Legislature(2013 - 2014)BUTROVICH 205
02/11/2013 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 21 | TELECONFERENCED | |
SB 21-OIL AND GAS PRODUCTION TAX
3:32:11 PM
CHAIR GIESSEL announced SB 21 to be up for consideration.
3:32:38 PM
SENATOR BISHOP joined the committee.
BRYAN BUTCHER, Commissioner, Department of Revenue (DOR),
Juneau, Alaska, introduced himself.
3:33:07 PM
DAN SULLIVAN, Commissioner, Department of Natural Resources
(DNR), Juneau, Alaska, introduced himself.
COMMISSIONER SULLIVAN began the first part of the presentation
saying that throughput decline is the most urgent issue facing
the economic future of Alaska and his goal today was to provide
a little bit of background on the Trans Alaska Pipeline System
(TAPS) throughput and describe the challenge in the broader
context of what is going on in the country and globally with
energy developments and underscore the fact that the decline is
not inevitable. There are many examples where the state can look
at how other basins have turned around serious production
declines and Alaska can do that, too!
3:35:04 PM
He said TAPS is a critical state and national energy asset and
having the federal government as a partner is critical in
turning the decline around, but he hadn't seen much interest
from them. TAPS used to represent 25 percent of US domestic
production and he said the administration sees the decline as
the "ultimate giveaway." Bloomberg reported about a month ago
that it lost 40,000 barrels a day from December 2011 to December
2012; at $100/barrel that is about $1.5 billion that is not
circulating through either state coffers or the Alaska economy.
That revenue is gone and he stated that is the ultimate give-
away to future generations of Alaskans.
3:37:46 PM
COMMISSIONER SULLIVAN said the North Slope is a mature basin but
the state as well as the United States Geological Survey (USGS)
believe that it still has enormous opportunity, but there is
some urgency he said recalling a TAPS shutdown that happened two
years ago in 40 below zero weather. If you talk to Admiral
Barrett or the folks at Alyeska, getting it back up and running
was not a sure thing. The lower output TAPS has each year, the
more risk there is of it shutting down. Companies will be
required to spend more on maintaining existing infrastructure
and that also has an impact with regard to how new explorers
view the state and on the revenues the state will be getting.
The best way to address these challenges is to turn the
throughput around.
3:39:58 PM
COMMISSIONER SULLIVAN said many positive things are going on
that are providing Alaska the wherewithal to address this
challenge. A huge resource basin still exists on the North Slope
and its next phase of development includes huge fields, smaller
conventional fields, unconventional oil and the fact that much
of its area is still relatively unexplored, enough to sustain
Alaskans for decades.
3:41:08 PM
SENATOR DYSON joined the committee.
3:41:32 PM
COMMISSIONER SULLIVAN said the other positive development that
has happened in the last couple of years is the very significant
renaissance of energy production in the US and the Organization
for Economic Co-operation and Development (OECD) countries; the
International Energy Agency (IEA) has predicted the US will
become the world's largest global oil and gas producer by 2020,
overtaking Saudi Arabia and Russia. This monumental shift has
all kinds of positive implications. The Financial Times reported
an estimated $600 billion was spent in 2012 in the US and OECD
and that was projected to increase to $650 billion in 2013;
unfortunately he estimated that only about half of 1 percent of
that $600 billion went to Alaska in 2012. He said it was
important for this committee to realize that the US energy
renaissance is happening and that Alaska should be leading it
not dragging it down. The industry investment is out there for
Alaska to get.
3:44:52 PM
COMMISSIONER SULLIVAN said most other basins had or were in the
process of turning around their production declines; that Alaska
clearly has better geology companies agree, but it still is not
getting any of that investment. One Internet article said the UK
was turning its North Sea production around with tax reform and
reductions and that area is mature and in many other ways
analogous to Alaska.
3:46:26 PM
COMMISSIONER SULLIVAN said Apache had also turned around a
declining field by using technology here in Alaska. So,
facilitating the next phases of North Slope development in terms
of unconventionals or smaller pools of conventionals is not just
about tax reform. He said the DNR went to Houston last week and
set up a booth meeting with dozens of companies that talked
about Alaska and its resource basin, but a continuing theme from
those companies was that while they recognized the resource base
they also recognized the costs around developing them; one was
Alaska's high production taxes particularly at high prices.
3:48:52 PM
SENATOR FRENCH ask how Alaskans would know this bill is working
if it passes. When throughput goes up?
COMMISSIONER SULLIVAN replied yes; they are focused on the
throughput decline number, although it would not go up
overnight. And they would start to see increased investment on
the North Slope.
3:49:54 PM
COMMISSIONER BUTCHER said the governor's oil tax reform
principles were under a base of getting Alaska more competitive.
If you look at the investment and job increases going on in
other jurisdictions you see that Alaska is lagging. Alaska has
the highest oil taxes in North America in the current high price
environment; in fact it is second to Norway among OECD states
and countries and they don't have to go much higher to pass
Norway. Taxes are not the only thing that companies base their
decisions on, but it's a big piece. Combining that with how
expensive it is to do business on the North Slope, it is not
surprising that Alaska is not seeing what is going on in almost
every other oil producing jurisdiction.
He outlined the governor's four tax reform principles. It must:
-be fair to Alaskans.
-encourage new production in new and legacy fields
-be simple so that it restores balance to the system
The state takes a disproportionately large chunk of
revenue at high ends and at low ends we take a very
minimal piece of it. In a way at low prices you would
hope to have a higher percentage coming in and we have
very little; at high prices when potentially we have
enough coming in that we don't need to take a huge
piece and we are taking a large piece. We have one of
among the most complex tax systems in the world;
companies struggle with understanding it.
-be durable for the long-term
3:53:53 PM
COMMISSIONER BUTCHER explained that companies view our tax
system as being very complicated to explain to board members
making the return on investment equation hard to calculate. It
has to do with how progressivity works at any particular dollar
amount, how the tax credit system works and with how it is
calculated on a monthly basis rather than annually.
The tax reform must be durable for the long-term. Alaska's oil
tax structure has changed too many times over the last few years
and if you think of being a company and looking at some areas
around the world that don't change very often, they know what
they are going to get 10 years out. They look at Alaska and see
it changing every couple of years and in the years it's not,
change is seriously being talked about.
3:55:10 PM
He said that the DNR and DOR had been working closer than
previously and had brought on a new consultant, Econ One
Research with Barry Pulliam, who has worked for the
administration and the legislature before.
3:55:47 PM
CHAIR GIESSEL asked what he meant by tax reform "being fair to
Alaskans." Is there a particular way to divvy that up, 60/40?
3:56:12 PM
COMMISSIONER BUTCHER replied that is one issue that makes this
topic so difficult. They started out looking at Jay Hammond's
one-third/one-third/one-third concept, but of course, it doesn't
work out that way; the state government takes much larger than a
third share and the federal government takes less. Ultimately,
Alaskans can define what makes a lot of sense to the state, but
if it's not getting any new development or new production, it
needs to take a fresh view.
COMMISSIONER SULLIVAN commented that he thinks that fairness
also goes to future generations of Alaskans and that the decline
status quo approach is unfair now as well as into the future.
3:58:22 PM
COMMISSIONER BUTCHER said the tax reform team reviewed previous
work by the legislature and the administration, work done during
the past two years, work done during ACES, PPT, ELF and
identified problems with the current tax system as follows:
-declining production of 6 percent per year
-competitive environment
-progressivity
It's difficult piece to compare to other areas that
don't have it or have it in a very simple way such as
North Dakota that has 8.5 percent up to $50/barrel and
11 percent after that, which is very easy to
calculate. Their tax department has one person doing
its oil taxes as opposed to Alaska's Army.
-tax credits
(Which ones are working and which ones need tweaking
to be a little more effective)
SENATOR FAIRCLOUGH asked for a better explanation of North
Dakota progressivity.
COMMISSIONER BUTCHER explained that they use a gross tax, which
is much simpler (although he wasn't suggesting going to that)
and it's two-tiered; up to $50 is taxed at a flat percent and
over $50 is taxed at a higher percentage. It doesn't go back and
pick up the entire barrel like Alaska does. It is progressive in
that they take a little bit higher percentage when the price of
oil is higher, but it doesn't lead to the high marginal tax
rates of 80 to 90 percent that Alaska's progressivity has for
its government take.
SENATOR FAIRCLOUGH said she wanted it to be clear that it isn't
really progressivity as the state of Alaska has defined it.
COMMISSIONER BUTCHER agreed and said he wasn't aware of any
jurisdiction that had progressivity like Alaska's. Very few have
it and the ones that do tend to do it bracketed.
SENATOR DYSON asked if he was inferring they should go to a
gross tax as opposed to a net profit tax on new oil.
COMMISSIONER BUTCHER answered no, just the opposite. The benefit
of net is that it takes into consideration a higher cost
development compared to gross. But it is much more difficult to
administer.
4:02:33 PM
SENATOR DYSON said they had heard testimony that our net profits
tax removes the incentive for the producers to reduce their cost
of drilling allowing a way to hide some of their resources from
taxes and he hoped the commissioner would help them rethink
that.
COMMISSIONER BUTCHER said they would in future discussion about
taxes and credits.
SENATOR DYSON asked if he was suggesting that credits reduce the
impediments to more efficient production.
COMMISSIONER BUTCHER answered yes; tax credits can be used to
spend down one's tax liability under progressivity and all the
credits in this bill were weighed separately on how effective
they have been.
SENATOR DYSON said he would come back to that question at
another time.
4:04:09 PM
COMMISSIONER BUTCHER said there was a coordinated effort to
understand the impacts of production decline on not just
revenues but on TAPS. Slide 15 compared the largest oil
producing jurisdictions in North America of North Dakota, Texas,
Alaska and Alberta after the 2003/04/05 price spike. They all
started with very slow but steady production over many decades
until the price of oil spiked. Then oil shale played a huge
factor in North Dakota passing Alaska as a producer. New
technology allowed this to happen, but the price of oil had to
be at $70 in order for that technology to become economic. So at
$40 or $50 a barrel it wouldn't have happened. Alberta was faced
with the same situation.
Most interesting, however, was the comparison between Texas and
Alaska, because Texas had been producing oil a lot longer than
Alaska. In the mid-70s they were in a decline when Alaska shot
up with Prudhoe Bay. After Prudhoe Bay peaked in the mid-80s
Texas and Alaska had the same decline curve until the price of
oil spiked up. Then Texas turned around and Alaska stayed the
same.
COMMISSIONER BUTCHER said everyone knows that shale oil is
occurring in Texas just like it is in North Dakota, but the
interesting things about Texas was told to him by the Texas
Railroad Commission - that the Texas turn-around was done almost
entirely on conventional oil and only the last two years was
from shale oil.
4:08:19 PM
SENATOR MICCICHE asked if it was all conventional in 2006 and
2007 when Alaska and Texas started separating on the graph.
COMMISSIONER BUTCHER replied yes; for Texas it was a combination
of going into new fields and going back to old fields that were
more economical to produce at $100/barrel than they were when
they had stopped producing at $30/barrel.
4:09:00 PM
Slide 16 compared Alaska to other opportunities using detailed
models and analyzing a variety of metrics. It showed Alaska
being more competitive at lower oil prices, but less competitive
at higher prices. Unfortunately, companies lose money when the
price goes low and it's at the high prices where they hope to
recoup that loss. But in Alaska that is where the state takes a
lot higher piece.
4:11:01 PM
SENATOR FAIRCLOUGH asked why he pulled a slide of West Coast ANS
prices from the TTP Committee presentation.
MIKE PAWLOWSKI, Advisor, Petroleum and Fiscal Systems,
Department of Revenue (DOR), Juneau, Alaska, explained that that
slide evolves continually as the administration's consultant
runs the numbers, which he does on a regular basis.
SENATOR FAIRCLOUGH again asked why they were not showing
$70/barrel that had some negative numbers.
MR. PAWLOWSKI replied that there was no specific reason, but it
does go negative in certain circumstances for different
jurisdictions.
4:12:22 PM
COMMISSIONER BUTCHER said progressivity is complicated and
unpredictable both for the state and investors. Having to factor
in the rate dollar by dollar makes forecasting where the price
of oil is going and how it will affect a particular development
more complicated. Having to calculate it monthly also makes it
more difficult; and at high marginal tax rates, the government
can take 80 percent plus on each increasing dollar.
4:14:01 PM
Slide 18 showed a graph on how production tax credits were
applied against production tax liability as refunded tax credit
certificates. The commissioner said they started with a five-
year look back, but there was very little information on how tax
credits were working and there wasn't a break down on what the
spending was on even by the time he came into office two years
ago. He explained that the DNR and the DOR had spent the
previous years trying to implement and administer over 70 new
regulations for ACES, which took the vast majority of their
time. As a result they didn't have as good of a picture of what
tax credits were doing on the North Slope as they would have
liked. But 2013 will be the first year in which companies will
provide a much more detailed breakdown and they expect at the
close of calendar year 2013 to have a much more detailed view of
what is going on up there.
4:15:55 PM
SENATOR DYSON asked if the Y axis represented billions.
COMMISSIONER BUTCHER answered that it represented millions. He
said the state had paid out a little under $6 billion in tax
credits so far and an estimated $800 million plus would be paid
out in FY14. The state paid out almost $1 billion in credits to
companies that have no production yet - and at high oil prices
with a lot of revenue coming in, that number doesn't jump out as
much as it does when there are low oil prices and less revenue
coming in. If the price of oil drops into the $70s, $80s or $90s
the state budget would be billions of dollars in deficit, he
said and the state would still be on the hook for the credits.
The current tax system really gets into difficulties if we were
able to get the kind of investment we want, like $20 billion
over two or three years because we would also see the $8 to $12
billion going out in tax credits to pay for that investment. We
may not even have the reserves to get us to the point of that
potential production, because we were too good at getting
companies to come here. And that is a pretty upside down tax
structure.
4:18:51 PM
COMMISSIONER SULLIVAN added that situation would happen
particularly at low oil prices.
COMMISSIONER BUTCHER said the reason it was set up that way was
because one company used to be able to sell its tax credits to
another company, but it was discovered they would have to be
sold at a discount. That was changed so that now companies can
come to the state for a check.
SENATOR MICCICHE said he would like to know if the state is
paying out more than it is bringing in and which were the right
credits.
COMMISSIONER BUTCHER said they would get that information for
him, but basically, the companies that are producing in Alaska
are paying for all the tax credits. As the department analyzed
what the state was getting for the $5.85 billion, they didn't
see a direct connection over these years to any production in
the future. That isn't to say there isn't a connection, but the
DOR couldn't see that with the information it has.
4:21:26 PM
COMMISSIONER SULLIVAN said one of the reform proposals is to
significantly tighten up the nexus between credits and
production.
SENATOR FAIRCLOUGH asked if they were establishing criterion in
regulations for credentials of people applying to become
wildcatters or explorers on the North Slope - or could
Fairclough and Company come in and receive millions of dollars'
worth of credit to try and dig a hole and then go back home.
COMMISSIONER BUTCHER answered if your company does the work and
submits the information, you would qualify for the tax credit.
SENATOR FAIRCLOUGH said that was her point; Fairclough has no
experience in oil exploration and she was asking if the
department had considered criteria so they know a company
actually has exploration ability and experience for getting
those credits.
COMMISSIONER BUTCHER said they hadn't spent any time talking
about it, but they could.
SENATOR FAIRCLOUGH asked if she would have any skin in the game
if she was able to do that.
COMMISSIONER BUTCHER answered yes. The state would not be paying
for 100 percent of what she was doing, but it would be a fairly
high percentage depending on the credits she qualified for.
SENATOR FAIRCLOUGH asked an outside number for how much skin she
would have in the game in order to qualify for Alaska's tax
credits.
4:24:25 PM
COMMISSIONER BUTCHER replied that the department has generally
considered that state participation is 40 to 60 percent.
He said there was growing concern that their revenue modeling
didn't link throughput with tariff rates or capture any CAPEX or
OPEX for low throughput mitigation measures and how those costs
may affect the state of Alaska's bottom line. Low flow
mitigation CAPEX and OPEX could increase tariffs by as much as
$1/barrel by 2019 and as much as $2.50/barrel by 2022. If you
assume the price of production and the tariff that was provided
in the fall 2012 Revenue Sources Book, a $1 increase in TAPS
tariff would decrease state oil and gas revenue by an average of
about $110 million a year.
4:26:46 PM
COMMISSIONER SULLIVAN said it's hard to attract new investment
with those kinds of TAPS tariff issues.
4:27:33 PM
COMMISSIONER BUTCHER said the proposal has the following pieces:
-eliminates progressivity and qualified capital expenditures
(QCE) credits of 20 percent. Exploration tax credits would be
kept the same
-reforms remaining credits to be carried forward to when there
is production (up to 10 years) to subtract it from, eliminating
checks going out from the State Treasury
-establish a Gross Revenue Exclusion (GRE) for newer units and
new Participating Agreements (PAs) in existing units
-holds Cook Inlet and Middle Earth harmless
4:29:24 PM
SENATOR DYSON asked what "gross revenue exclusion" means and how
it applies.
COMMISSIONER BUTCHER replied in this case it would mean a
certain amount of barrels. If you were to start production from
a new field - 100,000 barrels a day for instance - 20 percent of
those would be excluded from the tax equation. So, 80,000
barrels would be taxed. It accomplishes what they were already
working on - making the economics of a project better.
SENATOR DYSON asked why he was using gross instead of net on the
revenue side.
COMMISSIONER BUTCHER explained that equation was done on the
gross and the net would apply to the 80 percent not the entire
100,000 percent.
4:33:34 PM
SENATOR BISHOP asked if capital expenditures credits are going
away.
COMMISSIONER BUTCHER replied yes, as of January 1, 2014.
SENATOR BISHOP said he was concerned that some new drilling
technology that might advance and further enhance production
from the existing fields wouldn't qualify and he wanted that to
be a deduction. Is that eliminated in the proposal?
COMMISSIONER BUTCHER said he had a presentation that dug into
that in detail that he would be happy to show him. He said no
changes would be made to Cook Inlet and Middle Earth and that
this change would only affect 68 degrees North latitude (the
North Slope).
4:35:05 PM
Slide 21 compared the current tax rate with the proposal in SB
21. The 25 percent base rate would stay the same. Under the
proposal, progressivity and the QCE tax credits would be
eliminated and the proposal would add the GRE for new oil.
Under current law, they expect progressivity in FY14 to amount
to approximately $1.5 billion and the tax credits to amount to
$1 billion. So there is a much more modest number in the fiscal
note as a result of that balance.
4:37:52 PM
SENATOR FRENCH asked if he would consider the bill a failure if
it's adopted and production doesn't goes up.
COMMISSIONER BUTCHER replied that he would consider it a failure
if it doesn't lead to new investment that leads to new
production. If it goes from a 6 percent decline rate to
flattening out and not turning around, he would consider that
the first step.
COMMISSIONER SULLIVAN added the state is looking for levers it
can pull, but it doesn't have all the levers. They might do
everything right, but wished the federal government would be a
little bit more motivated to help us and help the country put
more oil in it.
COMMISSIONER BUTCHER said they could see when Econ One testifies
if this bill passes how the state will become more competitive.
4:40:41 PM
SENATOR DYSON said he didn't want to appear negative, but he
really wanted to see what the state's oil and gas people say
will add another 400,000 barrels a day, because he didn't think
that would happen until Shell oil comes in from the Beaufort
Sea. None of the little fields coming on line are going to
produce half of what one well did in the legacy field. He
thought we would be lucky to just flatten the decline curve.
COMMISSIONER SULLIVAN said that was a good point and they
realize the 1 million barrels a day goal in 10 years is very
ambitious, but it's important to be able to lay out a vision
that people can try to achieve. If they get to only 700,000
barrels a day within 10 years, he wouldn't consider that a
failure. They are concentrating on a diversity of plays; there's
Shell in the OCS and the shale play and that technology could
take off here like it did in North Dakota and Texas. There are
smaller pools that folks like Repsol are focused on. Maybe all
of them will come together, but maybe only one or two. So, they
have to focus on all of them and make the tax system attractive
to them all.
4:44:06 PM
SENATOR MICCICHE said he thought flattening the decline curve
would be an absolute victory, but reducing it to 3 percent would
kick the sustainability foot out there quite a ways and give the
state a chance to diversify the rest of the economy. Texas, a
tired 100-year old producing economy, turned itself around and
he wanted to capture some of those philosophies.
COMMISSIONER SULLIVAN explained that the spike in the price of
oil made things become economic in Texas, but Alaska has
progressivity which the others don't and companies can't get the
same return on investment they can in Texas or elsewhere.
4:46:20 PM
SENATOR FRENCH said he had asked why there was a difference in
the spring revenue forecast that had a 2 percent decline for
Prudhoe Bay over the next 10 years whereas the fall Revenue
Sources Book a much steeper decline and he wondered how that
answer was coming along.
COMMISSIONER BUTCHER said he had just signed off on that and he
should get it tomorrow.
CHAIR GIESSEL thanked them and said they would next get an
overview of SB 21 from the Department of Revenue (DOR).
4:47:24 PM
MICHAEL PAWLOWSKI, Oil & Gas Project Manager, Department of
Revenue, Anchorage, Alaska, stated that he would walk the
committee through SB 21 so that they could understand the
language and locations of the provisions in the bill. He said
the principles in SB 21 were:
· Tax reform must be fair to Alaskans
· Encourage new production
· Simple so that it restores balance to the system
· Durable for the long term
He said when taken together, these guiding principles are
intended to create a competitive environment that attracts new
investment to the state and grows the economy.
4:51:35 PM
MR. PAWLOWSKI explained that the proposal is built around four
core provisions:
· Eliminating progressivity and credits based on capital
expenditures
· Reforming remaining credits to be carried forward to when
there is production
· Establishing a "Gross Revenue Exclusion" for newer units
and new participating areas in existing units
· Holding Cook Inlet and Middle Earth Harmless
4:53:21 PM
MR. PAWLOWSKI explained how the bill intends to eliminate
progressivity starting with Section 26 on page 23, line 12,
which repeals three sections of law: AS 43.55.011(g), the actual
progressivity; AS 43.55.023(i), the transition investment
expenditure credits that were done leading into PPT before ACES
(that are no long being used and this was an opportunity to take
it off the books) and AS 43.55.160(c), the monthly production
tax value that relates specifically to the progressivity going
away (because it was repealed).
MR. PAWLOWSKI explained when progressivity is repealed it
effects several different parts of statute. To understand those
he went to the beginning of the bill, page 1, line 12.
4:54:55 PM
SENATOR MICCICHE asked what is retroactive to January 1, 2013 if
this passes (page 23).
MR. PAWLOWSKI said to answer that he would have to walk through
the different sections; section 3 is the Cook Inlet Middle Earth
provision that was passed last year in SB 23 establishing a 4
percent gross tax for oil and gas produced from frontier basins
essentially outside of Cook Inlet and not the North Slope for
the first seven years immediately following the commencement of
commercial production if it happens before January 1, 2012.
MR. PAWLOWSKI continued that section 7 on page 9, line 12, was
the important one. He explained under current law when a
qualified capital expenditure credit (QCE) is earned on the
North Slope, that 20 percent credit is divided and taken over
two years and is issued in two certificates, 10 percent one year
and 10 percent the next year. Outside of the North Slope,
credits are allowed to be taken in one year. So, because the
bill is ending qualified capital expenditure credits for the
North Slope after January 1, 2014, they need to go retroactive
to 2013 and allow the credits to be taken in one certificate,
cut the program off and end the obligation to the state.
4:57:23 PM
He explained that several years ago a fund for community revenue
sharing was established and revenue from progressivity was
dedicated to it. That revenue was limited to the amount of 20
percent of progressivity, intended to be $60 million a year or
up to the amount necessary to bring the balance of the fund to
$180 million, the thought being that if revenue sharing is $60
million a year there would be three years of revenue sharing in
the fund and then it could be refreshed. The proposal (section 1
on page 1, line 12, through page 2, line 7) eliminates the "20
percent of" language and rather relies strictly on the $60
million and $180 million criteria as the goal. But since
progressivity is being eliminated, a different fund source(the
Alaska net income tax which is corporate income tax payments to
the state) is designated in AS 43.20.030(c) on pages 2, line 3.
So under this proposal revenue sharing is not linked to one
element of the oil tax system but rather the corporate income
and earnings of the diversified base of businesses that pay
corporate income taxes in the state of Alaska.
4:58:52 PM
MR. PAWLOWSKI said another adjustment was required due to the
removal of progressivity from the bill. He said it is found in
section 2 on page 2, lines 8 through 18. The language deleted is
currently in AS 43.55.011(e), the primary tax section. Line 14
says that the annual production tax value of the oil or gas as
it's calculated in AS 43.55.160(a) is multiplied by 25 percent.
Then under the current system, that 25 percent plus
progressivity is where the production tax is defined. In that
progressivity is repealed, this deletes (2), the "sum of",
language that is no longer necessary, because going forward the
production tax will be a simple 25 percent of the net value of
the oil or gas produced from the North Slope.
4:59:58 PM
SENATOR DYSON asked how $30 figures into what he just said.
MR. PAWLOWSKI replied that the $30 is the trigger that
determines the progressivity feature each month that is being
repealed. Repealing progressivity means going back into the
statute and repealing every place that it is referenced in the
monthly installment payments, because now it is 25 percent of
your production tax value (not 25 plus 13 percent one month and
25 plus 6 month the next), which is all dependent on the price
of oil, the production of the company and the costs associated
with that production.
5:02:28 PM
Section 4, starting on page 2, line 25, is the installment
payments for Cook Inlet and Middle Earth that will exist for one
year before the progressivity is repealed to make the law work
in the way it is referenced. Section 4 will exist for a year and
then section 5 will be the law of the land going forward after
January 1, 2014.
Section 5 eliminates the "sum of" language again (same as
section 2). It is what the monthly installment payments will be
after progressivity is repealed. And that is why it is
considered a conforming section.
5:03:51 PM
CHAIR GIESSEL noted that there are still monthly payments.
MR. PAWLOWSKI said that was true; there are still monthly
payments in an annual true up. What is different in the proposal
is that the tax rate won't vary on a monthly basis.
SENATOR DYSON asked how "gross value at the point of production"
on page 7, line 3, was used.
MR. PAWLOWSKI replied that a specific calculation determines the
gross value at point of production.
SENATOR DYSON asked if production costs were deleted from that
figure.
MR. PAWLOWSKI replied it's the market price minus the
transportation costs.
SENATOR DYSON said he would be interested in knowing why they
are doing that.
5:05:14 PM
MR. PAWLOWSKI said section 6, on page 8, line 25, through page
9, line 10, was another conforming section because progressivity
goes away. He explained that several different tax treatments
for specific types of oil and gas had been added into law over
the years and after progressivity is repealed, section 22, on
page 21, line 10, is the cleaner and clearer categorization of
all of those tax treatments.
SENATOR BISHOP asked if they are "bundling" everything now.
MR. PAWLOWSKI answered no, but rather highlighting in statute
how oil will be treated based on the existing law in an orderly
list rather than leaving them scattered around the statute. The
point would be that page 21, line 21, talks about oil or gas
produced from leases or properties in the state that include
land north of 68 degrees - the North Slope - the area the bill
is attempting to really make changes to - other than gas
produced before 2022 and used in state that gets treated
differently.
SENATOR FRENCH asked what AS 43.55.011(p) referred to.
MR. PAWLOWSKI replied that is the provision that was included in
SB 23 last year that was the specific tax treatment for oil or
gas produced from areas south of 68 degrees North latitude and
not in the Cook Inlet sedimentary basin (Middle Earth). To put a
finer point on it he said page 22, lines 9-11, will read kind of
like the oil or gas that essentially at this point in time does
not exist in the State of Alaska. This is oil or gas produced
from leases or properties that are not north of 68 degrees, not
gas used in state, not oil produced from Cook Inlet, not gas
produced from Cook Inlet, and not oil or gas produced from
Middle Earth. There must be a catch-all statute that says after
the limits that were put in other statutes expire after 2022 -
the treatment has to go somewhere and it defaults back into
essentially the flat 25 percent severance tax under this
proposal.
5:09:50 PM
The North Slope qualified capital expenditure credits (QCE),
section 8, on page 9, line 30 through page 10, line 18 has new
language that a credit for QCE incurred for those areas north of
68 degrees may only be taken if the expenditures occurred before
January 1, 2014. So, until January 1, 2014 the QCE credit on the
North Slope will qualify for the 20 percent credit; after that
it will not.
5:10:50 PM
SENATOR MICCICHE asked if that was adequate time for smaller
investors to wean off of the old system.
MR. PAWLOWSKI said that is an important conversation to have,
but he would have to defer to testimony from the companies. The
administration's consultants have shown the improvement in the
economics of the life cycle of the project should actually drive
the ability to move past the credits and into the actual
investment and taking too long could cause the problem the bill
is attempting to address.
5:12:05 PM
Section 7 was another conforming section that talked about the
retroactive appeals. That was followed up with section 11 on
page 11, line 4, that talks about two credit certificates that
are divided up. The conforming change on page 11, line 8,
substitutes "certificate" for "certificates" because they are no
longer two certificates but rather a single certificate. The
associated language on lines 21-28 that is deleted also relates
to that division of certificates.
The important piece here is the conforming language later on the
North Slope QCE credits that had to be divided into the two
certificates. However, a separate provision - AS 43.55.023(m) -
said a credit can be taken in a single year if it is not on the
North Slope. The problem in trying to simplify the system is
that AS 43.55.023(d) said credits had to be divided into two
certificates and then AS 43.55.023(m) came along later and said
"except for anywhere other than the North Slope"; an investor
could read that and misinterpret it by not reading the other.
This language is trying to be transparent by saying that these
credits can be retained and already can be taken in one
certificate.
5:13:52 PM
Section 12 on page 11, line 29 is conforming language that
conforms "except for the tax credits incurred after December 31,
2013." It's just being clear that the issuance of transferable
and redeemable tax credit certificates cannot be done for
qualified capital expenditure credits that occur on the North
Slope after that date.
5:14:35 PM
Section 9 changes the North Slope net operating loss credits.
The current system has a 20 percent capital credit and a 25
percent credit of the losses that are incurred by a company that
might have no production but is spending and has a loss on an
annual basis on the North Slope. Twenty-five percent of that
loss can be turned into the state for a credit certificate which
is redeemable by a cash payment from the state or sold to
another company. Under the governor's proposal that 25 percent
loss credit would no longer be allowed for an area north of 68
degrees North latitude. Instead they are subject to language on
page 10, line 24, the new (p)-(u) sections of AS 43.55.023. A
loss carry forward credit on the North Slope will be subject to
a host of new requirements in section 15, which begins on page
13, line 15.
SENATOR BISHOP asked for clarification.
MR. PAWLOWSKI replied (p) through (u) relates only to the loss-
carry forward credit and in order to qualify for a loss-carry
forward credit you have to have a loss. So it is hard
functionally to see a situation where this would apply on legacy
fields.
Subsection (p) on page 13, line 20, limits application of a
North Slope carried-forward loss credit to tax liability two or
more calendar years after the expenditures on which the credit
is based were incurred. Since the credit isn't applied for until
the second year after the loss is why there is the two-year
issue. Then they can come to the state and get a certifcate if
they have complied with the filing law. The other limitation is
on page 13, line 23, that says each one of the of these credit
certificates expires after 10 years.
SENATOR BISHOP asked if the credit on line 23 shows as a
liability in the state's annual budget.
MR. PAWLOWSKI responded that there are provisions in this
section about coming to the state so it can recognize that
liability. The importance of the other provisions was to have
the certification, have reporting and have it tracked so that it
can be included subsequently.
5:19:03 PM
SENATOR FRENCH asked if this is meant to say you can't lose
money for 10 years on the North Slope or does it pick some
arbitrary date.
MR. PAWLOWSKI replied that the function of 10 years is balanced
by subsection (r) on page 14, lines 2-14. He explained that
under current law these credits are given to a company as a cash
payment from the state, and not getting that cash payment a
company suffers essentially a loss of opportunity. So there is
an opportunity cost to the company. The credit is increased at a
rate of 15 percent a year beginning in the second year to
compensate for that cost of capital. They decided on 15 percent,
because it was comparable to what their consultant saw as a
reasonable level of upstream oil and gas opportunity - and the
point was to protect the state from that being carried forward.
Functionally, it is intended to allow a company to recover a lot
of the cost that they put into the development when they get
into the production tax payment stage. It's complicated, but the
credit is based on 25 percent of your losses; 15 percent
compounds that credit by doubling in five years. So you can
write off 50 percent of the cost of your development prospect
when you have production tax. This is intended to provide a
balance between how long those costs and the obligation to the
state are out there with really improving the economics of the
life cycle, which is the goal of the bill.
SENATOR FRENCH provided a hypothetical example: if Fairclough
Oil and the committee are shareholders and drill one well for
$10 million and it's a duster, then they leave Alaska and never
come back, that 25 percent credit expires after 10 years and
grows to a magnificent number, but since they had no profit to
show, it just expires and goes away. They can't sell it or trade
it.
SENATOR FAIRCLOUGH asked if that credit is also intended to
increase production.
MR. PAWLOWSKI answered yes, because the value of the credit only
exists if there is production and revenues.
5:23:05 PM
SENATOR FRENCH asked how mergers and acquisitions are handled.
MR. PAWLOWSKI said a provision will allow for the transfer of a
credit to another company, but its only valuable in that the
purchaser of the credit takes the property, creates production
from it and then a proxy limits the value of the credit each
year to 20 percent of the gross value X the operating
percentage. The goal is to not let a company buy a property,
produce a very little bit of oil and then use a massive amount
of tax credits bought from someone else. It is meant to provide
a ceiling on the use of the credit which will let market forces
drive how that credit is actually affected.
SENATOR BISHOP asked if the end result was intended to limit the
state's exposure.
MR. PAWLOWSKI answered yes. It enforces that point that there
needs to be production and revenue before the credits are used.
SENATOR MICCICHE asked if there is other text saying if the
remainder is negative it is considered to be equal to zero for
purposes of this paragraph (page 15, line l3) to ensure there is
no cash back.
MR. PAWLOWSKI replied yes in relation to this specific credit.
One other credit is available under current law until 2016 that
could be turned in for cash specifically limited to the
exploration phase on the North Slope that have distance and
sharing information with DNR requirements. There is a similar
concept in the small producer tax credit that is extended as
well in Section 16 of the bill.
5:26:04 PM
He said there are two more important things to say about the
treatment of the 15 percent increase in value for these credits:
page 13, line 25, is really the "first in/first out rule."
Because expenditures are happening in several years before there
is other production and the credits are increasing in value, the
first credit earned should be the first credit used. The second
credit earned the second credit used - as there is production
value that comes on. That is intended to keep the person earning
the credits from taking a credit and holding it for the 15
percent increase. In fact, to protect the state further, if a
company has a tax liability and doesn't use a credit against it,
they lose the increase for that year. The point is to not have a
company have the opportunity of either paying their taxes with a
credit or holding on to the credit and getting the 15 percent
compounded. The credits are earned and should be used to take
the tax liability to zero in any given year.
MR. PAWLOWSKI said that philosophy takes them to page 16, line
26, section 16, which is the small producer tax credit. Like the
new version of the loss-carry forward credit, it is only usable
to offset a tax liability. It may not be transferred or turned
into the state for cash. This is a basic reduction for a small
producer in the state of Alaska.
5:28:01 PM
He explained under current statute (page 16, line 29) a small
producer had until 2016 to come into production and qualify for
this credit and SB 21 extends that deadline to 2022.
5:28:31 PM
MR. PAWLOWSKI said that brought them to the Gross Revenue
Exclusion (GRE) on page 23, line 1.
5:28:49 PM
SENATOR MICCICHE asked why 15 percent was used and not some
indexed figure.
MR. PAWLOWSKI replied that the point was to provide
predictability to an investor and also that you are creating
almost a proxy for the cost to be recovered. An existing
producer could write these expenditures off against taxes; a
person without production can't. So the 25 percent is giving
them credit for that expenditure. The increase in value of that
expenditure carry forward is essentially a way to allow for a
company to write the costs of their investment off against their
taxes in the early years if they have a tax liability. In
working the life-cycle economics, 15 percent was the one that
provided transparency and worked. It's important to know the 15
percent isn't occurring for 10 years but for the 8 years because
of the two calendar years issue.
5:30:17 PM
JOE BALASH, Deputy Commissioner, Department of Natural Resources
(DNR), Juneau, Alaska, explained that another section, section
24, is a key component of the bill; it is the incentive that has
been targeted at new production. There is very little
disagreement about a willingness to extend some incentive or
share some portion of the pie with those companies that are
going to bring in new oil to TAPS. This particular provision
emerged in the waning days of last session. It is a mechanism
that takes the gross value at the point of production and
reduces it by 20 percent before a company starts to apply its
costs to arrive at the production tax value (PTV). The mechanism
itself fits well for investors who are incumbents and have
legacy production that happen to qualify for the gross revenue
exclusion on any new production.
One can qualify for the gross revenue exclusion (GRE) one of two
ways: you can produce barrels from a unit formed after January
1, 2003 or you can produce oil or gas from a participating area
(PA) approved by the DNR after December 31, 2011. Those two
types of lease management units are important and have different
dates for different reasons. The date January 1, 2003 goes back
to the only two units that are producing today, Oooguruk and
Nikaitchuq, that experienced a tax change while they were in the
middle of having their fields developed. Oooguruk Unit was
formed in 2003; a sanctioned decision was made for the field in
2006 and while they were doing that, changes were circulating
around ELF and PPT. By the time they got through construction
and first production, PPT was modified in 2007 by ACES and their
first oil flowed in 2008. The Nikaitchuq field was unitized in
2005/6 and a similar royalty modification was granted in 2008,
sanctioned and construction began, and their first oil was
produced in 2010.
SENATOR FRENCH asked if both fields would qualify for the 20
percent GRE.
MR. BALASH replied yes; these are the only two units producing
today that would qualify under this unit threshold.
He said the second way in which a company could qualify for the
GRE is through the formation of a new PA approved by the
department after December 31, 2011. No PAs have been approved
since that point in time, so they are really talking about those
that would be approved prospectively.
He explained that PAs are a management tool used by the DNR. PAs
are a third dimension to leases and units, two dimensional
measures of property. In other words, within a unit area you
have a large column of earth that has multiple pockets of oil
and gas within it. When they are produced they are reported as
belonging to a PA. Those reservoirs that contribute to
production are included in the PA.
5:35:39 PM
If at another horizon in a different formation in a different
reservoir another pocket or pool of oil is found and developed,
a new PA is formed. You can have multiple PAs within the same
unit at varying horizons so that they may be overlying or
underlying one another. The important point here is that a new
PA is new oil. That is how the GRE would apply to oil produced
in the legacy fields in terms of satisfying the "command" from
the public and the legislature that they are going to reward new
oil.
CHAIR GIESSEL asked what if there is a provision for new
technology finding more oil in an existing PA that is producing.
MR. BALASH answered no, but that isn't to say they couldn't
account for it. He said expanding that provision could be done,
but it wouldn't be easy and some policy calls would have to be
made.
SENATOR FRENCH asked where Pt. Thomson falls in this scheme.
MR. BALASH replied that Pt. Thomson doesn't have a PA. If they
are successful in meeting their obligations under the
settlement, a PA would be formed once they achieve production in
2016, and they would qualify for the GRE. But with other changes
being made, certain incentives and benefits that the
leaseholders at Pt. Thomson would receive under the current
system would no longer be available to them, particularly the
QCE credit and the benefits of deducting their expenditures as
they proceed to production.
5:39:19 PM
SENATOR FRENCH said new fields had been produced from Kuparuk,
for example Tarn and Tabasco, and asked if those are new PAs.
MR. BALASH replied yes, both are separate PAs.
SENATOR FRENCH said that enhanced oil recovery (EOR) was not
envisioned here.
MR. BALASH said that was right.
5:40:48 PM
MR. PAWLOWSKI said one policy call had to be made to preserve
the Cook Inlet and Middle Earth sections that had separate tax
treatments for oil and gas. It was reflected on page 2, lines
19-24. He explained that prior to the passage of SB 23 last year
gas produced in state and used in state was subject to the
equivalent of the "Cook Inlet treatment." With passage of SB 23,
gas produced in the Middle Earth and used in state was left
unclear and subject to a 4 percent. So they went with the most
recent action by the legislature around the tax treatment of
that gas or oil produced from that area. That was really done
largely because of the complexity of trying to do separate
accounting for the potential producers within the Middle Earth
for one stream of oil and one stream of gas under a different
tax system while they are both coming out of the ground in the
same well. So, they went with the most recent action by the
legislature, which means gas produced in Middle Earth and used
in state would be subject to (up to) the 4 percent cap for the
first seven years.
5:43:24 PM
MR. PAWLOWSKI explained that section 4 on page 2, line 25, was a
conforming section so that now instead of having to divvy out
all the different sections for a calendar year in which a
producer is subject to tax under AS 43.55.011(e)-(i) or (p) it
just says AS 43.55.011.
Section 13 on page 12, line 19, was the provision dealing with
the credit split (AS 43.55.123(m)); it now says a credit issued
under (d) (which was the former (m) that was deleted). This is
about the two-year to one-year certificates and being able to
turn them into the state for a transferable tax certificate.
There is no reason to have duplicative sections, which is what
you see through sections 13, 14, and 17. Section 18, on page 17,
inserts "former" to recognize that there was a time period
before where credits were issued under (m) and (d). This is
related to the purchase of certificates by the state in AS
43.55.028(g) and recognizes if a tax credit was issued under (m)
at one point and someone waited a few years to turn it in to the
state, that at one point (m) was an actual statute that a credit
was validly issued under.
Section 21 on page 19, line 5, talks about the way the
production tax (AS 43.55.160) value is calculated. This is clean
up language related to all the different types of production
that are in statute and is for the period of one year while
there still is progressivity. This inserts a reference to AS
43.55.011(p) that was missed in the passage of SB 23 last year
so there isn't a mistake in the calculation of production tax
value. After next year this section will be repealed and
replaced with the clean section that lists each type of
production and tax treatment.
5:48:00 PM
Finally, he said Section 25 on page 23, line 11, repeals AS
43.55.023(m), which he reminded them was for areas outside of
the North Slope where a credit doesn't have to be divided
between two certificates and can be issued as one certificate.
MR. PAWLOWSKI wrapped up his presentation saying that his intent
today was to make it easier for people to find the relevant
sections.
5:49:03 PM
SENATOR DYSON said under ACES discussions, Governor Palin had
reluctantly said that companies should be allowed to deduct
their expenses under a net profits tax, because they needed to
incentivize development. Pedro van Meurs and at least one of the
producers in the last two weeks said that incentive was gone. If
that was true, was there any way to help? His other point was
that they should be careful about raising folks' expectations
that they were going to get 1 million barrels of throughput a
day in the TAPS, because that sets them up for looking like
failure. He agreed with Senator Micciche flattening the decline
by half that would be a victory. The million barrels is probably
subject to the unconventional and heavy oil production and
probably Shell bringing their oil on shore.
CHAIR GIESSEL thanked Mr. Pawlowski for his presentation and
held SB 21 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 21 vs A SRES 2013.02.11.pdf |
SRES 2/11/2013 3:30:00 PM |
SB 21 |
| SB 21 Transmittal Letter SRES 2013.02.11.pdf |
SRES 2/11/2013 3:30:00 PM |
SB 21 |
| SB 21 Sectional Analysis DOR-TAX SRES 2013.02.11.pdf |
SRES 2/11/2013 3:30:00 PM |
SB 21 |
| SB 21 Overview Sullivan and Butcher SRES 2013.02.11.pdf |
SRES 2/11/2013 3:30:00 PM |
SB 21 |
| SB 21 OTR Sectional Analysis SRES 2013.02.11.pdf |
SRES 2/11/2013 3:30:00 PM |
SB 21 |
| SB 21 Intent Letter TAPS Throughput SRES 2013.02.11.pdf |
SRES 2/11/2013 3:30:00 PM |
SB 21 |
| SB 21 Fiscal Note DOR-TAX SRES 2013.02.11.pdf |
SRES 2/11/2013 3:30:00 PM |
SB 21 |
| SB 21 Fiscal Note DNR-DOG SRES 2013.02.11.pdf |
SRES 2/11/2013 3:30:00 PM |
SB 21 |
| SB 21 Econ One Presentation TAPS Throughput SRES 2013.02.11.pdf |
SRES 2/11/2013 3:30:00 PM |
SB 21 |
| SB 21 DOR Response to Sen. Gardner's questions 2-7-13. in SRES 2013 02 11.pdf |
SRES 2/11/2013 3:30:00 PM |
SB 21 SB 21 SRES packet addition from STTP Feb 7 meeting |