Legislature(2011 - 2012)HOUSE FINANCE 519
04/20/2012 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB3001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 20, 2012
1:06 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 Lance Pruitt
Representative Neal Foster
Representative Bob Lynn
Representative Dan Saddler
Representative Chris Tuck (via teleconference)
Representative Pete Petersen
Representative Mike Doogan
Representative Tammie Wilson
Senator Cathy Giessel
COMMITTEE CALENDAR
HOUSE BILL NO. 3001
"An Act relating to adjustments to oil and gas production tax
values based on a percentage of gross value at the point of
production for oil and gas produced from leases or properties
north of 68 degrees North latitude; relating to monthly
installment payments of the oil and gas production tax; relating
to the determinations of oil and gas production tax values;
relating to oil and gas production tax credits including
qualified capital credits for exploration, development, or
production; making conforming amendments; and providing for an
effective date."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: HB3001
SHORT TITLE: OIL AND GAS PRODUCTION TAX
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
04/18/12 (H) READ THE FIRST TIME - REFERRALS
04/18/12 (H) RES, FIN
04/20/12 (H) RES AT 1:00 PM HOUSE FINANCE 519
WITNESS REGISTER
BRYAN BUTCHER, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation
entitled, "HB 3001 Overview" dated 4/20/12.
BRUCE TANGEMAN, Deputy Commissioner
Office of the Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Participated in the PowerPoint presentation
entitled, "HB 3001 Overview" dated 4/20/12.
ACTION NARRATIVE
1:06:08 PM
CO-CHAIR ERIC FEIGE called the House Resources Standing
Committee meeting to order at 1:06 p.m. Representatives Feige,
Herron, Gardner, Dick, Munoz, Foster, P. Wilson, and Seaton were
present at the call to order. Representative Kawasaki arrived
as the meeting was in progress. In attendance from the House
Special Committee on Energy were Representatives Pruitt,
Saddler, Petersen, Lynn, Foster, and Tuck (via teleconference).
Also in attendance were Representatives Doogan and T. Wilson,
and Senator Giessel.
HB3001-OIL AND GAS PRODUCTION TAX
1:06:58 PM
CO-CHAIR FEIGE announced that the only order of business would
be HOUSE BILL NO. 3001, "An Act relating to adjustments to oil
and gas production tax values based on a percentage of gross
value at the point of production for oil and gas produced from
leases or properties north of 68 degrees North latitude;
relating to monthly installment payments of the oil and gas
production tax; relating to the determinations of oil and gas
production tax values; relating to oil and gas production tax
credits including qualified capital credits for exploration,
development, or production; making conforming amendments; and
providing for an effective date."
1:07:32 PM
BRYAN BUTCHER, Commissioner, Department of Revenue (DOR), began
his presentation by stating the goals of HB 3001: incentivize
production on the North Slope both within and outside existing
units; generate additional jobs and activity for the Alaska
economy; build on work already undertaken in legislative
committees during the regular session; maintain the existing
structure of Alaska's Clear and Equitable Share (ACES) with
slight modifications to avoid major changes in tax structure;
and maintain alignment of working interest owners by not tying
incentives to individual companies. He explained the last
provision dealt with a situation that arose with previously
proposed legislation whereas some companies received tax
reductions, and some received tax increases. The five main
provisions of HB 3001 are: 30 percent gross revenue exclusion
for calculating a base tax and progressive tax for qualifying
new North Slope fields; 40 percent gross revenue exclusion for
calculating progressive tax for existing, currently producing
North Slope fields; reduce the cap on the maximum tax rate from
75 percent to 60 percent; extend 40 percent well lease
expenditure credit to North Slope - currently the North Slope
has a 20 percent credit and the rest of the state south of 68
degrees north latitude has a 40 percent credit; and allow
capital credits to be redeemed in the year they are earned
because the present schedule is difficult for the cash flow of
smaller companies, and is difficult to administer.
1:12:13 PM
COMMISSIONER BUTCHER said the governor used a hybrid approach
and intended for the bill to utilize proposals that had been
previously discussed, such as the gross revenue exclusion
introduced in the Senate Finance Committee as a way to
incentivize production. Furthermore, the production tax cap of
60 percent was introduced by the Senate Resources Committee as a
way to limit state take at high oil prices. In addition, the
gross revenue exclusion structure for new fields was applied to
existing fields and taken to a material level similar to that of
HB 110, which was supported by oil and gas companies.
Commissioner Butcher noted the Alaska Oil and Gas Association
(AOGA) indicated HB 3001 is meaningful tax reform that would
change investment in Alaska. The last provision is an expansion
of the well lease expenditure credit introduced and enacted in
2010 through the Cook Inlet Recovery Act.
1:14:31 PM
REPRESENTATIVE HERRON asked how percentages for the exclusions,
rates, and credits were determined.
COMMISSIONER BUTCHER explained that DOR agreed with the Senate
Finance Committee on the 30 percent gross revenue exclusion for
new fields. However, the percentage for calculating the
progressive tax was considered along with other percentages. He
restated that the governor sees the bill as a hybrid, bringing
together concepts and inspiring discussion of many different
approaches, such as a more gradual progressivity curve, moving
the "trigger" dollar amount, changes to the base tax rate, and
others. The bill will show one of many ways to get to
meaningful change.
1:17:02 PM
REPRESENTATIVE GARDNER clarified that the 30 percent gross
revenue exclusion on new oil fields is for 10 years, and then
rolls over to the proposed 40 percent gross revenue exclusion
for existing fields for an unlimited amount of time.
COMMISSIONER BUTCHER said correct, and he pointed out that the
30 percent would reduce the face tax and progressive tax for
new fields.
REPRESENTATIVE GARDNER requested that the responses from DOR to
questions raised by the Senate also be provided to members of
House committees.
COMMISSIONER BUTCHER agreed.
CO-CHAIR SEATON asked for an explanation of the goal which read:
To maintain alignment of working interest owners by
not tying incentives to individual companies
COMMISSIONER BUTCHER said the intent was to take an approach
that would not lead to tax increases for some companies and tax
decreases for others.
CO-CHAIR SEATON questioned whether allowing an equal tax break
for companies - if they invest or not - would defeat the purpose
of an incentive to production.
COMMISSIONER BUTCHER opined incentivizing production may be
DOR's goal, however, the department did not want to make changes
detrimental to some companies. He recalled testimony that a
consequence of the legislation proposed by the Senate may cause
a tax increase at current prices.
1:20:02 PM
CO-CHAIR SEATON encouraged Commissioner Butcher to reinvestigate
this question. He then called attention to the provision which
read:
Extends 40 percent well lease expenditure credit to
North Slope
COMMISSIONER BUTCHER, in response to Co-Chair Seaton, said the
well lease expenditure credits include capital expenditures, and
replace the 20 percent credits currently applicable on the North
Slope.
CO-CHAIR SEATON expressed his belief that as the bill is
written, 20 percent is not replaced by 40 percent, but adds 40
percent to 20 percent.
COMMISSIONER BUTCHER said, " ... we'll flesh that out."
REPRESENTATIVE KAWASAKI opined the key provisions in HB 3001 are
a hodgepodge of provisions from HB 110, which passed the House
but not the Senate, and from SB 192, which did not pass the
Senate. He encouraged Commissioner Butcher to explain how each
of the provisions taken from HB 110 and SB 192, and now included
in HB 3001, will advance the state to its goals of incentivizing
new production, filling [the Trans-Alaska Pipeline System
(TAPS)], and getting more capital development.
COMMISSIONER BUTCHER advised the presentation would begin with
the general concepts of the bill, and then go into more depth
using a sectional analysis. The governor's intent was to begin
with a blend of structures that have support. For example,
other jurisdictions with a progressivity system use brackets,
but because using brackets was not supported by the Senate, HB
3001 uses another way "to get to what we thought was
meaningful."
REPRESENTATIVE KAWASAKI heard testimony that progressivity and
brackets were necessary in any oil bill for it to be considered
meaningful. He asked whether there is a way to get an
acceptable meaningful bill without those provisions.
COMMISSIONER BUTCHER said the administration believes it can be
done. For clarity, graphs will be presented which compare
projected tax revenue under ACES, HB 110, and HB 3001.
1:24:27 PM
REPRESENTATIVE PETERSEN observed that the proposed changes to
the tax system are based on the premise that ACES is not
working. He asked whether audits covering the time period ACES
has been in effect - the last five or six years - are complete
and available for review.
COMMISSIONER BUTCHER said DOR has taken many years to adjust to
the changes to the regulations brought by ACES, as well as to
the switch from a gross to a net tax. Currently, DOR is
comprehensively auditing the first year of ACES - 2008. He said
completion of the audits will speed up now and that the
department is well within its statutory deadlines. However,
results of the audits are confidential and will not play a role
in this debate.
REPRESENTATIVE GARDNER recalled HB 110 proposed reducing the
time limit. She asked what the time limit would be, had HB 110
passed, and whether DOR would still be within the limit.
COMMISSIONER BUTCHER said yes. Although HB 110 proposed
reducing the time limit to four years, the current time limit is
six years. He further explained that after each regulation is
written and implemented by the department, the companies have an
opportunity to submit a new tax return specific to the
regulation, and the time limit begins anew. In most, if not all
cases, DOR has received the revisions for 2008-2009, thus has
remained under the statutory limit.
1:27:57 PM
BRUCE TANGEMAN, Deputy Commissioner, Office of the Commissioner,
DOR, presented slide 5 entitled, "How the Gross Revenue
Exclusion Works" which is the income statement format from the
Tax Division Revenue Sources Book, with some additions. He
observed that there has been much discussion centered on
different methods of taxes, and on DOR's regulations and audits;
however, the bill basically makes one calculation change for
existing fields and two calculation changes for new fields. He
warned against "throwing out ACES, starting over, [and]
recreating the wheel." The state is often unfairly taken to
task for personnel shortages that cause the division to fall
behind the pace set by industry. But now, since the state has
been under one tax structure for five years, the division can
keep up with industry, therefore, it is very important to work
within the existing system. Mr. Tangeman said the state tax
division understands the current tax system as well or better
than private industry, and is now on equal footing with
industry.
MR. TANGEMAN returned to slide 5 and said cells D and E are the
ACES and HB 3001 structures, which show how they calculate down
through the income statement. The only change under this
legislation for existing production is found on cell E, line 24.
Everything up to that point and calculating the gross point of
production and the production tax value (PTV) remains the same
as under ACES. Under HB 3001, the calculation of the base tax
is taken from cells D and E, line 20, and then the production
tax percentage is calculated off of that. The change is shown
in cell E, line 24 which is a 40 percent reduction to the gross
value at the point of production shown in cell E, line 12. So,
the state is taking 40 percent of approximately $17.4 billion
and that amount is a reduction in cell E, line 24 and which is
then subtracted from the PTV in cell E, line 20 resulting in a
new adjusted production tax value shown in cell E, line 25. Mr.
Tangeman pointed out that the progressive tax rate was already
calculated on the full PTV, so the 16.7 percent progressive tax
rate is applied to the new adjusted production tax value. The
result is shown in the difference between the amount shown in
cell D, line 26, of approximately $2 billion calculated under
ACES, and the amount shown in cell E, line 26, of approximately
$900 million calculated under HB 3001. Cells D and E, line 27
add the base tax and the progressive tax rate: the difference
between the total taxes before credits is approximately $1.1
billion; the difference after credits is approximately $1.4
billion.
1:33:34 PM
REPRESENTATIVE KAWASAKI asked whether the Gross Revenue
Exclusion in cell E, line 24 is comparable to a standard income
tax deduction.
MR. TANGEMAN described the difference as a tax reduction.
REPRESENTATIVE KAWASAKI asked for the origin of the 40 percent
reduction and how that reduction will lead to more production
and jobs.
COMMISSIONER BUTCHER explained DOR worked with the governor
looking at different tax rate models - with absolute profit and
with percentages of profit - to determine what would be viewed
by the industry as material and similar to HB 110. The decision
was made at 40 percent in the belief that companies will see
this as a material change, and that will lead to more investment
and production.
REPRESENTATIVE KAWASAKI asked whether the department found that
a savings of $1.5 billion was meaningful, and then deducted that
amount from the Gross Revenue Exclusion.
COMMISSIONER BUTCHER said the decision was made by looking at
the percentages through the effective tax curve, the absolute
profit, and the percentages of profit. The reduction in HB 3001
is less than that proposed by HB 110, but is not radically less.
He cautioned that a tax savings radically less would not
increase the likelihood that companies would change their view
of Alaska in terms of investment. In fact, there is no "perfect
percent," but this is a general area to work from that will be
viewed as meaningful. In further response to Representative
Kawasaki, he said the term material or meaningful refers to a
tax reduction that reflects looking at the tax rate, the dollar
amount, the percentage change between the government and the
companies, and other things.
1:37:59 PM
REPRESENTATIVE SADDLER returned attention to slide 5, and asked
Mr. Tangeman to review the calculations found in cell E, lines
12-16.
MR. TANGEMAN responded that 40 percent of $17.4 billion is the
exclusion amount which is deducted from the PTV of $12.4 billion
shown in cell E, line 20.
COMMISSIONER BUTCHER pointed out 100 percent of production is
taxed at the 25 percent base rate; 60 percent of the reduction
is taxed at the progressivity level; and 40 percent is held
harmless from the progressivity level.
REPRESENTATIVE GARDNER recalled the Senate suggested - for
simplicity - that progressivity could be kept the same, and the
state could take out 40 percent of the profits with the same
result. She inferred DOR's method adds a layer of complexity to
the tax system for the legislature and the industry to
understand.
CO-CHAIR FEIGE noted the state could get rid of progressivity.
COMMISSIONER BUTCHER agreed that the change could be made in
different ways, but this method is "a fairly minor tweak to us."
MR. TANGEMAN commented that the bulk of the complexity within
the ACES structure is taking place "above the PTV value." The
change being discussed is below the PTV calculation and is a tax
capitalization change that has "minimal to no effect on us
internally - and the private sector - in trying to figure out
the differences here ...."
CO-CHAIR SEATON asked whether the Deductible Capital
Expenditures found in cells D and E, line 16 are the aggregate
deductible expenditures estimated across the North Slope and all
existing fields for 2013.
MR. TANGEMAN said that estimate comes from the Fiscal Year 2013
(FY 13) Production Tax Estimate found in the Revenue Sources
Book, page 104. These are allowable lease expenditure
deductions; however, other expenditures that companies make -
that are not deductible - are not reflected in this estimate.
CO-CHAIR SEATON requested that DOR provide models on companies
that are investing and those that are not investing.
COMMISSIONER BUTCHER agreed. He further explained that the
Senate bill was amended to attach progressivity to gross
profits. This meant that a company working on a high-cost field
trying to develop viscous or heavy oil was penalized because
progressivity followed gross; however, a company "in harvest
mode," saw benefits. This provision was seen as a tax increase
by industry, and HB 3001 seeks to not penalize companies that
have higher costs.
1:44:41 PM
CO-CHAIR FEIGE clarified that HB 3001 is configured so that the
more expensive it is to run a field, and the more investment
that is made, the lower the percentage of total revenue is paid
in taxes. This is the advantage of making investments.
COMMISSIONER BUTCHER said correct. Currently ACES is "all net"
rather than having the progressivity piece being strictly gross,
and not having companies able to deduct their expenses.
CO-CHAIR SEATON reminded the committee it has not analyzed gross
progressivity. He said he was interested in the incentives that
are built into the structure of HB 3001 for companies that are
in harvest mode, that are in expansion mode, that are investing
overseas, and that are investing in Alaska. Merely reducing 40
percent of gross from progressivity does not make any
discrimination between companies engaged in the various
aforementioned pursuits, and he urged DOR to show what the
governor and the administration believe will incentivize
companies to invest in Alaska. Specifically, how HB 3001 will
incentivize investment in Alaska instead of Russia.
COMMISSIONER BUTCHER acknowledged the information presented so
far was more applicable to a previous meeting.
REPRESENTATIVE HERRON asked whether Gross Revenue Exclusion
could be called adjusted gross revenue.
COMMISSIONER BUTCHER indicated yes. He explained DOR took the
same language used by the Senate Finance Committee. Slide 6
entitled, "Effective production tax rates" was a graph showing
the tax rate for ACES is substantially higher than those
proposed by HB 110 and HB 3001. House Bill 3001 is a
substantial reduction from current law, and a small increase
from HB 110. The differences between the rates paid for HB 110
and the current bill occur mostly when the price of oil is
between $90 and $160 per barrel. At low prices, and extremely
high prices, the difference is slight. He said he believed the
companies will see the reduction of taxes in HB 3001 as
meaningful because the increase from proposed HB 110 is "a
couple hundred million dollars."
1:49:38 PM
REPRESENTATIVE GARDNER surmised that the production tax rate
shown for ACES on slide 6 assumes companies did not reinvest at
all to bring down the progressivity rate and lower their taxes.
COMMISSIONER BUTCHER explained that the chart indicates what tax
rates a company would pay, although if there were a lot of
investment a company would benefit some from that. Ultimately,
the exceedingly high ACES tax rate itself is a deterrent to
investment in Alaska. Slide 7 entitled, "Marginal Government
Take" illustrated a frequent complaint from oil companies that
during periods of high prices, ACES takes their profit away. At
high oil prices 80 percent to 90 percent of each dollar goes to
government due to progressivity. Moreover, unlike federal
income tax rates, where everyone pays a lower rate at a lower
bracket of income, in Alaska the higher tax rate is paid on the
entire barrel of oil, placing the government take at close to
100 percent. On slide 7, the ACES tax rate rises to over 90
percent when oil is approximately $130 per barrel. The red line
represented HB 110, and indicated how tax increases stepped up
in each bracket, and the blue line represented HB 3001,
indicating tax increases in the same manner as ACES, but at a
lower rate.
CO-CHAIR SEATON pointed out high marginal tax rates mean that
reinvestment by industry lowers the production tax value and
dramatically lowers taxes. He posited HB 3001 is created to
lower the marginal tax advantage from reinvestment in Alaska,
and inquired what is being substituted for this tax advantage to
encourage reinvestment in Alaska versus somewhere else.
1:54:44 PM
MR. TANGEMAN said the incentive through the operating
deductibility and the capital deductibility has not changed.
The method to calculate PTV remains identical to that of ACES,
thus a company that reinvests will realize the same benefits.
The only change is the amount of tax a company will pay;
therefore, the amount of tax paid on the ultimate net PTV is
going down.
CO-CHAIR SEATON acknowledged the tax credits incentive has not
changed; however, the incentive of taxing a barrel as one unit
means that as a company reinvests in Alaska it dramatically
lowers its production tax value on all of its oil. The
calculation in HB 3001 eliminates 40 percent of the gross value
of production, thus the amount of tax incentive to reinvest is
lowered by 40 percent. He surmised another tax incentive must
have been substituted in the bill.
COMMISSIONER BUTCHER said no. The bill keeps an aggressive
marginal take from 70 percent to 80 percent. Companies have
not spoken in favor of high progressivity; in fact, in the five
years after the passage of ACES, Alaska has not experienced
capital reinvestment at the rate that is taking place in North
Dakota, Texas, and Alberta, Canada. He questioned whether the
intent of ACES was to encourage reinvestment in this manner and
opined oil companies would say it does not.
REPRESENTATIVE SADDLER returned attention to slide 7 and asked
for the meaning of the percentages on the "y" axis of the graph.
COMMISSIONER BUTCHER said the percentages are of the additional
dollar take. For example, 90 percent at $130 per barrel (/bbl)
of oil means that "90 cents of that dollar would go to the
government." In further response to Representative Saddler, he
said the drop in the percentage at $130/bbl is because at oil
prices lower than $130/bbl the tax increase is point four, but
at $130/bbl the amount of the tax increase drops to a gradual
point one, resulting in a lower marginal take per dollar.
1:58:30 PM
REPRESENTATIVE P. WILSON questioned why Alaska - unlike other
jurisdictions - maintains a higher tax rate on the entire barrel
of oil when prices are rising.
COMMISSIONER BUTCHER reminded the committee that the governor's
"bill with brackets" was not supported by the Senate. The
governor's intent for HB 3001 was to use the structure supported
by the Senate for new fields, and to apply that to existing
fields, as long as the blended legislation resulted in material
change. In further response to Representative P. Wilson's
comment on whether HB 3001 is passable, he noted that the
effective tax rate is at a point where industry is expected to
testify; as a matter of fact, AOGA sees this as a material
change. Slide 8 entitled, "Absolute Profit - ACES" indicated at
oil prices of approximately $120/bbl, total government take is
about $12.3 billion and company take is $4.9 billion. Slide 9
entitled, "Absolute Profit - CSHB 110(FIN)" indicated that at
oil prices of approximately $120/bbl, total government take
would be about $11 billion and company take would be $6.3
billion. Slide 10 entitled, "Absolute Profit - HB 3001"
indicated that at oil prices of approximately $120/bbl, total
government take would be $11.2 billion and company take would be
$6 billion. He concluded that under these circumstances ACES
garners the state $9.6 billion and HB 3001 would garner $8
billion, which is still a substantial amount of money and would
also increase investment and ultimate production.
COMMISSIONER BUTCHER presented slide 11 entitled, "Share of
Profit - ACES" which indicated at $120/bbl the profit to state
and federal government currently is 7l percent and to companies
is 29 percent. Slide 12 entitled, "Share of Profit - CSHB
110(FIN)" indicated that at $120/bbl the profit to government
would be 64 percent and to companies would be 36 percent. Slide
13 entitled, "Share of Profit - HB 3001" indicated that at
$120/bbl the profit to the state would be 46 percent and to
companies would be 35 percent. This would be a substantial
reduction from ACES and a small increase from HB 110, and would
be viewed as meaningful by companies. Slide 14 entitled,
"Effective production tax rates - new fields" indicated the
rates on new fields for ACES, HB 110, and HB 3001. The rate for
HB 3001 is a lesser reduction than for HB 110, was initially
suggested by the Senate, and gives no tax breaks for new fields.
Commissioner Butcher opined this rate will be substantive enough
to gain meaningful investment.
2:05:47 PM
CO-CHAIR SEATON asked for information on the effects of post-
tax, post-credits, and well lease expenditure credits that are
applied to profits by HB 3001.
MR. TANGEMAN said the 40 percent well lease credit would take
the HB 110 line from "20 to 40."
CO-CHAIR SEATON asked whether the difference between the red
line [HB 110] and the blue line [HB 3001] was made by 20 percent
tax credits on well lease expenditures on the North Slope.
2:07:17 PM
The committee took a brief at-ease.
2:08:20 PM
COMMISSIONER BUTCHER clarified that both the red and blue lines
include the well lease credits; if the 40 percent credits were
taken out of the bill and the current 20 percent remain, there
would be "a little bit less of a tax reduction, compared to
current law." He offered to provide an additional graph to
reflect this scenario.
REPRESENTATIVE MUNOZ understood from the administration that
approximately $14 billion in reinvestment may happen if there is
meaningful tax reform. She inquired as to how much reinvestment
is expected specifically for legacy fields.
COMMISSIONER BUTCHER related the governor estimated $5 billion
of investment from companies working in existing fields and $9
billion from new fields, although more investment is
anticipated. Slide 15 entitled, "Marginal Government Take - new
fields" indicated "where the percentage would be of each
additional dollar increase in the price of oil." Similar to
that of the existing fields, the blue line [HB 3001] showed
there would be lower marginal take for the government than is
provided by ACES, and tracked a little higher than the red line
[HB 110], because there are no brackets. Slide 16 entitled,
"Share of Profit - ACES new fields" indicated at oil prices of
$120/bbl the prospective percentage of profit to government is
71 percent and to companies is 29 percent. Slide 17 entitled,
"Share of Profit - CSHB 110(FIN) new fields" indicated at
$120/bbl the prospective percentage of profit to government
would be 59 percent and to companies would be 41 percent. Slide
18 entitled, "Share of Profit - HB 3001 new fields" indicated at
$120/bbl the prospective percentage of profit to government
would be 61 percent and to companies would be 39 percent. He
pointed out the substantial benefit to companies that do the
exploration, investment, and development in expensive new
fields.
2:12:00 PM
REPRESENTATIVE SADDLER asked for a projection on the cost of a
barrel of oil over the next five to ten years.
COMMISSIONER BUTCHER stated DOR expects the price of oil to stay
around the $110/bbl range. Other projections range from $70-
$170/bbl. He noted that at the time ACES was under discussion,
oil prices were around $50-$60/bbl, thus consideration of its
outcomes at higher prices were not fully explored.
MR. TANGEMAN added that the absolute profit slides are based on
consistent prices for one entire year.
CO-CHAIR SEATON disagreed with Commissioner Butcher and related
that the discussion of ACES did cover high marginal tax rates
with data provided by oil and gas consultants. He then asked
whether the small producer tax credit is incorporated in DOR's
overview figures. This is important because he assumed the
prospective percentages on new fields are focused on non-legacy
producers.
COMMISSIONER BUTCHER said no.
CO-CHAIR SEATON stressed that ACES incorporates a small producer
tax credit specifically tasked to change some of the economics
for small fields and new producers. If this aspect is not
included in the present analysis, the picture will not be
complete; he urged for this subject to be included in subsequent
field-by-field analyses.
REPRESENTATIVE PETERSEN returned to the subject of new
investment and asked for the period of time during which the
expected investment would take place.
COMMISSIONER BUTCHER estimated three to ten years.
2:16:47 PM
REPRESENTATIVE PETERSEN called attention to slide 5, cell E,
line 32 and observed that the total tax after credits reduction
of $1.46 billion, when multiplied by 10 years, equals the
expected investment amount of $14 billion.
COMMISSIONER BUTCHER said this is a coincidence.
MR. TANGEMAN, also referring to slide 5, pointed out that DOR
estimated 47 percent of the total oil production 10 years from
now must come from new sources. The proposed legislation is
intended to ensure that significant investment is made, and new
sources are realized.
CO-CHAIR SEATON returned attention to slide 18, and asked how
much of the state take is projected from production tax.
COMMISSIONER BUTCHER said DOR would provide a breakdown.
2:20:33 PM
MR. TANGEMAN, also in response to Co-Chair Seaton's question,
said he did not want to speculate at this time.
2:20:41 PM
CO-CHAIR SEATON reminded the committee he has requested modeling
of HB 3001 based on the 4/11 analysis of a "Great Bear type"
production field that showed at $100/bbl through 2028, the state
would have a negative loss of production tax of $2 billion. He
remarked:
And if we averaged, I think it was, on that analysis,
$80 a barrel, we have a negative $7 billion from
production tax. And so I'm trying to figure out how -
if we're looking at a negative $2 billion in
production tax loss over the first 15 years of
operation of that style of a field, how we can have
that not calculated into this, as far as share of
revenue. And so, I'd appreciate that, and I know that
the Great Bear ... people are trying to say ...
they're not capable of drilling 200 wells a year, or
something, but ... we have a commercial proposal
before us, that was presented to the House, had
numbers ... of wells, had production amounts per year,
and so I don't want to go in and say that that's not
doable by someone else, especially when we have 6,000
wells a year being drilled in other shale operations
in other places, and we're trying to somehow mimic
that .... If you would get back to us on the analysis
of that same thing that we did just before we
adjourned last year ... and then roll that into how
this works, if these new fields are similar and are
composed of shale oil.
COMMISSIONER BUTCHER said DOR will address this issue. He
advised that shale oil is not what the department is used to
dealing with in terms of using capital credits to get
conventional oil. The development of shale oil is almost
continual capital spending - drilling well after well - because
90 percent of the oil comes from the well in the first two
years. Production is also radically different in terms of
taxation and development; for example, by the installation of
permanent roads, the use of many vehicles, and the number of
wells drilled. This would be a huge change in oil development
in Alaska, affecting taxes and permitting. Commissioner Butcher
cautioned that fitting in shale oil is very difficult.
Furthermore, the DNR says shale oil development is not as near
as previously thought.
CO-CHAIR SEATON observed that the shale oil proposal has been
underway for one year and millions of dollars have been spent on
leases and investigations in the Brooks Range. He warned that
DOR may not notice, but changes in tax structure will impact
shale oil development; in fact, projections of negative revenue
should be considered when designing structures and incentivizing
new fields.
2:25:46 PM
COMMISSIONER BUTCHER assured the committee DOR and DNR do take
the potential for shale oil seriously. Returning to the
presentation, slide 19 entitled, "HB 3001 Summary" read:
· Provisions in HB 3001/SB 3001 represent "meaningful change"
· Meaningful change is needed to incentivize development of
Alaska's oil resources
· Meaningful change is needed to stimulate jobs and economic
activity for Alaska's economy
· Producers have committed to additional investment
contingent on meaningful change
COMMISSIONER BUTCHER expressed the administration's belief that
production must come from known existing fields in the short-
term to stem the decline of production, hence its focus on
legacy fields.
2:27:13 PM
REPRESENTATIVE HERRON observed that critics believe the
administration has a blind allegiance to oil producers. He
asked the commissioner whether DOR could provide a written
commitment from the producers to the governor saying that there
will be investment contingent on meaningful change.
COMMISSIONER BUTCHER said he would provide to the committee
"whatever the governor has on, on that."
REPRESENTATIVE LYNN referred to the final bullet point on slide
19 which read:
Producers have committed to additional investment
contingent on meaningful change
REPRESENTATIVE LYNN asked for clarification on the form of the
commitment, the meaning of "additional investment," and who will
decide whether there has been "meaningful change."
COMMISSIONER BUTCHER responded:
The governor and I have both said the same thing from
the very beginning which is: We can lay out what we
see is the problem. We can lay out what we think is
the solution, but ultimately companies are going to
have to come forward and convince you ... how they're
going to look at Alaska differently, that's a very big
piece of this, government can't ... wrap it all up in
a nice neat bow and tell you that, you ultimately have
to hear from the industry: number one, that its
material and number two, what that means and what that
means for Alaska.
CO-CHAIR SEATON recalled that several years ago BP testified
that it is not interested in the rapid acceleration of
production because as the technology improves for the production
of heavy oil, light oil will be needed as a diluent to ship the
heavy oil through TAPS. He asked whether the industry is now
willing to rapidly accelerate production and strip the light oil
from the Prudhoe Bay area.
COMMISSIONER BUTCHER said no, BP is still working to determine
what percentage of light and heavy oil is needed to flow down
the pipeline. In addition, during the drafting of HB 110, BP
indicated it is not at the point of determining what incentives
are desired for the production of heavy oil. The state's role
in tapping the tens of billions of barrels of heavy and viscous
oil in the Prudhoe Bay/Kuparuk area is to continue to work with
industry.
2:32:58 PM
CO-CHAIR SEATON stated his willingness to work with everyone on
the North Slope to incentivize technology; in fact, not having
ring-fencing and allowing companies to write off high costs
against the existing production tax is the best way for the
state to do that. However, he questioned why the state would
change the taxes, thereby saving the industry billions of
dollars as an incentive for accelerating infield drilling and
stripping the oil out now, in spite of knowing that at least one
of the big three oil companies has no intention of doing that.
BP will take the tax savings, but has other strategic reasons
for not accomplishing the goal. Co-Chair Seaton asked for the
purpose of pursuing a tax-based incentive in light of BP's lack
of interest in increasing production by stripping light oil out.
COMMISSIONER BUTCHER answered that there are billions of barrels
of oil on the slope, "and in conversations I've had with DNR or
anybody else, I've never heard it couched that potentially there
wouldn't be the light oil available on the slope, in particular
if we get more investment and, and more development." He opined
whether BP holds back on light oil is not one of the big issues.
MR. TANGEMAN pointed out the goal to make Alaska more
competitive is to draw investment dollars, and those investment
dollars will be used by companies in different manners. BP has
a huge resource of heavy oil, thus its investment will probably
be used for heavy oil. Although shale oil has become a topic
for discussion, shale oil is just now economic because the price
of oil has risen above $60-$70/bbl. In North Dakota, new
technology and high oil prices combined to make the development
of the known reserves in the Bakken shale oil field economic.
The development of heavy and viscous oil requires the same
combination of technology, investment, and sustained high
prices.
CO-CHAIR SEATON concluded the state is not listening to the
companies that are saying the light oil will be needed as
technology advances, that it intends to change the tax rates to
try to force the companies to invest in the depletion of light
oil, and that it is waiting for technology that is unknown at
this time. He questioned whether the state should incentivize
now, when there is testimony from industry that the time is not
right to rapidly accelerate and deplete more easily-accessible
light oil. Co-Chair Seaton cautioned that all three companies
have to agree on accelerating production in legacy fields.
2:38:34 PM
REPRESENTATIVE KAWASAKI advised the Bakken shale field in North
Dakota became economic not due to changes in the tax system, but
because of high prices and a technological advance: hydraulic
fracturing became commonplace. He encouraged more testimony on
the goals and provisions of HB 3001, and asked for the actual
meaning of "meaningful" beyond the dictionary definitions of
"significant" and "purposeful." Representative Kawasaki heard
that meaningful change means "significant dollars back to the
oil industry," but targeting an oil tax regime to change the
behavior of companies and which results in more production,
development, and local hire, would be meaningful to him - and
that is what the administration should demand from the lessees.
He remarked:
I want to know exactly what the governor means by the
word meaningful ... I want to know exactly how each of
those specific bullets and ... each of the specific
bullets points on [slide] 2, dealing with key
provisions, are going to get us to more oil, producer
commitments, more development on the North Slope and
the rest of the state, more local hire ... I didn't
see it with HB 110 ...."
2:41:42 PM
REPRESENTATIVE SADDLER heard there should be a linkage between
the modification of oil taxes and a firm commitment to produce
more oil. He asked whether mechanisms exist to make this
linkage.
COMMISSIONER BUTCHER relayed it is unconstitutional to attach
quid pro quo to state tax policy. Furthermore, industry may
intend to meet a certain commitment, but changes in economic
circumstances, such as a drop in oil prices or losses due to an
oil spill, may intervene. He opined these are reasons that make
it hard for companies to come forward; however, he does expect
industry would provide details on the potential of the legacy
fields and "convince you that this is going to lead to something
material."
MR. TANGEMAN added that DOR is not looking in a vacuum just at
the effect on Alaska, but is comparing Alaska to the rest of the
world. In Alberta, North Dakota, Texas, and Russia, investment
is taking place due to high oil prices. He encouraged
legislators to study the economics, but to keep in perspective
that Alaska is not seeing investment sufficient to turn the
decline curve around.
REPRESENTATIVE SADDLER inquired as to the details of the
constitutional issue broached by Commissioner Butcher.
COMMISSIONER BUTCHER said he didn't know, but had discussions
with the Department of Law (DOL).
REPRESENTATIVE SADDLER requested a response for his
constituents.
CO-CHAIR SEATON asked whether Commissioner Butcher believed a
tax rate structured on a production rate above the decline rate
of the field is illegal, or unconstitutionally changes the tax
rate. He remarked:
That's a quid pro quo - you know - you get the tax
reduction if you produce above the decline curve, and
I just want to clarify that that's not the style of a
tax quid pro quo that you're talking about being
illegal.
2:46:48 PM
COMMISSIONER BUTCHER said he was talking about a situation
"doing a company-specific 'We'll do this to your taxes if you
this.'"
CO-CHAIR FEIGE observed decoupling becomes more of an issue if
there is a large sale of gas. He asked whether the legislature
should consider decoupling at this time.
COMMISSIONER BUTCHER advised the administration does not see
decoupling as a serious issue at this point. If the 2013
legislative session becomes the "gas fiscal session," both the
companies and the state acknowledge that changes are necessary
to progress the large gas pipeline; however, the decoupling
issue was not a priority for this legislation.
MR. TANGEMAN pointed to the benefit of making changes by working
within an existing tax structure that is understood. There are
different ways to change the existing tax structure, but moving
to gas will have an effect on all of the resources. Today's
changes do not require starting over.
REPRESENTATIVE DICK suggested two ways to incentivize and raise
production: drill more holes into the existing, finite amount
of oil, which would hasten the end of the resource; or enhance
technological development. The technology does not exist to
address heavy oil, although the state could invest in research
in heavy and tidal oil, and he urged for a focus on research.
He then asked about the possibility of being patient and waiting
for oil migration within a field to drain all of the oil out
through the wells that are already there.
COMMISSIONER BUTCHER expressed the administration's belief that
Alaska is not running out of oil; in fact, DOR and DNR will be
presenting details on production from the North Slope. When
production began in Prudhoe Bay, there was very high pressure;
90 percent of the flow was oil, and less than 10 percent was a
combination of water and natural gas. Now the companies are
cycling eight billion cubic feet of gas to keep up the pressure
and the flow is 90 percent water, gas, and sand in many wells.
Today it is much more expensive to produce a barrel of oil out
of Prudhoe Bay.
MR. TANGEMAN added that the Alaska Oil and Gas Conservation
Commission (AOGCC) has a significant role in that it monitors
the best way to extract the most oil from a field; for example,
limiting the initial flow to ensure oil is not left in the
ground. In addition, the U.S. Geological Survey (USGS)
determined the North Slope is 70 percent unexplored; in fact,
there is agreement that there remains a significant hydrocarbon
base on the North Slope - in addition to Prudhoe Bay - that can
be realized with new research, development, and investment.
REPRESENTATIVE SADDLER asked whether there are fallacies or
false arguments that the legislators should guard against during
the subsequent testimony.
2:53:53 PM
COMMISSIONER BUTCHER said it is easy to "get bogged down into a
lot of complexity." Tax rates, cost, world economics, and other
issues play a part in economics, but it is possible to focus on
specifics, such as the extremely high cost of development in
Alaska, which foils comparisons with the Lower 48. He also
recommended resisting simple answers to complex problems.
MR. TANGEMAN related the biggest fallacy is: How do we get back
to that number? Instead, the question is: Are we at the right
number? He explained that the state assessed a gross tax system
[economic limit factor (ELF)] for many years, then changed to a
net system [petroleum profits tax (PPT)], and then after one
year changed to ACES. Although the state's experience with a
net tax system was limited to one year, within weeks of its
introduction, ACES was enacted. There was a billion plus dollar
difference between PPT and ACES, and after experiencing the
effects of five years under the ACES tax system, Mr. Tangeman
questioned whether ACES provides the right number for the state,
and suggested seeking a return to that number is a false
discussion.
CO-CHAIR SEATON returned attention to the question of activity
around the world that is not seen in Alaska. He has heard that
HB 3001 might create a stampede; however, right now on the North
Slope: there are more new players than the total of existing
players; last year was the most successful lease sale ever; more
companies are looking at conventional and nonconventional plays;
employment is highest of all time; and there are more
international and small companies participating. Furthermore,
the state is collecting income from lease sales and interest.
There are 11 new companies, and he inquired how many are
necessary to be regarded as investment on the North Slope. He
related that Brooks Range Petroleum is producing from Mustang
10,000-13,000/bbls per day but may not be able to access TAPS in
2013-2014 when needed. Brooks Range Petroleum also has plans
for constructing processing facilities. As a matter of fact,
facility access is a real problem that needs to be addressed
now, and he asked why is there no interest from state agencies
to assist in oil production that is two years closer than that
from Point Thomson, or in shale prospects. Representative
Seaton asked what activities the administration is interested
in, other than a high rate of investment by the big three
producers.
3:01:45 PM
COMMISSIONER BUTCHER recalled employment peaked right before
ACES passed because maintenance was needed on the aging fields,
but over the last four or five years employment has plateaued.
In other places such as Texas, employment has exploded due to
high oil prices. Also, capital investment in Alaska is high for
mature fields, but has "dipped a little bit" and is going crazy
in other places. Triple-figure oil has made prospects economic
that were not before; in fact, Texas was on the same decline
curve as Alaska, but has begun to turn the decline around, and
Alaska continues with a slow decline.
MR. TANGEMAN explained that ACES provides a very generous suite
of tax credits which draw new companies to the state, but the
money to fund the credits comes from the taxpayers, therefore,
when they become producers and taxpayers, there is less
enthusiasm. Companies must consider what will happen if they
become producers, and what the opportunities are in North
Dakota, Texas, and Alberta. Although explorers are interested
"there's a definite disconnect between that side of ACES and the
production tax side of ACES."
REPRESENTATIVE GARDNER asked DOR to provide information on
whether the new oil production in Texas is from legacy fields
that are producing more, or from all new fields.
COMMISSIONER BUTCHER said there is a mix of production from both
that is now economic due to high prices.
3:06:21 PM
[HB 3001 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:06 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB3001A.pdf |
HRES 4/20/2012 1:00:00 PM |
HB3001 |
| HB3001 DOR Fiscal Note 4.18.12.pdf |
HRES 4/20/2012 1:00:00 PM |
HB3001 |
| Gov Transmittal Letter to Speaker.pdf |
HRES 4/20/2012 1:00:00 PM |
|
| HB 3001 Sectional Analysis - DOR.pdf |
HRES 4/20/2012 1:00:00 PM |
HB3001 |
| HRES HB 3001 DOR Overview 4.20.12.pdf |
HRES 4/20/2012 1:00:00 PM |
HB3001 |