Legislature(2007 - 2008)SENATE FINANCE 532
11/10/2007 01:30 PM Senate FINANCE
| Audio | Topic |
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| Start | |
| Presentation on Government Take by Cambridge Energy Research Associates | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB2001 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
November 10, 2007
1:33 P.M.
CALL TO ORDER
Co-Chair Hoffman called the Senate Finance Committee meeting to
order at 1:33:30 PM.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
Senator Fred Dyson
MEMBERS ABSENT
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice Chair
ALSO PRESENT
Senator Gene Therriault; Senator Gary Stevens;
David Dobbs, Vice President, Managing Director of Global
Research, Cambridge Energy Research Associates (CERA)
PRESENT VIA TELECONFERENCE
None
SUMMARY
SB 2001 "An Act relating to the production tax on oil and gas
and to conservation surcharges on oil; relating to the
issuance of advisory bulletins and the disclosure of
certain information relating to the production tax and
the sharing between agencies of certain information
relating to the production tax and to oil and gas or
gas only leases; amending the State Personnel Act to
place in the exempt service certain state oil and gas
auditors and their immediate supervisors; establishing
an oil and gas tax credit fund and authorizing payment
from that fund; providing for retroactive application
of certain statutory and regulatory provisions
relating to the production tax on oil and gas and
conservation surcharges on oil; making conforming
amendments; and providing for an effective date."
SB 2001 was HEARD & HELD in Committee for further
consideration.
SENATE BILL NO. 2001
"An Act relating to the production tax on oil and gas and
to conservation surcharges on oil; relating to the issuance
of advisory bulletins and the disclosure of certain
information relating to the production tax and the sharing
between agencies of certain information relating to the
production tax and to oil and gas or gas only leases;
amending the State Personnel Act to place in the exempt
service certain state oil and gas auditors and their
immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund;
providing for retroactive application of certain statutory
and regulatory provisions relating to the production tax on
oil and gas and conservation surcharges on oil; making
conforming amendments; and providing for an effective
date."
Presentation on Government Take
Cambridge Energy Research Associates
1:34:47 PM
Co-Chair Hoffman announced the presentation by the Cambridge
Energy Research Associates (CERA), "A Comparison of Fiscal
Regimes" (copy on file.)
1:35:27 PM
DAVID DOBBS, VICE PRESIDENT, MANAGING DIRECTOR OF GLOBAL
RESEARCH, CAMBRIDGE ENERGY RESEARCH ASSOCIATES (CERA), explained
that CERA is a syndicated research firm which looks at major
developments in the energy market. Mr. Dobbs related that CERA
was asked to prepare a report comparing fiscal regimes in the
energy sector. He summarized that the concept of a "fair share"
is meaningless and terms must be competitive.
1:38:08 PM
Mr. Dobbs explained that CERA looked at a peer group when
comparing Alaska to other regimes and concluded that Alaska
ranks near the bottom in terms of the economic attractiveness of
investment. Alaskan production is declining. He pointed out
that investment decisions are based on more than pure economics.
They are based on the perception of stability, the growth
potential, and the ease of operations in any environment. In
today's environment, where costs have doubled, the biggest
shortage seems to be of engineering and project management
talent.
Mr. Dobbs pointed out that CERA has taken a different approach
in their analysis. Charts which project state take are not very
meaningful. More sophisticated analysis of fiscal terms tend to
consider an example field and run that field under various
fiscal regimes and compare the economic returns.
1:40:26 PM
Mr. Dobbs continued to say that the world is not homogenous and
different locations have different technical challenges. CERA
considered costs of development and production for a variety of
models under a variety of environmental conditions, and then
compared investments and returns. CERA came up with a peer
group that broadly represented the Alaskan environment and cost
structure. A variety of oil and gas price scenarios were also
considered.
1:43:29 PM
Mr. Dobbs referred to figures 3 and 4 on page 6 of the report to
show the ranking of the rates of the returns of the regimes.
This shows that under PPT, Alaska is in the bottom half. He
emphasized that this is not the only measure that drives a
company to invest, but rather a combination of the risks, the
potential for growth, and the reliability of the resource, as
well as environmental factors and regulatory requirements.
Senator Elton asked when the Alberta group was considered in the
peer group. Mr. Dobbs said it was in August. The recent
uncertainty in Alberta has reduced its attractiveness since
then.
1:45:55 PM
Senator Thomas requested a comparison of the stability of
regimes.
Mr. Dobbs explained that the analysis was based on fiscal terms;
however, he could speak to stability issues. He shared a story
emphasizing the sensitivity of stability; even talking about
changing the fiscal regime can create much the same effect as
making a change. In the UK there was a pause in activity while
waiting for the possibility of change. Alaska may rank higher
in stability terms than in fiscal terms.
Senator Thomas commented on the psychology of change.
1:49:36 PM
Senator Dyson noted that others have said that when making
comparisons one must include the royalty structure and the cost
to "buy in". He thought old vs. new fields should also be taken
into consideration.
1:50:43 PM
Mr. Dobbs related that CERA's analysis included all money that
does not go to the investor in the notion of take. Royalties
and the cost of acquiring leases should be included in the take
calculation. CERA considered what funds flow to the investing
company, and anything that does not come to them is part of the
take.
Mr. Dobbs addressed the notion of having two different tax
regimes, one for legacy fields and one for new fields. The
problem with that idea in the oil industry is that investments
in fixed real assets of several billion dollars are made. He
maintained that two different regimes are rarely attractive.
1:54:26 PM
Senator Dyson inquired about amortizing the initial buying cost.
He wondered if old leases were considered when looking at
today's comparisons.
Mr. Dobbs replied that the cost of acquiring the lease is
incorporated into the fiscal model. Appropriate rules for
amortization have been applied for each of the environments. In
response to the second question, Mr. Dobbs explained that CERA
looks at how a field, over its life, would compare if the leases
were acquired today at today's terms. He used the North Sea as
an example.
1:56:52 PM
Co-Chair Hoffman noted that Alaska is contemplating changes in
the tax structure through ACES. However, ACES has changed. For
example, the floor is gone, taxing on gross is gone, and the tax
rate is still under consideration. He opined that legislators
are listening to the industry and are in support of 22.5 percent
rate, instead of 25 percent. Many changes have occurred since
ELF, PPT and ACES. He concluded that what Alaska is considering
today is due to what has happened world wide in the industry.
He asked Mr. Dobbs if other countries are looking at Alberta as
an example.
1:59:24 PM
Mr. Dobbs agreed that others have looked at the example of
Alberta. He maintained that it is harder to look at underlying
costs, than at government take. Those governments have a more
optimistic view of the profitability of activity than is
actually being experienced. He agreed that the majority of
resource holders have sought to increase state take. There have
also been governments such as Columbia, who have reduced state
take in order to attract more investment. Capital investments
are at record high levels, but most of this is due to inflation
of fiscal terms.
2:02:49 PM
Co-Chair Hoffman maintained that Alaska led the way on
progressivity. The primary reason that the legislature has not
moved to a gross system is awareness of increased development
costs. He opined that the legislature was willing to listen to
industry testimony and modify its tax structure.
2:04:16 PM
Mr. Dobbs pointed out that CERA's analysis does include the
original gross tax proposal. An examination of the field models
shows that gross tax doesn't make much difference to
attractiveness; however, it is much better to tax on the net,
rather than the gross when considering higher costs and lower
prices. Risks of a recession in North America could lower
prices. Regimes with a gross tax component are always less
attractive. Norway is attractive because it has removed the
gross element.
2:06:12 PM
Senator Elton reported that the head of BP predicted that the
price of oil will be higher than expected. He asked if, given
the fundamentals, Mr. Dobbs believes that the price of oil will
go down to historical levels.
2:07:52 PM
Mr. Dobbs pointed out that the industry responded to the Iraq
war and problems in Venezuela and Niger Delta with a price
spike. He elaborated on changes in the oil price environment.
He related that the industry lives in the margins. If prices go
to $40, it would be problematic for the oil companies. He
doubted that prices would revert to a historical level. He
maintained that the underlying fundamentals do not support a
price as high as today's. He thought that the market might
overcorrect and go lower. He suggested that in 1980's costs
were, in relative terms, as high as they are today. Through the
application of technology and disciplined project execution, the
prices retreated.
2:11:33 PM
Senator Elton said he couldn't understand how ACES falls below
PPT if there is a net floor of 22.5 percent in both, the rest of
the government take depends on progressivity, and the royalty is
the same.
Mr. Dobbs reported that at the time CERA did the analysis, the
ACES proposal had a 25 percent rate. There was also a range of
royalty rates that came into effect.
Senator Elton assumed that the attractiveness of Alaska as a
place to invest would be the same under ACES or PPT with both at
22.5 percent.
Mr. Dobbs agreed, with regard to fiscal attractiveness; however,
the attractiveness of investment under ACES is negative, because
of the uncertainty of change.
2:15:02 PM
Senator Elton used an analogy of deer hunting to make a point
that the tax should be durable and reliable over time, which
would lead to stability. Not doing anything would be
destabilizing.
Mr. Dobbs responded that if industry believes there is a greater
prospect of long-term stability because there is a durable
consensus, that is a better situation than if industry perceives
there to be no consensus and no durable settlement. If the
original settlement had been considered durable, and the debate
had never arisen, that would have been best situation. The more
durable the outcome, the more certain the investment potential.
2:18:55 PM
Senator Elton suspected that if the end result was no new tax or
no change to the existing tax, future discussions would be as
virulent as they have been.
Mr. Dobbs pointed out that the investment cycle in the oil and
gas industry is longer than the electoral cycle and that creates
a tension surrounding how durable a settlement might be.
Senator Dyson asked who was paying for Mr. Dobb's testimony.
Mr. Dobb's replied that ExxonMobil was funding his expenses, as
well as the production of the paper. He explained the method
that CERA uses for its research. In this instance, this work is
a reflection of previous work for clients in the oil industry.
2:21:56 PM
Senator Thomas referred to the figures in the document and noted
that Russia, East Siberia, and the United Kingdom are
particularly attractive to investment. He requested more
information about rate and volume as they apply to investment in
those countries.
Mr. Dobbs reiterated that the rankings show only fiscal
attractiveness. East Siberia is attractive due to incentives
provided by the Russian government; East Siberia is less
attractive because it is in a remote area and has a perception
of unstable ownership rights. Investment activities in the UK
have been growing and it is more attractive than Norway.
Activity in Brazil ranks high due to a lot of international
investment. Fiscal attractiveness is only one of several
indicators. Companies are looking to developing resources off
the East Coast of Canada, off-shore Brazil, and in the UK, and,
in general, seem to be getting a good share of investment volume
terms.
2:25:00 PM
Senator Thomas asked about the stability of various countries
and speculation of future investment.
Mr. Dobbs related that there are a number of North American
companies that appear to be withdrawing from foreign investment.
However, Canada, China, India, Korea, and others are investing
in the riskier environments. He maintained that risk is a
relative term. It is difficult to generalize about the
shrinking universe of investment opportunities.
2:28:03 PM
Senator Elton pointed out that the UK has two tax rates; 50
percent for new fields, and 70 percent. He asked if references
to the UK include a blending of the two rates.
Mr. Dobbs reported that the analysis was post 1992 and the new
field rate of 50 percent was used. He explained the process at
arriving at the two different tax rates. He maintained that it
is unattractive to have two rates, unless one is a reduction.
Senator Elton requested further clarification of the comparison.
Mr. Dobbs said the UK was compared at a 50 percent tax rate.
Senator Elton asked for a breakdown between old and new fields
in the UK. Mr. Dobbs didn't know, but guessed that it was about
half and half. Senator Elton asked if it would be a fairer
comparison between Alaska and the UK if only new fields were
considered. Mr. Dobbs thought it would be a fair comparison if
the legacy fields had a reduction in taxes and the new fields
had a near- abolition of taxes.
2:34:03 PM
Co-Chair Hoffman thanked Mr. Hobbs for his presentation.
CS HB 2001 (FIN)am was HELD in Committee for further
consideration.
ADJOURNMENT
There being no further business before the committee, the Senate
Finance Committee meeting was adjourned at 2:34 P.M.
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