Legislature(2009 - 2010)SENATE FINANCE 532
02/24/2010 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Gas Value under Aces Tax Provisions | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
February 24, 2010
9:07 a.m.
9:07:30 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:07 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Representative John Coghill, Senator Bill Wielechowski,
Senator Joe Paskvan, Pat Galvin, Commissioner, Department
of Revenue.
SUMMARY
^Gas Value under ACES Tax Provisions
Progressivity Profitability Parity Gas
9:07:44 AM
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, introduced
the overview "Progressivity Profitability Parity Gas" (Copy
on File). He stated that the presentation will address the
calculation of production tax from the perspective of
adding gas to an existing oil stream.
9:11:00 AM
Commissioner Galvin discussed Slide 2: "Agenda"
o How Does the Production Tax Calculation Change when
Gas is Produced?
o Brief historical background on the philosophy behind
the current system
o How does "Parity" affect the production tax
calculation?
o What is being potentially "locked in" with the AGIA
Open Season?
o Forecasting oil and gas prices 2020 to 2030
o Policy Issues Associated with the Gas Tax
Commissioner Galvin addressed the spreadsheet on Slide 3:
"Basic Oil Tax Calculation" Now What if We Added 4.5 Bcf of
Gas Production?" The top of the graph illustrates the oil
production beginning with the price on the market. The
Arctic North Slope (ANS) price chosen was $75. A production
level intended to reflect the projected level beginning in
2020 has been reduced to approximate the time frame when
the gas is arriving. The transportation cost was deducted.
The value at the point of production is used to exemplify
the value before the deduction of the upstream costs. The
royalty is removed to arrive at the taxable barrels. The
lease expenditures are deducted.
9:14:00 AM
Co-Chair Stedman why the ANS price chosen was $75. He asked
about the daily production of 500,000 barrels.
Commissioner Galvin answered that the $75 price was used as
a starting point. The number is variable and can be changed
with the parity issue. The projection is 500 barrels per
day for 2020. He continued to describe the graph and
mentioned the production tax value (PTV) that establishes a
per barrel PTV that is then used to determine the
progressivity rate that then provides the base tax and the
progressivity tax. He explained that 20 percent of the
capital expenditure allows for the after-credit tax.
Commissioner Galvin asked now what happens if we add 4.5
billion cubic feet per day (Bcf/d) of gas production? The
question was answered in Slide 4. He explained the use of
the market price multiplied by the production volume, which
provides the gross value at productions. The transportation
cost of 4.5 Bcf/d is a high projection of the combined
pipeline tariff and gas treatment plant cost. The range
currently advertised as part of the Alaska pipeline project
is lower, but 4.5 is used to place additional stress on the
gas portion of the equation.
Co-Chair Stedman commented that the tariff protection from
the gas treatment plant to the Alberta hub was 2.8-3.5, but
additional tariffs were included by TransCanada to continue
the movement of gas. Commissioner Galvin responded that
price expectations must be compared to the transportation
cost to arrive at the pricing point. If the Alberta hub is
used as the pricing point, and the $8 represents the price
at the Alberta hub, 2.8-3.5 Bcf/d would arrive at the
pricing point. Further transport would require a price
differential to cover the additional cost.
Co-Chair Stedman asked about the $8 dollar price.
Commissioner Galvin responded that $8 dollars is a
reasonable average. All the numbers are approximations. The
presentation is not intended to be precise, but instead to
be illustrative of the mechanism.
9:21:23 AM
Co-Chair Stedman added that the ratio between the oil price
at $75 and the gas price at $8 is approximately 9.4. If the
gas price is moved to five this changes the price
dramatically. Commissioner Galvin agreed.
Commissioner Galvin continued that following the deduction
of the transportation cost, the value at the point of
production for the gas is calculated. The similar gross
value of the commodity is different due to the scale of
operation. The value deducted comprised a larger percentage
of the overall commodity value. The taxable amounts are
similarly related. The costs capture the bulk on the oil
side to reflect the costs associated with oil production.
The numbers displayed in the spreadsheet representing the
gas costs are approximations of potential incremental costs
associated with gas production. He spoke to the disparity
in the costs.
9:24:33 AM
Commissioner Galvin continued with the production tax value
for oil and gas, which is represented on the next line.
Because there is a larger volume of gas on the Barrel of
Oil Equivalent (BOE), the BOE value is lower for gas than
oil. The spread sheet illustrates that the oil alone
results in a progressivity tax rate of 5 percent. The BOE
for gas is less than the $30 cut off point resulting in no
progressivity. The combined column in the graph shows the
combination of oil and gas and provides a combined value
used to establish the progressivity rate for the combined
stream. The combined tax after credits in the provided
example equaled $2.4 billion. He pointed out that the
combined total does not equal the result of adding the two
together as separate streams.
Co-Chair Stedman asked about the difference. Commissioner
Galvin responded approximately $400 million.
Commissioner Galvin posed the question, "was this expected
when ACES was crafted?"
Co-Chair Stedman wished to address the BTU equivalency
issue. He requested an explanation. Commissioner Galvin
explained that the production tax is based on the BOE.
Equivalents between gas and a barrel of oil are represented
by the energy value of the two commodities. The intent was
to replicate the ultimate value of the two. To compare gas
and oil on energy basis appears to provide a method to
convert in a way that reflects the primary purpose of
generating energy. Observing the market price does not
always correspond as the value equivalent is a six to one
ratio. Through trade the value comparison alters from six
to one frequently. As the price changes, the relative
profitability alters the effect.
9:31:52 AM
Co-Chair Stedman pointed out that the price range does not
reflect a six to one energy equivalency when analyzing the
market value price.
Commissioner Galvin added that establishing the parity
level depends on the point of reference. The price
relationship can range within an eight to one or ten to one
ratio.
Co-Chair Hoffman pointed out that oil is taxed on the price
of oil and gas is taxed on the BTU equivalent to the price
of oil and not on the price of gas.
Commissioner Galvin pointed out that gas is taxed on the
price of gas. The blending of the two is at a BTU
equivalent. The BTU is a constant while the price of gas
varies.
Co-Chair Hoffman added that gas is equivalent to the BTU of
oil. Commissioner Galvin agreed. The effect of the blending
is based upon the heating value. Co-Chair Hoffman added
that the price of gas varies, but the price of oil is based
on the dollar value, which depends on market conditions.
Senator Olson asked how many other countries or states use
the BTU method of taxing for production. Commissioner
Galvin responded that some jurisdictions use separate
methodologies and others use combined. Generally the BTU
equivalent base is the industry standard.
9:36:01 AM
Senator Thomas commented that the price ratios are nine to
one. He wished to view some alternative ratios to allow
comparison.
Co-Chair Stedman asked to know the royalty share of the
shown $1.7 billion from gas. Commissioner Galvin noted that
the royalty in the example provided is already taken prior
to the $1.7 billion tax value.
Co-Chair Stedman pointed out the basic component of royalty
and the production sharing arrangement. If the value to the
state is eroded, he believed that is a significant
percentage of the gas.
Commissioner Galvin agreed and noted that this example does
not represent an erosion of value. The slide provides an
example of combined tax to provide value to the state of
$2.4 billion in addition to $2.2 billion of royalty for the
combined value of the two streams. Just as the state
provides a similar effect for heavy oil or new production
that reduces the value of the taxpayers' current oil
production, it is intended to be an incentive for that
additional investment because of the value gained from the
additional gas stream.
Co-Chair Stedman disagreed and stated that the policy was
the leftover portion of gas and oil taxation that was
embedded in the original Petroleum Production Tax (PPT).
The policy was never addressed by the legislature.
Commissioner Galvin clarified his point. When he discusses
the crafting of ACES, he is speaking of the
administration's proposal. He explained that he did not
intend to impute on the legislatures expectations or
intentions. The dynamic described is the same type of
uplift for heavy oil and marginal oil field development.
The policy is intended to be a positive incentive for
producers to commit to the gas line project. The policy
must be viewed in the context of the gasline economic
analysis.
9:42:36 AM
Commissioner Galvin addressed Slide 8: "Goals for Fiscal
Design." He noted that past presentations communicated that
beyond the individual projects, the economic effect of the
project reduces the existing tax burden on the existing
production. The increased production is beneficial to the
state in addition to the bottom line tax revenue.
Co-Chair Stedman commented that the initial program under
Governor Palin was to lower progressivity. He recalled that
the legislature took action to raise the progressivity.
Commissioner Galvin acknowledged that the presentation
referenced was a method of explaining what happened when
the progressivity was increased from .2 to .4. Increasing
the progressivity had the advantage of increasing the
state's take on the upside and reducing the take on the
downside, and also increased the effect on current
production when new and less profitable production is
introduced.
Co-Chair Stedman requested a slow and careful presentation
of the issue due to its importance. He hoped for updated
slides for the Gaffney Cline presentation.
Commissioner Galvin admitted that he was unaware of the
said presentation. He offered to provide the needed
information at a later date.
9:47:18 AM
Senator Thomas referred to Slide 8, which was based on past
discussions that were still accurate and relevant.
Commissioner Galvin noted that different issues are raised
beyond those encompassing the gas tax. He explained that
the more aggressive the progressivity, the greater the
impact on the effective rate change and the relation
between the combined and the stand alone rate.
9:48:58 AM
Commissioner Galvin addressed Slide 12: "How Parity affects
Calculations" The following graphs were utilized to isolate
one variable, allowing the rest of the calculation to
remain the same. When the one variable is moved the bottom
line in the calculation is altered. He pointed out Slide 14
where $100 is used allowing for a 12.5 to 1 ratio. The
slide does not alter the gas, but the oil side reaches $4
billion in total after tax credits. The combined amount is
now barely equivalent. The affect of a twelve to one price
with assumptions result in the combined oil and gas
production tax being similar to the individual oil tax. He
noted that the state continued receiving royalty payments
for the oil and the gas in addition to the tax revenue,
which is not affected by the dynamic.
Co-Chair Stedman voiced concern about the lower combined
total for gas and oil versus that of oil alone. He opined
that a lack of gas revenue other than royalties was a
serious issue. Commissioner Galvin explained that it
depends upon the expectation of the parity and the value of
the overall stream of adding the gas to the state's
portfolio. The production tax is only one component of the
relationship. He expected the economics of the gas pipeline
and its effects on the state cash flow to be discussed
regarding the state take of the gas revenue stream. The
current system provides a fair distribution of the revenue
between the state and the companies when gas is produced.
9:54:36 AM
Co-Chair Stedman commented on the parity issue of 12.5,
when gas is $8 and oil is $100. He mentioned the forecast
by the United States Department of Energy of $110 to $125
per barrel of oil. The offset may be greater than this.
Commissioner Galvin moved on to Slide 17 illustrating $120
per barrel. He commented on the 15 to 1 ratio between the
oil and the gas price. He noted that the state now has less
production tax revenue as a result of the combination than
if the gas was not factored in.
Co-Chair Stedman noted that the Alberta Hub price noted in
the TransCanada presentation is close to the $8 dollar
range. He pointed out the $2 billion offset. He opined that
the offset erases the gas revenue of $1.1 billion. He asked
to know the remainder of the royalty share if the negative
$2 billion was taken against the gas as the royalty
calculation is absent from the graph. Commissioner Galvin
responded that given the $900 million reduction in
production tax compares to the additional royalty received
on the gas and the reduction would be greater than the
additional royalty on the gas.
Co-Chair Stedman opined that the current structure negates
all of the production gas revenue and takes the royalty
portion. Without the gas line, the treasury would increase
by $1 billion each year. He asked why the state would
choose the presented structure. Commissioner Galvin
answered that the state's fiscal system for gas production
will be evaluated by the producers and enables them to make
a decision about participating in the project. The state is
taking responsibility for the price risk and is in the
exchange of values.
Senator Thomas noted the reliance on the difference between
the price of gas and the price of oil. He commented on the
lack of clarity regarding oil and gas regulation. He
pointed out that no one can predict the future difference
between oil and gas prices.
Commissioner Galvin agreed that the big issue is the
establishment of the gas in the fiscal system. The issue
combines matters of cash flow sharing and the relative
risks born by the state and producer. He questioned whether
the state would participate in the project with the
likelihood of significantly high revenue and the
possibility of little or no revenue. If the state chooses
to shear off the risk of little to no revenue, the
producers will expect less likelihood of high revenue.
There is tradeoff between the cash flow and the risk. Less
risk leads to greater certainty, but less reward in the
investment world.
10:03:02 AM
Co-Chair Stedman stated that the United States Department
of Energy's outlook forecasts the parity for 2020 and 2030.
The parity is not a calculated anomaly that will never
happen.
Co-Chair Hoffman noted that oil is declining. He noted the
presented scenarios for 2020. He asked to see the scenarios
for the future decades as well. He wondered if the current
structure would sustain the state beyond 2020.
Commissioner Galvin agreed to provide the information. He
pointed out that with the gas production comes more oil
production. He explained that oil projections without a gas
line are different. Regarding the state's ability to
sustain revenue needs, he noted that the high parity
situations will sustain the state, without the maximum
amount of revenue. To maximize the revenue without the gas
line is also difficult.
10:07:29 AM
Co-Chair Stedman pointed out that the ability to extract
oil becomes more difficult once gas is produced. Alaska
does not currently have a gas line because the field
required pressurization for decades after opening Prudhoe
and Kuparuk. He commented on the advantages of retaining
pressure on the oil fields. He recognized the overall value
of the basin in harvesting gas and oil.
Commissioner Galvin moved onto Slide 18: "How does Parity
affect State revenues coming from an AGIA gasline." He
explained that the chart uses a 25 year cash flow
associated with a gas line to the state using production
profiles with and without a gas line. The chart does not
show the revenue generated in the different scenarios, but
is intended to provide a sensitivity picture of the
potential state revenue. He discussed the 12:1 ratio
presented in the chart. If the parities are anticipated
when the sanctioning decision for the project takes place
and the price of gas is expected to be no greater than five
dollars, the project will not go forward.
10:12:24 AM
Co-Chair Stedman noted many of the presented analysis use
sixty dollars per barrel of oil. The rough parity
relationship from the United States Department of Energy is
16:1. He encouraged caution about narrowing the range when
an analysis is observed or presented.
Commissioner Galvin wished to acknowledge that the market
for oil and gas are connected. A long term dislocation
between oil and gas lead to the expectation that behavior
will change among the consumer who will move to the lower
cost commodity. In many instances, if a broad price
disparity exists, the market will react.
Co-Chair Stedman explained that the great anticipated
parity makes him uncomfortable. Commissioner Galvin
suggested that the entire revenue stream generated by the
project be viewed by the chairman.
10:15:56 AM
Commissioner Galvin detailed Slide 20: "Gas Tax Policy
Issues"
· What cash flow does the state expect from the gasline?
· What price risk is the state willing to accept?
· Is the state willing to accept the risk of periods
where the oil and gas tax revenue is less than oil
alone?
· What is the cash flow sharing and risk sharing between
the Producers and the State?
Co-Chair Stedman shared an example from a conference he
attended in London. He advocated for cash flow in the early
part of the economic cycle. He expressed concern about the
state's fiscal system.
Commissioner Galvin pointed out that additional evaluation
and analysis is necessary prior to determining the
parameters of the state's fiscal system.
10:18:21 AM
Commissioner Galvin moved on to Slide 21: "Issues
Surrounding Gas Tax Discussion at this Time"
· Entering two open seasons for the gas pipeline
o Likely to result in Producers continuing to claim
changes in the fiscal system are necessary
· Full commitments to ship gas (i.e. project sanction)
not expected until 2014
· Stakeholders will continue to discuss:
o Necessary Producer cash flow from gas
development,
o Relative risks borne by the Producers and the
State,
o Amount of Fiscal Predictability the Producers
need
Co-Chair Stedman wished for an explanation of the project
sanction. Commissioner Galvin responded that firm
commitments from the producers must be made to finance the
project. The pipeline sponsor must make a decision about
whether to move forward with construction. The events will
take place after the project secures a certificate. The
project costs and schedule will be further refined and more
certain. The events will take place around 2014.
Co-Chair Stedman asked if the sanction determines whether
or not the project will go forward.
Commissioner Galvin pointed out that ultimately the
legislature will determine the state's position on the
parameters of gas taxes.
Co-Chair Stedman pointed out the significance of May 1st.
10:22:55 AM
Commissioner Galvin asked what is locked in with the Alaska
Gasline Inducement Act (AGIA) open season.
Co-Chair Stedman noted that the AGIA draft regulations came
out Friday. Commissioner Galvin clarified that two
different sets of regulations were released, one two weeks
ago and one on Friday.
Co-Chair Stedman commented that new information might
require increased detail. Commissioner Galvin agreed and
admitted that his presentation contained only a high level
view of the components of the parity issue.
Commissioner Galvin described Slide 23: "What kind of
shipping commitments quality shippers for AGIA Tax and
Royalty Inducements?"
For gas to qualify for the tax and royalty
inducements, "producer-shippers" and "shippers buying
from producers" must meet this requirement under AS
43.90.300:
"Must commit to acquire firm transportation capacity
in the first binding open season"
Co-Chair Stedman noted the binding open season deadline of
December 2010.
Commissioner Galvin discussed Slide 24: "Definition of Key
Terms"
· Precedent Agreement (PA): Establishes general terms of
transportation service the conditions under which
shipper will be obligated to acquire transportation
capacity on the project (via TSA). Also specifies when
the shipper and transporter are relieved of those
obligations (i.e. conditions).
· Transportation Services Agreement (TSA): Entered when
conditions of the PA are met; shipper is then
unconditionally obligated to pay for transportation
and the transporter to construct the project.
Commissioner Galvin explained that the precedent agreement
must be entered into by December 31, 2010 as a result of
the initial open season. The precedent agreement governs
the extent to which the shippers are obligated to pay those
development costs during the development time.
Commissioner Galvin continued that the shipper and the
pipeline will enter a transportation services agreement in
2014.
Commissioner Galvin commented that under the proposed AGIA
regulations currently out for public comment, a bid must be
submitted for firm capacity during the initial open season
which must result in a precedent agreement within 180 days
of the close of the open season. The process must lead to
an executed transportation services agreement. Capacity
that qualifies for the AGIA upstream inducements affects
the production tax exemption. The production tax exemption
states that if the production tax is changed between now
and the time of gas production, an exemption is awarded
that is equal to the gas production tax less the production
tax in place at the time of the open season. The exemption
is good for ten years following the beginning of gas
production and applied only to the volumes of gas
transmitted through the capacity that qualified for the
AGIA inducement.
10:32:51 AM
Commissioner Galvin addressed Slide 27: "Indentifying gas
production tax"
· Current Production Tax is calculated on combined oil
and gas production, with combined oil and gas lease
expenditures, so we need to attribute a "gas
production tax" value.
· Under proposed 15.AAX 90.220, to attribute "gas
production tax," we use the ratio of the gross value
of AGIA gas at the point of production divided by
the combined gross value of the oil and all gas at
the point of production. This ratio is multiplied by
the combined oil and all gas production tax
liability.
Commissioner Galvin detailed Slide 28: "Gas Tax Exemption
Mathematics" He explained that the AGIA Gas Value Ratio of
the gross value at Point of Production divided by the
combined oil and gas gross value at the Point of Production
multiplied by combined oil and gas production tax liability
under the system in effect May 1, 2010, equals the gas
production tax liability. He described the mathematical
formula on Slide 28.
Co-Chair Stedman noted that Slide 29 exhibits prices close
to the forecast by the United States Department of Energy.
He pointed out that the parity issue is in effect today and
is not a hypothetical issue.
Commissioner Galvin visited Slide 29 and noted that the
each individual tax payer will undergo the same process.
10:37:38 AM
Co-Chair Stedman asked about the timeframe for the
calculation. Commissioner Galvin did not know, but would
respond later.
Commissioner Galvin explained that the formula looks at the
ratio or the percentage of the value of gas against the
overall value. The percentage is then multiplied by the
combined production tax obligation resulting in a
production tax attributed to gas under the proposed
regulation.
Commissioner Galvin explained the calculations on Slides 31
and 32.
Co-Chair Stedman commented on the amounts collected using
the formula. He asked how much cash would be on the table.
Commissioner Galvin answered that the amount depends on the
legislature and the tax system. If nothing is done to the
tax system then $5.5 will be the amount. If the tax system
is altered, the amounts will differ. If the gas production
tax is increased and exceeds $1.1 billion, then an
exemption would be awarded.
Co-Chair Stedman complimented the department on the formula
for gas and oil. He asked if Commissioner Galvin would
apply the formula with a fifty percent allocation.
Commissioner Galvin commented that the regulations
accommodate a past tax consideration. He noted that the
allocation of credits was not taken into account.
10:44:25 AM
Co-Chair Stedman asked to know the cash flow position of
the state if regulations take effect in the way that they
were written. Commissioner Galvin responded that following
May 1st if the legislature decided to "ring fence" gas to
separate the gas and oil. The end result is that the state
brings in $7.5 billion without exemption.
Co-Chair Stedman asked for an estimate assuming no changes
to statute. Commissioner Galvin answered that the
regulations do not establish the funds going to the
treasury. If the legislature chooses not to change the
current production tax, then the end result is the $5.5
billion. If the legislature chooses to do something
different with oil and gas taxes, the effect of the
regulation will be that the gas tax cannot exceed $1.19
billion. The state will receive the $6.4 billion for oil
and the $1.1 billion for gas.
ADJOURNMENT
The meeting was adjourned at 10:48 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2010 02 24 DOR Progressivity Profitability Parity Gas revised SFC.pdf |
SFIN 2/24/2010 9:00:00 AM |
Oil and Gas Production Tax Review |
| Agenda 022410 am.docx |
SFIN 2/24/2010 9:00:00 AM |
Oil and Gas Production Tax Review |