Legislature(2011 - 2012)SENATE FINANCE 532
03/22/2012 01:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB192 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 192 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
March 22, 2012
1:12 p.m.
1:12:02 PM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee meeting to
order at 1:12 p.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lesil McGuire, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Janak Mayer, Manager, Upstream and Gas, PFC Energy; Senator Gary
Stevens; Senator Joe Paskvan; Senator Tom Wagoner; Senator Cathy
Giessel.
SUMMARY
SB 192 OIL AND GAS PRODUCTION TAX RATES:
SB 192 was HEARD and HELD in committee for further
consideration.
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax; and
providing for an effective date."
1:12:36 PM
Co-Chair Stedman announced that the presentation contained
additional slides in response to questions raised at the earlier
meeting.
JANAK MAYER, MANAGER, UPSTREAM AND GAS, PFC ENERGY, continued
with the revised presentation from the earlier meeting (March
22, 2012, 9:11 a.m.) titled, "Discussion Slides: Alaska Senate
Finance Committee," (March 22, 2012)(copy on file).
Mr. Mayer summarized the tax allowance analyses proposed in SB
192, with different variables, depicted on the slides on Pages
30 to 32. He explained that the legislation provided a $10
allowance for new production above the amount that was produced
the previous year. He cited the slide on Page 30, "CSSB 192
Including $10 New Oil Allowance Over 1 Year (Existing
Producer)." Based on a hypothetical model of 100,000mb/d
(thousand barrels per day) the allowance had a negligible impact
for the producer.
Mr. Mayer highlighted slide 31, "CSSB 192 Including $20 New Oil
Allowance Over 7 Years (Existing Producer)." He noted that if
the allowance was raised to $20 and extended over 7 years, the
NPV (net present value) for the producer rose slightly but the
high government take remained mostly unchanged (ranging from 74
to 79 percent at a range of $100/bbl. to $230/bbl. (dollars per
barrel). He referenced the slide on Page 32, "CSSB 192 Including
$60 New Oil Allowance Over 7 Years (Existing Producer)." He
remarked that when the allowance was raised to $60 the overall
impact remained minimal.
Mr. Mayer addressed slide 33, "CSSB 192 Excluding New Oil
Allowance (New Producer)." In response to a question that Co-
Chair Hoffman had asked him in the previous meeting (March 22,
2012, 9:11a.m.) he included the slides on Pages 33 to 36 that
analyzed the impact of the allowance on new producers. The
allowance had a favorable impact at the $60 level extended over
7 years. He cautioned that the hypothetical model based on such
a large field development (100,000mb/d) was necessary to detect
a quantifiable amount of incremental production for purposes of
analysis. The scenario was unlikely to happen in the predictable
future. Slide 33, "CSSB 192 Excluding New Oil Allowance (New
Producer)" illustrated the data proposed in SB 192 without an
allowance incentive for a new producer without existing
production.
1:16:05 PM
Mr. Mayer compared slide 34, "CSSB 192 Including $10 New Oil
Allowance Over 1 Year (New Producer,)" to the base data on the
previous slide. He reported that the $10 allowance applied over
one year resulted in similarly high government take (ranged from
77 to 80 percent at oil prices ranging from $100/bbl. to
$230/bbl.) and a modest increase in net present value (NPV) with
the same rate of return (11%). He turned to the slide on Page
35, "CSSB 192 Including $20 New Oil Allowance Over 7 Years (New
Producer)." He highlighted that a $20 allowance expanded over 7
years compared to the $10 allowance for one year, yielded a
decrease in government take [5 percent decrease at $100/bbl.; 72
percent from 77 percent], a significant increase in NPV and 3
percent increase in the rate of return (14 percent). He turned
to slide 36; "CSSB 192 Including $60 New Oil Allowance Over 7
Years (New Producer)," which depicted a $60 allowance extended
over 7 years. He noted a 4 percent decrease (78 percent reduced
to 74 percent) from the previous slide in government take at
very high oil prices of over $200/bbl. He concluded that under
the particular hypothetical scenario modeled; a new producer, a
large field development, $60 allowance over 7 years, and no base
decline in production, the government take was significantly
reduced. He warned that the scenario was unlikely and that the
threshold for the allowance was too high. He reiterated that the
later scenario was the only circumstance that the allowance
incentive demonstrated a significant impact.
Co-Chair Stedman requested that Mr. Mayer repeat his conclusion.
Mr. Mayer responded that under generous terms; "incentivizing
new investments by existing producers and new developments that
would raise the decline curve", the new oil incentives in SB 192
had no impact. He reiterated that the sole scenario which
demonstrated an impact on the decline curve included a new
producer, no base decline compensation, and a substantially
increased allowance extended over 7 years.
1:20:14 PM
Mr. Mayer explained the way the proposed tax holiday worked. He
recapped that the allowance incentive in SB192 established a
target rate of production based on last year's production and
incentivized incremental production above that level. The tax
holiday also established a target level set at last year's
production level less a decline factor. The decline factor was
determined based on the moving average of the prior 3 year's
production and decline. He exemplified a scenario of a steady 6
percent per year decline over the prior 3 years production; the
current year's target equated to last year's production less 6
percent. The tax holiday provided an exclusion from production
tax of all revenue derived from production that exceeded the
target level. He identified slide 37,"CSSB 192 Excluding New Oil
Allowance (Existing Producer)" that depicted the provisions
contained in SB 192 without the new oil allowance as a base
comparison. He compared the data to the slide on Page 38, "CSSB
192 Including Tax Holiday Based on 3 Year Rolling Decline
(Existing Producer)," that illustrated the tax holiday analysis.
He remarked that the NPV slightly increased and the government
take did not change (74 to 79 percent at oil prices ranging from
$100/bbl. to $230/bbl.)
1:23:02 PM
AT EASE
1:26:26 PM
RECONVENED
1:26:32 PM
Mr. Mayer determined that the tax holiday worked off of the
decline curve instead of the previous year's production but was
only applicable for a single year. The decline rate calculation
was based on a rolling average; as incremental production
increased the decline curve flattened out over time. The tax
holiday was more difficult to claim again in the future.
Mr. Mayer discussed slide 39, "CSSB 192 Including Tax Holiday
Based on 3 Year Rolling Decline for 7 Years (Existing
Producer)." The graphed analysis was based on extending the tax
holiday for seven years. He noted that, compared to the previous
slide the impacts were more significant. The government-take
decreased by 4 percent and the NPV and cash flow slightly
increased. He pronounced that overall; the result remained
minimal as an incentive.
1:29:53 PM
AT EASE
1:39:08 PM
RECONVENED
1:39:32 PM
Mr. Mayer identified slide 40, "CSSB 192 Excluding New Oil
Allowance (New Producer)" and noted that the graphed data
depicted the effects of the legislation without the new oil
allowance for a new producer without existing production. He
compared the slide on Page 40 with the slide on page 41, "CSSB
192 Including Tax Holiday Based on 3 Year Rolling Decline (New
Producer)," the slide portrayed the graphed analysis of the tax
holiday for a new producer. He reported that the government
take(78 percent on $100/bbl.) and NPV remained unchanged. He
discerned that the tax holiday proposal improved one aspect over
an allowance method, by basing the target threshold on a decline
as opposed to the previous year's production. He felt the
holiday had two shortcomings: the tax holiday only lasted for
one year and the benefit applied to a single year when measured
against the overall life of the project was nominal.
1:41:55 PM
Mr. Mayer discussed slide 42, "CSSB 192 Including Tax Holiday
Based on 3 Year Rolling Decline for 7 Years (New Producer)" that
illustrated the effects of the tax holiday extended over 7 years
for a new producer. He relayed that the after tax cash flow
analysis at $100/bbl. oil portrayed an increase in the NPV, a
one percent increase in the rate of return (11 to 12
percent),and the government take decreased from 78 percent to 76
percent. He remarked that the result was "limited."
1:43:08 PM
AT EASE
1:43:13 PM
RECONVENED
1:44:00 PM
Mr. Mayer reviewed slide 43, "Differences in Incremental
Production." The slide depicted a chart divided into three
sections with various data that summarized the analyses of the
different incentive scenarios discussed in the presentation. He
explained the middle section of data titled, "Incremental." The
data underlay the allowance proposal in SB192 that was based on
production above the previous year's production. Each column of
numbers corresponded to a given year sequentially beginning with
2012 and ending in 2020.
Incremental:
Target Production (prior year) 186 175 177 180 183 187 191 196 201
Production Above Target - 2 3 3 4 4 5 5 -
Percentage Above Target Forecast 0% 1% 1% 2% 2% 3% 3% 3% 3%
Mr. Mayer explained that the target production numbers
represented the previous year's production. The production above
target figures was the actual production that occurred above the
target base line. Depicted as a percentage, production above the
target was very small. He pointed to the figures in the first
section of the chart that considered the data from the tax
holiday proposal.
3year rolling decline:
3 year rolling decline rate 6% 4% 1% -1% -2% -2% -2% -3% -1%
Target Production 175 169 175 182 186 190 195 201 202
Production Above Target - 8 5 1 1 0 0 0 -
Percentage Above Target Forecast 0% 5% 3% 0% 0% 0% 0% 0% 0%
Mr. Mayer compared the tax holiday data to the incremental data.
He delineated that the target production was mostly lower than
the allowance scenario. The production above the target rates
was higher for the first three years and lower in the out years.
The 3 year rolling decline rate was 6 percent the first year and
decreased each year to negative rates by 2015. The tax holiday
benefit was quickly lost because production increased above that
target level and the decline rate was based on a rolling 3 year
average. The decline curve flattened out. He felt that as an
incentive, the consequence was problematic. He turned to the
last section of the graph. He noted that the data represented a
different alternative.
Decline above fixed forecast:
Target Production 175 165 155 145 137 128 121 113 107
Production Above Target - 13 25 38 50 62 75 87 88
Percentage Above Target 0% 8% 16% 26% 37% 49% 62% 77% 82%
Forecast
Mr. Mayer explained that the proposal set the decline rate at
the current year's production based on the prior year's
production and decline. The decline curve was set in future
years based on the same rate calculated from the base year. The
decline rate represented in the data was 6 percent. The
incremental new production accumulated above the 6 percent
decline grew substantially more each year. He felt the incentive
for new production based on a fixed forecast was more
"meaningful."
Co-Chair Stedman deduced that the fixed forecast decline curve
was parabolic and would flatten out to 100 percent after 2020.
All of the production after 2020 would be considered new. Mr.
Mayer confirmed that over time, more and more production would
actually be "new." He exemplified the current production decline
at 6 percent. Without significant new investment, the decline
will continue. The target production line in the fixed forecast
data reflected a 6 percent decline over years. If production was
incentivized above that rate then the "new" production over
years becomes more of the base production. He opined that an
incentive must apply over a long time period to offset the
investment costs over a new projects life cycle if the goal was
to lower government take to stimulate new production.
1:50:14 PM
Co-Chair Stedman noted that one of the challenges was
determining when the parabolic curve flattened out. He mentioned
oil production forecasts that predicted a flattened out decline
cure over time instead of a precipitous drop in the near future.
He wondered how to reconcile the flattened decline possibility
with a fixed forecast model. Mr. Mayer felt that method had a
lot of strengths. He noted that one difficulty was how to
accurately predict the decline curve. The challenge was
determining the decline rate and how to best calculate it, i.e.,
exponential or hyperbolic. He shared that in some fiscal regimes
the fixed decline forecast method was used in production sharing
contracts. The contracted fiscal terms were negotiated between
the producer and government. Determining the base decline to
establish a new production threshold proved difficult and
complicated during the negotiation process.
1:53:05 PM
Co-Chair Stedman asked if the fixed forecast model required
separate decline curves for the major producers working
different fields. Mr. Mayer replied that the logistics were
difficult to resolve. He hypothesized that a single decline
curve would provide a substantial incentive to all, even if a
little lopsided to some. A more tailored decline curve for each
producer was better but exceptionally complex to administer.
Additional definitions of new production could be included to
augment using a single decline curve; either production from new
areas or new production from a planned development approved by a
regulator. He remarked that production above a base decline
curve was only one way to measure new production.
Co-Chair Stedman pointed out that if the state did implement two
different tax structures, one for current and one for
incremental production, a lot of the incremental production
would fall under an incremental tax structure. He wondered how
the state could develop a tax structure that worked in 2012 but
was applicable in the future, without creating a system where
most production was applied to the "more lenient" tax code. Mr.
Mayer contended that if the decline curve was carefully
structured then any incremental production classified as new was
actually new production and the policy was successful.
Senator McGuire asked Mr. Mayer to share his experiences working
with other jurisdictions that used the fixed decline rate. She
queried whether he had worked with any governments who had to
set a fixed decline base rate or defined new production in other
ways. Mr. Mayer replied that a number of governments used the
approach of incentivizing production above a base rate. He noted
service contracts in Iraq that provided monetary compensation
for incremental barrels above an existing base or decline rate
in established oil fields. Specifically, PFC Energy worked with
Bahrain to negotiate an appropriate decline curve with
producers. Negotiating precise terms under contractual
arrangement was much more difficult than in a tax royalty regime
where the terms were set by the legislature.
1:58:20 PM
Senator McGuire inquired about the outcome of the negotiated
contracts. She wondered if more production over time "migrated"
into the "new production" stream. Mr. Mayer felt there was a
better way to understand the result. He hypothesized a decline
curve rate established at 6 percent in a scenario where new
production above the base was continually produced each year.
Progressively more of the production base over time would be
taxed at the preferential rate and less at the base rate. He
emphasized that outcome was precisely how the system was
designed to work. The new production was a "result of the
success of the policy by stimulating production above the six
percent decline rate."
Senator McGuire mentioned the idea of the state defining new
development by approving planned development that qualified for
favorable tax terms and asked Mr. Mayer to relate his experience
with alternate definitions of new production. Mr. Mayer replied
that he could not recall "concrete" examples to share with the
committee.
Mr. Mayer continued with the presentation. He compared the
slides on Page 44, "CSSB 192 Excluding New Oil Allowance
(Existing Producer)," which applied the data from SB 192
excluding the new oil allowance in a large field development
(100,000 mb/d) as a base comparison with the slide on page 45,
"CSSB 192 Including 20% Gross Revenue Allowance Above Fixed
Decline Rate (Existing Producer)". The slide depicted a 20
percent gross revenue allowance above a 6 percent fixed decline
rate. He pointed out that the project economics and government
take changed considerably. The government-take decreased from 79
percent to 75 percent at $230/bbl. oil and from 74 percent to 69
percent at $100/bbl. The NPV significantly increased for
producers. He highlighted the projected results from the slide
on Page 46, "CSSB 192 Including 40% Gross Revenue Allowance
Above Fixed Decline Rate (Existing Producer)." He noted the
graphed data illustrated a further reduction in government take
to 65 percent at $100/bbl and 70 percent at $230/bbl prices of
oil. He commented that he introduced the fixed decline incentive
to the committee as an alternative for further consideration.
2:03:09 PM
Mr. Mayer concluded with slide 47:
Conclusions - New Oil Allowance:
Even under highly aggressive assumptions regarding the
potential for a new-source development for a given
company, the impact of CSSB192's $10 allowance for
"new oil" is almost undetectable
•By increasing the time horizon and value of the
allowance, it is possible to increase the impact to
the point at which it becomes noticeable in the
specific hypothetical case of a 100 mb/d new
development for an existing producer.
•This, however, is a highly unlikely scenario. Under
any foreseeable scenario, regardless of rate or
duration, it is unlikely to have any impact because it
does not incentivize new production above the existing
decline, only volumes incremental to prior years'
production.
•Senate Resources Amendment B2 instead proposed a tax
holiday based on production above a target rate, set
based on the rolling average decline rate for the
prior 3 years.
•While the decline-curve approach is a sounder one,
the impact of this proposal is also highly limited,
for two reasons
•The allowance applies each year only to
production that year which exceeds the target
•After a few years of production growth, the
incentive no longer applies to new production,
due to changes in the rolling-average decline
curve
•An allowance based on a set decline-curve, based at a
particular point in time, has a significantly greater
impact than either of the other forms of allowance.
•Determining the appropriate decline basis to use
could pose difficulties.
•The decline curve concept could also be complemented
with other incremental production definitions, such as
production from new areas, and from approved
development plans
He determined that a more favorable incentive system based on
new production was one that spanned the life cycle of a new
project.
ADJOURNMENT
2:06:47 PM
The meeting was adjourned at 2:06 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 192 032212 Revised PFC Presentation Meyers.pdf |
SFIN 3/22/2012 1:00:00 PM |
SB 192 |