Legislature(2019 - 2020)BARNES 124
04/22/2019 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Alaska's Oil and Gas Tax Regime by the Department of Revenue | |
| HB122 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 122 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 22, 2019
1:03 p.m.
MEMBERS PRESENT
Representative John Lincoln, Co-Chair
Representative Geran Tarr, Co-Chair
Representative Grier Hopkins, Vice Chair
Representative Sara Hannan
Representative Ivy Spohnholz
Representative Dave Talerico
Representative Sara Rasmussen
MEMBERS ABSENT
Representative Chris Tuck
Representative George Rauscher
OTHER LEGISLATORS PRESENT
Representative DeLena Johnson
COMMITTEE CALENDAR
PRESENTATION(S): ALASKA'S OIL AND GAS TAX REGIME BY THE
DEPARTMENT OF REVENUE
- HEARD
HOUSE BILL NO. 122
"An Act relating to the Funter Bay marine park unit of the state
park system; relating to protection of the social and historical
significance of the Unangax cemetery located in Funter Bay and
providing for the amendment of the management plan for the
Funter Bay marine park unit; and providing for an effective
date."
- MOVED HB 122 OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HB 122
SHORT TITLE: FUNTER BAY MARINE PARK: UNANGAN CEMETERY
SPONSOR(s): REPRESENTATIVE(s) HANNAN
04/03/19 (H) READ THE FIRST TIME - REFERRALS
04/03/19 (H) RES, FIN
04/15/19 (H) RES AT 1:00 PM BARNES 124
04/15/19 (H) Heard & Held
04/15/19 (H) MINUTE(RES)
04/17/19 (H) RES AT 1:00 PM BARNES 124
04/17/19 (H) -- MEETING CANCELED --
04/22/19 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
DAN STICKEL, Chief Economist
Tax Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation
entitled, "Alaska Oil and Gas Production Tax Calculation ("Order
of Operations"), revised from 4-15-19 version" and answered
questions.
BRUCE TANGEMAN, Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered a question during the PowerPoint
presentation entitled, "Alaska Oil and Gas Production Tax
Calculation ("Order of Operations"), revised from 4-15-19
version."
ACTION NARRATIVE
1:03:01 PM
CO-CHAIR JOHN LINCOLN called the House Resources Standing
Committee meeting to order at 1:03 p.m. Representatives Hannan,
Rasmussen, Hopkins, Tarr, and Lincoln were present at the call
to order. Representatives Spohnholz and Talerico arrived as the
meeting was in progress. Also present was Representative
Johnson.
^PRESENTATION(S): ALASKA'S OIL AND GAS TAX REGIME BY THE
DEPARTMENT OF REVENUE
PRESENTATION(S): ALASKA'S OIL AND GAS TAX REGIME BY THE
DEPARTMENT OF REVENUE
1:03:17 PM
CO-CHAIR LINCOLN announced the first order of business would be
a continuation of the Department of Revenue presentation that
was previously heard on 4/15/19.
1:03:42 PM
DAN STICKEL, Chief Economist, Tax Division, Department of
Revenue (DOR), provided a PowerPoint presentation entitled,
"Alaska Oil and Gas Production Tax Calculation ("Order of
Operations"), revised from 4-15-19 version." Mr. Stickel noted
slides 1-15 were reviewed at the previous hearing and directed
attention to slide 16, which was a five-year comparison of the
production tax calculation for North Slope oil and gas from
fiscal year 2017 (FY 17) through the forecast for FY 21. In FY
17, all companies were paying at or below the gross minimum tax;
in FY 18, some companies paid above the minimum tax; beginning
in FY 19, several major producers are forecast to pay above the
minimum tax through FY 21. He said that was the conclusion of
the original presentation.
1:06:17 PM
MR. STICKEL continued to the first addendum to the presentation
entitled, "FY 2020 Distribution of Cash Flows." Slide 19 was an
analysis of the distribution of cash flows from North Slope oil
production, also known as "government take" or "company take."
The basis for the analysis is cash flows to industry after
subtracting transportation costs and lease expenditures. He
explained the analysis was modeled two ways: on a typical non-
gross value reduction (non-GVR) eligible field and on all North
Slope production and spending. Slide 20 was the model on
typical non-GVR production and outlined the assumptions made by
DOR which he described as follows: FY 2020 data for the Spring
2019 revenue forecast; a single company; all non-GVR production.
He pointed out this most recent analysis reflects change to the
federal corporate income tax rate from 35 percent to 21 percent.
Slide 21 was revised from the original version and illustrated
the typical cash flow from one barrel of non-GVR production
based on an Alaska North Slope (ANS) price of $66 per barrel:
costs represent approximately one-half of the value; the state
and municipalities get approximately 35 percent; the federal
government gets approximately 13 percent; producers get
approximately 51 percent. Revisions to the previous slide were
based upon the change to the federal corporate income tax and on
improved economics. Slide 22, also revised from the previous
presentation, illustrated government take at a range of prices;
the percentage of government take is higher at lower oil prices.
1:11:31 PM
MR. STICKEL explained slide 23 is a model similar to that shown
on slide 21, except looking at all slope/industrywide production
and costs, including special tax provisions for new fields, and
including companies that have exploration and development and
thus are not currently paying tax. Slide 24 - in a manner
similar to slide 21 - illustrated the typical cash flow from one
barrel of oil using all slope/industrywide production: the
state and municipalities get approximately 38 percent; the
federal government gets approximately 13 percent; producers get
approximately 49 percent. Slide 25 - in a manner similar to
slide 22 - illustrated government take at a range of prices,
using all production and development costs. In this case, at
low prices, government take is more than 100 percent of profit
due to gross value-based royalty, and minimum production tax and
property tax offsetting a smaller amount of cash flow. Mr.
Stickel explained DOR is forecasting significant increased
industry spending on new developments which will exacerbate the
indicated trend.
1:14:08 PM
REPRESENTATIVE HANNAN asked for clarification of the
aforementioned trend.
MR. STICKEL returned attention to slide 22, which indicated the
percentage of government take is higher at lower prices when
looking at North Slope industry as a whole; DOR is forecasting
additional capital expenditures from FY 21-FY 24 thus the total
distributable income will be smaller; however, state royalty and
property tax are fixed costs.
REPRESENTATIVE HANNAN surmised one field is on federal land in
the National Petroleum Reserve-Alaska (NPR-A) and inquired as to
whether the state only gets royalty from production on federal
land.
MR. STICKEL said production tax applies to all state land within
the state boundaries and offshore up to the three-mile limit.
The state gets a share of royalty which will be explained in the
following addendum. He continued to the second addendum
entitled, "Follow-up from 4-15-19 House Resources Hearing."
Slide 27 listed questions from the committee posed during and
following the previous hearing. Slide 28 was a map of NPR-A and
listed municipalities therein. Slide 29 provided information on
state share of royalties regardless of who owns the land and
which taxes apply. He pointed out production tax, corporate
income tax, and property tax all apply to all land within the
state and offshore out to the three-mile boundary, regardless of
who owns the land. In addition, lease expenditures within said
boundary are deductible for production tax purposes. For
purposes of royalty, beyond the six-mile limit is the federal
offshore continental shelf (OCS) where federal royalties apply,
and the state receives nothing. Between three miles and six
miles [offshore], 27 percent of federal royalties is shared back
to the state without restriction; for example, the Liberty
offshore oilfield, the federal portion of the Northstar field,
and some new exploration will be in [the 27 percent] category.
Mr. Stickel further explained state lands and offshore from zero
to three miles have state royalties at various ranges: within
NPR-A a federal royalty applies with 50 percent back to the
state with restrictions; in the Arctic National Wildlife Refuge
(ANWR), federal royalty applies with 50 percent back to the
state without restriction; on other federal land, federal
royalties apply with 90 percent back to the state without
restriction; on private land, including land owned by Alaska
Native corporations, royalties apply to the lease, and the state
levies a 5 percent (for oil) or 1.667 percent (for gas) gross
tax on the value of private landowner royalty interest as part
of production tax.
1:20:54 PM
MR. STICKEL continued to slide 30, which illustrated the royalty
rate for the Liberty oilfield: three separate federal leases at
a 12.5 percent royalty rate, with 27 percent back to the state,
or 3.375 percent of the value of production. He noted the state
would not receive tax revenue, "unless the development were to
result in a taxable event inside the three-mile limit, so [an]
example would be a pipeline bringing oil onshore, [that] would
be subject to property tax ...."
1:22:29 PM
[Due to technical difficulties, an at-ease was taken from
1:22:29 p.m. to 1:23:06 p.m.]
MR. STICKEL read from slide 31 which summarized information
about allowable lease expenditures for production tax purposes
under AS 43.44.165.
REPRESENTATIVE HANNAN questioned whether carry forward
expenditures transfer with the lease if the lease is sold.
MR. STICKEL was unsure and offered to provide the requested
information.
CO-CHAIR TARR directed attention to operating expenses and
surmised employee expenses, such as salaries, are considered
allowable lease expenditures.
1:26:42 PM
MR. STICKEL said yes, as long as the costs are upstream,
ordinary and necessary, and direct costs of production. Slide
32 provided information on how multi-year expenditures are
treated in the production tax calculation. Lease expenditures
are based on when the cost is incurred in one of the two
following situations: 1.) If a producer is also the unit
operator, costs are incurred when they are expensed or
capitalized for tax accounting purposes; 2.) If there are
multiple producers, the costs are incurred when they are billed
to the working interest owners. Slide 33 was a graph that
provided the components of netback costs including the Trans-
Alaska Pipeline System (TAPS) tariff. He clarified the Feeder
[pipeline] Tariff component is a weighted average of all
production on the North Slope, and the Quality Bank component is
negative due to the impact of state refineries that pay into the
Quality Bank.
MR. STICKEL, in response to Co-Chair Tarr, provided a brief
explanation of how oil of various qualities is mixed in TAPS
thus the end product is of a consistent quality that may be
higher or lower than what a producer put into TAPS; the Quality
Bank is an accounting mechanism to adjust for the quality of the
crude oil. The refineries along TAPS pay a charge to the
Quality Bank because they take out higher quality oil.
REPRESENTATIVE HANNAN asked for the location and ownership of
the refineries, and why the Quality Bank credits are forecast to
increase.
MR. STICKEL said he would provide detailed information to
explain the increases in Quality Bank credits that are shown on
slide 33; the refineries are in the Fairbanks area.
REPRESENTATIVE HANNAN restated her question.
1:32:59 PM
REPRESENTATIVE TALERICO said Petro Star has a refinery in North
Pole.
REPRESENTATIVE HOPKINS asked whether the TAPS Tariff is
consistent for all of the producers and shippers using the
pipeline.
MR. STICKEL advised each TAPS owner sets its own tariff; the
tariffs claimed by companies are slightly different; therefore,
the TAPS Tariff shown on slide 33 represents a weighted average.
REPRESENTATIVE HOPKINS surmised the three TAPS owners pay
themselves a tariff and then deduct it; a company that is not an
owner pays the tariff to the owners and claims a deduction.
MR. STICKEL said correct and pointed out there are four owners
of TAPS.
CO-CHAIR TARR posited Feeder Tariffs are quite a bit larger for
some developments such as Point Thomson, because of the expense
of the feeder line needed to connect to TAPS. For other "far
away" developments, the total transportation cost may affect the
economics of the project.
MR. STICKEL said DOR expects much of the new production [from
developments on the slope] to have higher feeder pipeline
tariffs. In further response to Co-Chair Tarr, he estimated
feeder pipeline tariffs for Point Thomson are between $10 and
$20 and offered to provide additional information. He read from
slide 34 information about feeder pipelines and TAPS.
REPRESENTATIVE HOPKINS asked whether the higher feeder pipeline
tariffs for Point Thomson are due to its distance from TAPS and
the central processing facilities.
MR. STICKEL responded the oil must travel a long distance from
Point Thomson to infrastructure on the North Slope; also,
current production is low.
1:39:02 PM
CO-CHAIR TARR has heard one of the challenges for smaller
operators is access to TAPS and other existing infrastructure,
even though there are regulations that seek to prevent a
pipeline carrier from discriminating. She questioned whether
Alaska's tax system benefits the owners of TAPS - the companies
that set the tariffs - and limits the economics of companies
that are not owners.
MR. STICKEL explained [tax benefits] from feeder pipelines
differ from those that affect a gathering line in that a
gathering line is upstream of production and transports oil from
the wells to production facilities located on the leased land.
Costs of developing gathering lines are allowable lease
expenditures against production tax; however, a feeder pipeline
is downstream of the point of production and the costs of
building a feeder pipeline are not immediately deductible but
will be deducted over time through the tariff. He read from
slide 35 related to the costs to Alyeska Pipeline Service
Company for the maintenance and operation of TAPS. He restated
each TAPS owner sets a tariff that is subject to regulation by
the Regulatory Commission of Alaska, or by the Federal Energy
Regulatory Commission, and three of the owners are active
carriers.
1:43:33 PM
MR. STICKEL continued to slide 36, which was a graph that
illustrated effective production tax rates since the enactment
of Senate Bill 21 [passed in the Twenty-eighth Alaska State
Legislature]. The graph showed estimated effective tax rates at
a range of prices for FY 20. The analysis is based on
aggregated data for non-GVR eligible production, calculated as
tax after taxable per-barrel credits and divided by total
production tax value; in FY 20, the effective tax rate on non-
GVR oil is estimated to be approximately 8 percent. He pointed
out at ANS prices below $65 per barrel, companies pay a gross
minimum tax and state take is a relatively higher share of
profit; at ANS prices above $65 per barrel, state take is a
relatively higher share under net tax. He noted current oil
prices put the tax rate at the "crossover point" of 8 percent.
REPRESENTATIVE HOPKINS surmised at an oil price of $72 per
barrel, the estimated effective tax rate would be at the lowest
point of Alaska's tax scheme.
1:45:56 PM
MR. STICKEL said if in FY 20, oil prices average in the low 70
[dollars per barrel], the effective tax rate on production tax
value would be in the range of 10-15 percent. On slide 37, DOR
modeled the effective tax rate for a typical non-GVR field and
applied it back to the time of the enactment of Senate Bill 21.
He pointed out the relationship between the effective tax rate
and ANS price: in FY 18, the rate was about 8 percent, near the
crossover point; in FY 14, after Senate Bill 21 took effect, and
the higher tax rate was due to higher prices and higher profits;
in FY 16, the higher tax rate was due to a gross tax and lower
profits and prices. He concluded FY 14 and FY 15 were two years
of net tax, FY 16 and FY 17 were two years of gross tax, and the
average effective tax was approximately 24 percent.
CO-CHAIR TARR pointed out slides 36 and 37 illustrated how
closely Alaska's tax system is linked to the price of oil; in
fact, legislative consultants have advised this link is the
cause for fluctuation in the tax system. She related at high
oil prices companies make more investments, and when prices
fall, as in 2014, there is a gradual adjustment to lower
activity which is not reflected until later years. She asked
Mr. Stickel to comment.
MR. STICKEL acknowledged company spending has been reduced in
response to lower oil prices. He returned attention to slide 36
and said the state has made a policy decision to take a higher
share of profits at certain prices and a lower share at other
prices.
1:50:19 PM
CO-CHAIR TARR opined if companies responded by reducing lease
expenditures more quickly in 2016, the overall effective tax
rate would have stayed lower. She urged the state to re-
evaluate the link to oil price.
MR. STICKEL agreed the price of oil has a tremendous impact on
the state and on producers; in FY 16, many companies lost money
and the 61 percent effective tax rate in FY 16 represents only
production tax as a share of production tax value. In fact,
additional information will be presented to show that other
elements of government take increased the state's share. He
turned to the question of total state take since enactment of
Senate Bill 21 and said slide 38 illustrated distribution of
profits estimated for FY 20 for a barrel of oil produced from a
typical non-GVR field and for slope/industrywide analysis with
all production and costs; slide 39 illustrated estimated share
of cash flow for a typical non-GVR field and for
slope/industrywide analysis with all production and costs over
the last five years. Mr. Stickel noted in FY 14-FY 15
government and producer take are similar: in FY 16, state and
municipalities take [slope/industrywide with all production and
costs] was over 100 percent of the cash flow and profit
generated on the North Slope; in FY 17, there was some recovery
in oil prices, lower spending, and major producers made some
profit; in FY 18, there was low production tax revenue due to
the effective tax rate, reduced federal corporate federal income
tax, and thus increased producer take.
1:55:34 PM
CO-CHAIR TARR referred to slide 39 and asked DOR to provide an
additional column to show royalty revenue separately from that
of production tax. She returned attention to slide 11 and
recalled consultants urged the committee to review production
tax value: in a true net profits system the production tax
value represents the value after all expenditures have been
deducted. She asked whether DOR is evaluating other [tax
regime] options at this time.
1:57:54 PM
BRUCE TANGEMAN, Commissioner, Department of Revenue, asked Co-
Chair Tarr to repeat her question.
CO-CHAIR TARR elaborated on her earlier question in regard to
problems created by the link between Alaska's oil and gas tax
system and the price of oil, compared to a true net profits tax
system. She suggested the current tax system also creates an
ongoing audit problem and restated her question as to whether
DOR was considering other options.
COMMISSIONER TANGEMAN said the biggest issue [creating the
backlog] of audits was that DOR was auditing several different
tax structures, which slowed progress. However, the state has
maintained a "consistent/stable tax regime for the last several
years," and DOR plans to return to a three-year audit schedule.
To the question as to whether DOR is exploring changes, he said
from a policy perspective, Senate Bill 21 has increased
production in consecutive years for the first time in 30 years
and will provide stable production for another 10 years. He
said Alaska's goal should be a stable, predictable, competitive
tax regime, which has been achieved by Senate Bill 21, and noted
other states such as Texas, California, Colorado, and New Mexico
have not made changes to their tax structures since 2004.
Commissioner Tangeman concluded all of Alaska's competitors
compete for investment at varying oil prices.
2:02:54 PM
The committee took an at-ease from 2:02 p.m. to 2:05 p.m.
HB 122-FUNTER BAY MARINE PARK: UNANGAN CEMETERY
2:05:46 PM
CO-CHAIR LINCOLN announced the final order of business would be
HOUSE BILL NO. 122, "An Act relating to the Funter Bay marine
park unit of the state park system; relating to protection of
the social and historical significance of the Unangax cemetery
located in Funter Bay and providing for the amendment of the
management plan for the Funter Bay marine park unit; and
providing for an effective date.
REPRESENTATIVE HANNAN, speaking as the sponsor of HB 122,
directed attention to a memorandum included in the committee
packet incorrectly dated 5/16/19, which should read 4/16/19.
She said the memorandum answers questions raised at the first
hearing of the bill on 4/15/19. Also included in the committee
packet was another version of a map entitled, "Funter Bay State
Marine Park" which illustrated the existing Funter Bay State
Marine Park in a bold outline. Representative Hannan pointed
out most of the park is over water with a portion on land in
Coot Cove; the recommendation by the Department of Natural
Resources was to add acreage, including the cemetery, and create
a contiguous parcel. In addition, Ledge Island is not always
above water and would also be included in the marine park.
2:09:21 PM
CO-CHAIR TARR moved to report HB 122 out of committee with
individual recommendations and the accompanying fiscal notes.
There being no objection, HB 122 was reported from the House
Resources Standing Committee.
2:10:22 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:10 p.m.