Legislature(2021 - 2022)SENATE FINANCE 532
02/12/2021 09:00 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 | |
| Oil and Gas Severance Tax - Order of Operations | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
February 12, 2021
9:01 a.m.
9:01:51 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lyman Hoffman (via teleconference)
Senator Donny Olson
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
Senator Natasha von Imhof
PRESENT VIA TELECONFERENCE
Dan Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue.
SUMMARY
^OIL AND GAS SEVERANCE TAX - ORDER OF OPERATIONS
9:03:25 AM
Co-Chair Stedman discussed the topic of the meeting and
emphasized that Alaska had one of the most complex oil tax
structures on the planet. He mentioned that some considered
the system to be overly complex and led to difficulties and
unknown results. He informed that the state had multiple
oil basins, but the focus of the day's meeting would be
mostly on the North Slope. He relayed that corporate data
was consolidated, which made it challenging in numerous
areas. He stressed that each company was different in
ownership, corporate structure, and profitability.
9:04:16 AM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE (via teleconference),
discussed the PowerPoint, "Order of Operations
Presentation; Senate Finance Committee" (copy on file). He
expressed that the purpose of the presentation was to give
a high-level overview of how the state's oil and gas
production tax worked for the North Slope.
Mr. Stickel looked at slide 2, "Acronyms":
ANS-Alaska North Slope
ANWR-Arctic National Wildlife Refuge
Avg-Average
Bbl-Barrel
CBRF-Constitutional Budget Reserve Fund
CIT-Corporate Income Tax
DOR-Department of Revenue
FY-Fiscal Year
GVPP-Gross Value at Point of Production
GVR-Gross Value Reduction
NPR-A National Petroleum Reserve Alaska
OCS-Outer Continental Shelf
PTV-Production Tax Value
SB21-Senate Bill 21, passed in 2013
TAPS-Trans Alaska Pipeline System
Thousand-Thousands
Mr. Stickel pointed to slide 3, "Agenda":
?Oil and Gas Revenue Sources
o How production tax fits in
o FY 2019 FY 2023 oil and gas revenues
?Production Tax Calculation "Order of Operations"
o Detailed walk through of each step of tax
calculation
o Defining commonly used terms
o Focus on North Slope oil
o FY 2019 FY 2023 comparison
Mr. Stickel reiterated Co-Chair Stedman's point that Alaska
had one of the most complex oil and gas tax regimes. He
asserted that the presentation was not about policy, but
rather how the system worked.
Mr. Stickel looked at slide 4, "Overview":
?Alaska's severance tax is one of the most complex in
the world and portions are subject to interpretation
and dispute.
?These numbers are rough approximations based on
public data, as presented in the Fall 2020 Revenue
Sources Book and other revenue forecasts.
?This presentation is solely for illustrative general
purposes.
?Not an official statement as to any particular tax
liability, interpretation, or treatment.
?Not tax advice or guidance.
?Some numbers may differ due to rounding.
Mr. Stickel discussed slide 5, "Oil and Gas Revenue
Sources":
?Royalty based on gross value of production
o Plus bonuses, rents, and interest
o Paid to Owner of the land: State, Federal, or
Private
o Usually 12.5 percent or 16.67 percent in
Alaska, but rates vary
?Corporate Income Tax based on net income
o Paid to State (9.4 percent top rate)
o Paid to Federal (21 percent top rate, used to
be 35 percent)
o Only C Corporations* pay this tax
Property Tax based on value of oil and gas property
o Paid to State (2 percent of assessed value or
"20 mills")
o Paid to Municipalities credit offsets state tax
paid
?Production Tax based on "production tax value"
o Paid to State calculation to follow
Mr. Stickel pointed out that corporate income tax was based
on worldwide income that was apportioned to Alaska and
applied to many but not all the companies operating in the
state. He explained that the production tax applied to all
production in the state, regardless of landowner, and any
production within the state's three-mile limit. He noted
there would be a slide towards the end of the presentation
that would address how different taxes and royalties
applied to each different category of land in the state.
9:08:45 AM
Senator Wielechowski made note of the 9.4 percent top rate
for corporate income tax listed on the slide. He asked for
the total corporate income tax for the North Slope.
Mr. Stickel replied that the 9.4 percent was the marginal
tax rate. He discussed the effective tax rate and cited
that some companies paid more than 9.4 percent, and some
companies paid less. In aggregate, the average across the
North Slope was slightly less than 9.4 percent.
Senator Wielechowski asked if the tax rate signified 9.4
percent of gross profits.
Mr. Stickel explained that the 9.4 percent corporate income
tax marginal rate applied to Alaska's taxable income. He
continued that income was determined by looking at a
company's modified worldwide income and apportioning the
amount to Alaska based on a factor that was the state's
share of production, property, and sales and tariffs. The
items in Alaska were compared to the worldwide figures, and
the worldwide income was apportioned to the state to
determine Alaska taxable income.
Senator Wielechowski asked if the system allowed for
corporations to write off expenses that occurred outside
the state.
Mr. Stickel explained that determining worldwide net income
of a company would incorporate expenses anywhere in the
world. Similarly, Alaska expenses would be incorporated
into the net income determined for corporate income taxes
at a federal level and in other states.
Senator Wielechowski asked if there had been any past
analysis of how much it had cost or earned the state to
change from separate accounting to worldwide apportionment.
Co-Chair Stedman thought Senator Wielechowski's question
had two parts. He recalled that the current process had
been in place since the Hammond Administration. He asked
Mr. Stickel to define separate accounting and how it was
different than proportional accounting.
9:12:12 AM
Mr. Stickel explained that there were two methodologies for
corporate income tax that had been used in the state in the
past. The methodology of apportionable income currently
used in Alaska was widely used across the United States for
corporate income taxes in various states. The method
started with federal taxable income (with some
modifications) and then used the federal income tax return
as a starting point to determine a state taxable income
using apportionment factors. He continued that in the past,
Alaska had used what is known as separate accounting, which
attempted to account for revenues and expenditures just in
the state.
Mr. Stickel affirmed that the state had done analysis of
the potential impacts of apportionment versus separate
accounting but did not have the information at hand.
Co-Chair Stedman thought the committee would address the
subject at a later time if there was a corporate income tax
bill for the committee's consideration.
Senator Wielechowski requested the information pertaining
to the analysis between worldwide apportionment and
separate accounting, and what it may have cost or earned
the state since the change in practice.
Co-Chair Stedman asked Mr. Stickel to provide the requested
information. He thought it might be helpful to clarify
about corporate income tax deductions and how amortization
or depreciation potentially affected the calculation of
production tax.
Mr. Stickel offered to provide further information as a
response or as a future presentation. He discussed
production tax expenditures and noted the state did not
have depreciation of production tax. The state did have
depreciation of corporate income tax, and the topic would
be addressed in upcoming slides.
Co-Chair Stedman clarified that both production tax and
corporate income tax deducted operating and capital
expenditures.
Mr. Stickel agreed.
Co-Chair Stedman thought it was nice to keep things clear.
He thought it was important to establish that the tax
structures were different and for different purposes.
Senator Wilson deferred his question regarding oil income
tax structure.
Co-Chair Stedman thought there would be more meetings on
the topic, and there was a potential bill coming. He had
asked departments to prepare.
9:16:05 AM
Senator Wielechowski observed that the slide pointed out
that only C corporations paid corporate income tax. He
asked how many S corporations (or non-C corporations) were
currently on the North Slope, and how much tax revenue the
state was losing or not collecting as a result.
Co-Chair Stedman thought a separate discussion was needed
to address Senator Wielechowski's entire question. He asked
Mr. Stickel to discuss the number of different types of
corporations and the aggregate dollar balance between the
types.
Mr. Stickel thought the question of the relative proportion
of C corporations and non-C corporations was important,
because the corporate income tax applied to C corporations.
There were other types of corporations that were considered
pass-through entities for tax purposes, whereby the
entities did not pay a corporate tax but instead passed
through income to the individuals. He used a subchapter S
corporation and a partnership as two examples of pass-
through entities, both of which were not taxed at the state
level as Alaska did not have a personal income tax.
Mr. Stickel did not have available numbers of individual
companies. He shared that for FY 22, approximately 70
percent of production was estimated to come from C
corporations, while approximately 30 percent of production
was estimated to come from non-C corporations (pass through
entities).
Co-Chair Stedman asked for Mr. Stickel to put further
analysis into addressing Senator Wielechowski's question,
so as to discuss the topic in more detail at future
meetings.
Mr. Stickel offered that he would be happy to provide
additional analysis if there was an associated bill to come
before the committee.
Co-Chair Stedman was sure that the committee would also be
considering a look-back provision on separate accounting
versus apportionment accounting.
Senator Wielechowski was not aware of whether a bill would
come before the committee and requested to see analysis of
C corporations versus non-C corporations regardless.
Co-Chair Stedman did not see an issue with requesting the
information.
Co-Chair Stedman explained that the corporate tax issue was
one of four component parts in examining the split of
sharing the profits with the state. He stressed that
changes to any of the four components would make a
difference in the balance of the fiscal structure. He
observed that there had been significant changes in recent
years, and it was important for the committee to stay
abreast of the magnitude and direction of movements.
9:21:03 AM
Mr. Stickel looked at slide 6, "Oil and Gas Revenue
Sources: Five Year Comparison of State Revenue." He stated
that the slide showed all sources of state revenue for FY
19 through FY 23; the oil price; and ANS oil production
that went into the numbers. He stated that the property tax
on the slide represented only the state's share. He
remarked that there were several hundred million dollars of
oil and gas property tax that accrued to municipalities. He
noted that the corporate income tax only applied to the C-
corporations only. He remarked that there were some
temporary impacts for FY 20 - 22 that had to do with low
oil prices and federal law changes as was discussed in a
previous meeting related to the fall forecast. He noted
that the production tax would be addressed in upcoming
slides. He pointed out that the royalties included bonuses,
rent, and related interest. He noted that there were
settlements to the CBR fund, which were based on
assessments or disputes regarding past years' production
tax royalties, or other oil, gas, or mineral taxes. He
stated that, under the state constitution, the revenues
from settling the revenues or disputes were deposited to
the Federal Reserve Fund. He stated that 50 percent of any
shared royalties from the NPRA were shared with the state,
but had special descriptions around its usage. He noted
that there would be a bigger piece of the revenue picture
beyond the time horizon of the slide, as the line item was
forecasted to grow $94 million by FY 30 with increased
production in NPRA.
Senator Wilson queried the impact of Covid-19 on the Alaska
oil and gas industry, particularly as it related to
production and federal regulatory changes, and its impact
on the forecast over the upcoming four years.
Mr. Stickel replied that the impact of Covid-19 on the oil
and gas industry was very significant in FY 20. He pointed
out that there was an unprecedented drop in oil price. He
noted that ANS oil prices fell below zero for one day in
April 2020. He stressed that the combination of the low
price and the difficulty in figuring out the operations
through the Covid-19 situation led several companies to
suspend activities and reduce production. He remarked that,
since then, prices and production had rebounded.
Senator Wilson asked about any federal changes in the
corporate tax structure that may have impacted Alaska's
future financial standing in some of the companies.
Mr. Stickel replied that the CARES Act, passed at the
federal level, included some changes to the corporate
income tax. He explained that the change allowed companies
to tax net operating losses in calendar years 2018, 2019,
or 2020, and carry those losses back up to five years and
obtain refunds for prior year paid taxes. He stated that
the CARES Act refunds were incorporated into Alaska's
corporate income tax forecast for FY 21 and FY 22.
9:25:55 AM
Senator Wielechowski wondered whether the companies were
allowed to write-off their net losses on their state and
federal taxes in the CARES Act refunds.
Mr. Stickel replied that he may not fully understand the
question, but stated that any net operating loss would be
based on worldwide net income as a portion to Alaska.
Senator Wielechowski surmised that a company with a net
operating loss had the ability to write that loss off on
the federal taxes, as a result of the CARES Act. He further
explained that Alaska's state law was tied to the federal
taxes, so the company could do an additional write-off on
their state taxes.
Mr. Stickel explained that a company would be able to
potentially claim refunds for prior year taxes at both the
state and federal level if a company had a net operating
loss in one of the three years.
Senator Wielechowski wondered whether the state had been
"writing checks" to the companies for refunds of the net
operating losses. He also asked how much the state had
issued for the net operating losses.
Mr. Stickel agreed to provide that information.
Co-Chair Stedman recalled that sometimes checks were
issued, and other times it was a deduction on paperwork. He
wondered whether there was a $60 million swing in the oil
and gas basin.
Mr. Stickel replied in the affirmative. He explained that
the oil and gas corporate income tax had an impact of
approximately $6.6 million for FY 21, and approximately
$62.9 million FY 22. The net impact over the two years was
approximately $70 million. He stated that the $20 million
was for FY 22 was the net result of what would have been a
positive revenue of approximately $40 million.
Senator Wielechowski queried the breakeven price for
companies producing at Prudhoe Bay.
Mr. Stickel responded that he did not have a field-specific
number, but agreed to calculate a number and provide that
to the committee.
Senator Wielechowski requested a breakeven price for the
legacy fields. He wanted to know what the price of oil
needed to be for the industry to breakeven.
9:30:02 AM
Co-Chair Stedman asked that the requested information be
broken down into as many component parts as possible.
9:30:30 AM
Senator Wielechowski wondered whether the department
considered a net operating loss a credit.
Mr. Stickel referred to the prior question about the
breakeven price. He stated that the major producer
breakeven price was around $35 per barrel, but the value
varied for each individual producer and year. He stated
that the presentation would show how individual producers
had very different economics. In response to the most
recent question, he stated that the net operating loss was
not considered a credit.
Co-Chair Stedman urged caution in using the word, "credit",
because it could be used for multiple angles.
Senator Wielechowski queried the breakeven price of each
individual legacy field. He wondered whether the Prudhoe
Bay breakeven price was $35 per barrel.
Mr. Stickel replied that the $35 per barrel price was an
aggregate number across several fields. He would follow up
with more detail around that number.
Co-Chair Stedman stated that the department had been asked
to work on different price ranges to examine the movement
of the cost factors. He understood that some of the fields
could not be separated out, but asked that there be an
explanation included as to why a further breakdown could
not be established. He understood the confidentiality and
statutory requirements that must be met.
Senator Wielechowski surmised that there was still a $10.32
profit per barrel in FY 21.
Co-Chair Stedman felt that the presentation needed to get
back on track in order to understand the bottom line.
9:34:55 AM
Mr. Stickel agreed to provide context around the discussed
numbers. He highlighted slide 7, "Fiscal System: Overall
Order of Operations":
Royalties (State, Federal, or Private)
Property Tax
Production Tax
State Corporate Income Tax
Federal Corporate Income Tax
Mr. Stickel addressed slides 8 and 9, "Production Tax
'Order of Operations': FY 2022." He stated that the slide
was based on the income statement of the production tax as
referenced in the appendix of the Revenue Sources Book. He
noted the DOR forecast of average oil prices of $48 per
barrel and average daily production of $439.6 thousand
barrels per day. There was then a calculation of the annual
number of barrels and the dollar value of that production.
He stated that the focus of the next several slides would
be how the total annual value of $7.7 billion worth of oil
was split and taxed. He stressed that it was an aggregation
and an illustration. He explained that actual taxes were
based on monthly filings and annual calendar year returns
that were then subject to audit. He remarked that the slide
only referred to ANS oil, which was the state's largest
production tax revenue.
Mr. Stickel looked at the income statement. He stated that
the first step was to calculate taxable barrels. He
explained that any royalty barrels were subtracted
regardless of any ownership of those barrels. Typical
royalty rates were one-eighth or one-sixth, but rates
varied throughout. He stated that federal and private land
royalty was also subtracted in the slide. He stressed that
barrels were also subtracted that were not subject to tax
due to their location in federal waters, of which there
were small number in Northstar and Liberty production. He
stated that after subtracting the royalties and non-taxable
barrels, the taxable barrels were estimated at 141 million
barrels for a total value of $6.8 billion.
Co-Chair Stedman recalled that in years past the committee
had trouble arriving at that number, so there had been much
progress.
Co-Chair Bishop wondered whether Alaska's royalty-in-kind
was included under the "royalty and other federal barrels."
Mr. Stickel replied in the affirmative. He explained that
the royalty included both royalty in-kind and royalty in
value.
9:39:32 AM
Mr. Stickel addressed slide 10, "Production Tax 'Order of
Operations': FY 2022." He stated that the term, "GVPP" was
widely used in production tax and royalty. He remarked that
it was also referred to as the well-head value. He remarked
that transportation costs were deducted from the taxable
value to determine the GVPP. He explained that the GVPP
began with the sales price at market, then deducted each
individual piece of the transportation cost to net back to
the well-head value. The oil sale showed $48 on the west
coast, then there was a deduction of the various
transportation costs to get to an average well-head value
of $38.09 per barrel estimated for FY 22. The total GVPP
for tax purposes of $5.4 billion.
Co-Chair Stedman recalled the previous questions related to
corporate income tax, and requested that the department
examine the transportation issue. He felt that there may be
some federal legislation that would allow the
transportation costs to artificially increase, thereby
increasing the deduction. He stressed that there may be a
federal policy change that would affect the transportation
costs just like other tax deductions. He queried the cost
of transportation and the relationship with the cost of the
production through TAPS.
Mr. Stickel replied that the total cost of transportation
for FY 22 was estimated at $9.91 per barrel. He explained
that as production values declined, the average cost per
barrel would increase, because some of the cost of
operations of TAPS had fixed maintenance costs.
Co-Chair Stedman surmised that it was advantageous to have
more volume down TAPS, in order to decrease the per barrel
transportation costs. He wondered whether the
transportation cost of $1.4 billion was a relatively static
number.
Mr. Stickel stated that Co-Chair Stedman was "generally
correct", and explained that higher production would put
downward pressure on the per barrel transportation costs.
Mr. Stickel highlighted slide 11, "Production Tax 'Order of
Operations': FY 2022." He stated that the production tax
that was used was a modified net profits tax, so companies
were allowed to deduct both capital and operating
expenditures in calculating their production tax. He stated
that capital expenditures used IRS guidelines, however for
production taxes there was no depreciation so companies
could immediately deduct all capital costs in the year. He
stated that operating expenditures were any allowable
expenditures that were not a capital expense. He stated
that there were important terms in lease expenditures:
allowable and deductible lease expenditures. He explained
that allowable lease expenditures were generally any costs
that were directly associated with producing oil, but not
everything was allowable under the tax code. He stated that
some examples of non-allowable lease expenditures were
financing costs, lease acquisition costs, and costs of
resolving disputes. He stated that deductible lease
expenditures was a term used for presentation purposes, and
was not defined in any statute or regulation. The
deductible lease expenditures was the portion of the
allowable lease expenditures allowed in the tax calculation
for the year incurred. He shared that any lease
expenditures beyond the deductible lease expenditures were
referred to as non-deductible lease expenditures, which
would turn into carry-forwards that could potentially be
used to offset a future year tax liability.
9:46:26 AM
Senator Wielechowski requested a breakdown of the
deductible per field operating and capital expenditures.
Mr. Stickel replied that one of the issues in obtaining
that information was that the expenditures were calculated
at a company level, so Alaska's production taxes were not
levied on a field basis rather they were levied on a
company basis. He agreed to provide as much information as
possible.
Senator Olson wondered whether there was a limit to the
non-deductible carry-forwards per year.
Mr. Stickel replied that there was not a limit to the
amount of lease expenditures that could be earned in a
carry-forward, but there were some limits of how far into
the future a carry-forward could be "carried." He explained
that after the eighth or eleventh year after earned, the
carry-forwards began to lose value over time.
Co-Chair Stedman noted that the presentation included
carry-forward expenditures. He stressed that the deductions
and expenditures were not the same that were used in the
corporate income tax.
Mr. Stickel pointed to slide 12, "Production Tax 'Order of
Operations': FY 2022." He stated that the production tax
value (PTV) was measure of net profit used for the
production tax. He explained that each company calculated
its PTV based on all the ANS activity, including all
fields, investments, and new developments. The PTV was
essentially the tax base for the production tax.
Mr. Stickel addressed slide 13, "Production Tax 'Order of
Operations': FY 2022." He explained that there were two
parallel tax calculations. He stated that the minimum tax
was a tax floor calculation, and was 4 percent of GVPP when
annual oil prices were $25 per barrel or more. He stated
that in FY 22, the minimum tax was 4 percent times the
gross value of $5.4 billion, or approximately $214.5
million.
9:50:44 AM
Mr. Stickel discussed slide 14, "Gross Value Reduction":
? Gross Value Reduction (GVR) is an incentive program
for new fields.
? Available for the first seven years of production
and ends early if ANS prices average over $70 per
barrel for any three years.
? Allows companies to exclude 20 percent or 30 percent
of the gross value from the net production tax
calculation.
? In lieu of sliding scale Non GVR Per Taxable Barrel
Credit, qualifying production receives a flat $5 GVR
Per Taxable Barrel Credit.
? The $5 GVR Per Taxable Barrel Credit can be applied
to reduce tax liability below the minimum tax floor,
assuming that the producer does not apply any sliding
scale Non GVR Per Taxable Barrel Credits.
Co-Chair Stedman surmised that the 4 percent floor was a
"soft floor."
Mr. Stickel agreed. He explained that the 4 percent was a
minimum tax calculation floor. He explained that a company
could not pay below that floor if a company chose to use a
sliding scale for taxable barrel credits.
Co-Chair Stedman surmised that the five dollar credit could
be attributed to the fields that had the 20 or 30 percent
GVR.
Mr. Stickel agreed. He explained that the five dollar per
taxable barrel production tax credit applied to the same
GVR eligible production that received the 20 or 30 percent
GVR.
Co-Chair Stedman requested percentages of the production
that could be expected to be attributed to the 20 or 30
percent GVR. He assumed that the remaining would total 100
percent.
Mr. Stickel replied that he was looking at figure 6-7 of
the Fall 2020 Revenue Sources Book. He noted for FY 21, 8
percent of oil production was estimated to be eligible for
GVR. He stated that the number increased to 23 percent by
FY 27, and 27 percent in FY 28. He noted that as new
developments come online, the forecasted share of
production from GVR-eligible fields would increase.
Co-Chair Stedman queried the referenced page number.
Mr. Stickel looked at page 51 of the Fall 2020 Revenue
Sources Book.
9:55:08 AM
Co-Chair Stedman stressed that there was a concern about
the cash flow. He noted that there was a breakdown of the
GVR-eligible fields, and wondered whether it split out the
percentage of what would be exposed to each the 20 percent
and 30 percent.
Mr. Stickel replied that he would provide that information.
Senator Wielechowski wondered whether a company could write
off their production at Prudhoe Bay and Kuparuk if that
company was spending $1 billion in NPRA.
Mr. Stickel replied that regardless of land type, a company
with sufficient GVPP could have the investment in new
production be considered a deductible lease expenditure.
Senator Wielechowski stressed that oil production at NPRA
was not "equal", because developing companies could write
off their existing fields. The result could be a cost to
the state of hundreds of millions of dollars for years. He
furthered that once the field went online, the state
received virtually no royalties. He stressed that under the
GVR, the state received virtually no taxes for at least
seven years.
Mr. Stickel replied that it was a situational question that
depended on the company, price of oil, and relative
production.
Co-Chair Stedman understood that deductions created on
areas of the basin without much revenue to the state was
still subject to deductions. He felt that there may be
better answers from consultants at Legislative Budget and
Audit to model the different ownership interests. He asked
that Mr. Stickel provide any possible information related
to Senator Wielechowski's question.
Senator Wielechowski requested NPRA specifics about how
much the state allowed in tax deductions in existing
fields, the state revenue, and the projected revenues.
Co-Chair Stedman felt that sometimes the state had statutes
which created "blocks." He shared that Point Thomson had
significant expenditures in billions in credits and high
tariffs with questionable economics. He requested as much
of a breakdown of information as possible. He felt that
there would be considerably more production being moved
outside of the state-owned land, so there needed to be an
understanding of the financial impact of that possibility.
10:00:33 AM
Mr. Stickel pointed to slide 15, "Production Tax 'Order of
Operations': FY 2022." He explained that the slide looked
at the calculation of net production tax. The net tax was
based on production tax value times the 35 percent
statutory tax rate. The GVR to the production tax value
shown on the slide was only accounting for companies that
had a positive production value. The companies with
qualifying new production could reduce their GVPP for
purposes of calculation the production tax value. The 35
percent tax rate was then applied to the production tax
value after subtracting the GVR. He noted that in FY 22,
there was an estimate that the 35 percent tax calculation
would be approximately $367 million. He furthered that the
higher of the gross minimum tax floor or the net tax, and
in the displayed case the "higher of" was the net tax. He
stated that the $367 million became the production tax
before credit.
Co-Chair Stedman felt that there was some confusion around
this subject. He noted that the tipping point changed
depending on volume and expenditures. He felt that there
would be a sliding scale on that issue in the future.
Mr. Stickel looked at slide 16, "Production Tax 'Order of
Operations': FY 2022." He explained that the major credits
were the per taxable barrel credits, which were two
credits: one for GVR-eligible oil and one for non-GVR-
eligible oil. The vast majority of oil that was non-GVR-
eligible, but the GVR-eligible oil would increase as new
fields come online. He stated that there was a sliding
scale for non-GVR production for taxable barrels credits
that ranged from zero to $8 per barrel of taxable
production. The $8 per barrel credit applied when well-head
values were less than $80 per barrel, which was currently
the case, and was expected in the time horizon of the
forecast. The sliding scale credits could not be used to
reduce the tax below the minimum tax. He stressed that any
company claiming that credit could not pay below the
minimum tax. He explained that the GVR-eligible production
had a flat $5 per taxable barrel production tax credit. The
credit, in some instances, could be used to reduce taxes to
below the minimum tax for companies that did not take any
sliding scale credits. He explained that any of the per
taxable barrel credits could not be carried forward or
refunded. He explained that other tax credits applied
against tax liability included small producer credits and
some prior year credits earned back when the state gave
credits for net operating losses.
Co-Chair Stedman looked at the Fall 2020 Revenue Sources
Book, which showed $46 million in credit reductions on
55.23-A and -B, which was some comingled data. He wondered
whether that was in the category of "other credits against
liability."
Mr. Stickel replied in the affirmative.
10:05:08 AM
Senator Wielechowski noted that there was $7.701 billion of
oil in TAPS, $7.68 billion in taxable barrels, and the
gross value at the point of production was $5.38 billion.
He announced that the state received $163.3 million was 3
percent of tax at the gross value of production, 2.4
percent at taxable barrels, and 2.1 percent tax of total
oil being produced. He stressed that Alaska had a 35
percent tax rate, but only received 3 percent of the gross
value at production. He stressed that adding the royalties
resulted in the state receiving 13.9 percent of the total
value of the oil. He wondered whether the state ever
received a lower amount for oil. He felt that, by his
calculations, the state was currently receiving half of
what it had collected historically since the passage of SB
21.
Co-Chair Stedman felt that the question was to aggressive,
but noted that there were some actuals from FY 19 and
forecasted numbers for up to FY 23. He wanted to ensure
that a DOR's upcoming presentation included a history as
compared to the current numbers.
Senator Wielechowski understood that his question was
aggressive, and stressed that the state could lose up to $1
billion per year. He felt that, if the state received its
historic average for the resource, there would be an
additional $1 billion by his calculation. He wanted an
analysis done by the department, because they could not
afford to "keep giving its money away."
Co-Chair Stedman stressed that the there were many other
factors that contributed to the issue. He pointed out that
there would be some help from the consultants because the
price structure in the industry was constantly changing.
10:08:47 AM
Mr. Stickel discussed slide 17, "Production Tax 'Order of
Operations': FY 2022." He explained that after the total
tax after credits calculation, there were some other items
that were added to reach the total production tax revenue
received by the state in any given fiscal year. He detailed
that the items included prior year tax payments or refunds,
private landowner royalty tax, hazardous release surcharge,
any taxes on natural gas on the slope as well as total Cook
Inlet tax liability, and any additional company-specific
details.
Co-Chair Stedman asked if the $163.3 million shown on the
slide as total tax paid to the state included Cook Inlet.
Mr. Stickel answered "yes" and affirmed that the $163.3
million was the net cash to the state from the production
tax for the fiscal year.
Co-Chair Stedman thanked Mr. Stickel for clarity in the
slide and presentation with regard to net cash. He asked
for Mr. Stickel to address the $562.7 million in "Net New
Lease Expenditures Earned and Carried Forward" listed at
the bottom of the slide and how it might affect the state
in the future.
Mr. Stickel said that the $562.7 million in non-deductible
lease expenditures in FY22 were expected to be carried
forward by companies that were not able to deduct the costs
against production tax value in FY 22. The carry-forward
could potentially be applied to reduce future year's tax
liability.
Co-Chair Stedman asked whether the figure was cumulative or
was annual for FY 22.
Mr. Stickel replied that the figure reflected the amount
expected to be earned just for FY 22.
Co-Chair Stedman thought the cumulative figures were in the
Revenue Source Book and asked about the page number.
Mr. Stickel relayed that page 76 (row 22 of Figure 84) of
the Fall 2020 Revenue Sources Book had values for carried-
forward credits balances and tax value of carried-forward
annual losses.
10:11:56 AM
Mr. Stickel continued that the value in the table was the
ultimate tax value, which signified the amount of the
carry-forward loss times the 35 percent net tax rate.
Co-Chair Stedman thought the amount was forecast to go over
$1 billion in 2024, and to approach $1.6 billion in 2030.
Mr. Stickel replied in the affirmative.
Co-Chair Stedman offered a quick note of explanation. He
stated that the industry had to be allowed to deduct
expenditures or the numeric would not work. He thought
although the numbers were large and alarming, there was
more to the equation.
Co-Chair Bishop highlighted Mr. Stickel's use of the word
"potentially" when referencing new lease expenditures that
could be earned and carried forward. He thought the word
was key in discussing future deductions or production.
Mr. Stickel affirmed that a company would need to have
sufficient future production and sufficient future value to
apply the lease expenditures.
Mr. Stickel thought some might make note of the $163
million in total production tax and ask why it was lower
than the minimum tax calculation of $215.5 million. He
explained that the minimum tax was applied on a company-by-
company basis. He noted that the forecast projected
$48/bbl. Some companies would forego using sliding scale
credits and use other credits to reduce payments below the
minimum tax.
Co-Chair Stedman thought that net numbers were important
for clarity.
Mr. Stickel looked at slide 18, "Order of Operations: Five
Year Comparison." The slide showed a 5-year comparison
including two years of history and two years of forecast.
He pointed out that in FY 19 and FY 20 some taxpayers paid
above the minimum tax. In FY 21 through FY 23, generally
production companies were able to bring production tax down
to the minimum tax. He elaborated that the forecast assumed
that with projected oil prices some companies in all three
years would choose to forego sliding scale credits and use
other credits to pay below the minimum tax. He noted that
the additional slides offered more detail.
Co-Chair Stedman asked Mr. Stickel to continue.
10:15:46 AM
Mr. Stickel pointed to slide 19, "Tax Calculation with
Varying Non GVR Taxable Barrel Credit Rates: FY2022." The
slide was an update of a slide from the previous year and
showed how revenue would be impacted by different levels
for the sliding scale per-taxable-barrel credit. Currently
the credit was a sliding-scale credit for up to $8 per
taxable barrel. The table showed what the FY 22 tax
calculation would look like assuming different values of
$5, $4, and $3 per taxable barrel.
Co-Chair Stedman asked Mr. Stickel to run the calculation
using oil price at $50, $55, and $60/bbl.
Mr. Stickel relayed that he would be happy to provide the
information.
Mr. Stickel continued to look at slide 19 and cited figures
for the estimated production tax with per-barrel credit
differences. He noted that the figures were not a policy
recommendation, but rather an update of scenarios that were
requested the previous year.
Mr. Stickel discussed slide 20, "Illustration Assuming a
Single North Slope Taxpayer: FY 2022." The slide depicted
what the tax calculation would look like if there was only
a single taxpayer for the entire North Slope. He elaborated
that currently some companies paid at or above the minimum
tax while others chose to forego using sliding-scale
credits and reduce payments below the minimum tax. As a
result, for FY 22 the production tax forecast was less than
the aggregate minimum tax calculation.
Mr. Stickel thought the slide illustrated that a single
taxpayer would be expected to only use sliding scale
credits to reduce tax liability down to the minimum tax but
not below. In the illustration, total production tax in the
treasury would be $229 million in FY 22 compared to $163
million in the official forecast. The conclusion in the
slide highlighted the impact of individual company
economics on the tax. Each of the taxpayers had a different
portfolio of operation in existing fields, and a different
portfolio of investments being made in exploration and
development.
Co-Chair Stedman shared that he had worked with Mr. Stickel
on how to present the information to the committee,
including how to depict the minimum tax and net tax and how
it might cross over. He had asked Mr. Stickel to assemble
the slide depicting one taxpayer. He thought it was
beneficial to see where some of the deductions occurred. He
reiterated the need for clarity.
Mr. Stickel highlighted slide 21, "State Petroleum Revenue
by Land Type." The slide illustrated how not all oil was
the same. He explained that production tax, corporate
income tax, and property tax all applied everywhere in the
state except for federal waters that were beyond three
miles offshore. Regardless of the ownership of the lands,
the state taxes applied. He continued that royalty rate
varied by ownership. He offered to go over each land type.
10:20:33 AM
Co-Chair Stedman felt that the reference sheet would be
useful in the future when the committee was discussing
deductions on some fields where the potential revenue
source to the state was lower. He thought there some
concern about why the deductibility was not also different.
He thought the committee would delve more deeply into the
topic at a later date. He expressed that he had been
working with the department on a future presentation
dealing with varying prices and cost structures. He thought
a future presentation would shed light on how revenue in a
basin looked at different prices.
Mr. Stickel thanked the committee for the opportunity to
present.
Co-Chair Stedman thanked Mr. Stickel for his work. He
stated he would work with the department on a future
presentation.
ADJOURNMENT
10:23:11 AM
The meeting was adjourned at 10:22 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 021221 Order of Operations SFIN.pdf |
SFIN 2/12/2021 9:00:00 AM |
Oil and Gas Severance Tax |