Legislature(2011 - 2012)BUTROVICH 205
03/14/2011 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB49 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 49 | TELECONFERENCED | |
SB 49-PRODUCTION TAX ON OIL AND GAS
3:34:59 PM
CO-CHAIR PASKVAN announced SB 49 to be up for consideration. He
welcomed Commissioner Butcher to continue his presentation on SB
49 [started on March 11].
3:37:27 PM
BRIAN BUTCHER, Commissioner-designee, Department of Revenue
(DOR), continued his presentation on SB 49 starting on slide 7,
a graph of North Slope exploration drilling. It listed the
number of exploration drills (in blue) according to the Alaska
Oil and Gas Conservation Commission (AOGCC) and an overlay (in
green) of the price of oil during that time. He pointed out that
Alaska's Clear and Equitable Share (ACES) passed in the latter
half of 2007 when 18 wells were drilled. Decisions had been made
to drill 16 exploratory wells for 2008 previous to the passage
of ACES; in the next two years, 9 wells in 2009 and 4 in 2010 (2
in Pt. Thomson) were drilled and DNR estimates 1 will be drilled
in 2011.
SENATOR WIELECHOWSKI asked if the DOR had done any analysis of
why the decrease in exploration wells happened.
COMMISSIONER BUTCHER replied that the Department of Natural
Resources (DNR) could better answer that. "It's our belief in
looking at it that as the price of oil has increased and the
exploration has increased in other states that it's as a result
of our tax system that passed at the end of 2007."
SENATOR WIELECHOWSKI asked if that would be directly contrary to
what his department said just last year that there was an
increase in investment on the North Slope and it was due to
ACES.
COMMISSIONER BUTCHER responded that the department has new
information now.
SENATOR WIELECHOWSKI asked when he came to this conclusion and
when the decision was made.
COMMISSIONER BUTCHER replied in discussions with the governor in
the latter part of December and after taking the job in January.
SENATOR WIELECHOWSKI asked if he agreed with or disagreed with
the following statement: "The good news is we are seeing a lot
of increase in oil exploration."
COMMISSIONER BUTCHER replied he didn't flat agree or disagree
with that, but he thought they were seeing more activity by the
independents. Ultimately, though, he didn't think they were
seeing more production or exploration wells drilled.
3:40:25 PM
SENATOR WIELECHOWSKI asked if Karen Rehfeld knew what she was
talking about when she mentioned "increased oil exploration"
before the House Finance Committee on January 19.
COMMISSIONER BUTCHER answered that she was probably answering a
question in reference to the dollar amount of tax credits that
were in the FY12 budget request.
3:41:14 PM
SENATOR FRENCH said the state went from 16 exploration wells in
2001 to 11 in 2002 and down to 1 in 2003, and in 2004 if
lawmakers had decided to reduce oil taxes to stimulate
exploration on the North Slope, that would have been an enormous
mistake because the state would have missed out on billions and
billions of dollars of revenue in 2007/08/09. While he
appreciated the point of needing more exploration wells, Senator
French said he thought maybe they should just set up a $150-200
million fund and subsidize the first three and see who drills
them first. He cautioned that they must be careful to connect
the dots correctly.
CO-CHAIR PASKVAN asked if the DOR had looked at a correlation
between the collapse in the U.S. economic markets in 2001/02 and
the decline of exploration drilling in 2003.
COMMISSIONER BUTCHER replied yes; some states didn't have a dip
and in others did. But as the price of oil began to climb again
in 2010/11 drilling began to increase again also. However,
drilling did not increase in Alaska and, in fact, continued to
decrease. It's not a correlation one can see in some of the
other states.
3:43:42 PM
SENATOR MCGUIRE joined the meeting.
CO-CHAIR PASKVAN asked if he could break out gas exploration
wells as compared to oil, because of the "shale explosion in the
Lower 48."
COMMISSIONER BUTCHER replied that would be difficult, but they
would do their best.
3:44:54 PM
SENATOR WIELECHOWSKI asked if the 2008/09 wells were all drilled
by a single company.
COMMISSIONER BUTCHER replied that companies work together when
drilling wells, but he didn't have specifics on those particular
years.
SENATOR WIELECHOWSKI asked if he knew companies have agreements
with each other such that one decides not to drill a well and
the other companies don't drill either.
COMMISSIONER BUTCHER replied that he didn't know.
SENATOR WIELECHOWSKI asked him to look into that, because he has
heard if ConocoPhillips and BP want to drill a well and then BP,
because of some financial disaster doesn't do it, then the well
doesn't get drilled. Is there any sort of interplay?
COMMISSIONER BUTCHER replied he would be happy to do that.
CO-CHAIR PASKVAN said he was trying to ascertain if there is a
natural pattern of decline in the number of exploration wells
simply because there are fewer undiscovered potentially
recoverable barrels of oil in a "mature elephant field."
COMMISSIONER BUTCHER replied that he would get back to him on
that, adding that they had been digging into what the natural
evolution in the decline of a field is.
CO-CHAIR PASKVAN said 10 or 12 years ago it's likely that the
central North Slope had 7 billion barrels of undiscovered
potentially recoverable oil and now according to the USGS it has
4 billion barrels and asked if going from 7 barrels to 4 over a
10 or 12 year period is a natural decline.
SENATOR WIELECHOWSKI asked if the explorer companies are
required to tell them of their future drilling plans.
COMMISSIONER BUTCHER replied that information is shared between
the companies and the DOR, but Ms. Nienhuis could enlighten them
more.
3:48:21 PM
CHERI NIENHUIS, Petroleum Economist, Department of Revenue
(DOR), explained that the companies do file plans of development
with the DNR and their production forecaster has access to those
plans.
SENATOR WIELECHOWSKI asked how much in advance companies are
required to give that notification.
MS. NIENHUIS replied that she wasn't sure.
3:49:57 PM
SENATOR WIELECHOWSKI asked if she was aware of the future
drilling plans for 2011/12/13.
MS. NIENHUIS answered that their production forecaster would
probably have access to that information prior to doing the
forecast.
SENATOR WIELECHOWSKI asked the commissioner for a more
definitive answer.
COMMISSIONER BUTCHER answered that he didn't know, but Frank
Molly, their production forecaster, could give them more detail.
SENATOR WIELECHOWSKI said he would like to have that
information. He asked if an increase in the projected number of
drilled wells would change his opinion on changing ACES.
COMMISSIONER BUTCHER responded that would be a good sign, but
more exploration wouldn't necessarily lead to more production,
because they don't know the success of the exploration wells.
CO-CHAIR PASKVAN asked how far into the future the exploration
plans the state receives go.
MS. NIENHUIS replied it varies. Some developers provide
comprehensive information; a shorter term project might be
different.
SENATOR FRENCH said they are talking about reducing oil taxes on
the producers hoping the explorers "will run out there" and
explore more. But Exxon, ConocoPhillips and BP don't explore;
they're producers, and he was concerned that there may be a
mismatch between what they are trying to incentivize, which is
exploration, and the people who are going to benefit from this
bill who are largely producers.
3:52:10 PM
SENATOR WIELECHOWSKI said the issue of drilling future wells is
important and he hoped someone would be able to testify as to
the specifics on the slides that are being presented to the
committee.
COMMISSIONER BUTCHER replied that the slides were put together
with the expectation that someone would be here from DNR. He
said slide 8 highlighted potential production on the North Slope
showing 16 billion barrels of cumulative production through 2010
with a little over 5 billion barrels remaining.
CO-CHAIR PASKVAN asked what needs to occur for a volume of oil
to be classified as "reserves."
COMMISSIONER BUTCHER replied for oil to be classified "reserves"
enough work would have had to be done to tell the company and
the state that "the barrels are there." At some point in the
future, industry will provide some estimates on what it will
cost to produce that oil, particularly in some of the newer
areas that have no or very little infrastructure. He pointed out
that while remaining North Slope reserves exceed 5 billion
barrels, that does not include the approximately 20 billion
barrels (heavy oil) in the Ugnu deposit or offshore volumes from
the Chukchi or Beaufort Seas that are in the department's
forecast.
CO-CHAIR PASKVAN asked what royalty interest the state has in
the Chukchi or the Beaufort locations.
COMMISSIONER BUTCHER replied none; they would be jobs for
Alaskans and there is no place to put the oil if the
construction of a link to the TransAlaska Pipeline doesn't
coincide with production occurring out in federal waters.
CO-CHAIR PASKVAN asked what royalty or production tax interest
Alaska has in the Arctic National Wildlife Refuge (ANWR) or NPR-
A areas.
COMMISSIONER BUTCHER replied the state would get production
taxes but no royalty.
CO-CHAIR WAGONER asked if the state receives 50 percent of the
royalty in ANWR.
COMMISSIONER BUTCHER replied yes.
CO-CHAIR WAGONER said that still has to be decided in some of
the other areas.
COMMISSIONER BUTCHER said that was correct. That was something
that was being negotiated between the federal and state
government in previous discussions about opening ANW-R.
3:57:14 PM
He said that slide 9 shows underdeveloped areas of the North
Slope where they want to encourage exploration. The darker
shaded areas near the coast have the legacy fields where most of
the production occurs now. To the left and right are federal
lands and just south of the developed North Slope area is the
region the governor has identified as state land that the new 15
percent base tax rate in the bill would most likely apply.
Armstrong/Repsol and Great Bear leases are in that area.
COMMISSIONER BUTCHER said they put together a sample of investor
decision criteria, with industry input, on how to reverse the
trend; prospectivity (if and how much oil is out there) and
geopolitical stability were two of those.
CO-CHAIR PASKVAN asked if "prospectivity" refers to conventional
oil.
COMMISSIONER BUTCHER replied that it is a reference to
conventional oil, but it could include other things. When
industry testifies they will comment on what they think is
available and possible.
SENATOR WIELECHOWSKI asked how Alaska rates in terms of
prospectivity and geopolitical stability.
COMMISSIONER BUTCHER answered that it rates very well in
prospectivity when compared to other states, but not as well
when compared to other Middle Eastern countries. Geopolitical
stability is an area where the United States is very strong.
SENATOR STEVENS asked if the health of the TransAlaska Pipeline
System (TAPS) enters into investor decisions at all.
COMMISSIONER BUTCHER replied he has heard anecdotally that it
does, because there is a concern about when it would shut down.
It's a potential negative when companies look at investing long
term.
SENATOR STEVENS said they keep hearing it's all on the state's
shoulders to help fill the pipeline, but it certainly isn't. If
it were to close tomorrow it would be an enormous loss to the
oil companies.
COMMISSIONER BUTCHER agreed; it's in their best interest to keep
it flowing, as well.
He moved back to the list of investor decision criteria saying
regulations (access to resources, development permitting,
environmental constraints) is an area in which Alaska has been
as accommodating as possible. However, there are federal hurdles
here that are not seen in other countries, which make it more
difficult. This is nothing the state has any control over, but
something that is factored in when a company is weighing
development here or someplace else.
He said that operations (existing infrastructure, experienced
workforce availability, costs, market proximity) is another
important criterion. This is an area that is difficult to
compare Alaska with other states like Texas and North Dakota
that produce oil, as well as the Middle Eastern areas that sit
close to tidewater in that our existing infrastructure is a
benefit to the legacy fields, but exploring areas outside of it
will be costly to connect to the existing infrastructure. Also,
the workforce is not as easy to come by as it is in states like
Texas. Alaska's distance from the market also makes it more
difficult to "make a development pencil." Dealing with these
issues means the oil in Alaska has to be more profitable.
COMMISSIONER BUTCHER said the tax regime in SB 49 does something
to improve the investment climate in Alaska when looking at all
of the other issues SB 49.
CO-CHAIR PASKVAN asked if he is using the Fraser Report
definition of the term "tax regime."
COMMISSIONER BUTCHER replied no; they use it in the broader
application, because it means different things to different
areas. As an example, in Alberta it means royalty, in Alaska it
means production tax; they are different but an oil company has
to weigh them all.
4:04:31 PM
CO-CHAIR PASKVAN asked if he agreed the term "tax regime" in the
Fraser Report didn't include production taxes.
COMMISSIONER BUTCHER responded that he agreed, but explained
that it was included because it resonated after surveying
industry on the pros and cons of different jurisdictions.
CO-CHAIR PASKVAN said they were here focusing on production
taxes and the Fraser Report has that category under "fiscal
terms" and asked if he agreed with that.
COMMISSIONER BUTCHER replied yes.
SENATOR WIELECHOWSKI asked if there is a reason he didn't
include the "fiscal term" section in his Fraser Report when he
did his presentation in House Resources.
COMMISSIONER BUTCHER replied it was a fairly minor piece in the
House Resources presentation - a snapshot - just as they showed
Alaska as 129th out of 141 in a snapshot of the "Wood Mac
study." He didn't include that here because it just confused the
issue from all perspectives and was more of a problem than it
was worth.
SENATOR WIELECHOWSKI asked if he agreed that the fiscal term
section of the Fraser Report deals with "government requirements
pertaining to royalty payments, production shares and licensing
fees" and that when they are considering how industry executives
view Alaska's fiscal terms that's really the more appropriate
slide to include.
COMMISSIONER BUTCHER replied that he didn't agree with that.
They believe that including "tax regime" would have represented
one more state that does not have any personal income tax, in
particular, when almost 50 percent of them had a negative view.
SENATOR WIELECHOWSKI said he spoke with the author of the study,
Gerry Angevine, who said that in looking at the Alaska oil
production taxes and royalty payments that it's more appropriate
under the "fiscal terms" section. Since the commissioner thinks
the taxation regime which is the tax burden "other than for oil
production including personal corporate payroll and capital
taxes and complexity of tax compliance," he asked what part of
SB 49 alleviates the personal, corporate, payroll or capital
taxes.
COMMISSIONER BUTCHER replied that no sections of the bill deal
with those.
SENATOR WIELECHOWSKI asked, "You thought even though your bill
has absolutely nothing to do with alleviating those things, you
felt it was appropriate to include a slide to make your case
about why we need to reduce production and taxes?"
COMMISSIONER BUTCHER responded that they felt it told a story,
which is that 44 percent of respondents when asked about
Alaska's tax regime found it a mild to a serious deterrent. He
appreciated Senator Wielechowski saying he spoke to the author,
but given the other things Alaska has a relatively low score on,
it doesn't make sense to not look at it from a larger view.
However, it was set aside along with the Wood Mac study because
it was too confusing.
SENATOR WIELECHOWSKI asked if he reviewed the question/responses
to fiscal terms which deal with royalty payments and production
shares to see what sort of responses were given by industry
executives.
COMMISSIONER BUTCHER replied no.
SENATOR WIELECHOWSKI asked the commissioner if it would surprise
him to know that 40 percent of the executives who were
questioned said that Alaska's fiscal terms encourage investment
and 34 percent said Alaska's fiscal terms are not a deterrent to
investment.
COMMISSIONER BUTCHER countered that wouldn't surprise him at
all. A number of independents and new companies are very excited
about the Alaska credits. There is a real split between that
excitement from independents who are up here looking to buy up
leases and the "larger deeper moneyed companies - the producers"
that they then have difficulty finding to partner with. FEX is a
good example of a company that got leases, drilled and found oil
but couldn't find any producers who were looking at it in the
same way. The governor has said this isn't setting ACES aside,
but it is trying to keep the positive in ACES while tweaking
some of the other issues.
4:10:34 PM
SENATOR WIELECHOWSKI asked if the fact that 74 percent of
industry executives think that Alaska's fiscal terms either
encourage investment or are not a deterrent to investment is
immaterial to him.
COMMISSIONER BUTCHER answered that it could be said the other
way, too; it doesn't change the fact that people don't appear to
be exploring in Alaska and production is declining.
CO-CHAIR PASKVAN said a possible way to address Senator
Wielechowski's issue is that the commissioner presented five
criteria and was asked which ones are most strongly correlated
to decisions to invest in Alaska at this time. Senator
Wielechowski is saying almost three-quarters of the respondents
say our fiscal terms are either not a deterrent to or do
encourage investment.
COMMISSIONER BUTCHER responded that he couldn't say specifically
which one was the largest deterrent; that would be something the
companies could discuss. Of the five, this bill deals with the
one something can be done about and that's taxes. The DNR is
working on regulations from the state side of things and the
Department of Law is doing what it can on the federal side of
things. In terms of the operations, geopolitical stability and
prospectivity, they would probably hear different views from
different companies because they each have a different focus;
some have national and some have global.
CO-CHAIR PASKVAN said the legislature could do something about
workforce availability under "operations," but he wanted to know
which one is most strongly correlated with decisions to invest
given that 74 percent hold the opinion of Alaska that they do.
COMMISSIONER BUTCHER responded that he didn't think they could
be separated out; they are all very important. Industry will be
in front of them soon and they could ask them that question
first hand.
SENATOR WIELECHOWSKI asked if this is his bill or industry's.
COMMISSIONER BUTCHER replied that it is the state's bill and
that he can lay out what they believe are some of the issues and
the solutions to them, but ultimately they would have to hear
from the companies on what it means to them.
SENATOR WIELECHOWSKI said it's the state's bill and the burden
is on the state to make its case; they shouldn't rely on
industry to do that. The oil companies can say what they want.
He asserted that the state would benefit greatly from
independent expert analysis - trust but verify.
4:16:20 PM
COMMISSIONER BUTCHER said he didn't disagree, and they will lay
out a case they believe says there is a problem and that it can
be solved with an improved investment climate. But ultimately,
as state government, they can't say they are going to force the
private sector to do A, B and C if this passes. That needs to be
heard from industry. The state doesn't have a crystal ball.
CO-CHAIR PASKVAN asked what the administration believes is a
fair distribution of net profits.
COMMISSIONER BUTCHER replied that they will get to slides that
compare the status quo to where they think tax rates are fair
for Alaska as well as reducing them to a point where it would be
an encouragement for industry to invest here. Initially they
started with Governor Hammond's concept of one-third/state, one-
third/federal and one-third/industry when development first
started on the North Slope. The state is far in excess of its
one-third now and would still be in excess under this bill. They
hoped SB 49 would be something material for the industry that
did say it was, in fact, a material change and would cause them
to reevaluate the decisions they were going to make in terms of
Alaska. That is where they are today.
CO-CHAIR PASKVAN said they are here under a production tax
system that looks at net profits and asked if the administration
has a fair goal in mind.
COMMISSIONER BUTCHER replied no. One of the aspects of the
current law and this bill is progressivity and at $114/barrel
the state gets to a point where it's taxing at a higher level
than it is in other areas.
SENATOR WIELECHOWSKI said he read the governor's statement where
he said Alaska is an "outlier" and asked what states he is
comparing us to at those prices, because when he looks at
government take figures at those numbers, he doesn't see Alaska
as being an outlier. What analysis has been done that shows
Alaska is an outlier at those prices?
COMMISSIONER BUTCHER replied that Alaska is an outlier
nationally and it becomes very difficult to make an apples-to-
apples comparison to other countries. For example, a Middle
Eastern country that is sitting on many times the oil Alaska has
and is very close to where it can be exported is in a different
situation and with very low labor costs.
4:20:40 PM
SENATOR MCGUIRE said she wanted to make two comments to Senator
Wielechowski that she does think it's common when introducing
bills to do them by request when industry asks them for certain
bill, and other times, like in this case, it's an issue where
lawmakers and the administration recognize people are talking
loudly about the fact that we are not seeing the exploration on
the North Slope that we used to see and we are seeing a decline
in the throughput of the TAPS. Those facts bear consideration.
She said she didn't see anything in testimony or anything from
the governor that says he has put this out at the direction of
the industry. Rather she sees it as an attempt to elicit
conversation, to say "this is our stab at it."
As lawmakers, they also have a broader obligation to see how to
diversify the state's economy, she said. "We're 90 percent
dependent on one main artery." The state owns the resources
through subsurface rights and is looking to partner with
industry to develop them unlike Texas and other places where
subsurface rights are privately held for the most part. She
hoped those conversations would not be adversarial, but rather
about what can be done to make the climate in Alaska more
investment friendly for those who are unhappy. "Wildcatters are
very happy," but she wanted to find out which companies aren't
happy.
4:25:10 PM
SENATOR WIELECHOWSKI referenced slide 10 and asked how the five
investor criteria are ranked by industry when making a decision
where to invest.
COMMISSIONER BUTCHER responded that these are just sample big
picture topics that the department put together and those
questions would have to be asked of individual companies. He
thought that geopolitical stability would mean a lot more to a
multinational company than to a small company that just deals
with North America.
SENATOR WIELECHOWSKI asked if he thought tax regime is the most
important thing companies look at.
COMMISSIONER BUTCHER responded that he couldn't say; obviously,
prospectivity would be tremendous. If you didn't have oil
available for development you wouldn't even be worried about the
tax structure.
SENATOR WIELECHOWSKI asked him if it would be beneficial for him
to know how important tax regime is to industry when making a
decision to drastically alter it.
4:27:05 PM
COMMISSIONER BUTCHER responded that tax structure has been very
important, but there are many important factors. But that is one
of the top ones.
SENATOR WIELECHOWSKI said the commissioner cited the fact that
Alaska has the highest taxes in the United States and asked why
any company would invest in Alaska because of that.
COMMISSIONER BUTCHER replied it's because Alaska would be rated
so high in prospectivity. Prudhoe Bay is the largest field in
North America and Alaska continues to have more oil than other
states. As a result, there is going to be more interest in
exploring in Alaska than in states with the very low tax rates
like Illinois, for instance.
He explained that slide 12 illustrated production tax value
(PTV) that is the market price of oil minus the transportation
costs and allowable lease expenditures (operating and capital
expenditures). The base tax rate on the PTV is 25 percent.
4:29:30 PM
SENATOR FRENCH said it would be helpful to see the governor's
bill projected against the dollar breakdown on page 13.
COMMISSIONER BUTCHER replied he could certainly do that for him.
CO-CHAIR PASKVAN asked for backup on how this section of SB 49
applies to FY10/11/12.
COMMISSIONER BUTCHER said he would do that for him.
CO-CHAIR PASKVAN asked if the $2,754,000,000 is 28.5 percent of
PTV in FY12.
COMMISSIONER BUTCHER answered it works out to 33.1 percent, then
minus the credit. He didn't know what the percentage is off the
top of his head.
CO-CHAIR PASKVAN asked, assuming the math is right, if 28.5
percent is the tax actually paid of the PTV.
COMMISSIONER BUTCHER replied yes, if the math is correct. He
also remarked that the department would come out with the spring
revenue forecast in the next couple of weeks; these numbers were
based on their fall revenue forecast.
CO-CHAIR PASKVAN moved the presentation along to slide 18.
COMMISSIONER BUTCHER said this shows the nominal production tax
rate with the blue line being the nominal rate for ACES with a
25 percent base and moving up the slope. Red represents SB 49
unitized fields of the same 25 percent base rate with brackets
instead of the way progressivity is currently factored. The bill
mimics the ACES slope. The green line represents the non-
unitized fields in SB 49; the nominal rates would be 15 percent
based rate (as opposed to 25 percent). It has the same slope and
caps at 40 percent instead of 50 percent.
4:33:13 PM
CO-CHAIR PASKVAN asked for clarification: no credits are
factored into this graphing?
COMMISSIONER BUTCHER answered that was correct.
CO-CHAIR PASKVAN asked for example, at a $30 PTV the production
tax is approximately 10 percent - in other words, about 15
percent below the base tax rate.
4:34:08 PM
BRUCE TANGEMAN, Deputy Commissioner, Department of Revenue
(DOR), answered that would depend on an individual company's tax
credits and its liability. Different levels of credit would
determine that starting point.
SENATOR WIELECHOWSKI asked how much in reduced revenue the state
would have taken in had SB 49 been in effect since the passage
of ACES.
COMMISSIONER BUTCHER replied he would get back to him on that.
SENATOR WIELECHOWSKI asked him to include information on the
reduction to the treasury projected at $100, $110, $120/oil when
they discuss the fiscal note.
COMMISSIONER BUTCHER indicated he would do that.
COMMISSIONER BUTCHER said slide 19 illustrates the marginal
government take that continues to grow, but at a slower rate
than under the current ACES progressivity. It eliminates the 93
percent marginal tax rate effect that one hears frequently about
from the industry that continues to take more in for the state
as the price of oil goes higher up into the 50 percent cap. It's
just not as steep as the current progressivity.
COMMISSIONER BUTCHER said page 20 is a breakdown at different
ANS West Coast prices in current law. The blue line is the
producers' percentage of profit.
CO-CHAIR PASKVAN asked if the term "profit" includes royalty.
COMMISSIONER BUTCHER answered yes.
CO-CHAIR PASKVAN asked if this graph depicts the relationship of
the state's production tax relative to the producers looking
purely at a production tax with or without credits applied.
COMMISSIONER BUTHCER answered that this graph is inclusive of
credits. Using an example of $115/barrel (about $1 above what it
is today) the state take would be 57 percent, the producer take
would be 28 percent and the federal take would be 15 percent -
quite a ways from one-third, one-third, one-third.
SENATOR FRENCH asked him to use $90/barrel as an example. Does
he mean the 50 percent share of profit includes the state's one-
eighth royalty share?
COMMISSIONER BUTCHER answered yes.
SENATOR FRENCH said if that's true, he wanted to him to rerun
that graph, because he was trying to work off of what ACES does,
not what the royalty does (because that is set). He said he was
working off of slide 14, the production tax called ACES. It
shows him that at $82/barrel out of a production tax value of
$9.6 billion, the state gets $2.7 billion. That strikes him as
being less than one-third. That leaves about two-thirds for
industry and the federal government. He needs to know how ACES
treats oil company profits, not how we deal with the royalty
share, which is set in stone.
CO-CHAIR PASKVAN added that it's important to understand that in
using the FY12 projected figures, the costs are $639 and $26.
The commissioner used upstream costs at $20; so it's short $6,
which downgrades the deductions and potentially the credits and
"gooses up" the progressivity by factoring costs out.
4:40:32 PM
COMMISSIONER BUTCHER said he could make that adjustment.
CO-CHAIR PASKVAN said in analyzing the percentage of split
between FY10/11/12, the state in FY10 got 29.5 percent, in FY11
it gets 28 percent and in FY12 gets 28.5 percent of the PTV
(using DOR production tax projections), and said, "We need to
get to a specific base line on what the costs are."
SENATOR MCGUIRE said she thought slide 20 was helpful because
when businesses look at profit, it's not relevant to them who
they have to pay taxes to or in what category. It just means
less profit. It would be helpful, however, to in the green part
divide out the green bars and show what part between the four
taxes is allocated. She said this should remind everyone of how
complex Alaska's system is.
COMMISSIONER BUTCHER said they can absolutely do that.
CO-CHAIR PASKVAN asked if he had estimated a percent of taxes
that are paid to the U.S. government in the federal portion.
COMMISSIONER BUTCHER replied yes.
CO-CHAIR PASKVAN asked if the federal portion includes federal
royalty. The reason he asked is because the FY12 projection
includes federal barrels.
COMMISSIONER BUTCHER replied it's just the federal income tax
portion.
CO-CHAIR WAGONER said he had been looking at that all the time
and he didn't think the federal take was accurate.
COMMISSIONER BUTCHER responded that he just didn't know and
invited Ms. Nienhuis to comment.
4:43:54 PM
MS. NIENHUIS said the federal portion is just federal corporate
income tax. The state's proceeds from that come from federal
waters to which federal royalties are assessed and is relatively
minor. They tried to show the bigger scheme on the North Slope
where most of the barrels are state barrels. If they were to
divide up everything they would also have to talk about private
royalties and things like that; those portions, at least at this
point, are pretty small.
CO-CHAIR PASKVAN said his question is in part, for example,
federal/state royalty barrels are included on the FY 12
projection. He was getting very confused about whether the
state's percentage included federal royalty barrels, because
that figure is 15.1 percent. And when one deducts that from the
gross value of the oil, the state's value is 12.5 percent. The
federal barrels are another 2.6 percent. If that 2.6 percent is
included in the state's share, that is distorting it completely.
MS. NIENHUIS agreed and added that she thought the royalty was
probably higher than that. It's not 12.5 percent across the
entire North Slope; each lease has a slightly different royalty.
So, the royalty percentage is closer to 13 percent for the
state. Senator Paskvan was correct in that federal barrels
(mostly from North Star) are included, but those could be left
out on future models. They were trying to depict what a barrel
produced on state land would receive.
SENATOR FRENCH said they are talking about ACES, so he found
those words misleading because they are not talking about ACES
but total global tax take. It's fair to do that, but it's
misleading. That leads to the question of if the 50 percent
includes royalties barrels, does it also include corporate
income tax and property tax.
COMMISSIONER BUTHCER replied yes.
SENATOR FRENCH remarked, "Share of total profit, not ACES, just
per barrel."
4:46:46 PM
SENATOR WIELECHOWSKI pointed out when Governor Hammond made his
one-third, one-third, one-third statement, the state had a gross
tax and if they were to look at the gross one-third, one-third,
one-third, Alaska's tax rate is probably not too far off.
Another point would look at the costs the state contributes to
unsuccessful development projects, which the DOR says runs 76
percent; the federal share was 8 percent and the company's share
was 15 percent. "So, in looking at these numbers, if the state
is contributing 76 percent to the unsuccessful development
project costs of an existing producer, I think it's fair for us
to get a fair share back from that."
COMMISSIONER BUTCHER said they believe this bill provides the
state with a fair share.
CO-CHAIR PASKVAN asked who prepared the numbers this slide used.
COMMISSIONER BUTCHER replied they were provided by a DOR model.
CO-CHAIR PASKVAN asked if they could see the numbers. He is
trying to figure out if they are basing their predictions on a
certain volume of oil.
COMMISSIONER BUTCHER asked if he wanted to know if the model has
numbers that can be manipulated.
CO-CHAIR PASKVAN replied that he wanted to be able to "track the
thinking" so they could understand the message that was intended
to be delivered by showing those percentages.
MR. TANGEMAN responded that they have that model and can provide
it to his staff. He said it has a certain number of variables
and it flows through to different types of slides.
4:50:42 PM
CO-CHAIR PASKVAN said he really wanted to see it, particularly
the variables that affected this slide.
CO-CHAIR WAGONER said he's "sick and tired" of hearing about
North Dakota because they don't see royalty figures or other
taxes people pay like county taxes. He wanted to see green
section of the graph that is on page 20 broken down into
corporate, royalty and property taxes, which Alaska has no
control over. On the North Slope, 19 percent of the property tax
goes to the borough; the state doesn't get any of that. He
repeated they are talking about ACES and this doesn't reflect
that at all.
COMMISSIONER BUTCHER said okay. They were looking very broadly
only at state land, but he understood the importance of having
the breakdown.
CO-CHAIR WAGONER said he wanted him to include state lands; he
wasn't interested in what the state gets from federal lands
right now.
SENATOR WIELECHOWSKI asked the highest average ANS price they
forecast over the next decade.
COMMISSIONER BUTCHER replied in 2020 they have projected an ANS
West Coast price of $111.84.
SENATOR FRENCH asked if that is the highest price they
projected, why is more than half the graph directed at prices
they do not anticipate they are not going to see.
COMMISSIONER BUTCHER replied they just wanted to lay out all of
the prices; and they focused on $115 because that is where it is
today.
SENATOR FRENCH said the commissioner didn't know that when he
made the graph; the $115 is a way point. Did you get
extraordinarily lucky?
MR. TANGEMAN replied that they can manipulate the model to show
whatever ANS price they want and they thought that was
representative.
SENATOR FRENCH replied that it's more productive to spend time
on the more likely range of outcomes. He suggested aiming at the
center of the target and educating lawmakers about what they
want the tax structure to look like at their predicted prices.
Then they can go from there.
4:55:45 PM
CO-CHAIR PASKVAN said so they understand why he is struggling
with this, that if in FY11 they are using $78/barrel for crude
(half-way between $65 and $90) the state's projected percentage
of the gross of 14.8 percent plus 13 percent royalty, for a
total of 27.8 percent, how do you get from there to between 42-
50 percent as shown on the graph.
COMMISSIONER BUTCHER replied he would be happy to get a
breakdown on that for him.
SENATOR WIELECHOWSKI asked in comparing page 20 to 21, what is
the policy reason behind lowering the state's share at
$40/barrel. It looks like it's even lower than it would be under
the ELF [economic limit factor].
COMMISSIONER BUTCHER answered that they focused more on the
"sweet spot" of where they saw the price of oil going.
4:59:38 PM
CO-CHAIR PASKVAN thanked everyone for their comments and finding
no further questions, adjourned the meeting at 4:59 p.m.
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