Legislature(2013 - 2014)SENATE FINANCE 532
03/12/2013 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 | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
March 12, 2013
1:51 p.m.
1:51:03 PM
CALL TO ORDER
Co-Chair Meyer called the Senate Finance Committee meeting
to order at 1:51 p.m.
MEMBERS PRESENT
Senator Kevin Meyer, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Kevin Meyer, Co-Chair
Senator Anna Fairclough, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Janak Mayer, Manager, Upstream, PFC Energy; Joe Balash,
Deputy Commissioner, Department of Natural Resources;
Michael Pawlowski, Advisor, Petroleum Fiscal Systems,
Department of Revenue; Senator Cathy Giessel; Senator Bert
Stedman; Senator Bill Wielechowski;
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."
1:52:29 PM
JANAK MAYER, MANAGER, UPSTREAM, PFC ENERGY, summarized that
the crucial provisions of CSSB 21(FIN) affecting
government take and economics were a 30 percent base rate
with the $5 per barrel allowance, a 20 percent Gross
Revenue Exclusion (GRE) for 10 years on new production in
new and legacy fields and a monetizable net operating loss
credit. The system was revenue "neutral" with a government
take of 62.5 percent across a broad range of oil prices. He
declared that the CS was a "substantial improvement over
ACES (Alaska Clear and Equitable Share)" in terms of
competitiveness with "peer" oil and gas producers.
Mr. Mayer began a PowerPoint presentation titled: "Senate
Finance Committee CSSB 21 Analysis" (3/12/13) (copy on
file), and spoke to Slide 2 titled "Base Production." He
pointed to the graph on the upper left corner of the slide
and explained that the 30 percent base rate combined with
the $5 dollar per barrel allowance was a "capped
progressive element" of the tax system. The element "almost
perfectly compensated the regressive nature of the royalty"
system and resulted in a neutral system of government take
ranging from prices of $65/bbl. (per barrel) up to
$160/bbl. barrel. The neutrality corresponded to the value
of production split between the state, producers and the
federal government as illustrated in the graph on the top
right of the slide.
Mr. Mayer turned to Slide 3 titled: "18/bbl. New
Development with GRE, Standalone." He related that the
system had a neutral government take of approximately 60
percent at prices over $80/bbl.
Mr. Mayer addressed Slide 4 titled: "25/bbl. New
Development with GRE, Standalone." He noted the similar
level of government take as illustrated in the graphs. He
qualified that the "combination of higher costs for new
development and the regressive nature" of the tax resulted
in a 62 percent government take at $80/bbl. lowering to 61
percent at $100/bbl. of oil.
Mr. Mayer discussed Slide 5 titled: "18/bbl. New
Development with GRE, Incremental to Incumbent." The slide
looked at the after tax effect economics for an existing
producer. He explained that the data examined the finished
economics of base production cash flow of a large producer
layered on the new field development and subtracted one
from the other to determine the after tax effect for an
existing producer. The results were slightly higher
government take of 62.5 percent across a wide range of oil
prices, which included the GRE (gross revenue exclusion)
for new production.
Mr. Mayer addressed Slide 6 titled: "25/bbl. New
Development with GRE, Incremental to Incumbent" and noted
the very similar results as the previous slide. He thought
that overall the bill realized the committee's desire of a
revenue neutral system at a competitive level of 62.5
percent government take for existing production and 60
percent for new production. He continued with a global
comparison of the tax structure.
Mr. Mayer spoke to Slide 7 titled: "Government Take
Competitiveness-$80/bbl." The graph compared the proposed
tax system to other world tax regimes at $80/bbl. of oil.
He pointed out that under ACES, Alaska was the second
highest tax regime in the Organization for Economic
Cooperation and Development (OECD). The committee
substitute (CS) ranked the state toward the center of the
OECD countries.
Mr. Mayer moved to Slide 9 titled: "Government Take
Competitiveness -$120/bbl." He observed that at $120/bbl.
under ACES for new development, Alaska was the highest in
the OECD. The CS kept Alaska in "the heart of the pack" at
existing production and was even more competitive for new
production.
Co-Chair Meyer asked for an explanation of Slide 8:
"Government Take Competitiveness - $100/bbl."
1:59:24 PM
Co-Chair Meyer felt that some of the regimes characterized
with blue lines were countries that Alaska was not
competing with but that the countries denoted in yellow
were similar. He observed that the ACES system was at the
top of the list at $100/bbl. of oil. The CS placed
government take in the middle at 63 percent for existing
production and for new development Alaska was very
competitive. He pointed out that under the CS; an existing
producer in Alaska was more competitive than North Dakota.
Co-Chair Meyer stated that it appeared that the committee
had met its goal of being competitive in global markets,
especially for new oil. He inquired whether his deductions
were correct. Mr. Mayer replied in the affirmative and
turned to Slide 11: "Government Take Competitiveness" to
illustrate his point. He offered that the graph summarized
the competitiveness from a limited peer perspective of
global producers. The slide depicted the peer tax regimes
across a range of prices for comparison. The red bar
portrayed $80/bbl., the yellow bar portrayed $100/bbl., the
blue bar portrayed $120/bbl., and the green bar portrayed
$140/bbl. He related that the set of bars that signified
ACES marked by red arrows, depicted a steep slope for new
development and base production which characterized
progressivity; exclusive to Alaska. He pointed to the two
sets of bars marked by blue arrows. The bars depicted the
CS provisions for base production and new development and
were level, which represented the neutral feature of the
tax system of 62 percent to 60 percent government take. The
figures placed Alaska in the competitively placed middle of
the peer group.
Co-Chair Meyer appreciated the analysis and a job well
done.
Co-Chair Meyer noted that the various tax credits were
confusing and inquired whether there was a simpler way to
offer credits. Mr. Mayer responded that the credit system
under ACES was complicated and noted that the CS was
simpler, which excluded capital credits. Options existed to
streamline the proposed provisions in the CS. He elaborated
that the net operating loss (NOL) credit was monetizable
under the new CS under certain conditions. The NOL was only
montizable if the producer had capital spending the
following year sufficient to monetize the full value or the
balance was carried forward. He believed monetizing the NOL
credit was sensible as long as the state's liability was
"manageable." The system was designed for fairness to both
an existing producer and a new producer. The tax liability
should be "as similar as possible" to both. He stated that
the monetizable NOL tax credit achieved fairness. An
existing producer bore the full 30 percent of the tax
liability but a new producer would not have a production
tax liability. The monetizable NOL credits created equity
amongst the tax liability. The existing producer's spending
could take its tax liability below zero and for the portion
of the negative liability can obtain a refundable credit.
He pointed out that if NOL credits were monetizable without
the restrictions the system could be further simplified.
Mr. Mayer remarked that the exploration credit was due to
expire in 2016, but was extended to 2022 in the CS. He
mentioned two issues with the exploration credit. The
levels of government support for spending were very high.
The exploration credit could be added to a tax liability or
the NOL credit bringing the level of government support to
over 70 percent. An existing producer under ACES can
achieve over 100 percent support for exploration spending.
He reported that the CS limited the amount of government
support to 30 or 40 percent for exploration and eliminated
"stacking credits." He qualified that an existing producer
can still stack deductions against an existing tax
liability with the exploration credit and still achieve 70
percent government support. He suggested addressing the
exploration credit to level the playing field with new
producers. He understood that most producers use the NOL
credit for exploration. He recommended elimination of the
exploration credit. He detailed that if the CS base credit
was 30 percent and a fully monetizable NOL was 30 percent
the same level of government support as the exploration
credit would be available. He offered that the state did
not need a separate level of credits. The same result was
available through the NOL credit "with less complexity."
The scenario also achieved equity between the small and
large producer. Government support was set at 30 percent
regardless of an existing tax liability.
2:12:31 PM
He discerned that the scenario also created a "completely
level playing field between small producers and large
producers." He questioned the need for a small producer
credit under the circumstances. A much simpler tax system
could be achieved under the scenarios of reducing the
number of credits and leveling the playing field.
Senator Olson asked what the potential impacts were with
NOL credits coupled with the GRE and new production. He
inquired whether the state was creating a future financial
problem with credits. Mr. Mayer responded that the biggest
liability to the state was with the capital credit. The
capital credit could be stacked with the NOL available to
both incumbent or new producer rather than only to new
producers. Removing the capital credit eliminated the
largest portion of the liability. He opined that
maintaining a fully refundable NOL credit created a
liability for the state but was "manageable" and
"justified" in attempting to balance the tax system between
new and incumbent producers.
Senator Bishop queried whether it was possible for Alaska
to become too competitive by "starting a race to the
bottom." Mr. Mayer responded that the Lower 48 states were
not a "perfect" comparison but that a strong counterforce
was the dependency on oil and gas production for revenue.
He judged that in general, "very few countries wanted to
aggressively pursue a race to the bottom because the costs
were too great."
Co-Chair Meyer inquired whether eliminating the exploration
and small producer tax credits would help the state's
position regarding government take. Mr. Mayer responded
that his comments were related to achieving the greatest
possible simplicity and balance between new and existing
producers within the tax structure. He acknowledged that
the result had a fiscal impact to the state. The state
would realize a "relative net positive" through elimination
of the small producer credit. The financial benefits to the
state were minimal through elimination of the exploration
credit because of the NOL credit, but would substantially
simplify and balance the tax system.
2:19:43 PM
AT EASE
2:21:18 PM
RECONVENED
Co-Chair Meyer noted some committee concern regarding the
GRE and how it dealt with new oil in legacy fields.
Vice-Chair Fairclough offered that the discussion had been
whether the GRE should have a time limit or not. She
relayed that there were arguments on both sides of the
issue.
JOE BALASH, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, explained that the administration had intended
to apply the GRE to new oil reserves brought into
production. He reported that Alaska had a "tremendous
resource base" and that estimates required drilling to
confirm reserve quantities and move the oil resource into
the known "reserve" category. The goal was to incite new
reserves development. The Department of Natural Resources
(DNR) identified new units and "new participating areas"
within legacy fields. He stated that the challenge and
priority was identifying new oil within the legacy fields.
He detailed that DNR's system of managing units included
"participating areas." "A participating area was a
reservoir within a unit that contributed to production."
Oil wells within a unit might not be drilling all of the
oil in individual reservoirs that comprise the unit. The
department identified new participating areas within the
legacy fields as new oil and extended the GRE to oil from
new participating areas. He furthered that the Senate
Resources Committee applied the GRE to oil in previously
identified participating areas that was now recoverable
through new technology. The Senate Resources committee
qualified oil recovered from the expanded participating
area for the GRE. He understood that the finance CS went
even further and extended sections of existing
participating areas that contained a geographic or other
impediment to production. The section would become eligible
for the GRE if it had not been producing but now would be
and was approved by DNR. The intent was to target new oil
reserves from previously unrecoverable oil in dormant
sections of existing participating areas with new
technology by extending the participating areas and
applying the GRE.
2:29:14 PM
Senator Dunleavy recalled that according to public
testimony there were large amounts of "known" oil that was
being "sat on." He inquired whether this assertion was true
and whether the more accessible known oil could be taxed
under the lower rate proposed in the CS. Mr. Balash replied
that DNR was unaware of any large pockets of oil that
remained undeveloped that were profitable to develop;
however, the department was aware of small pockets
("bubbles") of oil within legacy fields and participating
areas that could be developed with new sophisticated
technology. He added that viscous and heavy oil deposits
were large, but were not economic enough to be developed.
Senator Bishop continued that he had written the comments
down that Senator Dunleavy was referring to and offered
that the testifier cited a 600 million barrel field within
BP's properties. He inquired how many barrels a "small
bubble" quantified. Mr. Balash replied that a small bubble
amounted to approximately 300,000 barrels.
Senator Olson reiterated his inquiry regarding what the
potential impact on state revenue was from the NOL credits
and the GRE on shale oil exploration and production by
Great Bear. Mr. Balash replied that DOR pondered the same
question when it was considering how to address the
production tax system. He stated that the department wanted
to avoid a situation where a company was profitable and
state revenues were "in the red." Tax incentives
potentially turned into subsidies that cost the state. He
maintained that the underlying principle of the GRE was to
create incentives for new oil production. The state would
accept less now for new production in the future that would
create value to the state. The way the NOL was structured a
producer could not continue to produce and lose money. He
added that Great Bear drilled for core samples but did not
conduct a flow test. Without a flow test it was difficult
to determine the economics of shale production. The
department believed shale production was not predicted in
the near future and was not factored into DNR's production
forecast.
Mr. Balash segued into a response to Co-Chair Meyer's
question regarding an unlimited GRE shifting legacy or
currently producing oil to new oil. He explained that
legacy fields were capable of producing oil for multiple
decades depending on production costs and the price of oil.
Existing production would remain under base production and
was not eligible for the GRE. Over time more and more
barrels would become GRE eligible barrels in the production
model. He stressed that GRE barrels would not displace
legacy barrels until existing oil production ceased.
Vice-Chair Fairclough communicated that the explanation was
precisely the question. Considering the next generation of
Alaskans, most of the oil would be taxed under the GRE. She
inquired whether the state should continue the GRE beyond
an initial recovery period for industry. Mr. Balash replied
that the issue regarding the timing of the GRE was related
to the level of the GRE. He stated that the administration
set the GRE at 20 percent without a time limit. The
resources version set the GRE at 30 percent. At that amount
of reduction to the gross value a time limit seemed
justifiable. The administration was "comfortable" with no
time limit on a 20 percent GRE. The department did agree
with the finance CS provision which established a time
limit for the GRE on a well by well basis. The department
could provide the committee with production rates and
recovery factors for wells over a ten year period.
2:39:52 PM
Vice-Chair Fairclough recalled a scenario from previous
testimony where the state created a threshold limit under a
previous tax regime that resulted in unintended
consequences for the state. She asked for clarification.
Mr. Balash replied that the issue arose when ELF (Economic
Limit Factor) was in effect. He delineated that ELF was a
multiplier against a 15 percent gross tax rate and used
productivity and field size in order to determine
profitability. The system offered "marginal" incentives to
produce a specific number of barrels in a well in order to
optimize the ELF factor. He offered that the Kuparik oil
field was developed under the system and produced more
wells than necessary to "efficiently" recover the oil. The
producers were "efficiently" recovering the oil in a manner
that favored their tax liability.
MICHAEL PAWLOWSKI, ADVISOR, PETROLEUM FISCAL SYSTEMS,
DEPARTMENT OF REVENUE, stated that the department was
working on some cash-flow comparisons in order to examine
the impact of the GRE versus monetizable credits and the
effect on state revenues over time. He addressed Senator
Olson's question regarding the "up front" monetization of
loss carry forwards versus carry forwards only applied to a
tax liability. He voiced that the practical impact to the
state would be lost revenue either upfront revenue or
future revenue. The issue was timing; when the state could
afford the lost revenue. He reminded the committee that in
all versions of SB 21 the carry forward's value was
increased and compounded, which reduced taxes in the
future. The balance was between upfront payments and more
tax revenue in the future compared to the GRE.
Vice-Chair Fairclough recalled testimony from industry that
the major producers had stated that the GRE did not have
any impact on their production. She asked for clarification
from industry.
Co-Chair Meyer remembered that the industry favored
"targeted capital credits" over the GRE. He remarked that
capital credits did not favor the state's economics. He
anticipated that the GRE would provide industry the same
benefit; just not "upfront." The credit was only available
if industry produced oil.
SB 21 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
2:48:36 PM
The meeting was adjourned at 2:48 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 21 AK SFIN CSSB21 (FIN) Analysis JMayer PFC 12 March 2013.pptx |
SFIN 3/12/2013 1:30:00 PM |
SB 21 |