Legislature(2005 - 2006)SENATE FINANCE 532
03/31/2006 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
March 31, 2006
9:01 a.m.
CALL TO ORDER
Co-Chair Lyda Green convened the meeting at approximately
9:01:50 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Bert Stedman
Senator Donny Olson
Senator Lyman Hoffman
Also Attending: SENATOR GARY STEVENS; SENATOR BEN STEVENS; BILL
CORBUS, Commissioner, Department of Revenue; ROBYNN WILSON, CPA,
Director, Tax Division, Department of Revenue; DAN DICKINSON,
CPA, Consultant;
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
SB 305-OIL AND GAS PRODUCTION TAX
The Committee heard from the Department of Revenue. The bill was
held in Committee.
9:02:24 AM
CS FOR SENATE BILL NO. 305(RES)
"An Act providing for a production tax on oil and gas;
repealing the oil and gas production (severance) tax;
relating to the calculation of the gross value at the point
of production of oil or gas and to the determination of the
value of oil and gas for purposes of the production tax on
oil and gas; providing for tax credits against the tax for
certain expenditures and losses; relating to the
relationship of the production tax on oil and gas to other
taxes, to the dates those tax payments and surcharges are
due, to interest on overpayments of the tax, and to the
treatment of the tax in a producer's settlement with the
royalty owners; relating to flared gas, and to oil and gas
used in the operation of a lease or property under the
production tax; relating to the prevailing value of oil or
gas under the production tax; relating to surcharges on
oil; relating to statements or other information required
to be filed with or furnished to the Department of Revenue,
to the penalty for failure to file certain reports for the
tax, to the powers of the Department of Revenue, and to the
disclosure of certain information required to be furnished
to the Department of Revenue as applicable to the
administration of the tax; relating to criminal penalties
for violating conditions governing access to and use of
confidential information relating to the tax, and to the
deposit of tax money collected by the Department of
Revenue; amending the definitions of 'gas,' 'oil,' and
certain other terms for purposes of the production tax, and
as the definition of the term 'gas' applies in the Alaska
Stranded Gas Development Act, and adding further
definitions; making conforming amendments; and providing
for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Green announced the intended schedule for this
legislation.
9:03:58 AM
BILL CORBUS, Commissioner, Department of Revenue, presented the
bill, giving the following testimony.
Before focusing on SB 305 I would like to comment on DOR
policy of providing tax and economic staff expertise, and
in some cases consultants under contract, to Legislators
and their staffs when contemplating or preparing their own
new legislation or amendments to legislation under
consideration.
The Tax Division routinely provides this assistance,
subject to the availability of resources, to members on
both sides of the aisle.
If so requested, DOR provides this assistance on a
confidential basis.
DOR provides it for two reasons:
In some cases it is the only part of government that has
the background, data base and the pool of talent
If such legislation is enacted, we want to make sure it
works and is in the best form for the Tax Division to
administer
Providing this assistance does not signal Administration
support of a bill or amendments to a bill before a
committee.
The Commissioner or Deputy Commissioners normally
articulate the policy positions - which is why today I am
representing the Administration.
The Governor and his Administration strongly support the
Petroleum Profit Tax as originally proposed.
SB 305 is an historic piece of legislation that will:
· Replace a broken ELF based production tax system
· Provide incentives for badly needed investment
· Provide special incentives for the small sized
companies to explore Alaska
· Provide higher State revenues, particularly at higher
prices
We commend the Senate Resources Committee for their many
hours of hard work.
We note that the Senate Resource CS supports the 25% tax
rate; we support the 20% investment as originally proposed.
The Administration does not support the 25% tax rate.
Over time oil production has dropped dramatically and must
restored:
· TAPS operating at less than 50% capacity
· Oil production was once 2m b/d now about 870k b/d,
projected to 772k b/d by 2016
· Recent investment in development and production has
been inadequate
· Higher tax rates will further discourage new
investments
· Must not emphasize short term revenues - must maximize
State's wealth over the long run
· We believe 20/20 is the appropriate tax and tax credit
rate to arrest this trend
And we need to keep eye on the prize, which is the gas
pipeline.
Although the PPT includes investment incentives, the
stronger link for effecting investment is the tax rate.
As tax rates go up, investment goes down.
Let's try to boil down what a change in the tax rate might
mean - in numbers for 20/20 vs. 25/20.
Assumptions
· $60 oil and $7 gas
· Uninflatted or today's dollars
· Governor's bill - no progressivity factor, July 1
effective date, transition provision
With 20/20
· A gas line $2b/yr for 35 yrs or $70b
· Extend life of Prudhoe Bay thru at least 2050
· 20 year longer life than without a gasline
· State royalty and 20% PPT revenues on oil of
$2.3b/yr for at least 35 yrs worth $83b
With 25/20
· Risking gasline or attempt to change gas economics
· Shortened field life at Prudhoe Bay - say 2030
· State revenues for royalties and 25% PPT $80b
· During the same period $69b for 20% tax rate
What do you want? $80b from oil only in the short term with
25/20 or with the 20/20 $70b from the gasline and $83b from
oil life thru 2050, a total of $153b.
This Administration believes we should go with the 20% tax
rate.
We note that the CS has several changes from the Governor's
original bill:
· The transition provision
· The $73,000,000 deduction for the small companies
· Change of the effective date
· Introduction of a progressivity factor
· They should be carefully scrutinized
In conclusion, this Administration strongly supports the
original SB 305, not the Senate Resource CS.
· Although we commend Senate Resources for their hard work
on this complex legislation
· We continue to believe the 20/20 is the appropriate level
to attract investment, bring us a gasline and maximize
the State's wealth over the long term
9:16:20 AM
Co-Chair Green requested the figures the commissioner cited.
9:16:37 AM
Mr. Corbus noted an editorial opinion paper written by Governor
Murkowski distributed to the Committee, which also lists the
figures [copy on file].
9:17:06 AM
Co-Chair Wilken asked the date of the Governor's letter.
9:17:15 AM
Mr. Corbus replied the letter is current of as of today and
would be submitted for publication in newspapers across the
state.
9:17:30 AM
Co-Chair Wilken asked, "Are we now in the process of changing
the rules that we started with two months ago?" He explained
that at the start of this legislative session when a change to
the oil tax system was first proposed, the issue was clear that
the current Economic Limit Factor (ELF) was "broken" given the
higher oil prices. The commissioner had also voiced this to him
two years prior.
Co-Chair Wilken continued that the legislature was instructed to
consider the merits of this bill separately, as it would be a
tax on oil. However, the Department of Revenue is now asserting
that to increase the proposed tax rate of 20 percent would
affect negotiations to secure a natural gas pipeline. Therefore,
he concluded that the "rules" had been changed. If this is the
case, the legislature must change its approach and investigate
the negotiations. The details of the negotiations must be
learned if the legislature were to make an informed decision
regarding this bill. The legislature could not be expected to
act upon this legislation without full knowledge of all its
impacts. Two months ago, the legislature was advised this bill
had no linkage to the gasline negotiations; however, such a
linkage is clear. He would be unable to make a decision on a tax
changes without knowing how it would affect the development of
natural gas resources.
9:20:20 AM
Mr. Corbus indicated he would provide a written response.
9:20:28 AM
ROBYNN WILSON, CPA, Director, Tax Division, Department of
Revenue, introduced Mr. Dickinson. They would provide a
comparison of the Senate Resources Committee substitute to the
original version submitted by Governor Murkowski. They gave a
presentation titled, "Petroleum Profits Tax (PPT), CS for SB 305
(RES) Overview, Alaska Department of Revenue before the Senate
Finance Committee, March 31, 2006…" [copy on file].
9:21:56 AM
DAN DICKINSON, CPA, former Director of the Tax Division, secured
as a consultant by the Office of the Governor, began the
presentation.
Page 2
Alaska Oil Production
[Line graph showing Million Barrels/Day for the fiscal
years 1965 through 2020 of: Other (Cook Inlet, Duck Island,
Milne Point, Greater Point McIntyre, Liberty, Known On &
Offshore, Fiord and N-PRA), Northstar, Alpine, Kup-Sat,
Kuparuk, PBU-Sat, and Prudhoe Bay.]
Mr. Dickinson would focus on the "ideas that motivated the
Governor when he submitted this bill." The graph demonstrates
the production history, which peaked between 1985 and 1990 and
is steadily declining. In the middle 1980s nearly $2 million
barrels were produced per day, of which $1.6 million were from
fields at Prudhoe Bay. Prudhoe Bay production has been steadily
declining. Production at other smaller fields is beginning and
is offsetting the decline. However, the Governor is concerned
that if more investment does not occur, the decline would
increase. This would not be in the best interest of the State
treasury or Alaska's economy.
9:23:22 AM
Page 3
The Governor's 3 Big Ideas
· The current Production Tax system is broken.
· We need to use the tax system to encourage investment
· We ought to get a fair share of tax revenues when
prices are high, especially if reinvestment is low
Mr. Dickinson listed the items, expressing the Governor's
particular concern that the current tax system could be
discouraging investment.
9:24:12 AM
Page 4
The Governor's 3 Big Ideas
· The current Production Tax system is broken. The CS
also replaces it.
· We need to use the tax system to encourage investment.
The CS has incentives for investment.
· We ought to get a fair share of tax revenues when
prices are high, especially if reinvestment is low.
The CS pushes the tax rate to 25%, maintains credit
rate of 20%.
Mr. Dickinson overviewed this page. Many of the incentives
included in the committee substitute reflect the Governor's
proposals and some are different.
9:25:09 AM
Page 5
The Governor's 3 Big Ideas
· Idea one: The Production Current Tax System is broken
o We are not getting the investment we need - could
the structure of the Production Tax be to blame
o We are not getting a fair share of revenues when
Prices are high and investment is low
Mr. Dickinson read this into the record.
9:25:30 AM
Page 6
Unrestricted & Restricted Revenue
$ Billion
[Pie chart indicating the breakdown for FY 05: Federal
$1.9; Investment $2.8; Oil $3.4; and Other $0.8.]
Mr. Dickinson utilized this chart to give perspective. The total
State revenues are divided into three main categories and a
category for other sources. The "investment" revenue represents
investment from the Alaska Permanent Fund.
9:26:17 AM
Slide 7
FY 2005 Petroleum Revenue
$ Million
[Pie chart listing the breakdown of: Royalties + Bonuses +
Interest $1,419.8; Production Tax $863.2; Corporate Income
Tax $524.0; Property Tax $42.5; NPR-A Rents & Bonuses
$31.6; Royalties to PF & PSF $486.5; and CBRF Settlements
$27.4]
Mr. Dickinson noted the revenues were unrestricted with the
exception of Constitutional Budget Reserve (CBR) Fund
settlements, royalties to the Alaska Permanent Fund and the
Public School Fund, and the National Petroleum Reserve - Alaska
(NPR-A) rents and bonuses. This bill relates to the production
tax. It would have no affect on the restricted funds or the
corporate income tax.
9:28:07 AM
Page 8
1. Destination Value at Market (2005)
[Table calculating the following information related to the
330 million barrels produced:
Destination Value at Market
$43.43 per barrel
$14,332 million
Less Tankering & Pipelines
$4.51 per barrel
($1,488) million
Gross Value at Point of Production
$38.92 per barrel
$12,844 million
Less Upstream Costs
Operating: $3.33
Capital: $3.18
Total: $6.52 per barrel
($2,150) million
Net Value at Point of Production
$32.40 per barrel
$10,694 million]
Mr. Dickinson outlined this information. He corrected an error,
as the $6.52 amount was incorrectly shown as $96.52.
Mr. Dickinson noted the destination value reflects the cost of
transportation mostly to Los Angeles, California.
Mr. Dickinson stated this information provides an understanding
of the value of Alaska resources.
9:30:24 AM
Page 9
2. Current Production Tax
$ in Billion
Gross Value at Point of Production $12,844
1 - Royalty Rate 0.875
Value Net of Royalty $11,238
Tax Rate 0.15
ELF Rate 0.55
Tax $927
Mr. Dickinson posed the question of how to tax the value. He
detailed this page. The State does not tax royalties, which
reduces the gross value 0.875 percent to the amount to be taxed.
The gross value is then multiplied by the tax rate and the ELF.
9:31:55 AM
Page 10
Implicit Cost
$ in Billion
Production Tax Net of Royalty $11,238
Less Implicit Cost from Proxy ($5,057)
$6,181
Tax Rate 1.05
Proposed Production Tax $927
Mr. Dickinson defined ELF in this table as "a proxy for the cost
of getting the oil ready to go to market; the cost of getting
the oil out of the ground". He stated, "If the ELF is a proxy it
isn't working" explaining this is why the system is "broken".
Mr. Dickinson posed the question that if the State were allowing
deductions of actual costs instead of utilizing a proxy, how
much investment would be necessary to equal $927 million. He
answered that approximately $5 billion worth of deductions would
be required. Less than one-half that amount was actually
invested.
Mr. Dickinson emphasized that the ELF was designed as a proxy
when the gross value was at a "certain dollar range", which
"worked". When prices increased to unprecedented levels and the
ELF is a percentage, the proxy is no longer effective. Oil
companies operating in the North Slope are being allowed
deductions that are "all out of line" with the actual costs.
"They are paying their taxes as if they were making huge
investments," although they are not making those investments.
The Governor suggests that the proposed Petroleum Production Tax
(PPT) should reflect the actual investments. The deduction
should be allowed only for investments actually made.
9:33:31 AM
Page 11
Kuparuk Crude Oil Production & ELF
[Bar graph showing Production in Million Barrels per Day
and ELF for the years 1990 through 2005 and forecasted for
2006 through 2015.]
Mr. Dickinson stated that the relationship between volumes and
the ELF could become "supercharged". This slide demonstrates
that ten to 15 years ago, Kuparuk was producing approximately
320,000 barrels per day with an ELF of approximately 0.8. An ELF
of 1.0 would pay the full 15 percent rate. Over that ten-year
period, the volume has decreased by about one-half to about
160,000 barrels per day. However, over that same period, the ELF
has decreased from 0.8 to zero and the field is paying no
production tax. The method of exempting certain fields from tax
could have been considered effective at one point, but it is
not.
Mr. Dickinson informed that Kuparuk is the second largest oil
field in the United States even with the dramatic decline. Yet
it is not paying any production tax as of this year. That
suggests that the mechanism used to exempt fields from tax was
no longer effective.
Mr. Dickinson surmised agreement has been reached on this issue
and how the system should be changed is the next step in the
process.
9:35:14 AM
Page 12
Economic Limit Factor
FY 1995-2005 and FY 2006-2016
[Bar graph showing the percentage rate of ELF for the years
1995 through 2005 and the projected rate for 2006 through
2015.]
This page was not directly discussed.
Page 13
The Governor's 3 Big Ideas
· Idea two: We need to use the Tax system to encourage
investment
· Investment leads to more production
· More production leads to more revenue
· Four ways the bill recognizes investment
Mr. Dickinson indicated Ms. Wilson would give this portion of
the presentation.
9:35:41 AM
Ms. Wilson stated the Governor's legislation utilized the tax
system to improve and encourage investment. The understanding is
that investment leads to more production and more production
leads to more revenue. The bill recognized four ways to
encourage investment.
9:36:00 AM
Page 14
Governor's Bill: 4 ways of encouraging investment
· Net vs. gross - all investment is a deduction
· 20% credits for capital investments
· Up to a $73 million Annual Allowance
· Recognition of Transaction Investment Expenditures
Ms. Wilson outlined this page.
9:36:31 AM
Page 15
CS: 4 ways of encouraging investment
· Net vs. gross - all investment is a deduction - CS
preserves
· 20% credits for capital investments - CS preserves
· Up to a $73 million annual allowance - CS has a tax-
free allowance based on production
· Recognition of Transition Investment Expenditures - CS
changes this from a deduction to a credit with a
requirement for current investment
Ms. Wilson overviewed the comparison of the committee substitute
adopted by the Senate Resources Committee to the original bill
submitted by the Governor.
Page 16
Tax Based on Net Profits
· Governor's bill provided a tax based on Net Profits
· CS maintains this approach.
This page was not specifically discussed.
9:37:21 AM
Page 17
Gross vs. Net
Current Tax on Gross
Value at wellhead $50.00
Times: tax rate 15%
Tax before ELF $7.50
PPT on Net
Value at wellhead $50.00
Less:
Lease op exps (12.50)
Net taxable $37.50
Times: tax rate 20%
Tax before credits $7.50
Ms. Wilson remarked this page demonstrates that simply changing
tax from net to gross would not necessarily change the bottom
line taxable collections. The tax rate is the real issue.
Additionally, the tax rate is expected to increase by changing
from gross to net.
9:38:12 AM
Page 18
Tax Base
Gross value at point of production
Ms. Wilson explained the rate starts with the tax base, which is
the gross value at the point of production. The tax base is what
is taxed.
9:38:27 AM
Page 19
Determining value under current system
[Illustrations depicting: West coast value $; an oil
tanker; a pipe with oil flowing out the end; and an off-
shore drilling platform.]
Ms. Wilson surmised the matter would be simple if all oil sales
occurred on the North Slope. However, most sales occur on the
West Coast and therefore, the selling price at the West Coast
must be considered. This price is not the value at the wellhead.
To account for the differences, transportation costs and
pipeline tariffs are backed out to calculate the wellhead value.
9:39:16 AM
Page 20
Gross Value under PPT
Department of Revenue can allow a producer to elect the use
of:
· Royalty value
· DOR formula that estimates a value at a specific
location such as point of delivery into a common
carrier pipeline
Ms. Wilson stated the intention of both the original bill and
the committee substitute is simplification. Currently, two sets
of State auditors review the same "number" and are reaching
close, but not identical results. The bill would instead allow
royalty values to be used. The formula may include other
factors, such as published prices, quality differentials,
applicable transportation costs and inflation adjustments.
Ms. Wilson noted this approach preserves the current statutes
and regulations pertaining to gross value.
9:40:23 AM
Page 21
Tax Based on Net Profits
Gross value at point of production
Less: Lease expenditures
· Operating costs
· Capital expenditures
· Allowance for overhead
Equals: Net Profits
Ms. Wilson overviewed this page. She qualified that allowable
operating and capital expenses must be necessary and directly
attributable to the lease. Allowance for overhead must be
directly related to exploration, development and production.
Ms. Wilson furthered that the bill directs that substantial
weight be given to industry practices. An option is provided
that would include as lease expenditures, the costs paid by a
producer that are paid by an operator under the terms of a unit
operating agreement. Lease expenditures would be reduced by any
reimbursements received by the producer from other producers or
government.
Ms. Wilson noted that capital expenditures are allowed at 100
percent in the year of acquisition. This is in contrast to usual
accounting practices in which an asset is purchased and
depreciated against its useful life. The intent is to encourage
investment and allow for an immediate deduction for those
expenditures.
9:42:23 AM
Page 22
Non-deductible expenses
· Depreciation
· Royalty Payments
· Taxes based on net income
· Interest & financing charges
· Lease acquisition costs
· Other costs
Ms. Wilson reiterated that because 100 percent of write off is
allowed in the first year an asset was purchased, depreciation
in future years would not be allowed.
Ms. Wilson listed two reasons royalty payments could not be
deducted, the gross value at point of production excludes
federal and state royalties and therefore royalties are not
included in the calculation of the tax, and because private
royalty leases is taxable. Other costs would include the costs
of arbitration, donations, cost of organizing partnerships and
joint ventures and other business entities.
9:43:37 AM
Senator Stedman asked for additional information about the
depreciation factor, as the proposal would differ from current
income tax procedures. He wanted to know how the issue would be
handled with a producer paying both PPT tax and corporate income
tax.
9:44:00 AM
Co-Chair Green remarked this matter would be discussed.
9:44:20 AM
Ms. Wilson explained that depreciation would be taken over the
lives of the assets on federal income taxes. Much of the
equipment is depreciable over seven years, some offshore
drilling equipment has a five-year life and other equipment is
depreciable up to 17 years. Longer useful life is granted for
State corporate income tax purposes, with slower depreciation
for oil and gas companies. This legislation would allow
immediate write-off.
9:45:17 AM
Senator Stedman understood that the State corporate income tax
is calculated on a percentage of a company's worldwide income.
Despite the loss of the depreciation schedule for the proposed
PPT tax, equipment would still be depreciable.
9:45:57 AM
Ms. Wilson affirmed. The State corporate income tax considers
worldwide income and apportions income attributable to Alaska,
based on a formula. That result is taxed. Depreciation is taken
into account in that calculation.
9:46:46 AM
Page 23
Governor's Bill: Credits to Encourage Investment
· 20% of qualified capital expenditures
· May be taken on:
o Exploration costs
o Capital costs incurred on lease
Credits are transferable
Ms. Wilson told of another key element for encouraging
investment is a provision that credits would be transferable.
The third party to whom credits are transferred could only use
those credits to offset up to 20 percent of the transferee's
tax. The recipient of transferred credits would apply to the
Department of Revenue for a credit certificate. The Department
would maintain information on credits and if deemed appropriate,
the certificate would be issued. This would not preclude the
Department from undertaking future audits and reviewing the
credit in more detail.
Ms. Wilson noted that exploration costs would include geological
and geophysical expenses.
9:48:35 AM
Page 24
CS: Credits to Encourage Investment
· CS maintains credits
· Credits may not be taken on:
o Abandonment costs
Ms. Wilson noted that the committee substitute added an
additional exemption for abandonment costs.
9:48:57 AM
Page 25
Friendly to New Investors
· Ability to monetize credits
· Ability to monetize losses
· Base allowance
o Governor's bill: $73M deduction
o CS: converts this to tax-free allowance based on
production:
(5000 - .2 x [ADP - 5000]) / ADP
ADP = average daily production
Sunsets in 2013
Ms. Wilson outlined the comparison.
9:50:05 AM
Page 26
CS: 5,000 bbl plan
[Table showing the following:
Daily Production: 5,000
PPT tax-fee production: 5000
Percentage of net income tax-free: 100%
Daily Production: 6,000
PPT tax-fee production: 4800
Percentage of net income tax-free: 80%
Daily Production: 7,000
PPT tax-fee production: 4600
Percentage of net income tax-free: 66%
Daily Production: 8,000
PPT tax-fee production: 4,400
Percentage of net income tax-free: 55%
Daily Production: 9,000
PPT tax-fee production: 4200
Percentage of net income tax-free: 47%
Daily Production: 10,000
PPT tax-fee production: 4000
Percentage of net income tax-free: 40%
Daily Production: 15,000
PPT tax-fee production: 3000
Percentage of net income tax-free: 20%
Daily Production: 20,000
PPT tax-fee production: 2000
Percentage of net income tax-free: 10%
Daily Production: 25,000
PPT tax-fee production: 1000
Percentage of net income tax-free: 4%
Daily Production: 30,000
PPT tax-fee production: 0
Percentage of net income tax-free: 0%]
Ms. Wilson outlined this information.
9:50:13 AM
Senator Bunde asked why the presenter chose to demonstrate a
five-year "window".
9:50:25 AM
Ms. Wilson deferred to the sponsor of the committee substitute.
9:50:49 AM
Senator Stedman requested conversion of the information
contained on pages 25 and 26 from percentages to dollars and
determine which producers were included and excluded from the
tax to show how broad the provision would be.
9:51:21 AM
Mr. Dickinson explained the current three-tier system. The three
large producers have productions of significantly more than
100,000 barrels per day. These producers would never realize a
tax savings from this provision of more than five or ten
percent. Two other producers intend to produce 20,000 barrels
per day and other companies would likely produce less. He
deferred to the upcoming presentation to further explain this.
9:53:16 AM
Senator Stedman relayed that the Senate Resources Committee
spent numerous hours on this issue, deeming it important. The
Senate Finance Committee should understand it as well. The risk
of potential gains or increased number of producers must be
understood and further investigated.
9:54:21 AM
Mr. Dickinson would address this in an upcoming hearing.
9:54:28 AM
Senator Stedman remarked that the committee substitute before
the members is "radically different" and that both versions must
be understood.
9:55:01 AM
Page 27
Transition Provision
· Governor's bill allowed deductions for recent capital
expenditures
o Last five years' capital expenditures
o Allowed over 6 years
o Allowable on when price of oil exceeded $40
Ms. Wilson corrected an error indicating that the deductions
would be allowed over six years rather than five, as shown on
the original version of the presentation.
Ms. Wilson characterized this provision as one of fairness.
Assets purchased over the past several years would be generating
revenues calculated at the higher rates proposed in this
legislation.
9:56:08 AM
Senator Bunde surmised that investments made five years prior
were not made with expectation of this "claw back" provision.
Instead the investments were made based on the economics at that
time.
9:56:38 AM
Ms. Wilson agreed, but qualifying that the investments were made
with the expectation that the ELF based system would not be
changed.
9:56:49 AM
Senator Bunde found the argument counterintuitive and that the
producers would need a claw back for times when oil was less
than $40 per barrel.
9:57:04 AM
Ms. Wilson remarked the decision was a policy call made by the
Governor in conjunction with the "balance he envisioned".
9:57:16 AM
Senator Hoffman asked why an increased tax for the past six
years was not included in the bill. Deductions would be
permitted but increased taxes would not be imposed on revenues
generated during this period.
9:57:48 AM
Mr. Dickinson responded that the tax would not be retroactive.
9:57:55 AM
Senator Hoffman understood, and asked why the tax change would
not be retroactive if the deductions would be.
9:58:04 AM
Mr. Dickinson relayed the intent is that producers not regret
any investments already made. Those companies that had been
investing in Alaska should be allowed to recuperate from those
investments.
9:58:53 AM
Senator Stedman identified two incentives: a transition period
aimed to benefit larger producers that have made more
investments, and a "barrel holiday" exempting low production
rates from the tax that would benefit smaller producers.
9:59:41 AM
Co-Chair Green discerned the claw back is designed as a
transition between the old and new tax systems.
9:59:56 AM
Ms. Wilson affirmed.
9:59:59 AM
Mr. Dickinson agreed, but pointed out that Pioneer Natural
Resources is investing currently. The transition provision would
acknowledge those investments if the tax structure were to
change in the midst of their project. Smaller producers would
also benefit from this provision.
10:00:30 AM
Page 28
Transition Provisions in CS
· CS maintains 5 year look-back
· Allows recoupment of $1 for every $2 currently
invested
· Removes oil price test
· Changes from a deduction to a credit
Ms. Wilson noted the committee substitute would allow for less
recoupment.
10:01:00 AM
Co-Chair Wilken asked for an explanation of the change from a
deduction to a credit.
10:01:16 AM
Ms. Wilson gave an example of personal income tax in which
charitable contributions and business expenses are utilized to
establish the amount of income to be taxed. Credits allowed for
personal income tax include childcare and education. The
committee substitute assigns a deduction of 25 percent, to a
credit worth 20 percent.
10:02:28 AM
Senator Dyson understood that for this application, the credit
is for investment rather than credit against taxes.
10:02:51 AM
Ms. Wilson corrected that the credit is against taxes and only
pertains to the transition recognition of previous investments.
10:03:27 AM
Senator Dyson shared that credits are significantly more
valuable than deductions in calculating his income tax. He asked
the extent of the value difference for oil companies.
10:03:53 AM
Ms. Wilson replied that how the tax rate compares to the credit
rate is the determining factor. She affirmed that credits are
more valuable in relation to personal income tax.
10:04:28 AM
Senator Dyson asked if the variation would be different for the
major producers than smaller producers.
10:04:38 AM
Mr. Dickinson clarified that the credit is not 100 percent. A $1
million investment allowed as a deduction would lower taxes by
$250,000 at the 25 percent rate. As a credit, $200,000 at the 20
percent rate would be applied after taxes were calculated,
reducing the tax by that amount.
10:05:30 AM
Senator Dyson asked if the provisions of the committee
substitute would benefit all participants equally.
10:05:47 AM
Mr. Dickinson responded that credits don not always transfer at
face value. A small explorer might need to monetize the
investment credit before production begins, by selling the
credit. In such an instance, the explorer would likely only
receive 90 percent of the credit amount. Credits do not always
transfer at face value.
Mr. Dickinson pointed out that a small explorer took the
deduction but did not reach production, that deduction could
increase the size of the loss. As a consequence that amount
would be transferred to a credit to carry forward.
Mr. Dickinson identified the main feature between the deduction
and the credit as the 25 percentage and the 20 percentage.
10:06:56 AM
Senator Stedman noted that the common assumption of these
credits is as investment tax credit, in which a 20-cent
investment would reduce the tax bill by 20 cents. He asked Mr.
Dickinson to further explain this.
10:07:30 AM
Mr. Dickinson detailed that a small business owner could deduct
from income tax the entire amount paid for an equipment item.
The amount of marginal rate would be the amount gained from that
transaction. The investment tax credit provides that ten percent
of the purchase price could be applied against income for a
reduction of basis.
10:08:12 AM
Senator Stedman informed that the tax credit is subtracted
directly from the tax "bill". The credit is therefore a "much
more powerful mechanism" than a business expense.
10:08:28 AM
Mr. Dickinson agreed. A $10 tax credit reduces tax by $10; a
$100 investment results in a tax reduction of $10.
10:08:43 AM
Senator Stedman stressed the importance of this issue because of
the multiple complexities.
10:09:11 AM
Senator Bunde asked if the difference between a deduction and a
credit is that a credit could be sold and a deduction could not.
10:09:33 AM
Ms. Wilson corrected that deductions, if they generate loss at
end of year, could be converted to credits then sold. The net
operating loss could not be sold. The depreciation provision
could not generate a loss, which could be sold.
10:10:15 AM
Senator Bunde concluded that a credit is more valuable to the
producers than a deduction.
10:10:20 AM
Ms. Wilson affirmed.
10:10:25 AM
Mr. Dickinson qualified this is generally true; however in the
context of committee substitute it is reverse because the tax
rate is 25 percent and the credit is only 20 percent.
10:10:45 AM
Senator Stedman noted, "The magnitude of the tax is
approximately five to one versus the credit." As the tax is
increased, it would have substantially more impact than
increasing the credit percentage.
10:11:11 AM
Mr. Dickinson acknowledged this is correct at current oil
prices. However, at different prices the amount would vary.
10:11:32 AM
Page 29
The Governor's 3 Big Ideas
· Idea Three: We ought to get a fair share of tax
revenues when prices are high, especially if
reinvestment is low
· With high prices we are not getting a fair share
· We should be treated as fairly as other jurisdictions
while remaining competitive with them for reinvestment
Mr. Dickinson pointed out that investment dollars "would move
around" and Alaska must therefore remain competitive. Other
regimes protect, so must remain competitive. Other regimes act
in manners to protect their natural resources, and do not allow
investment to "escape", which the Governor's proposal intends to
accomplish.
10:12:15 AM
Senator Bunde asserted that the State should be treated fairly
and should treat industry fairly. Some discussions have given
him the understanding that either the Governor's proposal or the
Senate Resources Committee proposal is very competitive and
would provide a better tax break than other venues. He asked if
this information is accurate and whether Alaska would remain
competitive.
10:13:08 AM
Mr. Dickinson responded that "peer groups" to which Alaska could
be compared, Dr. Pedro Van Muirs concluded that the 20-percent
proposal would place Alaska in a better relationship to the
other jurisdictions than the 25-percent proposal would.
Mr. Dickinson cautioned on the need to be careful in comparing
Alaska to a location with large resources near tidewater and
markets and without arctic engineering challenges.
10:14:02 AM
Page 30
Fair Tax Rate
Governor's bill: 20%
Page 31
Fair Tax Rate
Governor's bill: 20%
CS pushes tax rate to 25% and adds progressive feature
Mr. Dickinson overviewed these pages.
10:14:27 AM
Page 32
Progressivity Surcharge
· Oil surcharge applies when oil price (ANS West Coast)
exceeds $40/bbl
(ANSwc - $40) x .0015
x ANS PV "wellhead" x taxable barrels of oil
Different definition for gross value at point of
production
· Deductible from PPT
Mr. Dickinson detailed the formula. The formula contained in the
committee substitute has several more terms, but those are
fixed.
Mr. Dickinson noted that although not expressively stated in the
bill, it is likely that a surcharge would be deducted as a
business expense in calculating PPT.
10:16:10 AM
Co-Chair Green asked why the formula includes both ANS West
Coast price and wellhead price.
10:16:40 AM
Mr. Dickinson replied that the ANS West Coast price just forms
an index and is taken as a marker to compare to the $40 amount.
The wellhead value would be lower by approximately $5 for 2005
and would likely increase to approximately $7. This definition
of the wellhead value is different than the gross value
definition.
10:17:36 AM
Senator Stedman surmised that the tax provision language could
require amending. The surcharge should not be a "double
deduction". He suggested stipulating an "in effect" or "after
tax deduction" to avoid this due to the calculation on the gross
rather than the net. The surcharge should not be embedded in the
formula and then allowed as a deduction. He preferred "one less
the PPT rate". He cautioned against allowing the surcharge to be
taken as a deduction, stating it would allow the industry to
"move expenses forward and backward" depending on the price of
oil or other factors for the benefit of industry versus the
State.
Senator Stedman next spoke to the issue of utilizing West Coast
pricing rather than West Texas pricing. Both options have
benefits and drawbacks. When this bill was under consideration
by the Senate Resources Committee, West Texas pricing was
originally proposed because it is considered a "more liquid
market, more actively traded and less likely to be manipulated."
That Committee amended the bill to provide for West Coast
pricing. In the event of decreasing production, the West Coast
pricing would be subjective to significant variations due to a
lower volume. However, the current version of the bill includes
language providing the State the ability to utilize a proxy if
published West Coast prices were not an "accurate reflection" of
the worth of the commodity. He acquiesced to the "logical
argument" for utilizing West Coast pricing.
Senator Stedman continued explaining that Alaska North Slope
wellhead (ANS) West Coast pricing, less the trigger amount of
$40, is the current formula. He noted the $40 amount is subject
to discussion. The ANS price, at the point of sale would be
multiplied by the taxable barrels to calculate the surcharge on
the barrels produced at the wellhead. This involves considering
"where the oil is produced" and "where the price is triggered
from".
Senator Stedman noted that the formula is not mathematically
correct, or "compressed" because the calculation would change if
the PPT rate was increased to .25, .3, or another amount. The
surcharge formula would be adjusted to "float with" the PPT rate
ultimately adopted. This is a "conceptually easier way" to
understand the PPT tax rate embedded in the formula.
10:22:40 AM
Co-Chair Green pointed out this is reflected in the committee
substitute.
10:22:43 AM
Senator Stedman affirmed. The actual formula would be longer.
The abbreviated formula is utilized at this stage to provide
clarity.
10:22:54 AM
Mr. Dickinson further confirmed this, stating that once the
legislature determines the PPT tax rate, the formula would be
compressed. This is intended to avoid drafting errors made
during the amendment processing of the bill remaining
unidentified before enactment into law.
10:23:22 AM
Senator Stedman supported this method, as he anticipated
significant discussion on the trigger point and the "slope
number".
10:23:46 AM
Senator Hoffman asked how often the formula would be calculated
and whether it would be done daily.
10:23:59 AM
Mr. Dickinson responded the formula would be calculated monthly.
10:24:04 AM
Senator Hoffman hypothesized the price of oil increasing from
$20 per barrel at the beginning of a month to $30 at the end of
the month, although at some point in that month reaching a
maximum of $40. He asked if in such an instance if the formula
would be calculated on the ending price of $30 and not take into
account the temporary higher price.
10:24:23 AM
Mr. Dickinson clarified the formula would be calculated on the
average daily price during the one month period.
10:24:41 AM
Senator Stedman asked if the Senate Resources Committee
substitute stipulated that a "weighed average" of "barrels
produced" would be utilized in the formula, rather than a
"simple average on barrels produced". He recommended the
weighted average, as it would take into consideration rate of
production at different price levels.
10:25:11 AM
Mr. Dickinson replied that over time, a "different effect" would
be experienced. He questioned the benefits of establishing
different triggers for each producer and subsequently different
calculations for every producer.
10:25:29 AM
Senator Stedman pointed out the need to amend the bill to
stipulate the use of "average" North Slope wellhead price,
nothing the multiple wellhead prices for the North Slope.
10:25:48 AM
Co-Chair Green asked if the intent is to be consistent with West
Coast prices.
10:25:58 AM
Senator Stedman affirmed, as he understood there to be several
wellhead prices for the North Slope. The State must specify
which would be utilized for these calculations. The
Administration could assist in accomplishing this.
10:26:11 AM
Mr. Dickinson informed that "gross wellhead" is already defined
in statute and proposed utilizing it for this tax as well. All
terms affecting the gross at the point of production are
detailed in the Department's regulations, including calculation
of the average, rounding, accounting for days not reported, and
addressing retroactive changes in reporting services. These
small amounts when accumulated are significant.
10:26:33 AM
Co-Chair Green clarified such regulations currently exist.
10:26:37 AM
Mr. Dickinson answered in the affirmative.
10:26:45 AM
Page 33
CS: Progressivity Feature
House Resource Progressivity Feature
[Line graph depicting additional billions of dollars in tax
based on the ANS West Coast price per barrel. The
additional tax is imposed at a price of $35bbl and
increases steadily to approximately $15 at a price of
$120bbl.]
This page was not discussed.
Page 34
Governor's bill provided a fair tax rate
ANS West Coast Price $70.00
Downstream Transportation (7.00)
Wellhead Value (gross) 63.00
Upstream Production Costs (7.00)
Production Tax Value (net) 56.00
20%
11.20
Percentage Gross 17.8%
Percentage Net 20.0%
And
Page 35
CS: How Does Progressivity Feature Work?
Progressivity
PPT Factor
ANS Wellhead (PV) $63.50
ANS wc $70.00
Downstream Transportation (7.00) 4.5%
Wellhead Value (gross) 63.00
Progressivity 4.5%
Progressivity Amount (2.90) 2.90
Upstream Production Costs (7.00)
Production Tax Value (net) 53.10
Mr. Dickinson stated that these pages, plus the following page,
provide a comparison of the committee substitute to the original
bill introduced at the request of the Governor.
10:27:34 AM
Page 36
How Does Progressivity Feature Work?
(Cont.)
Senate Resources CS
Progress-
PPT ivity Total
Production Tax Value (net) $53.10 $53.10
PPT Rate 25%
Total Tax 13.29 2.86 16.15
Percentage Gross 25.5% 28.8%
Percentage Net 21.1% 25.6%
Mr. Dickinson explained that the same ANS West Coast Price
figure of $70 is utilized in this chart. The tax has increased
to almost 29 percent calculated on the net.
10:28:09 AM
Senator Bunde asked if the 29 percent increase is to the current
economic limit factor (ELF) rates.
10:28:23 AM
Mr. Dickinson corrected that these are the "current rates". The
current "take on gross" for the North Slope on average is
approximately seven to eight percent.
10:28:43 AM
Senator Bunde requested further definition of the 28.8 percent
figure cited on Page 36.
10:28:52 AM
Mr. Dickinson replied this would be the effect of the committee
substitute at a price of $70 per barrel expressed as a percent
of the gross value at the point of production. This would
compare to the ELF tax, which also taxes at the gross value at
the point of production.
Senator Bunde asked the net tax in this scenario.
10:29:11 AM
Mr. Dickinson answered the net tax would be approximately 25.6
percent.
10:29:20 AM
Mr. Dickinson qualified that Senator Stedman had expressed that
he did not intend for this as calculated to be deductible.
Therefore, the actual amount would be higher. The current
language of the committee substitute provides that it would be
deductible.
10:29:39 AM
Senator Bunde had understood that a PPT rate of 25/20 would
result in a net tax burden of approximately 12 percent.
10:29:57 AM
Mr. Dickinson explained that a price per barrel of $70 would
trigger the progressivity increase. The cited amount includes
the progressivity feature.
10:30:16 AM
Senator Stedman referred to Mr. Dickenson's comment that the
percentage would be higher if treated as a deduction. Senator
Stedman again cautioned against double deduction, as
progressivity formula is written to reflect the deduction.
Senator Stedman reported that the consulting firm, EconOne, had
also calculated the Percentage Net at 25.6 percent under a 25/20
rate with a .2 escalator at $70 per barrel. That is an effective
tax rate estimated for 2007 to 2016. The formerly considered
six-year transition would have allowed deduction of 75 percent
of expenses incurred in FY 05, 50 percent deduction for FY 04
expenses, and 25 percent deduction for FY 03 expenses with an
exclusion of $75 million. He was unsure whether the percentages
include the six-year transition provisions.
Senator Stedman expressed intent to request that EconOne
recalculate the figures incorporating the changes made by the
Senate Resources Committee.
Mr. Dickenson indicated the Department has prepared a fiscal
note that includes this information. This would be detailed to
the Committee at a later date.
10:32:00 AM
Senator Hoffman, noting that the graph on Page 33 reflected
action of the House Resources Committee, requested a similar
chart reflecting the Senate Resources Committee substitute.
10:32:24 AM
Mr. Dickinson acknowledged the title of the graph is in error
and should read Senate rather than House. The data is reflective
of the Senate Resources Committee actions.
10:32:33 AM
Page 37
Governor's Bill: Other Provisions
· Monthly return filing
· 90% payment safe harbor
· Yearly true-up on 3/31
Ms. Wilson reiterated that the existent practice of producers
filing on a monthly basis would not change under either the
Governor's proposed legislation or the committee substitute.
Ms. Wilson stated that the Governor's version contained a 90
percent "safe haven" payment provision, which is similar to
citizens' estimated tax payments for federal personal income tax
returns. The intent is to accommodate for the necessary
estimates involved. As a matter of fairness, the Governor
determined that a safe haven be provided. This provision also
includes a "yearly true-up" on March 31, to correct any
differences between the estimates and the actual tax.
10:33:30 AM
Senator Stedman referenced the graph on Page 33, noting that the
exponential curve starts at the price per barrel of oil at $35
rather than $40. The higher amount is the point specified in the
committee substitute at which progressivity would take effect.
10:34:04 AM
Mr. Dickinson identified this as an error made in the graph. He
confirmed progressivity would begin at $40 under the provisions
of the committee substitute and stated that a corrected graph
would be prepared.
10:34:33 AM
Senator Stedman requested that once details including the tax
percentages had been agreed upon, other provisions, such as
"trigger points" could be discussed.
Co-Chair Green agreed.
10:35:03 AM
Page 38
CS: Other Provisions
· Monthly return filing
CS maintains
· 90% payment safe harbor
CS increases this to 95%
· Yearly true-up on 3/31
CS changes this to quarterly true-up
Ms. Wilson outlined the differences between the original bill
and the committee substitute.
10:35:22 AM
Co-Chair Green surmised that the producer would have less time
to reconcile discrepancies once the actual tax amount was
determined.
10:35:40 AM
Ms. Wilson affirmed that the true-up period would be shortened.
Governor Murkowski determined that an annual reconciliation
would be more appropriate.
10:36:07 AM
Page 39
Other Provisions in CS
Spill fee increases total fee 1¢ to 6¢
· Suspended fee (AS 43.55.201)
o 2 cents changed to 1 cent
· Non-suspended fee (AS 43.55.300)
o 3 cents changed to 5 cents
No Longer Creditable as in Governor's Bill
Ms. Wilson overviewed this information.
10:36:30 AM
Page 40
Other Provisions in CS
o Existing Private royalty oil tax rate set at 5%, 1.5%
in Cook Inlet
o Bill sets no tax rate on new private royalty lease
production
o Effective date changed from 7/1/06 to 4/1/06
Ms. Wilson explained that the commission of the Department of
Revenue would recommend a tax rate for new private royalty
leases; however no tax would be established until the
legislature took specific action.
10:37:14 AM
Ms. Wilson remarked that retroactive taxes are problematic from
effective date, from "a tax administration standpoint". The
Governor determined that July 1 would be a "fair" date for the
new tax structure to be implemented.
Ms. Wilson announced this concluded the prepared presentation.
10:37:48 AM
Co-Chair Wilken returned to Page 8 depicting Destination Value
at Market (2005). He asked if the referenced Point of Production
would be established at Pump Station 1.
10:38:15 AM
Mr. Dickinson replied that this is correct for resources
originating at Prudhoe Bay. Point of production for the Alpine
field and other sites would be established at the point the
resources enters a common carrier pipeline. Typically, the point
of production is established where the resource enters a
pipeline that has a published tariff.
10:38:43 AM
Ms. Wilson next spoke to the fiscal note provided for the
committee substitute. She directed attention to the final two
pages outlining the projected revenues. The calculations are
based on the projections of the Spring 2006 Department of
Revenue forecast. She detailed the information, noting the
comparisons of the original bill to the committee substitute and
to the existing tax structure.
10:40:48 AM
Ms. Wilson informed that the Department requests four additional
positions to administer the new tax structure: three auditors
and one tax technician. Although the workload would be somewhat
less, additional responsibility would be required.
10:41:33 AM
Ms. Wilson referencing page 3 of the fiscal note, spoke to the
transitional and auditing costs. Records of the prior five years
must be audited to implement the new structure. Funds would also
be necessary for costs associated with the adoption of new
regulations to provide for an immediate or retroactive effective
date.
10:42:21 AM
Senator Stedman asked if the information contained on the third
page of the fiscal note pertains to the Senate Resources
Committee substitute or a committee substitute adopted by a
House of Representatives committee, as stated.
10:42:46 AM
Ms. Wilson clarified that the fiscal note should state that the
information relates to the Senate Resources Committee
substitute.
10:42:52 AM
Senator Stedman spoke the issue of the proposed 20 percent tax
credit for exploration expenses and the effect this credit would
have on revenues for the State. He requested an explanation of
the "magnitude" of the credit and how it is addressed in the
fiscal note.
10:43:30 AM
Ms. Wilson deferred to Roger Marks, who would be giving the next
presentation.
10:43:45 AM
Senator Hoffman, speaking to the number of positions required to
administer the new tax. He surmised that transitioning from a
tax based on gross profits to one based on net profits could
jeopardize billions of dollars if the calculations were
incorrect. He asked if the four additional positions would be
sufficient for this undertaking.
10:44:18 AM
Ms. Wilson explained that the four mentioned new positions would
be in addition to three existing positions that are currently
vacant. Once filled, six positions would be utilized for this
purpose. Also, the Department intends to secure assistance from
outside auditors to garner baseline data. Many fields located on
the North Slope are under joint ownership and each producer
effectively monitors the expenses of the others. This
information would also be utilized, although the calculations
would not be solely dependent on producer-generated figures.
Safeguards would be in place to ensure that the data and
calculations were accurate.
10:45:43 AM
Senator Hoffman requested affirmation that the number of
requested positions to implement the committee substitute is
unchanged from that of the original version.
10:45:58 AM
Ms. Wilson answered this was correct. She qualified that
additional expenses would be incurred for the contractual costs
of writing new regulations to provide for the retroactive date
stipulated in the committee substitute.
10:46:30 AM
Co-Chair Wilken questioned the figure of $25.50 reflecting the
Department's forecasted price per barrel for FY 09.
10:46:49 AM
Ms. Wilson replied that the long-term forecast, which is updated
every two years, is currently projected at $25.50 for 2009 and
into the future. The fiscal note also provides calculations
using a price per barrel of $40.
10:48:23 AM
ROGER MARKS, Petroleum Economist, Department of Revenue, gave a
presentation titled, "PPT Revenue Studies, Presentation to
Senate Finance, Alaska Department of Revenue, March 31, 2006"
[copy on file].
10:49:58 AM
Page 2
Overview
o Description of tax
o Description of model
o Long-term cumulative revenues
o Annual revenues
o Effective tax rate
o State take
o Cook Inlet
Mr. Marks listed these items, which would be discussed in the
presentation.
AT EASE 10:50:15 AM
10:51:06 AM
Mr. Marks noted that due to time constraints, he would focus on
certain issues during this meeting, deferring others to the
following meeting.
10:51:32 AM
Mr. Marks provided observations on certain aspects of the tax
proposals.
10:51:44 AM
Page 5
Assist Small Companies & Attract New Investors
o Small Investors
o Bigger appetite for smaller targets
o New targets
o Diversity
o Less risk averse
o New Investors
o ANWR, NPRA
Mr. Marks reiterated Ms. Wilson's testimony that provisions were
contained in the original version of the bill to encourage
investors for both large and small new investors. One is the
ability to deduct costs. Historically, the tax has been based on
the gross value at the point of production and does not include
any capital or operating costs. Under this system, any
investments made do not reduce taxes. As a result, producers
could take the profits earned on Alaska operations and reinvest
those monies in localities where investments do reduce taxes.
Mr. Marks relayed that the Murkowski Administration determined
that small investors should comprise an important part of oil
development in Alaska. He listed the Nenana Basin, Minto Flats,
and the southern foothills of the North Slope as locations that
smaller investors would be interested in developing.
Additionally, opportunities would be available for new investors
to participate in the development of the Arctic National
Wildlife Reserve and offshore operations. Provisions in the bill
are intended to attract these investments.
10:53:48 AM
Page 6
Small & New Investors Mechanisms
o Selling credits
o Converting losses to credits
o Big NPV boost
o Standard allowance
o (5,000 - 0.2 x [ADP - 5,000])/ADP
ƒWhere ADP is average daily production for
company
ƒExpires after 2013
Mr. Marks characterized the Governor's proposal as a three-part
approach. Development of an oil field takes a couple of years
and requires investment during that time. Revenues would not be
achieved for several years. The original bill would allow
credits on the investment to be sold immediately. This would
"monetize credit on day one on a net present value (NPV)" and
would be a significant value for new investors.
Mr. Marks compared this to the current system in which
investments made on operations that prove unproductive would be
lost to the investor. A wildcat outfit that spent $10 million to
drill a well that "came up dry" would carry the entire burden of
that investment. Under the provisions of the Governor's
proposal, the investor could convert the expenses to credits and
sell those credits. The State would be "risk sharing" in these
activities would essentially pay 40 percent of the costs. The
State would pay 45 percent of these costs under the provisions
of the committee substitute. This is important for promoting
exploration.
Mr. Marks detailed the standard allowance. The original version
of the bill provides a standard allowance of "5,000 barrels per
day at a $40 barrel net income". Under the current system, small
fields pay no tax, a provision important to attract small
investors.
10:56:37 AM
Page 7
[Line graph showing the Percentage Allowance of the Company
Daily Production. At a production rate of 5,000 barrels per
day, the allowance would be 100 percent. The percentage of
the allowance would decrease as production increases and
would be eliminated at a production rate of 30,000 barrels
per day.]
Mr. Marks explained this graph depicts "what percentage of your
production is tax fee depending on what your total production in
the state is." No tax would be imposed on a production rate of
5,000 barrels or fewer per day. Daily production rates higher
than 5,000 would be assessed a tax on a percentage of the
barrels produced; for example 50 percent of the barrels produced
would be taxed on a production rate of 9,000 or lower. The tax
would be assessed on all barrels produced for production rates
of 30,000 barrels and higher.
10:57:43 AM
Senator Bunde asked if the graph reflects the original bill or
the committee substitute.
10:57:49 AM
Mr. Marks responded this information pertains to the provisions
in the Senate Resources Committee substitute.
10:57:55 AM
Mr. Marks gave examples of the amount of barrels that would be
taxed for independent operators developing smaller fields.
10:58:42 AM
Mr. Marks noted that all producers would receive a tax waiver on
the first 5,000 barrels produced each day. Because this is
"gauged to income" as prices increase and decrease, the number
of tax free barrels would vary.
10:59:41 AM
Senator Dyson asked if smaller producers would make an effort to
limit production to less than 5,000 barrels per day to avoid the
tax, thus extending the production over a longer period.
11:00:12 AM
Mr. Marks replied that the incentive for doing this is
insignificant because the allowance percentage is provided on a
sliding scale. Forgoing the revenue of $50 per barrel to save
the tax is illogical unless the tax rate is very high. He was
also unsure why a producer would limit production under a net
present value basis, thus delaying earnings. He remarked, "Time
is everything in business."
11:00:50 AM
Senator Stedman informed that the under the provisions of the
original bill, at a price per barrel of $40, approximately $14.6
million of production annually would be tax free per producer.
The number of producers operating in the future is unknown,
although it is hoped that more producers would be operating and
that production would be higher than the current level. The
forgone tax on $14.6 million annually for each producer would
over ten to twenty years be a significant amount of lost revenue
to the State. Concern was expressed in the Senate Resources
Committee that the "large exclusion" would raise questions. The
amended provision in the committee substitute represents a "re-
manipulated" of the tax exemption. However, new concerns have
been raised that the amended provision could be too restrictive.
Regardless, the intent is to have "a tax-free holiday [of] less
than 5,000 barrels for all the companies."
Senator Stedman emphasized this is one portion of the incentives
for smaller producers. The other portion is a "two for one look-
back". This matter should be revisited by this Committee.
11:03:17 AM
Co-Chair Green announced that Mr. Mark's presentation would
continue the following day.
ADJOURNMENT
Co-Chair Lyda Green adjourned the meeting at 11:03:52 AM
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