02/17/2012 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB192 | |
| Analysis of Oil Industry Investment Strategies Presentation by Pfc Energy | |
| SB176 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 192 | TELECONFERENCED | |
| + | HB 144 | TELECONFERENCED | |
| += | HB 185 | TELECONFERENCED | |
| = | SB 176 | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 17, 2012
3:35 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
MEMBERS ABSENT
Senator Gary Stevens - excused
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
ANALYSIS OF OIL INDUSTRY INVESTMENT STRATEGIES PRESENTATION BY
PFC ENERGY
- HEARD
SENATE BILL NO. 176
"An Act exempting sand and gravel and marketable earth mining
operations from the mining license tax; and providing for an
effective date."
- HEARD & HELD
CS FOR HOUSE BILL NO. 144(RES)
"An Act requiring the Department of Natural Resources annually
to deliver to the legislature and the governor a report on
fishing stream access."
- SCHEDULED BUT NOT HEARD
CS FOR HOUSE BILL NO. 185(RES)
"An Act relating to an exemption from authorizations that may be
required by the Department of Environmental Conservation for the
firing or other use of munitions on active ranges."
- SCHEDULED BUT NOT HEARD
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
BILL: SB 176
SHORT TITLE: EXEMPTIONS FROM MINING TAX
SPONSOR(s): SENATOR(s) WAGONER
01/27/12 (S) READ THE FIRST TIME - REFERRALS
01/27/12 (S) RES, FIN
02/15/12 (S) RES AT 3:30 PM BUTROVICH 205
02/15/12 (S) <Bill Hearing to Continue 2/17/12>
02/17/12 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
TONY REINSCH, Senior Director
Upstream and Gas Group
PFC Energy
POSITION STATEMENT: Accompanied Mr. Mayer in the analysis of oil
industry investment strategies.
JANAK MAYER, Manager
Upstream and Gas
PFC Energy
POSITION STATEMENT: Continued the presentation on oil industry
investment strategies.
MARGRET DOWLING, Staff
Senator Tom Wagoner
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Explained CSSB 176 for the sponsor.
JOHANNA BALES, Deputy Director
Tax Division
Department of Revenue (DOR)
Juneau, AK
POSITION STATEMENT: Answered tax questions on CSSB 176.
TONY JOHANSEN, Partner
Great Northwest, Inc.
President, AGC of Alaska
Fairbanks, AK
POSITION STATEMENT: Supported SB 176.
MARK COTTINI, Professional Civil Engineer
Vice President, Alaska Rock Products Association,
Mat-Su Borough, AK
POSITION STATEMENT: Supported SB 176.
BEN SIMMONS, Vice President and Controller
Anchorage Sand and Gravel (ASG)
Anchorage, AK
POSITION STATEMENT: Supported SB 176.
CHERYL SHAFER, Owner
Dibble Creek Rock
Kenai, AK
POSITION STATEMENT: Supported SB 176.
ACTION NARRATIVE
3:35:06 PM
CO-CHAIR JOE PASKVAN called the Senate Resources Standing
Committee meeting to order at 3:35 p.m. Present at the call to
order were Senators French, Stedman, Wielechowski, McGuire, Co-
Chair Wagoner And Co-Chair Paskvan.
SB 192-OIL AND GAS PRODUCTION TAX RATES
ANALYSIS OF OIL INDUSTRY INVESTMENT STRATEGIES PRESENTATION BY
PFC ENERGY
3:36:51 PM
CO-CHAIR PASKVAN said the committee would continue the hearing
from yesterday on SB 192 and the analysis of oil industry
investment strategies by PFC Energy.
^Analysis of Oil Industry Investment Strategies Presentation by
PFC Energy
3:38:00 PM
TONY REINSCH, Senior Director, Upstream and Gas Group, PFC
Energy, introduced himself.
JANAK MAYER, Manager, Upstream and Gas, PFC Energy, and project
manager on fiscal terms reform in Alaska for the LB&A committee,
said he would pick up where he left off yesterday. He recapped
that he talked about thresholds and metrics that determine how
and where companies invest, principals for a well-designed
fiscal system, what makes for efficient or inefficient taxation
in general and arrived at the basic question of what
progressivity is and how and why it is used.
MR. MAYER said he would continue today talking about
progressivity in principal and look at some international
comparisons, then look specifically at progressivity under the
ACES regime and answer some of the questions on its limitations
to the upside with the oil price; he would then look at what
overall levels of government take looks like for ACES in several
scenarios including what would happen if particular caps were
placed on progressivity.
3:39:13 PM
Yesterday he started with his favorite quote from Jean Baptiste
Colbert about how the art of taxation is plucking the goose so
as to get the most feathers with the least hissing. In present
day terms that means taxation is about maximizing revenues
subject to the important constraints of efficiency and
competitiveness - efficiency being a measurement of how
intelligently we are applying a tax and whether it distorts
investment opportunities or only targets economic rent, and the
idea that one could have a very efficient tax and still not have
it necessarily be competitive.
3:40:34 PM
He said that royalties are simple to administer, their main
strength laying in the ease of administration, but they are also
inefficient precisely because at certain prices, some costs
distort investments so that by and large, certain projects that
might otherwise go forward will not go ahead. Royalty is highly
regressive in that as costs fall and prices raise, government
take decreases rather than staying neutral or increasing. He
said in principal, a well-designed fiscal system, one that meets
Colbert's test, is one that would ideally come close to
targeting economic rent and taxes things that don't affect
economic incentives, making sure that all projects that might
otherwise be viable without the tax remain viable.
3:41:32 PM
MR. MAYER said as a starting point, one of the things that
becomes apparent in thinking about things this way is that
progressivity (to achieve the aim of targeting economic rent)
can be used in many ways. Internationally, it's used primarily
not to create necessarily an overall progressive regime but
simply to partially or completely counterbalance the regressive
elements of one. A regime that may for historical reasons have a
long-standing fixed percentage royalty may introduce another
progressive element to offset the aggressive effect of that
royalty. PPT, the precursor to ACES, as it was first proposed
(as opposed to as it was enacted), looked very much like
something that was designed to create an overall neutral regime
to counteract the regressive impact of the royalty.
In other cases, however, progressivity is not used just to
counteract the regressive effect of a royalty, but to
deliberately create a progressive regime, one that as costs
increase, as oil prices increase, as there is more economic rent
available, to make sure that the state's share isn't just a
neutral or a fixed percent, but takes more for the state.
3:43:55 PM
MR. MAYER said that both approaches can yield fiscal taxation
regimes that are entirely efficient to the extent that it is
possible to distinguish economic rent and not costs from
ordinary return on capital. Regimes that combine both high
levels of government take and high levels of progressivity, if
well designed, may meet that first criteria of efficiency, but
may not always meet the second criteria of competitiveness. That
is something he would detail more.
MR. MAYER said one of his conclusions was that progressivity
works very differently in different regimes. In particular, one
can design a fiscal regime to use a wide range of metrics
against which to be progressive. Using production levels is the
simplest and the most wide-spread application of progressivity.
This started in some of the earliest production sharing
contracts (PSC) that sought to increase levels of government
take on the more profitable fields and it remains a key feature
of production sharing contracts in many parts of the world; it
is also used in creating variable royalty systems.
He explained that Vietnam's fiscal terms have two progressivity
elements with regard to production amount; one is a royalty and
one is the profit oil split. Both vary depending on how much is
produced in a given asset. In essence, he inserted, the idea
that is common to all production bearing progressivity is that
production level is used as a proxy for profitability, but
production level is a poor proxy for profitability because it's
only one factor that will determine profitability. If all of the
assets in a given country have a very similar cost structure,
then possibly a regime could be tailored like this to come close
to targeting profitability, but that approach has serious
limitations. Vietnam has a single regime for pre-2010 fields
that increase the government take in the profit split as
production goes up, but after 2010 there are three different
possibilities. That reflects that the vast majority of the asset
base previously was fairly consistent shallow water fields, and
the government of Vietnam understood that if you want to go into
deep water, those costs are very different. Having a structure
that accommodates those means you have to think differently
about how production levels are taxed. That led in this case to
increasing complexity in different options within the regime.
3:47:20 PM
He said that these systems are always bracketed. In this case,
20,000 barrels of production a day is the first bracket and up
to 50,000 barrels a day is another, with the royalty on the
incremental barrels increasing and the profit split decreasing
(but only on the additional barrels).
3:49:07 PM
He said that Vietnam is just one example of a production sharing
contract, but there are other royalty-based regimes that
similarly use a price-based metric for progressivity. British
Columbia in Canada is one example of a regime that combines a
production-based metric with a price-based metric to try and
achieve a slightly better measure of progressivity.
MR. MAYER said that a number of other regimes specifically
target price and only price with regard to progressivity. This
is particularly common in windfall profits taxes around the
world, the idea being that all of the given assets in the
country will economically break even below a certain price
including return on capital to the investor. So above that
threshold, the government would like to take some increasing
amount of the rents. For instance, Venezuela's windfall profits
tax is essentially a zero rate at all prices below $40, and 20
percent for all prices between $40 and $70. This particular
aspect of Venezuela's regime is highly progressive, so that 95
percent is taken by the government at oil prices over $100 (for
the incremental barrels).
SENATOR FRENCH had jumped ahead to slide 16 that showed that
Venezuela, despite bracketing, produces a government take of
$100 a barrel and remarked that was virtually indistinguishable
from Alaska. So, you can get to the same place, just through
different rates.
MR. MAYER agreed that was entirely correct. The lack of
bracketing in ACES does one thing: it makes a significantly more
progressive regime than it would otherwise be and the overall
effect is that it increases government take. He said he would
never suggest that the lack of bracketing in ACES makes, in and
of itself, an invalid or an undesirable characteristic.
3:51:51 PM
CO-CHAIR PASKVAN referred to slide 8 and asked if the 90 percent
threshold for Venezuela's windfall profits tax was dependent
upon the price of oil staying at $95 for an entire year.
MR. MAYER replied in the case of the $100 threshold, if the oil
price is $110, $10 of that is being taxed at the 95 percent
rate, another $10 is being taxed at 90 percent and another $20
is being taxed at 80 percent and so on. That is the way
bracketing works in that system.
SENATOR WIELECHOWSKI said the argument they hear all the time is
that Alaska's system takes away the upside, but a system like
this one takes away much more of the upside. Yet this is where
the majors have invested historically. Why would they do that in
this situation but not in Alaska?
MR. MAYER replied that Argentina is an extreme example of the
highest marginal tax rate imaginable, because it's 100 percent
after the price hits $42, but before that the windfall profits
tax component is zero. He explained that the reason a regime
like that is implemented in a place like Argentina is not
because it's a particularly efficient or sensible form of
taxation; it's because the high levels of regulation distort all
sorts of aspects of the domestic energy market.
3:54:29 PM
MR. REINSCH added that Venezuela was a particularly complex
example and because of the impacts of not only the windfall
profits tax but other unilateral conditions imposed by the
government on the contractors, virtually all of the majors and
large companies left Venezuela and they are not going back.
Chevron that has stayed deeply vested in Venezuelan heavy oil
sands is the exception. This is a different kind of development
- more like a manufacturing process - much like integrated mined
oil sands in Canada where a company doesn't carry exploration
risk. So a company can afford to maintain operations in this
kind of confiscatory fiscal environment.
SENATOR STEDMAN asked what would be the marginal tax rate in
this example if oil was $110.
MR. MAYER replied the marginal tax rate in that case would 95
percent.
SENATOR STEDMAN said if all of the western oil companies were
out of Venezuela except for Chevron, and if Chevron leaseholders
were put on the screen, "It would almost be I hate America."
3:56:54 PM
MR. REINSCH responded that Repsol, Statoil and a number of other
companies are positioned in the same type of asset, Repsol being
unique in that it has pursued very large scale gas exploration
and commercialization with an eye to LNG, but it is also a
Spanish speaking quasi or former national oil company itself and
has staked a claim as a linguistic leader in the upstream
development in South America generally, and as a result has a
different sort of incentive and strategy towards the continent.
But there is no question that under a different set of fiscal
terms and a different positioning by the national oil company,
that Venezuela would attract much more foreign direct investment
than is the case today.
3:58:01 PM
MR. MAYER moved on to slide 9 showing another more sophisticated
metric targeting economic rent a little more directly by looking
at the process by which projects recover their capital - instead
of focusing on just price, just production or just cost, to
assess projects on how far they have recovered their capital and
taxing them at a progressively higher rate as they go further
above simple undiscounted full recovery. For instance,
Malaysia's 1997 and beyond (still in place) production sharing
contract was introduced precisely to be more efficient in the
sense of increasing rates of taxation once costs had been
recovered. It's based on a metric called the "R-Factor." The "R"
stands for "ratio" and most commonly refers to comparing
cumulative revenues for a project to cumulative costs (both
operating and capital). Having an R-Factor of 1 means that one
has fully recovered the pure undiscounted accounting costs of
the project. As the R-Factor increases, an R-Factor of 2 means
the basic costs have been doubled. So the basic idea behind a
regime like Malaysia's is that at an R-Factor below 1 (well
before cost recovery) there is a relatively high limit on the
amount of revenues in any given year that can count towards cost
recovery and 80 percent of the split profit oil above that can
be kept. As the R-Factor rises above 1 and towards significantly
higher numbers, that profit split will go from 80 percent down
as low as 30 percent. It's quite a back-loaded regime that
allows quick cost recovery for the contractor and improves their
economics on metrics like RR and MPV, but allows quite a high
level of government take by taking progressively more as costs
are recovered.
SENATOR FRENCH asked how the Malaysian investment level should
be compared to Alaska's.
4:01:44 PM
MR. REINSCH answered that the question should be how projects
are defined and how capital continues to be attracted to them.
Malaysia has a sharper definition of "new project." For
instance, a field that has been producing with primary and
perhaps secondary water flood techniques and whose production
has matured and it's time to introduce enhanced oil recovery
would be presented to the government as a new project
development falling back, now, to an R-Factor of 1 for the
incremental production.
SENATOR FRENCH asked if one way to compare the investment levels
in Malaysia versus those in Alaska is to compare the number of
barrels produced, the decline curve and the relative Capex.
MR. REINSCH replied that his expectation was that on a dollar
BOE (barrel of oil equivalent) basis he would see the more
remote nature and difficult operating environment in Alaska
versus Malaysia.
SENATOR FRENCH asked if it could overcome any taxation
differences.
MR. REINSCH replied that it may.
SENATOR STEDMAN said he didn't see how such a model could be
implemented with Alaska's aging field.
MR. MAYER agreed and said he wouldn't suggest using an R-Factor
model in Alaska, because it relies on an accurate historical
accounting for costs. In that sense, it's something that is much
easier going forward than it is for existing mature assets.
4:05:11 PM
He said that slide 10 showed another variation of this idea
focusing with each of these steps more explicitly on taxing
returns above a baseline normal return on capital. One of the
new ways some regimes choose to do this is to set progressivity
rates specifically based on a particular IRR that may have been
achieved. For instance, in the shallow water Angola where
significant above ground risks exist the focus is explicitly on
an IRR metric meaning that a contractor's share of profit may be
quite high in any project that has yet to make a 20 percent IRR,
(60 percent in the example). But as IRR rises above those hurdle
rates, the contractor's share gets progressively less and less.
And in the case of Angola, the deep water has a slightly
different regime than for the shallow.
SENATOR STEDMAN said when the legislature initially did
progressivity in PPT, they contemplated doing it on the IRR
basis, but couldn't get that information. He asked how this
would this be implemented on an aging field.
MR. MAYER answered that it is a system that tends to be seen
much more in production sharing contracts than in tax royalty
regimes. Part of the reason for that is that production sharing
contracts tend more frequently to exist in places that either
have a very active national oil company that is, itself,
involved in the development of the project or a highly developed
oil ministry. Many parts of the world may have very little
government capacity, but have a highly functioning petroleum
industry. Having one of those things helps you to do this in a
way that if you don't have that capacity it's very difficult to
do.
4:08:35 PM
MR. REINSCH said the actual application of a system like this
can be seen in Tanzania and Mozambique, young jurisdictions
where organizations like the International Finance Corporation,
World Bank and International Monetary Fund (IMF) were very much
involved in supporting development of these regimes. To make
this operational, the companies were required to give IRR models
to third party auditors to verify.
MR. MAYER said an extreme example of regimes of this sort would
be the shift in certain jurisdictions away from simple
production sharing contracts to things like risk service
contracts, which fundamentally change the role of the
international oil company from being a risk bearing partner to
being a system where government takes the risk and the
international oil company is guaranteed a particular IRR, but no
more. In Malaysia the national oil company has put a number of
fields on a risk service contract basis.
SENATOR STEDMAN asked if he was aware of any areas in the world
where industry felt the tax structure was too heavy and asked
the government to look at IRR methodology to bring the
government split more in line with what they wanted to see.
MR. MAYER replied no.
4:12:10 PM
SENATOR MCGUIRE asked for an example of a government bearing a
larger share of the risk, then negotiating with oil companies
for a guaranteed rate of return and nothing more. And what did
he mean by the state bearing the risk in his Malaysia example?
MR. MAYER replied that guaranteeing a 15 percent rate of return
to work a field on one hand limits the upside, but it also works
to guarantee an absolute maximum if it turns out that the fields
is "dreadfully marginal."
SENATOR MCGUIRE asked if Malaysia had other credits, loan
incentives or guarantees.
MR. MAYER replied that he was not aware of those sorts of
things. He moved on to slide 11, an example of Australia that is
an OECD jurisdiction. It is one that in some ways follows a
method of taxation that is most similar to ACES in that it's a
profit based taxation regime, but it's one that is particularly
thoughtful and clever. It's the only system that explicitly
targets just economic rent rather than profit, including return
on capital. He thought this was the least distorting and most
efficient tax regime in the world - whether or not it is
competitive.
4:15:39 PM
MR. MAYER said it's a very simple regime compared to many. Other
than corporate income tax, it essentially has one single tax,
the petroleum resource rent tax, that is levied at one single
rate of 40 percent. That tax is levied not on profit, but on the
cash flow of the asset. The basic idea of the system is to try
to come as close as possible, without establishing a national
oil company and actually directly participating in a project, to
replicate the economics of a direct equity stake in the project.
Mr. Mayer explained that instead of directly contributing 40
percent of the capital, those costs get recovered from the
government later by being taken out of the revenues that would
otherwise go in taxes to it. Those revenues are inflated each
year by a rate that is essentially equivalent to the cost of
capital for the company; it's set in relation to the government
bond rate plus a certain percentage. By doing so, the economics
on a net present value basis are identical to saying the
government puts in 40 percent of the costs and takes out 40
percent of the benefits.
4:17:18 PM
Precisely because it's a simple system, no royalty and no other
taxes, it's one of the most transparent and rent targeting
regimes he has seen anywhere.
MR. MAYER said if government pays 100 percent of the costs and
gets 100 percent of profits and if the private sector is
actually doing all the work, there is very little incentive for
the private sector to minimize the costs involved in an
undertaking. This is important in talking about the high
marginal tax rate under ACES, because in principal, high
marginal rates at times imply the same thing. He elaborated that
if a company at any point under ACES faces a 90 percent or
higher marginal tax rate, that doesn't particularly affect
project economics or the hurdle rate; but if the company is
considering installing a new gas processing facility and could
spend $1 billion to get a pretty good one or spend $1.5 billion
to get a really good one, with a 95 percent marginal tax rate,
the actual incremental difference in the spending on those two
choices is very small and it may be worth spending the $1.5
billion, because the full cost of it will not be borne by the
company.
SENATOR STEDMAN said that might be getting into the issue of
gold plating.
MR. MAYER agreed.
SENATOR STEDMAN asked when he thought a system got close to gold
plating.
MR. MAYER responded that he didn't have a particular marginal
rate in mind, but certainly marginal rates above 85 or 90
percent.
4:21:36 PM
SENATOR STEDMAN said that previous testimony had shown that with
Alaska's system the state might be in a negative position (over
100 percent) at prices over $200.
MR. MAYER said he had looked at the impact of ACES under high
price environments and only at production tax values north of
$200 had he seen rates over 100 percent. He wanted to look into
that question further before answering definitively.
SENATOR STEDMAN agreed that they could look at it in more detail
later.
MR. MAYER summarized that one could have an efficient regime
without distorting project economics, but that regime might not
be competitive on the one hand and on the other, one could have
a competitive regime in terms of low government take but a
distorted structure meaning that marginal projects would be
unviable. So the principal that one would seek to follow is
having a regime that is neither inefficient nor distorting and
without total government take so high as to be uncompetitive. In
his discussion up to now, he said he had focused on the
efficiency side of the question (progressivity) looking
specifically at ACES, at ACES with some international
comparisons, and ACES with certain modifications.
However, it's important to understand that ultimately, effective
rates, not marginal rates, are the ones that drive project
economics at a given price level. They determine if a project
meets a hurdle rate for return on capital or not. But the fact
that is the case doesn't mean that marginal rates are not a
useful piece of information and help in understanding certain
key characteristics of a fiscal system. One thing that can be
understood from the interaction between average rates and
marginal rates is that it provides a useful way of benchmarking
progressivity of different regimes. A graph of average and
margin rates just for production tax components of the ACES
regime shows the high rate of progressivity for PTV up until
$2.50 and the lower rate of PTV after that threshold.
MR. MAYER explained that as long as the marginal rate line is
above the average rate line, it is a progressive regime. When
the marginal rate line is below the average, it would pull the
average rate down as prices increased, and that is a regressive
regime. By subtracting the average from the marginal rate one
can create an index that can be used to understand just how
progressive a regime is at a given price level.
4:27:44 PM
CO-CHAIR PASKVAN asked him to define "gold plating" and the
context he is using it in and to explain why he used the term
"perverse incentives" when talking about high marginal rates.
MR. MAYER replied that the term "gold plating" comes from the
heart of his previous comments about high marginal rates and the
incentives or lack of lack incentives for companies to exercise
cost control in certain circumstances. In this sense it
describes the sense of his further description of needing a new
facility and spending $1 million for one that would do the job
or spending $1.5 billion to get an even better facility but one
that doesn't in and of itself justify the extra half billion in
expenses. If he faces a 95 percent marginal rate of tax, his
incentive might be to go for the $1.5 billion facility, because
after accounting for the effects of his changed taxation rate in
addressing that investment he would only be paying a small
portion of that cost. So if there is a very small additional
benefit to him for making that additional investment it might be
worth it since he is not the one paying the full cost of it.
CO-CHAIR PASKVAN asked what would be the cumulative effect of
combining the concept of gold plating and high marginal rates
with Alaska's capital credit.
MR. MAYER replied it would probably move toward increasing
costs, because suddenly it's not a system that strongly
incentivizes cost control, but quite the opposite.
SENATOR WIELECHOWSKI remarked that he understood that it really
taxes the cash flow. If you look at industry's $30 billion in
profits, it would appear that they are taking the profits and
they are certainly reinvesting. He asked if he had seen any
evidence of gold plating in Alaska's system.
MR. MAYER replied that "gold plating" is hard to identify. If
one is not the individual actually making purchasing decisions
and deciding whether one needs the $1 billion or the $1.5
billion facility it's very hard to know whether it is going on
or not. The incentives might encourage it, but he hadn't looked
at enough data to go further than that.
SENATOR WIELECHOWSKI said economists used during ACES talked a
lot about the advantages of a high marginal tax rate, and the
philosophy at the time was that companies were in harvest mode,
taking the money out of Alaska and reinvesting it in other
places around the world. So, the rationale for the higher
marginal rate was that it would incent reinvestment in Alaska,
and since ACES has passed, they have seen all-time highs every
single year in both capital and operating investment. Are those
positive things you would expect to find about a high marginal
tax rate? Would you agree with that philosophy that encourages
reinvestment in the basin?
4:31:58 PM
MR. MAYER replied that it is a very specific set of carrots and
sticks and they are set up to provide significant benefits from
reinvesting. Whether those benefits are sufficient to compensate
for the overall high level of government take is another
question and he didn't have a conclusive answer to that at this
point.
SENATOR STEDMAN commented that it's more complex than saying
having a high marginal rate policy encourages reinvestment.
Alaska also has up front credits to encourage capital to stay
here and if they both accelerate at the same time all of a
sudden there are distortions all over the place and the whole
thing loses its ability to function at more moderate levels.
There is the issue of the theory and then the issue of the
implementation, which could be explored in further detail with
advanced modeling. He asked if they could get a reference to the
price of oil on the chart of Production Tax Values, slide 13.
4:36:36 PM
MR. MAYER responded that slide was showing something specific
about a specific small portion of the ACES system; there are
many different variables and cost is one of the major ones; cost
over time and how cost is phased over time is another. So if
they do this analysis on the basis of oil price rather than PTV,
it's suddenly no longer a clear-cut simple graph. "It's a much
fuzzier picture."
SENATOR STEDMAN said maybe they could have a double X axis with
current prices underneath so people could reference back and
forth. Getting the concept across is kind of a two-edged sword.
MR. MAYER said the basic point he was making about subtracting
the average rate from the marginal rate to get a basic idea of
progressivity was that this is not the way other fiscal system
comparisons are made. This is analysis PFC does by identifying
assets in their database of assets as typical for a particular
regime. In some cases they may be comparing a relatively low
cost field to a relatively high cost field, but that's because
both of the developments are typical of that area and that
regime, and they are trying to get to the question of what
government take looks like given the nature of the assets in a
given jurisdiction in different places. Here they do an exercise
of subtracting the average and marginal take and see that the
world is split up into progressive and regressive regimes, at
least at the $100 price level, with a few neutral ones in the
middle, and of those, Alaska is among the more progressive
regimes around. In doing the same exercise at $140 barrel, that
becomes even more the case, and suddenly it is the most
progressive regime of any in the Organization for Economic
Cooperation and Development (OECD) and among the highest they
have seen.
4:39:48 PM
SENATOR STEDMAN, referring to the chart on slide 14, asked if
Texas, North Dakota, the Gulf of Mexico and Louisiana are all
regressive.
MR. MAYER replied yes and said that is precisely because they
are largely royalty-dominated regimes, and royalty-dominated
regimes are inherently regressive.
SENATOR STEDMAN commented like royalty and property and income
taxes.
MR. MAYER said of those, royalty and property tax, in
particular, are the most regressive components.
SENATOR STEDMAN recalled that in doing the initial review of
PPT, the system was regressive and that's what created the
interest to insert a progressivity measure to at least in theory
get them to the middle of the chart (slides 14).
MR. MAYER agreed and said in looking at ACES at a range of price
levels, one of the first things they will see is an analysis of
PPT as it was originally proposed rather than as it was enacted.
It's a very neutral regime, because the progressivity is almost
exactly enough to counter the regressive nature of the royalty.
4:41:39 PM
He said since they were addressing the question of overall
competitiveness of a regime, regardless of whether it is
efficient or not, it was useful to do the same global
benchmarking model exercise, and again Alaska ranks relatively
high in the deck of OECD countries; at $100 barrel, Norway is
the highest, but it is the second highest OECD country. The
regimes above it tend to be by and large production sharing
contract regimes with some of the high levels of government
take. The analysis at $114 barrels makes that even more the
case; in this case, Alaska is about equal with Norway.
SENATOR WIELECHOWSKI asked in calculating government take, if he
takes the actual amount paid in a given year and then backs out
what is actually paid or if he uses the general tax rates and
assumes that the full tax is being paid.
MR. MAYER replied the basic methodology is first of all to start
with the concept of divisible income being all of the revenues
that the project creates less its costs (per the supplement
slide yesterday). That divisible income can be distributed
either to the private company owning and operating the project
or to the government. If you take away the after-tax cash flow
based on what the model suggests that goes to the contractor,
everything else, in some form or another, goes to the
government. That's the absolute government take (through
royalty, property taxes, profit sharing or other ways).
4:44:08 PM
SENATOR WIELECHOWSKI asked if he was assuming in this government
take figure the companies are paying the full corporate income
tax of 9.4 percent.
MR. MAYER replied that the model, in most cases, uses a 9.4
percent tax rate, certainly in the Alaska model.
SENATOR WIELECHOWSKI said he didn't think that anyone in Alaska
pays 9.4 percent, because for instance companies are allowed to
write off their losses in other regions. He thought these
numbers were much lower for Alaska.
MR. MAYER said that may be the case here and in other regions as
well. He would also say in that sense, that state income tax is
one if the smallest components of government take and would have
a small impact here.
4:45:23 PM
Slide 18 had a few graphs of PPT as proposed, that was designed
with enough progressivity to counteract the regressive nature of
the royalty, but that led, relatively speaking, to an overall
neutral regime that is very slightly regressive, but overall
almost spot-on neutral using these assumptions. It indicated a
flat government take of 60 percent.
4:47:01 PM
MR. MAYER explained that slide 19 had graphs of PPT as enacted
with significantly greater progressivity where government take
rose from the flat 60 percent level across all price levels to a
peak of about 74 percent, given the assumptions of the
particular asset type they were looking at. As a result, there
was a decline in some of the MBV and IRR metrics for this
generic representation of assets. The primary difference between
ACES as it was proposed versus PPT as enacted is that
progressivity kicks in at a lower threshold and that raised
government take somewhat. ACES as it was actually enacted had a
significant increase in the progressivity and a significant
increase in the overall government take.
CO-CHAIR PASKVAN asked what parameters as far as costs he was
imposing and what increased costs would do to the total
government take column.
MR. MAYER replied that increased costs would suddenly reduce
that figure. This analysis had been prepared on the basis of a
lower-cost development on the Alaska North Slope, not
inconsistent with the cost numbers he had from the Department of
Revenue for assets like Prudhoe Bay, but certainly much lower
than he would anticipate for some of the newer developments like
Oooguruk. He recalled using slightly over $8 per barrel in Opex,
around $5 barrel in pure maintenance Capex and probably a
similar amount in development Capex. He said he could produce an
analysis like this based on a higher cost asset.
4:49:18 PM
SENATOR WIELECHOWSKI said a $100 barrel of oil had a 16 percent
royalty and a 39 percent production tax, and he thought more
accurate numbers would be 12.5 percent for the royalty and 27.5
to 28 percent for production tax. He realized that the federal
tax flexed with that, but wanted to know where he was wrong.
4:53:53 PM
MR. MAYER responded that the percentages in his model sum up to
a total government take of 60 percent, half from royalty,
because royalty is 12.5 percent of the gross revenues of the
project, which is more like 30 percent of the divisible income
not 12.5 percent of it.
SENATOR FRENCH remarked that the Capex and Opex numbers were
significantly lower than the ones he recalled from the Revenue
Sources Book and asked where they are from.
MR. MAYER replied that they come from a number of things. A
different modeling exercise would show different cost fields in
the context of different portfolios. The costs here are not out
of keeping with the data he had from the DOR on costs at the
lower end of the spectrum from places like Prudhoe Bay.
SENATOR FRENCH asked if the commissioner or one of his deputies
gave him these numbers.
MR. MAYER answered that these specific numbers, no; but he did
have numbers that the department was able to release in the
cases where there were more than three working interest partners
in an asset on general levels of operating and capital costs. He
adjusted his figures to distinguish between maintenance costs
and capital going to incremental development.
SENATOR FRENCH said he was looking forward to seeing maybe 20
more runs using new fields, heavy oil fields along with Prudhoe
Bay fields (for some standard to compare to).
SENATOR STEDMAN said it would be interesting to look at cost
numbers going forward, because in 2013 the Revenue Source Book
(that the legislature has access to) has about $13.60 a barrel
for Prudhoe Bay Opex and about $17.50 for Capex depending on if
you are using net or gross on royalty barrels. It's quite a
difference.
MR. MAYER agreed and said from those aggregate numbers one can
say what an average fields looks like, but no asset and no
company portfolio looks like an average field. This was an
exercise to show the lower-cost more mature assets. It's very
different than the higher cost ones.
CO-CHAIR PASKVAN said that is where some of the problems are
surfacing from; they are seeing a homogenized industry. It's
well taken that they need to understand more specific fields'
operations within this overall fiscal system.
MR. MAYER said he hoped the work they are doing on an ongoing
basis in terms of coming up with a more detailed and granular
model assist in that exercise.
4:54:47 PM
To address the question that was asked about how ACES limits the
upside of high oil prices for an oil and gas company, he said,
some of that was seen on the preceding slides looking at the
escalating level of government across prices. They could also
maybe graph net present value of a project over a range of
different prices for some of the different regimes. They could
see how that changes over time under PPT as proposed, as
enacted, ACES as proposed and ACES as enacted and see the
limitation of upside. But whether capping upside is necessarily
a bad thing in all circumstance is another question. In many
ways it comes to the heart of what they have been talking about
in terms of taxing economic rent.
MR. MAYER said one way one could seek to quantify this is to
take a probabilistic approach to the oil price rather than
simply saying they want to know what the economics of this field
or another looks like at $60 or $80 or $100 a barrel. A
probability distribution curve on slide 22 graphed what each of
those looked under different prices; the legend on the right of
the graph showed the expected value falling as the upside
potential is curbed by high progressivity. That wasn't the same
as saying that by curbing the benefit of high upside, one
affects the economics that determine meeting hurdles rates or
some of the other key metrics under which capital is allocated,
but it is one way of understanding the limitations on price
upside that high progressivity creates.
4:57:12 PM
MR. MAYER said finally to answer the committee's question on the
impacts of changing nothing else about the ACES system other
than the level at which progressivity is capped that he did a
graph on slide 25 capping progressivity at 50, 60 and 70 percent
at any price up to $230. It shows almost no difference; that's
because the 75 percent cap itself only binds high prices around
the $220-230 mark and a very slight decrease from 83 percent to
82 percent in the $230 case.
4:58:31 PM
CO-CHAIR PASKVAN asked what oil price the 75 percent cap
translates to.
MR. MAYER said to get a precise number he would have to do the
math again, but somewhere in the $300s. He further explained
that reducing the cap to 60 percent would show more of an impact
and capping progressivity somewhere around the $160 mark would
result in a neutral structure going forward.
Similarly, looking at this in a probabilistic approach (slide
22), both straight lines come up as they reach the cap on
production tax and, again, relatively speaking, increased
expected values on the higher oil side as a result.
4:59:56 PM
MR. MAYER summarized that there are a wide range of forms of
progressivity in different parts of the world and a wide range
of metrics on which it can be based. Sometimes progressivity can
be used to counterbalance the inherently regressive elements of
a regime - things like a royalty component - and other times
progressivity is applied in a way that is deliberately taking as
large a share of economic rent as possible. There may be merits
in doing so, but even if that can be done efficiently, it could
affect competitiveness.
He said that Alaska is one of the more progressive regimes in
the world and, based on his assumptions, has a relatively high
level of government take. In the OECD, only Norway has a higher
level and at $140, oil is about equal to Norway. The higher GT
regimes tend to be PSE regimes in some of the high-take parts of
the world.
PPT as proposed was a progressive component that counterbalanced
other regressive elements to create a fairly neutral regime.
Progressively, as time has gone on, the regime has become more
and more progressive, more focused on capturing higher amounts
of economic rent at higher prices and less focus on simply at
creating a neutral regime.
5:02:24 PM
CO-CHAIR PASKVAN thanked Mr. Mayer and Mr. Reinsch for the
presentation over the last two days and held SB 192 in
committee.
At ease from 5:02 p.m. 5:04 p.m.
SB 176-EXEMPTIONS FROM MINING TAX
5:04:44 PM
CO-CHAIR WAGONER announced consideration of SB 176 [version 27-
LS1201\M was before the committee].
CO-CHAIR PASKVAN moved to bring CSSB 176( ), version \B, before
the committee for purposes of discussion.
CO-CHAIR WAGONER objected for discussion purposes.
MARGRET DOWLING, staff to Senator Wagoner, explained that the CS
to SB 176, removes standing gravel operations, quarry rock
operations and marketable earth from the mining licensing tax.
This is because it is extremely cumbersome to both industry and
the state. For example, in the last five years an average of
about $268,000 was collected as a result of the mining license
tax, and it cost the Department of Revenue about $150,000 to
collect it. In addition, in FY2011 when the 182 operations were
subject to the tax, that included both sand and gravel
operations and quarry rock operations. Of those 182 operations,
only 17 were actually required to pay the tax, largely because
many of them were small operations serving their local
communities that fell within the $40,000 exemption for net
taxable income.
5:07:30 PM
MS. DOWLING said it's cumbersome to tax these businesses,
because they produce many products - different grades of
aggregate, sand, concrete, concrete blocks, pit run and the like
- and in order to comply with this tax, all of the expenses
associated with each product have to be tracked. Sometimes one
expense can be attributed to a number of different products and
their task, then, is to try to determine which part of the
expense is attributable to which product and to allocate it
appropriately.
It gets fairly complex and involves quite a bit of record
keeping. A letter in their packets from Secon said it takes
about 200 hours per year to do the recording keeping required to
file a tax return and respond to audit requests. If a company
owns more than one pit, it has to file a tax return and a
schedule for each pit. Even if an operation is so small that it
qualifies for the $40,000 net income exemption, it still must
file a tax return and keep records. That is why the burden of
this tax is pretty extraordinary relative to the actual tax
revenue that is generated.
5:09:27 PM
MS. DOWLING pointed out that 60 to 80 percent of the material
that comes out of the ground in Alaska goes into public works
projects that serve state residents in local communities. So,
what really happens is that the state ends up paying on both
sides of the equation; they pay to collect the tax and then as a
consumer it ends up paying for the tax again. In addition, it
pays for the overhead portion for the bookkeeping that these
companies have to add to the price of their materials.
5:10:28 PM
MS. DOWLING explained that the reason marketable earth was
included in this measure was to address a Department of Revenue
and industry concern that once they took out sand and gravel
that someday some regulator or some member of the public would
see marketable earth and wonder if it included sand and gravel.
She understood that there are no tax returns filed under
marketable earth now, so it wouldn't cause any harm.
In addition, she said, the reason quarry rock was excluded was
because there are just too few of them. In the last five years
only four to six companies have filed tax returns under that
designation. So keeping quarry rock in would not be achieving
the efficiencies they are trying to achieve with this
legislation.
5:11:40 PM
SENATOR WIELECHOWSKI said they had heard a lot over the last few
years about rare earth minerals and he wanted to be absolutely
certain that taking out marketable earth was not removing those
sorts of things.
5:12:23 PM
JOHANNA BALES, Deputy Director, Tax Division, Department of
Revenue (DOR), said her understanding is that marketable earth
includes things such as peat, top soil and clay. She said the
Department of Law looked at the rare earth elements to determine
whether or not that would cause a problem, but to be honest,
they weren't sure those types of elements were even covered
under the mining license tax.
Another good point to consider was that rare earth elements,
unlike the marketable earth, such as peat and top soil, are
locatable minerals, and excluding the marketable earth wouldn't
affect them, but this issue should lead to a further
conversation and some research in the future if the rare earth
elements start being produced.
5:13:33 PM
SENATOR WIELECHOWSKI said he thought the conversation needed to
happen now if they are contemplating removing it from the
state's tax structure. Taxes are hard to change down the line if
someone discovered and started to mine rare earth minerals,
which are extremely valuable. He said he supported the concept
of exempting sand, quarry rock and gravel, but he didn't want to
go far beyond that. He strongly preferred clarifying the
definition.
5:14:32 PM
MS. BALES responded that that was a valid concern. The
definition of mining in statue includes "valuable metals, ores,
minerals," and that she would immediately consult with the
Department of Law on whether or not rare earth elements would
fit under that language.
5:15:11 PM
CO-CHAIR WAGONER asked her to do that and said they would
probably hold this bill until next Tuesday.
SENATOR FRENCH concurred with that and asked why the department
spends $150,000 each fiscal year examining and auditing sand and
gravel tax returns (on page 2 of the fiscal note).
MS. BALES explained that that amount has been expended over the
last five years. Back in 2006, the Matanuska Susitna Borough
contacted them about several sand and gravel operators that
could not get permits from the borough because they didn't have
the state's mining license. At that point, the department
realized that a significant number of sand and gravel operators
were actually not in compliance. So, they spent the last five
years bringing several hundred sand and gravel operators into
compliance. The same page of the fiscal note indicates there
were only 11 licensees at the time, and in 2011 there were 189.
So, about 170 taxpayers were brought into compliance and the
resulting tax was negligible. Until they did that exercise they
had no idea that most of the operators were small and because of
the $40,000 exemption, didn't pay tax. She said the department
had already started moving resources back to other excise tax
programs after diverting them to help with this.
5:17:42 PM
CO-CHAIR WAGONER opened the public hearing.
5:17:57 PM
TONY JOHANSEN, partner, Great Northwest, Inc., Fairbanks, and
president, AGC of Alaska, supported SB 176. He said early last
year his company received a two-page audit request from the
Department of Revenue concerning their sand and gravel sales.
The request listed 19 detailed sets of information and data
needed to perform an audit of the mining license tax for the
years 2008 and 2009, paperwork that would take their office
manager weeks to assemble. In frustration, he said, he contacted
John MacKinnon, the executive director of the AGC of Alaska, and
after researching the issue last summer, the AGC approached the
DOR about the problems and with suggestions on how the present
requirements could be improved. After researching the revenues
generated and the cost of their collection, the administration
recommended that the simplest and best solution was to exempt
quarry rock and sand and gravel operations from the mining
license tax requirements. Everyone recognized it as a "true
nuisance tax."
5:20:15 PM
MARK COTTINI, Professional Civil Engineer and Vice President,
Alaska Rock Products Association, Mat-Su, said he supported SB
176. He said he represented 10 gravel pits in the Mat-Su Borough
and that he is also vice president of a gravel screening
business and owns a pit that receives gravel royalties from the
company that operates it. He had never paid mining taxes to the
state of Alaska, he said, and all of the small gravel pit owners
and the small gravel pit screening business think the mining tax
is broken and concurred with the earlier presenter that they
should be exempted from the mining licensing tax.
5:22:06 PM
BEN SIMMONS, Vice President and Controller, Anchorage Sand and
Gravel (ASG), Anchorage, said he has extensive experience with
the mining license tax and supported SB 176. He concurred with
prior testimony that the statute is very ambiguous as it
pertains to sand and gravel. For the most part the other metals
and minerals that are covered by the statute are gold, silver,
zinc, lead and so forth, but Anchorage Sand and Gravel currently
produces and stocks 20 to 40 products made with sand and gravel.
Complying with the current audit requirements of determining
fair market value for each product is very cumbersome, time
consuming and requires a lot data and a lot of paper.
He said the tax is inconsistent as it's applied to sand and
gravel producers, because each producer is different. A supplier
like Anchorage Sand and Gravel sells approximately 70 percent of
its production to third parties and uses 30 percent for its
internal operations compared to a general contractor, who, for
instance, sells approximately 30 percent of his product to third
parties and uses 70 percent internally for large construction
jobs. The average sales prices calculation for each of those
exact same products is different from one supplier to another
and from producers.
MR. SIMMONS said it just took him more than 18 months and cost
more than $50,000 to complete an audit for tax years 2005 and
2006, and the amount of taxes collected were negligible compared
to what the state had to do to get them.
5:25:21 PM
CO-CHAIR WAGONER thanked him and went to Cheryl Shafer.
5:25:30 PM
CHERYL SHAFER, owner, Dibble Creek Rock, Kenai, said she
supported SB 176. She said her family runs a small sand and
gravel and ready mix business on the Lower Kenai Peninsula. She
reiterated what everyone had been saying that the mining tax is
burdensome. Because they own a number of pits, she has to file a
double mining tax for each piece of property simply because the
property is in their family name and she is currently being
audited by the DOR for three years of past mining taxes. She
only has a two-person office and has spent weeks supplying
information and answering questions. It is difficult to separate
out the mining activities from the family's integrated
activities. More time is actually spent with trying to comply
with filing a correct mining tax return than for her filling out
her corporate tax return.
5:27:36 PM
CO-CHAIR WAGONER added that this is an opportunity that every
politician looks forward to - taking something off the books not
putting something on the books. He found no further testimony
and closed the public hearing.
He said SB 176 would be held in committee awaiting the
information on rare earth minerals.
5:28:24 PM
CO-CHAIR WAGONER, seeing no further business, adjourned the
Senate Resources Standing Committee meeting at 5:28 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| PFC Energy_Bios_Feb_2012.pdf |
SRES 2/17/2012 3:30:00 PM |
SB 192 |
| 23 - SB 176 Support Testimony ARPA 021512.pdf |
SRES 2/17/2012 3:30:00 PM |
SB 176 |
| 1 CSHB144 Sponsor Statement.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 144 |
| 2 CSHB144 ver I.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 144 |
| 3 CSHB144(RES) Sectional Analysis.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 144 |
| 4 CSHB144(RES) Summary of Changes.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 144 |
| 5 CSHB144-Fiscal Note-HB144-DNR-LATD-02-23-11.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 144 |
| 6 CSHB144 Fiscal Note-HB144-DFG-SFD-02-17-11.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 144 |
| 7 HB144-DNR-MLW-12-13-2011.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 144 |
| 8 HB 144 Support Docs Combined.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 144 |
| 1 CSHB185res Sponsor Statement.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 185 |
| 2 HB0185A.PDF |
SRES 2/17/2012 3:30:00 PM |
HB 185 |
| 3 HB0185B.PDF |
SRES 2/17/2012 3:30:00 PM |
HB 185 |
| 4 HB185-DEC-WQ-03-11-11.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 185 |
| 5 HB185-DEC-WQ-12-03-11.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 185 |
| 6 DEC Response to (H) RES HB 185- Munitions Ltr.PDF |
SRES 2/17/2012 3:30:00 PM |
HB 185 |
| 7 AK_CWA_Support_Letter_Mar_2011.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 185 |
| 8 DMVA Letter to Support CWA Amendment.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 185 |
| 9 FEDERAL WATER POLLUTION CONTROL ACT Summary.pdf |
SRES 2/17/2012 3:30:00 PM |
HB 185 |
| PFC Energy_Alaska_Senate Resources_Slides_Feb_17_2012.pdf |
SRES 2/17/2012 3:30:00 PM |
SB 192 |