Legislature(2005 - 2006)HOUSE FINANCE 519
04/03/2006 09:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB488 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 488 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 3, 2006
9:09 A.M.
CALL TO ORDER
Co-Chair Chenault called the House Finance Committee
meeting to order at 9:09:55 AM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Richard Foster
Representative Mike Hawker
Representative Jim Holm
Representative Reggie Joule
Representative Mike Kelly
Representative Beth Kerttula
Representative Bruce Weyhrauch
MEMBERS ABSENT
Representative Carl Moses
ALSO PRESENT
Representative Les Gara
PRESENT VIA TELECONFERENCE
Dr. Pedro Van Muers, Consultant to the Office of the
Governor, Algeria
SUMMARY
HB 488 An Act repealing the oil production tax and gas
production tax and providing for a production tax
on the net value of oil and gas; relating to the
relationship of the production tax to other
taxes; relating to the dates tax payments and
surcharges are due under AS 43.55; relating to
interest on overpayments under AS 43.55; relating
to the treatment of oil and gas production tax in
a producer's settlement with the royalty owner;
relating to flared gas, and to oil and gas used
in the operation of a lease or property, under AS
43.55; relating to the prevailing value of oil or
gas under AS 43.55; providing for tax credits
against the tax due under AS 43.55 for certain
expenditures, losses, and surcharges; relating to
statements or other information required to be
filed with or furnished to the Department of
Revenue, and relating to the penalty for failure
to file certain reports, under AS 43.55; relating
to the powers of the Department of Revenue, and
to the disclosure of certain information required
to be furnished to the Department of Revenue,
under AS 43.55; relating to criminal penalties
for violating conditions governing access to and
use of confidential information relating to the
oil and gas production tax; relating to the
deposit of money collected by the Department of
Revenue under AS 43.55; relating to the
calculation of the gross value at the point of
production of oil or gas; relating to the
determination of the net value of taxable oil and
gas for purposes of a production tax on the net
value of oil and gas; relating to the definitions
of 'gas,' 'oil,' and certain other terms for
purposes of AS 43.55; making conforming
amendments; and providing for an effective date.
HB 488 was HEARD & HELD in Committee for further
discussion.
HOUSE BILL NO. 488
An Act repealing the oil production tax and gas
production tax and providing for a production tax on
the net value of oil and gas; relating to the
relationship of the production tax to other taxes;
relating to the dates tax payments and surcharges are
due under AS 43.55; relating to interest on
overpayments under AS 43.55; relating to the treatment
of oil and gas production tax in a producer's
settlement with the royalty owner; relating to flared
gas, and to oil and gas used in the operation of a
lease or property, under AS 43.55; relating to the
prevailing value of oil or gas under AS 43.55;
providing for tax credits against the tax due under AS
43.55 for certain expenditures, losses, and
surcharges; relating to statements or other
information required to be filed with or furnished to
the Department of Revenue, and relating to the penalty
for failure to file certain reports, under AS 43.55;
relating to the powers of the Department of Revenue,
and to the disclosure of certain information required
to be furnished to the Department of Revenue, under AS
43.55; relating to criminal penalties for violating
conditions governing access to and use of confidential
information relating to the oil and gas production
tax; relating to the deposit of money collected by the
Department of Revenue under AS 43.55; relating to the
calculation of the gross value at the point of
production of oil or gas; relating to the
determination of the net value of taxable oil and gas
for purposes of a production tax on the net value of
oil and gas; relating to the definitions of 'gas,'
'oil,' and certain other terms for purposes of AS
43.55; making conforming amendments; and providing for
an effective date.
9:10:32 AM
DR. PEDRO VAN MUERS, (TESTIFIED VIA TELECONFERENCE),
CONSULTANT TO THE OFFICE OF THE GOVERNOR, ALGERIA,
commented on the process the bill has gone through while
moving through the legislative committees.
Dr. Van Muers addressed the 20/20 ratio versus the 25/20-
ratio taxation package with regards to building the
pipeline. Analysis indicates there is some difference
between the two fiscal packages. Ultimately, the oil
companies are the decision makers and it is important to
include them in the process. He worried about the 25/20
ratio activity and international attractiveness including
the progressivity feature. Analysis indicates there is a
difference.
9:14:01 AM
Dr. Van Muers stated that negotiating could lead to delayed
contracts. He reiterated that the question remains with
the companies. Interesting ideas have surfaced over the
past six weeks. He appreciated the progressive feature
coming out of the House Resources Committee (HRC), which
was considered and adopted in the Senate Resources
Committee (SRC). It is important to realize that the price
at which it becomes progressive is an important feature.
In the HRC proposal, that number was based on a nominal
price that could not be escalated with inflation. Over
time, the value of the insertion point becomes less. A
progressive feature based on a nominal system should be on
a reasonable price. If the price inserted is too low, it
would be unattractive. If using the progress feature, oil
and gas should be separated.
9:17:42 AM
Dr. Van Muers mentioned that the HRC version removed the
"crawl back". He supported the idea of a 2 for 1 feature
put in place by the SRC, insuring the maximum amount of
commitment from the large companies.
He mentioned the small company allowance originally
proposed at $73 million dollars. HRC chose the tax credit;
SRC choose the 5 thousand barrels a day with no tax payable
up to 30 thousand barrel a day. He believed that was a
good feature and could help the small companies.
9:20:33 AM
Co-Chair Meyer asked about the idea of starting at a high
tax rate and adjusting it down until supported by the oil
companies. Dr. Van Muers agreed that the companies could
move out of Alaska. A famous case arose in Columbia where
that county lost the investment; it took about five years
for them to get their investment back. If the industry
considers the overall fiscal package too tough, it becomes
difficult to get the investment back. After Columbia lost
their investment, it cost them more attempting to get their
investment back. It is important that it not misfire. The
fiscal systems overtime adjust. He thought that the
proposed tax rate shifts were relatively modest compared to
what has happened in other countries.
9:24:57 AM
Co-Chair Meyer hoped to get the "arrangement" correct the
first time. He pointed out that Alaska is a more stable
place than many others, although, there are more
economically desirable places to invest such as the Gulf of
Mexico and Texas.
Dr. Van Muers acknowledged that the Gulf of Mexico rates as
one of the best fiscal systems in the world and comes with
a lot of deep-water activity. There is no question that
area's fiscal system would be more attractive than
Alaska's. The same is true of the Alberta oil sands.
There are places more attractive, however, that does not
necessarily mean that all the investors go only to that
spot. He addressed the overall tax rate and activity
happening in Europe.
9:28:15 AM
Dr. Van Muers explained that the level of activity will be
affected. The more attractive the fiscal system, the
higher the activity.
Texas has an entirely different series of systems with the
State water concerns. There are other jurisdictions in the
world such as Norway and Russia, which have tougher fiscal
systems and continue to have activity in those regions. It
is a gray area. The Alaska fiscal terms as formulated
would be "in the middle of the pack" and would not present
the toughest or the best terms around the world.
9:29:51 AM
Representative Weyhrauch asked if when oil price falls
below $20 dollars a barrel, would it be reasonable to
implement a per barrel tax rate at 75%. Dr. Van Muers
explained that the Petroleum Production Tax (PPT), at least
for the next ten years, is clearly more attractive than the
current Economic Limit Factor (ELF) system. Obviously,
Alaska with the high transportation costs of $5 dollars per
barrel provides a low netback. Every time the price
declines, Alaska gets hurt more than anywhere else in the
world. One of the advantages of the PPT in maintaining
activity is that it is a profit-based system, which means
that Alaska runs a higher risk at low price levels.
9:32:37 AM
Co-Chair Chenault asked what tax structure is used in the
Gulf of Mexico. Dr. Van Muers advised that the Gulf of
Mexico does not have the kind of tax credits considered by
Alaska. They have two payments, a royalty and a federal
corporate income tax at 35%. There is no production tax at
all. The royalty tax offers a "royalty holiday" for
initial volumes of production. There could actually be a
0% royalty, with only 35% corporate income tax, which is
the way the federal government encourages activity.
9:35:32 AM
Co-Chair Chenault inquired the actual royalty. Dr. Van
Muers replied 12.5% for deep waters and 16% for the shallow
waters.
Co-Chair Chenault pointed out that there are no state taxes
involved, which makes it considerably different than
Alaska. He mentioned the situation in Louisiana. Dr. Van
Muers responded that in State waters, the fiscal system
applies. In Texas, along the coast, the taxation system is
as tough as the Alaska system. In federal waters, the
system is based on the one previously described.
9:37:14 AM
Co-Chair Chenault noted that the three major producers were
not as interested in the tax credit versus the 20/25 ratio.
Dr. Van Muers explained that in discussing PPT with those
companies, there was no indication of interest-free in the
tax credit; they figured highly in that proposal for heavy
oil. Those companies proposed that the tax credits should
be higher than the 20/20 proposal. He clarified that they
received incentive for investment. However, the current
focus is on the rate; a higher rate means a lower corporate
take. Tax credits are an integral part of the Industry's
own discussion and the 20% credit number has been
encouraged.
9:40:05 AM
Vice Chair Stoltze mentioned the remarks that the oil
companies are the decision makers on the gas line. Dr. Van
Muers advised that the first phase of the plan is changing
of the oil tax, which is a stand-alone feature. As a
result of that, the oil companies hoped it would be
consistent with bringing a gas pipeline forward. Then the
tax credits were consistent with putting the gas pipeline
forward. At 20/20 ratio, the companies are willing to live
up to the Stranded Gas contract. The Industry sees it that
if the 20/20 ratio is in place, they are willing to move
forward.
It is up to the Legislature to decide on the taxes. If
there are certain levels of changes to the oil tax, it
could impact the overall concept of the package. If an oil
tax is passed, fundamentally different from the investment
package that the Industry had in mind, there could be
reconsideration. That needs to be investigated with those
companies. He speculated on possibilities.
9:45:40 AM
Vice Chair Stoltze asked for recommendations on an
incentive package. Dr. Van Muers commented that the worst-
case scenario would be that the oil tax passed and then the
sponsors became hesitant to move forward with the gas
contract. That would leave Alaska with the oil tax; it
would remain to be seen what happens then. It could mean
there would be no gas contract put forward; anything could
happen. It is important not to speculate, as the Industry
is the one that will give clear answers on the questions.
9:48:44 AM
Representative Kerttula asked about the 2 for 1 concept
discussed in SRC. Dr. Van Muers said SRC came up with a
good formula - the crawl back. In the Governor's proposal,
it was agreed that the bill would contain the possibility,
that companies would have the ability to recover $1 billion
dollars expended over the past five years. In the HRC
version, that feature was cancelled; canceling it, puts
Alaska $1 billion dollars ahead. The SRC version proposed
that the three sponsors must indicate that they "mean
business" with inclusion of the 20/20 ratio investment.
They must show their commitment to Alaska. One way to
prove that, Alaska would allow to recover whatever the
number is, but only allow $1 dollar extra deduction for
every $2 invested into the future. Alaska needs a doubling
of investment. There is evidence that production is
declining, which led to the SRC proposal, indicating that
companies are allowed to recover $1 in addition to the $2
dollars as an extra encouragement. He thought that was a
good idea, as Alaska needs more investment.
9:52:38 AM
Representative Kerttula asked if he had seen the New York
Times article addressing the windfalls in the Gulf of
Mexico and the congressional plunders resulting from that
action. Dr. Van Muers was aware of the fact that on the
federal level, the fiscal system off the Gulf of Mexico has
been questioned and may need to be reviewed.
9:54:52 AM
Representative Kerttula understood that Alaska would be
competitive using the 20/20 and/or the 25/20 ratio. At
this point, the companies will make their internal
decision. Dr. Van Muers testified that he had analyisized
all the levels of taxation credits and rates. There is a
difference between the 20/20 and the 25/20 ratio. The
25/20 is approximately the same as currently exists. He
assumed that at the 25/20 ratio, more tax would be
collected but there would not be as much activity; the
20/20 rate provides more activity and would be the more
attractive feature.
9:58:13 AM
Representative Kerttula mentioned the tax and tax credit
for new investors. Dr. Van Muers agreed; it relates to the
$73 million additional allowance. If no tax is paid, the
higher the tax rate & credits, the more that can be claimed
in loss carried forward credits. The Governor's bill
proposed using the flat rate for all companies. Dr. Van
Muers preferred the version proposed by the SRC as it
provides a sliding scale and only small companies would
benefit from that. If a company falls within the small
company bracket, the higher the tax rate, the better
because they receive credits, more loss carried forward.
10:01:26 AM
Representative Hawker commented on testimony regarding the
environment of lower net effective taxes, and how
exploration and development is encouraged and expands; in
an environment of higher taxes, exploration and development
is discouraged. He understood that testimony on the PPT,
establishes overall, a net effective tax rate, which leads
to the conclusion that passing PPT could lead to less
development and exploration in the State.
Dr. Van Muers stated there are two features, the tax credit
and the tax rate. The Governor's bill attempts to achieve
some kind of economic balance by creating higher tax rates,
at the same time providing stronger tax credits. It is not
only the tax rate that is important, but rather, the entire
structure of the credit. The economic analysis indicates
that taxes could be increased but at same time providing
increased tax credits. Some nations have been successful
at creating the right tax structure such as Norway at the
same time creating an environment that encourages
reinvestment, which is the focus of the PPT proposal.
10:05:22 AM
Representative Hawker did not see how higher taxes could
encourage economic development. Dr. Van Muers explained
the idea is related to the entire cash flow. The concept
of profitability is not the total amount of profit but
rather how much profit results from how much investment.
What they are saying is that they get less profit, but the
investment is somewhat less and is affecting the total
balance between what they get and what they pay.
Consequently, it is the entire relationship between what
you get and what you pay that determines whether an
investment is attractive or not. In that balance, the
20/20 ratio is a favorable system.
10:07:18 AM
Representative Hawker advised that is the definition of an
internal rate of return on any investment. He did not see
how the net affects increased tax rates could be improved.
Dr. Van Muers explained it would improve, because after tax
investment, it would be considerably less. A rate of
return is not the only criteria.
10:08:52 AM
Dr. Van Muers explained that if an investment is more
profitable, then the investment becomes more likely.
10:09:42 AM
Representative Kelly inquired if the tax rate increases,
should the credits be raised to 25% as well. Dr. Van Muers
noted that his original report recommended 20/15 ratios,
but has increased to a 20/25 ratio, in order to strike a
correct rate. He explained that the downside risk for
Alaska would be higher if tax rates and credits were too
high. He did not recommend going "all out on a limb" on
tax credits, due to the significant risks resulting to the
State of Alaska. He felt that 20% tax credit was as high
as the State should go.
10:13:31 AM
In response to a question by Representative Kelly regarding
connection of the gas line with the PPT, Dr. Van Muers
observed that the Stranded Gas Act did not address fiscal
stability for oil. The concept is to judge oil taxation on
its own merit, next a public review, and then the Stranded
Gas Act would have to be amended before considering the
contract. Finally, the Legislature would have the view of
the total package; a process which allows renegotiation and
then the public and Legislature would have the opportunity
to refute or accept.
10:18:55 AM
Representative Kelly spoke to the complexity of the issue.
The system would be changed to taxing the net, with a claw-
back provision and credits within that system. He
questioned if there are other systems like that and how
they perform auditing over time.
Dr. Van Muers recommended the PPT to the Governor because
it is well established worldwide. Norway uses the system;
Britain use to use that system; Australia, Newfoundland,
Algeria and other areas have been successful with the
profit-based system. The international experience is that
more auditing is needed. Dr. Van Muers is presently in
Algeria to create a monitoring system. It requires extra
governmental effort to insure that they have their fair
share. He felt confident that the Administration would be
able to implement the process and encouraged the
Legislature to listen to those who implement the law. He
acknowledged it is more complex than the ELF. ELF has its
own concerns regarding how fields are defined. There are
advantages and disadvantages to both systems. Profit based
systems seem to provide a fairer share for the
jurisdictions. He recognized that regulations need to be
passed.
10:26:22 AM
In response to a question by Representative Kelly, Dr. Van
Muers commented he was positive about the 20/20 ratio
proposal including the progressivity feature. He believed
that it was a more balanced proposal than his original one
at 25/20. There is more balance in the number and will
make companies more likely to reinvest. The 25/20 ratio
scales have more risk than the 20/20 for carry forward
credits. He agreed it is a superior system and supports
that approach.
10:29:19 AM
In response to a question by Representative Kelly, Dr. Van
Muers felt that international factors could lead to more
investment in Alaska. He observed that the world is
changing and a number of governments are considering higher
taxes to make their systems more progressive. There is a
trend happening and higher oil prices are causing
governments to review their fiscal oil price. He thought
that gas is still on the moderate side, but that could
change once there is more supply. He expected more nations
to join in higher takes over the next few years. He
concluded that Alaska could take significant more without
seeing investment decline. There currently is an over-
supply of stranded gas, still on the modest side.
10:32:55 AM
Co-Chair Meyer advised that neither version addressed heavy
oil and that significant amounts of heavy oil reserves are
present. Dr. Van Muers spoke to stimulating heavy oil on
the North Slope, depending of course on an adequate fiscal
package. The conclusion is if there is a higher tax
credit, there would be an additional stimulus, which the
companies are seeking. The higher the credits, the higher
the rate of return. The conclusion is if the tax credits
are pushed up to high, the government becomes too exposed
from a risk point of view, which would be unwise. The
20/20 is a package that would stimulate heavy development.
10:38:13 AM
Co-Chair Meyer indicated that the HRC was referring to the
Western Texas Instruments (WTI) as the standard; whereas,
typically, the Alaska North Slope (ANS) standard is used.
He asked if the three major producers could manipulate the
ANS price, based on the quality of the oil.
Dr. Van Muers advised that there are advantages and
disadvantages in using the WTI versus ANS. ANS reflects
better the actual North Slope crude. There is quite a bit
of variation; the advantage of using ANS is that it better
reflects the value of the North Slope crude. ANS typically
trails $2 dollars less than WTI. There are disadvantages
and no matter what the State does, eventually there will be
a decline in production of the crude. Already, the level
of production does not create a very transparent market and
it will likely increase in the future. Eventually, if the
Stranded Gas contract moves forward, WTI will be the
reliable benchmark. The State at some point will need to
switch to WTI because the market may become too narrow for
the other. The WTI standard is used worldwide.
10:42:50 AM
Co-Chair Chenault asked if locking in the long term was
done in other parts of the world. Dr. Van Muers advised
that the Stranded Gas Development Act permits locking in
the tax system for a period of time and many nations in the
world are doing that. If there is a marginal gas project,
fixed terms have an enormous risk factor for the investors.
He worried about those risk factors. Other nations have
been adept in guaranteeing fiscal stability. Nations are
locking into terms for a considerable period [35 years] of
time, which is attractive to investors and is the basis for
the entire Stranded Gas Act. Not all investments have
fiscal stability such as Norway & Britain. Those
governments have sufficiently profitable projects that
allows for no fiscal stability. Having fiscal stability
gives the project a huge push forward. He urged that the
entire oil package be considered with the idea of fiscal
stability.
10:48:00 AM
Representative Kerttula asked if the profit-based system
was similar to the severance tax based on profits. Dr. Van
Muers responded that each fiscal system around the world is
somewhat different. The Alaska PPT is not a copycat of one
done anywhere else. If there are royalties, then the
profit-based system must be designed differently. The PPT
attempts to make a profit based system, the same goal of
other nations, but unique to the situation of that place.
He thought that Alaska was more favorable to offer tax
credits. Once the PPT is introduced, other nations will
watch to see how it works. The PPT is based on
international standards.
10:51:57 AM
Representative Kerttula asked if any other country had a
production tax based on profit rather than on the gross.
Dr. Van Muers replied that it is common for nations to have
three levels of taxation:
• Royalty based on gross value
• Extra tax based on the net value
• Corporate income tax
10:53:36 AM
Co-Chair Chenault asked if Dr. Van Muers could determine a
fix for Cook Inlet. Dr. Van Muers pointed out that SRC
came up with a good formula to insure that Cook Inlet
produces. The levels there now are low and would not be
hurt by the overall tax system of the 5 thousand barrel a
day with a sliding scale going up to 30 thousand barrels a
day was designed around Cook Inlet. It is a non-
discriminatory system and achieves for that platforms
producing little, no tax would be applied, yet producers
still benefit from the tax benefit. The PPT stipulates
that and will result in more activity in the area. There
will be tax by some of the major players on the gas. He
reiterated as a result of PPT, more development could
happen in the Cook Inlet region.
HB 488 was HELD in Committee for further consideration.
10:56:17 AM
ADJOURNMENT
The meeting was adjourned at 10:56 A.M.
| Document Name | Date/Time | Subjects |
|---|