Legislature(2013 - 2014)BARNES 124
02/22/2013 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB72 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 72 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 72-OIL AND GAS PRODUCTION TAX
1:05:42 PM
CO-CHAIR FEIGE announced that the only order of business is
HOUSE BILL NO. 72, "An Act relating to appropriations from taxes
paid under the Alaska Net Income Tax Act; relating to the oil
and gas production tax rate; relating to gas used in the state;
relating to monthly installment payments of the oil and gas
production tax; relating to oil and gas production tax credits
for certain losses and expenditures; relating to oil and gas
production tax credit certificates; relating to nontransferable
tax credits based on production; relating to the oil and gas tax
credit fund; relating to annual statements by producers and
explorers; relating to the determination of annual oil and gas
production tax values including adjustments based on a
percentage of gross value at the point of production from
certain leases or properties; making conforming amendments; and
providing for an effective date."
1:06:29 PM
BARRY PULLIAM, Economist & Managing Director, Econ One Research,
Inc., stated he had reviewed the presentations by the producers'
representatives and would comment on that material.
1:07:47 PM
MR. PULLIAM addressed slide 14 of the Pioneer Natural Resources
presentation to the House Resources Standing Committee on
February 18 which used Econ One data for the economics of [HB
72] versus ACES for a new development. He opined that his
conclusion for this data differed from the Pioneer conclusion.
He directed attention to the $115 million on the right of the
slide, explaining that this referred to the difference between
the net present values under HB 72 and ACES for a new producer
developing a 50 million barrel field with capital costs of $16
per barrel. He offered his belief that slide 16, developed for
Pioneer Natural Resources by Palantir, used the same 50 million
barrel field, and was modeled for the Nuna Project. He declared
this to have capital spending of almost $900 million, similar to
the Econ One analysis, although the production profile was "a
little different than what we had used." He noted that, instead
of a $115 million benefit, Pioneer analyzed this to reflect a
$92 million detriment. He pointed to the assumptions at the
bottom of the slide, which he stated were similar to his
analysis. He pondered why there was an "opposite conclusion
essentially." He declared that the assumption for price, $100
per barrel ANS West Coast, was the same, but that he had assumed
the price would increase over time at the rate of inflation,
about 2.5 percent per year. He offered his belief that Palantir
did not make this same assumption for inflation, which would
result in a 2012 price of $78 per barrel, and would account for
the different conclusion.
1:13:34 PM
CO-CHAIR SADDLER, referring to the aforementioned slide 16 of
the Pioneer Natural Resources presentation, asked for a
comparable Econ One slide to show its results.
MR. PULLIAM, in response, referenced the top box of the
aforementioned slide 14, which listed the net present value for
ACES as $192 million compared to the net present value for
proposed HB 72 of $309 million. He reported that differential
to be about $115 million.
REPRESENTATIVE HAWKER, clarifying that the Econ One model
included annual inflation to the $100 per barrel price, asked
what that inflation rate was.
MR. PULLIAM replied it was 2.5 percent.
REPRESENTATIVE HAWKER asked if this annual increase was
compounded or linear.
MR. PULLIAM responded it was compounded, and reflected that the
compounded price would be about $170 per barrel in 30 years, but
that the linear mean price would be about $129 per barrel.
1:16:36 PM
REPRESENTATIVE SEATON opined that it was not possible to compare
outcomes if an annually inflated price was now being introduced
in only one of the evaluations.
MR. PULLIAM explained that all of his presented analyses were
for real terms, so a specific price over an extended time period
would include inflation adjustment. He offered to clearly label
his projections as a 2012 dollar value. He surmised that this
was the common way to present assumptions.
CO-CHAIR FEIGE affirmed that any calculation for net present
value (NPV) in the future should reflect that inflation
adjustment.
MR. PULLIAM expressed his agreement, and indicated that a NPV of
12 percent was consistent with an inflationary assumption of 2.5
percent.
1:19:30 PM
REPRESENTATIVE SEATON asked if, at $100 per barrel, the NPV
would be 9.5 percent.
MR. PULLIAM confirmed this to be correct on a real basis.
MR. PULLIAM said that it was important to understand whether the
analysis was done in real or nominal terms, as each could create
a very different outcome. He opined that a fixed price scenario
for real terms would be adjusted for inflation over time, and
would then use a discount rate with the same inflationary
assumption.
1:21:04 PM
JANAK MAYER, Manager, Upstream and Gas, PFC Energy, concurred
with the analysis by Mr. Pulliam, stating that all the PFC
presentations to the Alaska State Legislature had factored in
the impact of inflation, usually a 2.5 percent rate. He
declared that the real or nominal analysis models for many
fiscal regimes did not necessarily make a huge amount of
difference when the fundamentals of the fiscal system did not
change with nominal prices. He declared that these models did
not work in Alaska, however, as ACES and progressivity were not
indexed to inflation, but were set in nominal terms, which
allowed for "bracket creep." He stated that as nominal prices
rise, the production tax value point for progressivity would
move lower in real terms. He confirmed that there was a
fundamental difference for a one year review for ACES and a
review for an extended time frame. He pointed out that the
government take became higher and the economics for ACES looked
worse when an extended time frame was analyzed with the impact
of inflation factored in because of the effect of "bracket
creep."
1:23:07 PM
REPRESENTATIVE SEATON questioned if inflation was factored on
expenses, which were all deducted prior to the progressivity
point, then that point would not "bracket creep" because the
inflation was below the tax point. He stated that the inflation
was assumed in the costs.
MR. MAYER pointed out that the inflation was also in the oil
price.
REPRESENTATIVE SEATON questioned whether the consumer price
index in Anchorage was related to the actual oil prices.
CO-CHAIR FEIGE surmised that there was a theoretical nature to
predicting future prices.
REPRESENTATIVE SEATON expressed his difficulty for understanding
the different models if the calculations were not the same. He
asked if the models for NPV 10 and NPV 12 would only be 0.5
percent different.
MR. PULLIAM, in response to Representative Seaton, said that it
would be better if the cash flow and the discount rate were not
inflated, however, the challenge would be that an assumption for
constant oil prices in real terms, a common forecasting method,
would differ from nominal terms as these would be rising and
would affect the ACES tax. He declared that it was not as valid
to ignore the effects of inflation in an analysis, as it would
understate the taxes due under ACES because the rate rises as
the price rises.
REPRESENTATIVE SEATON asked if the basis of all the
considerations had been the DOR Revenue Sources Book, and were
these projections all inflated by 2.5 percent to the consumer
price index.
1:26:58 PM
MR. PULLIAM offered his belief that the figures presented in the
DOR Revenue Sources Book were nominal, or dollars of the day,
but when the costs and prices were forecast there was
consideration for the effects of inflation. He pointed to the
gradual increase of prices in the forecast, which reflected the
inflationary effect.
CO-CHAIR FEIGE surmised that, if history was any guide, that the
price had steadily increased.
MR. PULLIAM suggested that, although there was some disagreement
for the direction of oil prices, even a conservative forecast
would reflect no growth, or a constant, in real terms.
MR. MAYER opined that no economist would say that time series
data could be looked at in nominal terms and generate meaningful
conclusions, as inflation was a fact of life. He pointed out
that the price of oil in the 1960s, when reviewed in nominal
terms, offered no information for a meaningful conclusion. It
would be necessary to inflate that 1960s oil price to 2012
dollars to gain a sense of the purchasing power.
MR. MAYER affirmed that for any of these current analyses, the
point was not to forecast the exact oil price, but to compare
using certain assumptions. He declared that the crux of the
matter was to determine the nominal price for its impact.
1:30:35 PM
CO-CHAIR SADDLER asked if it had been an omission with ACES in
not accounting for inflation.
MR. MAYER opined that, as Palantir was a software company, the
Pioneer Natural Resources analysis was not necessarily a
commissioned report from Palantir. He pointed to a white paper
produced by Palantir, which included an analysis using nominal
terms. In response to Co-Chair Saddler, he surmised that it was
not an uncommon oversight, as few people realized the
significance that "bracket creep effect of ACES is over time."
He stated that he had not specifically reviewed the Pioneer
Natural Resources analysis for real or nominal basis.
CO-CHAIR SADDLER asked how significant was the bracket creep.
MR. MAYER replied that it had a noticeable effect on government
take and on the price level at which progressivity would kick
in.
MR. MAYER, in response to Co-Chair Saddler, said that the price
level for progressivity became significantly lower over a 20-30
year time frame.
1:33:45 PM
REPRESENTATIVE SEATON asked about the inflation rate for in-
field project costs, and whether it had been entered into the
analysis. He opined that these project costs had increased more
than the consumer price index.
MR. PULLIAM offered his belief that, on average, there had been
a greater increase for project costs. He reported that the
inflationary pressure on oil project costs was greater than the
consumer price index, and that these had been factored into the
Econ One analyses. If one simply assumed that oil prices and
costs were going to rise at the level of inflation, or somewhat
higher, the tax rate for ACES would go up because of it, as the
taxable base for the price of oil was larger than the taxable
base for costs.
1:35:51 PM
REPRESENTATIVE HAWKER reflected on the initial dialogues
regarding the production profits tax (PPT), which had a lower
progressivity level than ACES. He stated that there had been
discussion for bracket creep, with recognition that there would
be opposing consequences for cost and revenue inflation, which
would tend to be offsetting for the tax calculations over time.
He indicated that, as progressivity rates under ACES had never
been modeled or evaluated significantly for the possible
consequences, there now existed a potentially profound bracket
creep.
CO-CHAIR FEIGE reviewed that, although inflation affected the
revenues and the expenses evenly, there were other factors that
affected expenses.
REPRESENTATIVE HAWKER replied that these were relatively equal
and offsetting under the original PPT. However, under ACES the
differential became quite profound, which resulted in the
current bracket creep.
1:37:56 PM
REPRESENTATIVE SEATON confirmed that bracket creep had been
discussed for ACES. He opined that bracket creep entered when
there were higher prices, as there was then more revenue in the
progressivity range.
MR. PULLIAM declared that this was the margin over the
progressivity trigger, and inflation would increase that margin
resulting in an increasing tax rate with progressivity. He
noted that the "upside gain" on slide 16 was the amount saved
when not paying any progressivity, and he opined that similar
results would be reflected if he assumed a real price of $80 per
barrel.
1:40:23 PM
REPRESENTATIVE TARR recalled that Mr. Pulliam had stated that
the tax credits were not an important aspect for decision
making; however, she pointed out that all of the independent
producers testified to the importance of the tax credits for
commitment to investment in Alaska.
MR. PULLIAM replied that he did not recall offering those
opinions as he had intended to indicate that the overall
economics of the project, including the credits, were important
to review.
REPRESENTATIVE TARR asked how to attract the small producers to
invest in Alaska, as the proposed bill would remove those
credits.
MR. PULLIAM suggested making it attractive for the enhanced
present value of the projects. Even without credits, there were
enough other benefits to enhance the project's present value.
REPRESENTATIVE TARR asked, if the proposed bill passed, at what
point and for how many barrels of oil it would take to recoup
the $1.5 billion revenue loss.
1:43:30 PM
MR. PULLIAM replied that he was not familiar with the $1.5
billion revenue loss, although DOR had analyzed the impact for
new production. He explained that it depended on the response
from the producers, although no one could predict the time line.
He stated that it was possible to make the system more
attractive to encourage greater participation.
REPRESENTATIVE TARR asked whether he had an estimation for the
number of barrels of new oil production necessary to recoup the
losses from the change in tax structure.
MR. PULLIAM replied that the calculation and analysis could be
done and he opined that some of this information had been
provided.
1:45:14 PM
MR. MAYER shared his conclusion that, should there be no change
in current production until 2017 when new production came on
line, it was necessary for an additional 20,000-barrel-a-day
project to come on-line each year after that. By 2019 - 2020,
there would be greater revenue than currently under ACES, and
real revenue to the state would level off.
1:46:06 PM
CO-CHAIR SADDLER requested Mr. Mayer to repeat his response.
MR. MAYER explained that, if one assumed no change in the rate
of decline between now and 2017, it would be necessary for an
additional 20,000 barrels of oil a day each year in order to
hold state revenues steady. By 2020, the state would then be in
a net positive position compared to the current system with
ACES, if the additional barrels were a result of the tax change.
1:47:40 PM
REPRESENTATIVE SEATON directed attention to page 3 of the
attached fiscal note [Included in members' packets] and asked
about the $1.5 billion loss in 2015 and the additional loss each
year after. He declared that there would be some balance
against this loss if the credits were also removed. He surmised
that the total negative fiscal impact would be over $1 billion
in 2017 - 2019 according to the fiscal note. He questioned
whether the buy-down provision of progressivity was an incentive
to invest in Alaska, when the capital credits were also removed.
He asked how removal of these incentives to reinvest in Alaska
offered an overall fiscal system incentive that would counter
balance these.
1:50:17 PM
MR. PULLIAM expressed his disagreement with the conclusions of
the Palantir white paper with respect to the legacy fields. He
declared that the combination of the two changes in proposed HB
72 made the system more attractive. He allowed that there was a
question whether the buy down would act as strongly as an
incentive for a lower tax rate. He pointed out that the buy
down required continued investment in Alaska rather than the
freedom to invest elsewhere.
REPRESENTATIVE SEATON reflected on the "quality of the cash" for
the incentives, which was dependent on the ability to take it
wherever desired. He asked for any financial mechanism that
would hold funds until the investments or production commenced
under the proposed tax system. This would allow Alaska to
retain the revenue until the incentives offered had been met.
1:53:53 PM
MR. PULLIAM suggested an escrow-type account, which allowed
access to the funds given the adherence to certain conditions.
REPRESENTATIVE SEATON offered his belief that this would give
comfort to many Alaskans regarding the proposed bill.
MR. PULLIAM opined that the value would be determined by the
hurdles to access the escrow funds, and whether there was
interest accrued for those funds.
1:57:03 PM
REPRESENTATIVE HAWKER reflected on an earlier dialogue during
the debate on ACES that the high marginal rates were an
incentive to the industry to buy-down their taxes through
additional investment in Alaska. At that time, he had
questioned the validity of the premise, and he noted that these
buy-downs had not happened.
CO-CHAIR SADDLER asked if Representative Seaton intended the
escrow money to only be available as script to use at "the
company store of Alaska."
REPRESENTATIVE SEATON explained that there was a need to
guarantee that the proposed bill would encourage investment,
hence the money in the escrow account would be returned given
investment and increased production in Alaska. He offered his
belief that the other exclusions in the proposed bill created
winners and losers, and he was in search of a solution. The
escrow money would be available for redemption upon attainment
of the benchmarks. He offered his belief that this would
assuage any concerns for the loss of revenue with no guarantees.
2:01:18 PM
CO-CHAIR FEIGE relayed that all of these companies had stated
that they would miss the capital credits. He opined that the
capital credits had led to spending, but not to an increase in
production necessary to level out or reverse the production
decline. He asked whether a credit to encourage increased
drilling and new oil production would accomplish the goals as
stated by Representative Seaton.
MR. PULLIAM declared that the goal was to get more oil, and that
the current credits had been valuable, in so far as the current
tax structure without these credits was abominable. He
clarified that the credit did not offset or make up for the tax
structure. He expressed preference for a credit tied to actual
barrels, rather than spending, and he suggested a per barrel
allowance that would exempt new barrels from some or all of the
tax. He pointed out that this would allow the producers and the
engineers to determine the best means to access the oil. This
would tie the incentive to the end result, which would
effectively offer a lower tax rate. He offered an example that
a credit tied to drilling could be a disincentive for
facilities.
2:05:47 PM
MR. MAYER expressed concern for the impact from complete
elimination of the capital credits. He noted that the crossover
price point whereby there was a tax decrease for high price of
oil and a tax increase at low price levels, was "potentially, at
the moment, uncomfortably high, particularly when it comes to
more expensive new production." He offered that the gross
revenue exclusion addressed completely new areas. When the
current system for profit based production tax was first
proposed by Pedro van Meurs, it was for a flat 25 percent base
tax, without a progressive component, but had included a capital
credit to mitigate the project economics at low price levels.
He opined that the capital credit played a significant role in
the improvement of project economics. However, a credit based
solely on production would not necessarily offset, as it was
applied later in the cash flow cycle to reduce the overall tax
burden, but did not help with the initial economics for rate of
return. He asked how concerned the state was for the downside
liability from the tax credits and if there were other ways of
providing the incentive that the credits offered. He suggested
more limited credits for spending, credits that are tradable
with other companies, or credits that allowed more discretion by
the state.
2:09:24 PM
CO-CHAIR FEIGE outlined the process for finding and developing
new oil fields, and asked if there were different credits which
were more helpful at different points of the timeline. He
suggested a credit system be structured to allow companies to
elect which credit they preferred to use.
MR. MAYER said he would like to think about that.
2:11:02 PM
REPRESENTATIVE TARR pointed out that removal of the tax credits
in the proposed bill would create difficulties for the small
producers and for exploration, and that the gross revenue
exclusion (GRE) would create difficulties for the large
producers as it did not apply to the legacy fields where the
majority of new oil was projected to be produced. She noted
that 20,000 new barrels of oil per day was necessary to offset
the loss of tax revenue, and yet, the only accomplishment for
the proposed bill was "giving the oil companies more money."
She stated that it did not attract small producers with new
investment, or incentivize legacy field development. She
questioned why Alaska would move forward with the proposed bill.
She suggested a change of the gross revenue exclusion to include
the legacy fields, and she asked for comments.
2:12:16 PM
MR. PULLIAM expressed his understanding for the producers'
desire to have the tax credits extended to include the legacy
field. He shared his confidence that the economics of
production and additional investment in the legacy fields would
be better under the proposed bill than currently under ACES, and
therefore, the proposed bill should be an incentive to continue
production in the legacy fields. He offered his belief that the
GRE and similar incentives could be applied to new developments
within existing fields which were "getting at new oil." He
acknowledged that it could be more difficult to measure new
production in an existing field. He reported that the United
Kingdom had a similar approach with their brownfield allowance,
which was designed for mature fields with pockets that were less
economic to produce. In this system, the operator would make a
proposal to the government and upon approval an exclusion was
granted.
2:15:04 PM
MR. PULLIAM addressed earlier points by Representatives Hawker
and Seaton that ACES was designed to allow a buy down for the
tax rate, which should encourage investment. He referenced
earlier analysis that had been focused on internal rate of
return (IRR), which reflected that additional investments in
legacy fields were huge. He directed attention to a slide [not
distributed to members] which depicted the IRR on incremental
investments in a legacy field under ACES and other systems with
different rates for progressivity. He noted the flat 25 percent
tax rate, which offered an IRR that increased linearly over the
price range. He shared that as progressivity was added, the tax
rate went up and the IRR was increased. He declared that it was
an odd result, as it appeared that an increase to the tax rate
would make the investment more attractive. He mused why the
companies did not also see this. He opined that the resulting
IRRs were attractive and should be stimulating investment. He
asked which system would be preferred as a taxpayer.
2:19:06 PM
REPRESENTATIVE TARR opined that, as this was a much higher price
environment than possibly envisioned, there were much higher
effective production tax rates. She pointed out that this tax
rate was only 10 percent when the price of oil was $60 per
barrel. She suggested that it was now necessary to offer an
approach that more appropriately responded to the higher prices.
She asked if he had made calculations for progressivity at these
higher prices.
MR. PULLIAM replied that he had reviewed a variety of potential
progressivity scenarios, and that he used a model which allowed
changes to predict various outcomes.
REPRESENTATIVE TARR asked if these were available for review.
MR. PULLIAM stated that he would request approval from
Department of Revenue (DOR).
2:21:56 PM
REPRESENTATIVE SEATON questioned whether to tie credits to
production, as it increased the risk to exploration and drilling
because a dry hole would not allow for any credit. He asked if
this revision of the credit would discourage drilling and
exploration to both the new producers and the legacy field
producers. He offered his belief that it was the reverse of an
incentive.
MR. PULLIAM replied that part of a lease agreement was for
exploration and development, which was a risk to which the
company agreed in the hope of having a big reward. He suggested
that any mitigation of that risk was favorable to them as long
as they did not have to give up part of the reward. He declared
that the advent of technology today had greatly reduced the
probability of a dry hole, as extensive work was done in advance
of drilling. He opined that the risk was not overwhelming when
it was commensurate with the potential reward. He noted that
there was a program which offered credit for exploration
drilling, although there were some limitations, and he suggested
a review of this program with some modifications.
2:26:41 PM
REPRESENTATIVE SEATON asked to clarify that Mr. Pulliam was
saying that a company would bid on a lease if the opportunity
for reward was good and the tax rate was down, therefore the
credits were not necessary.
MR. PULLIAM, in response, offered his belief that overall, while
trying to help, "we tend to try and micromanage a little bit
what it is that the companies do." He established that, as the
companies take on risk and explore, the state would be better
off letting them do that without trying to provide so much
assistance. He nominated that streamlined permitting and
reasonable tax rates would accomplish the goal, more so than
trying to offer incentives.
2:28:55 PM
CO-CHAIR SADDLER asked about the link of tax relief with
production, pointing to an allowance for production of new
barrels of oil, credits to drilling, and credits for facilities.
He summarized that Mr. Pulliam had suggested the state leave the
decision to producers for the most efficient allocation to the
credit. He inquired whether the current credit system was
working toward that end, or were there other ways to modify the
tax credit system which would address production and abnormal
cost structures, while limiting exposure by the State of Alaska.
MR. PULLIAM, in response, offered his belief that, if there were
going to be credits, the current credit was better than having
more specific credits directed to activities, which could lead
to unexpected consequences. He opined that a credit would best
be tied to barrels instead of spending, because that would get
to what was desired. He suggested that it may be worthwhile to
investigate a definition for new barrels of oil, suggesting that
these may be barrels which exceeded the natural decline rate.
He proposed an engineering review of specific developments to
guarantee new production, and then to offer those new barrels a
greater per barrel credit.
2:32:21 PM
MR. MAYER mused that there was a fundamental question to the
philosophical approach for the achievement of a fiscal system.
He opined that the approach in Alaska had been to micromanage
the systems. He assessed that the exploration credit,
especially when combined, was overly generous and was not
affected by the proposed bill. He reported that exploration
risk was the one form of risk that most taxing jurisdictions
were unwilling to risk, as it was similar to the economics of
venture capital. He surmised that a substantial part of the
problem with Alaska's fiscal system was the concern for
minimizing risk to take as much as possible return on the
upside. He suggested a rebalancing to take less on the upside,
while taking even less risk.
MR. MAYER reflected on the overall approach to this goal, and he
considered the balance for a high level of take with the
creation of a competitive, attractive fiscal regime to
incentivize behaviors. He noted that substantially reduced
government take and relatively few specific interventions was
one solution, although there was a significant cost to the state
treasury as companies would receive cash back for activities
that were currently economic. He pointed out that a lot of the
spending on the North Slope was currently economic. However,
there was also the alternative for a simpler, competitive regime
with reduced exposure and reduced revenue, which would require
specific interventions with possible unintended consequences.
He considered that, to the extent that one was trying to create
specific incentives, approaches that provided the producer with
greater discretion were preferable. He referred to the
aforementioned brownfield solution in the United Kingdom, which
applied to incremental new developments that produced oil from
mature fields. Approval was given after plans were reviewed,
the incremental new production over the status quo was
determined, economics were finalized, and agreement to the
allowance was negotiated. He opined that this solution was much
more sensible than simply giving a tax credit.
CO-CHAIR SADDLER asked to clarify that this was a negotiated
level of credit.
MR. MAYER expressed his agreement, and noted that there were
parameters.
CO-CHAIR SADDLER asked how there was a determination for new
production.
MR. MAYER replied that the government had to make that judgment.
He commented that the tax code was the worst way to incentivize
incremental production, especially if it required a written
formula for calculation. He stated that DNR had experts for
well level analysis and determinations, although it was
necessary for trust among the branches of government.
CO-CHAIR FEIGE reflected on the quandary for defining a decline
curve that arose during the last year's special session. He
noted that it was necessary to agree on the point of decline, in
order to define new oil.
2:41:15 PM
REPRESENTATIVE SEATON, noting that this would be a field by
field specific policy, pointed out that the three major oil
companies had significantly different company rates of decline.
He asked how to retain the elements of a profit-based tax while
putting in the separate elements for field development.
MR. MAYER stated his support to the legislature for making the
overall playing field more competitive in Alaska, while
recognizing the costs to future revenues. He declared that
rigid incentives through the tax code were often not the best
approach, and instead, specific incentives could be negotiated
for a specific field.
2:44:10 PM
MR. PULLIAM added that the tax code was the least flexible
option when conditions warranted a change. He announced that
royalty relief offered additional incentives and was an example
of what had worked along those lines. He explained that
Department of Natural Resources (DNR) would review the
application and the proposed development, and then evaluate the
need for royalty relief in order to be economic. He declared
this to be "a scalpel as opposed to a chain saw approach."
2:45:34 PM
REPRESENTATIVE HAWKER expressed his appreciation to Mr. Mayer's
and Mr. Pulliam's commentaries, and disclosed that "I may have
just heard one of the greatest understatements that I have ever
heard in the oil and gas tax debates in this legislature in
eleven years, and that was when Mr. Pulliam said the legislature
attempts to micromanage the companies a little bit." He
concurred with the statement that Alaska would be a lot better
off if the legislature focused on removing obstacles and let the
companies do what they do best.
2:46:40 PM
REPRESENTATIVE TARR, noting that testimony had stated that ACES
had not yet been in place for many years, exploration was
anticipated to lead to new production, and that the audits for
those ACES years had not yet been completed, asked how it could
be determined that the capital credits were working or not.
MR. MAYER replied that the state did not lack adequate
exploration, but lacked the ability to turn known resources into
reserves and production. He explained that capital credits were
essential in the current system, as no development activity,
given the high level of take under ACES, would be economic
without this credit. He suggested that a small amount of credit
was necessary to reduce the base tax. He characterized the tax
code as a blunt instrument used to incentivize particular
behavior.
2:49:36 PM
CO-CHAIR SADDLER asked for suggestions to reduce the regressive
elements of the proposed bill at lower prices, for consideration
to a GRE at $80 per barrel which increased as the price per
barrel decreased, and for a progressive gross tax as prices
moved above $100 per barrel in the legacy fields.
2:50:18 PM
MR. MAYER expressed his agreement that these were the most
obvious solutions. He explained that the cause of regressivity
in this proposed bill was the fixed royalty, which he called
regressive by nature. As long as this remained, there was the
need for a progressive wedge. If the wedge was solely
progressive, then the problems were those which had already been
discussed, including decoupling and the impact of gas production
on progressivity, or the incentives for cost control. He
offered that levying this on the gross was a means to overcome
some of the problems, however the difficulty would be at the
intersection of the 25 percent base rate and the gross
progressive element. He opined that the situation could arise
for some companies that low prices would mean an effective tax
increase. In that case, it would be necessary to either reduce
the base rate and have a progressive tax, or keep the base rate
and have a progressive GRE.
2:52:54 PM
CO-CHAIR FEIGE pointed out that Mr. Mayer was the consultant
hired by the Alaska State Legislature, while Mr. Pulliam was the
consultant hired by the governor and the administration.
MR. MAYER, in response to Co-Chair Feige, said that the quality
of Mr. Pulliam's work was very high, and that ongoing dialogue
between he and Mr. Pulliam would improve the quality of both
their models and presentations. He declared his faith and
confidence in the quality of the models and assessments
presented by Mr. Pulliam. He opined that Mr. Pulliam had
presented one possible solution of many to the particular issues
of HB 72, and that potential solutions would continue to be
reviewed in more detail.
2:55:04 PM
CO-CHAIR FEIGE lauded the discussions and presentations.
2:55:36 PM
REPRESENTATIVE SEATON referred to net operating loss, posing a
scenario in which oil prices went down and expenses were high,
and questioned whether the state had any liability under the
proposed bill, specifically from the Big 3 producers.
MR. PULLIAM expressed his belief that proposed HB 72 would allow
for those losses to be carried forward for a certain time
period. He mused that prices would need to be low for an
extended period of time to create losses, and he did not put a
high probability on significant state exposure. He offered to
review the price levels that would create an exposure.
MR. MAYER clarified that the state's biggest net operating loss
liability would come from the small operators, those below
production of 55,000 barrels each day, and not the Big 3
producers. These operators could claim their net operating loss
directly from the state treasury, whereas the larger operators
could only claim this loss against future production.
REPRESENTATIVE SEATON surmised that the state was at a greater
risk for net operating loss under ACES than it would be under
proposed HB 72. He noted that a tax on the gross would always
generate income for the state, which was not the case with a net
operating loss. He questioned whether it was necessary to
address this possibility in proposed HB 72.
2:59:32 PM
CO-CHAIR SADDLER recounted the effective tax rates of previous
tax regimes, and asked if it was a surprise that the effective
tax rate under ACES of 26 percent was so much higher than
previous tax systems.
MR. PULLIAM, in response to Co-Chair Saddler, said that this
rate was not a surprise, and he clarified that the earlier data
was the tax rate on the gross value of the oil, and not the net
value. He noted that the effective tax rate was generally
declining under ELF in the five years prior to ACES, although,
as the data was from fiscal years, it did include a little bit
of PPT in the time period. He pointed out that the changes for
ACES significantly increased the tax rates, and that there was
also a rise in oil prices.
3:01:56 PM
CO-CHAIR FEIGE urged members to be thinking of amendments to the
proposed bill, and, in response, he said that he would not limit
the number of amendments. He noted that he planned to hold the
proposed bill until the Senate version was passed over to the
House.
[HB 72 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES HB 72 Armstrong O&G Letter.pdf |
HRES 2/22/2013 1:00:00 PM |
HB 72 |
| HRES HB 72 PFC Energy Updated Slides 2.22.13.pdf |
HRES 2/22/2013 1:00:00 PM |
HB 72 |
| HRES HB 72 Butcher-Sullivan Response 2021013.pdf |
HRES 2/22/2013 1:00:00 PM |
HB 72 |
| HRES HB 72 Butcher-Sullivan Response Slides 2.21.13.pdf |
HRES 2/22/2013 1:00:00 PM |
HB 72 |
| HRES HB 72 Progressivity Slide Econ One 2.22.13.pdf |
HRES 2/22/2013 1:00:00 PM |
HB 72 |