Legislature(2013 - 2014)BUTROVICH 205
02/13/2013 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SJR8 | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
| *+ | SJR 8 | TELECONFERENCED | |
SB 21-OIL AND GAS PRODUCTION TAX
3:41:18 PM
CHAIR GIESSEL announced SB 21 to be up for consideration and
said the Department of Revenue (DOR) had answered questions from
Senators French and Gardner and those were available to the
committee. She invited Mr. Pulliam from Econ One, consultant to
the sponsor, to testify.
3:42:01 PM
BARRY PULLIAM, Managing Director, Econ One Research, Inc.,
consultant for the sponsor of SB 21, Juneau, AK, presented an
analysis of Alaska's tax system, North Slope investment and the
administration's proposal, SB 21. He started with some
background saying that the North Slope to date had produced 16.2
billion barrels of oil, a lot more than people thought it was
going to produce when it was first discovered; about 5.5 billion
barrels of economically recoverable oil are left in those fields
today. About 90 percent of the discovered resources to date were
discovered prior to 1970 and largely in Prudhoe Bay and Kuparuk.
The following discoveries are smaller and more typical of what
can be expected going forward.
SENATOR FRENCH asked if they should look at incumbent producers
in analyzing ACES, since that is who is producing oil now and
will likely be producing oil in the future.
MR. PULLIAM answered that the incumbent producers are important,
but a lot of the oil that is left to be produced is sitting
outside of the Legacy Fields and waiting to be produced by
anybody and that Alaska would benefit from a much broader
participation by companies that are here and those that aren't
here yet. Less than half of the North Slope potential has been
produced to date and an estimated 40 billion barrels of
economically oil is available to be produced at today's prices,
a majority of it being conventional oil much of which is on
federal property.
3:46:16 PM
According to the United State Geological Survey (USGS) estimate,
about 3 billion barrels of recoverable oil at $90/barrel remains
in the central North Slope in smaller fields of 32-64 million
barrels and significant resource still remains in the Beaufort
and Chukchi Seas; efforts are just starting to tap that
resource. In NPRA the estimates are about .5 billion barrels are
economic to recover and ANWR has close to 10 billion barrels
with some bigger field sizes on average (not approaching Prudhoe
Bay).
USGS knows there is some shale in Alaska, but they don't have a
number for what is economic, because they are just scratching
the surface. The heavy oil resource in place estimates are in
the 25 billion barrel range and about 15 percent are recoverable
according to current estimates, but those figures are expected
to go up with anticipated technology developments.
3:49:56 PM
Briefly, the history of Alaska's production tax system started
at 12.25 percent, similar to the rate in the Lower 48, in 1977
when oil first flowed off the North Slope. It was increased to
15 percent in 1981 with an exemption for new fields for the
first five years.
SENATOR DYSON asked him to explain the impact of the economic
limit factor (ELF) in 1977.
MR. PULLIAM explained that the ELF modified the production tax
based on a well's production. Royalties at that time were 12.5
percent and the gross production tax was 12.25 percent. The
impact wasn't great initially, but by 2005 the ELF greatly
reduced the tax rate for fields like Kuparuk down to the 2-4
percent range.
SENATOR DYSON asked if it was a gross tax at the time.
MR. PULLIAM replied yes.
SENATOR FRENCH said according to DNR numbers in 1996 Kuparuk was
paying about 12 percent tax and went down continuously until in
2005 it was under 1 percent and asked if the state saw an uptick
in investment in that time. Did dropping the tax at Kuparuk
produce enormous new investments and with that more oil?
MR. PULLIAM said he would get to that later in the presentation,
but that Senator French was right about the tax rate dropping
over that period due to how the ELF worked. Yes, putting more
wells in the ground reduced the nominal tax rate at Kuparuk,
which was 15 percent at the time. By 2006, PPT was introduced
and that fundamentally changed a gross-based tax system to a
net-based system. So, instead of taxing the value of the oil and
determining the taxable value at the wellhead, it allowed the
producer to take deductions for operating and capital costs.
Therefore, the taxable value under our net system is lower than
it was under the gross system. The tax rate under PPT was 22.5
percent and then a progressivity piece was added to it, so that
when the net value of the oil exceeded $40/barrel, the tax rate
went up by .25 percent per dollar a barrel (or 2.5 percent for
every $10 increase in value of the oil).
3:54:40 PM
SENATOR MCGUIRE said they had heard that at high oil prices the
progressivity factor itself changes behavior because companies
have more money to invest. They want to put their capital
somewhere, but if a jurisdiction takes more, they're not
necessarily going to continue to invest there. And she wanted
him to factor oil prices into his comments about behavior of oil
companies.
MR. PULLIAM agreed that price of oil is a key determinant in
what the producer gets to keep.
SENATOR DYSON asked if field wide aggregating of the calculation
is what happened when the ELF was eliminated.
MR. PULLIAM answered that when the Prudhoe Bay satellites first
started producing the ELF was very low, so the tax rate was very
low. But in 2005, the Murkowski administration decided that
those satellites would be aggregated with the main field for
purposes of calculated the ELF making the new rate much closer
to 15 percent than zero.
SENATOR DYSON asked when we got rid of ELF.
MR. PULLIAM said that technically we still have it, but we don't
use it. The PPT eliminated it from the tax calculation for the
first time in 2006.
3:58:23 PM
After one year, PPT was amended to ACES increasing the base rate
by 2.5 percent and the progressivity from .25 percent to .4
percent, and the base rate at which it applied was lowered.
Progressivity was flattened out at $92.50. The overall tax rate
increased more quickly with the progressivity under ACES and was
capped at a higher level than under PPT.
3:59:25 PM
He said comparing activity on the North Slope relative to other
locations was challenging because overall prices and general
economic conditions impact activity there. So, in order to get
the most meaningful comparison the other places have to have
similar characteristics, for instance, in political and legal
structure, prospectivity and have readily available data like in
the major Organization for Economic Co-operation and Development
(OECD) producing areas (the North Sea, Canada, Australia and the
rest of the U.S.). These provinces are not running out of oil,
but producing it is high cost and technology will have to help
out. The resources are also being developed in large part by
the private sector so the incentive structure to invest and
produce is similar among them.
4:02:49 PM
He related the North Slope Profile as follows:
-crude oil production has been declining over time
-growth in capital spending between 2005 and 2006 then a
flattening out from 2009 forward
-increase in employment 2006 to 2007 and then a leveling off
-focus on maintenance and a downtick in drilling/development
activity
SENATOR DYSON remarked that production was going down faster
before ACES and spending and drilling in the legacy fields was
less.
MR. PULLIAM responded that there are rational reasons for that.
A decline in production occurred across all fiscal regimes and
some decline was inevitable regardless of the fiscal regime.
Capital spending increased as fiscal regimes changed, but it
hadn't increased as quickly on the North Slope as in other
places in response to the same price level changes. And as far
as employment goes, there was probably a need prior to 2006 to
do some maintenance work.
4:07:54 PM
He pointed out that capital spending grew in the new units of
Oooguruk and Nikiatchuq that weren't producing oil prior to 2003
and that those were largely developed during ACES.
4:08:32 PM
SENATOR FRENCH said they were given a fascinating presentation
recently by ConocoPhillips about their exploding use of coil
tubing units to do multiple completions from a single well and
asked if that had changed the state's method of counting wells.
For instance, he wondered whether 20 years ago eight different
completions off of one well bore would count as eight wells and
now be counted as one.
MR. PULLIAM answered that he thought that number referred to
down-hole completion.
4:10:38 PM
SENATOR FRENCH asked if he was using consistent capital spend
units of measurement between graphs.
MR. PULLIAM replied that he used nominal dollars of the day.
He explained that the production pattern in the North Sea looks
very similar to Alaska's: capital investment for the first few
years plateaued around 2010 with a significant uptick in capital
expenditure in the last few years (but with a flattening off in
drilling particularly for the U.K.).
SENATOR FRENCH asked him to comment on what seemed to be an
interesting set of comparisons: $50 billion being spent in the
North Sea for 3 million barrels of production and in Alaska $2.5
billion being spent for .5 million barrels of production.
MR. PULLIAM answered that the comparison was attempting to look
at spending for the future, which doesn't have a direct
relationship to current production. Both places have significant
resources yet to be exploited and it would be nice to see the
same kind of spending in Alaska as seen in the North Sea.
4:13:36 PM
The next profile was of the U.S. excluding the North Slope that
showed an uptick in production - as a result of shale oil and
conventional oil production. California has a much lower decline
rate than Alaska as a result of increased investment in
conventional production. That is seen in Texas as well. Much of
the increase in Canada has been from heavy oil. And he said that
prices are a key aspect of what has made that production
possible.
4:15:15 PM
SENATOR MICCICHE remarked that it's interesting that Texas'
production increased in 2007-2010 largely before any shale
production, yet drilling declined significantly between 2008 and
2010.
MR. PULLIAM said he knew drilling activity went down, because of
the price drop in 2009 and that Texas and the Lower 48, in
general, are very responsive to price.
SENATOR MICCICHE asked if Texas' fields are better at curtailing
production while waiting for price than Alaska is.
MR. PULLIAM replied that probably some of that goes on
especially around the margin, because a well can be shut in more
quickly in a place like Texas or the Lower 48 without impacting
overall operations. There are also have a lot more smaller
producing wells down there. Australia has a little bit of a
different story where declining oil production was replaced by
LNG. So, a lot of their capital spend has been to develop their
LNG gas resources.
4:18:43 PM
He displayed another graph of aggregated production relative to
price in these areas starting in 2003 that indicated 950,000
barrels a day were produced initially on the North Slope, but
that had gone down by 50 percent to 515,000 barrels a day. In
that same time period the price of oil went from $35 up to over
$100 a barrel in 2012. The OECD declined through 2008 and then
had an uptick that corresponded with the increase in prices. The
U.S. had the same pattern as the OECD countries.
4:21:20 PM
SENATOR BISHOP asked what a million barrels a day production
would do to the ANS market price.
MR. PULLIAM replied that it wouldn't have a material impact. The
West Coast is supplied by foreign oil at about 1 million barrels
a day. So increasing ANS would simply cut back on the imports.
SENATOR MICCICHE said it looks like it takes some time for
conventional oil production to respond to oil price but while
the rest of the market responded to the higher oil price in
2009, Alaska continued to decline.
MR. PULLIAM said looking back, 2008/09 was a very volatile
period; within six months oil prices dropped by $100 a barrel.
But industry realized the low price was not sustainable, because
the cost of finding and producing oil had risen. Therefore, the
drop in price was from a combination of an overinflated market,
a financial crisis and the following recession. He explained
that investors look at the long term and that while the drop in
2008/09 impacted their margin, the longer term view was that the
price of oil would not go back to $40 or $60 a barrel.
SENATOR MICCICHE said everyone was in decline prior to 2008, but
Alaska didn't respond to the higher price while other markets
did and asked if other factors contributed to that difference.
4:25:43 PM
MR. PULLIAM replied that a number of factors like the take,
technology and the ability to get at some of these resources
all add up very quickly. He added that a lot of production in
the U.S. is readily accessible.
4:26:33 PM
He continued that capital spending in Alaska and other places
doubled between 2003 and 2006; then Alaska's spending flattened
out for a couple of years and rises a little after 2008 and
flattened again. Spending in the rest of the world continued to
respond to the higher price level and came down again in 2009
and matched where Alaska was, but has continued to increase
since then as the price of oil has gone up. We know that
spending was taking place in the legacy fields during that
period; much of the Alpine oil was developed in the 2003/05
period.
He said that it takes a while for industry to adjust their
expectations to changing prices, especially when it was at $40 a
barrel, and that accounts for the period between 2003-2006/8.
4:30:06 PM
MR. PULLIAM explained how ACES works: the tax is calculated on
the net value of the taxable production (all of the production
minus the royalties). The per barrel net value is the gross
wellhead value (West Coast minus transportation) minus the cost
of production. That cost of production consists of capital
expenses, operating expenses and property tax payments, and the
cost associated with actually finding and pulling it out of the
ground to the wellhead. A 25 percent base tax is applied to the
net value and the progressivity increases by 4 percent per $10
over $30/barrel and then 1 percent for every $10 over $92.50;
the progressive piece is capped at 50 percent. So, the total tax
rate if prices are that high (around $300/barrel) would be
capped at 75 percent.
SENATOR DYSON asked at the range Alaska prices have been in
($90-120) what has been the highest tax rate.
MR. PULLIAM replied close to 50 percent at current prices.
SENATOR DYSON asked what the highest effective tax rate has
been.
MR. PULLIAM said he couldn't quote that figure exactly - maybe
40-45 percent varying across producer (in the current price
range). For example, assuming $100/barrel production tax value,
that would correspond to $130/barrel (West Coast), the base rate
of 25 percent and progressivity at $25 at .75 percent for a
total tax rate of 50.75 percent. Once that tax rate has been
applied to the taxable value of the oil, the production tax
credit allows 20 percent over a two-year period, a smaller
producer credit of $12 million/year that is phased out when
production exceeds 50,000 barrels a day, and a provision that
the state will purchase credits and operating losses from
companies that do not have a tax obligation against which it can
be applied. Most of this involves capital expenses in the
earlier phases of exploration and development. So, in combining
the 20 percent credit with the 25 percent tax rate, the state is
purchasing a total of about 45 percent of those expenditures.
4:35:18 PM
SENATOR DYSON asked which capital expenditures within a unit
could not be deducted as an operating expense.
MR. PULLIAM answered generally if a capital expenditure is
charged to all of the working interest owners as part of the
joint billing it could be deducted. There are some exceptions,
but he didn't know what they are because he wasn't an expert.
There is also a 30-cent exception overall; so, for instance if
your Capex were $10/barrel, you are only allowed to deduct
$9.70. Sometime between the corrosion event in 2006 and a few
years ago a limitation was put on deductible capital expenses
based on where they had been in 2006, but that provision has
expired.
SENATOR DYSON replied you can't get any better watchdog than a
partner in a unit.
MR. PULLIAM agreed. He said the next several slides revealed
some examples of how the tax is calculated at various prices:
$80, $100 and $120 using 50 million barrels after royalty.
4:40:22 PM
CHAIR GIESSEL asked where the royalty was calculated.
MR. PULLIAM answered that the royalty volumes are not taxable
and had already been deducted.
SENATOR MICCICHE said it would be interesting to incorporate
corporate income tax, property tax, royalty and federal tax for
an overall government take in his example.
MR. PULLIAM said total government take would be more like 75
percent (41 percent of it production tax).
4:42:17 PM
Another slide held the price at $100/barrel but varied the cost
of the fields from a relatively low cost to a relatively high
cost. With only $20 in expenses, there is a pretty high
progressive rate (16 percent), but if the expenses go up to $50
that progressive piece drops to 4 percent. The effective tax
rate could be as high as 38 percent or as low as 19 percent.
4:43:39 PM
CHAIR GIESSEL asked if this illustrated the potential impact of
gold-plating where companies would spend more to reduce their
taxes as well as the benefit to the small new producers in that
they would have more capital expenses initially.
MR. PULLIAM responded that the ability to reduce the progressive
rate is a benefit to the incumbent that the new small producer
doesn't have, because they don't get to buy down their rate -
although they do get to sell their losses to the state - but
just at the base rate of 25 percent.
4:44:46 PM
The next slide (22) varied the costs, but at $80/barrel as the
starting price. At this level the progressive piece was lower at
all the cost scenarios and actually went away in a high cost
scenario. So, the effective tax rates varied from 29 to 50
percent. He explained in a low-price/high-cost environment
you'll have very low effective tax rates. The taxable value
before expenditures was $40/barrel. The expenditure itself when
amortized over production equated to about $5/barrel. So, that
expenditure reduced the taxable per barrel value the tax could
be applied to; it also has the effect of reducing the tax rate.
So, before the expenditure his tax rate would have been 29
percent (25 plus 4 percent progressive) and after taking the
credits there was a $280 million tax obligation.
MR. PULLIAM explained that after making his expenditure his
taxable value was reduced from $40 to $35, which reduced his
progressive rate. So, his total tax rate was 27 percent - as
opposed to 29 percent - but 27 percent times a lower price. He
gets additional credits as well and after factoring those in,
his tax obligation was $122.5 million.
4:45:24 PM
The effect of all of that is that his tax rate was reduced by
$107 million before any application of credits, which added $50
million. So, his total tax was reduced by $157.5 million, a 63
percent reduction. Twenty percent of that was the credit, but 43
percent was simply the effect of progressivity of the buy-down.
4:48:16 PM
SENATOR FRENCH commented that this essentially illustrates how
someone who is investing more in Alaska buys down their tax
obligation under the current system.
MR. PULLIAM said that was correct; it shows how someone can buy
their tax obligation in Alaska by having more capital
expenditures. You can see going across his chart that the higher
prices go the more that is worth. So, at $80/barrel his tax was
reduced by $157 million (63 percent); if prices are $120/barrel
that would reduce his taxes by almost the full amount of the
expenditure (95 percent) making it effectively an amount that is
funded by the state.
SENATOR FRENCH said in extending that further, the state could
be seen as participating too strongly in that buy down effect.
That number could be tweaked and still preserve the basic
mechanism of rewarding people who invest in Alaska and (the flip
side) penalizing people who ship their profits overseas.
MR. PULLIAM responded that he understood what he was saying. It
could be changed to not have that strong of an effect, but
penalizing a company for sending its profits elsewhere was a
strong assumption and one of the best incentives the state can
provide, in his view, was to allow investors to do with their
profits as they see fit.
He said the quality of the profit generated here is very
different than the quality that is generated elsewhere, because
elsewhere that money has no strings attached. Requiring
reinvesting here is kind of like giving someone a gift
certificate as opposed to giving him cash. That is why Alaska
hasn't had the kind of response it had hoped to get with this
system. It's set up to greatly subsidize the investment, but the
expense of doing that is that the state will take a large
portion of it back. It's just not as appealing to the companies
as other places are.
SENATOR MICCICHE remarked that what is painful to watch is that
the credits are not tied to production, so that "gift
certificate" brings no value to the people of Alaska.
4:52:39 PM
MR. PULLIAM said that is a problem, particularly in a high price
environment when the state One of the reasons PPT was changed to
ACES was because we didn't see the results we wanted to.
4:55:13 PM
SENATOR MCGUIRE said it's nice to have an economist in the room,
because there is a tendency to inject a lot of emotion and
ascribe feelings to companies that aren't there when often it's
just a matter of numbers. She agreed with eliminating qualified
capital expenditures (QCE) because they are not working, but as
they move forward she wanted to know what, if any, credits
should be in a long-term tax system.
MR. PULLIAM said he felt the less done with credits, the better
off you are. For instance, the U.K. has instituted the "brown
field allowance" when they recognized they weren't getting the
production they wanted. Instead of giving credits they incented
additional production in areas that had already been developed
by exempting the first number of barrels coming out of the new
investment from a portion of the tax. While that can be done
more easily there, because they tax by field and Alaska taxes by
company, it's a credit in the form of taking less when it's
produced. If a company wants the allowance, they have to apply
for it and the U.K. has a review process. Here we give credits
to anybody who does something that qualifies under the law. So,
it could be a good investment or one that is poorly thought out.
5:01:02 PM
It would be better for Alaska if it wants to get involved to do
something like AIDEA has done with the Mustang development.
There they have a company that wants to develop and is having a
tough time accessing capital probably because of their size and
newness. But they went to AIDEA and laid it out and their
economics are compelling, so they were able to get funding. That
kind of vehicle is better ultimately for the state than pledging
to buy the 45 percent.
SENATOR DYSON said they keep hearing that the sovereign should
have some skin in the game and using AIDEA gets closer to the
idea of the state sharing the risk.
MR. PULLIAM agreed with him and said that sharing also allows a
level of review for the state. He explained that sometimes small
companies will get funding from the private sector and then
AIDEA will buy a significant portion of that debt and be able to
reduce the capital cost. He thought exploring ways to make that
kind of funding more accessible would be a great thing to look
at. And while people thought PPT was competitive when it was
changed, the message Alaska needs to send is that we will always
be competitive even though situations change.
5:06:31 PM
SENATOR MICCICHE said he hears concerns from folks that they
believe in being competitive, but how do they keep from starting
a tax reduction war with Exxon's competitors across the board in
OECD countries.
MR. PULLIAM said that was a good question. He didn't think
matching them or being in the same ballpark that they are would
constitute a price reduction. What happened is that our
government take jumped up above theirs' and we've stayed there.
5:07:19 PM
SENATOR DYSON asked if those figures include royalty and
property taxes.
MR. PULLIAM replied everything.
5:08:54 PM
SENATOR FRENCH asked what his assumption was for federal income
taxes.
MR. PULLIAM answered 35 percent.
SENATOR FRENCH said he believes BP, ConocoPhillips and
ExxonMobil pay significantly less than 35 percent and that his
slide overstated the tax rate of the majority of the taxpayers
on the North Slope.
MR. PULLIAM replied if it does for the North Slope it does for
every place in the world.
SENATOR FRENCH said they don't pay federal income tax in the
U.K. or Norway.
MR. PULLIAM responded that they do if they are a U.S. based
company. He didn't know of anybody who does investment analysis
who doesn't use the marginal rate of 35 percent for the federal
take. They could get their effective rate lower with certain
deductions, but it couldn't be applied to the marginal income
and that is why it's appropriate to use the marginal rate for
this analysis.
5:11:08 PM
SENATOR BISHOP said they are all trying to find a tax that is
fair for everybody at the end of the day and asked if his
calculation factored in the credits.
MR. PULLIAM replied yes.
5:12:53 PM
SENATOR MICCICHE asked Mr. Pulliam to answer his question.
MR. PULLIAM said PFC was kind enough to send their calculation
of government take across different regimes so he could put it
into his graph. All government take averages 65 percent; and
it's fairly constant among progressive, regressive and flat
systems, he said. The OECD areas - Australia, Canada, Norway,
U.K., and the U.S. - all come in a little bit lower than 60
percent, but slightly higher than SB 21 in the $100 and above
range. Anything calculated on the gross will create a regressive
component, which reflects the royalties that get paid in the
U.S., but that is minor. But the proposal would put us within
spitting distance of the average for other areas and he didn't
think it would start any tax war if prices stay where they are.
If prices drop considerably, jurisdictions may be forced to
lower their tax rates, but what would make prices drop? A
significant change in technology or a discovery someplace. Right
now we know that the marginal barrel coming out of the Lower 48
is in the $80/barrel range and the same for Canada. With prices
below that you start to shut in production and that isn't
sustainable. High prices might increase takes as in the mid-
2000s, but that isn't likely either. It will incent a shift to
other technologies.
CHAIR GIESSEL asked him to define regressive, progressive and
progressivity.
5:17:12 PM
MR. PULLIAM said that progressive refers to an increase in take
as prices rise (tax rate is 25 percent at $100 but 35 percent at
$120). Regressive refers to decreasing take as prices rise,
because take is always calculated on the net (after costs).
Progressivity increases the tax rate as prices rise; we did that
by going to the net, which tends to flatten out the take, and
then adding the progressive component to the tax, which made the
overall system progressive as prices go up.
5:19:05 PM
Next he said the high cost scenario (slide 30) looks at the
economics of producing both light and heavy oil and ACES
provides an incentive in the form of the net present value and
the internal rate of return (IRR). Producing heavy oil under the
ACES system for an incumbent at above $90/barrel looks like a
positive net present value (attractive), but if you look at what
happens if there is no production tax at all, that same project
doesn't look very attractive. What makes the difference? The
ACES provisions that allows buying down the rate and the tax
credit. ACES turns revenues associated with that production into
a negative return for the state.
MR. PULLIAM said that producing heavy oil is a "challenged
activity." If we had no production tax, things still wouldn't be
quite right; the technology isn't quite there yet. Yet, under
ACES we might make those look attractive, but at an expense to
the state and "We might be jump starting something here that
even if we had no tax wouldn't make sense to do."
5:23:04 PM
An excerpt from a CERA report (consulting firm) for the U.S.
Department of Interior on government take in areas they thought
were competitive with the U.S. federal properties characterized
Alaska's system as a profits tax in the range of 25-75 percent,
and when people look at Alaska's terms without digging too deep
that is what they see. Another page in the report showed the
attractiveness of fiscal systems and Alaska was the number two
least attractive - sandwiched between Venezuela and Russia. If
companies look at these things without digging too deeply, this
paints an impression that is not real good for Alaska.
SENATOR DYSON asked him to go down the list of categories.
MR. PULLIAM listed them as total government take, profitability
index (measure of the efficiency of capital investment (PI)),
internal rate of return (IRR), and a component for progressivity
and regressivity. He noted that you get a more favorable score
the flatter your system is and a less favorable score if you are
highly progressive or highly regressive. Revenue risk refers to
the time in which the state receives the payments; to the extent
you are sharing equally in the risk you get a higher score. For
instance, a gross system would have a bad score and a net system
would have a better score. The type of change refers to the type
of fiscal change that has occurred over a number of years and
the applicability of the change.
SENATOR DYSON asked what types of change.
MR. PULLIAM replied that they are looking here at fiscal systems
in each jurisdiction.
SENATOR DYSON asked if that meant the sovereign's wisdom,
strength and reliability.
MR. PULLIAM answered yes; he added that they also looked at the
applicability, degree and frequency of the change. Alaska needs
to be concerned with frequency, especially between 2005/06/07.
5:27:26 PM
SENATOR FAIRCLOUGH asked if Alaska takes the lion's share of the
hit in terms of revenue risk during the monthly progressivity
payments.
MR. PULLIAM answered that he didn't know if the monthly payments
factor in or the gross royalty.
SENATOR DYSON said that nothing in this rating system talks
about geo-political stability.
MR. PULLIAM replied nothing directly, but there would be an
indirect relation through changes to the system itself.
5:29:44 PM
SENATOR DYSON asked if any others marked as "changed" were more
likely to show geopolitical risk in the evaluation.
MR. PULLIAM replied that he didn't directly measure geo-
political risk, but it comes in indirectly with the manner in
which a fiscal system changes in frequency. For instance,
Norway, a relatively good place to invest from an investor's
perspective, is towards the bottom of the list and they have a
high take.
SENATOR BISHOP said he was confused.
MR. PULLIAM said one must be careful in using just the take
statistic. Norway's take is high but it's flat (not
progressive). Norway has been fairly stable and has some aspects
that provide for accelerated cost recovery. But Norway is still
struggling with some of the same things that the U.K. is, and
the U.K. has responded aggressively. A lot of activity in Norway
is state funded by Statoil, a majority owned state company.
SENATOR FRENCH asked what Norway's capital spending record has
been recently.
MR. PULLIAM replied that it has trended up.
SENATOR FRENCH remarked, "and with a higher government take than
we have."
MR. PULLIAM added that other aspects come into play: the cash
generation in Norway has been a little bit higher than what
Alaska has had and it has the presence of a state-owned company
with significant activity - and maybe a little bit different
requirements. Yet they have also seen a decline in production
and might have to make a change. Norway's recent discoveries are
large and that encourages prospectivity, which is important when
investors make decisions; they also look at reserves remaining.
5:34:02 PM
SENATOR DYSON said he was surprised to see Texas between Angola
and Kazakhstan as an attractive place and that he was reacting
to all the criticism Alaska gets for being amongst the worst in
the world. He has often thought Alaska's critics don't take into
account that it has a net tax and credits.
MR. PULLIAM said he suspected that Texas is there because theirs
is a purely gross system and at lower prices takes in Texas
don't look that great. His point is that the companies Alaska
would like to have here look at things like this and have to be
dissuaded that it isn't as bad as is being reported.
5:38:40 PM
Mr. Pulliam said the advantage to moving to SB 21, specifically,
is that it:
-provides balance between the state and producer incentives
-reduces tax rates at high prices and that is balanced with the
elimination of credits
-continues largest percentage of oil production revenues at any
price to the state
-simplifies tax system and provides clarify for planning
-eliminates question of marginal tax rate/take for investment
planning
5:40:28 PM
CHAIR GIESSEL said that large companies say they model in the
$70-90 price range, but that is not evidenced on this chart.
MR. PULLIAM explained the variety of investment statistics for
ACES, SB 21 with the GRE and SB 21 without the GRE on slide 44.
As the price of the oil goes up SB 21 significantly improves the
present value of the investment for a new producer. He also
explained that the U.K. has two systems (the difference between
columns 10 and 11), one for pre-'93 discoveries and one for
post-'93 discovered fields; the rate on the post-'93 discovered
fields is lower. So column 10 (post-'93) has a net present value
of $6.04/barrel and they wanted to get more oil out of those
fields, so they instituted the "brown field allowance" that had
the effect of increasing the present value by $2.25, which puts
it much higher than ACES.
CHAIR GIESSEL asked if the brown field allowance is for their
legacy fields.
MR. PULLIAM answered yes. Their new field allowance operates in
a similar fashion, but it would be legacy and non-legacy,
anything in production really. When we think about legacy we
think about Prudhoe and Kuparuk, but theirs would be applied
more broadly.
5:45:56 PM
SB 21 with the GRE is a significant boost to a new participant's
economics. There is a big benefit in cash generation, but not in
the IRR. And at $100/barrel a new development by a new
participant moves the government take from 75 percent to 61
percent.
The next slide showed the same set of metrics for the incumbent
whose MPV numbers, because of the buy down, were at $6.14 (as
opposed to $3). This change really elevates the new participant
to the level where the incumbent is already with the benefit of
the tax buy down. It does it without progressivity and without
providing credits, which makes it more efficient than providing
that incentive. The producers' incentive at the $100 level is
not all that different in looking at the NPV. Margins are
significantly increased under SB 21 and that will be viewed as
attractive. The net present value of the state's take is
actually a little better under SB 21 at $100 oil and that's
because it doesn't provide all of that upfront money. So, at the
net present value basis the state is actually better off.
SENATOR MICCICHE asked if the crossover happened at around $82
and if it had been reconciled with company modeling on slide 38.
MR. PULLIAM replied that was a good point and he noted that all
of their analysis was done in constant 2012 dollars assuming 2.5
percent inflation. If one were instead to do this analysis using
inflated prices that would correspond to $80 today in 2015 that
might be at $83 or $84. The crossover point would be different
and that accounts for some of the differences in the
ConocoPhillips analysis. But if you use real prices, they would
both have the same slide.
5:50:31 PM
MR. PULLIAM added that there was a lot of useful detail in the
appendix of his presentation.
CHAIR GIESSEL asked for closing remarks.
MR. PULLIAM said a lot of significant analysis had gone on this
problem and SB 21 strikes the right balance that will be well
received and does a good job of presenting a fair take for the
state. Taking less is a much more attractive and additional
monies will come into the state if it gives industry the freedom
to do what they see fit.
SENATOR GIESSEL thanked Mr. Pulliam for his presentation and
held SB 21 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SJR 8 Version A.pdf |
SRES 2/13/2013 3:30:00 PM |
SJR 8 |
| SJR 8 Recent Press N60MN Press Release 2013.01.31.pdf |
SRES 2/13/2013 3:30:00 PM |
SJR 8 |
| SJR 8 Sponsor Statement.pdf |
SRES 2/13/2013 3:30:00 PM |
SJR 8 |
| SJR 8 Support Doc-Rare Earth Elemnts- AK ADGGS- 2011.pdf |
SRES 2/13/2013 3:30:00 PM |
SJR 8 |
| SJR 8 Amendment 1 Supp Doc S. 181.pdf |
SRES 2/13/2013 3:30:00 PM |
SJR 8 |
| SJR 8 Bokan-Niblack Road Map 2013.02.13.pdf |
SRES 2/13/2013 3:30:00 PM |
SJR 8 |
| SJR 8 Presentation UCore 2013.02.13.pdf |
SRES 2/13/2013 3:30:00 PM |
SJR 8 |
| SJR 8 Supp Letter- Ucore 2013.1.30.pdf |
SRES 2/13/2013 3:30:00 PM |
SJR 8 |
| SJR 8 Supp Resolution POWCAC 2011.11.22.pdf |
SRES 2/13/2013 3:30:00 PM |
SJR 8 |
| SB 21 Econ One Presentation SRES 2013 02 13 pdf.pdf |
SRES 2/13/2013 3:30:00 PM |
SB 21 |