Legislature(2007 - 2008)HOUSE FINANCE 519
10/30/2007 09:00 AM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB2001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
October 30, 2007
9:06 a.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Anna Fairclough
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative David Guttenberg
MEMBERS ABSENT
Representative Scott Kawasaki
OTHER LEGISLATORS PRESENT
Representative Bob Buch
Representative Mike Chenault
Representative John Coghill
Representative Les Gara
Representative Kyle Johansen
Representative Mike Kelly
Senator Bert Stedman
COMMITTEE CALENDAR
HOUSE BILL NO. 2001
"An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to the issuance of
advisory bulletins and the disclosure of certain information
relating to the production tax and the sharing between agencies
of certain information relating to the production tax and to oil
and gas or gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas auditors
and their immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund; providing
for retroactive application of certain statutory and regulatory
provisions relating to the production tax on oil and gas and
conservation surcharges on oil; making conforming amendments;
and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB2001
SHORT TITLE: OIL & GAS TAX AMENDMENTS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
10/18/07 (H) READ THE FIRST TIME - REFERRALS
10/18/07 (H) O&G, RES, FIN
10/19/07 (H) O&G AT 1:30 PM HOUSE FINANCE 519
10/19/07 (H) Heard & Held
10/19/07 (H) MINUTE(O&G)
10/20/07 (H) O&G AT 12:00 AM HOUSE FINANCE 519
10/20/07 (H) Heard & Held
10/20/07 (H) MINUTE(O&G)
10/21/07 (H) O&G AT 1:00 PM HOUSE FINANCE 519
10/21/07 (H) Heard & Held
10/21/07 (H) MINUTE(O&G)
10/22/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/22/07 (H) Heard & Held
10/22/07 (H) MINUTE(O&G)
10/23/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/23/07 (H) Heard & Held
10/23/07 (H) MINUTE(O&G)
10/24/07 (H) O&G AT 9:00 AM HOUSE FINANCE 519
10/24/07 (H) Heard & Held
10/24/07 (H) MINUTE(O&G)
10/25/07 (H) O&G AT 10:00 AM HOUSE FINANCE 519
10/25/07 (H) Heard & Held
10/25/07 (H) MINUTE(O&G)
10/26/07 (H) O&G AT 10:00 AM HOUSE FINANCE 519
10/26/07 (H) Heard & Held
10/26/07 (H) MINUTE(O&G)
10/27/07 (H) O&G AT 2:00 PM HOUSE FINANCE 519
10/27/07 (H) Heard & Held
10/27/07 (H) MINUTE(O&G)
10/28/07 (H) O&G AT 2:00 PM HOUSE FINANCE 519
10/28/07 (H) Moved CSHB2001(O&G) Out of Committee
10/28/07 (H) MINUTE(O&G)
10/29/07 (H) O&G RPT CS(O&G) NT 4DP 1NR 2AM
10/29/07 (H) DP: SAMUELS, NEUMAN, RAMRAS, OLSON
10/29/07 (H) NR: DOOGAN
10/29/07 (H) AM: KAWASAKI, DAHLSTROM
10/29/07 (H) RES AT 1:00 PM HOUSE FINANCE 519
10/29/07 (H) Heard & Held
10/29/07 (H) MINUTE(RES)
10/30/07 (H) RES AT 9:00 AM HOUSE FINANCE 519
10/30/07 (H) RES AT 6:30 PM HOUSE FINANCE 519
WITNESS REGISTER
DAN E. DICKINSON, Consultant to
Legislative Budget and Audit Committee
Anchorage, Alaska
POSITION STATEMENT: Discussed progressivity in CSHB 2001(O&G).
PATRICK GALVIN, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Provided information regarding economic
issues related to tax change proposed in HB 2001.
RICH RUGGIERO
Gaffney, Cline & Associates (GCA)
Houston, Texas
POSITION STATEMENT: Presented models based on CSHB 2001(O&G)
and provided information on HB 2001.
BOB GEORGE
Gaffney, Cline & Associates (GCA)
Houston, Texas
POSITION STATEMENT: Presented models based on CSHB 2001(O&G)
and provided information on HB 2001.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 9:06:00 AM. Representatives
Fairclough, Edgmon, Guttenberg, Wilson, Roses, Seaton, Gatto,
and Johnson were present at the call to order. Other
legislators present were Buch, Chenault, Coghill, Gara,
Johansen, Kelly, and Stedman.
HB2001-OIL & GAS TAX AMENDMENTS
9:06:20 AM
CO-CHAIR GATTO announced that the only order of business would
be HOUSE BILL NO. 2001, "An Act relating to the production tax
on oil and gas and to conservation surcharges on oil; relating
to the issuance of advisory bulletins and the disclosure of
certain information relating to the production tax and the
sharing between agencies of certain information relating to the
production tax and to oil and gas or gas only leases; amending
the State Personnel Act to place in the exempt service certain
state oil and gas auditors and their immediate supervisors;
establishing an oil and gas tax credit fund and authorizing
payment from that fund; providing for retroactive application of
certain statutory and regulatory provisions relating to the
production tax on oil and gas and conservation surcharges on
oil; making conforming amendments; and providing for an
effective date." [Before the committee was CSHB 2001(O&G).]
9:07:55 AM
DAN E. DICKINSON, Consultant to Legislative Budget and Audit
Committee, informed the committee that he would be talking about
progressivity. He began by explaining that a tax is the total
of its base multiplied times the rate. Progressivity, he said,
is a little more complicated, because the rate recognizes how
much free cash flow is being generated on the [North] Slope. He
explained that rates "one" and "two" get multiplied together to
produce an effective rate, and that rate gets multiplied times
the base.
MR. DICKINSON directed attention to slide 2 of a PowerPoint
presentation, which offers information extracted from page 13,
lines 15-21, of CSHB 2001(O&G), which read as follows:
For each month for which this subsection applies, the
tax is equal to .225 percent of the monthly gross
value at the point of production of the taxable oil
and gas multiplied by the number that represents the
difference between (1) the quotient of the total
monthly gross value at the point of production of the
taxable oil and gas produced by the producer during
that month divided by the amount of taxable oil and
gas produced by the producer in BTU equivalent
barrels, and (2) $50.
MR. DICKINSON explained that slide 2 shows "the total cash being
thrown off on the North Slope, after deducting transportation
costs." It does not include the cost of "lifting" - the
upstream costs. That amount, he said, is multiplied by the
gross value expressed on a per barrel basis.
9:11:41 AM
CO-CHAIR GATTO asked if the term, "BTU equivalent barrels," is
used because some oil is better than other oils.
MR. DICKINSON said that term is used primarily because there are
gas and gas liquids that need to be measured on a barrel
equivalent basis, but secondarily, because each barrel will be a
barrel of oil despite quality differences.
9:12:58 AM
MR. DICKINSON, in response to a follow-up question from Co-Chair
Gatto, said the calculation for BTU equivalents is defined
clearly. He explained that the problem with the definition is,
historically, there was a relationship between a British Thermal
Unit (BTU) of gas and a BTU of oil - a 6:1 ratio. Currently, he
said, that is no longer the case. He explained, "If oil is
selling on the market at $90, and gas is selling at $6 or $7,
you're looking at more like a 12:1 ratio ...."
9:14:09 AM
MR. DICKINSON, in response to a request from Representative
Seaton, confirmed that gas liquids are really considered to be
oils, not gas. He returned to the example on slide 2 to point
out that the next step would be to subtract $50.00 from the
gross value. He explained how slide 3 shows the same
information in a more logical order. He stated, "The difference
between this and existing law and the governor's proposal [HB
2001, as introduced] is: you then take that 6.75 percent and
you multiply it times the gross value to come up with the
additional dollars in tax." He continued:
In both the governor's plan and current law, both the
progressivity and the base rate are all on net, so you
could literally take this number and add it to the
[0.00225] or add it to the 25 percent, and say,
"Here's my new tax rate." But you can't do that here
because the base is different.
But, I think if you put these in a different order, at
least to me, it's clearer. You use ... the difference
between $50 and the gross value to generate how much
progressivity you're going to look at. The statute
tells you for each dollar how much rate you get, and
so, you get the 6.75 and you multiply times the base
to come up with the answer.
9:17:30 AM
MR. DICKINSON, in response to a question from Representative
Seaton, said the phrase, "gross value to the point of
production," is defined in AS 43.55.150 as: "after subtracting
the actual cost of transportation." He confirmed that if
assuming an Alaska North Slope (ANS) market price of [$87 per
barrel], then according to the statutory section of .150, he
would subtract his transportation costs to get down to the
figure of [$80.00].
9:17:59 AM
REPRESENTATIVE GUTTENBERG noted, "On the term, 'actual costs of
transportation', you've got a different rate between [Federal
Energy Regulatory Commission (FERC)] and [Regulatory Commission
of Alaska (RCA)]." He asked how that rate is calculated.
MR. DICKINSON responded, "For [the Trans-Alaska Pipeline System
(TAPS)] it will be the rate that the barrels are shipped." He
explained that the RCA looks at the barrels that are going to be
delivered in the state, and the federal government regulates the
rates for the barrels that are going out of state. He
recollected that at one point approximately 3 percent was
delivered in state and about 97 percent would be calculated at
the FERC rate. He indicated that the Department of Revenue has
over 100 pages of regulations interpreting the words related to
"actual cost of transportation".
MR. DICKINSON directed attention to slide 4, which compares the
progressivity taxes the state would receive under PPT [the
petroleum production profits tax - current law], ACES [Alaska's
Clear and Equitable Share - HB 2001, as introduced], and HO&G
[House Special Committee on Oil and Gas substitute - CSHB
2001(O&G)]. He explained that he used in the example 244
million barrels, which is the number of taxable barrels that DOR
forecast for fiscal year 2008 (FY 08). The slide shows an ANS
market price of $87, minus a $7 cost of transportation, which
equals $80.00 gross value at the point of production (GVPP).
The lifting cost for PPT and ACES is $20, and when that amount
is subtracted from the GVPP, the total production tax value is
$60.00; for HO&G the number is still at $80. He said, "You then
multiply the barrels that are taxable times the per barrel, and
you come up with ... the tax base." Under the net plan - PPT
and ACES - the total base is $14,640, while under the gross plan
- HO&G - the total base is $19,520. Mr. Dickinson reviewed the
numbers on the slide that are factors of the rate, which he said
is "how much you're going to change for each dollar of
progressivity times the number of dollars that you're over your
starting point." The result shows that the progressivity factor
for PPT would be 5 percent, for ACES 6 percent, and for HO&G
6.75 percent. The resulting tax would be $732 million, $878
million, and $1.3 billion, respectively.
9:22:40 AM
REPRESENTATIVE SEATON made a comment comparing the bottom line
on tax. He observed that every company will pay differently
regarding progressivity, because the progressivity will be
calculated on each individual company-wide net.
MR. DICKINSON confirmed that is correct. He clarified, "This is
the ... progressivity tax piece before the base - 22.5 or 25
percent - is added in and before the application of credit. So,
this is just one tiny step out of the whole thing." He said
progressivity is not symmetrical.
9:24:16 AM
REPRESENTATIVE SEATON said, "But the relationship between 50 ANS
West Coast, and the 40 and 30, really is something that we're
just guessing at, because ... it's all individual companies, and
that can definitely change."
MR. DICKINSON said that is correct. He clarified that the
$40.00 and $30.00 starting rate [for PPT and ACES] are both free
cash flow generated after all costs have been generated, while
the $50.00 starting rate [under the HO&G plan] is a result of
finding out how much is at the well head before deducting costs
- "and then you subtract the 50."
9:25:19 AM
CO-CHAIR JOHNSON requested a chart be given to the committee
with actual numbers on it - actual costs.
MR. DICKINSON said he would do that. He returned to the
PowerPoint presentation, directing attention to slide 5. He
said .25 percent is multiplied times the monthly production tax
value of the taxable oil and gas, and that is multiplied by the
price index. The price index is defined as the number derived
from subtracting $40.00 from "the number that is equal to the
quotient of the total monthly production tax value of the
taxable oil and gas produced by the producer during that month
... divided by the total amount of the taxable oil and gas
produced by the [producer] during that month, in BTU equivalent
barrels".
9:27:00 AM
MR. DICKINSON turned to slide 6, which shows progressivity
studies from 10/28/07 and assumes $7 downstream and $20 upstream
costs. It shows how many dollars will be generated prior to
credits for the three aforementioned plans. He indicated that
there are many ways to look at [progressivity], and they all
have the same end result.
REPRESENTATIVE SEATON asked if PPT and ACES would perform better
than the HO&G plan if it were the PPT that was first
constructed.
MR. DICKINSON said perhaps, but he would have to check the
figures.
REPRESENTATIVE SEATON said that information would be helpful.
9:30:46 AM
MR. DICKINSON, in response to a question from Representative
Fairclough, noted that the subject of allowable lease
expenditure can be found in [AS 43.55.165], while adjustments to
those expenditures can be found in [AS 43.55.170]. In further
response to Representative Fairclough, Mr. Dickinson said that
under the net structure of the governor's proposal, everything
is on a cash basis, how it is financed does not matter, and
interest is not a deductible expense.
[Co-Chair Gatto passed the gavel over to Co-Chair Johnson.]
9:32:13 AM
REPRESENTATIVE FAIRCLOUGH clarified that she wants to know:
"Will we drive people to actually buy assets to create a
secondary market that can be resold, that they take the
allowable cost because of the slope of the progressivity?" She
added, "I'm just wondering how our language reacts to that."
MR. DICKINSON responded:
One of the things in [AS 43.55.170] is if people start
buying and selling assets, then they've got to
subtract the cost, and the whole thing carries
through. An attempt was made to not create incentives
for that kind of behavior. I mean, the whole reason
we're here is we believe taxes affect behavior, and
clearly at the margin you asked the tax department how
something is affected, but usually ... they're the
last people you ask ....
9:33:12 AM
REPRESENTATIVE SEATON said he is not seeing information
pertaining to reduction in liability to the state. In all three
of the aforementioned plans, he noted, the progressivity is
limited to 25 percent of the cost; however, ACES and PPT are
based on net. He asked Mr. Dickinson if he agrees with the
following scenario:
So, if a company invests a billion dollars, and we're
at the max on progressivity at 25 percent, and if we
had, let's say under ACES we're 25 percent. That
means ... that billion dollars is totally deductible,
and the state ends up kicking in $500 million, plus
the credits and everything else. And if you had 20
percent credit, you'd (indisc.) $200 million. ... So,
basically, we are up there in that respect, and yet,
with [the HO&G plan] what they have done is said,
"Progressivity - nondeductible," so our liability
would be the 25 percent under ACES, plus the ...
credits. So, we don't take on another 25 percent of
the total cost as liability.
MR. DICKINSON said Representative Seaton is correct in his
analysis and has identified "one of the shortcomings of the
gross." He continued:
The notion is that someone making those investments
receives less benefit if part of the tax is based on
gross. If it's based on net, ... they receive the
full benefit. ... The point is the state is trying to
encourage those investments; it's trying to set its
tax rate so that someone making those investments is
paying less [and] someone not making those investments
is paying more. And going to the gross essentially
ignores that piece of it.
9:35:36 AM
REPRESENTATIVE SEATON suggested that the problem lies in how
much risk the state should take. He offered an example.
MR. DICKINSON concurred. He said the state "take" number will
represent "how much of any dollar of investment the state is
underwriting ... if everything is on net."
9:36:46 AM
REPRESENTATIVE SEATON asked if it is advisable for the state to
take 79.5 percent - if at the high prices where progressivity
kicks in the state should assume the liability for "additional
deductibility."
MR. DICKINSON said he thinks the theory behind having a gross
that comes in above $50 is based on the idea that projects below
that are in the investment range. He continued:
You're going to make sure that you're not creating
poor incentives there. And then, as you go above, ...
a truly free cash flow's being thrown off; you're
taxing on a basis that doesn't recognize those earlier
investments. Clearly, you never want to be in a
position where a company, by making a dollar
investment is getting $1.10 in tax breaks. You don't
want to be in a position where you harvest the tax
system.
MR. DICKINSON said there will be debate on this issue and,
ultimately, the legislature will have to make a judgment call to
discern where "gold plating" would start.
9:38:58 AM
REPRESENTATIVE SEATON stated his concern is that at the net cap
of 25 percent, companies could dump in a large amount of capital
during a spike in prices, which would mean the state would be
paying a huge amount. Then, he said, prices ameliorate by the
time "the taxing comes down," which means taxing at the base
rate. That would mean [the state] would not "even get to
recover it on the other end." He offered further details. In
response to Mr. Dickinson, he added, "So, although we've dumped
in and had deductibility for the progressivity, we might well in
the end, with long-term projections of oil prices, ... not
receive any of the tax benefit from that at that time on that
production."
MR. DICKINSON said it may seem counter intuitive, but the more
the state is taking in a true net system, the more it is
underwriting the company's investments.
9:42:33 AM
REPRESENTATIVE SEATON clarified:
The problem is you've invested when progressivity was
maxed out at 25 percent, so you've written off and you
paid for an additional 25 percent of the cost. And
yet, when prices ameliorate to a long-term average,
you're only going to tax at the base rate, not at the
progressivity rate, because ... as you say, it's on an
instantaneous, cash-flow basis. The net present value
of that investment deduction that we allow is huge
compared to the future tax rate, if tax rates have
ameliorated.
REPRESENTATIVE SEATON said he would like Mr. Dickinson to
consider the risk potential that the state would have in that
kind of situation if the progressivity is on the net and offer
feedback to the committee.
MR. DICKINSON pointed out that other projects will balance out
the effects of price changes. One of the aspects of making the
capital investments deductible upfront is an accelerated
appreciation, he said.
9:44:00 AM
REPRESENTATIVE ROSES said he hopes what Representative Seaton is
describing will happen. He explained:
Because if they're investing enough money to prevent
having to pay the progressivity, if prices do fall,
they're going to be bringing more barrels on, so we're
going to be taxing at the 22.5 percent on a whole lot
more volume than we would have been if it had not been
for that investment as a result of trying to offset
that progressivity. Is that correct?
MR. DICKINSON said yes, theoretically.
9:44:47 AM
REPRESENTATIVE GUTTENBERG said so much of this issue of
progressivity and tax rate is about trying to second guess
behavior. He questioned who benefits from the HO&G plan -
whether it is the big investor in capital with high operating
costs or the producer with low operating costs.
MR. DICKINSON responded that the producer that would benefit
would be the one whose costs are lower than 20, while "the
person who would ... receive a benefit from it, who would rather
be under net, is someone whose costs are above 20." He said the
problem with the gross is that if there is a single gross rate,
the person making more investments will be relatively overtaxed,
while the person making fewer investments will be relatively
undertaxed. In response to Representative Guttenberg, he said
everyone is faced with this fact.
REPRESENTATIVE GUTTENBERG spoke of finding a balance between the
base tax rate and progressivity.
9:46:28 AM
REPRESENTATIVE WILSON asked whether it is possible that a
company would spend excessively on a borderline field, knowing
that there would be a deduction offered by the state.
MR. DICKINSON replied that ultimately the state would be
trusting that the professional geologists hired by the oil
companies would be trying to make a profit for those companies.
He said the state does not want a tax system that defeats the
goal of encouraging development of resources.
9:48:29 AM
REPRESENTATIVE ROSES observed that under the HO&G bill, there
would be "a gross on the front end," which is the royalty tax,
then the base tax, which is net, and then the progressivity
factor, "which is another gross."
MR. DICKINSON confirmed that is correct. He added:
But one of the things I do want to contrast it with
[is that] under the governor's proposal, there's sort
of a gross at the low dollar end and a gross at the
high dollar end. Under all these systems, yeah, the
12.5 percent comes off the top; the state's getting
their royalty anyway. So, I think it's a fair way of
characterizing it.
9:50:20 AM
REPRESENTATIVE FAIRCLOUGH recollected that the committee had
requested information from the administration the prior day and
she asked if there had been a response.
PATRICK GALVIN, Commissioner, Department of Revenue (DOR), said
he had not received a list of questions.
REPRESENTATIVE FAIRCLOUGH reviewed the questions that had been
asked, along with the names of those who had made the requests.
She explained that she has taken it upon herself to keep a list
of the queries as a means of keeping track of when they get
answered. She explained that answers have not always been
forthcoming from those who had been asked.
COMMISSIONER GALVIN shared his understanding that the department
has responded to all questions it has received.
9:53:27 AM
CO-CHAIR JOHNSON offered his understanding that it is incumbent
upon the testifier to provide any information requested by the
committee; however, he offered to provide a list for
Commissioner Galvin.
COMMISSIONER GALVIN said the department will take responsibility
for ensuring that it responds. He reiterated that he had not
been aware of any outstanding requests.
CO-CHAIR JOHNSON said he will have the House Special Committee
on Oil and Gas staff review requests by examining the minutes.
9:54:54 AM
REPRESENTATIVE GUTTENBERG asked whether the administration has
been communicating with bargaining units. He said he would
appreciate knowing what the results of any such communication
have been. He explained, "Because the auditor in that situation
is taking up a lot of our time, and people in the know tell me
this is a simple answer and it would solve all of our problems."
COMMISSIONER GALVIN indicated that there is a basic disagreement
between the Department of Administration and the auditors as to
whether a simple answer is possible. The bargaining unit says
it is more than willing to negotiate a reclassification into
existing agreements, while the administration says there is no
classification system in the agreements to reclassify.
9:57:00 AM
REPRESENTATIVE GUTTENBERG suggested that the Department of
Administration may think that the best place for bargaining to
happen is at the legislature's table, but that he does not
agree.
COMMISSIONER GALVIN said the issue was addressed in a Senate
Judiciary Standing Committee meeting, because the chair of the
committee had orchestrated the discussion. If the chair of the
House Resources Standing Committee wants to address the issue
"in that form," he said he would be happy to bring the
Department of Administration to the table.
REPRESENTATIVE GUTTENBERG explained that the issue is broad at
this point and he wants to see only the key points brought
before the legislature.
CO-CHAIR JOHNSON said he would like to proceed with the
presentation and come back to that question.
9:58:32 AM
COMMISSIONER GALVIN said he would provide information on the
proposed tax change and look at the impact the tax code would
have on investment. He said the department has recently
provided information to the legislature regarding the economic
challenges of new fields and the advantages of net based tax in
encouraging those investments while still bringing in revenue
for the state. He said today he will discuss those factors in
relation to the legacy field investment.
COMMISSIONER GALVIN related that the process is two-fold. First
is the reinvestment to get oil out of existing pools. One
investment decision is to go into "harvest mode" and allow the
decline curve to go down at a steep rate. Another decision
would be to put more money into the legacy fields and "bring
that decline rate up." He said one question is how to look at
the alternatives and evaluate the impact that the proposed tax
choice could have on them. Commissioner Galvin said he invited
a representative from Gaffney, Cline & Associates (GCA) to not
only look at the issue from a theoretical standpoint, but to
study the numbers that were provided last week by the [oil]
companies and determine how they reflect the actual decisions
that are being made now.
COMMISSIONER GALVIN said there will also be discussion regarding
the difference between net-based and gross-based progressivity
and how the two would impact new field investment within the
legacy fields and how the difference in those two systems can
impact the decision making and "potentially incentivize
additional investment in the new fields."
COMMISSIONER GALVIN mentioned Mr. Dickinson's slides and a chart
comparing ACES and the HO&G version. The combined total for
deductions for operating and capital expenditures were, a year
ago, predicted to be at $7 per barrel, and currently the number
is at $14 per barrel. He recollected that Mr. Dickinson had
chosen $20 per barrel as a "nice round number." Commissioner
Galvin stated that he thinks it is important that accurate
numbers are used to make a comparison.
10:03:14 AM
CO-CHAIR JOHNSON told Commissioner Galvin that the committee did
request that the real numbers be reported.
COMMISSIONER GALVIN recollected that Representative Seaton had
asked for an explanation related to the difference between the
gross-based and net-based [progressivity] and whether a field
with a smaller margin would still be paying the same amount
under the gross. He said the answer was lost in the
explanation, but it is: yes, the amount would not change. He
stated, "An operator who had a lower cost - and therefore a
higher margin - would ..., in comparison, be potentially ...
better off, as it were, under the gross, because that margin
isn't going to be recognized in that progressivity factor."
10:04:40 AM
CO-CHAIR JOHNSON asked, "Along those same lines, would that not
encourage that individual with lower costs to possibly invest
more?"
COMMISSIONER GALVIN answered no. He said more detail on that
issue would be forthcoming.
10:06:02 AM
COMMISSIONER GALVIN, in response to Representative Seaton, said:
When we came forward with the ACES proposal, we had
what I would refer to as the three primary components.
... You had the gross-based floor, you had the base-
net tax, and you had the progressivity. And within
that, what we recognized was the gross tax floor was
intended to provide protection for the state on the
low end, and that was coupled with the ... primary
base that provided the flexibility for balancing
investment opportunities and the state revenue.
When we got to progressivity, it was primarily to
accentuate the value of the net, and that it was to
encourage or to provide the state with a higher
revenue at the higher prices, while also, being based
upon the net, have the impact that it has a greater
... impact on the highly profitable fields as opposed
to the new, more challenged fields. And ... we were
trying to recognize, on the progressivity, the same
intent of having the impact felt by the fields that
basically could handle it better and still keep that
incentive in place.
What we recognize in the discussion that's taken place
since the session has begun - and I think the House CS
is an indication of that - is that within the
legislative body, there seems to be a greater focus on
that upside. ... A lot of the companies talk about
their investment decisions and how the floor had a
negative impact on that [and] has caused, I think, a
lot of the folks in the building to say, "Okay, let's
move away from worrying so much about capturing the
value for the state, protecting the state, on that low
end, and recognize the state's going to take on some
of the risk there. Let's look at the upside." And we
can appreciate that. ... I mean, that's your role as
the ones who set the tax policy. If that's the
direction you're going to go, then we highly encourage
you to make sure that that upside is truly captured in
an appropriate way. And so, we still very much
support the 25 percent base tax rate, and we believe
that if you're going to move away from the gross tax
floor - which we still believe has value to the state
- ... then make sure that you capture that upside in a
bigger way by trading that off.
And the discussion that you're going to have today is:
If you're going to capture the upside, know the impact
that you're going to have when you make the choice
between ... a gross-based progressivity and a net-
based one.
10:09:54 AM
RICH RUGGIERO, Gaffney, Cline & Associates (GCA), presented
models based on CSHB 2001(O&G). He explained that his firm is
not necessarily in the position to support the administration.
He told the committee that he would also talk about issues that
oil companies face. He said his firm would like to test the
recommendations that are coming out of both houses and from the
governor against "more real life scenarios," and to challenge
them with multiple moving parts. He talked about changes in oil
price and cost structure in the future. He said GCA will not be
giving specific numbers that show exactly how much money the
state would make, but it will show what it believes the industry
presented and is making. He remarked that nobody has shown the
legislature how "when the state take changes, how the oil
company take is changing." This is equally as important for the
legislature to look at, he said, in order to make an assessment
as to what is equitable and fair to share.
[Co-Chair Johnson returned the gavel to Co-Chair Gatto.]
10:14:09 AM
MR. RUGGIERO began his PowerPoint presentation. Slide 2 covers
the topics to be addressed: the risk of raising state revenue
share on existing producing reservoirs, goals for the fiscal
system, and a bird's-eye view of the structure of the fiscal
system. He highlighted slide 4, which asks, "Where is the
tipping point?" He said the state needs to figure out a balance
between earning revenue and keeping the companies interested in
continuing their work in the state.
10:19:14 AM
MR. RUGGIERO used the analogy of Rock, Paper, Scissors, wherein
rock is prospectivity and trumps scissors, which is the fiscal
system, scissors cuts paper, which is profit, and paper, which
buys reserves, covers rock, which he explained is developing
reserves. Another issue to keep in mind, he said, is that at
one point in time, companies felt that it was cheaper to buy
barrels of gas than to drill to find oil. Taxes, he said, are
just one part of the process of deciding whether or not to
invest in one project or area versus another.
MR. RUGGIERO said GCA will "roll all this together" in an
attempt to look at the information from the state's perspective.
He mentioned past presentations and the necessity to read
between the lines. He stated, "There is significant upside to
reduce the ... natural decline in your legacy reservoirs." He
said GCA will illustrate why it thinks the economics of
reinvestment in the legacy fields is "extremely profitable."
10:25:29 AM
MR. RUGGIERO, in response to a question from Co-Chair Gatto,
said the natural decline in the legacy fields is 15 percent a
year, but new technologies have come forth that allow companies
to sweep the reservoir and "pull" more of the oil that is in it.
In response to a follow-up question from Co-Chair Gatto, he
offered his understanding that if a field is allowed to "follow
its natural decline," it could be possible to return to that
field to drill, but the start-up cost would be tremendous and
the amount that would come out would not be substantial. He
concurred with Co-Chair Gatto that it is crucial that the state
prevent companies from packing up and going home due to decline.
10:28:21 AM
MR. RUGGIERO said slide 7 shows an excerpt from a letter from
the Alaska Oil and Gas Association (AOGA), which proffers that
the fiscal system chosen must recognize the current and near-
term importance of improving production from existing fields.
In the letter, Mr. Ruggiero said, AOGA noted that North Slope
field life could be extended up to another 25 years with
continued investment (slide 8). Slide 8 also shows that oil
companies achieved 70,000 barrels per day of additional
production from the 2006 drilling program in Prudhoe Bay.
MR. RUGGIERO referred to a chart on slide 9, which shows a five-
year running summary of the infill drilling program for BP
Exploration (Alaska) Inc. (BP). The summary concludes that at
the beginning of 2007, over half the production from the field
is a result of the sustaining investment or reinvestment in the
legacy fields. He said the chart could be interpreted as
showing either a declining return per dollar or a higher
production cost per barrel. He said GCA asked, "How can we
ground truth that? Is that sounding like that's about right?"
MR. RUGGIERO highlighted information on slide 10, which shows
that it is getting more expensive to develop a barrel of
reserves. He said BP has invested approximately $19 billion
overall to produce approximately 9.5 billion barrels; to date
the finding and development cost has been about $2. He said the
Prudhoe/Kuparuk upside shows that "moving forward," the cost to
find a barrel will increase to $3.5, then $7.7, then $12. The
slide also shows Pioneer's view of average finding and
development costs for the Lower 48 is $14, which is a blended
rate derived from the smallest to the largest operations. He
stated, "The good news about Prudhoe and Kuparuk is they don't
have to find it. They know it's there; they've got a model that
says it's there. It's about applying the technology, and it's
about using the outputs of their model to do the best that they
can to extract what they know to be there."
10:33:20 AM
MR. RUGGIERO, regarding slide 11, said a five-year drilling
program was formulated which shows that every dollar of drilling
spent will mean an expenditure of three times that amount. He
explained, "So, whatever my drilling cost is for the development
well, I've got to spend a like amount on injection wells and
injection facilities, and I've got to spend another like amount
on additional surface facilities in order to move that to
market." The slide shows a bar chart for the drilling capex for
the years 2002-2006, and a bar chart for the capex for the
drilling program which reflects the 300 percent for added
facilities and injection. Annual investments for the drilling
program are in the range of $700-$800 million a year. He said
that seems to be consistent with the amount of capital that has
been reported to have been spent in the area. He said GCA
digitized the data and produced a graph on slide 12, which shows
incremental production. He directed attention to the point on
the graph at which there was new oil in 2003 as a result of the
new program of 2002. The ensuing programs of 2003 and 2004
brought more oil. There is a significant jump in oil production
shown on the graph between 2005 and 2006, after which begins a
natural field decline of about 15 percent. He said GCA stressed
the production even further, to 25 percent, "to make sure that
we didn't put more barrels into the program than they had stated
were being developed with that drilling program." As shown on
slide 13, he noted that BP was in a net investing position from
2002-2004, came into a net positive cash position by 2005, and
by the end of 2007 will have earned roughly a 50 percent rate of
return on the drilling program.
MR. RUGGIERO moved to slide 14 which shows BP's net present
value (NPV) for Prudhoe Bay. He said the model reflects
royalty, production tax, property tax, and corporate tax - full-
cycle economics. By 2011, the NPV to the oil companies is over
$3.5 billion for the program.
10:38:38 AM
MR. RUGGIERO, in response to a question from Representative
Wilson, said the slides in his presentation are based on the
current tax, which is PPT.
REPRESENTATIVE ROSES reflected that businesses naturally
increase in profit over time, but in his business as a landlord,
no one had any sympathy for him during his first 15 years when
times were lean.
MR. RUGGIERO talked about the varying degrees of profit, from
breaking even to "obscene," and the need to make a decision as
to what is fair and when that changes to an obscene level of
profit.
10:41:35 AM
BOB GEORGE, Gaffney, Cline & Associates (GCA), said he thinks
the rate of return speaks to the issue of how quickly a company
gets its money back.
REPRESENTATIVE ROSES said his idea of what is obscene is
probably different from that of others because of his own
experience in weathering hard times.
10:42:52 AM
CO-CHAIR GATTO posited that if a company takes six years to get
$4 billion of investment back, but subsequently makes $4 billion
each year following, then that is a pretty good return.
MR. RUGGIERO questioned how it would be viewed if a landlord was
able to cover the cost of an apartment building or house from
the very beginning. He said GCA will be able to show that each
of the drilling programs has less than a one-year payout. The
NPV slide shows that the company has made three and one half
times above what it has invested.
REPRESENTATIVE ROSES remarked that if he had recouped his costs
in months instead of years, he would have owned many more
apartment complexes.
10:44:57 AM
CO-CHAIR JOHNSON asked what kind of production and pricing
assumptions are made in the models.
MR. RUGGIERO reviewed that GCA used a 25 percent decline rate.
He explained the reason for doing so was because GCA did not
want to "put more barrels into the economics than [had been]
developed with respect to each of those drilling programs."
When GCA used the natural decline, it came up with a figure of
40 percent more barrels being developed than [BP] said it
actually had developed. He said, "We didn't want to put up good
numbers and then have somebody come back and say, 'But you put
in too much oil, that's not fair.'" Regarding pricing
assumptions, he explained that the pricing in the models is the
actual price as realized for 2002 through 2006, for ANS North
Slope. Beyond 2006, a $70 price is taken out "flat."
10:47:40 AM
MR. RUGGIERO, in response to Representative Guttenberg, said GCA
ran the drilling program and the economics associated with it as
"incremental above whatever they had otherwise." The
incremental revenue does not suffer any fixed costs. He
continued with his presentation, and highlighted the information
on slide 15, entitled, "Robust drilling program." The slide
shows that the program remains profitable with a capex at 300
percent, and opex at 200 percent, a 25 percent discount rate,
$50 ANS, and high progressivity.
MR. RUGGIERO recognized that the legislature is attempting to
make some difficult decisions in a short period of time. He
said GCA's desire is to provide a model to the legislature,
allow it to ask "what if?" questions, and to have those "what
ifs" tested. He said it is possible to take out specific years
to look at individual years. He offered an example.
10:55:52 AM
MR. RUGGIERO, in response to Representative Roses, clarified
that his example is a "PPT/ACES-type, total net calculation,
other than the royalty, which is a gross tax." In response to
Representative Guttenberg, he clarified that in his example, he
took the progressivity from .2 to .5. He added that what he
should do for a fair comparison is take the cost back down to
100 percent. He said the progressivity lowered the NPV from
approximately $3.5 billion to $2.5 billion. He stated his
belief that the fact that there is a steep progressivity and
taxing happens when the margin or profits are high would not
influence the decision on whether or not to continue the
drilling program.
10:56:06 AM
REPRESENTATIVE WILSON asked if putting the opex and capex down
to zero in the model would "give us a little bit of an idea of
what the oil and gas one is."
MR. GEORGE responded, "If that's what you want in there, yes,
we'd need to check that that particular feature is in there,
because I don't think it is at the moment - if you're talking
about the House [Special Committee on] Oil and Gas gross."
REPRESENTATIVE WILSON said she would like to play with the
numbers for all the plans.
MR. RUGGIERO told Representative Wilson that this information
only looks at reported results of the infield drilling program.
He said he would highly recommend against taking results from
this example and "extrapolate it to Alaska." He said this model
can give insight into the financial health of "this type of
investment in this particular field."
10:58:27 AM
CO-CHAIR GATTO asked for clarification.
MR. RUGGIERO warned, "The minute you get into something that
looks like it's starting to fit, then the other ... 'what
abouts' come out: What about heavy oil? What about gas? What
about new development? ... We're going to try and address a
number of those as we go through today."
10:59:19 AM
REPRESENTATIVE SEATON asked Mr. Ruggiero if he would show the
tax rate under PPT and ACES before moving on to the rest of his
presentation.
MR. RUGGIERO answered:
I think ... we'd have to go back and forth to get the
exact numbers on there, but you see it made a slight
change in the overall NPV of the program to the oil
companies, which means that the inverse of that would
be a change to both the federal and the state take on
the other side. But, if we really want to go there,
what you have is ... at the 25 percent base and a .2
progressivity, you've got $11.1 billion as a state.
If I ..., in comparison, take this back down to 22.5
[and] take this back up to .25, the 11.1 is now [$10.9
billion]. Again, ... as you can see, this model
didn't carry it out to full abandonment, and there
would be additional time and monies that would come
into that, which you could do.
11:00:54 AM
MR. RUGGIERO talked about the need to get more oil out of
existing reservoirs in the near and medium term, and that the
heavy oil and gas would come over the longer term. He said GCA
built a generic model, seen on slide 18 entitled, "North Slope
Potential," which shows decline rates, produced barrels,
industrial investment, and abandonment rate. The latter, he
said, is 250,000 barrels per day. "We tried to match everything
up so it would fit," he said.
11:03:22 AM
MR. GEORGE, in response to a question from Co-Chair Gatto
regarding the abandonment rate, said during testimony in the
past, a number was used that was between 200,000 to 300,000. He
added, "There was also a mathematical issue that when you start
at today's production rate of plus or minus 750,000 a day and
decline those rates and achieve those produced barrels, you have
to abandon at something like 250,000 a day, or, if you abandon
at lower than that, you get more barrels than are sitting in
there. So, it seemed consistent with that number."
11:03:40 AM
MR. RUGGIERO turned to slide 19 entitled, "Production Drives
Revenue" under PPT. He said GCA ran the numbers at
approximately $80 per barrel (bbl) West Texas Intermediate (WTI)
or $70/bbl North Slope (NS). The figures on the slide look at
the oil company's "NPV10" and "NPV0" - the latter is
undiscounted and represents the total take. Also shown is how
much is made per barrel on an undiscounted basis. On the 15
percent decline, he reported, the NPV10, above investment and
opex, is in the range of $15-$20 billion. He said that is based
on the $5 billion and the 1.3 billion barrels associated with
it. Adding another $20 billion in to the capex and another 2.6
billion barrels of produced oil into the model, he said, the
NPV10 comes up into the $30-$40 billion dollar range. On an
undiscounted basis, he added, that is $55-$75 billion of cash
flow and $14-$19 dollars made per barrel. On a discounted
basis, he said, [the NPV10] is only $35-$45 billion, mainly
because most of the barrels produced incrementally in going to
the 3 percent decline from a 6 percent decline are "far out into
the future," thus the discounting is not that significant.
Where the difference really shows, he noted, is when the figures
do not take into account time value and do not discount the
numbers at all. In that scenario, he said, there is a 50
percent or more increase in the undiscounted NPV - going from
$90-$125 billion.
MR. RUGGIERO directed attention to slide 20 entitled, "North
Slope Abandonment". When GCA took the abandonment level down
incrementally from 250,000 barrels of oil per day, to 200,000,
to 150,000, to 100,000, the result showed that there are even
more reserves that can be developed. He stated his
understanding of outside testimony that there are limiting
factors, and one such factor is a mechanical limit on TAPS of
300,000 barrels a day. He said one possibility is to encourage
investment in and around existing reservoirs, because the
barrels that are developed are "more barrels down that maintain
the rate in the pipeline above the minimum level that they
have." The more additional production that is brought in and
the longer the pipeline runs, the lower the abandonment rate can
be run on the existing fields. He said additional investment -
even if the state picks up a portion of it - creates a "double
multiplier effect," and existing reservoirs may not have to be
abandoned as soon as they would be otherwise.
11:08:15 AM
MR. GEORGE clarified that the figure of [7.7 billion barrels
abandonment rate, shown under the 3 percent scenario on slide
20] does not include the heavy oil reservoirs. He said the
slide shows a simplified assumption, but it illustrates the
effect of maintaining the life of the slope in general.
11:09:23 AM
MR. RUGGIERO stated that under filing rules, oil companies must
show reasonable certainty regarding future spending in order to
book reserves. There is pressure within the market place to
declare proved reserves as soon as feasible, he noted. If a
company does book the reserves at the aforementioned 3 or 6
percent scenario, and it does not invest, that would require
significant "write-down." He continued:
To the extent that they haven't yet booked the
reserves between the natural decline of 15 and the 6
... or 3 percent decline, then ... besides the
economic upside of the value to be generated, there is
also significant upside in ... call it the shareholder
and the analyst community of them being able to book
those reserves and show their ability to replace that
which they are producing. So, there's other strong
drivers that get associated with this program that
will inform the oil companies in the decisions that
they're making.
11:11:18 AM
Mr. GEORGE, in response to a question from Representative
Wilson, explained that when a reserve is booked it means a
reserve is embedded and the overall company reserve number is
reported to the U.S. Securities and Exchange Commission (SEC).
Under SEC regulation, he related, there must be reasonable
certainty that the barrels will be produced in the future. Oil
companies will also carry other barrels called "reserves," but
not "proved reserves," that they expect will ultimately produce,
but which have not been booked for SEC purposes because some of
the tests related to rules for required recognition for those
barrels have not yet been met. He noted that ConocoPhillips
Alaska, Inc. breaks out Alaska as a separate reporting entity,
but most companies do not.
11:12:32 AM
REPRESENTATIVE WILSON asked, "So, Alaska can't necessarily know
if they're talking about our area or some area in the Gulf of
Mexico or something?"
MR. GEORGE confirmed that it is not possible to look at what is
called "the 10K" from SEC reporting and separate out the
information pertaining to Alaska. However, he said, many
countries require that reserves of individual field be reported
to the host government state and put into the public domain.
11:13:21 AM
REPRESENTATIVE SEATON asked whether there is any public source
which would list whether or not reserves had been booked at the
3 or 6 percent decline.
MR. GEORGE said he does not know. He proffered that in the case
of a small company with a small interest in a big field, it may
be possible to get at the information through a person who acts
as a conduit to that information.
11:14:13 AM
CO-CHAIR GATTO asked if it is permissible to book reserves in
politically unstable countries.
MR. GEORGE said Iran would be one such country and companies do
have involvement there; however, he said he does not know "what
they do." He said there are a number of tests that have to be
met.
11:15:20 AM
MR. GEORGE, in response to a question from Co-Chair Gatto
regarding Saudi Arabia, said none of the companies would be
booking reserves there, because "they don't have oil interests."
He said if a company thinks there is a reasonable likelihood
that in a couple of years it would not be producing, then the
company would have to say, "It doesn't meet a reasonable
certainty test." In response to a question from Co-Chair Gatto
regarding terrorism, Mr. George said, "If you thought you were
going to have to suspend operations in the country and go away,
and it was uncertain - yes, you would have a 'write-down.' And
you do see write-downs occurring for a variety of reasons each
year."
MR. RUGGIERO announced that the first portion of the PowerPoint
presentation was complete.
11:17:44 AM
CO-CHAIR JOHNSON noted that the models done by GCA were done
using PPT, and he asked if GCA would be providing models on the
HO&G and ACES plans.
MR. RUGGIERO said the slides related to the Prudhoe Bay drilling
program were set on the PPT rates; however, any variation of a
pure net system with a base rate and progressivity factor can be
run on the same model. The next portion of the PowerPoint
presentation, he related, would show the impact of additional
investment within aggregated units and what the impacts of high-
and low-margin fields would be. That would also be done on a
net basis, he added.
11:19:25 AM
CO-CHAIR JOHNSON asked if it would be possible to "have access
to that model" in order work the numbers independently.
MR. GEORGE responded, "I'm sure something can be arranged again
with the global health warnings." That said, he indicated that
still to come is general information related to the gross
progressivity structure of the HO&G plan.
The committee took an at-ease from 11:20 a.m. to 12:20 p.m.
12:11:23 PM
MR. RUGGIERO returned to the GCA PowerPoint presentation. He
offered a recap of the earlier portion. He recalled that
Representative Wilson had asked a question regarding wells that
are drilled laterally, and she had not yet received a full
answer. He explained that the vertical hole - called the
"mother bore" - costs approximately $5 million, while three
"laterals" off of it each cost $1 million. Each lateral is the
equivalent of an existing vertical well. Since more producing
wells from that mother bore is the result, the cost actually
goes down.
12:13:31 PM
REPRESENTATIVE FAIRCLOUGH asked for confirmation that an oil
company would not be allowed to deduct increased costs for
drilling lateral wells - that those costs are not being
duplicated in expenses being recorded against capital credits.
MR. RUGGIERO said he does not know the answer.
MR. DICKINSON stated that there is a specific stipulation that a
cost can receive a credit only once, but what ever the
percentage of the credit, it is applied to the total project.
REPRESENTATIVE GUTTENBERG stated that there are major economic
advantages to lateral drilling, because the infrastructure is
already in place. He added, "The capex is not there, so, they
get a little credit for a well, and it's gravy."
12:17:31 PM
MR. RUGGIERO continued his presentation. He stated that GCA did
not come to Alaska with a preconceived notion of what Alaska
should do. He directed attention to slide 23, entitled, "Goals
for Fiscal Design," which, based on hearings, discussions, and
feedback shows that the legislature would like to see fields
with larger profitability pay more taxes, while encouraging
reinvestment in producing assets and investment in new
developments - both conventional and unconventional, such as
heavy oil.
12:20:45 PM
MR. RUGGIERO, in response to a question from Co-Chair Gatto,
said technology should not be looked upon as a means to rescue
Alaska, but as a way to help the state "extract in a profitable
fashion the resources that it has in the ground much more
effectively than it could without that technology."
12:21:20 PM
CO-CHAIR GATTO observed that extracting sandy, heavy oil with
buckets rather than a pipe in the ground will be difficult. He
said that he is hopeful that the predictions of getting to the
heavy oil in the future are accurate; however, he said he is not
"putting a big investment in it."
MR. RUGGIERO responded:
The one thing I've always liked is the industry has
risen to the occasion .... Every time there's many
who believe we're running out of oil and we're running
out of energy, along does come the innovation that is
the result of a lot of money and time spent by the oil
companies and the associate service companies to just
improve the way business is done. So, I'm not sure
we're quite running out.
MR. RUGGIERO said regardless of whether more oil can be
extracted from existing fields, it is important to encourage
investment in existing units. He spoke of volumes that are
decreasing in TAPS. He said the heavy oils will need to be
blended with lighter oil in order to help produce it. The
longer the light oil reservoirs can be kept alive, the more
likely it will be that the heavy oil reservoirs will be
developed and the better the longevity will be in those
reservoirs.
MR. RUGGIERO, returning to slide 23, noted that GCA perceived
that another wish of the legislature is to encourage new
investment outside of the legacy units, which can also encourage
"new players" to get involved. Furthermore, the legislature has
indicated that it would like durability and stability. The
challenge regarding durability, he said, is that no one believes
anything related to oil will stay the same in the future.
12:26:00 PM
REPRESENTATIVE GUTTENBERG, regarding encouraging investment in
existing units, noted that there are other restrictions in play
outside existing fields, which are: facilities, access, and
tariffs. He asked if GCA has looked at and addressed those
issues or has just done economic models for costs.
MR. RUGGIERO replied that GCA has specifically not studied nor
offered any recommendations on facilities in Alaska. Based on
other jurisdictions in which GCA has worked, he said, in modern
times the governments have played a much more active role in
ensuring that the right commercial transaction takes place
between the players in order to get access to infrastructure.
He stated that access to existing facilities should be
considered by the legislature. He explained, "Because if it
becomes too costly, then the new players will put in new
facilities, and, depending on the tax structure that you have,
you as the State of Alaska will be paying a portion of those new
facilities."
12:28:00 PM
REPRESENTATIVE SEATON asked where windfall profits shows in the
list on slide 23.
MR. RUGGIERO offered his understanding that windfall profits
would be captured under the first goal: "Fields with larger
profitability should by paying more taxes."
MR. RUGGIERO noted that the final goal is that the legislature
would build upon prior tax dialogue; it would use the
information it gained through its work on PPT, while still
accomplishing the aforementioned goals.
12:29:42 PM
MR. RUGGIERO highlighted information from slide 24, regarding
encouraging new investment. He stated that Alaska, through PPT,
has some aspects that make it one of the best regimes for new or
existing players to explore. The PPT offers investment credit.
To the extent that a new entrant has no existing tax base, that
entrant is able, in the year following, to turn whatever its
investments were into net operating loss credits, and then
receive cash back on that. The PPT allows a lower tax rate to
be paid when a company's margin is lower. Mr. Ruggiero talked
about higher costs due to being distant from infrastructure,
dealing with heavy oil, or because there is more cost to get gas
out of the ground versus oil. He said the question to ask is
whether the base rate is low enough and whether the starting
rate is at the right level to attract the desired investment.
He pointed out that although the extraction of heavy oil and gas
are "a few years out," those making the decision on whether or
not to invest are running their models now. The answers to the
questions are not simple, he said, but overall, in encouraging
new investment, GCA says Alaska scores high.
12:32:56 PM
MR. RUGGIERO referred to slide 25 and said there are two pieces
to the fiscal design challenge: the take and the give back.
The take is what either the government or the oil companies take
from existing operations. Today, production revenues and
profits are being taxed, based on investments 5 to 20 years ago,
while tax credits are being given for investments today which
may not realize any production and/or revenue for another three
or four years. The challenge, he said, is to figure out how to
get a system correct that taxes both the past and future at the
same time. He said price, production, and cost are "moving
parts." He explained:
When you start getting into systems where we start
talking about unit value, the unit value can change,
even if costs are flat, because the production rate in
a given area goes up or down, so the unit cost goes up
or down. And you can have price moving but cost and
production not, and that, indeed, impacts the margin,
and there should be a commensurate reaction with that
impact. Best example is: ... Over the last three or
four years, we've seen oil go from $25-$30 to $90, and
yes, we've seen 100 percent cost inflation. ... You
can have 200 percent cost inflation at that level, but
when you got prices that are at $90 in the market, it
seems to mask that a bit. ... The real challenge is
how to balance all that out.
MR. RUGGIERO, regarding giving back, said the question for the
state is how much it should give back to encourage reinvestment
in the legacy units. As shown on slide 26, Mr. Ruggiero
emphasized that "price does not equal margin." He said the two
need to be separated. Any net system, such as PPT and ACES,
works off of margin, whereas the gross tax, as proposed by HO&G
works off of price.
12:36:42 PM
MR. RUGGIERO directed attention to slide 27, regarding price
versus margin. The slide shows a "graduated bar that goes from
zero to 70," which is the market price of the product. The next
bar over has a $10 cost added on, so reading across from the
first bar's $50 price line to the second bar is the equivalent
of a $40 margin, he said. That same line moving over to the
next bar is a $30 margin when the cost is at $20. Eventually,
he noted, the bar to the far right shows a cost of $50 a barrel
to produce, which means there is a zero margin. He explained
that this wide variance in margin can occur for several reasons.
First, it can happen over time through natural decline; "as the
barrels go down, the unit cost per barrel goes up." Eventually,
over time, what might be perceived as a $40 windfall profit
today, can equal no profit in a few year's time, he said. He
continued:
Another way to view this is: these could be
representative of different developments. What you
might have on the second ladder with the $10 barrel
cost are existing reservoirs. What you have at the
$20 barrel cost is new light oil development. And
what you have at the $50 a barrel cost is heavy oil
and gas development. ... At a given price, any
individual operator, any individual project, can be at
different points on the margin curve.
12:39:08 PM
CO-CHAIR JOHNSON said he would like to see illustrated the
importance of keeping production up and the investment of doing
it.
MR. RUGGIERO said that is what is intended by the notation of
"Time - Natural Decline" in the lower left corner of slide 27.
He stated, "Even if all other things remain equal, just the
passage of time and natural decline of fields will cause that
margin to decrease at a given price. And you're right, you need
to keep the production up so that we can keep the margin up and
get the cost covered."
MR. RUGGIERO directed attention to slide 28, which starts with
"margin" and compares it to "price." In the illustration, the
margin was kept at $40. Legacy fields make $40 pre-tax profit
at a $60 price. A new development doesn't hit that $40 margin
until the market price is $70 a barrel. A heavy oil development
hits the $40 margin only when the price is $80. Finally, gas
does not hit the $40 margin until it reaches $100 a barrel.
12:42:25 PM
MR. RUGGIERO turned to slide 29, entitled, "Pulled Into a single
mechanism." The left side of the slide shows the base tax rate,
while the right side shows the maximum tax rate. The line for
PPT shows that the maximum rate would be between $150 and $200 a
barrel. ACES, he noted, would start at a slightly higher rate,
but with a lower progressivity factor, the maximum rate would be
$180 to $280 a barrel. [The green line on the slide] shows a
much more progressive system, he said. It would start out at a
base rate, and it has a varying progressivity that gets it to
the maximum rate sooner, but "tops out as it goes across."
MR. RUGGIERO listed goals: to encourage investment in new
fields; to encourage investment in the higher cost per barrel
fields, such as heavy oil fields; to encourage the development
of the gas business. All those factors, he said, keep the
petroleum business in Alaska going. Price in the market can be
high, but when margins are low for any number of factors, the
tax paid on the margin must be reasonable in order to attract
investors. He said, "A highly progressive system basically says
if you're taking very high margins, and you're not reinvesting
in the state, then there's going to be a very high tax rate.
You're going to get to whatever you want to call your maximum
rate faster."
12:45:54 PM
CO-CHAIR JOHNSON asked whether Mr. Ruggiero is presenting a new
concept that is supported by the administration or is simply
throwing ideas out. If the former, he said he would like to see
confirmation from the commissioner that the concept is
supported.
MR. RUGGIERO, in response to Co-Chair Gatto, said the green line
on the slide is "based on everything we've seen" - it is
formulated by using the goals that GCA has heard the State of
Alaska list.
CO-CHAIR GATTO observed that slide 29 has no numbers along its
coordinates; therefore, it illustrates a "projection, not a
plan."
12:48:16 PM
REPRESENTATIVE ROSES observed that [the green line] starts out
at a lower base tax rate, with incremental increases in the
progressivity percentage, and reaches a maximum rate that is
higher than that of the PPT.
MR. RUGGIERO said that is a fair assessment.
12:49:13 PM
MR. RUGGIERO, in response to Co-Chair Gatto, explained that the
orange oval encapsulating the peak of the green line's rise to
its maximum rate, and labeled "existing," indicates that the
existing fields in production are at a high margin today. He
said:
And so, this would be achieving goal number one on the
list of goals, which is: when there is a
significantly high margin, ... that's when the state's
rate should be at its highest.
... We do believe that somewhere before $150 to $250
oil, and somewhere before a $140 margin, or a $125
margin, the state should be maxing out on what it had
before as its highest rate on its production tax.
12:50:11 PM
REPRESENTATIVE ROSES said:
So then, in those incremental increases in the
progressivity, based on what you're talking about with
a margin, then that would necessitate that that
progressivity be built on net in order to get to that
margin, as opposed to gross, which is on the price.
MR. RUGGIERO answered that's exactly correct.
12:50:46 PM
REPRESENTATIVE FAIRCLOUGH said a constituent heard
Representative Doogan on the radio saying that the system is
broken. She said Representative Doogan has a list of ten
assumptions that need to be made in order to believe in a net
profit tax. She offered her understanding that there is no
certainty in cost, production, or price per barrel of oil.
Because of those variables, she said Representative Doogan is
pointing to different criteria in the models that are being
presented to the committee that are broken. She said she does
not believe things are broken, but that there is a daily
variable in price because of many costs. She stated, And every
day, as [the Department of] Revenue tries to project, they are
basing all of their projections on differences."
12:53:37 PM
CO-CHAIR GATTO said point four of Representative Doogan's ten
points is, "You know how each of the oil companies operating in
Alaska makes its investment decisions." Co-Chair Gatto said the
industry makes that decision based on numbers. Some companies
have been willing to share those numbers with the legislature,
and some have refused. Estimates are made when numbers are not
revealed, and hopefully those estimates are high.
REPRESENTATIVE SEATON said, "That representation is not far off
from what the committee passed out as saying that we wanted to
get the state's equal share through the production tax at about
$110 dollars."
12:56:54 PM
REPRESENTATIVE WILSON asked Mr. Ruggiero if he could superimpose
the HO&G plan onto slide 29 to be able to make comparisons.
MR. RUGGIERO responded that in order to do that he would need to
account for all the variables and add a line for gross.
Depending on the variables picked, he said, any net system only
crosses a gross system at one point; other than that they
diverge from each other. He explained, "That's why I started
with 'price does not equal margin.'" The gross system starts
with a price and ignores margin. Superimposing that plan on the
slide would be "a misrepresentation of true comparison between
the regimes." In response to a follow-up question from
Representative Wilson, he clarified:
This is based on margin, which is a surrogate for
profit. The House suggestion is a tax based on the
price in the market, regardless of the margin or the
profit being made. It's just based on the price.
12:59:32 PM
CO-CHAIR JOHNSON asked again whether the green line plan is one
that is supported by the administration.
COMMISSIONER GALVIN clarified that the numbers in the
presentation are not indicative of a particular proposal, nor
are they a reflection of a starting rate, a certain
progressivity, or a certain cap rate. The presenters' purpose
primarily is to discuss progressivity based on margin versus
price. The way that the presentation depicts this is to show
that any starting point can be chosen, progressivity can be
chosen at a certain rate, and a cap can be chosen at a certain
point. He stated:
If you're going to be talking about a tax program that
does not have a floor, then we believe it would be
appropriate to then have a steeper progressivity to
get it more on the high side. We still believe that
the starting rate should be 25 percent; that's the
rate that we believe is appropriate as a starting rate
across all the fields. And that's the numbers that we
presented last week, in terms of the impact on the ...
various fields that we were looking at. ... And those
were based upon stress prices and low prices and
investment decision making. When you start looking at
revenue generation, and you're going to drop off the
floor, then we think that you need to be talking about
a higher progressivity. And that's why they're
talking here about if you're going to go for that,
then we agree with the concept that it should be based
upon the margin, as opposed to the gross, in order to
provide the disparity between or appropriately
allocate it between the high margin fields and the low
margin fields.
1:02:13 PM
CO-CHAIR JOHNSON asked whether the administration would be
supportive of a plan wherein progressivity is based upon margin,
but with a lower tax rate.
COMMISSIONER GALVIN replied that the administration believes
that the base rate should be 25 percent. In response to a
follow-up question from Co-Chair Johnson, he said even without a
floor, the prices can drop low; therefore the base rate that is
used at the beginning will remain the base rate. He reiterated
that the base rate of 25 percent is "the appropriate place to
start," regardless of progressivity.
1:04:04 PM
CO-CHAIR JOHNSON asked whether Commissioner Galvin is at odds
with the consultants who "brought this forward."
COMMISSIONER GALVIN said he does not think the consultants are
recommending a particular rate, but rather have provided the
information for demonstration purposes.
1:04:44 PM
CO-CHAIR JOHNSON said, "So, the fact that it starts off lower is
just (indisc. -- overlapping voices)."
COMMISSION GALVIN said, "They're just showing that you can do
any of these variables. ... They could flip this around so that
the base rate started in between those two lines, and so, they
were just picking one to show that there's a choice to be made
at each one of these different places."
CO-CHAIR JOHNSON said that was not the answer he was hoping for.
1:04:52 PM
REPRESENTATIVE GUTTENBERG said theoretical models predict
behavior. He referred to the aforementioned topic of tipping
points. He said the governor realizes that the state does not
have the full history of behavior and predictions of the
industry from the past 30 years. Without that information, the
models available are not as accurate. Regarding the green line
on slide 27, he said, "If you change the behavior by starting
off with a lower base rate ... and give credits at that lower
base rate for return on investment, then you're going to have a
steeper curve, and you should be taking a more progressive tax
rate when it gets up there." In response to Co-Chair Johnson's
comment, he said, "I think that's all we're seeing, giving us
more tools to make decisions, because that's all we have is
theory."
COMMISSIONER GALVIN asked the committee to recognize that it is
still only part of the way through the presentation; there is
still more information to come that addresses the behavioral
aspects and "how this is intended to fall into a full package."
1:07:34 PM
REPRESENTATIVE ROSES recalled that variables and factors that
can change so rapidly are one of the reasons that [Mr. Ruggiero]
thinks margin is a better approach. He stated, "But in terms of
forecasting, you're not any better off, because ... the
difference between the price and the cost is what gives you
margin."
MR. RUGGIERO said that is correct; in the calculation of the net
process, it is the unit cost or cost per barrel relative to the
market price.
1:08:10 PM
REPRESENTATIVE ROSES concluded that the margin approach would
not be more accurate than the other approach.
MR. RUGGIERO replied:
This doesn't increase accuracy, but I think
Representative Guttenberg hit the nail on the head
when he said you haven't in the past had the data.
That if you had the data that other governments have
for their oil and gas operation, regardless of whether
you're gross or net, you would be able to be more
accurate in your predictions, because you would have
known history upon which to build, to trend, to find
relationships to then be able to better predict the
future and to understand what outside factors
influence those costs or those barrels or those
dollars in the market, and be able to see that coming
- to be able to more timely adjust forecasts and
predictions. But without the data - yes, you're
shooting a bit in the dark.
1:09:23 PM
REPRESENTATIVE ROSES, regarding the prior comment that the
system is broken, used an analogy of an old truck to illustrate
that the PPT is not broken but needs work; it is not efficient
but can be tuned. He said he sees the goal as to improve what
the state has, not to fix something that is broken.
CO-CHAIR GATTO said although there is no data going back 30
years, there are annual reports submitted to the SEC. He quoted
one company in a report as referring to "our enormously
profitable Alaskan operation." He said he knows that whatever
the average is that companies make worldwide, that average is
higher in Alaska. He said the system is not broken without
data; the state needs to discover, as best it can, "the most
reasonable input we have and that we can make."
1:12:33 PM
REPRESENTATIVE SEATON said there have been comments made that
progressivity based on the gross could not be plotted on "this"
diagram; however, he noted that Mr. Dickinson had plotted
progressivity against net. He asked if it would be easy to plot
keying the progressivity to a $30 or $40 margin, taxed on the
gross, to escape the liability of the state "for adding another
25 percent into the ... cost on those higher ends," rather than
keying the gross progressivity to the trigger point at "WTI 50."
MR. RUGGIERO responded:
If you actually triggered a gross tax to a net profit,
you just put a dress on the guy. I mean, it's still a
net profit, because ... that's what it becomes. And
... that's all this is suggesting. Any of the lines
that you pick here is, in your words, a gross tax on a
net profit. Once you calculate that net, you have a
net tax system. And now, to the plot that [Mr.
Dickinson] put forward, if you notice, it's at a
single price; it's at a single production level; it's
at a single cost structure. And his assumption in
there: you may have one field that's $20 a barrel;
you may have eight different fields that average $20 a
barrel. But the decisions you're going to make if
you've got eight fields, where one of them's averaging
a cost of five [and] another one's averaging a cost of
$40 - that gross versus that net's going to have an
impact on how you operate and on your thinking about
whether or not you're going to do any further
investment in that $40 versus the $5 field on cost.
So, when I said, you've got ... [to account for all
the variables], that's exactly what [Mr. Dickinson]
did, is he fixed all those variables and gave you
representation at one point in time. And as you saw:
net crossed gross once.
1:15:17 PM
REPRESENTATIVE SEATON said he wants to ensure that the problem
of increasing the state's liability is addressed. He said
taking more money on the high end and doubling the state's risk
on the high end are two different issues. He said he would like
Mr. Ruggiero to address that topic as he continues his
presentation.
REPRESENTATIVE ROSES asked if the marginal approach necessitates
that each well be analyzed independently as opposed the average
that is proposed in [HB 2001].
MR. RUGGIERO replied that Mr. George will address the issue in
the ensuing portion of the presentation.
1:17:11 PM
MR. GEORGE offered his presentation, which begins with slide 30,
"The Net Tax Story." He asked the committee to bear in mind
that the numbers used in the slides are illustrative.
COMMISSIONER GALVIN clarified that GCA had to choose one net
progressivity to use as an example, and it decided to use the
progressivity that exists in current law, as opposed to the one
that is in "one version of a bill versus another." He
reemphasized that the model used is not the administration's new
proposal.
1:20:43 PM
MR. GEORGE said he has heard PPT spoken of as a tax on net
profits. He said it is "sort of that." The PPT plan contains a
progressivity feature that increases tax rate and profitability
of a barrel, but it is ring fenced so that that profit per
barrel that is the basis of calculating the rate is reflective
of a company's entire portfolio. He added, "This is not ring
fenced on a field by field basis for calculation, but it has
impacts on a field by field basis."
MR. GEORGE, regarding slide [33], stated:
I've kind of started out with ... the end game, and
then try and work back to the beginning, as to how we
might get there with an example, and what actually
might sit inside that ... end game. And ... in this
particular [example] I said okay, let's start with
West Coast price of $80 a barrel. And within that
entire ... portfolio, there is $18 of what everyone's
calling costs, and I'll talk a little bit more as we
go forward as to what ... really is that number,
although it is referred to as cost by everybody. And
then we have a ... profit per barrel ... of $52.
And if you take that $52, and you go to the PPT
structure that's in there, you would end up with a
25.5 percent PPT rate that would be applicable to that
profit in there, ... and that will vary up and down,
along the blue line, until $40 a barrel of margin, and
then up the green line as that ... profitability
increases. And I haven't taken it out to the ultimate
maximum that ... it could reach out there.
... One other feature that perhaps comes out of that
single point formulation is that it implies that this
net system taxes all fields at a single rate - at
whatever it happens to be .... I would say it
doesn't, and I think you certainly can show that it
actually taxes different fields or reservoirs or
reservoirs based on their individual profitability,
except you don't quite see it because of the way that
... it's put together.
MR. GEORGE said his presentation attempts to show the gradual
building up of a portfolio within a company, while tying that
into the decision-making process for investments, which he said
is incremental each time. He began with a portfolio of one
investment [shown on slide 36] of $200,000, with a net margin of
$65 dollars a barrel. In that scenario, the PPT rate would be
28.4 percent. Mr. George added another field to the portfolio
[shown on slide 37], which added 50,000 barrels a day. The new
field has a net margin of $61, but the two added together, with
their differing levels of production, equal an average net
margin of $64.20. The PPT rate on these fields combined would
be 28.2 percent.
1:26:21 PM
MR. GEORGE pointed out that [as shown on Slide 38] the 28.2
percent is not being paid on each field, because while paying
the original 28.4 percent on the existing reservoirs, a lower
rate of 27.5 percent is being paid on the new investment. Mr.
George skipped over to an illustration of a portfolio with four
investment decisions [shown on slide 43]. He noted that the net
margins decrease with each investment. He explained that may
have happened because it is physically more expensive to produce
or because the company gets less per unit for heavier oil. The
progressivity feature, he relayed, actually lowers the marginal
rate for each more challenged project [shown on slide 44].
While the company may be paying a blended rate of 26.9 percent,
it is still paying the 28.4 percent on its existing investment,
an effective rate of 27.4 on its first incremental investment,
24.2 percent on the third investment, and - on the fourth and
most challenged investment in the portfolio - is paying 18.9
percent, which is slightly below the minimum rate. He
clarified:
As we go forward in time and we start adding in the
more challenged investment opportunities, so the
average rate will go down. But really I'm still
paying the high rate on the more profitable parts, but
an even lower rate on the newer parts.
MR. GEORGE said when companies make investment decisions they do
not just run a consolidated cash flow. They will question what
would happen if they do nothing and what would happen if the
investment decision is made. He stressed the importance of
looking at "the difference in outcome" rather than the "stand
alone calculation." He said that is imperative when dealing
with a progressive tax that ring fences everything together.
1:31:41 PM
CO-CHAIR GATTO said this scenario sounds similar to federal
income taxes, where a person may question whether it is
worthwhile earning more and having his/her taxes increase at a
marginal rate.
MR. GEORGE agreed that the situation is similar, in terms of the
marginal rate. He added:
I think that the illustration is that with the
expectation here that every investment you make going
forward is going to be slightly tougher, at least in
the cost side - and of course we don't know exactly
how price will develop as well, and so how the margin
will go - but at least an expectation that it'll get
tougher. As you make those investment decisions in
the tougher ones, actually your marginal rate is
lowered, not increased.
1:32:27 PM
MR. GEORGE continued to the impact of capital investment and
covered information on several slides. He said PPT is based not
on profit per barrel, but on net cash flow per barrel after
capital investment. He continued:
You have a portfolio ..., and before you make any
capital investment decisions, you know you're going to
be ... paying so much tax in total, based on that
portfolio. You then have a choice: Okay, now I'm
going to make some capital investment decisions, and
that's going to alter things, and how will it alter
them? And because of the way this ... tax works, at
the first level you have an operating margin ..., and
then you add something called costs, but it's actually
a reinvestment rate; it's an amount of capital based
on your production today.
... I said we had a profit per barrel of $52 after ...
$10 of transportation and quality adjustments and $18
dollars of costs in there. And, ... based on the
previous slides, the ... blended tax rate payable was
going to be a little shy of 27 percent - not the 25.5
percent I had in there - because I had left at that
point something out of the ... story, and I hadn't got
to this point yet. But if ... I did nothing more with
my portfolio at the beginning of a year, I made no
capital investments, then 26.9 percent is the rate
that I would pay on there. So, I said, "Okay, let me
make a decision that I'm going to spend this year $800
million." And ... it's that decision to spend $800
million that will drop my rate to 25.5 percent, and
the question is: How do we get to that?
Well, let's go back again to the portfolio that I have
in there. ... In this particular example is producing
350,000 barrels a day: 200,000 out of one ... set of
investments and reservoirs, and 50,000 each out of ...
separate reservoir investments .... And I'm looking
at spending $800 million on ... adding A, B, and C,
and whatever else to the right, here. But that
represents $6.26 per barrel of my existing portfolio -
not [what] I'm going to get out in the future - but
$6.26 against my production today. So, what happens
here is that that $6.26 goes into that $18 that is
deducted in calculating my ... 25.5 percent blended
rate .... I had $11 of ... lifting costs and
operating costs out in the field, but for the purposes
of tax, I'm allowed to deduct a further $6.26, and
they're all lumped together and called costs. And
together would tell me my costs ... for the purposes
of the definition of the tax: $18, and that's how I
get my rate.
1:36:55 PM
MR. GEORGE continued:
By reducing my rate now, across the portfolio that
averages 26.9 percent, but is actually ... 28.4
[percent] on my existing reservoirs, down to ... 18.9
percent on my ... most marginal investments in there.
By adding that additional ... $6.26 of capital, I've
reduced the rate across the portfolio to 25.5 percent.
Put another way: I have spent $800 million in
capital; I've reduced my tax bill and got a sum of
money back. That sum of money, in this particular
example, is 38.6 percent of the $800 million I spent.
That 38.6 will vary; it ... depends on what my blend
of my portfolio is and how much I'm spending. But in
this particular example, it's 38.6 percent, and that's
before investment credits in this case.
CO-CHAIR GATTO asked whether Mr. George is speaking only of
state tax in this example, not property or federal tax.
1:38:23 PM
MR. GEORGE answered that's correct. In response to
Representative Seaton, he said:
Prior to making this investment, I would have been
paying tax at the 26.9 percent rate, and you may think
on the flip side the state's picking up 26.9 percent
of my investment. Because that investment decision is
actually altering the rate, the state picks up a
higher proportion in this ... particular example -
about 39 percent of the PPT, before I make all the
other bits of what's picked up by the feds and the
state on corporate income tax, and the effect this
reduction has on increasing those taxes as well.
MR. GEORGE returned to his presentation:
If these were four individual fields in there, in this
case we'd be paying a little bit over $2 billion in
PPT, as individual properties. When you combine them,
there is a slight benefit to that, because you lower
the overall rate. And the fact that the number comes
out at 2,000 for the blended is just pure ...
coincidence .... So, again, before I make my
investment decision in this case, I would be faced
with a tax bill of $2 billion. I spend my $800
million, and that has an effect of lowering my tax
rate ... of 39.6 percent. Or, put another way, I
reduce my tax bill by $309 million. And I can look at
that $309 million as coming out in two ways: On the
one hand, I previously had a tax rate of ... 26.9
percent, and the state was going to pay 26.9 percent
of that; but I also lowered my tax rate, so it pays a
further proportion. And in this case, that allocation
and the way I've done the allocation and prioritized
them is: there was $215 million reduction in tax due
to just the investment, and there's a further $94
million reduction in the tax due to the change in rate
that's come in here.
MR. GEORGE said there is a further reduction with investment
credits. In the model, the state offers 20 percent of what the
company spends, which equals $160 million. He continued:
The overall effect is that ... I started out with the
prospect of paying $200 million in here. By spending
that money, the state has reduced that tax bill
considerably ..., so that my net cost in there is
about $330 million.
MR. GEORGE said the two sides of the issue are deciding an
appropriate rate for the state to offer, while considering the
incentive and helpfulness of a credit to a company. He said
capital costs come out against today's production and
profitability, while what gets deducted in the future is a
company's operating expenses, because the capital tends to be
"front-end loaded." He continued:
Mostly, I view this as: I assist the investment
decision in this by reducing the ... net amount of
capital that has to be paid in there, and thereafter,
the tax that flows through is more based on the
operating margin going forward. And that will be a
function of the underlying costs in there, the quality
of the product that's sold in the market, and the
price of the tracts, ... and where prices go in the
future. And as those prices rise or fall, ... so the
amount of tax levied on this particular investment
will vary going forward ....
1:44:00 PM
MR. GEORGE stated:
So, when you actually roll all that together ... with
the investment credits in there, ... the effective tax
rate is lowered ..., in this particular example [on
slide 58], down to about 23 percent, and ... you'd get
58.6 percent being paid of the $800 million, by the
state. Now, that 58.6 percent has further
consequences, because the first step is recaptured in
income tax, but ... the investment also becomes ... a
deduction for income tax, as well.
MR. GEORGE, in response to a question from Representative
Seaton, confirmed that the capital credit is not being used to
reduce the tax credit.
1:45:08 PM
MR. GEORGE, regarding slide 59, stated that PPT is really a tax
on net cash flow per barrel, as opposed to profit per barrel.
Put another way, he said, PPT is a tax on the net revenues that
"have not reinvested." He continued:
So, ... you come back to some of the issues that were
done before in terms of incentivizing: the
reinvestment of capital as opposed to the export of
capital .... It plays to that aspect of ... box
ticking. ... Although you see the headlines of $18 of
costs in there, that actually is not $18 to run the
fields; that is ... "X" dollars to run the fields and
another number that is a proportion between the amount
of money you're investing and the amount you're
producing today - but for tomorrow's production shoved
into today. And it's ... a basket of fruit rather
than ... any one number in there.
1:46:48 PM
REPRESENTATIVE SEATON asked:
If we're seeing an effect of a deductibility of ... 26
percent ... when the tax rate was there actually
yielding an effective tax reduction of 38 percent, if
we get to the equal share where we're talking - under
ACES - 50 percent, what ... would be the effective tax
lowering amount of ... this?
REPRESENTATIVE SEATON said it is clear that [the state] will be
paying "50 percent of it," which he said was scary enough, but
now "27 or 28 percent really represents 30 percent." He asked,
"What would we be looking at when we reach the point of ... the
equal share of the maximum tax rate? Does it still have that
same effect?"
MR. GEORGE answered yes. He said if nothing else is done, as
the system sits, the result can be fairly high deductible rates,
particularly if the investment credit is left in place at those
rates. He said that is an issue that may need review.
1:49:20 PM
MR. RUGGIERO added that as progressivity is increased, so is the
state's participation in ongoing investment. Historically, he
noted, the number of dollars of investment, upon which the state
would be participating, pales in comparison to the dollars of
net cash flow. If the state moves to a point where it
participates "to a lower percentage in the investment," then it
would also be participating to a much lower percentage in a much
larger cash flow. He relayed, "And you'll only get to that
maximum number when you're all the way at whatever you deemed to
be the maximum margin at that point in time where that rate
becomes applicable." Mr. Ruggiero said he understands
Representative Seaton's concern that the state may pay a big
investment and find later that prices may not be good; however,
he pointed out that at the same time, the state would be getting
the rate of take on whatever profits are being made at the time,
which is a much larger number.
1:50:32 PM
REPRESENTATIVE SEATON referred back to the green line [on slide
33] and the steepness of the progressivity curve. He mentioned
PPT and a high margin. He observed:
If we were ... kind of getting close to that max, it
seems like the application of this would drop ... the
return to us by a long ways, because of the steepness
of the curve. If, under this example, ... we're
talking about going from ... 26 percent to 38 percent
just by dropping the tax rate, if we were in a point
where we were having fairly steep progressivity, the
loss of dollars ... would be something that would be
very significant, as I see it.
REPRESENTATIVE SEATON asked if he is correct in his assumption.
MR. RUGGIERO echoed Mr. George's comment that the state should
consider what position it would be in if it does not have high
progressivity. The answer, he said, is that the state would not
get the extra income from the profits being made at that point.
He stated, "If you go to a higher progressive system, you're in
a net gain position. Even if your share of one of those
investments goes bad, you're still way ahead of where you are
with today's system."
1:52:26 PM
MR. GEORGE added that by increasing the progressivity, the state
may add another $500 million in taxes, for example, and the
companies would invest an additional $300, whereby the state
would pay them back $250 million of that. In that case, the
state would still be "ahead in the game," even though the
investment portion of that scenario shows that the state would
be paying a high proportion. He warned that although it is
important to isolate each issue in order to understand "the
inner workings of the thing," it is also important to look at
the big picture. He said the decision making is not all
intuitive.
1:53:27 PM
REPRESENTATIVE WILSON asked if she is correct in assuming that
the larger companies with the legacy fields would benefit more
than smaller companies from progressivity, because those larger
companies would be able to acquire more wells to bring down the
percentage.
MR. RUGGIERO said that is basically correct. He reiterated that
one of the top goals is for the state to set up a structure such
that when companies are making profits at a very high margin,
the state will get its fair share. However, the very mechanism
that generates those profits for you at that margin, is also the
built-in incentive "to reinvest those and to bring on the lower
profitability projects and prospects within that defined unit."
MR. GEORGE reiterated that he looks at PPT as a tax on exported
cash flow, not a tax entirely on profitability, because the
exported cash flow can be affected by investment decisions.
REPRESENTATIVE GUTTENBERG observed that in the PPT the exported
cash flow is being taxed; therefore, if the companies are not
exporting and are reinvesting, "they're being rewarded here."
As a result, he said, theoretically production goes up and
everyone gets increases value, as long as the companies export
their profits, which is what is being taxed.
MR. GEORGE said that is a fair characterization.
CO-CHAIR GATTO said, "So, if they export their profits to the
United Kingdom (UK), and they get taxed on their profits at the
UK, they get to make a decision as to whether or not they should
reinvest here and ship less money to the UK to pay less tax, and
use the savings - pass it back on to the customer, which is us."
1:56:28 PM
MR. GEORGE responded:
I think it goes to Alaska making a decision as to how
it wants to effect the decisions with respect to
Alaska. And once the money is ... back in treasury in
any ... company, ... some will go to share holders,
some will be retained in increased prices, some will
be invested in another country which has a different
regime, and ... we'll benefit accordingly from it.
So, you're looking at ... what do you want to do to
create the right level of incentives - not too much,
not too little - to get them to invest in the
opportunities that are here that are unavailable to
them.
CO-CHAIR GATTO expressed the ongoing desire to make balanced
decisions.
1:57:46 PM
REPRESENTATIVE SEATON asked whether there is another factor
involved. He clarified that he would like to know if, when
discussing the creation of a model tax and maximum
progressivity, consideration is being given regarding a
reasonable limit "on the upper end of what we should do."
MR. GEORGE reiterated that the purpose of [the presentation] is
to illustrate mechanisms rather than to recommend any particular
rate. He said there will be a point at which there either are
no more projects physically or capital. He continued:
And, yes, if you ... place too much in those - as was
kind of a gold plating question - but you distort
investment decisions at the other end that they
ordinarily might not make, just because you've made it
cheap to make them. There are benefits to that, of
course, but nevertheless, ... you start to go into the
... territory where you obviously don't want people
pocketing a dollar for every dollar they invest and
getting the benefits of those come back, as well,
because that's not too good either.
2:00:07 PM
REPRESENTATIVE FAIRCLOUGH directed attention to [slides 23 and
24] and said that while they illustrate the key components of
the fiscal plan, each legislator may place different weighted
averages for each of the different points. She said she hopes
"it's all about production." Alaska's future, she said, is
based on how many barrels of oil are actually produced now as a
bridge to reaching a gas development or some other large
resource development that would bring revenue into the state.
For the benefit of the listening public, she stated:
Our goal here is to balance an investment in a fiscal
policy and that taxing structure that fairly
encourages development, fairly values Alaska's
resource and what's coming out of the ground in oil,
and brings back to us in a monetized way, those
resources for the people of Alaska.
CO-CHAIR JOHNSON said the state's investment will lead to jobs
for Alaskans; money out of the state's treasury goes to the
private sector payroll, which he said is a different way to
redistribute the wealth, and which he supports.
2:03:56 PM
REPRESENTATIVE SEATON said one of the problems under the current
system [PPT] and "that is not taken care of in ACES is that
unfortunately the capital investments that are allowed to be
deducted and taken on credits don't have to be in Alaska." He
said he hopes the legislature will address this issue to ensure
that, as much as possible, the capital does actually generate
jobs in Alaska for Alaskans.
CO-CHAIR JOHNSON noted that even though the capital may not be
spent in Alaska, the end result of the capital dollars the state
is investing in turns into jobs and production.
2:05:15 PM
REPRESENTATIVE EDGMON stated his understanding that Alaska is
unique, in that it offers tax credits and incentives for
reinvestment.
MR. GEORGE responded that Norway writes a check to new entrants
to cover the tax part of the investment in exploration. He
added, "If you don't have a tax base already, you can't actually
get a check back, as you can under the Alaska system." In terms
of level of participation, Alaska is high on the royalty scale.
The economics of projects will reflect in the lower rate of
taxes, he said.
2:08:14 PM
CO-CHAIR GATTO noted that Norway has 10 times Alaska's
population and generates 10 times the revenue. He asked if that
makes Norway better off with its off-shore drilling, or if their
oil is in decline as well.
MR. GEORGE estimated that Norway is producing between 2.5-3.0
million barrels a day in oil, and that number is declining after
peaking at about 3.2 million barrels a day. The country also
produces a large amount of gas, he said. The high revenue comes
from a high level of production. Norway has always been a "high
state take" country, he said, but it is also a big co-investor
in projects going forward - both privately and through its
fiscal system. In response to a comment from Co-Chair Gatto, he
said he thinks it would be reasonable to characterize Norway as
a country that plans around issues of development and takes
management of the industry to heart. He offered further
details.
2:11:35 PM
CO-CHAIR GATTO inquired whether Norway has done anything
resembling a permanent fund.
COMMISSIONER GALVIN said that one of the things about ACES is
that it is about investing Alaska's oil revenue back into the
field as well as investing in the state's future by saving.
Norway has an equivalent to [Alaska's] Permanent Fund that has a
balance in the hundreds of billions of dollars as opposed to
Alaska's balance of $40 billion. In further response to Co-
Chair Gatto, Commissioner Galvin agreed that Norway has 10 times
the population of Alaska. He also noted that Norway is further
along on the curve of gas development than is Alaska.
2:12:30 PM
REPRESENTATIVE GUTTENBERG said it sounds like Norway has more
control over its oil patch than does Alaska. He asked what the
"high government take" in Norway is.
MR. GEORGE responded that the "Norwegian system is 78 percent
tax, although there is a 30 percent uplift on capital investment
against 50 of that 78 percent in their royalty." In further
response to Representative Guttenberg, Mr. George agreed that,
historically, Norway played a larger partnership role in
development. Statoil was Norway's state oil company, he said,
which is now partly privatized but was previously entirely the
state and was a partner in pretty much everything. "Statoil is
still the dominant player on the Norwegian part of the North
Sea," he said. They also have a direct interest through a
company called "Petoro," (ph) but it used to be what was called
the state's "direct financial interest" and they were a working
interest partner which was a fund that received a budget each
year. This resulted in a very significant portfolio being built
up, he said.
2:13:20 PM
REPRESENTATIVE GUTTENBERG commented that it is interesting to
note that Norway's high government take has played a significant
part in development and how that development is done. Norway
obviously takes the position that this is being done for the
best interests of its people, he said, and the industry is not
leaving Norway.
CO-CHAIR GATTO noted that Norway has a system of "cradle to
grave security" that allows citizens to simply go to college or
obtain medical benefits, but the country is not without some
costly social ills such as alcoholism. He surmised that some of
the reasons for a high government take relate to high government
expenses.
MR. GEORGE said this would be true, but that there is also the
issue of political philosophy.
CO-CHAIR GATTO stated that Norway is a good comparison because
it is at the same latitude and has similar issues to Alaska. It
is interesting to see whether increased investment has helped or
hurt.
2:16:29 PM
REPRESENTATIVE FAIRCLOUGH pointed out that Norway is a country
and Alaska is a state and the producers in the state are subject
to multiple levels of jurisdiction. What is lacking in the
comparison with Norway, she said, is that the federal government
is taking an extraction of profits from the producers operating
in Alaska.
CO-CHAIR GATTO inquired whether Norway actually has a permanent
fund dividend or just a permanent fund and is that available.
MR. GEORGE said he did not know, but that the objective of
putting money in is to pay it out whether it is in pensions or
other liabilities. In further response to Co-Chair Gatto, Mr.
George confirmed that Norway's taxes as a country are high.
2:18:20 PM
REPRESENTATIVE SEATON referred to the issue of the fairness of
only a 20 percent net operating loss (NOL) credit carry forward
when the tax rate is 22.5 percent. He noted that the credits
generated by the legacy fields can result in an effective
reduction of 35-38 percent and not just the 22.5 percent, but
that there has been no discussion about the fairness of this.
He inquired whether there is anything that addresses this
disparity between the legacy fields and the other fields.
MR. RUGGIERO responded that the issue of tax credits for
investment is a "dark corner" as far as what that impact is and
how it is. Philosophically speaking, at a very high marginal
rate, the need for the credits is not necessary for the
investment, he said. The need for the credits is greatest when
the margin is low or there is no income at all. Depending on
the starting rate, progressivity, and the rest, there may be
pieces of the overall package that can be used differentially to
create a more level playing field and to create more fairness.
2:20:46 PM
REPRESENTATIVE SEATON asked whether he is correct in
understanding that when a NOL is sold as a credit to another
company, it would be applied as a credit and there would be no
capital deduction applied against the company's costs, so the
company would not be able to reduce its effective tax rate like
it does with its own costs.
COMMISSIONER GALVIN responded that the distinction being made by
Representative Seaton is that an incumbent having production can
take that NOL for a particular project and slide it over,
thereby reducing the incumbent's current [tax] bill by whatever
its effective tax rate is at that particular time. Someone that
is high on the high margin may get a higher value out of that
because of the features just described, he said, and that was
one of the things that was indicated as an incentive for that
type of investment. New companies coming into Alaska have no
existing production against which to transfer the NOL. To
protect these new companies and ensure that their starting point
is not below the others, there is a mechanism within PPT that
would still exist in some form within ACES that allows these new
companies to carry over the credit to the following year. When
they credit the amount, the percentage of the value is the rate
described by Representative Seaton. It is not based upon a
margin because the new companies have no margin yet.
2:22:33 PM
REPRESENTATIVE SEATON surmised that in the instances when tax
credits are traded to an incumbent or legacy field, there would
be no cost reduction - only the tax rate value could be applied.
COMMISSIONER GALVIN said right. "It would only be transferable
at the dollar value and the dollar value would be after the
effect of this marginal effect and so it's not going to change
that."
2:23:13 PM
CO-CHAIR JOHNSON cited the [10/22/07] testimony of Ken Thompson
of Brooks Range Petroleum where Alaska's government take was
compared to other states as follows: Louisiana 57 percent, Gulf
of Mexico 45 percent, Texas 53 percent, New Mexico 53 percent,
Oklahoma 53 percent, California 53 percent, Colorado 51 percent,
and Wyoming 52 percent. Co-Chair Johnson said he thought Alaska
was in the 60 percent range. He said comparison should be made
to other states under the same government as Alaska, not to
other countries. He asked whether the witnesses agreed with
these percentages and whether Alaska is that much higher on
total government take.
MR. GEORGE replied that he has not personally checked the
accuracy of the percentages in Mr. Thompson's testimony, but
that he believed they are probably accurate for what they are.
They tell a story, he said, but not the entire story in terms of
take. He said he is trying to avoid using the word government
take because in states like Texas the vast majority is federal
offshore and very limited onshore state lands and waters as well
as private royalties. Royalty rates on new leases on private
leases are rising as the market is rising, he said. So, yes,
those percentages might be a reflection of the state position in
state water leases, but bonuses must be added to that. He
referred to Mr. Ruggiero's slide on the last federal government
Gulf of Mexico lease that showed a bonus payment of $2.9
billion. This is another form of government take, he said, but
it is not added into that percentage basis because it is too
hard to correlate.
2:26:30 PM
CO-CHAIR JOHNSON inquired whether there is a way to get the
entire picture for all government and private take. He said he
is tired of Alaska being compared to Norway and other countries.
MR. RUGGIERO stated that the question is whether to look at old
leases or new leases. A lot of the old leases are one-eighth or
12.5 percent royalties. He said GCA has worked projects
recently where the royalties associated with small equity
investment trying to get listed on exchanges is as high as 37.5
percent or three-eighths. So, there is a transition compared to
what happened 30-50 years ago when life-of-lease holdings were
negotiated and the royalty is fixed. Additionally, Alaska has
good rock - for example, the incremental 4-5 billion barrels of
recovery by arresting the decline rate. Outside of deep water
in the Gulf of Mexico, he said, there is no comparison of
finding a billion barrel project in any of the other states just
mentioned. In further response to Co-Chair Johnson, he said the
accuracy of the 45 percent government take cited for the Gulf of
Mexico depends upon whether it is shallow or deep water because
there are two different royalties.
2:28:17 PM
COMMISSIONER GALVIN said when doing these comparisons it is
important to recognize that there is no state take for the Gulf
of Mexico. There is only federal government corporate income
tax and federal royalty which is very low because of the royalty
relief that was provided in order to incentivize that
development. He said he would provide a case study to the
committee that compares Alaska to the Gulf of Mexico.
CO-CHAIR JOHNSON stated that it is important to eliminate
comparisons because they are always discounted by someone else.
He said he just wants to focus on Alaska.
COMMISSIONER GALVIN agreed with Co-Chair Johnson. He said he
believes that government take is the least useful tool in doing
an analysis. There are so many different variables with so much
subjectivity that it does not provide useful information for
making policy-based decisions. This is why, he said, he asked
GCA to address only the issues relating to Alaska.
2:30:49 PM
REPRESENTATIVE FAIRCLOUGH thanked the administration for
providing the different perspectives on all the points of view
in order to help the legislature make a decision on taxation.
The legislature's job is to balance the different interests and
this is not a science that can be modeled in its entirety, she
said. She reiterated her belief that the system is not broken,
it is just different people's perspectives regarding what is
best for all of Alaska.
CO-CHAIR GATTO said he likes to explore all of the issues as
well as look at comparisons. He wants to get as much
information as possible and hear as many points of view as
possible in order to make decision, he said.
REPRESENTATIVE EDGMON noted that he has a list of terms of art:
political stability, fiscal stability, government take, fair,
profitability. He said he just added comparability to the list
because he thinks it is important to have some benchmarks
against which to base decisions.
2:36:25 PM
MR. GEORGE continued his presentation. The PPT sets a 22.5
percent base tax rate that increases by .25 percent for every
dollar that net cash flow per barrel exceeds $40. The amendment
by HO&G maintains the 22.5 percent base rate, but adds a
separate tax of .225 percent for every dollar that the gross
value at the point of production exceeds $50. This is applied
to the gross value at the point of production. So, the
amendment has a different way of calculating the rate and a
different base to which it is applied. He compared the tax rate
by field within a company as affected by portfolio blending
under the PPT progressivity and under the HO&G progressivity.
He noted that the bent red line on slide 62 shows how the
progressivity works to produce a lower effective tax rate on
lower margin developments under PPT. On slide 63, the bent red
line remains in the same position, thus showing that under [CSHB
2001(O&G)] the bulk of the progressivity burden is being borne
by the lower margin fields, not the higher margin fields. To
give examples in dollar terms, Mr. George referred to slides 64
and 65. Under the PPT progressivity, he explained, the example
portfolio would pay a tax of $1.5 billion at $80 ANS West Coast
price; it would be $2 billion before the capital investment was
made. Under the HO&G CS, he continued, the same portfolio would
pay a higher tax of $1.7 billion; it would be $2.07 billion
before the capital investment was made. Thus, [under CSHB
2001(O&G)]], the state would only co-invest to the tune of 22.5
percent plus the 20 percent tax credit, rather than the higher
levels that would otherwise be seen. To conclude, he noted the
following: A net tax on the margin is a tax on the retained
cash flow and not just a tax on simple profitability. The
corporate ring fence for production tax allows the effective
rate to vary between more and less profitable fields. More
aggressive net progressivity provides a greater differentiation
on the effective rate than simple gross progressivity. Taxes
are lower at low margins and higher at high margins.
2:42:10 PM
MR. RUGGIERO noted that progressivity added to the net function
of PPT or ACES is more responsive to the different types of
individual fields that may be brought forward as investments.
As seen in the examples, the less profitable field paid
differentially much more tax under a gross tax than under a net
tax. Outside a ring fence family, or outside of a company that
has a very profitable existing production, a new high dollar
development with a $60 cost would be taxed under a gross
progressivity as though the costs did not exceed $50. The
examples show that there are cases where a gross tax can
differentially harm the additional investments that the state is
trying to encourage, he said. Using net with progressivity when
margins are high results in the state receiving a large fair
share. At the same time, it provides the incentive to keep the
money invested in the state and in Alaska's petroleum industry
because of the state's role as a partner in that investment.
The net is self-adjusting, said Mr. Ruggiero. It self-adjusts
whether the portfolio is inside a ring fence or a stand-alone
project by a new entrant. Because it self-adjusts, he
continued, no predictions on the margins at today's or
tomorrow's prices are necessary - companies will pay a tax based
on the margin that they are actually making on their operations.
A properly designed net system with aggressive progressivity can
achieve all of the state's four goals: taxing higher
profitability at higher progressive rates, inducing or
encouraging investment in legacy areas, encouraging investment
outside legacy areas, and durability.
2:46:00 PM
CO-CHAIR GATTO proffered that establishing the structure just
described may be the win-win situation that both the state and
industry are looking for because it would provide certainty as
well as durability.
MR. RUGGIERO responded that this gets closer to aligning the
state's interest with the oil companies' investment decision
making. When margins are low the state take is low and the
state participates in bringing on low margin developments
because of what it means down the pipeline, in jobs, and other
things. At the same time, when margins are extremely high, it
is still easy for the oil companies to make their economic
hurdles with the state taking a higher share.
CO-CHAIR GATTO commented that if the state becomes a good
steward of its money, then when margins are low it won't make
much of a difference.
2:47:19 PM
REPRESENTATIVE ROSES summarized his understanding of what is
being said: A net, rather than a gross, progressivity would
offset the HO&G progressivity from being borne by the lower
margin fields. A higher base tax with a net progressivity would
allow the state to capture a higher percentage on the legacy
fields. Under a net tax the state will pay a larger share in
future investments because of the tax offsets, whereas under a
gross progressivity the burden would fall on the oil companies
to pay a higher share because the state is not offsetting those
values against the progressivity. Thus, to maximize the state's
potential, the base tax rate is raised and there is an
aggressive net progressivity. By doing this, GCA believes that
a "wonderful investment climate" will be created that will
provide the state the greatest opportunity to capture great
production values and [generate] greater production levels in
the future.
MR. GEORGE said he thought that was reasonable. He pointed out
that although the progressivity is seen as a single number such
as a tax rate of a certain percent, it is actually taxing
individual components at a rate commensurate with rational
profitability. The state is thus providing more assistance to
those that need it and taking more away from those that do not
need it. The state will get more investment over the longer
run, he said. Investment is also helped by the tax benefit that
is being received and this is likely to drive more investment;
the issue is how far the state wants to go in assisting that.
2:50:24 PM
REPRESENTATIVE ROSES referred to the earlier discussion about
basing [the tax] on the margin model as opposed to the profit or
the cash flow model. For companies with more than one field,
does this not necessitate that each well be assessed
independently as opposed to an average, he asked.
MR. GEORGE replied that the companies making investment
decisions based on this [tax] structure will know what is being
layered in through that investment decision. From legal and
administrative standpoints the tax is ring fenced around the
individual investment. From an economic standpoint a company
can isolate that effect and make a decision based on what the
net effect of that investment will be after the adjustments to
tax rates that it may cause.
2:53:02 PM
REPRESENTATIVE ROSES said he was not talking about decision
making within the companies, but rather decision making by the
legislature and how to build a system on margins. The closest
thing to building a formula based on the margin of each
individual field would be to have a net base tax and a net
progressivity, he surmised.
COMMISSIONER GALVIN responded that DOR will set up the system so
that it is based on a certain rate on the margin for that
taxpayer. The taxpayer will blend all of its fields together
and tell DOR the total result. The taxpayer will break it down
on a field-by-field, well-by-well basis and look at how that is
going to affect their blended response to the state, he said.
The state determines what across-the-board level is fair and
appropriate and does not have to set an individual rate per well
as would have to be done to replicate this under a gross tax.
Because [the net tax] is self-adjusting, it adjusts according to
the taxpayer's investment options and the taxpayer will make a
decision based on how the single [tax] system affects that
individual decision, he advised.
2:55:08 PM
CO-CHAIR JOHNSON said he was hoping what the committee had just
seen was a new way to do tax on margins, but that it is actually
nothing new and is only a way to justify a tax increase under
ACES. Will there be something new that will allow taxation on
margins, he asked.
COMMISSIONER GALVIN stated that a rate based upon the net base
and a progressivity set upon the margin or cash flow are the
basis for PPT [current law] and ACES [HB 2001, as introduced].
That is not the basis for CSHB 2001(O&G) which is before the
committee. What he and GCA are identifying, he said, is the
value of having [the tax] based upon the margin and the
flexibility that is provided in terms of how to set the rate.
"In the end, you are right, this is a recognition that the basic
structure of ACES without the floor is sound economic policy,
... but it is different than the CS," he said. "... It is also
recognition that if you are going to drop out the floor, ...
then we believe that in the exchange of values ... we better
protect ourselves on the high end in a more aggressive way than
what ACES proposed."
2:58:08 PM
REPRESENTATIVE SEATON talked about the actual deduction for
capital costs being higher than the calculated deduction. For
example, the tax deduction might be 25 percent, but the
effective deduction is 38 percent because of the change in the
tax rate that those costs account for. The gross was a way to
protect the state from leaving excessive money on the table, he
opined. However, after listening to the presentation, he said
he is inclined to consider keying the progressivity at a higher
slope if the floor is dropped off and protecting the state by
disallowing deduction of the progressivity portion.
COMMISSIONER GALVIN stated that while the presentation talked
about companies that have a high margin field that are looking
at other investment decisions and how to blend them together,
there are also companies that only have one low margin field.
The question is whether to have a progressivity based upon a
gross value that would add the same rate increase to each one of
these, or whether to have a progressivity based upon the margin
so that it would only affect those that have the higher margins
to start with. That is a separate issue from whether the value
of credits is affected by the progressivity scale, he said.
3:03:54 PM
REPRESENTATIVE SEATON noted that when PPT was being considered,
what was looked at was the application of this onto a single
field and whether the 25 percent tax reduction as well as the
credits were a reasonable assessment. What was not considered
was that companies with a suite of options would be able to
reduce their tax rates through the application of the
deductibility along with receiving credits for investments. "I
don't think that we should consider that as being the baseline
structure that we are coming from because we didn't realize it,"
he said.
[HB 2001 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:05 p.m.
| Document Name | Date/Time | Subjects |
|---|