Legislature(2005 - 2006)SENATE FINANCE 532
03/06/2006 03:30 PM Senate RESOURCES
| Audio | Topic |
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| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 305 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
SENATE FINANCE COMMITTEE
March 6, 2006
3:36 p.m.
MEMBERS PRESENT
SENATE RESOURCES
Senator Thomas Wagoner, Chair
Senator Ben Stevens
Senator Fred Dyson
Senator Bert Stedman
Senator Kim Elton
Senator Albert Kookesh
SENATE FINANCE
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
SENATE RESOURCES
Senator Ralph Seekins, Vice Chair
SENATE FINANCE
All members present
OTHER LEGISLATORS PRESENT
Senator Gretchen Guess
Senator Hollis French
Senator Gary Stevens
Senator Gene Therriault
Representative Beth Kerttula
COMMITTEE CALENDAR
SENATE BILL NO. 305
"An Act repealing the oil production tax and gas production tax
and providing for a production tax on the net value of oil and
gas; relating to the relationship of the production tax to other
taxes; relating to the dates tax payments and surcharges are due
under AS 43.55; relating to interest on overpayments under AS
43.55; relating to the treatment of oil and gas production tax
in a producer's settlement with the royalty owner; relating to
flared gas, and to oil and gas used in the operation of a lease
or property, under AS 43.55; relating to the prevailing value of
oil or gas under AS 43.55; providing for tax credits against the
tax due under AS 43.55 for certain expenditures, losses, and
surcharges; relating to statements or other information required
to be filed with or furnished to the Department of Revenue, and
relating to the penalty for failure to file certain reports,
under AS 43.55; relating to the powers of the Department of
Revenue, and to the disclosure of certain information required
to be furnished to the Department of Revenue, under AS 43.55;
relating to criminal penalties for violating conditions
governing access to and use of confidential information relating
to the oil and gas production tax; relating to the deposit of
money collected by the Department of Revenue under AS 43.55;
relating to the calculation of the gross value at the point of
production of oil or gas; relating to the determination of the
net value of taxable oil and gas for purposes of a production
tax on the net value of oil and gas; relating to the definitions
of 'gas,' 'oil,' and certain other terms for purposes of AS
43.55; making conforming amendments; and providing for an
effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 305
SHORT TITLE: OIL AND GAS PRODUCTION TAX
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/21/06 (S) READ THE FIRST TIME - REFERRALS
02/21/06 (S) RES, FIN
02/22/06 (S) RES AT 3:30 PM BUTROVICH 205
02/22/06 (S) Heard & Held
02/22/06 (S) MINUTE(RES)
02/23/06 (S) RES AT 3:30 PM BUTROVICH 205
02/23/06 (S) Heard & Held
02/23/06 (S) MINUTE(RES)
02/24/06 (S) RES AT 3:30 PM BUTROVICH 205
02/24/06 (S) Heard & Held
02/24/06 (S) MINUTE(RES)
02/25/06 (S) RES AT 9:00 AM BUTROVICH 205
02/25/06 (S) -- Reconvene from 02/24/06 --
02/25/06 (H) RES AT 10:00 AM SENATE FINANCE 532
02/25/06 (S) Heard & Held
02/25/06 (S) MINUTE(RES)
02/27/06 (S) RES AT 3:30 PM BUTROVICH 205
02/27/06 (S) Heard & Held
02/27/06 (S) MINUTE(RES)
02/28/06 (S) RES AT 3:30 PM BUTROVICH 205
02/28/06 (S) Heard & Held
02/28/06 (S) MINUTE(RES)
03/01/06 (S) RES AT 3:30 PM BUTROVICH 205
03/01/06 (S) Heard & Held
03/01/06 (S) MINUTE(RES)
03/02/06 (S) RES AT 1:30 PM BUTROVICH 205
03/02/06 (S) Heard & Held
03/02/06 (S) MINUTE(RES)
03/02/06 (S) RES AT 3:30 PM BUTROVICH 205
03/02/06 (S) Heard & Held
03/02/06 (S) MINUTE(RES)
03/03/06 (S) RES AT 3:30 PM BUTROVICH 205
03/03/06 (S) -- Meeting Canceled --
03/04/06 (S) RES AT 10:00 AM SENATE FINANCE 532
03/04/06 (S) Presentation by Legislative Consultants
03/06/06 (S) RES AT 3:30 PM SENATE FINANCE 532
WITNESS REGISTER
Daniel Johnston, Owner
Daniel Johnston & Co, Inc.
60 Shady Lane
Hancock, New Hampshire 03449
POSITION STATEMENT: Delivered Presentation entitled Alaska's
Proposed Production Tax - PPT 20/20
ACTION NARRATIVE
CHAIR LYDA GREEN called the joint meeting of the Senate
Resources Standing Committee and the Senate Finance Committee to
order at 3:36:58 PM. Present were Senators Fred Dyson, Bert
Stedman, Kim Elton, Thomas Wagoner, Donny Olson, Con Bunde, Gary
Wilken, Ben Stevens, Lyman Hoffman and Gary Stevens.
SB 305-OIL AND GAS PRODUCTION TAX
3:36:58 PM
CO-CHAIR THOMAS WAGONER announced that the presentation would
begin.
DANIEL JOHNSTON, Owner of Daniel Johnston & Company and
Legislative Consultant to the international petroleum industry,
introduced himself.
3:38:42 PM
MR. JOHNSTON reviewed his credentials and said he advises
governments on issues like the petroleum production tax as well
as teaches classes on resource development for different
universities. He also does arbitration work involving
litigations and mediations. He said it was his strong opinion
that minerals and resources were a gift from God and that his
mandate was to help the State of Alaska design a fair system.
3:42:27 PM
MR. JOHNSTON continued reviewing his credentials and said that
much of the presentation would be addressing fundamental
taxation theory. Future generations will ask whether the
Legislature designed the system right and negotiated the best
contract with the information and tools of the present date, he
stated.
3:44:40 PM
Senator Albert Kookesh joined the meeting.
3:45:45 PM
MR. JOHNSTON advised the committees of his disclaimer prior to
the presentation. He highlighted the exorbitant amount of
material that he had to study and said he needed more time in
order to provide a more thorough report. He reserved the right
to correct, amend, change, and add to what he called his
preliminary report.
Slide 6: Conclusions
Alaska has every right to change the system and is not the only
region considering or making changes these days. Alaska may have
more justification to change than most due to the following:
· Because the ordinary regressive effect of the royalty
· The ordinary regressive effect of a severance tax
· The inefficiencies of ELF's field production rate element
· The inefficiencies of ELF's daily well production rate
element
3:50:29 PM
The new system should increase revenues to the State of Alaska
and enhance exploration activity. These are not mutually
exclusive objectives. Increasing taxes on existing production is
relatively inelastic and the proposed credits work well for
exploration.
The new system should be a well-designed modern system and
should be flexible, progressive, simple, and transparent.
3:55:02 PM
The ELF tax itself as is structured is a progressive tax but it
only just barely counterbalances the regressive effect of the
12.5 percent royalty, in which case as a whole is effectively
neutral and that is not enough. Alaska must develop a system
that could handle extreme prices in case oil goes up to $200 a
barrel.
3:56:58 PM
Trying to craft one system to fit all situations may be
impossible. Exploration is extremely different than production
from existing fields. With fields like Prudhoe Bay there is
little margin for error.
4:03:12 PM
The producers want fiscal certainty but Alaska must be extremely
careful. It is such a long-term contract that no wonder they
want certainty but companies operate regularly with much less
certainty than is being demanded.
4:05:09 PM
Much of the debate revolves around government take. With the gas
pipeline project, a government take statistic is much less
meaningful because the project is so large.
4:07:57 PM
Crafting language to avoid leakage deserves appropriate terms on
the front end so it is important to "get the deal right."
Numerous issues were left un-addressed due to lack of time to
prepare presentation.
4:11:15 PM
MR. JOHNSTON related what he called "The Indonesian Story"
wherein the country changed their tax structure and suffered
through production challenges.
4:13:56 PM
MR. JOHNSTON related "The California Story" wherein the state
designed their royalty and tax rates poorly and lost a large
amount of revenues.
4:17:20 PM
Slide 9: What Criteria?
· The system must be progressive
· There must be a fair division of profits
· There must be no unhealthy dis-incentives
It must be simple and transparent
4:18:24 PM
Slide 10: Alaska is Unique
Boundary conditions make Alaska unique due to it being
landlocked the Arctic creates high transportation costs. There
are also issues of sovereignty.
4:20:32 pm
One objective is that Alaska must fix the ELF and obtain a fair
share of the profits. In order to do so Alaska must craft a
modern state-of-the-art system and magnify exploration activity.
Alaska must craft a progressive tax yet reduce risk exposure for
the oil companies.
4:23:21 pm
Slide 11: Fiscal System Analysis and Design - things to consider
· Expected field size distributions
· Petrophysical characteristics
· Well deliverability
· Estimated success probability
· Data quality and quantity
· Post discovery costs
· Climate
4:28:38 pm
Slide 11: Contract terms
· Type of system
· Timing
· Royalties
· Cost recovery limit
· Government take
· Contract stability
4:34:26 pm
Slide 12: Government Take
The petroleum industry hates government participation because
the company takes all the risk yet the government takes a piece
of the pie. Some companies report short of what they extract
from the ground in order to keep more of the oil revenues.
4:42:49 pm
Slide 13: Do credits work?
MR. JOHNSTON said that he believed the credit system worked and
that he leans toward enhancing credits but he is still
researching that effect. He offered a few examples of crediting
and the effects of the intricacies involved.
4:49:12 pm
Slide 14: BP Graph of Production vs. Tax Rate
MR. JOHNSTON showed a graph of how lowering the tax rate in 1993
encouraged rapid growth in production. He said something else
had to have happened in order for such a dramatic increase in
production.
4:51:57 pm
Slide 15: UK Petroleum Taxation History
MR. JOHNSTON presented a history of the effect of taxation. He
said small increases or decreases in taxes have very little
effect on production.
4:55:01 pm
Slide 16: UK Drilling Activity
MR. JOHNSTON said the graph confirms the fallacy of the claim
that the reduction of government take enhanced production. This
demonstrates that something is wrong with BP's conclusions of
the 1993 event.
4:56:16 pm
Slide 17: Risk vs. Reward and the PPT Credit Plan
One critical aspect of the PPT is the fact that it was designed
in part to encourage exploration by providing credits and
allowing companies to sell or trade them and any tax loss
carries forward. This aspect reduces the risk for explorers and
the state takes on added risk. Mr. Johnston's slide listed
several examples of other countries risk versus reward factors.
5:02:34 pm
Slide 18: Summary of Key Fiscal Elements of PPT 20/20%
MR. JOHNSTON recapped the 5 main components of the PPT as
presented by Robynn Wilson on February 22, 2006.
· PPT rate/base
· Tax credit rate/base
· Net operating loss
· Base allowance rate/base
· Transition provision
5:05:53 pm
Slide 19: Summary continued
The proposed structure shifts some risk from the industry to the
State of Alaska. The shift is multi-dimensional.
· By shifting the tax base from net production to profits
· By providing a liberal definition of profit
· By applying a 20% credit on capital expenditures
· By allowing credits to be traded
· By allowing TLCFs to be traded
· By providing the 73MM allowance
5:10:01 pm
MR. JOHNSTON compared the allowance to designing one saddle to
fit every farm animal and said he did not know if it would work.
The 73MM is difficult and awkward, he stated.
5:12:00 pm
Slide 20: The "Lookback Provision"
MR. JOHNSTON questioned the fairness of the provision but noted
there was some logic in it due to the losses suffered through
ELF.
5:14:28 pm
Slide 21: Flow Diagram
MR. JOHNSTON presented a flow diagram that was based on Roger
Marks' presentation assuming 20 million barrels at $50 per
barrel.
5:18:34 pm
Slide 22: Regressiveness and Marginal Take
MR. JOHNSTON presented a spreadsheet comparing different prices
per barrel as an illustration of why royalties are regressive
and the logic behind government take.
5:21:25 pm
Slide 23: Variations on Government Take Calculation
MR. JOHNSTON presented a spreadsheet that illustrated differing
levels of government take.
5:24:21 pm
Slide 24: Wood Mackenzie Treatment Of Government Participation:
Global oil and gas risks and rewards
Slide 25: Dr. van Meurs treatment of Government Take:
A page taken from Dr. van Meurs presentation "Proposal for a
Profit-based Production Tax for Alaska."
Slide 26: Take Calculations With & Without Factoring-in
Participation
Without factoring in the government participation element the
universe of fiscal terms is distorted by around 5 percentage
points. Alaska looks worse than it should if this element is
excluded. Mr. Johnston showed an accompanying graph.
Slide 27: ConocoPhillips Government Take, Cost, and Tax Graph
MR. JOHNSTON recreated a graph from the ConocoPhillips
presentation of February 27, 2006. The graph compares low and
high costs with both low and high tax.
5:30:28 pm
Slides 28-30: Government Participation
Many systems provide an option for the national oil company to
participate in development projects. Under most government
participation arrangements, the contractor bears the cost and
risk of exploration and if there is a discovery the government
backs in for a percentage.
MR. JOHNSTON described the government take in India, Columbia,
and China.
Slide 31: Efficiency and Flexibility in Fiscal System Design
If a system were designed efficiently and flexibly theoretically
it would be a more stable contract.
5:34:06 pm
Slide 32: Typical Regressive System & the Regressive Signature
MR. JOHNSTON displayed a typical graph on government take
statistics.
5:36:16 pm
Slide 33: Regional Distribution of Petroleum Fiscal Systems
MR. JOHNSTON displayed a global graph demonstrating regional
distribution of petroleum fiscal systems. Most have a
progressive element of some sort.
5:37:39 pm
Slides 34-38: Effective Oil Severance Tax Rate - Government Take
MR. JOHNSTON provided a series of graphs, some of which were
taken from Dr. van Meurs and Mr. Marks presentations.
Slide 39: Industry Statistics:
Slide contained Mr. Johnston's disclaimer regarding the dated
material.
5:39:29 pm
Slide 40: Weaknesses of Government Take
· Does not adequately capture signature bonuses
· Does not address how government takes
· Says nothing of timing
· Does not measure contract or system stability
· Does not differentiate between diverse work programs
Slides 41-43: More Dated Industry Statistics
· Database table 8
· World averages for oil and gas
· Average state take for deepwater projects
5:43:27 pm
Slides 44-47: International Petroleum Exploration and
Development Contracts Graphs
MR. JOHNSTON overviewed a series of graphs detailing the royalty
tax system for many different countries. The graphs include data
on how systems changed when oil prices fluctuated, the risk
components, world average government take, and comparative
yields.
5:49:47 pm
Slide 48: Contract Duration
MR. JOHNSTON advised that the accompanying graph was developed
in response to a statement made by one of the oil company
representatives claiming that typical contract duration was 50-
60 years. The average contract term is 25 years.
Slides 49-50: Libya's Latest License Round
Graph of Gross revenue split into government revenue and
contractor revenue, "Not worth discussing," he stated.
5:52:35 pm
Slide 51: Expected Value
MR. JOHNSTON displayed a graph of probability of success and
risk analysis. The PPT would reduce risk exposure by 50 percent
and so companies can justify smaller prospects.
Slide 52: BP Presentation on PPT (28 February 2006)
Slides 53-54: Ringfencing
MR. JOHNSTON defined "ringfencing" with several examples.
Slides 55-56: Alaska PPT 20/20% Approach
MR. JOHNSTON highlighted the comparison to ELF.
This signifies the end of the presentation and the beginning of
the question and answer period.
6:00:29 pm
SENATOR BERT STEDMAN asked Mr. Johnston whether he could provide
material on a smaller comparative group rather than worldwide
averages.
MR. JOHNSTON replied yes. Dr. van Meurs and Mr. Marks used
comparative presentations of countries where producers were
actively involved.
SENATOR FRED DYSON asked Mr. Johnston the risk and the likely
outcome if the tax rate were set too high for the Legacy part at
Prudhoe Bay.
6:03:54 pm
MR. JOHNSTON replied the risk was placed on the oil companies
but if the risk is too high, it's easy to change the contract.
On the other hand, if the tax rate were too low, it would be
hell to change.
6:04:30 pm
SENATOR DYSON asked what the likely outcome would be if the oil
companies walk away from the gas negotiations.
MR. JOHNSTON said it depends on the tax rate increase. In
today's price environment it would not have much of an effect on
production, although there would certainly be projects that they
would put on the back burner.
6:08:33 pm
SENATOR STEDMAN asked whether he had a feeling for the magnitude
of risk involved.
MR. JOHNSTON replied the magnitude is such that "you should only
pay for the additional risks that you take." Some big companies
feel they are subsidizing someone else's exploration but that is
not true.
6:11:02 pm
SENATOR DYSON asked him to talk about how the "look-back" should
be different for Cook Inlet and the Legacy fields.
MR. JOHNSTON replied that it would be fair to treat the two
differently and they just need to make sure of what they are
trying to obtain. For example, they want to incentivize
exploration at Cook Inlet and so that makes sense.
There being no further business to come before the committee,
Chair Wagoner adjourned the meeting at 6:14:11 pm.
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