Legislature(2011 - 2012)SENATE FINANCE 532
04/04/2012 01:30 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB203 | |
| SB192 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 192 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 203 | TELECONFERENCED | |
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax;
and providing for an effective date."
Co-Chair Stedman noted that an expenditure had accidentally
been included twice in the PFC Energy morning presentation,
which, moved a $150 million net in the numerics. The
updated presentation adjusted the progressivity trigger and
held revenue constant at $100 per barrel in FY 13. The
intent was to hold revenue neutral below $100 per barrel
(not including the $40 floor). The progressivity trigger
was lowered by $5, the upper level was increased by $5, and
the slope was increased from 0.25 percent to 0.27 percent.
He summarized that revenue was neutral at 0.275 percent,
but the number had been rounded up to 0.27 percent.
4:21:11 PM
JANAK MAYER, MANAGER, UPSTREAM AND GAS, PFC ENERGY,
CONTRACT, LEGISLATIVE BUDGET and AUDIT COMMITTEE, provided
members with PowerPoint presentation titled "Discussion
Slides: Alaska Senate Finance Committee" dated April 4,
2012 (the presentation was updated from the morning meeting
version with the same name) (copy on file). He compared
revenue from production tax and cash to companies under
Alaska's Clear and Equitable Share (ACES), CSSB 192(FIN),
and HB 110.
Mr. Mayer outlined the thresholds of the progressive
severance tax on gross option as adjusted to match FY 13
numbers at the $100 price per barrel. The proposed
Progressive Severance Tax would use the following
parameters:
· No severance tax below $60 Gross Value at Point of
Production (GVPP);
· Progressivity of .27 percent commencing at a threshold
of $60 GVPP;
· At $120 GVPP, a tax rate of 16.2 percent is reached.
At this point, progressivity is reduced to 0.03
percent; and
· Progressivity is capped at 20 percent.
Mr. Mayer referred to the graphs on slide 3, which compared
revenue under ACES, CSSB 192(FIN), and HB 110. He concluded
that revenue from the severance scenario would be close to
that of the production tax at $100 per barrel. The
comparable revenue diverged at the $120 per barrel market,
which became more significant as price increased beyond
that point.
4:23:26 PM
Mr. Mayer noted that slide 4 compared total state and total
government take under ACES, CSSB 192(FIN), and HB 110. He
observed that production tax at $100 per barrel would be
$3.628 billion under ACES versus $3.577 billion under CSSB
192(FIN). The total state take at $100 per barrel would be
$7.629 billion under ACES compared to $7.582 billion under
CSSB 192(FIN).
4:24:35 PM
Co-Chair Hoffman referred to the cash that oil companies
would receive when oil prices were high and concluded that
one billion dollars would be "passed back" when prices were
under $70 per barrel (between ACES and CSSB 192(FIN)). Mr.
Mayer responded in the affirmative.
Co-Chair Hoffman pointed out that revenue to oil companies
would increase to $1.7 billion at $200 per barrel.
Co-Chair Stedman concluded that the change in cash to
companies [ACES compared to CSSB 192(FIN)] would be: $31 at
$100 per barrel; $92 million at $110 per barrel; and $180
million at $120 per barrel. He reviewed changes in
government take at different prices [ACES compared to CSSB
192 (FIN)]. Government take [under CSSB 192 (FIN) compared
to ACES] would be: down $5 million at $90 per barrel; up
$12 million at $80 per barrel; down $7 million at $70 per
barrel; down $92 million at $110 per barrel; down $180
million at $120 per barrel; and down $340 million at $130
per barrel. He added that numbers would change as
expenditures changed and time ensued. He concluded that
expenditures [under ACES] would change as prices increased.
He did not expect that [the spread of government take]
would materialize at $200 per barrel since expenditures
underneath would advance. He stressed that the comparisons
were as close as they could achieve.
Co-Chair Stedman noted that a comparison had been made to
HB 110 for discussion purposes.
4:28:30 PM
Mr. Mayer noted that slide 6 showed the same numbers [as
slide 5] adjusted down by $400 million to account for
credits not claimed against current production.
Mr. Mayer noted that slide 7 addressed issues with the tax
floor for large fields. There were significant issues with
specifying any tax floor regardless of the level set. The
language in CSSB 192(FIN) addressed the tax floor for large
fields: fields that had produced one billion barrels
cumulatively and 100,000 barrels per day in the current
year.
Mr. Mayer observed that the intent had been to simplify and
get away from accounting for costs separately for different
streams of production, which was done for oil and gas
decoupling by taking progressivity out of the net profit
tax and substituting gross profit tax. He speculated that
costs would have to be calculated if a particular minimum
floor was leveled only on particular assets and not on
others. He suggested that [the tax floor] created an issue
related to multiple streams of cost accounting for diverse
assets for different producers.
Mr. Mayer observed that the 100 mb/d (million barrels per
day) production threshold had the potential to create an
undesirable incentive. He noted that Kuparuk was only four
years away from meeting the threshold. He concluded that
the floor was not a significant incentive given that it
only applied at very low price levels that were not highly
likely in the near future. He noted that making the
distinction at the company level instead of the asset level
would be easier administratively. He concluded that small
producers could be exempted if the desire was to ensure
that they would not face the floor, instead of making the
distinction on the asset basis.
4:32:05 PM
Mr. Mayer spoke to incentives for new production and the
possibility of incentivizing new production associated with
plans of development during the regulatory process. He felt
there were difficulties with the approach of incentivizing
new production above a fixed decline rate and that the same
outcome could be achieved with greater simplicity. He spoke
to a reduced rate of the progressive severance tax on gross
for new production and modeled a progressivity of .05
percent commencing at a threshold of $60 gross value at the
point of production (GVPP) and capped at 5 percent.
Mr. Mayer observed that taxation on incremental production
from existing fields above a fixed decline rate could not
have a specific limit of time in the same way because it
would be difficult to identify a particular stream of
production begun at a specific time. He suggested one
option would be an intermediate regime with no time limit
for incremental production, for instance:
· Progressivity of .14 percent commencing at a threshold
of $60 GVPP
· At $120 GVPP, a tax rate of 8.4 percent is reached. At
this point, progressivity is reduced to 0.03 percent
· Progressivity is capped at 10 percent
4:34:31 PM
Mr. Mayer reviewed how the production decline curve was
calculated on slide 9: Production Above a Decline - Fixed
v. Annual Calculation. He discussed the difference between
performing an annual calculation (based on the prior year
and a target that was slightly less based on a rolling
average decline) and setting a fixed point (based on 2011
production figures and applying a company-wide decline rate
for any given producer). The fixed point would be
determined by forecasting the curve forward; any production
above the amount would be incentivized and would represent
a meaningful benefit that would not be shown if the
calculation was redone on an annual basis. He continued to
address the decline rate and referred to legislation that
had been introduced by Senator Tom Wagoner related to
decline rate calculation; the methodology could be applied
in 2011 looking back to 2009 and rather than calculating
the rate on each year's production it could be extended
forward.
4:36:15 PM
Mr. Mayer concluded with slide 10: Total Government Take
Comparison Including New Production Incentives." The
government take comparison for FY 13 related to the overall
rate for mature production included: ACES, CSSB 192(FIN),
CSSB 192(FIN) (incremental production 10 percent maximum
progressivity), CSSB 192(FIN) (new production 2 percent
maximum progressivity, CSSB 192 (new production 5 percent
maximum progressivity), CSSB 192 (new production, no
progressivity), HB 110, and HB 110 (new production). The
chart provided a look at government take for any given
year.
Co-Chair Stedman communicated that development of the
language related to incremental production was currently
underway. He discussed work that was in progress related to
the mechanics of the statutes.
4:38:57 PM
Senator Ellis asked several questions that had been
provided by another Senate majority member. He pointed to
the revenue comparisons on slide 4 of the morning meeting
presentation (Discussion Slides: Alaska Senate Finance
Committee, April 4, 2012); the slides assumed a certain
amount of oil production. The oil production numbers were
derived from the Department of Revenue Fall Source Book,
which showed the FY 13 forecast was for 550,000 barrels per
day (page 31). He asked whether any of the 550,000 barrels
per day would be counted as new oil under the proposed
concept. He wondered which sources would be new (using page
101 of the source book as a reference). He queried whether
the revenue comparisons on slide 4 took the data into
account.
Mr. Mayer responded that the revenue comparisons were
generated on the maximum rate that applied to everything.
One issue was how to treat new production from new areas
that did not have three years of historical production on
which to base the decline and did not have declining
production. He relayed that one option would be to include
the new areas in the new production components. The
specific data was only for a period of a couple of years
and the projects were mainly high cost, which could face a
more significant tax burden at current prices under the
gross tax option. He opined that under the scenario an
adjustment to the revenue figure would probably need to be
made.
4:41:29 PM
Co-Chair Stedman surmised that the adjustment would be
relatively minor given the 450,000 barrels out of 600,000
coming out of Prudhoe Bay and Kuparuk. He relayed that
there was a struggle to determine how to work the
particular incremental. Petroleum consultant Pedro van
Meurs and PFC had suggested that the committee address the
incremental production out of the legacy fields; however,
it was a policy call. He opined that it was necessary to
address an incentive for incremental production above the
decline curve on the legacy fields. He relayed that the
committee would want to look at a projection if it decided
to use a specific algorithm, especially if 2009 through
2011 were used as a base to project forward. He wondered
how the data would look compared to 2012 and 2013 and where
the mathematical line would come to the projections looked
at by the committee.
Co-Chair Stedman discussed that the incremental production
cap of 10 percent was essentially a reduction in the
progressivity to .14 percent, which had been cut in half to
.27 percent. He addressed the magnitude of going from zero
to nothing; it was a numeric that would be set by the
committee. He relayed that a number would need to be on the
table for people to have a good feel for; it could be
anywhere from no incremental incentive to zero
progressivity. He opined that zero progressivity was too
extreme. He expressed his desire to have input from
committee members. He concluded that it was a linear
relationship and that different increments could be used if
members were interested; the base progressivity began at
.27 percent. There were some increments that went down to
zero, but he wondered what the base rate of 25 percent
would be at that level.
4:44:58 PM
Senator Olson pointed to slide 10 and questioned what made
up the new production incentive calculations other than tax
credits. Mr. Mayer responded that the comparison looked at
lower taxation rates for new production and their impact on
government take.
Senator Olson asked for verification that the comparison
did not include tax credits. Mr. Mayer answered that the
model included the 20 percent capital credit.
Co-Chair Stedman added that progressivity was the only
component that changed in the model on slide 10. The number
could be increased or decreased. He reiterated that PFC
could run the model with a different numeric if committee
members were interested.
4:46:36 PM
Senator McGuire wondered whether new production with a 2
percent maximum progressivity or new production with no
progressivity was easier to administer. Mr. Mayer clarified
that removing the progressive tax took one element of the
tax out and made things slightly simpler; however, the
progressive tax calculation only required production volume
and price and was not administratively complex.
Senator McGuire asked for copies of past slides that showed
cash flows with government take and industry take at
different ranges (fields producing 200,000 barrels per day
versus fields producing 10,000 barrels per day). She
explained that progressivity had been adopted at .4 percent
under ACES, but no one had looked at how punitive the
percentage would be at the high end of the oil price
spectrum; she wanted to avoid a similar situation on the
low end. She believed the rates of taxation at the $40 per
barrel were very high because of the floor that was
included. She wanted a system to work at all prices. She
referred to oil price fluctuations and how removing oil
from strategic reserves nationally and internationally
could impact prices.
Senator McGuire was interested in an overarching
perspective about jurisdictions that had adopted
progressivity and how they kept it as an incentive and not
a detriment. She requested more information on where PFC
believed the "sweet spot" was in respect to new production
and the progressivity rates. She compared the progressivity
to the Internal Revenue Service system; some people felt
that the harder they worked the higher their taxes were.
She was fine with reducing the progressivity on new
production, but she was interested in learning how to
change behavior. She appreciated information that PFC had
provided on its experience in Canada; the company had
discussed its observations with policy makers, which had
led industry to pick up. She reiterated that the goal was
to change industry behavior.
4:50:46 PM
Mr. Mayer addressed the question related to high rates of
taxation at low oil prices. He agreed that a portion of the
high rate was related to the impact of the floor, but the
general increased slope of the curve was also due to
regressive nature of the tax regime at low prices, which
was almost entirely a function of the 12.5 percent fixed
royalty. He elaborated that with any fixed royalty there
was a price level at which the royalty could consume almost
all of the divisible income, which resulted in high rates
of government take.
Mr. Mayer spoke to progressivity and incentives for new
development. He discussed that there were two purposes of
progressivity: (1) was to create a system that worked at a
variety of prices and created stability. He detailed that
progressivity was intended to counter the decrease of
government take as oil prices increased and to avoid a need
to restructure the tax regime as prices rose. The goal of
the progressivity under the gross was to counteract the
regressive effects of the royalty at the rate and to
maintain an overall neutral regime going forward; (2)
progressivity was also used by government to increase its
share of the take at higher levels. The strategy could be
useful if there was a fiscal target that needed to be met;
however, there also needed to be workable economics for
companies.
Mr. Mayer believed that progressivity was so substantial
under certain tax regimes (e.g. ACES) that there was less
and less benefit for companies with every additional $1
increase in oil price. He stressed that an efficient system
was not necessarily a competitive system; it was possible
to have an efficient regime that did not tax basic capital
returns that simultaneously sought to tax access profits or
economic rents; high progressivity levels could be very
compatible with such a system. He pointed to significant
investment currently going into areas in the Lower 48 that
had lower levels of government take and overall cost. He
emphasized the importance of competitiveness in fiscal
regime design.
4:55:14 PM
Co-Chair Hoffman commented on the loss of government take
at high oil prices versus the assured government take when
prices were low. He referred to testimony from Mr. Mayer
stating that the likelihood of seeing low oil prices was
not very high. He pointed out that at $40 a barrel
companies would be responsible for $194 million in taxes,
but at $120 a barrel companies would gain revenue. He
stressed that at $170 a barrel companies would earn $1
billion and at $200 a barrel they would receive $1.7
billion. He discussed the importance of taking into
consideration what the state may be giving up under the
scenario and the probability that oil would ever go back to
$40 per barrel.
SB 192 was HEARD and HELD in Committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 192 April 4 2nd Session Alaska Senate Finance.pdf |
SFIN 4/4/2012 1:30:00 PM |
SB 192 |