Legislature(2013 - 2014)SENATE FINANCE 532

03/04/2013 09:00 AM FINANCE


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09:03:22 AM Start
09:04:31 AM SB21
10:28:48 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 21 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
PFC Energy
Roger Marks
Bills Previously Heard/Scheduled
                 SENATE FINANCE COMMITTEE                                                                                       
                       March 4, 2013                                                                                            
                         9:03 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
9:03:22 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Meyer called the Senate Finance Committee meeting                                                                      
to order at 9:03 a.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                                                                                                                  
                                                                                                                                
Roger Marks, Legislative Consultant, Legislative Budget and                                                                     
Audit Committee; Senator Cathy Giessel                                                                                          
                                                                                                                                
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."                                                                                          
                                                                                                                                
9:04:31 AM                                                                                                                    
                                                                                                                                
ROGER MARKS, LEGISLATIVE  CONSULTANT, LEGISLATIVE BUDGET AND                                                                    
AUDIT COMMITTEE,  gave a  brief overview  of his  resume and                                                                    
began the  presentation, "Review of SB  21(RES) Presentation                                                                    
to Senate Finance" (copy on file).                                                                                              
                                                                                                                                
9:04:48 AM                                                                                                                    
                                                                                                                                
Mr. Marks discussed Slide 2, "Roger Marks - Background":                                                                        
                                                                                                                                
     •Since 2008:  Private consulting practice  in Anchorage                                                                  
     specializing in petroleum economics and taxation                                                                           
          -Clients  include:  State of  Alaska  Legislature,                                                                    
          federal    government,    local    municipalities,                                                                    
          University  of  Alaska,  independent oil  and  gas                                                                    
          explorer/producers, pipeline companies                                                                                
                                                                                                                                
     •1983-2008:  Senior petroleum  economist with  State of                                                                  
     Alaska Department of Revenue Tax Division                                                                                  
          -Fiscal development                                                                                                   
               •Statutory and regulatory design                                                                                 
                                                                                                                                
               •Petroleum economic  and commercial valuation                                                                    
               of   exploration,  development,   production,                                                                    
               transportation,      refining,     marketing,                                                                    
               taxation                                                                                                         
                                                                                                                                
               •Analysis of international competitiveness                                                                       
                                                                                                                                
               •Oil and gas valuation                                                                                           
          -North Slope gas commercialization                                                                                    
               •Economic valuation                                                                                              
                                                                                                                                
              •International competitiveness                                                                                    
                                                                                                                                
               •Pipeline financing                                                                                              
                                                                                                                                
               •Taxation                                                                                                        
                                                                                                                                
               •Tariff design                                                                                                   
     •1977-1983: Petroleum economist with United States                                                                       
     Geological Survey                                                                                                          
          -Resource evaluation of unleased acreage on                                                                           
          Alaska federal Outer Continental Shelf                                                                                
                                                                                                                                
          -Design of bidding systems                                                                                            
                                                                                                                                
     •Publications on Alaska  petroleum taxation: Journal of                                                                  
     Petroleum  Technology, OPEC  Review, Journal  of Energy                                                                    
     Finance and  Development, Oil & Gas  Financial Journal,                                                                    
     Journal  of Economic  Issues, Journal  of Legal  Issues                                                                    
     and Cases in Business                                                                                                      
                                                                                                                                
9:06:09 AM                                                                                                                    
                                                                                                                                
Mr. Marks  stated that he  would offer  several observations                                                                    
about the  bill and introduce other  possible approaches for                                                                    
the committee  to consider. He  spoke to Slide  3, "Approach                                                                    
for Evaluation":                                                                                                                
                                                                                                                                
     •The interest in evaluating the production tax stems                                                                       
    from concern over the perception of slow investment                                                                         
    and declining production levels on the North Slope                                                                          
     •The international investment climate is characterized                                                                     
     by plenty of opportunities, fluid capital, but finite                                                                      
     capital                                                                                                                    
     •Investors allocate productive resources to their most                                                                     
     highly valued uses                                                                                                         
    •Taxes are a significant part of the cost structure                                                                         
    and under Alaska's Clear and Equitable Share (ACES)                                                                         
     they are relatively high                                                                                                   
     •Tax rates under ACES have made Alaska uncompetitive                                                                       
     •The goal is to make Alaska competitive                                                                                    
                                                                                                                                
9:07:59 AM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer  noted  that  the  current  version  of  the                                                                    
legislation  had come  from the  Senate Resources  Committee                                                                    
and that the  chair of that committee,  Senator Giessel, was                                                                    
present.                                                                                                                        
                                                                                                                                
9:08:37 AM                                                                                                                    
                                                                                                                                
Mr. Marks  explained that taxes  were the price that  an oil                                                                    
producer paid  for the opportunity  to develop the oil  in a                                                                    
certain jurisdiction.  He likened the structure  to a market                                                                    
with the sovereign jurisdictions in  the role of the seller,                                                                    
oil companies as buyers, and  the tax as the price companies                                                                    
paid for  goods. He  stressed that  the state  should remain                                                                    
competitive, while still reaping a fair share of profits.                                                                       
                                                                                                                                
Mr.  Marks   discussed  Slide   4,  "Defining   Fair  Share:                                                                    
Determining a Competitive Tax Structure":                                                                                       
                                                                                                                                
     •Determine who the competition is                                                                                          
                                                                                                                                
     •Determine where Alaska should be in within that                                                                           
     competition                                                                                                                
                                                                                                                                
     •Design a system to achieve that target                                                                                    
                                                                                                                                
Mr.  Marks stated  that it  had been  demonstrated that  oil                                                                    
companies were  willing to pay  more taxes when  the rewards                                                                    
were  greater.  He relayed  that  companies  would pay  more                                                                    
taxes in places  where there was either  more reserves, less                                                                    
risk,  or  lower  cost.  He  offered  that  Alaska  was  not                                                                    
competitive  with Kazakhstan,  which had  more oil  at lower                                                                    
cost with lower  risk. He believed that when  looking at the                                                                    
competition  world-wide,  Alaska  needed to  examine  places                                                                    
with a similar risk/reward balance.                                                                                             
                                                                                                                                
9:11:33 AM                                                                                                                    
                                                                                                                                
Mr. Marks  addressed Slide 5, "Alaska  Peer Group Government                                                                    
Take at  $110/bbl Market Price."  The slide  illustrated who                                                                    
Alaska  was competing  with worldwide  after looking  at the                                                                    
factors of  geography, institutional  environment, operating                                                                    
environment  and  geologic  potential. The  slide  reflected                                                                    
total  taxes as  a percentage  of net  value; all  taxes and                                                                    
royalties.  He  stated  that  he  had  researched  on  North                                                                    
America  regimes (U.S.  states and  Canadian provinces  with                                                                    
greater than  200,000 bbl/day  production), tax  and royalty                                                                    
regimes, arctic regimes and  regimes with similar production                                                                    
and reserves  (between 400,000 - 800,000  bbl/day production                                                                    
and between 2  - 6 billion bbl proved  reserves). He pointed                                                                    
out to  the committee that  the graph ordered  the different                                                                    
regimes from  low government take  to high  government take;                                                                    
at 74 percent  Alaska fell just below Norway,  which had the                                                                    
highest percentage  of government take. He  detailed that of                                                                    
the 74 percent,  half was production tax and  the other half                                                                    
were  royalties,  property  taxes and  state  and  corporate                                                                    
income  tax.  He  believed that  a  competitive  target  for                                                                    
$110/bbl would be 62 percent.                                                                                                   
9:14:59 AM                                                                                                                    
                                                                                                                                
Mr. Marks  addressed Slide 6, "Alaska  Peer Group Government                                                                    
Take at  $70/bbl Market Price."  He relayed that  at $70/bbl                                                                    
the government take  under the current tax regime  was at 68                                                                    
percent. He said  that at $70/bbl, 65 percent  would be more                                                                    
competitive number.                                                                                                             
                                                                                                                                
Mr. Marks  discussed Slide 7, "Alaska  Peer Group Government                                                                    
Take  at $160/bbl  Market Price."  He pointed  out that  the                                                                    
current government take  was at 77 percent.  He thought that                                                                    
62 percent would be a more attractive number.                                                                                   
                                                                                                                                
9:15:33 AM                                                                                                                    
                                                                                                                                
Mr. Marks spoke to Slide  8, "Proposed Government Take to be                                                                    
Competitive":                                                                                                                   
                                                                                                                                
     •65% take at $70/bbl                                                                                                       
                                                                                                                                
     •Level down to 62% take at current prices ($110/bbl)                                                                       
     and beyond                                                                                                                 
                                                                                                                                
     •A fairly neutral system                                                                                                   
                                                                                                                                
Mr. Marks  explained that a  regressive system was  when the                                                                    
government take was  high at lower prices and  low at higher                                                                    
prices; a progressive  system was where the take  was low at                                                                    
low prices and  high and at high prices  and neutral systems                                                                    
were generally flat  across the price spectrum  in regard to                                                                    
government take.  He thought that  it would be  necessary to                                                                    
determine  a  target  number that  informed  where  the  tax                                                                    
system would fall.                                                                                                              
                                                                                                                                
9:17:29 AM                                                                                                                    
                                                                                                                                
Mr. Marks spoke to Slide 9, "Each Percentage Point of Take                                                                      
is Worth a Lot of Money At $110/bbl Each Percentage Point                                                                       
in Government Take Means $142 Million Annually to                                                                               
Government/Producers":                                                                                                          
                                                                                                                                
     •Market Price $110/bbl                                                                                                     
          -Costs $29                                                                                                            
     •Net value $81/bbl                                                                                                         
                                                                                                                                
     •Taxable percentage .875                                                                                                   
     •Million bbls/yr (@550,000/day) 201                                                                                        
                                                                                                                                
     •One-percent .01                                                                                                           
                                                                                                                                
     •TOTAL $142 mm                                                                                                             
                                                                                                                                
Mr. Marks stressed the difference a few percentage points                                                                       
could make in the overall numbers; each percentage point                                                                        
was worth a substantial amount of money.                                                                                        
                                                                                                                                
9:18:20 AM                                                                                                                    
                                                                                                                                
Mr. Marks  noted that the  ten percentage  points in-between                                                                    
Oklahoma and  Alaska were  equal to  $1.4 billion,  which he                                                                    
believed illustrated the main problem with ACES.                                                                                
                                                                                                                                
9:18:55 AM                                                                                                                    
                                                                                                                                
Mr. Marks relayed  that regressive elements in  ACES made it                                                                    
difficult  to hit  the financial  target at  low prices.  He                                                                    
discussed Slide 10, "Regressive Elements in Fiscal System":                                                                     
                                                                                                                                
     •Make for challenging economics at low prices,                                                                             
     particularly for high cost fields                                                                                          
                                                                                                                                
    •Makes for challenge in designing production tax to                                                                         
     offset effects                                                                                                             
                                                                                                                                
     •Royalty                                                                                                                   
                                                                                                                                
     •Property Tax                                                                                                              
                                                                                                                                
     •Minimum Tax                                                                                                               
                                                                                                                                
He added  that a 65  percent target  at low prices;  even if                                                                    
there was  zero tax,  and particularly  due to  the royalty,                                                                    
would result in high government take.                                                                                           
                                                                                                                                
9:20:54 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:21:42 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
9:21:45 AM                                                                                                                    
                                                                                                                                
Mr.  Marks opined  that  the challenge  of  designing a  tax                                                                    
system that included the regressive  elements was that there                                                                    
was  not  a single  system  that  applied uniformly  to  all                                                                    
costs. He  clarified that the royalty,  property and minimum                                                                    
taxes would not be eliminated, but needed to be addressed.                                                                      
                                                                                                                                
9:22:29 AM                                                                                                                    
                                                                                                                                
Mr.  Marks spoke  the need  to  examine how  the tax  system                                                                    
worked  with  the  cost  spectrum on  the  North  Slope.  He                                                                    
referred to Slide 11, "Cost Spectrum":                                                                                          
                                                                                                                                
     •Low cost fields (existing production)                                                                                     
          -$7/bbl capital; $13/bbl operating ($20/bbl                                                                           
          total)                                                                                                                
     •Medium cost fields (new production from existing                                                                          
     fields)                                                                                                                    
          -$20/bbl capital; $17/bbl operating ($37/bbl                                                                          
          total)                                                                                                                
     •High cost fields (new fields and some heavy and                                                                           
     viscous oil)                                                                                                               
          -$33/bbl capital; $21/bbl operating ($54/bbl                                                                          
          total)                                                                                                                
                                                                                                                                
9:23:35 AM                                                                                                                    
                                                                                                                                
Mr.   Marks  discussed   Slide  12,   "Example  of   Royalty                                                                    
Regressivity":                                                                                                                  
                                                                                                                                
     ANS Market Price ($/bbl) $70.00                                                                                            
         Less: Transportation Costs ($/bbl) $9.00                                                                               
                                                                                                                                
     Gross Value ($/bbl) $61.00                                                                                                 
          Less: Upstream Capital and Operating Costs                                                                            
          ($/bbl) $50.00                                                                                                        
                                                                                                                                
     Net Value ($/bbl) $11.00                                                                                                   
                                                                                                                                
     Royalty (1/8 of Gross Value) ($/bbl) $7.63                                                                                 
                                                                                                                                
     Royalty chews up 70% of profit before property,                                                                            
     production and income taxes                                                                                                
                                                                                                                                
9:24:57 AM                                                                                                                    
                                                                                                                                
Mr. Marks  addressed Slide 13,  "Comparison of Gross,  Net &                                                                    
Royalty Low  & High Cost  Fields." He related that  the blue                                                                    
dotted line on  the graph reflected the  gross market value,                                                                    
a spectrum from  $60 to $190/bbl. He noted  the green dotted                                                                    
line that represented the net-low  cost, a spectrum from $40                                                                    
to $170/bbl.  The red dotted line  represented net-high cost                                                                    
on a  spectrum of $10  to $140/bbl.  He noted that  the blue                                                                    
line at  the bottom  illustrated that  the royalty  for both                                                                    
the low and high cost fields were the same.                                                                                     
                                                                                                                                
9:26:21 AM                                                                                                                    
                                                                                                                                
Mr. Marks discussed Slide 14, "CS SB 21(RES) Features":                                                                         
                                                                                                                                
     •35% rate applied to net (production tax) value (ptv)                                                                      
                                                                                                                                
     •30% gross revenue exclusion (GRE) used in computing                                                                       
     net                                                                                                                        
                                                                                                                                
     •$5/bbl credit                                                                                                             
                                                                                                                                
     •If ptv is negative, the loss can be carried forward                                                                       
     to when ptv is positive as a credit at 35% of the loss                                                                     
                                                                                                                                
Mr. Marks stated that the  last bullet point was a provision                                                                    
that  would  allow tax  payers  to  realize the  benefit  of                                                                    
deductions  if they  fit the  tax floor  of zero.  He shared                                                                    
that the  bill proposed  that the  credit be  deferred, with                                                                    
interest, until the time of positive income.                                                                                    
                                                                                                                                
9:28:14 AM                                                                                                                    
                                                                                                                                
Mr. Marks addressed Slide 15, "How Features Operate":                                                                           
                                                                                                                                
     •1) GRE (CS increased from 20% to 30% for new fields)                                                                      
          -Brings down tax rate more for high cost fields                                                                       
          and more at lower prices                                                                                              
     •2) Per barrel credit (Introduced in CS)                                                                                   
          -Focuses on bringing tax rate down high cost                                                                          
          fields at low prices                                                                                                  
     •3) Rate (Increased from 25% to 35% in CS)                                                                                 
          -Moves entire curve for all fields up or down                                                                         
                                                                                                                                
Mr. Marks  reiterated that the  features were meant  to work                                                                    
together.                                                                                                                       
                                                                                                                                
9:29:44 AM                                                                                                                    
                                                                                                                                
Mr.  Marks spoke  to  Slide 16,  "Overview  of How  Features                                                                    
Interact":                                                                                                                      
                                                                                                                                
     •Tax is higher of net and 4% of gross calculation                                                                          
                                                                                                                                
     •There is a floor of zero on each                                                                                          
                                                                                                                                
     •The GRE is used to calculate the net; it is not used                                                                      
     to calculate the gross minimum                                                                                             
                                                                                                                                
     •The loss carry-forward credit is applicable                                                                               
     regardless of whether net or the gross minimum is                                                                          
     invoked                                                                                                                    
                                                                                                                                
     •The $5/bbl credit is applicable for both the net and                                                                      
    gross minimum calculation. It can only take the tax                                                                         
     down to zero. Any unused amounts are lost.                                                                                 
                                                                                                                                
9:31:26 AM                                                                                                                    
                                                                                                                                
Mr. Marks discussed  slide 17 titled "Government  Take CS SB
21  (Res)."  He  stated  that the  graph  reflected  a  more                                                                    
competitive regime  than ACES. He  said that the  bill would                                                                    
flatten out the taxes on the  low side for high cost fields.                                                                    
He warned that the  committee should not underappreciate the                                                                    
role that  low tax  scenarios played in  corporate planning.                                                                    
He  explained  that  companies  performed  stress  tests  to                                                                    
ensure that  money was not  lost at low prices.  He believed                                                                    
that  it  would  behoove  the committee  to  understand  how                                                                    
government  take related  to a  target and  how the  varying                                                                    
takes related to each other.                                                                                                    
                                                                                                                                
9:33:06 AM                                                                                                                    
                                                                                                                                
Senator  Hoffman  requested  documentation  of  the  current                                                                    
government take in  dollars and how it related  to the state                                                                    
treasury, as  well as what  the industry would be  taking in                                                                    
monetarily.                                                                                                                     
                                                                                                                                
Mr. Marks replied  that he would provide  the information in                                                                    
an expedient manner.                                                                                                            
                                                                                                                                
9:33:40 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy wondered  if the  frequency of  changes in                                                                    
the  state's  oil tax  policy  had  affected the  investment                                                                    
climate.                                                                                                                        
                                                                                                                                
Mr. Marks  replied that fiscal stability  was very important                                                                    
to possible investors. He believed  that Texas had not had a                                                                    
material  change to  its fiscal  structure in  the last  ten                                                                    
years,  which was  attractive to  industry. He  related that                                                                    
Norway's current structure had been  in place since 1994. He                                                                    
said that he  could provide a general  assessment within the                                                                    
peer group at a later date.                                                                                                     
                                                                                                                                
9:35:52 AM                                                                                                                    
                                                                                                                                
Co-Chair Meyer offered that PFC  might have that information                                                                    
readily available during the afternoon meeting.                                                                                 
                                                                                                                                
9:36:19 AM                                                                                                                    
                                                                                                                                
Mr. Marks  continued to  discuss Slide 17.  He spoke  to how                                                                    
the different  fiscal takes  related to  each other  and the                                                                    
difference between the low and  high cost fields. He relayed                                                                    
that the  difference was  approximately 7  percentage points                                                                    
after $110/bbl.                                                                                                                 
                                                                                                                                
9:37:25 AM                                                                                                                    
                                                                                                                                
Mr. Marks spoke to  Slide 18, "General Comments: Differences                                                                    
in Take Depending on Costs and Fields":                                                                                         
                                                                                                                                
     •Given a target take at a given price, the system                                                                          
     should come as close as possible to hitting the target                                                                     
     over a spectrum of costs                                                                                                   
                                                                                                                                
    •Treating Different Fields Differently (No GRE for                                                                          
     Existing Participating Areas)                                                                                              
          -Both existing and new production benefit from                                                                        
          existing and new investment.                                                                                          
                                                                                                                                
          -Existing fields may contain costly isolated                                                                          
         targets in existing participating areas.                                                                               
                                                                                                                                
          -The system is efficient when the highest valued                                                                      
          resources get produced. The tax system should not                                                                     
          distort this; it should not favor investing in                                                                        
          certain cost fields over others.                                                                                      
                                                                                                                                
          -Differential treatment could cause unwanted                                                                          
          shifts in investment.                                                                                                 
                                                                                                                                
Mr.  Marks offered  the economic  limit factor  (ELF) as  an                                                                    
example  of  a  tax  system that  resulted  in  differential                                                                    
treatment  that caused  unwanted  shifts  in investment.  He                                                                    
relayed that  in 1989 ELF  was altered so that  large fields                                                                    
had high tax  rates and low fields had low  tax rates, which                                                                    
caused an  immediate shift  in investment  from high  tax to                                                                    
low  tax fields.  He  said that  this  caused production  to                                                                    
decline  on the  high tax  fields  and increase  on low  tax                                                                    
fields, but the  high tax field decline  was significant. He                                                                    
expressed  concern that  different tax  rates for  different                                                                    
fields would cause an unwanted shift in investment.                                                                             
                                                                                                                                
9:40:43 AM                                                                                                                    
                                                                                                                                
Senator Hoffman pointed  out that in the later  years of the                                                                    
ELF regime  the tax  rates had shifted  drastically downward                                                                    
for Kuparuk.                                                                                                                    
                                                                                                                                
Mr.  Marks replied  in the  affirmative. He  noted that  the                                                                    
Kuparuk field  was an unusual  case. He shared that  in 1996                                                                    
Kuparuk had a  high ELF, and the tax rate  was based both on                                                                    
average  well  productivity and  field  size;  if less  than                                                                    
300/bbl were  produced then  no tax  was paid.  He furthered                                                                    
that Kuparuk's  average well productivity was  not much more                                                                    
than 300/bbl.  He said that in  the last years of  ELF, if a                                                                    
company  made investment  to  increase  production it  would                                                                    
increase production on every single  barrel in the field and                                                                    
that that  increase in tax  contributed to the  new barrels,                                                                    
which in  turn had a  very high tax  rate. As a  result, the                                                                    
production on  Kuparuk declined  to below  300/bbl resulting                                                                    
in no tax.                                                                                                                      
                                                                                                                                
9:42:41 AM                                                                                                                    
                                                                                                                                
Senator Hoffman inquired how many  years Kuparuk had no tax,                                                                    
and whether having no tax had stimulated investment.                                                                            
                                                                                                                                
Mr.  Marks  replied that  it  did  not stimulate  investment                                                                    
because the  marginal tax on increased  production under ELF                                                                    
was too  high. He  said that  the rate  at Kuparuk  had been                                                                    
zero during the last two years of ELF.                                                                                          
                                                                                                                                
9:43:24 AM                                                                                                                    
                                                                                                                                
Senator Hoffman  asked why no investments  had occurred even                                                                    
though Kuparuk  was the  second largest  field on  the North                                                                    
Slope.                                                                                                                          
                                                                                                                                
Mr. Marks  replied that during  the ELF era oil  prices were                                                                    
much lower  than present.  He contested  that the  reason no                                                                    
investments occurred  at Kuparuk during the  latter years of                                                                    
ELF was because of the way  the tax structure worked; if new                                                                    
barrels were produced  the tax rate for every  barrel in the                                                                    
field  increased.  He  reiterated that  the  increased  tax,                                                                    
attributable to  the new barrels,  made for a high  tax rate                                                                    
and poor economics.                                                                                                             
9:44:54 AM                                                                                                                    
                                                                                                                                
Mr.  Marks  noted  that  Slide   13  reflected  the  royalty                                                                    
distortion, or how much the  royalty eroded the net value at                                                                    
low prices.                                                                                                                     
                                                                                                                                
Mr.  Marks   spoke  to  Slide  19,   "Specific  Comments  on                                                                    
Features":                                                                                                                      
                                                                                                                                
     •Gross Revenue Exclusion and $5/bbl Credit                                                                                 
          -Same for all cost structures - unconnected to                                                                        
          actual production costs                                                                                               
          -Has different effects at low prices depending on                                                                     
          cost structure                                                                                                        
          -Unaffected by investment                                                                                             
          -$5/bbl credit: Lose some of it at low prices if                                                                      
          at $0 tax floor                                                                                                       
                                                                                                                                
     •20% Capital Credit (Revoked in Original Bill and CS)                                                                    
          -Explicitly related to actual costs                                                                                   
          -Automatic adjustment to different cost                                                                               
          structures: low credit if low costs; high credit                                                                      
          if high costs                                                                                                         
          -Affected by investment                                                                                               
          -Do not lose it at low prices                                                                                         
          -Boost to net present value and rate of return                                                                        
                                                                                                                                
9:45:13 AM                                                                                                                    
                                                                                                                                
Mr. Marks continued  to discuss Slide 19.  He suggested that                                                                    
the  committee consider  retaining  the  20 percent  capital                                                                    
credit.   He  understood   that  there   could  be   concern                                                                    
surrounding the  cash-flow associated  with the  credit, and                                                                    
the exploration  credits as well, but  that targeted capital                                                                    
credits could be beneficial.                                                                                                    
                                                                                                                                
9:49:55 AM                                                                                                                    
                                                                                                                                
Senator Hoffman pointed out to  the committee that retaining                                                                    
the 20  percent capital credit  could cost the  state nearly                                                                    
$1  billion, which  was why  it had  been excluded  from the                                                                    
legislation.  He  believed  that by  accepting  Mr.  Marks's                                                                    
recommendation   on   capital   credits  could   result   in                                                                    
complications with  operating costs for the  state of Alaska                                                                    
over the next ten years.                                                                                                        
                                                                                                                                
9:50:50 AM                                                                                                                    
                                                                                                                                
Co-Chair Meyer  hoped that  a plan  could be  developed that                                                                    
increased investment  and maximized  the state's  return. He                                                                    
offered  that  the current  capital  credit  did not  target                                                                    
production  and  that  Mr. Marks  was  suggesting  that  the                                                                    
capital  credit  would only  apply  to  companies that  were                                                                    
drilling wells. He said that  industry would not drill wells                                                                    
if they  had no intention  to produce. He believed  that the                                                                    
numbers  needed to  be examined  to determine  the potential                                                                    
impact to the  state. He understood that  the capital credit                                                                    
under discussion was  similar to an "uplift  credit" used in                                                                    
Norway.                                                                                                                         
                                                                                                                                
9:52:49 AM                                                                                                                    
                                                                                                                                
Senator Hoffman observed  that the state would  not get more                                                                    
production without  exploration. He  thought that  the state                                                                    
could encourage exploration, but  the success of exploratory                                                                    
wells provided  no guarantee that  the state would  find oil                                                                    
that  would lead  to production.  He stressed  that although                                                                    
the state wanted  more production it was  necessary to first                                                                    
encourage more exploration.                                                                                                     
                                                                                                                                
9:53:42 AM                                                                                                                    
                                                                                                                                
Co-Chair Meyer  thought that the  majority of the  known oil                                                                    
in the  legacy fields was  hard to  get to. He  opined that,                                                                    
theoretically, targeting  wells in the legacy  fields should                                                                    
lead to  more production, but acknowledged  that exploration                                                                    
was needed as well.                                                                                                             
                                                                                                                                
9:54:09 AM                                                                                                                    
                                                                                                                                
Vice-Chair Fairclough  stated that if the  state was looking                                                                    
for  immediately returns  on  its  investment, a  reflective                                                                    
look  needed to  be taken  at the  recovery rate  in Prudhoe                                                                    
Bay. She believed  that more exploration could  lead to more                                                                    
oil in  the pipe for  the long-term.  She added that  in the                                                                    
short-term the  legacy fields  were Alaska  best opportunity                                                                    
in regard to immediate oil in the pipe.                                                                                         
                                                                                                                                
9:55:54 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy  inquired  if  there had  been  any  study                                                                    
regarding  how the  fiscal/spending  policies  at the  state                                                                    
level affected the investment psychology of corporations.                                                                       
Mr. Marks  responded that in  the affirmative. He  said that                                                                    
that 90 percent  of Alaska's general fund  revenue came from                                                                    
the oil industry.  He believed that the  state could benefit                                                                    
from a diversified  tax base. He furthered  that there could                                                                    
be any  number of reasons  why there would be  no investment                                                                    
response  even  if the  state  passed  a "perfect"  tax.  He                                                                    
stated that the bill had  taken progressivity off the table.                                                                    
He related  that progressivity  provided certainty  and that                                                                    
oil companies  hated uncertainty;  some of  the corporations                                                                    
would prefer,  particularly in  more volatile  countries, to                                                                    
negotiate  a progressive  system  to  protect against  price                                                                    
increases. He  stressed that  corporations viewed  large tax                                                                    
increases as a confiscation of assets.                                                                                          
                                                                                                                                
10:01:57 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer  requested a response regarding  the targeted                                                                    
capital  credits versus  the  GRE and  how  the state  could                                                                    
limit the impact to the state treasury.                                                                                         
                                                                                                                                
Mr.  Marks   replied  that  the  targeted   tax  credit  was                                                                    
preferable  because they  provided incentive  to invest  and                                                                    
the credit was  directly related to the  cost of production.                                                                    
He offered  that, if the  concern was that the  credits were                                                                    
being currently  used for activities  that were  not related                                                                    
directly to  oil production, the  targeted tax  credit would                                                                    
be an improvement over the GRE or no credit at all.                                                                             
                                                                                                                                
10:04:08 AM                                                                                                                   
                                                                                                                                
Senator Olson  inquired if Norway  had a GRE element  in its                                                                    
tax structure.                                                                                                                  
                                                                                                                                
Mr. Marks replied no. He  furthered that Norway did not have                                                                    
a royalty tax. He noted that  the reason Norway had a higher                                                                    
take than Alaska  was because producers in  Norway were more                                                                    
protective on the low side of oil prices.                                                                                       
                                                                                                                                
10:04:42 AM                                                                                                                   
                                                                                                                                
Mr. Marks discussed Slide 20,  "How Much of $5 Credit Used",                                                                    
which reflected  how of the  non-transferable $5  credit was                                                                    
used  for  different cost  fields.  He  noted that  low-cost                                                                    
fields received  the $5  credit at  all prices  because they                                                                    
never hit  the floor,  but the  medium cost  fields received                                                                    
less than the full $5 because  they hit the floor at $90 ANS                                                                    
market price.                                                                                                                   
10:05:47 AM                                                                                                                   
                                                                                                                                
Mr. Marks spoke  to Slide 21, "Cash Flow  Comparison - Value                                                                    
of 30 percent GRE & $5  Credit vs. 20 percent Capital Credit                                                                    
Mid Cost  Fields", which  reflected what  the $5  credit and                                                                    
the  GRE were  worth together,  as opposed  to a  20 percent                                                                    
capital credit, for a mid-cost  field. He explained that the                                                                    
20 percent  capital credit  was the  same regardless  of oil                                                                    
price because it was based on  spending, but the GRE and the                                                                    
$5 credit was significantly higher.                                                                                             
                                                                                                                                
10:06:52 AM                                                                                                                   
                                                                                                                                
Senator Hoffman  requested a figure of  what the projections                                                                    
on slides 20 and 21 would cost the state treasury.                                                                              
                                                                                                                                
Mr. Marks responded that he could provide the information.                                                                      
                                                                                                                                
10:07:54 AM                                                                                                                   
                                                                                                                                
Mr. Marks spoke  to Slide 22, "Government Take  - 40 percent                                                                    
Rate/ 30 percent  GRE All Fields/ $5/bbl  Credit." Mr. Marks                                                                    
offered  that the  slide illustrated  the  state having  the                                                                    
goal of a 62 percent take  with similar tax rates across the                                                                    
entire spectrum of costs.                                                                                                       
                                                                                                                                
10:08:32 AM                                                                                                                   
                                                                                                                                
Mr. Marks discussed Slide 23,  "Government Take - 23 percent                                                                    
Rate/  20  percent  Capital Credit."  He  stated  that  this                                                                    
scenario brought down  the low and mid-cost  fields at lower                                                                    
prices. He  noted that the  credit was reflective  of actual                                                                    
costs.                                                                                                                          
                                                                                                                                
10:10:21 AM                                                                                                                   
                                                                                                                                
Mr. Marks looked at Slide  24, "Government Take - 26 percent                                                                    
Rate/ 20 percent  Capital Credit/ 5 percent  GRE All Fields/                                                                    
$2/bbl Credit."  He said that the  scenario incorporated all                                                                    
of  the  discussed features.  He  explained  that the  curve                                                                    
reflected a  slow, downward  slant based  on the  higher oil                                                                    
prices. He relayed  that the royalty still had  an effect at                                                                    
high costs and  that the GRE was able to  level the curve at                                                                    
higher prices.                                                                                                                  
                                                                                                                                
10:11:47 AM                                                                                                                   
                                                                                                                                
Mr. Marks discussed Slide 25, "Progressivity?":                                                                                 
                                                                                                                                
    •Can use a progressive structure to flatten out the                                                                         
    curve at both ends and make a neutral system, which                                                                         
     aligns interests                                                                                                           
                                                                                                                                
     •Or can make a progressive system                                                                                          
          -Pros (if not excessive)                                                                                              
               •Protects producers interests at low costs                                                                       
                                                                                                                                
               •Protects state's interests at high costs                                                                        
                                                                                                                                
               •May be necessary for fiscal stability                                                                           
          -Cons                                                                                                                 
               •Only works if balanced at low and high                                                                          
               prices                                                                                                           
                                                                                                                                
               •With inherent regressive elements may be                                                                        
               difficult to achieve, or can only achieve                                                                        
               modestly                                                                                                         
                                                                                                                                
               •Many jurisdictions in the peer group do not                                                                     
               have progressivity                                                                                               
                                                                                                                                
10:13:14 AM                                                                                                                   
                                                                                                                                
Senator Hoffman  wondered if  projections using  the current                                                                    
tax  structure could  be compared  to the  schedules in  the                                                                    
presentation.                                                                                                                   
                                                                                                                                
10:13:47 AM                                                                                                                   
                                                                                                                                
Mr. Marks replied in the affirmative.                                                                                           
                                                                                                                                
10:14:28 AM                                                                                                                   
                                                                                                                                
Senator Bishop clarified that Senator  Hoffman wanted to see                                                                    
ACES  compared with  the government  take  scenarios in  the                                                                    
presentation.                                                                                                                   
                                                                                                                                
10:14:47 AM                                                                                                                   
                                                                                                                                
Mr.  Marks discussed  Slide  26,  "Example: Government  Take                                                                    
under Bracketed Progressivity  - Base Rate of  20 percent up                                                                    
to $60 Net/ Brackets up to  50 percent at $160 Net/ Includes                                                                    
20  percent  Capital  Credit." He  recommended  against  the                                                                    
progressivity  structure under  ACES.  He  offered that  the                                                                    
example  system  reflected  on   the  slide  would  be  more                                                                    
attractive to industry.                                                                                                         
10:15:46 AM                                                                                                                   
                                                                                                                                
Mr. Marks spoke to Slide 27, "Other Issue: Section 10":                                                                         
                                                                                                                                
     •Defers loss carry-forward credits until positive                                                                          
     income                                                                                                                     
                                                                                                                                
     •Would eliminate loss carry-forward credit for                                                                             
    unsuccessful explorer with no other nexus in state                                                                          
                                                                                                                                
     •May discourage new entrants                                                                                               
                                                                                                                                
10:16:43 AM                                                                                                                   
                                                                                                                                
Mr. Marks discussed Slide 28 titled "Other Issues: Section                                                                      
25":                                                                                                                            
                                                                                                                                
     •Eliminates loss carry-forward credits for exploration                                                                     
     expenses                                                                                                                   
    •Explorers with offsetting income can still realize                                                                         
     benefit of deduction; those without offsetting income                                                                      
     will not                                                                                                                   
     •Disparate treatment                                                                                                       
    •Also, suppose a producer has $100 in gross value.                                                                          
     Suppose exploration expenses are $90. And suppose non-                                                                     
     exploration expenses are $80. If they deduct the                                                                           
     exploration expenses first, they will have $10. Then                                                                       
     they can deduct the $80 non-exploration expense from                                                                       
    the $10. This will give them $70 in losses they can                                                                         
     use for the loss carry-forward credit.                                                                                     
                                                                                                                                
    But, if they deduct the $80 non-exploration first,                                                                          
    they will have $20. Under the amendment they would                                                                          
     only be able to deduct $20 of the exploration expense.                                                                     
                                                                                                                                
     So there needs to be something about the order in                                                                          
     which costs are deducted.                                                                                                  
                                                                                                                                
10:19:21 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer appreciated that Mr. Marks was offering                                                                          
alternatives. He noted that the capital cost credits had                                                                        
been expensive and had not had the intended effect.                                                                             
                                                                                                                                
Senator  Dunleavy requested  a  list of  the countries  that                                                                    
Alaska's tax  structure was competing with,  and a breakdown                                                                    
of the economic diversification  of those countries. He also                                                                    
wondered  about  the  effects  of an  income  tax  in  those                                                                    
countries.                                                                                                                      
                                                                                                                                
10:21:53 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer  highlighted that there were  factors at play                                                                    
that  were  not  under  the  state's  control,  particularly                                                                    
accessibility and  weather. He  stressed that the  state was                                                                    
interested in being attractive not competitive.                                                                                 
                                                                                                                                
10:22:38 AM                                                                                                                   
                                                                                                                                
Senator Olson asked whether the  state would lose $1 billion                                                                    
due to the 20 percent capital credit.                                                                                           
                                                                                                                                
Mr.  Marks  relied that  some  of  the credit  were  capital                                                                    
credits and  some were exploration credits.  He referred the                                                                    
question to DOR.                                                                                                                
                                                                                                                                
Senator Olson hypothesized that  the figure was accurate. He                                                                    
queried a recommendation, outside of  the GRE, for the state                                                                    
to rectify such a sizeable deficit to the treasury.                                                                             
                                                                                                                                
Mr. Marks  replied that  the GRE  was an  innovative device,                                                                    
but that it also involved cash  flow out. He shared that the                                                                    
amount of  activity that resulted  from the  capital credits                                                                    
had  been  disappointing.  He  believed   that  all  of  the                                                                    
features needed to be examined holistically.                                                                                    
                                                                                                                                
10:25:20 AM                                                                                                                   
                                                                                                                                
Senator  Olson inquired  if Mr.  Marks had  a suggestion  to                                                                    
rectify the projected deficit.                                                                                                  
                                                                                                                                
Mr.  Marks  related that  the  best  way  to deal  with  the                                                                    
deficit was to have a good tax structure.                                                                                       
                                                                                                                                
10:26:14 AM                                                                                                                   
                                                                                                                                
Senator Bishop  understood that Alaska  had changed  its tax                                                                    
rate  historically very  seven  years since  1977. He  noted                                                                    
that  the easy  oil was  gone and  that as  the state  moved                                                                    
forward a stable tax structure  was a necessity. He surmised                                                                    
that the  state should  reconsider looking  at progressivity                                                                    
in  order to  quell the  possibility of  creating a  new tax                                                                    
structure if oil reached $200/bbl.                                                                                              
Mr. Marks replied in the affirmative.                                                                                           
                                                                                                                                
10:27:58 AM                                                                                                                   
                                                                                                                                
SB 21 was HEARD and HELD in committee for further                                                                               
consideration.                                                                                                                  
                                                                                                                                
10:28:48 AM                                                                                                                   
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:29 a.m.                                                                                         
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
Marks Sen Fin 030413 (2).pdf SFIN 3/4/2013 9:00:00 AM
SB 21