Legislature(2011 - 2012)SENATE FINANCE 532
04/24/2012 09:00 AM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
April 24, 2012
9:07 a.m.
MEMBERS PRESENT
Senator Joe Paskvan, Co-Chair
Senator Bill Wielechowski, Vice Chair
Senator Bert Stedman
Senator Lesil McGuire
Senator Hollis French
Senator Gary Stevens
MEMBERS ABSENT
Senator Thomas Wagoner, Co-Chair
OTHER LEGISLATORS PRESENT
Senator Cathy Giessel
Senator Dennis Egan
Senator Joe Thomas
COMMITTEE CALENDAR
SENATE BILL NO. 3001
"An Act relating to adjustments to oil and gas production tax
values based on a percentage of gross value at the point of
production for oil and gas produced from leases or properties
north of 68 degrees North latitude; relating to monthly
installment payments of the oil and gas production tax; relating
to the determinations of oil and gas production tax values;
relating to oil and gas production tax credits including
qualified capital credits for exploration, development, or
production; making conforming amendments; and providing for an
effective date."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 3001
SHORT TITLE: OIL AND GAS PRODUCTION TAX
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
04/18/12 (S) READ THE FIRST TIME - REFERRALS
04/18/12 (S) RES, FIN
04/19/12 (S) RES AT 3:30 PM SENATE FINANCE 532
04/19/12 (S) Heard & Held
04/19/12 (S) MINUTE(RES)
04/20/12 (S) RES AT 10:00 AM SENATE FINANCE 532
04/20/12 (S) Heard & Held
04/20/12 (S) MINUTE(RES)
04/24/12 (S) RES AT 9:00 AM SENATE FINANCE 532
WITNESS REGISTER
REPRESENTATIVE MIKE HAWKER, Chair
Legislative Budget & Audit Committee
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified during the discussion of SB 3001.
JANAK MAYER, Manager
Upstream & Gas
PFC Energy
Washington, DC
POSITION STATEMENT: Provided information during the discussion
of SB 3001.
ACTION NARRATIVE
9:07:57 AM
CO-CHAIR JOE PASKVAN called the Senate Resources Standing
Committee meeting to order at 9:07 a.m. Present at the call to
order were Senators French, Stevens, McGuire, Stedman,
Wielechowski, Co-Chair Paskvan.
SB 3001-OIL AND GAS PRODUCTION TAX
CO-CHAIR PASKVAN announced consideration of SB 3001. He said
Representative Hawker would clarify PFC's role in SB 3001.
CO-CHAIR WAGONER was excused.
9:09:18 AM
REPRESENTATIVE MIKE HAWKER, Chair, Legislative Budget & Audit
(LB&A) Committee, testified during the discussion of SB 3001. He
thanked Co-Chair Paskvan for the opportunity to clarify the
issue regarding who PFC's consultants are working for, their
relationship with the Department of Revenue (DOR), and their
fiscal system model. He related that he and Senator Bert
Stedman, Vice Chair of LB&A, realized the need for top notch
consultants to evaluate oil and gas fiscal systems and
legislative proposals. He said they requested that LB&A engage
PFC Energy to support the legislature in the development and
evaluation of the fiscal systems. One of the critical elements
of the contract with PFC Energy was that they would have to
develop a comprehensive fiscal model of the current oil and gas
system in order to analyze the consequences of proposed policy
changes. The goal was to avoid any controversy regarding dueling
models. Within the process of developing models, PFC was
encouraged to talk to all parties regarding new models and their
consequences.
9:12:47 AM
He continued to say that analysis occurred with PFC's modeling
as it related to the final work product from the Senate Finance
Committee near the end of the legislative session. He said DOR
was using the same input data and coming up with a different
consequential analysis than PFC did. PFC took a limited function
(snapshot) calculation of data to see why DOR was not coming up
with same numbers. That resulted in a change to PFC's numbers
that required an amendment in the Senate Finance Committee.
REPRESENTATIVE HAWKER repeated that PFC works solely for LB&A
and for the legislature. He said he verified the truth that
PFC's modeling was not used in any of DOR's modeling related to
SB 3001.
SENATOR STEVENS said that is what they suspected and he was
pleased to have it confirmed. He inquired if there were
additional consultants available to work with the legislature
during this special session.
REPRESENTATIVE HAWKER replied that LB&A has PFC Energy
consultants, as well as David Wood Associates for modeling gas
fiscal systems, and small contracts for quick services with
Roger Marks and Dan Dickinson.
SENATOR STEDMAN agreed with that inventory.
9:16:28 AM
SENATOR WIELECHOWSKI recalled that in the past, during ACES, the
legislature had had unfettered access to the consultants. In
this process, the legislature has been told it needs to go
through LB&A in order to access the consultants. He requested
unfettered access to PFC Energy.
REPRESENTATIVE HAWKER replied that all legislators have access
to PFC; however, there is a need to perform triage in order to
use consultants effectively. Their main function is to perform
support services for committee work. Service requests are
contractually required to go through the chair of the LB&A
Committee. He did not believe anyone had been denied access to
PFC Energy. If someone wants specific work done they can request
it, but it will be prioritized.
9:19:29 AM
SENATOR FRENCH reported that the Commissioner of Revenue
described how DOR had built the numbers for SB 3001 by working
in conjunction with PFC Energy. He said he understood that the
legislature would receive a model from PFC and he was surprised
that DOR had the information. He asked Representative Hawker if
he expects the legislature to receive a model from PFC, and if
so, when.
REPRESENTATIVE HAWKER said the contractual arrangement with PFC
states that their fiscal system model will be turned over to
LB&A at conclusion of their engagement. The reason is that the
model evolves each time a new proposal is introduced.
SENATOR FRENCH suggested that the contract with PFC could be
interpreted in several ways. He said it would have been more
helpful to get evolving models with the caveat that they are not
representative of the final product.
REPRESENTATIVE HAWKER said he understood, but maintained that
evolving models would be an entirely different work product than
was in the contract. PFC was engaged to provide reactive
analytical modeling services to policy developments proposed by
committees. He maintained that Senator French's suggestion of a
"dashboard" model would be too complex. He opined that another
consultant might be found to develop a backstop model.
9:24:31 AM
CO-CHAIR PASKVAN said he appreciated Representative Hawker's
explanation. He asked if Gaffney Cline advisors have been
participants in the "truing up" of the models to prevent dueling
models.
REPRESENTATIVE HAWKER said he had no knowledge of anything to do
with Gaffney Cline. He concluded that credibility and respect of
the consultants is critical. He voiced concern about bringing an
incomplete work product into the public domain during the
interim.
SENATOR STEDMAN noted that it is standard procedure to ensure
that models from the industry, the administration, and the
legislature result in reasonably close output, so the
concentration is on policy, rather than on who has the best
model. It benefits all three participants.
CO-CHAIR PASKVAN agreed that was important.
9:27:02 AM
REPRESENTATIVE HAWKER reported that PFC has satisfied their
initial contractual obligation to the legislature, which was to
provide models and services during the regular session. He noted
the decision to rehire PFC for special session will come before
the LB&A Committee tomorrow. He spoke in favor of providing a
new contract with PFC.
SENATOR STEDMAN commented that PFC began its work for the
legislature in December.
REPRESENTATIVE HAWKER agreed. He said that PFC did preliminary
work, meeting with the industry and identifying their
understanding of the state's fiscal regime.
SENATOR STEDMAN noted the compressed time frame PFC had to put a
complex model together.
REPRESENTATIVE HAWKER added that both DOR and the industry have
had to update their models constantly.
CO-CHAIR PASKVAN remarked that it has been useful to hear the
foundation information.
SENATOR WIELECHOWSKI requested PFC's billing records.
REPRESENTATIVE HAWKER said they were public records. He noted
that LB&A doesn't have PFC's internal time records, which would
require a specific request.
9:31:12 AM
JANAK MAYER, manager, Upstream & Gas, PFC Energy, provided
information during the discussion of SB 3001. He noted he was
project manager for the Alaska Legislature contract through
LB&A.
MR. MAYER began by discussing the impact of ACES and SB 3001 on
existing legacy assets and on higher cost new assets. He
related the problem of the increasingly high costs of developing
new projects in Alaska. He showed a slide which depicted the
costs of bringing on a new barrel of oil in Alaska, as compared
to other regimes. The cost of new oil in Alaska is comparable at
times to the capital costs of unconventional oil in the Lower
48. Alaska's government take has risen significantly over recent
years, meaning new project economics can be very challenging.
He explained that an analysis was done on new oil at different
prices under ACES and under new incentivized models.
CO-CHAIR PASKVAN asked how the bars would change if credits were
included in the analysis.
9:35:47 AM
MR. MAYER responded that Alaska certainly is unique in the types
and amounts of credits it provides. However, government take
must also be considered in the equation and is very high. ACES
exemplifies that combination of high number of credits and a
high government take.
CO-CHAIR PASKVAN said he wanted to be cautious in only looking
at one component of the economic analysis. Alaska is a
participant with the industry in operating and capital expenses.
SENATOR WIELECHOWSKI understood that the state picks up 60
percent of development costs.
MR. MAYER replied that it varies a lot depending on the
circumstances.
SENATOR WIELECHOWSKI requested more information on the subject.
He maintained that the credits and deductions and tax breaks
would knock down production costs even lower than some of the
Lower 48 regimes. He disagreed with the information portrayed on
PFC's chart.
MR. MAYER commented that one needs to compare Alaska to other
regimes that have similar credits. He maintained that Alaska
takes in more than it gives credit for.
9:43:21 AM
CO-CHAIR PASKVAN stressed the importance of knowing that Alaska
will have invested $5 billion of credits in North Slope
infrastructure through 2013, even to the extent of providing
cash to those who don't have production.
MR. MAYER agreed.
9:44:47 AM
SENATOR FRENCH drew attention to the comparison of Alaska to
Bakken fields' costs of $22/boe for operation and capital costs.
He pointed out that he has seen numbers far higher for Bakken,
up to $50/boe. He asked where PFC got their numbers and how sure
PFC was regarding them.
MR. MAYER offered that there was a PFC team in Huston that
focuses on unconventional oil development costs in North
America. This data comes from their cost estimates. He noted
that there are huge amounts of variation in estimations of
wells. It is PFC's best estimate.
SENATOR FRENCH asked if the estimate is homogenized across
Bakken fields.
MR. MAYER offered to provide more information on the Bakken
fields. He said the Haynesville fields have lower capital costs
due to Exxon's highly economic influence. He noted he was
talking about actual companies, more than a homogenized look.
9:48:00 AM
CO-CHAIR PASKVAN referred to a previous presentation regarding
Capex cost structures where North America was being used by
companies as a cash source for funding overseas operations and
vice versa. He called these areas "cash deficit" regions. He
asked if Alaska were to develop shale oil, if Capex investment
would increase.
MR. MAYER replied a lot would depend on the nature of the shale
resource. There is nothing uniform or predictable about the
development of unconventional play in North America or
elsewhere.
CO-CHAIR PASKVAN noted that the Senate passed a new field tax
incentive bill which includes shale oil. He inquired if a new
field tax incentive would provide significant incentive for
shale field development.
MR. MAYER replied that compared to the existing system, it
provides a significant incentive. However, it could still be
challenging even with most generous credits.
9:52:45 AM
SENATOR WIELECHOWSKI referred to an article in Petroleum News
where it said that Bakken producers, depending on location and
other factors, must receive from $40 to $60 per barrel of oil to
stay in business, according to industry representatives. He
questioned the $22 amount shown in Mr. Mayer's chart.
MR. MAYER countered that if one removes government take at 50 to
60 percent, it would bring the cost down.
MR. MAYER addressed the effect of progressivity under ACES on
price upside to oil companies. The graphs depict two new
development scenarios, one under ACES and the second using a
flat 25 percent profits-based tax using net present value (NPV)
and internal rate of return (IRR). The picture changes with
higher costs of development.
He turned to a slide that showed the project value under ACES
with cost and price sensitivity.
CO-CHAIR PASKVAN returned to the charts on page 4 and asked if
at $100/bbl, the internal rate of return is 20 percent. He
wondered if that was an acceptable rate.
MR. MAYER replied that the example is a hypothetical analysis of
new development with attractive economics.
10:00:35 AM
SENATOR FRENCH asked how far back you have to go to get a clear
picture of the capital spend impact on IRR.
MR. MAYER replied that to get a meaningful picture you must go
back to when the field was developed.
SENATOR FRENCH questioned if the initial spend diminished as an
impact on IRR.
MR. MAYER emphasized that the IRR can't be calculated unless the
initial spend is used.
SENATOR FRENCH referred to the chart and asked how the
calculations were made without knowing all the capital costs on
the North Slope.
MR. MAYER replied that the high cost developments are compared,
using various costs and prices, to low cost light oil averages
on the North Slope today. The chart is not a perfect example of
the rate of return of actual initial investments made by
companies thirty years ago. They are hypothetical examples.
SENATOR WIELECHOWSKI asked what discount rate is used in the
calculations.
MR. MAYER said for NPV it was 10 percent.
SENATOR WIELECHOWSKI asked if 10 percent is a reasonable rate.
He inquired about the standard hurdle rate an oil company uses
when trying to determine whether or not to make an investment.
10:04:38 AM
MR. MAYER related that NPV 10 is a common way to measure
economic value. Hurdle rates are considered an initial hurdle to
even get a project considered and depend on many factors.
MR. MAYER noted the point of slide five is to show that the
economics of low cost production can be attractive. At higher
cost levels, the economics are very challenging and the
progressivity factor, which is good for low cost fields,
achieves only break even rates.
SENATOR WIELECHOWSKI returned to the issue of credits. He
pointed out if the state is picking up half the cost, the
economics of a field is significantly improved.
MR. MAYER said the chart was made by running an actual profile
through the model and the figures account for the capital
credits. A slight improvement would be shown if this was done
for a stand-alone project.
10:07:40 AM
SENATOR FRENCH asked if PFC Energy has access to company books
that show costs of projects on the North Slope.
MR. MAYER related that PFC has no access to confidential company
information, but does have conversations with companies.
SENATOR WIELECHOWSKI reported on a discussion with the
Commissioner of Revenue about getting access to that
information. He opined that DOR already has that information in
the form of oil company tax returns.
MR. MAYER agreed that DOR has access to a lot of confidential
tax information. He opined that simply having access to
aggregate costs reported by companies doesn't provide that much
information about development costs, due to the variation of
types of production. He said looking at what a company is
spending doesn't accurately reflect what the field will make.
10:10:32 AM
SENATOR FRENCH asked, if PFC had access to individual taxpayer
information, if they could construct a far more accurate picture
of the North Slope.
MR. MAYER replied that he didn't think tax data would provide
enough detail.
SENATOR FRENCH said he couldn't tell what Mr. Mayer's answer
was. He restated the question. He thought PFC could construct a
clearer picture of the economics of the North Slope with a
company's actual figures.
MR. MAYER stated that he did not know enough about what
information DOR collects. He cautioned that looking at
historical data doesn't tell you much about future developments
and costs.
SENATOR FRENCH concluded that Mr. Mayer was resisting the idea
that actual tax numbers would provide important data.
MR. MAYER replied it could be very useful data, however, one
can't necessarily say it would provide data about future
projects.
10:14:17 AM
SENATOR WIELECHOWSKI suggested the legislature could try to
guess what the oil companies' profits are, but it would be more
informative to look at the actual profit figures. For example,
ConocoPhillips produced 226 million barrels of crude oil in
Alaska in the first quarter of 2012, as compared to 201 million
barrels produced in the Lower 48 during that time.
ConocoPhillips made $616 million in Alaska the first quarter of
2012, versus $254 million in the Lower 48. He concluded that
Alaska is an extremely profitable place to do business.
MR. MAYER did not disagree. He pointed out some of the
differences in production in the Lower 48, as compared to
Alaska. He questioned why oil companies are investing in the
Lower 48 as opposed to Alaska. He said there is a fundamental
difference between an oil company's base portfolio in the Lower
48 and in Alaska. Alaska is a highly profitable current day
location for ConocoPhillips. He noted that profit information
doesn't help predict what companies will do in the future. He
spoke of ways to incentivize new production.
10:20:21 AM
CO-CHAIR PASKVAN pointed out that slide 5 talks about project
value based on oil price sensitivity. He noted that royalties in
North Dakota and Texas are 25 to 30 percent. He asked if
Alaska's resource was located in either state if it would
receive 25 percent or more in royalties.
MR. MAYER replied that Alaska gets significantly more than that
in government take.
CO-CHAIR PASKVAN restated the question to say if Alaska's
resource was located in those jurisdictions would Alaska also
get 25 to 30 percent in royalties as the resource owner.
MR. MAYER replied that when comparing Alaska to other areas, PFC
uses an average number; however, due to Alaska's high government
take, it is difficult to compare numbers.
CO-CHAIR PASKVAN asked if it is Alaska's fiduciary
responsibility to act like a sophisticated owner of a world
class resource.
MR. MAYER said yes.
10:23:46 AM
Mr. Mayer turned to a discussion of ACES as a successful
production tax in a harvest area fiscal regime.
CO-CHAIR PASKVAN pointed out that Alaska went into harvest mode
many years before the current tax structure was created.
MR. MAYER agreed. He stated that ACES didn't create the harvest
mode situation. He maintained that ACES inhibits the development
of new projects and resources that might help stem or even
reverse the decline in oil production.
CO-CHAIR PASKVAN said he has heard about potential investment in
the legacy fields of $5 billion over the next five to ten years.
He wondered if that was consistent with the legacy fields
remaining in harvest mode.
MR. MAYER related that companies are looking at specific
projects on their books that are struggling, but are being
considered for going forward.
CO-CHAIR PASKVAN asked if the $5 billion amount was consistent
with "debottlenecking procedures" related to remaining in a
harvest mode.
MR. MAYER said he would have to look closer at that issue. It is
a very hypothetical discussion at this point.
10:28:46 AM
CO-CHAIR PASKVAN asked how many exploration wells have been
drilled by the majors on the North Slope in last 10 years.
MR. MAYER didn't know.
CO-CHAIR PASKVAN asked if a lack of exploration wells on the
Central North Slope is an indication that the field is in the
harvest mode.
MR. MAYER replied that it did not necessarily lead to that
conclusion. He did not expect to see a huge amount of
exploration wells in that area.
CO-CHAIR PASKVAN reported that the last major treatment facility
was completed in 1995. He asked if that was consistent with the
legacy fields being in harvest mode and staying in harvest mode.
MR. MAYER explained that there are many ways of determining a
companies' status, such as the level of investment versus the
cash that a region produces, and future spending plans.
10:31:20 AM
CO-CHAIR PASKVAN asked if TAPS throughput is a result of
treatment facility throughput on the Central North Slope.
MR. MAYER said that was a technical question he was not
qualified to answer. He deferred to DNR testimony about facility
limitations.
SENATOR WIELECHOWSKI referred to Mr. Mayer's statement that ACES
inhibits the development of new projects and resources that
might stem or reverse the decline in oil production. He asked if
Mr. Mayer was aware of how many companies were doing business in
Alaska before ACES and how many companies are doing business
now.
MR. MAYER said no. He thought there were more today.
SENATOR WIELECHOWSKI reported an increase of 253 percent in the
number of companies doing business since ACES was passed. The
number has gone from 18 to about 63 companies. He questioned if
that would indicate that Alaska's tax structure inhibits
development.
MR. MAYER explained that he expects that most of those companies
are in Alaska due to generous exploration credits. He discussed
a problem where the incentive provides development activity in
order to claim the credit, but not necessarily results or long-
term development plans. The exploration credit raises the
question of what it does for Alaska in the long run.
SENATOR FRENCH requested a working definition of harvest mode.
MR. MAYER reported that it's a region that is a net cash
producer that lacks new investment potential.
SENATOR FRENCH noted that analysis is buttressed by a 1994 BP
memo on the length of the life of the pipeline and how Alaska is
a great place to make money and ship it somewhere else to
invest.
MR. MAYER said harvest is a natural part of an economic cycle of
oil and gas development. It's typical for any large company in
the world to use profits from one project to develop another.
SENATOR FRENCH pointed out that it has been 18 years since that
memo was written and Alaska is still in the same mode.
MR. MAYER did not disagree. He suggested that there are economic
scenarios that could potentially change that.
10:38:04 AM
SENATOR FRENCH asked for examples of aging, conventional
reservoirs around the globe where a reasonable tax change
produced a different direction, from a harvest mode to a
favorable investment climate. He voiced concern that a small tax
change just means Alaska's money continues to go to some other
project elsewhere.
MR. MAYER offered to provide that information in a future
presentation.
SENATOR FRENCH asked if his request for information should go
through Representative Hawker.
MR. MAYER thought it there were a number of examples he could
provide.
10:40:03 AM
CO-CHAIR PASKVAN said it doesn't ring true that ACES is not
progressive with regard to costs. He noted when costs go up,
Alaska's deductibility of those costs increases. If Capex
increases, the deductions and credits increase.
MR. MAYER replied if one just looked at the production tax in
isolation, without considering the capital credits, it would be
a cost neutral system. But other elements of the tax regime are
highly regressive. Not only does the overall rate of government
take not decrease, it either stays flat or increases.
CO-CHAIR PASKVAN asked if he is saying that jurisdictions with
royalty rates of 35 to 40 percent are highly regressive.
MR. MAYER said yes. He added that ACES is especially regressive
at high oil prices.
10:42:42 AM
CO-CHAIR PASKVAN asked if it is correct to say that under
Alaska's current cost structure, at high prices and low costs,
there may be a taking away of some upside potential. The rate
progressivity magnifies itself when one has high oil prices and
low operational costs.
MR. MAYER replied that in Alaska the system doesn't really
change that much with regard to cost of project. Government take
does not decrease as costs go up, which is not considered
attractive economics.
10:44:15 AM
SENATOR WIELECHOWSKI turned to the issue of state participation.
He gave an example of a producer that produces 25 million
barrels in a year, with an average tax value of $80, total
production tax is $2 billion, with a tax rate of 45 percent, and
$900 million in taxes paid. If the producer decides to spend
$100 million on a new capital project that will result in future
production, the production tax value is reduced from $2 billion
to $1.9 billion, which drops their per barrel production tax
value from $80 to $76 and drops their tax rate to 43.4 percent
and their taxes from $900 million to $824 million, less a $20
million capital credit. There is an immediate tax savings of
$95.4 million. He asked if that was correct.
MR. MAYER thought the basic concepts of the example were
correct.
SENATOR WIELECHOWSKI asked if he has to go through LB&A to
discuss this further.
MR. MAYER offered to look at the calculations.
SENATOR WIELECHOWSKI inquired if state participation would be 95
percent.
MR. MAYER thought it could be that high, but said he would have
to look at the numbers.
10:47:42 AM
CO-CHAIR PASKVAN brought attention to the fact that there have
not been any complete-year audits under ACES. The trend for
capital expenditures has gone up and will continue to go up, and
new operators have been coming to Alaska. He questioned how Mr.
Mayer could say that ACES is inhibiting new production spending.
MR. MAYER replied that there is very limited new investment in
new production, and the economics of new production is not very
attractive.
CO-CHAIR PASKVAN provided an example of BP spending a lot of
money on heavy oil, which is new production. ConocoPhillips has
also invested in new projects, as has Pioneer and ENI, in the
last 4 to 6 years.
MR. MAYER agreed that Pioneer is an example of new investment
decisions before PPT or ACES were in place; however, Alaska has
made it difficult for Pioneer to make a good return on their
projects. A lot of the examples reached sanction before ACES was
put into place. There has been little investment in high cost
new development.
10:52:15 AM
At-ease from 10:52 a.m. until 11:09 a.m.
11:09:31 AM
CO-CHAIR PASKVAN reconvened the meeting.
CO-CHAIR PASKVAN asked Mr. Mayer if he could modify the chart on
slide 3 to reflect credits and deductions.
MR. MAYER said he would look into it, but was wary of the
answer. The point of the slide was to talk about the difference
in actual costs of development.
CO-CHAIR PASKVAN wanted a clearer understanding of the net the
company is expending and what portion of those expenses the
state is supporting.
MR. MAYER agreed to provide that information.
11:12:28 AM
MR. MAYER reiterated the conclusions regarding ACES and turned
to options to spur new development. There are a varied of
approaches: uniform lowering of government take, differentiating
between old and new production, and enhancing cost progressivity
of ACES. There are costs and benefits to all approaches.
He related that in terms of lowing government take, one does not
need to add any increased complexity into the system. The
disadvantage is moving cash to producers who are extremely
profitable today. If that approach is unacceptable, then the
answer lies in being able to differentiate between old and new
production. It is easy to set specific terms in new areas;
however, this approach has disadvantages, also. No approach has
the perfect option for spurring new developments.
He explained a third approach to enhance the cost progressivity
of ACES. This method may exacerbate the problem of poor cost
control incentives and may have unintended consequences.
MR. MAYER analyzed the three options to spur new development in
terms of SB 3001. Overall, the bill allows significant
reductions in government take on new and costlier developments,
as well as for existing fields. It also provides for a 40
percent well lease expenditure credit in the North Slope.
11:18:39 AM
MR. MAYER reviewed the main aspects of SB 3001. For production
from new North Slope fields, a 30 percent gross revenue
exclusion applies to the calculations of both base and
progressive tax amounts and does not apply to the progressivity
rate calculation. It applies for 10 years.
For all other North Slope production, a 40 percent gross revenue
exclusion applies to the calculation of the progressive tax
amount only, and not to the base tax amount or to the
progressivity rate calculation. It applies indefinitely.
The maximum progressive tax rate is capped at 60 percent,
reduced from 75 percent. A 40 percent well lease expenditure
credit applies now also to the North Slope. Capital credits can
be redeemed in a single year, rather than spread over two years.
11:20:28 AM
MR. MAYER explained how the gross revenue exclusions are
figured. He described slide 9, which takes data from DOR's
Revenue Sources Book for showing calculations that occur at a
high level of oil price under ACES and under SB 3001, for new
and for existing fields. He described the process of finding the
gross value at point of production (GVPP) and the production tax
value (PTV), yielding the estimated total tax after credits.
SENATOR FRENCH questioned the 40 percent GVPP.
MR. MAYER clarified that it was 40 percent of $17 billion. He
continued to explain that the red numbers show the differences
between the tax structures.
He said the far right column depicts the calculations for new
fields under SB 3001. The GVPP allowance is 30 percent for new
fields and applies to the base tax and the progressive tax.
11:25:50 AM
CO-CHAIR PASKVAN explained that the charts are just showing the
application of the system to numbers, not to dollars on existing
legacy fields.
MR. MAYER agreed.
SENATOR FRENCH asked if the calculations would apply to new
shale oil developments that are outside of existing units.
MR. MAYER said if those developments were to reach production in
2013, that would be correct.
SENATOR FRENCH added that it could be in 2014 or 2015. He stated
that it would not apply to heavy oil development in Prudhoe Bay
or in Kuparuk.
MR. MAYER agreed.
MR. MAYER described the purpose of the gross revenue exclusion
concept. It is a concept that allows the reduction of government
take on some fields of production under the existing tax
structure. ACES is a profit-based tax that taxes wellhead
revenue net of costs. Under ACES it is very difficult to vary
either the base or the progressive rates for some forms of
production and not others. The only way to do that requires
"ring-fencing" to allocate costs between different streams of
production. The only way to vary tax rates under ACES is by
using a gross revenue exclusion.
11:29:18 AM
SENATOR FRENCH focused on Prudhoe Bay and Kuparuk reservoirs. SB
3001 reduces taxes on all of the oil there, whereas the Senate
was trying to think of ways to reward investment performance
such as oil production that beats the decline curve as seen in
SB 192. He suggested using the gross revenue exclusion to reward
oil production that beats the decline curve.
MR. MAYER said that was correct.
SENATOR FRENCH inquired if the same was true for heavy oil.
MR. MAYER said yes, and it could be done at a higher rate, due
to high costs.
MR. MAYER continued to say that gross revenue exclusion makes it
possible to distinguish between production streams and provide
incentives for the most challenged.
He said SB 3001 takes the concept of gross revenue exclusion and
uses it to lower government take across all North Slope fields.
If one wants to reduce government take, it would be easier to
reduce the progressivity rate rather than use a gross revenue
exclusion.
11:32:37 AM
MR. MAYER turned to slide 11 to show how SB 3001, ACES, and HB
110 would look in the 2013 revenue comparison chart, based on
DOR assumptions in costs and levels of production. He described
the columns under each scenario at various oil prices.
11:37:04 AM
CO-CHAIR PASKVAN referred to page 19 of a recent publication
entitled, "Fiscal Systems for Hydrocarbons." He noted that
government take is listed as a fiscal statistic, as compared to
an economic measure. The article maintains that a lot of
confusion can arise out of a discussion of government take.
Comparisons of government take across jurisdictions can be very
difficult. He requested Mr. Mayer's opinion regarding government
take.
MR. MAYER agreed that benchmarking government take across
different fiscal regimes is difficult. He noted that PFC tries
to do analyses based on production profiles and cost estimates
from PFC's databases on new projects in a broad range of
jurisdictions around the world. He said they try to be as
accurate as possible.
11:39:56 AM
SENATOR FRENCH asked what the publication date of the report
was.
CO-CHAIR PASKVAN said it was 2007.
SENATOR STEDMAN inquired where it came from.
CO-CHAIR PASKVAN said it was called, "Fiscal Systems for
Hydrocarbon Design Issues, published by World Bank, Washington,
DC, working paper 123. It is posted on BASIS and is 31 pages.
11:41:33 AM
MR. MAYER turned to slide 12 which deals with government take
comparisons in FY 2013 under ACES, SB 3001, and HB 110 at
various price levels.
CO-CHAIR PASKVAN related that the committee received information
from Pedro Van Meurs which said that government take at 70
percent to 75 percent in existing fields was an appropriate
range to look for. He asked if the chart depicting government
take of 70 percent at $100 oil under ACES included legacy
fields.
MR. MAYER said yes. He stated that government take of 75 percent
was reached under ACES at about $135 oil.
11:44:15 AM
MR. MAYER described the project value of a field under different
fiscal options. He referred to charts 13-15 to explain the
differences in value at $17/bbl fields, $25/bbl fields, and
$34/bbl fields. The differences in project value become
magnified at higher cost of production.
11:47:38 AM
SENATOR WIELECHOWSKI asked what sort of assumptions Mr. Meyer
was using in terms of size of project, number of barrels
generated per day, upfront costs, and amount of time taken
before the initial investment.
MR. MAYER replied that he used the same level of hypothetical
series of cash flows used previously: a small 10,000 barrel/day
new field, with two years of heavy Capex spending, and five or
six years of drilling costs ongoing, start up after two years,
three years to ramp up to production, and then a relatively
shallow decline.
SENATOR WIELECHOWSKI requested a copy of that model.
MR. MAYER said that the model being used is a working model that
changes every day. He did not recommend anyone else's use of the
model until it was finished.
SENATOR WIELECHOWSKI asked Mr. Mayer to provide the specific
assumptions and said it would be helpful to have access to some
sort of model, even a rough model. He did not see any benefit in
receiving the model after all their work was finished.
SENATOR FRENCH referred to the World Bank document previously
discussed and suggested that pages 22 and 23 offer a helpful
framework for analyzing future developments. It uses four
different field characteristics and then applies each tax regime
to the various models. He asked if that process could be used
for analyzing Alaska's tax regimes.
MR. MAYER requested a copy of the document. He said he would
prefer to review the information before commenting.
SENATOR FRENCH commented that the analysis was done for fields
of different sizes in order to determine where the sweet spot
was. He said that was helpful.
11:54:05 AM
MR. MAYER offered to look over the material.
He continued with an explanation of how 40 percent exploration
well credits would create high levels of government support. The
interaction of the well credits with the high rates of
progressivity under ACES means that very high levels of
effective government support on a large tax cash flow basis can
be achieved. This is also the case when extending the 40 percent
well credit to the North Slope.
SENATOR STEDMAN requested the information in table format up to
$160.
MR. MAYER said that was possible.
SENATOR FRENCH opined that this slide was one of the most
revealing slides of the day. He summarized that at $90 barrel,
80 percent was the after tax effective government well work
contribution. He inquired if the government was picking up 80
percent of the costs of the well work.
MR. MAYER replied that it depends on the situation and who does
the well work. The costs are picked up in the form of reduced
tax liability and tax credit.
SENATOR FRENCH asked if there is any jurisdiction in the world
that provides that kind of government support.
MR. MAYER said that not many jurisdictions provide that level of
support. The 40 percent is high level of support, but also at
play is the combination of the high level of progressivity and
the credit. He noted there was also a high level of tax in
Alaska. It is difficult to make direct comparisons between
jurisdictions.
11:59:00 AM
SENATOR FRENCH said Mr. Van Meurs characterizes Alaska's credit
system as very generous. He asked if the 40 percent well credit
makes Alaska even more generous.
MR. MAYER agreed that it was a generous credit system that makes
a high level of government take workable.
SENATOR WIELECHOWSKI asked if countries with higher levels of
government support have higher levels of government take.
MR. MAYER said not always. He pointed out that it is important
to make sure revenue goes back to companies early in the process
for cost recovery.
12:01:42 PM
MR. MAYER summarized the key issues in his presentation. He said
that across-the-board reduction in government take is the
simplest approach. There is significant cost in doing so, such
as foregoing activities that are currently economic.
CO-CHAIR PASKVAN emphasized that all elected officials have
fiduciary duties. He asked why one would agree to doing across-
the-board reductions on fields that are economic.
MR. MAYER said that depends on many things, for example, how one
interprets fiduciary duties to the state, and what level of
revenue the state needs, and what the state sees as its role. It
also depends on an interpretation of what the fiscal system
should do and what framework it should take.
12:04:53 PM
CO-CHAIR PASKVAN maintained that it is a complex issue when one
is analyzing current economic activity and unknown future
activities.
MR. MAYER commented that it is not impossible to have increased
revenue simply by cutting taxes. A decline on legacy fields
could be reduced to 2 percent from 6 percent, and revenue from
2020 onward could be higher than under the current scenario, by
cutting taxes.
He suggested another possibility would be to differentiate
between existing and incremental production from legacy fields.
It would require significant complexities to do so effectively.
He concluded that SB 3001 does not address key issues with ACES
such as oil and gas decoupling, or high levels of spending
support through high credits and progressivity.
CO-CHAIR PASKVAN thanked Mr. Mayer for his presentation.
[SB 3001 was held in committee.]
12:08:56 PM
There being no further business to come before the committee,
Cc-Chair Paskvan adjourned the Senate Resources Standing
Committee at 12:08 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| PFC Analysis of SB 3001_Senate Resources_April 24.pdf |
SRES 4/24/2012 9:00:00 AM |
SB3001 |
| NEWS BULLETIN_Conoco earns $616 million on rising prices and production_April 2012.pdf |
SRES 4/24/2012 9:00:00 AM |
SB3001 |
| BACKGROUND_Fiscal Systems for Hyrdocarbons.pdf |
SRES 4/24/2012 9:00:00 AM |
SB3001 |