Legislature(2011 - 2012)SENATE FINANCE 532
03/30/2012 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB91 | |
| SB119 | |
| HB65 | |
| HB104 | |
| SB192 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 284 | TELECONFERENCED | |
| += | HB 285 | TELECONFERENCED | |
| += | SB 192 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 91 | TELECONFERENCED | |
| += | SB 119 | TELECONFERENCED | |
| += | SB 182 | TELECONFERENCED | |
| += | HB 65 | TELECONFERENCED | |
| += | HB 104 | TELECONFERENCED | |
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax;
and providing for an effective date."
JANAK MAYER, MANAGER, UPSTREAM AND GAS, PFC ENERGY,
displayed a PowerPoint presentation titled, "Discussion
Slides: Alaska Senate Finance Committee. March 30, 2012."
Mr. Mayer discussed slide 2, "Difficulties in Existing
Fiscal Structure."
The incorporation of progressivity into the Profit-
Based Production Tax (Net) in ACES creates two
significant problems:
Large-scale gas production at low gas prices could in
the future significantly reduce production tax revenue
from existing oil production.
-Resolving this problem within the framework of ACES
requires significant complexity.
-Approach to decoupling in CSSB 192 requires ability
to split costs between oil and gas production,
creating high degree of administrative burden, and
limiting capacity of state to effectively audit.
Options for incentivizing new production are limited,
and relatively complex.
-Proposed incentives within existing framework focus
on either allowances to reduce Production Tax Value,
or revenue exclusions (tax holiday).
Mr. Mayer spoke to slide 3, "Summary of Progressive
Severance Tax (Gross) Structure."
A Progressive Severance Tax (Gross) option would
instead remove progressivity from the Profit-Based
Production Tax (Net), instead levying this tax at the
flat, base rate of 25 percent.
To retain an element of progressivity, a new
Progressive Severance Tax (Gross) would then be added
to the system. The tax would:
-Be non-deductible for Profit-Based Production Tax
purposes.
-Be levied on gross production (net of royalties).
-Be levied solely on oil.
-The tax would use a progressivity structure not
dissimilar to that under the current system, with
progressivity coefficients that apply at different
thresholds.
Mr. Mayer discussed slide 4, "Summary of Progressive
Severance Tax (Gross) Options."
The first option for the Progressive Severance Tax
would use the following parameters:
1. No severance tax below $65 Gross Value at Point of
Production (GVPP).
2. Progressivity of .25 percent commencing at a
threshold of $65 GVPP.
3. At $125 GVPP, a tax rate of 15 percent is reached.
At this point, progressivity is reduced to 0.05
percent.
4. Progressivity is capped 20 percent
A second option, which would freeze government take at
70 percent at $100/bbl might look like this:
1. No severance tax below $60 Gross Value at Point of
Production (GVPP).
2. Progressivity of .25 percent commencing at a
threshold of $60 GVPP.
3. At $100 GVPP, a tax rate of 10 percent is reached.
At this point, progressivity is reduced to 0.03
percent.
4. Progressivity is capped 20 percent.
9:56:07 AM
Mr. Mayer explained slide 5, "Benefits of Progressive
Severance Tax (Gross) Structure."
By removing progressivity from the Profit-Based
Production Tax (Net), and having the progressive
element of the structure be a Progressive Severance
Tax (Gross), two things become much easier to achieve.
-The issue of gas production reducing production tax
revenue ceases to be a problem without progressivity
in the Profit-Based Production Tax. Complex provisions
to split costs between oil and gas production under
CSSB 192 are thus no longer required.
-Significant incentives can be provided to new
production, by eliminating or reducing the Progressive
Severance Tax (Gross) for new production.
A wide range of levels of government take can be
achieved using this structure, depending on the
parameters applied.
Mr. Mayer discussed slide 6, "WTI Light Sweet Crude-Forward
Curve." He stated that the WTI marker, because was
considered the most liquid. He stated that WTI currently
traded at a discount. In terms of spot prices, there may be
a ten or more dollar differential. The important point was
the shape of the curve, and the fact that 2020 delivery
dates could be below $90/bbl. He stated that the curve
represented March 29, 2012 contract prices for delivery
from everything from May 2012 to November 2020.
Mr. Mayer explained slide 7, "FY 2013 Revenue Comparison."
He stated that the chart had been extended from the
$150/bbl level to the $200/bbl level, and added a second
severance tax option. Severance tax option 1 displayed
progressivity continuing up to $125/bbl; and severance tax
option 2 stopped at $100, but kicked in at a slightly lower
level, and would "freezes" take at the 70/30 split for FY
13. He stressed that the displayed revenues were slightly
than the first option that was presented the day prior,
however the revenues were broadly similar to those under
the Alaska Clear and Equitable Share Act (ACES).
10:00:37 AM
Co-Chair Stedman asked for a clarification on the two
different severance tax options, specifically regarding
severance tax option 2. Mr. Mayer looked at slide 8, "FY
2013 Revenue Comparison." He looked at the difference
between the total state revenue from production tax on the
left and the cash to companies on the right hand side. He
stated that there was a main divergence showed a slight
change around the $120/bbl level that came from the
different progressivity coefficient that is applied under
CS SB 192: .35 percent rather than .4 percent. When the
level is taken $120/bbl to $200/bbl, there is a small split
displayed, as the cap in CS SB 192 is applied. He stressed
that below $200/bbl, there was very little difference. He
stated that the blue line represented severance tax option
1. The scenario was based on progressivity on the
progressive severance tax would kick in at a rate of
$65/bbl, and be progressive at a rate .25 percent up to a
level of $125/bbl. From that point on, it would continue at
a rate of .05 percent until a cap of 20 percent was
reached.
Co-Chair Stedman noted that the chart did not include the
$400 million in 20 percent capital as reflected on slide 7.
Mr. Mayer replied in the affirmative and that all of the
2013 numbers were prepared consistent with DOR methodology,
where their production tax forecasts did not reflect the
credits. The credits were calculated separately in the
state budget. The reason the $400 million was not included,
was because those credits were entirely exogenous to the
economic model that produces the numbers.
10:04:53 AM
Co-Chair Stedman stated that the $400 million was used to
calculate in the 2013. He wanted to be clear in the future
whether the credits represented $400 or $800 million. He
wondered why the $400 million was not included in the
chart. Mr. Mayer responded that he did not include the $400
million because it was attributed to projects that were not
necessarily producing. The additional $400 million in
credits were not subject to production tax.
Co-Chair Stedman stated that he would like to see the
credits shown in the chart. He observed that the committee
would like to look at the whole gross value and not just
adjusted numbers.
Senator Thomas observed that a 1 percent tax at $120/bbl,
could result in about $170 million. He stressed that $400
million or $800 million was a "big swap in cash."
Co-Chair Stedman looked at the severance tax option 2 on
slide 7, and surmised that the concept was to hold the tax
flow constant at $100/bbl and below. However, more cash
would be moved to industry at $100/bbl and above. Mr. Mayer
responded that there was a 70/30 percent split in both
state and federal governments. He stated that the 70/30
split, under this proposal, would make every additional
dollar above $100/bbl be broken, so 30 percent would to the
company, and 70 percent would go to the combined federal
and state governments.
Co-Chair Stedman asked if the price was frozen at $100/bbl
Mr. Mayer responded in the affirmative.
Co-Chair Stedman wondered if the price could be set at
$125/bbl. Mr. Mayer did not respond.
10:12:11 AM
Mr. Mayer displayed slide 9, "FY 2013 Revenue Comparison",
which compared the total state take with the total
government take.
Mr. Mayer explained slide 10, "ACES (FY 2013)." He stated
that the slide outlined the dollars to the treasury for
each of the components of the system, for each of the
regimes.
Co-Chair Stedman noted that the committee had not had a
chance to review the slides. He looked at slide 10, and
wondered if the revenue forecast was with or without the
additional $400 million in credits. Mr. Mayer responded
that the slide did not include the additional $400 million
in credits.
Co-Chair Stedman felt that information about whether or not
the $400 million was represented should be "footnoted" in
some of the slides, in order to reduce confusion. He
remarked that the numbers were homogenized, but without the
$400 million applied. He felt that a homogenized analysis
should include all credits, especially $400 million,
specifically all credits applied against the treasury: net
cash back on the table. Mr. Mayer replied that in order to
produce the numbers for a model, it was imperative to look
at credits that came from existing production, so one could
examine the estimate of the costs associated with the
production would be. He remarked that the reason the
presentation was in its current form, was for consistency
with the DOR figures and the current state budget
structure.
10:17:19 AM
Mr. Mayer discussed slide 11, "CSSB 192 (FY 2013)." When
looking at the overall government take figures, there was
not much difference from the current structure. The reason
there was not much change, the 60 percent cap did not bind
at a price level of $230/bbl. He furthered that if there
was an examination of a range of years, across the project
life span, the impact of inflation would display a
difference. The only difference that is showcased, was the
impact of the .35 percent rather than the .4 percent
progressivity coefficient.
Mr. Mayer explained slide 12, "Severance Tax-20 percent
Maximum (FY 2013) .25 percent progressivity from $65 to
$125, then.10 percent progressivity." He explained that the
two graphs displayed the difference between a .25 percent
progressivity and a .10 percent progressivity from $65/bbl
to $125/bbl.
Mr. Mayer discussed slide 13, " Severance Tax - 20 percent
Maximum (FY 2013) .25 percent progressivity from $60 to
$100, then .03 percent progressivity." He explained that
the two graphs displayed the difference between a .25
percent progressivity and a .03 percent progressivity from
$60/bbl to $100/bbl.
Co-Chair Stedman asked for a clarification on slide 7 and
asked if option was a $100 million. Mr. Mayer replied in
the affirmative and declared that it was a function of
progressivity kicking in at the $60/bbl level, rather than
the $65/bbl level. He furthered that, under severance tax
option 2, total state take was almost identical to what it
would be under CS SB 192.
Co-Chair Stedman noted that the sharing relationship would
increase, if there was an increase to $110 million. Mr.
Mayer agreed.
Mr. Mayer discussed slide 14, "Incentives for New
Production."
Significant incentives can be provided to new
production, by eliminating or reducing the Progressive
Severance Tax (Gross) on any combination of:
-Production from new areas.
-Production from new plans of development (determined
through the regulatory process to be for "new
production").
-Production above a fixed decline rate.
Here, a reduced rate of Progressive Severance Tax has
been modeled, using the following parameters for new
production:
-Base rate of 0 percent
-Progressivity of .05 percent commencing at a
threshold of $65 (gross value at point of production).
-Progressivity is capped 5 percent.
Following slides show a new, high-cost 10 mb/d
development under
-The regular rate.
-The reduced rate (with a time limit of 7 years).
-The reduced rate (with no time limit).
10:23:11 AM
Mr. Mayer explained slide 15, "Noted on Impact of
Inflation."
Under ACES, thresholds and coefficients for
progressivity are specified in nominal terms, without
indexation.
-As a result, when economics over the long-term rather
than just 2013 are examined, we see the effects of
'bracket creep' or 'stealth tax.'
-In real terms, as prices increase, thresholds for
progressivity decrease, and the higher take that comes
with progressivity occurs at lower and lower price
levels.
Severance tax options are also currently shown
assuming nominal thresholds.
-As a result, in the charts, the impact of the
severance tax can be seen below the $60/$65 level at
which it applies - a result of bracket-creep over the
lifetime of a project.
It is strongly worth considering the application of
price indexation to thresholds for progressivity.
Mr. Mayer discussed slide 16, "ACES (New Development)." He
remarked that the new development under ACES had negative
NPV at every price level, with a rate of return of
approximately 10 percent at the $100/bbl level. It faced
government take, over the project life cycle, of around 78
percent at the $10 level, and rising to $85 percent at the
high $200/bbl levels.
Mr. Mayer explained slide 17, "CSSB 192 (New Development)."
He stated that under CSSB 192, the reduced progressivity
coefficient had a small impact. The rate of return for the
project did not shift, but there was growth from a slightly
negative number to a slightly positive number at $100/bbl.
With the impact of inflation at the higher levels,
government take was brought down to north of approximately
$180/bbl.
10:26:25 AM
Mr. Mayer discussed slide 18, "Severance Tax-20 percent
Maximum (New Producer) .25 percent progressivity from $65
to $125, then .10 percent progressivity." He pointed out
the leveling of the life-cycle, including factoring the
impact of inflation at the $100/bbl to $110/bbl level with
a 76 percent split moving up the price deck.
Mr. Mayer explained slide 20, "Severance Tax-20 percent
maximum, (New Development)." He explained that the slide
represented what a project would look like under the
severance tax option 2, where progressivity kicked in at
$60/bbl and extends to $100/bbl.
Mr. Mayer looked at slide 22, "Severance Tax - 20 percent
Maximum with first 7 years at 5 percent (New Producer) .25
percent progressivity from $60/bbl to $100/bbl, then .03
percent progressivity." He explained that the slide
displayed the same factors as slide 20, but applied a time
limit of seven years.
10:31:30 AM
Mr. Mayer discussed slide 23, "20 Year Revenue Impact of
Reduced Rate of New Production (Using Severance Tax Option
1)." He stated that he redid the analysis of the possible
20-year revenue of a reduced rate for new production. He
ran the numbers again, but he realized he was attempting to
pull together a large amount of data in a short period of
time.
Co-Chair Stedman wondered if the chart included credits.
Mr. Mayer replied that the charts included the credits for
the existing production.
Co-Chair Stedman furthered that the chart should reflect
the impact of the legacy fields. Mr. Mayer responded in the
affirmative.
Mr. Mayer looked at slide 24, "Regime Competitiveness:
Relative Government Take." He stated that the number was
not too bad for government take at $60/bbl.
Co-Chair Stedman felt that Alaska would be more attractive
than North Dakota at $60/bbl. Mr. Mayer agreed, but
reiterated that Alaska was not more attractive than North
Dakota at current prices.
Mr. Mayer discussed slide 25, "Regime Competitiveness:
Relative Government Take." He pointed out that at $80/bbl,
ACES for existing producers was below other regimes, other
than Norway.
Mr. Mayer looked at slide 26, "Regime Competitiveness:
Relative Government Take." At $120/bbl, the gap started to
widen.
10:37:39 AM
Mr. Mayer looked at slide 29, "Regime Competitiveness:
Relative Government Take." At $140/bbl, ACES and CSSB 192
were basically the same as Norway, while the two severance
tax options were significantly more competitive. At
$160/bbl, ACES and CSSB 192 was nowhere near the top of the
regimes.
Mr. Mayer discussed slide 30, "Regime Competitiveness:
Relative Government Take." He stressed that at $180/bbl, a
split could be seen between ACES and CSSB 192.
Mr. Mayer spoke to slide 31, "Regime Competitiveness:
Relative Government Take." He pointed out that at $200/bbl,
ACES was matched with Algeria and other high taxing
regimes.
Co-Chair Stedman looked at the remaining slides, and noted
that they displayed a 7 year time horizon. Mr. Mayer
responded that the second set of slides represented
economics for new development, rather than an existing
producer.
10:40:52 AM
Mr. Mayer highlighted slides 36-39. He remarked that north
of $180 to $200 for new development, ACES was at the top of
the very high price levels.
Co-Chair Stedman remarked that Alaska was more stable than
Syria. Mr. Mayer agreed.
Co-Chair Stedman noticed calculations and net present value
in pricing displayed in slides 41 through 43. He requested
a brief description of those slides. Mr. Mayer responded
that the generic view of ACES was useful in the initial
analysis. Now, that there was a micro-level of detail, the
FY 13 numbers were more useful.
Mr. Mayer pointed out slide 41, "CSSB 192 (Existing
Producer)." The slide displayed the 79 percent maximum for
CSSB 192.
Mr. Mayer discussed slide 42, "Severance Tax - 20 percent
maximum (Existing Producer) .25 percent progressivity from
$65 to $125, then .10 percent progressivity." He stated
that severance tax was frozen at current prices, so from
$120/bbl and up would allow for a steady 72 percent
government take.
Mr. Mayer highlighted slide 43, "Severance Tax - 20 percent
maximum (Existing Producer) .25 percent progressivity from
$60 to $100, then .03 percent progressivity." He stated
that the slide displayed the freezing at $100/bbl with a 69
to 70 percent from that point on.
SB 192 was HEARD and HELD in committee for further
consideration.
Co-Chair Stedman discussed housekeeping.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 192 Alaska Senate Finance - March 30.pdf |
SFIN 3/30/2012 9:00:00 AM |
SB 192 |
| HB 104 work draft version S.pdf |
SFIN 3/30/2012 9:00:00 AM |
HB 104 |