Legislature(2005 - 2006)BUTROVICH 205
03/18/2006 10:00 AM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Department of Revenue – Bill Corbus, Commissioner | |
| Dr. Pedro Van Meurs, Consultant to the Governor | |
| Department of Revenue – Robynn Wilson, Director, Tax Division and Dan Dickinson, Consultant | |
| Department of Revenue – Robynn Wilson, Director, Tax Division | |
| British Petroleum – Angus Walker, Commercial Vice President | |
| Conocophillips Alaska – Brian Wenzel | |
| Exxonmobil – Richard Owen, Production Manager | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB 305 | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 18, 2006
10:06 a.m.
MEMBERS PRESENT
Senator Thomas Wagoner, Chair
Senator Ralph Seekins, Vice Chair
Senator Ben Stevens
Senator Fred Dyson (via teleconference)
Senator Bert Stedman (via teleconference)
Senator Kim Elton
MEMBERS ABSENT
Senator Albert Kookesh
OTHER LEGISLATORS PRESENT
Senator Gretchen Guess
Senator John Cowdery
Senator Gene Therriault
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
03/06/06 (S) Heard & Held
03/06/06 (S) MINUTE(RES)
03/07/06 (S) RES AT 3:30 PM BUTROVICH 205
03/07/06 (S) Heard & Held
03/07/06 (S) MINUTE(RES)
03/08/06 (S) RES AT 3:30 PM BUTROVICH 205
03/08/06 (S) -- Meeting Canceled --
03/09/06 (S) RES AT 3:30 PM BUTROVICH 205
03/09/06 (S) -- Meeting Canceled --
03/10/06 (S) RES AT 3:30 PM BUTROVICH 205
03/10/06 (S) -- Meeting Canceled --
03/11/06 (H) RES AT 10:00 AM CAPITOL 106
03/11/06 (H) -- Meeting Canceled --
03/13/06 (S) RES AT 3:30 PM BUTROVICH 205
03/13/06 (S) Heard & Held
03/13/06 (S) MINUTE(RES)
03/14/06 (S) RES AT 3:30 PM BUTROVICH 205
03/14/06 (S) Heard & Held
03/14/06 (S) MINUTE(RES)
03/15/06 (S) RES AT 3:30 PM BUTROVICH 205
03/15/06 (S) -- Testimony <Invitation Only> --
03/16/06 (S) RES AT 3:30 PM BUTROVICH 205
03/16/06 (S) -- Meeting Canceled --
03/17/06 (S) RES AT 3:30 PM BUTROVICH 205
03/17/06 (S) Heard & Held
03/17/06 (S) MINUTE(RES)
03/18/06 (H) RES AT 10:00 AM CAPITOL 124
WITNESS REGISTER
DR. PEDRO VAN MEURS
Consultant to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 00911-0001
POSITION STATEMENT: Commented on SB 305.
BILL CORBUS, Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Commented on SB 305.
DAN DICKINSON
Consultant to the Department of Revenue
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Commented on SB 305.
ROBYNN WILSON, Director
Tax Division
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Commented on SB 305.
ANGUS WALKER, Commercial Vice President
BP Alaska
Anchorage AK
POSITION STATEMENT: Commented on SB 305.
BRIAN WENZEL, Vice President
Finance and Administration
ConocoPhillips Alaska
Anchorage AK
POSITION STATEMENT: Supported SB 305; opposed CSSB 305(RES).
RICHARD OWEN, Production Manager
ExxonMobil Alaska
Anchorage AK
POSITION STATEMENT: Supported SB 305.
ACTION NARRATIVE
CHAIR THOMAS WAGONER called the Senate Resources Standing
Committee meeting to order at 10:06:01 AM. Members present at
the call to order were Senators Ralph Seekins, Ben Stevens, Fred
Dyson (via teleconference), Bert Stedman (via teleconference),
Kim Elton and Chair Thomas Wagoner.
SB 305-OIL AND GAS PRODUCTION TAX
CHAIR WAGONER announced SB 305 to be up for discussion. [In the
packets was a proposed committee substitute, (Version Y, labeled
24-GS2052\Y, Chenoweth, 3/16/06.]
10:06:37 AM
^Department of Revenue - Bill Corbus, Commissioner
BILL CORBUS, Commissioner, Department of Revenue, informed
members that he strongly supported the bill as it was originally
introduced with the 20/20 scheme and he strongly urged them to
return to it. It would provide badly needed incentive for
increasing Alaska's declining oil production. He said that the
TransAlaska Pipeline (TAPS) is currently operating at less than
half-capacity. Production was once at 2 million barrels a day
and now it's at 870,000 per day and projected to be 772,000 by
2016. Recent investment and development has been inadequate and
higher tax rates would further discourage new investments.
He said in the short-term, the next five years, the target has
to be known reserves from existing fields and records show that
existing producers have done that development. He advised that
the legislature must not emphasize short-term revenues from this
tax, but must look at maximizing the state's wealth over the
long run and the level of investment the state needs will not
occur unless there is an enlightened or balanced tax climate.
The numbers show that 20/20 is the right mix.
10:08:57 AM
Thirdly, he exhorted them to keep their eye on the prize - the
gas line. At current prices, it would bring the state more than
$100 billion over the first 35 years of its existence. It would
also extend the life of TAPS beyond the year 2030 until the gas
runs out. He again urged the committee to return to the original
20/20 scheme.
COMMISSIONER CORBUS mentioned that Dr. Pedro van Meurs would
testify on the problems in the CS. He had been a consultant to
the state on oil and gas taxation issues since 1996. He also
mentioned that Robynn Wilson, Director of the Tax Division,
would address administration problems within the CS and Dan
Dickinson, its former director who was now a consultant, would
address its tax policy problems.
10:10:39 AM
^Dr. Pedro van Meurs, Consultant to the Governor
DR. PEDRO VAN MEURS, Consultant to the Governor, informed the
committee that many issues in the proposed CS required his
attention. There were so many different ideas in the bill, it
was somewhat difficult to grasp the total concept. It was even
difficult to understand some clauses, such as the progressivity
factor, which wasn't actually progressive. He referred to the
formula on page 6, lines 4 and 5, and suggested that oil would
need to be over $1000 a barrel before the state would get a 20-
percent tax.
DR. VAN MEURS said the PPT bill is the first step in a process
that people hope will lead to a stranded gas contract.
Department of Revenue research indicates that there is a very
important interaction between the gas line and the state's oil
production. If the gas line goes forward, that will prolong the
life of the fields associated with TAPS. It will also provide
the opportunity for considerable additional oil development.
10:14:32 AM
DR. VAN MEURS referred to page 3 of his handout that was a
repeat of Roger Marks' slide to illustrate the point that
without the gas line, production on the North Slope may become
uneconomic or impossible after the year 2030. The gas line would
add significant oil, as well as particulate condensates and
other possibilities.
10:15:27 AM
DR. VAN MEURS said that they are potentially looking at very
high revenues from the gas line, depending on the various price
levels, as much as $4 billion a year at very high prices of,
maybe, $7.50 - at current prices, maybe $3 billion. There is
enormous synergy between gas and oil.
10:17:11 AM
DR. VAN MEURS said the combination in the PPT opens the
possibility of presenting a gas contract to the legislature. He
said there had been a lot of debate and evidence presented to
them on the relation between the tax rate and the amount of
investment. But he said the PPT was a modest change to the
overall government take, not a dramatic one, and he didn't see
more investment occurring over that rate alone saying,
"Nevertheless, it would be an error to say that there is
absolutely no relationship between tax rate and investment. Of
course there is a relationship between tax rate and investment."
The legislature had requested him to prepare competitiveness
indexes at $36 a barrel. It showed the competitiveness of the
PPT under various fiscal options - long term - and didn't
include the $73 million allowance. This is how large oil
companies would look at it. The table indicated that the numbers
clearly change under the PPT system and not under Alaska's
current system. Under his ranking system the lower the number,
the more competitive the system and it showed that the 20/20 was
clearly more competitive than the current system with this price
for the large companies. Other systems in the world are far more
attractive - the U.S. Gulf of Mexico or the UK, for instance.
However, the PPT proposal improves the competitiveness at 20/20.
At 25/20, there is a slight improvement, but not significant. At
30/20, the PPT becomes less attractive and at 30/15, it becomes
much less attractive.
10:21:47 AM
DR. VAN MEURS said these figures were not based on any analysis
of a specific investment, but were generated from the math in
his report once he made assumptions about field sizes, costs and
circumstances. His conclusion was that definitely there is some
relationship between tax rate and level of investment. He
summarized that relationship on page 8 of his handout with the
following comments.
With the $73 million tax-free allowance proposed by the
governor, new investors who come to Alaska for the first time
wouldn't pay any PPT on their first field. Consequently, the
credits under the PPT would always make the system more
favorable for new investors' first investments no matter what
the tax rate. "And that was a very important concept of the PPT
- to encourage this new investment, to bring new investors to
Alaska."
10:24:09 AM
DR. VAN MEURS said, at the same time, the reality of the North
Slope production is that any increases in production will come
from reserves that have already been discovered. "It take years
to explore; it takes years to develop and fairly large resources
have been identified." He believed if the state wanted to
maintain production or decline it less, then it must increase
investment by larger oil companies.
At 25/20, he believed the producers would invest about the same
- about $1 billion dollars a year. The system is clearly more
competitive under the 20/20 and logically, investment would
increase - how much is difficult to say. With 30/20, the state
would have less investment; with 30/15, even much less. One
thing they know is that at the current level of investment -
25/20 - production has declined.
We know that for a fact from the last five years. That
if you invest a billion dollars a year, the production
declines. So, I would say it would also be a fact, a
reasonable forecast of the model I developed, that if
you adopt 25/20, this decline will continue. Will they
continue to invest? Yes. As I said, my belief is that
investment will continue on a moderate pace - some
companies maybe more than others - but not enough to
change the decline rate. And this is the debate that
took place internally, but what is the best
combination?
10:27:10 AM
And consequently, the governor decided that the 20/20
was the best combination because he believes strongly
that we need to stop the decline of the oil
production. We need to do whatever possible to stop
that decline and the total revenues to the state are
not just how much you get per barrel, but also how
much barrels you produce. That is also logical.
So, the 20/20 is a system that at least, based on my
model, would result in more investment. You can
reasonably forecast that; and consequently, if we just
produce another billion barrels more, or two or three
billion barrels more, over the next 30 years,
obviously, at current prices, that means tens of
billions of dollars more for the government. So,
consequently, there is this important balance between
investment and tax rate. So, that is what I'd like to
leave you with. The evidence that I presented to you
in my report before and in my subsequent answers to
the legislators clearly illustrate that there is some
relationship between investment and tax rate.
As I said, I don't believe in dramatic statements. I
don't believe that at 25/20 that the oil industries
will leave Alaska and at 20/20 they will all storm
back. It is not that extreme. We live in an area of
uncertainty - that investment patterns, I believe,
will be modest. But, there is clear evidence that at
25/20 I think the decline in oil production will
continue, because investments will continue at
approximately $1 billion a year. At 20/20, logically
investment should increase and consequently,
production will decline less or may even stop
declining.
10:29:33 AM
DR. VAN MEURS said some provisions in the CS about Cook Inlet
puzzled him and were meant to protect it somehow. And even
though he understood the concern, he thought carving out
specific areas to be dealt with separately would be
counterproductive. First of all, language did not clearly apply
to oil or to oil plus gas and he firmly believed that even in
Cook Inlet there are further possibilities for further
development and exploration. The PPT was meant to encourage and
reward those people who are willing to develop the fields
further and willing to explore. It would reward them with very
significant tax credits. He persuaded:
We need more exploration, not just in the North Slope;
we also need it in Cook Inlet. And carving out Cook
Inlet from the main bill does not serve the purpose of
seeing more exploration. In fact, what I sense from
the special Cook Inlet provisions is that we go in a
harvesting mode - in Cook Inlet. We don't want to
explore more; we don't want to develop more. Just
leave us alone, we have some profits now. Let's just,
you know, enjoy it and don't bother us. I think that's
the wrong approach. I believe we should strive to also
increase activities in Cook Inlet and we should also
reward investors in the Cook Inlet region, just as we
would do all across Alaska.
10:32:45 AM
And I don't think that putting Cook Inlet in the
harvesting mode is the right thing to do. I also
believe that it would be an unfair balance struck as a
result in this proposal between those who operate in
Cook Inlet and those who operate in other areas.
DR. VAN MEURS said if oil prices go to very high levels, Cook
Inlet would not be subject to a severance tax, but companies
outside Cook Inlet would and he wasn't clear what the proposal
entailed. If there are very high prices, he could see why
everyone would want to share in the extra benefit. He also
didn't think it was fair for explorers in Cook Inlet to be
assured of no taxes while explorers outside Cook Inlet are put
on a very tight rein of only getting either the 30 percent or
the 4,000 barrel exemption for seven years.
10:34:08 AM
DR. VAN MEURS cautioned that a complex fiscal system is
difficult to administer and is a disincentive for investment to
begin with. There is great virtue in simplicity and clarity in
tax legislation. Nations that made simple tax laws applying to
the whole country get more investment than nations that try to
optimize every little corner and piece.
DR. VAN MEURS asked the committee to reflect on how the current
ELF system on oil and the new PPT for gas would work together.
He asked how one would distinguish between a development for oil
or one for gas and remarked that how the whole geographic system
would have to be set up to trace where investments were made. It
becomes very complex. He strongly urged them to not divide
Alaska into pieces.
10:36:35 AM
DR. VAN MEURS said there seemed to be some misconception on
promoting exploration in the CS. He said the PPT already targets
massive incentive for exploration, particularly for new
investors. The Expected Monetary Value (EMV) column on page 10
indicated how attractive exploration would be. It compared
Alaska's current system with the PPT and showed an enormous
increase in competitiveness, such that Alaska would be almost
among the top in the world in exploration incentive. Encouraging
more exploration would be overdoing it and there is no need to
complicate the law further.
10:40:02 AM
DR. VAN MEURS referenced pages 11 and 12 of his handout saying
there is a big difference between promoting exploration and
enhancing the economics of small oil companies. The proposed CS
seems to help the new small companies with a 4,000-barrel
exemption for several years, but that is not what is so
important about small companies. He explained that hundreds of
small companies have operated in Alberta, Canada for over fifty
years - as small companies; only a few will become big. As a
small company, they contribute to the economy in terms of jobs
for one thing. They also have a roll in exploration taking on
projects that the larger oil companies aren't interested in.
That's why the governor's bill included permanent benefits, not
just one-time benefits, for the small companies. He stated that
permanent fiscal policy for small companies, Alberta-style, is
good policy. He thought the CS confused exploration enhancement
with small company protection.
10:42:34 AM
He said the governor's bill had options to the $73 million
allowance, but he advised making it permanent protection for the
small companies reasoning if a company becomes large, it can pay
the PPT, but if it struggles on and stays small, it will have
protection for the entire time period. He summarized:
The PPT bill does everything necessary to promote
exploration - 20 percent tax credits are strong tax
credits by international standards. The tradability of
the losses is a magnificent feature from an
international perspective. That will attract new
explorers. At the same time we like to protect small
companies because of the contribution they make to the
state and the potential contribution they would make
to the state in the long term - not a one-time shot -
but as a long-term strategy - so that very gradually
we build up these companies to a permanent role in the
state. That was the spirit of what was presented and I
don't discover that spirit in this substitute.
10:44:48 AM
DR. VAN MEURS commented on "State Owned Assets," on page 13 of
the handout. He cited AS 43.55.024(i)(3)(B) [in the CS], which
stated that no credits would be provided for an asset in which
the government participates for 5 percent. He reflected that he
knew of no assets in which the government participates for 5
percent. So, it seems the clause was put in there as a result of
statements the Governor and he had made many times - that to
make this project go, there must be state participation and risk
sharing. He hoped to demonstrate that to the legislature with
ample evidence.
DR. VAN MEURS began his argument saying we live in a very
competitive world and this very large gas project may be delayed
if the contract is not strong enough to put it at the top of the
stack and in a rapid execution mode. He believed that could only
be achieved with direct participation of the state. He urged
members to delete [the 5 percent government participation
provision] - to hear the evidence first and then follow up.
SENATOR JOHN COWDERY joined the meeting at 10:47:27 AM.
10:48:53 AM
SENATOR ELTON said it seems there are two ways for the state to
invest in a gas pipeline; one is to purchase an equity share
(let's assume it's 20 percent) or to allow credits against
payments that otherwise would come to the state. He asked if it
uses credits that don't give a larger ownership share, what is
the advantage to the state.
10:50:18 AM
DR. VAN MEURS agreed that the participation in the line,
particularly taking the gas in kind, is a very important
methodology for improving the rate of return of the project.
Providing a credit is another way to improve the rate of return.
The two don't have to go together; they are two separate
decisions. It's important not to preclude any options and to
maintain an open mind with regard to how this gas line should be
structured. He cautioned against closing doors before the new
law is integrated into the contract.
10:53:04 AM
SENATOR BEN STEVENS agreed with Dr. Van Meurs' comments, which
related to Section 16 (i)(b) of the CS - that it's a preemptive
strike on an issue the legislature hasn't seen. It is up to the
legislature to make the policy call when the issue arises and
it's not up to consultants and drafters to insert a preemptive
clause. He also asked Dr. van Meurs to further define the
comparisons on page 7 of the handout. He asked why the numbers
decrease from left to right.
10:55:23 AM
DR. VAN MEURS replied that the decline was caused by the fact
that in this type of competitive rating analysis, you rate all
of the fiscal systems in accordance with the rate-of-return
(ROR). For example, the best ROR is 21 percent, then 19 percent,
et cetera. If you change fiscal terms for any one of the
systems, you are actually changing many of the other variations
- because suddenly the PPT becomes more attractive relative to
the current system.
10:57:09 AM
SENATOR BEN STEVENS asked for clarification on the comparison on
page 8.
DR. VAN MEURS answered that it indicates he expects the same
level of investment for the proposed system as under the current
fiscal terms. He made a simplifying assumption that if the ROR
is the same under the current system and the new system, there
was no argument for an investor to invest more or less. However,
companies may disagree with his rating features.
10:59:27 AM
SENATOR BEN STEVENS asked why he said the escalator clause, on
pages 5-6 of the proposed CS, didn't have an accurate formula.
DR. VAN MEURS replied that he didn't have an opinion on it
because he didn't understand it.
CHAIR WAGONER answered that that language needed clarification.
DR. VAN MEURS responded that it would have a huge impact
potentially on his economic evaluation.
11:02:15 AM
SENATOR GRETCHEN GUESS said she enjoyed reading his report,
which talked about exploration credits, but not production and
development credits. She asked:
Including production and development both in the lease
expenditure capital asset that is counted under the
lease expenditure and the qualified capital
expenditure, are production and development capital
expenditures in those two in these numbers?
DR. VAN MEURS replied no. The 20 percent applies to exploration
as well as all capital-development costs. The reason is that
actually most of the new oil production in Alaska won't come
from new discoveries, but from oil that is already discovered.
That is why it is so important to grant the 20 percent tax
credits for development of oil that is already discovered as
well as for exploration. He explained:
In the exploration analysis, people don't just look at
the exploration well. They also look at what follows
and, consequently, if you see tax credits all the way
through, then you know that you have better economics
for your development and if there's better economics
for your development, you make the exploration again
much more attractive. So, that's the philosophy of the
law.
SENATOR GUESS thanked him for his answer and went to slide 7 on
the international competitive model and asked him to reconcile
what he just said about increasing tax credits helping with
competitiveness and his testimony was that the state doesn't
need any more tax credits in the bill.
11:05:41 AM
DR. VAN MEURS concurred with her analysis and explained that the
reason, internationally, one is careful with pushing tax credits
too high is that it exposes the state on the down side. If it
gives 30 percent credit on everything when prices are high and
everyone invests and then the price collapses, the state is in
really bad shape - "because now you have all these tax credits
and suddenly no income." He said he actually soul-searched a
little bit about whether 20 percent was already on the high side
and initially recommended 20/15.
Also, Alaska is contributing to the capital of the investment by
implementing tax credits and if they are too high (the term is
"gold-plating"), as some nations have done, investments become
irrational and become hard to administer. That's why there's a
balance between tax credits, risk, proper administration and
investment behavior. You have to strike a balance and that's
what he thought the 20/20 formula did.
11:10:32 AM
CHAIR WAGONER referred to page 8 of the handout and asked how
the claw-back provision - for every $2 invested by a company, it
can reach back and get $1 - would affect a 20/20 or a 25/20 if
it were implemented for four or five years.
DR. VAN MEURS answered that a two-for-one provision is a more
creative way of getting something back for Alaska.
As I mentioned, the $1 billion investment per year
that you have seen over the last five years is not
enough to stop the decline. Consequently, to
officially enshrine in the legislation the concept
that yes, if we see $2 billion a year, then we are
willing to give some extra benefit for that - rather
than - as you did in the law to just reduce the claw
back. And I agree, if you reduce the claw back, of
course, the state ends up with more money and the
companies end up with less money. That's obvious! But
my concerns is what benefit other than this little bit
of extra money - now, I shouldn't say little, but
hundreds of millions of dollars for most Alaskans
sounds like a lot of money. I know that - but in the
total scheme of things... this is a small component.
He expounded that it is more creative to structure the provision
so that it actually does something for Alaska - and gives a
reward, especially to those companies that aren't eager to
increase their investment under the new fiscal system. He
believed all companies should be eager to increase investment
under the 20/20 system.
11:14:14 AM
DR. VAN MEURS suggested that while it would encourage
investment, it would also increase the state's risk for a
limited period of time - such as five years. Investors who
double their investment in Alaska could be rewarded. He
explained that the claw-back proposal has a limit that applies
only to oil over $40 a-barrel. It would be an interesting
feature to have and would express a philosophy that the state
wants to see. He didn't think companies would immediately start
doubling their investment.
CHAIR WAGONER said he was thinking of companies already
producing here.
DR. VAN MEURS agreed and said those would get an extra reward
for enhancing production from existing fields.
11:16:39 AM
SENATOR GENE THERRIAULT said that the "sunk cost" to the
companies was basically a giveaway and wouldn't impact their
future decisions and he favored limiting it. However, with the
new thought of two-for-one suggested a little further work would
make it useful to the state. He thought it would change the
25/20 scenario from being the same as the status quo to
increasing activity from the large producers.
11:19:50 AM
SENATOR THERRIAULT turned his attention to page 13 and the
troubling aspect of the state's paying for its percentage of
ownership, as well as for some of the partners' ownership. He
asked Dr. Van Meurs if he could somehow model the benefit to the
state of doing so. He compared the claw back to a bicycle built
for two.
We're willing to get on the bicycle and help our
partner pedal to make investment, but we're not going
to be the drivers. We're not going to be holding the
handlebars. That's going to have to be the companies.
I think the way the PPT is structured, we're
encouraged to push on the pedals and so are they....
11:22:59 AM
He saw the original problem was that the companies might be
reluctant to get on board the bicycle, but the look back's
potential value to the companies of up to $1 billion was a real
incentive for them to get on the bicycle and start pedaling with
the state.
11:24:28 AM
CHAIR WAGONER asked that Dr. Van Meurs hold his answer until the
following Monday so further work could be done and other members
would be able to be present.
11:24:57 AM
SENATOR STEDMAN asked that the same table on page 7 be run at
$46 a barrel oil for the following Monday.
DR. VAN MEURS responded that major oil companies don't forecast
at $46 a barrel, and thus it wouldn't reflect their investment
behavior. He believed the $26 - $36 was the range used for long-
term oil price forecast by the major oil companies, but he
agreed to generate that table for the committee's information.
CHAIR WAGONER asked Senator Stedman whether he'd meant for the
formula on page 6 to have .20 percent for each $10-increment or
for each $1.
SENATOR STEDMAN replied that he used Econ One's numbers and that
needed to be clarified.
11:27:26 AM
SENATOR ELTON asked if he was missing something when Dr. Van
Meurs said there is a difference of three points under 30/20
resulting in less investment and when there's a difference of
five points the other way, which would keep investment about the
same.
DR. VAN MEURS replied that was a good question. He used that
judgment because, in his rating, both NPV [Net Present Value]
and are EMV included. He discounted the EMV a little bit
because it reflects investment in fields that are already there,
not exploration.
If I would include the EMV kind of fully, then it
looks like the figures are slightly better for 25; if
you discount for EMV, which I have to do if you only
look at primarily development fields, then it comes
out more or less as I have it here.
11:30:10 AM
SENATOR ELTON asked if the 20/20 zero on page 7 was with or
without the $73 million.
DR. VAN MEURS replied 20/20 zero indicated that a large producer
wouldn't benefit anymore from the $73 million because it already
took the allowance on a corporate basis.
11:30:38 AM
CHAIR WAGONER returned to the issue of Cook Inlet, saying that
the CS didn't excluded it from the PPT - just the current
production. He explained that the Inlet has 20 producing units
and those fields are virtually at the end of their lifespan.
The CS language rolls those into one area and maintains them at
the their royalty reduction level that was established a few
years ago. Placing a tax on them would greatly increase their
burden even with oil at $60 a barrel and, "Things will start
shutting down." Two platforms are already shut down. The attempt
is to maintain that infrastructure. The provision in the CS only
affects current production of oil; the PPT applies to all new
production.
DR. VAN MEURS replied that some parts of the CS were difficult
to interpret on short notice and he is well aware of the
marginality of the fields in Cook Inlet, but he wanted to
structure the PPT in a way to achieve the more exploration. By
excluding a certain portion, as implied in this draft, it would
become difficult to administer and without necessary achieving
the desired results. He opined that perhaps some other
"wrinkles" could be added to the PPT bill to obtain the
provision's objectives. He subscribed to the philosophy that if
something is good for Cook Inlet, it should be good for all of
Alaska. He urged them to keep the framework united.
CHAIR WAGONER said he wanted that infrastructure up and running
for future production.
DR. VAN MEURS totally agreed.
11:35:46 AM
SENATOR GUESS requested a slide of Dr. Van Meurs' assumptions on
what is included and excluded on costs, the lease expenditures
and the qualified capital expenditures.
DR. VAN MEURS agreed to that.
11:36:29 AM
SENATOR BEN STEVENS asked if the committee would need a new
draft before beginning with amendments.
CHAIR WAGONER said they would just do a cleanup and then work on
amendments.
SENATOR BEN STEVENS said the reason he asked was because the
chair put a timeline of Tuesday afternoon for amendments due in
his office and it would be nice to have the cleaned-up version
before then.
CHAIR WAGONER said they would get an update on when the CS would
be cleaned up by drafting.
CHAIR WAGONER called an at-ease from 11:38:29 AM to 11:39:27 AM.
11:39:32 AM
^Department of Revenue - Robynn Wilson, Director, Tax Division
and Dan Dickinson, Consultant
DAN DICKINSON, Consultant to the Department of Revenue, came
forward with Robynn Wilson, Director, Tax Division to comment.
MR. DICKINSON said there are four separate tax components
created [in the CS] - a tax on Cook Inlet oil, which is based on
the old ELF system and a tax on Cook Inlet gas and other Alaskan
oil based on the PPT; there is also a tax on private royalty and
the 20 percent of each $10-increment. Maybe that level of
complexity was appropriate, but what struck him was that folks
had not carefully identified which ones they were talking about.
11:41:36 AM
^Department of Revenue - Robynn Wilson, Director, Tax Division
ROBYNN WILSON, Director, Tax Division, Department of Revenue -
said she would walk through the bill and invite Mr. Dickinson to
add comments. She started with page 3, line 18, of the CS
[version Y]. This section levies the tax and tries to address
Cook Inlet properties, but the language that is used talks about
"from each lease or property within a field or unit...that was
in production". Her concern was that there could be multiple
fields within a unit and if part of a field is in production and
a new one comes on line within the same unit, how that would
work together wasn't clear. The clause "was in production" could
be applied to "lease", "property", "field" or "unit".
Another definitions issue was that "unit" is the equivalent of a
participating unit, which is a Department of Natural Resources
definition; the AOGCC looks a pools and Department of Revenue
regulations look at fields. So, she asked for more clarity in
that language.
11:43:31 AM
MR. DICKINSON brought attention back to page 4, lines 10 - 23,
that used the existing definition for "value at the point of
production (POP) for oil only. He could see three problems with
that. First, he believed the DOR's definition cleans up archaic
language for oil, but he would want to suggest that having two
different definitions apply in two different places, that the
legislature thinks they mean something different. He explained:
As a matter of legislative history, we believe we are
not changing the point of production and the fact that
we have the language in here and need to put it in two
different places might suggest otherwise. [He offered
a handout - see packet]. The point I'd like to make
here is the two definitions essentially are going for
the exact same notion. The proposed definition for
Cook Inlet, which is our existing definition - it
repeats this several times, once dealing with on the
premises and one dealing off the premises. The key
idea is it's the value of the oil where it's first
metered or measured by an automatic custody transfer
meter, a tank gauge, or other method approved by the
commissioner in a condition of pipeline quality.
That's the current definition and if you go, you'll
find that phrase in here three separate times. What we
have done is try to rewrite it and the proposed
definition, which is the second piece of this piece of
paper - and again, we used all those same phrases, but
we tried to tie them together in a way that we felt
was more coherent - saying the value of the oil at the
automatic custody transfer meter, which in fact is the
universal standard in Alaska, or a device through
which the oil enters into the facilities of a pipeline
carrier or other transportation carrier, again, in a
condition of pipeline quality, or in the absence of an
automatic custody transfer meter. We need to put this
language in so we're covered - even though as a
general rule this doesn't happen.
The gross value at the point of production means the
value of the oil at that mechanism or device, which
measures the quantity of oil that has been approved by
the department for that purpose through which the oil
is tendered or accepted in a condition of pipeline
quality in the facilities of a pipeline carrier or
other transportation carrier or a field topping plant.
MR. DICKINSON said the other tension is, given the definition
Ms. Wilson talked about earlier, you could have a single
production facility in which an old oil stream and a new oil
stream were coming in at the same time. The department wanted to
avoid having two different systems and two different definitions
of points of production because that could get awkward.
11:47:07 AM
MS. WILSON returned to her testimony and went back to page 5,
line 27, where the CS indicated that the commissioner shall
determine the amounts of royalties on all fields developed in
ANWR and the NPRA. She wasn't' sure that was the drafter's
intent, since the commissioner doesn't set royalty. She wondered
whether it needed to be "tax on royalty".
CHAIR WAGONER replied that it was supposed to be "tax on the
royalty".
MS. WILSON said that needed to be clarified and also suggested
that level of discretion would be best left to statute rather
than to the commissioner.
11:48:07 AM
MR. DICKINSON went to page 6, lines 4 and 5, and said his main
concern was that it wasn't clear if the tax referred to net or
gross.
MS. WILSON agreed. Moving on to page 7, lines 16 - 20, she said
Section 10 of the governor's bill had a 90 percent safe harbor
payment scenario with an annual true up and she wasn't sure
about the purpose of the yearly true up. Lines 16 -20 talked
about how interest on an over-payment works. The governor's bill
talks about only allowing interest from a date that was 90 days
after the March 31 true up. Once a quarterly true up is thrown
in, the language indicates that interest will start 90 days
after the later of March 31 or the 90 days after the end of each
calendar quarter. That doesn't make sense.
11:50:53 AM
MS. WILSON moved on to page 8, line 21, that described
situations where oil and gas is sold under circumstances that
don't represent prevailing value. Clarifying language was added
to the governor's bill. It read: "If oil or gas is not sold or
if oil or gas is sold under circumstances that do not represent
prevailing value". The CS added a couple words - "produced, but
not sold". Someone might question why those words were not added
in front of the second clause, which is "or if oil or gas is
sold under circumstances that are not prevailing value".
One could argue if it's sold, obviously it would have been
produced; she suggested that one can buy or sell anything and
advised taking that language out, and added that would make that
language consistent with the governor's bill.
11:52:33 AM
MS. WILSON turned to the section on credits, page 9, lines 10 -
12. The CS envisioned a 20 percent credit for production or
development (A) and a 30 percent credit for exploration (B). The
rest of (B) says "a credit under this subsection may be applied
only against a tax due under AS 43.55.011 - 43.55.160;" She
interpreted that to mean that it's creditable only against the
PPT, that it's not creditable against the oil, the spill fee or
the progressive piece of the tax. But the confusing part is if
that restriction was only on the 30 percent credit, then the
subsection needs to be sub-paragraphed. If the intent is to put
that restriction on both, she said that is not clear.
CHAIR WAGONER interrupted to say that section could be taken
out.
11:54:15 AM
MS. WILSON said, "Okay." She turned to page 10, lines 2 - 6, and
asked if those could also come out.
CHAIR WAGONER replied, "Yes, Ma'm."
11:55:21 AM
SENATOR THERRIAULT asked if the credits could be applied to what
is owed in the spill fund.
MR. DICKINSON replied that he believed the intent is to have
nothing creditable against the spill funds or vice versa.
11:56:11 AM
MS. WILSON moved to page 11, lines 7 - 13, Section (e) that
talked about transferable tax credit certificates to another
person. The governor's bill had an 80 percent limit on the tax
that could be offset by a transferred credit. The CS took that
out and she didn't think that had been mentioned yet. On the
same page, lines 14 - 22 say the commissioner may repurchase a
transferable tax credit certificate.
CHAIR WAGONER said that was a drafting error and was coming out.
11:57:33 AM
MR. DICKINSON asked if lines 14 - 23 were coming out.
CHAIR WAGONER nodded yes.
11:57:52 AM
MS. WILSON moved on to page 12, lines 16 - 20, that talked about
not taking tax credit for expenditures and paragraph (2) talked
about abandonment and used "extended period", which was not
defined and that could be the subject of litigation with
taxpayers. She noted similar language on page 20, lines 26 - 31.
11:59:20 AM
MS. WILSON went to page 12, lines 22 - 24, that indicated that
overall a person cannot take a tax credit for an expenditure
incurred for or directly related to a regulated pipeline, but
the problem she saw was that it also says, "regulated pipeline
per the FERC or the RCA or "similar regulatory body". That may
be intended to mean a successor agency, but that was not clear -
particularly because language on line 22 says not just
"pipelines", but "facilities, other assets, or services". If
that is paired with the idea of "similar regulatory body", then
you don't know if you're dealing with things that might be
regulated by DEC or some other entity.
CHAIR WAGONER said that had already been covered by Mr.
Dickinson.
12:00:46 PM
MR. DICKINSON said he was going to spend a lot of time talking
about one word - "or" on page 16, lines 17 - 28. He explained
that existing statute sets up three criteria. The CS takes those
three criteria and linked them with an "or". They have Section
(a) in front of them and he passed out Section (b) of the
current statue, which takes the three criteria and says:
If the department finds that the conditions in (a)(1),
(a)(2), and (3) of this section are present, then the
department shall determine the reasonable costs of
transportation.
The point he wanted to make is if they are going to insert an
"or" in (a), then insert it in (b), as well. Not doing that
would change the meaning in ways that he didn't think would
solve an existing problem. The statute says the costs of
transportation are the actual costs and regulations have 127
pages on how to determine actual costs. He further elucidated:
The world that was envisioned by this statute and by
the consultant is a world in which there are transfer
costs and the consultant says when you have transfer
costs and you have affiliated parties and they sell
each other things by the transfer costs, you can get
into trouble. That's absolutely correct! But there's
no transfer cost. In the early '80s companies came to
us and said gosh, here's the costs that our shipping
company charges our production company. The state was
not interested - either in looking at royalties or
looking at taxes of those. What we do is we look at
actual costs. When we audit, we're looking at
invoices. The big issues that arise are how you take
the $100 million plus that you take to buy a tanker,
that construct a tanker, in American shipyards with
certain tax benefits and you recapture those over the
20 years in which you use that tanker. That is the
major issue.... I think this notion of trying to find
the market value of services or equally efficient
services, the kinds of things that are in the statute,
the rate, that the consultant talks about, simply
aren't necessarily appropriate.
To resolve this, he suggested leaving out the "or" - as the
governor's bill had it or else change it in several places.
SENATOR BEN STEVENS asked if it were to be changed in several
places, would that change the intent of the existing statute.
MR. DICKINSON replied yes and he strongly recommended not doing
that, but it they chose to leave it in, to make it consistent.
12:04:58 PM
MR. DICKINSON moved on to page 19 and said the consultant from
the same firm focused on line 29 of the governor's bill on
allowable direct costs and said, if you're going to say just
allow outlays of capital assets, folks are going to show up
having bought stock in a company and ask for a deduction. A
better definition was needed and he suggested the following
language:
An expenditure when occurred to acquire an item if the
acquisition cost is otherwise a direct cost
notwithstanding that the expenditure may be required
to be capitalized rather than being treated as an
expense for financial accounting or federal income tax
purposes.
12:06:25 PM
SENATOR BEN STEVENS went to page 17, lines 22 - 24, where old
Section 20 of the governor's bill was changed and rewritten to
Section 25 in the CS and noted that line 22 had a big change.
MR. DICKINSON responded that the governor's bill proposed that
the department could do one of several things. One of them was
to see if the DNR was looking at the same set of transactions as
the DOR and if so, to allow DOR to incorporate those. Secondly,
they could set up formulas that look at market values (which is
where 150(b) would take them). One of them is on line 3 and the
second one starts on line 16. The CS says in option one, you can
incorporate DNR generated values; but the second formula says
you may not. So, you have to look at other things like indices
of market transportation. He understood that they may not
incorporate a royalty value, royalty methodology, value or
royalty settlement agreement. But lines 22 and 23 only refer to
the second kind of formula, not to the first.
SENATOR BEN STEVENS asked if they were both at the discretion of
the commissioner.
MR. DICKINSON replied yes.
12:09:01 PM
MS. WILSON moved on to page 20, lines 26 - 31, beyond the
abandonment language. This section lists things for which a
person cannot take an expense; that includes abandonment in (m).
However, that is modified on the top of the next page where
language disallows abandonment and reads, "(i) or proportionate
to the production of oil or gas occurring before the effective
date of this section; or". What that means to her is that
abandonment that happens on April 1, 2006, which would clearly
have to do with old production, would be disallowed, but
abandonment that happened down the road on a well that just
started producing in May 2006, that would be allowed. She saw
problems with handling abandonment that happens some time after
the effective date for a well that was producing both before the
date and after the date. It suggested to her that somehow the
expense had to be split up between the old and the new
production.
CHAIR WAGONER said he would check on that.
MS. WILSON remarked that in that same vein, (i) is one
modification and then an alternate modification is in (ii)
saying abandonment will not be allowed if it has to do with a
regulated pipeline, if the tariff takes into account abandonment
restoration obligations. Again, she had similar problems and she
wasn't sure how to administer that and wanted clarification.
12:11:55 PM
MS. WILSON asked them to keep their finger on page 20, but to
turn to page 23, beginning at line 29, where subsection (l)
began (and went through page 25) that said, "(l) For purposes of
making a determination of direct cost under (d)(2)(L)" and she
asked them to flip back to page 20 where (d)(2)(L) has to do
with surcharges and (d)(2)(M) has to do with abandonment and
then asked them to compare the two. She said it looked like the
purpose of the subsection on page 23, beginning on line 29,
appears to be in situations where there might not be arm's
length exchanges. So, it doesn't make sense to refer to page 20
(L) surcharges and (M) abandonments. She thought perhaps it was
mis-referenced and was meant to refer to page 21, line 8, (N)
where it talks about non-arm's length transactions.
MS. WILSON asked members to keep that in mind and directed their
attention to page 21, line 12, to Section (O), which talked
about purchases of businesses. She asked them to flip to page
24, line 2, where it said: "(1) the department may adopt
regulations incorporating the concepts of the 26 U.S.C. 482
(Internal Revenue Code)," and remarked that that section talks
about transfer pricing. She remarked, "It is a really ugly audit
section.... I mean we could employ auditors for years on that
one."
MS. WILSON said in addition to Section IRC 482, line 3 [page 24]
allowed the department to look at IRS Code 6662(e) that
addressed substantial valuation misstatement. It is included in
IRC Section 6662, which overall addresses "imposition of
accuracy-related penalties on underpayments." Section 6662(e)
particularly addresses valuation misstatements. She just didn't
know what they were doing with that section overall.
12:16:17 PM
MS. WILSON moved on to page 24, line 13. This paragraph said the
producer shall provide contemporaneous documentation available
at the time the document was prepared. So, if the department
asks for that documentation and the producer fails to comply
with that request, they will be liable for a penalty, but what
sort of penalty is not addressed.
She noted that line 14, Subsection (m), says "The provisions of
this subsection apply to the purchase or acquisition of a
business entity", then it goes on to address particularly an
acquisition that is accounted for under IRC Section 338. That
section provides that where one company sells the stock of a sub
to another company, they can agree that it will be treated for
federal tax purposes as a sale of assets. That has specific
application under income tax law having to do with the basis of
those assets and she was completely unclear about why it was
applied here.
12:18:40 PM
MS. WILSON moved on to page 25, lines 7 - 11, that referenced
where a taxpayer has taken a credit in one year for a qualified
lease expenditure and then that asset for which the expenditure
was made is subsequently removed from the state, and the
taxpayer would have to recapture that credit. She noted this
paragraph had no time limit, so if the asset was 80 years old
and was taken out to salvage or whatever, the taxpayer still has
to recoup that. She questioned whether that was the intent. She
said that concluded her comments on the proposed CS, although
she might find a few other items.
12:19:52 PM
MR. DICKINSON interrupted that he had two items to add to the
list. He skipped back to page 21, lines 20 - 22 that defined the
kinds of things a producer has to net against their lease
expenditures. The CS added the following condition to the
governor's bill regarding a producer who has an ownership
interest in a facility and they are paid for it:
subject to a management agreement that provides for
the producer to receive a management fee determined by
whole or in part of the income or gross revenue earned
by the production facility;
He was concerned about how expansively that might be read if the
producer doesn't have to have any ownership interest and asked
if someone could explain what was trying to be accomplished
there.
Lastly, language on page 22 talked about the kinds of things
that have to be "netted out" when arriving at net value. This
referred explicitly to the transition investment expenditures.
Line 18 says if they were "a result of expenditures the producer
incurred on or after January 1, 2003, and before April 1, 2006,"
and he suggested deleting the phrase "on or after January 1,
2003," - the notion being if you had something to acquire five
years ago, when you sell it, it's part of your net outlay
calculation. So, selling something under non-transitional
expenditures goes into your calculation and it doesn't make
sense to limit it to January 1, 2003.
12:22:05 PM
SENATOR GUESS referred to page 25, lines 21 - 23, and said that
"ordinary and necessary" was not defined anywhere. She asked if
Ms. Wilson was comfortable that 26 U.S.C. 6662 was clear enough
or that the case law around it was clear enough to limit the
risk of litigation of the definition.
MS. WILSON replied that quite a body of court cases exist that
address this and she expected that would continue. She said she
was much more comfortable with a big body of case law than with
setting a different standard that has no precedence.
MR. DICKINSON added that the standards they have set have to be
"direct, ordinary, and necessary". Merely meeting a standard of
ordinary and necessary doesn't qualify them as a lease
expenditure.
CHAIR WAGONER said that concluded the presentation and announced
a short break from 12:23:35 PM to 12:33:37 PM.
CHAIR WAGONER announced that they would hear from British
Petroleum next.
12:34:02 PM
^British Petroleum - Angus Walker, Commercial Vice President
ANGUS WALKER, Commercial Vice President, BP Alaska, had two
handouts, one was entitled BP's Presentation on SB 305 and the
other Addendum: BP Presentation on SB 305(PPT). He said since
1999, both industry and the Department of Revenue have
consistently overestimated production. This was a huge concern
to BP as he thought it was for the state. He also concurred that
production had been declining at the rate of 6 percent per year
with the most recent DOR forecast of 3 percent per annum going
forward. He mentioned the development of Alpine and Northstar.
[The teleconference transmission became unclear at this point.]
12:37:11 PM
CHAIR WAGONER indicated that his testimony was breaking up.
MR. WALKER continued by yelling into his Blackberry. He
referenced the second graphic, a slide of the latest DOR
forecasts that indicate the natural decline of the fields would
be 15 percent per year. He said that at the current investment
level, $1 billion to $1.5 billion per year, that decline will
continue be around 6 percent. Significantly more investment was
needed around $2 billion to $3 billion per year, to get that
line to move in the other direction. He said that legislators
needed to ask themselves what it would take to get that kind of
investment.
12:39:42 PM
CHAIR WAGONER broke in to say he was hearing only half of Mr.
Walker's comments.
MR. WALKER asked if they could proceed with someone else while
he found a different phone.
CHAIR WAGONER said he would proceed with ConocoPhillips and then
return to Mr. Walker.
12:42:22 PM
^ConocoPhillips Alaska - Brian Wenzel
BRIAN WENZEL, Vice President, Finance and Administration,
ConocoPhillips Alaska, presented ConocoPhillips' views on the
proposed changes to SB 305.
Your committee substitute, if enacted into law, is
going to have a negative impact on the attractiveness
of Alaska for ConocoPhillips' investment dollars.
ConocoPhillips absolutely opposes this CS and any
proposal that increases our industry's taxes above $1
billon per year proposed by the governor's bill.
The proposal before us today, although difficult to
interpret and confusing in several places, might
increase oil taxes by an annual average of more than
$2.4 billion. If today's prices continue, this is $24
billion over the next 10 years. The approach reflected
in this committee substitute is clearly to maximize
short-term state revenue, while putting at risk long-
term production, state revenues, growth in the private
sector and jobs. The CS you are considering destroys
the balance of the original bill.
ConocoPhillips' view is that our relationship with the
state is one in which we are partners that share a
common, all-important goal - maximizing production.
For the State of Alaska, maximized production will
naturally lead to maximized state revenues and jobs.
We must both strive to find ways to maintain current
production, mitigate natural field production decline
and, where possible, develop new production. In our
industry, production projections and reserves can be
more important the current cash flow and earnings.
This is because we take a long-term view about how to
create value in the future regardless of our inability
to predict prices. Alaska also needs to take a long-
tem view by focusing on how to motivate long-term
investment and increase production rather than
extracting incremental short-term revenue increases
above and beyond the $1 billion already accepted by
the industry.
We realize you have developed this revised bill after
listening to the advice of various consultants. If we
understand your consultants' testimony, they are
suggesting that you can jettison the balance of the
original proposal and adopt an approach like that
reflected in the CS with no adverse consequence on
investment. Indeed, they suggest you will actually
increase investment in the state by doing so.
We also have hired a number of consultants and will
use their input as we lay out for the House and Senate
Finance committees the same points we were
unsuccessfully in demonstrating to you. However, at
the end of the day, neither your consultants nor ours
must make or live with the decision currently before
the Alaska State Legislature. Similarly, none of these
consultants ever has or ever will make an investment
decision on behalf of ConocoPhillips. To the extent
your consultants are telling you that the CS will not
have a negative impact on ConocoPhillips' investment
decisions going forward, I can tell you they are 100
percent wrong.
12:45:38 PM
Taking billions of dollars for our industry will have
a negative impact on investment. Taking away a
significant portion of the upside potential in a basin
with lead times of a decade or more in an area with
low prospectivity and higher costs than almost
anywhere else in the world will negatively affect
investment and consequently negatively affect
production, state revenues and jobs. This is a natural
consequence of the action you are taking.
Moreover, the negative effect on our decision-making
and on the decision-making of others, will not result
just from the increased tax burden you are seeking to
impose. There is also the question of our and others'
confidence in the future investment climate here in
the state. Adverse changes in the key parameters of
the originally proposed bill will result in a
fundamental shift in the balance of risks and rewards
of reinvestments in Alaska. Unreasonable changes like
those imbedded in this CS will cause not only
ConocoPhillips, but also other investors to question
not whether, but when, Alaska will again change its
fiscal regime and impose unfair and unreasonable
burdens on those who have taken great risks and
invested billions of dollars to develop the state's
resources.
It is irrelevant whether that future change will be in
the state's production tax, its property tax, its
corporate income tax or in the creation of some
entirely new tax. The point is that investors will now
need to consider another is significant risk in making
their economic decisions in Alaska - the risk that
Alaska will not approach future fiscal policy changes
in a reasonable manner that recognizes the commitment
and contribution of companies like ConocoPhillips.
When you are considering how to finalize this CS, I'd
encourage you to ask yourselves, is Alaska getting
enough industry investment today? If you don't think
there's enough investment today, how can raising taxes
lead to more investment? Granted, the investment
incentives for exploration can be expected to garner
some additional production, but that will be years
away. The additional production we need to tem decline
of the next several years can only come from
additional investment around existing infrastructure.
Raising taxes on existing infrastructure as you are
doing in the CS can only deter that investment.
12:48:20 PM
MR. WENZEL drew the committee's attention to the handout on
satellite fields developed over the last 10 years. He pointed
out that there are only four fields greater than 50 million
barrels. In Alaska, prospectivity is low and costs are high. He
cautioned the state about looking at other comparable countries
and determining that its government take should be equivalent to
them because of the low prospectivity and the high cost. He also
pointed out that some of the largest investors are also the ones
who are developing the new fields; it's not coming from new
investors into Alaska. Even in the future, the State of Alaska
should not expect the list to change dramatically with new
names. He said the production would come from the known
resources today and further developing them and mitigating
decline in the already discovered big fields.
12:49:54 PM
MR. WENZEL returned to his written testimony, saying:
From our quick review of your CS, it appears that you
have changed nearly every key parameter in the
original bill in a decidedly one-sided manner that
benefits the state and is at the expense of
ConocoPhillips and the other major North Slope
producers. You have destroyed the balance previously
represented in the bill.
Through the CS, you propose to not only significantly
increase the base PPT rate to 25 percent, but also
further increase that tax rate on the industry at all
prices above $40. At current prices, depending on how
we interpret the unfinished language in the CS, the
additional surcharge will result in anywhere from $1.8
to $2.4 billion in annual tax liability for the
industry over the current system. This change is
neither fair nor reasonable to existing investors and
will be viewed as unfair and unreasonable by potential
future investors.
You have severely reduced the intended transition plan
such that investors with large, recent capital
investment projects, which haven't even begun
producing yet are penalized for apparently investing
in Alaska too early and being too optimistic about the
future of Alaska. I want to emphasize this point. This
CS penalizes the very companies that have been
investing, creating jobs and building the resource
base in the state of Alaska.
You have provided for differentially higher
exploration tax credits, but as one of the few
companies who have actually applied of exploration
credits under the current statue, our experience that
that, in fact, current regulation effectively reduces
the value of these credits to 70 percent or less of
their stated value. Further, these credits only affect
about 4 percent of the DOR's expected future sources
of production and investment in Alaska.
12:51:41 PM
Finally, you have moved the effective date of this
bill back to a date that is completely impractical.
The necessary regulations, procedures and computer
systems cannot possibly be adopted and put in place by
April 1of this year, which means that production tax
payers in Alaska will have to guess at their tax
liability and make unsupported payments of tax in an
uncertain attempt to avoid punitive interest costs.
Unfortunately, we are unable to precisely quantify the
dollar impact form the CS due to the short turn-around
time and the fact that many of the key parameters are
apparently still subject to change. However, in our
view, these changes from the original bill are
completely inconsistent with the goals of a fair and
reasonable fiscal policy, increase long-term
investment in Alaska and a vibrant, secure Alaska oil
industry. We urge you to reconsider the long-term
impact of this bill on future production, Alaska jobs
and the future of the State of Alaska generally. We
urge you not to move this bill out of committee until
it can be re-crafted with a more balanced, long-term
perspective. Thank you for considering our views.
12:52:53 PM
SENATOR ELTON turned to page 2 of Mr. Wenzel's written testimony
to his comment that government take would amount to $24 billion
over the next 10 years and asked him what the industry take
would be - using the same assumptions.
MR. WENZEL answered that he didn't have that number with him,
but said that no doubt, the industry would make significant
profits.
SENATOR ELTON asked that information to be provided to the
committee.
12:54:09 PM
SENATOR BEN STEVENS asked how many people ConocoPhillips
employed in Alaska.
MR. WENZEL replied about 900 employees.
SENATOR BEN STEVENS asked what effect he thought the CS would
have on maintaining that number.
MR. WENZEL said this CS wouldn't immediately change employment.
But in the long term, positions would be lost through attrition
and management would not approve as many projects. He stated
that is not their goal in Alaska.
12:55:29 PM
SENATOR COWDERY asked if he had an estimate of the numbers of
subcontractors ConocoPhillips has.
MR. WENZEL replied that he had no estimate of subcontractors.
12:56:06 PM
SENATOR GUESS referred to Dr. van Meurs' testimony that the CS
incentivizes exploration too much and asked him to comment.
MR. WENZEL replied that as the state's leading explorer, he
would not agree that the state is incentivizing too much. It
would not meet all of ConocoPhillips' needs to improve
production and mitigate production in current facilities.
SENATOR GUESS said she understood that both the original bill
and the CS provide that all production and development in the
lease expenditures are depreciated in the first year; and yet
Mr. Wenzel testified that this legislation does nothing for
current production. She asked why he said that.
MR. WENZEL answered that a couple of things come to mind. He
mentioned the transition effect. Also, much of the investment
that goes into facilities to maintain current production are
repair and replacement dollars, which don't qualify as capital
expenditures. "In our view those investments are as important as
your capital expenditures...." His other concern was that the CS
severely limits the transition program in the original bill.
ConocoPhillips has two projects underway, but not yet producing
- Fjord and Nanook. If Alaska goes forward with this sort of
approach, it wouldn't get credit for the several hundreds of
millions of dollars spent on those projects and that says to
investors that they should have waited and done their
investments later.
1:00:18 PM
SENATOR BEN STEVENS looked at page 2 of Mr. Wenzel's written
testimony where he said production projections and reserves are
more important than current cash flow and earnings. He related
that to his statement on page 6 about being too optimistic for
the future and asked whether the company remains optimistic
about Alaska.
MR. WENZEL replied yes, optimistic and committed.
SENATOR BEN STEVENS asked if this CS would dim his optimism.
MR. WENZEL replied yes.
1:01:50 PM
CHAIR WAGONER said he didn't see this bill being too much more
punitive than the governor's bill. He asked what the governor's
bill would do for his outlook on Alaska.
MR. WENZEL respectfully disagreed that the CS is not much more
punitive. The governor's bill stated additional taxes would be
$800 million per year and the CS could be easily over $2 billion
per year. The governor's bill proposed a significant increase in
tax liability, but that was looked at in the context of all the
things the company expects to do in the future and it felt it
could step up to that level of investment.
1:02:59 PM
SENATOR THERRIAULT asked if he was quantifying the total
additional governmental take in the $800 million - $1 billion or
the total shift from the producers.
MR. WENZEL replied that was the incremental additional tax
liability over the current system.
SENATOR THERRIAULT said the federal government picks up 30 to 35
percent also.
MR. WENZEL responded no, those were just production tax numbers.
1:03:53 PM
SENATOR GUESS went back to her previous question on production.
Maintenance would be a lease expense because it's an operating
expense, not a capital expense. But if you replace a "widget"
that would be a capital expense.
MR. WENZEL replied that he didn't have enough accounting
knowledge, but he understood that it would have to extend life
of field. He wasn't sure what that meant, but capital
expenditures would allow the company to bring on additional
production, extend the life beyond what they expected, et
cetera, as opposed to simply repairing or replacing equipment.
SENATOR GUESS asked if they needed to repair or replace
something to keep current production or increase it, would those
come under capital assets in this bill.
MR. WENZEL replied that he wasn't convinced of that.
1:05:33 PM
SENATOR SEEKINS said he thought those would be operation and
maintenance expenses in a different category. As he looked at
information from multiple consultants and experts in the field,
the 20/20 program, as laid out by the governor with the look
back provisions and the $73 million floor on taxes would
increase taxes in terms of the effective tax rate of about 6
percent. If all other factors were the same and then the state
adopted a 25/20 program, it would be increased by about another
2.5 percent. He asked if that was a good characterization of
what he said.
MR. WENZEL replied that the CS results in an additional $1.8
billion to $2.4 billion in tax burden.
SENATOR SEEKINS asked if that was the result of the 25/20 versus
20/20 or did he use a progressivity number at the $40-range and
then back out all the credits.
MR. WENZEL answered yes and he included all elements of this CS
including the change in the effective date.
SENATOR SEEKINS asked he agreed with the estimate of $250
million for the changed effective date (of one quarter).
MR. WENZEL replied that figure was roughly correct for the
industry.
SENATOR SEEKINS said they are all put together, it looks like a
pretty big chunk, but no one has provided him with the total
impact of all the things that would come out of that in the CS.
He asked for a graphic, as simple as possible, of the total
impact of the CS.
MR. WENZEL said he would attempt to provide that, but making
estimates about other companies would be difficult. He suggested
that he ask the administration, as well.
1:10:02 PM
CHAIR WAGONER asked when Mr. Wenzel said an additional $1.8
billion to $2.4 billion, if he meant in addition to the status
quo or in addition to the governor's bill.
MR. WENZEL replied in addition to the status quo.
SENATOR GUESS added that the difference she saw between the
original bill versus the CS is that the state gets more of the
upside, but with more risk - because of the credit structure.
She asked what price range those estimates used.
MR. WENZEL replied that estimate was based on today's prices.
CHAIR WAGONER asked what would be the additional money under the
governor's bill.
MR. WENZEL replied that he concurred with the administration's
numbers of $800 million to $1 billion more to the state at
today's prices.
CHAIR WAGONER said the adjusted credits and the additional 5
percent, which is really only about 2 percent in total
government take would result in an additional $1 billion to $2.4
billion from the industry.
MR. WENZEL replied yes.
1:12:13 PM
SENATOR BEN STEVENS asked how he calculated the PPT rate with
the escalator to get that number - at current prices. He thought
the government take would go up more significantly than the
chair just stated.
MR. WENZEL replied that he didn't know the exact rate, but
today's price was $59 or so. He said there are different
interpretations of how the progressivity would work.
SENATOR BEN STEVENS asked if the CS was 29/20 at current rates.
MR. WENZEL replied that was correct, but the 29 percent was the
nominal rate before any credit.
1:14:01 PM
SENATOR SEEKINS asked what ConocoPhillips' long-term projection
was on the price of oil.
MR. WENZEL respectfully declined to answer saying that was
proprietary information.
SENATOR SEEKINS asked with $40 as a starting point and a 2.5
percent incline that would put the tax at 25/20 at $60 a barrel
and with all other elements being the same, would that be a
punitive rate.
MR. WENZEL answered that he was not sure "punitive" was the
appropriate term, but he believed it was too high and would
result in less investment over the long term compared to a 20/20
scenario.
1:16:13 PM
SENATOR BEN STEVENS said he thought Mr. Wenzel's rate of the
escalator was inaccurate, because it was pegged to West Texas
International (WTI) crude. Yesterday's WTI was $63 and typically
ANS is less.
SENATOR ELTON said Dr. Van Meurs used $36 a barrel oil for his
competitive index rating on investment and said that the 25/20
would result in the same level of investment as is now
occurring. He asked Mr. Wenzel if he used $36 a barrel, would he
come to the same conclusion.
MR. WENZEL replied no. He suggested that legislators listen to
the consultants, but also consider whether a consultant who
doesn't invest in Alaska knows best what is going to happen at
20/20 or at 25/20. He suggested listening to what the people who
are making those investments are saying and he said it would be
potentially "less" than the "same." He reiterated that the 20/20
scenario was a good balance.
1:19:11 PM
CHAIR WAGONER asked whether Senators Stedman and Dyson, both on
teleconference, had questions.
SENATOR STEDMAN didn't.
SENATOR DYSON asked why at today's much lower tax rates there
hasn't been more investment.
MR. WENZEL replied that was one of ConocoPhillips' concerns
also. He questioned whether this was the right environment to
increase the tax burden.
SENATOR DYSON said he'd conclude, then, that taxes aren't
perhaps even a significant portion of the issue. He asked if Mr.
Wenzel would prefer them to drop the tax rate below the
governor's recommendation.
MR. WENZEL said he would encourage legislators to look at all
possibilities to find the best mix that would motivate the
activity and behavior the state wanted. He couldn't say that
fiscal policy completely effected investment or non-investment.
1:22:17 PM
SENATOR DYSON asked how much investment might increase using a
15/30 scenario.
MR. WENZEL replied that he didn't have estimates for that,
although ConocoPhillips' level of investment would definitely be
greater. The focus of the company is not on prices, but rather
on opportunities to increase production.
1:23:26 PM
SENATOR STEDMAN asked to get total numbers for the government
and industry take so they could be compared.
CHAIR WAGONER asked if ConocoPhillips would invest more under
the governor's bill at 20/20.
MR. WENZEL replied yes, under the long term. But more than the
current system - he said it would be difficult to quantify. The
20/20 proposal has real potential for a gas pipeline; it
represents something that provides common ground to go forward.
Also, 20/20 stands on its own as a fair balance.
CHAIR WAGONER asked if governor's proposal at 25/20 would be a
pipeline deal-breaker.
MR. WENZEL replied that ConocoPhillips didn't control the
decisions for all three companies. Getting to 20/20 was very
difficult.
1:28:27 PM
CHAIR WAGONER thanked Mr. Wenzel for his testimony and said they
would go back to Angus Walker from BP.
MR. WALKER returned to page 2 of his written testimony and took
up where he left off:
Whilst development of Alpine, Northstar, and the
Prudhoe Bay satellites between 2000 and 2002
successfully flattened North Slope production for a
number of years, 2005 saw decline return to the 6-
percent rate that has characterized this basin in the
past. Unfortunately for all of us, there are no more
fields of Alpine or Northstar's magnitudes waiting to
be developed.
1:34:25 PM
MR. WALKER presented a graphic addressing the current situation
under three different scenarios that showed with no investment
the natural decline of the fields would drop. At the current
level of investment of $1 billion to $1.5 billion per year, the
decline would be around 6 percent a year. The latest DOR spring
forecast translated into an approximate 3 percent decline, which
is the status quo. He said:
However, the 3 percent decline cannot be met without
significant additional investment in the order of $2
billion to $3 billion per year. Unless those
investments are made, history will repeat itself,
decline will continue at the current rate and the DOR
will be revising its production forecast down yet
again.
The real question for you to be asking industry and
the consultants is 'What would it take to double
investment in the Alaska North Slope?'
Encouraging new exploration is good, but it is a fact
acknowledged by all who have testified that the
resources expected to be discovered through
exploration will likely be significantly less than the
resources we already know about. It is investment in
these known resources that offers the greatest chance
of stemming the decline of ANS production. As you look
at incentives for exploration, you must not overlook
incentives for investments, which are more likely to
succeed.
The tax regime, which you approve will directly impact
how attractive Alaska is for investment and that will
translate into what the future decline will be. It is
in the interest of all, industry and Alaska, that w
focus o growing the pie rather than increasing state
take from a declining pie. [He explained a graphic
illustrating his point.].... The point I'd really like
to make here is this is not just about severance tax.
MR. WALKER said the status quo of a 6-percent decline is
happening under the current tax system. The 20/20 proposal is a
big tax increase on the industry and is a disincentive to
investment rather an incentive and he predicted a bigger decline
with it.
SENATOR ELTON followed up, referring to page 2 of Mr. Walker's
written testimony. He asked whether Mr. Walker was suggesting
that an additional $2 billion to $3 billion investment per year
was needed to get to the 3-percent decline level and that 20/20
made things difficult. He didn't understand how investment would
double under the new proposal if they couldn't get there under
ELF.
MR. WALKER answered that he was correct.
There is no prospect of getting to $2 billion or $3
billion per year of investment under the new proposal,
because we couldn't get there under ELF. In fact our
belief is that the new proposal causes an additional
burden on industry and will yield a decline rate
higher than 6 percent, rather than one that is less
than 6 percent.
SENATOR ELTON followed up that the only way to get to the
production level needed for the 3-percent decline was to go a
tax recipe that is less severe than the existing ELF.
MR. WALKER replied that was correct. He would talk later about
examples.
1:38:04 PM
SENATOR BEN STEVENS tried to elucidate by asking Mr. Walker if
he was speaking to the CS as proposed.
MR. WALKER replied that he hadn't addressed the CS. He clarified
that the governor's 20/20 proposal increased tax on industry and
thus was a disincentive. He advocated rather than increasing the
tax burden on industry, to reduce it to stimulate investment.
Returning to Senator Elton's question about the investment
required to get to a 3-percent decline; it is a total investment
of $2 to $3 billion per year, not incremental.
1:39:52 PM
MR. WALKER said the state could collect zero severance tax and
get a better outcome than collecting high severance tax and
having less resource development. He said:
The size of the pie is the most important
consideration. Maximizing the value of resources for
Alaskans means maximizing state revenue and maximizing
production. Resources left in the ground are simply a
wasted opportunity. This should be the focus of our
deliberation. Alaska needs more investment, more jobs,
more production, not higher taxes.
The good news for Alaska is that you have a huge known
resource base on the North Slope and the bad news is
that it is going to be technically difficult to
extract and it is one of the most expensive places in
the world to produce oil and gas.
Assuming the new 20/20 is put in place, Alaska would
also become the area in the United States with the
highest marginal tax rate. And needless to say, this
introduces one more barrier to attracting investments.
Incorporation of a yet higher tax rate at higher
prices is yet another take from industry and creates a
bizarre fiscal regime being regressive at low prices
and progressive at high prices - thus reducing the
space for industry and creating yet more barriers to
attracting investments.
MR. WALKER'S next graphic indicated U.S. marginal tax rates.
With the PPT at 20/20, the marginal tax rate in Alaska will be
61 percent, significantly higher than any other place in the
United State. When you add more taxes at higher prices, that
adds additional hurdles to investment. He concluded:
To maximize the value of the resources in the ground,
the legislature should be focused on maximizing North
Slope production by attracting investment. The
priority for the State of Alaska should be to
encourage investment to help industry develop those
known resources, not to make it more difficult and
risky than it already is.
1:42:53 PM
MR. WALKER drew attention to the United Kingdom [see handout]
and said he couldn't agree more with Daniel Johnston who said
that reducing taxes virtually created and subsequently sustained
an economic boom in the UK. He read a quotation from Daniel
Johnston:
Ordinary measures of government taken throughout the
1990s made the United Kingdom government appear rather
crazy and irresponsible.... The 'gross benefits' to
the UK government go way beyond direct tax revenues
and royalties received from the upstream sector of the
petroleum industry. The economic impact of the
industrial hyperactivity in the UK sector or the North
Sea, a direct result of the 'lenient' terms of the
1990s is difficult to measure. Furthermore, the
activity in the UK started in the late 1980s and early
1990s when the UK government dropped the ring fence
for the 75 percent Petroleum Revenue Tax (PRT) before
government take, as it is ordinarily measured, was
drastically reduced. The UK offshore became the most
active offshore province in the world. Reducing the
government take in the following years managed to
sustain that boom. Activity and employment in the
British petroleum sector is healthy and robust....
The actions of the UK during the 1980 and 1990s
provide an excellent role model for any government
hoping to attract investment. Let us please not forget
the urgent need to stem decline and attract
significantly more capital (about twice what is being
spent today to the North Slope).
In order to maximize the value of Alaska's resources
we believe you should be adopting tax rates lower than
those proposed by the governor. In so doing, you would
maximize investment, maximize production and maximize
jobs for Alaskans. You would also take an important
step towards creating a healthy oil business, which
ill be the foundation for gas.
We recognize the burden on your shoulders in making
these decisions. There are many people advising you to
increase taxes, which will indeed increase state
revenue, but for how long? One year - two years? But
at what cost to future production?
MR. WALKER said that BP hadn't had the opportunity to review the
CS, but could not support the substantial increase in take from
the industry. The base tax rate of 25 percent was too high given
Alaska's urgent need to attract large-scale capital to stem
decline. Alaska needs a competitive fiscal regime to attract the
investment required.
1:47:21 PM
MR. WALKER said the change in the effective date meant the tax
would be implemented before it was enacted; the transition
provisions have been significantly reduced making the
implementation unfair for its investors. He urged them not to
adopt the CS.
1:49:28 PM
CHAIR WAGONER noted there were no questions and thanked Mr.
Walker for his presentation.
1:50:21 PM
^ExxonMobil - Richard Owen, Production Manager
RICHARD OWEN, Production Manager, ExxonMobil Alaska, said he was
Vice President, ExxonMobil Alaska Production, gave the following
statement:
I am here today to express ExxonMobil's concerns with
the proposed Committee Substitute to SB 305. On
February 28, I testified about our key concerns with
SB 305 as originally proposed. These changes
exacerbate the concerns I described on February 28.
Specifically, I will make comments on two areas: the
proposal to change the tax rate; and the proposal
around reduced transition provisions.
SB 305, as originally proposed, represented a dramatic
tax increase on the industry. As I previously
testified, we expressed concern that the higher tax
rate included in the bill could prevent some of
Alaska's challenged resources from being developed.
We understand the Committee is now considering even
higher tax rates.
Too high a tax rate discourages investment. Companies
are willing to accept the risks of long-term, capital
intensive investments when there is a corresponding
opportunity for upside potential through a variety of
factors, such as increased production or higher
prices. When you limit or reduce the benefit that
Companies can achieve from the upside factors, you
reduce the attractiveness of those investment
opportunities. The proposal to increase the already
high base tax rate and then further increase that tax
rate as oil prices rise, does reduce or limit the
upside potential and will result in Companies
recalibrating investment decisions. Reduced investment
will result in reduced resource recovery, diminished
state revenues and fewer employment opportunities,
with a resultant negative impact on the state's
economy. Again, let me reemphasize this point. While
higher taxes may bring in additional revenues in the
short-term, any reduction in investment and subsequent
production will significantly impact those revenues in
the longer term. We believe the focus of the tax bill
should be to encourage investment and grow production.
ExxonMobil is concerned with the significant change
from the ELF-based system to the PPT system and the
need for sufficient transition provisions to mitigate
the adverse impact on recent investments. We
understand the Committee is considering reducing those
transition provisions. While the benefits from a
typical oil and gas investment take many years to be
realized, the Administration's proposed five-year
transition into the higher tax PPT system represented
a reasonable transition. The Committee Substitute's
proposed transition provisions do not sufficiently
address the significant increase in tax burden these
past investments will now have to bear.
1:54:08 PM
Despite our concerns with SB 305 as originally
proposed, we are prepared to move forward under that
system since it sought to provide a balance of
revenues to the state and producers across a range of
oil prices, provided sufficient incentive for
producers to undertake exploration and development
risks, and included reasonable transition provisions
for past investments. And, most importantly for
ExxonMobil, oil fiscal contract terms consistent with
the Administration's proposal would provide the
predictability and durability necessary to advance the
gas project to the next phase.
It is important that the quality of the resources, the
risks undertaken by a producer, and the impact on the
state's overall investment climate be factored into
the design of the tax system. While industry needs
predictably and durability under which to gauge
investment decisions, the attractiveness of that
predictably and durability is lost if it comes at too
high a cost.
As I mentioned earlier, the Committee's proposed
substitute exacerbates our key concerns regarding both
tax rates and transition provisions. We urge this
Committee to support SB 305 as originally proposed.
Thank you again Mr. Chairman for the opportunity to
testify today.
1:55:29 PM
CHAIR WAGONER asked if he heard Dr. van Meurs' testimony on the
two-for-one credits for the look back.
MR. OWEN replied yes.
CHAIR WAGONER asked what his reaction to that kind of incentive.
MR. OWEN replied that the transitional arrangement was trying to
transition past investments that will incur significantly higher
tax burden than was originally foreseen when they shortly come
on line. Those transition arrangements, while they are based on
capital investments in the past are simply trying to reduce the
significantly increased tax burden of those revenue streams. He
favored the original proposal.
CHAIR WAGONER asked what effect the 20/20 proposal would have on
the positive side to maintain current levels of production or to
stop the decline.
MR. OWEN answered that the original 20/20 provided a balance
between the tax rate the credit rate. It provided incentives
that allow ExxonMobil to go ahead with those investments.
1:58:06 PM
SENATOR SEEKINS asked if Dr. Van Meurs' competitive rating index
indicating that the 20/20 was more favorable than the status quo
was a reasonable assumption.
MR. OWEN answered that was very good question. The 20/20 system
as proposed, based on the kinds of opportunities that Dr. Van
Meurs was looking at, improved the rate of return of the
projects by shrinking the pie. It offset some of the upfront
investment and reduced the stream going forward by 20 percent.
One confusing part of the picture is that it was dealing with
average scenarios, not specific opportunities.
2:00:53 PM
SENATOR SEEKINS referred to Dr. Van Meurs' page 8 that indicated
what he thought would be a level of investment. He suggested
that under 20/20, both large producers and new investors would
increase investment and asked if he thought that was a
reasonable assumption.
MR. OWEN replied that he would make the same observation as
before, that it was based on an average of projects, not a
specific project. It was dominated by the rate of return, which
used date from previous charts. His characterization was
correct, but if you look at the broader scale, some of the
projects didn't look as attractive as they might under an ELF
system, where a producer would be paying zero severance tax. The
pie is shrunk, but there is a better cash flow for a while.
2:03:06 PM
SENATOR GUESS asked the same question she asked ConocoPhillips -
that the CS provided increased credits and Dr. Van Meurs thought
it provided too many and she asked him to comment on that.
MR. OWEN replied that he hadn't enough time to look at the CS.
High credits, by their very nature, do provide incentive. The
governor's proposal balanced a lot of these components. While it
increased taxes, it provided the basis to move forward.
2:04:54 PM
SENATOR BEN STEVENS commented that he interpreted Dr. Van Meurs'
statements about over-incentivizing exploration to refer to the
clause that included a 20 percent for traditional production and
development and 30 percent for exploration. He also mentioned
that the 25 percent increased the state's exposure on the
downside.
2:05:55 PM
SENATOR THERRIAULT asked whether Mr. Owens supported the 20/20.
MR. OWEN answered yes and specified that he did not oppose the
governor's bill.
2:07:19 PM
CHAIR WAGONER thanked Mr. Owen for his testimony and announced
that SB 305 would be held over. There being no further business
to come before the committee, he adjourned the meeting at
2:07:41 PM.
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