Legislature(2005 - 2006)SENATE FINANCE 532
02/01/2006 01:30 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Profit Sharing Production Tax | |
| Adjourn | |
| Profit Sharing Production Tax |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
MINUTES
SENATE FINANCE COMMITTEE
HOUSE FINANCE COMMITTEE
February 1, 2006
1:34 p.m.
CALL TO ORDER
Co-Chair Lyda Green convened the meeting at approximately 1:34:28
PM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Lyman Hoffman
Senator Donny Olson
Representative Kevin Meyer, Co-Chair
Representative Mike Chenault, Co-Chair (via teleconference)
Representative Richard Foster
Representative Mike Hawker
Representative Jim Holm
Representative Mike Kelly
Representative Bruce Weyhrauch
Representative Beth Kertulla
Also Attending: SENATOR BEN STEVENS; SENATOR GENE THERRIAULT;
SENATOR HOLLIS FRENCH; BILL CORBUS, COMMISSIONER, DEPARTMENT OF
REVENUE; PEDRO VAN MUIRS, PhD; ROGER MARKS, ECONOMIST, DEPARTMENT
OF REVENUE
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
^Profit Sharing Production Tax
Profit Sharing Production Tax - Joint Overview with House Finance
Committee
1:35:40 PM
Co-Chair Green introduced the topic of Profit Sharing Production
Tax (PPT).
1:36:35 PM
BILL CORBUS, COMMISSIONER, DEPARTMENT OF REVENUE, gave an opening
statement as follows:
As we have all seen in recent weeks, much attention is focused
on reforming oil taxes in Alaska. We hope, through today's
presentation, to provide you with more information on what oil
tax reform would mean for Alaska and Alaskans.
We must reform our oil tax system. The current production tax
system with its ELF exclusions is no longer working for
Alaska, particularly in this era of high prices. In 2020, only
one in five barrels will be taxed. Most Alaskans and most
lawmakers realize that the current system is flawed: as
exemplified by the fact that Kuparuk, the nation's second
largest oil field, pays no tax starting this year.
Many have asked, how does this fit into the gas pipeline? And
there has been much confusion on this issue.
Let me make two important points:
First and foremost: we must adopt an oil tax structure that is
right for Alaska, irrespective of the future gas pipeline.
Second: Alaska oil and gas tax structures have a significant
impact on the economics of any oil or gas project. The current
tax structure must be changed. Because of that, we must change
it prior to a final gas pipeline agreement - so that companies
understand the state's tax regime before investing in a $20
billion project.
There is an obvious connection between oil taxes and the gas
pipeline. But a new tax regime must be adopted on its own
merits, regardless of gas pipeline negotiations.
What we are suggesting is balanced, not punitive, as are some
other proposals.
The balance is based on three factors:
What is a fair state share on oil - based on what the
producers are already paying in similarly situated oil regimes
around the world?
What incentives are needed to induce exploration, investment
and reinvestment in Alaska?
What is needed to protect explorers, independents and small
operators?
We are still working with the producers, independents, the
Legislature's consultants and knowledgeable legislators to
make sure we construct a profit-sharing production tax bill
that works for Alaska.
A profit-sharing production tax system will provide revenue we
can use now, to improve our schools, build our communities,
and shape our future.
1:40:27 PM
Mr. Corbus introduced Pedro Van Muirs, an international oil
consultant, who has worked with the state since 1996. He has a PhD
in petroleum economics from the Dutch University system. He
provides advice on oil and gas tax regimes only to governments.
1:41:03 PM
Mr. Corbus introduced Roger Marks, a petroleum economist with the
Department of Revenue since 1983. He has been in the trenches all
along for the complete change of the state's tax system.
1:42:10 PM
PEDRO VAN MUIRS, PhD, presented from a handout entitled "Profit
Sharing Production Tax" [copy on file]. He described, on page 2,
that the fiscal system applicable to oil and gas of Alaska consists
primarily of four components: royalties, production tax, property
tax, and state corporate income tax. He emphasized that when
looking at the economics of investing in Alaska, federal corporate
income tax must also be considered. He pointed out that the
presentation today relates to proposed changes to production tax.
1:43:31 PM
Dr. Van Muirs noted, on page 3, that the current production tax for
oil is 12.25 percent net of royalty for the first five years of
production and 15 percent thereafter. These percentages are
multiplied by the Economic Limit Factor (ELF), which is between 0
and 1, and lowers the production tax rate for smaller fields and
fields with low productivity wells.
Dr. Van Muirs reviewed the history of the ELF formula, which
reflected the economic conditions in 1989. Satellite fields have
been developed since then and the benchmarks are now completely
outdated.
1:45:18 PM
Dr. Van Muirs referred to page 5, serious deficiencies in the
production tax. ELF is no longer rational in relation to well
productivity and field production, is not responding reasonably in
case of field production decline, does not provide a reasonable
balance under a range of oil prices, and does not provide a
sufficient incentive for re-investment.
1:46:13 PM
Dr. Van Muirs shared, on page 6, some examples as to why the
current tax is not sufficient. ELF is too sensitive to oil
productivity. This stimulates producers to keep every well flowing
because what counts is the number of wells. This creates an
environment where the ELF declines faster than originally intended.
1:47:54 PM
Dr. Van Muirs noted a dramatic example, on page 7, of ELF declining
faster than production in Kuparuk, the second largest oil field in
North America without production tax.
1:48:52 PM
Dr. Van Muirs highlighted a graph on page 8, which portrays another
example of ELF declining faster than production in all fields
combined and in Prudhoe Bay. Taxes are fading out, ELF is
declining, oil prices are increasing, and the current system is not
working well for the state.
1:49:38 PM
Dr. Van Muirs explained, on page 9, the reason why the governor has
proposed a profit sharing production tax (PPT). PPT would
completely replace the current production tax and would be a law of
general application.
1:50:16 PM
Dr. Van Muirs reported, on page 10, that PPT is calculated as a tax
rate multiplied by the corporate cash flow from production in
Alaska from oil and gas, with tax credits to encourage investments.
It is a consolidated tax at the corporate level. The cash flow is
calculated as gross revenues based on wellhead prices, less the
producer's lease expenditures.
Dr. Van Muirs emphasized, on page 11, that there would be tax
credits to encourage investment based on a percentage of the
investment. A loss in any year can be converted to a tax credit by
multiplying the amount of the loss with the tax rate. Tax credits
can be transferred and traded. This would encourage explorers and
independents to monetize part of their investments immediately.
1:52:04 PM
SENATOR BEN STEVENS interjected that the tax and tax credit rate
scenarios on page 12 are the result of his request for numbers for
comparison on certain fields in production, versus the status quo.
He thanked Dr. Van Muirs for providing this information.
1:53:15 PM
Dr. Van Muirs pointed out that the tax rate figures are a
reasonable range. The purpose of the presentation is to show how
PPT would work, how much it would bring in, and the different
levels of tax and tax credits.
1:54:18 PM
Dr. Van Muirs also defined PPT features for small producers, as
seen on page 13. The features would ensure that there is no tax on
a low level of production per company in order to encourage
explorers and independents. Small producers often have hurdles to
overcome and access problems to deal with, so it is fair to create
a level playing field. Several alternatives are being considered:
the tax rate on the first 5,000 barrel oil equivalent per day per
company would be 0 percent; there would be a tax free allowance
equal the lower of an agreed level per company or the actual
profits per company in the range of $50 million to $100 million per
year. Many of the smaller producers in Cook Inlet would not be
subject to PPT.
1:56:02 PM
Dr. Van Muirs indicated, on page 14, that the state is also
considering the possibility of having a somewhat higher tax credit
on capital investments in the development of heavy oil. Increased
development of heavy oil will add to the level of North Slope
production. Heavy oil around the world is being considered as
needing special tax consideration.
1:57:08 PM
Dr. Van Muirs pointed out, on page 15, that enhanced incentives to
invest in exploration and development through the PPT, as well as
the gas line investment, will create a new environment whereby
Alaska will be considered by many petroleum companies a new core
area for petroleum investment and increased oil and gas production.
1:57:43 PM
Dr. Van Muirs concluded, on page 16, that the current ELF based
production tax is completely outdated, is a regressive tax, and is
no longer in the interest of Alaska. The governor proposes that
Alaska adopt a profits based system that will provide, on average,
a higher government take for Alaska. It is a progressive tax with
strong incentives for investment and exploration.
1:59:09 PM
ROGER MARKS, ECONOMIST, DEPARTMENT OF REVENUE, gave a presentation
on PPT using various tax and credit rates. He referred to a
handout called "PPT Studies" [copy on file.]
1:59:29 PM
Mr. Marks explained on page 2 how PPT works. The wellhead value is
market price less transportation costs, and is the basis of the
current tax, which is subject to the nominal 15 percent rate and
ELF. The goal of PPT is to bring in the upstream costs as well,
such as the operating cost, property tax, royalty, and capital
costs, subject to a tax rate of x and a credit on capital costs of
y.
2:00:51 PM
Mr. Marks explained about the modeling used and the assumptions
behind it. One of the most important components to consider when
predicting how much a tax might bring in is the amount of oil
production. Forecasts are very difficult to predict for both ELF
and PPT scenarios. In looking at future volumes, two parameters
were considered; enhanced volume scenario, and "gas line in place".
The way the gas line affects oil volumes is that with a decline in
oil pressure from producing gas out of the field, initially there
would be less oil in Prudhoe Bay. On the other hand, combined with
the economics of the gas line, there would be extended fuel life
and more oil. The assumption is that without a gas line, Prudhoe
Bay would shut down in 2030. In addition, with a gas line the
Point Thompson field would come on, and there would be additional
exploration for gas and new oil associated with that. The volume
scenarios presented today are "no enhanced volumes/no gas line" and
"gas line/enhanced volumes".
2:03:30 PM
Mr. Marks depicted two volume scenarios on page 4. The low volume
goes out to 2030 and the high volume goes until 2050.
2:03:54 PM
Mr. Marks clarified the costs and prices component of PTT on page
5. The Department of Revenue has access to many sources of data on
cost such as federal tax returns, property tax assessments,
corporate financial statements, and special reports. The data on
page 5 is an estimate of what capital costs might be. The costs
and prices are real 2005 dollars escalating at 2 percent a year.
2:05:23 PM
Mr. Marks discussed, on page 6, the cumulative revenues over the
forecast period, for the low volume scenario to 2030, and for the
high volume period to 2050. The latter time period was chosen
because it accentuates the difference between the volume scenario,
and it accentuates the long-term trend associated with both the
current and proposed production tax structures.
2:06:00 PM
Mr. Marks referred to the graph on page 7, which shows accumulative
revenues at different ANS prices in the low volume scenario. The
bottom line is the status quo, and the other lines represent
various tax rates and credits in nominal dollars. The pairs of
lines show that the money received is a lot more sensitive to the
tax rate than to the credit rate. He emphasized that the tax rate
is the bigger influence. He cautioned not to obsess too much over
the crossover point. The slope of the line after it crosses is
more important.
2:08:29 PM
Mr. Marks noted that the ELF structure is a modest standard of
comparison. He summarized that the graph is the low volume
scenario between $15 and $65 over the next 25 years, with total
revenues of anywhere from $3 billion less to $61 billion more,
depending on price.
2:09:09 PM
Mr. Marks reported that page 8 depicts the same information in a
high volume scenario. The scale on the left goes up to $160
billion because there is more oil going out over a longer period of
time.
2:09:40 PM
Mr. Marks presented the annual revenues, on page 9, for both the
high and low volume scenarios. Page 10 depicts the low volume
scenario at $20 in graph form. The top line, the status quo, shows
that at low prices, anywhere from $100 million to $180 million less
money is made, depending on the fiscal scenario.
2:10:25 PM
Mr. Marks pointed out, on page 11, that at $40, anywhere between
$400 million to $900 million is made annually over the status quo.
Money made at $40 in one year is more than what would be lost for 4
years at $20.
2:11:12 PM
Mr. Marks showed the $60 scenario on page 12, with average annual
revenues of $1.1 billion to $2 billion a year more than the status
quo. These revenues are equivalent to what would be made with a
gas line at $5 per million Btu market price in Chicago.
2:11:50 PM
Mr. Marks explained that the next series of graphs are high volume
scenarios, but the revenues do not include the money received from
the gas severance tax from a stranded gas contract. If there was a
gas line, and the severance tax was received, the upstream gas
costs would be deductible. In this scenario the average annual
revenues are $150 million to $200 million less than status quo.
2:12:52 PM
Mr. Marks continued to explain, on page 14, the $40 scenario where
the average annual revenues are $0.6 billion to $1.2 billion more
than status quo. Page 15 depicts the $60 scenario with average
annual revenues of $1.5 billion to $2.6 billion more than status
quo.
2:13:28 PM
Mr. Marks directed attention to the effective tax rates under PPT,
on page 16, for both low and high volume scenarios. Page 17
depicts a graph of the low volume scenario. It is a progressive
system; even though there is a flat tax rate of 20 percent, because
the upstream costs are deductible, and those costs are a smaller
percentage of the value as prices go up, the tax rate is effective.
The effective tax rate is defined as the severance tax revenue
divided by the wellhead value, less royalty. The status quo is
flat at about 4 percent, regardless of price. Mr. Marks reviewed
the original history of ELF from 1977, when it was structured, so
that the operating costs would be deductible at any given price.
2:14:59 PM
Mr. Marks explained that the graph on page 18 shows the tax rate at
a high volume scenario.
2:15:31 PM
Mr. Marks concluded by describing the corporate take under PPT.
Page 20 depicts the current Energy Information Association (EIA)
forecast, at $58 per barrel in 2004 dollars, in a high volume
scenario over 45 years. It would generate $1 trillion of gross
revenues to the North Slope. The graph shows how corporate take
would be affected under that scenario with the status quo and with
the PPT. Out of that $1 trillion comes various expenses: capital,
operating, transportation, property taxes and royalties. Mr. Marks
drew attention to the severance tax, which would increase under
PPT. Federal corporate income tax would decrease under PPT. The
federal government would pick up the tab on one third of the PPT.
The corporate take would go from 39 percent to 33 percent of gross
revenues, or from 51 percent to 44 percent of the economic rent or
pre-tax profits.
2:18:14 PM
Mr. Marks concluded by describing that the producers would get 6
percent less under PPT, but walk away with 33 percent of $1
trillion. He questioned if it is painful to walk away with $33
billion. He emphasized that ELF is a modest standard by
comparison.
2:19:10 PM
Dr. Van Muirs referred to a handout entitled "PPT, New Investments
and International Competition" [copy on file]. He spoke about
international trends as found on page 2 of his handout. The high
oil prices have had an important impact on international government
take. There are progressive countries in the world that have
deals, production sharing, contracts or taxes agreed on beforehand.
Taxes will increase significantly with price or profitability
indicators. Russia, for example, uses a PPT of 10 percent if
prices are low, but a PPT of 70 percent if prices are high. There
are a large number of countries with oil companies that work in
Alaska where these systems are in place, such as Angola, Russian,
Azerbaijan, Libya, Norway, Alberta, and Indonesia.
Dr. Van Muirs noted that there are also regressive countries where
the government take stays the same or declines, regardless of the
price. Countries such as the United States, the United Kingdom,
Egypt, and Argentina are behind.
2:23:22 PM
Dr. Van Muirs detailed the situation of various countries, on page
3. The high oil prices create a possibility for the regressive-
neutral countries to increase their government take. In the United
Kingdom, the government recently indicated that their share should
be increased from 40 percent to 50 percent. Trinidad, Tobago,
Kazakhstan, Bolivia, and Venezuela have taken steps to also rectify
this situation.
2:24:50 PM
Dr. Van Muirs pointed out, on page 4, that he has analyzed PPT from
the viewpoint of an investor, under both high cost and low cost
scenarios. Six field cases were analyzed. Because of special
support for small producers, first investment and re-investment
scenarios were analyzed.
2:25:51 PM
Dr. Van Muirs referred to page 5 as an example of PPT re-investment
in a 50 million barrel field. Under the current system ELF would
be zero, and under the proposed system PPT would become positive,
using WTI oil prices. During low oil prices or unprofitable
fields, tax credits would help.
2:27:25 PM
Dr. Van Muirs explained, on page 6, that PPT re-investment in large
oil fields would collect more production tax for Alaska under
average and high oil prices.
2:27:58 PM
Dr. Van Muirs referred to the chart on page 7 as the most
interesting chart - the Cook Inlet chart - for small companies. A
small producer would not pay PPT, but would earn tax credits, which
is a great incentive.
2:29:26 PM
Dr. Van Muirs pointed out, on page 8, that first investment in a
large field would result in considerable PPT under high prices, but
less than under a re-investment scenario.
2:30:15 PM
Dr. Van Muirs further clarified, on page 9, how tax credits would
modify cash flow and lower the amount of the initial investment, so
the rate of return would actually increase. He emphasized that the
rate of return goes up for small fields as well as for large
fields. Companies interested in a strong rate of return would find
this a very attractive aspect.
2:31:21 PM
Dr. Van Muirs explained, on page 10, how he compared PPT in the
Alaska system with competition in other countries. Eight fiscal
systems were analyzed using the same field sizes and applying
international terms. They all reflected areas in the world where
there is considerable investment taking place: Norway, United
Kingdom, U.S. Gulf Coast, Alberta Oil Sands, Nigeria, Angola,
Russia-Sakhalin, and Azerbaijan.
2:32:37 PM
Dr. Van Muirs clarified that the graph on page 11 only depicts the
United Kingdom, on the low side of government sharing, and Norway,
on the high side of government sharing. The five requested
scenarios are shown, plus the current system, Norway, and the
United Kingdom. In a first investment in a large field, Norway's
rate of return is about equal to the current system, and the United
Kingdom's rate of return is much higher than the current system.
2:33:23 PM
Dr. Van Muirs depicted the rate of return on a small field as shown
on page 12. Both Norway's and the United Kingdom's fiscal systems
were applied to Alaska cost conditions so that the cost and the
revenues are identical. He explained that he used WTI oil prices
in his calculations to correct for the wellhead price in Alaska.
The PPT creates a very significant improvement in the investment
rate of return relative to Norway and the United Kingdom, for a
first investment in a small field.
2:34:31 PM
Dr. Van Muirs related that the graph on page 13 reflects the
government take on a first investment in a large field. The
current system, the yellow line, is somewhat regressive. The PPT
provides for a modest total government take for each of the five
options, in order to compensate for low net back prices and high
costs.
2:35:48 PM
Dr. Van Muirs referred to page 14 to show that for first investors
or small producers, there is a reduction of the government take
compared to the current system. The regressive nature of the
government take is removed for each of the five options.
2:36:18 PM
Dr. Van Muirs reviewed a competitiveness analysis, on page 15, of
48 economic criteria including different field sizes, rates of
return, etc., and rated the eight world systems and the two Alaska
systems from best to worst. The U.S. Gulf Coast rated as the best
of the ten systems, followed by the United Kingdom, Alberta,
Nigeria, the Alaska PPT, Angola, Azerbaijan, Alaska current,
Norway, and Russia-Sakhalin. The table shows a considerable
improvement in overall competitiveness for the PPT for new
investors (20/15/option was used).
2:38:51 PM
Dr. Van Muirs pointed out, on page 16, that it is different for
large companies that are already in business. The table shows a
modest improvement in overall competitiveness for the PPT for
investors who do not benefit from the small producer incentive
(20/15 option was used).
2:40:00 PM
Dr. Van Muirs concluded that any one of the five scenarios
requested for analysis would be competitive and would encourage
investment in the state. The range seems to be reasonable from an
international perspective and could result in large additional
revenues, maybe as much as $1 billion a year.
2:41:41 PM
Senator Bunde related that he has heard anecdotally that a clever
accountant could hide profits. He wondered what Alaska's
protection would be from clever accounting, and how to prevent a
company that has to pay profit tax from never showing a profit.
2:42:36 PM
Dr. Van Muirs agreed that clever accountants could potentially hide
profits. Profit sharing systems are in place worldwide, so
consequently there is no widespread experience to indicate that
governments get cheated out of massive profits. The administration
of the system must be set up sufficiently transparent with ground
rules. Alaska already has profit sharing in place with extensive
guidelines. A process must be in place to resolve differences. An
easy, profitable way to set this up is to use a joint venture
billing system that many companies use.
2:46:14 PM
Senator Bunde wondered if it is correct to assume that if Alaska
guesses wrong and oil prices decline, then in one year "we would
make up what we lost in four". Mr. Marks suggested comparing $20
dollars to $40 dollars. Senator Bunde inquired if something needs
to be in place for future downturns. Mr. Marks replied that it
would be prudent to do so.
2:47:13 PM
Representative Weyhrauch referred to Mr. Corbus' testimony that
Alaska's tax structure needs to be changed before the state reaches
an agreement on the gas pipeline. He inquired if the legislature
adopts PPT at a rate above 25 percent or below 17.5 percent, if
that PPT is still conducive to proceeding with gas pipeline
negotiations.
2:47:40 PM
Senator Ben Stevens clarified that the numbers used were at the
request of the Senate.
2:47:47 PM
Representative Weyhrauch indicated that he understood that, but was
using the numbers as a hypothetical example.
2:47:49 PM
Mr. Corbus responded that he did not know the answer. The intent
of the Department of Revenue is that whatever is adopted by
legislature would be included in the gas pipeline negotiations.
2:48:15 PM
Representative Weyhrauch pointed out that one out of three of the
major oil companies have already agreed with the state on the terms
of the gas pipeline agreement. He wondered if that agreement would
be lost with a change from ELF to PPT.
2:48:40 PM
Mr. Corbus responded that it is possible. The one company that has
agreed to the gas pipeline agreement has not agreed to PPT.
2:48:55 PM
SENATOR GENE THERRIAULT recalled that for heavy oil, a different
level of credit might be needed. He surmised if there is more
expense to deduct and less profit with the production of heavy oil,
then PPT alone is not enough to compensate for heavy oil.
2:49:46 PM
Dr. Van Muirs indicated that it is something his company is
studying at the moment. No conclusions have been reached yet. He
acknowledged that Senator Therriault is correct in assuming that
the higher costs and lower revenues of heavy oil would result in
lower profits. Many nations such as Canada, Venezuela, and
Columbia, have come to the conclusion that heavy oils need further
fiscal incentives. This area needs more work.
2:52:06 PM
Senator Therriault pointed out that the state is trying to help
companies mitigate risk. He asked if there should be a
differentiation in compensation for exploration away from existing
infrastructure versus replacing facilities in existing fields where
there are expenses, but not risk.
2:53:09 PM
Dr. Van Muirs agreed that Senator Therriault is correct in that all
capital investments do not have the same risk. He clarified that a
new investor is looking more at a broader exploration program and
development of a new field. Exploration becomes far more
attractive because both exploration capital expenditures and
equipment expenditures receive the same rate.
2:54:42 PM
Senator Therriault addressed a question to Mr. Marks regarding
calculations on basic cost for finding new oil at $4 per barrel.
He wondered how much of that calculation is based on past prices
and whether it should be revised.
2:55:40 PM
Mr. Marks responded that it is historical data and, in general,
with commodities when there is a run up in price, there is a short-
term inflationary effect because of the demand for resources to
produce the commodity, which then corrects itself. The technology
effect is important as well
2:56:46 PM
Senator Therriault asked for clarification on who would propose the
legislation. Mr. Corbus replied that the administration and
members of the legislative leadership are discussing the best way
to address that issue.
2:57:25 PM
SENATOR HOLLIS FRENCH pointed out that the structure seems to favor
smaller companies, which is a good idea because the future of the
Alaskan oil industry is going in that direction. The best
historical example is Cook Inlet. He asked if the models take into
account that in the future the three major oil companies may not be
operative or may have distributed their assets to smaller
companies.
2:58:32 PM
Dr. Van Muirs replied that the proposal that favors small companies
is similar to other jurisdictions in the world. Alberta is the
best example of favoring small producers, some of which receive
almost 75 percent of the royalties back from the state. This
proposal was inspired by some of those techniques. He cautioned
that there must be protection legislated so that a company does not
voluntarily fracture into many smaller companies to benefit from
the deduction.
Dr. Van Muirs agreed with the view that in a maturing oil province
smaller companies should take increasing larger roles as is being
done in Alberta. All the oil companies have indicated, especially
the three majors companies, that they also see themselves as large
investors in Alaska. He expected them to continue to play a large
role. The state needs both aggressive new smaller investors, but
also the continued presence of the large oil developers. The
legislation could be a strong incentive for the large oil companies
to transfer portions to smaller companies. It would create a wider
base of wealth.
3:03:33 PM
Senator Ben Stevens referred to page 7, a first investment in a
small field, and asked for clarification on the length of the term
depicted in the graph.
3:04:08 PM
Dr. Van Muirs replied that the graph is the total payments that
result over the life of a field, from a 50 million barrel field.
The graph is for different prices of oil. For any one of the five
scenarios, a new investor would see about $150 million worth of tax
credits, which is an enormous incentive.
3:05:21 PM
Senator Ben Stevens restated that it is over the life of the
production of the field.
3:05:33 PM
Dr. Van Muirs added that it is assumed that the small producer
would not develop any other fields, just get the tax credits, and
pay the royalties and the corporate income tax. The state would
still gain, yet the incentive for small companies is very strong.
3:05:53 PM
Senator Ben Stevens inquired if this differs from current NPSL
program leasing agreements, in that once capital cost recovery is
achieved, then the tax structure kicks back in.
3:06:21 PM
Dr. Van Muirs responded that under the current tax profit sharing
leases there is no similar mechanism because there are no tax
credits. Under the current system nothing is paid until investment
costs are recovered.
3:07:18 PM
Senator Ben Stevens added that the tax credits are tradable.
3:07:26 PM
Mr. Marks indicated that under the current net profit share system,
until a field starts turning a profit, the unrecovered costs accrue
interest. That is not proposed under PPT.
3:07:41 PM
Senator Therriault added that interest also accrues on every
previous leaseholder.
3:08:14 PM
Mr. Marks, in response to a question from Senator Therriault,
replied that if an owner sold its interests, expended the money,
and took the credit, they would earn the credit as soon as they
made the expenditure. If they sell a credit, it is important how
the PPT is developed; either by statute or by regulations to make
sure when assets are churned there is no double dipping on credits.
Once a PPT is in place, if someone makes an expenditure, the credit
is realizable immediately.
3:08:57 PM
Senator Therriault related that a duplication of the current net
profits cost-recoupment mechanism shouldn't be expected under PPT.
3:09:10 PM
Mr. Marks said that is correct. Under the current system the cost
is only recovered once regardless of lease owner.
3:09:23 PM
Dr. Van Muirs gave an example of a $100,000 truck purchased for
exploration. If the tax credit were 15 percent, $15,000 would be
given as a tax credit. If the truck were sold, the seller would
recoup the tax credit. The buyer of the truck can then claim it
again. The legislation would need to incorporate a recoupment
mechanism of the seller of the asset so that there is no double
dipping.
3:10:18 PM
Co-Chair Meyer asked how a tax credit is defined. He wondered if
it is only for exploration, or if it could be used when an oil
company re-invests like in Prudhoe Bay, or when expanding the pipe.
3:10:40 PM
Dr. Van Muirs replied that a definition of qualified capital
expenditures would have to be specified in legislation. He said he
assumed there would be tax credit for all exploration expenditures.
There would be tax credits on all capital investments, including
re-investments. Even a single new well or facility in Prudhoe Bay
would receive a tax credit. The tax credit is a universal
mechanism at the corporate level.
3:12:05 PM
Mr. Marks added that "capital" and "operating" would be defined by
federal terms. Under federal taxation there is an incentive to
make things operating rather than capital because operating
expenses can be deducted right away and capital expenses
depreciate. The federal code is a self-enforcing mechanism to
hinder the incentive to shift costs between operating and capital.
3:12:49 PM
Co-Chair Meyer noted that Alaska is competing worldwide for
investment dollars. According to the chart the best place to
invest is the Gulf of Mexico.
3:13:13 PM
Dr. Van Muirs affirmed that is correct among the ten examples in
the chart. Analysis of 140 countries shows that the most
attractive system is Palau, but there is no oil there. The U.S.
Gulf has the most attractive fiscal system by international
standards, and it became more attractive with the British and
Venezuelan increase in take. Alaska will not be able to compete
fiscally with that high a level of attraction. Alaska is trying to
achieve the best possible scenario.
3:15:06 PM
Co-Chair Meyer inquired if Canada is a competitor, with Alberta a
better place to invest than what is proposed in Alaska. He asked
whether Canadian tax breaks for heavy oil is a factor.
3:15:33 PM
Dr. Van Muirs clarified that he is referring to the Alberta oil
sands. When looking at conventional oil, the Alberta system is
tougher than the PPT. Under current oil prices Alberta royalties
are 27 percent across the board. Under current high oil and gas
prices, Alberta has sliding scale royalty that goes up with price.
Alberta has been successful in developing oil sands, which has been
achieved by eliminating the royalties altogether replacing them
with a PPT-style feature. Dr. Van Muirs did not recommend this to
legislature.
3:17:00 PM
Co-Chair Meyer asked if oil sands in Alberta would compare to heavy
oil in Alaska.
3:17:11 PM
Dr. Van Muirs replied that he is not able to compare the two, but
oil sand technology has improved recently. There is an immense
difference in wellhead value, and oil sand development is probably
more attractive than heavy oil.
3:18:02 PM
Representative Kelly wondered what percentage of the entire array
of PPT systems in world would be coupled to the investment credit
system.
3:18:25 PM
Dr. Van Muirs pointed out that there are not PPT systems that would
work with a tax credit. The reason is that a vast majority of PPT
systems are production-sharing contracts, which are field specific.
However, the majority of nations with PPT systems also have
features to protect the smaller fields. Norway has an "uplift",
which deducts 130 percent of capital costs. Australia has a
special feature that is based on the rate of return. The reason to
have a tax credit system in Alaska is because it is tradable, which
would make it attractive to new members.
3:20:57 PM
Representative Kelly suggested that it would be ideal to have PPT
and the gas contract on the table at the same time. He requested
Dr. Van Muirs' opinion of this idea.
3:21:37 PM
Dr. Van Muirs replied that the stranded gas contract is being
negotiated with three companies for one specific project. The PPT
proposal is to be applied to all fields across Alaska. The change
to PPT must first be evaluated to see if it is good for Alaska by
itself. Once the legislature has passed a specific law regarding
PPT, then it makes sense to return to the gas contract to see if it
makes sense. The PPT law should be a good law with or without the
stranded gas contract.
3:23:11 PM
Representative Kelly noted that a model for doing these deals might
be worth considering. He wondered how the legislature should
proceed at this point.
3:24:01 PM
Dr. Van Muirs said it is his understanding that the concept is not
to bury this law with the stranded gas contract. He repeated that
the concept is to bring forward the PPT law, which must stand on
its own merit. Once the law is established, then the stranded gas
contract can be considered.
3:25:32 PM
Mr. Corbus agreed that Mr. Van Muirs has summarized his opening
statement.
3:25:49 PM
Senator Ben Stevens referred to page 20 of the PPT Studies handout.
He asked if the term is 50 years. Mr. Marks said it is 45 years.
3:26:28 PM
Senator Ben Stevens asked if the accumulative revenue stream is a
trillion dollars. Mr. Marks explained it is gross revenue; the
West Coast price, times the volume.
3:26:39 PM
Senator Ben Stevens wondered if the same bar graph distribution
could be annualized to find the culmination of the distributions on
an annual basis, on average. Mr. Marks noted that the problem is
that there are not capital costs every year, but those could be
depreciated.
3:27:13 PM
Dr. Van Muirs pointed out that the graph on page 15 depicts that
concept on an annual basis.
3:27:18 PM
Senator Ben Stevens asked if the top three portions of the bar
graph on page 20 are operating expenses. Mr. Marks said they are
pre-tax expenses. Senator Stevens continued to say that the top
three portions are expense take, the next four are state take, and
then federal take and corporate take. He asked if Mr. Marks said
that the federal government picks up 1/3 of the total change in
take. Mr. Marks replied that he said that PPT would be deductible
for federal income taxation.
3:28:09 PM
Mr. Marks explained that the federal income tax decreased because
the PPT increased. The federal government would pick up 35 percent
of the PPT bill and the producers would pick up the other 65
percent.
3:29:03 PM
Senator Ben Stevens responded that he finds it significant that
Alaska picks up the tax instead of the federal government.
3:29:46 PM
Senator Ben Stevens asked if the severance tax would change to PPT.
Mr. Marks affirmed that it would.
3:29:58 PM
Senator Ben Stevens summarized that this scenario includes a
pipeline in place and enhanced oil production over a course of a
45-year period. Alaska would contribute approximately $300 billion
to the federal treasury.
3:30:39 PM
Mr. Marks indicated that about $200 billion of the trillion would
go to the federal government.
3:30:56 PM
Dr. Van Muirs explained that the bar graph shows that the federal
government gains $200 billion over 45 years.
3:31:28 PM
Senator Ben Stevens pointed out that Alaska receives a couple
billion per year from the federal government. He concluded that
Alaska gets back about half of what it puts in. He stressed that
Alaska is often accused of taking more than it supplies, but this
example demonstrates that Alaska has the potential to contribute
$200 billion.
3:32:20 PM
Mr. Marks commented that much of that amount is due to compounded
inflation at 2 percent over 45 years.
3:32:31 PM
Senator Ben Stevens suggested that this information should be given
to a public relations firm to increase national awareness about
Alaska.
ADJOURNMENT
Co-Chair Lyda Green adjourned the meeting at 3:32:26 PM.
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