Legislature(2005 - 2006)HOUSE FINANCE 519
03/27/2006 02:00 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB488 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 488 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 488
"An Act repealing the oil production tax and gas
production tax and providing for a production tax on
the net value of oil and gas; relating to the
relationship of the production tax to other taxes;
relating to the dates tax payments and surcharges are
due under AS 43.55; relating to interest on
overpayments under AS 43.55; relating to the treatment
of oil and gas production tax in a producer's
settlement with the royalty owner; relating to flared
gas, and to oil and gas used in the operation of a
lease or property, under AS 43.55; relating to the
prevailing value of oil or gas under AS 43.55;
providing for tax credits against the tax due under AS
43.55 for certain expenditures, losses, and surcharges;
relating to statements or other information required to
be filed with or furnished to the Department of
Revenue, and relating to the penalty for failure to
file certain reports, under AS 43.55; relating to the
powers of the Department of Revenue, and to the
disclosure of certain information required to be
furnished to the Department of Revenue, under AS 43.55;
relating to criminal penalties for violating conditions
governing access to and use of confidential information
relating to the oil and gas production tax; relating to
the deposit of money collected by the Department of
Revenue under AS 43.55; relating to the calculation of
the gross value at the point of production of oil or
gas; relating to the determination of the net value of
taxable oil and gas for purposes of a production tax on
the net value of oil and gas; relating to the
definitions of 'gas,' 'oil,' and certain other terms
for purposes of AS 43.55; making conforming amendments;
and providing for an effective date."
Co-Chair Meyer declared a conflict of interest regarding HB
488, citing his background with the oil industry. Co-Chair
Chenault objected and requested that Co-Chair Meyer
participate and vote on the bill.
Representative Hawker also declared a conflict of interest,
citing his wife's occupation with an oil company. Co-Chair
Meyer objected and requested that Representative Hawker
participate and vote on the bill.
Co-Chair Chenault also declared a conflict of interest
because of his construction company's involvement with oil
companies. Representative Foster objected. Co-Chair
Chenault responded that he would participate and vote on the
bill.
Co-Chair Chenault stated that the bill before the committee
is the House Resources Committee Substitute (CS) for HB 488.
ROBYNN WILSON, DIRECTOR, DIVISION OF TAX, DEPARTMENT OF
REVENUE introduced Commissioner Corbus.
WILLIAM CORBUS, COMMISSIONER, DEPARTMENT OF REVENUE, noted
that he was representing the administration and its strong
support for the Petroleum Profits Tax (PPT). HB 488 would
replace the broken Economic Limit Factor (ELF) severance tax
system, provide incentives for badly needed investment, and
provide special incentives for small companies to explore in
Alaska at higher prices. He commended the House Resources
Committee for their hard work on the bill. He noted that
the CS supports a 20 percent tax rate as well as a 20
percent tax credit investment rate.
Commissioner Corbus clarified why the administration
supports the 20/20 tax. At present Trans-Alaska Pipeline
System (TAPS) is operating at less than a 50 percent
capacity. Oil production was once 2 million barrels per day
and is now about 870,000 barrels per day. By 2016 it is
projected to be 772,000 barrels per day. Recent production
has been inadequate and discourages new investment. He
emphasized that the state's wealth must be maximized over
the long run.
Commissioner Corbus explained how a 20/20 tax rate would
look. If oil was $40 per barrel, an equivalent of about $7
gas, and the prices remained uninflated, revenues from a gas
line would be about $2 billion per year for the next 35
years. Prudhoe Bay's life would be extended at least
through 2050.
Commissioner Corbus addressed the 25/20 tax proposal. Under
this plan there would be no gas line and a shortened field
life at Prudhoe Bay. About $200 million would be earned
annually until the year 2030.
Commissioner Corbus referred to the changes made to the CS
by the House Resources Committee. He suggested that the
House Finance Committee carefully scrutinize these changes:
one, the removal of the transition provision, two, changing
the effective date, and three, the introduction of the ELF
factor. In conclusion, the administration strongly supports
HB 488 with the 20/20 tax proposal.
DAN DICKINSON, DIRECTOR, TAX DIVISION, DEPARTMENT OF
REVENUE, referred to a handout entitled "Petroleum Profits
Tax (PPT)" (copy on file.) He began his presentation by
discussing the governor's three big ideas: the current
production tax system is broken, there is a need to use the
tax system to encourage investment, and Alaska ought to get
a fair share of tax revenues when prices are high,
especially if reinvestment is low.
Mr. Dickinson related that the House Resources CS addresses
the three ideas by replacing the old tax system, by
providing incentives for investment, and by preserving the
governor's 20/20 structure.
Mr. Dickinson addressed idea one - the current tax system is
broken. He repeated that Alaska is neither getting the
investment needed, nor a fair share of revenues when prices
are high and investment is low. Mr. Dickinson referred to
Slide 5 to show the state's unrestricted and restricted
revenue and how the severance tax fits into that picture.
Of the $3.4 billion of oil, about $2.8 is unrestricted and
forms 88 percent of the general fund budget.
Mr. Dickinson reported that Slide 6 shows how the petroleum
revenue is broken down. The largest piece is royalties (and
should be labeled unrestricted), which in FY 2005
constituted about $1.4 billion. The smallest slice was
property tax, which was about $42.5 million. He noted that
the production tax, $863.2 million, is the focus of today's
presentation. The proposed tax would only affect production
tax and none of the other components.
2:31:12 PM
Mr. Dickinson related that Slide 7 depicts the destination
value at the market in 2005. He used 330 million barrels
per year as the volume at $43.43 per barrel to yield about
$14 billion. He deducted the cost of infrastructure to find
the gross value at the point of production. He then
subtracted the upstream costs to obtain the net value at the
point of production, which in this example is $10,694
million. This is the value that would be split between the
state, the federal government, and the oil companies.
2:33:03 PM
Slide 8 addresses what would happen under the current
production tax. He started with the gross value at the
point of production, subtracted the royalty rate, and
multiplied by ELF. Currently, there is a high ELF on three
fields: Prudhoe Bay, North Star, and Alpine. All other
fields have an ELF of zero. He explained that the average
ELF rate on the North Slope was .55, as depicted in the
slide. The tax under this scenario equals $927 million.
Mr. Dickinson explained how the ELF was supposed to work.
As a proxy the ELF is not working. Slide 9 depicts this.
Mr. Dickinson pointed out that ELF has exponents and is
driven by, and is sensitive to, volume.
Slide 10 shows what happened at Kuparuk, the second largest
oil field in the United States, when well productivity
declined. Because productivity was so low, the ELF
decreased to zero. The volume fell and costs increased.
The graph shows that the severance tax is not what is
affecting the barrels.
2:38:33 PM
Slide 11 depicts the decline of ELF. Prudhoe Bay is high,
but the smaller fields have declined dramatically. Mr.
Dickinson stated that this situation needs to be fixed.
Slide 12 shows what is happening in the North Slope of
Alaska, especially the decline in Prudhoe Bay. The ELF tax
system was focused on a large field and does not work for
small fields.
Ms. Wilson focused on the second point of the presentation -
the need to use the tax system to encourage investment. She
pointed out that investment leads to more production, which
leads to more revenue. She discussed four ways of
encouraging investment: net vs. gross - all investment is a
deduction, 20 percent credits for capital investments, up to
a $73 million annual allowance, and recognition of
transition investment expenditures.
2:43:17 PM
Ms. Wilson explained how the CS addresses the previous four
points. It preserves the net vs. gross idea where all
investment is a deduction. It preserves the 20 percent
credit for capital investments, has a feature like the $73
million annual allowance, and reduces the 5 years transition
investment expenditures period to 3 months.
Ms. Wilson stated that the new CS provides a tax based on
net profits like the governor's bill did. She further
explained the gross vs. net concept in Slide 17. She
compared the current tax based on gross to the PPT based on
net.
Ms. Wilson clarified that tax base is gross value at the
point of production. She explained how the wellhead value
is determined under the current system.
2:47:07 PM
Ms. Wilson pointed out in Slide 20 that the Department of
Revenue can allow a producer to elect the use of royalty
value or a Department of Revenue formula that estimates a
value at a specific location, such as a point of delivery
into a common carrier pipeline.
Ms. Wilson explained the tax based on net profits as
depicted in Slide 21. The gross value at the point of
production, less the lease expenditures, which are operating
costs, capital expenditures, and allowance for overhead,
equals net profits.
2:51:00 PM
Ms. Wilson listed the non-deductible expenses:
depreciation, royalty payments, taxes based on net income,
interest and financing charges, lease acquisition costs, and
other costs such as arbitration, donation, and partnerships.
The intent is to separate things that are applicable to the
lease from things that are not.
2:52:56 PM
Ms. Wilson explained that the governor's bill included
credits to encourage investment. Twenty percent of
qualified capital expenditures may be taken on exploration
costs and on capital costs incurred on the lease. These
credits are transferable. She explained the process of
transferring credits.
Ms. Wilson related that the CS maintains the credits, but
also allows the state to purchase up to $10 million worth of
credits. Credits may not be taken on abandonment costs.
Ms. Wilson noted that the CS is friendly to new investors.
It has the ability to monetize credits and losses. It
provides for a base allowance and converts the $73 million
deduction to a credit of up to $12 million, which is equal
to a $60 million deduction.
2:57:16 PM
Ms. Wilson pointed out examples of the effect of the
standard credit in Slide 26. Ms. Wilson discussed net
operating losses and how they are handled. Slide 27
clarifies that net operating loss (NOL) can be converted to
credits at the end of the year at the rate of 20 percent of
the loss.
3:00:43 PM
Ms. Wilson highlighted the transition provision. The
governor's bill allowed deductions for recent capital
expenditures from the last five years, allowed over 6 years
when the price of oil exceeded $40.
Ms. Wilson addressed the transition provision in the CS,
which allows for a cost recovery of assets placed in service
between 1/1/06-3/31/06. A deduction of 1/9 of the cost in
each of the 9 months after the effective date is allowed.
This is in place of a 5-year look back in the governor's
bill.
3:04:09 PM
Mr. Dickinson addressed idea three - Alaska should get a
fair share of tax revenues when prices are high, especially
if reinvestment is low. The governor's bill had a 20
percent fair tax rate. The CS maintains a general tax rate
of 20 percent and adds a progressive feature. The
progressivity surcharge applies when oil price (WTI) exceeds
$50/bbl and the gas surcharge applies when gas price (HH)
exceeds $8. This is deductible from PPT. The progressivity
surcharge adds 3 percent tax, based on the gross value of
oil, for each $10 increase in oil price. The gas surcharge
adds a 2 percent tax based on the gross value of gas, for
each $1 increase in HH gas price.
Mr. Dickinson explained Slide 36, which shows the
progressivity feature, as amended in the CS.
3:09:06 PM
Mr. Dickinson further clarified how the progressivity
feature works on Slide 37. Slide 38 shows how the
calculation works under the House Resources CS. Slide 39 is
a continuation of the calculation of the progressivity
feature. He stated that this feature is an important
distinction from the governor's version of the bill.
3:13:38 PM
Ms. Wilson addressed other provisions in the governor's
bill, which include monthly return filing, 90 percent
payment safe harbor, and a yearly true-up on 3/31.
Ms. Wilson noted other provisions in the CS. The spill fee
remains the same in total. It is no longer creditable, as
in the governor's bill.
3:15:59 PM
Ms. Wilson addressed other provisions in the CS. The SB 185
40 percent credits are extended for 10 years. The private
royalty oil tax rate is set at 5 percent and a penalty
applies if the 90 percent safe-harbor is not met. The
effective date change is from 7/1/06 to 4/1/06.
Ms. Wilson concluded that PPT is a tax for Alaska's future
because it would ensure Alaska's competitiveness in the
world market, it would have high oil development incentives,
it would increase Alaska's share at high oil prices, and
give a fair split of oil company profits.
3:18:06 PM
Co-Chair Meyer asked for clarification about the 90 percent
safe harbor. Ms. Wilson explained that estimates are used
on a monthly basis. Rather than have the producer pay the
full amount, a safe harbor of 90 percent is paid without
interest or penalty.
Co-Chair Meyer referred to a "two-for-one" term used during
discussion of a Senate bill. Mr. Dickinson clarified that
for every dollar reclaimed from five years of expenses, two
dollars need to be spent during the recapture period. There
needs to be a continual investor.
Co-Chair Meyer asked about the objective of continually
investing and whether progressivity would work. He gave an
example. Mr. Dickinson questioned if that would incentivize
more investment. He opined that there would not be a
significant difference for small amounts by raising the
marginal rate. He said it was a possibility.
3:22:27 PM
Co-Chair Meyer asked if the credit would go up along with
the price of oil. Mr. Dickinson did not recall that
discussion.
Representative Holm asked why higher prices are not
sufficient incentive for more capital investment. Mr.
Dickinson replied that when oil prices are high, all areas
are equally incentivized. Alaska would be competing for a
company's investment dollars. PPT is trying to make Alaska
competitive. Representative Holm he asked why Alaska has
not seen a tripling of investment when prices are high. He
said he is not convinced that this CS will incentivize oil
companies to invest if high oil prices don't do the same
thing.
Mr. Dickinson responded that some companies are going out
and exploring when prices are high. Other companies are
bringing known fields on line. The bill intends to change
Alaska relative to other oil fields in the world. The tax
situation now is unique in that it does not create
reinvestment. The current fiscal system is partially
responsible for lack of investment in Alaska.
3:28:23 PM
Co-Chair Chenault asked what the normal depreciation
schedule on oil production equipment is. He referred to the
"claw back" noting that the depreciation has already been
taken. Ms. Wilson replied that depreciation varies
depending on the type of equipment. She gave the range for
various types. The general schedule is 7 years for
exploration and production equipment.
Co-Chair Chenault thought that there would be a pro-rata
agreement and noted that 5 years of appreciation would
already be taken off. He questioned why 100 percent should
be written off for depreciation. Ms. Wilson observed that
the five-year look back reflects the governor's choice,
which is only one option.
3:32:00 PM
Representative Weyhrauch asked why the $73 million figure
was selected. Ms. Wilson responded that it was the choice
of the governor and amounts to $200,000 per day. Mr.
Dickinson further explained that $40 dollar oil at 5,000
barrels a day would amount to $73 million.
Representative Weyhrauch referred to Slide 36, the
progressivity feature, as amended, and asked about a $150
per barrel scenario. Mr. Dickinson replied that $150 was
the number in the original CS, which was then amended. He
clarified what the lines in the graph depict.
Representative Weyhrauch requested information about the
progressivity feature in writing. Mr. Dickinson responded
that he does not have that available.
3:35:08 PM
Representative Weyhrauch questioned if one of the big ideas
is to lay the base for gas line investment. Mr. Dickinson
agreed that the result would affect the gas line proposal,
but suggested that PPT would stand on its own.
Representative Weyhrauch referred to ways to measure
reinvestment and questioned if it would be quantified. Mr.
Dickinson agreed that it would make sense to review the
affects on reinvestment.
3:37:13 PM
Representative Holm asked for the number of barrels produced
in 2016. He thought that the reduction was minimal. Mr.
Dickinson estimated that the production in 2016 would be
700,000 barrels a day.
Representative Holm questioned why the urgency, if the field
is not dropping quickly. Mr. Dickinson observed that there
is an urgency for investment because it takes 5 - 6 years
for investment to come to term. He added that the current
values would drop if the production were not leveled.
Representative Holm summarized that there would not be an
increase, since it would take 5 years. The drop in
production would offset the additional investment. Mr.
Dickinson agreed.
3:41:39 PM
Representative Hawker referred to the governor's proposal
and noted that the committee substitute would change the
implementation date to six months. He questioned if there
were sufficient time to form regulations. He asked if it
would be better to have regulations in place before the
taxpayers were asked to comply.
Ms. Wilson noted that there is a provision to allow
regulations to be put in place. The fiscal note reflects
built-in expenditures to get regulations out quickly. She
acknowledged that it is not an ideal situation. She did not
think the effective date would be worse than the governor's
date, in terms of administration.
3:44:25 PM
Representative Hawker questioned the amount of regulation
needed to implement this bill. Ms. Wilson thought there
would be a fair amount of regulation regarding allocation
and overhead. Mr. Dickinson added that the CS would allow
the first six month's payments to be based on the old
th
formula. The 7 payment would have to "true up" for the
th
first 6 months, with no interest and no penalties. There
is urgency by the State of Alaska to put the new terms in
place while oil prices are high. He added that there are
two aids which will help when writing regulations: one
allows work that Department of Natural Resources has already
done, and the other is to accept the agreements that are in
place on the North Slope. He observed that there is a group
that audits monthly bills, and the hope is to rely on that
current agreement. The fiscal note provides for contract
work to set regulations. There are firms that represent
small producers and the intent is to bring them on board to
help write regulations.
3:48:32 PM
Representative Hawker stated that internal auditing of joint
structures might not get to the problem, because they would
be writing regulations for which they are accountable.
Representative Hawker referred to the progressivity chart
and observed that there is a huge "jump up break point". He
asked if there were other mechanisms to achieve a
progressive structure. Mr. Dickinson observed that there
are other models, but that this one is fairly typical.
Representative Hawker declared that he did not have the
economic background to analyze the various approaches. He
questioned if the administration and other committees have
the ability and resources to analyze models other than a
surtax model. Mr. Dickinson responded that they would
continue to do that.
Representative Hawker noted that the governor proposed a
flat tax. He questioned if the administration has the
resources to "flush out" a credit system as well as a
revenue system. Mr. Dickinson stated that they did.
3:53:00 PM
Representative Hawker referred to the mechanism for annual
monthly payments to provide 90 percent over the year. He
questioned if the House Resources CS would subject payees to
a penalty if they did not make sufficient payment. Ms.
Wilson observed that the CS provides a penalty if the 90
percent is not met. Mr. Dickinson added that unless payment
was 90 percent or over, there would be a penalty provision.
This is not the case in the status quo.
Representative Hawker referred to Slide 26, the effect of
the standard credit. He asked if he invests $5 million, if
he would receive a benefit of $6 million. Ms. Wilson said
that is correct. He added that for a $12 million
investment, the investor would receive a $14.4 benefit. Ms.
Wilson agreed.
3:57:07 PM
Representative Kelly referred to Slide 10 on Kuparuk. He
asked how much the state lost from not anticipating the
Kuparuk curve. Mr. Dickinson agreed to find out that
information. Representative Kelly wondered if a comparison
was done on the 20/20 regarding progressivity. Ms. Wilson
observed that the comparisons were done and would be
provided in the next presentation.
Representative Kelly asked if there are other models to look
at. He inquired about other possible safety nets such as
ELF. Mr. Dickinson offered to provide other models. Mr.
Dickinson explained that the floor is a cash-flow issue.
Neither the original bill nor the CS has that provision.
Ms. Wilson encouraged the members to write down their
questions.
4:03:54 PM
Representative Hawker said he looks forward to flushing out
some progressivity mechanisms.
Representative Joule commented on Slide 40 regarding the
effective date and the claw back. He wondered why the state
does not have a claw back. Mr. Dickinson spoke to
investment expectations and the dangers of a situation where
there is no transition provision.
Ms. Wilson noted that the sponsor statement contains some
errors that need to be corrected.
4:07:20 PM
ROGER MARKS, PETROLEUM ECONOMIST, ECONOMIC RESEARCH SECTION,
TAX DIVISION, DEPARTMENT OF REVENUE, presented quantitative
analysis as shown in a handout entitled "PPT Revenue
Studies" (copy on file.)
Mr. Marks referred to Slide 5 to show the progressive
surcharge using West Texas Intermediate (WTI) prices. He
pointed out the "jump up" that occurs at $110.01, which is
of concern. Slides 6 and 7 shows WTI and Arctic North Slope
(ANS) differential from Jan. 1988 - Feb. 2006.
4:11:20 PM
Mr. Marks depicted two volume scenarios on Slide 9. One is
without enhanced volume and no gas line, the other with a
gas line and enhanced volumes. With a gas line there would
be an additional 3.1 billion barrels of conventional oil and
1.7 billion barrels of heavy oil. In the low volume
scenario, there would be 5.7 billion barrels through 2030.
The graph on Slide 10 depicts these two scenarios.
Mr. Marks related costs and prices relating to the
production tax. Slide 11 lists the various costs, prices,
and revenues in real $2005 dollars. Heavy oil is discounted
8 percent for quality. It is predicted that ten full
company equivalents would take the $12 million credit
allowance.
4:19:09 PM
Mr. Marks addressed the original intent of the $73 million
allowance. Small companies would explore new areas with
this incentive. The House Resources CS changes this to a
$12 million credit.
4:20:51 PM
Mr. Marks addressed the feedback effects not modeled. He
shared several tendencies such as production depends on
investment. There is more investment with incentives and
credits are incentives. Upstream costs cannot be deducted
currently. Credits can be sold or converted, which will
increase net investment. There are more investments with
higher prices, and less investment with higher taxes.
Investment is driven by competitive international
opportunities.
4:24:21 PM
Mr. Marks discussed cumulative revenues without enhanced
volumes/without gas line and with enhanced volumes/with gas
line. Enhanced volume scenarios do not include gas line
severance taxes, but do include gas line costs. Upstream
development costs are deductible.
4:26:19 PM
Mr. Marks referred to Slide 14 - cumulative severance tax
from 2006-2030, low volume scenario. The low volume
scenario does not include the gas line. He related that
what is deductible under PPT are upstream costs for
producing oil and gas. Downstream costs are not deductible.
Severance taxes from gas are not included. The stranded gas
contract is separate from the PPT bill. A $5 price of gas
in Chicago would equal an extra $1 billion a year over 35
years.
He addressed the low volume scenario from $15 to $65 ANS
West Coast Price bbl. He compared the governor's bill to
the House CS and the status quo.
Slide 15 shows the crossover point and slope of two plans.
He suggested that the slope is as important as the crossover
point. Slide 16 addresses the high volume scenario of the
cumulative severance tax. It compares the governor's bill
and the House CS.
4:31:48 PM
Mr. Marks expounded on annual revenues without enhanced
volumes/without gas line and with gas line/with enhanced
volumes.
Representative Holm stated that the gas line in the high
volume scenario has no money for 20 percent "in kind". He
asked if it is assumed that there would be participation in
"in kind" if a gas line goes in. Mr. Marks agreed but said
it would be distinct from PPT. A percent of gas "in kind"
would be taken outside of the 20 percent PPT. With the gas
line there would be additional oil barrels.
Mr. Marks continued to show the low volume scenario on Slide
18. The status quo averages $116 million annually. The
average annual revenues are $100 million less than the
status quo. At $20 oil prices there are bigger problems
under the status quo. Obsessing about low prices is not
fruitful because there is not a significant amount of money.
Mr. Marks addressed Representative Joule's comment about
claw back for the state. He noted that those investments
could have been deferred had it been know that the tax was
changing. He addressed the problem of retroactive taxes and
the rationale for having an effective date.
4:36:30 PM
Mr. Marks referred to page 19. The House Resources CS has
average annual revenues of $400 million more than the status
quo and $100 more than the governor's bill. He emphasized
not to worry about low prices under this scenario. Slide 20
shows the House CS has average annual revenues of $1.3
billion more than the status quo and $400 million more than
the governor's bill. He noted that this scenario is
equivalent to state gas line revenues at $5.00/mmbtu Chicago
price without the gas line.
Mr. Marks related that Slide 21 shows average annual
revenues of $100 million less that status quo for both
proposals. The status quo averages $112 million annually.
Slides 22 and 23 depict the same information at $40 and $60.
4:39:50 PM
Mr. Marks explained the effective tax rate under the status
quo is based on the wellhead value, which is the market
price, less transportation costs. Under the status quo, the
effective tax rate is the ELF times the 15 percent nominal
rate. Under PPT the effective tax rate is the severance
tax, divided by the gross value at the point of production.
Slide 25 depicts the effective severance tax rate under a
low volume scenario, and Slide 26 shows the high volume
scenario.
4:42:19 PM
Mr. Marks defined state take as the amount of money that the
state gets by dividing the severance tax by the economic
rent. This is a regressive system under all three
scenarios. Slides 28-29 depict the three scenarios
regarding state take.
4:45:26 PM
Mr. Marks concluded the presentation highlighting how PPT
would affect Cook Inlet. Slide 31 shows how Cook Inlet
looked in 2005 with 8 producers producing both gas and oil.
He stated that there were 3-4 oil producers with 3 sizeable
gas producers.
Mr. Marks described Cook Inlet gas as "gas prone" - about 80
percent gas on a barrel of oil equivalent. The PPT impact
on oil is not going to be significant. The Cook Inlet gas
industry is evolving and it is difficult to determine which
way it is moving. There is new increased investment. It is
difficult to define how investors will react.
The price inlet picture in Cook Inlet is uncertain. He
mentioned that gas taxes on existing fields may increase at
higher prices. He spoke to the decision made by the RCA and
how that affects contract pricing. It is difficult to
determine what is going to happen.
Under PPT, on existing fields where the infrastructure is
old, there may be an increase in tax. New fields may see
lower taxes. He spoke to the ability to modify taxes. The
old existing fields are based on the gas ELF, which is
structured much simpler than the oil ELF.
Mr. Marks pointed out that the gas ELF has been in place
since 1977 and it has not changed in almost 30 years.
Anyone producing gas has been under the same structure for
35 years.
Mr. Marks referred to Slide 34, which depicts all of the
Cook Inlet gas fields. The average ELF is .5; producing
about 6,000 mcf per day. The impacts of the gas ELF were
not included in the fiscal note because of the smaller
fiscal impact and because of its uncertainty.
Mr. Marks referenced Slide 35 and the facts related to the
gas ELF. He estimated a crossover point at about $5/mcf on
existing fields, and at $6/mcf, an increase of $25 million
annually on existing fields. The $25 million would decrease
as production decreases. New production may see reduced
taxes unless prices were very high.
4:55:15 PM
Co-Chair Chenault recommended that questions be given to his
office.
HB 488 was heard and HELD in Committee for further
consideration.
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