Legislature(2013 - 2014)HOUSE FINANCE 519
04/05/2013 09:00 AM House FINANCE
| 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 | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 5, 2013
9:08 a.m.
9:08:12 AM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 9:08 a.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative Lindsey Holmes
Representative Scott Kawasaki, Alternate
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
Representative David Guttenberg
ALSO PRESENT
Daniel Sullivan, Commissioner, Department of Natural
Resources; Senator Micciche; Michael Pawlowski, Advisor,
Petroleum Fiscal Systems, Department of Revenue; Joe
Balash, Deputy Commissioner, Department of Natural
Resources.
SUMMARY
CSSB 21 (FIN) am(efd fld)
OIL AND GAS PRODUCTION TAX
SB 21 was HEARD and HELD in committee for further
consideration.
CS FOR SENATE BILL NO. 21(FIN) am(efd fld)
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
providing a tax credit against the corporation income
tax for qualified oil and gas service industry
expenditures; relating to the oil and gas production
tax rate; relating to gas used in the state; relating
to monthly installment payments of the oil and gas
production tax; relating to oil and gas production tax
credits for certain losses and expenditures; relating
to oil and gas production tax credit certificates;
relating to nontransferable tax credits based on
production; relating to the oil and gas tax credit
fund; relating to annual statements by producers and
explorers; establishing the Oil and Gas
Competitiveness Review Board; and making conforming
amendments."
9:08:20 AM
Co-Chair Stoltze explained that the legislation would be
presented by the Department of Natural Resources (DNR) who
represented the sponsor.
DANIEL SULLIVAN, COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, presented the PowerPoint "Oil Tax Reform -
Arresting TAPS Throughput Decline." He appreciated the
opportunity to present a broad overview of the issues
related to oil tax reform and the House Finance Committee.
He intended to provide a straightforward agenda with a
focus on three important topics.
9:12:49 AM
Commissioner Sullivan discussed slide 2: "Outline."
Part I: current Context - Opportunities and Challenges
Part II: Is the Current Tax System Working for
Alaskans?
Part III: Production, Production, Production
Commissioner Sullivan discussed slide 3: "Part 1 Current
Context Opportunities and Challenges." He noted that a
common argument seen by DNR throughout the oil reform
debate was that "everything was fine" with the oil business
and tax system in Alaska. The department argued with those
sentiments that the tax system was functioning well. The
department did not believe that business was booming. He
hoped to compare production from Alaska to worldwide
production. He wished to address the significant challenges
faced by the state.
9:15:09 AM
Commissioner Sullivan referred to various slides as "good
or bad news." The state must come to grips with the
significant challenges and opportunities. He stated that
comparisons with past performance, production and pricing
were not always accurate, so he hoped to focus on the
present day. He stressed that the United States was
experiencing a hydrocarbon boom in investment and
production. He opined that the country's greatest
hydrocarbon basin, Alaska, was observing from the
sidelines.
9:16:59 AM
Co-Chair Stoltze referred to a poll regarding public
opinion about the oil industry's contribution to the state
budget and oil flow through the Trans-Alaska Pipeline
System (TAPS). He opined that additional information from
the department could better educate Alaskans.
9:17:45 AM
Department of Natural Resources discussed slide 4: "TAPS -
A Critical State and National Energy Asset."
· TAPS has transported over 16.3 billion barrels of oil
and natural gas liquids since June of 1977. Production
peaked at 2.2 million barrels per day in the late
1980s, representing 25 percent of U.S. domestic
production
· Since its peak, however, throughput has steadily
declined; today, TAPS is 2/3 empty and declining at an
average of 6 percent per year
· TAPS throughput decline threatens economic disruption
and the very existence of our pipeline
· 90 percent of state revenues come from oil production
· We must encourage industry to invest in exploration
and development of conventional and unconventional
resources on state and federal land, onshore and
offshore
· TAPS has plenty of capacity for increased throughput
· Most near-term critical economic issue facing the
state
· Most urgent issue facing the state - two and half
years of studies
9:21:30 AM
Commissioner Sullivan discussed slide 5: "Production
History." He stated that the slide represented a declining
oil field, which he compared to a dried-up basin. He
discussed the rig count number for various states. The rigs
in Alaska were much larger than those used in other states.
He concluded that business was not booming in Alaska.
2013 Rig Count:
· Texas = 830 active rigs
· Oklahoma = 183 active rigs
· North Dakota = 174 active rigs
· Pennsylvania = 80 active rigs
· Alaska = 8 active rigs
9:22:57 AM
Commissioner Sullivan discussed slide 6: "Massive Resource
Base."
· USGS estimates that Alaska's North Slope has more oil
than any other Arctic nation
o Oil: Est. 40 billion barrels of conventional oil
(USGS & BOEMRE)
o Gas: Est. over 200 trillion cubic feet of
conventional natural gas (USGS)
· Alaska has world-class unconventional resources,
including tens of billions of barrels of heavy oil,
shale oil, and viscous oil, and hundreds of trillions
of cubic feet of shale gas, tight gas, and gas
hydrates
· Alaska's North Slope has already produced more than 16
billion barrels of oil to date
· At year-end 2010, the Energy Information Agency (EIA)
(federal Department of Energy) put remaining North
Slope reserves at 3.7 billion barrels of oil
· Reforms now can create enormous future opportunities
and benefits
· Compared to most hydrocarbon basins, Alaska is
relatively underexplored, with 500 exploration wells
on the North Slope, compared to Wyoming's 19,000.
Commissioner Sullivan stated that Alaska was on the cusp of
enormous opportunity in the areas of unconventional oil. He
believed that the state's geology compared to the shale oil
plays in states like North Dakota or Texas. He stressed the
opportunities for exploration on the North Slope. He
pointed out that Prudhoe Bay had exceeded production
expectations dramatically.
9:26:35 AM
Commissioner Sullivan detailed slide 7: "Other Basins have
Turned Decline Around." He noted that DNR and Department of
Revenue (DOR) worked together to create a tax proposal.
Throughout the process, research was performed to determine
which oil basins had deviated from production decline
historically. The slide's graph depicted oil production
increases in Texas, North Dakota and Alberta. Alaska
continued to decline in oil production during the same time
period. He believed that Alaska's tax system did not
incentivize production.
9:30:13 AM
Commissioner Sullivan stated that the incentive to invest
in Alaska was less because of the high prices of investment
as related to the long-term elements of investment return.
He noted that the spike in Texas was related to shale. He
pointed out that Alaska was also a shale basin. If new
shale technology with conventional and shale plays.
9:31:57 AM
MICHAEL PAWLOWSKI, ADVISOR, PETROLEUM FISCAL SYSTEMS,
DEPARTMENT OF REVENUE, commented on slide 7. He stated that
the example of Texas and its flattened production curve was
the result of conventional oil development. The ability to
level oil production decline was possible with conventional
oil plays.
Commissioner Sullivan stressed that the slide was a "bad
news slide for Alaska." The good news was that Alaska could
mitigate or increase decline with the right investment
environment.
9:33:41 AM
Commissioner Sullivan discussed slide 8: "Change in Average
Daily Oil Production by State 2007 - 2008." He mentioned an
energy renaissance in the United States. Various basins in
the Lower 48 were experiencing large exploration booms. The
slide compared multiple basins along with the price of oil.
9:35:20 AM
Commissioner Sullivan discussed slide 9: "Change in Average
Daily Oil Production by State 2008 - 2009." He opined that
the slide was a "bad news slide for the state." He stated
that comparisons with the rest of the country were
essential. He stressed that a competitive tax regime was
important and a partnership with the federal government was
beneficial.
Commissioner Sullivan discussed slide 10: "Change in
Average Daily Oil Production by State 2009 - 2010."
9:36:36 AM
Commissioner Sullivan discussed slide 13: "Crude Oil
Production: Alaska North Slope vs. U.S. and OECD Countries,
2003 - 2012." He clarified that the color green represented
oil production in the United States, red represented
Organization for Economic Co-operation and Development
(OECD) production and blue represented Alaska.
Co-Chair Stoltze asked about the meaning of the acronym
ODEC.
Commissioner Sullivan answered Organization for Economic
Community and Development, which represented Western
Europe, Norway, North America and Canada. He pointed out
the graph's illustration of the significant increase in
United States production. The blue bars clearly depicted
Alaska's production and the decline in production by half
of that recorded ten years ago. He noted that the decline
in Alaska was observed despite the high prices of oil.
Alaska was the only basin in the United States that failed
to experience the oil production boom.
9:38:27 AM
Commissioner Sullivan discussed slide 14: "Capital
Investment and the U.S Energy Renaissance."
· Global and U.S. hydrocarbon boom
· IEA World Energy Outlook 2012 - U.S. to overtake Saudi
Arabia and Russia to become the world's largest global
oil producer by the second half of this decade
o Congressional Research Service report found that
since 2007, all increases in U.S. oil and gas
production occurred outside federally controlled
areas, with oil and gas production on federal
lands decreasing by 7 percent and 33 percent
respectively
· Financial Times, November 12, 2012- "U.S. set to
become biggest oil producer"
· Financial Times, December 27, 2012 -"Oil and gas - hey
big spenders"
o 2012 - $600 billion on exploration and production
in oil and gas industry
o 2013 projected - $650 billion on exploration and
production in oil and gas industry
o Alaska one of the world's great hydrocarbon
basins - accounted approximately half of 1
percent of these expenditures in 2012
9:42:37 AM
Commissioner Sullivan discussed slide 15: "Est. Capital
Spending for Exploration and Development." He stated that
the notion that the state did not have a problem sat in
stark contrast with the data provided on slide 15. He
believed that the issue of oil production would greatly
affect the future of Alaskans.
9:43:13 AM
Commissioner Sullivan introduced slide 16: "Part II, Is the
Current Tax System Working for Alaskans?"
Commissioner Sullivan discussed slide 17: "Average
Government Take at $100/BBL." He noted that the slide was
created by PFC Energy, the state's consultant. The
government take was assessed at the price of $100 per
barrel of oil. He pointed out that Alaska was the second
highest in OECD classification. For new developments,
Alaska was higher than Venezuela, Russia and Kazakhstan.
The high government-take combined with Alaska's arctic
conditions, remote location, infrastructure issues,
permitting systems and litigation worked against
incentivizing investment. The issue of government-take
could be modified, whereas the arctic conditions and remote
location could not.
Commissioner Sullivan respected Daniel Yergin as saying,
"Tax regimes are one of the most important elements of when
and how oil and gas comes out of the ground, whether in
Alaska, Russia or Central Asia."
9:46:35 AM
Commissioner Sullivan discussed the term "giveaway." He
noted slide 18: "Current System is Not Working for
Alaskans."
Examples of the Real Giveaway
· ACES has taken away most of the incentive to
produce more barrels and more profit at higher
prices
o In FY 08, North Slope oil averaged $96.51
per barrel and the total production tax
collected was $6.8 billion
o By next fiscal year (FY 14), prices are
forecasted to be $13 higher at $109.61, but
the total production tax collected is
estimated to be $3.8 billion - a decrease of
more than $3.8 billion in unrestricted
general fund revenue
· The Ultimate Giveaway
o Comparing year-end 2011 and year-end 2012,
there were ~40,000 fewer barrels of oil per
day flowing through TAPS
o Approximately 14.6 million barrels a year =
$1.46 billion in lost economic activity and
value
9:50:18 AM
Commissioner Sullivan discussed slide 17 again. He
mentioned Senator French and his statement that ACES was a
functional system, but the governor's proposal was flawed
because it did not require more oil in the pipeline in
exchange for tax reductions.
Commissioner Sullivan countered that the current tax system
handed out significant tax credits and direct cash payments
of approximately $1 billion annually. He stated that the
governor's bill sought to tighten the nexus between tax
benefits and production. He discussed tax returns under
ACES.
9:52:48 AM
Mr. Pawlowski stated that Alaska had seen an increase in
the amount of companies filing tax returns in the state. He
had seen an increase in returns, but not an increase in tax
payers. Many of the returns were filed without payment as
the companies were eligible for tax credits.
Co-Chair Stoltze requested that Mr. Pawlowski repeat his
statement.
Mr. Pawlowski repeated that the state had seen an increase
in the number of companies filing returns with DOR. The
department had not seen an increase in the amount of
companies paying taxes. When a company qualified for
credits, the state paid the company through the treasury.
Co-Chair Stoltze clarified that the state was writing the
oil companies checks.
Mr. Pawlowski concurred.
9:54:57 AM
Commissioner Sullivan addressed slide 19: "New Entrants in
Alaska's Current Tax System."
· Secure Alaska's Future - Oil is the State's
comprehensive strategy to increase TAPS throughput to
one million barrels a day
o Enhance Alaska's global competitiveness and
investment climate
o Ensure the permitting process is structured and
efficient
o Facilitate and incentivize the next phases of
North Slope development
o Promote Alaska's resources and positive
investment climate to world markets
· Governor Parnell's 2013 State of the State: "Our
problem is not below the ground. Our problem is above
the ground."
o The missing piece is meaningful tax reform
o "Our state's prosperity has always rested on
natural resources. Tonight, that foundation is at
risk, not because we are running out of oil, but
because we are running behind the competition."
9:57:51 AM
Commissioner Sullivan agreed with Representative Gara's
comments regarding the future of small and medium sized
companies in the state. He saw great futures for the large
companies and shale plays.
Co-Chair Stoltze asked the commissioner not to address
individual members of the committee. Commissioner Sullivan
agreed. Co-Chair Stoltze believed that the "personality
issue" would improve if committee member were not addressed
individually.
Commissioner Sullivan stated that the department would
speak at a conference to large LNG companies. He pointed
out the executive branch's outreach efforts. The
conferences allowed the department to ascertain other
company's opinions about Alaska.
9:59:22 AM
Commissioner Sullivan noted slide 20: "New Entrants in
Alaska's Current Tax System."
· We came to the North Slope in 2011, after many years
of reviewing numerous opportunities and turning them
down. We considered the North Slope to be an
especially promising area that has been shown to be
oil rich and with lower exploratory risk than other
regions.
· Offsetting these positive aspects were the extreme
climate, and a short exploration season in a remote,
expensive and environmentally sensitive area with
little established infrastructure. The biggest
negative factor, however, was a tax system that did
not encourage long-term investment.
· With regards to investment in onshore state lands, we
found that in all but the best scenarios, the
progressive nature of the ACES petroleum tax structure
did not allow for returns that were competitive with
opportunities in the lower forty-eight states or other
parts of the world.
· This view changed in early 2011 when it appeared that
serious reform of the ACES tax structure would be
enacted, we would risk being lost in the rush of
companies to Alaska to invest in North Slope
exploration and development projects.
10:01:07 AM
Co-Chair Stoltze asked if Commissioner Sullivan referred to
geological structure in his statement that Alaska had the
best oil and gas structure in the world. Commissioner
Sullivan concurred.
10:02:08 AM
Commissioner Sullivan stressed that Alaska's high costs,
difficult permitting processes, lawsuits and the issue of
progressivity or high taxes at high oil prices. Those were
the sentiments expressed by companies communicating with
the department during recent oil and gas conferences. He
had heard the argument that the Spanish oil major, Repsol
made a decision to initiate projects in Alaska two years
ago, when ACES was the tax regime.
Co-Chair Stoltze noted that Repsol would come before the
committee to provide testimony.
Commissioner Sullivan stated that Repsol reported the
company initiated its project during a time of potential
tax reform.
10:04:49 AM
Mr. Pawlowski added that conversations among the executive
and legislative branches regarding tax reform often led to
an increase in interest in Alaskan investment.
Co-Chair Stoltze expressed familiarity with the issue. He
reported to the committee rumors that he had killed the
film industry by introducing a bill addressing the film
industry's tax credits.
Commissioner Sullivan relayed that the broad issue was the
limitation in investment caused by the high tax rate. He
furthered that it was unknown how many companies were not
moving to the state because of the tax system.
Mr. Pawlowski pointed to slide 21.
· Under ACES - by 2022 oil prices will have to rise to
$123.44 per barrel for unrestricted general fund oil
revenues to meet the forecast
· If oil prices do not rise further or if they fall,
this revenue decline becomes more severe.
10:07:58 AM
Mr. Pawlowski discussed slide 22: "The Challenge."
· If we do not make the changes today to encourage the
investment that will pay dividends tomorrow we are
dooming our future to deficits and decline
· If you are evaluating this challenge based simply on
the range of the fiscal note, you are missing the
scale of the obstacle we face in the further
· $1.3 billion less in revenues will require more than
$4,000 in new revenues per job in Alaska - those
revenues will have to come from somewhere
10:09:35 AM
Commissioner Sullivan stated that slide 21 showed revenues
declining while estimated oil prices were rising. He
mentioned that when oil prices declined the revenue curve
followed.
Representative Gara noted that ConocoPhillips stated
projections in legacy fields for production declines of
approximately 3 percent. He wondered if slide 21 employed a
6 percent production decline.
Mr. Pawlowski noted that the information was based on data
from the 2012 revenue sources book. He offered to provide
the data underlying the chart to the committee.
10:11:04 AM
Commissioner Sullivan moved to slide 23: "Part III -
Production, Production, Production." He recognized the need
to be more competitive. He stated that ACES focused on
incentivizing spending while the department recommended a
tighter nexus on tax reform and direct oil production.
Commissioner Sullivan discussed slide 24: "Oil Tax Reform."
· Tax reform must be fair to Alaskans
· Encourage new production
· Simple so that it restores balance to the system
· Durable for the long-term
10:12:54 AM
Commissioner Sullivan discussed slide 25: "CS SB 21 (FIN)'s
Major Components Are Focused on Incentivizing Production."
Alaska's Clear and Equitable Share (ACES)
· Qualified Capital Credit
o Based on 20 percent of qualified capital
expenditures
o To generate an additional $100 million in
capital credits a company must spend $500
million
o $500 mm x 20 percent = $100 mm
CS SB21 (FIN)
· Per Barrel Credit
o Based on taxable production
o To generate an additional $100 million in
credits a company must produce an additional
20 million barrels
o 20 mm x $5 = $100 mm
· Gross Revenue Exclusion
o Tax benefit for new production
o Newer units (2003 and after)
o New participating areas in legacy units
o Expansions of participating areas in legacy
units
Mr. Pawlowski discussed the qualified capital expenditure
credit. He stated that a company must spend $500 million to
generate an additional $100 million in capital credits.
With SB 21, the incentives moved away from a credit tied to
spending and toward a credit based on a company's
production. The qualified capital expenditure credit would
tax each taxable barrel produced. With SB 21, a company was
eligible for the same $100 million credit with production
of 20 million additional barrels of oil.
Mr. Pawlowski continued with secondary incentives tied
directly to production. Both options required oil
productions to qualify. The gross revenue exclusion (GRE)
was limited to new production (established after 2003) for
new geologically distinct pieces within legacy units and
expansions of participating areas within the legacy units.
The value of the new incentives was based on the gross
value of oil produced.
Representative Wilson asked if the department was
discussing the finance version or the resource version of
the bill.
Co-Chair Stoltze believed that the department was referring
to broader concepts and policies.
10:16:51 AM
Mr. Pawlowski apologized for the confusion.
Commissioner Sullivan clarified that incentives provided by
SB 21 focused on production rather than spending.
10:17:44 AM
Commissioner Sullivan discussed slide 26: "Status Quo of
continued Decline is Unacceptable."
· This is about Alaskans' future present citizens and
future generations
· We clearly have the resource base to turn our oil
production decline around
· The status quo of continued decline when there is a
global investment boom and literally every other basin
in the United States is increasing production is
unacceptable
· ACES, although well-intentioned, is significantly
contributing to our production decline as well as
discouraging potential new entrants.
· As the production continues to decline, the strain on
the state will only grow
· Tax reform must focus on incentivizing production
· "The ANSCA Regional Association is calling on state
leaders to continue moving on an oil tax reform bill.
Tax reform for the oil and gas industry that results
in increased production will give communities across
the state access to important economic opportunities.
Association members stress the importance of new and
increased production with long-term benefits to
Alaskans." -March 28, 2013
Co-Chair Stoltze appreciated the department's presentation
and presence. He discussed future finance committee
hearings with consultants. He encouraged committee members
to present their written questions to his office for
transmittal to the appropriate department personnel.
10:22:45 AM
Representative Gara responded to Commissioner Sullivan's
statement that many legislators were content with the
status quo regarding oil production. He countered that
while different proposals existed, he was unaware of a
legislator who was happy with the current tax regime.
Co-Chair Stoltze asked both parties to tone down the
rhetoric.
Representative Holmes asked about the adoption of HCS CSSB
21(RES).
Co-Chair Stoltze replied that he intended to introduce the
bill later in the afternoon meeting. He wanted committee
members to take time to read the bill and return with
questions.
CSSB 21 (FIN) am(eld fld) was HEARD and HELD in committee
for further consideration.
ADJOURNMENT
10:24:54 AM
The meeting was adjourned at 10:25 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 21_House Finance_Sullivan & Butcher Introduction_4-5-13.pdf |
HFIN 4/5/2013 9:00:00 AM |
SB 21 |