02/07/2011 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB110 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 110 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 7, 2011
1:03 p.m.
MEMBERS PRESENT
Representative Eric Feige, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Peggy Wilson, Vice Chair
Representative Alan Dick
Representative Neal Foster
Representative Bob Herron
Representative Cathy Engstrom Munoz
Representative Berta Gardner
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Mike Hawker
COMMITTEE CALENDAR
HOUSE BILL NO. 110
"An Act relating to the interest rate applicable to certain
amounts due for fees, taxes, and payments made and property
delivered to the Department of Revenue; relating to the oil and
gas production tax rate; relating to monthly installment
payments of estimated oil and gas production tax; relating to
oil and gas production tax credits for certain expenditures,
including qualified capital credits for exploration,
development, and production; relating to the limitation on
assessment of oil and gas production taxes; relating to the
determination of oil and gas production tax values; making
conforming amendments; and providing for an effective date."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 110
SHORT TITLE: PRODUCTION TAX ON OIL AND GAS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/18/11 (H) READ THE FIRST TIME - REFERRALS
01/18/11 (H) RES, FIN
02/07/11 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
BRYAN BUTCHER, Acting Commissioner
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Presented HB 110 on behalf of the governor.
CHERYL NIENHUIS, Petroleum Economic Policy Analyst
Tax-Administration
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Reviewed how Alaska's oil taxes work.
FRANK MOLLI, President
Molli Computer Services, Inc.
Consultant to Department of Revenue
Colorado Springs, Colorado
POSITION STATEMENT: Answered questions regarding HB 110.
ACTION NARRATIVE
1:03:31 PM
CO-CHAIR ERIC FEIGE called the House Resources Standing
Committee meeting to order at 1:03 p.m. Representatives Feige,
Foster, Dick, Gardner, Kawasaki, P. Wilson, Herron, and Munoz
were present at the call to order. Representative Seaton
arrived as the meeting was in progress. Representative Hawker
was also present.
HB 110-PRODUCTION TAX ON OIL AND GAS
1:04:06 PM
CO-CHAIR FEIGE announced that the only order of business is
HOUSE BILL NO. 110, "An Act relating to the interest rate
applicable to certain amounts due for fees, taxes, and payments
made and property delivered to the Department of Revenue;
relating to the oil and gas production tax rate; relating to
monthly installment payments of estimated oil and gas production
tax; relating to oil and gas production tax credits for certain
expenditures, including qualified capital credits for
exploration, development, and production; relating to the
limitation on assessment of oil and gas production taxes;
relating to the determination of oil and gas production tax
values; making conforming amendments; and providing for an
effective date."
CO-CHAIR FEIGE stated that the issue of oil and gas production
tax is important for the future of Alaska. If no action is
taken now, he said, there is a good possibility that in less
than 10 years the oil flow will be too low to operate the Trans-
Alaska Pipeline System (TAPS). With little oil production to
tax, the state will be forced to look elsewhere for its revenue.
Many people feel this issue should be addressed now rather than
later and HB 110 is a good start for this debate, he continued.
The committee's objective is to ensure that HB 110 will put more
oil into TAPS and encourage new exploration and enhanced
recovery methods. The federal government continues to create
more obstacles to resource development in Alaska, he opined, and
action must be taken by the state to keep oil flowing in TAPS
until federal agencies change direction and promote domestic oil
production. The recent shutdown of TAPS was a warning that the
state's financial independence is tied to the flow of oil. He
said the committee will wait to make any substantive changes, if
any, to HB 110 until it hears from the Department of Revenue,
the governor's office, producers, explorers, contractors, and
the general public.
1:06:35 PM
BRYAN BUTCHER, Acting Commissioner, Department of Revenue,
introduced HB 110, noting that the bill would change the state's
tax system to make Alaska more competitive both nationally and
globally, produce more jobs for Alaskans, and increase Alaska's
oil production. Recent articles project that North Dakota will
surpass Alaska in oil production and are a wakeup call, he
continued. The federal government has deterred onshore and
offshore development in the state; Alaska must therefore
maximize production on state lands. Many of the tax credits and
incentives passed by the legislature over the past few years
have helped, but production continues to decline.
ACTING COMMISSIONER BUTCHER advised there is much oil yet to be
produced in Alaska. Thus, the main objectives of HB 110 are to
develop currently unexplored fields and to get more production
out of the "Prudhoe and Kuparuk" legacy fields that currently
provide over 80 percent of the state's oil production. The
issue of oil production is important, he continued, because 85
percent of state revenues come from oil. Last month's leak at
Pump Station 1 shut down TAPS for a couple of days. This leak
was another wakeup call because today the pipeline carries only
one-third the volume it did 20 years ago and there was concern
that the pipeline would freeze up from the shut down.
1:09:27 PM
ACTING COMMISSIONER BUTCHER pointed out that developing oil on
the North Slope is much more challenging now than it was in the
past - for both the state and producers. The bulk of the
easiest to produce oil has been produced. Therefore, attention
is now on viscous/heavy oil, developing areas that have little
or no infrastructure, and developing smaller pools of oil. He
related that Governor Parnell is not focused on growing the size
of state government; rather the governor is focused on growing
the size of the private sector economy in Alaska, which will
provide more jobs for Alaskans. While the executive branch has
its opinion on what constitutes reasonable change, industry will
have to weigh in about what the changes proposed by HB 110 will
mean to industry's view of investment and exploration in Alaska.
ACTING COMMISSIONER BUTCHER said the three goals of HB 110 are
to address progressivity, promote infield drilling in the
currently producing legacy fields, and promote the development
of new fields (slide 3). Alaska's oil tax regime needs to be
changed to make Alaska more competitive nationally and globally,
to create more jobs for Alaskans, and to increase production in
the Trans-Alaska Pipeline System (slide 4).
1:11:31 PM
ACTING COMMISSIONER BUTCHER discussed the North Slope's
declining production, noting that production peaked in Fiscal
Year (FY) 1988 at just over 2 million barrels per day (slide 5).
By FY 2010 production decreased to about 644,000 barrels per
day, a 68 percent decline that has averaged about 5 percent per
year. Over the next 20 years the decline rate is expected to
flatten to between 3 and 4 percent, he reported. This decline
rate is based upon expected production from the new Oooguruk,
Nikaitchuq, and Liberty fields. What the state does in the out
years will have a large say over whether the decline steepens or
flattens out. He added that another issue with less barrels of
oil in TAPS is that tariff costs will be more because the costs
of transportation are divided by the number of barrels flowing
through the pipeline. The fewer the barrels, the higher the
cost; the higher the cost, the less profit the state receives on
its royalty barrels.
ACTING COMMISSIONER BUTCHER reviewed the expected production
from old and new fields (slide 6). He noted that by 2020
approximately half of the projected oil production will be from
new fields, meaning 50 percent of the projected oil production
must come from current fields. Therefore, he continued, HB 110
has provisions for both unexplored and current legacy fields.
1:14:31 PM
ACTING COMMISSIONER BUTCHER warned that the number of
exploration wells is declining, according to the Alaska Oil and
Gas Conservation Commission (AOGCC) and the Department of
Natural Resources (DNR) (slide 7). Between 2005 and 2007 the
number of exploratory wells drilled each year increased [from 7
to 18] as the price of oil increased, but each year since 2008
the number has declined despite the price of oil staying in the
range of $80-$90 per barrel. Only three exploration wells were
drilled in 2010 and DNR expects one exploration well to be
drilled in 2011.
ACTING COMMISSIONER BUTCHER reviewed the total number and type
of wells that have been drilled on the North Slope (slide 8).
He pointed out that the total number of currently producing
wells has decreased a little, but in general has stayed fairly
level [131 wells in 2005, 110 in 2010]. He explained that
service wells [38 wells in 2005, 33 in 2010] are drilled for the
purpose of supporting production in the field, and include gas
injection, water injection, and oil development wells. He drew
attention to the number of exploration wells [7 in 2005, 3 in
2010].
1:16:09 PM
ACTING COMMISSIONER BUTCHER related that annual surveys are
conducted by the Frasier Institute to judge the overall
attractiveness of the world's oil and gas jurisdictions [slide
9, entitled "Frasier: Alaska is #68 of 133 in terms of overall
attractiveness"]. The survey asks seventeen questions about
possible barriers to investment, including infrastructure,
environmental protection, resource potential, and the tax
system. This slide depicts a composite index of the 17 aspects
of competitiveness used to rank each jurisdiction, he explained.
The bars on the graph indicate the percentage of negative
responses for each jurisdiction - the blue color within each bar
represents the percentage of responses that said there are
moderate barriers to investment, yellow represents extreme
barriers, and green represents the percentage of companies that
said they would absolutely not invest in that jurisdiction. The
overall negative response for Alaska was about 40 percent, he
specified, which puts Alaska in about the middle of the pack.
Alaska ranks worse than other North American jurisdictions, such
as Alberta and North Dakota, and ranks worse than Norway. He
pointed out that these surveys are somewhat subjective, but said
they help show in general terms how the companies view Alaska
relative to other states and countries. Acting Commissioner
Butcher further elaborated that the most difficult investment
climates tend to exist in other continents, such as the Middle
East, Asia, and Venezuela in South America (slide 10). In North
America, Alaska competes for capital dollars from North American
companies as well as multi-national corporations, yet falls in
the same [third] quintile as China, Egypt, and Pennsylvania.
1:18:44 PM
ACTING COMMISSIONER BUTCHER continued discussing the [Frasier
Institute 2010 Global Petroleum Survey], reporting that Alaska
ranks 31 out of 38 jurisdictions in North America for fiscal
attractiveness (slide 11). Those states near and worse than
Alaska in attractiveness are typically high tax states, he said,
such as New York, Florida, and California. Expounding further
(slide 12), he said the least attractive jurisdictions in North
America are Alaska, California, Florida, New York, Quebec, and
Northwest Territories. The high-producing states of North
Dakota, South Dakota, Texas, and Louisiana [most attractive
quintile] rank considerably better for investment climate than
Alaska [third quintile]. Paraphrasing from the 2010 Frasier
report, he said:
Seven U.S. states and regions (New York, Florida,
California, the Atlantic Offshore, Alaska, Kentucky,
and Pennsylvania) had relatively unattractive third
quintile scores. Investors were concerned about
environmental regulations in each of these
jurisdictions, except for Alaska where the fiscal
regime is also an issue.
1:20:59 PM
ACTING COMMISSIONER BUTCHER, in response to Representative
Gardner, returned to slide 9 and reiterated that the blue within
each bar on the graph represents the percentage of companies
that said a jurisdiction has moderate barriers to investment,
yellow represents extreme barriers to investment, and green
represents absolutely will not invest in that jurisdiction. He
specified that the least attractive jurisdictions are Bolivia,
Venezuela, Russia, Ukraine, and Iran, all of which have
political upheaval that makes investment extremely risky. Most
attractive are South Dakota, Texas, Illinois, Wyoming, and
Austria, he added.
ACTING COMMISSIONER BUTCHER, in response to Representative
Munoz, said he does not have a breakdown on whether the
production in other states is from state or federal land, but
will get that information and provide it to members.
1:22:52 PM
ACTING COMMISSIONER BUTCHER, regarding how Alaska is rated in
the Frasier report for specific investment factors (slide 13),
said Alaska's strengths include geopolitical risks, the legal
system process, and other things related to the U.S. having a
stable environment in which to do business. Alaska is in the
middle of the pack in terms of commercial environment, quality
of infrastructure, and labor availability. Alaska's weaknesses
include environmental regulations, cost of regulatory
compliance, uncertainty concerning protected areas, disputed
land claims, and the tax regime. Alaska can do something about
its tax regime, he added. Expounding further, he pointed out
that 44 percent of survey respondents said Alaska's tax regime
deters investment (slide 14). The negative impact of Alaska's
tax system is probably understated, he continued, because small
exploration companies like Alaska's generous credit provisions,
while the larger companies that produce the most significant
amount of oil and pay state taxes have a different perspective.
Alaska has steep progressivity, he pointed out. At low oil
prices, say $30-$40 per barrel, Alaska would score better
because the state's tax would then be comparatively low.
However, at today's high oil price of $90 per barrel, Alaska's
unique progressivity method increases the tax on industry.
1:26:02 PM
ACTING COMMISSIONER BUTCHER said the Frasier report ranks the
attractiveness of Alaska's tax regime at 34 of the 38 North
American jurisdictions (slide 15). He related that 25 percent
of respondents said Alaska's tax regime is encouraging to
investment, which suggests the state has done a good job of
marketing to some oil and gas companies, such as the smaller
explorers that have received cash for some of the tax credits.
However, Alaska has discouraged large companies that invest and
produce from the state's major fields.
ACTING COMMISSIONER BUTCHER illustrated the subjectivity of
jurisdictional ranking by directing attention to a 2010 study
conducted by Wood Mackenzie Research and Consulting, which ranks
Alaska's fiscal attractiveness at 129 of 141 jurisdictions
worldwide (slide 16). He pointed out that the Wood Mackenzie
study places Alaska at the negative end along with such
countries as Venezuela and Algeria. He included this slide in
his presentation, he said, because the legislature is looking at
purchasing a detailed study from Wood Mackenzie.
1:27:31 PM
ACTING COMMISSIONER BUTCHER directed attention to a Department
of Natural Resources map depicting areas of heavy oil and gas
development and areas that Governor Parnell has talked about in
recent speeches (slide 17). The areas being talked about by the
governor are located just south of the Kuparuk and Prudhoe Bay
fields and they have had very little exploration in recent
years, he said. The administration believes there is a high
chance of finding new fields once opportunities and incentives
are given to companies to explore such areas, he related. Since
hitting the huge field of Prudhoe Bay 40 years ago, he added,
companies have put most of their exploration and development
dollars into it because the field is known.
ACTING COMMISSIONER BUTCHER said the Department of Revenue
believes there is a lot of oil left in Alaska (slide 18). The
cumulative production through 2010 has been over 16 billion
barrels. The department believes the remaining North Slope
reserves exceed 5-7 billion barrels, he reported, and the
geology-based estimates of total oil volumes are much higher.
For example, the department does not include any of the
approximately 20 billion barrels in the Ugnu deposit or offshore
volumes from the Chukchi or Beaufort Seas in its forecast.
1:30:18 PM
CHERYL NIENHUIS, Petroleum Economic Policy Analyst, Tax-
Administration, Department of Revenue, in response to
Representative Wilson, understood the Ugnu deposit to be a
fairly large deposit underlying several North Slope units,
primarily the Prudhoe Bay and Kuparuk units. In further
response, she understood the deposit to be shallower than the
Prudhoe Bay and Kuparuk deposits.
FRANK MOLLI, President, Molli Computer Services, Inc.,
Consultant to Department of Revenue, in response to
Representative Gardner, explained that the Ugnu deposit is not
included in the department's forecast of remaining North Slope
reserves because, at this point, there has not been a sustained
test or proof of production. Until he sees that, he hesitates
to put it into the Department of Revenue forecast, he said. In
response to further questions from Representative Gardner, he
said industry is attempting to produce the Ugnu deposit, but to
date there has not been a successful method of significant,
sustained production. This is because the Ugnu deposit is
composed of heavy oil that does not easily flow toward the wells
that are drilled.
1:33:40 PM
The committee took a brief at-ease.
1:34:03 PM
MS. NIENHUIS recapped how Alaska's oil taxes work (slide 19).
Prior to 2006 oil and gas were taxed under a gross production
tax, she said. In April 2006 the oil tax was restructured with
passage of the petroleum profits tax (PPT), which changed the
tax system to a net of the cost of production. Alaska's Clear
and Equitable Share (ACES) was passed in 2007. Most of its
provisions became effective on July 1, 2007, the start of Fiscal
Year (FY) 2008, although some provisions were retroactive. The
two major components of ACES are a net production tax, rather
than a gross tax, and tax credits for various activities in oil
and gas production on the North Slope.
1:38:25 PM
MS. NIENHUIS discussed the various terms used in the ACES
production tax (slide 21). She explained that the point of
taxation is at the North Slope wellhead. The "wellhead value"
is the West Coast market price less the cost of getting the oil
and/or gas to the West Coast. The "gross value at point of
production" is the wellhead value multiplied by the number of
barrels produced. The "production tax value" (PTV) is the gross
value at the point of production minus the upstream cost to
produce the oil and/or gas. The upstream cost can be broken
down into capital and operating expenses. Thus, the basis of
the oil tax is like a net income.
MS. NIENHUIS, in response to Co-Chair Feige, understood that the
dividing line between upstream and downstream is Pump Station 1
[on the Trans-Alaska Pipeline System (TAPS)], although there are
some feeder pipelines.
MS. NIENHUIS, in response to Representative Munoz, confirmed
that upstream cost includes the cost of employees. Upstream
cost is the direct cost of producing oil and gas, she said.
1:40:22 PM
MS. NIENHUIS continued her discussion of terms, noting that the
"base tax rate" under ACES is 25 percent of the production tax
value (PTV), but under the petroleum profits tax (PPT) the base
tax rate was 22.5 percent. The "progressive surcharge rate" is
a formula-driven rate that increases as oil profits grow.
"Credits" are also a part of ACES. She said credits were
started prior to PPT, were expanded during PPT, were expanded
even more during ACES, and she believes more credits were passed
last year.
MS. NIENHUIS explained that the ACES base tax is calculated by
multiplying the production tax value (PTV) by the 25 percent
base tax rate (slide 22). A progressive surcharge is calculated
by multiplying the production tax value by the progressive
surcharge rate. The progressive surcharge rate is the amount of
tax, in addition to the base rate, that is applied on profits
per barrel above $30. The base tax and progressive surcharge
are added together and then the credits are subtracted to arrive
at the total production tax owed to the state.
1:42:57 PM
MS. NIENHUIS demonstrated how the projected Fiscal Year (FY)
2012 production tax would be calculated (slide 23). She said
that at the forecast price of $82.67 per barrel and the forecast
production of 622,182 barrels per day, the value is $51.4
million per day. This daily value is multiplied by 365 days to
arrive at the annual production value [$18.7 billion]. Royalty
barrels are then subtracted to arrive at the annual taxable
production/value [192,426,540 barrels/$15.9 billion]. Next, the
marine transportation costs, TAPS tariff, and other costs are
subtracted to arrive at the gross value at point of production.
From here the total lease expenditures (deductible operating
expenditures forecast at about $2.5 billion and deductible
capital expenditures forecast at about $2.5 billion) are
subtracted to arrive at the forecasted production tax value
(PTV) of $9.6 billion. The base tax rate of 25 percent is
multiplied by the production tax value to arrive at a base tax
of $2.4 billion. The progressive tax rate, calculated here at
8.1 percent, is multiplied by the production tax value to arrive
at a progressive tax of $785 million. [The base tax and
progressive tax are added together], so the total tax due before
credits is $3.2 billion. The projection for credits in FY 12 is
$450 million. Thus, the total projected tax after credits for
FY 12 is about $2.7 billion. She cautioned, however, that this
is a very simplified, averaged view of the calculation for the
production tax.
1:46:10 PM
MS. NIENHUIS, in response to Representative P. Wilson, confirmed
that lease expenditures are considered upstream costs.
MS. NIENHUIS, in response to Representative Kawasaki, confirmed
that at the projected FY 12 oil value of $18.7 billion, the
state will receive $2.7 billion. In further response, she said
the deductible capital expenditures are projections that the
state receives from the companies. Twice a year the state asks
the companies to forecast their projected expenditures for five
years out and the figures used in this example are the most
recent forecast.
1:48:03 PM
MS. NIENHUIS reviewed the tax credits currently available under
ACES (slide 24), explaining that the "qualified capital
expenditure credit" is an automatic 20 percent credit for
qualified capital expenditures.
The committee took a brief at-ease due to technical
difficulties.
MS. NIENHUIS continued, noting that a qualified capital
expenditure credit of 40 percent was passed by the legislature
last year for well lease expenditures outside the North Slope.
She explained that the "carried-forward annual loss credit" is
primarily for producers that are spending money developing
fields but do not yet have income exceeding their expenditures;
these producers are given a 25 percent credit for that loss in
the following year.
MS. NIENHUIS said the "small producer and new area development
credit" is a non-refundable credit that can only be applied in
the year the producer can use it. Companies with North Slope
production of less than 100,000 barrels a day can receive a
credit of [up to] $12 million [per year]. Companies with
production outside the North Slope and Cook Inlet of less than
100,000 barrels [a day] can receive a credit of up to $6 million
per year. She added that the credit ramps up between 50,000 and
100,000 barrels and there is a formula.
MS. NIENHUIS, in response to Representative Kawasaki, agreed to
provide members a list of those producers with production rates
below 100,000 barrels a day.
MS. NIENHUIS, in response to Representative Gardner, said she
believes the $12 million credit and the $6 million credit are
additive, so a company can receive both.
1:51:26 PM
MS. NIENHUIS returned to her review of credits, explaining that
the "alternative credit for exploration" has been a relatively
attractive credit for companies exploring in remote areas where
exploration is quite expensive. This credit is 30 or 40 percent
depending on whether the exploration meets certain criteria.
Prior to ACES this credit was 20 and 30 percent.
MS. NIENHUIS explained that the "Cook Inlet jack-up rig credit,"
passed [in 2010], provides credit of up to 100 percent for the
first three exploration wells that are drilled using a jack-up
rig in Cook Inlet.
MS. NIENHUIS, in response to Representative Kawasaki, said she
would provide members with a listing of federal credits that are
available to companies, but that she is unsure the department
can provide company-specific information in this regard.
1:52:54 PM
MS. NIENHUIS, in response to Representative Gardner, confirmed
that no companies have yet qualified for the jack-up rig credit,
given it was just passed this last spring. However, several
companies are competing to do so.
ACTING COMMISSIONER BUTCHER added that the first company to
bring a jack-up rig to Cook Inlet will receive 100 percent of
the cost up to $25 million. The second jack-up rig must be
brought up by a different company and that credit would be up to
90 percent or $22.5 million, and the third jack-up rig would be
up to 80 percent or $20 million. If the drilling results in
sustained production, 50 percent of the credit would be paid
back over a 10-year period.
ACTING COMMISSIONER BUTCHER, in response to Co-Chair Feige,
confirmed that two companies are seriously discussing jack-up
rigs.
1:53:59 PM
MS. NIENHUIS, in response to Representative Herron, understood
that the $12 million and $6 million credits were passed by the
legislature to encourage development of new fields. She said it
takes some time for small producers to get to the point of where
income exceeds expenses. In further response, she said she
would look at the legislative history and provide information to
members about why the particular dollar amounts of $12 million
and $6 million were chosen.
1:55:19 PM
MS. NIENHUIS provided examples of how the tax and the credits
affect the different types of producers. For the first example
she used a new entrant with no current production in Alaska that
is pursuing an exploration project requiring $200 million in
investment (slides 25-26). Depending on whether that project
meets certain criteria, she said the state would give this
company a credit of 20, 30, or 40 percent, which would be $40-
$80 million in tax credit for this size project. If the company
were to experience a loss it would be eligible for a 25 percent
net operating loss tax credit, which could be worth up to $50
million. Thus, for this $200 million investment the company
could receive a credit of $90-$130 million from the state. The
credit could be directly recouped from the state via refundable
tax credits or the credit could be transferred to a company in
the state that does pay tax. Regardless of whether the credit
is directly refunded or transferred, she explained, the state
would pay $90-$130 for the exploration and the company would pay
$70-$110 million. The state therefore bears the risk for
failure, as does the new entrant, because the state does not
recoup this money even if the exploration effort fails.
1:57:46 PM
MS. NIENHUIS, in response to Representative P. Wilson, allowed
that $200 million is high for just an exploration well. The
exploration tax credit was set at 40 percent, she said, because
exploration costs can be very high depending upon the distance
from existing infrastructure.
1:59:19 PM
MS. NIENHUIS next provided an example of an incumbent producer
that already has current production to which a tax credit can be
applied (slides 27-28). If this incumbent pursued a non-
exploration development requiring $200 million in investment,
she said, it would receive a 20 percent capital investment
credit of $40 million. That capital investment would reduce the
incumbent's production tax value (PTV), which would reduce the
taxes due. This is because the progressive surcharge rate is
triggered off the profit per barrel, so if expenditures are
higher the profit per barrel is lower and this would lower the
tax rate. The deductions and credits would total more than 45
percent (greater than $90 million) of the $200 million. The
state would therefore be paying more than $90 million of the new
development's capital cost, meaning the incumbent would be
spending less than $110 million. Once again, the state would be
an investor in the project and would bear the risk for failure
as would the incumbent investor.
2:01:16 PM
MS. NIENHUIS summarized the key points of tax and credits under
the ACES system (slide 29). For credits, the state can cut a
check [to new entrants] or reduce the tax liability owed by
incumbents. In both cases the state is an investor and shares
the risk with the company doing the project. She said the aim
of ACES is to incentivize investment through the state bearing
risk and reducing the costs incurred by explorers and producers.
Tax credits and the net-based structure make the state an
investor in exploration and new development activities.
MS. NIENHUIS, in response to Representative P. Wilson's
recollection that the average number of dry wells is 5 out of 6,
agreed the state is sharing a lot of the risk and cost. Tax
credits have increased, she allowed; for example, in FY 2010 the
state paid about $250 million in tax credits. She said she
thinks the belief at the time ACES was passed was that this was
a trade-off the state could bear.
2:03:15 PM
MS. NIENHUIS, in response to Representative Dick, said she
believes other states also provide incentives, although she
could not say whether they are of the same magnitude as those in
Alaska. Also, she added, there are federal tax credits.
MS. NIENHUIS, in response to Representative Kawasaki, nodded her
agreement to provide committee members with information on what
the federal tax credits would be for the examples she provided
earlier (slides 26-28).
2:04:08 PM
MS. NIENHUIS, in response to Representative Foster, said she
believes the Interstate Oil and Gas [Compact] Commission (IOGCC)
publishes the tax rates and incentives offered by other states.
She agreed to provide members with this information.
ACTING COMMISSIONER BUTCHER cautioned that most other states are
based on gross and Alaska is net, which makes it complicated to
put together an accurate comparison. He said the department is
putting together a slide to provide such a comparison, but was
unable to have it ready for today's presentation. In response
to Co-Chair Feige, he agreed to put together a comparison of the
top 10 states that Alaska is competing against.
2:05:47 PM
ACTING COMMISSIONER BUTCHER said the main changes proposed by HB
110 are in the progressivity rates, the tax cap, the tax
calculation, the tax credits, and the base tax rate (slide 31).
He explained that HB 110 would define progressivity as discrete
brackets rather than a continuous function and, like the bracket
system used for federal income tax, the progressivity would be
applied only to the incremental revenue. Under current law, the
progressivity rate is 0.4 percent on each dollar over $30 per
barrel in profit up to $92.50 in profit, and after $92.50 the
progressivity drops to 0.1 percent on each dollar. This
increase in tax percentage is on the entire barrel, not just the
last dollar, which at high oil prices can result in 70-80
percent of each increased dollar in profit going to government.
He pointed out that the oil industry is very high risk/high
reward; for example, "Shell" has put $3 billion into developing
the outer continental shelf and is at risk of not getting this
money back. The majority of exploration is not productive
enough to develop, so when it is productive enough to develop
the company must recoup those losses.
2:09:28 PM
ACTING COMMISSIONER BUTCHER, regarding the tax cap, noted that
state taxes can currently go up to 75 percent on a barrel.
Under HB 110 the tax cap would be limited at 50 percent of the
profit per barrel for legacy fields and 40 percent for new
fields. The lower tax cap for new fields is to encourage
exploration and development because the taxes for those fields
would be less.
ACTING COMMISSIONER BUTCHER said HB 110 proposes a yearly tax
calculation based on average prices and costs. Currently, this
is done on a monthly basis, which has proven difficult for both
industry and the Department of Revenue. A yearly calculation
would be a more simplified method. Regarding the base tax rate,
HB 110 would keep the current base rate of 25 percent, except
leases or properties not producing as of 12/31/2010 would pay a
base rate of 15 percent.
ACTING COMMISSIONER BUTCHER noted that the proposed changes for
progressivity rates, tax cap, tax calculation, and base tax rate
would take effect 1/1/2013. He pointed out that due to the laws
changing from the Economic Limit Factor (ELF) to the PPT in 2006
and then changing again at the end of 2007 under ACES, the
department is only now catching up with its audits. The passage
of HB 110 would be the third law change in five years.
Therefore, this effective date would give the department the
opportunity to write the regulations and work out the kinks.
2:12:03 PM
ACTING COMMISSIONER BUTCHER further explained that HB 110 would
allow tax credits to be claimed in the first year instead of
splitting the credit into two years as required by current law.
This change would take effect on 1/1/2012 and would have a
negligible effect on the state. Additionally, HB 110 would
extend the 40 percent well lease expenditure tax credits to the
North Slope. Given the expectation that in 10 years 50 percent
of production will be from currently existing fields, the state
needs to do what it can to help overcome the problem of viscous
oil and other challenges in the existing fields.
ACTING COMMISSIONER BUTCHER, in response to Representative P.
Wilson, said the tax cap is currently at 75 percent. In
response to further questions from Representative P. Wilson, he
explained that under HB 110 companies would still make estimated
tax payments to the state on a monthly basis, but those payments
would be based on the rolling average for the year. Regarding
the base tax rate, he said the proposed 15 percent base tax rate
for oil and gas coming from leases or properties not producing
as of 12/31/10 would be in permanent statute until the governor
or legislature decided to make a change at a future date.
2:15:31 PM
ACTING COMMISSIONER BUTCHER, in response to Representative Dick,
explained that a unit is defined in statute as a group of leases
covering all or part of an accumulation of oil and gas. The
lessees agree to operate the leases as a single unit under an
approved plan of exploration or plan of development. The basis
for being a unit is the approved unit agreement which gets
approved by the appropriate agency, which for state land is the
Department of Natural Resources and for federal land is the U.S.
Bureau of Land Management.
ACTING COMMISSIONER BUTCHER, in response to Co-Chair Feige,
confirmed that a "unitized" area is an area that a company would
plan to put into production as opposed to exploration.
2:16:50 PM
ACTING COMMISSIONER BUTCHER, in response to Representative
Munoz, agreed to provide members with estimates for
infrastructure costs to tie pipelines from new fields into the
Trans-Alaska Pipeline System, along with information as to who
would pay those costs.
REPRESENTATIVE MUNOZ, in response to Co-Chair Feige, said she
imagines "the line would need to be extended into the new areas"
that have been talked about.
CO-CHAIR FEIGE responded that it would depend upon where the
discovery was made.
ACTING COMMISSIONER BUTCHER added that he is sure "Shell" has
put a lot of thought into what its costs will be to connect with
the Trans-Alaska Pipeline System from the developments it is
looking at in the Beaufort and Chukchi seas. He reiterated that
he will see what information he can find on this type of cost.
ACTING COMMISSIONER BUTCHER, in response to Representative
Herron, said that when developing HB 110 the department did not
look into brackets for progressivity as it would relate to
declining production. He explained that the department kept HB
110 on the same curve for progressivity as currently exists in
state law because the department thought brackets had more value
than tweaking the current law.
2:19:57 PM
REPRESENTATIVE P. WILSON asked how much revenue the state would
forego as a result of these changes, although she understood the
reason for making these proposed changes is to get more flow
through the Trans-Alaska Pipeline System.
ACTING COMMISSIONER BUTCHER replied that the department's fiscal
note estimates a revenue reduction of approximately $5 billion
over the next five years, which does not include the revenue
increase that the department expects further out the road after
the increased development has occurred. It is very difficult to
try to figure out, he continued. If the price of oil were to
reach $100 or $110 [per barrel] for two years in a row, that $5
billion would be gone and there would be even more than
anticipated, and it goes the other way if the price drops lower.
He added that the Office of Management & Budget (OMB) projects
that at the end of that five-year period, the state would still
have significant reserves in the Constitutional Budget Reserve
(CBR) even with a sizeable increase in state government. He
noted that the department will have details at a later date.
2:21:59 PM
ACTING COMMISSIONER BUTCHER returned to his presentation and
addressed the effective, nominal, and marginal tax rates (slide
32). He said the effective tax rate is the tax rate that a
company would pay after taking out tax credits and anything
else. The nominal tax rate is the rate in statute; for example,
the 25 percent base going up, but it is not applied in the real
world to the pluses and minuses of tax credits. The marginal
tax rate is a theoretical rate that would be applied to each
additional $1 of profit; for example, for higher and higher
potential profit it would be the amount of government take and
the amount left over for the producer. As progressivity is
currently calculated, the higher the profit the higher the
marginal tax, which can reach over 80 percent.
ACTING COMMISSIONER BUTCHER, in response to Representative P.
Wilson, further explained that the nominal tax rate is the
number in the bill. Under current law, for example, the nominal
tax rate is the base rate of 25 percent up to $30 a barrel [in
profit] after which each additional dollar [in profit] would
increase the tax rate by 0.4 percent, so the tax would be 25.4
percent, 25.8 percent, and so on. It is the tax rate "on paper"
and does not include subtraction of tax credits. In further
response, he confirmed that the nominal tax rate is the tax rate
not counting all the pluses and minuses along the way.
2:24:36 PM
ACTING COMMISSIONER BUTCHER compared the current nominal tax
rate under ACES with that proposed by HB 110 (slide 33). Under
ACES the nominal tax rate is 25 percent until a production tax
value of $30 per barrel is reached, at which point the tax rises
in a continuous 0.4 percent per dollar until leveling out at 0.1
percent [when the production value reaches $92.50]. Under HB
110, the base rate on production from current fields would
remain at 25 percent up to a production tax value of $30 per
barrel, at which point the tax would rise in brackets until it
reached a tax cap of 50 percent. Under HB 110, the base rate on
production from new fields would be 10 percent lower and would
rise in brackets until reaching a tax cap of 40 percent.
ACTING COMMISSIONER BUTCHER compared the current marginal tax
rate under ACES with that proposed by HB 110 (slide 34).
Starting at $30 per barrel in production tax value, the marginal
tax rate under ACES is very steep, he said. This is because
each 0.4 percentage per dollar applies to the entire barrel, not
just that next dollar. At [$92.50] per barrel in profit, the
ACES tax reaches 87 percent, at which point onward the
progressivity drops from 0.4 percent per dollar to 0.1 percent.
Under the bracketed system proposed by HB 110, the marginal tax
rate would increase in bracketed steps, but it would not rise as
steeply as under ACES because the brackets apply the tax rate
only to the bracketed amount instead of to the entire barrel.
2:27:10 PM
ACTING COMMISSIONER BUTCHER, in response to Representative P.
Wilson, agreed to provide one graph depicting both the marginal
and the effective tax rates so that committee members can see
the difference between the two. He explained that the marginal
tax rate is what industry looks at when determining whether to
develop a field. Each company has its own projections on the
price of oil and how it perceives the future, and looking at the
marginal tax rate provides an indication of the high end of
potential tax. It is the marginal tax rate that is seen in a
negative sense when the differences between Alaska and other
jurisdictions are discussed.
ACTING COMMISSIONER BUTCHER, in response to Representative
Herron, explained that HB 110 would cap the tax once the profit
per barrel reaches a certain level, rather than provide a stair-
stepped decrease in tax. He clarified that all three tax rates
are based on the production tax value or profit per barrel, not
the price of oil. The [$92.50] cap is the profit per barrel,
not the price per barrel. On average, the subtracted costs are
$25-30 per barrel. Thus, the [$92.50] profit represents a price
per barrel of about $120.
2:29:46 PM
ACTING COMMISSIONER BUTCHER, in response to Representative P.
Wilson, elaborated further about the cost per barrel versus the
price per barrel. Because the tax is on the profit, not the
gross, what is looked at is the dollar amount per barrel times
the production minus the transportation, operating, and capital
costs. The total of these three costs averages about $30.
Therefore, at a price of $90 per barrel of oil, less $30 in
production cost, the profit is $60; therefore, tax on the $60 in
profit is 40 percent.
ACTING COMMISSIONER BUTCHER, in response to Co-Chair Feige about
whether there is incentive to control costs under this type of
tax regime, said the lower the spending that a company has, the
higher the profit. Even though the state would be taking 40 or
50 percent of the profit, it would still create more profit for
the company by reducing the costs than it would be to increase
them. He offered to have the department's auditors address
members about this issue at a later date.
2:32:07 PM
ACTING COMMISSIONER BUTCHER, in response to Co-Chair Feige,
confirmed that the Department of Revenue sets the costs of
production and transportation.
MS. NIENHUIS pointed out that the cost for each barrel on the
North Slope can be different because the crudes come from
different areas of the state and the properties are developed by
different companies. So, while the department uses an average
cost of $26-$30 per barrel, each property can have a different
amount than that. Thus, this tax is really a company-specific
tax in that the company's tax rate and tax liability are
determined by the taxes on the company and what it spends.
2:33:03 PM
ACTING COMMISSIONER BUTCHER returned to his presentation and
compared the current effective tax rates under ACES on the gross
value at the point of production with the effective tax rates
proposed by HB 110 (slide 35). He said the effective tax rate
under HB 110 would not rise nearly as quickly or as steeply as
it currently does under ACES, and [the administration] believes
this reduction would spur development.
ACTING COMMISSIONER BUTCHER concluded by reiterating that the
current well lease expenditure credit under ACES is 40 percent
outside of the North Slope and 20 percent within the North Slope
(slide 36). He said HB 110 proposes to increase the North Slope
credit from 20 percent to 40 percent for capital expenditures
directly related to exploration wells, stratigraphic test wells,
producing wells, and injection wells.
2:34:54 PM
MS. NIENHUIS, in response to Representative Gardner, described
the different kinds of wells, but qualified that her knowledge
of the different kinds of wells is limited. She said an
exploration well is presumably pretty far from existing
infrastructure. She understood a stratigraphic test well is
drilled to determine and delineate the various areas of the
reservoir. A producing well is drilled to produce oil and an
injection well injects fluids into a reservoir to enhance the
oil recovery.
ACTING COMMISSIONER BUTCHER added that an injection well is a
service well and this type of well is included under service
wells on slide 8.
MS. NIENHUIS, in further response to Representative Gardner,
explained that there are tangible and intangible drilling costs.
An intangible drilling cost is not a physical asset; rather it
is the cost of engineering, labor, and other things that go into
drilling a well.
2:36:55 PM
CO-CHAIR SEATON asked whether the 40 percent tax credit for
capital expenditures in Cook Inlet has been effective in
producing the expected rapid exploration and development.
MS. NIENHUIS replied that this tax credit is relatively new,
having been put in place in spring [2010]; therefore, she
believes the department's experience with the credit is too
short to be able to fully evaluate any effect.
MS. NIENHUIS, in response to Co-Chair Feige, offered her belief
that wells have been drilled by companies that expect to get the
40 percent [qualified capital expenditure] credit.
CO-CHAIR FEIGE, regarding the Frasier report, asked what other
factors besides Alaska's fiscal structure cause the state to be
ranked in the middle in terms of competitiveness.
ACTING COMMISSIONER BUTCHER responded that it generally has to
do with the U.S. political system, which is stable and seen as a
positive compared to politically volatile countries. He
suggested this question be asked of industry members when they
testify before the committee at a later date because each
company has a different view of the positives and negatives of
investing in Alaska.
2:39:40 PM
CO-CHAIR FEIGE asked what the Department of Revenue's record has
been on predictions versus what actually happened.
ACTING COMMISSIONER BUTCHER replied that in terms of production
the department has tended to be optimistic. He said this has to
do with a number of variables, one of which is that the
department's forecasts are based on the assumption that TAPS
will be running 365 days a year. In terms of oil price, he
allowed the department has been "all over the place," but that
it is thought the department has improved in these forecasts
over the last few years.
ACTING COMMISSIONER BUTCHER, in response to Representative
Kawasaki, nodded his agreement to provide members with a copy of
the 2010 Frazier report. In further response, he said he would
provide members with what information he can in regard to how
Alaska's position of overall attractiveness would be shifted in
the Frazier report if Alaska were to have the best tax regime.
ACTING COMMISSIONER BUTCHER, in response to Co-Chair Feige,
confirmed that the more attractive Alaska's tax regime, the less
would be the state's revenue.
2:42:13 PM
REPRESENTATIVE KAWASAKI asked how Alaska's strengths and
position in the Frazier report would be changed if the billions
of dollars in foregone tax revenue were instead used to punch a
road to Umiak or provide infrastructure that improves the
state's economy. He said he does not think the administration
has made a case that the tax changes proposed by HB 110 would
actually bring more jobs to the state.
ACTING COMMISSIONER BUTCHER responded that for today the
department was asked to present a high level explanation of HB
110 as well as to discuss where the department thinks the state
is today. He said the department will be providing more
detailed information at its next presentation before the
committee and these details may provide answers to the
aforementioned question.
REPRESENTATIVE GARDNER posited that in addition to the state
doing something about its tax regime, Alaska could also do
something about many of the other investment factors listed on
slide 13. For example, Alaska could do a lot about the
availability of labor and the quality of infrastructure because
those are responsibilities of state government.
ACTING COMMISSIONER BUTCHER agreed, but said that for today the
department was just focusing on what HB 110 had to do with it.
2:44:30 PM
CO-CHAIR SEATON inquired whether the Frasier report has moved
the producers in Alaska to make significant investments in the
five most attractive jurisdictions listed on slide 14 -
Illinois, Chile, Utah, Northern Territory, and Uruguay.
ACTING COMMISSIONER BUTCHER suggested this question be asked of
the producers directly and pointed out that Alaska has no
control over what states or countries are studied by the Frasier
Institute. He acknowledged that just because Illinois has the
lowest and most attractive tax regime does not mean there is a
lot of activity in that state.
CO-CHAIR SEATON noted that the title of slide 14 states "44% of
respondents say Alaska tax regime deters investment." He asked
whether this means that 56 percent of respondents did not say
that Alaska's regime deters investment.
ACTING COMMISSIONER BUTCHER replied that 44 percent of
respondents in the survey specifically pointed out that they
consider the tax regime a deterrent. He said he does not know
whether 56 percent said "not a deterrent at all." He offered to
provide more information in this regard.
CO-CHAIR FEIGE suggested that maybe the other 56 percent were
not considering investing in Alaska because they are invested in
other places.
CO-CHAIR SEATON added it may be that this 44 percent of
respondents are not considering investing in Alaska either,
given this is a general survey which makes it difficult to
interpret exactly what the response means.
2:47:27 PM
CO-CHAIR SEATON referenced the nominal tax rates depicted on
slide 33 and asked whether it is the stepped increase in
marginal tax rate that is being addressed by HB 110. He
surmised that the gestalt is about a bracketed tax like the
[federal] income tax where the lower tax rate is paid on the
lower amount of income and the higher tax rate is paid only on
the higher amount of income and asked whether this is
incorporated into the proposal. He noted that slides 33-34
depict the profit, so the [average production] cost of $26 is
below the starting point of $0 [in production tax value] shown
on the graphs. For example, he said, no barrels of oil were
produced this year in the $0-$40 range, which would be
equivalent to the [federal] income tax of where be no tax is
paid on the first $10,000, and the tax rate on the next $10,000
would be at 15 percent, and so on. Under HB 110, the tax would
be whatever it averages for the year rather than the month. He
questioned whether the analogy to an income tax is appropriate
because it seems to him that there would no base amount of
production that is taxed at 25 percent. For example, if the
average [price] this year is $82 [per barrel], the tax would be
48 percent for all of the oil, none would be at 30 percent. He
asked whether he is correct in this calculation.
2:50:32 PM
ACTING COMMISSIONER BUTCHER responded that the first $30 of
profit per barrel would be taxed at 25 percent. In response to
further questions from Co-Chair Seaton, he said that at $50 of
profit on the barrel, $30 of the profit would be taxed at 25
percent and then the $30-$50 of profit would be taxed at the
bill's proposed bracketed increases. He confirmed that the
bill's effective tax rate would be much lower than it currently
is under ACES (slide 35).
CO-CHAIR FEIGE offered his appreciation for the Department of
Revenue's work on HB 110.
[HB 110 was held over.]
2:52:52 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:53 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB110 Dept Revenue Fiscal Note.pdf |
HRES 2/7/2011 1:00:00 PM |
HB 110 |
| HB110 DNR Fiscal Note.pdf |
HRES 2/7/2011 1:00:00 PM |
HB 110 |
| Hearing Request HB110 production tax 20jan11.pdf |
HRES 2/7/2011 1:00:00 PM |
HB 110 |
| Section Analysis HB110 production tax 20jan11.pdf |
HRES 2/7/2011 1:00:00 PM |
HB 110 |
| Sectional Summary for HB110 by Leg. Legal.PDF |
HRES 2/7/2011 1:00:00 PM |
HB 110 |
| HB110 production tax transmittal letter 20Jan11.pdf |
HRES 2/7/2011 1:00:00 PM |
HB 110 |
| HB0110A.pdf |
HRES 2/7/2011 1:00:00 PM |
HB 110 |
| HB 110 Dept. Revenue Presentation.pdf |
HRES 2/7/2011 1:00:00 PM |
HB 110 |