Legislature(2013 - 2014)SENATE FINANCE 532
02/28/2013 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB23 | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 23 | TELECONFERENCED | |
| + | SB 21 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
February 28, 2013
9:09 a.m.
9:09:08 AM
CALL TO ORDER
Co-Chair Kelly called the Senate Finance Committee meeting
to order at 9:09 a.m.
MEMBERS PRESENT
Senator Kevin Meyer, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Anna Fairclough, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Sarah Fisher-Goad, Executive Director, Alaska Energy
Authority, Department of Commerce, Community and Economic
Development; Nick Szymoniak, Project Economist, Alaska
Energy Authority; Ted Leonard, Executive Director, Alaska
Industrial Development and Export Authority; Representative
Pete Higgins; Brian Rogers, Chancellor, University of
Alaska Fairbanks; Daniel Sullivan, Commissioner, Department
of Natural Resources; Bryan Butcher, Commissioner,
Department Of Revenue; Michael Pawlowski, Advisor,
Petroleum Fiscal Systems, Department of Revenue; Joe
Balash, Deputy Commissioner, Department of Natural
Resources.
PRESENT VIA TELECONFERENCE
Merrick Pierce, Self, North Pole; Luke Hopkins, Mayor,
Fairbanks North Star Borough.
SUMMARY
SB 21 OIL AND GAS PRODUCTION TAX
SB 21 was HEARD and HELD in committee for further
consideration.
SB 23 AIDEA: LNG PROJECT; DIVIDENDS; FINANCING
SB 23 was HEARD and HELD in committee for further
consideration.
SENATE BILL NO. 23
"An Act relating to development project financing by
the Alaska Industrial Development and Export
Authority; relating to the dividends from the Alaska
Industrial and Export Authority; authorizing the
Alaska Industrial Development and Export Authority to
provide financing and issue bonds for a liquefied
natural gas production system and natural gas
distribution system; and providing for an effective
date."
Co-Chair Meyer MOVED to ADOPT the proposed committee
substitute for CS SB 23 (FIN) Work Draft 28-GS1738\C
(Bailey, 2/16/13).
Senator Olson OBJECTED for the purpose of discussion.
9:10:23 AM
AT EASE
9:11:41 AM
RECONVENED
Senator Olson wondered what changes were proposed in the
committee substitute. Co-Chair Kelly replied that the
changes were mostly technical changes.
Senator Olson WITHDREW his OBJECTION. There being NO
OBJECTION, the proposed committee substitute was ADOPTED.
SARAH FISHER-GOAD, EXECUTIVE DIRECTOR, ALASKA ENERGY
AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC
DEVELOPMENT, introduced herself.
NICK SZYMONIAK, PROJECT ECONOMIST, ALASKA ENERGY AUTHORITY,
introduced himself.
TED LEONARD, EXECUTIVE DIRECTOR, ALASKA INDUSTRIAL
DEVELOPMENT AND EXPORT AUTHORITY, introduced himself.
Ms. Fisher-Goad discussed the PowerPoint, "SB 23 AIDEA
Development Project Financing for a Liquefied Natural Gas
Production and Distribution System." She highlighted slide
2, "Interior Energy Plan."
-Opportunity to provide Alaskans with low-cost North
Slope natural gas and propane
-Governor's finance package acts as a catalyst,
bringing together LNG and propane customers with the
private entities that will construct and operate the
system
-AIDEA is investigating project feasibility and will
only utilize their authorized finance tools if the
project makes economic sense
-AIDEA will take an equity stake in project but will
not outright build or operate the LNG plant or
distribution system
-Governor's finance package is targeted at funding the
initial capacity with future expansion funded by
private/community investment
Ms. Fisher-Goad looked at slide 3, "Project Goals."
-Provide lowest-cost energy to Interior Alaska
consumers as soon as possible
-Get gas first to the Interior while assuring long-
term access to gas and propane from liquefaction plant
for all Alaskans
-Utilize private sector mechanisms as much as possible
Ms. Fisher-Goad highlighted slide 4, "Project Description."
-Natural gas will be liquefied on the North Slope and
trucked to Interior Alaska
-Propane will be produced and delivered to Interior
and Rural Alaskans
-Primary LNG demand anticipated to be Fairbanks and
North Pole
-LNG will be temporarily stored andre-gasified in
Interior Alaska
-Natural gas distribution system with storage to
supply natural gas for heating
9:18:20 AM
Mr. Szymoniak looked at slide 6, "LNG Lowers Energy Costs."
Expected Utility Price per Mcf
-Wholesale LNG: $10.15
-Natural Gas to home: $13.42-$17.00 per Mcf
-Delivered price is equal to $1.79 -$2.27 per gallon
of fuel oil
Key Assumptions
-Initial costs associated with a 9 Bcf plant at start
up
-Snapshot in time, costs change with expansion
-LNG plant bifurcated into two sections (industry and
utility)
-$50 million capital cost reduction applied to 6.5 Bcf
utility section
Mr. Szymoniak highlighted slide 7, "Heating Energy Supply
Comparison."
Trucked LNG is the lowest-cost option for Interior
Alaska heating
-Electricity would need to be $0.04 -$0.06 per
kWh to compete with trucked LNG
-Electricity would need to be much cheaper to
compete with fuel oil
Mr. Szymoniak looked at slide 8, "Plant Use and Expansion."
Plant Expansion
-LNG plant will expand as the demand for natural gas
increases
-Size or timing of expansion is driven by demand
-Customer count includes residential and commercial
users
-Second expansion is possible based on pipeline timing
9:24:55 AM
Vice-Chair Fairclough wondered if there was a consideration
of the University related to future demand. Mr. Szymoniak
responded that there were discussions with the University
regarding the use of LNG, and was not included as an
explicit line item. Ms. Fisher-Goad furthered that there
were discussions with the University of Alaska Fairbanks
(UAF) about replacing the combined power plant, but the
project was merely a possibility.
Vice-Chair Fairclough remarked that she was looking for a
holistic plan to address the energy needs in the area, and
the state was approached for a significant amount of money
for the co-generation plant at UAF.
9:28:05 AM
Ms. Fisher-Goad remarked that AIDEA was incorporating what
UA's issues and their potential plans into the discussion.
She agreed that there should be a holistic approach, but
felt that it was not as simple to address.
Senator Dunleavy wondered if the high end cost was
incorporated into the gas the costumer purchased. Mr.
Szymoniak replied in the affirmative.
Senator Dunleavy looked at slide 9, and wondered if there
was going to be a gas conditioning plant on the slope that
was not included in the plan. Mr. Szymoniak replied that
the plant proposal was included in the LNG.
Senator Dunleavy wondered if the plant was located as a
sub-set of the LNG. Mr. Szymoniak responded in the
affirmative.
Mr. Szymoniak looked at slide 9, "Capital Cost Breakdown."
-Based on "Mid Cost" scenario
-Economies of scale achieved in LNG plant as
additional 4.5 Bcf trains are added
-Costs for expansions are cumulative
-Does not include trucking capital
Mr. Szymoniak highlighted slide 10, "Household Heating
Savings."
Typical Home Heating Savings
-$2,900 -$3,750 annually
-43 percent -55 percent reduction in cost
Key Assumptions
-Typical Interior Alaska household will use 225
Mcf of gas per year (equivalent to 1,700 gallons
of fuel oil)
-Does not account for expected improvement in
heating efficiency with natural gas
9:33:40 AM
Mr. Szymoniak discussed slide 11, "Reduce Fuel Price
Uncertainty."
Reduced price variability
-Small portion of delivered LNG price is natural
gas cost
-Fuel oil prices are much more volatile than
trucked LNG
-Trucked LNG is cheaper even when oil prices drop
Key Assumptions
-Fairbanks fuel oil price is based on linear
regression analysis
-Natural gas price uses publicly available
information on LNG supply contracts
Mr. Szymoniak looked at slide 12, "Air Quality."
Conversion to natural gas should reduce air pollutant
emissions in Fairbanks and North Pole
-Will reduce overall emissions of PM 2.5
-Fairbanks is presently a non-attainment area for
PM 2.5
-Potential public health benefits of natural gas
is substantial
Impact on Federal funding and economic development
-Alaska risks losing Department of Transportation
and Public Facilities funding if State fails to
submit an attainment plan to EPA
-Federal projects in the area face funding
hurdles while area is non-attainment
-Cleaner, healthier air in Fairbanks will promote
economic development
9:38:00 AM
Mr. Szymoniak highlighted slide 13, "Long Term Use of LNG
Plant."
LNG Plant will be used after gas pipeline
-Plant can serve Rural Alaska before gas pipeline
is constructed
-Expect opportunity to sell LNG to new industrial
users both before and after pipeline
-Information in chart is for demonstration only
Senator Hoffman remarked that there should be a
demonstration project for the river and highway system.
Senator Bishop felt that there were people in Fairbanks
that needed propane soon.
Senator Dunleavy remarked that the LNG concerns were across
the state. He wondered if the cost dealt with the main or
to a residence. Mr. Szymoniak responded that the cost
included from the main, but did not include the meter at
the residence, and he agreed to provide that information.
9:45:58 AM
Senator Dunleavy surmised that there could be a main, but
the resident may not be able to afford to get the gas. Mr.
Szymoniak replied that it was an aspect that AIDEA was
examining, and announced that there were a variety of
different programs that could help fund that.
Mr. Leonard stated that a proposal declared that a hookup
would cost $300 to $400 for the family, with a conversion
of the appliances at an additional cost. He felt that there
would be an overall savings.
9:51:03 AM
Mr. Leonard looked at slide 15, "Governor's Finance
Package."
$50 million General Fund appropriation
-Directly reduces the cost of LNG
$150 million AIDEA bonds
-3 percent to 4.5 percent interest rate (depending on
tax-exempt status of component financed and market
rates)
-$125 million SETS capitalization
-3 percent interest rate (set by SB23/HB74)
-Flexibility to provide optimal commercial structure
$325 million total 2013 package
$30 million natural gas storage credit
-$15 million tax credit per qualifying storage tank
-Created through previous legislative action
-$355 million total Governor's package
Co-Chair Meyer asked for a description of the SETS program.
Mr. Leonard responded that the SETS program was the
Sustainable Energy Transmission and Supply Development
Fund.
9:57:50 AM
Co-Chair Meyer noted that the money to fund the program
came out of the general fund. Mr. Leonard responded that.
the original loan participation fund started with an
original amount that had grown 200-300 and was to grow the
fund as more loans were issued. He stated that the interest
back from the loan went to the state.
Co-Chair Meyer noted that there was a charge association
with the debt service and inquired how it was factored into
the loans. Mr. Leonard replied that if they issued bonds on
loan participation there would also be interest revenue
from the
Co-Chair Meyer stated that he understood the program itself
and noted that the fiscal note did not show all the
financing that as being proposed. Ms. Fisher-Goad agreed to
provide more information.
10:03:49 AM
Co-Chair Meyer felt that the fiscal note should reflect the
different financing. Mr. Leonard responded that // He
stated that slide 16 reflected that concern.
10:07:46 AM
AT EASE
10:07:58 AM
RECONVENED
Co-Chair Kelly handed the gavel to Co-Chair Meyer.
Vice-Chair Fairclough looked at slide 2, and then slide 9.
She surmised that the low cost startup was projected at
$368 million, and the high cost startup was $481 million.
Mr. Leonard agreed, and furthered that he hoped that the
number would be narrowed soon. He explained that the
numbers were based on the proposals from the letters of
requests for interest.
10:10:51 AM
Vice-Chair Fairclough assumed that, if the state was
providing $355 million at a low cost scenario, carrying 95
percent of the risk. Mr. Leonard agreed, but looked at
slide 16. He shared that there would be $70 million from
the private sector. He stressed that AIDEA had provided an
explanation of their process and analysis that is
undertaken to determine the different phases.
Vice-Chair Fairclough remarked that there needed to be
equal insurance between the public sector contribution and
the state's investment. Mr. Leonard responded that the
state would be involved in the initial build out and
distribution. He explained that AIDEA's risk would only be
involved in the original startup.
10:19:48 AM
Vice-Chair Fairclough noted that the state would have an
equity interest at 86.4 percent, and a private sector
investment of 3.7 percent. Mr. Leonard replied that one
must look at the difference of the distribution system. He
explained that AIDEA would not have an equity position in
the distribution system, but it would have an equity
position in the plant.
Vice-Chair Fairclough wanted the interior of Alaska to have
low-cost energy, but remarked that the state was going "all
in" on this investment. She pointed out that it was
mitigated through bond packages and state structures. She
queried the qualifications of the private investors,
because their risk was mitigated by the state's investment.
Mr. Leonard responded that AIDEA conducted a due diligence,
to verify that the investors had the financial capacity to
maintain their side of the deal with expertise to run a
proposed plant.
Co-Chair Meyer commented that the state's storage credit
was $30 million, the state appropriation was $50 million,
and the SETS loan was $125 million, with total general fund
capital at $205 million. He felt that those numbers should
be outlined in the fiscal note.
10:25:49 AM
Senator Hoffman looked at slide 7, and commented that the
risk should be analyzed based on what the users were
currently paying with the probability of the cost of oil in
Fairbanks exceeding $5 or falling below $2. He felt that
the economy and the Fairbanks residents would suffer, if
action was not taken quickly.
Mr. Leonard looked at slide 17, "SETS Loan Interest Rate."
SETS Loan interest rate has minimal impact on LNG
Price
-Assumes 30-year loan term
-Reduces natural gas price by $0.25 per Mcf
10:34:01 AM
Mr. Leonard discussed slide 18, "Project Timeline and
Milestones." He stated that AIDEA was embarking on the
feasibility phase of the project, and planned to have that
phase complete by June 2013. He explained that the end goal
was to provide gas by the second quarter of 2015.
Vice-Chair Fairclough surmised that AIDEA could take no
more than one-third equity interest. Mr. Leonard explained
that the SETS program had a limitation that stated that
without legislative approval, AIDEA could not participate
in direct financing of a project under SETS. He remarked
that AIDEA could participate in direct financing in other
projects from between 23 percent to 100 percent ownership.
Co-Chair Meyer handed the gavel to Co-Chair Kelly.
10:39:35 AM
MERRICK PIERCE, SELF, NORTH POLE (via teleconference),
testified in support of SB 23. He furthered that the bill
should be amended to ensure that AIDEA was required to
complete full due diligence in the best possible method for
delivering natural gas to Fairbanks. He felt that LNG
trucking was not the best method. He stressed that LNG had
many problems including high out backs, it was the most
dangerous method for transporting LNG, gas contracts would
link the gas to the price of oil, and there was no propane
availability.
LUKE HOPKINS, MAYOR, FAIRBANKS NORTH STAR BOROUGH (via
teleconference), testified in support of SB 23. He
commented that AIDEA had approached the legislation
appropriately. He remarked that the legislation was
important, because it backed a project that had viability.
He remarked that the build out of the LNG plant and
distribution was important to the community of Fairbanks.
10:45:13 AM
BRIAN ROGERS, CHANCELLOR, UNIVERSITY OF ALASKA FAIRBANKS,
explained that UAF had a 50-year-old power plant that
provided most of its heat and electricity. He stated that
there were approximately 250 universities in the country
that had similar combined heat and power plants, and most
of them were gas. He explained that UAF spent $9.8 million
on heat and power for the campus.
Vice-Chair Fairclough was concerned about the operating
costs and remarked that there would be $0.5 million in
operating costs annually. She stressed that she wanted to
find an overall solution, rather than an incremental
solution.
Vice-Chair Fairclough stressed that the federal government
tended to postpone coal plant permits. Chancellor Rogers
understood that risk. He stressed that the plant would be a
replacement plant, so it would reduce emissions. He also
pointed out that it was lower than the regulatory limit.
SB 23 was HEARD and HELD in committee for further
consideration.
10:50:24 AM
RECESSED
1:34:24 PM
RECONVENED
SENATE BILL NO. 21
"An Act relating to appropriations from taxes paid
under the Alaska Net Income Tax Act; relating to the
oil and gas production tax rate; relating to gas used
in the state; relating to monthly installment payments
of the oil and gas production tax; relating to oil and
gas production tax credits for certain losses and
expenditures; relating to oil and gas production tax
credit certificates; relating to nontransferable tax
credits based on production; relating to the oil and
gas tax credit fund; relating to annual statements by
producers and explorers; relating to the determination
of annual oil and gas production tax values including
adjustments based on a percentage of gross value at
the point of production from certain leases or
properties; making conforming amendments; and
providing for an effective date."
1:36:28 PM
DANIEL SULLIVAN, COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, provided a Power Point presentation titled
"Arresting TAPS Throughput Decline and Oil Tax Reform"
(copy on file). He discussed that the department would
provide an overview of the bill and would discuss the
challenge related to TAPS throughput decline, it would also
underscore that the continued decline was not inevitable.
Commissioner Sullivan looked at slide 2, "TAPS - A Critical
State and National Energy Asset."
-The Trans Alaska Pipeline, 11 pump stations, several
hundred miles of feeder pipelines, and the Valdez
Marine Terminal constitute the Trans-Alaska Pipeline
System (TAPS).
-At 800 miles long, the Trans Alaska Pipeline is one
of the longest pipelines in the world; it crosses more
than 500 rivers and streams and three mountain ranges
as it carries Alaska's oil from Prudhoe Bay to Valdez.
-The U.S. Congress was instrumental in the approval
and rapid development of TAPS. Congress approved
construction of the pipeline with the Trans Alaska
Pipeline Authorization Act of 1973.
-The principle focus of this Act is as relevant today
as it was in 1973: "the early development and delivery
of oil and gas from Alaska's North Slope to domestic
markets is in the national interest because of growing
domestic shortages and increasing dependence upon
insecure foreign sources."
1:40:20 PM
Commissioner Sullivan turned to slide 3 with the same
title.
-TAPS has transported over 16.3 billion barrels of oil
and natural gas liquids since June of 1977. Production
peaked at 2.2 million barrels per day in the late
1980s, representing 25 percent of U.S. domestic
production
-Since its peak, however, throughput has steadily
declined; today, TAPS is 2/3 empty and declining at an
average of 6 percent per year
-TAPS throughput decline threatens economic disruption
and the very existence of our pipeline
-We must encourage industry to invest in exploration
and development of conventional and unconventional
resources on state and federal land, onshore and
offshore
-TAPS has plenty of capacity for increased throughput
-Most near-term critical economic issue facing the
state
-Less oil in the pipeline year after year takes away
revenue from future generations-the ultimate giveaway
-Reconfiguration, 1.2 million barrels/day
He directed attention to slide 4, "Oil Tax Reform -
Production History." He stated that the opportunity on the
North Slope continued to be "enormous." He looked at the
urgency of the issue on slide 5, "TAPS Throughput Decline
is an Urgent Problem." The discussion was not a scare
tactic. He relayed that the issue was real and needed to be
addressed. He referred to a prior shutdown of TAPS due to a
pipeline leak, and opined that the state had dodged a
bullet in the dicey situation. He pointed out that it had
not been clear that the line would be restarted.
Commissioner Sullivan continued to discuss slide 5. The
best way to address the technical issues was to increase
throughput. There were significant consequences for the
state and country.
Commissioner Sullivan moved to slide 6, "Alaska's North
Slope Oil and Gas Potential."
USGS estimates that Alaska's North Slope has more oil
than any other Arctic nation
-OIL: Est. 40 billion barrels of conventional oil
(USGS & BOEMRE)
-GAS: Est. over 200 trillion cubic feet of
conventional natural gas (USGS)
Alaska has world-class unconventional resources,
including tens of billions of barrels of heavy oil,
shale oil, and viscous oil, and hundreds of trillions
of cubic feet of shale gas, tight gas, and gas
hydrates
-Positive methane hydrate test production
1:46:20 PM
Commissioner Sullivan turned to slide 7, "U.S. Energy
Renaissance." The opportunity was enormous for the country.
There had been a huge oil and gas investment boom in the
past several years worldwide. He provided amounts including
$650 billion. The state of Alaska received less than 1
percent of the total in the prior year. He stressed that
the state needed to take back its lead in the production
industry.
Commissioner Sullivan moved to slide 8, "Other Basins have
Turned Decline Around." Every major basin was turning
around their throughput decline with the exception of
Alaska.
"The expansion has been spurred by record-breaking
levels of investment, with about £40bn set to be
ploughed into North Sea production in the next three
years…"
"The surge in investment comes after the government
relaxed the tax regime around North Sea development,
prompting a record-breaking licensing round when the
Department of Energy and Climate Change awarded 167
new licenses on 330 blocks last October."
Commissioner Sullivan pointed to pages from the Wall Street
Journal on slide 9. He quickly moved to slide 10 showing
natural decline rates that had been turned around. He moved
to slide 11 titled "Other Basins have Turned Decline Around
- Historical Oil Production." He emphasized that the line
chart was probably the most important slide that would be
presented to the committee. He discussed that the yellow
line represented Texas, Alaska was blue, North Dakota was
red, and Alberta was brown. He discussed that movement had
been remarkably similar for many years; however, all of the
basins had started turning their production curve around."
The only place that oil companies had not increased their
production was in Alaska. The department believed that it
was directly related to Alaska's unfriendly tax regime.
1:53:44 PM
Commissioner Sullivan addressed slide 12 titled Secure
Alaska's Future - Oil."
Secure Alaska's Future-Oil is the State's
comprehensive strategy to increase TAPS throughput to
one million barrels a day.
I. Enhance Alaska's global competitiveness and
investment climate
II .Ensure the permitting process is structured
and efficient
III. Facilitate and incentivize the next phases
of North Slope development
IV. Promote Alaska's resources and positive
investment climate to world markets
1:57:37 PM
Senator Hoffman did not believe there was one individual in
the state that did not want to add more oil into the
pipeline. He discussed the necessity of volume. He shared
that the number heard from the industry in order to turn
the investment field around was between $2 billion to $4
billion. Commissioner Sullivan responded that the
department had worked to encourage production, but the
growing sense that action was needed. He was reluctant to
speak for the oil and gas industry, because it was
important for them to address the committee directly. One
of the items in the proposal was focused on balancing the
system and increasing production. The imbalance made the
state treasury incredibly vulnerable. He shared that DNR
should be making the state more competitive with peers in
other basins when the companies were most eager to invest.
He discussed large tax credits for companies that did not
commit to any production.
2:02:42 PM
Senator Hoffman stated that the issue was the most
important facing the state for upcoming decades. He wanted
to ensure that the state had enough revenue to provide
services until the oil came online, but there would be a
big question mark about when or if the oil would ever come
online.
Senator Olson wondered how the state would not just provide
giveaways to the oil companies. Commissioner Sullivan
replied that the department had taken a hard look at the
issue. The governor's initial proposal looked at balancing
the system with a strong focus on incentivizing production.
Many people did not know that explorers received cash
checks from the state, so the incentives needed to be more
closely tied to production.
2:06:11 PM
Senator Olson believed much of the bill addressed existing
production. Commissioner Sullivan replied that the
governor's bill was not a snapshot way to increase in state
revenues, but it was a balance. At higher prices, ACES
inhibited the needed investment. One of the challenges was
related to progressivity and the bill was very focused on
new production and credits for oil.
Senator Bishop pointed to slide 5. He discussed that the
department had been onsite working around the clock. He
relayed that there were workers responsible for getting the
pipeline up and running. He stated that money was being
well spent on workforce development. Commissioner Sullivan
agreed. He added that there had been some problems with the
Environmental Protection Agency (EPA).
Co-Chair Meyer pointed to slide 14 and asked where the
governor's bill would put Alaska in the range on the slide.
Commissioner Sullivan would follow up with an answer.
2:11:38 PM
BRYAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE,
provided a Power Point presentation titled "Oil Tax Reform:
Creating a Durable Production Tax System that is
Competitive for the Long Term Benefit of Alaskans." He
moved to slide 2, "Principles of Reform."
Tax reform must:
1. Be fair to Alaskans.
2. Encourage new production.
3. Be simple so that it restores balance to the
system.
4. Be durable for the long-term.
Commissioner Butcher turned to slide 3 titled "Challenges
in the Current Tax System." The department would discuss
declining production, progressivity, and tax credits at a
later time. He looked at slide 4 titled "Rising Prices and
Declining Production." He directed attention to slide 5
titled "Rising Prices and Declining Production." He talked
about gross value in production versus gross value of the
ANS oil price.
2:19:29 PM
Commissioner Butcher pointed to slide 6, "Rising Prices and
Declining Production."
Less production = less potential value for both the
state and producers.
In FY 2008 an ANS price of $96.51 yielded
approximately $20.4 billion in gross value.
By FY 14, a price that is $13 higher will yield a bit
more than $3 billion less in gross value.
Commissioner Butcher looked at slide 7, "Rising Prices and
Declining Production Observations."
1.High prices have generally offset declining
production over the past several fiscal years.
2.As production has continued to fall however, the
level of production tax generated by high oil prices
has fallen.
3.But, the level of production tax revenues have
fallen faster than production.
4.The question is why?
Commissioner Butcher moved to slide 9, "The Progressivity
Function."
Found in AS 43.55.011 (g)
Based on the Production Tax Value (PTV)
When the PTV exceeds $30 per barrel of oil equivalent
(BOE) the tax is levied at:
-.4 percent per dollar until the PTV/bbl = $92.50
-.1 percent per dollar that the PTV/bbl is
greater than $92.50
-Maximum rate of 50 percent (in addition to 25
percent base tax)
Calculated monthly
A single statewide calculation on all oil and gas
Co-Chair Meyer wondered if DOR promoted a bracket of
progressivity. Commissioner Butcher replied that DOR would
like not progressivity.
2:26:20 PM
Commissioner Butcher looked at slide 10, "Progressivity:
How it is Calculated."
Based on page 108 of the 2012 Fall Revenue Sources
Book.
Taxable Production: 170,262,000
GVPP = Gross Value at the Point of Production.
PTV = Production Tax Value.
Commissioner Butcher presented slide 11, "Progressivity:
How it is Calculated." He explained the following
equations:
Calculating the Progressivity with a PTV/bbl = $64.87
$64.87 - $30 = $34.87
Because the PTV/bbl < $92.50
$34.87 x .004 § percent
The 13.95 percent progressive tax is then applied to
the PTV/bbl of $64.87 not to the $34.87
$64.87 x 13.95 percent = $9.05 per barrel
Therefore: the $9.05 progressive tax + $16.22 (25
percent) base tax = $25.27 production tax per barrel
before credits.
Multiplied by the taxable production (170,262,000
bbls) = $4,302 million
Commissioner Butcher discussed slide 12, "Observations."
Progressivity increases the overall tax rate as the
overall profitability (before state and federal income
taxes) rises.
Remember, progressivity is company specific and each
company will have a different exposure because
progressivity is sensitive to:
-The oil price.
-Spending.
-Production.
Progressivity is only one part of what makes the
overall system progressive; it is not a factor at low
oil prices.
2:30:06 PM
Commissioner Butcher looked at slide 13, "Example 1: New
Capital Spending in Fiscal Year 2014."
Based on page 108 of the 2012 Fall Revenue Sources
Book.
Taxable Production: 170,262,000.
Increased capital spending by $500 million from
$3,338.6 million to $3,836.6 million.
CAPEX per barrel goes from $19.61 to $22.55 per
barrel.
Commissioner Butcher highlighted slide 14, "Example 1: New
Capital Spending in Fiscal Year 2014."
Calculating the Progressivity with a PTV/bbl = $61.93
-$61.93 - $30 = $31.93
-Because the PTV/bbl < $92.50
-$31.93 x .004 §