Legislature(2017 - 2018)SENATE FINANCE 532
04/15/2017 09:01 AM Senate FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| Presentation: Mr. Roger Marks, Consultant, Legislative Budget and Audit Committee | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | HB 111 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
SENATE FINANCE COMMITTEE
April 15, 2017
9:00 a.m.
9:00:47 AM
CALL TO ORDER
Chair Giessel called the Senate Finance Committee meeting
to order at 9:00 a.m.
SENATE FINANCE COMMITTEE MEMBERS PRESENT
Co-Chair Anna MacKinnon
Co-Chair Lyman Hoffman
Vice-Chair Click Bishop
Senator Peter Micciche
Senator Donald Olson
Senator Shelley Hughes
Senator Natasha von Imhof
SENATE FINANCE COMMITTEE MEMBERS ABSENT
none
SENATE RESOURCE COMMITTEE MEMBERS PRESENT
Chair Cathy Giessel
Vice-Chair John Coghill
Senator Natasha von Imhof
Senator Bert Stedman
Senator Shelley Hughes
Senator Kevin Meyer
Senator Bill Wielechowski
SENATE RESOURCE COMMITTEE MEMBERS ABSENT
none
ALSO PRESENT
Roger Marks, Legislative Consultant, Legislative Budget and
Audit Committee; Senator Gary Stevens, Senator Mia
Costello, Representative Chris Birch.
SUMMARY
HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
HB 111 was HEARD and HELD in committee for
further consideration.
PRESENTATION: MR. ROGER MARKS, CONSULTANT, LEGISLATIVE
BUDGET AND AUDIT COMMITTEE
CS FOR HOUSE BILL NO. 111(FIN) (efd fld)
"An Act relating to the oil and gas production tax,
tax payments, and credits; relating to interest
applicable to delinquent oil and gas production tax;
relating to carried-forward lease expenditures based
on losses and limiting those lease expenditures to an
amount equal to the gross value at the point of
production of oil and gas produced from the lease or
property where the lease expenditure was incurred;
relating to information concerning tax credits, lease
expenditures, and oil and gas taxes; relating to the
disclosure of that information to the public; relating
to an adjustment in the gross value at the point of
production; and relating to a legislative working
group."
9:00:47 AM
^PRESENTATION: MR. ROGER MARKS, CONSULTANT, LEGISLATIVE
BUDGET AND AUDIT COMMITTEE
9:01:50 AM
Chair Giessel relayed that HB 111 was heard for the first
time in the Senate Resources Committee the previous day.
She informed that the joint committee would have two
meetings to hear testimony from legislative consultants.
ROGER MARKS, LEGISLATIVE CONSULTANT, LEGISLATIVE BUDGET AND
AUDIT COMMITTEE, introduced himself and noted that he was
on contract with the Legislative Budget and Audit
Committee. He discussed the presentation, "Evaluation of HB
111," (copy on file).
Mr. Marks showed 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, oil and gas explorer/producers, pipeline
companies, commercial/investment banks, private equity
firms
•1983-2008: Senior petroleum economist with State of
Alaska Department of Revenue Tax Division
-Statutory and regulatory design
-Economic and commercial valuation of exploration,
development, production, transportation, refining,
marketing, taxation
-Analysis of international competitiveness
-North Slope gas commercialization
Mr. Marks discussed his work pertaining to oil production
tax policy and associated legislation.
9:04:38 AM
Mr. Marks displayed slide 3, "North Slope Oil Price ($/bbl)
- The Alignment of Misery," which showed a line graph
depicting a drop in oil prices starting at the end of 2014.
He wanted to discuss that the state's budget woes from
lower oil taxes were matched by the taxpayers having less
money to pay the taxes. He additionally wanted to explore
the issue of how the misery of low oil prices was allocated
between the state and taxpayers under current statute and
the proposed HB 111.
Mr. Marks turned to slide 4, "Two Themes":
1. The alignment of misery:
-The state's budget woes from lower oil taxes are
matched by the taxpayers' having less income to
pay them
2. How is the misery of low prices allocated between
State and taxpayers under SB 21 and HB 111?
Mr. Marks remarked that for his evaluation of HB 111, he
would generally present the approach he took in practicing
economics and in practicing tax administration when he
worked for the department. He thought the method would help
enlighten multiple perspectives and the impacts to all
parties.
Mr. Marks showed slide 5, " Fair Share: Understanding
Impacts to All Parties":
•State
-Development of resources for maximum benefit of
its people
•Taxpayers
-Investor demands
-Competitive opportunities
-Cash flow constraints
Mr. Marks relayed that as he considered the information, he
believed that maximizing the long-term benefit of resource
development in the state was competitiveness. In his career
he had actively participated in efforts to both increase
and decrease taxes when it appeared that what Alaska was
receiving was out of line with international competitive
norms.
9:07:07 AM
Mr. Marks discussed slide 6, "Current North Slope Income
Legacy Fields (Old Oil)":
•ANS Market Price ($/bbl) $55
•Less Transportation ($10)
•GROSS Revenue $45
•Less Upstream costs ($23) *
•DIVISIBLE Income $22
•Less State Taxes & Royalties ($11)
•Less Federal Income Tax ($4)
•PRODUCER after-tax net income $7
* DOR average estimate based on reported and audited
costs. Including transportation, Alaska about $5-
$15/bbl higher than average Lower 48 costs. Newer oil
upwards of $10-$20/bbl more expensive.
Mr. Marks informed he would be focusing on the North Slope
and some basic numbers for his presentation. He
characterized the slide as a basic income statement for
current North Slope activity for legacy fields. He pointed
out that he would be discussing gross value (market price
plus transportation cost); which was sometimes called
"wellhead value" and was the basis for royalties and
taxation.
Mr. Marks continued to discuss slide 6, noting that when
considering gross revenue less upstream costs, it resulted
in divisible income. Divisible income was available to be
divided between the government and investors before taxes.
Divisible income could also be called production tax value
(PTV). He specified that a break-even price was
approximately $40 under the assumptions on the slide.
Mr. Marks spoke to slide 7, " Economic Barometer on Fair
Share: "Government Take"":
Defined: Percentage of divisible income that goes to
government
Allows:
Look at tax on its own terms
Systematic comparison to other similar jurisdictions
Compare proposal to status quo
Looks at all taxes / royalties
Mr. Marks explained that 'Government Take' was a cash flow
snapshot of who received what funds. He stated that for an
investor or taxpayer, the total amount paid for production
tax and royalties was most important, as opposed to how
much was paid for each. He stated that government take was
not a perfect tool. He referred to comments by fellow
consultant Rich Ruggiero that suggested that sometimes
timing of revenue was more important than the quantity of
revenue. He thought that timing issues had more of a role
in rate-of-return type fiscal systems that were in play in
production sharing contracts. Alaska was a cash-flow type
tax system, and he wanted to compare the state to other
such systems. Government take provided a tool for analyzing
tax.
9:11:54 AM
Mr. Marks spoke to slide 8, which showed a bar graph
entitled "Government Take at $55/bbl Market Price." He
explained that when government take was used as an analysis
tool, there were areas of judgement that needed to be
exercised. It was important to consider the peer group, or
what states Alaska would be compared to. He had looked at
places that had investment opportunities where the physical
terms were established in a similar context as Alaska; and
additionally, places where the geological and cost contexts
were similar. On the slide, the peer group of tax and
royalty regimes were basic Western industrialized
democracies. In the group, the taxes were governed by
statutes and regulations established by democratically
elected legislators.
Mr. Marks continued discussing the bar graph on slide 8,
explaining that he had put a threshold of 400,000 barrels
per day. He asserted that another area in which to compare
regimes was cost. He explained that every jurisdiction on
the slide had cost variability, as did Alaska. He had
access to a number of informational databases and the graph
depicted a good estimate of the average cost for production
under development in peer group of regimes.
Mr. Marks continued to discuss slide 8, indicating that the
regimes being compared were across the bottom axis of the
graph, and the government take on the left-hand column. The
graph assumed an oil price $55 per barrel (bbl). He stated
that of the five United States regimes represented; all of
them had royalties, and three had production taxes based on
gross revenue. Of the five international regimes; three had
royalties, one had a production tax. All the ten regimes on
the graph had corporate income taxes.
9:14:41 AM
Co-Chair Giessel stated that Alaska was commonly compared
to Norway, and wondered if the country had a royalty tax.
Mr. Marks answered in the negative. He furthered that the
country had a combination of two different taxes that
basically functioned like an income tax, at about 78
percent of net income. He characterized the structure as a
neutral system - whether oil prices were high or low, the
tax was roughly 78 percent and neither progressive nor
regressive. He added that oil taxes in the United Kingdom
were similarly structured.
Senator Meyer asked where Alaska fit within the group.
Mr. Marks stated he would address Alaska's position in the
group later in the presentation.
Senator Wielechowski thought that Alaska was in the 60
percent range, but was unsure if it signified that the
state took 60 percent of $55/bbl. He referred to a
presentation by the Department of Natural Resources from
the previous day, which had shown that at $60/bbl the state
received $2.03, which was an effective tax rate of a couple
percentage points. He asked if the number was accurate and
thought the oil companies got transportation costs, lease
expenditure costs, and profit.
Mr. Marks looked at slide 10, "Government Take SB 21
(Legacy Fields)," which showed a line graph that
demonstrated how Alaska fit in to the peer group. At
$55/bbl, the government take was 67 percent of the
divisible income. He stated that later in the presentation
he would discuss the production tax amount.
9:17:31 AM
Senator Micciche asked to go back to slide 6. He referred
to the $22 in divisible income indicated on the slide, and
thought the government take of $15 would equate to 60
percent.
Mr. Marks confirmed that 15 percent divided by 22 percent
would be the government take.
Senator Micciche asked to go back to slide 8. He pondered
the 68 percent, and wondered if there was an equivalent
comparison with the peer group list on the slide.
Mr. Marks stated that given that government take was
looking at the percentage of divisible income that went to
government, the comparison was looking at the same metric.
Senator Stedman referred to slide 8, and asked for
discussion on how the private royalties were handled in
Texas and North Dakota. He asked for more information on
the regime in North Dakota, which was frequently used as an
example for comparison. He noted that the state of North
Dakota did not own sub-surface rights.
Mr. Marks affirmed that the states of Texas and North
Dakota both had a number of different royalty rates
depending on the ownership structure of the land. He
explained that to be conservative he was using a royalty
rate of 19 percent for North Dakota, and a royalty rate of
25 percent for Texas.
Senator Stedman thought the amounts sounded reasonable. He
expressed interest in discussing the calculations further
with Mr. Marks after the meeting. He expressed a desire to
recognize the minimum tax range within the $55/bbl range.
9:20:34 AM
Senator Stedman asked to review slide 6. He thought there
was several ways to view the information, including by
changing the order of information and view production tax
value. He wondered if Mr. Marks could elaborate on the
matter.
Mr. Marks stated that divisible income was much like
production tax value, and the government take being
examined was exactly the split of divisible income (or
production tax value) between the government and the
investor.
Senator Stedman thought that royalties would come out
first. He thought the point of the list was to demonstrate
production tax value, and acknowledged the list could be
presented in many ways.
Mr. Marks stated that in calculating taxes and royalties,
the portion of production was paid, and taxes were paid on
the non-royalty portion. The spreadsheet showed the
financial impact of both royalty and production tax. He
thought one could do a slightly different split to
calculate what happened after deduction of royalty. He
believed it was important in looking at total government
take, in terms of analyzing the real outcome of the tax.
9:23:06 AM
Senator Stedman agreed that it was important to look at all
components, but reiterated that he wanted his colleagues to
look at the total value rather than merely per barrel
numbers. He commented that a previous discussion included
the total production tax value moving about $1.3 billion.
He thought it was possible to forget the magnitude of what
was being discussed.
Mr. Marks returned to slide 8, which showed the government
take at $55/bbl.
Mr. Marks turned to slide 9, "Government Take Competitive
Boundary," which showed a line graph with one descending
blue line. All prices between $40/bbl and $100/bbl were
examined for an average government take among the ten
regimes, which created the blue line on the graph entitled
"Competitive Boundary." There was high take at low prices,
and lower take at high prices. There was a general
regressive pattern, because most of the jurisdictions were
on a gross taxation basis. He stated he would talk more in
detail about the reasoning behind the shape of the line. He
explicated that generally if the government take fell above
the line, it was not competitive; and if government take
fell below the line, it was competitive. He stated that he
would present the competitive boundary when he showed the
impacts of the current tax and the proposed tax.
9:25:11 AM
Mr. Marks went back to slide 10, which had a line graph
showed how SB 21 [Oil and gas tax reform legislation that
passed in 2013] lined up with the competitive boundary. He
noted that when SB 21 had been designed, its goal was to
get a government take of between 60 and 65 percent at high
oil prices. Since that time, competitive jurisdictions had
dropped taxes in response to low prices. In the peer group;
United Kingdom, Norway, and Alberta had done so. He pointed
out the difference between Alaska and the competitive
boundary as shown on the graph. He noted that every one
percent difference in government take represented about $30
million.
Co-Chair Giessel asked if Mr. Marks could elaborate on the
gap between lines on the left-hand side of the graph below
$60/bbl. She wondered why Alaska was so different than the
competitive boundary.
Mr. Marks stated that most of the jurisdictions were taxing
on gross, and most of them had a royalty based on gross.
The graph showed the percent of the net value (not gross
value) that went to government. When taxing on percent of
gross, it was a much larger percent of net, because net was
so low. The reason Alaska was so much higher was not due to
the tax system, but rather the fact that the state's costs
were so much higher. He compared Alaska's $10/bbl
transportation cost compared to most Lower-48 production
with $3/bbl. The extra cost of doing business on the North
Slope raised the tax from $5 to $10 more than the average
Lower-48 cost. The higher costs resulted in how the graph
manifested at the low end.
9:28:03 AM
Senator Stedman asked if it was possible to get a breakdown
of slide 10 with major components including minimum tax,
royalty, income tax, and property tax. He also requested
Mr. Marks to help the committee understand how tax credits
were used in the calculations.
Mr. Marks agreed to provide additional information through
the Legislative Budget and Audit Committee.
Mr. Marks showed slide 11, "Calculation of SB 21 Tax":
Higher of
-Net calculation
OR
-Gross Minimum Tax (market price less transportation):
4% of gross*
Can use loss carryforward credits to bring tax below
gross minimum
* Legacy fields are on gross minimum tax until about
$65/bbl
Mr. Marks explained that net income signified gross value
after subtracting the upstream costs. He explained that the
gross was the market price less transportation.
Mr. Marks turned to slide 12, "Basic Net Calculation for
North Slope Legacy Fields (Old Oil)":
Net calculation:
35% X Net Value
less sliding scale per barrel produced credit
Mr. Marks reiterated that net value was divisible income or
the production tax value.
9:30:46 AM
Mr. Marks turned to slide 13, "Sliding Scale Credit Per
Barrel Produced Calculation: Legacy Fields":
•Gross value less than $80/bbl: $8/bbl
•$80-$90/bbl: $7/bbl
•$90-$100/bbl: $6/bbl
•$100-$110/bbl: $5/bbl
•$110-$120/bbl:$4/bbl
•$120-$130/bbl:$3/bbl
•$130-$140/bbl: $2/bbl
•$140-$150/bbl: $1/bbl
•Over $150/bbl: $0/bbl•For old oil cannot use credit
to bring tax below gross minimum tax
Mr. Marks discussed how the net calculation was done. As
prices went up, the per-barrel credit went down. Under the
current statute for the legacy fields, the per-barrel
credit could not be used to bring tax below the gross
minimum. Carry-forward losses could be used to bring tax
below the gross minimum.
Mr. Marks turned to slide 14, "The $45/bbl Gross Pie
($55/bbl market price)," which showed a pie chart. He mused
about the purpose of a per-barrel credit. He stated he
would discuss gross taxation. He addressed the pie chart on
the slide. Of the $45/bbl gross amount, $23 was upstream
costs, and $22 was divisible income. Royalty was based on
gross value, so half of a royalty payment to the state was
for costs. With gross as the basis, half the royalty would
be a payment on cost; which was the reason that at low
prices, the government take was so high.
Mr. Marks spoke to slide 15, "The $45/bbl Gross Pie
($55/bbl market price)." The slide showed the same pie
chart as the previous slide, broken down into who received
the divisible income. He commented on the breakdown between
the state, the federal government, and producers.
9:33:07 AM
Mr. Marks referred to slide 16, " January 2016: The $20/bbl
Gross Pie($30/bbl market price)":
Costs $23/bbl (115%)
State $4/bbl (20%)
Feds -$2/bbl (-10%)
Producers -$5/bbl (-25%)
•Taxpayers pay 16% of $20, plus property tax, while
they are $3 in the hole
•Government take is off the charts (Slide 10)
Mr. Marks discussed why the information on slide 16 was not
interpreted into a pie chart. He indicated that Excel could
not process the numbers for a chart when the costs exceeded
the amount of the whole. He noted that in January 2016,
there was $20 in gross revenue and $23 in cost. Producers
started out $3 in the hole, and paid royalty and property
tax. If producers had prior loss carry-forwards, it could
be used to bring tax below the 4 percent of gross. If not,
the producers would be paying 16 percent of the $20 gross.
Mr. Marks turned back to slide 10 to illustrate the graph
in an even lower price scenario, where the government take
would be off the charts.
Senator Stedman wanted more information on how tax credits
affected the share calculation. He asked if it was common
around the world that the industry took business risk (and
low-price risk), and most sovereigns structured business
relationships to have a constant revenue source.
Mr. Marks answered in the affirmative. He stated that most
fiscal systems around the world were regressive; and took a
high government take at the low end, and a low government
take at the high end. In Alaska the industry took a high
end at the low-price scenario, and a high end at the high
price scenario. He relayed that he would be discussing the
rationale for the system. In most regressive systems the
taxpayer took the low side risk, but received a bigger
share of the upside as a trade-off. He informed that he
would be concluding his presentation by explaining how the
typical regressive system did not happen in Alaska.
9:37:41 AM
Mr. Marks turned to slide 17, "Disadvantage of Taxes &
Royalties Based on Gross (vs. Net)":
•Ever increasing gross/net value divide
•Net more reflective of actual economics
•Under gross a field with $20/bbl costs is taxed the
same as a field with $50/bbl costs
•A net system automatically adjusts
•Some other jurisdictions do tax on gross
-Alaska's high costs exacerbate the problem
•At prices under $65/bbl Alaska essentially operating
on a gross system
Mr. Marks commented that Alaska had a gross system through
2006, and had changed due to declining production. Under a
gross system companies could not deduct upstream costs. As
the North Slope was extending to more and more expensive
fields, there was an ever-increasing gap between gross
value and net value, and taxing on growth was distorting
the economics. He stated that taxing on the net profit was
much more reflective of the actual economics. He used the
example of Kuparuk River Unit which had a number of fields
with much different production costs. Under a gross system,
all fields paid the same amount in tax because the upstream
costs were not being deducted.
Mr. Marks restated that most other jurisdictions taxed on
gross value, but Alaska's high costs exacerbated the
problem. With a "higher-of" system in which gross and net
were being compared, legacy fields switched from gross to
net at about $65/bbl. Until prices reached $65/bbl, Alaska
operated under a gross system.
Mr. Marks showed slide 18, "Govt Take With and Without Per
Barrel Credit - SB 21 Legacy Fields," which showed a line
graph. As prices went higher, cost was a smaller slice of
the gross amount, and royalty based on growth became less
of a problem. As prices increased, the tax rate was
lowered. The goal in 2013 was to get a government take
between 60 percent and 65 percent to be competitive.
Mr. Marks explained that the blue and green lines on the
graph represented SB 21 and the competitive boundary,
respectively. He highlighted the red line, which showed
what the government take would be without a sliding scale
credit. The effect made a huge difference in making the tax
competitive and off-setting the negative aspects of taxing
on gross at low prices.
Mr. Marks displayed slide 19, "Summary: Sliding Scale Per
Barrel Produced Credit":
•Adjustment of effective tax rate to offset high
royalty at low prices
•Economically should not be considered a credit or
called a credit
•An important feature
9:41:50 AM
Senator Wielechowski asked to return to slide 18. He asked
if Mr. Marks was suggesting that the state should lower its
tax rate.
Mr. Marks reiterated that the red line on the graph on
slide 18 showed what the government take would be if Alaska
did not have the sliding scale per-barrel royalty. The
slide had illustrated that the point of putting the feature
in SB 21 was to bring the government take down competitive
international norms.
Senator Wielechowski reiterated his question as to whether
the state should be lowering its tax rate.
Mr. Marks referred to the blue line, which showed the
current system under SB 21. He noted that at prices above
$50/bbl, the state was fairly competitive. Prices below
$50/bbl yielded a higher government take because of the
state's higher costs.
Senator Wielechowski referred to the revenue forecast, and
numbers provided by DNR. He pondered that if the government
take was 100 percent at $40/bbl, it was 100 percent of
virtually nothing. According to the Department of Revenue,
Alaska received $1.23/bbl out of an oil price of $40/bbl,
which was an effective tax rate of 3 or 4 percent. He
considered that between a price of $40/bbl and $55/bbl, the
state got virtually nothing because any funds were paid
back in tax credits. He offered that the estate had tax
credit liabilities of hundreds of millions of dollars.
Senator Wielechowski compared Alaska's tax scenario to the
State of North Dakota, where he had seen 25 percent to 30
percent royalty rates for private land owners. He thought
if one examined the raw numbers of monetized oil running
through the pipeline; North Dakota was at an effective tax
rate of 35 percent to 40 percent, which equated to between
$3 billion and $4 billion. He asked Mr. Marks if the state
should adopt the tax and royalty structure of North Dakota,
and wondered how much more the state would get with the
change.
Mr. Marks turned back to the bar graph on slide 8, and
acknowledged that North Dakota had a healthy government
take given the assumptions used on the slide. He was happy
to look at Alaska under North Dakota's system if requested.
He stated that he would discuss the tax credit situation as
he furthered his presentation. He acknowledged that
Alaska's tax credit situation was a problem given the
state's cash flow issue. He did not disagree with Senator
Wielechowski that the affordability of oil credits at
current oil prices for Alaska was a significant issue.
Co-Chair Giessel referred to the low profit per barrel
number that DOR had presented, and asked if it included
only the severance tax or other things such as royalty,
corporate income tax, etc.
Mr. Marks understood that the DNR numbers were only
considering the production tax.
9:46:44 AM
Senator Stedman referred to North Dakota, and recalled the
state had a royalty rate of 20 percent or higher. He
thought Alaska's net system had an advantage relative to
the gross systems; and thought the state should balance its
high-cost environment and be able to compete against North
Dakota's structure. He asked Mr. Marks if he could tie in
the relationship between the 35 percent base tax and the
per-barrel deduction to get the effective tax rate down. He
mentioned net operating loss (NOL) and carry-forwards,
which he wanted to be included in the ongoing discussion.
Co-Chair Giessel suspected the matter would be addressed in
the several hours of testimony that would follow.
Senator von Imhof thought it was important to look at the
combined nature of all the different mechanisms that SB 21
encompassed. She referred to testimony the previous day
that suggested considering the mechanisms separately could
have unintended consequences. She referred to slide 18, and
thought the red line reminded her that HB 111 removed the
$8 per barrel credit. She thought it seemed that the state
may be uncompetitive at any oil price. She found it
interesting that Alaska took a 100 percent minimum tax at
prices of $40/bbl or below. She thought North Dakota might
also be examining the tax regime practices of Alaska.
9:50:10 AM
Mr. Marks looked at slide 20, "Tax Rate Vocabulary":
•Statutory Rate:
-Nominal rate in tax code applied to some base
that may be increased or decreased by other
factors
•Effective Rate:
-Tax as percentage of pre-tax income (divisible
income)
•Marginal Rate:
-How much additional tax is when price goes up $1
•Can look at the production tax in isolation or all
taxes and royalties as a whole
•Investor economics depend on the total payments to
government without regard to specific sources
Mr. Marks had been asked to present tax rate vocabulary;
and explain the difference between statutory rates,
effective rates, and marginal rates. He discussed
differences in statutory tax rates. He thought it was not
possible to go far in discussing the statutory tax rate in
isolation without referring to everything it applied to. He
thought the effective rate was a much more useful concept.
He reiterated that investors cared most about the total tax
that would be paid, rather than the amount of the
components.
Mr. Marks discussed slide 21, "Effective and Marginal Prod
Tax and Total Tax/Roy Rates - SB 21," which showed a line
graph. He explained that the bottom two lines were the
effective and marginal production tax rates under SB 21. He
pointed out the top two lines were total tax royalty. He
recalled that Ken Alper (Tax Division Director for the
Department of Revenue) had shown a similar graph the
previous day; but used numbers from the average North Slope
cost instead of a legacy field.
Mr. Marks continued discussing slide 21, addressing the
bottom line representing marginal severance tax rate. He
discussed how the marginal rate varied with price. He
looked at the line depicting the total tax royalty
effective rate. He commented that the Alaska marginal tax
rate was higher than the worldwide competitive norm.
9:54:36 AM
Senator Micciche referred back to slide 8. He thought it
was clear that more dollars went into the GF than in the
past tax regime. He asked how many of the tax regimes on
the slide would be at 100 percent of government take at the
oil price of $40/bbl.
Mr. Marks preferred to contemplate the question further
before offering an answer.
Senator Micciche thought the number would be next to zero,
considering that most were on a gross tax basis. He
referred to slide 6, and thought most of the regimes were
based on the economics of drawing investment. He asked how
many successful oil producing regimes were based on the
philosophy of wanting more money.
Mr. Marks thought most regimes were similarly based on
trying to get as much profit as possible while keeping a
competitive environment. He thought the dynamics were a bit
skewed because of the high percentage of income the state
gathered from oil, where most other regimes had a more
balanced and diverse source of income.
9:57:08 AM
Vice-Chair Bishop referred to slide 21, which was modelled
on legacy fields. He thought Mr. Marks had commented that
Ken Alper had modelled after the aggregate of North Slope
fields.
Mr. Marks referred to the Revenue Source Book. He conveyed
that 90 percent of production was from legacy fields. He
stated he would discuss new oil.
Senator Stedman thought there were distortions embedded in
the system. He referred to the current structure of a 35
percent tax rate, and thought the state could have just as
well set a 45 percent or 55 percent tax rate and increased
the per-barrel deduction. He thought the committee should
try and get as many of the distortions out of the system.
Mr. Marks commented that focusing on the statutory rate was
a limited exercise without considering how it interacted
with the whole. He thought solely focusing on the statutory
rate could not go far in understanding the tax.
9:59:44 AM
Senator Wielechowski asked to return to slide 8, and
recalled that the royalty rate in Texas was 25 percent for
private land owners.
Mr. Marks relayed that there was a variety of royalty rates
in Texas. The high end was 25 percent, which he used for
the analysis in order to be conservative.
Senator Wielechowski asked about the gross tax in Texas.
Mr. Marks answered in the affirmative.
Senator Wielechowski had a hard time comprehending that the
government take in Texas was the same as that in Alaska. He
wondered about corporate income tax and sales tax in Texas.
Mr. Marks stated that the combined state and federal rate
was 36 percent in Texas.
Senator Wielechowski suggested that if there was $10
billion of oil going down the pipeline, royalties and taxes
would add up to $3.6 billion in Texas. In Alaska, the state
would only get $1.5 billion in royalties and taxes for $9
million worth of oil in the pipeline.
Mr. Marks stated that the big difference was that in Texas
it was not necessary to spend $10 per barrel to get oil to
market, which made a huge difference in the value of the
oil.
Senator Wielechowski stated that there was tremendous value
to the fact that Alaska had a net profit system. He thought
it was not possible to compare Texas and Alaska fairly,
since Alaska had a net system and Texas was able to write
off all its costs.
Mr. Marks stated that the $10 per barrel cost made an
enormous difference in the value of the oil in terms of low
oil prices.
10:02:57 AM
AT EASE
10:04:26 AM
RECONVENED
Senator Wielechowski clarified that the transportation
costs were incurred in large part to Aleyeska pipeline,
which was owned by the oil companies. So in large part, the
$10 per barrel was staying in the same company.
Mr. Marks emphasized that nearly all tax tariff was a
repayment of actual costs incurred. He relayed that most of
the Trans-Alaska Pipeline System (TAPS) had been recovered
through depreciation, and there was a small amount of
undepreciated costs on which a profit was made.
Mr. Marks displayed slide 22, "New Oil":
•Defined
-Units created after 2002
-Fields in older units created after 2011
-Extensions of existing fields
-About 5%-10% of total oil
•Can cost $10-$20/bbl more than legacy fields
•Differential tax provisions
-Gross reduced by 20% in calculating production
tax value
•(Reduced by 30% for high royalty fields)
-Per barrel credit set at $5/bbl at all prices
-Can use per barrel credits and loss carryforward
credits to bring tax below gross minimum tax
Mr. Marks explained that sometimes new oil was referred to
as "GVR oil," since there was a gross value reduction to
the oil. He explained that unlike legacy oil, it was
possible to have a per barrel credit for new oil.
10:07:10 AM
Mr. Marks showed slide 23, "Govt Take for New (GVR) Oil -
SB 21," which showed a line graph. He pointed out that
starting on the left-hand side, the blue line representing
Alaska government take was very high. He explained that it
was possible for companies to use loss carry-forwards as
well as a per-barrel credit to bring taxes down to zero.
The graph showed high government take that occurred when
there was zero tax. He explicated that even with no tax,
companies were paying $33 in upstream costs, $10 in
transportation, property tax, and a royalty based on gross.
He calculated that a tax would kick in at an oil price of
about $75/bbl. The break-even price under the assumptions
on the slide was about $55/bbl.
Mr. Marks turned to slide 24, "Govt Take for New (GVR) Oil
- SB 21 - Focus on $55 - $75." He reiterated that at
$55/bbl price, the government take would be 80 percent; and
at $75/bbl price (when oil companies began paying tax),
there was a competitive boundary. He understood the
department's concern about companies not paying taxes on
"new oil." He thought the economics for new oil, even
without taxes, was very daunting.
Co-Chair Giessel reminded that the legislature had put a
timespan on new oil the previous session. The limit was 7
years, or 3 years if the price of oil reached $70/bbl.
Mr. Marks discussed slide 25, "Major Economic Provisions of
HB 111 - North Slope":
•Floor hardened to gross minimum tax
•No per barrel credits for legacy fields
•Base rate on net reduced from 35% to 25%
•Progressivity after ptv exceeds $60
•Fields are ring-fenced for exploration/development
•Elimination of refundable credits
•After 7 years losses carried forward lose 10%
Mr. Marks stated that he would focus on the North Slope. He
stated that the first four points on the slide were four
major economic parameters, and he would later explain how
the items affected government take. He informed that he
would discuss other provisions in the bill such as ring
fencing, elimination of refundable credits, and reducing
the value of loss carry-forward credits after 7 years.
10:10:53 AM
Mr. Marks showed slide 26, "Ring Fencing / Refundable
Credits":
•PPT was set up in 2006 to ring fence a company's
operations North Slope-wide
-A company with production could offset its
exploration / development costs
-This provided a very significant net present
value benefit
•Refundable credits were originally designed to put
explorers/developers on an even basis with producers
-A company with no offsetting income could
realize the tax value of expenditures in the same
timely manner
•By ring fencing exploration / development separately
and eliminating the refundable credits, the net
present value of exploration / development costs are
significantly diminished to everyone
•The state's cash affordability of refundable credits
is an issue
•The way most of the rest of the world does it:
-Company operations are ring-fenced jurisdiction-
wide
-Explorers/developers carry their losses forward
without refundable credits until they have
offsetting income
Mr. Marks explained that ring fencing and refundable
credits were related. He explained that ring fencing
signified (in tax parlance) the size of the entity that was
being examined for tax calculations. He gave the example of
the United States, which was ring fenced for corporate
income taxes; one could offset income in one state through
losses in another. Oil fields and geographic areas could be
ring fenced.
Mr. Marks relayed that ConocoPhillips was developing the
Willow field under the ring fencing provision. Under the
status quo, the company could offset the cost for Willow
with income from Prudhoe Bay; but could not under the
provisions of HB 111. He thought the committee would be
hearing from Conoco Phillips in the following days. He
encouraged the committee to ask the company what the
legislation would do to the rate of return and viability of
the Willow project. He suspected the bill would have a
significant impact.
10:13:26 AM
Mr. Marks continued to discuss slide 26, noting that in
2007 refundable credits were established to put non-
producers and producers on an even basis. Without
refundable credits, an exploring company with no offsetting
income would have to wait for production to deduct costs.
Mr. Marks explained that previously, all parties were on
the same basis for the positive value of the economics; and
HB 111 would put all parties on the same basis in terms of
the negative value of the economics (not being able to
monetize the losses in a timely manner). He thought it was
difficult to determine the state's cash affordability of
refundable credits.
Senator Hughes thought that slide 26 indicated that the
combination of ring fencing and refundable credits would
deter exploration and development and thereby reduce future
production and revenue.
Mr. Marks thought that the scenario would reduce the net
present value for investors. He thought that some viable
projects would not be so without ring fencing and
refundable credits. He thought there were situations in
which refundable credits could be given and result in
either successful exploration or not.
10:17:37 AM
Mr. Marks turned to slide 27, "Reduction of Carried Forward
Losses After 7 Years":
•If losses are incurred and not deducted:
-Production tax value artificially elevated
-Application of the nominal tax rate will result
in an artificially elevated tax
•Punishes taxpayers for delays not of their doing
Mr. Marks explained that a provision of HB 111 was a 10
percent annual decline of loss carry-forwards after 7
years. He thought there had been a representation that part
of the provision was intended to provide incentive for
earlier development. He had observed that there were many
reasons that projects did not move forward that were
unrelated to the investor. He thought the state should not
send the message for companies to work with haste (in order
to avoid losing value of tax deductions) due to the fragile
arctic environment.
Senator Meyer asked if it was safe to say that some delays
were due to permitting or negotiations with the North Slope
Borough, both of which were not within the producer's
control.
Mr. Marks answered in the affirmative, pointing out that
one of Conoco Phillips fields was delayed for years over
the issue of building a bridge in a certain area versus
building a pipeline underneath the ground. Negotiations
between the company and regulators had taken a lot of time.
Senator Stedman thought the federal government allowed for
the carry-forward of losses for 20 years. He mused about
the appropriate amount of time to allow for carry-forward,
and referred to problems in the Arctic with delays of
implementation. He thought letting carry-forward of losses
run for the long term it was problematic for accounting. He
asked for Mr. Marks to comment on the subject.
Mr. Marks commented that not only did the federal
government allow for 20 years of loss carry-forwards, but
losses could also be carried back for two years to get
additional net present value. He thought that if it was not
possible to deduct costs, ultimately the tax rate applied
would be to an artificially high income base. He opined
that he would not place any time limitation on carrying
losses forward. He suggested that no one was more motivated
to get projects moving than the investors themselves.
10:21:40 AM
Vice-Chair Bishop spoke to the last bullet on the slide,
and reminded that litigation was a new component to
consider. He referred to a mine nearby that took over
twenty years of litigation before production. He thought
there was merit in extending the seven-year time period for
loss carry-forwards.
Vice-Chair Coghill referred to variability of commodity
prices. He thought it was important to consider that a
long-term investment in Alaska had to go through economic,
litigation, and commodity price cycles. He echoed the words
of Vice-Chair Bishop.
Mr. Marks showed slide 28, "Hardening the Floor":
•Losing costs
-Suppose gross value is $21/bbl
-Suppose upstream costs are $25/bbl
-So there is a $4/bbl loss
•There are two parts to the $25/bbl cost:
-Part that took income down to zero
($21/bbl)
-The other part that took income below zero
($4/bbl). This is the loss.
-When paying on the gross minimum tax, by
hardening the floor, and carrying the losses
forward, only those latter costs get recovered.
The former never do.
•January 2016 Situation (Slide 16):
-With the hard floor, taxpayers would have been
$3 in the hole, then paid royalties and property
tax, and then paid production tax.
10:24:20 AM
Senator Stedman referred to extensive dialogue over the
previous years regarding hardening the floor. He thought
there was $80 million worth of $5 credits that would go
below the floor in 2017; and suggested it would change the
investment dynamics of companies it applied to. He thought
if the floor was hardened it was important to consider how
to not negatively distort the economics of projects.
Mr. Marks stated that he would present a slide that would
explicitly demonstrate the effects of hardening the floor,
particularly regarding the economics of legacy fields.
Mr. Marks looked at slide 29, "Section 21: Gross Value May
Not Be Less Than Zero":
•High pipeline costs are not a trivial occurrence
-Pt Thomson, Smith Bay, etc.
•In circumstances of high pipeline costs and low
prices gross value could be less than zero
•Production tax value (ptv) is gross value less
upstream costs
•Losses are negative production tax value
•If gross value has a floor of zero, those costs that
brought ptv below zero are never recovered
Mr. Marks relayed that the tariff for the Point Thomson
pipeline was between $15/bbl and $20/bbl. The cost was so
high due to the settlement between the operators and the
state, in which the state had insisted that the operators
build a pipeline that could transport 70,000 barrels per
day. He thought much of the capacity of the pipe was empty
and still being paid for. He mentioned very high pipeline
costs as the Western North Slope was developed.
10:27:44 AM
Senator Stedman asked if the state ring fenced Point
Thomson, if it would disallow the producer to take losses
from other areas where there was a gain. He asked about
hypothetical distortion of economics by different ring
fencing configurations.
Mr. Marks informed that after the initial development of
Point Thomson, the project was probably not losing money.
Ring fencing could affect the economics of large-scale
development. Under the existing code, he thought the Smith
Bay project would get refundable credits, which would be a
huge amount of money. He discussed offsetting of costs in
the absence of ring fencing, and thought Smith Bay would
probably be ring fenced.
10:30:45 AM
Mr. Marks turned to slide 30, "Government Take: Legacy
Fields." He stated that for the rest of the presentation he
would show government take graphs, comparing SB 21 and HB
111. He explained that the four basic elements working
dynamically in the graphs were the hardening of the floor,
the repealing of the per-barrel credits, the drop in the
tax rate (from 35 percent to 25 percent), and progressivity
at higher prices.
Mr. Marks showed slide 31, "Government Take - SB 21 vs. HB
111 - Legacy Fields," which showed a graph which
illustrated the government take for legacy fields. The
bottom line showed the competitiveness boundary, and the
top line showed HB 111. He wanted to focus on the range of
prices between $50/bbl and $70/bbl, where the was a huge
gap between SB 21 and HB 111.
10:32:06 AM
Mr. Marks showed slide 32, ""Government Take - SB 21 vs. HB
111 - Legacy Fields - Focus on $50 - $70." He stated that
under SB 21, the change-over from gross to net happened at
$65/bbl. Under HB 111, the switch from gross to net
happened at $40/bbl. He noted that the difference between
the graph and the previous graph was entirely attributable
to getting rid of the per-barrel credit. He discussed the
importance of the per-barrel credit in tempering the tax to
be within international norms. At $55/bbl, the difference
between the two bills (for legacy fields) was 8 percentage
points and in government take (about $1.60/bbl).
Senator Wielechowski referred to the lower green line
representing the competitive boundary, and was distressed
to hear the state was not competitive. He referred to
Security and Exchange Commission (SEC) filings from Concoco
Phillips; and reported that in 2014 in Alaska Conoco made
$2.04 billion, and lost $22 million in the Lower 48. He
discussed company earnings and losses. He considered the
net income of the company, and thought Alaska was the most
profitable place in the world where it did business.
10:35:08 AM
AT EASE
10:35:13 AM
RECONVENED
Co-Chair Giessel asked if Senator Wielechowski would
provide other committee members with a copy of the
documents he was referencing.
Mr. Marks replied to Senator Wielechowski's comments and
thought that SB 21 showed that the state was competitive.
He compared the SB 21 graph line to the international
competitive line on the graph on slide 32. He thought it
was important to understand the difference between
ConocoPhillips' operations in Alaska versus the Lower 48
and the rest of the world.
Mr. Marks discussed different compositions between gas and
oil in the state versus elsewhere. He stated that the
economics between oil and gas were very significant. He
asserted that natural gas markets in the Lower 48 had been
poor, as had oil. He noted that companies did not
separately report oil and gas income, but there were shared
costs. He discussed financial statement reporting, and the
difference between oil and gas on a British Thermal Unit
(BTU) basis. He did not think it was possible to compare
per-barrel numbers between different geographic areas that
had different compositions of oil and gas.
10:37:22 AM
Senator Stedman commented on the complexity of the topic
and asked Mr. Marks to elaborate on the difference between
a net tax system and a gross tax system, as well as how the
proposed bill would affect the system under various oil
price contingencies.
Mr. Marks turned back to slide 11, which explained the
calculation of tax under SB 21. He stated that there was a
"higher of" calculation between a net calculation and a
gross calculation. Under SB 21 the crossover point was
$65/bbl (using cost assumptions with legacy fields); at
which point the net calculation became higher, and a net
system was in effect.
Mr. Marks showed slide 25, which explained major economic
provisions of HB 111. He explained that under HB 111 the
dynamic shifted; the per-barrel credit was eliminated, and
the base rate was reduced. The crossover point was then
changed from $65/bbl to $40/bbl.
Senator Stedman suggested that the current year was under a
gross tax structure. He wondered if the bill was adopted,
if the crossover point would be moved, and change the tax
structure to a net tax system as well as create a
substantial change in tax that was due.
Mr. Marks referred to slide 32, and answered in the
affirmative.
10:40:33 AM
Mr. Marks read slide 33, "Government Take: New (GVR) Oil."
Mr. Marks showed slide 34 through slide 37, "Government
Take: New (GVR) Oil - SB 21 vs. HB 111," which each showed
a line graph. He indicated that he would break the graph
down in to three different graphs in order to see what
happened with different oil prices between $45/bbl and
$55/bbl and above.
Mr. Marks shared that with oil at $45/bbl, government take
went from 230 percent to 260 percent. He thought the
numbers were daunting, given the cost of new oil. He stated
that the difference between SB 21 and HB 111 was about 30
percentage points in government take, which was worth about
60 cents per barrel at $45/bbl. He also noted that under
both curves the lines were significantly over the
international competitive boundary.
Mr. Marks explained that new oil was allowed to bring tax
down to zero with a per-barrel credit. The government take
under SB 21 was a high take with no tax. When examining the
graph from an oil price of $45/bbl to $55/bbl, the
difference between SB 21 and HB 111 was about 6 percentage
points, worth about 75 cents per barrel. Under HB 111, the
government take was about 23 percentage points above the
international competitive boundary.
Mr. Marks continued, and examined the effects of oil priced
between $55/bbl and $65/bbl. There was a 5 percent
difference between SB 21 and HB 111, which equated to
approximately 90 cents per barrel. He furthered that under
HB 111, the government take was about 17 percentage points
above the international competitive boundary.
Mr. Marks looked at higher oil prices between $65/bbl and
$150/bbl; at this threshold he thought SB 21 and HB 111
were not too dissimilar. He detailed that up until about
$105/bbl, progressivity kicked in.
Mr. Marks turned to slide 38, "Observations on Gross & Net
Taxation":
•Gross value is higher than net value
•Gross tax rates will generally be lower than net tax
rates
•At low prices net value will be small and gross taxes
will generally be higher than net taxes
•As prices increase, and costs become an increasingly
smaller share of gross value, net taxes will generally
be higher than gross taxes
Mr. Marks commented that gross tax system taxed on a higher
base and a lower tax rate.
10:44:38 AM
Mr. Marks showed slide 39, "Conclusion":
-Notwithstanding the havoc low prices have played with
the state budget
-How is the misery of low prices allocated between
State and taxpayer?
-Generally there is a basic risk/reward symmetry in
the world between how investors and governments share
downside risk and upside potential (Slide 30)
-Alaska appears at odds with the general pattern
Mr. Marks went back to slide 31 to illustrate how there
were regressive systems in the world that taxed on gross;
in which the investor bore most of the downside risk, but
got most of the upside potential. He explained that there
were progressive systems in the world that taxed on net; in
which the government and producers shared the downside risk
and upside potential. He qualified that most systems in the
world were gross systems, which explained the downward
slope of the competitive boundary line on the graph. He
reiterated that regressive systems were high take at low
prices, and low take at high prices. He shared that Alaska
was the only place in the world where as oil prices went
up, the system was flipped from gross tax to net tax.
Mr. Marks continued discussing slide 39. He thought SB 21
was slightly at odds with the general pattern of global tax
systems. He considered that HB 111 was noticeably more at
odds with the pattern, especially considering the price
range that was expected in the forthcoming years.
Co-Chair Giessel discussed the agenda and topics for the
afternoon joint meeting.
ADJOURNMENT
10:47:35 AM
The meeting was adjourned at 10:47 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 20170415_Senate Resources_Finance HB111_Castle Gap Advisors.pdf |
SFIN 4/15/2017 9:01:00 AM |
HB 111 |
| HB 111 Marks Sen Res Fin 041517 (002).pdf |
SFIN 4/15/2017 9:01:00 AM |
HB 111 |