Legislature(2017 - 2018)BARNES 124
02/27/2017 01:00 PM House RESOURCES
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): United Tribes of Bristol Bay | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 111 | TELECONFERENCED | |
HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
1:45:38 PM
CO-CHAIR TARR announced that the final only order of business
would be HOUSE BILL NO. 111, "An Act relating to the oil and gas
production tax, tax payments, and credits; relating to interest
applicable to delinquent oil and gas production tax; and
providing for an effective date."
CO-CHAIR TARR made announcements.
1:47:10 PM
RICHARD RUGGIERO, Consultant, Legislative Audit and Budget
Committee, Alaska State Legislature; Managing Partner, Castle
Gap Advisors, provided a PowerPoint presentation entitled,
"Petroleum Taxation Design," dated 2/27/17. He summarized from
an earlier presentation to the House Resources Standing
Committee entitled, "Developing Petroleum Fiscal Policy"
provided at the meeting of 2/20/17, restating the following key
points: there is constant change in the industry, including
government terms; governments often make corrections to a near-
term issue which jeopardizes long-term goals; increase in
government take is a reduction in value for industry; a
historical perspective and transparency create better tax
systems; new players should be encouraged; regime to regime
comparisons should be questioned; countries have different needs
[slide 3]. Slide 4 illustrated petroleum taxation change
charts, and he acknowledged many governments change their fiscal
systems in response to the volatility in oil prices, as was
presented in previous testimony by the Alaska Oil and Gas
Association (AOGA). The charts identified the many governments
that increased their take during rising oil prices, and that
during periods of rapid decline in oil price, governments
lowered take and created incentives.
1:53:24 PM
REPRESENTATIVE BIRCH pointed out when oil was plummeting in
value, Alaska was the only regime that increased government
take. His stated the distinction between the two slides
[presented by Mr. Ruggiero and AOGA] is his concern that Alaska
will not be competitive if it tries "to squeeze more revenue out
of, out of an already struggling industry."
MR. RUGGIERO agreed.
REPRESENTATIVE RAUSCHER questioned whether the information on
the aforementioned charts indicated if any of the many changes
in fiscal policy were successful, for example, the changes made
by Russia.
MR. RUGGIERO observed the United Kingdom has made significant
changes in response to high and low oil prices; however, other
countries react in an incremental way. In Russia, the
government has taken over a working ownership interest from
multinational companies that had started or developed fields.
In further response to Representative Rauscher, he said some
changes are working, and countries have gained investment and
development. However, sometimes a successful policy is unique,
and he gave an example of a Southeast Asia country that needed a
source for natural gas.
REPRESENTATIVE JOHNSON understood the charts on slide 4 intend
to give a sense of the inconsistencies in Alaska's oil tax
policy. However, she pointed out that from January 15 all of
the changes [to other regimes] are consistently to fiscal
incentives, because oil prices are going down, and when oil
prices go up, they are consistently increasing taxes.
Representative Johnson concluded Alaska is one of the latest -
and may be the only - regime to increase government take.
2:00:40 PM
MR. RUGGIERO agreed the charts indicate that in periods of very
low prices most, if not all, governments change to more
favorable terms. Whether a system should be changed at a
certain point lies with the legislature, and the information
provided is to inform its decision.
REPRESENTATIVE TALERICO noted the regime comparisons are usually
between Alaska and sovereign nations; however, as a state,
Alaska has to also contend with federal take, as other states
must, and as do Canada and Alberta. The U.S. tax rate does not
change often, and he questioned whether there are comparisons
with other states.
MR. RUGGIERO pointed out the charts include U.S. Gulf of Mexico,
which are federal waters, and where changes in royalty rates and
in lease payments in the last decade have occurred. Further, in
most of the Lower 48, the acreage involved in oil production
garners private royalty, such as in Texas, where new land leases
are approximately one-quarter royalty and above, thus the
payment for the acreage goes to a private mineral holder. He
explained comparing operator take to "government" take is really
comparing operator take to "non-operator" take, because some of
the take goes to private holders of the mineral rights. Mr.
Ruggiero directed attention to slide 5, and summarized
"takeaways" as follows: there is no ideal structure and many
are unique, however, some aspects are more successful; regimes
seek to produce a level playing field; all systems have biases.
He then listed long-term strategic petroleum taxation design
goals for Alaska as follows [slide 7]: keep oil flowing through
the Trans-Alaska Pipeline System (TAPS); encourage the
exploration and development of new fields; encourage new
operators; understand and capture value from existing fields;
create more durability to the taxation system. Further, Alaska
has high potential and prospectivity but will always be a
higher-cost area for the exploration, discovery, and production
of oil [slide 7].
2:08:03 PM
REPRESENTATIVE RAUSCHER opined the state always intends for
"long-term strategic goals for Alaska," and always enters into
agreements projecting a long period of stability, "and then,
couple years later, we're rewriting it."
MR. RUGGIERO said his presentation addresses how unintended
consequences and results occur, and whether there are ways to
include in legislation procedures that "stand the test of time."
For example, modeling can be too simplistic, and may not include
some of the factors that will change in the future, which skews
the results.
REPRESENTATIVE BIRCH recalled last year there was a welcome
uptick in production that appeared to be the result of the
stability provided by Senate Bill 21 [passed in the Twenty-
Eighth Alaska State Legislature]; he questioned why the state
would make changes to a successful tax structure.
MR. RUGGIERO pointed out there are aspects to Alaska's current
tax structure that will lead to unintended consequences when
circumstances change, for example, the minimum tax.
REPRESENTATIVE BIRCH pointed out HB 111 raises an additional
$300 million in state revenue, which is a massive tax increase
on industry.
MR. RUGGIERO said he had not reviewed "the numbers" on HB 111,
but at this time is providing to the committee helpful
background information based on his extensive experience in this
regard.
REPRESENTATIVE BIRCH characterized Alaska's Clear and Equitable
Share (ACES) [passed in the Twenty-Fifth Alaska State
Legislature], with progressivity that raised a lot of money, as
"terrible from an investment standpoint," and asked whether it
was successful.
MR. RUGGIERO stressed there is a long lead time between spending
and production, thus data is not available to indicate whether
the additional production now generated is because of spending
attributed to ACES, or spending attributed to Senate Bill 21.
However, "a bit" of the spending and arresting of the decline is
as a result of spending after ACES, along with increased
employment. He acknowledged the very high progressivity rate in
ACES led to difficulty, but there were positive aspects also.
2:15:28 PM
REPRESENTATIVE DRUMMOND asked whether insufficient data
regarding ACES and Senate Bill 21 is due to a lack of
transparency.
MR. RUGGIERO explained it is known how much money was spent but
it is unknown what the money was spent on, "and so we can't tie
the correlation between where the production comes from and then
when the money was spent on that production, or on the wells and
facilities in order to get there." In further response to
Representative Drummond, he said yes, because [the legislature]
doesn't have the information and can't make a correlation.
MR. RUGGIERO directed attention to slide 8 that listed short-
term goals at a time when profits are low; for example, keeping
industry activity high and encouraging operators to continue
doing business, and offering incentives for new investment
without putting the state in a "cash-reimbursement position."
REPRESENTATIVE JOHNSON inquired as to how a tax increase in HB
111 will help increase production.
MR. RUGGIERO responded:
I have had some dialogue in talking with people about
it. I am not an advocate of putting a heavy burden
onto the oil companies at a time when there's no
profit in the system.
REPRESENTATIVE JOHNSON expressed her understanding the
presentation is "an interpretation of HB 111, that's being
offered to address these issues, and I don't know exactly how
[it] ... actually address[es] the issues ... put before us."
CO-CHAIR TARR said the committee would return to Representative
Johnson's question.
MR. RUGGIERO continued to a comparison of Alaska's petroleum
taxation terms to those in the Lower 48 [slide 10]:
· Royalty: The royalty charged in Alaska is in line with
that of older leases in the Lower 48, many of which are
one-eighth royalty. Alaska is more favorable when compared
to new royalty rates, which are at a 20 percent minimum in
Texas; new private leases average around 20 percent,
depending on the location of the land. In addition to
higher royalty, many new leases have a "drill or drop"
provision which escalates fees to force activity, thus an
oil company faces a deadline and may drill an uneconomic
well just to hold on to its lease.
· Effective tax rate: Under Senate Bill 21, Alaska has one
of the lower tax rates and competes mainly against
severance tax rates.
· Credits: Alaska's exploration and production credits are
very unique and valuable to the industry as they serve to
overcome the additional risk associated with the state's
environment and long lead time.
· Unique aspects: Different taxation for location,
substantial and stackable credits, and monthly taxation are
unique to Alaska.
MR. RUGGIERO, speaking from his experience working in the oil
industry, said when projects are considered, fiscal terms have
to meet certain criteria, but most attention is centered on
relative risk; in fact, a project may advance with a higher non-
operator take if risks can be mitigated.
2:25:05 PM
REPRESENTATIVE BIRCH referred to information previously provided
to the committee indicating HB 111 "shows a $300 million
increase in taxes. ... I'm concerned that that is not stable,
that that is actually a pretty significant increase."
CO-CHAIR TARR clarified Representative Birch was referring to a
fiscal note, "and those are the numbers for 2025, so the actual
fiscal note for the bill, as it stands in this current fiscal
year, is $45 million."
MR. RUGGIERO advised an increase can be seen as stable - if it
occurs at the right time - or unstable, relative to those who
are impacted. He cautioned against looking at situations in
isolation.
REPRESENTATIVE BIRCH, referring to a statement on slide 11,
questioned whether stability of the petroleum tax is a good
thing.
MR. RUGGIERO responded that "you've got a certain increase in
one spot, but you may have also at the same time enacted other
incentives, other credits, other things that would actually draw
people in." He urged for the committee to look at the totality
of the circumstances. Mr. Ruggiero directed attention to slide
13, and in response to an earlier question from Representative
Rauscher, said governments do believe in their legislation at
the time of enactment; however, the future brings unintended
results due to changing prices and unpredictable variables.
Further, interdependencies of variables are often ignored for
modeling simplicity. Self-correcting systems attempt to avoid
unintended consequences; one approach to petroleum taxation
theory is that operators recover their cost and a fair return,
with the government to receive the remainder. However, in
reality, an attempt to approach taxation design from this
direction and to determine the operator's fair share, returns
all parties to the ongoing to debate on what is fair, which
remains an unanswered question. Mr. Ruggiero further explained
self-correcting mechanisms have been developed because
governments are setting a tax rate prospectively, and the future
is unknown. Therefore, self-correcting mechanisms allow
governments and operators to make appropriate adjustments such
as project profitability, and fixed, bracketed, and S curve
metrics [slide 14].
2:32:06 PM
REPRESENTATIVE BIRCH returned attention to slide 14 and asked
whether it was the government's role to decide what a fair
return is for a business in the United States.
MR. RUGGIERO clarified he is presenting theories of costs and of
economic rent; the theory of economic rent is that government,
as the steward of the resource, should receive economic rent,
which is everything that is in excess of the company's return of
its cost and a return on its costs. He said, "The whole bit
about putting together petroleum taxation systems is governments
deciding what their fair share is, oil companies battling and
trying to achieve the best return that they can on their
resources, and trying to find that point where you can make them
both work."
REPRESENTATIVE BIRCH opined the risk is made by an investor
during exploration and development, and decisions are made in
response to their return [on investment]. He said he struggled
to accept that the government would be metering out a fair
return on investment for any business.
MR. RUGGIERO noted that when many countries set a windfall
profits tax on a typical project they are setting a cap on what
producers will make; in addition, many governments are using
risk service contracts which have defined caps and rates of
return so that governments set an expected range of profits, and
the range of profits is known to the oil company.
REPRESENTATIVE JOHNSON asked whether petroleum taxation theory
is a field of study.
MR. RUGGIERO explained the aforementioned theory applies for all
extractive industries in which the government is the owner of an
asset and hires a private company to develop its asset. The
theory of economic rent is that whoever develops on behalf of
the state should recover their costs and a fair return, and the
government gets the rest as the owner of the resource. He
returned to options for Alaska and suggested adopting a self-
correcting system that would remove much of the complexity of
the current tax system, and some of the unintended results.
Firstly, in order to create durability, the state needs to
retain its net based system which is based on margin and not on
price; in fact, fixing a system on price is "setting yourself up
for some of these unintended consequences or ... if you don't
make changes, then people are going to pick up their toys and go
home." Also, a system based on margin and profit will
demonstrate to producers there will be sharing on the low end,
and on the high end, as well [slide 15]. Slide 16 illustrated
an example of an unintended consequence: The intent at the time
of the legislation was that there was to be no tax when the
companies were losing money, however, there has been a $25 shift
in cost, and thus companies have an additional burden of a gross
tax when they are losing money [slides 16 and 17].
2:42:40 PM
MR. RUGGIERO, referring to changes that can result in an
unintended consequence, provided a chart that showed the total
average cost of production has increased from $17.34 per barrel
in 2007 to $35.64 per barrel in 2016 [slide 18]. Slide 19
illustrated another possible unintended consequence of Alaska's
current tax structure, and he explained:
If at any point, if your effective tax rate is the
same as the tax rate at which your NOLs are converted
to a credit, you're in a[n] equal situation whether I
get an NOL carry forward or I get the tax credit. ...
We'll leave the time value out on it right now.
However, if you're ... giving credits at 35 percent
and your effective tax rate is only 10, that credit is
actually shielding three and [one]-half times the
margin than the loss that created that tax credit.
And that has to do with the differential between the
rate at which the NOLs converted to a credit and then
the rate at which their future revenues are taxed at
when they use those credits.
CO-CHAIR TARR advised the committee will have further discussion
related to effective tax rates and NOLs.
MR. RUGGIERO said his first option for the committee's
consideration is to continue with the net tax system - outside
of royalty - and ensure mechanisms of the system are not tied to
price but to margins, and to include a low base rate with
bracketed progressivity, which be a system that would eliminate
features such as gross value reduction (GVR) and per barrel
credits. He stressed that a net system requires the state to
become an indirect investor in every project, because it allows
income to be offset by costs. The second option is for the use
of carry forward losses instead of cashable credits, so that the
state invests indirectly and after the project is online through
taxes not paid. Also as an indirect investor, the state must
insure costs are reasonable, and that there is no duplication of
facilities. Further, the state must continue to offer top
quartile, or decile, exploration and investment incentives to
ensure further activity, and allow certain conditional cashable
credits. Mr. Ruggiero further suggested an uplift factor to
compensate for the time value of money, and that credits or
uplift should be tied to a minimum level of data transparency
[slide 21].
2:50:16 PM
CO-CHAIR TARR asked for an example of "uplift to account for the
time value of money."
MR. RUGGIERO explained some countries offer an annual uplift on
any unused losses or NOLs; for example, in a year NOLs or losses
are not used, they are increased by 10 percent, so when the
operator eventually uses the credit or loss, it has a value
similar to if it had been cashed or used immediately against
current income. This type of uplift can be open-ended or extend
for a set length of time. Other regimes use a mechanism that
provides a one-time, lump-sum, 100 percent uplift, which creates
an incentive to expedite a development by a certain date. Mr.
Ruggiero returned attention to a gross versus a net system and
restated his next option, which is to retain the net system.
However, he advised keeping royalty along with the net system
because worldwide, all regimes where petroleum revenues
represent a large portion of the treasury include royalty in
their fiscal systems, even though royalty may have been
eliminated in regimes where petroleum revenues are a small part
of total revenue. Because Alaska is predominately funded by
petroleum, the state should retain royalty [slide 22]. Net
systems have options for rates, and he suggested the best option
for Alaska would be a net system with bracketed steps, based on
increased profitability per barrel: at high profits per barrel,
"you can step up your tax, when the profit per barrel is very
low, that's when you start from a low tax" [slide 23]. Mr.
Ruggiero reviewed a net system with stepped or bracketed
progressivity that is based on margin or profit and not on oil
price, and which will adjust as costs and inflation "[go] up and
down with respect to the oil patch." For a successful system,
the state must determine the starting tax rate, the number of
steps, and how broad the change in state take is between steps.
He reminded the committee that every dollar of profit not taken
as state take remains subject to state and federal corporate
income tax [slide 24]. Although not a recommendation, slide 25
illustrated how a bracketed net tax functions - without
accommodations for GVR or per barrel credits - and he provided
an explanation. Slide 26 illustrated an example of the self-
correcting nature of the aforementioned tax system, and he
provided an explanation. He said working models of a net based
bracketed system, relative credits, and effective tax rates will
be presented at the meeting of [2/27/17 at 7:00 p.m.] [slide
27]. Mr. Ruggiero concluded his options for the committee to
consider are as follows [slide 28]:
· retain a net tax system that has self-correcting mechanisms
and is based on taxing on profitability
· simplify as much as possible
· utilize a system that ensures operators can recover all of
their costs
· allow NOLs to carry forward and be recovered from
production-based income
· provide uplift for the time value of money.
[HB 111 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB111 ver O 2.8.17.PDF |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM |
HB 111 |
| HB111 Fiscal Note DOR-TAX 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM HRES 3/13/2017 1:00:00 PM |
HB 111 |
| HB111 Sponsor Statement 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM HRES 3/13/2017 1:00:00 PM |
HB 111 |
| HB111 Sectional Analysis 2.12.17.pdf |
HRES 2/13/2017 1:00:00 PM HRES 2/17/2017 1:00:00 PM HRES 2/20/2017 1:00:00 PM HRES 2/22/2017 1:00:00 PM HRES 2/22/2017 6:30:00 PM HRES 2/24/2017 1:00:00 PM HRES 2/27/2017 1:00:00 PM HRES 3/1/2017 1:00:00 PM HRES 3/1/2017 6:00:00 PM HRES 3/6/2017 6:30:00 PM HRES 3/8/2017 1:00:00 PM |
HB 111 |
| UTBB 2016 MLUP Renewal Official Comments Cover Letter.pdf |
HRES 2/27/2017 1:00:00 PM |
United Tribes of Bristol Bay |
| 2015-11-03 -- FINAL Petition to DNR re PLP Exploration w Exhibits-2.pdf |
HRES 2/27/2017 1:00:00 PM |
United Tribes of Bristol Bay |
| 2016 09 20 Comparison of CSP2 and DNR results at overlapping sites.MEMO.pdf |
HRES 2/27/2017 1:00:00 PM |
United Tribes of Bristol Bay |
| 2016 11 15 Nunamta Letter re_ Pebble MLUP Violations (1) (1) (1).pdf |
HRES 2/27/2017 1:00:00 PM |
United Tribes of Bristol Bay |
| CSP2 PEBBLE DRILL HOLE RECLAMATION - CSP2 3NOV16 (2).pdf |
HRES 2/27/2017 1:00:00 PM |
United Tribes of Bristol Bay |
| CSP2 Pebble Inspection Summary Report - DMC 3Nov16 (4).pdf |
HRES 2/27/2017 1:00:00 PM |
United Tribes of Bristol Bay |
| Northern Dynasty Minerals NAK.pdf |
HRES 2/27/2017 1:00:00 PM |
United Tribes of Bristol Bay |
| PebbleTimeline[4] (1).pdf |
HRES 2/27/2017 1:00:00 PM |
United Tribes of Bristol Bay |
| UTBB Juneau Presentation - Feb27.pdf |
HRES 2/27/2017 1:00:00 PM |
United Tribes of Bristol Bay |
| HB111 Supporting Document-Castle Gap Advisors_Presentation to House Resources 2.27.17.pdf |
HRES 2/27/2017 1:00:00 PM |
HB 111 |
| HB111 Supporting Document - Responses from Rich Ruggiero in Followup to 20170220 2.27.17.pdf |
HRES 2/27/2017 1:00:00 PM |
HB 111 |