Legislature(2009 - 2010)SENATE FINANCE 532
02/25/2010 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Gas Issues and Alaska's Fiscal Design | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 25, 2010
9:05 a.m.
9:05:33 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:05 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
David Wood, Consultant, Legislative Budget and Audit;
Senator Joe Paskvan; Senator Gary Stevens; Senator John
Coghill
PRESENT VIA TELECONFERENCE
None
SUMMARY
2010 Oil and Gas Production Tax Review
^GAS ISSUES and ALASKA'S FISCAL DESIGN
9:05:41 AM
DAVID WOOD, CONSULTANT, LEGISLATIVE BUDGET AND AUDIT,
referred to a handout entitled, "Gas Issues and Alaska's
Fiscal Design" (copy on file). He provided information
about his work history. He reviewed topics he covered in
the previous presentation. The issue which received the
most attention was effective cross subsidy between gas and
oil in the progressivity component and its impact at high
oil prices, mixing low margin gas with high margin oil, and
the effect of significantly reducing the tax revenue to the
state, especially when oil to gas price ratios were high,
and gas to oil volumes were high.
Mr. Wood reported that he used a model derived from a
Department of Revenue model which he adapted to show
gas/oil calculations rather than just oil calculations. It
was clear from the model that the "dilution effect" took
place. He stressed the importance of the need to run multi-
year cash-flow scenarios to analyze fiscal take from a
gasline. He said that he is putting together a model to
show a wide range of potential scenarios.
9:12:30 AM
Mr. Wood continued his presentation from the previous day,
beginning with slide 44. He termed the presentation the
Alaska Gas Fiscal Model (AGFM), but pointed out that the
model could accurately address oil issues, as well. He
noted that the slide shows the structure of the model: the
multi-year and multi-scenario fiscal integrated upstream
and downstream performance cash flow model.
Mr. Wood turned to the Alaska gas fiscal model (AGFM) -
slide 45, which shows a range of legacy fields as well as
hypothetical fields. He pointed out the importance of the
yellow boxes which depict a scenarios macro, a sensitivity
macro, and a gas tax macro. The model is able to look at a
wide range of price scenarios for gas and oil, in addition
to production rates, timing, and field inputs. The model is
designed to look at items in detail.
9:14:44 AM
Mr. Wood explained that AGFM now evaluates in-state gas
scenarios - slide 46. The downstream components can be
reconfigured to model gas export routes and potential in-
state routes. The model is complex because it covers a
forty-year period.
Mr. Wood turned to slide 47 which shows the dashboard
control sheet: high level controls: spinners and graphics.
The top graphic shows the multi-year cash flow in
undiscounted terms. It can also show discounted terms. It
breaks out the various fiscal elements to show how much of
the revenue is coming from royalty, base production tax,
progressivity, and property tax. There was a decline in the
latter years in this scenario.
Mr. Wood described the pie chart at the bottom of the
slide. It summarizes the multi-year cash flow into a
snapshot that shows an average for the life of the
scenario. He pointed to the significance of royalties and
the base production tax for Alaska. Progressivity provides
another component. In a higher price scenario progressivity
will provide a slightly different component. The purpose of
the model is to be able to look at the range of scenarios.
9:17:48 AM
Mr. Wood observed that another part of the scenario is the
downstream, as depicted in slide 48 - dashboard control
sheet: dynamic graphics and summary results. It shows an
integrated model of upstream and downstream elements.
Mr. Wood showed a model which depicts the contributions of
each fiscal element to Alaska's take for the total North
Slope slide 49. The graphic shows Alaska's fiscal
components undiscounted.
9:19:46 AM
Mr. Wood explained slide 50, which shows that Alaska North
Slope production and reserves are dominated by three
corporations. The model shows the company holdings of Exxon
Mobil, BP, and ConocoPhillips. Slide 51 shows ANS
production profiles forecast by AGFM for BP. The model
provides the ability to see the impacts of various elements
in the fiscal design to the corporate positions.
Mr. Wood discussed slide 52 - hypothetical field cases
evaluated. He pointed out that in his report to Legislative
Budget & Audit in December of 2008 he did not look at the
legacy fields. He only looked at hypothetical gas fields in
order to try to establish the significance of various
fiscal components. The important point is to look at it
from a range of perspectives and fields. The slide
describes five non-associated natural gas fields and five
oil fields with associated gas. The point is that it is
important to examine the impacts of fiscal design changes
from a range of perspectives.
9:21:44 AM
Mr. Wood stated that a key component is the sensitivity of
an Alaska gas field to project and market variables - slide
53. As the gas price increases, so does the net present
value of the producer's share. He said the interesting
aspect on the graph is the Capex curve, which is less steep
than the operating cost curve. The reason is due to the
impact of investment credits. The model is a way of showing
the success of the investment credits, which play a
significant role in keeping projects economic.
9:23:23 AM
Mr. Wood noted that base case hypothetical field models
reveal high-level implications for government take - slide
54. He stressed the difference in government take of oil
fields compared to gas fields and the impact of the Alaska
fiscal design. The government take of destination value for
a stand-alone oil field is about 60 percent. For a gas
field it is about 30 percent. The difference is the high
cost of getting gas to market.
Mr. Wood related that the difference in net take between
oil and gas is about 75 percent for oil and about 67
percent for gas. These figures are not exceptional by
international standards. Many companies around the world
have government takes in excess of 80 percent. The
criticism that the Alaska fiscal design is punitive doesn't
hold up.
Mr. Wood showed a model of a large gas field: division of
destination value - slide 55. He noted that 42 percent of
the destination value is taken up by transportation costs.
A major difference between gas and oil fields is the high
cost of getting gas to market.
9:26:11 AM
Mr. Wood discussed a large oil field: division of
destination value - slide 56. Transportation costs are less
significant than for gas.
Mr. Wood turned to slide 57 - components of Alaska state
take for a large gas field. The graph shows the significant
components in terms of raising revenue for Alaska.
Royalties and the base production tax at medium level
prices account for two-thirds of Alaska's take. He noted
that the combined progressivity tax or CPT is a small
component, only 4 percent.
Mr. Wood compared the previous price scenario to a large
oil field on slide 58 - components of Alaska state take for
a large oil field. In this scenario CPT is much larger at
31.7 percent.
9:28:17 AM
Mr. Wood listed his conclusions and recommendations. Slide
60 lists his approaches to fiscal design that can improve
performance and credibility. He stressed one element as the
key conclusion: drive progressivity fiscal elements for gas
with gas PTV (not boe). He suggested isolating the gas
component.
9:30:43 AM
Mr. Wood talked about the need to clarify and optimize
fiscal revenue streams from NGL's. He suggested considering
state equity involvement in strategic infrastructure
projects. He stressed promoting cost disclosure and control
with some fiscal incentives. Finally, he said to apply time
constraints to new leases to develop resources.
9:32:51 AM
Senator Thomas requested more historical information in
order to have context for considering the future. That
would also allow for incentives. Mr. Wood thought it was a
good suggestion. He commented that there was a peak in oil
that can be used to see what might have happened if a gas
line was in place during those two years. He surmised that
the state would have received a substantially lower amount
of production tax, had the gas line been in place at past
gas prices.
Co-Chair Stedman summarized that the request is for a
summary of market prices for the last two years.
9:36:15 AM
Co-Chair Stedman turned to slide 13 - latest U.S.
government forecast shows high oil to gas price ratios
through to 2035. He asked what the probability was that
projection of oil to gas ratios could be inaccurate. Mr.
Wood replied that the graph has been put together using
Energy Information Authority (EIA) annual energy outlook
2010 forecast. He suggested that there is no certainty that
the forecast is accurate. If for only three years the price
is higher, there is an impact of billions of dollars of
revenue to the state. He voiced concern if price spikes
were to happen. Looking back to 2008's price spike, the
revenue benefits to the state were quite substantial.
9:39:17 AM
Co-Chair Stedman asked for further information about slide
12 - U.S. oil to gas price ratio and the range of fiscal
designs. He wondered how often in the past spiking has
occurred. Mr. Wood said that from 1996 to about 2006 the
price ratio was below ten. In all of the remaining period
it has been above ten consistently. He reported that since
May - June 2007 the price ratio was below 10 for only four
months. Since March 2009 it has been above 10 and above 20
for several months. He did not think the level would return
to 6, but the state should be planning for ratios above 10
and for spikes.
Co-Chair Stedman thought the current ratio was at 15. Mr.
Wood noted that there had been several months above 20 in
the last six months. Co-Chair Stedman commented that the
issue had moved beyond a theoretical exercise. Mr. Wood
agreed.
ADJOURNMENT
The meeting was adjourned at 9:42 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2010 02 24 DWood Gas AK FiscalDesign SFC Revised.pdf |
SFIN 2/25/2010 9:00:00 AM |
Oil and Gas Production Tax Review |