Legislature(2013 - 2014)SENATE FINANCE 532
03/04/2013 01:30 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
March 4, 2013
1:36 p.m.
1:36:35 PM
CALL TO ORDER
Co-Chair Meyer called the Senate Finance Committee meeting
to order at 1:36 p.m.
MEMBERS PRESENT
Senator Pete Kelly, Co-Chair
Senator Kevin Meyer, Co-Chair
Senator Anna Fairclough, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Senator Cathy Giessel; Janak Mayer, Upstream Manager, PFC
Energy.
SUMMARY
SB 21 OIL AND GAS PRODUCTION TAX
SB 21 was HEARD and HELD in committee for further
consideration.
SENATE BILL NO. 21
"An Act relating to appropriations from taxes paid
under the Alaska Net Income Tax Act; relating to the
oil and gas production tax rate; relating to gas used
in the state; relating to monthly installment payments
of the oil and gas production tax; relating to oil and
gas production tax credits for certain losses and
expenditures; relating to oil and gas production tax
credit certificates; relating to nontransferable tax
credits based on production; relating to the oil and
gas tax credit fund; relating to annual statements by
producers and explorers; relating to the determination
of annual oil and gas production tax values including
adjustments based on a percentage of gross value at
the point of production from certain leases or
properties; making conforming amendments; and
providing for an effective date."
1:36:53 PM
JANAK MAYER, UPSTREAM MANAGER, PFC ENERGY, introduced
himself. He explained that the focus of PFC Energy was
related to above ground risk, and the issues that the oil
and gas companies face that did not come from the
subsurface. He furthered that PFC Energy dealt with issues
of supply and demand in welled oil markets; regional
markets for natural gas; competition analysis and strategy;
political risk in various parts of the world; and the
question of fiscal terms and project economic analysis.
Mr. Mayer acknowledged Senator Olson and Senator Hoffman's
presence in the committee.
Mr. Mayer discussed the PowerPoint, "Senate Finance
Committee, Alaska Fiscal System Discussion Slides" (copy on
file).
1:39:42 PM
Mr. Mayer looked at page 3, "Regressive and Progressive
Regimes."
2 potential reasons to desire a progressive element in
Alaska's fiscal regime:
-To counteract regressive elements in the regime to
achieve something close to neutrality
-To go beyond neutrality, to ensure a higher level of
take for the state in high price environments
Regressive and Progressive regimes imply very
different outlooks on risk and reward, for government
and the private sector:
-Regressive regimes limit risk to the state, placing
large downside risk on the private sector, protecting
the state in low price or high cost environments
-In return, regressive regimes offer outsized returns
in high price environments.
-Progressive regimes involve the state bearing more
price and cost risk, in return for a higher share of
returns in good times.
Perhaps the single biggest problem with Alaska's
current fiscal regime is that it involves elements
that are both strongly regressive and strongly
progressive.
-It seeks to place downside risk on the private
sector, while taking most of the returns in high price
environments.
-It is this combination that makes it particularly
unattractive from an investment perspective.
Mr. Mayer highlighted page 4, "Royalty Only Base
Production." Even with just a 12.5 royalty on base
production, a fixed royalty is regressive at low prices; at
$40/bbl the royalty and property tax consume all divisible
income.
1:48:24 PM
Mr. Mayer looked at page 5, "Royalty Only $18/bbl New
Development, Standalone." He stated that with the 16.7
percent royalty that generally applies to newer leases, an
$18/bbl new development faces more than 70 percent
government take at $65/bbl. He pointed out that the company
would not break even until it hit $18/bbl. He remarked that
the royalty only option would be very profitable for the
state, assuming production occurred at oil prices. He
furthered that the bottom left chart displayed the cash
flow development, beginning at $100 per barrel. He stated
that the yellow bars represented the initial Capex
facilities costs; the light blue bars represented the
drilling capital costs; the green represented the revenue
that is collected once production commences; the red bars
represented the operating costs; and the purple bars
represented the government take. He furthered that the
dashed line on the graph represented the off-tax cash flow
of the investments. He remarked that there was negative
cash flow in the early years, which turned into positive
cash flow as production occurred. He remarked that the
black line was essentially the difference between the top
bars and the bottom bars on the graph.
Mr. Mayer discussed page 6, "Royalty Only, $25/bbl New
Development, Standalone." He stated that a high-cost
$25/bbl development may face more than 70 percent
government take at $85/bbl. He explained that the break-
even cost for the company would be approximately $100/bbl.
1:52:29 PM
Mr. Mayer explained page 7, "Base Production." He stated
that the Alaska Clear and Equitable Share Act (ACES) layers
onto the regressive fixed royalty a highly progressive
profit-based production tax. The gross-based minimum tax
also increases the regressive nature at the low end. The
result is very high levels of government take at both very
low and high prices.
Mr. Mayer looked at page 8, "ACES-$18/bbl New Development,
Standalone." He stated that standalone new developments
face particularly high government take- although this is
partly offset by the significant downside risk the state
takes through reimbursable credits. He looked at the cash
flow line on the chart, at $100/bbl, was no longer as far
negative as the capital and drilling cost. He also pointed
out that there would be negative government take in the
early years, as the capital credits contributed to the cost
of the project. He stated that the new development, on a
stand-alone basis, was an even higher government take than
the base production. This was because of a combination of
the higher royalty and the inability to write the cost off
against the royalty.
1:57:41 PM
Mr. Mayer highlighted page 9, "ACES-$25/bbl New
Development, Standalone." He stated that the downside
exposure to the state from reimbursable credits to small
producers is potentially significant for high-cost projects
in low price environments. He remarked that the cash flow
analysis chart differed from the previous charts. He stated
that the slide was based on what might occur at $50/bbl. He
remarked that the negative purple bars in the early stage
of capital spending were greater than the corresponding
relatively small amount of government take that occurred at
the tail-end of $50/bbl.
Mr. Mayer discussed page 10, "Alaska Base Production Under
UK North Sea Regime." He explained that by comparison, pure
profit-tax based regimes like the UK North Sea can be
completely neutral over an indefinite range of prices, with
or without some progressivity at low prices. He stated that
the UK North Sea regime was completely neutral, because it
did not have the fixed royalty, property tax, or other
regressive components. He stressed that the UK North Sea
regime was a strictly profit based taxation system. He
explained that a pure profit based taxation system could be
designed to target any level of government take. He stated
that their system created a small amount of progressivity
at low price levels, but at a certain price level, it
reached its target level of government take. That
government take was maintained at all price levels, at all
cost structures for base production.
Co-Chair Kelly wondered if the $18/bbl was a capital
expenditure. Mr. Mayer responded that the $18/bbl was both
drilling and facilities capital expenditures.
Mr. Mayer answered some of Senator Dunleavy's previous
questions related to changes to fiscal regimes to match
some of the more competitive environments. He stated that
Alaska had a greater degree of change over recent years
than most every other comparable regime. He remarked that
constant change was a great disincentive to investment,
because investments were made on a 10 to 20 plus year time
horizon. He stressed that the fiscal system was ultimately
was determines the economics of a growing investment.
2:02:42 PM
Mr. Mayer highlighted page 11, "Alaska $18/bbl Development
Under UK North Sea Regime." He explained that by
comparison, pure profit-tax based regimes like the UK North
Sea can be completely neutral over an indefinite range of
prices, with or without some progressivity at low prices.
He stated that the UK had experienced a number of changes
to its fiscal regime. He explained that, in 2003, the UK
took away a significant component to reduce government
take. He explained that, recently, the UK turned to North
Sea oil and gas production as a source of additional
revenue. He pointed out that the chart displayed to two
components of government take: corporate income tax and
supplementary tax. He remarked that the UK substantially
increased the rate from 20 percent to 32 percent. He
remarked that, in order to encourage reinvestment, the UK
government developed the Brownfield Allowance that reduces
government take to attempt to stimulate investment. He also
shared that Australia recently experienced significant
changes to its fiscal regime. He pointed out that in
Australia had federalized oil and gas production. He
explained that there was a federal profit-based production
tax system off-shore in Australia, which was known as the
Petroleum Resource Rent Tax (PRRT). He furthered that on-
shore production had been at the jurisdiction of the states
in Australia, but was recently changed to match the PRRT.
Mr. Mayer looked at page 13, "ACES- Base Production." He
remarked that there were a number of ways to achieve a
level of neutrality at the 60 percent mark. He stated that
ACES was a regime that gave 65 percent to 75 percent
government take. He stated that the original Senate Bill 21
took out the progressivity and capital credits, which would
create a slightly regressive regime. He noted that there
were two key issues: 1. the proposal was regressive,
because the only component was a flat 25 percent profit-
based production tax, and 2. the capital credit would
eliminated, therefore causing a tax increase at lower price
levels.
Mr. Mayer discussed page 15, "Government Take Under SB 21
and ACES Capex Sensitivity."
As noted in PFC Energy testimony on 1/31/13, at low
oil prices, Relative Government Take under SB 21 is
higher than under ACES, due to the impact of low or no
progressivity, combined with the elimination of the 20
percent capital credit under SB 21.
The oil price level at which this occurs is highly
sensitive to annual levels of capital spending, since
CAPEX both reduces the oil price level at which
progressivity kicks in under ACES, and determines the
size of the available capital credit under ACES.
Looking at a single year of production also slightly
raises this neutrality point, since over many years,
inflation reduces the real price level at which
progressivity starts under ACES.
For mature, producing assets with a low ongoing CAPEX
requirement ($10/bbl), SB21 represents a reduction in
government take at prices above ~$75, however for
capital intensive new developments in existing units,
that neutrality point can be as high as $110/bbl.
It is thus important to understand that one impact of
the removal of the 20 percent capital credit under SB
21 is that for companies with high development costs
relative to overall production, it can represent a tax
increase at current prices.
2:09:26 PM
Mr. Mayer looked at slide 16, "Regimes for Comparison: CS
SB 21.
CS SB 21:
-35 profit-based production tax, $5/bbl allowance, 30
percent GRE for certain new production.
-Production-based allowance curves the tax-rate down
at lower process, creating a progressive element that
achieves relative overall neutrality.
-Overall relative neutrality removes potential for
"gold-plating incentives."
-Progressive element being determined on gross basis
removes issue of oil vs. gas 'decoupling.'
-Gross Revenue Exclusion reduces the overall level of
government take for incentivized projects.
-Elimination of capital credit and carry forward of
NOL credit reduces downside risk to state, but carries
a cost in terms of project economics.
Mr. Mayer stressed that an exploration credit would not put
more oil in the pipeline.
2:14:50 PM
Senator Hoffman wondered if Alaska the production goal of
400 to 600 million barrels of oil per day could be compared
with other similar, exploration-based regimes. Mr. Mayer
replied that he did not know the answer.
Mr. Mayer looked at page 17, "$5 Production Allowance is
like Reverse Progressivity." He explained that the
production allowance is referred to as a "credit", so it
would be easy to compare it to the capital credit. He
stressed that the production allowance was really a
substitute for progressivity. He explained that the
production allowance was a different form of progressivity,
because the production allowance set a top maximum rate.
Progressively, as the price decreases, the allowance
subtracts further away from the top maximum rate. He stated
that the slide displayed a simplified and stylized tax
calculation.
Mr. Mayer continued to discuss slide 17. He remarked that
there was $2.5 billion at the point of production in the
$60/bbl case. He furthered that $30/bbl lease expenditures
would result in $1.5 billion.
2:19:36 PM
Mr. Mayer highlighted page 18, "GRE Increases the Price
Level at Which Production Tax, and 'Progressivity', Apply."
He remarked that the slide was exactly the same as the
previous slide, but with the application of the Gross
Revenue Exclusion (GRE). He stated that the GRE was set at
30 percent, and applied throughout the slide.
Mr. Mayer looked at page 19, "Both Share Similarities with
UK Brownfield Allowance."
The UK's fiscal regime is a relatively simple one,
with two core components - a Corporate Income Tax
(CIT) of 30 percent, and a Supplemental Resource Tax
(SRT) of 32 percent, levied on the CIT tax base.
The UK Brownfield Allowance is an income exclusion,
used in calculating the SRT. Up to a total £250mm of
income can be excluded, with up to 20 percent of the
exclusion amount allowed in a given year. For projects
subject to the additional Petroleum Tax (pre-1993
projects), the exclusion is up to £500mm of income
Because it is a fixed exclusion, it has a greater
impact at lower oil prices
Projects are individually assessed for qualification,
and for the total amount of relief available.
Qualifying projects are incremental projects
increasing production from mature fields.
A 100mmb incremental development, with costs of
$25/bbl, could see its government take reduced by to
anywhere from 3 to 11 percentage points, depending on
the oil price level
Mr. Mayer highlighted page 20, "Alaska $18/bbl Development
under UK North Sea regime." He noted the curving downward
of a fixed total, as lower price levels were reached. He
stated that the committee substitute was not unlike what
was represented in the slide.
2:24:40 PM
Mr. Mayer discussed page 21, "Regimes for Comparison:
Bracketed Progressivity (Net)."
Bracketed Progressivity (Net):
25 percent Profit-based Production Tax
Bracketed progressivity with the following
thresholds and rates:
$30 PTV - 5 percent
$42.5 PTV - 10 percent
$55 PTV - 15 percent
20 percent capital credit maintained, but carried
forward to production for producers with no
liability
Overall relative neutrality removes potential for
'gold-plating incentives.'
Progressive element being determined on net basis
does not entirely remove issue of oil vs. gas
'decoupling', but low degree of progressivity
minimizes impact.
Gross Revenue Exclusion not included in modeling,
but could be applied to incentivize new projects.
Carryforward (without escalation) of credits
reduces some downside risk to state, while
retaining a cost-progressive element. Escalation
could also be included to compensate for time
value of money foregone.
Mr. Mayer highlighted page 22, "Regimes for comparison:
Bracketed Progressivity (Gross)."
Bracketed Progressivity (Net):
20 percent Profit-based Production Tax - lower rate
needed to when progressivity on gross to prevent a tax
increase at lower price levels for higher cost
producers.
Bracketed progressivity with the following thresholds
and rates:
$70 ANS West Coast Crude - 5 percent
$90 ANS West Coast Crude- 10 percent
$110 ANS West Coast Crude- 15 percent
$130 ANS West Coast Crude- 20 percent
20 percent capital credit maintained, but carried
forward to production for producers with no liability.
Overall relative neutrality removes potential for
'gold-plating incentives.'
Progressive element being determined on net basis does
not entirely remove issue of oil vs. gas 'decoupling',
but low degree of progressivity minimizes impact.
Gross Revenue Exclusion not included in modeling, but
could be applied to incentivize new projects.
Carryforward (without escalation) of credits reduces
some downside risk to state, while retaining a cost-
progressive element. Escalation could also be
included to compensate for time value of money
foregone
Mr. Mayer highlighted page 24, "ACES - Base Production." He
stated that the committee was already familiar with ACES.
Mr. Mayer highlighted page 25, "CS SB 21 Base Production."
He explained that the committee substitute had even lower
government take than the original proposal. He stated that
the slide used assumptions of only $10/bbl and cost from
production solely from the mature fields. He noted that
there was a constant 64 to 65 percent government at the
relevant price levels, except for very low price levels. At
very low price levels, the regressive nature of the royalty
took over. In that instance, there would be a very high
government take. He noted that from $50/bbl the government
take stayed at the 64 to 65 percent range. He noted the
even corresponding split in value between the company and
the state.
2:31:22 PM
Mr. Mayer discussed page 26, "Bracketed Progressivity (Net)
Base Production." He remarked that a net progressivity
would result in a similar regime to the proposed senate
bill. He remarked that there would be slightly lower
government take at $80/bbl; and a slightly higher
government take at a higher price levels.
Mr. Mayer spoke to page 27, "Bracketed Progressivity
(Gross) Base Production." He remarked that this slide
represented a theory that was virtually indistinguishable
from the committee substitute and almost all price levels.
Mr. Mayer highlighted page 28, "ACES-$18/bbl New
Development, Standalone." He remarked that he had already
explained the government take under ACES.
Mr. Mayer highlighted page 30, "CSSB21 $18/bbl New
Development, Standalone, no GRE." He remarked that there
would be lower government take from $65/bbl and higher. He
pointed out that there would be high government take from
$65/bbl and below, which was the impact of not having the
credits. He remarked that there was an overall flattening
at the 67 percent mark, which could be argued to be higher
than one might want for new development, if one was to be
truly competitive. He remarked that the display excluded
the GRE.
Mr. Mayer explained page 31, "Bracketed Progressivity (Net)
$18/bbl New Development, Standalone." He remarked that the
display would be essentially 62 percent at $80/bbl to
$100/bbl. He felt that the display was a result of the
credits, because the credits did not occur for the
standalone new development up front. The cash flow chart
did not show the purple bar contributing to the capital
expense, because those credits would carry forward to
production.
Mr. Mayer looked at page 32, "Bracketed Progressivity
(Gross) $18/bbl New Development, Standalone." He remarked
that this slide was very similar to slide 32. He pointed
out the lower government in the $80/bbl to $100/bbl range,
because of the impact of maintaining the credits.
2:36:36 PM
Mr. Mayer displayed page 33, "CS SB 21, $18/bbl New
Development, Standalone, with GRE." He stated that the
committee substitute was very similar to the original
version, but new development looked substantially more
attractive in the $80/bbl to $100/bbl price range. He
stressed that the addition of the GRE would substantially
alter the attractiveness as it related to new development,
because it reduced the amount of overall production tax and
substantially adjusted the point at with the production tax
occurred. He stressed that the addition of the GRE would
greatly reduce government take: 61 percent government take
at $80/bbl down to 57 percent at $100/bbl. He looked at the
bracketed progressivity versus CS SB 21 with the GRE, and
noted that the impact was in the government take cash flow
at the tail-end. He explained that peak production in the
early years would contribute relatively little production
tax. He pointed out that the GRE made a difference by
carrying forward the cash flow.
Mr. Mayer highlighted page 34, "ACES $18/bbl New
Development, Incremental." He explained that the slide
represented an analysis based on the portfolio of an
existing producer at $18/bbl new development. He stressed
that there would not be a large amount to deduce from the
price, other than there would be substantial levels of
government take under ACES, as well as substantial
contribution to the overall initial production costs
through the capital credit at buy-down, which would reduce
the tax burden on the producer.
Mr. Mayer discussed page 36, "Bracketed Progressivity (Net)
$18/bbl New Development, Incremental." He remarked that the
slide showed a lower level of government take in the $80 to
$100 range, as well as with the net of progressivity.
Mr. Mayer highlighted page 37, "Bracketed Progressivity
(Gross) $18/bbl New Development, Incremental." He remarked
that the slide was a virtually indistinguishable comparison
between the gross and CS SB 21.
Mr. Mayer discussed the competitiveness of SB 21. He looked
at page 49, "Regime Competitiveness-$80/bbl." He stated
that the slide compared regimes as it concerns overall
levels of government take to the broadest range of
international competitors. He pointed out that the biggest
competitors with Alaska were the other North American
regimes, the North Sea, and Australia. He remarked that,
under ACES, at $80/bbl for new development, was one of the
highest in the world, and only second behind Norway.
2:41:26 PM
Co-Chair Meyer queried a definition of "OECD." Mr. Mayer
replied that OECD stood for the Organization for Economic
Corporation and Development, which was the "club" for
developed countries.
Co-Chair Meyer wondered if the OECD countries were
considered the free market countries. He specifically
queried the difference between the OECD highlighted
countries versus those highlighted in blue. Mr. Mayer
responded that the OECD countries that had per capita gross
domestic product (GDP) that were near the United States
(US) level or no less than half of the US GDP.
Vice-Chair Fairclough wondered if the production
competitiveness these countries would be similar to the
displayed analysis. Mr. Mayer responded that it would
depend on how one would define "competitiveness." He
remarked that the most desirable hydrocarbons in the world
entailed an ability to maintain a level of government take
that Alaska could not maintain. He pointed out that Ireland
was not an immediate competitor, because it had a favorable
fiscal regime with little to no oil production. He stressed
that the slide was intended to give a global context, but
noted that there could be a chart that had only immediate
competitive regimes.
Vice-Chair Fairclough wondered if there would be a
different matrix to determine the competitiveness based on
government take as it relates to production. Mr. Mayer
responded that in terms of reaching a sustainable
government take, there were two key determinants of what
the level would be for any country: 1) the size and
desirability of the resources; and 2) the cost of producing
those resources. He explained that if there were large,
low-cost resources, there could be a high level of
government take.
2:46:16 PM
Vice-Chair Fairclough stressed that Alaska was not in first
place in total production, and remarked that the comparison
graph might be representing regions that compete
differently than Alaska. She furthered that there were some
regimes that had young government structures, so those
regimes were in flux. She specifically mentioned North
Dakota, but felt that they had not developed environmental
sensitivity, so restrictive regulations could be put in
place as they continue to produce oil and gas. Mr. Mayer
replied that large producers tended to have large
economics, and had a high level of government take. He
agreed that South Dakota had a small government take,
because that was part of incentivizing development at an
early stage.
Co-Chair Meyer wondered if the price point of $80/bbl to
$100/bbl was the Alaska North Slope (ANS) price or the West
Texas Intermediate (WTI) price. He furthered queried the
reason why there was such a large premium between ANS and
WTI. Mr. Mayer responded that ANS traded almost
indistinguishable from the global marked crude, Brent
Crude. He stated that ANS was considered an imported
barrel, because it came through the port as any other
imported barrel. He explained that WTI formerly traded at a
slight premium to Brent Crude, but WTI currently traded at
a deep discount to Brent Crude. He stressed that the WTI
was traded at a discount, because of the massive increase
in the lower 48 oil production.
Co-Chair Meyer wondered if the $15 premium with ANS would
be maintained, or would it be reduced after the pipeline
system development. Mr. Mayer replied that PFC Energy felt
that the disconnect between WTI and Brent would be
maintained as long as the US unconventional resources
remained at the current level of performance. He remarked
that pipeline capacity could moderate that impact.
Senator Hoffman requested a chart that reflected the impact
on the state treasury at $80, $100, $120, and $140 per
barrel. Mr. Mayer agreed to provide that information.
2:54:46 PM
Senator Bishop wondered what would happen to ANS pricing if
Alaska resumed 1 million barrels per day production. Mr.
Mayer responded that it would depend on the question of the
happenings of the overall North American market.
Mr. Mayer looked at page 50, "Regime Competitiveness-
$100/bbl." He noted that the slide showed that Alaska was
on the same level as Norway regarding the level of
government take. He remarked that ACES, for an existing
producer, was lower, but remained above $70 per barrel. He
noted that the $80 per barrel, new development without the
GRE reflected relatively high governments take at 67
percent. Once the GRE is applied, an aggressive level of
competitiveness would occur. He pointed out that once the
level of $120 per barrel is reached, the disparity between
CS SB 21 for new development with the GRE versus everything
else increased; $140 per barrel reflected an even greater
disparity.
Co-Chair Meyer wondered if the existing producer would
share 64 percent at $100 per barrel. Mr. Mayer replied that
the existing producer would share 64 percent at $100 per
barrel under CS SB 21.
Co-Chair Meyer noted that under the legislation, with the
GRE included, the government share would drop below 60
percent. Mr. Mayer agreed, and furthered that new
development would share between 65 and 69 percent without
the inclusion of GRE. He remarked that eliminating the
capital credit and relying on the GRE resulted in losing a
cost-responsive element in the system. He remarked that the
capital credit was a self-stabilizing element in the
system, which could achieve some impact on new development,
because it achieved lower overall level of government take
in the $80 to $100 per barrel range.
2:59:38 PM
Co-Chair Meyer queried the cost to the state in regards to
using capital credits versus GRE. Mr. Mayer replied that
one must first determine the desired level of government
take. He remarked that the capital credit had a greater
impact on the front end of the cash flow, so it may have a
greater impact on the state early on. He remarked that a
percentage point of government take depended greatly on how
the tax was structured.
Co-Chair Meyer wondered what Mr. Mayer's opinion of what
the government's take should be. He noted that the
inclusion of the GRE would put the government take at 60
percent, so it would make Alaska attractive to producers.
He wondered if that level would make Alaska too attractive.
Mr. Mayer replied that being too attractive, for completely
new areas, was positive. He stressed that the rate should
apply to areas that were not currently producing. He
pointed out that the rate should not reduce government take
on existing production. He furthered that existing
production, incremental production, and new production
should each be separated with the qualifier that there is
an incentive substantial new production from the new
fields. He felt that reducing the rate and making it
overall neutral would make Alaska competitive, but that
strategy would reduce revenue on existing production. He
felt that there needed to be mechanisms to maintain
revenue, like the GRE, in order to differentiate between
existing versus new production. He stated that the GRE
would be a mechanism under the existing structure that
would combine cost and production in order to distinguish a
tax rate on different forms production. He stressed that
the GRE was intended to effectively lower the tax rate on
certain targeted forms of production by reducing the
effective rate without tracking the costs that apply to
different forms of production.
3:03:52 PM
Co-Chair Meyer remarked that Norway and some other
countries had an uplift tax credit, to encourage production
of new oil from existing reservoirs. He felt that the
majority of Alaska's undeveloped oil was waiting in the
legacy fields. He wondered if there should be an incentive
for the legacy fields, like a 10 percent GRE, or targeted
capital tax credit. Mr. Mayer responded that the GRE was
relied upon as a means to encouraging new production
competitive; he felt that the GRE for incremental
production in legacy fields was imperative. He stated that
the executive should be allowed discretion, rather than
legislation to the tax code. He remarked that it was nearly
impossible to define "incremental production" in the tax
code.
Co-Chair Meyer wondered if there should be a targeted tax
credit on the wells. Mr. Mayer responded that limiting the
capital credit to a particular form was not an ideal
solution, because often productive wells were pulled
offline in order to bring a new well online.
Senator Hoffman stated that DOR estimated that in 2015, the
GRE could cost the treasury $825 million. He remarked that
the credit was only a one-time allocation, but the GRE
could eventually be even more expensive to the state
treasury. Co-Chair Meyer agreed, and felt that the issue of
the GRE deserved further discussion.
3:10:10 PM
Vice-Chair Fairclough suggested an investment model
strategy that was utilized in other oil tax regimes. She
wondered if there should be a committee that was a review
board much like the Permanent Fund Board, which would use
the $400 million in capital credits, and choose investment
partnerships under a specific kind of exploration criteria.
She noted that PFC Energy had indicated that Alaska's
administration needs flexibility, but the legislative body
wanted to be the oversight regarding the direction of the
board. She wondered if the board should have oil expertise
and financial investment strategy to examine where Alaska's
dollar could have the greatest benefit to Alaska. Mr. Mayer
responded that there was merit to that idea. He stated that
there were a number of existing bodies in the state, which
had an investment role in the state treasury.
Vice-Chair Fairclough remarked that each investment had a
different set of scenarios that could not be predicted in
the legislature.
Senator Dunleavy agreed with Vice-Chair Fairclough, but
felt that the idea for a board did not go far enough. He
remarked that there needed to be an exploration of an
independent vehicle that made business investments for the
state. He stressed that the board should have Alaska's
interests, and felt that there could be feedback from a
trusted outlet that was concerned with Alaska's future.
Senator Bishop agreed with Senator Dunleavy, and would like
to hear more input from the client.
3:15:57 PM
Co-Chair Meyer stated that the industry would be sharing
their input with the Senate Finance Committee on the
following day.
Mr. Mayer looked at targeting neutrality directly. He
discussed page 54, "Alaska $18/bbl Development Under UK
North Sea Regime." He remarked that one could set up a
system that looked at base production at a particular
series of assumptions around costs and production profiles;
but as the cost level increased, the result was different.
He stressed that nothing was perfectly opposite to the
regressive element of the fixed royalty.
Mr. Mayer highlighted page 55, "Alaska $18/bbl Development
Under Norway Regime." He stated that Norway was one of the
highest government take regimes, but had a very different
downside than Alaska. He explained that Alaska had similar
levels of government take at the high end, but Norway fell
right away as divisible income decreased. He pointed out
that Norway had no fixed royalty, and he also mentioned
that Australia's regime was similar to Norway.
3:20:59 PM
Mr. Mayer discussed page 56, "Targeting Neutrality //
-All of the preceding regimes seek to compensate
indirectly for the regressive nature of the fixed
royalty and ad valorum tax by inserting a roughly
equal and opposite progressive element
-Inevitably, the match must be imperfect
-At low prices, government take is still very high -
and for high cost developments, the fixed royalty can
create a high level of price downside risk,
particularly in conjunction
with the gross minimum tax
-The only way to create a completely neutral regime is
to counteract the regressive elements directly -
either by eliminating or perfectly opposing them
Since royalties are contractual, and ad valorum
taxes shared with local government, if this were
desired, putting in place a perfect offset might
be easier than elimination
All that would be required to achieve this would
be a fully reimbursable tax credit equal to the
amount of royalty and ad valorum tax paid
A completely neutral regime could increase
downside price risk to the state, but would also
lead to an even sharing of risk and reward
Many major OECD oil producing states with profit-
based taxes have chosen to eliminate regressive
elements altogether - i.e. Australia, UK, Norway
- because of the distorting impact such elements
have on investment
-The following slides model a 42.5 percent Profit-
Based Production
-Tax rate, combined with a fully reimbursable tax
credit equal to the amount of royalty and ad valorum
tax paid (or the eventual elimination or one or both
of those elements
Mr. Mayer looked at page 57, "Profit Tax Only (Royalty and
Ad Valorum Reimbursed) Base Production."
Mr. Mayer highlighted page 58, "Profit Tax Only (Royalty
and Ad Valorum Reimbursed) $18/bbl New Development,
Standalone."
Mr. Mayer discussed page 59, "Profit Tax Only (Royalty and
Ad Valorum Reimbursed) $18/bbl New Development,
Incremental."
Mr. Mayer noted that a property tax would have
approximately 65 percent government take at every possible
price deck.
Senator Bishop surmised that the proposal would allow the
company to choose where to invest, because there was no GRE
or incentive for downhill work, etc. Mr. Mayer agreed, and
furthered that there were many discussions regarding
specific incentives. He stated that the approach would only
set the level of overall government take, and reflect a
reasonable share.
3:23:44 PM
Vice-Chair Fairclough wondered if OCED experienced similar
historical patterns as different countries became more
mature in their relationships with industry. Mr. Mayer
responded that the evolution of the global fiscal systems
have been very simple fixed royalties and also a greater
focus on trying to tax profit directly, rather than taxing
volume and gross revenue. He stated that tax royalty
arrangements were fairly normal before the 1960s. He stated
that the 1960s and 1970s held two great oil shocks, and
coincided a post-colonial period. He explained that many of
the colonial counties examined their resource wealth, and
felt that they were not benefitting enough from the
resource wealth compared to the companies.
Co-Chair Meyer discussed housekeeping.
SB 21 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
3:32:49 PM
The meeting was adjourned at 3:32 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AK Sen Finance JMayer PFC 4 March 2013.pptx |
SFIN 3/4/2013 1:30:00 PM |
SB 21 |