to fiscal  regimes to  match                                                                    
some of  the more  competitive environments. He  stated that                                                                    
Alaska  had a  greater degree  of change  over recent  years                                                                    
than most  every other comparable  regime. He  remarked that                                                                    
constant  change was  a  great  disincentive to  investment,                                                                    
because investments were  made on a 10 to 20  plus year time                                                                    
horizon. He  stressed that the fiscal  system was ultimately                                                                    
was determines the economics of a growing investment.                                                                           
                                                                                                                                
2:02:42 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  highlighted page 11, "Alaska  $18/bbl Development                                                                    
Under   UK  North   Sea  Regime."   He  explained   that  by                                                                    
comparison, pure profit-tax based  regimes like the UK North                                                                    
Sea can  be completely neutral  over an indefinite  range of                                                                    
prices, with  or without some  progressivity at  low prices.                                                                    
He stated  that the UK  had experienced a number  of changes                                                                    
to its  fiscal regime.  He explained that,  in 2003,  the UK                                                                    
took  away  a  significant component  to  reduce  government                                                                    
take. He  explained that, recently,  the UK turned  to North                                                                    
Sea  oil  and  gas  production as  a  source  of  additional                                                                    
revenue.  He pointed  out that  the chart  displayed to  two                                                                    
components  of government  take:  corporate  income tax  and                                                                    
supplementary  tax. He  remarked that  the UK  substantially                                                                    
increased  the  rate  from  20 percent  to  32  percent.  He                                                                    
remarked that,  in order to  encourage reinvestment,  the UK                                                                    
government developed  the Brownfield Allowance  that reduces                                                                    
government take to attempt to  stimulate investment. He also                                                                    
shared  that  Australia   recently  experienced  significant                                                                    
changes  to  its  fiscal  regime. He  pointed  out  that  in                                                                    
Australia  had  federalized  oil   and  gas  production.  He                                                                    
explained that  there was a federal  profit-based production                                                                    
tax system  off-shore in Australia,  which was known  as the                                                                    
Petroleum Resource  Rent Tax (PRRT).  He furthered  that on-                                                                    
shore production had been at  the jurisdiction of the states                                                                    
in Australia, but was recently changed to match the PRRT.                                                                       
                                                                                                                                
Mr. Mayer  looked at  page 13,  "ACES- Base  Production." He                                                                    
remarked  that there  were a  number  of ways  to achieve  a                                                                    
level of neutrality  at the 60 percent mark.  He stated that                                                                    
ACES  was  a regime  that  gave  65  percent to  75  percent                                                                    
government take. He stated that  the original Senate Bill 21                                                                    
took out the progressivity  and capital credits, which would                                                                    
create  a slightly  regressive regime.  He noted  that there                                                                    
were  two  key  issues:  1.  the  proposal  was  regressive,                                                                    
because the  only component  was a  flat 25  percent profit-                                                                    
based  production  tax,  and 2.  the  capital  credit  would                                                                    
eliminated, therefore causing a  tax increase at lower price                                                                    
levels.                                                                                                                         
                                                                                                                                
Mr. Mayer  discussed page 15,  "Government Take Under  SB 21                                                                    
and ACES Capex Sensitivity."                                                                                                    
                                                                                                                                
     As noted  in PFC  Energy testimony  on 1/31/13,  at low                                                                    
     oil  prices, Relative  Government Take  under SB  21 is                                                                    
     higher than under ACES, due to  the impact of low or no                                                                    
     progressivity, combined with the  elimination of the 20                                                                    
     percent capital credit under SB 21.                                                                                        
                                                                                                                                
     The  oil price  level at  which this  occurs is  highly                                                                    
     sensitive to  annual levels of capital  spending, since                                                                    
     CAPEX  both  reduces  the  oil  price  level  at  which                                                                    
     progressivity kicks  in under ACES, and  determines the                                                                    
     size of the available capital credit under ACES.                                                                           
                                                                                                                                
     Looking at  a single  year of production  also slightly                                                                    
     raises this  neutrality point,  since over  many years,                                                                    
     inflation  reduces  the  real   price  level  at  which                                                                    
     progressivity starts under ACES.                                                                                           
                                                                                                                                
     For mature,  producing assets with a  low ongoing CAPEX                                                                    
     requirement ($10/bbl),  SB21 represents a  reduction in                                                                    
     government  take  at  prices above  ~$75,  however  for                                                                    
     capital intensive  new developments in  existing units,                                                                    
     that neutrality point can be as high as $110/bbl.                                                                          
                                                                                                                                
     It is thus  important to understand that  one impact of                                                                    
     the removal of  the 20 percent capital  credit under SB
     21 is  that for  companies with high  development costs                                                                    
     relative to overall production,  it can represent a tax                                                                    
     increase at current prices.                                                                                                
                                                                                                                                
2:09:26 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  looked at slide  16, "Regimes for  Comparison: CS                                                                    
SB 21.                                                                                                                          
                                                                                                                                
     CS SB 21:                                                                                                                  
     -35 profit-based  production tax, $5/bbl  allowance, 30                                                                    
     percent GRE for certain new production.                                                                                    
                                                                                                                                
     -Production-based  allowance curves  the tax-rate  down                                                                    
     at lower  process, creating a progressive  element that                                                                    
     achieves relative overall neutrality.                                                                                      
                                                                                                                                
     -Overall  relative  neutrality  removes  potential  for                                                                    
     "gold-plating incentives."                                                                                                 
                                                                                                                                
     -Progressive  element being  determined on  gross basis                                                                    
     removes issue of oil vs. gas 'decoupling.'                                                                                 
                                                                                                                                
     -Gross Revenue  Exclusion reduces the overall  level of                                                                    
     government take for incentivized projects.                                                                                 
                                                                                                                                
     -Elimination  of capital  credit and  carry forward  of                                                                    
     NOL credit reduces downside risk  to state, but carries                                                                    
     a cost in terms of project economics.                                                                                      
                                                                                                                                
Mr. Mayer stressed that an  exploration credit would not put                                                                    
more oil in the pipeline.                                                                                                       
                                                                                                                                
2:14:50 PM                                                                                                                    
                                                                                                                                
Senator Hoffman  wondered if Alaska  the production  goal of                                                                    
400 to 600 million barrels of  oil per day could be compared                                                                    
with  other similar,  exploration-based  regimes. Mr.  Mayer                                                                    
replied that he did not know the answer.                                                                                        
                                                                                                                                
Mr. Mayer  looked at  page 17,  "$5 Production  Allowance is                                                                    
like   Reverse  Progressivity."   He   explained  that   the                                                                    
production allowance  is referred  to as  a "credit",  so it                                                                    
would  be easy  to  compare  it to  the  capital credit.  He                                                                    
stressed  that   the  production  allowance  was   really  a                                                                    
substitute   for  progressivity.   He  explained   that  the                                                                    
production allowance was a  different form of progressivity,                                                                    
because  the production  allowance set  a top  maximum rate.                                                                    
Progressively,  as   the  price  decreases,   the  allowance                                                                    
subtracts further away from the  top maximum rate. He stated                                                                    
that  the  slide displayed  a  simplified  and stylized  tax                                                                    
calculation.                                                                                                                    
                                                                                                                                
Mr. Mayer  continued to discuss  slide 17. He  remarked that                                                                    
there was  $2.5 billion  at the point  of production  in the                                                                    
$60/bbl case.  He furthered that $30/bbl  lease expenditures                                                                    
would result in $1.5 billion.                                                                                                   
                                                                                                                                
2:19:36 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer highlighted  page 18,  "GRE  Increases the  Price                                                                    
Level at Which Production  Tax, and 'Progressivity', Apply."                                                                    
He  remarked that  the slide  was  exactly the  same as  the                                                                    
previous  slide,  but  with the  application  of  the  Gross                                                                    
Revenue Exclusion (GRE).  He stated that the GRE  was set at                                                                    
30 percent, and applied throughout the slide.                                                                                   
                                                                                                                                
Mr. Mayer looked  at page 19, "Both  Share Similarities with                                                                    
UK Brownfield Allowance."                                                                                                       
                                                                                                                                
     The  UK's fiscal  regime is  a  relatively simple  one,                                                                    
     with  two  core components  -  a  Corporate Income  Tax                                                                    
     (CIT) of  30 percent,  and a Supplemental  Resource Tax                                                                    
     (SRT) of 32 percent, levied on the CIT tax base.                                                                           
                                                                                                                                
     The  UK Brownfield  Allowance is  an income  exclusion,                                                                    
     used in  calculating the SRT.  Up to a total  £250mm of                                                                    
     income can  be excluded, with  up to 20 percent  of the                                                                    
     exclusion amount allowed in a  given year. For projects                                                                    
     subject  to  the  additional  Petroleum  Tax  (pre-1993                                                                    
    projects), the exclusion is up to £500mm of income                                                                          
     Because  it is  a  fixed exclusion,  it  has a  greater                                                                    
     impact at lower oil prices                                                                                                 
                                                                                                                                
     Projects are  individually assessed  for qualification,                                                                    
     and  for   the  total   amount  of   relief  available.                                                                    
     Qualifying    projects    are   incremental    projects                                                                    
     increasing production from mature fields.                                                                                  
                                                                                                                                
     A  100mmb   incremental  development,  with   costs  of                                                                    
     $25/bbl, could  see its government  take reduced  by to                                                                    
     anywhere from  3 to 11 percentage  points, depending on                                                                    
     the oil price level                                                                                                        
                                                                                                                                
Mr. Mayer  highlighted page 20, "Alaska  $18/bbl Development                                                                    
under UK  North Sea regime."  He noted the  curving downward                                                                    
of a  fixed total,  as lower price  levels were  reached. He                                                                    
stated  that the  committee substitute  was not  unlike what                                                                    
was represented in the slide.                                                                                                   
                                                                                                                                
2:24:40 PM                                                                                                                    
                                                                                                                                
Mr. Mayer discussed page 21, "Regimes for Comparison:                                                                           
Bracketed Progressivity (Net)."                                                                                                 
                                                                                                                                
     Bracketed Progressivity (Net):                                                                                             
                                                                                                                                
          25 percent Profit-based Production Tax                                                                                
          Bracketed   progressivity   with   the   following                                                                    
          thresholds and rates:                                                                                                 
               $30 PTV - 5 percent                                                                                              
               $42.5 PTV - 10 percent                                                                                           
               $55 PTV - 15 percent                                                                                             
                                                                                                                                
          20 percent capital  credit maintained, but carried                                                                    
          forward  to  production   for  producers  with  no                                                                    
          liability                                                                                                             
                                                                                                                                
          Overall relative neutrality  removes potential for                                                                    
          'gold-plating incentives.'                                                                                            
                                                                                                                                
          Progressive element being  determined on net basis                                                                    
          does  not entirely  remove issue  of  oil vs.  gas                                                                    
          'decoupling',  but  low  degree  of  progressivity                                                                    
          minimizes impact.                                                                                                     
                                                                                                                                
          Gross Revenue Exclusion  not included in modeling,                                                                    
          but could be applied to incentivize new projects.                                                                     
                                                                                                                                
          Carryforward   (without  escalation)   of  credits                                                                    
          reduces  some   downside  risk  to   state,  while                                                                    
          retaining a cost-progressive  element.  Escalation                                                                    
          could  also be  included  to  compensate for  time                                                                    
          value of money foregone.                                                                                              
                                                                                                                                
Mr.  Mayer highlighted  page  22,  "Regimes for  comparison:                                                                    
Bracketed Progressivity (Gross)."                                                                                               
                                                                                                                                
     Bracketed Progressivity (Net):                                                                                             
     20  percent Profit-based  Production Tax  - lower  rate                                                                    
     needed to when progressivity on  gross to prevent a tax                                                                    
     increase  at   lower  price  levels  for   higher  cost                                                                    
     producers.                                                                                                                 
                                                                                                                                
     Bracketed progressivity  with the  following thresholds                                                                    
     and rates:                                                                                                                 
          $70 ANS West Coast Crude - 5 percent                                                                                  
          $90 ANS West Coast Crude- 10 percent                                                                                  
          $110 ANS West Coast Crude- 15 percent                                                                                 
          $130 ANS West Coast Crude- 20 percent                                                                                 
                                                                                                                                
     20  percent  capital  credit  maintained,  but  carried                                                                    
     forward to production for producers with no liability.                                                                     
                                                                                                                                
     Overall  relative  neutrality   removes  potential  for                                                                    
     'gold-plating incentives.'                                                                                                 
                                                                                                                                
     Progressive element being determined  on net basis does                                                                    
     not entirely remove issue of  oil vs. gas 'decoupling',                                                                    
     but low degree of progressivity minimizes impact.                                                                          
                                                                                                                                
     Gross Revenue  Exclusion not included in  modeling, but                                                                    
     could be applied to incentivize new projects.                                                                              
                                                                                                                                
     Carryforward  (without escalation)  of credits  reduces                                                                    
     some downside  risk to state,  while retaining  a cost-                                                                    
     progressive   element.     Escalation  could   also  be                                                                    
     included  to   compensate  for  time  value   of  money                                                                    
     foregone                                                                                                                   
                                                                                                                                
Mr. Mayer highlighted page 24,  "ACES - Base Production." He                                                                    
stated that the committee was already familiar with ACES.                                                                       
                                                                                                                                
Mr. Mayer highlighted  page 25, "CS SB  21 Base Production."                                                                    
He explained  that the committee  substitute had  even lower                                                                    
government take  than the original proposal.  He stated that                                                                    
the slide  used assumptions  of only  $10/bbl and  cost from                                                                    
production  solely from  the mature  fields.  He noted  that                                                                    
there  was a  constant 64  to 65  percent government  at the                                                                    
relevant price levels, except for  very low price levels. At                                                                    
very low price levels, the  regressive nature of the royalty                                                                    
took  over. In  that instance,  there would  be a  very high                                                                    
government take.  He noted that from  $50/bbl the government                                                                    
take stayed  at the  64 to  65 percent  range. He  noted the                                                                    
even corresponding  split in value  between the  company and                                                                    
the state.                                                                                                                      
                                                                                                                                
2:31:22 PM                                                                                                                    
                                                                                                                                
Mr. Mayer discussed page  26, "Bracketed Progressivity (Net)                                                                    
Base  Production."  He  remarked that  a  net  progressivity                                                                    
would  result in  a similar  regime to  the proposed  senate                                                                    
bill.  He  remarked  that  there  would  be  slightly  lower                                                                    
government   take  at   $80/bbl;  and   a  slightly   higher                                                                    
government take at a higher price levels.                                                                                       
                                                                                                                                
Mr.  Mayer  spoke  to   page  27,  "Bracketed  Progressivity                                                                    
(Gross)  Base  Production."  He  remarked  that  this  slide                                                                    
represented  a theory  that was  virtually indistinguishable                                                                    
from the committee substitute and almost all price levels.                                                                      
                                                                                                                                
Mr.   Mayer   highlighted   page   28,   "ACES-$18/bbl   New                                                                    
Development, Standalone."  He remarked  that he  had already                                                                    
explained the government take under ACES.                                                                                       
                                                                                                                                
Mr.  Mayer   highlighted  page   30,  "CSSB21   $18/bbl  New                                                                    
Development,  Standalone, no  GRE." He  remarked that  there                                                                    
would be lower  government take from $65/bbl  and higher. He                                                                    
pointed out  that there would  be high government  take from                                                                    
$65/bbl and  below, which was  the impact of not  having the                                                                    
credits. He  remarked that there  was an  overall flattening                                                                    
at the 67  percent mark, which could be argued  to be higher                                                                    
than one  might want for new  development, if one was  to be                                                                    
truly  competitive. He  remarked that  the display  excluded                                                                    
the GRE.                                                                                                                        
                                                                                                                                
Mr. Mayer explained page  31, "Bracketed Progressivity (Net)                                                                    
$18/bbl New  Development, Standalone." He remarked  that the                                                                    
display  would  be  essentially 62  percent  at  $80/bbl  to                                                                    
$100/bbl.  He felt  that the  display  was a  result of  the                                                                    
credits,  because   the  credits  did  not   occur  for  the                                                                    
standalone  new development  up front.  The cash  flow chart                                                                    
did  not show  the purple  bar contributing  to the  capital                                                                    
expense,  because  those  credits  would  carry  forward  to                                                                    
production.                                                                                                                     
                                                                                                                                
Mr.  Mayer  looked  at  page  32,  "Bracketed  Progressivity                                                                    
(Gross)  $18/bbl New  Development, Standalone."  He remarked                                                                    
that this  slide was  very similar to  slide 32.  He pointed                                                                    
out the lower  government in the $80/bbl  to $100/bbl range,                                                                    
because of the impact of maintaining the credits.                                                                               
                                                                                                                                
2:36:36 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer  displayed  page  33,  "CS  SB  21,  $18/bbl  New                                                                    
Development,  Standalone,  with  GRE." He  stated  that  the                                                                    
committee  substitute  was  very  similar  to  the  original                                                                    
version,  but  new  development  looked  substantially  more                                                                    
attractive  in  the  $80/bbl to  $100/bbl  price  range.  He                                                                    
stressed that  the addition of  the GRE  would substantially                                                                    
alter the  attractiveness as it related  to new development,                                                                    
because it reduced the amount  of overall production tax and                                                                    
substantially adjusted the point  at with the production tax                                                                    
occurred. He  stressed that  the addition  of the  GRE would                                                                    
greatly reduce  government take: 61 percent  government take                                                                    
at $80/bbl down to 57 percent  at $100/bbl. He looked at the                                                                    
bracketed progressivity  versus CS SB  21 with the  GRE, and                                                                    
noted that the  impact was in the government  take cash flow                                                                    
at the  tail-end. He explained  that peak production  in the                                                                    
early  years would  contribute relatively  little production                                                                    
tax.  He pointed  out  that  the GRE  made  a difference  by                                                                    
carrying forward the cash flow.                                                                                                 
                                                                                                                                
Mr.   Mayer  highlighted   page   34,   "ACES  $18/bbl   New                                                                    
Development,  Incremental."  He  explained  that  the  slide                                                                    
represented  an  analysis  based  on  the  portfolio  of  an                                                                    
existing producer  at $18/bbl  new development.  He stressed                                                                    
that there  would not be a  large amount to deduce  from the                                                                    
price,  other  than there  would  be  substantial levels  of                                                                    
government  take   under  ACES,   as  well   as  substantial                                                                    
contribution  to   the  overall  initial   production  costs                                                                    
through the  capital credit at buy-down,  which would reduce                                                                    
the tax burden on the producer.                                                                                                 
                                                                                                                                
Mr. Mayer discussed page  36, "Bracketed Progressivity (Net)                                                                    
$18/bbl New Development, Incremental."  He remarked that the                                                                    
slide showed a lower level of  government take in the $80 to                                                                    
$100 range, as well as with the net of progressivity.                                                                           
                                                                                                                                
Mr.  Mayer  highlighted  page 37,  "Bracketed  Progressivity                                                                    
(Gross) $18/bbl  New Development, Incremental."  He remarked                                                                    
that the slide was  a virtually indistinguishable comparison                                                                    
between the gross and CS SB 21.                                                                                                 
                                                                                                                                
Mr. Mayer discussed the competitiveness  of SB 21. He looked                                                                    
at  page  49,  "Regime Competitiveness-$80/bbl."  He  stated                                                                    
that  the  slide compared  regimes  as  it concerns  overall                                                                    
levels  of   government  take  to  the   broadest  range  of                                                                    
international competitors.  He pointed out that  the biggest                                                                    
competitors  with  Alaska  were  the  other  North  American                                                                    
regimes,  the North  Sea, and  Australia. He  remarked that,                                                                    
under ACES, at  $80/bbl for new development, was  one of the                                                                    
highest in the world, and only second behind Norway.                                                                            
                                                                                                                                
2:41:26 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer queried  a definition  of "OECD."  Mr. Mayer                                                                    
replied that  OECD stood for  the Organization  for Economic                                                                    
Corporation  and  Development,  which  was  the  "club"  for                                                                    
developed countries.                                                                                                            
                                                                                                                                
Co-Chair  Meyer   wondered  if   the  OECD   countries  were                                                                    
considered  the  free   market  countries.  He  specifically                                                                    
queried   the  difference   between  the   OECD  highlighted                                                                    
countries  versus  those  highlighted  in  blue.  Mr.  Mayer                                                                    
responded that the OECD countries  that had per capita gross                                                                    
domestic  product (GDP)  that were  near  the United  States                                                                    
(US) level or no less than half of the US GDP.                                                                                  
                                                                                                                                
Vice-Chair   Fairclough    wondered   if    the   production                                                                    
competitiveness  these countries  would  be  similar to  the                                                                    
displayed  analysis.  Mr.  Mayer  responded  that  it  would                                                                    
depend  on  how  one   would  define  "competitiveness."  He                                                                    
remarked that  the most desirable hydrocarbons  in the world                                                                    
entailed an ability  to maintain a level  of government take                                                                    
that Alaska could not maintain.  He pointed out that Ireland                                                                    
was not an immediate competitor,  because it had a favorable                                                                    
fiscal regime with little to  no oil production. He stressed                                                                    
that the  slide was intended  to give a global  context, but                                                                    
noted that  there could be  a chart that had  only immediate                                                                    
competitive regimes.                                                                                                            
                                                                                                                                
Vice-Chair  Fairclough   wondered  if   there  would   be  a                                                                    
different matrix  to determine the competitiveness  based on                                                                    
government  take  as it  relates  to  production. Mr.  Mayer                                                                    
responded   that  in   terms  of   reaching  a   sustainable                                                                    
government  take, there  were two  key determinants  of what                                                                    
the  level  would  be  for  any country:  1)  the  size  and                                                                    
desirability of the resources; and  2) the cost of producing                                                                    
those  resources. He  explained  that if  there were  large,                                                                    
low-cost  resources,   there  could  be  a   high  level  of                                                                    
government take.                                                                                                                
                                                                                                                                
2:46:16 PM                                                                                                                    
                                                                                                                                
Vice-Chair Fairclough stressed that  Alaska was not in first                                                                    
place in total production,  and remarked that the comparison                                                                    
graph   might   be   representing   regions   that   compete                                                                    
differently than Alaska. She furthered  that there were some                                                                    
regimes  that  had  young government  structures,  so  those                                                                    
regimes  were  in  flux. She  specifically  mentioned  North                                                                    
Dakota, but  felt that they had  not developed environmental                                                                    
sensitivity,  so restrictive  regulations  could  be put  in                                                                    
place as  they continue  to produce oil  and gas.  Mr. Mayer                                                                    
replied   that  large   producers  tended   to  have   large                                                                    
economics,  and had  a  high level  of  government take.  He                                                                    
agreed  that  South  Dakota had  a  small  government  take,                                                                    
because  that was  part of  incentivizing development  at an                                                                    
early stage.                                                                                                                    
                                                                                                                                
Co-Chair Meyer  wondered if  the price  point of  $80/bbl to                                                                    
$100/bbl was the Alaska North  Slope (ANS) price or the West                                                                    
Texas  Intermediate (WTI)  price. He  furthered queried  the                                                                    
reason why  there was such  a large premium between  ANS and                                                                    
WTI.   Mr.   Mayer   responded  that   ANS   traded   almost                                                                    
indistinguishable  from  the   global  marked  crude,  Brent                                                                    
Crude.  He  stated  that  ANS  was  considered  an  imported                                                                    
barrel,  because  it came  through  the  port as  any  other                                                                    
imported barrel. He explained that  WTI formerly traded at a                                                                    
slight premium to  Brent Crude, but WTI  currently traded at                                                                    
a deep  discount to  Brent Crude. He  stressed that  the WTI                                                                    
was traded  at a discount,  because of the  massive increase                                                                    
in the lower 48 oil production.                                                                                                 
                                                                                                                                
Co-Chair Meyer  wondered if the  $15 premium with  ANS would                                                                    
be maintained,  or would  it be  reduced after  the pipeline                                                                    
system development.  Mr. Mayer replied that  PFC Energy felt                                                                    
that  the   disconnect  between  WTI  and   Brent  would  be                                                                    
maintained  as  long  as  the  US  unconventional  resources                                                                    
remained at  the current level  of performance.  He remarked                                                                    
that pipeline capacity could moderate that impact.                                                                              
                                                                                                                                
                                                                                                                                
Senator Hoffman requested a chart  that reflected the impact                                                                    
on  the state  treasury at  $80,  $100, $120,  and $140  per                                                                    
barrel. Mr. Mayer agreed to provide that information.                                                                           
                                                                                                                                
2:54:46 PM                                                                                                                    
                                                                                                                                
Senator Bishop wondered what would  happen to ANS pricing if                                                                    
Alaska  resumed 1  million barrels  per day  production. Mr.                                                                    
Mayer responded that it would  depend on the question of the                                                                    
happenings of the overall North American market.                                                                                
                                                                                                                                
Mr.  Mayer  looked  at  page  50,  "Regime  Competitiveness-                                                                    
$100/bbl." He  noted that the  slide showed that  Alaska was                                                                    
on  the  same  level  as   Norway  regarding  the  level  of                                                                    
government  take. He  remarked  that ACES,  for an  existing                                                                    
producer, was lower,  but remained above $70  per barrel. He                                                                    
noted that the  $80 per barrel, new  development without the                                                                    
GRE  reflected  relatively  high   governments  take  at  67                                                                    
percent. Once  the GRE  is applied,  an aggressive  level of                                                                    
competitiveness would  occur. He  pointed out that  once the                                                                    
level of $120  per barrel is reached,  the disparity between                                                                    
CS SB 21 for new  development with the GRE versus everything                                                                    
else increased;  $140 per barrel  reflected an  even greater                                                                    
disparity.                                                                                                                      
                                                                                                                                
Co-Chair  Meyer  wondered  if the  existing  producer  would                                                                    
share 64 percent at $100  per barrel. Mr. Mayer replied that                                                                    
the existing  producer would  share 64  percent at  $100 per                                                                    
barrel under CS SB 21.                                                                                                          
                                                                                                                                
Co-Chair Meyer  noted that under  the legislation,  with the                                                                    
GRE  included,  the government  share  would  drop below  60                                                                    
percent.   Mr.  Mayer   agreed,  and   furthered  that   new                                                                    
development would  share between  65 and 69  percent without                                                                    
the  inclusion  of GRE.  He  remarked  that eliminating  the                                                                    
capital credit and  relying on the GRE resulted  in losing a                                                                    
cost-responsive element in the  system. He remarked that the                                                                    
capital  credit  was  a   self-stabilizing  element  in  the                                                                    
system, which could achieve some  impact on new development,                                                                    
because it  achieved lower overall level  of government take                                                                    
in the $80 to $100 per barrel range.                                                                                            
                                                                                                                                
2:59:38 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer queried  the cost to the state  in regards to                                                                    
using  capital credits  versus GRE.  Mr. Mayer  replied that                                                                    
one  must first  determine the  desired level  of government                                                                    
take.  He remarked  that the  capital credit  had a  greater                                                                    
impact on the front  end of the cash flow, so  it may have a                                                                    
greater impact  on the  state early on.  He remarked  that a                                                                    
percentage point of government  take depended greatly on how                                                                    
the tax was structured.                                                                                                         
                                                                                                                                
Co-Chair  Meyer wondered  what Mr.  Mayer's opinion  of what                                                                    
the  government's   take  should  be.  He   noted  that  the                                                                    
inclusion of  the GRE  would put the  government take  at 60                                                                    
percent, so  it would  make Alaska attractive  to producers.                                                                    
He wondered if that level  would make Alaska too attractive.                                                                    
Mr. Mayer replied that being  too attractive, for completely                                                                    
new areas,  was positive. He  stressed that the  rate should                                                                    
apply  to  areas  that  were  not  currently  producing.  He                                                                    
pointed out that the rate  should not reduce government take                                                                    
on   existing  production.   He   furthered  that   existing                                                                    
production,  incremental  production,   and  new  production                                                                    
should each  be separated with  the qualifier that  there is                                                                    
an  incentive  substantial  new   production  from  the  new                                                                    
fields.  He  felt  that  reducing the  rate  and  making  it                                                                    
overall  neutral would  make  Alaska  competitive, but  that                                                                    
strategy  would reduce  revenue on  existing production.  He                                                                    
felt  that  there  needed  to   be  mechanisms  to  maintain                                                                    
revenue,  like the  GRE, in  order to  differentiate between                                                                    
existing  versus  new production.  He  stated  that the  GRE                                                                    
would  be  a mechanism  under  the  existing structure  that                                                                    
would combine cost and production  in order to distinguish a                                                                    
tax  rate on  different forms  production. He  stressed that                                                                    
the GRE  was intended to  effectively lower the tax  rate on                                                                    
certain  targeted  forms  of   production  by  reducing  the                                                                    
effective  rate without  tracking  the costs  that apply  to                                                                    
different forms of production.                                                                                                  
                                                                                                                                
3:03:52 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer   remarked  that   Norway  and   some  other                                                                    
countries had an uplift tax  credit, to encourage production                                                                    
of  new  oil from  existing  reservoirs.  He felt  that  the                                                                    
majority  of Alaska's  undeveloped  oil was  waiting in  the                                                                    
legacy fields. He  wondered if there should  be an incentive                                                                    
for the  legacy fields, like  a 10 percent GRE,  or targeted                                                                    
capital tax  credit. Mr.  Mayer responded  that the  GRE was                                                                    
relied  upon  as  a  means  to  encouraging  new  production                                                                    
competitive;   he  felt   that  the   GRE  for   incremental                                                                    
production in  legacy fields was imperative.  He stated that                                                                    
the  executive should  be  allowed  discretion, rather  than                                                                    
legislation to the tax code.  He remarked that it was nearly                                                                    
impossible  to define  "incremental production"  in the  tax                                                                    
code.                                                                                                                           
                                                                                                                                
Co-Chair Meyer  wondered if there  should be a  targeted tax                                                                    
credit on the  wells. Mr. Mayer responded  that limiting the                                                                    
capital  credit  to  a  particular form  was  not  an  ideal                                                                    
solution,  because   often  productive  wells   were  pulled                                                                    
offline in order to bring a new well online.                                                                                    
                                                                                                                                
Senator Hoffman stated that DOR  estimated that in 2015, the                                                                    
GRE could cost  the treasury $825 million.  He remarked that                                                                    
the  credit was  only  a one-time  allocation,  but the  GRE                                                                    
could  eventually  be  even  more  expensive  to  the  state                                                                    
treasury. Co-Chair Meyer agreed, and  felt that the issue of                                                                    
the GRE deserved further discussion.                                                                                            
                                                                                                                                
3:10:10 PM                                                                                                                    
                                                                                                                                
Vice-Chair   Fairclough   suggested  an   investment   model                                                                    
strategy that  was utilized  in other  oil tax  regimes. She                                                                    
wondered if  there should be  a committee that was  a review                                                                    
board much  like the Permanent  Fund Board, which  would use                                                                    
the $400  million in capital credits,  and choose investment                                                                    
partnerships under a specific  kind of exploration criteria.                                                                    
She  noted  that  PFC Energy  had  indicated  that  Alaska's                                                                    
administration needs  flexibility, but the  legislative body                                                                    
wanted to  be the oversight  regarding the direction  of the                                                                    
board. She wondered  if the board should  have oil expertise                                                                    
and financial investment strategy  to examine where Alaska's                                                                    
dollar could have the greatest  benefit to Alaska. Mr. Mayer                                                                    
responded that there was merit  to that idea. He stated that                                                                    
there were a  number of existing bodies in  the state, which                                                                    
had an investment role in the state treasury.                                                                                   
                                                                                                                                
Vice-Chair Fairclough  remarked that  each investment  had a                                                                    
different set  of scenarios that  could not be  predicted in                                                                    
the legislature.                                                                                                                
                                                                                                                                
Senator  Dunleavy  agreed  with Vice-Chair  Fairclough,  but                                                                    
felt that  the idea for  a board did  not go far  enough. He                                                                    
remarked  that  there needed  to  be  an exploration  of  an                                                                    
independent vehicle  that made business investments  for the                                                                    
state.  He  stressed that  the  board  should have  Alaska's                                                                    
interests,  and felt  that there  could be  feedback from  a                                                                    
trusted outlet that was concerned with Alaska's future.                                                                         
                                                                                                                                
Senator Bishop agreed with Senator  Dunleavy, and would like                                                                    
to hear more input from the client.                                                                                             
                                                                                                                                
3:15:57 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer stated  that the  industry would  be sharing                                                                    
their  input  with  the  Senate  Finance  Committee  on  the                                                                    
following day.                                                                                                                  
                                                                                                                                
Mr.  Mayer  looked  at  targeting  neutrality  directly.  He                                                                    
discussed  page 54,  "Alaska  $18/bbl  Development Under  UK                                                                    
North  Sea Regime."  He remarked  that  one could  set up  a                                                                    
system  that  looked  at base  production  at  a  particular                                                                    
series of assumptions around  costs and production profiles;                                                                    
but as the  cost level increased, the  result was different.                                                                    
He  stressed  that nothing  was  perfectly  opposite to  the                                                                    
regressive element of the fixed royalty.                                                                                        
                                                                                                                                
Mr. Mayer  highlighted page 55, "Alaska  $18/bbl Development                                                                    
Under Norway Regime."  He stated that Norway was  one of the                                                                    
highest government  take regimes,  but had a  very different                                                                    
downside than  Alaska. He explained that  Alaska had similar                                                                    
levels of government  take at the high end,  but Norway fell                                                                    
right  away as  divisible income  decreased. He  pointed out                                                                    
that  Norway had  no fixed  royalty, and  he also  mentioned                                                                    
that Australia's regime was similar to Norway.                                                                                  
                                                                                                                                
3:20:59 PM                                                                                                                    
                                                                                                                                
Mr. Mayer discussed page 56, "Targeting Neutrality //                                                                           
                                                                                                                                
     -All  of  the  preceding  regimes  seek  to  compensate                                                                    
     indirectly  for  the  regressive nature  of  the  fixed                                                                    
     royalty  and  ad valorum  tax  by  inserting a  roughly                                                                    
     equal and opposite progressive element                                                                                     
                                                                                                                                
     -Inevitably, the match must be imperfect                                                                                   
                                                                                                                                
     -At low  prices, government take  is still very  high -                                                                    
     and for  high cost developments, the  fixed royalty can                                                                    
     create   a  high   level   of   price  downside   risk,                                                                    
     particularly in conjunction                                                                                                
     with the gross minimum tax                                                                                                 
                                                                                                                                
     -The only way to create  a completely neutral regime is                                                                    
     to  counteract  the   regressive  elements  directly  -                                                                    
     either by eliminating or perfectly opposing them                                                                           
                                                                                                                                
          Since  royalties are  contractual, and  ad valorum                                                                    
          taxes shared  with local government, if  this were                                                                    
          desired, putting  in place a perfect  offset might                                                                    
          be easier than elimination                                                                                            
                                                                                                                                
          All that  would be required to  achieve this would                                                                    
          be a  fully reimbursable  tax credit equal  to the                                                                    
         amount of royalty and ad valorum tax paid                                                                              
                                                                                                                                
          A   completely  neutral   regime  could   increase                                                                    
          downside price  risk to the state,  but would also                                                                    
          lead to an even sharing of risk and reward                                                                            
                                                                                                                                
          Many major OECD oil  producing states with profit-                                                                    
          based  taxes have  chosen to  eliminate regressive                                                                    
          elements altogether  - i.e. Australia,  UK, Norway                                                                    
          - because  of the distorting impact  such elements                                                                    
          have on investment                                                                                                    
                                                                                                                                
     -The following slides model a 42.5 percent Profit-                                                                         
     Based Production                                                                                                           
                                                                                                                                
     -Tax  rate,  combined  with a  fully  reimbursable  tax                                                                    
     credit equal  to the amount  of royalty and  ad valorum                                                                    
     tax paid  (or the eventual  elimination or one  or both                                                                    
     of those elements                                                                                                          
                                                                                                                                
Mr. Mayer looked  at page 57, "Profit Tax  Only (Royalty and                                                                    
Ad Valorum Reimbursed) Base Production."                                                                                        
                                                                                                                                
Mr.  Mayer highlighted  page 58,  "Profit Tax  Only (Royalty                                                                    
and   Ad  Valorum   Reimbursed)  $18/bbl   New  Development,                                                                    
Standalone."                                                                                                                    
                                                                                                                                
Mr. Mayer discussed  page 59, "Profit Tax  Only (Royalty and                                                                    
Ad    Valorum   Reimbursed)    $18/bbl   New    Development,                                                                    
Incremental."                                                                                                                   
                                                                                                                                
Mr.   Mayer   noted  that   a   property   tax  would   have                                                                    
approximately 65  percent government take at  every possible                                                                    
price deck.                                                                                                                     
                                                                                                                                
Senator Bishop  surmised that the  proposal would  allow the                                                                    
company to choose where to  invest, because there was no GRE                                                                    
or incentive for  downhill work, etc. Mr.  Mayer agreed, and                                                                    
furthered  that   there  were  many   discussions  regarding                                                                    
specific incentives. He stated  that the approach would only                                                                    
set  the level  of overall  government take,  and reflect  a                                                                    
reasonable share.                                                                                                               
                                                                                                                                
3:23:44 PM                                                                                                                    
                                                                                                                                
Vice-Chair Fairclough  wondered if OCED  experienced similar                                                                    
historical  patterns  as  different  countries  became  more                                                                    
mature  in  their  relationships with  industry.  Mr.  Mayer                                                                    
responded that  the evolution of  the global  fiscal systems                                                                    
have been  very simple  fixed royalties  and also  a greater                                                                    
focus on trying  to tax profit directly,  rather than taxing                                                                    
volume  and  gross  revenue.  He  stated  that  tax  royalty                                                                    
arrangements were fairly normal  before the 1960s. He stated                                                                    
that  the 1960s  and 1970s  held two  great oil  shocks, and                                                                    
coincided a post-colonial period.  He explained that many of                                                                    
the colonial  counties examined  their resource  wealth, and                                                                    
felt  that  they  were  not   benefitting  enough  from  the                                                                    
resource wealth compared to the companies.                                                                                      
                                                                                                                                
Co-Chair Meyer discussed housekeeping.                                                                                          
                                                                                                                                
SB  21  was   HEARD  and  HELD  in   committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                

Document Name Date/Time Subjects
AK Sen Finance JMayer PFC 4 March 2013.pptx SFIN 3/4/2013 1:30:00 PM
SB 21