Legislature(2011 - 2012)BUTROVICH 205

02/27/2012 03:30 PM RESOURCES


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03:33:58 PM Start
03:34:40 PM SB192
04:56:21 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 192 OIL AND GAS PRODUCTION TAX RATES TELECONFERENCED
Heard & Held
Department of Revenue
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                       February 27, 2012                                                                                        
                           3:33 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Joe Paskvan, Co-Chair                                                                                                   
Senator Thomas Wagoner, Co-Chair                                                                                                
Senator Bill Wielechowski, Vice Chair                                                                                           
Senator Bert Stedman                                                                                                            
Senator Lesil McGuire                                                                                                           
Senator Hollis French                                                                                                           
Senator Gary Stevens                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Cathy Giessel                                                                                                           
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 192                                                                                                             
"An Act relating to the oil and gas production tax; and                                                                         
providing for an effective date."                                                                                               
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 192                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX RATES                                                                                   
SPONSOR(s): RESOURCES                                                                                                           
                                                                                                                                
02/08/12       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/08/12       (S)       RES, FIN                                                                                               
02/10/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/10/12       (S)       Heard & Held                                                                                           
02/10/12       (S)       MINUTE(RES)                                                                                            
02/13/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/13/12       (S)       Heard & Held                                                                                           
02/13/12       (S)       MINUTE(RES)                                                                                            
02/14/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/14/12       (S)       Heard & Held                                                                                           
02/14/12       (S)       MINUTE(RES)                                                                                            
02/15/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/15/12       (S)       Heard & Held                                                                                           
02/15/12       (S)       MINUTE(RES)                                                                                            
02/16/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/16/12       (S)       Heard & Held                                                                                           
02/16/12       (S)       MINUTE(RES)                                                                                            
02/17/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/17/12       (S)       Heard & Held                                                                                           
02/17/12       (S)       MINUTE(RES)                                                                                            
02/21/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/21/12       (S)       Heard & Held                                                                                           
02/21/12       (S)       MINUTE(RES)                                                                                            
02/22/12       (S)       RES AT 1:30 PM BUTROVICH 205                                                                           
02/22/12       (S)       Heard & Held                                                                                           
02/22/12       (S)       MINUTE(RES)                                                                                            
02/22/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/22/12       (S)       Heard & Held                                                                                           
02/22/12       (S)       MINUTE(RES)                                                                                            
02/23/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/23/12       (S)       Heard & Held                                                                                           
02/23/12       (S)       MINUTE(RES)                                                                                            
02/24/12       (S)       RES AT 1:30 PM BUTROVICH 205                                                                           
02/24/12       (S)       -- MEETING CANCELED --                                                                                 
02/24/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/24/12       (S)       Heard & Held                                                                                           
02/24/12       (S)       MINUTE(RES)                                                                                            
02/25/12       (S)       RES AT 1:00 PM BUTROVICH 205                                                                           
02/25/12       (S)       Heard & Held                                                                                           
02/25/12       (S)       MINUTE(RES)                                                                                            
02/27/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
DON BULLOCK, Legislative Attorney                                                                                               
Legislative Affairs Agency                                                                                                      
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Testified during the discussion of SB 192.                                                                
                                                                                                                                
BRYAN BUTCHER, Commissioner                                                                                                     
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Testified during the discussion of SB 192.                                                                
                                                                                                                                
DAN STICKLE, Chief Economist                                                                                                    
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Testified during the discussion of SB 192.                                                                
                                                                                                                                
BRUCE TANGEMAN, Deputy Commissioner                                                                                             
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Testified during the discussion of SB 192.                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:33:58 PM                                                                                                                    
CO-CHAIR  JOE  PASKVAN  called   the  Senate  Resources  Standing                                                             
Committee meeting  to order at 3:33  p.m. Present at the  call to                                                               
order were  Senators McGuire, Stedman, French,  Wielechowski, Co-                                                               
Chair and Co-Chair Paskvan.                                                                                                     
                                                                                                                                
            SB 192-OIL AND GAS PRODUCTION TAX RATES                                                                         
                                                                                                                                
3:34:40 PM                                                                                                                    
CO-CHAIR PASKVAN announced consideration of  SB 192. He said that                                                               
CSSB 192(RES), labeled 27-LS1035\B,  was adopted by the committee                                                               
on February 22, 2012.                                                                                                           
                                                                                                                                
CO-CHAIR  PASKVAN  noted  the presence  of  Senator  Giessel  and                                                               
Senator Egan.                                                                                                                   
                                                                                                                                
3:36:39 PM                                                                                                                    
DON  BULLOCK, Legislative  Attorney,  Legislative Affairs  Agency                                                               
(LAA), related that  LAA tries, when drafting a  bill, to achieve                                                               
the  intent of  the bill  sponsor, as  well as  to make  the bill                                                               
clear,  and   to  point  out  unforeseen   consequences.  Of  the                                                               
amendments written  to SB  192, seven relate  to tax  rates, five                                                               
relate to  progressivity, one to  the minimum tax, one  to adjust                                                               
the  $30   start  of  progressivity,   and  two  to   adjust  the                                                               
calculation of production tax value  - one adjusts the production                                                               
tax value  based on prior  production and the second  one adjusts                                                               
the gross value at the point of production.                                                                                     
                                                                                                                                
He  continued  to  explain  that  because  the  tax  rate  in  AS                                                               
43.55.011 applies  to the production  tax value in  AS 43.55.160,                                                               
it is  important to understand  what the production tax  value is                                                               
because  the   average  production   tax  value   determines  the                                                               
progressive tax  rate. He cautioned that  there may be more  of a                                                               
tax  benefit than  is  intended  by reducing  the  value that  is                                                               
taxed,  as well  as lowering  the average,  which lowers  the tax                                                               
rate.                                                                                                                           
                                                                                                                                
3:39:36 PM                                                                                                                    
He reviewed that  the tax rates, except for the  minimum tax, are                                                               
applied to  the production  tax value. To  get to  production tax                                                               
value on oil  on the North Slope, the sale  price is "netted back                                                               
to the point of production." Tanker  costs and the tariff on TAPS                                                               
are  subtracted in  order to  arrive at  the gross  value at  the                                                               
point  of production,  which is  further adjusted  by subtracting                                                               
lease expenditures.                                                                                                             
                                                                                                                                
He  continued  to  explain that  the  Federal  Energy  Regulatory                                                               
Commission (FERC)  tariff takes into  account the value  of TAPS,                                                               
which has  recently been raised and  is under appeal. One  of the                                                               
Regulatory Commission  of Alaska  (RCA) statutes, AS  42.06.420 -                                                               
valuation of  property of  a pipeline carrier  - requires  RCA to                                                               
periodically  look  at  the  value of  TAPS.  Should  the  tariff                                                               
increase,  the  cost  of  transportation  would  increase,  which                                                               
decreases the gross value of oil at the point of production.                                                                    
                                                                                                                                
3:41:38 PM                                                                                                                    
MR.  BULLOCK   informed  the   committee  that   the  legislature                                                               
addressed tanker  transportation in AS 43.55.150.  The purpose of                                                               
the  statute  is  for  DOR  to determine  a  reasonable  rate  of                                                               
transportation. Once the  gross value at the  point of production                                                               
has  been determined,  and the  lease expenditures  are deducted,                                                               
the production tax value is determined.                                                                                         
                                                                                                                                
He  noted the  differences  between the  two proposed  amendments                                                               
regarding the affective production  tax value. The amendment that                                                               
adjusts  the gross  value  at  the point  of  production will  be                                                               
reduced  by the  lease  expenditures. The  one  that adjusts  the                                                               
production  tax  value  directly   does  not  involve  the  lease                                                               
expenditures. The  minimum tax  proposed in  one amendment  is on                                                               
the gross value at the point of production.                                                                                     
                                                                                                                                
He related that lease expenditures  have been examined during the                                                               
discussions of PPT  and ACES. He referred to AS  43.55.160 as the                                                               
statute that shows  which lease expenditures are  allowed and not                                                               
allowed to be deducted.                                                                                                         
                                                                                                                                
3:43:20 PM                                                                                                                    
SENATOR  WIELECHOWSKI asked  how oil  taxes are  calculated on  a                                                               
monthly basis as in ACES.                                                                                                       
                                                                                                                                
MR. BULLOCK suggested that when  calculating production tax value                                                               
monthly,  one  could  look  at  the  height  of  the  capital  as                                                               
representing the  value of  oil, with the  full value  subject to                                                               
the initial  25 percent  tax and the  progressive tax.  There are                                                               
two approaches  to determine the  amount of the  progressive tax.                                                               
One  method, which  is currently  in effect,  is to  look at  the                                                               
average production tax  value per barrel of  oil equivalent using                                                               
two levels;  the other method is  to do the same,  but with three                                                               
levels,  and  the progressive  tax  rate  applies to  everything.                                                               
Other proposed  methods divide  the segment  of value  in various                                                               
ways,  which could  serve  to  fine tune  the  tax under  certain                                                               
scenarios.                                                                                                                      
                                                                                                                                
3:46:36 PM                                                                                                                    
MR.  BULLOCK addressed  the separate  accounting amendment  which                                                               
would re-enact AS  43.21. He explained that  the deductions would                                                               
be taken  against the  gross income on  the oil  production side;                                                               
however,  on the  gas production  side, the  gross amount  is the                                                               
value  of  the  oil  and  gas produced,  minus  a  long  list  of                                                               
deductions  that  are  allowed,  or  not  allowed,  in  order  to                                                               
determine the taxable amount.                                                                                                   
                                                                                                                                
He said  the two amendments  that would help the  state determine                                                               
what  the   tax  should  be,   would  provide  for   a  petroleum                                                               
information management system and competitive review board.                                                                     
                                                                                                                                
MR. BULLOCK  noted that he was  a hearing officer for  DOR during                                                               
the ELF hearings. He recalled  presumptions made during the first                                                               
ELF hearing when  the state had to deal  with lease expenditures,                                                               
which were quite complicated. One of  the changes made in TAPS in                                                               
2007  allowed DOR  to have  six years,  rather than  three years,                                                               
after the return was filed  to make assessments. Consequently, it                                                               
may be six years before an  audit is completed, plus appeal time.                                                               
The  used of  a  petroleum information  management  system and  a                                                               
competitive  review  board  could  provide  valuable  information                                                               
about how the tax system is working, in a timelier manner.                                                                      
                                                                                                                                
3:50:34 PM                                                                                                                    
MR. BULLOCK turned to the  subject of royalties. He described the                                                               
difference between  a royalty and  a tax. The state,  the federal                                                               
government,  regional  corporations,  and  some  individuals  and                                                               
businesses are  resource owners.  The state receives  royalty off                                                               
of state  land and  part of  the royalty  from federal  land. The                                                               
royalty is  a share of production  or money for allowing  land to                                                               
be  used for  resource  development. Twenty-five  percent of  all                                                               
mineral  lease rentals  and royalties  received by  the state  go                                                               
into the Permanent Fund.                                                                                                        
                                                                                                                                
He  defined taxes  as "the  lifeblood of  government." It  is the                                                               
money that funds government.                                                                                                    
                                                                                                                                
3:53:25 PM                                                                                                                    
BRYAN  BUTCHER, Commissioner,  Department of  Revenue, began  the                                                               
presentation on modeling  and discussion of CSSB  192, version B,                                                               
and   amendments.  He   related  that   version  B   changes  the                                                               
progressivity rate  over $30 per  barrel of production  tax value                                                               
from 0.4  percent to 0.35  percent. It changes the  trigger point                                                               
that slows the rate of  progressivity to 0.1 percent, from $92.50                                                               
to $101.43  per barrel  of production tax  value. It  changes the                                                               
maximum production  tax rate  from 75 percent  to 60  percent for                                                               
over $201.43 per  barrel of production tax value,  and provides a                                                               
modest reduction in taxes compared to DOR's Fall 2011 forecast.                                                                 
                                                                                                                                
SENATOR  STEDMAN asked  for  the background  of  the format  upon                                                               
which  these figures  were calculated,  including opex  and capex                                                               
numbers, credits, and expenditures.                                                                                             
                                                                                                                                
COMMISSIONER BUTCHER  replied that  the assumptions are  from the                                                               
current fiscal year and assume  transportation cost of $8.72/bbl,                                                               
opex  of $14.03  per  taxable  barrel, and  capex  of $10.25  per                                                               
taxable bbl.                                                                                                                    
                                                                                                                                
SENATOR  STEDMAN asked  if those  figures were  from the  FY 2012                                                               
Fall forecast.                                                                                                                  
                                                                                                                                
COMMISSIONER BUTCHER said yes.                                                                                                  
                                                                                                                                
SENATOR  STEDMAN inquired  if they  included royalty  barrels. He                                                               
thought the capex number looked low.                                                                                            
                                                                                                                                
COMMISSIONER BUTCHER  said the numbers referred  to taxable, non-                                                               
royalty barrels.                                                                                                                
                                                                                                                                
SENATOR STEDMAN figured that if  the $10 per barrel by production                                                               
was included, the result should equal the capex.                                                                                
                                                                                                                                
COMMISSIONER BUTCHER  explained that  the numbers  should connect                                                               
directly  to the  income  statement numbers  from  the Fall  2011                                                               
revenue forecast.                                                                                                               
                                                                                                                                
3:58:44 PM                                                                                                                    
SENATOR  STEDMAN suggested  having those  numbers checked  before                                                               
the next meeting. He did not  think that the numbers would result                                                               
in  $2.7 billion  in capex.  He  also wondered  how credits  were                                                               
handled.                                                                                                                        
                                                                                                                                
DAN STICKLE,  Chief Economist,  Department of  Revenue, clarified                                                               
that the capex  and opex numbers shown are taken  from the income                                                               
statement  and reflect  deductible  capex and  opex.  There is  a                                                               
portion of the total capex  expenditures that DOR would expect to                                                               
not be deductible  for purposes of the production  tax. Those are                                                               
not reflected  in the income  statement. For the  snapshot model,                                                               
as far as  credits go, DOR assumes a straight  20 percent capital                                                               
credit on all capital expenditures.                                                                                             
                                                                                                                                
SENATOR STEDMAN  understood that the capital  credit was included                                                               
in the calculations for the tax.                                                                                                
                                                                                                                                
MR. STICKLE said that was correct.  He added that the charts show                                                               
the effective tax rates, net of credit.                                                                                         
                                                                                                                                
CO-CHAIR  PASKVAN  noted  that   the  capex  expenditures  varied                                                               
greatly from $2.7 billion to  $1.8 billion. He suggested that the                                                               
legislature is trying to "find  level ground" so that the numbers                                                               
are internally consistent.                                                                                                      
                                                                                                                                
MR. STICKLE pointed  out that the total  transportation and lease                                                               
expenditure  costs could  be  shifted  over by  $5  to equal  the                                                               
projections for FY 13.                                                                                                          
                                                                                                                                
4:01:23 PM                                                                                                                    
SENATOR FRENCH requested to know  the dollar difference in income                                                               
to the state between ACES and SB 192, version B, at $120 barrel.                                                                
                                                                                                                                
COMMISSIONER BUTCHER  replied that  revenues would be  reduced by                                                               
about $125  million in FY 13,  $230 million in FY  14, and around                                                               
$200 million a year in the out years until 2020.                                                                                
                                                                                                                                
BRUCE TANGEMAN, Deputy Commissioner,  Tax Division, Department of                                                               
Revenue,  added that  FY 13  represents half  a year  because the                                                               
effective date would be January 1, 2013.                                                                                        
                                                                                                                                
SENATOR  FRENCH inquired  if  it  would be  a  reduction of  $250                                                               
million for the full year.                                                                                                      
                                                                                                                                
COMMISSIONER BUTCHER agreed.                                                                                                    
                                                                                                                                
SENATOR FRENCH said that was a lot of money.                                                                                    
                                                                                                                                
SENATOR STEDMAN  asked how much of  the $2.7 billion in  capex is                                                               
non-deductible.                                                                                                                 
                                                                                                                                
4:03:28 PM                                                                                                                    
MR.  STICKLE  explained  that the  difference  between  the  $2.7                                                               
billion and $1.8 billion would  represent spending from companies                                                               
that do not  have a tax liability. The intent  with the charts is                                                               
to show the effective tax rate paid by producing companies.                                                                     
                                                                                                                                
SENATOR STEDMAN asked what amount DOR was using for the credits.                                                                
                                                                                                                                
MR. STICKLE related that it is a 20 percent capital credit.                                                                     
                                                                                                                                
SENATOR STEDMAN asked for the amount in dollars.                                                                                
                                                                                                                                
MR. STICKLE said it would be about $360 million.                                                                                
                                                                                                                                
SENATOR  STEDMAN  suggested  that current  producing  fields  and                                                               
their  tax  implications  be  kept   separate.  He  inquired  how                                                               
changing oil prices impact capex and opex.                                                                                      
                                                                                                                                
4:05:03 PM                                                                                                                    
MR. STICKLE  replied, for the  purpose of the  snapshot analysis,                                                               
DOR froze  in the capex and  opex expenditures. The intent  is to                                                               
provide a snapshot of impacts on current producers.                                                                             
                                                                                                                                
SENATOR STEDMAN  asked if  the 30  cents per  barrel non-credited                                                               
exclusion allowance was included.                                                                                               
                                                                                                                                
MR. STICKLE said he would have to check on that.                                                                                
                                                                                                                                
SENATOR STEDMAN asked  if the model was a snapshot  of the legacy                                                               
fields.                                                                                                                         
                                                                                                                                
MR. STICKLE said that was correct.  The intent of the modeling is                                                               
to provide a  high level snapshot that would  allow comparison of                                                               
tax systems.                                                                                                                    
                                                                                                                                
SENATOR STEDMEN  said it was a  good idea, but he  cautioned that                                                               
there are huge  capital credits coming to the  state. The overall                                                               
petroleum revenue will decrease significantly.                                                                                  
                                                                                                                                
COMMISSIONER BUTCHER  agreed. He  said the  snapshot was  of what                                                               
would  happen if  the  investment climate  is  increased and  tax                                                               
credits are considered for companies that are paying taxes.                                                                     
                                                                                                                                
4:07:50 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked for an explanation  of the difference                                                               
between ACES and version B of SB 192 at $120 and $130 oil.                                                                      
                                                                                                                                
COMMISSIONER  BUTCHER  reported  that  it  would  be  a  loss  of                                                               
approximately $175  million for  FY 13, $350  million for  FY 14,                                                               
and about $300 million a year in the out years through 2020.                                                                    
                                                                                                                                
MR. TANGEMAN added that was based on $120 per barrel.                                                                           
                                                                                                                                
CO-CHAIR PASKVAN said  that the public could be  confused by $120                                                               
per barrel. That amount is pricing, not production tax value.                                                                   
                                                                                                                                
COMMISSIONER BUTCHER  said that was  correct if the price  of oil                                                               
over a fiscal year averaged $120 per barrel.                                                                                    
                                                                                                                                
CO-CHAIR  PASKVAN asked  what the  production tax  value was.  He                                                               
said that  for FY  13 the  number is  $37.50 worth  of deductions                                                               
taken from the ANS crude price.                                                                                                 
                                                                                                                                
4:10:01 PM                                                                                                                    
COMMISSIONER BUTCHER  reported that it was  approximately $33 for                                                               
FY 12.                                                                                                                          
                                                                                                                                
MR. STICKLE  clarified that when  calculating the  production tax                                                               
value  for tax  purposes,  a  company is  allowed  to take  lease                                                               
expenditures for all of the barrels against the taxable barrels.                                                                
                                                                                                                                
SENATOR STEDMAN advised  looking at dollars, not  cost per barrel                                                               
due to net royalties and other factors.                                                                                         
                                                                                                                                
COMMISSIONER  BUTCHER responded  that  he was  happy  to put  the                                                               
numbers in dollars.                                                                                                             
                                                                                                                                
He turned  to slide 4  - a  snapshot of comparisons  of effective                                                               
production tax rates at oil prices between $60 and $200.                                                                        
                                                                                                                                
4:12:17 PM                                                                                                                    
He  explained  that slide  5  compares  effective production  tax                                                               
rates of ACES and CSSB 192/B.                                                                                                   
                                                                                                                                
He related  that slide  6 shows  a breakdown  of share  of profit                                                               
under  SB 192/B  by dollar  amount, from  $40 to  $265. The  blue                                                               
areas  show the  producer's share,  the green  shows the  state's                                                               
share, and  the red shows  the federal government's  share. Under                                                               
current law,  at $115, the  federal share  is at 15  percent, the                                                               
state share is  at 57 percent, and the producer's  share is at 28                                                               
percent.                                                                                                                        
                                                                                                                                
CO-CHAIR  PASKVAN asked  what is  included in  the definition  of                                                               
profit.                                                                                                                         
                                                                                                                                
COMMISSIONER  BUTCHER  replied  that   it  is  all-inclusive  and                                                               
contains royalties and other taxes.                                                                                             
                                                                                                                                
MR. STICKLE added  that the definition of profit  is gross value,                                                               
less transportation costs and lease expenditures.                                                                               
                                                                                                                                
CO-CHAIR  PASKVAN  questioned  if  royalty was  included  in  the                                                               
calculation.                                                                                                                    
                                                                                                                                
MR. STICKLE  said it  was calculated based  on total  barrels, so                                                               
royalty is included as part of the state share.                                                                                 
                                                                                                                                
SENATOR STEDMAN noted income tax  and property tax were included.                                                               
He asked  if a 35 percent  federal corporate income tax  rate was                                                               
used.                                                                                                                           
                                                                                                                                
MR. STICKLE  said yes, and  a 9.4 percent state  corporate income                                                               
tax rate was used.                                                                                                              
                                                                                                                                
SENATOR  STEDMAN inquired  about the  subject of  "flattening the                                                               
split" between the state and  the industry. He predicted that the                                                               
federal share would hold at about 13 percent.                                                                                   
                                                                                                                                
4:15:50 PM                                                                                                                    
MR.  STICKLE  answered  that Senator  Stedman  was  approximately                                                               
correct in his predictions.                                                                                                     
                                                                                                                                
COMMISSIONER  BUTCHER showed  how absolute  profit would  look in                                                               
terms of  dollars under CSSB  192/B - slide  7. He looked  at the                                                               
$115 snapshot to compare CSSB 192/B to the current law.                                                                         
                                                                                                                                
CO-CHAIR  PASKVAN  understood that  DOR  was  using FY  12  capex                                                               
numbers. He  referred to  the Revenue Sources  Book on  page 103,                                                               
which shows that  profit is about $13.36  billion. After credits,                                                               
the government take is about  $5.4 billion. He questioned if that                                                               
was correct.                                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER replied  that what DOR is trying  to show is                                                               
the investment  climate in  the state from  the perspective  of a                                                               
company  doing business  in Alaska,  therefore,  included in  the                                                               
analysis of the state's share are royalties.                                                                                    
                                                                                                                                
CO-CHAIR PASKVAN said he was  examining the definition of profit.                                                               
Generally speaking,  at $115  the state  receives 40  percent and                                                               
the industry receives 60 percent of the profit.                                                                                 
                                                                                                                                
MR. STICKLE added that would  be correct when referencing what is                                                               
left  over  exclusively  after  looking  at  the  production  tax                                                               
payment. Out  of that 60 percent,  the company would have  to pay                                                               
the royalties and taxes.                                                                                                        
                                                                                                                                
CO-CHAIR  PASKVAN  again referred  to  page  103 of  the  Revenue                                                               
Sources Book and  stated that it starts out at  $22.8 billion and                                                               
then takes out the royalty.                                                                                                     
                                                                                                                                
4:20:18 PM                                                                                                                    
SENATOR  STEDMAN thought  there was  a problem  reflected in  the                                                               
chart on  slide 7 regarding how  the state's share grows.  One of                                                               
the  consultants recommended  freezing the  industry/state split,                                                               
which would  substantially change the results.  He also cautioned                                                               
the use  of widespread  pricing from $40  to $265.  He maintained                                                               
that  the expense  side  and  the credit  side  would never  stay                                                               
constant over the vast changes in price.                                                                                        
                                                                                                                                
COMMISSIONER  BUTCHER agreed.  He offered  to research  a formula                                                               
that would account for that issue, such as between $90 and $140.                                                                
                                                                                                                                
4:23:33 PM                                                                                                                    
MR. TANGEMAN  agreed that  with a  steady increase  in inflation,                                                               
capex would rise  with the price of oil. He  said there have been                                                               
significant oil  price swings in  a short amount of  time whereby                                                               
capex would not have kept up.                                                                                                   
                                                                                                                                
COMMISSIONER BUTCHER  addressed Amendment  B.5 as shown  on slide                                                               
8. Progressivity  would be bracketed  with 25 percent as  the top                                                               
bracket. The  amendment provides tax brackets  for progressivity,                                                               
with the  progressively higher  rate only  applying to  the value                                                               
within  that  tax  bracket. It  generally  follows  the  existing                                                               
progressivity slope. A maximum production  tax rate of 50 percent                                                               
would apply over $92.50 per barrel production tax value.                                                                        
                                                                                                                                
COMMISSIONER BUTCHER turned to slide  9 which shows the effective                                                               
production tax rates of ACES,  as compared to the bracketed rates                                                               
up to 50 percent as seen in Amendment B.5.                                                                                      
                                                                                                                                
CO-CHAIR PASKVAN asked how much  production tax is lost under the                                                               
amendment at  $110, which is  an FY 12 or  FY 13 estimate  of the                                                               
yearly average oil price.                                                                                                       
                                                                                                                                
MR. STICKLE replied  that he did not have the  numbers for FY 12.                                                               
From FY 14 to FY 18, the  first five years the provision would be                                                               
fully in  effect under the terms  of the amendment, the  range of                                                               
the  change  in revenue  would  be  from  $1.05 billion  to  $1.3                                                               
billion per year.                                                                                                               
                                                                                                                                
4:27:00 PM                                                                                                                    
CO-CHAIR  PASKVAN  opined that  FY  12  would  also be  about  $1                                                               
billion.                                                                                                                        
                                                                                                                                
COMMISSIONER BUTCHER related  that slide 10 depicts  the share of                                                               
profit under  bracketed rates  up to  50 percent  under Amendment                                                               
B.5.  He made  a comparison  to current  law at  $115 oil,  which                                                               
shows a more substantial shift of profit to the industry.                                                                       
                                                                                                                                
SENATOR  STEDMAN said  there appears  to be  more of  a shift  of                                                               
profit to the industry than recommended by one consultant.                                                                      
                                                                                                                                
CO-CHAIR PASKVAN agreed that was Mr. Van Meurs' opinion.                                                                        
                                                                                                                                
COMMISSIONER  BUTCHER explained  slide  11,  the absolute  profit                                                               
under  bracketed rates  up to  50 percent  as found  in Amendment                                                               
B.5. He again made the comparison to current law at $115 oil.                                                                   
                                                                                                                                
CO-CHAIR PASKVAN  referred to slide  6 where government  take was                                                               
about 75 percent at $150 oil.  He asked how much revenue loss the                                                               
state would experience in production  tax at the same price under                                                               
the conditions depicted in slide 11.                                                                                            
                                                                                                                                
COMMISSIONER BUTCHER  offered to get  back to the  committee with                                                               
that information.                                                                                                               
                                                                                                                                
SENATOR FRENCH  pointed out  to the public  some of  the problems                                                               
the  legislature has  with this  balancing act  when the  state's                                                               
take  is reduced  by  almost $2  billion.  The industry  receives                                                               
about $1.1  billion; however, the  federal government  gets about                                                               
$700,000 million  or $800,000  million, none  of which  will come                                                               
back to the state.                                                                                                              
                                                                                                                                
COMMISSIONER  BUTCHER  agreed.  He   corrected  that  about  $1.3                                                               
billion would go to the producers.                                                                                              
                                                                                                                                
4:31:14 PM                                                                                                                    
COMMISSIONER BUTCHER turned  to Amendment B.4, as  shown on slide                                                               
12. He  said that in  this amendment, progressivity  is bracketed                                                               
at 35  percent. It provides  for tax brackets  for progressivity,                                                               
with the  progressively higher  rate only  applying to  the value                                                               
within  that  tax  bracket. It  generally  follows  the  existing                                                               
progressivity  slope.  The  maximum  production tax  rate  of  60                                                               
percent would apply over $92.50 per barrel production tax value.                                                                
                                                                                                                                
He related  that slide 13  compares the effective  production tax                                                               
rates of ACES and Amendment B.4.                                                                                                
                                                                                                                                
CO-CHAIR PASKVAN asked if the  reduction in revenues to the state                                                               
at $110 oil was the same as shown on previous slides 9 and 13.                                                                  
                                                                                                                                
COMMISSIONER BUTCHER  opined that  the numbers  at $110  would be                                                               
identical.  He said  the  separation between  B.4  and B.5  would                                                               
occur at about $160.                                                                                                            
                                                                                                                                
MR.  STICKLE  added  that  Amendment   B.4  adds  two  additional                                                               
brackets, one  at 30  percent at  $105 to $117.50  and one  at 35                                                               
percent above $117.50. The difference  between the two amendments                                                               
is apparent at $105 oil.                                                                                                        
                                                                                                                                
COMMISSIONER  BUTCHER turned  to  slide 14  to  discuss share  of                                                               
profit  under bracketed  rates  up  to 60  percent.  He said  the                                                               
differences are  not as  extreme beyond  $130 oil,  but identical                                                               
for what DOR is looking at in the current fiscal year and today.                                                                
                                                                                                                                
4:34:27 PM                                                                                                                    
MR.  TANGEMAN  pointed  out  that  slide  16  addresses  Co-Chair                                                               
Paskvan's  question   about  progressivity.   It  lays   out  how                                                               
different  progressivity brackets  would  change  at various  oil                                                               
prices.                                                                                                                         
                                                                                                                                
CO-CHAIR  PASKVAN  asked  about  slide 15.  He  wondered  if  the                                                               
transition occurs at about $150 pricing.                                                                                        
                                                                                                                                
MR. TANGEMAN said that was correct.                                                                                             
                                                                                                                                
CO-CHAIR PASKVAN commented that it  looked like the numbers below                                                               
$150  remained the  same  and  the numbers  increasing  on the  X                                                               
access have been modified by the  35 percent bracketed rate to 60                                                               
percent.                                                                                                                        
                                                                                                                                
MR. TANGEMAN said that was correct.                                                                                             
                                                                                                                                
SENATOR MCGUIRE reported  that using round numbers  shows $135 to                                                               
$147 for the first additional  bracket and $147.50 for the second                                                               
bracket.                                                                                                                        
                                                                                                                                
COMMISSIONER BUTCHER concluded the  presentation with slide 17, a                                                               
comparison  of effective  production tax  rates under  ACES, CSSB                                                               
192/B, Amendment B.5,  and Amendment B.4. He said the  goal is to                                                               
find the  sweet spot  or the material  difference. He  noted that                                                               
DOR is aware of additional amendments to SB 192.                                                                                
                                                                                                                                
MR. TANGEMAN pointed out that the  red and purple lines mirror HB                                                               
110 more or less. The  private sector considers the difference of                                                               
a $5 billion gap of potential new investment significant.                                                                       
                                                                                                                                
SENATOR FRENCH inquired about Amendment  B.8 submitted by Senator                                                               
Wielechowski and himself.                                                                                                       
                                                                                                                                
4:38:22 PM                                                                                                                    
MR.  STICKLE  reported  that  DOR   did  some  modeling  on  that                                                               
amendment.  Both "simple  progressivity and  simple progressivity                                                               
2" show effective tax rate lines  that are very close to ACES and                                                               
CSSB 192/B.                                                                                                                     
                                                                                                                                
SENATOR FRENCH  thought they would be  significantly different in                                                               
dollars.                                                                                                                        
                                                                                                                                
MR. TANGEMAN related that DOR  received the 18 amendments late in                                                               
the week  and found it difficult  to model them all.  He hoped to                                                               
receive a more firm decision on the preferred amendment.                                                                        
                                                                                                                                
SENATOR FRENCH agreed, but he  maintained that $10 million to $30                                                               
million  are  significant  amounts  of  money.  He  stressed  the                                                               
important financial needs of the state.                                                                                         
                                                                                                                                
COMMISSIONER BUTCHER  said he would  be happy to get  the numbers                                                               
to  the committee.  He stated  if the  legislation is  a material                                                               
change  that results  in  billions more  in  investment and  more                                                               
production, it has  a tremendous value. If it is  a reduction but                                                               
does not lead  to increased investment or production,  then it is                                                               
just "less revenue to the state".                                                                                               
                                                                                                                                
SENATOR  STEDMAN  commented  that  Senator  Wielechowski  used  a                                                               
suggestion  from  Mr.  Van  Meurs   to  write  his  progressivity                                                               
amendment. He wished to have a model run on that amendment.                                                                     
                                                                                                                                
COMMISSIONER BUTCHER said he would provide that information.                                                                    
                                                                                                                                
CO-CHAIR  PASKVAN   agreed  that   there  are   important  subtle                                                               
differences between amendments.                                                                                                 
                                                                                                                                
4:43:10 PM                                                                                                                    
SENATOR WIELECHOWSKI requested marginal tax rates modeled.                                                                      
                                                                                                                                
He  noted that  the  governor said  last week  that  when oil  is                                                               
between $60  and $80 the  current oil tax system  is competitive.                                                               
He wondered if Commissioner Butcher agreed.                                                                                     
                                                                                                                                
COMMISSIONER BUTCHER  said he could provide  marginal tax graphs.                                                               
He also  agreed that ACES  does not need  to be changed  at those                                                               
prices. He pointed out that the  forecast is that oil prices will                                                               
greatly exceed those prices.                                                                                                    
                                                                                                                                
4:44:34 PM                                                                                                                    
SENATOR  WIELECHOWSKI asked  if the  state was  better off  doing                                                               
nothing than passing SB 192.                                                                                                    
                                                                                                                                
COMMISSIONER  BUTCHER  stated  it   was  his  position  that  the                                                               
legislation has  to be  a substantive  change. He  did not  see a                                                               
couple million dollars making a  major change as to how companies                                                               
look at Alaska's investment climate.                                                                                            
                                                                                                                                
MR. TANGEMAN said  that ultimately Alaska is in  a position where                                                               
it has to consider tax regimes around the world.                                                                                
                                                                                                                                
SENATOR  WIELECHOWSKI  related  that  BP  maintains  that  Alaska                                                               
should not  be comparing itself  to other countries,  but instead                                                               
should do what is best for Alaska. He said he agreed with that.                                                                 
                                                                                                                                
He said  that new  oil leases require  companies to  develop when                                                               
they can  make a reasonable profit.  Under $115 oil and  $140 oil                                                               
under  CSSB 192/B,  the  oil  industry is  making  $5.2 and  $5.9                                                               
billion in profit.  He asked if those were  not reasonable levels                                                               
of profit.                                                                                                                      
                                                                                                                                
COMMISSIONER  BUTCHER   countered  that  the  vast   majority  of                                                               
production isn't under  those leases. He said DNR  was the expert                                                               
on leases.  He maintained that  if a company has  the opportunity                                                               
to make more money by investing $1 billion elsewhere, it will.                                                                  
                                                                                                                                
4:48:00 PM                                                                                                                    
MR.  TANGEMAN agreed  that the  legislature needs  to do  what is                                                               
best for  the state  - long  term. The current  tax is  only good                                                               
short term.                                                                                                                     
                                                                                                                                
SENATOR WIELECHOWSKI differed. He  stated that the legislature is                                                               
looking  long term.  He  said  he has  requested  DOR to  provide                                                               
information on  which projects are  not economic under  ACES that                                                               
would be  economic under  HB 110. That  information has  not been                                                               
forthcoming.                                                                                                                    
                                                                                                                                
SENATOR FRENCH suggested  that the state take the  $1 billion and                                                               
invest it as a long-term solution.                                                                                              
                                                                                                                                
COMMISSIONER BUTCHER  said the administration  would be  happy to                                                               
look at that  suggestion if it makes sense. He  said state shares                                                               
are very complicated and include liability.                                                                                     
                                                                                                                                
SENATOR  FRENCH  pointed out  that  the  suggestion is  found  in                                                               
Amendment B.12.                                                                                                                 
                                                                                                                                
MR. TANGEMAN responded  that the liability and  revenue impact to                                                               
the state as part owner would be great if oil was $15.                                                                          
                                                                                                                                
He  disagreed  with  Senator Wielechowski's  statement  that  the                                                               
state "would  be broke  in 10  years" under HB  110. He  said the                                                               
fiscal note  is based on  current production forecast.  The point                                                               
is  to  generate  more  production  through  investment  and  the                                                               
administration would  not wait 10  years for that to  happen. The                                                               
administration does  not need to  make a  leap of faith,  but has                                                               
adequate information to make good decisions.                                                                                    
                                                                                                                                
4:52:42 PM                                                                                                                    
SENATOR STEDMAN  stressed the need  to be aware of  a fundamental                                                               
flaw  which needs  to be  corrected -  revenue sharing  at prices                                                               
higher  than $100  to $130.  At some  point there  needs to  be a                                                               
discussion on  freezing the  split at  75/25 percent  forward. He                                                               
also  highlighted  the  downside  risk  to  the  state  regarding                                                               
credits at low prices.                                                                                                          
                                                                                                                                
CO-CHAIR PASKVAN  asked if  DOR is  relying on  any probabilistic                                                               
determinations of the particular values of oil.                                                                                 
                                                                                                                                
MR. STICKLE  explained that  there are  several sources  for that                                                               
type of  analysis. He said  the United States  Energy Information                                                               
Association publishes such a forecast  and DOR could look further                                                               
into the issue.                                                                                                                 
                                                                                                                                
CO-CHAIR PASKVAN thought that would be helpful.                                                                                 
                                                                                                                                
COMMISSIONER BUTCHER  added that for  five of the last  six years                                                               
the  department's  price forecast  has  come  in under  what  the                                                               
actual price ended up being.                                                                                                    
                                                                                                                                
[SB 192 was held in committee.]                                                                                                 
                                                                                                                                
4:56:21 PM                                                                                                                    
There being no further business to come before the committee,                                                                   
Co-Chair Paskvan adjourned the Senate Resources Standing                                                                        
Committee at 4:56 p.m.                                                                                                          
                                                                                                                                

Document Name Date/Time Subjects
DOR_SB192 Progressivity Analysis v2_02-27-2012.pdf SRES 2/27/2012 3:30:00 PM
SB 192