Legislature(2005 - 2006)HOUSE FINANCE 519
02/23/2006 12:30 PM House RESOURCES
| 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 | ||
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 23, 2006
12:36 p.m.
MEMBERS PRESENT
Representative Jay Ramras, Co-Chair
Representative Ralph Samuels, Co-Chair
Representative Gabrielle LeDoux
Representative Kurt Olson
Representative Paul Seaton
Representative Harry Crawford
Representative Mary Kapsner
MEMBERS ABSENT
Representative Jim Elkins
Representative Carl Gatto
OTHER LEGISLATORS PRESENT
Representative Berta Gardner
Representative Mike Kelly
Representative Beth Kerttula
Representative Vic Kohring
Representative Mike Hawker
Representative Kevin Meyer
Representative Mark Neuman
Representative Norman Rokeberg
COMMITTEE CALENDAR
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."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 488
SHORT TITLE: OIL AND GAS PRODUCTION TAX
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/21/06 (H) READ THE FIRST TIME - REFERRALS
02/21/06 (H) RES, FIN
02/22/06 (H) RES AT 12:30 AM HOUSE FINANCE 519
02/22/06 (H) Heard & Held
02/22/06 (H) MINUTE(RES)
02/23/06 (H) RES AT 12:30 AM HOUSE FINANCE 519
WITNESS REGISTER
DR. PEDRO VAN MEURS, Oil and Gas Consultant
to the Governor
Van Meurs Corporation
POSITION STATEMENT: Presented information on the proposed
profits-based Petroleum Production Tax (PPT).
ROBYNN WILSON, Director
Anchorage Office
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Answered questions regarding HB 488.
ROGER MARKS, Petroleum Economist
Department of Revenue
POSITION STATEMENT: Presented HB 488 on behalf of the
Administration.
ROBERT MINTZ, Assistant Attorney General
Oil, Gas & Mining Section
Civil Division (Anchorage)
Department of Law
Anchorage, Alaska
POSITION STATEMENT: Began the sectional analysis of HB 488.
DAN DICKINSON, Consultant
to the Office of the Governor
Anchorage, Alaska
POSITION STATEMENT: Presented HB 488 on behalf of the
Administration.
ACTION NARRATIVE
CO-CHAIR RALPH SAMUELS called the House Resources Standing
Committee meeting to order at 12:36:34 PM. Representatives
Samuels, Seaton, LeDoux, Ramras, and Kapsner and were present at
the call to order. Representatives Crawford and Olson arrived
as the meeting was in progress. Also in attendance were
Representatives Gardner, Kelly, Kerttula, Kohring, Meyer,
Neuman, Hawker, and Rokeberg.
HB 488-OIL AND GAS PRODUCTION TAX
CO-CHAIR RALPH SAMUELS announced that the only order of business
would be 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."
12:39:27 PM
DR. PEDRO VAN MEURS, Economic Consultant, informed the committee
that the committee packet should include the PowerPoint
presentation entitled, "Petroleum Production Tax." Dr. Van
Meurs said that he would discuss the proposed profits-based
Petroleum Production Tax (PPT) from the international
perspective. He began by highlighting that the fiscal system of
Alaska, applicable to oil and gas, consists primarily of four
components: royalties, production tax, property tax, and state
corporate income tax. Additionally, the federal corporate
income tax would be included when performing
worldwide/international comparisons. He then turned to slide 3,
which lays out the PPT as specified in HB 488. The PPT in HB
488 has a tax rate and tax credit of 20 percent, a tax-free
allowance of up to $73 million, and a capex [capital
expenditure] clawback provision in the amount of 20 percent over
the last five years.
CO-CHAIR SAMUELS recalled that when the economic limit factor
(ELF) was instituted an extraordinary tax break incentivized the
development of satellite fields, which, 20 years later, has
resulted in the state having many satellite fields that don't
pay taxes. Therefore, Co-Chair Samuels inquired as to what
would prohibit a similar situation [under HB 488] with the $73
million in tax-free allowances.
DR. VAN MEURS said he didn't foresee that problem because the
North Slope will be the terrain of the larger oil companies.
The level of investment and the complexity of the resource,
particularly in regard to heavy oil, is the kind of investment
that large/major oil companies make. Therefore, he predicted
that the vast majority of Alaska oil and gas will be produced by
major oil companies over the coming decades. However, the small
oil companies could be attracted and the state would desire to
attract them to the basins around Fairbanks and Cook Inlet.
Therefore, Dr. Van Meurs opined that there is definitely a place
in the petroleum industry for smaller companies, although he
said he didn't foresee a situation in which 90 percent of the
oil would be used by small companies 20 years from now.
REPRESENTATIVE LEDOUX inquired as to what a capex clawback is.
DR. VAN MEURS related that although he wasn't involved in its
development, he understood that the concept is that oil
companies that have been investing for the last five years can
take capital expenditures as a deduction over a specified price
level, which he estimated to be $40 a barrel. He deferred to
Mr. Dickinson, consultant to the governor, for further details
and noted that his analysis doesn't include the clawback
provision.
12:46:17 PM
REPRESENTATIVE KERTTULA inquired as to what other jurisdictions
have implemented something similar to the capex clawback
provision.
DR. VAN MEURS said that the concept of permitting past
depreciation when a new tax is introduced is a normal feature.
However, in [Alaska's] context it's a bit unusual since [Alaska]
permits a 100 percent write-off of the capital expenditures.
Contributing to the uniqueness of the capex clawback provision
is the fact that it would only apply over a particular price
level. Therefore, the provision isn't easily identifiable in
other countries.
12:47:56 PM
DR. VAN MEURS continued with his fourth slide. He reminded the
committee that until early January 2006, he had recommended a 20
percent tax and a 15 percent credit based on the international
competitiveness analysis. However, as a result of the economic
analysis done in DOR and input from the various other
consultants, he concluded that a 25 percent tax rate and 20
percent tax credit rate was a better package. The 20/20 PPT
package was adopted after his analysis, and therefore he noted
that his report doesn't include specific analysis on that. Dr.
Van Meurs moved on to slide 5 with an outline of his report. He
explained that the reason he preferred the 25/20 PPT and the
20/15 PPT is because the tax rate is high enough to balance the
credits. The 20/20 PPT is a slightly more risky package because
there may not be enough taxes to make up for the tax credit. He
commented that there are various risk distributions among these
taxation systems.
12:51:52 PM
DR. VAN MEURS, in response to Representative Kerttula,
highlighted the need to understand the balance between the tax
rate and the tax credit rate. He explained that if large tax
credits are used due to high investments, it results in
significantly less income. Therefore, the notion is to have
sufficient income for the tax credits to be taken, if the
companies heavily invest. He reiterated that good balances are
20/25 and 25/20, although he noted that the difference between
all of these packages is really small. Still, when there is a
lower tax rate combined with a somewhat higher credit, it's
somewhat riskier for the state, he said.
REPRESENTATIVE ROKEBERG questioned whether the administration's
preference for the 20/20 ratio was impacted by negotiations with
the producers. He then asked if Dr. Van Meurs has been able to
quantify/model the capex clawback.
DR. VAN MEURS again deferred to Mr. Dickinson regarding the
clawback provision. However, he related his understanding that
at higher prices, these taxes bring in billions more in tax.
The clawback provision, he opined, is just $1 billion and thus
is a relatively minor component that wouldn't dramatically
change the economic impacts. "Consequently, it is just a
feature that results in somewhat lower tax in the coming few
years than otherwise would've been created, but it's not
something that ... would change the basic conclusions that I'm
also presenting," he said.
12:56:05 PM
DR. VAN MEURS reminded the committee that he and Mr. Marks, DOR,
presented the full slate of options to the House Finance
Committee. He opined that all of the options are attractive to
the state, if there is at least a 20 percent tax rate.
Therefore, it becomes a question as to the precise balance for
the state in the opinion of the governor. From a consulting or
international analysis point of view, all of these systems are
closely related in terms of competitiveness. The higher the tax
rate and the lower the tax credit, the more revenue there is for
the state, he reminded the committee.
12:57:19 PM
REPRESENTATIVE ROKEBERG inquired as to why HB 488 wasn't drafted
with a 30/20 [PPT] when another benefit was included.
DR. VAN MEURS pointed out that there can be higher tax rates.
He noted that his report analyzed higher tax rates, including a
30 percent tax rate. However, he recommended not having a tax
rate that is too high because he believes it would gradually
make the system less competitive and the overall government take
becomes gradually unattractive relative to other international
fiscal systems, and therefore companies would probably start to
invest less in Alaska. Dr. Van Meurs related his understanding
that the goal was for the taxes to bring in more revenues, which
any of the [PPT] combinations achieve. However, at the same
time there was a desire to see more investment and stabilized
production. Therefore, the goal is to find the balance between
the aforementioned objectives, he said.
12:59:25 PM
DR. VAN MEURS moved on to slide 6, which relates the range of
cost scenarios that were analyzed. He commented that with this
type of fiscal analysis it's important to take a wide range of
cost and field sizes because one never knows what is there. If
the Arctic National Wildlife Refuge is ever opened to oil
development, the desire is to ensure that there's a fiscal
system in place that's adequate and that the fields provide the
benefit to the state. However, he acknowledged that the ongoing
developments of the North Slope relate to the smaller fields
that are gradually getting expensive. In order to test whether
this test is suitable for a wide range of field sizes, prices,
and costs, much emphasis was placed on the high cost fields
because there is abundant evidence that the majority of the
fields will be "looked at" in the coming years.
1:02:08 PM
DR. VAN MEURS pointed out that slide 7 relates the various
outcomes with a 20/20 PPT tax. He explained that the negative
figures under the "dry hole" column are due to the tax credits
and the deductions of the dry hole itself, for PPT purposes and
corporate income tax purposes. The 64.7 percent specified for
the total under the "dry hole" column means that the federal
government and the state absorb 64.7 percent of the cost of a
dry hole in terms of deductions. Therefore, the PPT will make
an enormous contribution to increase the attractiveness of
exploration because a company could receive $6.47 back for every
$10 spent. Furthermore, exploration would become far more
attractive throughout Alaska. He then turned attention to the
"50 MM," and explained that the smaller fields are more
attractive because of the $73 million allowance and don't pay
the PPT, although they receive the tax credits. The hope is
that will increase [exploration] activities, particularly
outside of the North Slope. He then reviewed the Alaska
government take under various scenarios, which illustrates that,
in terms of field size, there is a progressive system with a
heavy burden on the larger fields. Therefore, new investments
would generate very significant revenue flow to the state.
DR. VAN MEURS moved on to slide 8, which illustrates the
importance of tax credits for small fields. The tax credits
have a considerable impact on the break-even point, he reminded
the committee. The graph provides sensitivity analysis for a
PPT of 20 percent with no tax credits, a 15 percent tax credit,
and a 25 percent tax credit. The slide illustrates that the
break-even point, in terms of the PPT received, depends upon the
tax credits. He pointed out that the higher the credit, the
higher the break-even price.
1:07:16 PM
DR. VAN MEURS highlighted that the graph on slide 9 illustrates
the rate of return on a 150 million-barrel field. Again, this
is a sensitivity analysis of the tax credits. The graph
illustrates that the internal rate of return (IRR) is primarily
determined by these tax credits. Therefore, the 20/20 [PPT]
would result in the same return as the current system in Alaska
for the specified field size. As the tax credit increases, the
IRR increases. The graph specifies that the IRR can be
increased by almost 7 percentage points by moving from 0 to 25
percent. The 20/20 [PPT] proposal in HB 488 would significantly
increase the IRR, and therefore it makes investment in smaller
fields or fields of any size by smaller companies far more
attractive. Slide 10, he said, enters into the international
comparison. He explained that his job was to ensure that
whatever system was selected would be internationally
competitive. The analysis carefully compares eight
jurisdictions in which the companies are very active and thus
the terms are sufficiently attractive to merit significant
investment.
1:11:16 PM
DR. VAN MEURS said that slide 11 is important. He explained
that one of the large drawbacks on the Alaska North Slope is
that the wellhead prices are much less than anywhere in the
world relative to West Texas Intermediate (WTI) taxes. He noted
that there is a quality differential of about $2.00, which
varies from day-to-day. Therefore, in comparing the North Slope
with the U.S. Gulf of Mexico, Alaska immediately has to overcome
a $7.00 difference [in value with Mexico]. He noted that
Azerbaijan is similar to Alaska in that it is a low netback
country and thus has low wellhead prices relative to the world
price. Within the economic comparison, Dr. Van Meurs said that
he subtracted the differential in order to address it and thus
if Alaska is compared with Norway or the United Kingdom, the
assumption is that the value of the crude oil in Alaska is $7
less than in the Gulf of Mexico or $6 less than in Norway.
Therefore, if the graph illustrates that Alaska is competitive
it's a real competitiveness because it corrects for the low
wellhead prices.
1:13:51 PM
DR. VAN MEURS then turned the committee's attention to slide 12,
which presents a graph comparing Norway and the United Kingdom.
The aforementioned example was chosen because it presents a good
spread in that the United Kingdom has an overall government take
that is an overall percentage of the profits of about 50 percent
whereas for Norway it's about 78 percent. Consequently, that
almost represents the world from the lower government takes to
the higher government takes. Slide 12 represents an IRR on a
very large field. Slide 13 addresses smaller fields for new
investors whereby the IRR becomes very significant due to the
tax credit. From an international perspective, these smaller
fields would be more attractive for the new investors, he said.
1:15:49 PM
DR. VAN MEURS, in response to Representative Seaton, explained
that the 20/20 [PPT], which has an attractive tax credit, would
have a high IRR. Furthermore, it fits right over the United
Kingdom and is a bit higher than the United Kingdom at the
higher price levels. At the low price levels for small fields,
it's difficult to be attractive compared to international
circumstances because at $22 the $7 has to be subtracted for the
netback, and furthermore there is a very high cost for that
field. Therefore, no matter the case, at low prices small
fields aren't very attractive and not much can be done to
address it.
REPRESENTATIVE KERTTULA asked if she understands the graph on
slide 13 correctly in that the 25/20 [PPT] at the high price
provides the highest IRR.
DR. VAN MEURS replied yes. He explained that small fields with
new investors who receive the $73 million allowance wouldn't pay
taxes and would still receive the tax credits. Therefore, the
higher the tax rate and the tax credits, the higher the IRR
because of the much higher carry forward on the losses and thus
it actually boosts how much the company gets back. In other
words, the 25/20 [PPT] provides $.45 per dollar while the 20/20
[PPT] only provides $.40 per dollar, and therefore the 25/20
[PPT] is more attractive. However, once one reviews large
fields, that's not necessarily the case.
1:19:00 PM
CO-CHAIR SAMUELS related his understanding then that the
assumption is that it's a small new company with no other write-
offs for the $73 million.
REPRESENTATIVE KERTTULA inquired as to what would occur with a
30/20 [PPT]. She asked if it would result in the [IRR] being
even higher for the small fields.
DR. VAN MEURS replied yes, and reiterated that the higher the
tax rate and the higher the tax credit, the higher the IRR. For
example, if the system in place was a 30/30 [PPT], the company
would receive $.60 per dollar, which illustrates that one must
take care with these high tax credits and find the right
combination.
1:20:40 PM
CO-CHAIR SAMUELS surmised then that a 30/20 [PPT] would have a
higher IRR for the company than would a 25/20 [PPT]. However,
he inquired as to whether both [the tax rate and the credit]
would have to go up because only increasing the tax rate would
seem to lower the IRR.
DR. VAN MEURS explained that the reason for the situation is
because the company isn't paying the tax because of the $73
million shelter. Therefore, it's an enormous incentive for the
companies.
1:21:30 PM
DR. VAN MEURS moved on to slide 14, which reviews the overall
government take of the various countries with Norway being on
the high end of the international scale and the United Kingdom
on the low end. The graph illustrates that Alaska fits in the
middle, although located more closely to the United Kingdom.
The graph further illustrates that the government take [in
Alaska] is modest, which is because of the earlier mentioned $7
[net differential] problem that doesn't allow [Alaska] to "ask"
the same as Norway or the United Kingdom. However, the graph
highlights that from an overall government take it doesn't
really matter whether the [PPT] is 25/20, 20/20, 20/15, or
25/20. At most, there is a 2 percent difference between the
options and thus small changes in the PPT only have small
effects on the international competitiveness. He said that the
same is true for smaller fields, although the [government take
for the various countries] starts to spread a bit at very low
prices due to the high costs of these fields and thus creates a
modest degree of progressivity on the PPT.
1:24:28 PM
DR. VAN MEURS continued with slide 16, which reviews the PPT and
competition. He explained that he systematically rated the
fiscal systems to compare them with the other nations around the
world in order to determine whether there was an improvement in
competitiveness when moving from the current system to the PPT.
Slide 17 clearly rates the 20/15 and 25/20 systems for the
various countries. He highlighted that under the 20/15 [PPT]
Alaska doesn't rate very well. However, with Alaska's PPT, the
rating improves. With the 25/20 [PPT], the competitiveness is
improved a bit, primarily because stronger tax credits are
achieved. Dr. Van Meurs opined that under the 20/20 [PPT] it
would show a slight further improvement in the competitiveness
index.
1:27:13 PM
REPRESENTATIVE GARA inquired as how Alaska's competitiveness
would be impacted if the 30/20 [PPT] was in place.
DR. VAN MEURS opined that it wouldn't be too different from the
25/20 [PPT]. He further opined that the 30/20 [PPT] would be
somewhat less competitive because of the higher tax rate that
would begin to [infringe] on the overall government take.
Still, [the 30/20 PPT] would be more competitive than Alaska's
current system. He explained that how the 30/20 would precisely
rate compared to the 25/20 [PPT], depends upon the effect on the
smaller fields. However, he suggested that it would rate
somewhat less that 244, but significantly better than 363. In
further response to Representative Gara, Dr. Van Meurs agreed to
provide the committee with a rating for the 30/20 [PPT].
1:29:29 PM
REPRESENTATIVE ROKEBERG highlighted that slide 17 specifies that
the 20/20 [PPT] would rate somewhat more attractive to investors
than the 25/20 [PPT], although not significantly more. He asked
if that includes the provisions for the capex clawback. He also
inquired as to what impact that would have on the calculations.
DR. VAN MEURS clarified that the aforementioned statements don't
include the capex clawback. He related his understanding that
the capex clawback is a corporatewide feature and thus isn't a
field-by-field feature. However, Dr. Van Meurs related that his
analysis was performed on a field-by-field basis, which is what
his competition analysis is based on because investors make
decisions on individual field opportunities. Therefore, the
[capex] clawback wouldn't typically be included in a rating of
this nature because the companies can deduct it regardless of
the economic analysis.
1:31:23 PM
CO-CHAIR SAMUELS related his understanding that the analysis on
slide 17 is for a new company that can take advantage of the $73
million if that company has not taken advantage of that $73
million in another field in another investment.
DR. VAN MEURS said that would be true. He then posed an example
in which a new company enters [a field] for the first time and
receives its $73 million tax-free allowance. If that company
invests in another field, it places the company over the $73
million allowance and the PPT would rate significantly less
attractive. Consequently, the rating is for first investors who
would really obtain a boost to enter. Once the first investors
are in and settled, the PPT is still better than the current
system. However, not significantly better, as illustrated in
the ratings and thus companies would still view Alaska as a more
attractive environment than before. The aforementioned is
exactly what's desired because once the companies are
established, the incentives to reinvest through the tax credits
are beneficial although the $73 million allowance is gone and
the full tax is paid on any size field.
1:33:03 PM
DR. VAN MEURS confirmed that the analysis and the $73 million is
for new investors with their first investment in Alaska.
However, he noted that the report also includes rating analysis
for current operators. He related that the analysis illustrates
that the [proposed] system would be somewhat more attractive
from an investment point of view, although not as attractive as
slide 17 presents.
REPRESENTATIVE ROKEBERG surmised then that current producers
with some costs in capital investments would have a slightly
higher rate of return than are shown because of the clawback.
1:35:00 PM
DR. VAN MEURS replied yes, and explained that from an overall
corporate perspective the clawback would primarily benefit the
larger companies in Alaska and would lower their total PPT
payments for a few years.
CO-CHAIR SAMUELS related his understanding that ConocoPhillips
Alaska, Inc. ("ConocoPhillips") would receive the $73 million
write-off, but as it moves forward to invest in another field
the $73 million won't be counted because it has already been
written off. Therefore, the proposal will only apply to a
completely new company with zero [current investment in the
state]. He surmised that this won't apply to even some of the
smaller companies, such as Anadarko Petroleum Corporation
("Anadarko") that might be coming close to $73 million in
current investments in Alaska.
DR. VAN MEURS agreed and specified that he is attempting to
illustrate that Alaska is attractive to new companies. He
pointed out that these slides are representative of small
companies that don't go over the $73 million or new investors
such as Shell. Although a company such as Anadarko is in the
middle, and will still benefit significantly in the overall
corporate cash flow from the $73 million, there will be
production that would go over that limit, making the
reinvestment in new fields not as attractive. For the smaller
companies in a heavy investment mode, such as Pioneer, the
company would have so many tax credits that it wouldn't pay
anything, even if it's over the $73 million. The large
companies, as illustrated by Mr. Marks' analysis, have so much
existing production that the $73 million is almost meaningless.
Furthermore, the larger companies' level of reinvestment as
compared to existing production is relatively modest, and thus
as long as the prices are reasonably high, the larger companies
will pay a significant additional PPT.
1:39:38 PM
REPRESENTATIVE SEATON asked if the large companies still receive
the tax credit for their investment.
DR. VAN MEURS replied yes. Therefore, under the 20/20 [PPT]
system if ConocoPhillips wanted to drill a new exploration well,
it would receive $4 for every $10 it invested. Consequently,
even for the ConocoPhillips companies, this proposal is a
significant encouragement to reinvest. Faced with large
investment and budgets, the tax credit portion of the PPT is
really designed to get [the large companies] going on those kind
of developments.
1:41:32 PM
DR. VAN MEURS pointed out that slide 18 shows the heavy oil
investment and the various PPTs. The graph illustrates that no
matter the system, the tax credits are very important for heavy
oil development. Therefore, he opined that there will be much
more action with heavy oil, which is necessary to fill the
pipeline and maintain production. Dr. Van Meurs further opined
that much of the production in Alaska will come from the major
oil companies and this system is designed to provide them with a
strong incentive to maintain production on the North Slope and
ensure that new technologies and ideas are being developed.
1:43:57 PM
REPRESENTATIVE ROKEBERG recalled the 400-500 differential in the
IRR, particularly as it relates to heavy oil. However, the
graph doesn't really illustrate the [magnitude] of the
difference between a 20 and a 25 percent tax credit. He
requested that Dr. Van Meurs speak to the actual numbers and the
impact of the 5 percent difference on the IRR.
DR. VAN MEURS explained that there's about a 1-2 percentage
point difference between a 20 percent tax credit and a 25
percent tax credit. He further explained that the graphs were
included in the report because there was the desire to determine
whether the state should support heavy oil production, even with
a higher tax credit than the 20 percent. As the graph
illustrates, the difference isn't that much, and therefore at
the 25 percent tax credit, the risk for the state becomes too
high. Consequently, Dr. Van Meurs opined that the 25/20 or
20/20 [PPT] are good systems to promote heavy oil and there is
no need to over stimulate that production with higher tax
credits. In further response, Dr. Van Meurs confirmed that
those figures are available in his report.
1:46:36 PM
DR. VAN MEURS, in further response, clarified that the PPT is
designed to stimulate heavy oil exploration as well as
[exploration] in the smaller fields in other areas.
CO-CHAIR RAMRAS recalled the presentations' from prior day's
hearing, and expressed the need for there to be an apples-to-
apples comparison. He then inquired as to whether Dr. Van
Meurs, on the tax credit side, is comfortable with the things
that are not included, such as the depreciation, the royalty
payments, the tax on which it's based, et cetera. He related
his understanding that adopting the approach [in HB 488] would
make the accounting arm of these large oil companies much more
material in regard to how to formulate new investment in the
state because they will take advantage of these tax credits.
"Are you satisfied that we have enough of a collar on the
ability of the accounting arms of the large oil companies to not
be too exploitative of how to manage the credit side of this
equation," he asked. He requested that Dr. Van Meurs also speak
to the cost side as well.
1:49:56 PM
DR. VAN MEURS noted that the vast majority of countries have
established a profit-based system. When a country establishes a
profit-based system, it requires a deeper accounting of costs
and revenues. He explained that there must be sufficient power
and definition in order to prepare detailed regulations and
accounting procedures for companies to calculate the PPT. He
noted that also contemplated is to make use of the joint venture
accounting systems that the companies maintain. Therefore,
there are different ways to tie into the extensive accounting
that is already being done. Moreover, it wouldn't be a major
problem to organize those systems. Dr. Van Meurs pointed out
that [HB 488] also contemplates that in 2006 companies will be
allowed to continue on the old basis and then in March 2007
there will be a "through up" to ensure that everything has been
calculated properly. From the government side there will be a
shift in emphasis. He pointed that Alaska already has modest
experience with running profit-based systems through the net
profits leases that it has held for decades. However, the scale
of the PPT will be much larger and thus Alaska will also have to
prepare for more in-depth auditing and accounting. He pointed
out that although companies will try to take advantage of [what
they can], in Alaska there is an extremely sound base of highly
knowledgeable people who can be hired. Alaska, he opined, is on
the forefront of the oil and gas industry and has the
infrastructure to properly do this without much difficulty.
CO-CHAIR RAMRAS asked, "What kind of a shift and what kind of an
empowerment are we going to see from the different accounting
arms of the large producers and some of these smaller companies
to begin to make that shift and that assessment of whether
projects in Alaska are viable as they try to shelter income by
taking advantage of tax credits and the different variables that
are going to drive that?"
1:55:47 PM
DR. VAN MEURS related his belief that the world is reacting
quickly to the new incentives as the world is becoming more
competitive. The introduction of the PPT system, which is
oriented toward reinvestment and investment while gaining
significant revenues will gain the attention of a wider group of
investors. The aforementioned is desirable and will increase
production, he said.
1:57:35 PM
REPRESENTATIVE SEATON referred to slide 3 of Robynn Wilson's
[Tax Division, Department of Revenue (DOR)] presentation on
February 22nd, which speaks to incremental revenue based on the
Department of Revenue forecast. That slide illustrates that
Alaska's income under the PPT will perform better through mid
2008 than under the current system with ELF. However, the PPT
seems to under perform and generates less money than the current
system through mid 2010 after which time the PPT and the current
system remain even. He then pointed out that Dr. Van Meurs'
slide 15 shows the current system out performing the PPT system.
DR. VAN MEURS pointed out that [the outcomes] depend on the
various assumptions made, including the oil prices. If oil
prices are assumed to be relatively low and it's assumed that
there will be considerable investment, the PPT won't be very
strong. If the prices are high, the PPT will be much higher.
He reminded the committee that he has not been able to evaluate
the clawback and doesn't know whether Ms. Wilson's graphs
include that feature. The broad concept, he explained, is that
at low prices, the PPT could be less than the current system.
Dr. Van Meurs reminded the committee that he has been working
with the state since 1996 and has been monitoring the ELF
annually. The most striking discovery is that the predictions
of the ELF seem to decrease each year. For example, three years
ago the ELF was predicted to be at .1 or .2 in the year
2011/2012. However, it is all gone and the ELF is crashing a
lot faster than the typical production forecasts. Therefore,
when looking forward to 2015 or later, one must keep in mind
that the ELF may decline faster than the official forecast. The
aforementioned, he opined, makes the introduction of this new
system very important to avoid entering a situation that's far
worse than already predicted.
2:02:06 PM
ROBYNN WILSON, Director, Anchorage Office, Tax Division,
Department of Revenue, interjected that Dr. Van Meurs'
presentation is on assumed field sizes while the figures in the
fiscal note and the charts provided [by her to the committee
yesterday] are actual Alaska numbers based on certain
assumptions, which will be fully explained later.
2:03:07 PM
REPRESENTATIVE CRAWFORD related his understanding that [this
proposal] is setting tax rates for both oil and gas at the rate
of 6,000 cubic feet of gas per barrel of oil. However, all the
charts are related to the worldwide competitiveness of oil.
Therefore, he inquired as to whether, by setting these rates,
the state's competitiveness with gas is being changed.
DR. VAN MEURS explained that the reason the charts focus on the
competitiveness with oil is related to [the notion] that a
stranded gas contract would be presented, which includes
provisions with respect to the production tax for gas that
differ from what's presented today. The idea with the stranded
gas contract is that the state takes its taxed gas in-kind,
which is a totally different concept. Since it's a totally
different package with regard to the North Slope gas that may
come on-line as a result of the stranded gas contract, he said
he didn't present the hypothetical case of the system also
applying to the large gas developments in the North Slope. If
the stranded gas contract doesn't pass or isn't submitted, then
these terms will apply to gas as well as oil. In that case the
Point Thomson field would be positively impacted. The overall
structure and investment behavior of the tax would be similar,
he said.
2:06:35 PM
REPRESENTATIVE CRAWFORD asked if Dr. Van Meurs means that Point
Thomson would be positively affected for the leaseholder or the
current operator of the field. If so, would it be more
competitive and reduce the state's take, he also asked.
DR. VAN MEURS answered that the behavior will be the same. He
posed a situation in which there is no stranded gas contract and
[HB 488] only applies to Point Thomson. In regard to what would
happen, he explained that Point Thomson would receive the same
40 percent tax credit as any oil development. Therefore, since
the capital costs at Point Thomson are high, that would be an
attractive feature. At the same time, Point Thomson is a large
field and thus over time the PPT would decrease significantly
and the revenues for oil and gas would be added together. The
aforementioned would result in the total gas take being very
significant and very high if prices increase. Therefore, the
overall behavior demonstrated for oil would also apply to the
gas development, in case there isn't a stranded gas contract.
If there is a stranded gas contract, the law would still apply
for oil.
2:08:50 PM
CO-CHAIR SAMUELS asked if the following is correct: the gas
line itself is paid for by the tariffs; this [legislation]
wouldn't have any implications on the main gas line or the gas
treatment plant (GTP).
DR. VAN MEURS resounded that the tax credits he mentioned will
not apply to the main gas line. In further response to
Representative Samuels, Dr. Van Meurs confirmed that the tax
credits are paid for by the tariffs, the users, and the shippers
of the gas.
CO-CHAIR SAMUELS clarified that the tax structure for the gas
pipeline will be established in the contract. Furthermore, if
there is a contract, the tariffs will pay for the gas line and
the associated facilities.
REPRESENTATIVE GARA said he is trying to differentiate between
the 25/20 and the 20/20 plans. He recalled that Dr. Van Meurs
had related [prior to the 20/20 plan] that the 25/20 plan and a
January 1st effective date would place the state in a strong
position competitively and would provide a fair return to the
state. He asked if that assumption remains the same with the
25/20 plan.
2:10:49 PM
DR. VAN MEURS echoed his earlier comments that the 25/20 and
20/20 plans are both very competitive systems and considered
very attractive to investors. However, a retroactive start date
in January as compared to a mid-year start would gain an extra
half year of income to the state, although typically taxes start
after they have been approved. Dr. Van Meurs confirmed that a
January 1st start date wouldn't impact the competitiveness of
the system because new investors will not have to pay tax for a
while. However, the difference between a January 1st and July
1st start date is the impact on current production.
2:13:29 PM
REPRESENTATIVE KERTTULA surmised that [the January 1st start
date] would provide another six months and would result in the
full five years for the clawback.
DR. VAN MEURS deferred to Mr. Dickinson.
REPRESENTATIVE KERTTULA turned attention to the royalty
reduction and related her belief that it makes sense during
exploration. However, once the company starts producing, she
questioned whether the credit should continue. She asked if Dr.
Van Meurs has seen systems that work that way.
2:15:20 PM
DR. VAN MEURS explained that the reason to look at a broader tax
credit in Alaska is because building the necessary
infrastructure is an enormous obstacle for many of the investors
entering Alaska. The beauty of the proposed tax is that it is
an enormous help for the smaller companies when building the
infrastructure such that a wider group of companies can have
access to it. Furthermore, a much stronger basis for
development is formed, he stated.
2:17:33 PM
REPRESENTATIVE LEDOUX asked when the capex clawback feature was
first discussed.
DR. VAN MEURS said it was discussed over the last week. He
noted that the capex clawback was part of the discussions the
governor had with the oil companies and was a component [that
attributed] to the companies supporting the package. He
clarified that the concept of recovering prior cost was
discussed among the experts in DOR when alternatives to the ELF
were discussed and when the PPT was discussed, but the official
inclusion in the package occurred in the last two weeks.
2:19:58 PM
ROGER MARKS, Petroleum Economist, Department of Revenue (DOR),
informed the committee that he would provide a quantitative
analysis of HB 488 and how it impacts revenues as compared to
the status quo. He further informed the committee that he would
describe the department's model and its assumptions as well as
the long-term cumulative revenues, annual revenues, and
observations regarding the corporate take resulting from the
tax. Mr. Marks then referred to the PowerPoint entitled, "PPT
REVENUE STUDIES."
2:22:47 PM
MR. MARKS explained that it is important to know how much oil
there will be, which is difficult to forecast. For the model,
whether there is enhanced exploration success and development or
not and whether there is a gas line or not, both of which would
impact volume scenarios, were segregated. He specified that the
presence of a gas line would impact oil volumes because Prudhoe
Bay volumes would decline earlier on, although the life would be
extended. Moreover, the assumption is that Point Thomson would
come on line, although whether or not it's economic without the
gas line is a question that remains. The assumption, from DOR,
is that Point Thomson will only come on line with a gas line.
The DOR, he related, believes that with Point Thomson there will
be 15 trillion cubic feet (tcf) additional gas that will be
discovered, and furthermore the department believes oil will
also be discovered with that.
MR. MARKS explained that he would present a low and high
scenario such that the low scenario doesn't include the enhanced
volumes and gas line. As specified on slide 5, no enhanced
volumes and no gas line produces a total of 5.5 billion barrels
through 2030. The model includes no additional heavy oil at
prices under $30. The basis of the volumes are included in
DOR's revenue sources book, including oil that is in development
now and some fields that are under evaluation. He then
explained that the high volume scenario assumes enhanced volumes
and a gas line, which would produce 10.5 billion barrels through
2050. The department further assumes that at the aforementioned
point, the North Slope would be cut off at 2030 because it
becomes questionable whether there would be enough oil to
support the pipeline at that point. The high scenario includes
an additional 3.2 billion barrels of conventional oil, including
700 million barrels from the gas line as well as an additional
1.8 billion barrels of heavy oil. Although DOR doesn't know
from where the oil will come, the United States Geological
Survey (USGS) and Alaska's state geologists, in reviewing the
reserves on state and federal land, estimate that 23 billion
barrels would be discovered in the mean commercial case.
Therefore, the volume scenarios range from 5.5 billion barrels
to 10.5 billion barrels.
2:26:49 PM
MR. MARKS turned attention to the graph located on slide 6. He
explained that the fluctuation in the high volume scenario
represent a series of new fields starting every four years. Mr.
Marks pointed out that DOR knows the following: the more that
is invested, the more is produced; the more incentives there
are, the more investment there is; the credits in the PPT are
incentives; higher taxes provide less investment; higher prices
elicit more investment; and investment is driven by competitive
international opportunities. However, the department doesn't
know how to quantify the aforementioned. Therefore, the volumes
as given were taken and the revenue effects specified are
entirely attributable to tax mechanics.
MR. MARKS then turned to the question as to why the proposal
went from a 25/20 [PPT] to a 20/20 [PPT]. He commented that
what is internationally competitive is a broad spectrum that's
continually evolving. If high prices continue, much oil that's
not economic will become so and there could once again be a
situation in which governments are competing for investment. He
opined that more oil coming on line may reduce the competitive
edge governments have if there are more governments competing
for the same amount of investment. He reminded the committee of
the Lafer (ph) curve, which showed that as taxes increase, more
revenue is collected. However, if taxes increase too much,
income could be lost and international economists don't know
exactly the point at which high tax rates lead to reduced
activity. Therefore, the governor's 20/20 proposal attempts to
[ensure that the tax rates don't become high enough to lead to
reduced activity].
2:30:23 PM
MR. MARKS returned to the PowerPoint and the assumptions related
to costs and prices, as specified on slide 7. He acknowledged
that "at the end of the day" these numbers won't be correct.
Mr. Marks informed the committee that the PPT will subject the
[state] to cost volatility such that if the ongoing capital
costs, operating costs, and developmental capital costs are off
by $1, the annual revenues of the state will differ by $200
million up or down. He highlighted that for modeling purposes,
the costs and prices are in real 2005 dollars and the heavy oil
is discounted 8 percent for quality while viscous oil is
discounted at 4 percent for quality. Mr. Marks then turned
attention to the cumulative revenues for the high and low volume
scenarios as presented on slide 8. In the enhanced volume
scenario, which includes the oil from the gas line, the revenues
specified don't include the gas line severance taxes, although
they do include the gas line costs. He explained that the PPT
is structured such that the upstream costs associated with the
gas and the capital costs for developing new gas fields would be
subject to deductions and credits through the PPT. In response
to Co-Chair Samuels, Mr. Marks confirmed that "it" would be
upstream of the GTP and wouldn't include the main line.
2:35:41 PM
REPRESENTATIVE GARA surmised then that there will be enhanced
volumes of oil if there is a gas pipeline because oil will be
found during the development of the gas fields. However, the
producers have always said that once gas is produced, less oil
will be derived from those [gas fields]. He asked whether the
notion that there will be more oil if the gas line is built is
based on science or is it debatable.
MR. MARKS said there are two different effects. At Prudhoe Bay,
once gas is depleted from the reservoir, there is a loss in
pressure, and initially Prudhoe Bay volumes will decrease.
However, Mr. Marks opined that in the absence of a gas line,
Prudhoe Bay will shut down in 2030. Therefore, with a gas line,
it becomes more economic to keep the oil flowing and thus
extended fuel life is experienced at Prudhoe Bay. He pointed
out that the extended life doesn't offset all the oil lost
earlier. He estimated that at the end of 45 years, Prudhoe Bay,
as a result of a gas line, may [produce] 150 million barrels
less. The other effect is that between Prudhoe Bay and Point
Thomson there is about 35 tcf. Since [the department] believes
the gas line would be built with 50 tcf in mind, it believes
people will look for another 15 tcf, which the department
believes is there. When that 15 tcf is discovered, there will
be oil associated with it. The gas line is a net effect of
about 700 million barrels of additional oil, including
approximately 250 million from Point Thomson, 150 million lost
from Prudhoe Bay, and 600 million from the yet defined gas
field.
2:38:05 PM
CO-CHAIR SAMUELS interjected that the GTP and the gas line will
be paid for by the users of the gas. Therefore, the GTP is
included in the tariff.
MR. MARKS clarified that the high volume scenario includes the
gas line costs not the gas line revenues. At $5 gas, the gas
line's revenues would amount to about $1 billion a year. In
order to provide further clarity, Mr. Marks explained that the
costs that are deductible and subject to the credit are
technically costs upstream from the point of production. He
confirmed Co-Chair Samuels understanding that the GTP and the
pipeline would not be subject to these deductions and credits.
MR. MARKS then moved on to Figure 2A on slide 9, which shows
cumulative revenues between the status quo and HB 488. The
graph illustrates, depending upon the price, that the total
revenues are either $2 billion less or $25 billion more. The
crossover point under the specified assumptions is $26.50. In
reviewing these graphs, Mr. Marks encouraged the committee to
keep in mind that the ELF is a modest standard of comparison.
With regard to the crossover point, he encouraged everyone to
keep in mind the slope of the line as well as the [amount] at
the crossover point. In reference to Figure 2B on slide 10, Mr.
Marks highlighted that although Plan B has a higher crossover
point, it [over the long term] receives more money that Plan A.
2:42:11 PM
REPRESENTATIVE GARA returned to Figure 2A on slide 9, which
specifies a crossover point at $27 a barrel and illustrates that
the state would receive less money under the proposed 20/20 plan
versus current law. He recalled the department's fall forecast
for the next fiscal year that estimates total gross revenue of
about $6.5 billion and company profits of about $2 billion,
which is about a 30 percent profit margin. Representative Gara
questioned whether that's a high profit margin at which to begin
to reduce taxes.
MR. MARKS offered to provide Representative Gara an answer after
thinking it through. He mentioned the need to be careful
because heavy oil is expensive and under $30, the department
doesn't believe it makes sense. Furthermore, one must take into
account what other countries are doing at those prices, the
answer to which he deferred to Dr. Van Meurs.
REPRESENTATIVE GARA asked if the numbers provided by the
department in regard to corporate profitability are reliable.
MR. MARKS said he hasn't reviewed the numbers himself, and
therefore he said that he was uncomfortable addressing them at
this point.
REPRESENTATIVE SEATON recalled that since this is a percent
profits tax, the impact of heavy oil isn't as great as it would
be for a gross tax. However, now he understands Mr. Marks to be
saying this is not the case, and "not only do we discount what
is going to be there, but even with the percent profits tax and
the credit back, now we're again reinjecting a consideration
that heavy oil has to be considered differently."
MR. MARKS clarified that the [crossover point] of $26.50 is a
mixture of all the oil, both the heavy and the light.
Therefore, increasing the tax rate or decreasing the credit rate
to decrease the crossover point impacts all the oil, including
the heavy oil. The effect is to water down the beneficial
effects of the PPT because heavy oil requires a lot of
investment. This all makes heavy oil more of a challenge than
it's structured to be treated in HB 488, he said.
2:46:13 PM
MR. MARKS moved on to Figure 3A on slide 11, which relates the
high volume scenario. He highlighted that the crossover point
is higher, which reflects the gas line costs and the heavy oil
without the gas revenues. Therefore, under the high volume
scenario, depending upon the price, [the state] receives from $3
billion less to $42 billion more. On slide 12, the high volume
scenario with 2.5 percent inflation results in a crossover price
of $28. He then turned his attention to slide 13 regarding the
annual revenues. He pointed out that at $20 a barrel, the state
would lose money and would have bigger problems than having the
wrong tax system.
MR. MARKS, in response to Representative Croft, confirmed that
the status quo number [on the graph on slide 14] decreases due
to the ELF as well as the defining volume. He then directed
attention to slide 15, which reviews the low volume scenario
with $40 per barrel. He then informed the committee that one
year at $40 per barrel oil allows the state to recover what it
lost in the three years at $20. Therefore, the state makes more
money at high prices than it loses at low prices. He reminded
the committee that with the capex clawback included at prices
over $40, [the state] would [receive] $170 million less for five
years. He then turned to why the clawback is included in HB
488, and explained that most of the investment made to produce
oil is made to produce future oil. The rationale for having the
clawback is to not penalize the producers for not deferring
their investments.
2:51:28 PM
REPRESENTATIVE HOLM pointed out that the [producers] made the
investment when oil was predicted to be about $25 a barrel, and
therefore when the price of oil increases, it changes the
[producers'] view of their investment life as well.
MR. MARKS reiterated that investments are for future oil, that
is oil taken three to fifteen years in the future. The
companies could have deferred those investments, and this
wouldn't penalize them for not doing so.
CO-CHAIR SAMUELS inquired as to when the producers expect the
increase in volume.
2:53:15 PM
MR. MARKS recalled the 1990s during which extensive gas handling
expansion projects were implemented. At that time, more gas was
coming up with the oil, and that was the limiting factor of
production. Therefore, multi-billion dollar facilities were
built in order to process the gas. Otherwise, the producers'
oil production would have plummeted. Those investments made in
the early 1990s are still producing lots of oil. Along the same
vein, Mr. Marks indicated that the effective date was changed
because making taxes retroactive is impossible to plan for and
creates a weak business environment.
REPRESENTATIVE SEATON surmised then that HB 488 proposes to
retroactively do the tax credits, but not the tax.
2:54:54 PM
MS. WILSON said the so-called recent recovery [clawback] of the
investments is not a credit, but rather is a deduction similar
to depreciation expenses. Furthermore, it recognizes that the
asset is generating income into the future. She explained that
any time net income is measured in accounting, it's important to
match the income with the expenses. The [clawback provision]
recognizes that "this is an amortized expense so it is not a
credit that is being taken."
REPRESENTATIVE GARA surmised that under a 20/20 [PPT], whether
it's a 20 percent credit or deduction, the companies receive the
same amount of money.
MS. WILSON replied yes.
2:56:19 PM
MR. MARKS continued with Figure 6, which illustrates a low
volume scenario at $60 barrel oil. He noted that the transition
rules are modeled and thus there is a reduction of $170 million
for the first six years. He highlighted that [at $60] the
average annual revenue amounts to over $600 million more a year
than the status quo. "This is, at $4.70 gas price in Chicago,
this is our gas line revenues without the gas line at current
oil prices," he pointed out.
REPRESENTATIVE KERTTULA inquired as to how much more the state
would have made under the 25/20 scenario.
MR. MARKS said he could model that for the committee.
2:57:32 PM
MR. MARKS then turned to the high volume scenarios under the
$20-$60 prices. He reminded the committee that these include
the gas line costs without the gas line revenues. As specified
on slide 17, under the high volume scenario with $20 a barrel
oil, the average annual revenue is $110 million less than the
status quo while $40 a barrel oil amounts to about $190 million
more than the status quo.
REPRESENTATIVE CROFT inquired as to why the graphs have bumpy
lines.
MR. MARKS explained that in the high volume scenario a series of
fields come on line every five years. Therefore, the bumps
illustrate the field coming on line and then declining. The dip
between 2025 and 2030 is when new investments for new gas fields
come on line. The dip prior to 2014 is the upstream deduction
for the Point Thomson field.
REPRESENTATIVE CROFT highlighted that the lines converge even
with the ELF in 2030 and then separate out.
MR. MARKS explained that the [dip] in the graph in the year 2030
illustrates about $3 billion of investment for new gas fields.
He then turned attention to Figure 9 on slide 19, which
illustrates that at the $60 scenario, the average annual
revenues are $800 million more than the status quo. He
continued with the effective tax rate under a low volume
scenario, as specified on slide 21. He explained that the total
severance tax divided by the total wellhead value less the
royalty amounts to the effective tax rate. With the PPT,
because the upstream costs are deductible and the tax increases,
a higher percentage of the wellhead price is received as the
price increases. Mr. Marks explained that when the ELF was
originally submitted in 1977, it was supposed to be such that
[companies] didn't have to pay tax on the amount of production
necessary to cover the operating costs at the price of oil at
the time the tax is being paid. Therefore, as prices increase,
less oil would be tax free and thus there would be an increasing
progressive rate. However, what ultimately resulted was a flat
$300 a barrel per well per day. He noted that the high volume
graph on slide 22 looks about same.
MR. MARKS concluded by discussing the corporate take. He
explained that he reviewed the U.S. Department of Energy's
current long-term forecast, which amounts to about $58 a barrel
in 2004 dollars and modeled it under the status quo and the PPT.
The graph [on slide 24] illustrates that $58 over 45 years
amounts to about $600 billion in gross revenues that would be
generated, with 2 percent inflation it amounts to about $1
trillion. Mr. Marks highlighted that under the PPT the
severance tax increases while the federal income tax decreases.
Because severance taxes are deductible from the federal income
tax, the federal government essentially picks up 35 percent of
the PPT from the producer. The corporate take, in terms of
gross revenues, goes from about 33 percent to 30 percent of
gross income under the PPT or 49 percent to 44 percent of the
economic rent. The state, he noted, ends up with 32 percent of
the economic rent. He reminded the committee that although the
current system is a fairly modest standard of comparison, the
corporations receive 30 percent of $600 billion, which amounts
to $180 billion.
3:04:31 PM
REPRESENTATIVE KERTTULA requested annual scenarios under the
25/20, 30/20, and 30/15 proposals at $20, $40, and $60 a barrel
oil. She requested that the aforementioned proposals also be
presented in the same type of chart as is presented on slide 24.
REPRESENTATIVE BERKOWITZ requested analysis of a straight 50/50
split between the state and the companies' profits.
MS. WILSON surmised that Representative Berkowitz is pointing
out that often government take is quoted based on profit after
expenses. She further surmised that Representative Berkowitz
was interested in the net profit and a 50/50 split.
REPRESENTATIVE ROKEBERG said that he would like the charts to be
based on the fiscal note and the credits to be increased to 25
percent such that the 25/25, 30/25, and 15/25 proposals are
reviewed.
REPRESENTATIVE SEATON requested that Figure 12 on slide 24 be
presented under $20, $40, $60, and $100 a barrel price
scenarios.
3:09:21 PM
REPRESENTATIVE GARA asked where, under current law, the
corporate profit margin would "sink" to 20 percent and 15
percent in order to consider if those are good crossover points.
REPRESENTATIVE ROKEBERG asked if the department has any
progressivity models that would represent a sliding scale scheme
that illustrated the change in both the tax and the credit rates
at different levels of pricing as related to the amount of
revenue.
MR. MARKS offered to put together a hypothetical sliding scale
range.
CO-CHAIR SAMUELS pointed out that the 20/20 proposal would be
considered flat not regressive nor progressive.
3:12:04 PM
REPRESENTATIVE MICHAEL KELLY, Alaska State Legislature, related
that once some of these sensitivities are done, then all the
ones in between can be determined and analyzed in regard to
whether it's appropriate for the state.
REPRESENTATIVE REGGIE JOULE, Alaska State Legislature, turned to
the fiscal note, and pointed out that with the proposed tax
regime, three additional auditors and another lower level staff
person are required. He asked if the aforementioned staffing
will be enough to keep up with the changes.
MS. WILSON explained that the department, under HB 488, will be
auditing different things than what it's accustomed and the
department views this as the necessary increment to increase the
department's capacity to audit additional things. She pointed
out that included in contractuals is temporary audit help to
assist in the transition. She predicted that the primary and
immediate needs are auditing the transition assets and writing
regulations.
3:16:57 PM
CO-CHAIR RAMRAS opined that over the years there has been a
great reluctance to adjust the tax system. However, no one has
tested any numbers lower than 20/20, which he surmised to mean
that [the administration] is predisposing the tolerance of the
producers lays at that level. Therefore, he questioned the
responsibility in proposing the 20/20 level.
MS. WILSON reminded the committee that a range of options were
offered by Dr. Van Meurs. Furthermore, the governor carefully
considered the whole picture. She then pointed out that other
states are competing state-by-state and although Alaska is not
forced to compete with other states, it is forced to compete
globally. She opined that the governor surely took the
aforementioned into consideration when selecting what he
considers to be the best scenario for Alaska in the world
market.
3:21:29 PM
ROBERT MINTZ, Assistant Attorney General, Oil, Gas & Mining
Section, Civil Division (Anchorage), Department of Law,
announced that he would review the highlights of the PPT as
presented in HB 488. Mr. Mintz specified that the fundamental
provision of HB 488 is Section 5, which is a repeal and
reenactment of AS 43.55.011(a). He explained that the current
production tax has a separate tax on oil and on gas, with
different rates, minimum tax, and ELF. However, under HB 488
those differences are immaterial because it proposes a single
tax on all oil and gas. Furthermore, the production tax remains
a monthly tax with a flat tax rate of 20 percent that is being
applied to the net value. The aforementioned differs from the
current production tax that taxes the gross value of oil and gas
at the point of production. In response to Co-Chair Samuels,
Mr. Mintz confirmed that if the gas is used in the operation of
the lease of property, it's not considered produced and thus
isn't subject to tax.
MR. MINTZ then turned attention to the net value, which is found
in Section 21. He informed the committee that net value still
starts with the gross value at the point of production. He
then explained that one of the philosophies with HB 488 is to
preserve the existing law as much as possible. With HB 488, all
of the gross value from all of the leases and properties in the
state that belong to a producer together determine the statewide
value for a producer. Once that value is determined, there will
be the following two categories of deductions: lease
expenditures as adjusted and a fraction of transitional
investment expenditures. He then pointed out that Section 31
slightly redefines "gross value at the point of production."
The major change, he highlighted, is moving the point of
production downstream of gas processing plants. Under current
law, once the oil or gas leaves the mechanical separators, the
matter is either oil or gas depending upon its state. However,
gas often continues to contain heavier hydrocarbons that can be
extracted by gas processing. This legislation proposes to
include gas processing in the upstream of the production
process, which results in the liquids extracted by gas
processing being treated as oil and the cost of gas processing,
including investment costs, would be deductible and subject to
the capital investment credit. The purpose, he explained, is to
encourage small producers to be able to afford investing in gas
processing, which is more economical.
REPRESENTATIVE CROFT asked if the aforementioned is the opposite
of what was said in regard to gas treatment.
CO-CHAIR SAMUELS clarified that earlier he was referring to a
gas treatment plant for gas entering the gas pipeline.
DAN DICKINSON, Consultant to the Office of the Governor,
clarified that HB 488 distinguishes between gas processing and
gas treatment. Gas processing involves production and
separating the heavier hydrocarbons. However, gas treatment is
specifically a transportation process. Mr. Dickinson explained
that gas treatment is being treated as a transportation cost and
is viewed as the first step of the pipeline process. However,
with gas processing, as occurs in the central gas facility,
there will be an upstream cost for both the gas and liquids
produced at that point. Mr. Dickinson highlighted that under
current rules about 8 percent of what is in Trans-Alaska
Pipeline System (TAPS) is considered gas because the natural gas
liquids were extracted at the central gas facility. However,
under the new definitions proposed in HB 488, that 8 percent of
the TAPS will be considered oil. He said that under HB 488
about 99 percent of what is done at TAPS will be considered oil.
3:30:57 PM
CO-CHAIR SAMUELS recalled Mr. Marks' example in which current
gas production facilities were held out as a long-term
investment as opposed to the GTP.
REPRESENTATIVE SEATON mentioned that there has been discussion
of stripping some of the liquids at Fairbanks or elsewhere along
the line. He surmised that these definitions wouldn't shift the
pipeline or a portion of it to Fairbanks.
MR. MINTZ said that's not the intent of HB 488 because once the
[gas] is in the main line it will be downstream to the point of
production. He pointed out that Section 33 defines gas
processing and gas treatment.
3:32:19 PM
MR. MINTZ, in response to Representative Rokeberg, confirmed
that the language on page 20, lines 3-4, redefines oil. He then
turned attention to [Section 19], which addresses gross value at
the point of production in the same manner as current statute,
save one respect that will be mentioned later. Basically,
[Section 19] codifies the net back approach to calculating value
and thus the cost of transportation is deducted.
REPRESENTATIVE CROFT related his understanding that the
reasonable costs of transportation being used are the actual
costs of transportation. However, sometimes reasonable and
actual are not the same. Therefore, he inquired as to why the
two are being equated.
MR. DICKINSON explained that the statute establishes three
conditions, which if met, the market value of the transportation
services are used. However, the three conditions establish a
fairly high barrier and thus most of the time actual costs are
used and they are deductible. He indicated that [AS
43.55.150(a)] has generated hundreds of pages of regulations in
order to define actual costs for owners of tankers and
pipelines.
REPRESENTATIVE CROFT surmised then that the current standard is
to assume that actual is reasonable unless it meets all three
criteria.
3:34:05 PM
CO-CHAIR SAMUELS opined that there won't be the TAPS settlement
methodology (TSM) fight again rather it will be determined by
the Federal Energy Regulatory Commission (FERC) or the
Regulatory Commission of Alaska (RCA).
MR. DICKINSON replied yes.
MR. MINTZ clarified that Section 20 the bill varies from the
existing law with regard to the net back calculation. He
explained that the legislation would authorize the department to
allow taxpayers in certain situations to use formulas to
calculate the gross value at the point of production. For
example, if a taxpayer has a royalty settlement agreement with
the Department of Natural Resources (DNR) under which there is a
royalty value that is similar to the tax value, rather than have
two duplicative calculations the department could allow the
royalty settlement value to be used subject to appropriate
adjustments. However, there are other alternatives, such as a
royalty valuation that the federal government utilizes on its
leases when no state leases are involved. He noted that this is
an option that the department would have.
3:36:25 PM
MR. MINTZ, referring to Section 21, explained that net value is
determined by subtracting various items from gross value,
including lease expenditures. Lease expenditures are an
aggregate of cost of a producer across the state and are defined
as direct, ordinary, and necessary costs of exploring,
developing, or producing oil or gas deposits in the state. He
noted that exploring can include geological and geophysical
exploration. He reminded the committee that [lease
expenditures] are upstream of the point of production and
downstream costs are already taken into account in reaching the
gross value at the point of production.
REPRESENTATIVE BERKOWITZ asked if these definitions have been
litigated.
3:37:56 PM
MR. MINTZ specified that the terms "ordinary and necessary" are
used in the Internal Revenue System (IRS) code as well as
existing department regulations for transportation costs.
Although the term "direct" may not have as much legal
interpretation, the legislation specifies particulars regarding
the types of costs that would be excluded and included. In
continuing with Section 21 subsection (c), he explained that
this provision provides additional guidance to the department in
determining the direct, ordinary, and necessary costs. The
guidance has to do with the experience of the oil and gas
industry in unit operating agreements and other joint operating
agreements, which are situations in which an operator actually
does the drilling and producing and other lessees share in the
production and expenses. Therefore, the other lessees don't
want to pay more than they owe. The aforementioned are examples
of industry practice to which the department would review in
developing its standards for what would be considered allowable
costs. He then pointed out that there are appropriate
safeguards in an existing actual joint unit operating agreement
in the state. For example, a working interest owner, not the
operator, has enough incentive to audit it effectively.
Therefore, the department is authorized to allow producers to
rely on their actual billings under the operating agreement in
determining the deductible costs. In response to Representative
Croft, Mr. Mintz clarified that it's a new concept because it
addresses upstream costs that are currently not deductible.
REPRESENTATIVE CROFT surmised that it gives substantial weight
to the industry practice, although it's not how the state
assesses under the income tax or any other oil taxes.
MR. MINTZ replied yes. The income tax, he explained, doesn't
usually get into that detail because it starts with the federal
taxable income and merely apportions. He mentioned that HB 488
also directs DOR to look to DNR's standards and regulations in
regard to what costs are deductible under net profit share
leases.
CO-CHAIR SAMUELS commented that the costs are a huge concern.
He recalled yesterday's testimony relating that the larger
fields at Kuparuk [River Unit] and Prudhoe Bay have the dynamic
of the three major producers looking over each other's shoulders
exists. He characterized the aforementioned as good for the
state. Therefore, he asked whether it's a completely different
procedure for DOR when multiple producers are present versus a
sole operator, as is the case at the Milne Point [Unit]. He
then inquired as to the total revenue of the Milne Point [Unit]
versus the Kuparuk [River Unit] and Prudhoe Bay.
MR. DICKINSON highlighted that the larger units are all owned
jointly and they pale in size to Prudhoe Bay and Kuparuk [River
Unit]. He informed the committee that DOR doesn't have any
procedures because currently the department stops at the point
of production. He related that the department intends to review
the standards being used with joint operating agreements in
order for the state to utilize when there is a sole owner and
the state [provides oversight].
CO-CHAIR SAMUELS posed a situation in which an individual works
for BP solely on Alaska issues but lives in London, and asked if
that individual's salary is excluded [under the Commerce
Clause].
MR. DICKINSON said the unit operating agreement would have to be
reviewed regarding whether the tasks meet the standard versus
where the task was performed. He noted that there are certain
things for which all parties agree to pay.
CO-CHAIR SAMUELS, returning to the fiscal note, asked if it's a
"shot in the dark" because the department doesn't know how many
auditors it will need until the first audit is performed at
Milne Point Unit.
MR. DICKINSON related that in Texas there are firms that perform
joint venture audit billings for smaller partners. The thought
is to hire a firm or several to review the transitional costs
and at the same time help bring Alaska's auditors up to speed.
He indicated that there wouldn't be a long-term relationship
with those firms. Therefore, the fiscal note specifies a large
increment up-front for contract work and three specialized
auditors with one support person.
3:45:43 PM
REPRESENTATIVE BERKOWITZ inquired as to who wrote this section
and the instructions given to write it.
MR. MINTZ said that he basically wrote HB 488 through a long
process. In terms of the direction given, Mr. Mintz said that
he attempted to implement the concepts he was asked to do.
Although a number of people were involved, he noted that he
worked closely with Mr. Dickinson who was generally the conduit
for the direction provided. In further response to
Representative Berkowitz, Mr. Mintz said that the process was an
iterative process involving many drafts, reviews, and changes.
REPRESENTATIVE BERKOWITZ asked whether it would be possible to
review earlier drafts.
MR. MINTZ offered to check into that.
REPRESENTATIVE ROKEBERG informed the committee that the House
Rules Standing Committee introduced legislation to reallocate 10
auditors to help with this issue. He then turned attention to
[AS 43.55].160(a) and (b), which refer to transitional
expenditures. He asked if those subsections only relate to the
transitional investment expenditures.
MR. MINTZ explained that [AS 43.55].160(a) provides the basic
structure with regard to how net value is calculated. In
further response to Representative Rokeberg, Mr. Mintz confirmed
that the language on page 12, lines 3-6, relate to the
calculations for the clawback, which is addressed in subsections
(g) and (h) on page 15. Subsection (b) addresses to what extent
either are deductible in a given month, and what can be done if
the deduction caused the net value to fall below zero. The $40
floor is mentioned at the end of subsection (g) and elaborated
on in subsection (h).
3:49:27 PM
REPRESENTATIVE ROKEBERG related his belief that there are
elements in subsections (a) and (b) that go beyond the
transitional investment expenditure.
MR. DICKINSON clarified that subsections (a) and (b) are general
statements with regard to everything that's deductible.
However, subsections (g) and (h) on page 15 specifically refer
to the transitional investment expenditures and subsection (j)
on page 16 refers to the allowance.
REPRESENTATIVE ROKEBERG referred to page 14, line 1, which
relates that taxes based on net income are excluded. He
inquired as to the federal policy effects on the revenue stream
to Alaska if [a windfall profits tax] is enacted.
MR. MINTZ related his understanding that most taxes that aren't
income taxes, including the production tax, are deductible for
income tax purposes. Therefore, the windfall profit tax would
not directly affect the production liability if it works like
any other income tax. However, presumably price controls would
effect the gross value at the point of production and could lead
to a lower taxable value than if there were no price controls.
3:52:04 PM
MR. DICKINSON recalled when price controls have been imposed,
and related that if the department believed the producers were
following the price controls, it would just flow through and the
lower profits would be recognized.
CO-CHAIR SAMUELS then related that tomorrow he would like
assurance that the legislation addresses the $73 million in a
situation in which the Kuparuk River Unit is split into 20
limited liability companies (LLC). He also requested assurance
with regard to [the $73 million] in a situation in which a small
company finds a good size oil field.
[HB 488 was held over]
3:53:41 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:53 p.m.
| Document Name | Date/Time | Subjects |
|---|